International Business

Course Instructor:
Asghar Ali Sahito
 The Nature and Scope of
International Business

 International Business (IB) deals with the nature, strategy

and management of international business enterprises and
their effects on business and national performance (e.g.,
efficiency, growth, profitability, employment)

 IB is interdisciplinary. It draws, among others, on economics,

politics, sociology, marketing, management (human
resources, strategic).

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 Need Of International
Business.
International business: 6. reallocates resources, makes
1. causes the flow of ideas, preferential choices, and shifts
services, and capital across activities to a global level
the world.
2. offers consumers new
choices
3. permits the acquisition of
a wider variety of
products
4. facilitates the mobility of
labor, capital, and
technology
5. provides challenging
employment opportunities
 Key Definitions

 FDI is the control of production which takes place in one

country (‘host country’) by a firm based in another country
(‘home country’). FDI is the defining feature of the
multinational corporation (MNC)

 Globalisation refers to the increasing integration of markets

(exchange) and production, to include the mobility of
resources (capital, labour, ‘organization and knowledge’).

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 Key Definitions

 A firm is an organisation which produces commodities for

sale in the market for a profit, and allocates resources (such
as capital and labour) without direct reliance on the price
mechanism (the market) on the basis of
internal entrepreneurial decisions (hierarchy)

 An MNC is a firm which controls production in countries other

than (and including) its home base.

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 Key Definitions

 The market (price mechanism) is an institution of resource

allocation, based on voluntary exchanges (transactions) by
individuals, motivated by preferences and market prices.

 The state is an institution which allocates resources and

influences the organization of economic activity through a
legal monopoly on force.

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 Globalization
 There was a time when most regions were economically self-
sufficient. Locally produced foods, fuels and raw materials were
generally processed for local consumption. Trade between
different regions was quite limited.

 Today, the economies of most countries are so interconnected

that they form part of a single, interdependent global economy.
 What is Globalization?

 The world is toward an interdependent, integrated global

economic system
 Compression of Time & Space
 Globalization refers to the shift toward a more integrated
and interdependent world economy, including two
facets:
 Globalization of markets
 Globalization of production

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 Types of Globalization

1. Economic
Countries that trade with many others and have few trade barriers
are economically globalised.

2. Social
A measure of how easily information and ideas pass between
people in their own country and between different countries
(includes access to internet and social media networks).

3. Political
The amount of political co-operation there is between countries.
 Causes of Globalization:
1. Improved Communications
 The development of communication
technologies such as internet, email and
mobile phones have been vital to the growth
of globalisation because they help MNCs to
operate throughout the world.
 The development of satellite TV channels such
as Sky and CNN have also provided worldwide
marketing avenues for the concept and
products of globalisation.
 Causes of Globalisation
2. Improved Transport

 The development of refrigerated and container

transport, bulk shipping and improved air transport
has allowed the easy mass movement of goods
throughout the world. This assists globalisation.
 Causes of Globalisation:
3. Free Trade Agreements

 MNCs and rich capitalist countries have always

promoted global free trade as a way of increasing
their own wealth and influence.
 International organisations such as the World Trade
Organisation and the IMF also promote free trade.
 Causes of Globalisation:
4. Global Banking
 Modern communication technologies allow vast amounts of
capital to flow freely and instantly throughout the world.
 The equivalent of up to $US1.3 trillion is traded each day
through international stock exchanges in cities such as New
York, London and Tokyo.
 Causes of Globalisation:
5. The Growth of MNCs
 The rapid growth of big MNCs such as Microsoft, McDonalds and
Nike is a cause as well as a consequence of globalisation.
 The investment of MNCs in farms, mines and factories across the
world is a major part of globalisation.
 Globalisation allows MNCs to produce goods and services and to
sell products on a massive scale throughout the world.
 The Effects of Globalisation:
1. Changed Food Supply
 Food supply is no longer tied to the seasons. We can buy food
anywhere in the world at any time of the year.
 The Effects of Globalisation:
2. Division of Labour
 Because MNCs search for the cheapest locations to
manufacture and assemble components, production
processes may be moved from developed to
developing countries where costs are lower.
 The Effects of Globalisation:
3. Less Job Security
 In the global economy jobs are becoming more temporary and
insecure.
 A survey of American workers showed that people now hold 7 to 10
jobs over their working life.
 The Effects of Globalisation:
4. Damage to the Environment

 More trade means more transport which uses more fossil

fuels and causes pollution.
 Climate change is a serious threat to our future.
 The Effects of Globalisation:
5. Cultural Impact

 Websites such as YouTube connect people across the planet.

As the world becomes more unified, diverse cultures are being
ignored. MNCs can create a monoculture as they remove local
competition and thereby force local firms to close.

Replacing
 The Effects of Globalisation
6. Increase in anti-Globalisation Protests

 There is a growing awareness of the negative impacts of

globalisation. People have begun to realise that globalisation
can be challenged by communities supporting each other in
business and society and through public protest and political
lobbying.
 Globalization of Markets

 Globalization of markets refers to the merging of

historically distinct and separate national
markets into one huge global marketplace.
 Instead, there is the “global market”
 falling trade barriers make it easier to sell globally
 consumers’ tastes and preferences are converging
 firms promote the trend by offering the same basic
products worldwide
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 Example: Starbucks was a single store in Seattle's
Pike Place Market selling premium-roasted coffee.
Today it is a global
But customised
 Levis Jeans
 McDonald
 Left Hand Vs Right Hand Drive Cars

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 Globalization of Production

 Globalization of production refers to the sourcing of

goods and services from locations around the globe to
take advantage of national differences in the cost and
quality of factors of production like land, labor, and
capital.
 Factor of Production
Land, Labor, Capital
 Companies can
lower their overall cost structure
improve the quality or functionality of their product
offering

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Example:
 Honda
 IBM
 Iphone

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 Global Institutions

 Institutions are needed to

 help manage, regulate, and police the global marketplace
 promote the establishment of multinational treaties to govern
the global business system
 Examples include
 General Agreement on Tariffs and Trade (GATT)
 World Trade Organization (WTO)
 International Monetary Fund (IMF)
 World Bank
 United Nations (UN)
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 Global Institutions
 The World Trade Organization (WTO) (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
 As of 2009, 153 member nations collectively accounted for
97% of world trade
 The International Monetary Fund (IMF) (1944)
maintains order in the international monetary
system

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 Global Institutions

 The World Bank (1944) promotes economic

development, focusing on making low-
interest loans governments in poor
nations
 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

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 Drivers of Globalization
Two macro factors underlie the trend toward
greater globalization:
Declining trade and investment barriers
 since 1950, average tariffs have fallen
significantly and are now at about
4%
 countries have opened their markets
to FDI
Technological change
 microprocessors and
telecommunications
 the Internet and World Wide Web
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Average Tariff Rates on Manufactured
Products as Percent of Value

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 Implications for Business
 Lower barriers to trade & investment mean firms can
 view the world as their market
 base production in the optimal location for that activity
 Technological change means
 lower transportation costs - help create global markets
 lower information and communication costs
 low-cost global communications networks - help
create an electronic global marketplace
 global communication networks and global media -
create a worldwide culture, and a global market for
consumer products

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 The Changing Demographics
of the Global Economy
 There has been a drastic change in the
demographics of the world economy in the last 30
years
 Four trends are important:
1. Changing World Output and World Trade Picture
2. Changing Foreign Direct Investment (FDI) Picture
3. Changing Nature of the Multinational Enterprise
(MNE)
4. Changing World Order

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 Changing World Output & World
Trade Picture
 In 1960, the US accounted for over 40% of world
economic activity; by 2008, it accounted for
just over 20% of world economic activity
 A similar trend occurred in other developed
countries
 The share of world output accounted for by
developing nations is rising and is expected to
account for more than 60% of world
economic activity by 2020
 From 1963 to 2008, China’s share of world GDP
increased to 11.2%
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The Changing Demographics of World GDP & Trade

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 Has FDI Changed Over Time?
 In the 1960s, U.S. firms accounted for about
two-thirds of worldwide FDI flows; today, the
US accounts for less than one-fifth of worldwide
FDI flows
 Other developed countries have followed a
similar pattern
 In contrast, the share of FDI accounted for by
developing countries has risen
 Developing countries, especially China, have
also become popular destinations for FDI

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Percentage Share of Total FDI Stock 1980-2007

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FDI Inflows 1988-2008

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 Multinational Enterprise (MNE)

 A MNE is any business that has productive

activities in two or more countries
 Since the 1960s, two notable trends in the
demographics of the MNE:
1. The rise of non-U.S. multinationals – a relative decline in the
dominance of U.S. firms in the global marketplace
2. The growth of mini-multinationals – international business
(IB) is conducted not just by large firms but also by
medium-size and small enterprises

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 MNE

 MNE or MNC
 Global company: integrates its operations that are
located from different countries. (owned and
managed by two different countries)

 Multi-Domestic company: Allow each of its foreign

company to act fairly independently. packaging and
producing products according to country(coca cola
MC donald)

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 The Changing World Order

 Many former Communist nations in Europe and Asia are

now committed to democratic politics and free market
economies
 so, there are new opportunities for IB

 China and Latin America are also moving toward

greater free market reforms
 between 1983 and 2008, FDI in China increased from less
than $2 billion to $90 billion annually
 but, China also has many new strong companies
that
could threaten Western firms
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 Global Economy of 21st Century

 The world is moving toward a more global

economic
system…
 But Globalization brings risks
 the financial crisis that swept through Southeast Asia in the
late 1990s
 the recent financial crisis that started in the U.S. in 2008, and
moved around the world

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 The Globalization Debate
 Supporters believe that increased trade and cross-
border investment mean
 lower prices for goods and services
 greater economic growth
 higher consumer income, and more jobs
 Critics worry that globalization will cause
 job losses
 environmental degradation
 the cultural imperialism of global media and MNEs
 Anti-globalization protesters now regularly show up
at most major meetings of global institutions

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 Increased competition among nations

Example:
 For example, many companies have shifted their production
facilities to emerging markets such as China and India to enjoy
lower costs of production.
 Benefiting from the increased revenue, these countries are
able to rapidly develop their infrastructure such as road
networks and industrial parks, which further increased their
attractiveness to foreign investors.
 This poses a strong challenge for developed economies like
Singapore and Taiwan and more so for less developed
countries with poor infrastructure and political stability such as
Cambodia and East Timor.
 Globalization, Jobs and Income

 Critics argue that falling barriers to trade are destroying

manufacturing jobs in advanced countries

 Supporters contend that the benefits of this trend

outweigh the costs
countries will specialize in what they do most efficiently and trade for
other goods—and all countries will benefit

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 Increased competition among nations

 “They (economists) predict that increased competition from low-

wage countries will destroy jobs in richer nations and there will be
a “race to the bottom” as countries reduce wages, taxes, welfare
and environmental controls so as to be more competitive, at
enormous social cost. Pressure to compete will erode the ability of
governments to set their own economic policies and the move
towards deregulation will reduce their power to protect and
promote the interests of their people.”
World Health Organization
 Globalization, Labor Policies and the
Environment

 Critics argue that firms avoid costly efforts to adhere to labor

and environmental regulations by moving production to
countries where such regulations do not exist, or are not
enforced

Lead from batteries

 Supporters claim that tougher environmental and labor

standards are associated with economic progress
as countries get richer from free trade, implement
they tougher environmental and labor regulations

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 Globalization & the World’s Poor
 Is the gap between rich nations and poor nations is
getting wider?

Critics believe that if globalization was beneficial there

should not be a divergence between rich and poor
nations

Supporters claim that the best way for the poor nations
to improve their situation is to
 Reduce barriers to trade and investment
 Implement economic policies based on free
market
economies
 Microfinance
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 Managing in the Global Marketplace

Managing IB differs from managing a domestic business

because
 Countries are different
 The range of problems confronted in IB is wider and the
problems more complex than those in a domestic
business
 Firms have to find ways to work within the limits imposed
by government intervention in the international trade and
investment system
 International transactions involve converting money into
different currencies
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 Review Questions
1. The shift toward a more integrated and
interdependent world economy is referred to as
.
2. The merging of historically distinct and separate
national markets into one huge global
marketplace is known as .
3. Firms that are involved in international business
tend to be .
4. Which is not a factor of production?
a) Trade b) Land
c) Capital d) Energy

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 Review Questions
5. The sourcing of good and services from around
the world to take advantage of national
differences in the cost and quality of factors of
production is called .
6. Which organization is responsible for policing
the world trading system?
7. What is the single most important innovation
to
the globalization of markets and production?

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 Review Questions
8. Which of the following trends is true?

a) The US is accounting for a greater percentage of

world trade than ever before
b) The US is accounting for a greater percentage of
foreign direct investment than ever before
c) The share of world trade accounted for by
developing countries is rising
d) The share of foreign direct investment by
developing countries is declining

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 Review Questions
9. Which of these is not a concern of anti- globalization
protesters?

a) globalization raises consumer income

b) globalization contributes to environmental
degradation
c) globalization is causing a loss of manufacturing
jobs in developed countries
d) globalization implies a loss of national sovereignty

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Q1. Where did the original idea for the Starbucks’ format come from?
What lesson for international business can be drawn from this?

The original idea for the Starbucks format came from Italy. The founder of
Starbucks, Howard Schultz, was inspired to start the chain after experiencing
Italy’s coffeehouses on a visit to the country.

 This shows that opportunities for international business exist everywhere.

Howard Schultz for example, was able to take a concept that had been
popular in Italy for decades and successfully duplicate it in the United
States, and then elsewhere in the world. Similarly, McDonald’s and KFC
have been very successful at creating a market for American fast food
around the world.

 Competition from foreign markets can transform industries. U.S. car

makers were forced to respond to the demand for better quality vehicles
after Japanese automakers successfully invaded the U.S. auto market
and make quality a key buying point.
Q2. What drove Starbucks to start expanding internationally? How is the
company creating value for its shareholders by pursuing and international
expansion strategy?
After Starbucks grew from a single store to more than 700 locations in just a
decade, the company began to explore growth opportunities elsewhere. Today,
Starbucks operates more than 16,700 stores in some 50 countries. Not only has
this strategy increased profits for the company, which is of course a clear benefit
for stockholders, it has also diversified the company’s earnings base providing
another benefit to stockholders.
Q3. Why do you think Starbucks decided to enter the Japanese market
via a joint venture with a Japanese company? What lesson can you draw
from this?

 A 50/50joint venture with SazabyInc.

 Starbucks required all managers and employees to attend the same training
provided to U.S. Managers.
 The JV use the same store design and menu.
 The Japanese company provided Starbucks with a local connection to the
market.

 Lesson :

 This type of strategy can be very helpful to companies that are just
beginning their international expansion.
Q4. Is Starbucks a force for globalisation? Explain your answer.

Starbucks experience in some 50 countries.

Created a global market that transcends national and cultural borders.

Similarities with other global operators such as McDonalds.

Any other companies you can think of?

 Q5. When it comes to purchasing coffee beans, Starbucks adheres to a “fair
trade” program. What do you think is the difference between fair trade and free
trade? How might a fair trade policy benefit Starbucks?

 Fair trade: non-exploitative and environmentally sound growing policies

 Free trade: trade without barriers.
 Starbucks’ fair trade program is designed to empower small coffee growers
and
at the same time, protect the environment.
 Engaging with consumers (Brand Value enhancement)