Module I

Introduction to International Business:

International Business:
Meaning:

International business refers to business across countries. It includes any type of business
activity that crosses national boundaries. International business involves transfer of goods,
service, capital, knowledge and information across national boundaries.

Features of International Business:

1. Huge in size: the IB is large in size, there are number of multinational companies
which are very huge in size:
2. Geographic segmentation: Generally IB Classifies its market on the basis of
geography.
3. Mere risky: IB has more Business opportunities. So risk also will be high.
4. It is a crucial venture: conducting and managing of IB is a crucial venture.
because the political, cultural social and economic factors different in different
countries.
5. Foreign exchange risk: IB is subjected to foreign exchange risk
6. Timely and accurate information: IB environment is very dynamic in nature, so it
requires timely and accurate information to take appropriate decisions.

 Domestic business: A domestic business typically has the advantage of only having
to deal with its local currency, customs, culture, regulations and tax system

Difference between domestic business and international business

Basis of Difference Domestic Business International business

1. Geographical coverage Confined to the boundaries of Carried across the boundaries
one country of a country
2. Language use Local or native language used Foreign language is used
3. Nationality of parties Both the buyer and seller The buyer and the seller
belong to the same country belong to different countries

4. Usual mode of Roadways and railways Shipping and airlines

transportation
5. Documents and formalities Few documents and formalities More documents and
involved are involved formalities are involved
6. Currency payment Local currency Foreign currency
7. Govt. Restrictions Very little restrictions Restrictions such as tariffs,
quotas etc.

Complexities or Problems of International Business:

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 1. Political stability: Sometimes the political conditions of other country may affect
our business. Civil war in Pakistan may affects your business whether you have in
Pakistan.
2. Exchange of Rate fluctuations: Each country has its own currency. The rate at
which one currency is exchanged for another currency is called exchange rate. The
fluctuations in exchange rate creates some difficulties in International trade.
3. Foreign Indebtedness: The operations of Multinational Corporation in developing
counties may create debt trap for these countries due to their low purchasing
power.
4. Entry Regulations: Governments in domestic countries may impose entry
restrictions for multinational corporations.
5. Tariff and Non- Tariff Barriers: in order to protect domestic industry,
Government of different counties imposes tariffs, quotas and trade barriers.
6. Bureaucracy: Bureaucratic attitudes and practices of government in many
counties create considerable delays in granting permissions, sanctions and licenses
to foreign companies.
7. High cost: A company which wants to internationalize Its operations has t incur
high costs and make large investments.

Reasons for International Business( Why Companies Go Global?)

1. Higher Profitability: IB is more Profitable than Domestic Business. This may be

due to higher price and lower cost.
2. To seek Market opportunities: A company can seek more market and
opportunities.
3. Better Growth opportunity: The Business can cover large geographical area.
So there are higher growth opportunities in IB.
4. Economies of Scale: the business can enjoy the Economies of scale , because of
large scale production, technological advancement etc.
5. Technological and managerial competence: the international business can
enjoy the Technological and managerial competence. Because they will get
technology and better managerial people from the foreign country.
6. Govt. Policies and Regulations: the rules and regulations of a government is
also a motivating factor for the business to enter into IB.

Modes of Entry Into International Business:

1. Exporting: this is the traditional and most widely used route to international
business. A Firm can export directly or through middlemen such as export houses
and buying agents. Export can be in the following forms;
a) Direct exporting: direct export through distribution channel.
b) Indirect exporting: a company exports its products through another domestic
company.
c) Intracorporate transfer: A company in one country may sell its products to
its affiliated company in another country.

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 2. Contract Manufacturing : Under this strategy, the company enters into a contract
with a firm in the foreign market to manufacture or assemble the product as per its
specifications. It is otherwise known as outsourcing.
3. Licensing and Franchising : under this form, the local firm (licensee) obtain
license from a foreign firm (licesnsor) to manufacture, sell or use the patents and
copyrights.
4. Joint venture: in this method, the company which wants to enter foreing market
sets up an enterprise in collaboration with a local firm in the host country. The two
firms share the ownership and control of the joint venture.
5. Wholly owned subsidiaries : the foreign firm may establish a wholly owned firm
which is registered under the relevant law of the host country. Such an enterprise is
known as Greenfield venture.

Business Environment:

Business Environment:

Meaning: International business environment is the average of all the factors,forces,

institutions, etc. which influence the funtioning and performance of a global firm.

Features:

1. Aggregative.
2. Interrelated.
3. Dynamic.
4. Relative.
5. Uncertain.

Types of International Business:

I. Internal Environment: The internal factors of a company determine its

capability to do international business. Vision ,mission, competence of
management.
II. External Environment: The External are those factors which are situated outside
the company, affects the operations of business. the external business
environment are;
a) Domestic Environment: A International business should first consider the home
country environment.
b) Foreign Environment: the environment of other countries in which the firms
wants to do business is the foreign environment.
c) Global Environment: The environmental factors which have a global impact are
known as global environment.

International Business Environment

There are different kinds of International Business Environment;

1. Economic Environment
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 2. Social Environment
3. Cultural Environment
4. Political Environment
5. Legal/ Regulatory Environment
6. Technological Environment.\

I. Economic Environment:

The main components of international economic environment are as follows;

1. Economic system
2. Structure of economy
3. Economic policies
4. Economic Conditions`
1. Economic System: An economic system consists of institutions set up to satisfy
human needs and wants. there are 4 types of economic systems; a) Capitalism, b)
Socialism, c) Communism d) Mixed economy.
a) Capitalism: Under this system, there is a private ownership of production and
distribution facilities.
b) Socialism: In this system, state owns all the means of production and distribution .
c) Communism: Establishment of Socialism and abolishment of capitalism is called
communism.
d) Mixed economy: It is a mixture of capitalism and socialism.
2. Economic Structure: the relative contributions of primary ( mainly agricultural),
secondary ( industrial ) and tertiary (service sectors ) and integration of a national
economy with the world economy etc. have major implications for international
business.
3. Economic Policies: The economic policy of a govt may affect the operations of an
international business. main economic policies are as follows;
a) Industrial policy: this policy defines the scope and role of private, public, joint, co
operative and small sectors in the economy.
b) Foreign trade policy: a Restrictive import policy protects domestic firms.
c) Foreign Exchange policy: abolition of exchange controls and convertibility of
rupee have encouraged cross border movement of capital.
d) Monetary policy: The policy of Reserve Bank of India towards cost and availability
of credit has a strong impact on savings, investment and consumer spending in
India.

4. Economic Conditions: Rate of economic growth, price level, balance of payments

positions, trade cycles and other economic conditions in different countries
significantly influence international business.
II. Social Environment:

Social Environment consists of demographic factors, caste system, family system,

migration etc.

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 1. Demographic Factors: The main demographic factors that affect the international
business environment are ;
a. Size of population
b. age structure
c. Gender
d. Occupation
e. Education
2. Family system: the family system has an impact on IB. Women play a dominant
role in the family in Europe and North America. but Men play a major role in Asia
and Arab countries. The business environment also different in case of both the
family structure.
3. Migration: Migration of people from one country to another country plays an
important role in IB.

III. Cultural Environment

Culture is the aggregate of customs, beliefs, values, habits and attitudes that bind
people together ass a social entity.

some important traits or dimensions of culture are as follows;

1. Low context and high context cultures: a low contact culture is one that
emphasizes on tangible aspects. In high contact culture they emphasize on
relationship.
2. Masculine and Feminine cultures: a masculine culture appreciates
aggressiveness. a feminine culture improves inter personal relationship.
3. Monochromic and polychromic cultures: in monochromic culture, time is
considered precious and tasks are done in order of their priority. a polychromic
culture gives less importance to time and time is used to achieve diverse goals
simultaneously.
4. Universalism and paricularism: under universalism focus is more on rules than
relationship. in particularism , it focus more on relationship than rules.
5. individualism and communitarainism: in individualism, people consider them as
individuals whereas in communitarianism they consider themselves as part of a
group.

IV. Political Environment:

Political environment exercises influence on international business. the main
components of the political environment are as follows;
1. Political system: The type of government in a country is its political system.
democracy and totalitarianism (autocracy) are two types of political systems.\
2. International Political Relations: political relations between countries determine
the nature and volume of trade between them.
3. Government business relations: a country may allow entry of foreign firms to
increase investment.
4. Political stability: international business thrives in stable dynamic , honest and
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 efficient political systems. Political instability is a major threat to international
business.

V. Legal or Regulatory Environment:

Regulations regarding business differ widely between countries. legal or regulatory

environment of a country depends on the following:

1. Legal System: there are three systems of law;

a. Common Law.
b. Civil Law.
c. Theocratic Law.

2. International Regulations:

3. International Settlement Disputes

VI. Technological Environment:

Technology refers to system knowledge for the manufacture and distribution of a

product, for the rendering of a service and for the application of a process. Some of the
important issues in technological environment and their implications for international
business are given below;

a) Appropriate Technology
b) Time lags in introduction and absorption of Technology
c) Transfer of Technology.

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 Globalisation:

Meaning:

Considering the globe as a single market is called Globalization. Globalisation is the

process of integration of national economies through cross-border flows of products,
services, capital, technology, manpower and information.

Definition:

According to World Bank, “ globalization means a gradual abolishment of import control

over all items including consumption goods, reducing the rate of import duty and
privatizing public enterprises.”

Features of Globalisation:

1. Considering the globe as a single market

2. It deals with goods and services
3. Buying and selling of goods and services in the global market
4. Companies plan and organize their business at the global level
5. Worldwide interconnection.
6. Free flow of capital, technology and factors of production.
7. Product designing in one country, producing in another country and distributing in
yet another country.

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 Module II
Theories of International Trade
BALANCE OF PAYMENT (BOP)
Balance of Payment account is a statement that summarizes a country’s economic
transactions with other countries of the world during a specific time period.

Features of BOP

1. Summary: BOP is the summary of all international transactions of a country.

2. Economic transactions: BOP shows statement of economic transactions of a
country.
3. Country with Rest of the World: it records the transactions of a country with rest
of the world.
4. A Flow statement: Balance of payment is the compilation of economic inflow and
outflow of a country.
5. Definite time period: it records the transactions of a definite time period.
6. Double Entry System: There are two aspects for every transactions of BOP.

COMPONENTS OF BOP

1. CURRENT ACCOUNT:
The current account of BOP records the cash inflow and cash out flow of a country.
It records the income and expenditure generated from the sale and purchase of
goods and services:
It has two items;
a) Visible items: goods
b) Invisible items: services.

Current account shows a positive sign when the export decreases and import
increases. Ie surplus in current account.

Current account shows a negative sign when the import decreases and export
increases. Ie., deficit in current account.

2. CAPITAL ACCOUNT:

The Capital account of BOP records the capital inflow and capital outflow of a
country. Capital account is devided into three parts. They are;

a) Private capital: the long term or short term investment from foreign investors.
b) Banking capital: capital from the commercial bank and co operative banks.
c) Official Capital: capital from the central bank of a country.
3. UNILATERAL TRANSFER ACCOUNTS;
This account records the transactions relating to the fund and finance granted by
the country in the form of gift, disaster relief, grovernment grants, repo rate etc.
4. OFFICIAL RESERVE ACCOUNTS: government’s holdings or means of payment held
by official agencies that are generally accepted for the settlement of international
claims..

INTERNATIONAL ORGANISATIONS AND SETTLEMENTS

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I. General Agreement on Tariffs and Trade (GATT)
The GAAT was established on 1947. This was signed by 23 nations including
india. I was an agreement calling for equal treatment of all nations in
international trade, and the reduction of tariff.
Objectives of GAAT
1. To reduce trade barriers.
2. To facilitate negotiations between its members over trade disputes.
3. To serve as a forum in which nation could discuss trade issues.

II. WORLD TRADE ORGANISATION (WTO)

The WTO was established on 1ST january 1995 after the 8th round up of GATT in
Uruguay. WTO is the successor of [Link] is one of the founder countries of WTO.
At present it has 164 members.
Objectives of WTO
1. To ensure equal trading rights among members.
2. To promote trade without discrimination.
3. To eliminate trade barriers.
4. To eliminate trade disputes.
5. To establish the rules to ensure fair and consistent trade.
6. To achieve optimum utilisation of world recourses.

Functions of WTO
1. Supervising the implementation of tariff cuts.
2. Examination of the foreign policies of member countries
3. Collection of trade information of member countries.
4. Consultancy services to member countries.
5. Technical assistance and training programmes.
6. Administration and implementations of various trade agreements.

III. IBRD (International Bank for Reconstruction and Development) –WORLD

BANK.
The IBRD, popularly known as World bank, established as a result of Bretton
Woods Conference in 1944. It was established to re construct the war shattered
European economies. Later shifted the focus on the development of poor countries.
Objectives:
1. To assist the reconstruction and development member countries.
2. To promote foreign private investment by means of guarantees.
3. When private capital is not avalable on reasonable terms, to make loans.
4. To provide different terms loans to member countries.
5. To promote the long-range balanced growth of international trade.

IV. INTERNATIONAL MONETORY FUND.( IMF)

The IMF was established on Dellcember 27, 1945 along with IBRD. But it began its
financial operations on March1 , 1947. Initially 29 countries signed the agreement.
Now it has 189 member countries.
Objectives:
1. To promote international monetary cooperation
2. To promote exchange stability.
3. To assist in establishment of multilateral system of payments.
4. To give confidence to members by making the fund resources.
5. To make available to member countries the resources.
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 TRADING BLOCKS
Trading blocks are regional grouping of countries within chich trade barriers have
been removed. it is the preferential economic integration among a group of countries.
different types of trading blocks:
following are the different types of trading blocks;
1. Free Trade Areas(FTA): this is the simplest kind of trading block. it incorporates a two
or more countries tariffs and other barriers to trade amongst members, but inidvidually
each country retains its own tariffs on imports from other non member countries.
example: NAFTA
2. Common Monetary Area(CMA): A Common Monetary Area is when countries usually
geographically closely located to each other agree to accept one dominant currency as
letgal tender.
3. Customs Union: A Customs Union goes one steep further than an FTA in that it
abolishes all tariffs amongst member contries, while members agree to a single, external
tariff on goods imported from outside customs union. revenue generated by the cusoms
union is shated amongst members.
4. Common Market: in Common Market, no tariffs are exist on goods produced by one
member country and sold in the other member country's. the main additional difference
between a customs union and Common market is that with the latter, a free movement of
labour and capital is also permitted.
5. Monetary Union: In monetary union , member countries agree to use a single currency
or to fix their rates of exchange for the respective currencies. the Monetary Union involves
far greater integration and co operation amongst member countries.
6. Economic Union: beyond the free movement of labour and capital, an economic union
incorporates the harmonization of economic policies amongs member states, includeing
thee integration of moneetary policies, economic policies, taxation and other egulatory
requirements.
Advantages:
1. Economies of scale
2. International Specialisation
3. Alterative improvement in output
4..expansion of employment
5. improvement in terms of trade
6. improvement in living standard.
Importand Trading Blocks
Important Trading Blocks are;
1. European Union
2. SAARC
3. ASEAN
4. NAFTA
5. SAFTA

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I. European Union:(EU)
The origin of European Union goes back to the European Coal and Steal community
( ECSC) . It was formed with Germany, Grance , Italy , Belgium, Netherlands and
Lexumberg in 1952. The aim of ECSC was to Eliminate import duties and quotas on coal,
iron ,steel and scrap. the success of ECSC led to the formation of EEC (European Economic
Community ) in 1957 by signing the Treaty of Rome. Now known as Eropean Union. it
came into force on Jan 1., 1958. now it has 28 memebrs.

Achievements of European Union:

1. Balance of Trade and Payament: after the establishment of european union , there has
been a substantial rise in its export and imports in relation to the rest of the world.
2. Integrated regional development policy: the promotion of equitable,balanced and
intergrated regional developemtn was one of the prime objectives of EU.
3. Common agricultural Policy: The Treaty of Rome had stressed upon the evolution of
common agriculutral policy for all the members of the customs union.
4. Common fisheries Policy: in 1971 a common fisheries policy was brought into
operation by the EU. it is related to the marketing of fresh, forzen and prserved fish.
5. Common Transport Plicy: the Treaty of Rome b had laid down the adoption of a
common transport policy by all the memebrs of the EU.
6. Common social Policy : The member counties of EU adopted the Social Charter in
1989. it specified 12 principles related to the rights of workers and social justice.
7. Movement of Factors. A considerable progress has been made by the EU in ensuring
free movement of workers, capital and services form one member country to another.
8. Reduction in Unemployement: the countries of EU counld reduce the extent of
unemployment through utilisation of productive capacity, adoption of latest technoloiges,
increased investemnt etc.

II. SAARC (South Asian Association for Regional Co-operation)

it is an economic and political organisation of eight countries of southern asia. It
was formed by south asian countries including India, Bangladesh, Pakistan, Nepal,
Sreelanka, Maldiv, Bhutan in 1985 at Dhaka. In April 2007, Afganistan became its 8th
member. the members agreed on 5 areas of co operation.
a) Agricultural and Rural development.
b) Tele communication, science, technology and meterology.
c) health and polulation activities.
d) Transport.
e) Human Resournce Development
objectivess of SAARC
1. To Promote the welfare of people of South Asia and to improve the quality of life.
2. To acceelerate eeconomic growth, social progress and cultural development.
3. to strenthern the co operation with other developing countries.
4. To co operate with international and regional organisation with similar aims and
purpose.
5. To promote active collaboration and mutual assistance in economic , social and cultural,
technical and scientific fields.
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6. to contribute to mutual trust, understanding and appreciation of each other.

IV .ASEAN(Association of South East Asian Nations)

ASEAN is a group of six countries. Indonesia, Malasia, singapore and Thailand
constituted this association on 8th august 1967. the object of ASEAN is to promote
economic co operation in south east Asia and also to ensure economic stability in this
region. its headquarter is in JAKARTA. Now it has 10 member countries.

V. NAFTA( North American Free Trade Agreement)

NAFTA Came into being on January 1 ,1994. this trading block was formed by
USA,CANADA and Mexico. NAFTA is expected to eleminate all tariff and trade barriers
among these countries by [Link] was constituted to meet the chanllenges of EEC.
Objectives:
1. to create new business opporunities in MEXICO
2. to develop industries in MEXICO in order to create employment opportunities and to
reduce migration from MEXICO to USA.
3. to assist MEXICO in earning additional foreign exchange to meet its foreign debt
burden.
4. to enhance the competetive advantage of the companies from the member countries .
5. to reduce the prices of the products and services by enhancing the competition.
[Link](South Asian Free Trade Agreement)
SAFTA is an agreement reached on January 6,2004 at the 12th SAARC summit in
Islamabad, Pakistan. It created a free trade area in Bangladesh,Bhutan,India, Nepal,
Maldive, Pakistan and Sri [Link] came into force on 1st jan 2006 replaciing SAPTA which
was operative among SAARC countries. SAFTA aims to aboliish all kinds of trade and tariff
restrictiions.
Objectives:
1. Eliminating barriers to trade and facilitating cross border movement of goods
between the countries.
2. Promoting the conditions of fare competition in the free trade area.
3. Creating effective mechanism for the implementation and application of this
agreement .
4. Establishing a framework for further regional co operation to enhance the benefit
of member countries.

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