INTERNATIONAL BUSINESS
Why go internationally?
1. When home market is saturated
2. Strong market potential exists overseas (potential world market)
3. Geographical diversification
4. To prolong product life cycle that declines in domestic market
5. Low cost production due to experience curve
6. Possession of unique natural or human resources that give them comparative advantage
when it becomes to producing a particular product.
7. Possession of technological advantage –
8. International markets create attractive opportunities but competition is intense
9. To acquire resources –lower costs , new or better products
10. To minimize risks
11. Expand sales increase potential market and profits.
Success goes to the firm that understand and adapt to the environmental factors that influence
international business by being corporate citizen.
INTERNATIONAL CRITICAL COMMUNICATION SKILLS
1. The capacity to accept the relativity of one’s own knowledge and perceptions
2. Capacity to be non –judgmental. Judgmental cuts communication and acts as barrier to
communication and learning.
3. The capacity to communicate respect for other people’s ways, their country, and their
values.
4. The capacity to display empathy. Empathy is the ability to understand and share their
values.
5. Tolerance for ambiguity –uncertainty in culture
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6. Capacity to be flexible – to accomplish goals in foreign environment, flexibility is critical
7. Capacity for turn taking i.e. in negotiation.
8. The humility to acknowledge what one does not know. One should seek to learn rather
than act as if he\she knows.
9. Experience in foreign country
MAJOR INTERNATIONAL BUSINESS ACTIVITIES
Multinational enterprise (MNES) are major forces in international business. They concentrate
their activities in three main areas:
i. International trade
ii. Foreign direct investment and
iii. Cluster of activities including joint venture, licensing and franchising.
1. Direct and indirect importing and exporting
• Direct importing involves firms bringing in goods and services produced in
another country for sale in their own country.
• Indirect importing firm rely on intermediaries such as agents and trading
houses to undertake all the dealings with foreign market.
• Indirect exporting the domestic firm sells goods and services it produces at
home to foreign buyers either through intermediaries.
• Direct exporting involves the firm producing and setting direct to foreign
customers and thus marketing all the relevant activities itself without the
use of intermediaries.
2. Foreign direct investment (FDI): Is a form of equity investment which gives the investing
firm control over its assets, property and subsidiaries in the host country.
3. Licensing: Is a form of market entry involving two firms, the licenser and licensee, in which
the licenser agrees to sell to the licensee the right to use the licenser’s intellectual
property for a specific period of time in return for an agreed fee or royalty. The licenser’s
intellectual property is the firm’s intangible assets developed overtime at considerable
research and development costs. These assets include technical know-how, brand names,
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patents, trademarks, copy rights, exclusive trade or intimate market knowledge,
experience and expertise.
4. Franchising: Is a form of licensing arrangements whereby the franchiser (owner of the
intellectual property) agrees to allow the franchisee (the firm being allowed) to use the
franchisers intellectual property, such as trademarks, brand name, marketing technique
or a particular business systems, to undertake a business activity in a manner specified by
the franchiser also agrees to provide support services such as standard staff training
programmes and facilities.
5. Management contracts: Some firms have as their basic competitive advantage proven
management techniques and expertise which they may wish to share with other firms or
authorities in other countries. Management contracts is a type of licensing agreement
between the firm and another firm (private or state owned) whereby the contracting
firms makes available in managerial expertise and a part of its management personnel in
training local managers for the efficient operations of a project in return for agreed fee.
6. Turnkey projects: A turnkey project is a term used to describe an agreement under which
a firm, either on its own or in a consortium with other firms, undertake to design, build,
equip and train personnel’s to operate an entire production or service facility before
turning it over (i.e. handing over (‘the key’) to its owner, which may be a private company
or the government of the host country. One of the most successful forms of this type of
arrangements is the ‘build, operate and transfer’ (BOT) model, particularly appropriate
for development projects in developing countries , e.g. electricity , airports, dams ,
railways, stadiums, etc.
DRIVING AND RESTRAINING FORCES OF INTERNATIONAL BUSINESS (THE FORCES BEHIND
GLOBALIZATION)
The remarkable growth of the global economy over the past 50 years has occurred because the
balance of driving and restraining forces has significantly in favor of driving forces. It is useful to
identify these forces to gain an insight into foundations of the international economy and
international markets as they exist today and as they are expected to develop in the decades
ahead.
Driving forces
These are the forces that are contributing to the growth of international business.
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1. Market needs: There are cultural universals as well as cultural differences. There is a
common element inhuman nature and the human psyche that is underlying basis for the
opportunity to create and serve global markets. Most global markets do not exist in
nature, they must be created by marketing efforts, and e.g. soft drink exceeds
consumption of water.
2. Technology: Prof. Theodore Levitt of the Harvard Business School writes “…A powerful
force drives the world towards a converging commonality, and that force is technology.
It has proletarian Zed communication, transport, and travel. It has made isolated places
and impoverished people eager for modernity allurements. Almost everywhere wants all
the things they’ve heard about, seen or experienced via the new technologies.
Technology is a universal, uniform, consistent factor across national and cultural
boundaries.
There are no cultural boundaries limiting the application of technology. Once a
technology is developed, immediately becomes available everywhere in the world. If a
company’s know how to manage a technology in one country, it has experience that is
relevant for the rest of the world.
3. Costs: Uniformity can drive research engineering, design, creative and production costs
across the business functions, from engineering and manufacturing to marketing and
administration. The pressure for globalization is intense whe3n new products involve
major investments and long periods of development.
4. Quality: Global volumes generate revenues and greater operating margins to support
designs and manufacturing quality. Focusing on one marketing strategy, as opposed to
letting each country develop its own, can result in greater marketing effectiveness and
efficiency and therefore greater value of the consumer.
5. Communication and transport: The information revolution contributes towards the
emergence of global markets. Everybody wants the best, latest and most modern
expression of production. It is increasingly difficult to position the same brand differently
in countries where the customers are frequently exposed to brand communications from
other markets. When there are overlapping communications, the positioning message
and the marketing impact are diluted and there is a strong pressure to align positioning
and brand image.
6. Liberalization of cross- border trade and resources movements.
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a) Their citizens have expressed the desire for easier access to greater variety of
goods and services at a lower price.
b) Their domestic producers will become more efficient as a result of foreign
competition.
c) They hope to induce other countries to lower their barriers in turn.
7. Development of services that support international business e.g. bank-liquidity (Western
Union), UPS, DHL.
8. Growing consumer pressures. Consumer want more, new better and different products.
9. Increased global competition.
10. Changing political situation- collapse of communists and enhancing of world trade.
11. Expanded cross- national cooperation.
12. Leverage
13. One of the unique advantage of a global company is the opportunity to develop leverage
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Advantages that it has because it operates simultaneously in more than one national
market. A global company can develop five types of leverages.
a) Experience transfers: A global company can leverage its experience in any
market in the world. It can draw upon strategies, products, advertising appeals,
sales management practices, promotional ideas, and so on that have been tested
in actual markets and apply them in other comparable markets.
b) Systems transfers: In manufacturing, the global company can take advantage of
its greater volume to obtain the traditional single-plant scale advantage and it
can also combine into finished products components manufacturing in scale
efficient plants in different countries.
c) Scale economies: In manufacturing, the global company can take advantage of
its’ greater volume to obtain the traditional single plant scale advantages and it
can also combine into finished products components manufactured in scale
efficient plants in a different countries. Just as a national company can achieve
economies in staffing by eliminating duplicate staff after acquisition, a global
company can achieve the same economies on a global scale by centralizing
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functional activities. The larger scale of the global company also create
opportunities to increase the level of competence and quality of corporate staff
and expand its role.
d) Resource utilization: A major strength of the global company is its ability to scan
the entire to identify people, money, and materials (land, labor, and capital) that
will enable it to compete most effectively in the world markets.
e) Global strategy: The global company’s greatest single advantage is its global
strategy. A global strategy is based on scanning the world business environment
to identify opportunities, threats, trends and resources. The global company
searches the world for markets that will provide an opportunity to apply its skills
and resources to create value for customers that is greater than the value created
by its competitors. The global strategy is a design to create a winning offering on
a global scale. This takes great discipline, great creativity, and constant effort but
reward is just success – its survival.
RESTRAINING FORCES
1. Market difference: In every product category, differences are still great enough across
national and cultural boundaries to require adaptation of at least some elements of the
product mix.
2. History: Even in cases where the product itself may be good candidate for globalization,
a brands history may require a distinct and different marketing strategy and positioning
in each country.
3. Management myopia: In many cases, products and services are candidate for
globalization, but management does not seize the opportunity, e.g. management myopia
is any company that does not maintain leadership in creating customer value in an
expanding geographical territory. A company that looks backward will not expand
geographically.
4. Organization culture: In companies where subsidiary management knows it all, there is
no room for vision from the top. In companies where headquarters management knows
it all there is no room for local initiative and in-depth knowledge of the local needs and
condition. The successful global companies are marketers who have learnt how to
integrate global vision and perspective with local market initiative and input.
5. National controls / barriers entry: Every country protects local enterprises and interests
by maintaining control over market access and entry. This control ranges from the low-
tech tobacco monopoly control of access to tobacco markets to high-tech national
government control of broadcast equipment, and data transmission markets.
UNDERLYING FORCES OF INTERNATIONAL BUSINESS.
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There are seven underlying forces to gain further insights into the foundations of the global
economy as it exists today.
1. Orientation of management: An orientation is the assumption of beliefs, often
unconscious , about the nature of the world
• Ethnocentric – is the assumption or belief, that home sees similarities in foreign
country is superior, sees similarities in foreign countries, i.e. no modifications.
• Polycentric – each host country is unique , sees difference in foreign countries –
modify
• Region centric- sees similarities and differences in a world region.
• Geocentric –worldview sees similarities and differences in home and host country.
2. The international monetary framework: The rapid growth of trade and investment has
been created by increasing need for international liquidity, i.e. Money or means of
payments to facilitate the exchange of goods and services between nations.
3. The world trading system: The major challenge to the trading system is the 1990s is not
tariff level but rather the so called non-tariff barriers (NTBs). These include safeguard
action to protect industries, exclusion orders, standards (ISO).
4. Regional trade agreements: A regional free trade agreement is an agreement within a
region to expand trade. An RFTA creates trade when low tariffs and other barriers
encourage members to buy from each other what they previously made for themselves.
5. Global peace: We live in a paradoxical where there is bitter regional conflicts in many of
the middle income countries and regions, and peace in the high-income countries.
6. Domestic economic growth: There are two reasons why economic growth has been an
underlying forces in the expansion of the international economy.
a) Growth has created market opportunities existence of market opportunities
has been the major incentive for the international expansion of the
enterprise.
b) Economic growth has reduced the resistance that might otherwise have
developed in response to the entry of foreign firms into domestic economies.
7. Communication and transport technology: The time and cost barrier of distance have
fallen tremendously over the past 100 years. Increased speed and capacity and lower cost
communication have been a major force facilitating international business expansion. The
second major communications development has been the enormous improvement in
ability to transmit data electronically.
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THE GLOBAL /TRANSNATIONAL CORPORATION
The global / transnational corporation or any business enterprise that pursue global business
objective by relating world resources to world market opportunities, it is the organization that
has responded to the driving, restraining forces within the international financial framework and
under the umbrella of global peace, the global corporation has taken advantage of expanding
communication technologies to pursue market opportunities and serve needs and wants on a
global scale. The global enterprise has both responded to market opportunity and competitive
threat by going global and the same time has been one of the forces driving the world towards
greater globalization.
GLOBALIZATION FORCES
Three interrelated forces are leading international firms to the globalization of their production
and marketing.
1. Advances in computer and communication technology permits an increased flow of ideas
and information across borders, enabling customers to learn about
2. Progressive reduction of barriers to investment and trade by most governments are
hastening the opening of new markets by international firms that are both exporting to
them and building production facilities for local manufacture.
3. There is a trend towards the unification and socialization of the global community.
Preferential trading arrangements such as the North America Free Trade Agreements and
European Union that group several nations into a single market have presented firms with
significant marketing opportunities. Many have moved swiftly to enter either through
exporting or by producing in the area.
The impact of this rush to globalization had been an explosive growth in international business.
MULTINATIONAL ENTERPRISE
Multinational Enterprises (MNEs) are the key features of international business. They dominate
world’s trade and investment activities by producing most of the well-known products we
consume and undertaking significant amounts of Foreign Direct Investment (FDI) in host country.
The world’s most famous brands such Levi NIKE, Coca-Cola and Microsoft are standard names
for the products they represent in the market throughout the world. They influence
development and growth of the world’s economy. They are often viewed as agents responsible
for the changing world economic, political and social order.
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Definition: An enterprise, which extends its business activities into more than two countries with
the aim of responding to worldwide opportunities for the most efficient employment of its firm
specific asset (FSA) including its production and service facilities and knowledge either on its own
or in partnership with other firms, in pursuit of , clearly defined aims and objectives.
CHARACTERISTICS OF MNEs
Are divided into two broader general categories: - qualitative and quantities.
a) Size- quite a number of the world’s MNEs are large corporate entities with substantial
financial and technological resources which they use to gain power and influence in
markets in which they operate..
b) Geographical diversities- the number of countries in which MNEs operate various
enormously, depending on the product range, competition and marketing requirement.
c) Networking- one distinct advantage of geographical diversity is that it enables MNEs to
engage in inter firm (as opposed to international) trade whereby they supply
components, equipment’s and raw materials to other manufacturers. it also may provide
intra-firm or between the MNEs subsidiaries or affiliates.
d) Revenue – there is no consensus of opinion as to what proportion of the firms total
revenues should be generated outside its home country before it can be classified as an
MNEs. However, any percentage above 25% seems to be norm.
e) Ownership- MNEs has complete control over all strategic and operational aspects of its
subsidiaries.
Qualitative characteristics
a) Management philosophy
The key qualitative distinguishing features of MNEs is the management attitude and
commitment exemplified by its behavior.
• Ethnocentric orientation- (home country oriented). Are oriented toward domestic
markets and cannot therefore be regarded as true MNEs unless their domestic markets
form an integral part of their worldwide operations.
• Polycentric MNEs is oriented towards foreign markets which are loosely connected to the
firm without an integrative system.
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• Geocentric (or region centric) MNE view world markets from a global perspective, i.e. it
strives to integrate its world markets and resources acquisitions as part of its global
strategy to serve customers whenever they may be acquiring the best quality resources
at the lowest cost.
b) Operational structure
Is the way in which it organizes its production activities.
Three types:
i. Vertically integrated MNEs in a multi-plant or multi facility firm that organizes
successive stages of production in different locations to produce intermediate
inputs for subsidiaries affiliates as other firm’s e.g. industrial firm, e.g. G.M.
ii. A horizontal integrated MNEs produces the same or similar product in the
worldwide production units, e.g. found in retails industries (Mark and Spencer is a
highly successful food and clothing retail with shops in different countries.
iii. Diversified MNEs or conglomerate the firm operates a chain of formulation units
in many parts of the world which are neither vertically nor horizontally linked to
one another but operate as semi independent subsidiaries of affiliates. These
diversified MNEs are basically risk averters engaging in different unrelated
business activities in order to spread risks.
THE INTERNALIZATION
The Firm Specific Asset (FSA) both tangible and intangible, which give a distinctive advantage
when entering a market includes:
1. Technology: Is the technological advantage develop over time, is equivalent to superior
knowledge (technical knowledge and is the ability the firm efficiently or to produce goods
more efficiently or produce them at least as efficient as other firms but with better quality
appeal. Once developed, tested n market and proven successful, this provides firm the
continuous flow of revenue.
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