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Why Study International Business

Why Study International Business

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Why Study International Business?

In today's economy, most economic boundaries have already disappeared and those remaining will continue to diminish. This phenomenon is partially due to the proliferation of electronic communication, which allows instantaneous information transfer for sales, marketing, manufacturing and outsourcing. Furthermore, growing distribution networks, supply chains, and transportation hubs simplify the movement of products. And, the broad networks of worldwide financial institutions reduce currency issues. Thus, businesses operating in the Midwest can service the needs of customers around the world. Ultimately, most business professionals will in some way be impacted by international influences. All individuals planning a career in business must understand the intricacies of doing business with partners from other countries—whether the business is conducted in the United States or outside our borders. Culture, language, political systems, geography, and socio-economic factors all influence a person's business practices. Knowing that you need to research not only the company you wish to do business with but, also, the culture, tradition, and business practices of those you will be working with is vital to business success in this global marketplace. In order to be prepared for a career in any facet of the business world (accounting, finance, marketing, information technology, law, healthcare, etc.), knowledge and understanding of global issues is critical. Thus, you should study international business to be prepared for diverse business opportunities, knowing in advance that respect for and knowledge of your counterparts can give you a competitive advantage.

Wikipedia

International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics,and transportation) that take place between two or more nations. Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons.[1] It refers to all those business activities which involves cross border transactions of goods, services, resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc.[2] A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with operations in more than a country. An MNE is often called multinational corporation (MNC) or transnational company (TNC). Well known MNCs include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national markets. Areas of study within this topic include differences in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local culture, corporate culture, foreign exchange market, tariffs, import and export regulations, trade agreements, climate, education and many more topics. Each of these factors requires significant changes in how individual business units operate from one country to the next.

management contracts. An understanding helps you decide what governmental policies to support. turnkey operations. accounting. organization and control mechanisms Political policies and legal practices Cultural factors Economic forces Geographical influences Major advantage in price. direct investment and portfolio investments. licensing and franchising. Institutions provide services to ease the conduct of international business. The best way of conducting business may differ by country. human resources Overlaying alternatives: choice of countries. global manufacturing and supply chain management. risk minimization Modes: importing and exporting. Countries cooperate more on transnational issues. The operations affect and are affected by the physical and societal factors and the competitive environment. resource acquisition. . Consumers know about and want foreign goods and services. Governments are removing international business restrictions. especially in transportation and communications. or other factors. Most companies are either international or compete with international companies. Means • • • • • • • • • • • • • • • • • • • • • • • Physical and societal factors Competitive factors There has been growth in globalization in recent decades due to the following eight factors: Studying international business is important because: Managers in international business must understand social science disciplines and how they affect all functional business fields. Functions: marketing. Number and comparative capabilities of competitors Competitive differences by country Technology is expanding.The conduct of international operations depends on companies' objectives and the means with which they carry them out. Political relationships have improved among some major economic powers. Competition has become more global. Cross-national cooperation and agreements. Operations • Objectives: sales expansion. marketing. Modes of operation may differ from those used domestically. innovation. finance. tourism and transportation. An understanding helps you make better career decisions.

PA. Go to the source. Memorialize your company's code of ethics and compliance practices in writing. Maintain high ethical standards ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 4. Keep the home office operational. Travis & Rosenberg. You and your brand are inseparable. Participate in trade-government partnerships. Address your particular circumstances. Keep your personnel secure. All global business is personal . Participate in the process. Stay secure in an insecure world 5. Take advantage of trade agreements: think outside the border ○ ○ ○ ○ ○ ○ ○ ○ Familiarize yourself with preference programs and trade agreements. Make the most of new security measures. The unexpected will happen. 2. Become involved with the international business self-regulation movement. Understand corporate accountability laws. Keep communications open. Do your research now. Secure your data. Seize opportunities when they arise. the managing partner of Sandler. and international trade and customs consultant. Expect the Unexpected 6. Read the fine print.Tom Travis. You must be vigilant in enforcing your IP rights. Security requires transparency throughout the supply chain. uses the Six Tenets when giving advice on how to globalize one's business. Strong ethics translate into good business. Develop compliance protocols for import and export operations. Forge ethical strategic partnerships. Appoint a leader. The Six Tenets are as follows[3]: 1. Protect your brand at all costs 3. Protect your worldwide reputation by strict adherence to labor and human rights standards. You must be vigilant in protecting your intellectual property both at home and abroad.

trade mark and other proprietary advantages to be used for a fee by a licensee or technology importing firm. The fortune at the bottom of the pyramid. Joint ventures are the fourth mode.000 Approximately one billion people Second Tier: Per capita GDP/GNI $2. A firm imports its necessary inputs from the cheapest source. As compared to export. They represent a partnership agreement in which the venture is owned jointly by the international company and a company of the host country. An international company may acquire existing operations in a foreign country in order to penetrate the foreign market. Naturally. 111). Be available to overseas clients and customers 24/7. no overseas manufacturing is involved The other mode of international business is licensing. According to C.Hart. Strategy & Business. patent. Hart. Philadelphia: Wharton School Publishing. Prahalad & S.000-$20.○ ○ ○ Fly the flag at your overseas locations. For example technology and marketing ability of German firms and raw material availability of Australia firms have led to joint-venture agreements between the two countries. In this case.2002. like management skills. Top Tier: Per capita GDP/GNI > $20. Relate to offshore associates on a personal level. 26: 54-67. and so . and (2) S. This method is also used when the host government put restrictions on the inflow of foreign capital investment. In this mode.000 Approximately four billion people Modes of ib The oldest mode of international business is foreign trade. it allows its technology. 2005. The third mode is known as management contracting.000 Approximately one billion people Base of the Pyramid Per capita GDP/GNI < $2. The contract is meant for a given number of years during which the seller of management skills manages the affaires of the company located in the host country for a specific fee. Capitalism at the Crossroads (p. When a firm lacks capital and detailed knowledge about a foreign market. the joint venture allows the two firms to apply their respective comparative advantages in a given project. this mode requires less time or depth of involvement in foreign markets. The greatest benefit of this mode is that the acquiring company does not have to begin operations from scratch.K. the company sells abroad a particular resource. while its exports its output to different countries in order to earn maximum amount of foreign exchange.

. and direct and portfolio investment. This way. When a company innovates a specific technology and its product is mature in the markets abroad or when the company wants to reap the location advantage in foreign country. defined as tangible goods brought into or out of (respectively) a country. the benefits begin to appear only when the consumer base is firmly established. This mode is better than the acquisition inasmuch as the operations can be tailored exactly to the firm's need and what is more. particularly in smaller companies even though they are less likely to export. turnkey operations.. the company evaluates the cash inflow and outflow during his life of the project and makes investments only account foreign exchange risk and the political risk involved.does not have to labor hard to grab the market. Some time money is not the only way to do the business. an international company invests in the majority equity shares of the company of the host country. The importer of goods has normally to pay for the import in convertible currencies which they buy with their own currency. Cont. Companies may import and export merchandise. in other words in exchange of useful good or raw materials the exchange is done. While exports and imports apply mainly to goods. however. the size of the investment is often lower than in case of acquisition. The quantum of investment.. Imports and exports are the most common mode of international business. Whatever the motivation behind foreign investment or foreign manufacturing. the company in the host country becomes a subsidiary of the international company. or nonproducts. licensing and franchising.. tourism and transportation.. in this case is quite large. Large companies are more likely to engage in other modes of international business in conjunction with importing and exporting.. The revenue gained .. Most service imports and exports revolve around tourism and transportation. However. management contracts. they can also apply to services. it sets up an affiliate there. Finally.. IIND as per 2008 The six major modes of international business are imports and exports.

Gloria Vanderbilt has franchised her name out to several clothing companies. bills.from international tourism and transportation is best seen in hotels. A foreign direct investment (the more common of the two) gives the investor a controlling interest in the foreign company. their income on foreign tourism is more important than their income from exports. When two or more companies share in an FDI. many companies engage in franchising. The franchisor also assists on a continuing basis in the operation of the business-for example. For example. For many countries. or expertise) under contract. and technology. by providing components. copyrights. and China. forming the Gloria Vanderbilt line. This is most evident in Disney's theme parks in France. A turnkey operation involves construction of facilities. When a government joins a company in an FDI. Management contracts are initiated when one company supplies personnel to perform general or specialized management functions for another company. Similarly. performed under contract. allowing other countries around the world to use their assets (ie: trademarks. . management services. which is then transferred to the owner when the company is ready to begin operating. Companies also pay fees that may be incurred on an international level for engineering services handled through turnkey operations and management contracts. Conversely. international business occurs within direct and portfolio investments. By investing in a foreign company. the investor takes ownership in a foreign property for a financial return. The same holds true in countries such as Norway and Greece. travel agencies. airlines. receiving royalty payments in return. Finally. Many companies enter into international licensing agreements. who earn a considerable amount from foreign shipping. and shipping companies. a portfolio investment is a noncontrolling interest in a company that usually involves either taking stock in a company or making loans to a company in the form of bonds. or notes that the investor purchases. it becomes a mixed venture. it is known as a joint venture. patents. Japan. Portfolio investments are particularly popular with multinational enterprises as they offer a safe means towards short-term financial gain. a mode of business where the franchisor allows the franchisee to use a trademark that is an essential part of the franchisee's business. especially in the Caribbean and Southeast Asia.

if you were to employ a home country agency (i. over an above indirect exporting. The Internet The Internet is a new channel for some organizations and the sole channel for a large number of innovative new organizations. Finally we consider the Stages of Internationalization. but recognizes that alteratives are many and diverse. This lesson considers a number of key alternatives. Essentially the organization makes a commitment to market overseas on its own behalf. Here you will be consider modes of entry into international markets such as the Internet. For some companies the Internet is an additional channel that enhances or replaces their traditional channel(s). In reality. some see franchising as a stand alone mode. . Exporting. the most important point is that you consider all useful modes of entry into international markets . If in doubt. On the other hand. For example. an exporting company from your country .Modes of Entry into International Markets (Place) How does an organization enter an overseas market? Background A mode of entry into an international market is the channel which your organization employs to gain entry to a new international market. International Distributors. For others the Internet has provided the opportunity for a new online company. Strategic Alliances. International Agents. Export Management Houses (EMHs) that act as a bolt on export department for your company. always clarify your tutor's preferred view. This gives it greater control over its brand and operations overseas. as well as those pre-existing companies that now employ eMarketing approaches as part of their overall marketing plan. It is worth noting that not all authorities on international marketing agree as to which mode of entry sits where.which handles exporting on your behalf) to get your product into an overseas market then you would be exporting indirectly.over and above which pigeon-hole it fits into. Overseas Manufacture and International Sales Subsidiaries. They offer a whole range of bespoke or a la carte services to exporting organizations. More Exporting There are direct and indirect approaches to exporting to other nations.e. whilst others see franchising as part of licensing. The eMarketing space consists of new Internet companies that have emerged as the Internet has developed. Licensing. Direct exporting is straightforward. Joint Ventures. Examples of indirect exporting include: • • Piggybacking whereby your new product uses the existing distribution and logistics of another business.

to the franchisee. French. Toyota Ayago is also marketed as a Citroen and a Peugeot. make sure that your contract allows you to regain direct control of product. concepts. There are many examples including: • • • • Shared manufacturing e. Toyota's car plant in Adapazari.so beware conflicts of interest. Trading companies were started when some nations decided that they wished to have overseas colonies. If you intend to globalize. Put simply.• Consortia are groups of small or medium-sized organizations that group together to market related. Management tends to be controlled by the franchiser. They rarely take ownership of products.g. They date back to an imperialist past that some nations might prefer to forget e. Marketing agreements. and more commonly take a commission on goods sold. agents are individuals or organizations that are contracted to your business. Franchising involves the organization (franchiser) providing branding. Coffee Republic and McDonald's Restaurants. Agents usually represent more than one organization. Strategic Alliances (SA) Strategic alliances is a term that describes a whole series of different relationships between companies that market internationally. retain and train. Therefore they have an incentive to market products and to make a profit from them. Of course you need to set targets since you never know the level of commitment of your agent. Agents might also represent your competitors . They tend to be expensive to recruit. Distribution alliances e. the British. Spanish and Portuguese colonies.for example. You would not own the plant once it is handed over. Turkey. • International Agents and International Distributors Agents are often an early step into international marketing. iPhone was initially marketed by O2 in the United Kingdom. expertise. Turnkey contracts and contract manufacturing. Sometimes the relationships are between competitors. Today they exist as mainstream businesses that use traditional business relationships as part of their competitive advantage. Examples include Dominos Pizza. brand and/or expertise. Otherwise pros and cons are similar to those of international agents. but low-control option.g. and market on your behalf in a particular country. .g. • Licensing Licensing includes franchising. Agents are a low-cost. • • Licensing is where your own organization charges a fee and/or royalty for the use of its technology. or sometimes unrelated products in international markets. Turnkey contracts are major strategies to build large plants. They often include a the training and development of key employees where skills are sparse . and infact most facets that are needed to operate in an overseas market. with the main difference that distributors take ownership of the goods. Research and Development (R&D) arrangements. Distributors are similar to agents.

Honda's relationship with Rover in the 1980's.e. Of course you could assemble products in the new plant. For example. Joint Ventures (JV) Joint Ventures tend to be equity-based i. companies remain independent and separate. or the company might acquire a current business that has suitable plant etc. a new company is set up with parties owning a proportion of the new business. manufacturing and R&D are most common forms of Joint Venture. and foreign assembly Foreign manufacture . and simply export components from the home market (or another country). Overseas Manufacture or International Sales Subsidiary A business may decide that none of the other options are as viable as actually owning an overseas manufacturing plant i. You also will gain local market knowledge and be able to adapt products and services to the needs of local consumers. The downside is that you take on the risk associated with the local domestic market. This can be a new-build. core competences or management skills. the organization invests in plant. There are many reasons why companies set up Joint Ventures to assist them to enter a new international market: • • • Access to technology. Others will start at a later or even final stage. Some companies will never trade overseas and so do not go through a single stage. Strategic Alliances are non-equity based agreements i. To gain entry to a foreign market. any business wishing to enter China needs to source local Chinese partners.Essentially. However.e. Access to distribution channels. An International Sales Subsidiary would be similar. it acts more like a distributor that is owned by your own company. Of course some will go through each stage as summarized now: • • • • • Indirect exporting or licensing Direct exporting via a local distributor Your own foreign presences Home manufacture. reducing the element of risk. machinery and labor in the overseas market.e. Internationalization Stages So having considered the key modes of entry into international markets. This is also known as Foreign Direct Investment (FDI). we conclude by considering the Stages of Internationalization. For example. and have the same key benefit of course. The key benefit is that your business becomes localized you manufacture for customers in the market in which you are trading.

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2. Ability to create customer relationship. it’s the ability to prevent rivals and capture demand by establishing a strong brand name. And late when it enters after other international businesses. 3. and on what scale. 2.so that they can drive them out of market. time and expense to learning the rules of the country.risk is high for business failure(probability increases if business enters a national market after several other firms they can learn from other early firms mistakes) . -Long run benefits of doing business in a country depends on following factors: . Which foreign markets? -The choice based on nation’s long run profit potential.Size of market (in terms of demographics) . Ability to build sales volume in that country. when to enter those markets. Disadvantage: 1. Entry is early when an international business enters a foreign market before other foreign firms.firm has to devote effort. Timing of entry:It is important to consider the timing of entry.Nature of competition By considering such factors firm can rank countries in terms of their attractiveness and long-run profit.The present wealth of consumer markets (purchasing power) . The advantage is when firms enters early in the foreign market commonly known as firstmover advantages First mover advantage.1.1 • • Start on page: Scroll Preview View: <a title="Vie More share options Add to Collections Auto-hide: on Modes of entry into an International Business:There are some basic decisions that the firm must take befor forien expansion like: which markets to enter. -Look in detail at economic and political factors which influence foreign markets.

b. Exporting 2. Reactive motivators are those efforts taken by the company to export the product to a foreign country due to the decline in demand for its product in the home country. Licensing 3. Exporting involves less risk as the company understand the culture . Need for limited finance.Licensing : In this mode of entry . c. Here the manufacturer in the domestic country is called licensor and the manufacturer in the foreign is called licensee.the domestic manufacturer leases the right to use its intellectual property (ie) technology . Mergers & Acquisitions: 6. Active exporting conversely results from a strategic decision to establish proper systems for organizing the export fuctions and for procuring foreign sales. copy rights .investment etc. Joint Venture 7. It is a convenient method to increase the sales. customer and the market of the host country gradually. 2. The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership .managerial .brand name etc to a manufacturer in a foreign country for a fee. Later after understanding the host country the company can enter on a full scale. Acquisitions & Mergers 8. Motivation for exporting: Motivation for exporting are proactive and reactive. Proactive motivations are opportunities available in the host country.Exporting: It means the sale abroad of an item produced . Wholly Owned Subsidiary 1. Advantages Of Exporting: a. Turnkey Project 5. If the company selects a company in the host country to distribute the company can enter international market with no or less financial resources but this amount would be quite less compared to that would be necessary under other modes.stored or processed in the supplying firm’s home country. Less Risks. The cost of entering market through this mode is less costly. Franchising 4.Modes of entry:-1. Advantages. Passive exporting occurs when a firm receives canvassed them. .

Licensee escapes himself from the risk of product failure. 3. employee training . Franchisor learns more from the experience of the franchisees. Licensee may develop his reputation 6. 5. Product reoutation 4. customs and environment of the host country. Franchisor can get the information regarding the market culture. 1. Franchisee escapes from the risk of product failure. Licensor can investigate the foreign market without much efforts on his part. 2. The franchisor provides the following services to the franchisee. Therefore one party can affect the other through their improper acts. Disadvantages: 1. 4. 2. . Both parties have to maintain the product quality and promote the product . Operating System 3. Low financial risk to the licensor 3. It may be more complicating than domestic franchising. Continuous support system like advertising .Franchising Under franchising an independent organization called the franchisee operates the business under the name of another company called the franchisor under this agreement the franchisee pays a fee to the franchisor. 4. 3. Trade marks 2. Chance for misunderstanding between the parties. 3. reservation services quality assurances program etc. It reduces market opportunities for both 2. 5. Chance for leakages of the trade secrets of the licensor. 4. Licensee may sell the product outside the agreed territory and after the expiry of the contract.1. Low investment on the part of licensor. Advantages: 1. Licensee gets the benefits with less investment on research and development 5. Disadvantages: 1. Low investment and low risk 2. Franchisee get the benefits of R& D with low cost. It is difficult to control the international franchisee.

payment on cost plus basis. The company can formulate international strategy and generate more revenues. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. 4. 2.brand name and distribution networks. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. It provides immediate access to international manufacturing facilities and marketing network. 3. technology . Both the parties have the responsibilities to maintain product quality and product promotion. . Advantages: 1. airports. railway line etc. 5. This strategy adds no capacity to the industry. There is a problem of leakage of trade secrets.3. This strategy helps the host country. Labour problem of the host country’s companies are also transferred to the acquired company. 3. Disadvantages: 1. Acquiring a firm in a foreign country is a complex task involving bankers. 4. mergers and acquisition specialists from the two countries.Turnkey Project: A turnkey project is a contract under which a firm agrees to fully design . It reduce the market opportunities for both 4. Hence they are multiyear project. Eg nuclear power plants .Mergers & Acquistions: A domestic company selects a foreign company and merger itself with foreign company in order to enter international business. lawyers regulation. 2. Alternatively the domestic company may purchase the foreign company and acquires it ownership and control. This form of pricing allows the company to shift the risk of inflation enhanced costs to the purchaser. employee. construct and equip a manufacturing/ business/services facility and turn the project over to the purchase when it is ready for operation for a remuneration like a fixed price .oil refinery . 5. national highways . The company immediately gets the ownership and control over the acquired firm’s factories.

It spread the risk between or among partners. 3. It provide skills like technical skills. Life cycle of a joint venture is hindered by many causes of collapse. Scope for collapse of a joint venture is more due to entry of competitors changes in the partners strength. 4. Motives for acquisitions: .Joint Venture Two or more firm join together to create a new business entity that is legally separate and distinct from its parents.Acquisitions & Mergers: A mergers is a voluntary and permanent combination of business whereby one or more firms integrate their operations and identities with those of another and henceforth work under a common name and in the interests of the newly formed amalgamations. 3. and enable the companies to share the risk in the foreign markets.6. 5. 4. Various environmental factors like social . Joint venture provide large capital funds suitable for major projects. It involves shared ownership. expertise . 5. Then the operations become unresponsive and inefficient. Conflict may arise 2. Partner delay the decision making once the dispute arises. technological economic and political encourage the formation of joint ventures. This act improves the local image in the host country and also satisfies the governmental joint venture. It provides strength in terms of required capital. The decision making is slowed down in joint ventures due to the involvement of a number of parties. Advantages: 1. It make large projects and turn key projects feasible and possible. human skills . It synergy due to combined efforts of varied parties. 7. 2. technology. Disadvantages: 1. Latest technology required human talent etc. marketing skills.

building & other fixed asset that can be profitably sold off. The ability to control supplies of raw materials. salary to employees. The most common way that control of a subsidiary is achieved is through the ownership ofshar es in the subsidiary by the parent. may have subsidiaries of their own. 7. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. Obtaining patents. Acquisition of land. 5. A parent and all its subsidiaries together are . They give their own rent. A subsidiary. 10. This Subsidiary or individual body as per their own generates revenue. Reduction of the Co failure through spreading risk over a wider range of activities. is an entity that is controlled by a bigger and more powerful entity. other ways that control can come about and the exact rules both as to what control is needed and how it is achieved can be complex (see below). 6. only an entity representing a legal fiction as a separate entity can be a subsidiary. Expert use of resources. or limited liability company. in business matters.Wholly Owned Subsidiary Subsidiary means individual body under parent body. however. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. 8. license & intellectual property. The reason for this distinction is that a lone company cannot be a subsidiary of any organization. The controlled entity is called a company. But policies and trademark will be implemented from the Parent body. 3. 8. a business entity can only act through its directors. etc. Desire to become involved with new technologies & management method particularly in high risk industries. 4. and these. in turn. 9. and the controlling entity is called its parent (or the parent company). There are. Only the certain percentage of the profit will be given to the parent body. Tax consideration. While individuals have the capacity to act on their own initiative. officers and employees.1. Removal of competitor 2. The desire to acquire business already trading in certain markets & possessing certain specialist employees & equipments. Economies of scale possibly made through more extensive operations. There are no branches here. A subsidiary may itself have subsidiaries. corporation.

Time Warner. or Citigroup as well as more focused companies such asI BM. . and not legally or otherwise distinct from it.called a group. or Xerox Corporation. Examples includeholding companies such as Berkshire Hathaway. although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. These. distinctlegal entities for the purposes oftaxation andr egulation. For this reason. Subsidiaries are a common feature of business life and most if not all major businesses organize their operations in this way. which are businesses fully integrated within the main company. Subsidiaries are separate. and others. they differ fromdivisions. organize their businesses into national or functional subsidiaries. sometimes with multiple levels of subsidiaries.

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