Chapter 1
Introduction to
International Business
International Business
Strategy Management & the New Realities
by
Cavusgil, Knight and Riesenberger
International Business: Strategy, Management, and the New Realities
International Business – A Firm Level Activity
Performance of trade and investment
activities by firms across national
borders.
International Business: Strategy, Management, and the New Realities
The Internationalization of Business
• Companies conduct value-adding activities on a
global scale, primarily to organize, source,
manufacture, and market
• A “level playing field” has made international
activities appealing to all types of firms- large
and small; manufacturing and service sectors
(e.g. banking, transportation, engineering and
design, advertising, and retailing).
International Business: Strategy, Management, and the New Realities
The Nature of International Business
• All value-adding activities including
sourcing, manufacturing, and marketing,
can be performed in international locations
• The subject of cross-border trade can be
products, services, capital, technology,
know-how, and labor
• Firms internationalize via exporting,
foreign direct investment, licensing,
franchising, and collaborative ventures
International Business: Strategy, Management, and the New Realities
Globalization of Markets – a Macro Concept
Ongoing economic integration and growing
interdependency of countries worldwide.
• Integration is central to globalization,
which has resulted in the widespread
diffusion of products, technology, and
knowledge worldwide, regardless of where
they originate.
International Business: Strategy, Management, and the New Realities
Dimensions of Market Globalization
• Greater integration and interdependency of
national economies; leading to freer
movement of goods, services, capital, and
knowledge
• Rise of regional economic integration blocs
• Growth of global investment and financial
flows
• Convergence of consumer lifestyles and
preferences
• Globalization of production
International Business: Strategy, Management, and the New Realities
International Trade
Exchange of products and services across
national borders; typically through exporting
and importing.
International Business: Strategy, Management, and the New Realities
Exporting
Sale of products or services to customers
located abroad, from a base in the home
country or a third country.
International Business: Strategy, Management, and the New Realities
Importing or Global Sourcing
Procurement of products or services from
suppliers located abroad for consumption in
the home country or a third country.
International Business: Strategy, Management, and the New Realities
International investment
Transfer of assets to another country or the
acquisition of assets in that country.
• International Portfolio investment (typically shortterm): Passive ownership of foreign securities such
as stocks and bonds, to generate financial returns.
• Foreign direct investment (FDI) (typically longterm): An internationalization strategy in which the
firm establishes a physical presence abroad through
acquisition of productive assets such as capital,
technology, labor, land, plant, and equipment.
International Business: Strategy, Management, and the New Realities
World Trade Is Growing Faster than GDP
Rapid integration of world economies is
fueled by factors such as the decline of
trade barriers, e.g. tariffs, liberalization of
markets, privatization and the economic
vitality of emerging markets.
International Business: Strategy, Management, and the New Realities
Comparing the Growth Rates of World GDP
and World Exports
Leading Countries in International
Merchandise Trade, Total Value
Leading Countries in International
Merchandise Trade, as % of Nation’s GDP
The Nature of FDI
•
Foreign Direct Investment (FDI) - (asset
ownership and long time frame)
–
–
•
The ultimate commitment-level of
internationalization
We focus primarily on FDI, as opposed to
International Portfolio investment.
Large, resourceful companies with
substantial international operations
leverage FDI to:
– Manufacture/assemble products in low-cost
countries, e.g., China, Mexico, E. Europe
International Business: Strategy, Management, and the New Realities
Dramatic Growth of FDI Since the 1980s
• September 11, 2001 interrupted FDI inflows, the
longer term trend continues
• Developed economies = Australia, Canada,
Japan, the United States, and most countries in
Western Europe.
• Developing economies = Parts of Africa, Asia,
Latin America, and the Middle East. Of particular
significance is the growth of FDI into developing
economies despite widespread poverty and less
investment capital than advanced economies.
• The improved lives of billions are directly linked
to world trade and investment.
International Business: Strategy, Management, and the New Realities
Foreign Direct Investment (FDI) Inflows into World
Regions (in Billions of U.S. Dollars per Year)
Leading Countries in International
Services Trade, Total Value
Leading Countries in International
Services Trade , as % of Nation’s GDP
International Financial Services Sector
• Banking and financial services are the most active
international services.
• Explosive growth of global capital markets is due to:
– Deregulation of world capital markets
– Falling investment barriers
– Banks/financial institutions are internationalizing in
pursuit of high returns to many previously untargeted
countries
– Money is flowing internationally into portfolio
investments and pension funds
• Leading players include Citibank, Deutsche Bank,
BNP Paribas, and HSBC
International Business: Strategy, Management, and the New Realities
Service Industry Sectors That Are
Rapidly Internationalizing
The Four Risks of International Business
The Four Types of Risks in IB
• Cross-cultural risk: a situation or event where
a cultural miscommunication puts some human
value at stake
• Country risk: potentially adverse effects on
company operations and profitability holes by
developments in the political, legal, and
economic environment in a foreign country
• Currency risk: risk of adverse unexpected
fluctuations in exchange rates
• Commercial risk: firms potential loss or failure
from poorly developed or executed business
strategies, tactics, or procedures
International Business: Strategy, Management, and the New Realities
Risks: Always Present but Manageable
• Managers need to understand their
implications, anticipate them, and take
proactive action to reduce adverse effects.
• Some risks are extremely challenging,
e.g., the East Asian economic crisis of
1998 generated substantial commercial,
currency, and country risks. Political and
social unrest surged to Indonesia,
Malaysia, South Korea, Thailand, and the
Philippines.
International Business: Strategy, Management, and the New Realities
Participants in International Business
• Multinational enterprise (MNE): A large company
with substantial resources that performs various
business activities through a network of subsidiaries
and affiliates located in multiple countries.
• In addition to a home office, an MNE owns a
worldwide network of subsidiaries.
• Examples- Caterpillar, Kodak, Nokia, Samsung,
Unilever, Citibank, Vodafone, DHL
• Examples of Fortune’s Global 500- Exxon Mobil,
Royal Dutch Shell, BP, General Motors,
DaimlerChrysler, Toyota, Ford, and Wal-Mart.
International Business: Strategy, Management, and the New Realities
Geographic Locations of Multinational Enterprises
Small and Medium-Sized Enterprise
A company defined (in the U.S.) as having 500 or
fewer employees
• Comprise 90 - 95 % of all firms in most
countries.
• Increasingly more SMEs participate in
international business
• Account for 1/3 of exports from Asia; 1/4 of the
exports from the affluent countries in Europe and
North America
• Contribute more than 50 percent of total national
exports in Italy, South Korea, and China.
International Business: Strategy, Management, and the New Realities
The Born Global Firm
Born global firm: a young entrepreneurial company
that initiates international business activity very early in
its evolution, moving rapidly into foreign markets.
‘Born Globals’ and SMEs:
• Are often more innovative, adaptable, and have quicker
response times;
• Are better able to serve niche markets;
• Leverage the Internet to do international business;
• Tend to minimize fixed costs and outsource, due to
limited resources;
• Tend to flourish on private knowledge that they cultivate
via their knowledge networks.
International Business: Strategy, Management, and the New Realities
Why do Firms Internationalize?
1. Seek opportunities for growth through market
diversification
2. Earn higher margins and profits
3. Gain new ideas about products, services, and
business methods
4. Better serve customers that have relocated
abroad
5. Be closer to supply sources, benefit from global
sourcing advantages, or gain flexibility in the
sourcing of products
International Business: Strategy, Management, and the New Realities
Why do Firms Internationalize? (cont’d)
6. Gain access to lower-cost or better-value
factors of production
7. Develop economies of scale in sourcing,
production, marketing, and R&D
8. Confront international competitors more
effectively or thwart the growth of
competition in the home market
9. Invest in a potentially rewarding
relationships with foreign partners
30
Why Study International Business?
• A facilitator of the global economy and
interconnectedness
• A contributor to national economic wellbeing
• A competitive advantage for the firm
• An activity with societal implications
• A source of competitive advantage for you
International Business: Strategy, Management, and the New Realities
Contributor to National Economic Well-Being
• International trade is a critical engine for job
creation. It is estimated that every $1 billion
increase in exports creates more than 20,000 new
jobs.
• One of every seven dollars of U.S. sales is made
abroad.
• International business is both a cause and a result
of increasing national prosperity.
• Prosperity is accompanied by literacy rate gains,
nutrition and health care improvements, with some
tendencies towards freedom and democracy.
International Business: Strategy, Management, and the New Realities
A Competitive Advantage for the Firm
• Increase sales
• Maximize returns: Foreign markets often
generate returns far superior to those in
domestic markets.
• Global scale economies: International
players can maximize their efficiencies by
securing cost-effective factor inputs from
around the world.
• Resource acquisition: Access to otherwise
unavailable critical resources
International Business: Strategy, Management, and the New Realities
An Activity with Societal Implications
• As firms increase their international activities, so does
responsibility to society to be a good corporate citizen.
• Large corporations like Wal-Mart, Unilever, and Sony have
annual revenues larger than the GDPs of many of the nations
they operate.
• The internationalization of thousands of firms negatively impacts
the natural environment, e.g. pollution (Royal Dutch Shell’s
refining operations in Nigeria).
• Large banks and international investment brokers have disrupted
the economies of nations with aggressive currency trading or by
manipulating stock markets.
• Some MNEs ignore human rights and basic labor standards by
establishing factories in countries that pay low wages with
substandard working conditions, e.g. Nike in Asia.
• Building factories abroad often leads to job losses at home.
International Business: Strategy, Management, and the New Realities
A Competitive Advantage for You
• Julie, the student in the opening vignette is touched
everyday by a variety of global business
transactions.
• She is considering a career in international business
because she is grasping its importance and growing
role in the world.
• Working across national cultures exposes managers
to a diversity of experiences, new knowledge, novel
ways of seeing the world, and unusual challenges.
• Internationally-experienced managers are typically
more self-confident, cosmopolitan, and have
positioned themselves for unique professional
opportunities.
International Business: Strategy, Management, and the New Realities