International Business Overview

International Business

• International business is the performance of trade and investment activities by firms across national borders. It involves firms seeking foreign customers and exchanging physical and intellectual assets like products, capital, and know-how.
• Globalization is the increasing economic integration and interdependence of countries worldwide. Companies are internationalizing to systematically expand their international business activities.
• Gross Domestic Product (GDP) represents the value of products and services produced within a country in a year. Export figures often surpass GDP due to the growth of emerging markets like China and India.
• Entrepot economies act as major trading hubs, processing imports into higher-value products for export to other destinations. Singapore, Hong Kong, and the Netherlands are examples of entrepot economies.

Elements of International Business

• International Trade: The exchange of products and services across national borders. This frequently involves exporting goods (outbound flow) and importing (inbound activity).
• International Investment: The transfer of assets (factors of production) to another country, or acquiring assets in a foreign country. This includes domestic activities, and business activity across countries.

International Business Risks

• Cross-cultural risk: Differences in language, lifestyles, values, customs, and religion between countries create potential for misunderstandings and misinterpretations.
• Country risk: (Political risk) Negative impacts on operations and profitability caused by political, legal, and economic changes in host countries. Examples include restrictions on markets, and government regulations.
• Currency risk: (Financial risk) Fluctuation in exchange rates that affect the value of firm earnings.
• Commercial risk: Loss or failure due to ineffective business strategies, procedures, or tactics. This includes issues from selecting business partners, marketing, pricing and timing of market entry.

Participants in International Business

• Focal firm: The initiator or central player of an international transaction or enterprise. This involves conceptualizing, designing and producing offerings targeted at customers worldwide.
• Distribution channel intermediary: A specialist firm or group providing logistics and marketing services to focal firms as part of international supply chains. These intermediaries are often independent distributors and representatives.
• Facilitator: Individuals or firms with specialized expertise in banking, legal advice, customs clearance, or other international business transactions.
• Governments: actively participate in international business as buyers of goods and services, providers of these goods and services, and regulators of international trade.

Customers in International Business

• Individuals (consumers and households): Purchase finished goods for personal use
• Retailers: Purchase finished goods to resell them for profit.
• Organizational buyers: Purchase goods and services to run their business.
• MNEs (multinational enterprises): Large companies with extensive resources engaged in international activities that operate through a network of subsidiaries and affiliates across multiple countries.
• SMEs (small and medium-sized enterprises): Businesses employing 500 or fewer employees. They often specialize in exporting to target specific markets or niches since many are not equipped to make large investments.

Why Firms Internationalize

• Strategic/Proactive motives: Expanding into new markets to diversify, increase profit margins, and gain new knowledge.
• Reactive motives: Responding to a need or desire from a key customer to provide a service or good.

Globalization of Markets and Firms

• Phases of globalization: Historical periods exhibiting increasing economic integration.
• Market globalization considerations: Drivers include reduction of trade barriers and increased technological advances. Dimensions include integration, interdependence, and convergence. Firm-level and societal consequences include risks, new opportunities, interconnectedness, and conflicts.

The Cultural Environment of International Business

• Culture: Values, customs, beliefs, and behaviors specific to a community. Culture is relative, learned, comes from social environment, and not universally inherited through genetics.
• Cross-cultural risk: A situation or event in which a cultural misunderstanding puts some human value at stake.
• Socialization: The process of learning the rules and behavioral patterns appropriate to one's society.
• Acculturation: The process of adapting and adjusting to a foreign culture.

Ethical and Corporate Social Responsibility

• Ethics: Guiding moral principles that guide behavior of individuals, firms, and governments. Respecting right and wrong.
• Corporate Social Responsibility (CSR): The firm's commitment to ethical, legal, commercial and public expectations of its stakeholders. Including customers, shareholders, employees, and communities.
• Sustainability: Meeting present needs without harming future generations.
• Corporate governance: Procedures and processes for managing, controlling, and regulating the firm.

Theories of International Trade & Investment

• Comparative advantage: A nation's superior features that provide it with unique benefits over competitors in global markets.
• Classical Theories: Mercantilism, absolute and comparative advantage, factor proportions theory explain why nations trade.
• New Trade Theory: Expands on earlier theories, often focusing on the growth of industrialized countries, increased trade, and industry clustering.

Political and Legal Systems

• Country risk: Potential loss or decrease in profitability due to political and/or legal environments of a host country.
• Dimensions of political risk include corruption, unstable governments, laws, bureaucracy & red tape, and government intervention.
• Political Systems: Types such as Totalitarianism, Socialism, and Democracy, affect a country's relationship with other countries, and its legal environment.
• Legal Systems: Types include common law, civil law, and religious law. Differ in approaches to ownership of intellectual property and how contracts are handled.
• Legal issues and difficulties: Challenges of enforcing contracts, and compliance of contracts in the new host country compared to contracts in the firm's home country.