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BSA CORE 6
INTERNATIONAL BUSINESS AND TRADE

MODULE 1
(Monday)

Learning outcomes
1. Define international business.
2. Explain why companies go international.
3. Identify the participants in international business.
4. Describe the global perspective of international business.

What is international business?

International business is all commercial transactions - private and governmental
between two or more countries.
o Private companies undertake such transactions for profit; governments
may or may not do the same in their transactions.
 These transactions include sales, investments, and transportation.
o Company operating in the international business field will engage in
modes of business, such as exporting and importing, that differ from those
it is accustomed to on a domestic level.

International business refers to profit-related activities conducted across national

boundaries.
o The environment for those business activities within which the
international manager functions is shaped by major developments in the
world.
o Such developments are globalization; the various regional trading blocs
such as the
 European Union with the introduction of the Euro as its legally
tradable currency;
 North American Free Trade Agreement (NAFTA);
 Commonwealth of Independent States (CIS);
 information technology;
 workforce diversity;
 status of the emerging economies of China, India, Mexico and
Brazil;
 unstable political situation in various parts of the world, such as the
one in Afghanistan, the Middle East, and in various parts of Africa

International business is any firm that engages in international trade or

investment.
o A firm has to do is export or import products from other countries.
o As the world shifts toward a truly integrated global economy, more firms,
both large and small, are becoming international businesses.
Katsioloudes, Marios & Hadjidakis, Spyros. 2007. International Business: A Global Perspective. Elsevier
Inc.
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Differences between countries require that an international business vary its

practices country by country.
o Marketing a product in Great Britain may require a different approach than
marketing the same product in China.
o Managing Italian workers might require different skills than managing
Japanese workers.
o Maintaining close relations with a particular level of government may be
very important in Greece and irrelevant in Germany.
o Business strategy pursued in Sweden might not work in Singapore.
o Managers in an international business must not only be sensitive to these
differences, but they must also adopt the appropriate policies and
strategies for coping with them.

Conducting business transactions across national borders requires an

understanding of the rules governing the international trading and investment
system.
o Managers in an international business must also deal with government
restrictions on international trade and investment.
 They must find ways to work within the limits imposed by specific
governmental interventions.
o Furthermore, even though many governments are nominally committed to
free trade, they often intervene to regulate cross-border trade and
investment.
 Managers within international business must develop strategies
and policies for dealing with such interventions.

Cross-border transactions also require that money be converted from the firm’s
home currency into a foreign currency and vice versa.
o Since currency exchange rates vary in response to changing economic
conditions, an international business must develop policies for dealing with
exchange rate movements.
o A firm that adopts a wrong policy can lose large amounts of money, while
a firm that adopts the right policy can increase the profitability of its
international transactions.

Overall, managing an international business is different from managing a purely

domestic business for the following reasons:
1. Because of different cultural, political, economic, and legal systems, and
so on, countries are different.
2. The issues at the international business level are more complex than
those at the domestic level.
3. International business transactions involve converting money into different
currencies.
4. International business must find ways to work within the limitations and
constraints imposed by the various governments.
Katsioloudes, Marios & Hadjidakis, Spyros. 2007. International Business: A Global Perspective. Elsevier
Inc.
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Why Do Companies Go International?

To successfully conduct business abroad, companies must often adopt practices

other than what they are accustomed to domestically.
o Differences in the legal-political, economic, and cultural environment all
may necessitate a company’s altering every type of business activity, from
production and accounting to finance and marketing.

Legal–Political Environment
Different countries adhere to various treaties while every country in the world is a
sovereign entity with its own laws and political systems.
o These laws dictate what businesses can exist, how they can be organized,
their tax liabilities, the minimum wages they must pay to employees, how
much they may cooperate with competitors, and how they must price their
goods and services.
o Companies that do business internationally are subject to the laws of each
country in which they operate.
o When laws differ greatly from those at home, a firm may encounter
substantial operating problems abroad.

In some areas of the world most laws are codified while in others, such as the
United Kingdom, there is a common law heritage in which precedents set the
rules.
o In still other countries, like Saudi Arabia, a state religion dictates what is
legal.
o Political systems range across a spectrum from dictatorships to
democracies, and democracies vary substantially.
 For instance, Switzerland and the United States are both frequently
held to be models of democracy.
 In the former, however, the general population votes on most
legislation, whereas in the latter, representatives enact legislation.
In terms of business operations, companies wishing to have
specific legislation enacted may thus lobby public officials in the
United States but must influence general public opinion in
Switzerland.

Economic Environment
o People in rich countries, such as the United States, Canada, and Sweden,
earn on average about 100 times more than those in such poor countries
as Burkina Faso, Bangladesh, and the Democratic Republic of Congo.

o Generally, poor countries have smaller markets on a per capita basis, less
educated populations, higher unemployment or underemployment, poor
health conditions, greater supply problems, higher political risk, and more
foreign exchange problems.
Katsioloudes, Marios & Hadjidakis, Spyros. 2007. International Business: A Global Perspective. Elsevier
Inc.
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o In terms of market size on a per capita basis, the United States has almost
100 times as many cars as India has, despite India’s much larger
population.

o Inadequate infrastructure (such as roads, ports, electrical power, and

communications facilities) in poor countries causes supply problems.

o Poorer countries are more apt than richer countries to depend on primary
goods, such as raw materials and agricultural products, to earn income
abroad.
 The prices of these primary products have not risen as rapidly as
have prices of services and manufactured products.

o Prices tend to fluctuate greatly from one year to another because of

climatic conditions.
 Exporters to these economies thus face variations from year to year
in their ability to sell and receive payment for goods and service

Cultural Environment.
o “Culture” refers to the specific learned norms of society based on
attitudes, values, beliefs, and frameworks for processing information and
tasks.
 These norms vary from one country to another, and they are
reflected in attitudes toward certain products, advertising, work and
relationships among the people of a given society.
 For example, different countries have different norms
regarding the extent of worker participation and decision
making within their organizations.

o Cultural differences are also reflected in the acceptance of certain

products.
 Pork products, for instance, have almost no acceptance in
predominantly Muslim societies, nor do meats of any kind in
predominantly Hindu societies.
 Cold cereals are extremely popular in Ireland, but not in Spain.

Why Do Companies Go International?

Minimize competitive risk
o Many companies enter into international business to protect themselves
against domestic companies that might gain advantages in foreign
markets and then use that advantage in the domestic market.
 For example, Company X may fear that Company Y will generate
large profits from a foreign market if left alone to serve that market.
 Company Y then might use those profits to improve its ompetitive
position domestically.

Katsioloudes, Marios & Hadjidakis, Spyros. 2007. International Business: A Global Perspective. Elsevier
Inc.
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 Thus, companies, being afraid of such activities, may enter a

foreign market primarily to prevent a competitor from gaining
advantages.

o Acquire resources
 Manufacturers and distributors seek out products, services, and
components produced in foreign countries.
 They also look for foreign capital, technologies, and information
they can use at home or reduce their costs.
 For example, Nike relies on cheap manufacturing operations
in Southeast Asian countries to make its products.
 Acquiring resources may enable a company to improve its
product quality and differentiate itself from competitors,
potentially increasing market share and profits.
 Although a company may initially use domestic resources to
expand abroad, once the foreign operations are in place, the
foreign earnings may then serve as resources for domestic
operations.
 For example, McDonald’s used the strong financial
performance of its foreign operation to invest in more
resources for domestic growth.

o Expand sales
 By reaching international markets, companies increase their sales
faster than when they focus on a single market, that being the
domestic one.
 These sales depend on the consumers’ interest in the
product and their ability to purchase the product.
 Higher sales mean higher profits and that in itself is a motive for
companies to go international.
 Many of the world’s largest companies derive over half their sales
from outside their home country, such as BASF of Germany,
Electrolux of Sweden, Gillette and Coca-Cola of the United States,
Michelin of France, Philips of the Netherlands, Sony of Japan,
Nestle of Switzerland.

o Diversify sources of sales and supplies

 In order to minimize fluctuations in sales and profits, many
companies may look for foreign markets to take advantage of the
business cycle differences among countries.
 Sales increase in a country that is expanding economically
and decrease in another that is in recession.
 Consequently, companies may be able to avoid the full
impact of price fluctuations or shortages in any one country,
by obtaining supplies of the same product or component
from different countries.
Katsioloudes, Marios & Hadjidakis, Spyros. 2007. International Business: A Global Perspective. Elsevier
Inc.
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o Increase in Global Competition

 Many companies, of any size, decide to compete internationally
because new products quickly become known globally.
 Companies can produce in different countries.
 Suppliers, competitors and customers of domestic companies have
become international.

o Development and Expansion of Technology

 Technological advancements have enabled more and more
companies to be exposed to an increased number of international
business activities.
 Transportation and communication costs are more conducive for
international business operations.

o Liberalization of Cross-Border Movements

 Lower governmental barriers to the movement of goods, services,
and resources (financial, human, informational, physical) enable
companies to take better advantage of international opportunities.
 The European Union, the NAFTA, and other regional economic
blocs throughout the world provide fewer restrictions on cross-
border movements than they did a decade or two ago.

o Development of Supporting Services

 Companies and governments of various countries, alike, have
developed services that ease international business.
 Mail, which is a government monopoly, could be transferred by an
airline other than that of the country of origin, with a stamp of the
country of origin, and could go through many different countries
before it could reach its final destination.
 Also, banking institutions have developed efficient and effective
means for companies to receive payment for their foreign sales.
 The banks can assist in the payment of any currency through
various international business transactions, upon the receipt of
goods and/or services

Katsioloudes, Marios & Hadjidakis, Spyros. 2007. International Business: A Global Perspective. Elsevier
Inc.