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IBT NOTES Functions involved

How are International Trade and International Business  Since international business extends its scope to doing
different? business abroad, it shall involve related functions such as
 There is no doubt that international trade which includes the global manufacturing, supply chain, managerial, sales &
export and import of goods has always been the foremost packaging, marketing, and finance.
component of international business. However, with the  On the contrary, international trade will involve only
passage of time and with an increase in globalization, the managerial functions and logistics. Production,
scope of international business has expanded. manufacturing, and supply chain won’t be a part of it.
 Besides trade of goods, trade in services such as banking,
tourism, transportation, warehousing, etc. has also massively Type of Transaction
increased across borders. In addition, there are developments
in foreign investment and overseas production too.  When we talk of international business, commercial activities
Companies increasingly make investments in foreign may be done between two or more nations at an individual,
countries and undertake the production of goods or services corporate, private, or government level. And it may be
in foreign countries to tap foreign markets by being locally anything ranging from production, licensing, franchising,
present there. All of these activities form part of international FDIs, joint ventures, portfolio, investments, or acquisition of
business. subsidiaries.
 But when we talk of international trade, it only comprises
International Trade transactions of export and import.
- An exchange of goods/services among individuals and
companies outside the domestic boundaries of a Summarizing the Differences
country.
International Trade International Business
International business A subset of international All kinds of business operations
- Is a much wider term than international trade. It not only business. that take place between parties
includes international trade (i.e., export and import of in different countries.
goods & services) but also all other ways in which Export and import of A broad range of foreign
companies and individuals operate internationally. goods/services. transactions such as the trade of
- Refers to all kinds of business operations that take place goods and services across
between parties in different countries. It does not just nations, franchising, foreign
comprise trade but also other operations such as the investments, and overseas
production of goods or provisioning of services in production of goods and
foreign countries. services.
Narrower Much broader.
Form of Operations Only managerial functions Global manufacturing, supply
and logistics. chain, managerial, sales &
 Some major forms of business operations that form part of packaging, marketing, and
international business are merchandise exports and imports, finance.
service exports and imports, licensing and franchising, Transactions of export and All foreign commercial activities at
investment of funds abroad, etc. As a way of entering into import. an individual, corporate, private,
international business, many companies allow other parties or government level.
in foreign nations to produce and sell their products by using
their trademark or patent rights. This is done under a Need for International Trade and Business
licensing or franchise agreement.
 Similarly, foreign direct investments (FDIs) are another  Countries do not have access to all resources, and they cannot
most common way of getting into international business. produce all goods that are needed. The availability of inputs of
Companies invest their funds directly into foreign companies production such as men, materials, and capital for producing
to acquire a controlling interest in them and undertake different goods and services is not the same in every country.
production or marketing operations in such foreign
 Therefore, there are countries that are in a better position to
countries. Such investments may also take the form of a joint
produce certain goods and services at a lower cost than the
venture or acquisition of wholly owned subsidiaries.
other countries. As a result, countries make those goods that
 Unlike direct investments, many companies make portfolio they are most efficient at and procure the rest from other
investments too by way of acquiring shares of or giving loans countries in the form of trade.
to foreign companies in exchange for dividend and interest
 This is the main reason why countries engage in international
income. The main difference between direct and portfolio
business. Besides this, international business offers numerous
investments is that the investor does not get directly
opportunities to firms for their growth, expansion, and
involved in production or marketing, operations in latter.
increase in profits.
Final Words 6. Legal – the many foreign and domestic laws governing how
an international firm must operate.
 Although international trade and international business differ 7. Physical – elements of nature such as topography, climate,
in their scope, both of them deal with business transactions and natural resources.
done at a global level. 8. Political – elements of nations’ political climates such as
 On one hand, international business deals with all business nationalism, forms of governments, and international
activities and investments abroad, international trade is organization.
merely the export and import of goods and services. 9. Sociocultural – elements of culture (such as attitudes, beliefs,
 That is why these two terms are often used interchangeably and opinions) important to international managers.
considering the fact that international trade is nothing but a 10. Labor – composition, skills, and attitudes of workers.
subset of international business. 11. Technological – the technical skills and equipment that affect
how resources are converted to products.

The Challenging Context of International Business Management must adapt to changes in the uncontrollable
environment in order to enhance the prospects for their
“To tackle the challenges of globalization will require a serious company’s survival and success.
commitment to making international knowledge and skills a policy
priority. Knowledge of the world is no longer a luxury; it is a Domestic Environment
necessity.” – Nicholas Platt. President of Emeritus of the Asia Society. -All the uncontrollable forces originating in the home country that
surround and influence the life and development of the firm.
International Business -These forces with which managers are most familiar.
-Business that is carried out across national borders. Ex. Shortage of foreign currency, the government may place
-This definition includes not only international trade and foreign restrictions on overseas investment to reduce its outflow.
manufacturing but also the growing service industry in areas
such as transportation, tourism, advertising, consulting, Foreign Environment
constructions, retailing, wholesaling, and mass -Refers to all the uncontrollable forces originating outside the
communication. home country that surround and influence the firm.

Foreign Business Forces in the foreign investment are the same as those in the
-The operations of a company outside its home or domestic domestic environment except they occur outside the firm’s
market. home country.
-Business conducted within a foreign country.
1. Forces have a different values.
International Company (IC) Ex. Russian government imposed retaliatory sanctions including
-A company with operations in multiple nations. bans on the importation of food products from Europe.

The Influence of External and Internal Environment Forces 2. Forces can be difficult to Assess.
Ex. In terms of the country’s legal and political forces.
Environment – all the forces influencing the life and development
of the firm. 3. Forces are interrelated.
Ex. A combination of high-cost capital and an abundance of
Uncontrollable Forces – the external forces that management has unskilled labor in many developing countries may lead to the use
no direct control over. of a lower level of technology than would be employed in the more
industrialized nation.
Ex. Lobbying for a change in law, heavily promoting a new product
that requires a change in a cultural attitude.
International Environment
External Forces consist of the following: -Interaction between domestic and foreign environmental forces,
1. Competitive – kinds and numbers of competitors, their as well as interactions between the foreign environmental
locations, and their activities. forces of two countries.
2. Distributive – national and international agencies that
distribute goods and services. Ex. A sales manager at the Chinese electronics firm Xiaomi does
3. Economic – variables (such as gross national income (GNI), not work in an international environment if he or she sells cellular
unit labor cost, and personal consumption expenditure) that phones only in China. If China’s domestic environment and India’s
influence a firm’s ability to do business. foreign environment and thus is working in the international
4. Socioeconomic – characteristics and distribution of the environment.
human population.
5. Financial – variables such as interest rates, inflation rates, Self-Reference Criterion
and taxation. -Unconscious reference to your own cultural values when judging
the behavior of others in a new and different environment.
-It is probably the biggest cause of international business -In 1600, Great Britain’s British East India Company, a newly
blunders. Successful managers are careful to examine a formed trading firm, began to establish foreign branches
problem in terms of the local cultural traits as well as their throughout Asia, followed by many of the other European
own. nations (Portugal, Netherlands, & France)
-A number of multinational companies exited in the late 1800s.
Internationalization One of the first U.S. companies to own foreign production
-Describes designing a product in a way that it may be readily facilities, have worldwide distribution networks, and market
consumed across multiple countries. its products under global brands was Singer Sewing machine.
-This process is used by companies looking to expand their global -In 1868, Singer built a factory in Scotland by 1880, it had become
footprint beyond their own domestic market understanding a global organization with an outstanding international sales
consumers abroad may have different tastes or habits. organization and several overseas manufacturing plants.
-Often requires modifying products to conform to the technical or -In 1914, other firms such as J&P Coats (UK) and Ford Motor
cultural needs of a given country, such as creating plugs Company, soon followed 37 U.S. Companies had production
suitable for different types of electrical outlets. facilities in two or more overseas locations.
-1920 all cars sold in Japan were made in the United stated by
Other reasons for Internationalization Ford and General Motors.
-Multinational firms existed well before World War 1.
 There is a lot of money in the overseas market. The MNCs -Indeed, rapid urbanization of populations combined with
from the triad-the US, Europe, and Japan – have huge assets industrialization and merging market is quickly shift the
and a quarter of these assets are found in the foreign market. world’s economic center of gravity from Europe and America
GE of the US is one of the top MNCs with assets over $300 back to Asia.
billion in 1997 and nearly a third of its assets were found in
overseas countries. The Dutch/ UK firm shell has huge assets The Growth of International Firms and International
and three-fifths of these are located overseas. Business
-The number and size of U.S and foreign international firms have
 It is being realized that the domestic markets are no longer been increasing rapidly in recent years, as have the level of
adequate and rich. Japan flooded America with automobiles foreign direct investment (FDI) and exporting.
and electronics because the domestic market was not large
enough to absorb whatever was produced. Expanding Number of International Companies
Transnational Corporation – is an enterprise made up of
 Companies often set up an overseas plant to reduce high entities in more than one nation, operating under a decision-
transportation cost. The higher the ratio of unit cost to the making system that allows a common strategy and coherent
selling price per unit, the more significant the transportation policies.
factor becomes.
There are more than 103,000 transnational corporations with
 The motivation to go global in high-tech industries is slightly nearly 900,00 foreign affiliates.
different. They spend lot on research and development for
new products. If domestic sales and export do not generate -Transnational collectives account for more than half of world
sufficient cash flow, the company naturally might look to trade and 10 percent of world gross domestic products.
overseas manufacturing plants and sales branches to generate -The 100 largest nonfinancial transnational alone account for $4.5
higher sales and better cash flow. trillion in assets and $8.0 trillion in annual sales and have
16.5 million employees.
A brief history of International Business -While the vast majority of transnationals are privately owned,
- government ownership also represents an important element
-During the Hellenistic Age, before the Roman Empire was among the world’s international companies.
established, Phoenician and Greek merchants were sending -There is a minimum of 650 state-owned transnational
representatives abroad to sell their goods. corporations these state-owned firms account for more than
-A vast expansion and agricultural and industrial production in 10 percent of the world’s foreign direct investment.
China stimulated the emergence of an internationally
integrated trading system stretching from Asia to Foreign Direct Investment and Exporting are Growing Rapidly
Mediterranean and Africa.
-The old saying that, “all roads lead to Rome” might have instead -One variable commonly used to measure where and how fast
been stated as “all roads lead to China.” internationalization is taking place is total foreign direct
-Within the international trade system, China was the world’s investment.
leading manufacturing country for about 1,800 years until it -FDI refers to direct investment in equipment, structures, and
was replaced by Britain in about 1840. organizations in a foreign country at a level sufficient to
-The impact of the emerging international trading system was obtain significant management control. It does not include
extensive. Politics, the Arts, agriculture, industry, and other mere foreign investment in stock markets.
sectors of human life were profoundly influenced by the
goods and ideas that came with trade.
-The total level of outward FDI worldwide was $30.8 trillion at the  The foreign companies allow the companies of various other
beginning of 2018, which was nearly 14 times larger than countries to adopt their technology on a royalty payment
what it was in 1090. basis.
 Companies also globalize technology through the modes of
Exporting – is the transportation of any domestic good or service joint ventures and mergers.
to a destination outside a country or region.

Importing – is the transportation of any good or service into a 3. Market Drivers


country or region, from a foreign origination point. -As companies internationalize, they also become global
customers. Frequently, a firm will go abroad to protect its
-Merchandise exports have grown faster than world output in home market. Service companies (ex. Accounting, advertising
nearly each of the past 60 years. marketing research, banking, and law) will establish foreign
-World merchandise exports grew from $2.0 trillion in 1980 to operations in markets where their principal accounts are
$3.5 trillion in 1990, & $6.5 trillion in 2000, $15.3 trillion in located to prevent competitors from gaining access to those
2010, $17.7, and trillion in 2017. accounts.
-Managers are always under pressure to increase the sales and
This means that exports in 2017 were 9 times larger than they profits of their firms, and when they face a mature, saturated
were in 1980 and nearly 3 times larger than they were in 2000. market at home, they begin to search for new markets outside
Also Service exports in 2017 were more than 13 times larger than the home country.
they were in 1980.

What is Driving Internationalization of Business?

1. Political Drivers
How do Government Intervene in Trade?
 Tariffs
-Specific Tariffs: taxes or tariffs that are levied as a fixed charge,
regardless of the value of the product or service.
-Ad valorem tariffs: tariffs that are calculated as percentage of the
value of the product or service.
 Subsidies
 Important quotas and VER
 Currency controls 4. Cost Driver
-Globalization of product lines and production helps reduce costs
2. Technological Drivers by achieving economies of scale.
-Advances in computers and communication technology are
permitting increased flow of ideas and information across 5. Competitive Drivers
borders, enabling customers to learn about foreign goods. -Firms are depending on their home markets from foreign
-Global communications networks enable manufacturing workers competitors by entering the foreign competitor’s market.
to coordinate production and design functions worldwide so
that plants in many parts of the world may be working on the What are the Arguments for and Against the Globalization of
same product. Business
-Internet and network computing enable small companies to
compete globally because they make possible the rapid flow Economic Globalization – the tendency toward an international
of information regardless of the physically location of the integration and interdependency of goods, technology,
buyer and seller. information, labor and capital, or the process of making this
integration happen.
Technological change is amazing and phenomenal since 1950. In
fact, it is like a revolution in the case of telecommunication, Key Concerns with the Globalization of Business include:
information technology, and transportation technology. 1. Globalization has produced uneven results across
nations and people.
Methods of globalization technology 2. Globalization has had deleterious effects on labor and
 Companies with the latest technology acquire distinctive labor standards.
competencies and gain the advantage of producing high- 3. Globalization has contributed to a decline in
quality products at low cost. environmental and health conditions.
 Companies may have technological collaboration with the
foreign companies through which technology spreads from Key Arguments in Support of the Globalization of Business
one to another country. include:
1. Free trade enhances socioeconomic development.
2. Free trade promotes more and better jobs. 7. The government of a trading partner may be applying
pressure on its importers to buy from countries that,
like the United States, are good customers for that
nation’s exports.
International Trade and Investment
Trade Deficit – the amount by which the value of imports into a
Volume of International Trade nation exceeds the value of its exports.
-Back in 1990, international trade in goods and services reached a Trade Surplus – the amount by which the value of a nation’s
milestone when its volume surpassed $4 trillion.
-In 2017, the export of goods and services had grown to almost six
times that level. Physical goods, such as automobiles, food,
and clothing, accounted for $17.5 trillion of the $23 trillion in
international trade in 2017.
-Services, including such activities as $5.4 trillion of international
trade.
-Trade in services has been growing faster than the trade in
merchandise for the last 20 years.
-Nearly 60% of global output is now destined for an international
trade-another indication that international trade has become
a critical factor in the economic activity of many, if not most,
of the countries of the world.

How Evenly Has Trade Grown? exports exceeds the value of its imports.

-As trade has grown globally, have some nations fared better than Explaining Trade: International Trade Theories
other? Although the absolute value of their merchandise
export increased, the proportion of world trade coming from Mercantilism – an economic philosophy based on the belief that
North America, Latin America, Europe, Africa, and the Middle (1) a nation’s wealth depends on accumulated treasure, usually
East has decreased since 1983, reflecting the greater level of precious metals such as gold and silver: and (2) to increase
export growth in other regions of the world. wealth, government policies should promote exports and
-China become the largest exporter in the world. discourage imports.
-Rapid expansion of international trade has helped transform
countries such as Singapore, Taiwan, and South Korea from Absolute Advantage – a nation’s ability to produce more of a
conditions of Third World poverty in the 1950s to a develop- good or service than another country for the same or lower cost
country standard of living. of inputs.
-Service export? Many services, such as travel and tourism,
banking and insurance services, education and training, and Perfect Competition – a market situation in which there is a
entertainment (videogames and movies), and architectural sufficiently large number of well-informed buyers and sellers of
and engineering services, are sold to customers in other homogeneous products such that no individual participant has
countries and make up a growing part of international enough power to determine the price of the product, resulting in
business. a marketplace that is efficient in production and allocation of
products.
Major Trading Partners: Their Relevance for Managers - Mercantilism is an economic policy that is designed to
maximize the exports and minimize the imports for an
Suppose we want to consider looking for business opportunities economy.
abroad. Why should we know which countries are our own - ex. Of absolute advantage: if Japan and Italy can both
nation’s major trade partners? Here are some of the advantages: produce automobiles, but Italy can produce sports cars
1. The business climate in these importing nations is of a higher quality and at a faster rate with greater
already relatively favorable. profit, then Italy is said to have an absolute advantage
2. Export and import regulations are not insurmountable. in that particular industry.
3. There should be no strong cultural objections at home - Ex of Perfect competition: foreign exchange markets.
to buying that nation’s goods. Here currency is all homogeneous, agricultural markets.
4. Satisfactory transportation facilities have already been In some cases there are several farmers selling identical
established. products to the market and many buyers, internet-
5. Import channel members (merchants, banks, and related industries
customs brokers) are experienced in handling import Comparative Advantage – when one nation is less efficient than
shipments from the exporter’s area. other nation in the production of each of two goods, the less
6. Currency from the foreign country is available to pay for efficient nation has a comparative advantage in the production of
the exports. that good for which its absolute disadvantage is less.
Ex. Oil-producing nations, for ex., have a comparative advantage Resource Endowment – the land, labor, capital, and related
in chemicals. Their locally produced oil provides a cheap source production factors a nation possesses.
of material for the chemicals when compared to countries
without it. A lot of the raw ingredients are produced in the oil Overlapping Demand – the existence of similar preferences and
distillery process. As a result Saudi Arabia, Kuwait, and Mexico demand for products and services among nations with similar
become competitive with U.S. chemical production firms in the per capita income levels.
early 1980s.
- Per capita income is national income divided by
- Comparative advantage is what you do best while also giving up population size
the least. Ex. If you are great plumber and a great babysitter, your - ex . Of overlapping demand, countries with high levels
comparative advantage is plumbing of average income may have a substantial level of
demand for items such as large displays of television,
Exchange Rate – the price of one country stated in terms of high fashion branded clothing, jewelry, luxury
another international business trade and investment. automobiles, and gourmet foods and beverages.

Ex. If the exchange rate between the U.S dollar (USD) and the Product Differentiation – unique differences producers build
Japanese yen (JPY) is 120 yen per dollar, one U.S dollar can be into their products with the intent of positively influencing
exchanged for 120 yen in foreign currency markets. demand.

- The exchange rate is the price of a country’s currency in terms Ex. Whiskey from Europe is exported to the United States, and
of another currency. American whiskey is exported to Europe because consumers in
these markets perceive a difference between the brands.

International Product Life Cycle (IPLC) – a theory explaining


why a product that begins as a nation’s export eventually
becomes its import.

-IPLC this theory addresses the role of innovation in trade


patterns by explaining why a product that begins as a nation
export’s eventually become its import, thus viewing a product as
going through a full life cycle.

Stages of International Product Life Cycle (IPLC)


1. U.S. innovates and exports.
2. Foreign production begins.
3. Foreign competition appears in the exports markets.
4. Import competition appears in the U.S.

Economic of scale - the predictable decline in the average cost of


producing each unit of output as a production facility gets larger
and output increases.
Experience curve - the rising scale on which efficiency improves
as a result of cumulative experience and learning.
National competitiveness - a nation’s relative ability to design,
produce, distribute, or service product within an international
trading context while earning increasing returns on its resources.
Portfolio investment - the purchase of stocks and bonds to
obtain a return on the funds invested.
Direct investment - the purchase of sufficient stock in a firm to
obtain significant management control.
Greenfield investment – the establishment of new facilities from
the group up.

Cross-border acquisition
- the purchase of an existing business in another nation.
- Desire to find a new market, access raw materials, achieve
production efficiencies, gain to access new technologies or
Currency Devaluation – a reduction in the value of a country’s
managerial expertise, and enhance the political safety of the
currency relative to other currencies.
firm’s operations.
Monopolistic Advantage Theory
- Theory that FDI is made by firms in industries with
relatively few competitors, due to their possession of
technical and other advantages over indigenous firms.

Strategic Behavior Theory


- Theory suggesting that strategic rivalry between firms
in an oligopolistic industry will result in firms closely
following and imitating each other’s international
investments in order to keep a competitor from gaining
an advantage.
- Oligopolistic industry- an industry with a limited
number of competing firms.

Internationalization Theory
- Theory is that to obtain a higher return on its
investment, a firm will transfer its superior knowledge
to a foreign subsidy that it controls, rather than sell it in
the open for an advantage.

Dynamic Capability Theory


- The theory is that for a firm successfully invest overseas,
it must have not only ownership of unique knowledge or
resources, but also the ability to dynamically create,
sustain and exploit these capabilities over time.

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