Lecture one

Introduction to International
Business
Learning Objectives
In this lecture, you’ll learn about:
1. What is international business?
2. What are the key concepts in international trade &
investment?
3. How does international business differ from domestic
business?
4. What motivates firms to go international?
5. Market globalization: An organizing framework
6. Regional integration and economic blocs
 What is International Business?
International Business includes:
• All value-adding activities—including sourcing,
manufacturing, and marketing that are performed on an
international scale

• Firms who seek foreign customers

& engage in partnerships
with overseas companies
What is International Business?
• The exchange of physical & intellectual assets – including
products, services, capital, technology, know-how, & labor

• Activity performed mainly by specific firms, but also by

countries and non-governmental organizations & agencies
Key International Business Definitions

• International business
Performance of any trade or investment activity by firms across
national borders
• International trade
Exchange of products & services across national borders,
typically through exporting & importing
Key Concepts in International Trade & Investment
• Exporting
Sale of products or services to customers abroad from a base in
the home country or a third country. Boeing and Airbus export
billions of dollars in commercial aircraft products every year

• Importing or Global Sourcing

getting products or services from suppliers abroad to be used at
home or in a third country. Toyota imports many parts from China
when it manufactures cars in Japan
Key Concepts in International Trade & Investment

• International investment
Passive ownership of foreign securities, such as stocks and bonds, in
order to generate financial returns
• Foreign Direct Investment
the transfer of assets to another country, or the acquisition of assets
in that country such as capital, labor, land, plants, and equipment
• Globalization of markets
the ongoing process of economic integration & growing
interdependency of countries worldwide
How does International and Domestic Business Differ?

1. International business:
• is conducted across national borders
• cost intensive
• uses distinctive business methods
• must adjust to countries that differ in culture, language, political
& legal system, economic situation, infrastructure, & other factors
2. When they venture abroad, firms encounter four major types
of risk
• Cross-cultural risk
• Country risk
• Currency risk
• Commercial risk
The Four Risks of International Business
The Four Risks of International Business
The Four Risks of International Business
(cont.)
The Four Risks of International Business
(cont.)
 Cross-Cultural Risk, Examples
• Cultural differences
Risks arise from differences in language, lifestyle, attitudes,
customs, and religion, where a cultural miscommunication
jeopardizes a culturally valued mindset or behavior.

• Negotiation patterns
Negotiations are required in many types of business
transactions but differ in how they are conducted (e.g.,
Brazilians more likely to be aggressive; Americans don’t
spend a lot of time on social niceties
 Cross-Cultural Risk (cont.)
• Decision-making styles
Managers constantly make decisions about the operations and
future direction of the firm. For example, Japanese take considerable
time to make important decisions, whereas Canadians tend to be
decisive and “shoot from the hip”

• Ethical practices
Standards of right and wrong vary considerably around the world. For
example, “bribery” is relatively acceptable in some countries in
Africa, but is generally unacceptable in Sweden and legally enforced
by other countries (e.g., Germany, U.S.)
 Country Risk (Political Risk)
• Government intervention, protectionism, and barriers to trade
and investment

• Bureaucracy, red tape, administrative delays, corruption

• Lack of legal safeguards for intellectual property rights

• Legislation unfavorable to foreign firms

• Economic failures and mismanagement

• Social and political unrest and instability

Currency Risk (Financial Risk)

• Currency exposure
General risk of unfavorable exchange rate fluctuations

• Asset valuation
Risk that exchange rate fluctuations will adversely affect
the value of the firm’s assets and liabilities
 Currency Risk (Financial Risk)
•Foreign taxation
Income, sales, & other taxes vary greatly worldwide, with
implications for company performance & profitability

• Inflation
High inflation, common in many countries, complicates business
planning & the pricing of inputs and finished goods
 Commercial Risk
Commercial risk can be reduced by improving business
strategy & tactics.
The following should be avoided:
o Choice of weak partners
o Operational problems
o Poor timing of entry
o Competitive intensity
o Poor execution of strategy
Who Participates in International Business?
• Multinational enterprises (MNE)
Very large companies with extensive resources allowing them to
conduct business activities worldwide via a network of subsidiaries
and affiliates (e.g., Honda, Exxon-Mobil, Walmart, Samsung, P&G, &
Disney)

• Small and medium-sized enterprises (SME)

Companies with < 500 employees & more limited resources to
devote to international activity. Yet, in most countries they constitute
about 90% of all existing firms & are increasingly engaged in IB
Who Participates in International Business?

• Born global firms

Newer, entrepreneurial SMEs that initiate substantial
international business early after their founding

• Non-governmental organizations
Nonprofit organizations that pursue special causes and serve
as advocates for social issues, education, politics, & research
across borders
 What Motivates Firms to Go International?
• To seek opportunities for growth through market
diversification
- E.g., Harley-Davidson, Sony, Whirlpool
• To earn higher margins and profits
- Often, foreign markets are more profitable
• To gain new ideas about products, services, & business
methods
- E.g., GM refined its knowledge about small, fuel-efficient
cars in Europe
Why do Firms Participate in IB?
• To better serve key customers that have relocated abroad
- E.g., when Toyota launched its operations in Britain, many
of its suppliers followed suit

• To be closer to supply sources, benefit from global sourcing

advantages, or gain flexibility in the sourcing of products
-E.g., Dell sources parts and components from the best
suppliers worldwide

• To gain access to lower-cost or better-value factors of

production
- E.g., Sony does much of its manufacturing in China
 Why do Firms Participate in IB? (cont.)
• To develop economies of scale in sourcing,
production, marketing, and R&D
-E.g., Boeing lowers overall costs by sourcing, manufacturing, & selling
aircraft worldwide
• To confront international competitors more effectively or to
thwart the growth of competition in the home market
-E.g., Chinese appliance maker Haier built U.S. operations partly for
competitive knowledge about Whirlpool (chief U.S. rival)
• To invest in a potentially rewarding relationship with a
foreign partner
- French computer firm Groupe Bull partnered with Toshiba in Japan to
gain insights for developing information technology
The Drivers of Market Globalization

• Worldwide reduction of barriers to trade and

investment

• Market liberalization and adoption of free markets

• Industrialization, economic development, and

modernization

• Integration of world financial markets

• Advances in technology
Five Societal Consequences of Market
Globalization

• Loss of national sovereignty

• Offshoring and the flight of jobs

• Effect on the poor

• Effect on the natural environment

• Effect on national culture

 Societal Consequences of Globalization
• Loss of national sovereignty
– MNE activities can interfere with governments’ ability to control their
own economies & social-political systems. Some firms are bigger than
the economies of many nations (e.g., Walmart, Shell)
– Others argue that global competition in the context of global free
trade makes MNEs less powerful (e.g., the U.S. auto industry declined
as foreign rivals from Japan and Europe entered the U.S. market)

• Offshoring and the flight of jobs

– Jobs are lost as firms shift production of goods & services abroad in
order to cut costs and obtain other advantages
– Firms benefit, but communities and industries are disrupted
 Societal Consequences of Globalization (cont.)
• Effect on the poor
– In poor countries, globalization usually creates jobs & raises
wages, but tends to disrupt local job markets. MNEs may pay
low wages but then seek other locations for plants once
they do (e.g., wages in China are on the rise; MNEs are
moving production facilities to cheaper locations)

– Some workers are exploited; child labor and other

conditions difficult to monitor by MNE
 Societal Consequences of Globalization (cont.)
• Effect on the natural environment
– Can harm environment by promoting industrialization &
other activities that generate pollution, habitat destruction,
& other environmental harm
– But, as nations develop their economies, they tend to pass
laws that protect the environment
– This happened in Japan in the 1960/70’s & is occurring now
in Mexico, China, and India
 Societal Consequences of Globalization (cont.)
• Effect on National Culture
– Globalization opens the door to foreign firms, global
brands, unfamiliar products, and new values

– Increasingly, consumers buy similar products, modeled

according to Western countries, especially the U.S

– In this way, traditional norms, values, and behaviors may

homogenize over time

– Some believe that national identity may be lost to

“global” culture
 Regional Economic Integration
• When nations within a geographic region form an alliance
aimed at reducing barriers to trade and investment &
increasing their economic interdependence

• Over 50% of world trade today occurs under the auspices of a

preferential trade agreement entered into by groups of countries
 Regional Economic Integration
• Cooperating nations obtain:
✓ increased product choices, productivity, living standards

✓ lower prices

✓ more efficient resource use

• Examples:

• ECOWAS

• European Union (EU) and

• The North American Free Trade Agreement (NAFTA)

 Why Pursue Regional Integration?
1. Expand market size
• Increases size of market for firms inside the bloc. Belgium has
only 10 million people, but EU has nearly 500 million
• Buyers can access larger selection of goods
2. Enhance productivity & economies of scale
• Bigger market facilitates economies of scale
• Internationalization inside bloc helps firms learn to compete
outside bloc
• Competition & efficient resource usage inside the bloc leads to
lower prices for bloc consumers
 Why Pursue Regional Integration? (cont.)
3. Attract investment from outside the bloc
• Compared to investing in stand-alone countries, foreign
firms prefer to invest in countries belonging to bloc
• General Mills, Samsung, & Tata have invested heavily in
EU-member countries

4. Acquire stronger defensive & political posture

• Membership provides countries with a stronger defensive
posture relative to other nations and world regions
• Key motive for formation of EU
Economic Bloc
• A geographic area consisting of countries that agree to
pursue economic integration by reducing tariffs & other
barriers to cross-border flow of products, services, capital,
and labor

• Bloc countries become party to free trade agreement that

eliminates tariffs, quotas, & other trade barriers
• Examples: European Union, NAFTA, APEC - Asia Pacific
Economic Cooperation , ASEAN, & many others
Five Potential Levels of Regional Integration
 Levels of Regional Integration
• Free trade area:
– Simplest, most common arrangement
– Member countries agree to gradually eliminate formal trade
barriers within the bloc, while each member maintains an
independent international trade policy with countries outside
the bloc (e.g., GAFTA - Greater Arab Free Trade Area)

• Customs union:
– Similar to a free trade area except the members harmonize
trade policies toward nonmember countries via common tariff
and nontariff barriers on imports from nonmember countries
– Examples exist in Asia, Africa, the Middle East & more
 Levels of Regional Integration (cont.)
• Common market
– Like a customs union, except products, services, & factors of
production such as capital, labor, & technology can move
freely among the member countries
– For example, EU countries observe many common labor &
economic policies
• Economic union:
– Like a common market, but members also seek common
fiscal and monetary policies & standardized commercial
regulations
– The EU illustrates this by, among other features, the use of a
single currency - the euro
 Levels of Regional Integration (cont.)
• Political Union:
– Where countries come together as one with the same laws or
legal terrain and ruled by one leader.
– From 1958 – 1961 Ghana – Guinea - Mali
– From 1972 – 1977 Ghadhafi formed the Federation of Arab
comprised of Libya, Egypt and Syria
– The EU and US can also be seen as Political Unions
– The African Union is supposed to be a good example but its
not effective.
The EU: A Full-Fledged Economic Union
1. Market access. Tariffs and most nontariff barriers have been
eliminated

2. Common market. Barriers to cross-border movement of

production factors—labor, capital, and technology

3. Trade rules. Cross-national customs procedures and

regulations have been eliminated, which has streamlined
transportation and logistics within Europe

4. Standards harmonization. Technical standards, regulations,

and enforcements have been harmonized
EFTA – European Free Trade Association
• A free trade group comprised of 4 European countries:
Iceland, Liechtenstein, Norway, & Switzerland

• Operates parallel to but is linked with the EU

• Established in 1960 as a trade bloc alternative for European

states who were either unable to, or chose not to, join the EU

• They have preferential trade relations with 23 states and

territories, in addition to the 27 member states of the EU
 NAFTA (Canada, Mexico, the U.S.)
• Passage of NAFTA in 1994 was facilitated by the maquiladora
program, thru which U.S. firms located factories just south of the U.S.
border to access low-cost labor without significant tariffs

• Eliminated tariffs and most nontariff barriers for products and

services

• Established trade and investment rules, uniform customs

procedures, and intellectual property rights

• Provided procedures for settling trade disputes

 El Mercado Comun del Sur (MERCOSUR)
• Launched in 1991, is the leading economic bloc in South
America, accounting for nearly all of the region’s GDP

• 4 full members are Argentina, Brazil, Paraguay,

and Uruguay; several other associate members & partners

• Provides free movement of products & services, common

external tariff & trade policy, & coordinated monetary
policies
Other Economic Blocs
• Caribbean Community and Common Market (CARICOM)

• Comunidad Andina de Naciones (CAN) – Espania communities

(Bolivia, Columbia, Ecuador and Peru)

• Association of Southeast Asian Nations

(ASEAN) – Singapore, Vietnam, Thailand, Cambodia, Malaysia and
Indonesia, Philipines and East Timor,

• Asia Pacific Economic Cooperation (APEC)

• Australia and New Zealand Closer
Economic Relations Agreement (CER)
Implications of Regional Integration for the Firm
• Internationalization by firms inside the economic bloc

– Regional integration facilitates company internationalization

• Rationalization of operations
– Restructuring company operations can help managers
develop strategies tailored to region as a whole, not just
individual countries
– Re – engineering i.e. business process reenginering
– Goal is to cut costs & increase efficiencies via scale
economies.
– Firms centralize production and marketing, instead of
decentralizing them to individual countries
Implications of Regional Integration for the
Firm

• Mergers and acquisitions (M&A)

– Economic blocs lead to M&A, the tendency of one firm to
buy another, or of two or more firms to merge and form a
larger firm
• Regional products and marketing strategy
– Firms cut costs by standardizing products & services
– Case Inc. reduced its line of tractors from 17 to only a few,
following integration of the EU
Implications for Integration (cont.)
• Internationalization by firms from outside the bloc

– Because external trade barriers mainly affect exporting,

many foreign firms prefer to enter a bloc through FDI

– This is how Britain became the largest recipient of FDI

from the U.S. after formation of the EU