CBM 321

International Business
and Trade
 International Business and
Trade
• international Business and Trade -
consists of transactions that are devised
and carried out across national borders
to satisfy the objectives of individuals,
companies, and organizations.
 International Business and Trade
• Foreign Direct Investment - is a
company’s physical investment such as into
the building and facilities in the foreign
country, and acts as a domestic business
with a full scale of activity. Companies
practice FDI to get benefits from cheaper
labor costs, tax exemptions, and other
privileges in that foreign country.
International Business and Trade

• Globalization - the process by

which businesses or other
organizations develop international
influence or start operating on an
international scale.
 INTERNATIONAL BUSINESS IS
CHARACTERIZED BY SIX MAJOR
DIMENSIONS.
• International Trade
• International Investment
• International Business Risks
• Participants
• Foreign Market Strategies
• Globalization of Markets
 1.International trade
• Internationaltrade describes
the exchange of products
(merchandise) and services
(intangibles) across national
borders.
 International trade

• Exchange -it refers to exporting of

products and services ( outbound flow
of products ) and or importing is an
inbound activity of products and
services .
 2. International investment

• International investment refers

to the transfer of assets to another
country or the acquisition of assets
in that country..
 International investment

• Economists refer to such assets as

factors of production; they include
capital, technology, managerial talent,
and manufacturing infrastructure.
Trade implies that products and
services cross national borders. By
contrast, investment implies that the
firm itself crosses borders to secure
 THE TWO ESSENTIAL TYPES OF
CROSS-BORDER INVESTMENT :

1. international portfolio
investment
2. foreign direct investment..
 International investment

• International portfolio investment refers

to the passive owner- ship of foreign
securities such as stocks and bonds to gain
financial returns. It does not entail active
management or control over these assets. The
foreign investor has a relatively short-term
interest in the ownership of these assets
 International investment

• Foreign Direct Investment (FDI) i` It is a

foreign-market entry strategy that gives
investors partial or full ownership of a
productive enterprise typically dedicated to
manufacturing, marketing, or management
activities. Investing such resources abroad is
generally for the long term and involves
extensive planning.
 3. INTERNATIONATIONAL BUSINESS RISK
• HOW DOES INTERNATIONAL BUSINESS
DIFFER FROM DOMESTIC BUSINESS?
• Firms operate in countries characterized
by distinctive economic, cultural, and political
conditions. Not only does the firm find itself in
unfamiliar surroundings, it encounters many
uncontrollable variables—factors over which
management has little control. These factors
introduce new or elevated business risks.
 THE FOUR RISKS IN INTERNATIONALIZATION

 A. Cross-cultural risk occurs when a cultural

misunderstanding puts some human value at
stake.
These risk arises from differences in language,
lifestyles, mind-sets, customs, and religion.
Values unique to a culture transmitted from one
generation to the next. It influence the mind-set
and work style of employees and the shopping
patterns of buyers
THE FOUR RISKS IN INTERNATIONALIZATION

• Language is a critical dimension of

culture. In addition to facilitating
communication, language is a window on
people’s value systems and living
conditions.
• These challenges impede effective
communication and cause
misunderstandings. Miscommunication
due to cultural differences gives rise to
THE FOUR RISKS IN INTERNATIONALIZATION

Cross-cultural risk most often occurs in

encounters in foreign countries.

However, the risk also can occur

domestically, as when management
meets with customers or business
associates who visit company
headquarters from abroad.
THE FOUR RISKS IN INTERNATIONALIZATION

• B. Country risk (also known as

political risk) refers to the
potentially adverse effects on
company operations and profitability
caused by developments of the
following:
• A. political
• B. legal,
THE FOUR RISKS IN
INTERNATIONALIZATION
• Country risk includes the possibility of foreign
government intervention in firms’ business
activities. The ff are :
• restrict access to markets,
• impose bureaucratic procedures on business
transactions, and
• limit the amount of income that firms can
take home from foreign operations
 THE FOUR RISKS IN INTERNATIONALIZATION

• The degree of government intervention in commercial activities varies

from country to country. Singapore and Ireland are characterized by
substantial economic freedom—that is, a fairly liberal economic
environment.
• By contrast, the Chinese and Russian governments regularly intervene in
business affairs.
• Country risk also includes laws and regulations that potentially hinder
company operations and performance.
• Critical legal dimensions include intellectual property protection, product
liability, and taxation policies.
• Nations also experience potentially harmful economic conditions, often
due to high inflation, national debt, and unbalanced international trade.
•
 THE FOUR RISKS IN
INTERNATIONALIZATION

• C. Currency risk (also known as

financial risk) refers to the risk of
adverse fluctuations in exchange
rates. Fluctuation is common for
exchange rates—the value of one
currency in terms of another.
THE FOUR RISKS IN INTERNATIONALIZATION

• Currency risk applies when you own

foreign investments. It is the risk of
losing money because of a movement in
the exchange rate.
• For example, if the U.S. dollar becomes
less valuable relative to the Canadian
dollar, your U.S. stocks will be worth less
in Canadian dollars.
THE FOUR RISKS IN INTERNATIONALIZATION

• D. Commercial risk refers to the

firm’s potential loss or failure from
poorly developed or executed
business strategies, tactics, or
procedures such as :
• selection of business partners,
timing of market entry, pricing,
creation of product features, and
 4. WHO PARTICIPATES IN
INTERNATIONAL BUSINESS?

• A focal firm is the initiator of an international business transaction; it

conceives, designs, and produces offerings intended for consumption by
customers worldwide.
• Focal firms take center stage in international business. They are
primarily large multinational enterprises (MNEs; also known as
multinational corporations, or MNCs) and small and medium-sized
enterprises (SMEs).
• Some are privately owned companies, others are public, stock-held firms,
and still others are state enterprises owned by governments. Some focal
firms are manufacturing businesses; others are in the service sector.
 WHO PARTICIPATES IN INTERNATIONAL BUSINESS?

• A distribution channel intermediary is a

specialist firm that provides various logistics
and marketing services for focal firms as part
of international supply chains, both in the
focal firm’s home country and abroad.
• Independent distributors and sales
representatives, usually located in foreign
markets where they provide distribution and
marketing services to focal firms on a
contractual basis.
 WHO PARTICIPATES IN
INTERNATIONAL BUSINESS?
• A facilitator is a firm or an individual with special expertise in
banking, legal advice, customs clearance, or related support
services that helps focal firms perform international business
transactions.
• Facilitators include logistics service providers, freight
forwarders, banks, and other support firms that assist focal
firms in performing specific functions.
• A freight forwarder is a specialized logistics service provider
that arranges international shipping on behalf of exporting
firms, much like a travel agent for cargo. Facilitators are found
in both the home country and abroad.
 WHO PARTICIPATES IN
INTERNATIONAL BUSINESS?
• Governments, or the public sector, are also active in international
business as suppliers, buyers, and regulators
• . State-owned enterprises account for a substantial portion of
economic value added in many countries, even rapidly liberalizing
emerging markets such as Russia, China, and Brazil. Governments in
advanced economies such as France, Australia, and Sweden have
significant ownership of companies in telecommunications, banking,
and natural resources. The recent global financial crisis led
governments to step up their involvement in business, especially as
regulators.
 WHY DO FIRMS INTERNATIONALIZE?

• Seek opportunities for growth

through market diversification. In
addition to offering sales opportunities
that often cannot be matched at home,
foreign markets can extend the
marketable life of products or services
that have reached maturity in the
 6. WHY DO FIRMS
INTERNATIONALIZE?
• There are multiple motives for international
expansion, some strategic in nature, others
reactive. An example of a strategic, or proactive,
motive is to tap foreign market opportunities or to
acquire new knowledge. An example of a reactive
motive is the need to serve a key customer that has
expanded abroad. Specific motivations include the
following:
WHY DO FIRMS INTERNATIONALIZE?

• One example is the internationalization of

automatic teller machines (ATMs). The first ATMs
were installed in London by Barclays Bank. The
machines were adopted next in the United States
and Japan.
• As growth of ATMs began to slow in these
countries, they were marketed throughout the rest
of the world. There were more than three million
ATMs worldwide in 2015; a new one is installed
somewhere every few minutes.
 WHY DO FIRMS INTERNATIONALIZE?
• Earn higher margins and profits. For many types of
products and services, market growth in mature economies
is sluggish or flat. Competition is often intense, forcing firms
to get by on slim profit margins. By contrast, most foreign
markets may be underserved (typical of high-growth emerging
markets) or not served at all (typical of developing economies).
Less intense competition, combined with strong market
demand, implies that companies can command higher margins
for their offerings. For example, compared to their home
markets, bathroom fixture manufacturers American Standard
and Toto (of Japan) have found more favorable competitive
environments in rapidly industrializing countries such as
Indonesia, Mexico, and Vietnam.
WHY DO FIRMS INTERNATIONALIZE?

• Gain new ideas about products, services, and business

methods. International markets are characterized by tough
competitors and demanding customers with various needs. Unique
foreign environments expose firms to new ideas for products,
processes, and business methods. The experience of doing business
abroad helps firms acquire new knowledge for improving
organizational effectiveness and efficiency
• For example, Japan’s Toyota refined just-in-time inventory
techniques, which other manufacturers and foreign suppliers around
the world then applied to manufacturing in their own countries.
WHY DO FIRMS INTERNATIONALIZE?

• Serve key customers better that have

relocated abroad. In a global economy,
many firms internationalize to better serve
clients that have moved into foreign markets.
For example, when Nissan opened its first
factory in the United Kingdom, many
Japanese auto parts suppliers followed,
establishing their own operations there.
 WHY DO FIRMS
INTERNATIONALIZE?
• Be closer to supply sources, benefit
from global sourcing advantages, or
gain flexibility in product sourcing.
• Companies in extractive industries
such as petroleum, mining, and
forestry establish international
operations where raw materials are
located.
 WHY DO FIRMS
INTERNATIONALIZE?
• Gain access to lower-cost or better-value factors of
production. to access capital, technology, managerial talent, and
labor at lower costs, higher quality, or better value.
 Taiwanese computer manufacturers established subsidiaries in the
United States to access low-cost capital. The United States is home to
numerous capital sources in the high-tech sector, such as stock exchanges
and venture capitalists, which have attracted many firms from abroad
seeking funds.
Japanese firm Canon relocated much of its production to China to profit
from that country’s inexpensive and productive workforce.
 WHY DO FIRMS INTERNATIONALIZE?

• Develop economies of scale in sourcing,

production, marketing, and R&D. Economies of scale
reduce the per-unit cost of manufacturing by operating at high
volume. For example, the per-unit cost of manufacturing 100,000
cameras is much cheaper than the per-unit cost of making just
100 cameras. By expanding internationally, the firm greatly
increases the size of its customer base, thereby increasing
the volume of goods it produces. On a per-unit-of-output
basis, the greater the volume of production, the lower the total
cost. Economies of scale are also present in R&D, sourcing,
marketing, distribution, and after-sales service.
 WHY DO FIRMS INTERNATIONALIZE?
• Confront international competitors more effectively
or thwart the growth of competition in the home
market.
• The firm can enhance its competitive positioning by confronting
competitors in international markets or preemptively entering a
competitor’s home market to destabilize and curb its growth.
• One example is Caterpillar’s entry in Japan to confront its
main rival in the earthmoving equipment industry, Komatsu.
Caterpillar’s preemptive move hindered Komatsu’s international
expansion for at least a decade. Had it not acted proactively to stifle
Komatsu’s growth in Japan, Komatsu’s home market, Caterpillar
would certainly have had to face a more potent rival sooner.
 WHY DO FIRMS
INTERNATIONALIZE?

• Invest in a potentially rewarding relationship with a

foreign partner.
 Joint ventures or project-based alliances with key foreign players can lead to the
development of new products, early positioning in future key markets, or other
long-term, profit-making opportunities.

 For example, Black and Decker entered a joint venture with Bajaj, an Indian
retailer, to position itself for expected long- term sales in the huge Indian market.
The French computer firm Groupe Bull partnered with Toshiba in Japan to gain
insights for developing the next generation of information technology
•
 WHY DO FIRMS INTERNATIONALIZE?

• At the broadest level, companies

internationalize to enhance competitive
advantage and find growth and profit
opportunities.
•Good day!!!