International-Business-Trade-Module-1 (1).docx

**INTERNATIONAL BUSINESS TRADE** 1. **MODULE I: INTRODUCTION TO INTERNATIONAL BUSINESS TRADE** 2. **INTRODUCTION:** **International business** is all commercial transactions private and governmental between two or more countries. Private companies undertake such transactions for profits; govern...

**INTERNATIONAL BUSINESS TRADE** 1. **MODULE I: INTRODUCTION TO INTERNATIONAL BUSINESS TRADE** 2. **INTRODUCTION:** **International business** is all commercial transactions private and governmental between two or more countries. Private companies undertake such transactions for profits; governments may or may not do the same in their transactions. These transactions include sales, investments and transportation. Study of international business has become important because (i) It comprises a large and growing portion of the world's total business. (ii) All companies are affected by global events and competition, whether large or small, since most sell output to and secure raw materials and supplies from foreign countries. The company's external environment conditions such as physical, societal and competitive affect the way business functions such as marketing, manufacturing and supply chain management are carried out. When a company operates internationally, foreign conditions are added to domestic ones making the external environment more diverse and complex. 3. **LEARNING OBJECTIVES** On completing the module, you should able to - Know how the concept of international business evolved - State the nature of international business - Describe the influences and goals of international business - Identify the problems of international business 4. **LESSON PROPER** **Global, Multinational and Transnational Company** Each term is distinct and has a specific meaning which defines the scope and degree of interaction with their operations outside of their \"home\" country. ***International Business*** - Multinational companies have investment in other countries, but do not have coordinated product offerings in each country. More focused on adapting their products and service to each individual local market. - A Multinational Corporation (MNC) or Multinational Enterprise (MNE) is a corporation enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. They play an important role in globalization. ***Example:*** Toyota, Honda, Budweiser, Kia, McDonalds, Pepsi, KFC, Adidas, Nike, Puma, Umbro, Nissan, Renault, Citroen - Global companies have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. ***Example:*** Some examples of global companies are: Seagate, McDonald\'s boots, pizza hut, Burger king, Thornton\'s asda, Tesco, etc. - Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision making, R&D and marketing powers to each individual foreign market. ***Example:*** An example of a TNC is Nestlé who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralized headquarters. However, the terms TNC and MNC are often used interchangeably. **Evolution of International Business** - The analytical framework of international business is built around the activities of Multinational Enterprises (MNEs) enunciated by the process of internationalization. The FDI on the part of an MNE attempts to overcome the obstructions to trade in foreign countries. The strategies relating to the functional areas, such as production, marketing, finance and price policies, are adopted by the MNEs in such a manner that an amicable relationship between home and host nations is created. - Foreign direct investment can be distinguished from the other forms of international business, such as exporting, licensing, joint ventures and management contracts. Basically, it reacts to the restrictions in foreign trade, licensing, etc. and its growth at the global level has taken place mainly due to the imperfections in the world markets and protective trade policies pursued by different countries for the sake of protecting their economies. - The ways in which the MNEs have provided challenges to the imperfections and restraints in the world markets from an important part of the conceptual methods underlying the expanding role of international business. - Before the emergence of the MNEs, foreign trade and international business were regarded as synonymous, and international trade doctrines based on labor cost differentials and free trade guided the international transactions among different trading partners. The multinationals undertook FDI abroad, and their innovative efforts in technological development and ***International Marketing to International Business:*** The multinational companies which were producing the products in their home countries and marketing them in various foreign countries before 1980s, started locating their plants and other manufacturing facilities in foreign/host countries. Later, they started producing in one foreign country and marketing in other foreign countries. For example, Unilever established its subsidiary company in India, i.e. Hindustan Liver Limited (HLL), HLL produces its products in India and markets them in Bangladesh, Sri Lanka, Nepal, etc. - Thus, the scope of the international trade is expanded into international marketing and international marketing is expanded into international business. - The 1990s and the new millennium clearly indicate rapid internationalization and globalization. - The entire globe is passing at a dramatic pace through the transition period. Conducting and managing international business operations is a crucial venture due to variations in political, social, cultural and economic factors, from one country to another country. For example, most of the African consumers prefer high quality and high priced products due to their higher ability to buy. Therefore, the international businessman should produce and export less costly products to most of the African countries and vice versa to most of the European and North American countries. High priced Palmolive soaps are exported and marketed in developing countries like Ethiopia, Pakistan, Kenya, India, Cambodia, etc. **Nature of International Business** - The study of international business focuses on the particular problems and opportunities that emerge because a firm is operating in more than one country. In a very real sense, international business involves the broadest and most generalized study of the field of business, adapted to a fairly unique across the border environment. Many of the parameters and environmental variables that are very important in international business are either largely irrelevant to domestic business or are so reduced in range and complexity as to be of greatly diminished significance. ***Example:*** Foreign legal systems, foreign exchange markets, cultural differences, and different rates of inflation. - Thus, it might be said that domestic business is a special limited case of international business. - The distinguishing feature of international business is that international firms operate in environments that are highly uncertain and where the rules of the game are often ambiguous, contradictory, and subject to rapid change, as compared to the domestic environment. In fact, conducting international business is really not like playing a whole new ball game, however, it is like playing in a different ball park, where international managers have to learn the factors unique to the playing field. Managers who are astute in identifying new ways of doing business that satisfy the changing priorities of foreign governments have an obvious and major competitive advantage over their competitors who cannot or will not adapt to these changing priorities. - The guiding principles of a firm engaged in (or commencing) international business activities should incorporate a global perspective. A firm's guiding principles can be defined in terms of three board categories products offered/market served, capabilities, and results. However, their perspective of the international business is critical to understand the full meaning of international business. That is, the firm's senior management should explicitly define the firm's guiding principles in terms of an international mandate rather than allow the firm's guiding principles in terms as an incidental adjunct to its domestic activities. Incorporating an international outlook into the firm's basic statement of purpose will help focus the attention of managers (at all levels of the organization) on the opportunities (and hazards) outside the domestic economy. - It must be stressed that the impacts of the dynamic factors unique to the playing field for - International business are felt in all relevant stages of evolving and implementing business plans. The first broad stage of the process is to formulate corporate guiding principles. As outlined below the first step in formulating and implementing a set of business plans is to define the firm's guiding principles in the market place. The guiding principles should, among other things, provide a long-term view of what the firm is striving to become and provide direction to divisional and subsidiary manager's vehicle, some firms use "the decision circle" which is simply an interrelated set of strategic choices forced upon any firm faced with the internationalization of its markets. These choices have to do with marketing, sourcing, and labor. **Influences and Goals of International Business** Companies engage in international business to:  ***Expand Sales:*** Companies' sales are dependent on (a) the consumers' interest in their products or service and (b) the consumers' willingness and ability to buy them. The number of people and the extent of their purchasing powers are higher for the world as a whole than for a single country. Hence companies increase the potential market for their sales by pursuing global markets. Thus, higher sales means higher profits because of economies of scale. So, increased sales are a major motive for a company's expansion into international business.  ***Acquire Resources:*** Manufacturers and distributors also look for foreign capital, technologies and information that they can use at home, to reduce their costs. Sometimes, a company operates abroad to acquire something not readily available in the home country so as to improve its product quality and differentiate itself from competitors, potentially increasing market share and profits.  ***Minimize Risk:*** Companies seek out foreign markets to minimize swings in sales and profits arising out of business cycle recessions and expansions which occur differently in different countries. ***Example:*** Sales decrease or grow more slowly in a country that is in recession and increase or grow more rapidly in one that is expanding rapidly in one that is expanding economically. Many companies enter into international business for defensive reasons e.g. to counter advantages competitors might gain in foreign markets that in turn, can hurt them in the domestic market. The company forms its strategies and the means to implement them after examining the external environment. The company faces different external environment in each country where it operates. **Understanding a Company's Physical and Social Environments** - To operate within a company's external environment, its managers should have in addition to knowledge of business operations, a working knowledge of basic social sciences, political sciences, law, anthropology, sociology, psychology, economies and geography. Politics helps shape business worldwide because political leaders control shaping of international business. Political disputes can disrupt trade and investments; even small conflicts have far-reaching effects. - Domestic law includes regulations in both the home and host countries on matters such as taxation, employment and foreign exchange transactions. ***Example:*** Japanese law determines how Lucas film revenues from Japanese screenings are taxed and how they can be exchanged from yen to US dollars. US law in turn, determines how and when the losses or earnings from Japan are treated for tax purposes in the US. **Competitive Environment** - The competitive environment varies by industry, company and country and accordingly lay down international strategies. ***Example:*** Companies in industries with homogenous products such as copper tubing compete more on price, than companies in industries that compete more on differentiated and innovative products such as branded toothpaste or state-of-the-art computer chips. Strategies for the former are focused on cost savings such as developing better equipment and operating methods, producing on a large scale to spread costs over more units and location to have cheap labor and materials. Companies within the same industry also differ in their competitive strategies. ***Example:*** Honda's greater concern about reducing automobile costs than BMW helps explain why the former has recently moved much of its automobile production to China to take advantage of lower labor costs while the latter has not. Still another competitive factor is the size of the company and the resources it has, compared to its competitors. The competitive environment also varies in other ways among countries. For example, the domestic market in the US is much larger than the one in Sweden. Swedish producers have to depend more on foreign sales to spread fixed costs of product development and production than US producers. **Problems of International Business** What make international business strategy different from the domestic are the differences in the marketing environment. The important special problems in international marketing are given below: 1\. ***Political and Legal Differences:*** The political and legal environment of foreign markets is different from that of the domestic. The complexity generally increases as the number of countries in which a company does business increases. It should also be noted that the political and legal environment is not the same in all provinces of many home markets. ***Example:*** The political and legal environment is not exactly the same in all the states of One country. ***2. Cultural Differences:*** The cultural differences, is one of the most difficult problems in international marketing. Many domestic markets, however, are also not free from cultural diversity. ***3. Economic Differences:*** The economic environment may vary from country to country. ***4. Differences in the Currency Unit:*** The currency unit varies from nation to nation. This may sometimes cause problems of currency convertibility, besides the problems of exchange rate fluctuations. The monetary system and regulations may also vary. ***5. Differences in the Language:*** An international marketer often encounters problems arising out of the differences in the language. Even when the same language is used in different countries, the same words of terms may have different meanings. The language problem, however, is not something peculiar to the international marketing. ***Example:*** The multiplicity of languages in one country. 6\. ***Differences in the Marketing Infrastructure:*** The availability and nature of the marketing facilities available in different countries may vary widely. For example, an advertising medium very effective in one market may not be available or may be underdeveloped in another market. 7\. ***Trade Restrictions:*** A trade restriction, particularly import controls, is a very important problem, which an international marketer faces. 8\. ***High Costs of Distance:*** When the markets are far removed by distance, the transport cost becomes high and the time required for affecting the delivery tends to become longer. Distance tends to increase certain other costs also. 9\. ***Differences in Trade Practices:*** Trade practices and customs may differ between two countries. 5. **SUMMARY** - The analytical framework of international business is built around the activities of the MNEs explained by the process of internalization. - Before the emergence of the multinationals, foreign trade and international business were synonymous. International trade doctrines based upon labor cost differentials and free trade guided the international transactions. - Innovative efforts of the MNEs, in technological development and management styles superseded the international trade theories. - The theorists began to develop the FDI approaches in support of international business for the improvement and welfare of the world economies. - International companies operate in environments that are highly uncertain and where the rules of the game are often ambiguous, contradictory, and subject to rapid change, as compared to the domestic environment. - A company engages in international business to expand sales, acquire resources and minimize risks associated with doing business only in one country. - Many problems can arise in course of international business. Some prominent problems include political differences, cultural differences, and economic differences, differences in currency, language and marketing infrastructure. - The trade restrictions and differences in trade practices also pose problems for a company looking to expand itself in international market. 6. **SELF PROGRESS TEST / ACTIVITY** **Review Questions: International Business Trade** 1. Describe how international business evolved. 2. International business environment is very uncertain, then why do companies want to engage in international business? 3. Explain how venturing into international business can minimize risk for a company. 4. Is it important to study the physical environment of a country before setting up a business over there? Justify your answer. 5. Discuss the special problems that an international company faces in different host countries. 6. Cultural differences, is one of the most difficult problems in international marketing." **FRAMEWORK OF CASE ANALYSIS:** a. **Background of the Company** b. **SWOT Analysis** c. **Case Analysis** 1. **Define the Problem.** What is the main problem of manager has to overcome? Are there any sub problems that contribute to the main problem? What are the issues at stake in the case? 2. **Identify areas for consideration.** "Areas" are usually business or economic factors that are important and have a bearing on the problem, or could affect possible solutions. The students should put his "thinking cap" on, identify what he considers relevant, and state his reason for considering a particular factor relevant or important. The students should be able to state why it is relevant and important, and why other factor is not. 3. **Determine alternative courses of action.** There are two or three or more courses of action that could solve the problem or lead eventually to a solution. The student should state the pros and cons of each course of action. He should marshal the arguments for against each. He should give the possible consequences of taking each course of action. 4. **Choose the course of action that leads to a solution.** Among the alternatives previously identified, which course of action would solve the problem best? This should be recognized as valid, and often, the realistic way to attack a problem. d. **Summary** (What have you learned with the case?) **CASE STUDY** **Carpet Industry in India** In this era of globalization, every company and every industry wants to go global. India also wants to sell carpets to the foreign markets. This can only be done through exports when the profits in the exports increase we go in for International Marketing, which lead to international trade and international business. How it happens? This happens only when our company becomes international, multinational and transnational. The carpet industry at present is passing through international marketing stage. The carpets that are exported follow the concept of Ethnocentricity. In order to make the carpet industry an MNC the export of carpets have to increase to more than \$ 100 million turnover per annum. This can only happen in case this industry is properly organized and given more incentives by the Government being a labor intensive industry. The question of its becoming transnational cannot arise unless this industry falls in the hands of MNC itself and a large number of carpet weavers are trained on a large scale through Carpet Management Schools which is a far of dream. However, effort should be made to give more incentives to the carpet weavers so that the child labor in this industry is completely abolished and the objection of the importers on the use of child labor is removed. 7. **SUPPLEMENTARY READINGS AND MATERIALS / REFERENCES** **AUTHOR** **TITLE** **EDITION DATE** ----------------- ------------------------------------------------------------ ------------------ Vasudeva, P. K. *International Marketing*, New Delhi: Excel Books (2010) E-BOOK DCOM501\_International Business.pdf - Adobe Acrobat Pro DC PREPARED BY: **MADELINE N. ILAN** CBM FACULTY -- BSBA MM DEPARTMENT