Chapter 01

The Challenging World of International Business

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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What is an International Business (IB)?

• International Business – A business that buys, sells or invests cross

national borders

• Foreign Business – A company operating outside its home country

• Multidomestic Company (MDC) – A firm with multicountry affiliates, each with its

own business strategy based on perceived market differences

• International Business – A business that buys, sells or invests cross

national borders

• Foreign Business – A company operating outside its home country

• Multidomestic Company (MDC) – A firm with multicountry affiliates, each with its

own business strategy based on perceived market differences

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What is an IB?

• Global Company (GC) – A firm that standardizes and integrates functional operations worldwide

• International Company (IC) – A global or multinational company

• Global Company (GC) – A firm that standardizes and integrates functional operations worldwide

• International Company (IC) – A global or multinational company

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What is Different about IB?

• International Business deals with 3 environmental forces:1. Domestic2. Foreign3. International

• International Business deals with 3 environmental forces:1. Domestic2. Foreign3. International

• Domestic Business deals with the domestic market environment

• But…may face foreign competition in domestic markets

• Domestic Business deals with the domestic market environment

• But…may face foreign competition in domestic markets

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Influence of External and Internal Environmental Forces

• Three relevant terms:1. Environment

All forces surrounding and influencing the life and development of the firm

2. Uncontrollable Forces External forces over which management has no direct control, although it can exert an influence

3. Controllable Forces Internal forces that management administers to adapt to changes in the uncontrollable forces

• Three relevant terms:1. Environment

All forces surrounding and influencing the life and development of the firm

2. Uncontrollable Forces External forces over which management has no direct control, although it can exert an influence

3. Controllable Forces Internal forces that management administers to adapt to changes in the uncontrollable forces

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External Forces1. Competitive – competitors, their number, locations, activities2. Distributive – agencies available for distributing goods & services3. Economic – GNP, GDP, unit labor cost, personal consumption variables

that impact a firm’s ability to do business4. Socioeconomic – characteristics & distribution of populations5. Financial – interest & inflation rates, taxation, etc.6. Legal – laws governing international operations of MNCs7. Physical – topography, climate, natural resources8. Political – local political climate, government structure, international

organizations9. Sociocultural – attitudes, values, beliefs, etc., of the local culture10. Labor – composition, skills, and attitudes of local labor11. Technological – technical skills & w equipment converting resources

into product

1. Competitive – competitors, their number, locations, activities2. Distributive – agencies available for distributing goods & services3. Economic – GNP, GDP, unit labor cost, personal consumption variables

that impact a firm’s ability to do business4. Socioeconomic – characteristics & distribution of populations5. Financial – interest & inflation rates, taxation, etc.6. Legal – laws governing international operations of MNCs7. Physical – topography, climate, natural resources8. Political – local political climate, government structure, international

organizations9. Sociocultural – attitudes, values, beliefs, etc., of the local culture10. Labor – composition, skills, and attitudes of local labor11. Technological – technical skills & w equipment converting resources

into product

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Environments

• Domestic Environment All uncontrollable forces originating in the home country that surround and influence the firm’s life and development

• Foreign Environment All uncontrollable forces originating outside the home country that surround and influence the firm

• International Environment Interaction between domestic and foreign environmental forces or between sets of foreign environmental forces

• Domestic Environment All uncontrollable forces originating in the home country that surround and influence the firm’s life and development

• Foreign Environment All uncontrollable forces originating outside the home country that surround and influence the firm

• International Environment Interaction between domestic and foreign environmental forces or between sets of foreign environmental forces

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The Foreign Environment

• Forces are the same in all environments but occur and operate differently outside the home country.

• Forces are the same in all environments but occur and operate differently outside the home country.

• Forces:have different values

can be difficult to assess

are interrelational

• Forces:have different values

can be difficult to assess

are interrelational

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The International Environment

Consists of Interactions Between:

• Domestic and foreign environmental forces

• Between the foreign environmental forces of 2 countries when 1 does business with customers in another by crossing national borders

• Domestic and foreign environmental forces

• Between the foreign environmental forces of 2 countries when 1 does business with customers in another by crossing national borders

Affect of International Organizations

• Worldwide Bodies – World Bank, WTO

• Regional Economic Groupings – NAFTA, EU

• Organizations Bound by Industry Agreements - OPEC

• Worldwide Bodies – World Bank, WTO

• Regional Economic Groupings – NAFTA, EU

• Organizations Bound by Industry Agreements - OPEC

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Other Factors

Complexity of Decision Making

• Managers must consider the effect of EACH country they deal with and how their decisions might affect interactions between countries.

• Managers must consider the effect of EACH country they deal with and how their decisions might affect interactions between countries.

Self-Reference Criterion

• Managers tend to ascribe their own cultural values, preferences, taste, opinions to the host country.

• Managers tend to ascribe their own cultural values, preferences, taste, opinions to the host country.

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A Very Brief History of IB• Greek and Phoenician merchants traded before

Christ• China world’s leading manufacturer for 1,800 years,

replaced by Britain, 1844• Ottoman Empire trade routes <1300, Middle East,

Europe, North Africa• East India Company 1600, branches throughout

Asia; Dutch East India Company • The 17th and 18th centuries the “age of

mercantilism”• Significant multinationals in late 1800s: Singer

Sewing Machine, J&P Coates, Ford Motor Company

• Greek and Phoenician merchants traded before Christ

• China world’s leading manufacturer for 1,800 years, replaced by Britain, 1844

• Ottoman Empire trade routes <1300, Middle East, Europe, North Africa

• East India Company 1600, branches throughout Asia; Dutch East India Company

• The 17th and 18th centuries the “age of mercantilism”

• Significant multinationals in late 1800s: Singer Sewing Machine, J&P Coates, Ford Motor Company

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3 Key Terms• Foreign Direct Investment (FDI)

Direct investments of any type into a foreign country

• Foreign Direct Investment (FDI)Direct investments of any type into a foreign country

ImportingTransportation of a foreign good/service into a country

ImportingTransportation of a foreign good/service into a country

ExportingTransportation of any domestic good/service to a foreign country

ExportingTransportation of any domestic good/service to a foreign country

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Growth of International Firms and IB

International Companies• 64,000 transnational corps.

account for:• 25% of global output• 66.6% of world

trade• 866,000 foreign

affiliates• 53,000,000

employed, IB• 700% sales growth

>1990(UNCTAD estimates)

International Companies• 64,000 transnational corps.

account for:• 25% of global output• 66.6% of world

trade• 866,000 foreign

affiliates• 53,000,000

employed, IB• 700% sales growth

>1990(UNCTAD estimates)

FDI and Export Growth – World stock of outward FDI

$16.2 trillion in 2008– Growth of world merchandise

exports:• $2.0 trillion in 1980• $3.45 trillion in 1990• $16.1 trillion in 2008• $12.5 trillion in 2009

(Global recession)– Growth of world service

exports• $365 billion in 1980• $781 billion in 1990• $1.483 trillion in 2000

FDI and Export Growth – World stock of outward FDI

$16.2 trillion in 2008– Growth of world merchandise

exports:• $2.0 trillion in 1980• $3.45 trillion in 1990• $16.1 trillion in 2008• $12.5 trillion in 2009

(Global recession)– Growth of world service

exports• $365 billion in 1980• $781 billion in 1990• $1.483 trillion in 2000

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What is Globalization?

• Globalization is: The tendency toward an international

integration of goods, technology, information, labor and capital, or the process of making this integration happen.

• Globalization is: The tendency toward an international

integration of goods, technology, information, labor and capital, or the process of making this integration happen.

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Drivers of Globalization

• Political Drivers• Technological Drivers• Market Drivers• Cost Drivers• Competitive Drivers

• Political Drivers• Technological Drivers• Market Drivers• Cost Drivers• Competitive Drivers

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The details are on

pages 12 & 13 in

the text.

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Views On GlobalizationArguments Supporting Globalization

• Free Trade:– enhances

socioeconomic development

– promotes more and better jobs

• Free Trade:– enhances

socioeconomic development

– promotes more and better jobs

Concerns with Globalization

• Globalization has:– produced uneven

results across nations and people

– deleterious effects on labor and labor standards

– contributed to a decline in environment and health

• Globalization has:– produced uneven

results across nations and people

– deleterious effects on labor and labor standards

– contributed to a decline in environment and health

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Motives for Entering Foreign Markets

• Increase Profits & Sales:Enter New MarketsCreate New MarketsAvailability of Faster-Growing Markets Improved CommunicationsObtain Greater ProfitsGenerate Greater RevenueLower Cost of Goods SoldHigher Overseas Profits as an Investment Motive

• Increase Profits & Sales:Enter New MarketsCreate New MarketsAvailability of Faster-Growing Markets Improved CommunicationsObtain Greater ProfitsGenerate Greater RevenueLower Cost of Goods SoldHigher Overseas Profits as an Investment Motive

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The details are on

pages 16 - 19 in the

text.

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The 7 Dimensions for Globalizing A Business

1. Product2. Markets3. Promotion4. Value-Added5. Competitive Strategy6. Use of Non-Home-Country Personnel7. Firm’s Extent of Global Ownership

1. Product2. Markets3. Promotion4. Value-Added5. Competitive Strategy6. Use of Non-Home-Country Personnel7. Firm’s Extent of Global Ownership

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