International Business

by
Daniels and Radebaugh

Chapter 1

International Business:
An Overview
1-1

Objectives
To define internal business (IB) and describe how it differs from
domestic business
To explain why companies engage in IB and why its growth has
accelerated
To introduce different modes a company can use to accomplish its
global objectives
To illustrate the role social science disciplines play in understanding the
environment of IB
To provide an overview of the primary patterns for companies
international expansion
To describe the major countervailing forces that affect IB

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Introduction to International Business (IB)

IBall commercial transactions between two or more countries
Involves modes of business that differ from those at the domestic
level
Foreign conditions diversity companys external environment

Why Companies Engage in IB

Expand salesgreater purchasing power in the world as a whole
Acquire resourcesproducts, services, components
also, foreign capital, technologies, information
Diversify sources of sales and suppliestakes advantage of business
cycle differences among countries
Minimize competitive riskprevent competitor from gaining advantages

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International Business: Operations and Influences

OPERATIONS
EXTERNAL INFLUENCES
PHYSICAL AND
SOCIETAL FACTORS
Political policies and
legal practices
Cultural factors
Economic forces
Geographical influences

COMPETITIVE
ENVIRONMENT
Major advantage in price,
marketing, innovation, or
other factors
Number and comparative
capabilities of competitors
Competitive differences
by country

OBJECTIVES
Sales expansion
Resource acquisition
Diversification
Competitive risk
minimization
STRATEGY

MEANS
Modes
Importing and exporting
Tourism and transportation
Licensing and franchising
Turnkey operations
Management contracts
Direct and portfolio
investment

Functions
Marketing
Production
Accounting
Finance
Human
resources

Overlaying
Alternatives
Choice of
countries
Organization
and control
mechanisms

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Reasons for Growth of IB

Expansion of technologytransportation and communication are quicker
and less costly
Liberalization of cross-border movements
Government barriers reduced because:
desire for better access to greater variety of goods and
services
domestic producers forced to be more competitive
lowered trade barriers to their own exports
Development of supporting services by business and governments to:
Ease the flow of goods and services sold abroad
Reduce risks of IB
Increase in global competitionfirms have become more global to
maintain competitiveness

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Means of Carrying Out International Operations

OPERATIONS

EXTERNAL INFLUENCES

OBJECTIVES
PHYSICAL AND
SOCIETAL FACTORS

STRATEGY

MEANS

COMPETITIVE
ENVIRONMENT

Modes
Importing and exporting
Tourism and transportation
Licensing and franchising
Turnkey operations
Management contracts
Direct and portfolio
investment

Functions
Marketing
Production
Accounting
Finance
Human
resources

Overlaying
Alternatives
Choice of
countries
Organization
and control
mechanisms

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Modes of IB
Merchandise exports and importsmost common international
economic transaction, especially for smaller companies
Major source of international revenue and expenditures for most
companies
Service exports and importsnonproduct international earnings
Tourism and transportation
Performance of services for a fee
turnkey operations
management contracts
Use of assets by otherslicensing agreements
royalties
Franchisingfranchisor:
allows franchisee to use trademark
provides components, technology, services

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Modes of IB (cont.)
Investmentsownership of foreign property in exchange for financial
return
Foreign direct investmentinvestor gains a controlling interest in
foreign company
joint venture
mixed venture
Portfolio investmentnoncontrolling interest

International Companiesterminology
Strategic alliancecollaborative arrangement of critical importance to
the competitive viability of one or more partners
Multinational enterprise (MNE)company with global approach to
foreign markets and production
Globally integrated companyintegrates operations located in different
countries
Multidomestic companyforeign-country operations act fairly
independently
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Physical and Societal Influences on International Business

EXTERNAL INFLUENCES
OPERATIONS
PHYSICAL AND
SOCIETAL FACTORS
Political policies and
legal practices
Cultural factors
Economic forces
Geographical influences

OBJECTIVES

STRATEGY
COMPETITIVE
ENVIRONMENT
MEANS

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External Influences on IB
Physical and societal factorsmust understand
Politics that affect whether and how IB occurs
Domestic and international law determines what managers can do
in IB
Economics
Geographydetermine location and availability of worlds
resources
Competitive environment
Varies by industry, company, and country
strategies differ across companies
e.g., importance of controlling labor costs
e.g., influence of local and international competitors
size of market differs across countries

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Competitive Environment and International Business

EXTERNAL INFLUENCES

PHYSICAL AND
SOCIETAL FACTORS

COMPETITIVE
ENVIRONMENT
Major advantage in price,
marketing, innovation, or
other factors
Number and comparative
capabilities of competitors
Competitive differences
by country

OPERATIONS

OBJECTIVES

STRATEGY

MEANS

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Evolution of Strategy in International Process

Risk minimizationforeign operations viewed as risky
international commitments evolve gradually
Patterns of expansion
Passive to active pursuit of IB opportunities
initially wait for foreign opportunity
External to internal handling of IB
rely on intermediaries at first
Limited to extensive modes of operations
begin with importing or exporting operation
Few to many foreign locations
Similar to dissimilar business environments
Leapfrogging of expansionnew companies begin with international
focus
Possible because of founders experience and technological
advances that help define foreign markets
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The Usual Pattern of Internationalism

Impetus for
international A
business

HIGH

Active search
for opportunities

MEDIUM

Passive
response to
proposals
Moderately
similar
E
Degree of
similarity
between
foreign and
domestic
countries

Internal versus
external handling of
foreign operations
B

Very
dissimilar

LOW
Domestic
Business

Quite
similar

One
Several
Many
D

Company handles
its own foreign
operations

Other firms
handle external
contracts

Limited
foreign
functions,
usually
export/
import

Limited foreign
production and
multiple functions

Mode of

operations
Extensive C
production
abroad with
FDI and all
functions

Number of foreign countries in

which a firm does business
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Countervailing Forcescomplicate decision making

Global standardsexport suited to many countries
results in economies of scale
based on global strategy
Nationally responsive practicesadjust product or service to unique
local conditions
multidomestic approach advisable
Country versus company competitiveness
Companies compete by seeking maximum efficiency on a global
scale
Countries compete with each other to attain economic, political,
and social goals
no consensus on measures of goal attainment
Relationship unclear between country and company performance
high-value activitiesproduce high profits or performed by
well-paid employees

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Countervailing Forces (cont.)

Sovereigntyfreedom from external control
Countries will cede in order to:
gain reciprocal advantages
bilateral or multilateral commercial treaties or
agreements
attack problems that cannot be solved by a single country
problem is too big or widespread
problem results from conditions that spill over from
another country
deal with areas of concern that lie outside the territory of all
countries (noncoastal areas of the ocean, outer space,
Antarctica)
technologically advanced countries believe that
companies should reap benefits from exploitation
other countries want to share the spoils

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