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Unit 1
AN OVERVIEW
Learning Objectives:
To define international business and describe how it differs from domestic
business.
To explain why companies engage in international business 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 international
business.
To provide an overview of the primary patterns for companies’ international
expansion.
To describe the major countervailing forces that affect international business.
Lesson Overview:
The first part of the chapter is designed to give a brief overview of international
business in terms of why
companies get involved, why there has been a recent growth in international
business, the major modes of
international business activities, the relationship to other disciplines, and the need
to adjust operations to
different operating environments. The second part of the chapter introduces
features that will be covered in
other chapters as well. These include the internationalization process,
countervailing forces, ethical
dilemmas, and looking to the future.
Lesson 01
INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS
International business is all commercial transactions (private and governmental)
between two countries.
A. Why Companies Engage in International Business
1. Expand Sales. Going international allows companies to increase the size of the
market to which they
offer their products.
2. Acquire Resources. Foreign capital, technology, labor, components all can
help a firm become more
competitive.
3. Diversify Sources of Sales and Supplies. By operating in multiple countries,
firms help protect
themselves from economic downturns in any single country. In the same way,
having suppliers in
multiple countries helps protect the firm from shortages due to economic, social,
or political
disruptions in any single country.
4. Minimize Competitive Risk. Companies expand internationally to competitors’
home markets in
,order to maintain a competitive balance across markets.
B. Reasons for Recent International Business Growth—From Carrier
Pigeons to the Internet.
1. Expansion of Technology. Air travel, the internet, e-mail, e-commerce, direct
dial international phone
calls, fax, and other technologies have brought down the cost and increased the
efficiency of doing
business internationally.
2. Liberalization of Cross-Border Movements. The World Trade Organization
(WTO, discussed in
Chapter 6) and other international trade agreements have reduced barriers to the
movement of goods
and services across national boundaries.
3. Development of Supporting Services. International banking, international
document delivery, and
other services have tremendously simplified the conduct of international business.
4. Increase in Global Competition. It is becoming increasingly important that
firms have international
operations in order to be able to shift production across countries and take
advantage of new
production location and marketing opportunities to stay ahead of other
international competitors.
5. Exports are goods and services produced in one country and then sent to
another country. Imports are
goods and services produced in one country and then brought in by another
country. Information about
exports and imports helps us to explain the impact of international business on the
economy.
6. Foreign direct investment (FDI) is equity funds invested in other nations.
Industrialized countries have
invested large amounts of money in other industrialized nations and smaller
amounts in less developed
countries (LDCs), such as those in Eastern Europe, or in newly industrialized
countries (NICs), such as
Hong Kong, South Korea, and Singapore. Most of the world’s FDI is in the US, the
European Union
(EU), and Japan. As nations have become more affluent, they have pursued FDI in
geographic areas that
have economic growth potential. The Japanese, for example, have been investing
heavily in the EU in
recent years.
7. Over 50 per cent of world trade and over 80 per cent of foreign direct
investment is conducted by three
regional economic hubs: the US, the EU and Japan. Collectively, these areas are
referred to as the “triad”.
The triad is a group of three major trading and investment blocs in the
international arena.
Lesson 2
MODES OF INTERNATIONAL BUSINESS
A. Merchandise Exports and Imports:
,Merchandise exports are tangible products (goods) manufactured in one country
and sent out of that
country to another one. Merchandise imports are tangible products (goods)
brought in from another
country.
B. Service Exports and Imports:
Service exports and imports are international earnings that do not come from a
tangible product which
physically crosses a border. The company receiving payment is making a service
export. The company
paying is making a service import. Exports are goods and services produced in one
country and then sent to
another country. Imports are goods and services produced in one country and then
brought in by another
country. Information about exports and imports helps us to explain the impact of
international business on the
economy.
1. Tourism and Transportation. When an American flies to Germany on Lufthansa
(a German airline)
and spends a few days in a German hotel, the payments made to Lufthansa and the
hotel are
service exports for Germany and service imports for the United States.
2. Performance of Services. When an American engineering firm receives a
payment for designing a
plant in France, it is a service export for the United States and a service import for
France.
3. Use of Assets. International licensing agreements and franchising allow foreign
entities to use
another firm’s trademarks, patents, or technology. Payments for the right to use
these assets are a
service export for the country receiving those payments and a service import for
the country
making the payments.
C. Investments:
Foreign investment means ownership of foreign property is exchanged for a
financial return (e.g., interest
and dividends).
Direct Investment:
1. Foreign direct investment (FDI) occurs when an investor gains a controlling
interest in a foreign
company. That controlling interest can be 100% or much less. (See “Going Global”
additional
Exercise 1.3 at end of chapter.) When discussing foreign direct investment, it is
important to
distinguish between the flow of FDI and the stock of FDI. The flow of FDI refers to
the amount
of FDI undertaken over a given time period (normally one year). The stock of FDI
refers to the
total accumulated value of foreign owned assets at a given point in time.
, 2. Figure 6.1 illustrates the great increase in the flows of FDI between 1992-2001.
The significant
growth in FDI has both to do with the political economy of trade as outlined in the
previous
chapter and the political and economic changes that have been taking place in
developing countries.
3. The opening case on Starbucks helps illustrate one very important trend in FDI -
the globalization
of the world economy is causing firms to invest worldwide in order to assure their
presence in
every region of the world.
4. Another important trend is has been the rise of inflows into the US. The stock of
foreign FDI in
the US increased more rapidly than US FDI abroad.
5. The rapid increase in FDI growth into the US may be due to the attractiveness
of the US market,
the falling value of the dollar, and a belief by some foreign corporations that they
could manage US
assets and workers more efficiently than their American managers could.
6. It is difficult to say whether the increase in the FDI into the US is good for the
country or not. To
the extent that foreigners are making more productive use of US assets and
workers, it is probably
good for the country.
7. Figures 6.2, 6.3, 6.4 and 6.5 provide some insight into the countries that have
been the major
recipients and sources of foreign direct investment in recent years.
8. The management focuses box details the techniques of Mexican cement
manufacturer Cemex for
its aggressive international expansion of cement manufacturing. Because cement is
a product that is
not easily exported due to its low ratio of value to weight, Cemex sought
international expansion by
acquisition.
Portfolio Investment:
Portfolio investment is a non-controlling investment in a foreign company. It is
usually a purchase of stock
in a foreign company or loan to (bond purchase) a foreign firm.
International Companies and Terms to Describe Them:
The term “collaborative arrangements” between international companies
comprises joint ventures,
licensing, and manufacturing contracts. “Strategic alliances” are collaborative
arrangements that are of
critical importance to the competitive viability of one or more of the collaborating
firms. Multinational
enterprise (MNE), multinational company (MNC), transnational company (TNC)
are other terms used to
describe organizations operating in multiple countries.
A “global company” tends to integrate its international operations in order to
efficiently produce a globally
Unit 1
AN OVERVIEW
Learning Objectives:
To define international business and describe how it differs from domestic
business.
To explain why companies engage in international business 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 international
business.
To provide an overview of the primary patterns for companies’ international
expansion.
To describe the major countervailing forces that affect international business.
Lesson Overview:
The first part of the chapter is designed to give a brief overview of international
business in terms of why
companies get involved, why there has been a recent growth in international
business, the major modes of
international business activities, the relationship to other disciplines, and the need
to adjust operations to
different operating environments. The second part of the chapter introduces
features that will be covered in
other chapters as well. These include the internationalization process,
countervailing forces, ethical
dilemmas, and looking to the future.
Lesson 01
INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS
International business is all commercial transactions (private and governmental)
between two countries.
A. Why Companies Engage in International Business
1. Expand Sales. Going international allows companies to increase the size of the
market to which they
offer their products.
2. Acquire Resources. Foreign capital, technology, labor, components all can
help a firm become more
competitive.
3. Diversify Sources of Sales and Supplies. By operating in multiple countries,
firms help protect
themselves from economic downturns in any single country. In the same way,
having suppliers in
multiple countries helps protect the firm from shortages due to economic, social,
or political
disruptions in any single country.
4. Minimize Competitive Risk. Companies expand internationally to competitors’
home markets in
,order to maintain a competitive balance across markets.
B. Reasons for Recent International Business Growth—From Carrier
Pigeons to the Internet.
1. Expansion of Technology. Air travel, the internet, e-mail, e-commerce, direct
dial international phone
calls, fax, and other technologies have brought down the cost and increased the
efficiency of doing
business internationally.
2. Liberalization of Cross-Border Movements. The World Trade Organization
(WTO, discussed in
Chapter 6) and other international trade agreements have reduced barriers to the
movement of goods
and services across national boundaries.
3. Development of Supporting Services. International banking, international
document delivery, and
other services have tremendously simplified the conduct of international business.
4. Increase in Global Competition. It is becoming increasingly important that
firms have international
operations in order to be able to shift production across countries and take
advantage of new
production location and marketing opportunities to stay ahead of other
international competitors.
5. Exports are goods and services produced in one country and then sent to
another country. Imports are
goods and services produced in one country and then brought in by another
country. Information about
exports and imports helps us to explain the impact of international business on the
economy.
6. Foreign direct investment (FDI) is equity funds invested in other nations.
Industrialized countries have
invested large amounts of money in other industrialized nations and smaller
amounts in less developed
countries (LDCs), such as those in Eastern Europe, or in newly industrialized
countries (NICs), such as
Hong Kong, South Korea, and Singapore. Most of the world’s FDI is in the US, the
European Union
(EU), and Japan. As nations have become more affluent, they have pursued FDI in
geographic areas that
have economic growth potential. The Japanese, for example, have been investing
heavily in the EU in
recent years.
7. Over 50 per cent of world trade and over 80 per cent of foreign direct
investment is conducted by three
regional economic hubs: the US, the EU and Japan. Collectively, these areas are
referred to as the “triad”.
The triad is a group of three major trading and investment blocs in the
international arena.
Lesson 2
MODES OF INTERNATIONAL BUSINESS
A. Merchandise Exports and Imports:
,Merchandise exports are tangible products (goods) manufactured in one country
and sent out of that
country to another one. Merchandise imports are tangible products (goods)
brought in from another
country.
B. Service Exports and Imports:
Service exports and imports are international earnings that do not come from a
tangible product which
physically crosses a border. The company receiving payment is making a service
export. The company
paying is making a service import. Exports are goods and services produced in one
country and then sent to
another country. Imports are goods and services produced in one country and then
brought in by another
country. Information about exports and imports helps us to explain the impact of
international business on the
economy.
1. Tourism and Transportation. When an American flies to Germany on Lufthansa
(a German airline)
and spends a few days in a German hotel, the payments made to Lufthansa and the
hotel are
service exports for Germany and service imports for the United States.
2. Performance of Services. When an American engineering firm receives a
payment for designing a
plant in France, it is a service export for the United States and a service import for
France.
3. Use of Assets. International licensing agreements and franchising allow foreign
entities to use
another firm’s trademarks, patents, or technology. Payments for the right to use
these assets are a
service export for the country receiving those payments and a service import for
the country
making the payments.
C. Investments:
Foreign investment means ownership of foreign property is exchanged for a
financial return (e.g., interest
and dividends).
Direct Investment:
1. Foreign direct investment (FDI) occurs when an investor gains a controlling
interest in a foreign
company. That controlling interest can be 100% or much less. (See “Going Global”
additional
Exercise 1.3 at end of chapter.) When discussing foreign direct investment, it is
important to
distinguish between the flow of FDI and the stock of FDI. The flow of FDI refers to
the amount
of FDI undertaken over a given time period (normally one year). The stock of FDI
refers to the
total accumulated value of foreign owned assets at a given point in time.
, 2. Figure 6.1 illustrates the great increase in the flows of FDI between 1992-2001.
The significant
growth in FDI has both to do with the political economy of trade as outlined in the
previous
chapter and the political and economic changes that have been taking place in
developing countries.
3. The opening case on Starbucks helps illustrate one very important trend in FDI -
the globalization
of the world economy is causing firms to invest worldwide in order to assure their
presence in
every region of the world.
4. Another important trend is has been the rise of inflows into the US. The stock of
foreign FDI in
the US increased more rapidly than US FDI abroad.
5. The rapid increase in FDI growth into the US may be due to the attractiveness
of the US market,
the falling value of the dollar, and a belief by some foreign corporations that they
could manage US
assets and workers more efficiently than their American managers could.
6. It is difficult to say whether the increase in the FDI into the US is good for the
country or not. To
the extent that foreigners are making more productive use of US assets and
workers, it is probably
good for the country.
7. Figures 6.2, 6.3, 6.4 and 6.5 provide some insight into the countries that have
been the major
recipients and sources of foreign direct investment in recent years.
8. The management focuses box details the techniques of Mexican cement
manufacturer Cemex for
its aggressive international expansion of cement manufacturing. Because cement is
a product that is
not easily exported due to its low ratio of value to weight, Cemex sought
international expansion by
acquisition.
Portfolio Investment:
Portfolio investment is a non-controlling investment in a foreign company. It is
usually a purchase of stock
in a foreign company or loan to (bond purchase) a foreign firm.
International Companies and Terms to Describe Them:
The term “collaborative arrangements” between international companies
comprises joint ventures,
licensing, and manufacturing contracts. “Strategic alliances” are collaborative
arrangements that are of
critical importance to the competitive viability of one or more of the collaborating
firms. Multinational
enterprise (MNE), multinational company (MNC), transnational company (TNC)
are other terms used to
describe organizations operating in multiple countries.
A “global company” tends to integrate its international operations in order to
efficiently produce a globally
