1. THE NATURE OF
INTERNATIONAL
BUSINESS

2. After completing this chapter, you should
be able to explain
• Why study global business
• The process of internationalization
• Theories of internationalization
• Regional trading blocs

3. Introduction
In the world economy today, we see
• fewer self-contained national economies with high barriers to
cross-border trade and investment
• a more integrated global economic system with lower barriers
to trade and investment
• over $4 trillion in foreign exchange transactions daily
• over $12 million of goods and $3.3 trillion of services being
sold across national borders
• the establishment of international institutions

4. What is Globalization?
• Globalization refers to the trend towards a more integrated
global economic system
Two key facets of globalization are:
• the globalization of markets
• the globalization of production

5. The Globalization of Markets
• Globalization of markets - the merging of historically distinct
and separate national markets into one huge global marketplace
• In many markets today, the tastes and preferences of consumers
in different nations are converging upon some global norm
• Coca Cola, Starbucks, Sony PlayStation, and McDonald’s hamburgers,
IKEA furniture

6. The Globalization of Production
• Globalization of production - 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 (labor energy, land, and capital)
• Goal: lower overall cost structure or improve the quality or functionality of
their product and gain competitive advantage

7. International Business-Defined
International Business consist of all commercial transactions-
including sales, investments, and transportation-that take place
between two or more countries.

8. Explanation
• International Business involves commercial activities that cross national
frontiers.
• It concerns the international movement of goods, capital, services,
employees and technology;
• importing and exporting;
• cross-border transactions in intellectual property (patents, trademarks, know-
how, copyright, materials, etc.) via licensing and franchising;
• investments in physical and financial assets in foreign countries;

9. Explanation
• contract manufacturer of assembly of goods abroad for local sale or for
export to other nations;
• buying and selling in foreign countries;
• the establishment of foreign warehousing and distribution systems;
• the import to one foreign country of goods from a second foreign country for
subsequent local sale.

10. Why study International Business?
• International business comprises a large and growing portion of the world’s
total business.
• Global events and competition affect almost all companies-large and small.
• Most managers, regardless of industry or company size, need to approach
their operating strategies from an international standpoint.
• The manager need to consider both where to obtain the inputs needed of the
quality needed and at the best possible price; and where it can be best sold

11. Why firms engage in international business?
• Businesses undertake international operations in order to expand sales,
acquire resources from foreign countries, or diversify their activities.
• Specific reasons include saturation of domestic markets, discovery of
lucrative opportunities in other countries, the need to obtain materials,
products or technologies not available in the home nation, increase in the
flow of information, desire to expand the volume of firm’s operations.
• Commercial risk can be spread across several countries.
• Involvement in international business can facilitate the “experience curve”
effect i.e. cost reductions and efficiency

12. • Economies of scope i.e. unit cost reductions resulting from a firm
undertaking a wide range of activities
• The cost of new product development could require so much expenditure
that the firm is compelled to adopt an international perspective
• There might be intense competition in the home market but little in certain
foreign countries
• A company’s overall strategies and plans can be anchored against a wide
range of international opportunities
• Cross-border trade is today much easier to organize than in the past due to
advancements in communication
Why firms engage in international business?

13. The Forces Driving Globalization
1. Increase in and expansion of technology
2. Liberalization of cross-border trade and resource movements
3. Development of services that support international business
4. Growing consumer pressures
5. Increased global competition
6. Changing political situations
7. Expanded cross-national cooperation

14. The Process of Internationalization
• Establishment of an export or import department is for many firms the first
step toward internationalization of operations.
• This involves recruitment of specialist staff competent in the techniques of
foreign trade, in the financing of international transactions and in shipping
and other transport documentation.

15. • As the work of an import or export department expands, it becomes
inadequate to manage.
• The firm will have acquired detailed knowledge of business methods in
relevant foreign countries and in exporting/importing procedures, and thus
might be capable of dispensing either export/import intermediaries.
• The company may set up its own branches, subsidiaries, and possibly
production operations in other countries.
The Process of Internationalization

16. • The business might start conducting its own international marketing
research, place advertisements directly in foreign media, organize transport
to or from foreign destinations and raise finance from foreign sources.
• The company may license foreign companies to produce its brands, or
engage in franchising or local manufacture.
• The foreign markets are still being served predominantly from the company’s
home nation and no large-scale direct foreign investments have occurred.
The Process of Internationalization

17. • The next stage in the internationalization process might involve the firm
undertaking join ventures with foreign partners and/or establishing
substantial permanent presences in other states-each operation having its
own employees, premises, warehouse, delivery vehicles, etc.
• Setting up sizeable subsidiaries in other countries enables the firm to project
local images in foreign nations , to acquire know-how and technical skills
only available locally, reduce production costs, obtain investment grants
from foreign government, and perhaps minimize its worldwide tax liability
The Process of Internationalization

18. • A permanent local presence in particularly useful in situations where there
are long channels of distribution, where products is technically complex and
require extensive after-sale support, or where large-scale ongoing advertising
and/or sales promotion.
• As profits and sales become critically dependent on worldwide market, the
business moves towards becoming a genuinely multinational company
(MNC) i.e. one that owns production, distribution, service and other units in
many nations and plans the utilization of its resources on global scale.
The Process of Internationalization

19. • An MNC will seek to maximize its revenues at the world rather than national
level, locating its operations wherever conditions are most favorable and
regardless of the country in which the company’s head office is based.
• Expansions of MNCs due to trade liberalization, growth in the world
economy and easier trans-national transfer of technologies and human and
financial resources
The Process of Internationalization

20. Types of International Business
• The four types of international businesses one can start are as follows: 1.
Exporting 2. Licensing 3. Franchising 4. Foreign Direct Investment (FDI).
• 1. Exporting:
• Exporting is often the first choice when manufacturers decide to expand
abroad. Simply stating, exporting means selling abroad, either directly to
target customers or indirectly by retaining foreign sales agents or/and
distributors.
• Either case, going abroad through exporting has minimal impact on the
firm’s human resource management because only a few, if at all, of its
employees are expected to be posted abroad.

21. 2. Licensing:
• Licensing is another way to expand one’s operations internationally.
• In case of international licensing, there is an agreement whereby a firm,
called licensor, grants a foreign firm the right to use intangible (intellectual)
property for a specific period of time, usually in return for a royalty.
• Licensing of intellectual property such as patents, copyrights, manufacturing
processes, or trade names abound across the nations. The Indian basmati
(rice) is one such example.
Types of International Business

22. • 3. Franchising:
• Closely related to licensing is franchising.
• Franchising is an option in which a parent company grants another
company/firm the right to do business in a prescribed manner.
• Franchising differs from licensing in the sense that it usually requires the
franchisee to follow much stricter guidelines in running the business than
does licensing.
• Further, licensing tends to be confined to manufacturers, whereas
franchising is more popular with service firms such as restaurants, hotels,
and rental services.
Types of International Business

23. • One does not have to look very far to see how important franchising business
is to companies here and abroad.
• At present, the prominent examples of the franchise agreements in India are
Pepsi Food Ltd., Coca-Cola, Wimpey's Domino, McDonald, and Nirula. In
USA, one in 12 business establishments is a franchise.
Types of International Business

24. • However, exporting, licensing and franchising make companies get them
only so far in international business.
• Companies aspiring to take full advantage of opportunities offered by foreign
markets decide to make a substantial direct investment of their own funds in
another country.
• This is popularly known as Foreign Direct Investment (FDI). Here, by
international business means foreign direct investment mainly. Let us discuss
some more about foreign direct investment.
Types of International Business

25. • 4. Foreign Direct Investment (FDI):
• Foreign direct investment refers to operations in one country that are
controlled by entities in a foreign country. In a sense, this FDI means
building new facilities in other country.
• There are two forms of direct foreign investment: joint ventures and wholly-
owned subsidiaries.
• A joint venture is defined as “the participation of two or more companies
jointly in an enterprise in which each party contributes assets, owns the
entity to some degree, and shares risk”.
• In contrast, a wholly-owned subsidiary is owned 100% by the foreign firm.
Types of International Business

26. • An international business is any firm that engages in international trade or
investment. International trade refers to export or import of goods or services
to customers/consumers in another country.
• On the other hand, international investment refers to the investment of
resources in business activities outside a firm’s home country.
Types of International Business