INTERNATIONAL BUSINESS ENVIRONMENT

Part OneBackground For International Business

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“THE WORLD IS A CHAIN, ONE LINK IN ANOTHER”

-Maltese Proverb

Points to ponder

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

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Globalization in business is seen by much of the world as creating wealth that benefits the nations and individual worldwide.

Source: adapted from Paul Blustein, “A Quiet Round in Qatar”, Washington Post, January 30, 2001

BACKGROUND1-4

INTERNATIONAL BUSINESS consists of all transactions managed between one country and another country. For example, buying raw materials from one country and then transporting them to another country for processing, exporting products to other countries to be sold and building a factory at a foreign country to get cheap labours. The party which handles international transactions consists of individuals, private companies and corporate as well as government agencies.

International Business1-5

International business consists of all commercial transactions—including sales, investments, and transportation—that take place between two or more countries

Increasingly foreign countries are a source of both production and sales for domestic companies

GLOBALIZATION1-6

GLOBALIZATION is the ongoing process that deepens and broadens the relationships and interdependence among countries. Where as INTERNATIONAL BUSINESS is a mechanism to bring about globalization

Why Studying International Business?1-7

Most companies are either international or compete with international companies

Modes of operations may differ from those used domestically

The best way of conducting business may differ by country

An understanding helps you make better career decisions

An understanding helps you decide what government policies to support

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WHY STUDY INTERNATIONAL BUSINESS

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Knowledge about International Business can assist in enhancing career as well as enable effective interaction between managers and the subordinates around the world

For small business, because they might work with an organization which has headquarters abroad.

We have to have the knowledge of international business in order to compete and learn the methods as well as techniques that are used by advanced countries.

We are able to learn about cultures of other countries.

Difference Between International and Domestic Operations

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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.

THE DIFFERENCES BTW INTERNATIONAL AND DOMESTIC BUSINESS Use of Currency:

For customers who buy from foreign countries, they have to use the currency which has been fixed in the trade contract, for example, US Dollars or Japanese Yen. For domestic business, a customer should use the official currency of the country. For example, if someone living in Malaysia wants to buy things in the country, he has to use Malaysian Ringgit.

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THE DIFFERENCES BTW INTERNATIONAL AND DOMESTIC BUSINESS Legal System

Legal system is important in international business transactions. For customers who want to export or import a certain product from foreign countries, it has to abide to Custom Act and Trade Act which have been fixed by the particular country. For domestic business, customers need to abide to local law related to buy sell transactions.

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THE DIFFERENCES BTW INTERNATIONAL AND DOMESTIC BUSINESS Culture

Culture plays a vital role in international business transactions. If a local firm wants to make a direct investment in a foreign country, it has to understand the culture of the people in the country. This is because culture influences the behaviour in the usage and buying of products in the particular foreign market. For domestic business, a firm has to only understand local culture in the effort to gain their interest in buying the product.

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THE DIFFERENCES BTW INTERNATIONAL AND DOMESTIC BUSINESS Raw Materials

Each country has their own raw material which is different from one another due to climate and land factor. Most of advanced countries invest in developing countries to obtain materials which are cheap and cannot be found in their own country. For domestic business, the production of a product depends on the raw materials that can be easily found in the country.

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DEVELOPMENT OF INTERNATIONAL BUSINESS

The contributing factors for the development of international business are market development, purchasing of resources, competition pressures, technological changes, social changes, changes in government trade investment policy.

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Factors Contributing to Rapid Growth of International Business

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1. Increase in and expansion of technology2. Liberalization of cross-border trade and

resource movements3. Development of services that support

international business4. Growing consumer pressures5. Increased global competition6. Changing political situations7. Expanded cross-national cooperation

What’s Wrong with Globalization: ie. Criticisms of globalization

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Countries might lose sovereignty The result from growth may hurts the

environment. Some people might lose due to globalization

–both relatively and absolutely ie. Growing income inequality and personal stress

Offshoring – the transferring of production abroad – is controversial in terms of who benefits when costs are reduced and whether the process exchanges good jobs for bad ones.

Reasons Companies Engage in International Business1-17

To Expand Sales: > pursuing international sales increases the

potential market and potential profits To Acquire Resources: > may give companies lower costs, new and

better products, additional operating knowledge

To Diversify or Reduce Risks: > international operations may reduce operating

risk by smoothing sales and profits, preventing competitors from gaining advantage

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Modes of Operation in International Business

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exports and imports either merchandise or services

Service exports and imports includes: Tourism and Transportation Service Performance Asset Use

Investments Foreign Direct Investment (FDI) Portfolio Investment

What is called Multinational Enterprises

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Multinational Enterprises (MNEs) take a global approach to markets and production. Sometimes they are referred to as multinational corporations or companies (MNCs) or transnational companies (TNCs).

Physical and Social Factors Affecting International Business Operations

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To operate within a company’s external environment, its managers must have knowledge of business operations and a working knowledge of social sciences, and how they affect all functional business fields.

Competitive Factors Affecting International Business

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A company’s competitive strategy influences how and where it can best operate.

A company’s competitive situation may differ in terms of its relative strength and which competitors it faces.

Future of International Business and Globalization1-22

Further globalization is inevitable. International business will grow primarily

along regional rather than global lines. Forces working against further

globalization and international business will slow down both trends.

Global Institutions

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Institutions help manage, regulate, and police the global

marketplace promote the establishment of multinational

treaties to govern the global business system Examples include

the General Agreement on Tariffs and Trade (GATT)

the World Trade Organization (WTO) the International Monetary Fund (IMF) the World Bank the United Nations (UN)

Functions of Global Institutions

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The World Trade Organization (like its predecessor GATT) polices the world trading system makes sure that nation-states adhere to the rules laid down in

trade treaties promotes lower barriers to trade and investment

The International Monetary Fund (1944) maintains order in the international monetary system

The World Bank (1944) promotes economic development The United Nations (1945)

maintains international peace and security develops friendly relations among nations cooperates in solving international problems and in promoting

respect for human rights is a center for harmonizing the actions of nations

EXTERNAL INFLUENCES WHICH INFLUENCE INTERNATIONAL BUSINESS Each company that involves in

international business will face external influences which will affect international business.

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Learning Outcomes

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To define globalization and international business and differentiate or relates with one another

To understand reasons behind the acceleration growth for companies engage in international business

To outline globalization’s future and the major criticisms of globalization

To apply social science disciplines to understanding the differences between international and domestic business