BB-403

International
business
Ch. 1
An Overview of International
Business

Chapter Objectives
(1) The political, economic, and financial landscape
of international business
Instills awareness of the issues a firm might encounter in
international business:
Globalization of the marketplace, differences that remain in the
global marketplace (culture, ethics, etc), the international trade
/investment environment, political economy of trade, foreign
exchange and international monetary system

(2) Firm Strategies to undertake in order to operate

in a global arena
With an awareness of the political, economic, and
financial landscape of international business, how do
firms operate transnationally?
Strategy in general, entry strategy, alliances, exporting/importing,
global production/outsourcing/logistics, global marketing, R&D,
global human resource management, international financial
management

Introduction
International

business: the study of

transactions taking place across national
borders for the purpose of satisfying the needs
of individuals and organizations.
Transactions can be production or distribution of
goods or services.
A Modern Outlook of International Business is
Globalization
The shift toward a more interdependent and
integrated global economy.
Such globalization can take place in terms of
markets, where trade barriers are falling and
buyer preferences are changing. It can also be
seen in terms of production, where a company

Need of International
Business
Expand

sales

Volkswagen (Germany)
Ericsson (Sweden)
IBM (United States)
Acquire

resources

Better components, services, products

Foreign capital
Technologies
Information

Minimize

risk

Take advantage of the business cycle for

products/services
Diversify among international markets

Need for International Business

(Society)
Causes the flow of ideas, services, and
capital across the world
Offers consumers new choices
Permits the acquisition of a wider variety of
products
Facilitates the mobility of labor, capital,
and technology
Provides challenging employment
opportunities
Reallocates resources, makes preferential
choices, and shifts activities to a global
level

Types of International
Business
Imports
Exports
Foreign

Direct Investment (FDI)

Licensing
Franchising
Joint Venture
Manufacturing in Foreign Country
Management Contracts
Consultancy Services
Strategic Partnerships
Mergers
Counter Trades

Approaches to International
Business
Ethonocentric

Approach
Polycentric Approach
Regionocentric Approach
Geocentric Approach

Theory of International
Business
Classical School

Mercantilism
Absolute Advantage
Comparative Advantage
Factor Proportions Theory
Leontief Paradox

Modern School

Country Similarity
Product Life Cycle
Global Strategic Rivalry
Porters Theory of Competitive
Advantages

Classical School

Mercantilism 16th Century thinking. This theory stated that a countrys

wealth was determined by the amount of its gold and silver holdings. In its
simplest sense, mercantilists believed that a country should increase its
holdings of gold and silver by promoting exports and discouraging imports.
Eg: China, Japan, Singapore and Germany,
Absolute Advantage: Adam Smith in his book Wealth of Nations (yr.
1776) emphasized on the concept of better quality production with shorter
production time. Core view Specialization.
Comparative Advantage: developed by David Ricardo in the year 1817
based on the idea of Concentration.
Factor Proportions Theory (HeckscherOhlin theory) : In the early 1900s,
two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their
attention on how a country could gain comparative advantage by producing
products that utilized factors that were in abundance in the country .

Leontief Paradox: in economics is that the country with the

world's highest capital-per worker has a lower capital/labor ration in
exports than in imports.

Modern School

Country Similarity Theory: Swedish economist Steffan Linder developed the country
similarity theory in 1961.

Product Life Cycle Theory: Raymond Vernon, a Harvard Business School professor,
developed the product life cycle theory in the 1960s.

Global Strategic Rivalry Theory: Theory emerged in the 1980s and was based on the
work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs
and their efforts to gain a competitive advantage against other global firms in their
industry. Firms will encounter global competition in their industries and in order to
prosper, they must develop competitive advantages thus reducing entry barriers.

The barriers to entry refer to the obstacles a new firm may face when trying to enter into an
industry or new market. The barriers to entry that corporations may seek to optimize
include:
research and development,
the ownership of intellectual property rights,
economies of scale,
unique business processes or methods as well as extensive experience in the industry, and
the control of resources or favorable access to raw materials

Global Marketing Theory of

Competitive Advantages,
Michael

Porters theory of the

competitive advantage of nations
provides a sophisticated tool for
analyzing competitiveness with all its
implications. Porters theory contributes
to understanding the competitive
advantage of nations in international
trade and production
The home nation influences the ability
of its firms to succeed in particular
industries

Global Marketing Theory of

Competitive Advantages
Michael Porter considers the
competitiveness of a country as a
function of four major
determinants:
factor conditions;
demand conditions;
related and supporting
industries; and,
firm strategy, structure, and
rivalry.

1) Factor Conditions
Factor conditions being the inputs which affect
competition in any industry comprise a number of broad
categories:
Human resources: the quantity, skills, and cost of
personnel (including management);
Physical resources: the abundance, quality,
accessibility, and cost of the nations land, water,
mineral, or timber deposits, hydroelectric power sources,
fishing grounds, and other physical traits.
Knowledge resources: the accumulated scientific,
technical, and market knowledge in a nation in the
sphere of goods and services
Capital resources: the stock of capital available in a
country and the cost of its deployment;
Infrastructure resources: the characteristics
(including type, quality) and the cost of using the
infrastructure available.

2) Demand Conditions
Home Demand Composition: The composition of
home demand determines the way firms perceive,
interpret, and respond to buyer needs. Three
characteristics of the composition of home demand
play a particularly significant role for the achievement
of competitive advantage.
Segment structure of demand.
Level of buyers sophistication.
Anticipatory buyer needs.

Demand Size and Pattern of Growth

Internalization of Domestic Demand

3) Related and Supporting Industries

4) Firm Strategy, Structure, and Rivalry

Problems of Trade and Aid to

Developing Countries
1. Distance:
2. Different languages:
3. Difficulty in transportation and communication:
4. Risk in transit:
5. Lack of information about foreign businessmen:
6. Import and export restrictions:
7. Documentation:
8. Study of foreign markets:
9. Problems in payments:
10. Frequent market changes:
11. Investment for longer period:
12. Intense competition: