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What is a new legal business entity recognized by the host country called?
Which of the following is NOT a motivation for firm FDI?
How does international business differ from domestic business?
Complexity and risk due to differing macro forces, economic conditions, legal systems, and cultural differences.
Cross-cultural risk is a situation where a cultural misunderstanding places a company’s value at risk.
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What is cross-cultural literacy?
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What can government intervention in a host country lead to?
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What does the Index of Economic Freedom rank?
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What does commercial risk refer to?
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What is international business?
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What are the two megatrends underlying the changing business landscape?
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Globalization of markets refers to the ongoing ________ integration and growing interdependency of countries worldwide.
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What is a reactive motive for a firm to internationalize?
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Which of the following factors have driven the globalization of markets? (Select all that apply)
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International trade involves only the exchange of physical products.
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What does GDP stand for and what does it represent?
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What role do Multinational Enterprises (MNEs) play in international business?
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What characterizes a 'born global' firm?
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________ refers to the procurement of products or services from suppliers located abroad for consumption in the home country.
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SMEs account for a smaller percentage of total exports from countries compared to large firms.
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Which of the following are considered risks of international business? (Select all that apply)
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What do Inuit languages have that reflects their environment?
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What challenge can arise when translating words from one language to another?
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Cultural differences can lead to effective relations with customers.
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Which of the following describes decision-making styles in business managers?
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What ethical practice differs significantly between countries?
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What is an example of country risk?
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What does currency risk refer to?
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The tendency of firms to systematically increase the international dimension of their business activities is called ___
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What is the ultimate commitment-level of internationalization?
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Cultural miscommunication does not pose risks in international business.
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Study Notes
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
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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.
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Country Risk (Political Risk):
- Potential negative impacts on company operations and profitability due to political, legal, and economic environment changes in a foreign country.
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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).
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Laws and regulations:
- Laws affecting property rights, intellectual property, product liability, and taxation can hinder operations.
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Economic instability:
- High inflation, national debt, and trade imbalances can negatively affect business.
- The global financial crisis of 2009 plunged many nations into recession.
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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.
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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
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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.
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Nonverbal Communication:
- Body language, gestures, facial expressions, and space management vary across cultures.
- Understanding these differences is crucial for effective communication.
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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.
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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.
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Description
Test your understanding of key concepts in international business, including foreign direct investment, cross-cultural risks, and globalization. This quiz covers essential topics that shape the international business landscape and the motivations behind firm internationalization.
