ROCKVIEW UNIVERSITY

INTERNATIONAL BUSINESS
MODULE ONE
BBS 320

Email: [email protected]
Website: www.rockviewuniversity.edu.com
TABLE OF CONTENT
INTRODUCTION TO INTERNAL BUSINESS page 1
Introduction to internal business
Meaning internal business
Features internal business
Importance internal business
Merits and demerits internal business

GLOBALIZATION page 11

Introduction
Meaning globalization
Purpose of massive Globalization.
Effects of Globalization.
Forms of Globalization.
Driver of Globalization.
Market drivers
Cost drivers.
Merit and demerits globalization
Globalization debate

COUNTRY DIFFERENCE page 26

Introduction.
Political systems.
Economic systems.
Legal systems.
Culture systems.
Importance of systems to global business.

INTERNATIONAL TRADE page 56

Introduction.
Reasons for international trade.
Problems encountered in international trade.
Risk in international trade.
Government in international trade.

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 UNIT 1: INTRODUCTION TO INTERNATIONAL BUSINESS

Learning Outcomes
After studying this unit, you should be able to:

 Give definitions of international business

 Describe the major features of international business
 Discuss the importance of international business
 Provide reasons for the growth of international business
 Debate the advantages and disadvantages of international business

1.1 Introduction
Daniels, et al (2013), Hill (2012) including Ball, et al (2010) and other important authors all
agree that “International Business” is the most preferable and essential phenomena in the
modern world. In the 21st century, majority of the people know that ‘International Business’
is necessary for the prosperity of the entire world. Actually, they realize that no one can
prosper without performing or taking part in international business.

Furthermore, in today’s fast-changing economy, businesses need to predict, coordinate and

integrate interactions and relationships among different countries. Looking back, within the
few decades, the individual nations’ surrounding environments have enormously changed
creating inevitable interrelationships across the countries of the world.

In this era, even if a firm has no plan to go international, eventually all businesses are
influenced by the global economy wave. Therefore, when a firm plans to go abroad,
understanding and successfully reflecting those environmental changes is vital to achieve
competitive advantages in the global business arena.

1.2 Meaning of international business

International Business is also known as Global Business or International Marketing.
It can be defined in several ways. Some of the definitions include the following;

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  International business is the economic system of exchanging goods and services,
conducted between individuals and businesses in multiple countries.
 International Business field is concerned with the issues facing international
companies and governments in dealing with all types of cross border transactions.
 International Business involves all business transactions that involve two or more
countries.
 International Business consists of transactions that are devised and carried out
across borders to satisfy the objectives of individuals and organizations.
 International Business consists of those activities, private and public enterprises that
involve the movement across national boundaries of goods and services, resources,
knowledge or skills.

The definitions above show that International Business involves conducting business
transactions all over the world. These transactions include the transfer of goods, services,
technology, managerial knowledge and capital to other countries. But, most importantly,
international business deals with exports and imports.

1.3 Features of International Business

Like any other business, it is important to identify the characteristics or features of
international business. This will eventually enable us to know and understand the nature of
international business. The following are some of the major features of international
business:

• Large scale operations

In international business, all the operations are conducted on a very massive scale. As a
result, production and marketing activities are conducted on a large scale. However, goods
are initially sold in the local market. After satisfying the local demand, the surplus goods
are exported.

• Integration of economies
International business integrates (combines) the economies of many countries. This can be
illustrated as follows:

Firstly, it uses-

S finance from one country S labour

from another country
S infrastructure from another country.

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Secondly, It

S designs the product in one country S produces its parts in many different countries S
assembles the product in another country.

Finally,

S It sells the product in many countries, i.e. in the international market.

• Dominated by developed countries and MNCs

Generally, international business is dominated by developed countries and their
multinational corporations (MNCs). At present, MNCs from USA, Europe and Japan
dominate (fully control) foreign trade. The following reasons make it possible for the
developed countries to play a dominant role on the international market:

S they have huge financial and other resources

S they also have the best technology and research and development (R & D)
S they have highly skilled employees and managers because they give very high
salaries and other benefits.

As a result of the factors given above, developed countries produce superior quality goods
and services at low prices. This helps them to capture and dominate the world market.

• Benefits to participating countries

International business gives benefits to all participating countries. It has been noted,
however, that the developed (rich) countries get the maximum benefits.

The developing (poor) countries also get benefits. Mainly these benefits are in form of:

S foreign capital S technology

S rapid industrial development S more employment opportunities

The above benefits result in economic development of the developing countries. Therefore,
developing countries open up their economies through liberal economic policies.
• Intense competition
International business has to face a lot of competition in the world market. Practically, the
competition is between unequal partners i.e. developed and developing countries. In this
intense competition, developed countries and their MNCs are in a favourable position
because they produce better quality goods and services at very low prices. In addition,
developed countries have many contacts in the world market. In view of this, developing

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countries find it very difficult to face competition from developed countries.

• Special role of science and technology

International business gives a lot of importance to science and technology. This is because
Science and Technology (S & T) help the business to have large-scale production.
Admittedly, developed countries use high technologies. Therefore, they dominate global
business. However, International business helps them to transfer such top high-end
technologies to the developing countries.

• International restrictions
International business faces many restrictions on the inflow and outflow of capital,
technology and goods. Many governments do not allow international businesses to enter
their countries. They put in place many trade blocks, tariff barriers, foreign exchange
restrictions, etc. Such restrictions can be harmful to international business.

• Sensitive nature
The international business is very sensitive in nature. Consequently, any change in the
economic policies, technology, political environment, etc has a huge impact on it. In view
of the above, international business must conduct regular marketing research to find out and
study these changes. In this respect, those engaged in international business must inevitably
adjust their business activities and adapt accordingly in order to survive the changes.

1.4 Importance of International Business

At this stage, we are able to argue that different countries and companies are given the
chance to expand and to share their products and services to others beyond their own
territory. In fact, there is an actual give and take scenario between two or more nations that
sign a mutual agreement of trading.

The points below highlight the importance of international business:

• Expand sales
Businesses will have the chance to expand their companies and to be known to other
countries. Undoubtedly, this will increase their profits rather than restricting their business
within their own borders.

At domestic level, we will also benefit from this since new products, technologies and
services are being offered for us to use. And, because we allow them to export their goods
and services to us, we are also given the chance to export our own products to them. In this

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way, both our local businessmen and government will also earn.

• Earn foreign exchange

International business promotes exports of goods and services all over the world. This helps
to earn valuable foreign exchange for the countries involved. This foreign exchange is used
in so many aspects. For example, it helps a country to pay for its imports, makes the
business more profitable and strengthens the economy of a country.

• Optimum utilization of resources

In international business, there is a high chance of making optimum utilization of resources.
It utilizes resources from all over the world because those involved produce goods on a very
large scale for the international market. While international business uses the finance and
technology of rich countries, it makes enormous use of the raw materials and labour of the
poor countries.

For instance, countries that are rich in fuel, minerals and many more can utilize their
resources by sharing them to others. Instead of keeping these resources, they can share them
to other countries so that they also have the benefits. In return of their resources, they can
have more income for their government.

• Earn high profits

The main objective of doing business at international level is to earn high profits. Hence,
international business achieves this objective easily and quickly. This is because companies
involved:

S use the best technology S have the best employees

and managers S produce high-quality goods S sell their
goods all over the world (wider market).
• Spread business risks
International business makes it possible for business to spread many business risks. This is
due to the fact that business is conducted all over the world. So, a loss in one country can be
balanced by a profit made in another country. In addition, the surplus goods in one country
can be exported to another country. Similarly, the surplus resources can also be transferred
to other countries. As a result, potential business risks are minimized.

• Improve organization’s efficiency

International business requires very high organisation efficiency. This is because without efficiency,

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the participants will not be able to contend with the competition in the international market.
Consequently, they are expected to use all the modern management techniques to improve
their efficiency.

Further, they can hire the most qualified and experienced employees and managers. They
also need to ensure that employees are trained regularly, exceedingly motivated with very
high salaries and other benefits such as international transfers, promotions, etc. All these
strategies result in high organizational efficiency, i.e. low costs and high returns.

• Increase competitive capacity

International business contributes to the production of high-quality goods at low cost.
However, to sell these goods, a lot of money is spent on advertising and promoting them all
over the world. In addition, involvement in international business entails use of superior
technology, efficient management techniques, effective marketing techniques, etc. With
such factors at play, international business is made more competitive.

• Opens new opportunities

If there are increasing numbers of foreign companies in a particular country, they will need
more manpower to help them in running their business. Thus, the locals will be given the
chance to use and to share their skills and knowledge, once they are hired.

In return, people gain income to provide the needs of their family. The agreement also
implies that people can go to other countries to work, to study or to live.

• Gives new technologies

Through international business, some countries are able to access technologies which other
countries have invented. Clearly, modern appliances and computers invented and
manufactured by different countries help us in our daily living and the standard of living is
greatly enhanced.

Hence, countries that lack the means to create new high quality technologies can have an
opportunity to enjoy the benefits once these technologies are exported to them.

• Provides variety of quality products

Different countries have their own unique and useful products and services that they can
offer to the world. Accordingly, there are wide varieties of choices when it comes to brands,
prices, designs and features. In this way, we can choose the best ones that are useful to us.

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• Investment in infrastructure
Countries that deal with international business need to invest in infrastructure such as road
and rail. This will help them in transporting and communicating with other business
partners and customers. The people will also benefit since these infrastructural
developments are open to be used by the public.

1.5 Growth of international business

International business has grown rapidly. This growth is mainly attributed to the following:

• Developments in Communication and Technology

Technology such as email, conference calls and video conferencing is one of the main
reason for growth in international business. For example, most MNCs offer the internet to
communicate with customers. Customers visit a company’s website and the company can
build database from the website visits. They use it to market products to those customers.
• Time Zones
Although technology makes business communication easier, it has limitations. For example,
employees need to know time zones for different countries when conducting business. If
you have a conference call with people in different countries you need to schedule it within
business hours of all parties involved.

There are 24 time zones in the world. Time is measured in hours ahead of or behind the
time in Greenwich, England. Before the introduction of time zones, each different city
would have its own local time, which would make transport (e.g. railway) schedules very
confusing.

• Developments in Transportation
Faster means of transport have greatly increased international business. The availability of
perishable goods such as flowers, fruits, vegetables and meats, has increased due to
refrigerated containers on trucks, trains and ships.

Universally, transportation system includes five modes of transportation: ship, rail, airplane,
road and pipeline. Here is a brief summary of the modes of transport:
S Shipping by sea is used for national and international deliveries of bulky cargo. S
Rail is widely used within many countries for local and international haulage of goods.
S Trucks and busses are used for inter-continental transport.
S Air is used for national and international deliveries, mainly for small and light,

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 important or valuable goods.
S Pipelines across a number of countries are used to transport natural gas and crude oil
over great distances.

• Business Confidence
International trade has become less risky, less costly and to a very large extent, less time-
consuming. National and international institutions such as banks, postal services and
insurance companies, for example, have agreements that provide for better credit services,
currency conversion agreements and insurance against damage and nonpayment.

With the reduction in business risks, companies can feel confident in searching worldwide
for new ideas, products, manufacturing processes and intellectual property to import them
to the home country or to establish a presence in another country. There is also huge effort
made in increasing security of the internet. Hence, wireless communication is easier and
safer.

For example, large courier companies such as DHL that operate worldwide now also make
deliveries predictable and timely. Finally, the ability to plan confidently allows companies
to operate more efficiently and more reliably on the global market.
• Freer Borders
In the modern era, business transactions across borders have become smoother. Actually,
countries that have very few barriers to moving goods, services and resources across their
borders become attractive to businesses in other countries. Also, the lowering of customs
duties and the reduction of other trade barriers can be negotiated through trade agreements
among countries and groups of countries.

• Global Competition
Global competition has grown steadily over the last few years. New products are being
introduced and new companies are being established. If a company sets up in a country and
makes a new product, improves on an old one or begins resale of already available goods,
competition for all businesses that manufacture related products is created.

1.6 Advantages and disadvantages of international business

International business has both advantages and disadvantages.

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Advantages
• Lower marketing costs: If you are to consider the lump-sum cost, then, yes, it is high,
but the same cost goes even higher if the company has to market a product differently
in every country that it is selling.
• Global scope: Scope of this kind of business is so large that it becomes a unique
experience.
• Brand image consistency: International business allows a company to have a consistent
image in every region that it chooses to market the product.
• Quick and efficient use of ideas: A global entity is able to use a marketing idea and
mold it into a strategy to implement on a global scale.
• Uniformity in marketing practices: A global entity can keep some degree of uniformity
in marketing throughout the world.
•
Disadvantages
• Inconsistency in consumer needs: Recognition that consumers all over the world have
different preferences is important. For example, an American consumer will be
different from the African. Therefore, international business should seriously address
such inconsistencies in consumer needs.
• Consumer response inconsistency: A consumer in one country may react differently
than a consumer in another country. This could be attributed to a number of reasons.
For example, cultural beliefs.
• Country specific brand and product: It is quite costly and difficult to manufacture
country specific brands and products. Hence, a global strategy is difficult to devise.
For instance, Japanese might like a product to have a traditional touch, whereas an
American might like to add a modern look to it.
• The laws of the land have to be considered: Original company or business policies
may be according to the laws of home countries. However, the overseas laws may be
conflicting in these policies.
• Infrastructural differences: Infrastructure may be hampering the process in one country and
accelerating in another. Global strategy cannot be consistent in such a scenario.

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 Summary
This unit has described international business and the various forms of international
business. In addition, the following issues were fully discussed, features of international
business, importance of international business and growth of international business.

Activity

1. What is international business? Discuss the features of international business.

2. Explain the factors leading to the growth of international business.

Readings
Ball, D.A., Geringer, J. M., Minor M. S. and McNett, J. M. (2010).International Business:
The challenge of global competition.. London: McGraw-Hill.

Brooks, I and Weatherson, J. (2009). The Business Environment: challenges and

Changes. Edinburgh: Pearson Education Limited-Prentice Hall.

Folsom, Gordon, Spanogle and Fitzgerald. (2009). International Business Transactions

Tenth Edition. St. Paul: Thomson Reuters.

Hill, C.W. L. (2012). International Business: Competing in the Global Marketplace. New
York: McGraw-Hill.

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2 UNIT 2: GLOBALIZATION

Learning Outcomes

After studying this unit, you should be able to:

 Give the meaning of globalization

 State the key indicators of globalization
 Describe the forms of globalization
 Discuss the drivers of globalization
 Justify the globalization debate
 Examine the advantages and disadvantages of globalization

“No man is an island; entire of itself ... every man is a piece of the continent, a part of the
main ...” John Donne (1572-1631)

“The World Is Flat" Friedman

2.1 Introduction
There is a lot of literature which show that globalization has progressed significantly in the
past few decades. This has mainly been facilitated by modern communication,
transportation and improved infrastructure as well as the political choice to consciously
open markets to international trade and finance.

Included in this wave of globalization were the efforts of large companies (MNCs) to
broaden the geographic reach of their products. Today, multinational companies exhibit a
degree of trans nationality that would not be possible without the facilitating character of
globalization.

2.2 Meaning of Globalization

The term globalization encompasses a range of social, political and economic changes.

2.2.1 Some definitions

Globalization is defined in the following ways:

• The process by which the international exchange of goods, services, capital, technology

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 and knowledge becomes increasingly interconnected.

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• The process by which businesses create value by leveraging their resources and
capabilities across borders and include the coordination of cross-border manufacturing
and marketing strategies.
• The integration of national economies through trade, investment, capital flow, labour
migration and technology.
• The process of international integration arising from the interchange of world views,
products, ideas and other aspects of culture.
• The International Monetary Fund (IMF) defined globalization as a growing economic
interdependence of countries worldwide through the increasing volume and variety of
cross-border transactions in goods and services, free international capital laws and more
rapid and widespread diffusion of technology.

From the above definitions, it is clear that the concept of globalization refers to the shift
toward a more integrated and interdependent world economy. Thus, it is a trend toward
countries joining together economically, through education, society and politics and
viewing themselves not only through their national identity but also as part of the world as a
whole.

Its major aim is to expand and accelerate the exchange of ideas and commodities over
enormous distances.

2.2.1 Purposes/Motive of globalization

Among the major purposes of globalization are the following:
• Sales expansion
• Acquisition of resources like labour, capital, components, land, technology and
information
• Diversification of sales and supply of sources so as to minimize swings in sales and
overdependence on suppliers
• To minimize competitive risks for defensive purpose.

2.3 Key Indicators of globalization

Some of the key indicators of increased globalization within certain areas include;
• an increase in multinational enterprises
• an increase in direct foreign investment
• the financial market becoming more mature and internationalized
• increases in budget and development of transport and communication technologies

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• loosening of regulation or deregulation and more liberalized laws
• privatization of many of the general public services and assets

2.4 Effects of Globalization

The effects of globalization can be viewed from several facets. We state some of them
below;

• enhancement in the information flow between geographically remote locations

• the global common market has a freedom of exchange of goods and capital
• there is a broad access to a range of goods for consumers and companies
• worldwide production markets emerge
• free circulation of people of different nations leads to social benefits
• global environmental problems like cross-boundary pollution, over fishing on oceans,
climate changes are solved by discussions
• more trans-border data flow using communication satellites, the Internet, wireless
telephones, etc.
• international criminal courts and international justice movements are launched
• it is claimed that globalization increases the economic prosperity and opportunity in the
developing world.
• the civil liberties are enhanced and there is a more efficient use of resources. All the
countries involved in the free trade are at a profit.

2.5 Forms of globalization

The Globalization of the World Economy has many important forms, including the
globalization of markets and the globalization of production.

Globalization can be in the following forms:

2.5.1 Economic Globalization
No national economy is an island now. To varying degrees, national economies influence
one another. One country which is capital-rich invests in another country which is poor.
One who has better technologies sells these to others who lack such technologies.

The products of an advanced country enter the markets of those countries that have
demands for these products. Similarly, the natural resources of developing countries are
sold to developed countries that need them. Thus, globalization is predominantly an
economic process involving the transfer of economic resources from one country to

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another.

2.5.2 Cultural Globalization

Culture has increasingly become a commodity. Popular books and films have international
markets. For example, Harry Potter has readers almost all over the world, American movies
are seen almost in all countries and Western pop music has become popular in developing
countries. The reverse flow of culture is insignificant. The flow of culture is mainly from
the North to the South. In the last few years the media owners of the West have shown
interest in entering developing countries.

Cultural globalization has been facilitated by the information revolution, the spread of
satellite communication, telecommunication networks, information technology and the
Internet etc. This global flow of ideas, knowledge and values is likely to flatten out cultural
differences between nations, regions and individuals.

As this flow of culture is mainly from the centre to the periphery, from the North to the
South, and from the towns and cities to villages, it is the cultures of villages of poor
countries which will be the first to suffer erosion.

2.5.3 Political Globalization

This is the spread of political interests to the regions and countries outside the
neighborhood. Since long, efforts have been on to bring the whole world under one
government. The League of Nations and the UN have been the efforts in that direction. It is
believed that the world under one government will be safer and freer from conflicts. The
UN has faced expectations, but a number of regional organisations like European Union,
ASEAN, APEC and SAARC and multicultural economic organisations such as WTO have
come up.
Although member-states remain sovereign, through their obligations and commitments,
they have, to some extent, integrated themselves to the concerned international
organisations and groupings.

2.5.4 Globalization of markets

The globalization of markets refers to the merging of historically distinct and separate
national markets into one huge global marketplace. In many markets the emergence of a
global marketplace has begun to occur. There are three causes: falling barriers to cross-
border trade have made it easier to sell internationally; tastes and preferences are
converging on some global norm helping to create a global market; and firms are

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facilitating the trend by offering standardized products worldwide creating a global market.

This is facilitated by offering standardized products. For example;

S Coca-Cola S Sony
PlayStation S
McDonalds S Subway
S Starbucks S IKEA
furniture

2.5.5 Globalization of production

The globalization of production refers to the sourcing of goods and services from locations
around the globe to take advantage of national differences in the cost and quality of factors
of production (such as labor, energy, land and capital).

In this case, companies hope to lower their overall cost structure and/or improve the quality
or functionality of their product offering and increasing their competitiveness. Thus, the
implication is that production dispersed to economical locations due to transportation and
communication advances.

2.5.6 Globalization of Trade

This includes industrial globalization, which refers to the rise and expansion of
multinational companies (MNCs). In this century, the decline of barriers to trade has
immensely contributed to the increase in the levels of trade across borders.

2.5.7 Globalization of Investment

Investment barriers are disappearing. As a result, we have seen emergence of worldwide
financial markets and better access to external financing for corporate, national and sub-
national borrowers.

2.5.8 Globalization of finance

Perceived distances are shrinking due to advances in technology, transportation and
telecommunications. Some financial institutions are now operating at a global level.
Coupled with enabling domestic regulations in the host countries, some banks, for example,
Barclays Bank, have penetrated many countries of the world.

2.5.9 Informational globalization

There is a tremendous increase in information flow between geographically remote
locations.

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2.6 Drivers of Globalization
The main forces that have driven global integration have been expansively talked about by a
number of international business experts. Factors that contribute to globalization include
increasingly sophisticated communications and transportation, technologies and services,
mass migration and the movement of people, broader political changes and economic
policies.

In fact, we acknowledge the view that there is a level of economic activity that has
outgrown national markets through industrial combinations and commercial groupings that
cross national frontiers and international agreements that reduce the cost of doing business
in foreign countries.

The drivers of globalization can be classified into;

2.6.1 Market Drivers

As domestic markets become more and more saturated, the opportunities for growth are
limited and global expanding is a way most organizations choose to overcome this situation.
Common customer needs and the opportunity to use global marketing channels and transfer
marketing to some extent are also incentives to choose internationalization.

S Per capita income converging among industrialized nations

s Convergence of lifestyles and tastes s Organisations
beginning to behave as global consumers s Growth of global
and regional channels
s Global Customers due to increased travel and organizational buying s
Increasing number of world brands and global advertising

Globalization of markets and reorganization of distribution are mutually dependent

processes that involve changes in market structures (Mattsson & Wallenberg, 2003).

• Per Capita Income

The total national income divided by the number of people in the nation. Per capita income
is a measure of a country's living standard. It is the earning of each person when the
national income is evenly divided among the country's population.

Per capita income, also known as income per person, is the mean income of the people in
an economic unit such as a country or city. It is calculated by taking a measure of all

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sources of income in the aggregate (such as GDP or Gross national income) and dividing it
by the total population. Per capita income is often used as average income, a measure of the
wealth of the population of a nation, particularly in comparison to other nations. Per capita
income is often used to measure a country's standard of living. It is usually expressed in
terms of a commonly used international currency such as the Euro or United States dollar,
and is useful because it is widely known, easily calculated from readily- available GDP and
population estimates, and produces a useful statistic for comparison of wealth between
sovereign territories. This helps the country to know their development status.

Rank Country Per capita - GDP (PPP)

1 Qatar $102,211

2 Luxembourg $79,785

3 Singapore $60,410

4 Norway $55,009
5 Brunei $54,389

6 Hong Kong $51,494

7 United States $49,922

8 United Arab Emirates $49,012

9 Switzerland $45,418

10 Canada $42,734
13 The Netherlands $42,194

198 Zambia (Rank 198 of 226 countries) $1,700

www.rediff.com and CIA World Factbook

This entry shows GDP on a purchasing power parity basis divided by population.
(Purchasing power parity: a rate of exchange between two currencies that gives them equal
purchasing powers in their own economies).

• Convergence of lifestyles

Consumer convergence can be defined as reduction in the difference of consumer product

selection within a specified population, and therefore a growing similarity of preferences.

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(Darryl J. Mitry, David E.Smith
“In many ways, consumers are growing more alike, and we all know why. Mass
communications, travel, multinational companies, the whole apparatus of the global
village” (Bullmore 2000:48).

Hence, the consumer convergence and the debate between standardization vs. adaptation
have become important. With globalization and cultural cross-fertilization, it is reasonable
to believe that societies are converging in many ways (Usunier, 2000). For example, people
around the world are selecting and wearing mostly the same type of clothing, paying to see
many of the same films, watching typically the same type of programs on television and
youth are playing the same digital games on computers.

• Global consumers
These are consumer groups living in many countries or regions of the world who have
similar needs or seek similar features and benefits from products or services.

• Global Channels
The challenge to global distribution management is to structure a supply chain that is
responsive and flexible enough to cope with differences in customers' requirements and yet
enable the benefits of focused manufacturing to be achieved. (Schary & Skjott- Larsen,
1995). According to Black et al (2002) the past decade has seen some of the most rapid and
substantive changes in channels of distribution for goods and services in developed
economies.

2.6.2 Cost Drivers

Sourcing efficiency and costs vary from country to country and global firms can take
advantage of this fact. Other cost drivers to globalization are the opportunity to build
global scale economies and the high product development costs nowadays.

S Continuing push for economies of scale S Accelerating technological

innovation
S Advances in transportation
S Emergence of newly industrialized countries with productive capability and low
labour costs
S Increasing cost of product development relative to market life

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2.6.3 Government Drivers
Liberalized trading rules and deregulated markets lead to lower tariffs and allow foreign
direct investments in almost all over the world. The institution of General Agreement on
Tariffs and Trade 1947 (GATT) and the World Trade Organization 1995 (WTO) as well as
the ongoing opening and privatization in Eastern Europe are only some examples of latest
developments.

S Reduction of tariff barriers S Reduction of non-tariff barriers S Creation of blocs

S Decline in role of governments as producers and consumers S Privatization in
previously state-dominated economies
S Shift to open market economies from closed communist systems in eastern Europe
S Increasing participation of China and India in the global economy

2.6.4 Competitive Drivers

S Continuing increases in the level of world trade S Increased ownership of
corporations by foreign acquirers S Rise of new competitors intent upon becoming
global competitors S Growth of global networks making countries interdependent in
particular industries
s More companies becoming globally centred rather than nationally centred s
Increased formation of global strategic alliances

2.6.5 Other Drivers: (Macro Factors)

Revolution in information and communication Microprocessors and Telecommunications
• Technological drivers
Technology has shaped and set the foundation for modern globalization. Clearly,
innovations in the transportation technology revolutionized the industry. The most
important developments among these are the commercial jet aircraft and the concept of
containerization in the late 1970s and 1980s. Inventions in the area of microprocessors and
telecommunications enabled highly effective computing and communication at a low-cost
level. Finally, the rapid growth of the Internet is the latest technological driver that created
global e-business and e-commerce.

Undoubtedly, the technological progress is one of the main driving forces of globalization
since it shortens distances in a broad sense by reducing transport and communication costs.
This is further fostered by the elimination of politically-imposed barriers in recent years.

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2.7 Advantages and disadvantages of Globalization
There are many advantages to nation states from globalization but there are also many
downsides of globalization. Here, we discuss these points in more detail.

2.7.1 Advantages of Globalisation

On the positive side;

• Globalization has the power to transform nations by contributing to better living

standards and generating wealth for any of the nations involved in the production of the
goods or services. Also, consumers are given an opportunity to have a much wider
variety of products to choose from at more competitive prices.
• Resources of different countries are efficiently used for producing goods and services.
Therefore, the more skills, manufacturing or resources a nation has the more they
should benefit from globalization.
• Globalization can also have a positive effect on third world nations by helping to lift
countries out of the poverty. Greater economic growth is often realized and is the result
of a virtuous economic cycle.
• Financial investors and businesses from developed countries can invest in the large
scale production capabilities and untapped customer base available in the mineral, gas
and oil products as well as the farming and agricultural skills of developing countries.
There is an increased liquidity of capital allowing investors in developed nations to
invest in developing nations. In this way, businesses and investors get much wider
opportunities for investment.
• Companies are able to procure input goods and services required at most competitive
prices. In addition, they get access to much wider markets.
• It promotes understanding and goodwill among different countries.
• Adverse impact of fluctuations in agricultural productions in one area can be reduced by
pooling of production of different areas.
• There are far greater opportunities now available for employees of developing countries.
The skilled and educated individuals can now compete in a global market place for high
paying positions based in other countries. Production workers in developing countries
can not only compete but are at a clear advantage to developed countries due to cheaper
labour and supply capabilities
• There is increased free trade between nations. Therefore, corporations have greater
flexibility to operate across borders.
• Clearly, global mass media ties the world together. This means that increased flow of
communications allows vital information to be shared between individuals and

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 corporations around the world. Additionally, there is greater ease and speed of
transportation for goods and people.
• It has been realized that the reduction of cultural barriers increases the global village
effect. For example, spread of democratic ideals.
• Reduction of likelihood of war between developed nations.
• Increases in environmental protection in developed nations.

2.7.2 Disadvantages of Globalisation

There is also the downside of globalization. The key disadvantages are;

• Exploitation of underdeveloped countries: Multinational Corporations (MNCs), based

in developed countries, purchase raw materials at lower rates from developing
countries, process them in their own countries and sell the manufactured goods with big
profit in developing and underdeveloped countries.
• Increase in unemployment: The developed countries and MNCs employ machines to
reduce the number of employees: they are capital intensive rather labour. More
devastating is the fact that some governments of developing countries have started
withdrawing investment from industries in the public sector. All this has led to huge
unemployment in the affected countries.
• Widening of rich-poor gap: Globalization brings benefits to the rich who are small in
number and keeps the vast majority of people in poverty and misery. It is a game of
winners and losers. Those who are already rich succeed in taking advantage of
privatization while the poor and weak are doomed to suffer. The World Bank also backs
up the general feeling that certain nations are getting worse.
• Harmful effects of consumerism: Globalization produces consumerism. People being
coerced by attractive goods and advertisements, want to buy these goods. Therefore,
they would not hesitate to earn money for this by unfair means. This has resulted in vast
increase in corruption and other social evils.
• Adverse Effects on Social Security and Social Welfare: Because of privatization,
governments in many developing countries are withdrawing from the sector of social
welfare. In the modern world, private companies have entered education, health and
other such fields related to development. As a result of this, poor people are facing a lot
of difficulties.
• Harmful effects on small industries and small business: In the free economy, the big
fish has got license to eat the small fish. Small-scale and medium industries cannot

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 grow due to competition with big ones.
• Cultural homogenization: Globalization would lead to cultural homogenization. Each
nation or society has its own distinct culture. However, under globalization, the cultures
of developing countries are eroded and they are required to accept the values and norms
of developed countries.
• Hostile to humanism: Globalization would kill humanism. It aims at accelerating
economic growth and economic growth, according to its character, can be quickly
attained through privatization. However, we know that pursuit of growth hardly respects
human values.
• Erosion of democracy: Globalization has led to the weakening, erosion and even
destruction of democracy. Globalization has considerably increased the wealth and
power of multinational corporations and they have tended to interfere with and control
the economic policy and politics of developing countries.
• Gender-Insensitive: Globalization is said to be gender-insensitive. Some researchers
have shown that women have suffered a lot under globalization. In the privatized
economy, the interests and concerns of women, particularly of poor women, have been
seriously ignored.
• Destruction of the environment: Globalization has contributed to the rapid destruction
of the natural environment. In the name of economic development, protection of the
environment is overtly ignored.
• Adverse competition: Companies face much greater competition. This can put smaller
companies at a disadvantage as they do not have resources to compete at global scale.

Other disadvantages include;

• Spread of a materialistic lifestyle and attitude that sees consumption as the path to
prosperity.
• International bodies like the World Trade Organization infringe on national and
individual sovereignty.
• Increase in the chances of civil war within developing countries and open war between
developing countries as they vie for resources.
• Decreases in environmental integrity as polluting corporations take advantage of weak
regulatory rules in developing countries
• Increased flow of skilled and non-skilled jobs from developed to developing nations as
corporations seek out the cheapest labor Increased likelihood of economic disruptions in

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 one nation affecting all nations. Corporate influence of nation-states far exceeds that of
civil society organizations and average individuals
• Threat that control of world media by a handful of corporations will limit cultural
expression.
• Greater chance of reactions for globalization being violent in an attempt to preserve
cultural heritage.
• Greater risk of diseases being transported unintentionally between nations.
• The impact on social well-being of certain sections of society have been significant
resulting in large groups of the population of the world being excluded and suffering
from low wages and unemployment with no discernible means of improvement.

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2.8 Globalization debate
Kofi Annan in 2000 stated that:
"It has been said that arguing against globalization is like arguing
against the law of gravity. But that does not mean we should accept a law
that allows only heavy-weights to survive. On the contrary: we must make
globalization an engine that lifts people out of hardship and misery, not a
force that holds them down. We must build partnerships strong enough to
make sure that the global market is embedded in broadly shared values
and practices that reflect global needs, so that globalization can benefit all
the world's people."
Since the process of globalization is so widespread and dynamic, its pros and cons have
been some of the most hotly-debated topics in international economics in recent years.
S Destroys manufacturing jobs in wealthy, advanced countries S Wage rates of unskilled
workers in advanced countries declines S Companies move to countries with fewer labor
and environment regulations S Loss of sovereignty S The rich-poor gap

Globalization is the idea that people are now more connected across the globe than ever
before. Goods and services are traded worldwide. Items from one part of the world are
available in a large number of other nations. Travel between nations is also very frequent,
leading to an increase in exchange of ideas and ideologies. Thus, ideas and culture are much
more uniform worldwide than ever before, and many cultures have melded and meshed.
The internet has contributed largely to globalization, as instant communication with anyone
in the world is now possible. Whether or not globalization is good for the world economy is
debatable, however.

Summary

Globalization offers huge potential profits to companies and nations but has been
complicated by widely differing expectations, standards of living, cultures and values, and
legal systems as well as unexpected global cause-and-effect linkages.

Clearly, globalization allows for the linking of skills and assets in a way not thought
possible before in our history. From the unit, we learn that no one country can supply all the
main attributes of a globalized process and so linking with other nations can benefit all
concerned. With globalization, countries are integrated and heavily dependent on each other
for all sorts of transactions. Globalization results in economic, cultural, technological and

26 | P a g e
legal changes in the global market.
Globalization is the idea that people are now more connected across the globe than ever
before. Goods and services are traded worldwide. Items from one part of the world are
available in a large number of other nations. Travel between nations is also very
frequent, leading to an increase in exchange of ideas and ideologies. Thus, ideas and
culture are much more uniform worldwide than ever before, and many cultures have
melded and meshed. The internet has contributed largely to globalization, as instant
communication with anyone in the world is now possible.

Activity
1. What is globalization? Discuss the key indicators of globalization.
2. How have changes in technology contributed towards the globalization of markets
and of production?
3. Critically analyze the main drivers of globalization.
4. Is globalization good or bad? Provide a detailed essay of your perspective
5. The study of international business is fine if you are going to work in a large jj
multinational enterprise, but it has no relevance for individuals who are going to
work in small firms." Evaluate this statement.

Readings
Ball, D.A., Geringer, J. M., Minor M. S. and McNett, J. M. (2010).International Business:
The challenge of global competition.. London: McGraw-Hill.

Brooks, I and Weatherson, J. (2009). The Business Environment: challenges and

Changes. Edinburgh: Pearson Education Limited-Prentice Hall.

Folsom, Gordon, Spanogle and Fitzgerald. (2009). International Business Transactions

Tenth Edition. St. Paul: Thomson Reuters.

Hill, C.W. L. (2012). International Business: Competing in the Global Marketplace. New
York: McGraw-Hill.

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3 UNIT 3: COUNTRY DIFFERENCES

Learning Outcomes

After studying this unit, you should be able to;

 Discuss political systems

 Describe the economic systems
 Identify different legal systems
 Explain the differences in culture
 Understand the impact of all the systems to global business

3.1 Introduction
As noted in the preceding units, international business is much more complicated than
domestic business because countries differ in many ways. It is an acknowledged fact that
countries have different political, economic, cultural and legal systems. They also differ
in terms of the currencies and technology. Other areas in which differences exist include
market size, transportation costs and risks.

Therefore, this unit will attempt to discuss the differences existing among countries.
Mainly, it looks at the political, economic and legal systems. The aspect of culture is also
comprehensively dealt with. We appreciate from the onset that countries vary
significantly in their level of economic development and future economic growth route.

The main function of this unit is to develop an awareness of and appreciation for the
significance of country differences in political systems, economic systems, legal systems,
economic development and societal culture.

3.2 Political systems

The international business is also subject to political decrees made by governments both
in "home" and "host" countries. Home governments can apply pressure not to deal with
disapproved parties. These measures may take the refusal to grant an export license or
withdrawal of export guarantee cover. The host government may take measures like
taxation, ownership controls, operating restrictions or expropriation.

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 The Political Environment
Checks can be made on the legal/political system as to its ideology, nationalism,
stability and international relations.

Ideology: A country's ideological leaning may be capitalism, socialism, a mixture or

other form. In the last years remarkable changes have been taking place in the
ideologies of many countries.

Nationalism: It is primarily a phenomenon of the developing countries. Nationalism can

lead to expropriation of foreign held assets.

Stability: Changes in regime, violence and cultural divisions based on language or other
factors can lead to a very uncertain environment in which to conduct business. The
current uncertainty in Liberia and Rwanda, the violence of Somalia and Yugoslavia
increase the risk and diminish the confidence of doing business in these countries.

International relations: In general international relations have improved over the last
twenty years. The development of GATT, NATO and the EU have gone a long way to
reduce the element of "foreigness".

Expropriation: Expropriation is an extreme form of political action. It may occur for a

number of reasons, including the desire to retain national assets, as a "hostage" situation
in international disputes, for example the seizure of Union Carbide's assets after the
Bhopal disaster in India.

If expropriation is a real possibility then the investor should seek to minimise risk by:

• relatively rapid depreciation of assets and repatriation of funds by manipulated

transfer prices
• establish a local supply infrastructure so that any adverse action damages the host
economy
• raise as much investment capital in the country as possible
• retain control of critical inputs and minimise local stocks of these.

However, these measures may increase the risk of expropriation or reduce the potential
success of the venture.
Incentives: Many countries try to reduce perceived risk by promoting inward
investment through the provision of tax breaks, free ports, enterprise zones etc., which

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 are not tied as in partnering. The key is to look at what the disadvantages are. If the
government mainly wishes to attract the mobile investor, or overcome say poor local
skills, one has to assess what would happen if the scheme was withdrawn once the
capital had been committed. Similarly, if viability depends on incentives rather than
real return on investment, the question is, is the venture really worth it?

Political environments may range from a democratic system to communism with other
variations between these ideological extremes.

A country's political structure is one of the key issues considered by a company or an

individual entering a foreign environment for conducting business. Political constructs
are integrated bodies of ideas (ranging from simple to very complex) that constitute
sociopolitical platforms for different societies. A variety of political ideologies may
exist in the same society. It may, therefore, be a good idea to identify the key features
of some prevalent political ideologies:

The study of political systems is extensive and complex. A political system is basically
the system of politics and government in a country. It governs a complete set of rules,
regulations, institutions and attitudes. A main differentiator of political systems is each
system’s philosophy on the rights of the individual and the group as well as the role of
government. Each political system’s philosophy impacts the policies that govern the
local economy and business environment.

A political system has been defined by Dahl (1976) as a "persistent pattern of human
relationship that involves, to a significant extent, control, influence, power, or
authority." (p. 4).

In view of the above, the political system of a country shapes its economic and legal
systems. As such, we need to understand the nature of different political systems before
discussing economic and legal systems.
We need to be aware that political situations can be stable or unstable and can create
opportunities and threats to business.

3.2.1 Assessing political systems

Political systems can be assessed according to two dimensions.

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3.2.2 Collectivism and individualism
The first is the degree to which they emphasize collectivism as opposed to individualism.
• Collectivism

This refers to a political system that stresses the primacy of collective goals over
individual goals. When collectivism is emphasized, the needs of society as a whole are
generally viewed as being more important as individual freedoms. In such
circumstances, an individual’s right to do something may be restricted on the grounds
that it runs counter to “the good of society” or to “common good”.

• Individualism

This refers to a philosophy that an individual should have freedom in his or her
economic and political pursuits. In contrast to collectivism, individualism stresses that
the interests of the individual should take precedence over the interest of the state.

Individualism is built on two central tenets. The first is an emphasis on the importance
of guaranteeing individual freedom and self-expression. The second tenet of
individualism is that the welfare of society is best served by letting people pursue their
own economic self-interest, as opposed to some collective body (such as government)
dictating what is in society’s best interest.

In practical terms, individualism translates into an advocacy for democratic political

systems and market economies, which in general creates a more favorable environment
for international businesses to operate in.

3.2.3 Democracy and Totalitarianism

The second dimension is the degree to which countries are democratic or totalitarian.
Similarly, it is possible to have totalitarian societies that are not collectivist.
• Democracy

This refers to a political system in which government is by the people, exercised either
directly or through elected representatives.

Democracy is the most common form of government around the world today.
Democratic governments derive their power from the people of the country, either by
direct
referendum (called a direct democracy) or by means of elected representatives of the
people (a representative democracy). Democracy has a number of variations, both in

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theory and practice, some of which provide better representation and more freedoms for
their citizens than others.

Democracy Features

• Involves wide participation by citizens in the decision-making process

• Freedom of expression
• Voting rights for selection of representatives
• Independence of judiciary
• Nonpolitical and nonpartisan bureaucracy and defense infrastructure
• Limited terms of elected officials
• Empowerment of the citizens
• Assurance of political rights of citizens as indicated by:

s Fair and competitive elections s Power for elected representatives s

Safeguards on rights of minorities

• Assurance of civil liberties as indicated by:

s Freedom of press
s Equal rights of everyone under the law s Personal social freedom
s The degree of freedom from governmental indifference or corruption

The Spread of Democracy

There are three reasons for the spread of democracy:

• First, many totalitarian regimes failed to deliver economic progress to the vast bulk
of their populations.

• Second, new information and communication technologies have broken down the
ability of the state to control access to uncensored information.

• Third, the economic advances of the past quarter century have led to the emergence
of increasingly prosperous middle and working classes who have pushed for
democratic reforms.

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 • Totalitarianism

This is a form of government in which one person or political party exercises absolute
control over all spheres of human life and prohibits opposing political parties.
Totalitarianism contends that every aspect of an individual’s life should be controlled
and dictated by a strong central government.

Totalitarianism is also a more extreme form of authoritarianism. It occurs when an

authoritarian leadership is motivated by a distinct ideology, such as communism. In
totalitarianism, the ideology influences or controls the people, not just a person or party.

Totalitarianism is the other side of the political spectrum. Major features include:

• An individual, a single party, or a select group of individuals monopolizes

political power
• Non-recognition of any opposition
• Decision making is restricted to an individual or a select group of individuals
• All societal resources are monopolized by the state

Reactionary Authoritarian

Conservative Fascism

I ibcral Comm uni sm

Radical Authoritarian

Figure 1. The Political Spectrum

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 Political Risk

A major concern for any company or an individual before venturing on an international project
is whether the political situation in the host country will change in such way that the operating
position will deteriorate. It is very much a subjective business-specific event.

Haendel (1979) defines it as the occurrence of events that may change the projections for
profitability of a global business venture of a given investment. The political actions that may
affect the business or construction operations may include governmental takeover of properties
(with or without compensation), changes in import or export regulations, or even political
insurrections leading to other drastic changes. Failure to analyze and fully understand these risk
exposures may seriously affect one's objectives for profit, market share, and long-term relations.

"In the broad context of international business, political risk is defined as the risk or probability
of occurrence of some political events that will change the prospects for the profitability of a
given investment." (Chua et al, 2003).

Classification based on the characteristics of political risks

Characteristics refer to as the facts that are inherent to each political risk. In other terms, their
uniqueness or what make them different from one another. There are three types of such
characteristics: ownership risks, operating risks and transfer risks.

• Ownership risk

In which the property of the firm is threatened through expropriation, confiscation or

domestication. Ownership risk exposes property and life.

The triad will be explained in the second classification.

• Operating risk

In which there is interference with the firm operations. The ongoing operations of the and/or the
safety of its employees are threatened through changes in laws, environmental standards, tax
codes, terrorism, armed insurrection or wars, and so forth.
• Transfer risk

In which the government interferes with a firm's ability to shift funds into and out of the
country.
Political risks induced by the government

34 | P a g e
 These risks constitute some laws directed against foreign firms. Some government- induced
risks are very drastic. There are expropriation, confiscation and domestication.

• Expropriation

This is the seizure of foreign assets by a government with payment of compensation to the
owners. In other terms, it is involuntary transfer of property, with compensation, from a
privately owned firm to a host country government. Expropriation may generate some funds for
the owners. However, procedures to get paid from the government are sometimes protracted and
the final amount remains low. Furthermore, if no compensation is paid, conflicts may erupt
between the host country and the country of the expropriated firm.

• Confiscation

This is another type of ownership risk similar to expropriation, except compensation. It is

involuntary transfer of property, no compensation, from a privately owned firm to a host
country government. In confiscation, firms do not receive any funds from government. Thereby,
it represents a more risky situation for foreign firms. Some industries are more vulnerable to
confiscation than others because of their importance to the host countries and their lack of
ability to shift operations. Sectors such as mining, energy, public utilities, and banking have
been targets of such government actions.

• Domestication

This offers to governments a subtle control over the foreign investments. There is a partial
ownership transfer and companies are urged to prioritize local production and to retain a large
share of the profit within the country. Domestication can negatively impact the international
marketer activities, as well as that of the entire firm. For example, if foreign companies are
forced to hire nationals as managers, poor cooperation and communication
can result. If domestication was imposed within a short time span, poorly trained and
inexperienced local managers would head the firm operations with possible lost of profits.

• Other government actions-related risks

These are less dangerous but more common such as boycott, sabotage.

When facing shortage of foreign currency, government, sometimes, attempts to control the

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movement of capital in and out of the country.

Often, exchange controls are levied selectively against certain products or companies. Exchange
controls limit importation of goods so that firms might be confronted with difficulties in their
regular transactions.

Severe restrictions on import can be a motive for foreign corporate to shut down. Governments
may also raise the tax rate applied to foreign investors in order to control them and their capital.

Government may implement a price control system. Such control uses to derive from a sensitive
political situation. For example, social pressure may result in a kind of price standardization for
particular sectors like food, transportation, fuel, and healthcare.

Political risks like arms conflicts, insurrection may affect all firms in the country equally. For that
reason they are called macro political risks.

Unlike, nationalization, strikes, expropriation may affect only a handful and specific firm, and
they are named micro political risks.

Measuring Political Risk

• Instability: The probability of encountering political risk in a host country is considered to be

directly related to the relative stability the country's political system. This instability may
have its roots in different economic, political, and social factors. Some specific causal
factors may include communal unrest, strained international relations with neighboring
countries, social unrest, newly-acquired independence, vested interests of home country
industrial groups, proximity to armed conflict, etc. The political instability can thus be
measured as qualitative or quantitative accounting
of these correlates. An index of political instability is often produced using these
factors and marketed as political risk analysis (Ashley & Bonner, 1987). This
approach of measuring political risk, however, may not be ideal for all situations.
Political instability may not always effect all international businesses in a country.
In some situations, political instability may lead to changes that may not be at all
critical to most construction ventures. Rather than political stability, the direction in
changes in government may be more important in certain situations.
• Past patterns: Past patterns of political behavior is at times analyzed to determine

36 | P a g e
 political risk involved. However, predicting political risk on the basis of historical
records has its own drawbacks. Political situations under which risks were
encountered by companies or individuals in the past might have changed altogether;
the changed circumstances may provide a better environment for foreign investment
(e.g. Vietnam).
• Opinion analysis: Political risk may also be measured qualitatively by examining the
views of people engaged in governmental decision making and people who may
influence future political events affecting business. It involves the analysis of
statements of such people to determine their views on business in general, foreign
capital investment, the means of effecting economic changes, and their feeling
toward the host country in question. Such statements, however, should be analyzed
to determine their "inner meanings." (Sometimes statements are made for making
emotional appeals or merely to appease a particular interest group or social class.)

Impact of some political risks

Some negative effects of political risks on firm are summarized in the following table.

Table 1. Holistic table summarizing the major political risks and their effects on
firms
TYPES IMPACT ON FIRMS
Expropriation Loss of future profits
Confiscation Loss of assets
Loss of future profits
Campaigns against foreign goods Loss of sales

Kidnappings, terrorists threats, and other forms Increased costs of public relations efforts to improve
Disrupted production
public image
of violence Increased security costs
Mandatory labor benefits legislation Increased operating costs
Increased managerial costs
Lower productivity
Civil wars Destruction of property
Lost sales

Disruption of production
Increased security costs
Lower productivity
Inflation Higher operating costs

Repatriation Inability to transfer funds freely

Currency devaluations Reduced value of repatriated earnings
Increased taxation Lower after-tax profits

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Source, Ricky W. Griffin, International business, 2005, page 73

3.2.3.1 A balance of the two: Pluralism

In reality, neither extreme exists in its purest form. Instead, most countries have a
combination of both, the balance of which is often a reflection of the country’s history,
culture and religion. This combination is called pluralism, which asserts that both public
and private groups are important in a well-functioning political system. Although most
countries are pluralistic politically, they may lean more to one extreme than the other.

These dimensions are interrelated; systems that emphasize collectivism tend to lean
toward totalitarian, whereas those that place a high value on individualism tend to be
democratic. However, a large gray area exists in the middle. It is possible to have
democratic societies that emphasize a mix of collectivism and individualism.

Assessing political vulnerability

Political vulnerability should be assessed by using a systematic checklist. Such a

checklist should include the following:

• The firm's own country's relations with other countries

• Sensitivity of the product or industry
• Size and location of operation - the bigger the more vulnerable
• Visibility of firm - is it high profile say via advertising?
• Host country's political situation
• Company behaviour - is it a good corporate citizen?
• Contribution to host country, for example, employment
• Localisation of operations
• Subsidiary dependence.

Political Strategies for Conducting International Business

Some of the steps that an individual or a company may follow in order to establish
political strategies:

• Identifying the issue (e.g. protectionism, environmental standards, human

rights, workers rights, etc.)
• Defining the nature of the political issue
• Assessing the potential political action of other firms and of special interest

38 | P a g e
 groups
• Identifying important institutions and key individuals
• Formulation of strategies (objectives, alternatives)
• Determining the impact of implementation (both in home and host countries)
• Selection of the most appropriate strategy and implementation.

3.3 Economic systems

It should be clear from the above that political ideology and economic systems are
connected. In countries where individual goals are given primacy over collective goals,
we are more likely to find free market economic systems.

3.3.1 Types of economic systems

In this unit, we discuss three types of economic systems.

3.3.1.1 Pure market economy

In this economy, all productive activities are privately owned, as opposed to being
owned by the state. The goods and services that a country produces are not planned by
anyone. Production is determined by the interaction of supply and demand and signaled
to
producers through the price system. If demand for a product exceeds supply, prices will
rise, signaling producers to produce more.

3.3.1.2 Pure command economy

Here, the government plans the goods and services that a country produces, the quantity
in which they are produced, and the prices at which they are sold. Consistent with the
collectivist ideology, the object of a command economy is for government to allocate
resources for “the good of society”.

In addition, in a pure command economy, all businesses are state owned, the rationale
being that the government can then direct them to make investments that are in the best
interests of the nation as a whole rather than in the interests of private individuals.

3.3.1.3 Mixed economies

In a mixed economy, certain sectors of the economy are left to private ownership and
free market mechanisms while other sectors have significant state ownership and
government planning. Mixed economies were once common throughout much of the
world, although they are becoming much less so.

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The Nature of Economic Transformation

These changes have involved:

Deregulation - removing legal restrictions to the free play of markets, and allowing the
establishment and operations of private enterprises.

Privatization - transferring the ownership of state property into the hands of private
individuals, frequently by the sale of state assets through an auction.

Privatization - a way to unlock gains in economic efficiency by giving new private

owners a powerful incentive—the reward of greater profits—to search for increases in
productivity, to enter new markets, and to exit losing ones.

3.4 THE LEGAL ENVIRONMENT

Most controls or regulations revolve around export and import controls, transfer pricing,
taxes, regulation of corrupt practices, embargoed nations, antitrust, expropriation and
distribution of equity, patents and trademarks. The following touches on a number of
these issues and in particular the import/export regulations (terms of access).

3.5 Legal systems

The legal system of a country refers to the rules or laws that regulate behavior along
with the processes by which the laws are enforced and through which redress for
grievances is obtained. The legal environments of countries differ in significant ways.

Issues

Most issues in the legal environment centre around the following:-

• "Institutional environment" - made up of political, social and legal ground rules

within which the global marketer must operate.
• Property rights - patents, trademarks.
• Taxation - what taxation schemes will be faced abroad?
• Recourse - possibility and length of action with the possibility of image damaging
necessitating arbitration.
• Movement of equity and expropriation threats - often necessitating protocols or
the signing of trade frame working agreements.

3.5.1 Types of legal systems

In essence, there are three main kinds of legal systems; common law, civil law and
religious or theocratic law. Most countries actually have a combination of these
systems, creating hybrid legal systems.

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3.5.1.1 Civil law
This is based on a detailed set of laws that constitute a code and focus on how the law is
applied to the facts. It is the most widespread legal system in the world.

3.5.1.2 Common law

This is based on traditions and precedence. In common law systems, judges interpret the
law and judicial rulings can set precedent.

3.5.1.3 Religious law

This is also known as theocratic law and is based on religious guidelines. The most
commonly known example of religious law is Islamic law, also known as Sharia.
Islamic law governs a number of Islamic nations and communities around the world and
is the most widely accepted religious law system. Two additional religious law systems
are the Jewish Halacha and the Christian Canon system, neither of which is practiced at
the national level in a country. The Christian Canon system is observed in the Vatican
City.

The most direct impact on business can be observed in Islamic law- which is a moral,
rather than a commercial, legal system. Sharia has clear guidelines for aspects of life.
For example, in Islamic law, business is directly impacted by the concept of interest.
According to Islamic law, banks cannot charge or benefit from interest. This provision
has generated an entire set of financial products and strategies to simulate interest or a
gain for an Islamic bank, while not technically being classified as interest. Some banks
will charge a large up-front fee. Many are permitted to engage in sale-buyback or
leaseback of an asset.

Contract Law

A contract is a document that specifies the conditions under which an exchange is to

occur and details the rights and obligations of the parties involved. Contract law is the
body of law that governs contract enforcement.

Since common law tends to be relatively ill specified, contracts drafted under a common
law framework tend to be very detailed with all contingencies spelled out. In civil law
systems, contracts tend to be much shorter and less specific because many of the issues
typically covered in a common law contract are already covered in a civil code.

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Property Rights

Property rights refer to a resource over which an individual or business holds a legal
title; that is, a resource that they own.

These rights can be violated through private or public action. Private action refers to
theft, piracy, blackmail, and the like by private individuals or groups. Public action
violations occur when public officials, such as politicians and government bureaucrats,
extort income or resources from property holders.

Intellectual Property Rights

Intellectual property is property that is the product of intellectual activity, such as

computer software, a screenplay, a music score, or the chemical formula for a new drug.
Ownership rights over intellectual property are established through patents, copyrights,
and trademarks.

Product Safety and Liability

Product safety laws set safety standards for products and manufacturing processes.
Product liability involves holding a firm and its officers responsible for product safety
standards.

International law

To many, the supreme body is the International Court of Justice, situated in The Hague,
Holland. Here a number of international disputes may be taken for ultimate
adjudication. However, a series of other bodies and legislation exists.

Impact of international laws on business

The implications of international law on marketing operations are quite many. The
principle ones are as follows:

• Product decisions - physical, chemical, safety, performance, packaging,

labelling, warranty
• Pricing decisions - price controls, resale price maintenance, price freezes, value
added systems and taxation
• Distribution - contracts for agents and distribution, physical distribution,
insurance
• Promotion - advertising codes of practice, product restriction, sales promotion

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 and,
• Market research - collection, storage and transmission of data.

Other areas affected are obviously in currency and payments

3.6 Differences in culture

It is nearly impossible to discuss international business without taking culture into
account. Culture affects the everyday life that we live in and national cultures can vary
greatly. Therefore, for a company to be successful abroad it must be at least
knowledgeable of the host culture in order to function properly in that business
environment. Businesses evaluate cultural distances among other issues before making
strategic decisions of entering new countries, and must be especially careful for cultural
differences when interacting with foreign counterparts in business negotiations.

Much has been written on the subject of culture and its consequences. Whilst on the
surface most countries of the world demonstrate cultural similarities, there are many
differences, hidden below the surface.

3.6.1 Meaning of culture

It is difficult to give a concise definition of culture. That is especially so as only a
small part of culture is visible (body language, clothing etc.) whereas most of it is
invisible (values, morals, cultural assumptions etc.) That is to say culture is an
amorphous concept, something that is lacking definite form.

Culture is sometimes defined more by its characteristics and elements. Three important
elements of culture are that:

• Culture must be learned

• It must be interrelated and

• Must be shared.

This means that culture is something that is learned by being a member of a group as
cultural values are passed from generation to generation. Different parts of these
cultural values are connected to each other and the members of the group share these
values.

Furthermore, cultural practices can vary dramatically, as can the education and skill

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level of the population. All these differences can and do have major implications for the
practice of international business. As a matter of fact, they have a profound impact on
the benefits, costs and risks associated with doing business in different countries; the
way in which operations in different countries should be managed; and the strategy
international firms should pursue in different countries.

• Some definitions of culture

Terpstran (1987) has defined culture as follows:

"The integrated sum total of learned behavioral traits that are manifest and shared by
members of society"
Culture, therefore, according to this definition, is not transmitted genealogically. It is
not, also innate, but learned. Facets of culture are interrelated and it is shared by
members of a group who define the boundaries. Often different cultures exist side by
side within countries, especially in Africa. It is not uncommon to have a European
culture, alongside an indigenous culture.

The most widely used definition of culture is the one offered by Gert Hofstede (1980).
He defines culture as; ” the collective programming of the mind which distinguishes
the members of one human group from another.. ..Culture in this sense, includes
systems of values; and values are among the building blocks of culture”.

On the other hand, Kotler (2004, 175) defines culture as; “a society where people
grow up, shapes their beliefs, values and norms”. That is to say that people who grow
up within the circle of influence of one particular culture will learn and be shaped by
its values and basic cultural beliefs.

Culture is the beliefs, values, mind-sets, and practices of a group of people. It includes
the behavior pattern and norms of that group - the rules, the assumptions, the
perceptions, and the logic and reasoning that are specific to a group.

Therefore, culture, in the broadest sense, refers to how and why we think and function.
It encompasses all sorts of things; how we eat, play, dress, work, think, interact, and
communicate. Everything we do, in essence, has been shaped by the cultures in which
we are raised. Similarly, a person in another country is also shaped by his or her cultural
influences. These cultural influences impact how we think and communicate.

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• The elements of culture

The major elements of culture are material culture, language, aesthetics, education,
religion, attitudes and values and social organisation.

S Material culture - Material culture refers to tools, artifacts and technology. Before
marketing in a foreign culture it is important to assess the material culture like
transportation, power, communications and so on. Input-output tables may be
useful in assessing this. All aspects of marketing are affected by material culture
like sources of power for products, media availability and distribution.
S Language - Language reflects the nature and values of society. There may be
many sub-cultural languages like dialects which may have to be accounted for.
Some countries have two or three languages. In Zambia there are seven
languages
- English, with numerous dialects. Language can cause communication problems
- especially in the use of media or written material. It is best to learn the
language or engage someone who understands it well.
S Aesthetics refer to the ideas in a culture concerning beauty and good taste as
expressed in the arts -music, art, drama and dancing and the particular
appreciation of colour and form. African music is different in form to Western
music. Aesthetic differences affect design, colours, packaging, brand names and
media messages.
S Education refers to the transmission of skills, ideas and attitudes as well as
training in particular disciplines. Education can transmit cultural ideas or be
used for change, for example the local university can build up an economy's
performance.

S Religion provides the best insight into a society's behaviour and helps answer the
question why people behave rather than how they behave. Sensitivity is needed to
be alert to religious differences.

Religion can affect marketing in a number of ways:

• Religious holidays - Ramadan cannot get access to consumers as shops are

closed.
• consumption patterns - fish for Catholics on Friday
• economic role of women - Islam
• caste systems - difficulty in getting to different costs for segmentation/niche

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 marketing
• joint and extended families - Hinduism and organizational structures;
• institution of the church - Iran and its effect on advertising, "Western" images
• market segments - Malaysia - Malay, Chinese and Indian cultures making
market
• segmentation

S Social organisation

• Refers to the way people relate to each other, for example, extended families,
units, kinship. In some countries kinship may be a tribe and so segmentation
may
have to be based on this. Other forms of groups may be religious or political,
age, caste and so on. All these groups may affect the marketer in his planning.

There are other aspects of culture, but the above covers the main ingredients. In one
form or another these have to be taken account of when marketing internationally.

• Core values versus secondary values

These core values are very difficult to change as they are inherited through working
and living within their influence, and upheld as well as strengthened by the structures
of society. Core values change very slowly and it is virtually impossible for any single
player to change them.

Secondary values are not as deep rooted as core values and therefore are easier and
faster to change, and can thus be influenced. We should also keep in mind that we are
always looking at cultures from the perspective of our own culture and the values and
beliefs it has imposed on us (Hollensen 2004, 209).

The influence of culture can be seen in many aspects of life and society, some of the
more central ones are (Hollensen 2004, 198-204.):

• Ethnic
• Religion
• Political philosophy
• Economic philosophy
• Education

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 • Social institutions
• Customs and practices
• Communication

3.7 Impact of culture on global business

When you’re dealing with people from another culture, you may find that their business
practices and communication and management styles are different from what you are
accustomed to. Understanding the culture of the people you are dealing with is
important to successful business interactions as well as to accomplishing business
objectives. For example, you’ll need to understand the following:

• how people communicate

• how culture impacts how people view time and deadlines
• how people are likely to ask questions or highlight problems
• how people respond to management and authority
• how people perceive verbal and physical communications
• how people make decisions

There are several elements in the business that impact on the operations and performance of firms.
Culture impacts many things in business, including;

• The pace of business;

• Business protocol-how to physically and verbally meet and interact;
• Decision making and negotiating;
• Managing employees and projects;
• Propensity for risk taking; and
• Marketing, sales, and distribution.

Summary
We can summarize that the unit attempted to describe how the political, economic, legal,
and cultural systems of many of the world’s nation-states are evolving. In addition, the
unit was able to draw out the implications of these changes for the practice of
international business.
There are many major types of government, each of which consists of multiple variations. However,
the unit focused on the overarching modern political philosophies. Therefore, democracy and
totalitarianism have been discussed. Interestingly, the two are at different ends of a political

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dimension.

Activity

1. Identify and discuss the major political ideologies affecting international business. f

2. How does culture impact local business practices and how does cultural understanding apply
to business negotiating.
3. Free market economies stimulate greater economic growth, whereas state-directed
economies stifle growth. Discuss

Readings
Ball, D.A., Geringer, J. M., Minor M. S. and McNett, J. M. (2010).International Business: The
challenge of global competition.. London: McGraw-Hill.

Brooks, I and Weatherson, J. (2009). The Business Environment: challenges and Changes.
Edinburgh: Pearson Education Limited-Prentice Hall.

Folsom, Gordon, Spanogle and Fitzgerald. (2009). International Business Transactions Tenth
Edition. St. Paul: Thomson Reuters.

Hill, C.W. L. (2012). International Business: Competing in the Global Marketplace. New York:
McGraw-Hill.

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4 UNIT 4: ETHICS IN INTERNATIONAL BUSINESS
Adam Smith opined that "People of the same trade seldom meet together, even for
merriment and diversion, but the conversation ends in a conspiracy against the public, or
in some contrivance to raise prices."

Learning Outcomes

After studying this unit, you should be able to;

 Define business ethics

 Discuss the ethical issues in international business
 Describe ethical systems in international business
 Ethical dilemmas
 Roots of unethical Behaviour

4.1 Introduction
When businesses are engaged in multinational activities, a variety of important issues
arise that do not have the same easy answers as are offered by doing business in only one
area of legal jurisdiction or nation. Because of this dilemma that is increasingly plaguing
the large multinational corporations; international business ethics have been introduced
to help address these sticky subject matters. International business ethics attempts to deal
with questions of what to do in situations where ethical morals come into conflict as a
result of the differing cultural practices.

Questions concerning profit, growth and technological advances in business have ethical
dimensions. Some of these include the effects of pollution and depletion of natural
resources on society at large, the quality and character of the environment, safety of
customers and overall well-being of the global community.

International business ethics is a particularly complex issue as ethical standards are

different depending on where you are. Corporate governance, bribery, corruption,
working conditions and targeted marketing are all issues that require organisations to
establish an ethical standpoint from which they can work on.

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There is an increasing emphasis on the corporate responsibility of large organisations
from developed nations and the way they operate in third world countries. Many nations
now impose their ethical standards on developing countries even though they themselves
have been guilty of arguably unethical practices in the past. For example, the poor
working conditions suffered in the third world were commonplace during the
industrialisation of many western economies.

Whilst the temptation to help the process along in many countries can be high, it is
important to be aware of the consequences for doing so. Unsavoury and unethical
business practices and payments can be used against you or your organisation at a later
stage. For example, bribes may go unquestioned for a period of time, but the record of
them could be used against you later as an act of extortion, bargaining or retaliation.

When conducting international business, you should make yourself aware of the different
business practices and ethical standpoints around the world. Whilst you should always
maintain a high ethical standpoint yourself, you should also be prepared to acknowledge
the different standards and expectations of others and their reasons for them.

4.2 Business Ethics

Business ethics also known as corporate ethics are the accepted principles of right or
wrong governing the conduct of business people. It is a form of applied ethics or
professional ethics that examines ethical principles and moral or ethical problems that
arise in a business environment. An ethical strategy is a strategy or course of action that
does not violate these accepted principles. The ethics apply to all aspects of business
conduct and are relevant to the conduct of individuals and business organizations as a
whole.

4.3 Ethical Issues in International Business

Many of the ethical issues and dilemmas in international business are rooted in the fact
that political systems, law, economic development, and culture vary significantly from
nation to nation. In addition, some of the most common international ethical issues
surround the environment, child labour, working standards and conditions, targeting
marketing to vulnerable individuals and corruption.
In the international business setting, the most common ethical issues involve;
S Employment practices S Human rights S

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 Environmental regulations S Corruption
S Moral obligation of multinational corporations

4.3.1 Employment Practices

Ethics impacts various aspects of management and operations, including human

resources, marketing, research and development and even the corporate mission.

Ethical issues associated with employment practices abroad include;

• When work conditions in a host nation are clearly inferior to those in a
multinational’s home nation, what standards should be applied?
• While few would suggest that pay and work conditions should be the same across
nations, how much divergence is acceptable?

4.3.2 Human Rights

• Questions of human rights can arise in international business because basic human
rights still are not respected in many nations.
• Rights that we take for granted in developed nations, such as freedom of
association, freedom of speech, freedom of assembly, freedom of movement, and
freedom from political repression are by no means universally accepted.
• The question that must be asked of firms operating internationally is: ‘What is the
responsibility of a foreign multinational when operating in a country where basic
human rights are trampled on?’

4.3.3 Environmental Pollution

• Ethical issues arise when environmental regulations in host nations are far inferior
to those in the home nation
• Developing nations often lack environmental regulations, and according to critics,
the result can be higher levels of pollution from the operations of multinationals
than would be allowed at home
• Environmental questions take on added importance because some parts of the
environment are a public good that no one owns, but anyone can despoil
• The tragedy of the commons occurs when a resource held in common by all, but
owned by no one, is overused by individuals, resulting in its degradation
• The tragedy of the commons occurs when a resource held in common by all, but

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 owned by no one, is overused by individuals, resulting in its degradation.

4.3.4 Corruption

Bribery and corruption is another critical ethical concern for international organisations.
Corruption is “giving or obtaining advantage through means which are illegitimate,
immoral, and/or inconsistent with one’s duty or the rights of others.

Whilst it may seem like a clearly defined legal issue at first, it becomes more complex
when you realize that it is far from illegal in some countries and can even be part of the
business culture. International organisations are encouraged to not participate in such
business practices. Any payments made should be within the law of both the local
country and the home country and should be fully disclosed to the public.

• Corruption has been a problem in almost every society in history, and it

continues to be one today
• International businesses can, and have, gained economic advantages by making
payments to government officials
• In 1997, the trade and finance ministers from the member states of the
Organization for Economic Cooperation and Development (OECD) followed
the U.S. lead and adopted the Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions
• Obliges member states to make the bribery of foreign public officials a criminal
offense.

4.3.5 Moral Obligations

• Multinational corporations have power that comes from their control over
resources and their ability to move production from country to country
• Moral philosophers argue that with power comes the social responsibility for
corporations to give something back to the societies that enable them to prosper
and grow
• Social responsibility refers to the idea that businesspeople should consider the
social consequences of economic actions when making business decisions.
• Corporate social responsibility (CSR) is defined as “the corporate conscience,
citizenship, social performance, or sustainable responsible business, and is a
form of corporate self-regulation integrated into a business model.

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 • Advocates of this approach argue that businesses need to recognize their
noblesse oblige (benevolent behavior that is the responsibility of successful
enterprises)
• Social responsibility is a current issue being debated by the public, government,
organisations and critics. Organisations who claim to be socially responsible
ensure that their business practices don't impede on human rights and increase
the global standard of living. Many also claim to be reducing their impact on the
environment through a variety of strategies. However, critics argue that such
policies can make it difficult for developing nations who don't have the systems
and social structures in place to meet the high demands placed on them.

4.4 Ethical Dilemmas

Ethical dilemmas are situations in which none of the available alternatives seems
ethically acceptable. Managers must confront very real ethical dilemmas. The ethical
obligations of Multinational Corporation toward employment conditions, human rights,
corruption, environmental pollution, and the use of power are not always clear-cut.
There may be no agreement about accepted ethical principles. From an international
business perspective, some argue that what is ethical depends upon one’s cultural
perspective. Ethical dilemmas are situations in which none of the available alternatives
seems ethically acceptable.

4.5 The Roots of Unethical Behavior

Why do managers behave in a manner that is unethical?
• Personal Ethics

Social business ethics are not divorced from personal ethics, which are the generally
accepted principles of right and wrong governing the conduct of individuals. As
individuals, we are typically taught that it is wrong to lie and cheat-it is unethical-and
that it is right to behave with integrity and honor, and to stand up for what we believe to
be right and true. This is generally true across societies. The personal ethical code that
guides our behavior comes from a number of sources, including our parents, our
schools, our religion, and the media. Our personal ethical code exerts a profound
influence on the way we behave as businesspeople.

• Decision Making Process

Several studies of unethical behavior in a business setting have concluded that

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 businesspeople sometimes do not realize they are behaving unethically, primarily
because they fail to ask, “is this decision or action ethical?” instead, they apply a
straightforward business calculus to what they perceive to be a business decision, for
getting that the decision may also have an important ethical dimension. The fault lies in
process that does not incorporate ethical considerations into business decision making.
This may have been the case at Nike when managers originally made subcontracting
decisions. Those decisions were probably made based on good economic logic.

• Organization Culture

The climate in some businesses does not encourage people to think through the ethical
consequences of business decisions. This brings us to the third cause of unethical
behavior in business-an organizational culture that deemphasizes ethical, reducing all
decisions to the purely economic. The term organization culture refers to the values and
norms that are shared among employees of an organization. You will recall from our
earlier discussion that values are abstract ideas about what a group believes to be good,
right and desirable, while norms bare the social rules and guidelines that prescribe
appropriate behavior in particular situations.

• Unrealistic Performance Expectations

A fourth cause of unethical behavior has already been hinted- pressure from the parent
company to meet unrealistic performance goals that can be attained only by cutting
corner or acting in an ethical manner. In the Daimler, for example, bribery may have
been viewed as a way to hit challenging performance goals. The combination of an
organizational culture that legitimizes unethical behavior or at least turns the blind eye
to such behavior, and unrealistic performance goals may be particularly toxic. In such
circumstances, there is a greater than average probability that managers will violet their
own personal ethics and engage in unethical behavior. Conversely, an organization
culture can do just the opposite and reinforce the need for ethical behavior.
• Leadership

Leaders help to establish the culture of an organization, and they set the example that
others follow. Other employees in a business often take their cue from business leaders,
and if those leaders do not behave in an ethical manner, they might not either. It is not
just what leaders say that matters, but what they do or do not. One wonders, for example,
what message the leaders at Daimler sent about corrupt practices. Presumably, they did

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very little to discourage it and may well have encouraged such behavior.

• Societal Culture

Societal culture may well have an impact on the propensity of people and organizations,
to behave in an unethical manner. One study of 2,700 firms in 24 countries found that
there were significant differences among the ethical policies of firms headquartered in
different countries. Using Hofstede’s dimensions of social culture, the study found that
enterprises headquartered in cultures were individualism and uncertainty avoidance are
important cultural attributes.

4.6 Ethical Decision Making

Five things an international business can do to make sure that ethical issues are
considered in a business decision are:
• favour hiring and promoting people with a well-grounded sense of personal
ethics
• build and organizational culture that places a high value on ethical behavior
• make sure that leaders within the business not only articulate the rhetoric
of ethical behavior, but also act in manner that is consistent with that
rhetoric
• put decision making processes in place that require people to consider the
ethical dimension of business decisions
• develop moral courage

4.7 Ethical systems in International Business

An ethical system is a set of rules (virtues) which when followed lead us to the
achievement of certain goals (values), which when achieved raise the standard of our life
by increasing the achievement of the highest goal (moral standard/value).

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These systems can be of various kinds:

• Absolute: By divine sanction, by super-human sanction (King, Priest, Husband,

Father)
• Materialistic: Individual quest to achieve material targets
• Idealistic: Individual quest to achieve abstract ideals
• Normative: Sanction by society
• Subjective: Different according to individual perspective
• Altruistic: With "other's good" as the highest value
• Objective: Reason dictates rules; highest value being Life and its fulfillment

Summary

This unit has clearly shown that business ethics and especially ethical issues in
international business are critical to the smooth conduct of business transactions.
However, the unit has not ignored the fact that ethical dilemmas exist in an attempt to do
clean business at international level. Thus, aspects of human rights, corruption and
leadership, to name but a few have been recognized as potential ethical dilemma areas.

Readings
Ball, D.A., Geringer, J. M., Minor M. S. and McNett, J. M. (2010).International Business: The
challenge of global competition.. London: McGraw-Hill.

Brooks, I and Weatherson, J. (2009). The Business Environment: challenges and Changes.
Edinburgh: Pearson Education Limited-Prentice Hall.

Folsom, Gordon, Spanogle and Fitzgerald. (2009). International Business Transactions Tenth

56 | P a g e
Edition. St. Paul: Thomson Reuters.

Hill, C.W. L. (2012). International Business: Competing in the Global Marketplace. New York:
McGraw-Hill.

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5 UNIT FIVE: INTERNATIONAL TRADE

Learning Outcomes

After studying this unit, you should be able to;

 Define international trade

 Explain reasons for international trade
 Discuss the problems encountered in international trade
 Examine the risks of international trade
 Assess the reasons for government’s intervention in international trade

5.1 Introduction
Trade has always been the major force behind the economic relations among nations; it
is a measure of national strength. While international trade has been present throughout
much of history its economic, social, and political importance has been on the rise in
recent centuries. Industrialization, advanced transportation, globalization, multinational
corporations and outsourcing are all having a major impact on the international trade
system. Increasing international trade is crucial to the continuance of globalization. Thus,
international trade is carried on by a large number of countries in a vast range of goods
and services.

5.2 Meaning of International Trade

International trade is the exchange of goods and services across international boundaries
or territories. It is further defined as the external trade of a country. Foreign trade
consists of exchange of goods and services between two countries. This trade can take
place between two individuals or two organizations based in different countries or even
between two governments.

5.3 The basis and theory of foreign trade

International trade originated on the basis of nations exchanging their products for others

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which they could not produce for themselves or which they could only produce at
exorbitant cost.

Foreign trade takes place because no nation is completely self sufficient. Realistically, no
single country can produce everything that its consumers need or want. Essentially, it is
this rationale, that has given rise to nations engaging in foreign trade. Thus, without international
trade, nations would be limited to the goods and services produced within their own borders.

International trade allows a country:

• to specialize in the manufacture and export of products that it can produce efficiently

• import products that can be produced more efficiently in other countries

5.4 The Patterns of Trade

• International trade allows a country to specialize in the manufacture and export of
products that it can produce efficiently, and import products that can be produced
more efficiently in other countries.
• Some patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia
exports oil, the US exports agricultural products, and Mexico exports labor intensive
goods. Yet others are not so obvious or easily explained, such as cars in Japan

5.5 Types of International Trade

Basically, international trade is divided into import and export.
a) Import trade
This refers to buying of goods and services from other countries. The traders involved
here are called the importers.

An import is any good or commodity, brought into one country from another country in a
legitimate fashion, typically for use in trade. Import goods or services are provided to
domestic consumers by foreign producers. Import of commercial quantities of goods
normally requires involvement of the Customs authorities in both the country of import
and the country of export.

b) Export trade
This refers to selling of goods to other countries. The trader involved is called exporter.

An export is any good or commodity, transported from one country to another country in

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a legitimate fashion, typically for use in trade. Export is an important part of
international trade. Its counterpart is import.
Export goods or services are provided to foreign consumers by domestic producers.
Export of commercial quantities of goods normally requires involvement of the Customs
authorities in both the country of export and the country of import.

Imports and exports consist of the following:

i) The visible Trade (items)

Refers to trade in physical goods or merchandise e.g. coffee, machinery i.e. goods/ things
we can see, measure or weigh.
ii) The Invisible Trade

Refers to trade in services sold to other countries or consists of services rendered and for
which payment is made. E.g. doctors, hotels, tourists, insurance etc.

iii) Capital items

Shows amount borrowed and lent between countries. This includes investing and saving.
c) Entrepot Trade
This is a form of international trade where goods are temporarily imported into a
country, processed and then re-exported to other countries. It is simply the re-export
trade that is conducted in commercial centres throughout the world, where foreign goods
are handled for trans-shipment to final destinations.
Re-exporters may avoid payment of customs duty on such goods by keeping them in
bonded warehouses. However, where customs duty has been paid, a refund of the money
paid is made. This is called customs drawback.

5.6 Reasons for International Trade

International trade takes place due to numerous reasons and is usually promoted because
of its benefits and importance to a country.

a) Unequal distribution of natural resources

The various types of economic resources are unevenly distributed throughout the world.
Therefore, a country with a large supply of world scarce materials is bound to export.
Inevitably, countries import what they cannot produce. For example not all countries
possess such resources as oil, minerals, agricultural soils and other raw materials.
b) Climatic conditions

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Climate conditions are different throughout the world. One country may lack the climate
both as regards warmth and rainfall, which is necessary for the production of many food
stuffs. i.e. various parts of the world experience different climatic conditions at different
times of the year.
c) Wider range of goods
Foreign trade makes possible availability of imported goods. Therefore, most large retail
outlets, such as supermarkets, stock both locally manufactured goods and imported
goods. As a result, consumers have a wider range of goods to choose from and their
standard of living is improved.
Trade also enables a country to consume more than it would be able to produce if it
depended only on its own resources

d) Specialization
Goods may be imported because they can be produced more cheaply elsewhere. I.e.
countries tend to specialize in the production of certain goods and import those they find
expensive to make. International trade enables a nation to specialize in those goods it can
produce most cheaply and efficiently, and sell those that are surplus to its requirements.
e) Political reasons
International trade may bring good relations/unity between the countries. In fact,
countries with similar ideas tend to trade with each other. By so doing, they appear as a
trusted ally and a worthwhile friend.
f) Employment creation
International trade provides employment. The larger export market calls for increased
production level. As a result, more people need to be employed to produce more.
g) Technological advancement/Transfers
A country may acquire new technology from the developed through international trade.
h) Proximity to trading neighbours
Countries which are geographically close to one another tend to trade with one another
e.g. Zambia and South Africa.

i) Revenue base
A country exports goods in order to earn foreign exchange or income. This income is
used to finance development projects like the building of roads, schools, hospitals etc.

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Also, exports are vital to pay for imports.
j) Surplus/Avoid wastage
A country may import to get rid of surplus. A country which produces more than it can
consume can export the surplus to other countries where additional markets exists.
k) Market expansion
Finally, trade encourages economic development by increasing the size of the market to
which products can be sold.

5.7 Obstacles to Foreign Trade

In cognition of the fact that international trade is such an integral part of a nation’s
economy, governmental restrictions are sometimes introduced to protect what are
regarded as national interests. Government action may occur in response to the trade
policies of other countries, or it may be taken in order to protect specific industries.

All nations seek to achieve and maintain a favourable balance of trade- that is, to export
more than they import, or at least to keep the surplus of imports over exports to a
minimum. In this respect, countries impose restrictions order to check imports and
exports. However, this hinders the smooth inflow and outflow of goods. They include;

Trade barriers
Trade barriers are generally defined as government laws, regulations, policy, or practices
that either protect domestic products from foreign competition or artificially stimulate
exports of particular domestic products. The most common foreign trade barriers are
government-imposed measures and policies that restrict, prevent, or impede the
international exchange of goods and services. a) Tariff Barriers
A tariff is a tax placed on a specific good or set of goods exported to or imported from a
country, creating an economic barrier to trade. Usually the tactic is used;

• when a country's domestic output of the good is falling and imports from foreign
competitors are rising, particularly if there exist strategic reasons for retaining a
domestic production capability.
• Some failing industries receive a protection with an effect similar to subsidies in that
by placing the tariff on the industry, the industry is less enticed to produce goods in a
quicker, cheaper, and more productive fashion.
• The third reason for a tariff involves skirting of what is called dumping. Dumping
curtails a country producing highly excessive amounts of goods and dumping the

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 goods on another foreign country, producing the effect of prices that are "too low".
Too low can refer to either the price of the good on from the foreign market being
lower than the domestic market. The other reference refers to the producer selling the
product at a price in which there is no profit or a loss. The purpose (and expected
outcome) of the tariff is to encourage spending on domestic goods and services.

Tariffs may be of various kinds:

• An ad valorem tariff is a set percentage of the value of the good that is being
imported. Sometimes these are problematic as when the international price of a good
falls, so does the tariff, and domestic industries become more vulnerable to
competition. Conversely when the price of a good rises on the international market
so does the tariff, but a country is often less interested in protection when the price is
higher. They also face the problem of inappropriate transfer pricing where a
company declares a value for goods being traded which differs from the market
price, aimed at reducing overall taxes due.
• A specific tariff is a tariff of a specific amount of money that does not vary with the
price of the good. These tariffs may be harder to decide the amount at which to set
them, and they may need to be updated due to changes in the market or inflation.
• A "revenue tariff1' is a set of rates designed primarily to raise money for the
government. A tariff on coffee imports, for example (imposed by countries where
coffee cannot be grown) raises a steady flow of revenue.
• A "protective tariff1' is intended to artificially inflate prices of imports and "protect"
domestic industries from foreign competition. They protect what are known as infant
industries that are in the phase of expansive growth For example, a 50% tax on an
imported machine raises the price from $100 to $150. Without a tariff, the local
manufacturers could only charge $100 for the same machine; now they can charge
$149 and make the sale.
• A "prohibitive tariff1' is one so high that no one imports any of that item.
Tariffs/Taxes levied on imports or exports make it difficult for the imports to compete
with home made goods. This is because imports become more expensive than local
goods.

b) Non-Tariff Barriers
In recent years the use of non-tariff barriers to trade has increased. Although these

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barriers are not necessarily administered by a government with the intention of
regulating trade, they nevertheless have that result. Restrictive business practices
sometimes have a similar effect though they are not usually regarded as trade barriers.

Non-tariff barriers to trade can be:

• State subsidies, procurement, trading, state ownership

• Occupational safety and health regulation
• Employment law
• Import Licenses Import licenses are considered to be non-tariff barriers to trade
when used as a way to discriminate against another country's goods in order to
protect a domestic industry from foreign competition.
• Export subsidies
• Product classification
• Quota shares
• Foreign exchange controls and multiplicity
• Over-elabourate or inadequate infrastructure
• "Buy national" policy.
• Intellectual property laws (patents, copyrights)
• Bribery and corruption
• Unfair customs procedures
• Restrictive licences
• Import bans
• Seasonal import regimes

Embargo
Embargo is an edict, decree, or order, usually issued by a government, prohibiting the
departure of merchant ships from ports under its control, or prohibiting them from
carrying certain types of goods out of the country. An embargo may be levied on both
domestic and foreign vessels. It is actually a complete ban on specific exports or imports
to specific countries.
Quota
A quota is a type of protectionist trade restriction that sets a physical limit on the
quantity of a good that can be imported or exported in a given period of time.

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For example, a country might limit sugar imports to 50 tons per year. Quotas, like other
trade restrictions, are used to benefit the producers of a product in a domestic economy at
the expense of all consumers of the good in that economy.

One method of limiting imports is simply to close the ports of entry into a country. More
commonly, maximum allowable import quantities may be set for specific products.
These may also be used to limit the amount of foreign or domestic currency that is
permitted to cross national borders. Quotas are imposed with the aim of stopping or even
reversing a negative trend in a country’s balance of payments. They are also used as a
means of protecting domestic industry from foreign competition.

Modern economic thought tends to condemn both quotas and the aims they serve as
economically damaging protectionism. Critics argue that quotas often lead;
S to corruption (bribes to get a quota allocation),
S smuggling (circumventing a quota), and S
higher prices for consumers.

Export Subsidies: “Government help to exporters, generally in two forms;

• Service subsidy: trade information, trade shows, feasibility studies, foreign

representation, etc.

• Cash subsidy: This can be;

S rebate on imported raw materials and duty-free import of manufacturing
equipment (called indirect cash subsidy); or S drawback as a percentage of
the value of exports (called direct cash subsidy).
Although World trade Organization (WTO) recognizes that subsidies hinder fair
competition and distort trade practices, it has not been able to define precisely what kind
of assistance constitutes a subsidy.”
Thus, to subsidize an industry or company refers to, in this instance, a government
providing supplemental financial support to manipulate the price below market value.
Subsidies are generally used for failing industries that need a boost in domestic spending.
Subsidizing encourages greater demand for a good or service because of the slashed
price.

The effect of subsidies deters other countries that are able to produce a specific product

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or service at a faster, cheaper, and more productive rate. With the lowered price, these
efficient producers cannot compete. The life of a subsidy is generally short-lived, but
sometimes can be implemented on a more permanent basis.

Types of subsidies

There are many different ways to classify subsidies, such as the reason behind them, the
recipients of the subsidy, the source of the funds (government, consumer, general tax
revenues, etc). In economics, one of the primary ways to classify subsidies is the means
of distributing the subsidy.

In economics, the term subsidy may or may not have a negative connotation: that is, the
use of the term may not be prescriptive but descriptive. In economics, a subsidy may
nonetheless be characterized as inefficient relative to no subsidies; inefficient relative to
other means of producing the same results; "second-best", implying an inefficient but
feasible solution (contrasted with an efficient but not feasible ideal), among other
possible terminology. In other cases, a subsidy may be an efficient means of correcting a
market failure.

For example, economic analysis may suggest that direct subsidies (cash benefits) would
be more efficient than indirect subsidies (such as trade barriers); this does not necessarily
imply that direct subsidies are good, but that they may be more efficient or effective than
other mechanisms to achieve the same (or better) results.

Insofar as they are inefficient, however, subsidies would generally be considered by

economists to be bad, as economics is the study of efficient use of limited resources.
Ultimately, however, the choice to enact a subsidy is a political choice. Note that
subsidies are linked to the concept of economic transfers from one group to another.
Economics has also explicitly identified a number of areas where subsidies are entirely
justified by economics, particularly in the area of provision of public goods.

Direct subsidies

Direct subsidies are the most simple, and arguably the least frequently used. They
involve a direct cash transfer to the recipient, for example an unemployed person or an
agricultural corporation.

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Indirect Subsidies

Indirect subsidy is a term sufficiently broad that it may cover most other forms of
subsidy. The term would cover any form of subsidy that does not involve a direct
transfer.

Labour subsidies

A labor subsidy is any form of subsidy where the recipients receive subsidies to pay for
labor costs. Examples may include labor subsidies and tax deductions for workers in
industries, such as the film and/or television industries.

Tax Subsidy

A tax subsidy is any form of subsidy where the recipients receive the benefit through the
tax system, usually through the income tax, profit tax, or consumption tax systems.
Examples may include tax deductions for workers in certain industries, accelerated
depreciation for certain industries or types of equipment, or exemption from
consumption tax (sales tax or value added tax).

Perverse subsidies

Although some economists consider all subsidies to be perverse, mainstream economics

considers a subsidy perverse when it encourages undesirable actions imposing social
costs upon the rest of society. Examples include subsidies on the use of coal, gasoline,
and pesticides.
Production subsidies

In certain cases (to encourage the development of a particular industry, for example),
governments may provide direct production subsidies - cash payments for production of
a given good or service. Frequently, production subsidies are less easily identifiable,
such as minimum price policies. Indirect production subsidies may be less easy to
identify, such as infrastructure subsidies.

Regulatory advantages

Policy may directly or indirectly favor one industry, company, product, or class of
producer over another by means of regulations. For example, a requirement that full-time

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government inspectors (at company expense) be present to inspect meat may favor large
producers; conversely, if small producers were not required to undergo meat inspections
at all, this may constitute a subsidy to that class of producer. It may not be evident or
clear that there is a subsidy in many cases.

Infrastructure subsidies

Infrastructure subsidies may be used to refer to a form of indirect production subsidy,

whereby the provision of infrastructure (at public expense) may effectively be useful for
only a limited group of potential users, such as construction of roads at government
expense for a single logging company. The implication is that those users or industries
benefit disproportionately from the provision of that infrastructure, at the expense of
taxpayers.

In some cases, the "subsidy" may refer to favoring one type of production or
consumption over another, effectively reducing the competitiveness or retarding the
development of potential substitutes. For example, it has been argued that the use of
petroleum, and particularly gasoline, has been "subsidized" or favored by U.S. defense
policy, reducing the use of alternative energy sources and delaying their commercial
development.

In other cases, the government may need to improve the public transport to ensure pareto
improvement is attanied and sustained.This can therefore be done by subsidising those
transit agencies that provide the public services so that the services can be affordable for
everyone.This is the best way of helping different groups of disabled and low income
families in the society .

Trade protection (Import)

Measures used to limit imports from other countries may constitute another form of
hidden subsidy. The economic argument is that consumers of a given product are forced
to pay higher prices for a given good than they would pay without the trade barrier; the
protected industry has effectively received a subsidy. Such measures include import
quotas, import tariffs, import bans, and others.

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Export subsidies (trade promotion)

Various tax or other measures may be used to promote exports that constitute subsidies
to the industries favored. In other cases, tax measures may be used to ensure that exports
are treated "fairly" under the tax system. The determination of what constitutes a subsidy
(or the size of that subsidy) may be complex. In many cases, export subsidies are
justified as a means of compensating for the subsidies or protections provided by a
foreign state to its own producers.

Procurement subsidies

Governments everywhere are relatively large consumers of various goods and services.
Subsidies may occur in this process by choice of the products consumed, the producer,
the nature of the product itself, and by other means, including payment of higher-than-
market prices for goods purchased.

Consumption subsidies

Governments everywhere provide consumption subsidies in a number of ways: by

actually giving away a good or service, providing use of government assets, property, or
services at lower than the cost of provision, or by providing economic incentives (cash
subsidies) to purchase or use such goods. In most countries, consumption of education,
health care, and infrastructure (such as roads) are heavily subsidized, and in many cases
provided free of charge. In other cases, governments literally purchase or produce a good
(such as bread, wheat, gasoline, or electricity) at higher prices than the cost of sale to the
public (which may require rationing to control the cost).
The provision of true public goods through consumption subsidies is an example of a
type of subsidy that economics may recognize as efficient. In other cases, such subsidies
may be reasonable second-best solutions; for example, while it may be theoretically
efficient to charge for all use of public roads, in practice, the cost of implementing a
system to charge for such use may be unworkable or unjustified.

In other cases, consumption subsidies may be targeted at a specific group of users, such
as large utilities, residential home-owners, and others.

• Sanctions
This is combined effort by countries to restrict trade with particular countries for

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political and ideology reasons.

Others include;

i) Language differences
Language differences between countries can lead to communication breakdown.
Therefore, communication with overseas traders must be carefully translated-usually at
extra cost e.g specialist interpreters may have to be employed, advertising material,
information leaflets, invoices; receipts have to be translated into foreign languages.
ii) Distances
Distance involved in foreign trade is usually greater than domestic trade. This is given
additional transport problem which can be more expensive and time consuming.
Transport becomes more complicated as trans-shipments are often inevitable-hence
higher risks of loss due to thefts and damage.

iii) Market information

It is difficult to obtain information on foreign markets. Available facts indicate that it is
not easy to gather sufficient information about foreign markets.

iv) Measurement differences

Countries have different technical specification for goods sold in their countries. I.e.
methods for measuring length, volume and weight vary. This may lead to conversion
problems.

v) Cultural differences and local requirements

It is important to consider the culture of a particular market when trading internationally
because finding a suitable and profitable market is not easy in overseas countries.

vi) Documentation
This is more complicated in exporting/ importing than in home trade. It involves more
work on the part of the exporter.
vii) Payment
There is a problem of payment since different currencies are used by the exporter and the
importer. Government may impose foreign exchange controls. Additionally, foreign
exchange rates may vary from time to time. Political factors may also delay payments to
overseas traders. Thus, politically unstable countries can be rather risky.

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viii) Insurance cost
Increased insurance costs due to higher risks is another problem.

5.8 Risks in International Trade

The risks that exist in international trade can be divided into two major groups:
Economic risks
• Risk of insolvency of the buyer,
• Risk of protracted default - the failure of the buyer to pay the amount due
• Risk of non-acceptance
• Surrendering economic sovereignty
• Risk of Exchange rate

Political risks

• Risk of cancellation or non-renewal of export or import licences

• War risks
• Risk of expropriation or confiscation of the importer's company
• Risk of the imposition of an import ban after the shipment of the goods
• Transfer risk - imposition of exchange controls by the importer's country or
foreign currency shortages
• Surrendering political sovereignty
• Influence of political parties in importer's company

Government Intervention in International Trade

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Government intervenes in international trade mainly through trade policies and
regulations. This is normally done to protect the interests of politically important groups.
Reasons for intervention include the following;
Political reasons
• Protecting consumers
• Protecting jobs and industries
• Protecting human rights
• Achieving foreign policy objectives
• National security
• Revenging the negative policies from other countries

Economic Reasons
• Protecting infant industries
• Protecting new industries in developing countries
• Achieving strategic trade policy
• Helping firms to gain first mover advantage
• Recognizing the World Trade Organisation benchmarks

Summary
The unit has dealt with the meaning of international trade. It summarized a number of
reasons for carrying out this type of trade. It was also found necessary to consider the
possible difficulties encountered in the course of transacting at a global level.

Self-test exercise
1. Discuss barriers which can hinder trade between Zambia and China.

2. Discuss the major methods of payment used to overcome the constraint of paying
in this type of trade.

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Hill, C.W. L. (2012). International Business: Competing in the Global Marketplace. New York:
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John Daniels, Lee Radebaugh, and Daniel Sullivan, (2013). International Business, 14th edition
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Griffin Ricky W. and Pustay Michael W. International Business, 7th Edition.

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Ashley & Bonner (1987). Political risks in international construction. Journal of Construction
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