MBA Evening, International Business, Instructor: Binod Lingden Subba 2019

Unit : 1
INTERNATIONAL BUSINESS AND GLOBALIZATION
Chapter outlines
 Concept of International Business
 Reasons for International Business Expansion
 Domestic versus International Business
 Concept of globalization
 Forms of globalization
 Drivers of globalization

CONCEPT OF INTERNATIONAL BUSINESS

International business refers to all commercial transactions between two or more than two countries to satisfy the
objectives of individuals or organizations. These transactions include trade (import/export) of goods, foreign direct
investment (FDI), human resources, intellectual property, technology transfer, and international production. These
transactions may be of individuals, organizations, or government. Business can be internationalized through various
modes such as trade mode (import, export), investment mode (joint venture, Greenfield investment, acquisition,
strategic alliances), and contractual mode (licensing, franchising, management contract, and turnkey project).

How IB internationalized?
Trade mode (import, export)
Investment mode (joint venture, acquisition, etc.)
Contractual mode (licensing, franchising, etc.)

Commercial transactions
Home Country Host Countries

Who involved in IB? What are transacted in IB? Who involved in IB?
(In home country) Goods and services (In host country)
Individual/s Investment Individual/s
Organization/s Human resources Organization/s
Government Intellectual property Government
Technology

International business includes:

 Commercial transaction between two or more countries.
 Carried out by individuals, organizations and government.
 Transactions include goods & services, investment, technology, people, knowledge, skills, intellectual
property etc.
 Business internationalizes through trade, investment, and contractual modes.

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 MBA Evening, International Business, Instructor: Binod Lingden Subba 2019

REASONS FOR INTERNATIONAL BUSINESS EXPANSION

1. To increase sales and profits: Business expanding internationally allows sales expansion and higher profit.
When the company engaged in international business, numbers of customers are higher for a world as a whole
than in a single domestic market and therefore increases sales volume. Similarly, sales in foreign markets can
be at a higher price (margin) than in the domestic market because many imported products are as paid as
premium products and brands. Therefore, more sales in foreign markets, generally brings more profits.

2. To have economies of scale: Business expanding internationally facilitates to improve efficiency through
economies of scale in production. Economies of scale refer to the reduction of per-unit cost through mass
production. To put simply, expanding business will enable to produce more units and the more units company
produces to meet the demands of both domestic and foreign markets; the lower per unit cost will be. This will
ultimately increase the profit margin.

3. To get export incentives: When businesses internationalize their products, more often government provides
export incentives in order to encourage businesses to export products and to keep domestic products
competitive in the global markets. Some export incentives for international business include:
 Tax incentives: Government reduces tax for those businesses involved in foreign trade.
 Direct subsidies loans: Government provides loans at cheap interest rate those involved
in international trade with creative startups.
 Loan guarantee: Government promises to pay back or dismiss a loan if businesses fail:

4. To minimize the risk: As the old saying, “don’t put all your eggs in a single basket.” Companies that are over-
dependent on a single (or domestic) market may expose to increased risk from unpredictable market trends
and environments (PEST). Therefore, companies extend their businesses to foreign markets that provide
greater insulation to businesses when growth from other (or foreign) markets helps to sustain the overall
business, counterbalancing the affected ones. Becoming less dependent on a single market may helps to
mitigate potential risks in business.

5. To increase brand awareness: Today’s competitive markets (customers) demand products whose brand is more
popular assuming that it is more trusted and prestigious. Therefore, brand awareness is imperative to stand
out among the “noise”. Going overseas provide additional exposure to the business and increase prestige of
brand which may result in increased brand awareness or popularity. This is the part of the collective effort
needed for marketing to drive incremental sales. It provides companies with the ease of customer acquisition
and cultivates brand loyalty.

6. To increase market share: Some businesses expand internationally to increase their market shares. Market
share is the portion of a market controlled by a particular company or product. Businesses increase their
market share to keep their competitors away from markets, achieve greater sales and improve profitability.
This is done by expanding and intensifying their operations in various foreign countries.

7. To acquire resources: Sometimes raw material, human resources, capital, technologies, and other components
necessary for production are comparatively cheaper and easily available in foreign country. If businesses are
expanded internationally or operated abroad, these resources can be acquired from foreign country which are
not readily available in the home country so as to improve quality, differentiate itself from competitors, and
reduce cost of production.

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As some developing and emerging countries have large deposits of minerals, metals and land, the western
MNCs eye these markets in order to get access to the resources. This is the reasons why international
businesses operate in Africa and South Asia where the huge deposits of minerals and metals are attractive for
the profits that those these MNCs can make.
For example, Disney relies on cheap manufacturing bases in China and Taiwan to supply clothing to its souvenir outlets.

8. When domestic market is saturated: When the size of the home market is limited/saturated either due to the
smaller size of the population or due to lower purchasing power of the people or both, the businesses
internationalize their operations. This will revive the businesses in a big way and give revenue to the business.
Market saturation is the point at which a domestic market is no longer generating new demand for a firm’s
products due to tough domestic competition, decreased need, obsolescence, or some other factors.

DOMESTIC VERSUS INTERNATIONAL BUSINESS

1. Definition:
 A business that is carried out within the national or geographical borders of the country is called domestic
business. It always aimed at a single market.
 A business that is carried out across borders or with two or more countries in the world is called
international business. It aimed at multiple markets of different nations.
2. Scope
 Domestic business is carried out within the national border of the country. Though the business has many
establishments in different locations, all the commercial transactions are inside a single boundary.
 International business is carried out across border and territories of a country. It includes not only
merchandise exports, but also trade in services, licensing, franchising, and foreign direct investment.
3. Restrictions
 Tariffs and quotas are not present and very few local restrictions are imposed on a domestic business. As
domestic business has to follow law taxation of one country, there are only few restrictions.
 International businesses are directly and significantly influenced by the restrictions imposed by various
countries. These restrictions may be tariff and non-tariff barriers, exchange controls, local taxes etc which
most often act as barriers to international business.
4. Environment
 In case of domestic business, PEST environments are well known due to the familiarity of geography and
place of operation. Hence the organization can take the necessary precaution to assess its impact and adjust
quickly to the changes in the same.
 In case of international business, the various aspects of the macro external environment are unknown unless the
business is established and created a place for itself in the market. Thus a number of innumerable hidden
environmental factors may emerge during the settlement period which may pose problems.
5. Currency
 In case of domestic business, one currency is acceptable all over the country and therefore there are no
difficulties in making payments in internal trade.
 In case of international business, different currencies are used in different countries. Similarly, all payments
for imports are to be made in the exporting country’s currency which is not freely available in the
importers country. US dollar is the most common currency used in international business. Payment is
made through various modes such as letter of credit (LC), cash-in-advance, open account etc. However, the
scarcity of foreign currency may sometimes limit the size of imports from other countries.

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6. Human resources
 Due to past successes, proven record, and established systems, domestic business can prosper even if the
human resources have minimum skills and knowledge. The task of human resource management is much
simpler in domestic business. Employees are usually from the same country.
 International business requires multilingual, multi-strategic and multicultural human resources to handle
varied risks spread over countries. Thus the task of human resource management is much more complex.
Global human resource practices are carried out in an international business.
7. Nationality of buyer/s and seller/s
 With respect to domestic business, both the buyers and sellers belong to the same country. This leads to a
better understanding among each other and enter into business deals.
 With respect to international business, the buyers and sellers belong to different countries. Owing to
differences in their languages, attitudes, social customs and practices, it becomes comparatively more
difficult for them to work together and finalize business deals.
8. Plan and strategy
 In domestic business, plans and strategies are generally worked out in the short term. The short term plans
are linked together and carried forward into the long run.
 In case of international business, only a well thought out, proven, and practical long-term time bound
planning and strategy works.
9. Competition
 In domestic business, the competitive forces are restricted to a national boundary. The movement of
competitive forces can thus be analyzed and understood more clearly.
 In international business, the competitive forces are not restricted to a national boundary. They extend over
several countries, thereby making it difficult to analyze their motive and movement.
10. Investment
 In domestic business, depending on the size of business operations, one can start with a minimum
investment. Involvement of regulatory bodies in respect of small business enterprise is limited.
 In international business, all overseas operations except exports, call for huge investments to set up and
expand the business in foreign countries. Special regulatory bodies are involved in a process since the
foreign currency is transacted. Business should follow different legal or regulatory provisions for trade
and investment.

CONCEPT OF GLOBALIZATION
Globalization is the process of integration and interaction among people (through IT), organizations
(through FDI and contract), and governments of different nations (through free trade agreement)
across the world. It is the process of organizing the whole world into a single integrated unit through
politics, economy, culture, and technology. Globalization is a trend characterized by denationalization
(national boundaries becoming less important). It is the way in which the world is seen as the global
village.
From economic perspective, globalization refers to the process of increasing economic integration and
growing economic interdependence between nations. It means integration of different economies of
the world into one global economy thereby reducing the economic gap between different countries.
This is achieved by removing all restrictions on the movement of products, capital, labour and

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technology between nations. Globalization means integration of the national economy with the world
economy.
Globalization includes:
 It is the international integration
 It is the integration of national economies in to global economy.
 It facilitates free flow of factor of production such as capital, labour, technology and
management knowhow across countries.
 It is the promoter of economic interdependence among the countries.
 It is possible due to the advancement in information technology.

FORMS OF GLOBALIZATION
Globalization may be defines as the process of integration and convergence of economic, political, cultural,
environmental and technological system across world. Therefore, forms of globalization or types of globalization
include:
1. Political globalization: Political globalization refers to the amount of political co-operation that exists between
different countries through the medium of international institutions such as United Nation (UN), WTO, and
regional groupings. In political globalization, countries attempt to adopt similar political policies and styles of
government in order to facilitate other forms of globalization. It is the integration of national politics with rest
of the world.
For example, until the end of World War II, national governments were traditionally responsible for
ensuring the welfare of their citizens, however since 1945, more and more governments have become members
of International Institutions, such as the UN, through which they agree to stick to International guidelines on
issues such as citizenship and human rights. In this way, global political ideals restrict the freedom of
governments to shape domestic social policy. ‘

2. Economic globalization: Economic globalization is the increasing economic integration and interdependence
of national economy into global economy through expansion of cross-border movement of goods, services,
technologies and capital. Economic globalization primarily comprises the globalization of production, finance,
markets, technology, organizational regimes, institutions, corporations, and labour.
For example, Nepal sells handicraft products to rest of the world and buys technological
products, industrial raw materials, and investment from different countries.

3. Socio-cultural globalization: Socio-cultural globalization refers to the sharing and exchange of ideas,
language, religion, arts, dress, food, organizational culture among different countries. This process is marked by
the common consumption of cultures that have been diffused by the internet, popular culture media, and
international travel.
For example, English language is spoken globally. Fast food chains McDonald and KFC foods
are popular globally. English films and songs are watched worldwide.

4. Technological globalization: Technological globalization is concerned with improved information,

communication and transportation technologies that speed up the pace of information sharing, way of
communication, travelling, and foreign business operation. It is related with connection between nations
worldwide through technology such as television, radio, internet, etc.
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For example, Facebook, mobile phone, viber etc. allow people to communicate worldwide.
People can travel any part of the world in short period of time with advanced transportation.
Company can make mass production through advance technology.

5. Environmental globalization: Environmental globalization is concerned with protection of global ecosystem

from degradation and pollution where nations work together to conserve the world environment. The problem
of global warming, ozone layer depletion, air pollution, loss of biodiversity etc are becoming global issues for
which global actions are forwarded. It also concerned with international laws to save environment.
For example, international treaties to deal with environmental issues like biodiversity, climate
change or the ozone layer, wildlife reserves that span several countries.

DRIVERS OF GLOBALIZATION
Globalization is one of the powerful real aspects of the new world system, and it represents one of the most
influential forces in determining the future course of world. The drivers or determinants of globalization are:
1. Liberalization driver: Trade liberalization is the major driver of globalization that led to reductions in trade
barriers. Liberalized trading rules and deregulated markets lead to lowered tariffs barriers and allowed foreign
direct investments in almost all over the world. International institutions such as WTO (World Trade
Organization, 1995) and regional groupings such as EU, ASEAN, NAFTA, SAARC have facilitated trade
liberalization and privatization in the world.
Liberalization has resulted to:
 Decline in trade barriers: The liberalization led to the removal of trade barriers has taken place in
conjunction with increased trade and world output.
 Decline in investment barriers: The growth of foreign direct investment is a direct result of nations
liberalizing their regulations that allows foreign firms to invest and acquire local companies.

2. Advancement in technology driver: Technological advancements have made global expansion of international
business both possible and desirable. This drives globalization by making it easier for people, goods, and ideas
to move across borders.
 Advancements in transportation have made it possible to move vast amounts of people and product around
the world in just a short amount of time. Costs of shipping have come down, due to containerization, bulk
shipping, and other efficiencies. Similarly, the development of commercial jet aircraft has reduced the time
needed to get from one location to another.
 Advancements in communications have allowed people to send messages and information to each other
within seconds as opposed to days, weeks, or even months. The internet has dramatically lowered the cost of
transmitting and communicating information.
 Advancements in automations have made it possible to increase the production and flow of goods and
services.

3. Consumer demands driver: As population of the world increases and consumers have access to more goods,
companies are finding customers outside of their local region. As more people are exposed to media coverage,
movies, and television, their exposure to goods, and thus their desire for these products, is increasing.

4. Market driver: As domestic markets become more saturated, the opportunities for growth are limited and
global expanding is a way most organizations choose to overcome this situation. This means, after the domestic
market is saturated, organizations choose to enter into foreign markets to expand their businesses. Common
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customer needs and the opportunity to use global marketing channels and transfer marketing to some extent are
also incentives to choose internationalization.

5. Competition driver: Companies are forced to enter into foreign/global markets for various reasons although the
most rational are:
 To avoid domestic competition: If there is difficult to do business because of tough competition in domestic
market then companies choose to enter into international markets.
 Increased global competition: The pressure of increased global competition influence companies to expand its
business into international market. Companies have to become global to maintain competitiveness, failure to do
so could be disastrous to them.

6. Government driver: Government is the globalization driver that added favourable trade policies, acceptance of
foreign investment, compatible technical standards, and common marketing regulations. All these have a direct
and unequivocally positive effect on global marketing efforts.
Government has facilitates the following towards the globalization:
 Reduction of tariff barriers
 Reduction of non-tariff barriers
 Creation of new trading blocs
 Declining role of government as producers and consumers
 Market liberalization and privatization
 Adoption of common standards

7. Differences in cost between countries: As a number of factors such as stage of development, location, and
demography varies between countries, the cost of factors of production: land, labour, and capital will
undoubtedly differ as well. These differences also increase international trade and investment, thus further drive
globalization. Companies from developed or industrialized countries tend to outsource manufacturing works to
developing countries where factor of production costs are relatively low. These shifting trends of production
sites are the drivers of globalization.
For example, in China, 10,000 laborers work legal hours stitching shoes for Nike at $95 per month.
Therefore, it gives great incentive for companies such as Nike to outsource manufacturing work to
China and other low cost economies, where goods can be made at a fraction of the cost as opposed to
industrialized countries.