Introduction

to
International Business

Instructor: Madan Dhungana (MBA, Mphil ScholarTU)

 Contents

 Globalization

 Introduction to International Business

 International Business Environment

 Protection V/s Liberalization of Global Business Environment

 CONCEPT OF GLOBALIZATION
Globalization is the process whereby systems expand from being regional or
national to encompass the entire planet.
This is a broad trend that has been underway for centuries.
The following are common examples of globalization
 Trade
 Law
 Immigration
 Environment
 Travel
 Human rights
 Communication
 Political stability
 Knowledge and entertainment
 Capital
 Culture
 Science and inventions
 CONCEPT OF GLOBALIZATION
Benefits Drawbacks
 Create jobs

 Lowers prices  National sovereignty erodes

 Improved access to technology  Destroys the environment
 Improved productivity  Spread of infectious diseases
 Competitive pressures to  Threat to social cultural values
improved governance
 Trade imbalance
 Freer movement of labor
 Dominant global brands
 Competitive markets reduce
monopoly profits
WHAT IS INTERNATIONAL BUSINESS ?

 The exchange of

goods & services,

Resources,

Knowledge,

& Skills, among individuals & businesses in multiple/two or more countries.

 Transactions that are carried out across national borders to satisfy the objectives

of individuals and organizations

 FEATURES OF IB

1. Large scale operations

2. Integration of economies

3. Dominated by developed countries and MNCs

4. Benefits to participating countries

5. Keen competition

6. Special role of science and technology

7. International restrictions
 IMPORTANCE OF IB
1. Earn foreign exchange

2. Optimum utilization of resources

3. Achieve its objectives

4. To spread business risks

5. Improve the organization's efficiency

6. Get benefits from Government

7. Expand and diversify

8. Increase competitive capacity

GOING INTERNATIONAL
 MOTIVATION For I B
1. Proactive:

 To increase profit

 To take advantage of the product life cycle

 To achieve Economies of scale

2. Reactive:

 Competitive pressures

 Overproduction and excess capacity

 Declining domestic sales

 Saturated domestic markets

 Challenges IN I B

1. Political factors

2. High foreign investments and high-cost

3. Quality Management

4. Entry requirements

5. Tariffs, quotas etc.

6. Corruption and bureaucracy

7. Technological policy
 ADVANTAGES OF I B

1. Faster growth

2. Access to cheaper inputs

3. Increased quality and efficiency

4. New market opportunities

5. Diversification
DISADVANTAGES OF I B

1. Increased costs

2. Foreign regulations and standards

3. Delays in payments

4. Complex organizational structure

5. BOP crisis
 REASONS FOR RECENT GROWTH IN I B

1. Expansion of technology
2. Business is becoming more global because
•Transportation is quicker
•Communications enable control from afar
•Transportation and communications costs are more conducive for international
operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources enable
Companies to take better advantage of international opportunities
 Factors causing globalization of business

 Advancements in Technology: Technologies such as the internet, telecommunications, and

transportation have significantly reduced barriers to communication and transportation, enabling
businesses to operate globally with greater ease.

 Trade/Market Liberalization: Trade agreements and policies aimed at reducing tariffs, quotas, and
other trade barriers have facilitated increased international trade and investment, leading to
globalization.

 Globalization of Production: Companies have increasingly fragmented their production processes and
established global supply chains to take advantage of cost efficiencies, specialized skills, and resources
available in different countries.

 Emergence of Multinational Corporations (MNCs): MNCs have expanded their operations across
borders, leveraging their resources, technologies, and economies of scale to compete globally.
 Factors causing globalization of business

 Rise of Emerging Markets: The rapid economic growth of emerging markets, such as China, India, Brazil, and others,
has created new opportunities for businesses to expand internationally and tap into growing consumer markets.

 Cultural Exchange and Consumer Demand: Increased cultural exchange through media, travel, and globalization has
led to greater homogenization of consumer preferences and increased demand for international products and services.

 Financial Integration: Global financial markets, including foreign exchange, capital markets, and banking systems, have
become increasingly interconnected, facilitating cross-border investment and capital flows.

 Government Policies and Regulations: Government policies, both domestic and international, play a significant role in
shaping globalization through trade agreements, investment regulations, intellectual property rights protection, and
other measures.

 Environmental and Social Pressures: Environmental concerns, social movements, and labor standards have prompted
businesses to adopt more sustainable and socially responsible practices, often leading to global collaborations and
partnerships.
Components of global business environment
 Analysis of environment forces

 As an organization's environment expands from domestic to international,

managements face not only a larger number of environmental elements but also
far greater environmental complexity.

 The international environment is the interaction between

 The domestic environmental forces and the foreign environmental forces

and

 The foreign environmental forces of one country and those of another

country.
 ANALYSIS OF ENVIRONMENT FORCES
 PESTNG ANALYSIS:

 PESTNG analysis is an analysis of the political, economic, social &

technological, natural and global factors in the external environment of an
organization, which can affect its activities & performance.

 PESTNG analysis describes a framework of macro-environmental factors

used in the environmental scanning component of international business
management.

 It is a part of the external environmental analysis, & gives an overview of

the different macro environmental factors that the company has to take
into consideration.
 POLITICAL AND LEGAL SYSTEMS
 Political forces:

 Political forces are principal to what degree the government intervenes

in the economy.

 Specifically, political factors include areas such as tax policy, the labor
law, environmental law, trade restrictions, tariffs, & the political stability.

 Political factors may also include goods & services which the government
wants to provide or be provided (merit goods) & those that the
government does not want to be provided (demerit goods).

 Furthermore, governments have great influence on the health, education,

& infrastructure of a nation.
 POLITICAL AND LEGAL SYSTEMS

 Political and legal system

 A political system is basically the system of politics and government in a country.

 It governs a complete set of rules, regulations, institutions, and attitudes.

 A main differentiator of political systems is each system’s philosophy on the rights of the individual and the
group as well as the role of government.

 Each political system’s philosophy impacts the policies that govern the local economy and business
environment. Some of the five more common political systems around the world include:

 Democracy

 Republic

 Monarchy

 Communism

 Dictatorship
 POLITICAL AND LEGAL SYSTEMS
 Political climate: stability and security, types of governments and
philosophies

 Nationalism , political risks, international and diplomatic relationships

 International laws and institutions

 All legal provisions on trade and investment that affect the operation and
development of foreign business firms and companies, and enforcement
mechanism.
 POLITICAL AND LEGAL SYSTEMS
 Legal system

 Each country has its own regulations on external transactions such as

import, export, customs, foreign exchange, registration, taxation, transfer
of money and technology, foreign investments etc

 Attractiveness of a country for business investment also relies on the

extent to which legal environments are favorable

 Three important consideration

 Types of laws prevailing in a foreign country

 The court system where the laws are adjudicated, and

 The law enforcement mechanism

 Actors in political and legal system
 Government:

 The government, or the public sector is the most important actor,

operating at national, state, and local levels.

 Governments have the power to enact and enforce laws.

 They are influential in how firms enter host countries and how they
conduct business there.

 Governments regulate international business activity through

institutions, agencies, and public officials.
 ACTORS IN POLITICAL AND LEGAL SYSTEM
 International Organizations

 Supranational agencies such as the World Trade Organization ,United Nations ,

and the World Bank have a strong influence on international business activities.

 Such organizations help facilitate free and fair trade by providing administrative
guidance, governing frameworks, and, occasionally, financial support.

 Regional Economic Blocs

 Regional trade organizations, such as the European Union (EU), the North
American Free Trade Agreement (NAFTA), and the Association of Southeast
Asian Nations (ASEAN), aim to advance the economic and political interests of
their members.
 POLITICAL RISK
 Political risk

 Political risks are risks associated with changes that occur within a country's
policies, business laws, or investment regulations.

 Other influential factors include international relationships and any other

situation which may have an influence on the economy of a given country.

 A common example of political risk is countries that are in political upheaval.

 Many countries are experiencing changes in social attitudes and perspectives

as of late, causing unrest, changes in politics and political movements that are
disrupting economies.

 Conflicts in the Middle East, Chinese debt problems, American policies and
disputes over resources around the globe directly affect international
investment opportunities.
 Assessment of political risk
 National security (wars, revolution, coups etc)

 Expropriation and state ownership or nationalization

 Privatization

 Political embargoes and sanctions

 Embargoes are complete ban on all commercial activities between two

countries

 Sanction prohibits trade in certain types of goods, eg American sanction on

Cuba, Iran, Syria, North Korea

 Activisms and movements

 Violence and terrorism

 Hostilities ( India Vs Pakistan, Arab vs Israel, Hutus Vs Tutsis , Tamil Vs Sinhalese,

Us Vs Al Queda and Iraq, Black Vs White in SA)
 Assessment of political risk
 A rise in political risk has a variety of impacts on a country and
companies operating within its borders.

 While the most noticeable impact is a decline in equity prices, many

countries facing higher political risk factors experience reduced foreign
direct investment (FDI), which can prove destabilizing.

 A reduction in FDI can lead to slower economic growth across the board,
as well as potential social issues.

 Social issues, such as wage gaps, inequality, and corruption can lower the
value of international equities.
 MANAGING POLITICAL RISK
 Managing Political Risk

 The first step in managing political risk is understanding that these risks
are often worth taking in order to maintain a diversified portfolio.

 Even if you keep all of your investments in the U.S., you are still exposed
to decisions made in Washington D.C.

 Investors should maintain a diversified portfolio in order to avoid any

specific political risk significantly impacting the overall portfolio.

 Diversification should include hedging the risk that is inherent to

international investments.
 ANALYSIS OF ENVIRONMENT FORCES

 Reducing political risk

 Creating positive attitude about foreign investment

 Careful selection of entry strategy

 Technology transfer and management

 Insurance of investment

 Strong bilateral agreement

 Negotiation

 Political lobbying and bribery

 Legal areas of managerial concern

Strategic concerns Operational concerns

 Product safety, liability and national standards

 Business registration and establishment
 Marketing related regulations
 Contract and contract enforcement
 Local content requirement
 Pricing and wages
 Protection of intellectual property rights
 Hiring and firing
 Ownership laws
 Bribery and corruptions
 Foreign exchange
 Bankruptcy or closing down of a
 Environmental concerns company
 ANALYSIS OF ENVIRONMENT FORCES
 Economic factors

 Economic factors include economic growth, interest rates, exchange rates & the inflation
rate.

 These factors have major impacts on how businesses operate & make decisions.

 For example, interest rates affect a firm’s cost of capital & therefore to what extent a
business grows & expands.

 Exchange rates affect the costs of exporting goods & the supply & price of imported goods
in an economy.
 ANALYSIS OF ENVIRONMENT FORCES
 Socio-cultural factors include the cultural aspects & include health consciousness,
population growth rate, age distribution, career attitudes & emphasis on safety.

 Trends in the social factors affect the demand for a company’s products & how that a
company operates.

 For example, an aging population may imply a smaller & less-willing workforce (thus
increasing the cost of labor).

 Components of culture are grouped into two forms:

 Surface culture: foods, life-styles, education, language, material culture etc.

 Deep culture: attitudes, beliefs, religions, aesthetic values, social organization etc.
 ANALYSIS OF ENVIRONMENT FORCES
 Why culture matters in International business?

 Changing socio-cultural environment- social class, caste, lifestyles, family system

 Cultural universals and standardization- sports, food, dance, art, languages, education

 Cultural empathy

 Power distance- high Vs low

 High context culture- persons word is his/her bond (Japan, Middle east, China and India) and low
context culture- less importance attached to persons background and relationship, written contracts and
documents are valued ( USA and Europe)

 Social behaviors -Asking anything about spouse and other ladies in house is considered
inappropriate in Middle east and Pakistan, folding of two palms while greeting in Nepal, India,
Thailand
 ANALYSIS OF ENVIRONMENT FORCES
 Complexity of doing business across cultures

 It is often difficult to do business across cultures because much of business involves understanding
one's business partners and their thoughts and expectations.

 When we do business with one another, much of what we think and expect remains unspoken.

 We know how business is done in our culture. When we speak to our partners, we will know what
they mean when they say various things.

 When we do business across cultures, that easy understanding is not present.

 We and our partners may not share assumptions.

 We might not understand what the other means when we speak, even if we are speaking the same
language.

 This can lead to all sorts of misunderstandings that can harm our relationships with our business
partners.
 ANALYSIS OF ENVIRONMENT FORCES
 Technological factors include technological aspects such as R & D activity, automation,
technology incentives & the rate of technological change.

 They can determine barriers to entry, minimum efficient production level & influence
outsourcing decisions.

 Furthermore, technological shifts can affect costs, quality, & lead to innovation.

Technological advancement and their impact on International business

 Digital transformation: Emerging technologies redefine business processes, automation, and

data-driven decision-making.

 Global connectivity: Enhanced connectivity fosters global collaborations, remote work, and
virtual market expansion.

 Cybersecurity: Data protection and cyber resilience become paramount in interconnected

global operations.
 ANALYSIS OF ENVIRONMENT FORCES
 Natural factors: Natural components are the physical environment and resources that
affect business operations worldwide. These factors can significantly impact various aspects
of international business, including production, distribution, and marketing strategies.

 Natural Resources: The availability and quality of natural resources such as water, minerals,
energy sources, and agricultural products can significantly impact international trade
patterns and competitiveness in various industries.

 Geographical Factors: Geographical features such as terrain, climate, and proximity to

waterways affect transportation costs, logistics, and supply chain management for
international businesses.

 Environmental Sustainability: Growing concerns about environmental sustainability and

climate change influence international business practices, creating demand for eco-friendly
products, sustainable supply chains, and compliance with environmental regulations.
 ANALYSIS OF ENVIRONMENT FORCES
 Global factors: Global components shape international business by emphasizing the
connectivity of economies, markets, and societies worldwide. Key factors include:

 Trade Agreements and Tariffs: These agreements and barriers affect market access, pricing
strategies, and competitiveness. Changes impact supply chains and market dynamics.

 Globalization: This process integrates markets, economies, and cultures, offering market
expansion and talent access. However, it increases competition and regulatory complexity.

 Technology and Communication: Advances enable faster communication, efficient supply

chains, e-commerce, and remote collaboration.

 Political and Regulatory Environment: Political instability and regulatory differences pose
risks. Understanding diverse environments is vital for global expansion.

 Global Economic Trends: Factors like economic growth, inflation, and exchange rates influence
decisions and market opportunities, with regional fluctuations impacting global markets.
 Protectionism Vs Liberalization of Global
Business:
 Protectionism means any departure from free trade designed to give some protection
to local or domestic industries from foreign competition.
 In other words, Protectionism is the economic policy of restraining trade between
states through methods such as tariffs (taxes on imports), import quotas (limits on
foreign goods), subsidies to domestic producers, regulatory barriers, and buy-local
policies.
 “Infant Industry Argument” is the main argument in favor of Protectionism.

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 Liberalization of Business (Free Trade):

 It is a type of economic policy in which governments do not restrict exports and

imports of goods and services.
 Free trade allows businesses to trade more frequently, resulting in a greater exchange
of goods and services.
 Businesses also can save money by finding cheaper labor.

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 Main Features of free Trade:

 Trade of goods and Services without barriers.

 Without taxes

 Absence of Regulation policies which restrict trade.

 Access to markets

 Lack of Govt. Imposed Monopoly/Oligopoly.

 Agreements in favor of free trade etc.

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 Consequences of Free Trade
or
Liberalization of global business:
 Liberalization of business often leads to a loss of jobs through outsourcing.

 Infant Industries may be discouraged.

 Dependency may be increased.

 Loss of Revenue to the government.

 Outflight of domestic capital

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 Discussion Question:
 Prepare an Individual discussion paper on Protectionism Vs Free Trade Policy of
International Business in Context of Nepal.

Outline:
o Status of Nepalese foreign Trade
o Pros and cons of Liberalization of trade in Nepal
o Implementation of Free Trade economic system in Nepal
o Comparison /Debatable issues
o Conclusion.

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Deadline: 27th May, 2024