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INTERNATIONAL BUSINESS
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The World Market Places
International Environment
Managing International Business
Managing International Business Operations
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CHAPTER 1 – THE WORLD
MARKET PLACES
• An overview of international business
• Global marketplaces and business centers
• Legal, technological and political forces
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• An Overview of International Business
– International business consists of transactions
that are devised and carried out across
national borders to satisfy the objectives of
individuals, companies and organizations.
– Primary types of international business are
export-import trade and direct foreign
investment.
– Additional types of international business are
licensing, franchising, and management
contracts.
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– According to Wild and Han (2006)
international business is any commercial
transaction that crosses the borders of two or
more nations.
– No matter where you live, you’ll be surrounded
by imports – all goods and services brought
into a country that are acquired from
organizations located abroad.
– Export - all goods and services produced or
based in one country that are sold abroad.
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• Global Links Today
– International business has forged a network
of global links around the world that binds us
all – countries, institutions, and individuals –
much closer than ever before.
– These links tie together trade, financial
markets, technology and living standards in
an unprecedented way.
– Example: the sudden decline in the Mexican
peso affected financial market around the
world.
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• Global marketplaces and business centers
– Globalization of markets refers to convergence
in buyer preferences in markets around the
world. This trend is occurring in many product
categories, including consumer goods,
industrial products and business services.
– Clothing retailer, L.L.Bean, shoe producer Nike
and electronics maker Sony are just a few
companies that sell so-called global products –
products marketed in all countries essentially
without any changes.
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– Semiconductors (Intel, Philips)
– Aircraft (Airbus, Boeing)
– Construction equipment (Caterpillar, Mitsubishi)
– Autos (Honda, Volkswagen)
– Financial services (Citicorp, HSBC)
– Air travel (Lufthansa, Singapore Airlines)
– Accounting services (Ernest & Young)
– Consumer goods (Procter & Gamble, Unilever)
– Fast food (KFC & McDonald’s)
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– Globalization of markets is important to
international business because:
• Reduces marketing costs
• Create new market opportunities
• Levels uneven income streams
• Yet local needs are important
• Refer to International Business, The
Challenges of Globalization, John Wild,
Kenneth Wild & Jerry Han, 2006, 3rd
edition. Pg. 8
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• Example of international business centers
International Business Center (IBC) is Hong Kong's premier fullservice business center. Since 1986 we have been providing all of
our clients, in-house as well as overseas, with the most extensive
range of professional services available.
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• What makes international business special is
that it occurs within a dynamic, integrated
systems that weaves together four distinct
elements:
– The forces of globalization
– Many national business environment
– The international business environment
– International firm management
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• Legal, technological and political forces
– A political system includes the structures,
processes and activities by which a nation
governs itself.
– Politics and culture are closely related. A
country’s political system is rooted in the
history and culture of its people. Factors
such as population, age and race
composition and per capita income influence
a country’s political system.
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– Political Risk
• All companies doing business internationally
confront political risk – the likelihood that a
government or society will undergo political
changes that negatively affect local business
activity.
• Political risks arise from a variety of sources,
including the following:
–Corrupt or poor political leadership
–Frequent changes in the form of
government
–Political involvement of religious or
military leaders
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An unstable political system
Conflict among races, religions or
ethnic groups
Poor relations with other countries
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• Types of political risk
– Conflict and violence
– Terrorism and kidnapping
– Property seizure
– Policy changes
– Local content requirements
• Managing political risk
– Adaptation
– Information gathering
– Influencing local politics
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• Legal Systems
– A country’s legal system consists of its law
and regulations, including the processes by
which its law are enacted and enforced
and the ways in which its courts hold
parties accountable for their actions.
– A legal system is influenced by many
cultural variables, including class barriers,
religious beliefs and whether individualism
or group conformity is emphasized.
– A country’s legal system is also influenced
by its political system.
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• Types of Legal Systems
– Common Law
• Tradition: a country’s legal history
• Precedent: past cases that have come
before the courts
• Usage: the ways in which laws are
applied in specific situation
– Civil Law
• Based on a detailed set written rules and
statutes that constitute a legal code.
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– Theocratic Law
• A legal tradition based on religious
teachings. Three prominent theocratic
legal systems are Islamic, Hindu and
Jewish law.
• Example: according to Islamic law banks
cannot charge interest on loans or pay
interest on deposits. Instead, borrowers
give banks a portion of the profits they
earn on their investments and depositors
receive returns based on the profitability
of their bank’s investments.
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• Global Legal and Ethical Issues
– Standardization
• Refers to uniformity in interpreting and
applying laws in more than one country,
not to the standardizing of entire legal
systems.
• Treaties and agreements do exists in
several areas, including intellectual
property rights, antitrust regulation,
taxation, contract arbitration and general
matter of trade.
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– Intellectual Property
• Property that results from people’s
intellectual talent and abilities. It
includes graphic designs, novels,
computer software, machine-tool design
and secret formulas, such as making
Coca-Cola.
• Patent – property right granted to the
inventor of a product or process that
excludes others from making, using or
selling the invention.
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• Trademarks – property right in the form of
words or symbols that distinguish a
product and its manufacturer.
• Copyrights – property right giving creators
of original works the freedom to publish or
dispose of them as they choose.
• A copyright holder has rights such as the
following:
–To reproduce the copyrighted work
–To derive new works from the
copyrighted work
–To sell or distribute copies of the
copyrighted work
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• Taxation
– Tax levied on each party that adds value to
a product throughout its production and
distribution.
• Antitrust Regulations
– Laws designed to prevent companies from
fixing prices, sharing markets, and gaining
unfair monopoly advantages.
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CHAPTER 2 – INTERNATIONAL
ENVIRONMENT
• International trade and investment theory
• Foreign exchange and international financial
markets
• Formulation of nation trade policies
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• International Trade and Investment Theory
– International Trade
• Purchase, sale or exchange of goods
and services across national borders.
– Benefits of International Trade
• Opening doors to new entrepreneurial
opportunity across the globe. It also
provide a country’s people with a greater
choice of goods and services.
• An important engine for job creation in
many countries.
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• Volume of International Trade
– Most of world merchandise trade is
comprised of trade in manufactured goods.
– Trade and World Output – the level of
world output in any given year influence
the level of international trade in that year.
– Another reason output and trade move
together is that a country in recession also
often has a currency that is weak relative
to other nations.
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• International Trade Patterns
– Exploring the volume of international trade
and world output provides useful insights
into the international trade environment.
– Custom agencies in most countries record
the destination of exports, the source of
imports and the physical quantities and
values of goods crossing their borders.
– Who trades with whom? – trade between
the world’s high-income economies
accounts for 60% of total world
merchandise trade.
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– Two-way trade between high-income
countries and low and middle-income
nations accounts for about 34% of world
merchandise trade.
– Trade Dependence and Independence
• Effect on developing and transition
nations
• Dangers of trade dependency
• Balance between dependence and
independence
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• Theories of International Trade
– Mercantilism
• Trade theory that nations should
accumulate financial wealth, usually in
the form of gold, by encouraging exports
and discouraging imports.
• It states that other measures of a
nation’s well-being, such as living
standards or human development, are
irrelevant.
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– Just how did countries implement mercantilism?
• Trade surplus – the condition that results
when the value of a nation’s exports is
greater than the value of its imports.
• A trade deficit – one that results when the
value of a country’s imports is greater than
the value of its exports.
• Government intervention – the accumulation
of wealth depended on increasing a nation’s
trade surplus, not necessarily expanding its
total value or volume of trades.
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– Colonization – mercantilist nations acquired
less-developed territories (colonies) around
the world to serve as sources of inexpensive
raw materials and as markets for higherpriced finished goods.
– Colonies were the source of many essential
raw materials, including tea, sugar, tobacco,
rubber and cotton.
– Flaws of Mercantilism – believed that the
world’s of its neighbors- called a zero-sum
game. The main problem is that if all nations
were to barricade their markets from imports
and push their exports onto others,
international trade would be severely
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• Absolute Advantage
– Ability of a nation to produce a good more
efficiently than any other nation.
– With an absolute advantage can produce a
greater output of a good or service than
other nations using the same amount of or
fewer, resources.
• Comparative Advantage
– Inability of a nation to produce a good
more efficiently than other nations, but an
ability to produce that good more efficiently
than it does any other good.
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• Factor Proportions Theory
– Trade theory holding that countries
produce and export goods that require
resources (factors) that are abundant and
import goods that require resources in
short supply.
– Labor versus land and Capital Equipment
• It predicts that a country will specialize in
products that require labor if the cost of
labor is low relative to the cost of land
and capital.
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• International Product Life Cycle
– Theory holding that a company will begin
by exporting its product and later
undertake foreign direct investment as the
product moves through its life cycle.
– Stages of the Product Life Cycle
• New product stage
• Maturing product stage
• Standardized product stage
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• New Trade Theory
– Holding that 1) there are gains to be made
from specialization and increasing
economies of scale, 2) the companies first
to market can create barriers to entry, and
3) government may play a role in assisting
its home companies.
– First-mover advantage – economic and
strategic advantage gained by being the
first company to enter an industry.
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• How Exchange Rates Influence Business
Activities?
– The intentional lowering of the value of a
currency by the nation’s government is
called devaluation. The reverse, the
intentional raising of its value by the
nation’s government is called revaluation.
– Devaluation lowers the price of a country’s
exports on world markets and increases
the price of imports because the country’s
currency is now worth less on world
markets.
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– Devaluation reduces customer’s buying
power. It also allow inefficiencies to persist
in domestic companies because there is
now less pressure to be concerned with
production costs.
– Revaluation has the opposite effects: it
increases the price of exports and reduces
the price of imports.
– Exchange rates affect the amount of profit
a company earns from its international
subsidiaries.
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• What factors determine exchange rates?
– Law of One Price – principle that an
identical item must have an identical price in
all countries when the price is expressed in
a common currency.
– Purchasing Power Parity – is the relative
ability of two countries’ currencies to buy the
same ‘basket’ of goods in those two
countries. Suppose 650 baht in Thailand will
buy a bag of groceries that cost $30 in USA.
Use: Thai GNP/capita =122,277 baht
– U.S. GNP/capita = 26,980 dollar
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• Role of Inflation
– Impact of money-supply decisions
– Impact of unemployment
– How exchange rates adjust to inflation?
• Role of Interest Rates
– Fisher effect – principle that the nominal
interest rate is the sum of the real interest
rate and the expected rate of inflation over
a specific period.
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• Forecasting Exchange Rates
– Efficient Market view – view that prices of
financial instruments reflect all publicly
available information at any given time.
– Inefficient Market view – view that prices of
financial instruments do not reflect all publicly
available information.
– Forecasting techniques – fundamental analysis
– technique using statistical models based on
fundamental economic indicators to forecast
exchange rates. Technical analysis – using
charts of past trends in currency prices and
other factors to forecast exchange rates.
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• International Financial Markets
– Collection of agreements and institutions
governing exchange rates.
– Early Years: The Gold Standard –
international monetary system in which
nations linked the value of their paper
currencies to specific values of gold.
– Bretton Woods Agreements (1994) –
among nations to create a new
international monetary system based on
the value of the U.S. dollar.
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• Today’s Exchange-Rate Arrangements
– Pegged Exchange-Rate Arrangement
– Currency Board – monetary regime that is
based on an explicit commitment to
exchange domestic currency for a
specified foreign currency at a fixed
exchanged rate.
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• Formulation of Nation Trade Policies
– Strategy formulation permits managers to
step back from day-to-day activities and
get a fresh perspective on the current and
future direction of the company and its
industry.
– Identify company mission and goals –
written statement of why a company exists
and what it plans to accomplish.
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• Formulate Strategies
– Multinational strategies – adapting
products and their marketing strategies in
each national market to suit local
preference.
– Global strategy – offering the same
products using the same marketing
strategy in all national markets.
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CHAPTER 3 – MANAGING
INTERNATIONAL BUSINESS
• International Strategic Management
• International Strategic Alliances
• Controlling the International Business
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• International Strategic Management
– International Strategic Management is an
ongoing management planning process
aimed at developing strategies to enable
an organization to compete internationally.
The process of developing a particular
international strategy is referred to as
'strategic planning'.
– International strategies for multiple
countries are similar to the strategies used
in a single country.
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– An organization must be able to answer
the following questions:
• What products or services does the
organization intend to sell?
• Where and how will the organization
make those products or services?
• Where and how will the organization sell
those products or services?
• Where and how will the organization
acquire the resources?
• How does the organization expect to
outperform its competitors?
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– Complexity in developing an international
strategy
• In a domestic country, you only have to
consider one national government, one
currency, one accounting system, one
political and legal system and usually a
similar culture. In foreign countries, you are
talking about multiple governments,
multiple currencies, multiple accounting
systems, multiple political and legal
systems and a large variety of languages
and cultures.
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– In foreign countries, there are the possibility
of:
• local languages required in many
situations
• very diverse cultures, both between
countries and sometimes even within
countries
• often volatile politics
• varied economic systems
• scarcity of skilled labor, in which case you
would be talking about training or
redesigning
• poorly-developed financial market
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• problems and exorbitant costs in obtaining
market research data
• limited advertising, subjected to lots of
restrictions
• possible low literacy rate, not to mention
the possibility of making mistakes in the
language when advertising
• currency exchange fluctuation
• inadequate or limited communication
• mandatory worker participation
management in some countries
• legal restrictions on laying off of workers
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• International Strategic Alliances
– Strategic Alliance is a formal relationship
formed between two or more parties to
pursue a set of agreed upon goals or to
meet a critical business need while
remaining independent organizations.
– Partners may provide the strategic alliance
with resources such as products,
distribution channels, manufacturing
capability, project funding, capital
equipment, knowledge, expertise, or
intellectual property.
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– The alliance is a cooperation or
collaboration which aims for a synergy
where each partner hopes that the benefits
from the alliance will be greater than those
from individual efforts. The alliance often
involves technology transfer (access to
knowledge and expertise), economic
specialization], shared expenses and
shared risk.
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• Strategic alliances often bring partners the
following benefits:
– Access to their partner's distribution
channel and international market presence
– Access to their partner's products,
technology, and intellectual property
– Access to partner's capital
– New markets for their products and
services or new products for their
customers
– Increased brand awareness through
partner's channels
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– Reduced product development time and
faster-to-market products
– Reduced R&D costs and risks
– Rapidly achieve scale, critical mass and
momentum (Economies of Scale - bigger is
better)
– Establish technological standards for the
industry and early products that meet the
standards
– By-product utilization
– Management skills
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• Stages of Alliance Formation
– Strategy Development: Strategy
development involves studying the
alliance’s feasibility, objectives and
rationale, focusing on the major issues and
challenges and development of resource
strategies for production, technology, and
people. It requires aligning alliance
objectives with the overall corporate
strategy.
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– Partner Assessment: Partner assessment
involves analyzing a potential partner’s
strengths and weaknesses, creating
strategies for accommodating all partners’
management styles, preparing appropriate
partner selection criteria, understanding a
partner’s motives for joining the alliance
and addressing resource capability gaps
that may exist for a partner.
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– Contract Negotiation: Contract negotiations
involves determining whether all parties
have realistic objectives, forming high
caliber negotiating teams, defining each
partner’s contributions and rewards as well
as protect any proprietary information,
addressing termination clauses, penalties
for poor performance, and highlighting the
degree to which arbitration procedures are
clearly stated and understood.
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– Alliance Operation: Alliance operations
involves addressing senior management’s
commitment, finding the caliber of
resources devoted to the alliance, linking of
budgets and resources with strategic
priorities, measuring and rewarding
alliance performance, and assessing the
performance and results of the alliance.
– Alliance Termination: Alliance termination
involves winding down the alliance, for
instance when its objectives have been
met or cannot be met, or when a partner
adjusts priorities or re-allocated resources
elsewhere.
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– An alliance can fail for many reasons (Vyas
et. al 1993; Duysters et al, 1999)
• failure to understand and adapt to a new
style of management
• failure to learn and understand cultural
differences between the organisations
• lack of commitment to succeed
• strategic goal divergence
• insufficient trust
• operational and geographical overlap
• unrealistic expectations
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• Controlling the International Business
– Every company’s goals and strategies are
influenced by both its competitive strengths
and the challenges it faces in the
marketplace.
– Every partner must be firmly committed to
the goals of the cooperative arrangement.
Many companies engage in cooperative
forms of business, but the reasons behind
each party’s participation are never
identical.
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– Although the importance of locating a
trustworthy partner seems obvious,
cooperation should be approached with
caution.
– Companies can have hidden reasons for
cooperating.
– Each party’s managers must be comfortable
working with people of other cultures and
travelling to other cultures.
– A suitable partner must have something
valuable to offer. Managers must be certain
that they are getting a fair return on their
cooperative efforts.
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CHAPTER 4 – MANAGING
INTERNATIONAL BUSINESS
OPERATIONS
• International Marketing
• International Operations Management
• International Financial Management
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• International Marketing
– Globalization is transforming the way in which
some products are marketed internationally.
– Some companies implement a global strategy
that uses similar promotional message and
themes to market the same product around
the world.
– Others find products require physical changes
so that they suit the tastes of consumers in
market abroad.
– Others need different marketing campaigns to
reflect the unique circumstances of local
markets.
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• Standardization versus Adaptation
– Influence of National Business Environments
where consumers in different national
markets often demand products that reflect
their unique tastes and preferences.
– Cultural, political, legal and economic
environments have a great deal to with the
preferences of both consumers and industrial
buyers worldwide.
– Product standardization is more likely when
nations share the same level of economic
development.
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– Developing Product Strategies
• Law & Regulations – companies must
adapt their products to satisfy the laws
and regulations in a target market.
• The fact that many developing countries
have fewer consumer-protection laws
creates an ethical issue for some
companies.
• Cultural Differences – adapt their
products to suit local buyer’s product
preferences that are rooted in culture.
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• Brand and Product – a brand name is the
name of one or more items in a product line
that identifies the source or character of the
items.
• Brand is the central of a product’s personality
and the image that it presents to buyers.
• A strong brand can become a company’s
most valuable asset and primary source of
competitive advantage.
• Companies need to review the image of their
brand from time to time.
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• National Image – the value that customers
obtain from a product is heavily influenced
by the image of the country in which it is
designed, manufactured or assembled.
• If affects buyer’s perceptions of quality and
reliability, national image is an important
element of product policy.
• We consider the influence of a country’s
name when thinking of Italian shoes,
German luxury cars, Japanese electronics.
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– Counterfeit Goods and Black Markets
• Is common among highly visible brandname consumer goods including
watches, perfumes, clothing,
movies,music and computer software.
• Counterfeit products are typically sold to
consumers on what is called the black
market – a marketplace of underground
transactions that typically appears
because a product is either illegal or
tightly regulated.
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• Creating Promotional Strategies
– Push and pull strategies
• Pull strategies – promotional strategy designed
to create buyer demand that will encourage
channel members to stock a company’s
product.
• Push strategies – promotional strategy to
pressure channel members to carry a product
and promote it to final users of the product.
• International advertising – managers must rely
on their knowledge of a market to decide
whether an ad is suitable for the company’s
international promotional
efforts.
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• Factors that affect Pricing Decisions
– Transfer prices – price charged for a good or
service transferred among a company and its
subsidiaries.
– Arm’s length price – free-market price that
unrelated parties charge one another for a
specific product.
– Price controls – upper or lower limits placed
on the prices of products sold within a
country.
– Dumping – occurs when the price of a good
is lower in export markets than it is in a the
domestic markets.
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• International Operations Management
– Production Strategy
• Capacity planning – process of assessing a
company’s ability to produce enough output
to satisfy market demand.
• Facilities location planning – selecting the
location for production facilities. Location
economies benefits derived from locating
production activities in optimal locations.
• Facilities layout planning – deciding the
spatial arrangement of production
processes within production facilities.
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• Acquiring Physical Resources
– Make-or-Buy decision – deciding whether
to make a component or to buy it from
another company.
– Vertical integration – extension of company
activities into stages of production that
provide a firm’s inputs (backward
integration) or absorb its output (forward
integration).
– Outsourcing – practice of buying from
another company of good or service that is
not central to a company’s competitive
advantage.
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• Raw materials
– Some industries and companies rely
exclusively on the quantity of locally
available raw materials.
– The quality of raw material has a huge
influence on the quality of a company’s end
product.
– For instance, food-processing companies
must examine the quality of the locally
grown fruit, vegetables, grains and other
ingredients.
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• Key Production Concerns
– Quality-Improvement Efforts
– Companies strive towards quality
improvement for two reasons – costs and
customer value.
– First, quality products help keep production
costs low because they reduce waste in
valueable inputs, reduce the cost of
retrieving defective products from buyers,
and reduce the disposal costs that result
from defective products.
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– Second, some minimum level of
acceptable quality is an aspect of nearly
every product today.
– A company that succeeds in combining a
low-cost position with a high-quality
product can gain a tremendous competitive
advantage in its market.
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• Total Quality Management
– Emphasis on continuous quality
improvement to meet or exceed customer
expectations involving a company-wide
commitment to quality-enhancing
processes.
– ISO 9002 – is an international certification
that companies get when they meet the
highest quality standards in their industries.
To become certified, companies must
demonstrate the reliability and soundness
of all business processes that affect the
quality of their products.
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• Shipping and Inventory Costs
– When the cost of getting inputs into the
production process is a large portion of the
product’s total cost, producers tend to
locate close to the source of those inputs.
– Shipping costs are affected by many
elements of a nation’s business
environment, such as level of economic
development like airports, roads and rail
networks.
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• Reinvestment versus Divestment
– Companies often continue to reinvest
profits in markets that require long payback
periods as long as the long-term outlook is
good.
– Example: corruption, red tape, distribution
problems, and a vague legal system
present challenges for non-Chinese
companies.
– Most companies invested in production
facilities to take advantage of a low-cost
labor pool and low-cost energy.
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• Borrowing
– International companies try to get the lowest
interest rates possible on borrowed funds.
– Borrowing locally can be advantageous,
especially when the value of the local
currency has fallen against half of the home
country.
– Back-to-back loan is loan in which a parent
company deposits money with a host-country
bank, which then lends the money to a
subsidiary located in the host country.
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• Issuing Equity
– Companies issue such stock primarily to
access pools of investors with funds that are
unavailable domestically.
– Complying with all the rules and regulations
governing the operation of a particular stock
exchange costs a great deal of time and
money.
– Venture capital – financing obtained from
investors who believe that the borrower will
experience rapid growth and who receive
equity (part ownership) in return.
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– Emerging stock markets – emerging stock
markets commonly experience extreme
volatility. An important contributing factor is
that investments into emerging stock
markets are often so-called hot money –
money that can be quickly withdrawn in
times of crisis.
– Patient money – foreign direct investment
in factories, equipment and land – cannot
be pulled out as readily.
– Companies that issue equity on their
countries’ emerging stock markets are
often plagued by poor market regulations.
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• Internal Funding
– Internal equity, debt and fees – spin-off
companies and new subsidiaries typically
require a period of time before they
become financially independent.
– Equity is often purchased solely by the
parent company, which obviously enjoy
great influence over the subsidiary’s
decision.
– If subsidiary perform well, the parent earns
a return from the appreciating share price,
which reflects the increasing valuation of
the company.
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• Capital Structure
– Mix of equity, debt and internally generated
funds used to finance a company’s activities.
– Debt requires periodic interest payments to
creditors such as banks and bondholders.
– If the company defaults on interest payments,
creditors can take the company to court to
force it to pay – even forcing it into
bankruptcy.
– The basic principles of capital structure do
not vary from domestic to international
companies.
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