International Business Fundamentals Quiz

International Business

• Refers to the performance of trade and investment activities by firms across national borders.
• Emphasizes crossing national boundaries, also known as cross-border business.
• Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale.
• They seek foreign customers and engage in collaborative relationships with foreign business partners.
• While international business is performed mainly by individual firms, governments and international agencies also undertake international business activities.

Globalization of Markets

• Refers to the macro trend of intense interconnectedness between countries worldwide.
• Associated with the internationalization of countless firms and dramatic growth in the volume and variety of cross-border transactions in goods, services, and capital flows.
• Has led to widespread diffusion of products, technology, and knowledge worldwide.

International Trade

• Exchange of products and services across national borders; typically through exporting and importing.
• Trade involves both products (merchandise) and services (intangibles).

Exporting

• Sale of products or services to customers abroad, from a base in the home country or a third country.

Importing or Global Sourcing

• Procurement of products or services from suppliers located abroad for consumption in the home country or a third country.

International Investment

• Transfer of assets to another country or the acquisition of assets in that country.
• Also known as ‘foreign direct investment’ (FDI).

International Portfolio Investment

• Passive ownership of foreign securities such as stocks and bonds, in order to generate returns.

Gross Domestic Product (GDP)

• The total value of products and services produced in a country over the course of a year.

World Trade

• Trade between nations, accompanied by substantial flows of capital, technology, and knowledge.
• Development of sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge.
• Greater collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO) and the International Monetary Fund (IMF).
• International trade in services accounts for about one-quarter of all international trade and is growing rapidly.
• In recent years, services trade has been growing faster than products trade.
• Larger advanced economies account for the greatest proportion of world services trade.
• This is expected, because services typically comprise more than two-thirds of the GDPs of these countries.
• Although services trade is growing rapidly, the value of merchandise trade is still much larger.
• One reason is that services face greater challenges and barriers in cross-border trade than merchandise goods.

World Trade and GDP Growth

• World trade has grown more than thirty-fold, while world GDP grew only tenfold.
• This is due to advanced (or developed) economies such as Britain and the United States now sourcing many of the products they consume from low-cost manufacturing locations such as China and Mexico.

Focal Firms

• Businesses that directly initiate international business transactions.
• Company trying to move a domestic product into the international market.

Multinational Enterprise (MNE)

• A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries.
• MNEs carry out research and development (R&D), procurement, manufacturing, and marketing activities wherever in the world the firm can reap the most advantages.

Small and Medium-Sized Enterprise (SME)

• Typically, companies with 500 or fewer employees, comprising over 90% of all firms in most countries.
• Increasingly engage in international business.
• In addition to accounting for smaller market shares of their respective industries, SMEs tend to have limited managerial and other resources and primarily use exporting to expand internationally.
• SMEs constitute the great majority of all firms.
• Account for about one-third of exports from Asia and about a quarter of exports from the affluent countries in Europe and North America.
• In some countries—for example, Italy, South Korea, and China—SMEs contribute roughly 50 percent of total national exports.

Born Global Firm

• A young, entrepreneurial SME that undertakes substantial international business at or near its founding.
• Found in advanced economies, such as Australia and Japan, and in emerging markets, such as China and India.

Non-governmental Organizations (NGOs)

• Many of these non-profit organizations conduct cross-border activities.
• Pursue special causes and serve as advocates for social issues, education, politics, and research.

Reasons Firms Participate in International Business

• Better serve key customers that have relocated abroad.
• Be closer to supply resources, benefit from global sourcing advantages, or gain flexibility in sourcing products.
• Gain access to lower-cost or better-value factors of production.
• Develop economies of scale in sourcing, production, marketing, and R&D.
• Confront international competitors more effectively or thwart the growth of competition in the home market.
• Invest in a potentially rewarding relationship with a foreign partner.

Drivers of Market Globalization

• Worldwide reduction of barriers to trade and investment.
• Transition to market-based economies and adoption of free trade in China, former Soviet Union countries, and elsewhere.
• Industrialization, economic development, and modernization.
• Integration of world financial markets.
• Advances in technology.

Dimensions of Market Globalization

• Integration and interdependence of national economies.
• Rise of regional economic integration blocs.
• Growth of global investment and financial flows.
• Convergence of buyer lifestyles and preferences.
• Globalization of production activities.
• Globalization of services.

Societal Consequences of Market Globalization

• Contagion: Rapid spread of financial or monetary crises from one country to another.
• Loss of national sovereignty.
• Offshoring and the flight of jobs.
• Effect on the poor.
• Effect on the natural environment.
• Effect on national culture.

Firm-Level Consequences of Market Globalization

• Internationalization of the Firm’s Value Chain.
• Countless new business opportunities for internationalizing firms.
• New risks and intense rivalry from foreign competitors.
• More demanding buyers who source from suppliers worldwide.
• Greater emphasis on proactive internationalization.

Four Risks of International Business

• Cross-Cultural Risk
• Political Risk
• Economic Risk
• Legal Risk

Cross-Cultural Risk

• Occurs when cultural misunderstandings put some human value at stake.
• Cultural differences arise from differences in language, lifestyle, attitudes, customs, and religion where a cultural miscommunication jeopardizes a culturally-valued mindset or behavior.
• Values unique to a culture tend to be long-lasting and transmitted from one generation to the next.
• These values influence the mind-set and work style of employees and the shopping patterns of buyers.
• Foreign customer characteristics differ significantly from those of buyers in the home market.

Language

• Critical dimension of culture.
• Facilitates communication, but also offers a window on people’s value systems and living conditions.
• When translating from one language to another, it is often difficult to find words that convey the same meanings.
• Challenges impede effective communication and cause misunderstandings.
• Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers.

Negotiation Patterns

• Negotiations are required in many types of business transactions.
• e.g., Where Mexicans are friendly and emphasize social relations, Americans are assertive and get down to business quickly.

Decision Making Styles

• Managers make decisions continually on the operations and future direction of the firm.
• e.g., Japanese take lots of time to make important decisions, while Canadians tend to be decisive, and “shoot from the hip.”
• In developing countries, business owners are not looking to the long term, just trying to make it next month.

Ethical Practices

• Standards of right and wrong differ and vary a lot around the world.
• e.g., Bribes are relatively accepted in some countries such as in Africa, but for the most part not acceptable like in Sweden.
• In China, counterfeiters frequently publish translated versions of imported books without compensating the original publisher or authors, an illegal practice in most of the world.

International Business Risks

• Ethical Standards:
  • Ethical standards vary globally.
  • Some multinational firms tolerate unsafe conditions even when illegal in origin countries.
  • The fashion industry is an example, with unsafe working conditions in low-income nations supplying affluent global markets.
• Country Risk (Political Risk):
  • Potential negative impacts on company operations and profitability due to political, legal, and economic environment changes in a foreign country.
  • Government intervention:
    • Restricts market access, imposes bureaucratic procedures, and limits profit repatriation.
    • Varying degrees of intervention exist, with some countries having greater economic freedom (e.g., Singapore, Ireland) than others (e.g., China, Russia).
  • Laws and regulations:
    • Laws affecting property rights, intellectual property, product liability, and taxation can hinder operations.
  • Economic instability:
    • High inflation, national debt, and trade imbalances can negatively affect business.
    • The global financial crisis of 2009 plunged many nations into recession.
• Currency Risk (Financial Risk):
  • Adverse fluctuations in exchange rates, impacting earnings and import costs when transactions involve multiple currencies.
  • Currency exposure: The general risk of unfavorable exchange rate fluctuations.
  • Asset valuation: The risk of exchange rates impacting the value of company assets and liabilities.
  • Foreign taxation: International differences in taxes affect company performance and profitability.
  • Inflation: High inflation complicates business planning and pricing of inputs and finished goods.
• Commercial Risk:
  • Potential for loss or failure due to poorly developed or executed business strategies and tactics.
  • Common areas of poor decision-making include partner selection, market entry timing, pricing, product features, and promotional themes.
  • Failures in international markets have higher costs compared to domestic blunders.
  • Marketing inferior or harmful products, failing customer expectations, and inadequate customer service can damage reputation and profitability.
  • Currency fluctuations can affect various commercial deals.

Managing International Business Risk

• Understanding, anticipating, and taking proactive measures to mitigate risk.
• Some risks are highly challenging, but all are manageable.
• Researching and analyzing environments to anticipate potential risks and their implications is crucial.
• The global financial crisis highlighted the interconnectedness of commercial, currency, and country risks, affecting various businesses worldwide.

Cultural Context of International Business

• Culture: Values, beliefs, customs, arts, and products of human thought characterizing a society.
• Cross-cultural risk: Misinterpretations due to unfamiliar languages, values, beliefs, and behaviors.
• Socialization: Learning the rules and patterns appropriate to one's society.
• Acculturation: Adapting to a culture different from one's own, often experienced by expatriate workers.

Cultural Considerations

• Hall’s High- and Low-Context Typology of Culture:
  • High-context culture: Communication relies heavily on nonverbal cues and implicit understandings.
  • Low-context culture: Communication relies primarily on explicit verbal messages.
• Nonverbal Communication:
  • Body language, gestures, facial expressions, and space management vary across cultures.
  • Understanding these differences is crucial for effective communication.
• Hofstede’s Typology of National Culture:
  • Individualism versus collectivism: Individual focus vs. group focus.
  • Power distance: How a society addresses inequalities in power.
  • Uncertainty avoidance: Tolerance for risk and uncertainty.
  • Masculinity versus femininity: Society's orientation based on traditional gender roles.
  • Long-term vs. short-term orientation: Deferring gratification for long-term success.
  • Indulgence versus restraint: Control over impulses and desires.

International Business Fundamentals

• International business: Trade and investment activities across national borders.
• Globalization of markets: Ongoing economic integration and interdependency of countries worldwide.
• Internationalization: The tendency of firms to progressively increase their international business activities.

Key Perspectives on International Business

• Macro perspective (trend): Globalization of markets leads to economic interconnectedness among countries.
• Micro perspective (focus): Firm level, activity-driven focus on international business.
• Value-Chain Perspective: Companies conduct value-adding activities on a global scale, including sourcing, manufacturing, marketing, selling, and employing various entry strategies (e.g., exporting, strategic alliances, and direct investment).

International Trade and Investment

• International Trade: Cross-border exchange of goods and services through exporting and importing.
• Exporting: Selling goods and services to customers abroad.
• Importing (global sourcing): Procurement of goods and services from foreign suppliers.
• International Investment: Cross-border transfer or acquisition of assets, including capital, technology, talent, and infrastructure.

Types of International Investment

• International Portfolio Investment: Passive ownership of foreign securities (stocks, bonds) for financial returns.
• Foreign Direct Investment (FDI): Long-term investment, granting investors partial/full ownership of a foreign enterprise.
• Motivations for FDI:
  • Setting up manufacturing facilities for production.
  • Opening sales offices for marketing and distribution.
  • Establishing regional headquarters for support activities.

Differences Between Domestic and International Business

• Complexity: Macro forces like economic conditions, culture, legal systems, and political environments vary across countries, increasing complexity for international operations.
• Risk: Uncontrollable variables within foreign environments require effective risk management.

Key Drivers of Internationalization

• Strategic (Proactive) Motive: Seeking foreign market opportunities and acquiring new knowledge.
• Reactive Motive: Serving key customers that have expanded abroad.

The Role of Globalization and Technology

• Globalization: Accelerates technological development.
• Technology: Facilitates globalization and its advancement.