INTERNATIONAL BUSINESS AND TRADE

President Ramon Magsaysay State University

(Formerly Ramon Magsaysay Technological University)
College of Accountancy and Business Administration
Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683

College/Department College of Accountancy and Business Administration

Course Code AE 5
Course Title INTERNATIONAL BUSINESS AND TRADE
Semester & Academic
Second Semester AY 2022-2023
Year
Author/Instructor JOHN REY MERCURIO

CHAPTER I
GLOBALIZATION AND OVERVIEW OF
INTERNATIONAL BUSINESS
OBJECTIVES
After studying this unit, you should be able to:
 Understand the meaning of Globalization
 Determine the difference between Globalization of Production and
Globalization of Markets
 Understand the political stability of a country
INTRODUCTION
Globalization is the word used to describe the growing interdependence of
the world’s economies, cultures, and populations, brought about by cross-border
trade in goods and services, technology, and flows of investment, people, and
information. Countries have built economic partnerships to facilitate these
movements over many centuries. But the term gained popularity after the Cold
War in the early 1990s, as these cooperative arrangements shaped modern
everyday life. This guide uses the term more narrowly to refer to international

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trade and some of the investment flows among advanced economies, mostly
focusing on the United States.

The wide-ranging effects of globalization are complex and politically

charged. As with major technological advances, globalization benefits society as a
whole, while harming certain groups. Understanding the relative costs and benefits
can pave the way for alleviating problems while sustaining the wider payoffs.
THE HISTORY OF GLOBALIZATION IS DRIVEN BY TECHNOLOGY,
TRANSPORTATION, AND INTERNATIONAL COOPERATION
Since ancient times, humans have sought distant places to settle, produce,
and exchange goods enabled by improvements in technology and transportation.
But not until the 19th century did global integration take off. Following centuries
of European colonization and trade activity, that first “wave” of globalization was
propelled by steamships, railroads, the telegraph, and other breakthroughs, and also
by increasing economic cooperation among countries. The globalization trend
eventually waned and crashed in the catastrophe of World War I, followed by
postwar protectionism, the Great Depression, and World War II. After World War
II in the mid-1940s, the United States led efforts to revive international trade and
investment under negotiated ground rules, starting a second wave of globalization,
which remains ongoing, though buffeted by periodic downturns and mounting
political scrutiny.
The Globalization of Markets
Many companies have become disillusioned with sales in the international
marketplace as old markets become saturated and new ones must be found. How
can they customize products for the demands of new markets? Which items will
consumers want? With wily international competitors breathing down their necks,
many organizations think that the game just isn’t worth the effort.
A powerful force drives the world toward a converging commonality, and
that force is technology. It has proletarianized communication, transport, and
travel. It has made isolated places and impoverished peoples eager for modernity’s
allurements. Almost everyone everywhere wants all the things they have heard
about, seen, or experienced via the new technologies.

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The result is a new commercial reality—the emergence of global markets for

standardized consumer products on a previously unimagined scale of magnitude.
Corporations geared to this new reality benefit from enormous economies of scale
in production, distribution, marketing, and management. By translating these
benefits into reduced world prices, they can decimate competitors that still live in
the disabling grip of old assumptions about how the world works.
The globalization of markets is at hand. With that, the multinational
commercial world nears its end, and so does the multinational corporation. The
multinational and the global corporation are not the same thing. The multinational
corporation operates in a number of countries, and adjusts its products and
practices in each—at high relative costs. The global corporation operates with
resolute constancy—at low relative cost—as if the entire world (or major regions
of it) were a single entity; it sells the same things in the same way everywhere.
The Globalization of Production
Since the globalization of production involves splitting of the global value
chain into different components, success depends critically on several conditions,
including the technical capacity of the producers of components and assembly
firms, the availability of workers with necessary skills, and the ability of managers
to deliver according to strict time schedules (the so-called ‘just-in-time delivery’).
In some cases, e.g., for basic consumer goods such as garments and shoes, the
skills required are rather basic, while in the case of others, such as electronics and
their components, parts of capital goods, etc., higher level skills are required. But
what is key in either case is the flexibility with which labor can be employed and
its low cost, an arrangement that has its positive as well as negative aspects.
One major positive aspect is the location of labor-intensive (usually export-
oriented) manufactures in labor-abundant countries and the absorption of surplus
labor in sectors where wages and incomes may be higher than in traditional
sectors. This facilitates the transformation of the structure of employment towards
sectors where productivity and incomes are higher.
Competitiveness is a key word in the globalization of production, usually
interpreted in the narrow and static sense of cost per unit. As costs of material
inputs are often beyond the control of producers in developing countries, the onus
of maintaining competitiveness in terms of cost usually falls on labor. Wage
repression is a commonly used mechanism for achieving this goal.

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Political Stability
Political stability is a variable of great importance in a country's evolution
since, across time, it was identified as causing law level of economic growth, but
also it was presented as a consequence of poor economic development. The
purpose of this paper is to analyze the influence of political stability on economic
growth in Romania and to conclude in what extent this political factor is a
condition for a future and continuous sustainable growth in our country. By using
statistical and econometric approach (correlation and multivariate regression) we
conclude that political stability has an important role in a country's economic
growth and that a stable political environment helps in building a coherent and
continuous path for sustainable development.
INTERNATIONAL BUSINESS: AN OVERVIEW
INTRODUCTION
One of the most dramatic and significant world trends in the past two
decades has been the rapid, sustained growth of international business. Markets
have become truly global for most goods, many services, and especially for
financial instruments of all types. World product trade has expanded by more than
6 percent a year since 1950, which is more than 50 percent faster than growth of
output the most dramatic increase in globalization, has occurred in financial
markets. In the global forex markets, billions of dollars are transacted each day, of
which more than 90 percent represent financial transactions unrelated to trade or
investment. Much of this activity takes place in the so-called Euromarkets, markets
outside the country whose currency is used.
Evolution of International Business
The business across the borders of the countries had been carried on since
times immemorial. But, the business had been limited to the international trade
until the recent past. The post-World War II period witnessed an unexpected
expansion of national companies into international or multinational companies.
The post 1990’s period has given greater fillip to international business.

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International Trade to International Marketing: Originally, the producers used

to export their products to the nearby countries and gradually extended the exports
to far-off countries. Gradually, the companies extended the operations beyond
trade.
International Marketing to International Business: The multinational
companies which were producing the products in their home countries and
marketing them in various foreign countries before 1980s started locating their
plants and other manufacturing facilities in foreign/host countries. Later, they
started producing in one foreign country and marketing in other foreign countries.
DRIVERS OF GLOBALIZATION
 To Achieve Higher Rate of Profits
 Expanding the Production Capacities Beyond the Demand of the Domestic
Country
 Severe Competition in the Home Country
 Limited Home Market
 Availability of Technology and Managerial Competence
INFLUENCES OF INTERNATIONAL BUSINESS
Because most of the countries are not as fortunate as the India in terms of
market size, resources, and opportunities, they must trade with others to survive;
Hong Kong, has historically underscored this point well, for without food and
water from china proper, the British colony would not have survived along. The
countries of Europe have had similar experience, since most European nations are
relatively small in size. Without foreign markets, European firms would not have
sufficient economies of scale to allow them to be competitive with US firms.
Nestle mentions in one of its advertisements that its own country, Switzerland,
lacks natural resources, forcing it to depend on trade and adopt the geocentric
perspective. International competition may not be matter of choice when survival
is at stake. However, only firms with previously substantial market share and
international experience could expand successfully.
 Growth of Overseas Market
 Sales and Profit
 Diversification
 Inflation and Price Moderation

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 Employment
 Standards and Living

STAGES OF INTERNATIONALIZATION
Stage 1 – Domestic Company: Domestic Company limits its operations, mission
and vision to the national political boundaries. These companies focus its view on
the domestic market opportunities, domestic suppliers, domestic financial
companies, domestic customers etc. These companies analyze the national
environment of the country, formulate the strategies to exploit the opportunities
offered by the environment.
Stage 2 – International Company: These companies select the strategy of
locating the branch in the foreign market and extend the same domestic operations
into foreign markets. These companies remain ethnocentric or domestic country
oriented. Normally internalization process of most of the global companies starts
with this stage of two processes. Many of the companies follow this strategy due to
limited resources and also to learn from the foreign market gradually before
becoming a global company without much risk.
Stage 3 – Multinational Company: This stage of multinational company is also
referred as multidomestic company formulates different strategies for different
market, thus the orientation shift from ethnocentric to polycentric. Under
polycentric orientation the offices/branches subsidiaries of a MNC work like a
domestic company in each country where they operate with distinct policies and
strategies suitable to that country concerned.
Stage 4 – Global Company: Global company is the one which has either produces
in home country or in a single country and focuses on marketing these products
globally and focuses on marketing these products domestically.
Stage 5 – Transnational Company: Transnational company produces, market,
invests and operate across the world. It is an integrated global enterprise which
links global resources with global market at profits. There is no such pure
transnational corporation.
CHARACTERISTICS OF A TRANSNATIONAL COMPANY

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This company thinks globally and acts locally. This company adopts global
strategy but allow value addition to the customer of a domestic country. The assets
of a transnational company are distributed throughout the world, independent and
specialized. The R&D facilities of a transnational company are spread in many
countries.
Scanning or Information Acquisition: These companies scan the environmental
information regarding economic, political, social and cultural and technological
environment. These companies collect and scan the information regardless
geographical and national boundaries.
Vision and Aspiration are global, global markets, global customers, and grow
ahead of other global/transnational companies.
Geographical Scope: They analyze the global opportunities regarding the
availability of resources, customers, markets, technology, research and
development etc. The scope is not limited to certain countries in analyzing
opportunities, threat and formulating strategies.
Adaptation: Global and Transnational companies Adapt their products, marketing
strategies and other functional strategies to the environmental factor of the market
concerned.
Extension: Some products do not require any change when they are marketed in
other countries. Their market is just extension.
HRM policy: It selects the best human resource and develops them regardless
nationality, ethnic group.
Purchasing: Transnational company procures world class material from the best
source across the globe.
Differences between Domestic and International Business
Difference between domestic trade and foreign trade and their peculiar
problems. Trade, no doubt, implies exchange of goods between persons, but there
are marked differences between domestic trade and international trade. The
differences and the complications arise therein are as follows:
1. Distance: The distance involved in export of goods in external trade is generally
greater than on the domestic trade.

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2. Language differences: There are differences in the languages of the nations of

the world. The overseas traders should be very careful in preparing the publicity
material in the languages of the trading country.
3. Cultural difference: A producer should have full knowledge about the market
of his products. For exporting goods particularly, a thorough research is
undertaken.
4. Technical difference: In the national market the difference in the technical
specification for goods and their requirements is not wide.
5. Tariff barriers: In the national trade, there are no custom duties, exchange
restrictions, fixed quotas or other tariff barriers.
6. Documentations: In the home trade there are few documents involved in the
exchange of goods.
7. Payments: In the internal trade, the goods are exchanged in the currency unit of
the country. In case of foreign trade currencies differ widely throughout the world
and those also vary in value.
8. Transport and insurance cost: The transport and insurance costs are less in
case of domestic trade. For the exports, on the other hand the cost of transport is
high and the insurance is complicated.
INTERNATIONAL BUSINESS APPROACHES
In truth, we have become part of a global village and have a global economy
where no organization is insulted from the effect’s foreign markets and
competition. Indeed, more and more firm are reshaping themselves for
international competition and discovering new ways to exploit markets in every
corner of the world. Failure to take a global perspective in one of the biggest
mistake’s managers can make
Douglas Wind and Perlmutter advocated four approaches of international business.
They are:
Ethnocentric Approach: The excessive production more than the demand for the
product, either due to competition or due to change in customer preferences push
the company to exports the excessive production to the foreign countries. The
company export the same product designed for domestic market to foreign market

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under this approach. Thus, maintenance of domestic approach towards

international business is called ethnocentric approach.
Polycentric Approach: The company establishes a foreign subsidiary company
and decentralized all the operations and delegates decision making and policy
making authority to its executives. The executives of the subsidiary formulate the
policies and strategies, design the product based on the host country’s environment
and the preferences of the local customer. Thus, this approach mostly focuses on
the conditions of the host country in policy formulation, strategy implementation
and operations.
Regio centric Approach: The foreign subsidiary considers the regional
environmental for formulating policies and strategies. It markets more or less the
same product designed under polycentric approach in other countries of the region,
but with different market strategies.
Geocentric Approach: Under this approach, the entire world is just like a single
country for the company. They select the employees from the entire globe and
operate with the number of subsidiaries. Each subsidiary function like an
independent and autonomous company in formulating policies, strategies, product
design, human resource policies, operations etc.

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