Chapter I – Introduction to
International business
INTERNATIONAL BUSINESS:
AN OVERVIEW
I - Introduction
• International Business is all business transactions
that involve two or more countries.
• International Business comprises a large and
growing portion of the world’s total business.
• International Business usually takes place within a
more diverse external environment.
• Why Companies Engage in International Business?
A) To Expand Sales: companie’s sales are dependent on
two factors: the consumers’ interest in their product or
services and the consumers’ ability and willingness to
buy them.
B) Acquire Resources: products, services, technology,
and information
C) Diversify Sources of Sales and Supplies
D) Minimize Competitive Risk: companies move
internationally for defensive reasons. Profits from one
market can be used to expand operations in other
markets.
Reasons for Recent International Business Growth
Expansion of Technology:
transportation, telecommunications;
Transportation and telecommunications costs are more
conducive for international operations.
Liberalization of Cross-Border Movements:
goods, services, labour, Capital
Development of Supporting Institutional Arrangements:
development by business and governments of institutions
that enable us to effectively apply that technology.
Increase in Global Competition:
new products become global; Globalization of
production
Modes of International Business
A - Merchandise Exports and Imports: visibles and
invisibles
B - Performance of Services: fees; turnkey operations;
management Contracts
C - Use of Assets: licensing agreements; royalties;
franchising
D - Investments:
1) Foreign Direct Investment: gives the investor a
controlling Interest in a foreign company. It gives
access to:
- foreign markets
- foreign resources
- higher profits than exporting
- partial ownership
2) Portfolio Investment:- stock in a company or loans
to a company or country in the form of bonds, bills,
or notes that the investor purchases.
E - Other Operational Definitions
- Strategic Alliances
F – MNCs, MNEs, TNCs, Global Company,
Multidomestic Company
External Influences on International Business
Understanding a Company’s Physical and Societal
Environment Managers need a working knowledge of
business operations, a working Knowledge of political
sciences, law, anthropoly, sociology, economics, and
geography.
Reasons for Recent International Business Growth
Expansion of Technology:
transportation, telecommunications;
Transportation and telecommunications costs are more
conducive for international operations.
Liberalization of Cross-Border Movements:
goods, services, labour, Capital
Development of Supporting Institutional Arrangements:
development by business and governments of institutions
that enable us to effectively apply that technology.
Increase in Global Competition:
new products become global; Globalization of
production
Modes of International Business
A - Merchandise Exports and Imports: visibles and
invisibles
B - Performance of Services: fees; turnkey operations;
management Contracts
C - Use of Assets: licensing agreements; royalties;
franchising
D - Investments:
1) Foreign Direct Investment: gives the investor a
controlling Interest in a foreign company. It gives
access to:
- foreign markets
- foreign resources
- higher profits than exporting
- partial ownership
2) Portfolio Investment: stock in a company or loans to
a company or country in the form of bonds, bills, or
notes that the investor purchases.
E - Other Operational Definitions
- Strategic Alliances
F – MNCs, MNEs, TNCs, Global Company,
Multidomestic Company
External Influences on International Business
Understanding a Company’s Physical and Societal
Environment Managers need a working knowledge of
business operations, a working Knowledge of political
sciences, law, anthropoly, sociology, economics, and
geography.
Drivers of globalization
primary factors:
1. Declining trade and investment barriers-
In 1920 s and 30 s there were formidable barriers .however after the great
depression there was a need to remove the trade barriers for the free flow of
goods and services and capital among the [Link] was enshrined in
GATT(general agreement on tariffs and trade).
2 Role of technological change –advances in
communication,information processing,transportation technology,including
the emergence of [Link] which results in vast amount
ofinformation to be processed by individuals and firms.
3 Emergence of trading blocks like WTO,EU,ASEAN
Secondary factors
1. Developing countries have huge market potential.
2. Changing demographic features ie in developing
countries the younger population is more.
3. MNC wants to establish in low-cost countries.
Exporting
Most firms begin involvement in
overseas business by exporting
◦ Selling some of their regular production
overseas
◦ Requires little investment
◦ Relatively risk free
◦ Means of getting a feel for international
business without a large commitment
◦ Direct or indirect
Advantages:
◦ Avoids cost of establishing manufacturing operations
◦ May help achieve experience curve and location
economies
Disadvantages:
◦ May compete with low-cost location manufacturers
◦ Possible high transportation costs
◦ Tariff barriers
◦ Possible lack of control over marketing reps
FDI
characterized as a long-range investment by a
foreign direct investor in an enterprise resident in an
economy other than that in which the foreign direct
investor is based. The Foreign Direct Investment
interrelation, consists of a parent enterprise and a
foreign affiliate which together form a transnational
corporation (TNC).
FDI
Greenfield projects.
Brownfield projects-where a site in
advance used for a "un-clean" business
purpose, such as a steel mill or oil
refinery, is cleaned up and used for a
less polluting purpose, such as
commercial office space or a residential
area.
Mergers and acquisitions.
Horizontal Foreign Direct Invest
ment: investment in the same foreign
industry as a firm operates in at home.
Vertical Foreign Direct
Investment takes two forms:
backward vertical FDI: where an
industry abroad provides inputs
for a firm's domestic production
process
forward vertical FDI: in which an
industry abroad sells the outputs
of a firm's domestic production
Foreign Direct Investment also include investments which based on the
motive behind the investment from the perspective of the investing firm:
Market Seeking
Investments which target at either penetrating new markets or maintaining
existing ones. Foreign Direct Investment of this type may also be employed
as defensive strategy;it is argued that businesses are more likely to be pushed
towards this kind of investment out of fear of losing a market rather than
discovering a new one.
Resource Seeking
Investments which seek to acquire factors of production that are more
efficient than those obtainable in the home economy of the firm. In some
cases, these resources may not be available in the home economy at all (e.g.
natural resources, anover words - naturally occurring materials such as coal,
fertile land, etc., that can be used by man, and cheap labor).
Efficiency Seeking
Investments which firms hope will increase their efficiency by exploiting the
benefits of economies of scale and scope, and also those of common
ownership.
Foreign direct investment
Four distinct alternatives available for foreign
manufacturing
Wholly owned subsidiary
Joint venture
Contract manufacturing
Management contract
Utilized by both manufacturing and service
operations
Providing management expertise for a fee
Gain access to Obtain access to
new customers valuable natural
resources
Help
achieve
lower costs
Capitalize Spread
on resource business risk
strengths and across wider marke
competencies base
Wholly owned subsidiary
firm owns 100% of the stocks .
Subsidiaries could be Greenfield investments or acquisitions
When co acquire an established firm-cross border acqisitions.
Greenfield-when the co starts from the scratch..
Advantages:
No risk of losing technical competence to a competitor
Tight control of operations
Realize learning curve and location economies
Disadvantage:
Bear full cost and risk of setting up overseas opertions.
Also the problem of divergent corporate culture.
Joint venture
A Joint Venture may be
a corporate entity formed by an international company and
local owners
a corporate entity formed by two international companies to
do business in a third market
a corporate entity formed by a government agency and an
international firm
a cooperative undertaking between two or more firms
of a limited-duration project
Eg of fuji-xerox.
Adventges_
1. Firms get to know ´the host countrys competitive
conditions ie culture,lang,political systems.
2. Firms might be sharing the risk with the local firm.
3. No adverse political interference.
disadvantages
Risk of sharing the [Link] can be solved
through the majority ownership which is however
very [Link] wall-off from a partner technology ,while
sharing other technology.
Does not give tight control over the foreign
subsidiraries.
Shared ownership might result in conflicts and
battles for controlbetween the investing firms.
Greenfield investment
A form of foreign direct investment where a parent
company starts a new venture in a foreign country by
constructing new operational facilities from the
ground up. In addition to building new facilities,
most parent companies also create new long-term
jobs in the foreign country by hiring new employees.
acquisitions-greenfield ventures
Acquisitions are attractive if:
There are well established firms already in
operation
Competitors want to enter the region
Greenfield ventures are attractive if:
There are no competitors
Competitors have a competitive advantage
that consists of embedded competencies,
skills, routines, and culture
Partnerships between competitor, customers, or
suppliers
Also referred to as competitive alliances, competitive
collaborations, or competition
Reasons firms form strategic alliances
Expanding global competition
The growing cost of research, product development,
and marketing
The need to move faster in carrying out global
strategies
Advantages:
Facilitate entry into market
Share fixed costs
Bring together skills and assets that neither company has or can develop
eg microsoft and toshiba established an alliance to develop
microprocessors that can perform entertainment functions in an
automobile.
Establish industry technology standards. Eg in 1999 palm
computers,leader in making personal digital assistants,entered an alliance
with sony under which sony agreed to license and use palm operating
system in sonys PDA.
Company may not have skill, money or people to go it alone
Good way to learn
Good way to secure access to foreign markets
Disadvantages:
Alliances have greater risk.
Portfolio investment
The acquisition of bonds (of more than twelve
months to maturity) or of shares in a company,
domestic or foreign, for investing purposes only.
Portfolio investment carries a share in profits
and dividends but stops short of bringing a say
in how the business is run.
Turnkey project
The contrctor agrees to handle every detail of the
project for a foreign client,including training of
the personnel.
After the completion of the project the key is
handed.
This is a means of exporting technology to other
countries.
advantages
The know-how required to assemble and run
technoligically complex process is valuable asset.
Way of earning economic returns from the asset.
These could be less risky than the FDI.
Also highly suitable for those countries which are
politically unstable.
disadvantges
No long-term investments.
Can increase competition ie those companies which
have acquired the know-how may themselves be the
competitor.
Eg of the western countries who sold oil refinery
technology to saudi-arabia,Kuwait,and other gulf
countries and now they find them competing in the
world oil market.
licensing
It is an arrangement whereby a licensor grants the rights to
intangible property to another entity(licensee) for a
specified period of time.
Intangible property includes patent, inventions, formulas,
processes,designs,copyrights,and trademarks.
Eg to enter the japanese market,xerox,inventor of the
photocopier,established the joint venture with fujiphoto
that is known as [Link] then licensed its
xerographic know-how to [Link] inturn fujixerox
paid xerox a royalty fee of 5% of the netsales revenue that
fujixerox earned from the sales of photocopiers .
advantges
Most beneficial for those co which does not want to
bear the development cost overseas,.
Also beneficial for those co which wants to have
contact with those countries whose govt are not FDI
friendly.
Good for those firms which possess intangible
property which has business aplications but does not
want to develop those applications themselves.
disadvantages
Does not give the tight control over the
marketing,manufacturing,nd other strategies
required for experiencing location economies.
Firms can quickly lose the technology know-how in
the international market.
The solution to it is cross licensing agreement.
Franchising
It is almost like licensing .one difference is that it is
for longer duration.
It is a specilised form of licensing whereby the
franchiser not only sells the intangible property
,but also insist that the franchisee abide by strict
rules as to the conduct of the business.
Franchiser gets the royalty .
Advantages
Easy entry and less cost associated with it.
More profitable .
Disadvantges:
No control over the quality
