Lecture 01 - Introduction to International Business PDF

IntBus Introduction G. Ong Globalization Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries. International Business is a mechanism to bring about globalizat...

IntBus Introduction G. Ong Globalization Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries. International Business is a mechanism to bring about globalization. The Shift towards a more integrated and interdependent world economy. Two components of Globalization: A. The Globalization of Markets B. The Globalization of Productions Globalization of Markets The Merging of distinctly separate national markets into a global marketplace:  Tastes and preferences converge onto a global norm.  Firms offer standardized products worldwide creating a world market.  Significant differences still exist between national markets on many relevant dimensions.  These differences require that marketing and operating strategies and product features be customized to best match conditions in a country.  "Localization" changing the product to fit the market.  Countries are different.  Range of Problems are wider and more complex.  Government intervention in trade and investment creates problems.  International Investments is impacted by different currencies. Globalization of Production Refers to sourcing of goods and services from locations around the world to take advantage of:  Differences in cost or quality of the factors of production  Labor  Land  Capital International Business International Business International business consists of all commercial transactions, including production, purchase, and sale of goods and services, investments, and transportation, that take place between two or more countries It involves the in multiple countries. All commercial transactions private and government between two or more countries. The growth of international business activity coincides with the broader phenomenon of globalization of markets. The globalization of markets refers to the ongoing economic integration and growing interdependency of countries world- wide. While internationalization of the firm refers to the tendency of companies to systematically increase the international dimension of their business activities, globalization refers to a macrotrend of intense economic interconnectedness between countries. Reasons for Studying International Business 1. Facilitator of the Global Economy and Interconnectedness 2. Contributor to National Economic Well-Being 3. A Competitive Advantage for the Firm and For You. 4. An Opportunity for Global Corporate Citizenship IntBus Introduction G. Ong Influences and Goals of International Business Companies engage in international business to: A. Expand Sales – pursuing international sales increases the potential market and potential profits. B. Acquire Resources – businesses look for foreign resources such as capital, technologies and information because those are either not available in their country or those can reduce the costs of the company. C. Diversify or Minimize Risk – Companies who seek out foreign markets minimize swings in sales and profits arising out of business cycles recessions and expansions which occur differently in different countries. International operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage. Participants in International Business 1. Multinational Enterprises (MNE) – Multinational enterprises (also known as multinational corporations) have historically been the most important type of local firm. A multinational enterprise is a large company with substantial resources that performs various activities through a network of subsidiaries and affiliates located in multiple countries. 2. Small and Medium-sized Enterprise (SME) – a company with 500 or fewer employees in the United States, although this number may need to be adjusted downward for other countries. 3. Born Global Firm – a firm that makes one international sale within two years to any new market. A young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. Some of the very successful born-global startups are Spotify, Zoom. Though they have limited financial and tangible resources. 4. Non-Governmental Organizations (NGOs) – In addition to profit-seeking local firms in international business, there are numerous non-profit organizations that conduct cross-border activities. These include charitable groups and non-governmental organizations (NGOs). They pursue special causes and serve as an advocate for the arts, education, politics, religion, and research. They operate internationally to either conduct their activities or raise funds. Modes of Operation in International Business 1. Merchandise exports and imports 2. Service exports and imports a. Tourism and Transportation b. Service Performance c. Asset Use 3. Investments a. Foreign Direct Investment (FDI) b. Portfolio Investment Factors Contributing to Rapid Growth of International Business 1. Increase in and expansion of technology. 2. Liberalization of cross-border trade and resource movements. 3. Development of services that support international business. 4. Growing consumer pressures. 5. Increased global competition. 6. Changing political situations. 7. Expanded cross-national cooperation. IntBus Introduction G. Ong Problem of International Business 1. Political and Legal Differences – the complexity generally increases as the number of countries in which a company does business increases. 2. Economic Differences – the economic environment may vary from country to country. 3. Differences in the Currency Unit – this may sometimes cause problems of currency convertibility, besides the problems of exchange rate fluctuations. 4. Differences in the Language – even when the same language is used in different countries, the same words or terms may have different meanings. 5. Differences in the Marketing Infrastructure – the availability and nature of the marketing facilities available in different countries may vary widely. 6. Trade Restrictions – particularly import controls, is a very important problem, which an international marketer faces. 7. High Cost of Distance – when the markets are far removed by distance, the transport cost become high and the time required for affecting the delivery tends to become longer. 8. Differences in Trade Practices – trade practices and customs may differ between two countries. Four (4) Risks in Internationalization 1. Cross-cultural risk – refers to a situation or event where a cultural miscommunication puts some human value at stake. Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and/or religion. 2. Country risk (also known as political risk) – refers to the potentially adverse effects on company operations and profitably caused by developments in the political, legal, and economic environment in a foreign country. It includes the possibility of foreign government intervention in firms; business activities. 3. Currency risk (also referred to as financial risk) – refers to the risk of adverse fluctuations in exchange rates. Fluctuation is common for exchange rates, or the value of one currency in terms of another. Currency risk arises because international transactions are often conducted in more than one national currency. 4. Commercial risk – refers to the firm's potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes. Pursuing Internationalization Strategies 1. Seek opportunities for growth through market diversification. Substantial market potential exists outside the home country. When they diversify into foreign markets, firms can generate sales and profit opportunities that cannot be matched at home. 2. Earn higher margins and profits. For many types of products and services, market growth in mature economies is sluggish or flat. Competition is often intense, forcing firms to get by on slim profit margins. On the other hand, less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. 3. Gain new ideas about products, services and business methods. International markets are characterized by tough competitors and demanding customers with various needs. Unique foreign environments expose firms to new ideas for products, processes and business methods. 4. Better serve key customers that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. 5. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products. Companies in extractive industries such as petroleum, mining, and forestry establish international operations where these raw materials are located. IntBus Introduction G. Ong 6. Gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, labor, and land at lower costs, higher-quality, or better overall value at locations worldwide. 7. Develop economies of scale in sourcing, production, marketing and R&D. Economies of scale refer to the reduction of the per-unit cost of manufacturing and marketing due to operating at high volume. 8. Confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with international competitors invading markets worldwide. The firm can enhance its competitive positioning by confronting competitors in international markets or pre-emptively entering a competitor's home markets to destabilize and curb its growth. 9. Invest in a potentially rewarding relationship with a foreign partner. Firms often have long-term strategic reasons for venturing abroad. Joint ventures or project- based alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term, profit-making opportunities. International Trade Involves the exchange of goods and services between countries, typically through imports and exports Key Concepts in International Trade and Investment 1. International Trade - refers to an exchange of products and services across national borders. Trade involves both products (merchandise) and services (intangibles). 2. Exporting - an entry strategy involving the sale of products or services to customers located abroad, from a base in the home country or a third country. 3. Importing or Global Sourcing – the procurement of products or services from suppliers located abroad for consumption in the home country or a third country. 4. International Investment – refers to the transfer of assets to another country, or acquisition of assets in that country. With trade, products and services crossed national borders. With investment, by contrast, the firm itself crosses borders to secure ownership of assets located abroad. 5. International Portfolio Investment – refers to the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. 6. Foreign Direct Investment (FDI) – refers to an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant and equipment. Difference of International Business from Domestic Business Firms engaged in international business operate in business environments characterized by unique economic conditions, political systems, laws and regulations, and national culture. For example, the economic environment of Philippines differs sharply from that of China. The legal environment of Canada does not resemble that of Saudi Arabia. When operating abroad companies may have to adjust their usual methods of carrying out business. Foreign conditions often dictate a more suitable method, and the operating modes used for international business differ from those used on a domestic level.