ELINA BT ABD MANANMsc (Management)School of Business InfrastructureKuala Lumpur Infrastructure University College*

International business consists of all commercial transactionsincluding sales, investments, and transportationthat take place between two or more countriesincreasingly foreign countries are a source of both production and sales for domestic companies

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It is important to study international business becauseMost companies are either international or compete with international companiesModes of operations may differ from those used domesticallyThe best way of conducting business may differ by countryAn understanding helps you make better career decisionsAn understanding helps you decide what government policies to support

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Factors in International Business Operations*

The world is moving away from self-contained national economies toward an interdependent, integrated global economic systemGlobalization refers to the shift toward a more integrated and interdependent world economy

Globalization has two facets: 1) the globalization of markets 2) the globalization of production*

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplaceIn many industries, it is no longer meaningful to talk about the German market or the American marketInstead, there is only the global market

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Falling trade barriers make it easier to sell internationallyThe tastes and preferences of consumers are converging on some global normFirms help create the global market by offering the same basic products worldwide*

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 like land, labor, and capital

Companies compete more effectively by lowering their overall cost structure or improving the quality or functionality of their product offering*

Institutions are needed to:help manage, regulate, and police the global marketplacepromote the establishment of multinational treaties to govern the global business system*

Institutions created over the past half century include:the General Agreement on Tariffs and Trade (GATT)the World Trade Organization (WTO)the International Monetary Fund (IMF)the World Bankthe United Nations (UN)

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The World Trade Organization (like its predecessor GATT) is primarily responsible for policing the world trading system and making sure that nation-states adhere to the rules laid down in trade treaties signed by WTO membersIn 2007, the 150 nations that accounted for 97% of world trade were WTO membersThe WTO promotes lower barriers to trade and investment*

The International Monetary Fund and the World Bank were created in 1944The IMF was established to maintain order in the international monetary systemThe World Bank was established to promote economic development*

The United Nations was established in 1945 to:maintain international peace and securitydevelop friendly relations among nationscooperate in solving international problems and in promoting respect for human rightsbe a center for harmonizing the actions of nations

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Two macro factors underlie the trend toward greater globalization:the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War IItechnological change *

International trade occurs when a firm exports goods or services to consumers in another countryForeign direct investment (FDI) occurs when a firm invests resources in business activities outside its home countryAfter World War II, advanced countries made a commitment to lower barriers to trade and investmentSince 1950, average tariffs have fallen significantly and are now at about 4%Countries have also been opening markets to FDI*

Table 1.1: Average Tariff Rates on Manufactured Products as Percent of Value *

Lower barriers to trade and investment mean:that firms can view the world, rather than a single country, as their marketthat firms can base production in the optimal location for that activity

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Technological change has made the globalization of markets a reality

Important advances have occurred in:microprocessors and telecommunicationsthe Internet and World Wide Webtransportation technology *

Implications of technological change for the globalization of production include:lower transportation costs that enable firms to disperse production to economical, geographically separate locationslower information processing and communication costs that enable firms to create and manage globally dispersed production systems

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Implications of technological change for the globalization of markets include:low cost global communications networks help create electronic global marketplacelow-cost transportation help create global marketsglobal communication networks and global media are creating a worldwide culture, and a global market for consumer products

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There has been a drastic change in the demographics of the world economy in the last 30 years

Four trends are important: the Changing World Output and World Trade Picturethe Changing Foreign Direct Investment Picturethe Changing Nature of the Multinational Enterprisethe Changing World Order *

In 1960, the United States accounted for over 40% of world economic activityBy 2006, the United States accounted for less than 20% of world economic activityA similar trend occurred in other developed countriesThe share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020*

Table 1.2: The Changing Demographics of World GDP and Trade *

In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flowsToday, the United States accounts for less than one-fifth of worldwide FDI flowsOther developed countries have followed a similar patternIn contrast, the share of FDI accounted for by developing countries has risen from less than 2% in 1980 to almost 12% in 2005Developing countries, especially China, have also become popular destinations for FDI*

A multinational enterprise (MNE) is any business that has productive activities in two or more countriesSince the 1960s, there has been a rise in non-U.S. multinationals, and a growth of mini-multinationals*

Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies and so, create new opportunities for international businessesChina and Latin America are also moving toward greater free market reforms*

The world is moving toward a more global economic system, but globalization is not inevitableGlobalization also brings risks like the financial crisis that swept through South East Asia in the late 1990s*

Is the shift toward a more integrated and interdependent global economy a good thing?Supporters believe that increased trade and cross-border investment mean lower prices for goods and services, greater economic growth, higher consumer income, and more jobsCritics worry that globalization will cause job losses, environmental degradation, and the cultural imperialism of global media and MNEs*

More than 40,000 anti-globalization protesters took to the street at the WTO meeting in Seattle in 1999Protesters now regularly show up at most major meetings of global institutions *

Globalization critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countriesSupporters of globalization contend that the benefits of this trend outweigh the coststhat countries will specialize in what they do most efficiently and trade for other goodsand all countries will benefit*

Globalization critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforcedGlobalization supporters claim that tougher environmental and labor standards are associated with economic progress, so as countries get richer from free trade, they get tougher environmental and labor regulations*

Critics of globalization worry that todays interdependent global economy is shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UNSupporters of globalization contend that the power of these organizations is limited to what nation-states agree to grant, and that the power of the organizations lies in their ability to get countries to agree to follow certain actions*

Critics of globalization argue that the gap between rich nations and poor nations is getting widerSupporters of globalization claim that the best way for the poor nations to improve their situation is to reduce barriers to trade and investment and implement economic policies based on free market economies, and to receive debt forgiveness for debts incurred under totalitarian regimes*

To expand salespursuing international sales increases the potential market and potential profitsTo acquire resourcesmay give companies lower costs, new and better products, and additional operating knowledgeTo diversify or reduce risksinternational operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage

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These three reasons sales expansionresource acquisitionrisk minimizationguide all decisions about whether, where, and how to engage in international business *

Managing an international business differs from managing a domestic business because: countries are differentthe range of problems confronted in an international business is wider and the problems more complex than those in a domestic businessfirms have to find ways to work within the limits imposed by government intervention in the international trade and investment systeminternational transactions involve converting money into different currencies

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The merging of historically distinct and separate national markets into one huge global marketplace is known as

a) global market facilitationb) cross-border tradec) supranational market integrationd) the globalization of markets*

Firms that are involved in international business tend to be

a) largeb) smallc) medium-sizedd) large, small, and medium-sized*

Which is not a factor of production?

a) tradeb) landc) capitald) energy*

Which organization is responsible for policing the world trading system?

a) the International Monetary Fundb) the United Nationsc) the World Trade Organizationd) the World Bank*

Which of these is not a concern of anti-globalization protesters?

a) globalization raises consumer incomeb) globalization contributes to environmental degradationc) globalization is causing a loss of manufacturing jobs in developing countriesd) globalization implies a loss of national sovereignty*

The shift toward a more integrated and interdependent world economy is referred to as

a) economic integrationb) economic interdependencyc) globalizationd) internationalization*

The sourcing of good and services from around the world to take advantage of national differences in the cost and quality of factors of production is called

a) economies of scaleb) the globalization of productionc) global integrationd) global sourcing*

What is the single most important innovation to the globalization of markets and production?

a) advances in transportation technologyb) the development of the microprocessorc) advances in communicationd) the Internet*

Which of the following trends is true?

a) the United States is accounting for a greater percentage of world trade than ever beforeb) the United States is accounting for a greater percentage of foreign direct investment than ever beforec) the share of world trade accounted for by developing countries is risingd) the share of foreign direct investment by developing countries is declining*

**What is international business? International business consists of all commercial transactions that take place between two or more countries. International business activities allow us to get more variety, better quality, and/or lower prices. International business activities may be performed by private companies motivated by profit, or by governments that undertake them either for profit or for political reasons.

*Why should you study international business? There are many reasons. One of the most important is because global events affect companies of all sizes and in all industries. In fact, managers today need to consider where in the world to obtain the inputs they need of the required quality and at the best possible price and also where they can best sell the product or service that theyve put together from those inputs. In many cases, managers may find that they can be more competitive by engaging in global business transactions.Its also important to recognize that the best way of doing business abroad may not be the same as the best way at home. When a company operates internationally, it engage in modes of business such as exporting and importing that differ from those in which it engages domestically. In addition, physical, social, and competitive conditions differ among countries and affect the optimum ways to conduct business. So we often find that companies operating internationally have more diverse and complex operating environments than those that conduct business only at home.Even if you arent working at an international company its important to understand international business complexities because overall national conditions things like profits, employment security and wages, consumer prices, and national security are all affected by the international operations of companies and by government regulations of those operations.

*This Figure shows the complex relationships among conditions and operations that a firm may face when its conducts some of its business internationally. Well be referring back to this Figure throughout the chapter.

**The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace.

It is important to recognize that significant differences still exist among national markets, requiring companies to customize market strategies, product features, and operating practices to meet the conditions in particular markets.

The most global markets currently are not markets for consumer productswhere national differences in tastes and preferences are still often important enough to act as a brake on globalizationbut markets for industrial goods and materials that serve a universal need the world over.

These include the markets for commodities such as aluminum, oil, and wheat; the markets for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; the markets for computer software; and the markets for financial assets from U.S. Treasury bills to Eurobonds and futures on the Nikkei index or the Mexican peso. *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 facilitating the trend by offering standardized products worldwide creating a global market.

*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).

By doing this, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.

Early outsourcing efforts were primarily confined to manufacturing enterprises, but today, more companies are taking advantage of modern communications technology, like the Internet, to outsource service activities to low-cost producers in other nations. The Country Focus: Outsourcing American Healthcare illustrates how the Internet has allowed hospitals to outsource some radiology work to India, where images from MRI scans and the like are read at night while U.S. physicians sleep, and are the results are ready for them in the morning.

There are still substantial impediments to the globalization of production including formal and informal barriers to trade, barriers to foreign direct investment, transportation costs, issues associated with economic risk, and issues associated with political risk. ******The two macro factors underlie the trend towards greater globalization: First, the decline in the barriers to free flow of goods, services, and capital Second, technological change in communications, information processing, and transportation technologies.*International trade occurs when a firm exports goods or services to consumers in another country.

Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country.

After World War II, advanced industrial nations of the West committed themselves to removing barriers to the free flow of goods, services, and capital between nations. ***The lowering of trade barriers made globalization of markets and production a theoretical possibility, technological change made it a tangible reality.

Microprocessors and Telecommunications: Major advances in communications and information processing have lowered the cost of global communication and therefore the cost of coordinating and controlling a global organization.

The Internet and the World Wide Web: Web-based transactions have grown from virtually zero in 1994 to nearly $7 trillion in 2004.

Transportation Technology: the most important developments are probably development of commercial jet aircraft and super freighters and the introduction of containerization, which greatly simplifies trans-shipment from one mode of transport to another.

Improvements in transportation technology have enabled firms to better respond to international customer demands.

Managers today operate in an environment that offers more opportunities, but is also more complex and competitive than that of a generation ago. ****In the 1960s: the U.S. dominated the world economy and the world trade picture, U.S. multinationals dominated the international business scene, and about half the world-- the centrally planned economies of the communist world-- was off limits to Western international business.*The Country Focus: Indias Software Sector feature explores the growth of India software sector over the last twenty-five years. Four factors account for the growth of the sector. First, the country has a large supply of engineers. Second, labor costs in India are low. Third, since many Indians are fluent in English, coordination between Western firms and Indian firms is easier. Fourth, because of time differences, Indians can work while Americans sleep. *The share of world output generated by developing countries has been steadily increasing since the 1960s.

The stock (total cumulative value of foreign investments) generated by rich industrial countries has been on a steady decline.

There has been a sustained growth in cross-border flows of foreign direct investment.

The flow of foreign direct investment (amounts invested across national borders each year) has been directed at developing nations especially China. *A multinational enterprise is any business that has productive activities in two or more countries.

Expect the growth of new multinational enterprises (any business that has productive activities in two or more countries) from the world's developing nations.

The number of mini-multinationals (small and medium-sized companies) is on the rise.*The Management Focus: Chinas Hisense An Emerging Multinational examines how one Chinese company, Hisense, has emerged as one of Chinas premier makers of televisions, air conditioners, refrigerators, personal computers, and telecommunications. Hisense began as a state-owned company in 1969, but became a private corporation in 1994. Today, the company has sales of $3.3 billion, and has sets its sights on becoming a global enterprise with a world class consumer brand. Hisnese believes its core strength lies with its ability to rapidly innovate.

Teaching Tip: To find out more about Hisense, visit the companys web site at {http://www..hisense.com} ***The Country Focus: Protesting Globalization in France feature describes the anti-globalization protests going on in France. The protests, led by activist Jose Bove, started when the U.S. retaliated against EU bans on beef imports by imposing a 100% tariff on some EU products. Bove and his associates targeted McDonalds, and also California winemaker Mondavi as symbols of their opposition to American investments. Still, despite the protests, foreign investment in France is at record highs, and ironically, so are French investments abroad.*****Why should companies engage in international business? A general answer is that going in international can help firms create value. More specifically, going global can help firms expand sales, acquire resources, and diversify or even reduce risks. *All three of these can influence decisions about whether, where, and how to go global. **The correct answer is d.*The correct answer is d. *The correct answer is a.*The correct answer is c.*The correct answer is a.*The correct answer is c.*The correct answer is b. *The correct answer is b.*The correct answer is c.