WELCOME TO:

INTERNATIONAL BUSINESS

Dr. Abdu Muhammed

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 Chapter One
Introduction to
International Business
 1.1. Nature & Scope of International
Business
International Business (IB) deals with
the nature, strategy and management of
international business enterprises and their
effects on business and national performance
(e.g., efficiency, growth, profitability,
employment).
IB consists of trades and transactions at
international/ global level. It is cross border
transaction of goods and services between
two or more countries
 Conti…
International business is any activity
involving business operations across national
borders
IB is interdisciplinary. It draws, among others, on
economics, politics, sociology, marketing ,
management (human resources, strategic).

In contrast to home-based, international operations

(e.g., exporting), establishes a presence in the
foreign market by investing capital and securing
ownership of a factory, subsidiary, or other facility
there.
 Conti…
International business consists of all
commercial transactions—including sales,
investments, and transportation—that take place
between two or more countries, whether they
involve private or public parties.

Increasingly foreign countries are a source of

both production and sales for domestic companies

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1.2. International Vs Domestic Business?

- A domestic transaction is the selling of items

produced in the same country. It is when the
business transaction practices are limited to the
home country only.
- The business strategies are formulated and
implemented to the home countries

 An international transaction is the selling of

items produced in other countries. These items
contribute to the global economy.

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 conti…

 When operating IB, companies may have to

adjust their usual methods of carrying out
business.

 Foreign conditions often dictate a more

suitable method, and the operating modes used
for international business differ from those used
on a domestic level.

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Why is IB different?
 International Environment
 Interaction between domestic and foreign
environmental forces or between sets of
foreign environmental forces
 Increased complexity for decision-making

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 Domestic Environment
All the uncontrollable forces in the home
country that surround and influence the
firm’s life and development

 Foreign Environment
All the uncontrollable forces originating
outside the home country that surround
and influence the firm

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 1.6. Factors Contributing to Rapid Growth
of International Business
1. Increase in and expansion of technology
2. Liberalization of cross-border trade and
resource movements
3. Development of services that support
international business
4. Growing consumer pressures
5. Increased global competition
6. Changing political situations
7. Expanded cross-national cooperation
 1.7. Why firms seek international
business
React to inquiry from abroad
Exploit market potential and growth
Seek more sales and profits
Little or no growth at home
Respond to the domestic competition shock
Follow major customers abroad
leverage economic of scale and scope
Learn how to do business abroad
 Conti…
To Acquire Resources: may give
companies lower costs, new and better
products, additional operating knowledge
To Diversify or Reduce Risks: international
operations may reduce operating risk by
smoothing sales and profits, preventing
competitors from gaining advantage
 1.10. INTERNATIONAL ORGANIZATIONS
WORKING FOR THE Growth OF International Business
1.11. Globalization: New Term of
IB?
 Globalization
“as if the entire world (or major regions of it) were
a single entity; [such an organization] sells the
same things in the same way everywhere”
(Theodore Levitt)

 Globalisation refers to the increasing

integration of markets (exchange) and
production, to include the mobility of resources
(capital, labour, ‘organization and knowledge’).

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Globalization Forces I
 Political forces
 Reduction of barriers to trade and foreign
investment by governments
 Privatization of former communist nations

Technological forces
 Advances in computers and
communications technology
 Internet and network computing

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 Market forces
 Globalizing companies become global
customers

Cost forces
 Goal for economies of scale to reduce unit
costs

Competitive forces
 Increase in intensity due to explosive
growth in international business

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1.12. Multinational Enterprises
(MNEs)
Internationalisation of production involves
international capital flows, international trade of
commodities (exports-imports) and Foreign
Direct Investment (FDI) by MNCs.

IB is the result of the internationalisation of

production and the emergence of the
multinational corporations (MNCs), the
subject matter of IB.

Multinational Enterprises (MNEs) take a

global approach to markets and production.
Sometimes they are referred to as multinational
corporations or companies (MNCs) or
transnational companies (TNCs).
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1.13. The Five Ps of International Business
-All
countries benefit when businesses produce
specialized goods and services that appeal to
consumers.

-International business provides increased

markets for businesses and offers them a broader
choice of products, services, and prices for its
consumers.
The Five Ps of International Business
1. Product
2. Price
3. Proximity
4. Preference
5. Promotion 27
Product
-country’s resources determine what goods and services it
produces.

Price
The cost of producing goods and services varies from country
to country. Sometimes it may be more profitable for
businesses to produce products overseas and then ship them
here to sell to consumers. Lower foreign wages, taxes, and
material costs make it cheaper to produce products abroad
rather than domestically.
Proximity
It may be more advantageous and profitable for some
businesses to sell products and services to consumers near
a neighboring country’s border rather than to its domestic
customers.
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Preference
Consumers often purchase foreign goods and services
based on their reputation and specialization, even
though similar products are produced domestically.

Promotion
Technology, especially the Internet, makes it easy
for businesses to promote their products and services
internationally.

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 1.14. Barriers to International Marketing
One reason international trade is different from
domestic trade is that it is carried on between
different political units, each one a sovereign
nation exercising control over its own trade.
Domestic politics often cause countries to try to
protect their domestic firms from foreign
firms by erecting barriers to trade.
Such forms of government intervention can be
divided into two categories: tariffs and
nontariff barriers
 Conti…
To encourage development of domestic
industry and protect existing industry,
governments may establish such barriers to trade
as tariffs, quotas, boycotts, exchange controls,
embargoes, and other market barriers.
Barriers are imposed against imports and against
foreign businesses.
While the inspiration for such barriers may be
economic or political, they are encouraged by
local industry.
 I. Tariff Barriers

A tariff, simply defined as a tax imposed by a government on

goods entering at its borders.
In other words, tariffs are the taxes or custom duties levied
against goods imported from other countries.
A tariff, or duty, which is the most common type of trade
control, is a tax governments levy on a goods shipped
internationally.
 Tariff, if collected by the exporting country is known as
export tariff.
 Tariff, if collected by a country through which the goods
passed is known as transit tariff.
 If tariff is collected by the importing country it is known as
import tariff.
Tariffs may be used as revenue-generating tax or to
discourage the importation of goods, or for both reasons.
Three forms of tariffs exist
Advalorem tariff;
Specific tariff &;
Compound tariff.

A. Ad valorem Tariff
It is assessed as percentage of the market value of the
imported good – such as 10% or 20% ad valorem, and
levied on manufactured goods.
The tariff applies to the value of the product, which
is typically the sales price at which it enters the
country.
 CONTI…
B. Specific Tariff
It is that tariff which is levied on quantity, that is, for
example, 75 cents per kilogram of imported sugar.
Specific tariff is levied primarily on primary
commodities.

C. Compound Tariff
It has both an ad valorem tariff component and a
specific tariff component.
For example, imported cherries are levied a 10% ad
valorem tariff and a 75 cents per kilogram specific tariff.
revenue
 Tariffs historically have been imposed for two reasons:
collection and protecting domestic businesses.
II. Non-Tariff Barriers
Nontariff barriers are the second category of
government controls on international Business

Nontariff barriers include;

 Product standards regulatory control,
 Foreign exchange control,
 Trade Sanctions and Embargoes,
 Testing or approval procedures,
 Subsidies for local products, and;
 Bureaucratic red tape, testing, certification,
quotas,
1.15. Flow of Goods and Services

Imports, such as raw materials, processed material, semi-

finished goods, and manufactured products, flow into the
country. Goods and materials also leave as exports.

Balance of Trade
-To maintain a healthy balance of trade, countries try to
import the same total value of products that they export.

-An imbalance of the two results in the following:

• a trade deficit in which a country pays more for imports than it
earns from exports
• a trade surplus in which a country earns more from exports
than it pays for imports 36
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