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International Businessby
Daniels and Radebaugh
Chapter 1International Business:An Overview
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ObjectivesTo define internal business (IB) and describe how it differs
from domestic businessTo explain why companies engage in IB and why its growth
has acceleratedTo introduce different modes a company can use to
accomplish its global objectivesTo illustrate the role social science disciplines play in
understanding the environment of IBTo provide an overview of the primary patterns for
companies’ international expansionTo describe the major countervailing forces that affect IB
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Introduction to International Business (IB)IB—all commercial transactions between two or more countries
• Involves modes of business that differ from those at the domestic level
• Foreign conditions diversity company’s external environment
Why Companies Engage in IBExpand sales—greater purchasing power in the world as a
wholeAcquire resources—products, services, components
• also, foreign capital, technologies, informationDiversify sources of sales and supplies—takes advantage of
business cycle differences among countriesMinimize competitive risk—prevent competitor from gaining
advantages
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International Business: Operations and Influences
Modes• Importing and exporting• Tourism and transportation• Licensing and franchising• Turnkey operations• Management contracts• Direct and portfolio investment
Functions• Marketing• Production• Accounting• Finance• Human resources
OverlayingAlternatives• Choice of countries• Organization and control mechanisms
MEANS
EXTERNAL INFLUENCES
COMPETITIVE ENVIRONMENT• Major advantage in price, marketing, innovation, or other factors• Number and comparative capabilities of competitors• Competitive differences by country
PHYSICAL AND SOCIETAL FACTORS• Political policies and legal practices• Cultural factors• Economic forces• Geographical influences
OPERATIONS
OBJECTIVES• Sales expansion• Resource acquisition• Diversification• Competitive risk minimization
STRATEGY
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Reasons for Growth of IBExpansion of technology—transportation and communication
are quicker and less costlyLiberalization of cross-border movements
• Government barriers reduced because:– desire for better access to greater variety of goods
and services– domestic producers forced to be more competitive– lowered trade barriers to their own exports
Development of supporting services by business and governments to:
• Ease the flow of goods and services sold abroad• Reduce risks of IB
Increase in global competition—firms have become more global to maintain competitiveness
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Means of Carrying Out International Operations
Modes• Importing and exporting• Tourism and transportation• Licensing and franchising• Turnkey operations• Management contracts• Direct and portfolio investment
Functions• Marketing• Production• Accounting• Finance• Human resources
OverlayingAlternatives• Choice of countries• Organization and control mechanisms
MEANS
EXTERNAL INFLUENCES
COMPETITIVE ENVIRONMENT
PHYSICAL AND SOCIETAL FACTORS
OPERATIONS
OBJECTIVES
STRATEGY
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Modes of IBMerchandise exports and imports—most common international
economic transaction, especially for smaller companies• Major source of international revenue and expenditures
for most companiesService exports and imports—nonproduct international
earnings• Tourism and transportation• Performance of services for a fee
– turnkey operations– management contracts
• Use of assets by others—licensing agreements– royalties– Franchising—franchisor:
» allows franchisee to use trademark» provides components, technology, services
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Modes of IB (cont.)Investments—ownership of foreign property in exchange for
financial return• Foreign direct investment—investor gains a controlling
interest in foreign company– joint venture– mixed venture
• Portfolio investment—noncontrolling interest
International Companies—terminologyStrategic alliance—collaborative arrangement of critical
importance to the competitive viability of one or more partners
Multinational enterprise (MNE)—company with global approach to foreign markets and production
Globally integrated company—integrates operations located in different countries
Multidomestic company—foreign-country operations act fairly independently
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Physical and Societal Influences on International Business
EXTERNAL INFLUENCES
COMPETITIVE ENVIRONMENT
PHYSICAL AND SOCIETAL FACTORS• Political policies and legal practices• Cultural factors• Economic forces• Geographical influences
OPERATIONS
OBJECTIVES
MEANS
STRATEGY
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External Influences on IBPhysical and societal factors—must understand
• Politics that affect whether and how IB occurs• Domestic and international law determines what
managers can do in IB• Economics• Geography—determine location and availability of world’s
resourcesCompetitive environment
• Varies by industry, company, and country– strategies differ across companies
» e.g., importance of controlling labor costs» e.g., influence of local and international competitors
– size of market differs across countries
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Competitive Environment and International Business
OPERATIONS
OBJECTIVES
MEANS
STRATEGY
EXTERNAL INFLUENCES
PHYSICAL AND SOCIETAL FACTORS
COMPETITIVE ENVIRONMENT• Major advantage in price, marketing, innovation, or other factors• Number and comparative capabilities of competitors• Competitive differences by country
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Evolution of Strategy in International ProcessRisk minimization—foreign operations viewed as risky
international commitments evolve graduallyPatterns of expansion
• Passive to active pursuit of IB opportunities – initially wait for foreign opportunity• External to internal handling of IB
– rely on intermediaries at first• Limited to extensive modes of operations
– begin with importing or exporting operation• Few to many foreign locations• Similar to dissimilar business environments
Leapfrogging of expansion—new companies begin with international focus
• Possible because of founder’s experience and technological advances that help define foreign markets
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DomesticBusiness
The Usual Pattern of Internationalism
HIGH
MEDIUM
LOW
C
Mode ofoperations
Limitedforeignfunctions,usuallyexport/import
Extensiveproductionabroad withFDI and allfunctions
Limited foreignproduction andmultiple functions
AImpetus forinternationalbusiness
Active searchfor opportunities
Passiveresponse to
proposals
D
One
Several
Many
Number of foreign countries in which a firm does business
E
Quitesimilar
Verydissimilar
Moderatelysimilar
Degree ofsimilaritybetweenforeign anddomesticcountries
B
Other firmshandle externalcontracts
Company handlesits own foreignoperations
Internal versusexternal handling offoreign operations
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Countervailing Forces—complicate decision makingGlobal standards—export suited to many countries
– results in economies of scale– based on global strategy
Nationally responsive practices—adjust product or service to unique local conditions
– multidomestic approach advisableCountry versus company competitiveness
• Companies compete by seeking maximum efficiency on a global scale
• Countries compete with each other to attain economic, political, and social goals
– no consensus on measures of goal attainment• Relationship unclear between country and company
performance– high-value activities—produce high profits or
performed by well-paid employees
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Countervailing Forces (cont.)Sovereignty—freedom from external control
• Countries will cede in order to:– gain reciprocal advantages
» bilateral or multilateral commercial treaties or agreements
– attack problems that cannot be solved by a single country
» problem is too big or widespread» problem results from conditions that spill over
from another country– deal with areas of concern that lie outside the
territory of all countries (noncoastal areas of the ocean, outer space, Antarctica)
» technologically advanced countries believe that companies should reap benefits from exploitation
» other countries want to share the spoils
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