Chapter 1

Introduction to
International Business

International Business
Strategy Management & the New Realities

by
Cavusgil, Knight and Riesenberger

International Business: Strategy, Management, and the New Realities

 International Business – A Firm Level Activity

Performance of trade and investment

activities by firms across national
borders.

International Business: Strategy, Management, and the New Realities

 The Internationalization of Business

• Companies conduct value-adding activities on a

global scale, primarily to organize, source,
manufacture, and market

• A “level playing field” has made international

activities appealing to all types of firms- large
and small; manufacturing and service sectors
(e.g. banking, transportation, engineering and
design, advertising, and retailing).

International Business: Strategy, Management, and the New Realities

 The Nature of International Business

• All value-adding activities including

sourcing, manufacturing, and marketing,
can be performed in international locations
• The subject of cross-border trade can be
products, services, capital, technology,
know-how, and labor
• Firms internationalize via exporting,
foreign direct investment, licensing,
franchising, and collaborative ventures

International Business: Strategy, Management, and the New Realities

Globalization of Markets – a Macro Concept

Ongoing economic integration and growing

interdependency of countries worldwide.

• Integration is central to globalization,

which has resulted in the widespread
diffusion of products, technology, and
knowledge worldwide, regardless of where
they originate.

International Business: Strategy, Management, and the New Realities

 Dimensions of Market Globalization

• Greater integration and interdependency of

national economies; leading to freer
movement of goods, services, capital, and
knowledge
• Rise of regional economic integration blocs
• Growth of global investment and financial
flows
• Convergence of consumer lifestyles and
preferences
• Globalization of production

International Business: Strategy, Management, and the New Realities

 International Trade

Exchange of products and services across

national borders; typically through exporting
and importing.

International Business: Strategy, Management, and the New Realities

 Exporting

Sale of products or services to customers

located abroad, from a base in the home
country or a third country.

International Business: Strategy, Management, and the New Realities

 Importing or Global Sourcing

Procurement of products or services from

suppliers located abroad for consumption in
the home country or a third country.

International Business: Strategy, Management, and the New Realities

 International investment

Transfer of assets to another country or the

acquisition of assets in that country.

• International Portfolio investment (typically short-

term): Passive ownership of foreign securities such
as stocks and bonds, to generate financial returns.

• Foreign direct investment (FDI) (typically long-

term): An internationalization strategy in which the
firm establishes a physical presence abroad through
acquisition of productive assets such as capital,
technology, labor, land, plant, and equipment.
International Business: Strategy, Management, and the New Realities
 World Trade Is Growing Faster than GDP

Rapid integration of world economies is

fueled by factors such as the decline of
trade barriers, e.g. tariffs, liberalization of
markets, privatization and the economic
vitality of emerging markets.

International Business: Strategy, Management, and the New Realities

Comparing the Growth Rates of World GDP
and World Exports
Leading Countries in International Merchandise
Trade, Total Value
Leading Countries in International Merchandise
Trade, as % of Nation’s GDP
 The Nature of FDI
• Foreign Direct Investment (FDI) - (asset
ownership and long time frame)
– The ultimate commitment-level of
internationalization
– We focus primarily on FDI, as opposed to
International Portfolio investment.
• Large, resourceful companies with
substantial international operations
leverage FDI to:
– Manufacture/assemble products in low-cost
countries, e.g., China, Mexico, E. Europe
International Business: Strategy, Management, and the New Realities
 Dramatic Growth of FDI Since the 1980s
• September 11, 2001 interrupted FDI inflows, the
longer term trend continues
• Developed economies = Australia, Canada,
Japan, the United States, and most countries in
Western Europe.
• Developing economies = Parts of Africa, Asia,
Latin America, and the Middle East. Of particular
significance is the growth of FDI into developing
economies despite widespread poverty and less
investment capital than advanced economies.
• The improved lives of billions are directly linked
to world trade and investment.

International Business: Strategy, Management, and the New Realities

Foreign Direct Investment (FDI) Inflows into World
Regions (in Billions of U.S. Dollars per Year)
Leading Countries in International
Services Trade, Total Value
 Leading Countries in International
Services Trade , as % of Nation’s GDP
 International Financial Services Sector

• Banking and financial services are the most active

international services.
• Explosive growth of global capital markets is due to:
– Deregulation of world capital markets
– Falling investment barriers
– Banks/financial institutions are internationalizing in
pursuit of high returns to many previously untargeted
countries
– Money is flowing internationally into portfolio
investments and pension funds
• Leading players include Citibank, Deutsche Bank, BNP
Paribas, and HSBC
International Business: Strategy, Management, and the New Realities
Service Industry Sectors That Are
Rapidly Internationalizing
The Four Risks of International Business
 The Four Types of Risks in IB
• Cross-cultural risk: a situation or event where
a cultural miscommunication puts some human
value at stake
• Country risk: potentially adverse effects on
company operations and profitability holes by
developments in the political, legal, and
economic environment in a foreign country
• Currency risk: risk of adverse unexpected
fluctuations in exchange rates
• Commercial risk: firms potential loss or failure
from poorly developed or executed business
strategies, tactics, or procedures

International Business: Strategy, Management, and the New Realities

 Risks: Always Present but Manageable

• Managers need to understand their

implications, anticipate them, and take
proactive action to reduce adverse effects.
• Some risks are extremely challenging,
e.g., the East Asian economic crisis of
1998 generated substantial commercial,
currency, and country risks. Political and
social unrest surged to Indonesia,
Malaysia, South Korea, Thailand, and the
Philippines.

International Business: Strategy, Management, and the New Realities

 Participants in International Business
• Multinational enterprise (MNE): A large company
with substantial resources that performs various
business activities through a network of subsidiaries
and affiliates located in multiple countries.
• In addition to a home office, an MNE owns a
worldwide network of subsidiaries.
• Examples- Caterpillar, Kodak, Nokia, Samsung,
Unilever, Citibank, Vodafone, DHL
• Examples of Fortune’s Global 500- Exxon Mobil,
Royal Dutch Shell, BP, General Motors,
DaimlerChrysler, Toyota, Ford, and Wal-Mart.

International Business: Strategy, Management, and the New Realities

Geographic Locations of Multinational Enterprises
 Small and Medium-Sized Enterprise
A company defined (in the U.S.) as having 500 or
fewer employees
• Comprise 90 - 95 % of all firms in most
countries.
• Increasingly more SMEs participate in
international business
• Account for 1/3 of exports from Asia; 1/4 of the
exports from the affluent countries in Europe and
North America
• Contribute more than 50 percent of total national
exports in Italy, South Korea, and China.

International Business: Strategy, Management, and the New Realities

 The Born Global Firm
Born global firm: a young entrepreneurial company
that initiates international business activity very early in
its evolution, moving rapidly into foreign markets.
‘Born Globals’ and SMEs:
• Are often more innovative, adaptable, and have quicker
response times;
• Are better able to serve niche markets;
• Leverage the Internet to do international business;
• Tend to minimize fixed costs and outsource, due to limited
resources;
• Tend to flourish on private knowledge that they cultivate
via their knowledge networks.
International Business: Strategy, Management, and the New Realities
 Why do Firms Internationalize?

1. Seek opportunities for growth through market

diversification

2. Earn higher margins and profits

3. Gain new ideas about products, services, and

business methods
4. Better serve customers that have relocated
abroad
5. Be closer to supply sources, benefit from global
sourcing advantages, or gain flexibility in the
sourcing of Business:
International productsStrategy, Management, and the New Realities
 Why do Firms Internationalize? (cont’d)

6. Gain access to lower-cost or better-value

factors of production
7. Develop economies of scale in sourcing,
production, marketing, and R&D
8. Confront international competitors more
effectively or thwart the growth of
competition in the home market
9. Invest in a potentially rewarding
relationships with foreign partners
30
 Why Study International Business?

• A facilitator of the global economy and

interconnectedness
• A contributor to national economic well-
being
• A competitive advantage for the firm
• An activity with societal implications
• A source of competitive advantage for you

International Business: Strategy, Management, and the New Realities

 Contributor to National Economic Well-Being

• International trade is a critical engine for job

creation. It is estimated that every $1 billion
increase in exports creates more than 20,000 new
jobs.
• One of every seven dollars of U.S. sales is made
abroad.
• International business is both a cause and a result
of increasing national prosperity.
• Prosperity is accompanied by literacy rate gains,
nutrition and health care improvements, with some
tendencies towards freedom and democracy.

International Business: Strategy, Management, and the New Realities

 A Competitive Advantage for the Firm
• Increase sales

• Maximize returns: Foreign markets often

generate returns far superior to those in
domestic markets.
• Global scale economies: International players
can maximize their efficiencies by securing cost-
effective factor inputs from around the world.
• Resource acquisition: Access to otherwise
unavailable critical resources

International Business: Strategy, Management, and the New Realities

 An Activity with Societal Implications
• As firms increase their international activities, so does responsibility
to society to be a good corporate citizen.
• Large corporations like Wal-Mart, Unilever, and Sony have annual
revenues larger than the GDPs of many of the nations they operate.
• The internationalization of thousands of firms negatively impacts the
natural environment, e.g. pollution (Royal Dutch Shell’s refining
operations in Nigeria).
• Large banks and international investment brokers have disrupted
the economies of nations with aggressive currency trading or by
manipulating stock markets.
• Some MNEs ignore human rights and basic labor standards by
establishing factories in countries that pay low wages with
substandard working conditions, e.g. Nike in Asia.
• Building factories abroad often leads to job losses at home.

International Business: Strategy, Management, and the New Realities

 A Competitive Advantage for You
• Julie, the student in the opening vignette is touched
everyday by a variety of global business
transactions.
• She is considering a career in international business
because she is grasping its importance and growing
role in the world.
• Working across national cultures exposes managers
to a diversity of experiences, new knowledge, novel
ways of seeing the world, and unusual challenges.
• Internationally-experienced managers are typically
more self-confident, cosmopolitan, and have
positioned themselves for unique professional
opportunities.
International Business: Strategy, Management, and the New Realities