Basis concepts and Definition

• International Business
Commercial transactions that take place between two or more
nations or cross border
Economic system of exchanging goods and services, conducted
between individuals and businesses in multiple countries.
• Nature of International Business
All value-adding activities can be performed in international
locations
The subject of cross-border trade can be products, services,
capitals, technology, and labor (market offerings)
Firms internationalize through exporting, foreign direct
investment, licensing, franchising, and collaborative ventures.
Basis concepts and Definition
• Globalization of Markets
Ongoing economic integration and growing interdependency
of countries worldwide
• The Dimensions of Market Globalization consist of:
- Greater integration and interdependency of national
economics; leading to freer movement of goods, services, capital
and knowledge
- Rise of regional economic integration blocs
- Growth of global investment and financial flows
- Convergence of consumer lifestyles and preferences
- Globalization of production
International Business Key Players

Multinational Enterprise
(MNE)

Small and Medium-Sized

Enterprise (SME)

International Direct Venture

Firm (Born Global Firms)
International Business Key Players
• Multinational enterprise (MNE)
A large company with substantial resources performing various
business activities through a network of subsidiaries and affiliates located in
many countries around the world (e.g: Citibank, Wal-mart, IKEA, Nokia)
• Small and medium-sized enterprise (SME)
Most of the definition mainly focus on the number of employees that
the company currently engaged in. In US, a company is considered as SME
if its current number of employees is less than 500. But, in other less
developed economies, the number of employees is adjusted to reflect the
growth of the local economy.
• International direct venture firm (Born Global Firms)
Due to rapid advancement of technology, many young, energetic,
entrepreneurial companies take a shorter route to establish themselves by
launching international business activities directly at their primary evolution
 Why do firm internationalize
Obtain new opportunities for growth and earn higher returns
on investment

Expand new ideas about products and services and

business methods

Deal with international competitors more effectively or thwart

the development of competition in the home market

Increase economics of scale in sourcing, production,

marketing and R&D

Be nearer to lower-cost or better value factors of production

Invest in profitable venture with a foreign partner

International Business & Domestic Business
• Cost
Tariff, time costs due to border delays, costs associated with country
differences such as language, the legal system or a different culture
Currencies
Management
• Risk
Level of complexity and risk of the business nature, unknown political, social
and economic systems
• International Business may yield superior performance through:
Maximizing returns and market share, attaining global scale economies, the
ease to acquire resources and cost, enhanced competitiveness, superior
knowledge transfer
Risks in international business

Business risk

Economic risk

Political and legal risks

Culture risk
Risks in International Business
• Business risk is a firm’s potential loss or failure from poorly
developed or executed business strategies, tactics, or
procedures.
- Less than optimal formulation and/or implementation of
strategies, tactics or procedures, e.g. partnering
- Selections, market entry timing, pricing, product features,
and promotional themes poor
- Execution of strategy and competitive intensity
• Economic risk is the risk of adverse unexpected fluctuation in
exchange rates, inflation and other harmful economic conditions
create uncertainty of returns.
- For example, if money must be converted into a different
currency to make a certain investment, changes in the value of
the currency relative to the U.S. dollar will affect the total loss or
gain on the investment when the money is converted back.
- This risk usually affects businesses, but it can also affect
individual investors who make international investments
Risks in International Business
- Sometimes, this term is also called exchange rate risk
Risks in International Business
• Political and legal risks is the potentially adverse effects on
company operations and profitability holes by developments in
the political, legal, and economic environment in a foreign
country.
- Differences in host country political, legal and economic
regimes may adversely impact firm profitability.
- Changes in the laws, regulations and indigenous factors
such as property rights, intellectual-property protection, product
liability, taxation policies.
- The level of government intervention
Risks in International Business
• Culture risk involves a situation or event whereby a cultural
miscommunication can put a damper on business dealings and
at the same time place human value at risk
- Foreign customers’ attitude and behavior differ significantly
form those buyers at home
 Method Mode Options

Contractual Modes Exporting Investment Modes

• Franchising
• Licensing • Indirect
• Management • Direct: agent, • Joint Ventures
Contracts distributor • Alliances
• Subcontracting • Own sales • Acquisitions
• Project office/subsidiary n
operations n
n
Foreign operation methods embedded in many
subject areas
 International Management
International Management depends on Mode choices:
- Control
- Coordination and staffing

Licensing Wholly owned subsidiary

The activities of the

licensee depend on the Company is in a powerful
terms of the licensing position to be able to
agreement integrate and control what
happens in the subsidiary

Contractor will have its Staffing can moves

own staff within between parent and wholly
the foreign contractee – owned subsidiary as
managing its operations, in supporting control
whole or in part
 International Marketing
For international marketers, choice of mode drives the nature of the
marketing process and the options available in terms of marketing
strategy

Licensing Wholly owned subsidiary

little or no influence parent company is in a

over the pricing policy position to be able to
of its foreign licensee direct pricing within its
wholly owned subsidiary
 International Marketing
The choice by an exporter between using an agent or distributor in a foreign
market may have a large impact on the ability to determine pricing policy

Exporter

Agent Distributor

It can be difficult to control

the final price
 Global Business Strategy

- In what countries does the company operate?

- What does the company do there?

- How are its operations organized there?

 Global Business Strategy

4 international business strategies:

- international strategy
- multi-domestic strategy
- global strategy
- transnational strategy
THEORETICAL APPROACHES
Absolute Advantage Theory
 Adam Smith: Wealth of Nations (1776)
argued:
• Capability of one country to produce
more of a product with the same amount
of input than other country
• A country should produce only goods
where it is most efficient, and trade for
those goods where it is not efficient
 Trade between countries is, therefore,
beneficial
 Assumes there is an absolute balance
among nations
Absolute Advantage Theory
 Trade is between two countries.
 Only two commodities are traded
 Free Trade exists between the countries
 The only element of cost of product is labor.
 Absolute Advantage Theory
 Adam Smith: Wealth of Nations (1776) argued that a country has a absolute
advantage in the production of product when it is more efficient than any other
country producing it
 Countries should specialize in the production of goods for which they have an
absolute advantage and then trade these goods for the goods produced by
other country
 In economics, principle of absolute advantage refers to the ability of a party (an
individual, or firm, or country) to produce more of a good or service than
competitors, using the same amount of resources
Limitations
Fails to explain how free trade can be
advantageous to two countries when one
country can produce all goods

Country not having absolute advantage can’t

gain from free trade

Differences in climatic conditions & natural

resources won’t lead to absolute advantage

What if the country is bad at making everything?

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Comparative Advantage Theory

 David Ricardo: (1817) argued:

• A country should produce only goods where
it is most efficient & import those goods in
which it’s less efficient
 Even if a country is efficient in producing
all goods, still trade between two countries
will prove beneficial
 Assumes that a country does not have to
be best at anything to gain from trade
 Country gains in those activities which it
can produce at world prices even though it
may not have absolute advantage
Comparative Advantage Theory
 Ricardo’s Theory was based on only two
countries & only two commodities, but
international trade is among many countries with
many commodities
 Assumes of full employment helps theory to
explain trade on the basis of comparative
advantage. Cost of production, even in terms of
labour, may change as countries, at different
levels of employment move towards full
employment.
 Another serious defect is that transportation
costs are not considered in determining
comparative cost differences
 Ricardo theory is not applicable to developing
countries as these countries are nowhere near
to full employment
 Some newer
explanations for
the direction of
trade
Differences in Resource Endowments
 Some countries have abundant resource endowment, or the land,
labor, capital, and related production factors a nation possesses.
 Nations are likely to export those products that are less expensive
for them to produce and import those that are either unavailable at
home or more cheaply produced in other nations.
 According to H-O theory, countries would export products requiring
large amounts of their abundant production factors and import
products requiring large amounts of their scare production factors.

This theory explains the international trade in many primary products, such as
forest products, petroleum, and minerals.
Overlapping Demand
 The theory is proposed by Stefan Linder
 Customers’ tastes are strongly affected by their income levels,
therefore, a nation’s level of income per capital determines the
kinds of goods its people will demand.
 An entrepreneur will produce goods to meet the demands of
consumers, the kinds of products manufactured will reflect the
country’s level of income per capital.
 Goods produced for domestic consumption will eventually be
exported to countries that have similar levels of income, and
demand
This theory suggests that international trade in manufactured goods will be
greater between nations with similar levels of per capital income than
between those with dissimilar levels of per capital income
International Product Life Cycle
International Product Life Cycle
International Product Life Cycle
 Eclectic Framework

O: ownership

L: Location

I: Internalization

A decision tree for FDI, based on the OLI framework