Chapter One: An Over View of International Business

Introduction
The business across the borders of the countries has
been carried out many years ago.

 The post WWII witnessed unexpected expansion of

national companies into international or
multinational companies b/c of certain
developments in national and international
developments of many countries in the world.
For instance, Soviet union , East Germany and
many East European countries like Yugoslavia have
transformed their socialist economies in to capitalist
economies.

 And also many countries like India have

liberalized their economies making more open for
foreign trade.

Improvement in communication, and transportation

also are changes among the others that facilitated
increased international business in the present
 Definition of International Business

• IB is also called “ Global Business”.

• IB- is concerned with business activities/

transactions that are carried out across the two or
more national borders. Eg. Ethiopia and China

• IB – business activities that cross the national

borders.
 Scope of International Business
• IB is much broader in its scope. It involves:
-International Marketing
-International investment
-Management of foreign exchange
-Management of International HR
-Management of cultural diversity
-Mgt of international production, etc
 The global business carried out in varies ways:
- import and export
-Foreign direct investment(FDI)
-Licensing , Franchising, join venture, etc
Eg. Sheraton, Hilton Coca Cola are either franchising or
 Importance of International Business

• Business firm go globally to maximum the benefit

and minimize the risks ( would be more profitable
than domestic firms)
• The advantages of IB are:
-Wider market opportunities
-Reduced risks (diversification)
-Increased socio economic welfare
-Large scale economies
-Potential untapped market
-Division of labor/specilization
 -Economic growth of the world
-Cultural transformation
(it brings the world in to attractive traditional village)
 Why( Reasons) to pursue International Business
• The factors which motivates firms to go
internationally may be broadly divided in two:
1. Pull Factors ( proactive reasons)
2. Push factors( reactive reasons)
• The pull factors, most of which are proactive
reasons, are those forces of attraction which pull
the business to the foreign markets.

• In other words, companies are motivated to

internationalize because of the attractiveness of the
foreign market.
• Such attractiveness include, the relative
profitability potential and growth prospects
• The push factors refer to the compulsions of the
domestic market, like saturation of the market,
which prompt companies to internationalise.

• Domestic market constraints and sever competition

in home country (in develop economy , domestic
firms may go for developing countries when
domestic competition is high)

• Most of the push factors are reactive reasons.

• Important reasons for going international are
described below.
– Profit advantage
– Growth opportunities
– Domestic market constraints
– Competition
– Government policies and regulations
– Monopoly power
– Spin off benefits
– Strategic vision
 Profit Advantage

– An important incentive for international business is

the profit advantage.
– International business could be more profitable than
the domestic.
– One of the important motivations for foreign
investment is to reduce the cost of production (by
taking advantage of the cheap labour, for example).
While in some cases, the whole manufacturing process
of a product may be carried out in foreign locations, in
some cases only certain of it are done abroad. Almost
20 per cent of the merchandise imported into United
States is manufactured by foreign branches of
American companies.
 Growth opportunities

• To take advantage of the business opportunities in

other countries. MNCs are getting increasingly
interested in a number of developing countries as
the income and population are rapidly rising in
these countries.

• Of the one billion people estimated to be added

to the world population between 1999 and 2014,
only about three per-cent will be in the high
income economies.
• Many companies could achieve the growth they
realised only because of the foreign markets.
Foreign markets both in the developed country
and developing country, provide enormous
growth opportunities for firms of the developing
country too.

• For example, in recent years, a number of Indian

pharmaceutical firms have achieved a much faster
growth of their foreign business than the
domestic.
 Domestic market constraints

• Drive many companies towards expanding the

market beyond the national border. The market
for a number of products tend to saturate or
decline in the advanced countries. This often
happens when the market potential has been
almost fully tapped.

In the United States, for example, the stock of several

consumer durables like cars, TVs, etc. exceed the total
number of households. It is estimated that in the first
quarter of the 21st century, the population in some of
the advanced economies would saturate or would
grow very negligibly, and in some others there would
be a decline. Such demographic trends have very
adverse effect on certain line of business. For
example, the fall in the birth rate implies contraction
of market for several baby products.
– Another type of domestic market constraint arises
from the scale economies. The technological advances
have increased the size of the optimum scale of
operation substantially in many industries making it
necessary to have foreign market, in addition to the
domestic market, to take advantage of the scale
economies.

– It is the thrust given to exports that enabled certain

countries like South Korea to set up economic size
plants. In the absence of foreign markets, domestic
market constraint comes in the way of benefiting from
the economies of scale in some industries.

– For example, for a certain chemical product, the

minimum economic size of the plant is 35000 tonnes
but the demand for it in India by the end of the
century is expected to be less than 10,000 tonnes.
 Competition
• Competition may become a driving force behind
internationalization. A protected market does not
normally motivate companies to seek business
outside.

• Until the liberalization which started in July

1991, the Indian economy was a highly protected
market. Not only that the domestic producers
were protected from foreign competitors but also
domestic competition was restricted by several
policy induced entry barriers, operated by such
measures as industrial licensing, etc
 Government Policies and Regulations
• Government policies and regulations may also
motivate internationalization. There are both
positive and negative factors which could cause
internationalization.

• Many governments offer a number of incentives

and other positive support to domestic
companies to export and to invest in foreign
countries. Similarly, several countries give and
encourage import development and foreign
investment.
• Government policies which limit the scope of
business in the home country may also provoke
companies to move to other countries. That is
one of the most important motivations behind
foreign direct investment which is the desire to
escape the constraining effects of a government
 Monopoly Power
• In some cases international business is a
corollary of the monopoly power which a firm
enjoys internationally.
• Monopoly power may arise from such factors as
monopolization of certain resources, patent
rights, technological advantage, product
differentiation, etc.
• Such monopoly power need not necessarily be
an absolute one but a dominant position that
may facilitate internationalization.
 Spin-off Benefits
• International business has certain spin-off
benefits too.
• International business may help the company to
improve its domestic business; by doing so it
helps improve the image of the company.
International business, thus, becomes a means of
gaining better market share domestically. Further,
exports may have pay-offs for the internal market
too by giving the domestic market better products
• Further, the foreign exchange earnings may
enable a company to import capital goods,
technology, etc
 Strategic Vision
• The systematic and growing internationalization
of many companies is essentially a part of their
business policy or strategic management.
• The stimulus for internationalization comes from
the urge to grow, the need to become more
competitive, the need to diversify and to gain
strategic advantages of internationalization.
• There are a number of corporations which are
truly global. Planning of manufacturing facilities,
logistical systems, financial flows and marketing
policies in such corporations are done
considering the entire world as its, and a single,
market – a borderless world.
 Globalization of Business
•
Question for Brain Brush

What is globalization?
 Introduction

• “One day there will be no

borders, no boundaries, no
flags and no countries and the
only passport will be the
heart”
Carlos Santana
• Globalization is not new phenomena

• The period between 1870 to 1930 experienced a

growing trend towards globalization due various
economic and political changes around the world

• Globalization is a fact of life. “Globalize or

perish” is the slogan now days.
• The advents in information and communication
technology (ICT) and the rapid economic
liberalization of trade and investment in most
countries have accelerated the process of
globalization.

• Markets are getting flooded with not only

industrial goods but also with items of daily
consumption. Each day, an average person makes
use of goods and services of multiple origins
For instance,
• The Finnish mobile Nokia and the US toy-
maker’s Barbie doll made in China but used
across the world
• a software from the US-based Microsoft,
developed by an Indian software engineer based
in Singapore, used in Japan
• The Thailand-manufactured US sports shoe
Nike used by a Saudi consumer.
 Concept of Globalization

• ‘Globalization’ has become the buzzword that has

changed human lives around the world in a
variety of ways.
• Globalization means several things to several
people.
• For some of its new paradigm,
-A set of fresh beliefs’,
-Working method and economic,
-Political and cultural realties in which the
previous assumptions are not longer valid.
• Globalization refers to the free cross-border
movement of goods, services, capital,
information, and people.

• Globalization refers to the intensification of

cross-national economic, political, cultural, social,
and technological interactions that leads to the
establishment of transnational structures and the
integration of economic, political, and social
processes on a global scale.
• It has several facets, including the globalization of
markets and the globalization of production.

• In simple economic term, globalization is the

process of integration world into one huge
market . Such unification calls for the removal of
all trade barriers among the countries. Even
political and geographical barriers become
irrelevant.
• Globalization is shift towards a more integrated
and interdependent world economy.
• Globalization has two main components-
1. The globalization of market and
2. The globalization of the production.
• Thus, the interdependent and integration of
people in all countries of the world is known as
globalization.

• Globalization implies emergency borderless,

competitive economy, in which, survival of fittest
is the order