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INTERNATONAL BUSINESS

– all commercial transactions between two or more countries.


– Involves modes of business that differ from those at the domestic level
– Foreign conditions diversity company's external environment
– Private firms are profit-oriented whie Government organizations may or may not be profit oriented.
Note: IB environment is more complex and diverse than the domestic business environment.

IB consists of transactions that are devised and carried out across national borders to satisfy the objectives of:
▪ INDIVIDUALS ▪ COMPANIES ▪ ORGANIZATIONS
SCOPE
NATURE • International Marketing
• Accurate Information & timely • International Finance and Investments
• The size of the international business • Foreign Exchange
• Market segmentation • Global HR
• International markets have more potential than domestic markets
IMPORTANCE
FEATURES 1. Earn foreign exchange
• Large scale operations 2. Achieve its objectives
• Integration of economies 3. To spread business risks
• Dominated by developed countries and MNCs 4. Optimum utilization of resources
• Benefits to participating countries 5. Get benefits from Government
• Keen competition 6. Improve organization's efficiency
• Special role of science and technology 7. Increase competitive capacity
8. Expand and diversify
The Need for International Business
➢ Causes the flow of ideas, services, and capital across the world
➢ Offers consumers new choices
➢ Permits the acquisition of a wider variety of products
➢ Facilitates the mobility of labor,
➢ capital, and technology
➢ Provides challenging employment opportunities
➢ Re-allocates resources, makes preferential choices, and shifts

THE FOUR TYPES OF RISKS IN IB


Cross-cultural risk: a situation or event where a cultural miscommunication puts some human value at stake
Country risk: potentially adverse effects on company operations and profitability holes by developments in the political
Currency risk: risk of adverse unexpected fluctuations in exchange rates
Commercial risk: firms’ potential loss or failure from poorly developed or executed

 Managers need to understand their implications, anticipate them, and take proactive action to reduce adverse effects.

Reasons That Firm Engage in International Business


• To expand sales – acquire resources of products, services, components also, foreign capital, technologies, information.
• To acquire resources – Products, components, services, Foreign capital, Technologies & Information
• To minimize risk
MODES OF INTERNATIONAL BUSINESS
– are the most common international economic transaction, especially for smaller companies
– Major source of international revenue and expenditures for most companies

1. SERVICE EXPORTS AND IMPORTS NONPRODUCT INTERNATIONAL EARNINGS


– Tourism and transportation
– Performance of services for a fee
– Use of assets by others
– Licensing Agreements
2. INVESTMENTS
– ownership of foreign property in exchange for financial return
a. foreign direct investment - investor gains a controlling interest in foreign company by joint or mixed venture
b. portfolio investment
3. INTERNATIONAL COMPANIES THE TERMINOLOGY
– Strategic alliance - collaborative arrangement of critical importance to the competitive viability
– Multinational enterprise (MNE)
4. LICENSING
– official or legal permission to carry on an activity
– permit from an authority to own or use something
5. FRANCHISING
– marketing system revolving around a two-party agreement, whereby the franchisee conducts business according
to the terms specified by the franchisor
* Single franchiser owner * Master franchisee
IB Measuring Globalization Is Globalization good or bad?
• Political Engagement • Threats to national sovereignty
• Economic Integration • Economic growth & Environmental stress
• Personal Contact • Growing income inequality
• Technological Connectivity • Offshoring — transferring of production abroad
— when costs are reduced whether the
External Influences process exchanged good jobs for bad ones
• Political — affect whether and how IB occurs
• Domestic and Intl Law — determines what managers can do in IB
• Economics — types of IB
• Geography — location & availability of world's resources

Managers must have:


• knowledge of business operations
• working knowledge of social scienced
• how they affect all functionsl business fields

Evolution of Strategy in IB (Patterns of Expansion)


• Passive to active pursuit of IB opportunities — initially wait for foreign opportunities
• Limited extensive modes of operation — begin with import & export
• External to Internal handling of IB — rely on intermediaries first
• Few to many locations
• Similar to Dissimilar bus environment
Why study IB?
• A facilitator of the global economy and interconnectedness
• A contributor to national economic well- being
• A competitive advantage for the firm
• An activity with societal implications
• A source of competitive advantage for you

Contributor to National Economic


• International business is both a cause and a result of increasing national prosperity.
• Prosperity is accompanied by literacy rate gains, nutrition and health care improvements, freedom and democracy

A Competitive Advantage for the Firm


• Increase Sales
• Maximize Returns – foreign markets often generate returns far superior to those in domestic markets
• Global scale economies – international players can maximize their efficiencies by securing cost-effective factor inputs
• Resource acquisition – access to otherwise unavailable critical resources

CHAPTER TWO
CULTURE
– specific learned norms based on attitudes, values, and beliefs that exist in every nation
– integral part of external environments
CULTURAL AWARENESS
– It is vital that managers develop an acute awareness of all those cultures in which they operate. cultures are dynamic,
current attitudes and behaviors may well change in the future.
Social stratification systems
• Ascribed group membership – gender, family, age, and caste – ethnic, racial, or national origin
• Acquired group membership – religion, political affiliation, and professional and other associations

Characteristics that affect status


– Competence — competition versus cooperation
– gender-based groups
– age-based groups
– family-based groups
– occupation

Motivation — countries differ in how much people are motivated to work and why
• Materialism and leisure
– Protestant ethic—work a means to salvation
– most people consider economic achievement to be commendable, regardless of culture
• Expectation of success and reward
— people are more eager to work if:
– rewards for success are high » may have different rewards for success and consequences of failure
– some uncertainty of success » may have different probabilities of success

MASCULINITY INDEX — degree of admiration for success, sympathy for unfortunate, for being better than others
• High masculinity cultures – roles differentiated by gender – men should dominate
• Low masculinity culture – need for smooth social relationships
– employee and social welfare has higher priority than growth and efficiency
NEED HIERARCHY — lower-order needs must be fulfilled prior to higher-order needs
• Hierarcgy of needs
1. Physiological
2. Security
3. Affliation
4. Esteem
5. Self-actualization

POWER DISTANCE — describes relationship between superiors and subordinates


• High — people prefer little consultation – autocratic or paternalistic management
• Low — consultative styles preferred – easier to implement worker participation Individualism versus collectivism

INDIVIDUALISM — low dependence on organization and desire for personal time, freedom, and challenge
– self-actualization a prime motivator
COLLECTIVISM — dependence on organization
– value secure physical and social environments

RISK-TAKING BEHAVIOR
1. Uncertainty avoidance – handling uncertainty
2. Trust – degree of trust among people, leads to lower cost of doing business
3. Fatalism—belief in inevitability of events rather than self-determination
High fatalism—people plan less for contingencies
4. Future orientation – delaying gratification, planning ahead/optimism
Information processing
▪ All cultures have ordering and classifying systems
Monochronic — preference for sequential work
Polychronic — comfortable working on several tasks simultaneously

CULTURE SHOCK – Frustration from having to learn to cope with new cultural cues and expectations

Company and Management Orientations


POLYCENTRISM – overly cautious response to cultural variety
– decentralized structure
ETHNOCENTRISM – belief that home-country practices and objectives should prevail
– ignores important local factors
GEOCENTRISM – between polycentrism and ethnocentrism
– based on informed knowledge of home- and hostcountry needs, capabilities, and constraints
– Preferred approach to IB

Small And Medium Enterprises in The Philippines


• 99.1% of the businesses are small and medium enterprises (SMEs) and only 0.99% are large enterprises
• Republic Act No. 9501, The Magna Carta for Micro, Small and Medium Enterprises (MSMEs), signed by President
Arroyo - micro enterprises as entities with total assets of not more than Php 3,000,000, small enterprises
• The new law, R.A. 9501 amends the 17-year old R.A. 6977 or the Magna Carta for Small Medium Enterprises.
• SMEs are perceived to have greater linkages to microenterprises (backward linkage) and medium and large
businesses (forward sub-contracting links).
Value Added – have well-developed manufacturing capabilities and are able to reap the benefits of changes

ASSET SIZE
• Micro - less than Php3, 000,001
• Small - Php3, 000,001 up to Php15, 000,000
• Medium - Php15, 000,001 up to Php100, 000,000
• Large - Above Php 100M

EMPLOYMENT SIZE SMES may also be defined by the number of employees.


• Micro - regular employs less than 10 workers
• Small - 10 -99 workers
• Medium - 100 - 199 workers

BUSINESSES EXEMPT FROM MINIMUM WAGE LAWS


• If the company is a service establishment with not more than 10 employees
• A distressed establishment with a deficit of 20% or more of current paid-up capital
• A new business enterprise outside the National Capital Region (NCR) or
• is in an export processing zone

NOTE: the company may pay employees below minimum wage rates on condition that a request is filed for exemption from
compliance with wage orders with the National Wage and Productivity Council (NWPC)
If the company does not pay minimum wages
• It will be subject under Republic Act No. 8188 to a fine not less than (P25.000) nor more than (P100.000) or imprisonment
of not less than two years nor more than four years or both such fine and imprisonment at the discretion of the court

Computation of Wages
• Monthly-paid employees – you pay every day of the month, inc unworked rest days, special days and regular holidays.
• Daily-paid employees – you pay for days actually worked and on unworked regular holidays.

Equivalent Monthly Rate (EMR) of your employees is computed as follows:


• Formula for the EMR of monthly paid employees is:
EMR = (Applicable Daily Rate x 365)/12
The factor of 365 days consists of: 302 ordinary working days, 51 rest days, 10 regular holidays, and 2 special day

Workers who are paid by results, including home workers and those who are paid on piecework, takay, pakyaw, or task basis,
shall receive not less than the applicable statutory minimum wage rates prescribed.

Apprentices, learners or handicapped workers you would need to pay them no less than 75% of the applicable statutory wage

PREMIUM PAY
– companies need to pay employees premium pay if you require them to perform work on non-working days, such as rest days
and special days.
–The company may opt not to pay your managerial employees, workers paid by results or field personnel the above premium
pay
OVERTIME PAY
– company requires employees to perform work beyond eight hours a day the company would need to pay them
additional compensation as follows:
Overtime Rate
Work > 8 hours on ordinary working days 25%
Work > 8 hours on rest day or special or regular holidays 30%

13TH MONTH PAY


– company also needs to pay rank and file employees 13 than December 24 of every year.
– one half of the required 13th month pay no later the month pay may be made before the opening of the regular
school year and the other half on or before the 24th of December of every year. The minimum 13th month pay is not
less than 1/12 of the total basic salary earned by an employee within a calendar year.

CHAPTER THREE
POLITICAL & SOCIAL FACTORS
• Political policies and legal practices
- role of govt in society
- political ideologies
- political risk
- legal environment
- operational and strategic legal issues
• Cultural factors
• Economic forces
• Geographic Influences
* Managers - evaluate, monitor & forecast
* POLITICAL SYSTEM - structural dimensions & power dynamics of its govt that specify institutions, orgs & interest group
• POLITICAL ENVIRONMENT - constitutes the type of govt, relationship between govt & the business & political risk in the
country

POLITICAL FACTORS
— form of govt & political party system — trade restrictions & reform
— political ideology & role of govt — tariffs
— tax policy — political stability
— environmental regulations

• Governmental influences on trade:


*gov't policies & regulations affect all aspects of importing and exporting
*legal systems regulate trade
*companies must be able to work within various political & legal systems to be competitive internationally
*be aware of the ways of government shape economic policies and practices

TYPES OF GOVERNMENT
1. DEMOCRATIC
— nation citizens hold political power
— right, freedom & responsibilities of individual
— market economy - economic system based on supply & demand
2. TOTALITARIANISM
— gov't control all aspects of life
— including attitudes, values and beliefs
KINDS:
• THEOCRATIC - religious leaders
*theocracy - leader claims to be inspired by divine guidance (iran/afghanistan)
• SECULAR - comes from military/single political party

DEMOCRACY
— citizens politically and legally equal
— all are entitled to freedom of thought
— equally command sovereign power over public officials

TYPES: CHARACTERISTICS:
*representative 1. freedom of opinion, expression, press & freedom to organize
*multiparty 2. elections in which voters decided who is to represent them
*parliamentary 3. limited terms for elected officials
*social 4. independent & fair court system
5. nonpolitical bureaucracy
6. accessibility to the decision making process
TOTALITARIANISM
— subordinates the individual to the interest of the collective
• dissent is eliminated thru indoctrination, persecution, surveillance, propaganda, violence
TYPES: ENGINES OF TOTALITARIANISM ENGINES PF DEMOCRACY
• Authoritarianism *economic development *failure of totalitarian regimes to deliver economic progress
• Fascism *inconsistencies *improved communications tech
• Secular *economic problems *economic dividends of increasing political freedom
• Theocratic *standards of democracy

SPECTRUM ANALYSIS
• DEMOCRATIC • TOTALITARIANISM
- Reactionary - Authoritarian
- Conservative - Facist
- Liberal - Communist
- Radical - Dictatorship

MIXED SYSTEM
- combination of both
- citizens free to trade and create companies thru the govt still directs the economy

1. ISOLATIONISM
- foreign policy that combines an avoidance of political & military alliances
- govt protects its economy by closing its borders (discourages immigration & trade)
ECONOMIC POLICIES & PRACTICES
• INTERNATIONAL TAX
A. INCOME TAX - annual tax on indiv/corp net proft
- progressive - higher taxes, higher salaries
- regressive - higher taxes, lower salaries
- flat - pays taxes the same
B. SALES TAX - on sale of the products
C. EXCISE TAX - levied on specific goods/services, incl prices of the products
D. PAYROLL TAX - employees required to withhold emp' paycheck
E. VALUE ADDED TAX - paid on the increased value of good

• TRADE BARRIERS
a. Duties - goods that cross national borders
b. Tariffs - import tax
c. Quotas, embargoes, licensing reqs & exchange rate controls

• FREE TRADE (INCREASE TRADE)


a. improve economic well being of people.in the country
b. bring goods & services that otherwise would not be available
c. build political alliances

POLITICAL RISK - risk that political decisions in a country negatively affect the profitability of an investment
TYPES of PR:
• systemic • distributive
• procedural • catastrophic

• TRADE SANCTIONS - use of tariff, boycott, embargo to make a political statement


• EXPROPRIATION - act of taking control and ownership of a foreign owned
• ECONOMIC NATIONALISM - practice of discouraging thw importing goods
• POLITICAL TURBULENCE - disruptions such as protest, strikes / other social disorder
• WAR

LEGAL ENVIRONMENT
• host country laws • home country laws

• COMMON LAW - based on local customs, traditions & precedent (something has come before)
• CIVIL LAW - set of codes based on broad legal principles
- based on codes written over time
- must understand countries codes when doing a business
*THEOCRATIC LAW - based on religious teachings

Typical Forms of Host Country Controls


• EXPROPRIATION – taking of property w/ compensation
• CONFISCATION – taking of property w/o compensation
more:
• DOMESTICATION - moving of an existing business to a new state
• LOCAL-CONTENT - materials, workers, etc. used to make a product
• EXCHANGE CONTROLS - government-imposed limitations on the purchase and/or sale of currencies
• OVER INVESTMENT - more money is spent on something than is needed or wise
• TAX POLICIES - guidelines and principles established by a government for the imposition and collection of taxes.
• PRICE CONTROLS - government-mandated minimum or maximum prices set for specific goods and services

Laws & Regulations


• PRODUCT SAFETY & CONSUMER PROTECTION
*liability - legal responsibilities for the financial cost of another

• LABOR LAWS - vary from country to country


*minimum wages rates
*length of the work week & overtime
*hiring, firing & layoff policies
*age which person can work
*right to form a labor union
*right to strike

• INTELLECTUAL PROPERTY - original work fixed in a tangible medium of expression


*copyright - legal protection of a creator's product
*trademark - device that legally identifies ownership of a brand
*patent - exclusive rights to manufacture or sell an invention
• LICENSING REQUIREMENTS - must comply
* knowing the reqs
* meeting the reqs in cost-effective way
* successfully completing the paperwork

• RESOLVING LEGAL DISPUTES


* Litigation - solve thru the court system
* Mediation - intervention bet. conflicting parties outside the court
* Arbitration - each sides presents its case to an independent
- makes decision that is binding

OPERATIONAL CONCERNS STRATEGIC CONCERNS


• Operational issue - Strategic issues
- starting a business - Country of origin & local content
- entering & enforcing contracts - Marketplace behavior
- hiring & firing local workers - Product safety & liability
- closing down the business - Legal jurisdiction
- Intellectual Property
• In general
- rich countries regulate less
- poor countries regulate more
CHAPTER FOUR
INTERNATIONAL BUSINESS ENVIRONMENT
International Business
— buying and selling of the goods and services across the border.
— national border are crossed by the enterprises to expand their business activities like manufacturing, mining, etc

TRADE
— means exchange of goods and services for the satisfaction of human wants.
— Domestic or national trade is confined to the geographical limits of a country
— International or foreign trade refers to the trade between two countries.

Differences between Domestic and International Business


• Difference in Currencies
• Difference in Natural and Geographical Conditions
• Mobility of Factors of Production
• Sovereign Political Entities
– Imposition of tariffs and customs duties on imports and exports
– Quantitative restrictions like quotas
– Exchange controls
– Imposition of more local taxes
• Different Legal Systems
IMPORTANCE OF IBE
• Helps in expansion:
— geographic expansion may be used as a business strategy
• Helps in managing product life cycle:
— when the product reaches the last stages of life cycle in present market, it may get proper response at other
markets.
• Technology advantages:
— helps the company in capturing other markets.
• New business opportunities:
— help in expansion of many companies & might have reached a saturation point in domestic market.
• Proper use of resources:
— sometimes industrial resources like labor, minerals are available but are not productively utilized
• Availability of quality products:
— when markets are open, better quality goods will be available every where.
• Earning foreign exchange:
— may be used for strategic imports.
• Helps in mutual growth:
— countries depend upon each other for meeting their requirements.
• Investment in infrastructure:
— international business necessitates proper development of infrastructure.
PROBLEMS IN INTERNATIONAL BUSINESS
• Controlling the market:
— whenever they enter a new country, the first strategy is to eliminate the competitors either by taking over their
business or forcing them out of the market by following price reduction policies.
• Exhausting natural resources:
— set up their production facilities in those countries where natural resources are available in sufficient quantities.
• Importance to luxuries:
— enter those areas where margin of profits is high.
• Trade practices:
— since multinational corporations have their head office in one country
• Economic development:
— entry of businessmen from outside may help in the economic development of that country
• Shifting of investment:
— if a business is getting sufficient profits in a particular country then the investment remains there.

NEED FOR INTERNATIONAL BUSINESS


— causes the flow of ideas, services, and capital across the world
— offers consumers new choices
—permits the acquisition of a wider variety of products
— facilitates the mobility of labor, capital, and technology
— provides challenging employment opportunities
— reallocates resources, makes preferential choices, and shifts activities to a global level
TRENDS IN IB
• Trade between partners of Regional Trade Agreements (RTAs)
• Developing countries’ trade
— It is observed that developing countries are increasingly becoming an important destination for the exports of developed
countries.
• South-South trade
— Merchandise trade between developing countries, i.e. South-South trade. • Intra-regional trade, in particular through RTAs,
• Air Cargo; Express cargo
— reported that world air cargo accounts at present for a small portion of world merchandise trade by weight, but a significant
portion by value.
• Global production network
— share of manufactured goods within world merchandise trade has grown significantly throughout the world.
• Intra-firm trade
— trade within the same company around one-third of world merchandise trade,
— trade between high and middle income countries was directly related to the internationalization of production.
• E-commerce
— has dominant factor in international trade and business
— can reduce business costs in seeking potential foreign business partners
— enables firms to take more opportunities to expand their business
INTERNATIONAL TRADE THEORIES
• THEORY OF MERCANTILISM (16th to the ¾ of 18th centuries)
— beliefs in nationalism and the welfare of the nation alone
— power of a nation lied in its wealth
Note: Mercantilists failed to realize that simultaneous export promotion and import regulation are not possible in all
countries, and the mere possession of gold does not enhance the welfare of a people.
— keeping the resources in the form of gold reduces the production of goods
— was rejected by Adam Smith and Ricardo by stressing the importance of individuals
• THEORY OF ABSOLUTE COST ADVANTAGE
— propounded by Adam Smith (1776), arguing that the countries gain from trading, if they specialise according to their
production advantages.
— The pre-trade exchange ratio in Country I would be 2A=1B and in Country II IA=2B.
— terms of trade between the trading partners would depend upon their economic strength and the bargaining power
• Theory of Comparative Cost Advantage
— Ricardo (1817) pointed out cost advantage to both the trade partners was not a necessary condition for trade to occur.
— so long as the other country is not equally less productive in all lines of production, it will still be mutually gainful for them
if they enter into trade.
• HECKSCHER-OHLIN MODEL LEONIEF PARADOX

TYPES OF INTERNATIONAL BUSINESS


• Export-import trade • Licensing
• Foreign direct • Management contracts
• Investment • Franchising

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