1. International Businessby
Daniels and Radebaugh
Chapter 1
International Business:
An Overview
© 2001 Prentice Hall

2. Objectives
To define internal business (IB) and describe how it differs from domestic business
To explain why companies engage in IB and why its growth has accelerated
To introduce different modes a company can use to accomplish its global objectives
To illustrate the role social science disciplines play in understanding the environment of IB
To provide an overview of the primary patterns for companies’ international expansion
To describe the major countervailing forces that affect IB
© 2001 Prentice Hall

3. 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 IB
Expand sales—greater purchasing power in the world as a whole
Acquire resources—products, services, components
also, foreign capital, technologies, information
Diversify sources of sales and supplies—takes advantage of business cycle differences among countries
Minimize competitive risk—prevent competitor from gaining advantages
© 2001 Prentice Hall

4. International Business: Operations and Influences
EXTERNAL INFLUENCES
OBJECTIVES
Sales expansion
Resource acquisition
Diversification
Competitive risk
minimization
PHYSICAL AND
SOCIETAL FACTORS
Political policies and
legal practices
Cultural factors
Economic forces
Geographical influences
STRATEGY
COMPETITIVE
ENVIRONMENT
Major advantage in price,
marketing, innovation, or
other factors
Number and comparative
capabilities of competitors
Competitive differences
by country
MEANS
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
Overlaying
Alternatives
Choice of
countries
Organization
and control
mechanisms
© 2001 Prentice Hall

5. Reasons for Growth of IB
Expansion of technology—transportation and communication are quicker and less costly
Liberalization 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
© 2001 Prentice Hall

6. Means of Carrying Out International Operations
EXTERNAL INFLUENCES
OBJECTIVES
PHYSICAL AND
SOCIETAL FACTORS
STRATEGY
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
Overlaying
Alternatives
Choice of
countries
Organization
and control
mechanisms
MEANS
COMPETITIVE
ENVIRONMENT
© 2001 Prentice Hall

7. Modes of IB
Merchandise exports and imports—most common international economic transaction, especially for smaller companies
Major source of international revenue and expenditures for most companies
Service 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
© 2001 Prentice Hall

8. International Companies—terminology
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—terminology
Strategic 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
© 2001 Prentice Hall

9. Physical and Societal Influences on International Business
EXTERNAL INFLUENCES
OPERATIONS
PHYSICAL AND
SOCIETAL FACTORS
Political policies and
legal practices
Cultural factors
Economic forces
Geographical influences
OBJECTIVES
STRATEGY
COMPETITIVE
ENVIRONMENT
MEANS
© 2001 Prentice Hall

10. External Influences on IB
Physical 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 resources
Competitive 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
© 2001 Prentice Hall

11. Competitive Environment and International Business
OPERATIONS
EXTERNAL INFLUENCES
PHYSICAL AND
SOCIETAL FACTORS
OBJECTIVES
COMPETITIVE
ENVIRONMENT
Major advantage in price,
marketing, innovation, or
other factors
Number and comparative
capabilities of competitors
Competitive differences
by country
STRATEGY
MEANS
© 2001 Prentice Hall

12. Evolution of Strategy in International Process
Risk minimization—foreign operations viewed as risky
international commitments evolve gradually
Patterns 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
© 2001 Prentice Hall

13. The Usual Pattern of InternationalismB
Other firms
handle external
contracts
Company handles
its own foreign
operations
Internal versus
external handling of
foreign operations A
Impetus for
international
business
Active search
for opportunities
Passive
response to
proposals
HIGH
MEDIUM
LOW
Domestic
Business C
Mode of
operations
Limited
foreign
functions,
usually
export/
import
Extensive
production
abroad with
FDI and all
functions
Limited foreign
production and
multiple functions E
Quite
similar
Very
dissimilar
Moderately
Degree of
similarity
between
foreign and
domestic
countries D
One
Several
Many
Number of foreign countries in which a firm does business
© 2001 Prentice Hall

14. Countervailing Forces—complicate decision making
Global 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 advisable
Country 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
© 2001 Prentice Hall

15. 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
© 2001 Prentice Hall