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© 2012 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 1

the challenging world of

international business


Learning Objectives

• LO1: Understand what international business is

and why it is important.

• LO2: Comprehend why and how international

business differs from domestic business.

• LO3: Appreciate that international business has a

long and important history.

• LO4: Appreciate the dramatic internationalization

of markets.

Please continue.....

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LO’s continued…

• LO5: Understand the 5 kinds of drivers, all based on

change, that are leading firms to internationalize

their operations.

• LO6: Recognize the key arguments for and against

the globalization of business.

• LO7: Explain the reasons for entering foreign

markets.

• LO8: Recognize that globalization (standardization)

of an international firm occurs over at least 7

dimensions and that a company can be partially global

in some dimensions and completely global in others.

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Also a chapter of lists…

• 3 Environments

• 5 Drivers of Globalization

• 7 Dimensions of Globalization

(Standardization)

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What is an

International Business?• International Business –

�a business whose activities are carried out across

national borders

• Foreign Business –

� the operations of a company outside the home or

domestic market

• Multidomestic Company (MDC) –

�an organization with multicountry affiliates, each of

which formulates its own business strategy based on

perceived market differences

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What is an

International Business?

•Global Company (GC) –

�an organization that attempts to

standardize and integrate operations

worldwide for all functional areas

• International Company (IC) –

�either a global or multinational company

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What is Different about

International Business?International

Business

• deals with 3

environments:

1. Domestic

2. Foreign

3. International

Domestic Business

• deals with the

domestic market

• But…a business may

face foreign

competition in

domestic market

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Influence of External and

Internal Environmental ForcesThree relevant terms:

1. Environment

� all forces surrounding and influencing the life and

development of the firm. Composed of:

2. Uncontrollable Forces

� external forces over which management has no direct

control (although it can exert an influence).

3. Controllable Forces

� internal forces that management administers to adapt to

changes in the uncontrollable forces.

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External Forces (Uncontrollable)

1. Competitive – competitors, their number, locations, activities

2. Distributive – agencies available for distributing goods & services

3. Economic – GNP, GDP, unit labor cost, personal consumption variables that

impact a firm’s ability to do business

4. Socioeconomic – characteristics & distribution of populations

5. Financial – interest & inflation rates, taxation, etc.

6. Legal – laws governing international operations of MNCs

7. Physical – topography, climate, natural resources

8. Political – local political climate, government structure, international

organizations

9. Sociocultural – culture, attitudes, values, beliefs of the local environment

10. Labor – composition, skills, and attitudes of local labor

11. Technological – technical skills & equipment converting resources into

product

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Internal Forces (controllable)

• Factors of production (capital, raw

materials, and esp. people).

• Organization’s activities (personnel,

finance, production, marketing).

– Marketing example: firm can decide

whether to place an ad. But the reaction to

the ad is uncontrollable. Also, the

regulation of ads is uncontrollable.

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Environments

• Domestic Environment

� all uncontrollable forces originating in the home country that

surround and influence the firm’s life and development.

• Foreign Environment

� all uncontrollable forces originating outside the home country

that surround and influence the firm.

• International Environment

� interaction between domestic and foreign environmental forces

or between sets of foreign environmental forces.

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The Foreign Environment

Forces are the same as in the domestic

environment but occur outside the home

country and operate differently:– Forces have different values compared to the

domestic situation

– Forces can be difficult to assess for a foreign firm

– Forces are interrelated.

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The International Environment

Consists of Interactions

Between:

• Domestic and foreign

environmental forces

• Between the foreign

environmental forces of

2 countries when the

affiliate of 1 does

business with customers

in another

International Organizations

that affect international

environment:

• Worldwide Bodies –

World Bank, WTO

• Regional Economic

Groupings – NAFTA,

EU

• Organizations Bound by

Industry Agreements –

OPEC, Global Alliance

for Sugar Trade Reform

and Liberalisation

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© 2012 The McGraw-Hill Companies, Inc. All rights reserved. 1-14

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Other FactorsComplexity of Decision

Making

• Managers must consider

each force individually

and collectively, how

decisions might affect

interactions between

each country.

Self-Reference

Criterion

• Managers tend to

ascribe their own

cultural values,

preferences, taste,

opinions to the host

country.

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Some Other Distinctions

Ethnocentrism

• “I Love My Country”

• “The dollar is ‘real’

money”

• “Buy American”

Animosity

• “Feelings of hostility

toward a nation”

• “Because I fought in

WWII, I will never buy a

Japanese car”

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A Brief History of

International Business

• Greek and Phoenician merchants traded before Christ

• China world’s leading manufacturer for 1,800 years,

replaced by Britain, 1844

• Ottoman Empire trade routes <1300, Middle East,

Europe, North Africa

• East India Company 1600, branches throughout Asia;

Dutch East India Company

• The 17th and 18th centuries the “age of mercantilism”

• Significant multinationals in late 1800s: Singer Sewing

Machine, J&P Coates, Ford Motor Company

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The Silk Road

• Trade route between China

and the Mediterranean Sea.

• The first users of the road

must have lived in the first

half of the first millennium

BCE, but the name 'Silk road'

is recent. Its most famous

traveler lived more than

twelve hundred years later:

Marco Polo of Venice (1254-

1324).

• Pictures

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Growth of International Firms

and International BusinessInternational Companies

• 64,000 transnational corps.

account for:

• 25% of global output

• 66.6% of world trade

• 866,000 foreign

affiliates

• 53,000,000 employed,

IB

• 700% sales growth

>1990(UNCTAD estimates)

FDI and Export Growth

– World stock of outward FDI

$16.2 trillion in 2008

– Growth of world merchandise

exports:

• $2.0 trillion in 1980




(Global recession)

– Growth of world service exports

• $365 billion in 1980

• $781 billion in 1990


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World Merchandise Exports, Commercial

Services Exports and Outward FDI, 1980-2009

World Merchandise Exports Outward FDICommercial Services Exports

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What is Globalization?

• Globalization is:

� The tendency toward an international

integration of goods, technology,

information, labor and capital, or the

process of making this integration happen.

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Levitt’s Argument

• We all have common needs /wants (clean

clothes, sufficient food). Largely true.

• Levitt thought our preferences for how

these needs/wants are satisfied would

converge.

• But…that’s only somewhat true.

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Drivers of Globalization

• Political Drivers

• Technological Drivers

• Market Drivers

• Cost Drivers

• Competitive Drivers

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Views On GlobalizationArguments Supporting

Globalization

• Enhances socioeconomic

development

• Promotes more and better

jobs

Concerns with

Globalization

• Uneven results across

nations and people

• Deleterious effects on labor

and labor standards

• Decline in environmental and

health conditions

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Motives for

Entering Foreign Markets• Increase Profits & Sales:

– Enter new markets

– Create new markets

– Access faster-growing markets

– Availability of improved communications

– Obtain greater profits

– Generate greater revenue

– Lower cost of goods sold

– Seek higher overseas profits

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Motives for

Entering Foreign Markets, IIProtect Markets, Profits & Sales:

– Protect Domestic Markets by Following Customers Overseas

– Attack in Competitor’s Home Market

– Use Foreign Production to Lower Costs

– Protect Foreign Markets

– Respond to lack of foreign exchange

– Respond to local production by competitors

– Develop downstream markets

– Respond to protectionism

– Guarantee supply of raw materials

– Acquire technology and management know-how

– Diversify Geographically

– Satisfy management’s desire for expansion1-26

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The 7 Dimensions for

Globalizing a Business

1. Product

2. Markets

3. Promotion

4. Value-added

5. Competitive strategy

6. Use of non-home-country personnel

7. Extent of global ownership in firm

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GLOBAL gauntlet

• How

immediate

is the

fossil

fuel

crisis?

• How do we know when oil

reserves reach midpoint and

start to decline?

• Are these risks really above-

ground political issues?

• Is conversation the answer?

• Do developed countries have

moral duty to produce food over

fuel?

• How long till we need to move to

new energy sources?

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