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Nature of International Business

Presented By:

PGDM From Roll No. 1 to 23

Presented to: Mrs. Monika Sharma.

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What is International Business (IB)?

International business is business whose activities are carried out across national borders,

It includes: Not only international trade Foreign manufacturing But also the growing service industry in areas such as:

a) Transportation, Tourism,

b) Advertising, Construction, Retailing etc.

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Importance of IB

Every company is trying to expand its business by entering foreign markets.

IB helps in the following ways:-

1) Helps As Growth Strategy,

2) Technology Advantages,

3) New Business Opportunities,

4) Earning Foreign Exchange,

5) Helps In Mutual Growth.

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Different terms of IB

Foreign business denotes the operations of a company outside its home

or domestic market, many refer to this as business conducted with in a

foreign country. Multidomestic company (MDC) is an organization with multicounty

affiliates, each of which formulates its own business strategy based on

perceived market differences. Global company (GC) is an organization that attempts

to standardize and integrate operations worldwide in most or

all functional areas. International company (IC) is a global or multidomestic company.

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Difference Between IB And Domestic Business

International business differs from domestic business in that

a firm operating across borders must deal with the forces of

three kinds of environments—domestic, foreign, and international.

In contrast, a firm whose business activities are carried

out within the borders of one country needs to be concerned

essentially with only the domestic environment.

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Influence of External and InternalEnvironmental Forces

The External Forces are commonly called uncontrollable forces. It consits of the following:

Competitive, Distributive, Economic, Socioeconomic, Financial, Legal, Physical etc.

On the other hand, The elements over which management does have some

control are the internal forces, such as the factors of production

(capital, raw materials, and people) and the activities of

the organization (personnel, finance, production, and marketing).

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Types of IB

Domestic Environment: It is all the uncontrollable forces originating in the home country that influence the life and development of the firm.

Foreign Environment: The forces in this environment are the same as those in the domestic environment except that they occur outside the firm’s home country.

• International Environment: This environment consists of the interactions

(1) Between the domestic environmental forces and the foreign environmental forces,

(2) Between the foreign environmental forces of two countries when an affiliate in one country does business with customers in another.

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HISTORY OF INTERNATIONAL BUSINESS

International trade has a rich history starting with barter system being

replaced by Mercantilism in the 16th and 17th Centuries. The 18th Century saw the shift towards liberalism. Around 1913,

the countries in the west say extensive move towards economic liberty where in

quantitative restrictions were done away with and customs duties were reduced

across countries. All currencies were freely convertible into Gold, which was the international

monetary currency of exchange. Establishing business anywhere and finding employment was easy and one

can say that trade was really free between countries around this period.

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The need to reduce the pressures of economic conditions and ease

international trade between countries gave rise to the World Economic

Conference in May 1927 organized by League of Nations where in the most

important industrial countries participated and led to drawing up of

Multilateral Trade Agreement. Today the understanding of international trade and the factors influencing

global trade is much better understood.

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GROWTH OF INTERNATIONAL FIRMS AND INTERNATIONAL BUSINESS

The size and the number of U.S. and foreign international concerns have been increasing rapidly in recent years, as have the levels of foreign direct investment (FDI) and exporting.

The expanding importance of foreign-owned firms in local economies came to be viewed by a number of governments as a threat to their autonomy. However, there has been a marked liberalization of government policies and attitudes toward foreign investment in both developed and developing nations since the early 1980s.

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Foreign Direct Investment and Exporting Are Growing Rapidly

Foreign direct investment(FDI) : Direct investments in equipment, structures, and organizations in a foreign country at a level that is sufficient to obtain significant management control; does not include mere foreign investment in stock markets.

Exporting: The transportation of any domestic good or service to a destination outside a country or region.

Importing: The transportation of any good or service into a country or region, from a foreign origination point.

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What is Globalization?

The most common definition and the one used in international business is that

of Economic Globalization —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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What Is Driving the Globalizationof Business?

Globalization is discussed everywhere—television shows, Internet chat rooms,

political demonstrations, parliaments, management boardrooms, and labor

union meetings.

DRIVERS OF GLOBALIZATIONFive major kinds of drivers, all based on change, are leading international

firms to globalize their operations

(1) Political (2) Technological (3) Market (4) Cost (5) Competitive.

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Arguments Supporting Globalization

Free Trade Enhances Socioeconomic Development: Free trade is the best

strategy for advancing the world’s economic development is one of the few

propositions on which almost all economists agree, not only because it is

theoretically compelling but also because it has been demonstrated in

practice more people have become better off at a faster pace in the past 60 year. Free Trade Promotes More and Better Jobs: Expanded trade is also linked

with the creation of more and better jobs.

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Concerns with Globalisation

Those expressing concern with globalization have come from a range of

sectors of society, and they express a correspondingly diverse set of concerns. Some fundamentally oppose the very process and outcomes of globalization

on ideological grounds, while others may merely be concerned about finding

ways to better manage globalization processes.

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Three Primary Concerns are:-

Globalization Has Produced Uneven Results across Nations and People:- Opponents describe the painful impact of foreign investment and trade

liberalization on the people of the world. Far from everyone has been a

winner, they say. The promise of export-led growth has failed to materialize in

several places. For Example:- efforts in sub-SaharanAfrica have produced only limited

benefits,

and the share of the population living in extreme poverty there rose from 42 to

47 percent between 1981 and 2001. Many opponents of globalization have claimed that there is a huge gap

between the world’s rich and poor and that globalization has caused that gap to

increase. That there is a gap between rich and poor is unquestionable, but the

evidence is perhaps not so clear regarding the charge that globalization has

increased this inequality.

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According to Martin Wolf, Inequality has risen in some high-income

countries, but he attributes that more to the nature of technological change

than to globalization.

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Globalization Has Had Deleterious Effects on Labor and Labor Standards:- The issue of the impact of globalization on labor standards has become a

concern of workers in the United States and other nations. Workers in developed countries frequently voice concerns that their jobs

will migrate to developing nations where there are lower standards, and thus lower costs.

Indeed, the Labor Secretariat for the North American Free Trade Agreement (NAFTA) commissioned a report that found more than half of firms surveyed used threats to close U.S. operations as a tool to fight union-organizing efforts.

• As reported by Alan Tonelson, “In fact, more than 10 percent of employers studied . . . ‘directly threatened to move to Mexico,’ and 15 percent of firms, when forced to bargain with a union, actually closed part or all of a factory—triple the rate found in the late 1980s, before NAFTA.

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A study by the Carnegie Endowment for International Peace found that Mexico’s agricultural sector, which provides most of the country’s employment, had lost 1.3 million jobs in the first decade since NAFTA was implemented.

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Globalization Has Contributed to a Decline in Environmental and Health Conditions:-

Regarding concerns of antiglobalization forces that globalization contributes to declining environmental standards.

A difficulty caused by the North American Free Trade Agreement and the maquiladora program that began before NAFTA has been the substantial increases in ground, water, and air pollution along the Mexico–U.S. border.

Damage to the environment has been caused by the many new production facilities.

Some of NAFTA’s rules on trade in services may cause governments to weaken environmental standards for sometimes hazardous industries like logging, trucking, water supply, and real estate development.

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Protesters have also claimed that, under liberalized rules regarding the globalization of trade and investment, businesses have an incentive to move their highly polluting activities to nations that have the least rigorous environmental regulations or a lower risk of liability associated with operations that can create environmental or health-related problems.

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Motives for Entering Foreign Markets

Following are the reasons international firms enter foreign markets:- Increase Profits and Sales

Enter new firms:- Managers are always under pressure to increase the sales and profits of their firms. They find the markets outside the home country with a rising gross domestic product (GDP) per capita and population g are growing at a considerably faster rate than is the economy of their own market.

• New Market Creation:- Data from sources such as the Human Development Report indicate that from a macro perspective, markets around the world are growing. However, this does not mean that equally good opportunities exist for all kinds of business. Perhaps surprisingly, economic growth in a nation causes markets for some products to be lost forever while, simultaneously, markets for other products are being created. Growth and the economies of some nations where they are not doing business

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As economic development continues, however, managers see profit-making opportunities in

(1) producing locally the kinds of consumer goods that require simple technology or

(2) assembling from imported parts the products that demand a more advanced technology.

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Faster-Growing Markets:- Not only are new foreign markets appearing, but many of them are growing at a faster rate than is the home market. When you examine the low GDP per capita and negative growth rates of many of the African nations, you realize why foreign direct investment in that entire continent is so low. Clearly, market analysts will investigate other factors, such as the legal and political situations

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Interestingly, 83 of the 182 countries in the 2009 Human Development Report for which data were available (46 percent) had average annual GDP per capita growth rates that were higher than the U.S. growth rate for the period 1990–2007.

• Improved Communications:- the ability to communicate rapidly and less expensively with customers and subordinates by electronic mail, wireless and wired telephones, and videoconferencing has given managers confidence

in their ability to control foreign operations.

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• The clients of numerous Indian software companies are in the United States. A few years ago, software teams were required to fly back and forth between the two countries. Now, at the end of the day, customers in the United States e-mail their problems to India. For their work, Indian software engineers often receive only 15 to 20 percent as much pay as do their American counterparts

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• Obtain Greater Profits:- greater profits may be obtained by either increasing total revenue or decreasing the cost of goods sold, and often conditions are such that a firm can do both.

• Greater Revenue:- Where there is less competition, the firm may be able to obtain a better price for its goods or services. Increasingly, firms are also obtaining greater revenue by simultaneously introducing products in foreign markets and in their domestic markets as they move toward greater globalization of their operations.

• Lower Cost of Goods Sold:- Increasing total sales by exporting not only will reduce research and development (R&D) costs per unit but also will make other economies of scale possible. Another factor that can positively affect the cost of goods sold is the inducements—such as reduced taxes or subsidies for R&D—that some governments offer to attract new investments.

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• Higher Overseas Profits as an Investment Motive:- There is no question that greater profits on overseas investments has been a strong motive for going abroad. Business International, for example, reported that 90 percent of 140 F ortune 500 companies surveyed had achieved higher profitability on foreign than on domestic assets

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Protect Markets, Profits, and Sales

• Protect Domestic Market by Following Customers Overseas:- Frequently, a firm will go abroad to protect its home market. Service companies (e.g., accounting, advertising, marketing research, banking, law) will establish foreign operations in markets where their principal accounts are located to prevent competitors from gaining access to those accounts. They know that once a competitor has been able to demonstrate to top management what it can do by servicing a foreign subsidiary.

• Attack in Competitor’s Home Market:- a firm will set up an operation in the home country of a major competitor with the idea of keeping the competitor so occupied defending that market that it will have less energy to compete in the firm’s home country.

• Using Foreign Production to Lower Costs:- A company may go abroad to protect its domestic market when it faces competition from lower-priced foreign imports.

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• Managers may decide to produce certain components abroad and assemble them in the home country, or, if the final product requires considerable labor in the final assembly, it may send the components overseas for this activity.

• Protect Foreign Markets:- Changing the method of going abroad from exporting to overseas production is often necessary to protect foreign markets

• Lack of Foreign Exchange:- One of the first signs is a delay in payment by the importers. The importers may have sufficient local currency but may be facing delays in buying foreign exchange (currency) from the government’s central bank. If the advantages of making the investment outweigh the disadvantages, the company may decide to protect this market by producing locally.

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• Local Production by Competitors:- While a firm may enjoy a growing export business and prompt payments, it still may be forced to set up a plant in the market if competitors have also noticed their export volumes will support local production. If a competing firm moves to put up a factory in the market, management must decide rapidly whether to follow suit or risk losing the market forever.

• Downstream Markets:- A number of Organization of Petroleum Exporting Countries (OPEC) nations have invested in refining and marketing outlets, such as filling stations and heating-oil distributors, to guarantee a market for their crude oil at more favourable prices.

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SEVEN DIMENSIONS FOR GLOBALIZING A BUSINESS

In organizing their international activities, there are at least seven dimensions

along which management can globalize :

(1) Product

(2) Markets

(3) Promotion

(4) Where value is added to the product

(5) Competitive strategy,

(6) Use of non-home-country personnel

(7) Extent of global ownership in the firm.

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