Intro to International Business

• International firms are becoming more common, including manufacturing and service sectors, such as banks, insurance, consulting, art, film, and music.
• International Business causes the flow of ideas, services, and capital, offering consumers new choices, product variety and challenging employment opportunities.
• International business entails transactions across national borders to satisfy individual, company, and organizational objectives.

Types of International Business

• Export-Import Trade
• Foreign Direct Investment, Foreign Portfolio investment.
• Licensing allows a company (licensor) to grant another party (licensee) rights to its brand, patents, or technology for a fee or royalty.
• Franchising grants another party (franchisee) the right to operate under its brand, following strict guidelines.
• Management Contracts

Key Questions for Consideration

• How well will a product or service fit into the international market?
• Should foreign markets be entered through trade or investment?
• Should supplies be sourced domestically or internationally?
• What product modifications are needed to suit local conditions?
• What threats do global competitors pose, and how can they be countered?

Fundamentals of International Trade

• Trade barriers are restrictions reducing free trade among countries.
• Import taxes increase the cost of foreign products.
• Quotas limit the quantity of imports.
• Laws prevent certain products from being imported.

International Business Environment Factors

• Geographic factors: location, climate, terrain, waterways, and natural resources.
• Cultural factors: language, family structure, religion, customs, and traditions.
• Political and legal factors: government system, political stability, trade barriers, and business regulations.
• Economic factors: technology, education levels, inflation rates, exchange rates, and infrastructure.

Cultural & Social Factors Impact

• Culture significantly influences business activities through accepted behaviors, customs, and values.
• Social customs such as hugging or handshakes vary by society, affecting business greetings.
• Cultural and social factors include language, education, religion, values, customs, and social relationships.
• Social relationships include interactions among families, labor unions, and organizations.

Geographic Conditions Influence

• Climate, terrain, seaports, and natural resources impact business activities.
• Hot climates may limit crop types and business operations.
• Access to rivers and seaports facilitates foreign trade.
• Countries lacking natural resources rely more on imports.

Political & Legal Factors Impact

• Economic and political systems in different countries affect the regulation of businesses.
• Common political and legal factors include the type of government, stability, and policies toward businesses.
• Government regulation covers fair advertising, intellectual property rights, contract enforcement, and safety inspections.

Economic Conditions Influence

• Economic factors include the type of economic system, natural resource availability, and education levels.
• Industries, jobs (service, manufacturing, agriculture), and money supply stability are also key.
• Technology levels and infrastructure for production and distribution affect a nation's economy.

Impact of International Businesses on Local Economies

• US international business outflows balance the trade account on a macroeconomic level.
• International business participation enables firms to achieve economies of scale beyond domestic markets.

Impact of Globalization

• International business creates global links binding countries and institutions through trade, financial markets, technology, and living standards.
• A coffee production decline in Brazil can affect individuals and economies worldwide.

The Internationalization of Business

• Companies perform trade and investment activities across borders to organize, source, manufacture, and market products/services.
• Due to a "level playing field" international activities are appealing to all firms - large and small, manufacturing and service sectors.
• International business uses sourcing, manufacturing, and marketing that can be done in international locations
• Cross-border trade includes products, services, capital, technology, know-how, and labor,
• Involves exporting, foreign direct investment, licensing, franchising, and collaborative ventures

International Trade Aspects

• International trade occurs between 2 or more countries.
• The essence of Int'l trade is specialization, helping countries with greater advantage over other countries with specialization.
• Foreign trade involves exchange of goods between individuals, the private sector, and governments across countries.
• Categories of foreign trade are Bilateral = exchange between two nations
• Multinational = trade amongst three or more countries

International Trade cont..

• Importing and Exporting for visible trade which consists of imports and exports of tangible goods e.g. vehicles', coffee, plastics, fruits, etc.
• invisible trade consists of the purchase and sale of services with the exchange of services between countries e.g. telecommunications, Insurance, banking etc.

International Investment Aspects

• International Investment involves the Transfer of assets to another country or the acquisition of assets in that country - international portfolio investment, (Short Term) - Passive ownership of stocks and bonds, to generate financial returns.
• Foreign Direct Investment (FDI) = (Long Term) - An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets as capital, technology, labor, land, plant, and equipment.
• Foreign Direct Investment (FDI) - (asset ownership and long time frame) with the ultimate commitment-level of internationalization,

International Services Sector growth

• Banking and financial services are the most active international services.
• Explosive growth of global capital markets is due to the Deregulation of world capital markets, bank and financial Institutions internationalizing and falling investment barriers.

The Four Risks of International Business

• Cross-Cultural Risk: - where a cultural miscommunication puts some human value at stake and includes cultural differences
• Country Risk: potentially adverse effects on company operations and profitability by developments in the political, legal
• Currency (Financial) Risk: - risk of adverse unexpected fluctuations in exchange rates and the Firms have to value foreign taxation
• Commercial Risk: potential loss or failure from poorly developed or executed business strategies, tactics, or procedure
• Risks are Always Present but Manageable - Managers need to understand their implications and take proactive action to reduce adverse effects.

Participants in International Business

• Multinational enterprise (MNE): A large company with substantial resources and performs various business activities through a network of subsidiaries and affiliates located in multiple countries.
• Small and Medium-Sized Enterprise: A company defined (in the U.S.) as having 500 or fewer employees and account for 1/3 of exports.
• The Born Global Firm: A young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. - tend to minimize fixed costs and outsource, due to limited resources.

Reasoning for Internationalization

Firms Internationalize to seek opportunities for growth through market diversification, Earn higher margins and profits, Gain new ideas about products, services and business methods. Improve supply chain by gaining global sourcing advantages and to offer better service to customer

Contributors to National Economic Well-Being

• International trade is a critical engine for job creation. - With every $1 billion increase in exports creates more than 20,000 new jobs.
• International business is both a cause and a result of increasing national prosperity. - and is accompanied by literacy rate gains, nutrition and health care improvements

Competitive Advantage Factors

• Competitive Advantage includes Increase sales, Maximize returns to domestic markets and allow for global scale economies and international players.

Societal Implications

• Firms increasing their international activities means they have responsibility to society to be a good corporate citizen.
• Negatively impacting the natural environment, as they also Disrupt the economies of nations with aggressive currency trading or by manipulating stock markets.
• Some MNEs ignore human rights and Building factories abroad can often lead to job losses at home.

Aspects of Globalization

• Refers to the shift toward a more integrated and interdependent world economy.
• Involves merging historically distinct and separate national markets.
• Lower trade barriers facilitate global sales so that consumers tastes and preferences converge on some global norm, with Firms promoting the trend with same basic products worldwide.

Global Production

• Firms source goods/services worldwide to capitalize on national differences in cost/quality of factors of production.
• To lower their overall cost structure and Improve the quality or functionality of their product offering

Need Global Institutions

• Institutions help manage, regulate, and police the global marketplace. Includes Promotion of the establishment of multinational treaties to govern the global business system
• EX WTO, IMF, World Bank, United Nations

Driving Globalization

• Barriers decline to goods, services, and capital free flow since the end of World War II plus Tariff falls, markets have opened to FDI. - This is then coupled with tech changes like Microprocessors and telecommunications, The Internet and World Wide Web, plus Transportation Technology all enhance globalization

What Does Globalization Mean For Firms?

• Lower barriers to trade and investment mean firms can
• View the world, rather than a single country, as their market and can Base production in the optimal location for that activity

Technological change meaning

• Lower transportation costs - firms can disperse production to economical, geographically separate locations
• Lower information processing and communication costs - firms can create and manage globally dispersed production systems - Low cost global communications networks - help create an electronic global marketplace

The Changing Demographics of The Global Economy

• A drastic change in the demographics of the world economy has seen the The Changing World Output and World Trade China and United States account for over 40% of world economic activity.
• The Changing Foreign Direct Investment. USA accounts for 1/5 in FDI flows. Developing nations have a FDI rise.
• The Changing Nature of the Multinational Enterprise - Since the 1960s, there has been a rise in non-U.S. multinationals, and a growth of mini-multinationals

Trends of Globalization

• The world is moving toward a more global economic system that is NOT inevitable, rather Globalization brings risks such as the financial crisis that swept through South East Asia in the late 1990s
• Increased trade and cross-border investment leads to Lower prices for goods and services, Greater economic growth, Higher consumer income, and more jobs plus Environmental degradation with The cultural imperialism of global media and MNEs
• Countries are encouragedto specialize in efficiently trade
• Globalization involves avoiding costly efforts to adhere to regulations by moving production, with tougher environment and labor standards.
• May shift economic power away from governments toward organizations like the WTO and UN

Terms of Trade

• Trade is the voluntary exchange between two or more parties with compensation paid to a seller. Specialization is focusing on specific labor in a specific type of production.
• Gains from Trade is the net advantage gained when agents are allowed to engage in trade.
• Relative Advantage - where a the factor with lower opportunity cost can take advantage of the other factor
• Absolute Advantage - the greater number of items, given the same number of resources
• Imports are Goods produced abroad and sold domestically. Exports are Goods produced domestically and sold abroad.
• One must look at consumption with and without trade and determine the best production distribution

Benefits for Trade

• Trade and specialization increase the productivity and allow for total output increase that that were not possible with otherwise, where the Benefits of international trade far exceed the costs.
• absolute advantage, even with absolute advantage with all resources trade benefits can occur.
• The country must specialize according to comparative advantage and have lower opportunity cost
• Gains from trade - Arise from comparative advantage (differences in opportunity costs)