J ee The nature of international business gi. 1S now 2622- , INTRODUCTION TO INTERNATIONAL BUSINESS 1, Definition of international business /International business involves commercial activities that cross national frontiers)It concerns the international movement of goods, capital, services, employees and technology; importing and exporting; cross-border transac- tions in intellectual property (patents, trademarks, know-how, copyright materials, etc.) via licensing and franchising; investments in physical and financial assets in foreign countries; contract manufacture or assembly of goods abroad for local sale or for export to other nations; buying and selling in foreign countries; the establishment of foreign warehousing and distribu- tion systems; and the import to one foreign country of goods from a second foreign country for subsequent local sale. ' All the basic tools and concepts of domestic business management are relevant to international business (for information on these see the Frameworks text Management). However, special problems arise in international business not normally experienced when trading or manufacturing at home. In partic- ular: © Deals might have to be transacted in foreign languages and under foreign laws, customs and regulations. @ Information on foreign countries needéd by a particular firm may be difficult (perhaps impossible) to obtain, - aot ape Foreign currency transactions will be necessary. Exchange rate variations can be very wide and create many problems for international business. © Numerous cultural differences may have to be taken into account when trading in other nations. @ Control and communication systems.are normally more complex for foreign than for domestic operations. © Risk levels might be higher in foteign markets, The risks of inter- national business include political risks (of foreign governments expro- priating the firm's local assets, of war or revolution interfering with 1 Scanned with CamScannerINTERNATIONAL BUSINESS trade, or of the imposition of restrictions on importers’ abilities to pay for imports); commercial risks (market failure, products or adver ments not appealing to foreign custcmers, etc ); and financial ris} adverse “movements in exchange rates, tax changes, high rates of inflation reducing the real value of a company’s foreign working i capital, and soon. Heager © International managers require a broader range of management skills Gen m " f. than do managers who are concaitat oi oe domestic problems. Jomes he * Large amounts of important work might have to be left fe intonvedi- \ aries, consultants and advisers. 1 * It is_more_difficultto observe and monitor trends and acti (including com, titors’ activities) in foreign countri Why study international business? Nowadays the great majority of large enterprises operate internationally (as do an increasing number of small to medium sized firms), so that an awareness of the major issues in international business is a valuable asset for any manager in a company that deals with suppliers, customers, contractors, etc., in other countries. The study of i tional business helps licensees, ly of interna Ip the individual supplement his o owledge of general business functions (accounting and finance, personnel, marketing, etc) through examining issues, practices, problems and solutions os Telatin; to these functions in forej; . Also, it develops a person’s sensitivity to foreign cultures-values and Soci Social norms, thus enabling the individual to adopt broader perspectives and hence improve his or her’ overall managerial efficiency. Note how firms involved in international business necessarily operate in multifaceted, multicultural environments. 2. Why firms engage in international business Businesses undertake international operations in order to expand sales, acquire resources from foreign countries, or diversify their activities (Anderson 1993). Specific reasons for doing business abroad include the saturation of domestic markets; discovery of lucrative opportunities in other countries; the need to obtain ’materials, products or technologies not available in the home nation; increases in the How of information about conditions in foreign states; desires to expand the volume of a irm’s operations in ordé to obtain. Sconomis of ale or the need To ind am out br uplasToe ore Further motives for operating internationally are as follows: aut (a) Commercial risk can be spread across several countries.'3 (le pps 7 Val hem S T Combe . Problens ta Per , ©) Involvement’ in Intemational Business San faa eS fecteherbern | 0 curve’ effect, i.e. cost reductions ai ficiency, increases eae conse- quence of a business acquiring experience of certain types of activity, a function or project. These effects differ from economies of scale (see below) OAS in that they result from longer experience of doing something rather than 2 Scanned with CamScanner1+ THE NATURE OF INTERNATIONAL BUSINESS Producing a greater volume of output, Moreover, the firm's management is Taner fresh ideas and different approaches to solving. problems individual executives develop their general management skills and personal effectiveness; become innovative and adopt broader horizons. All. these factors can give a firm a competitive edge in its home country. (©) Economies of scope (as opposed to economies of scale) might become available. Economies of scale are_red resulting. from Impesale ope unit _productic Tculting from large-scale operations. Common examples are discounts obtained on bulk purchases, benefits from the application of the division of labour, integration of processes, the ability to attract high calibre labour and the capacity to establish research and development facilities. Similar benefits might ‘occur from ‘economies of scope’, i.e. unit cost reductions resulting from a firm undertaking a wide range of activities, and hence being able to Provide common services and inputs useful for each activity. Note how economies of scale might not be available if the firm has to modify its products, promotional strategies and business methods substantially for } each country in which it operates, and that the extra costs of foreign marketing, establishment of subsidiaries in other countries, market research, pl 0 etc., could erode the benefits obtained from a higher volume of output. (d) The costs of new product development could require so much expendi- jt! ture that the firmis com} to adopt an international perspective. (&) There might be intense competition in the home market but little in (© A company’s overall strategies and plans can be anchored against a wider range of (international) opportunities. Sudden collapses in market demand in some countries may be offset by expansions elsewhere. (e) Cross-border trade is today much easier to organise than in the past. Inter- Rational telephone and fax facilities are much better than previously. and facilities for international business travel are more extensive. Hence it is simpler to’ visit potential foreign customers,. partners and/or suppliers, to select the best locations for operations, and thereafter to control international activities. International operations of the small business ‘Although small firms are generally less likely to become involved in interna- tional operations than their larger counterparts, more and more small busi- nesses have foreign connections due to the development of regional trading blocs (especially the European Union), increased flows of information on foreign business opportunities (via the Internet for example) and the interna- tionalisation of finance and banking systems. However, nurfierous problems remain for the small firm wishing to engage in foreign trade: notably, lack of resources, limited time, and restricted’ knowledge of foreign business methods and markets. Characteristics of the international operations of small firms are: -3 Scanned with CamScanner(a) Activities are concentrated in the low-resource intensive and relatively low) INTERNATIONAL BUSINESS (ields of exporting and franchising, ie. isk forms of international trade. (6) The individual firm will ‘ypleally provide a limited range of goods or services, (© Normally the firm will not develop special products for foreign markets. Rather it will prefer to supply items Identical to those produced for sale at oly home. ee @) Small busines: ot dD international trade, SVG) Although the Ses are unlikely to possess strategies for managing their mi ‘anagers of small business will have accumulated much by oad =? experience of domestic marketing, their knowledge of international markets a and marketing methods will Probably be very poor, ) X x) Or, P cae Ke . 3. The process of internationalisation Material or other iny tex; rience of internationa i might be the receipt We A comy Les" ofan Unsolicited order from abroad, or a foreign firm offering to supply naterial or other inputs, ports might arise from the roducts possessin; in desired features and /or quality levels fro, local producers; from price differentials between imported and locally su; lied items; OF from inefficiencies in local dis ution syste fo eee ed Hes stems ‘that prevent local firms from Providing goods. Accordingly, the establishment of an export or import department is for many firms the first step towards wider internationalisation of operations. ny ie an list staff competent in the techni 7 of foreign trade, in the fina icing of international fransactions, and in shipping ‘umentation. Staff within the export department must bout various world markets, and will probably be multi- and other trang; be knowledgeable a lingual. . “As the work oan The ‘firm will (or' si import or export department expands, its inadequacy as foreign. bu: should) hav siness might become progressively evident © acquired detailed knowledge of business inethods in relevant foreign countries and in export/import procedures, and thus might be capable of dis Hence the com may set uy spensing with export/import intermediaries, its own branches, subsidiari Scanned with CamScanner1+ THE NATURE OF INTERNATIONAL BUSINESS businesses and to adopt regional perspectives that do not focus on particular nation states. Distinctions between international and domestic perspectives on company operations disappear: all the firm's corporate strategies now Possess an international dimension. ‘The next stage in the internationalisation process might involve the firm ndertaking joint ventures with foreign partners and/or establishing sub- ‘Stantial permanent presences in other states — each operation having its own employees, premises, warehouse, delivery vehicles, etc#-and operating as if it were a local firm. Setting up sizeable subsidiaries in other countries enables the firm to project local images in foreign nations, to acquire know- how and technical skills only available locally, reduce production costs (e.g. because of cheaper raw materials or labour), obtain investment grants from foreign governments, and perhaps minimise its worldwide tax liability. A permanent local presence is particularly useful in situations where there are Jong channels of distribution, where the product is technically complex and requires extensive after-sales support, or where large-scale ongoing adver- tising and/or sales promotions are required (Calof and Beamish 1995). As more and more of its activities take place in foreign countries and as sales and profits become critically dependent on world markets, so the business moves towards becoming a genuinely multinational company (MNO), ie. one that owns production, distribution, service and other units in many nations and (importantly) plans the utilisation of its resources on the global scale (Samiee and Roth 1992). An MNC will seek to maximise its Tevenues at the world rather, than national level, locating its operations wherever conditions are most favourable and regardless of the country in which the company’s head office is based. Trade liberalisation, growth in the world economy and easier trans-national, transfer of technologies and human and financial resources have greatly stimulated the number and rates of expansion of MINCs over the last 40 years (see Chapter 9). ~~ 4. Theories of internationalisation The ‘gradualistic’ process of internationalisation outlined in 3 above is known as the stages approach. This proposition that firms typically adapt to international marketing via an evolutionary series of sequential stages has a long and distinguished intellectual history (see Anderson 1993 and Calof and Beamish 1995 for reviews of relevant literature) although it is known that businesses do not necessarily internationalise in this manner (Turnbull 1987; Millington and Bayliss 1990). Of particular interest here is the highly influential Uppsala model (Johanson and Vahlne 1990) which sees inter- nationalisation as a process whereby firms gradually increase their inter- national involvement as, on the one hand, they cee lop knowledge of Yoreign markets and operations, and on the other commit more and more resuuroes to foreign sales Hosivésses are said to change their institutional arrangements for foreign operations as théy gain knowledge and experience of cross-border trade, moving from passive to active and from indirect to direct exporting and thence to the establishment of foreign branches and 5. Scanned with CamScannerother more capital-int ¢ forms of involvement wi . Market knowledge, according to the Uppsala model, derives pre gored. from experience of operating in the foreign nation concerne, i said to be country-specific and not easily | However, the experience gained Renerates further busin reduced market uncertainty, and hence an incentive to increase the firm’s international operations. The model Suggests that the only circumstances in Which additional commitment toi Nernationalisation will occur other than in Small incremental stages is when (i) firms have very large resources and the GH ENCES Of failure are small, (i) when market conditions are stable, or ii) when relevant market knowledge can be obtained in ways other than through experience. A number of Studies have challenged these propositions Turnbull 1987; Millington and Bayliss 1990). In reality, it is alleged, firms oiten jump straight into (extensive) foreign operations as a strategic choice, contingent on market conditions, Use of the Internet (sce 16:10) in particular is said to enable firms to leapfrog the conventional stages of internationalisation, as it removes all geographical Constraints, permits the instant establishment of virtual branches throughout Net connection can ‘substantially improve communications with existing foreign customers, suppliers, agents and distributors, identify new mengmers and distributors, and generate a wealth vr information on market trends and on the latest technology and reseancy and technical develop- pant. Maloff (1995) similarly asserts that the Intemar ‘enables small firms to sgnOves ‘at a stroke’ a number of the otganisational ana Tesource constraints Supposedly associated with exporting. 5. Why firms expett A substantial literature exists Tegarding the extents and importance of Various incentives and impediments to export activity, although results are frequently contradictory. ing 30 empirical studies completed from the 1960s onwards, Leonidou (1995) concluded that € in stimuli rt activity are: (i) the personal characteristics of decision makers (style, compe- fence, international orientation); (ii) company obj and (ii) availability of export facilities and poe part. Mixed evidence emerged reeaiig the influence of Various triggers at particular stages of an enterprise's development as an exporting business, and whether firm size and/or degree of export experience affected Specific motivators. Possibly, small to medium-sized enterprises (SMEs) are in Beneral less aware of the Potential benefits of exporting, less knowledgeable about how to export and 6 Scanned with CamScannerte inv. oot M nelore Jira 1s THE NATURE OF INTERNATIONAL BUSINESS Where to find relevant information and less confident in their ability to export. The business systems of an SME ye n are normally less elaborate than in a large firm, and employees have multiple responsibilities, SMEs may not have the ‘organisation to handle all the extra documentation that exporting involves. Dicht ct al (1990) suggested that the foreign market orientation of SME managers is a crucial determinant of the decision to “go international’. They found that managers who were older, less well-educated, not proficient in foreign languages, less well-traveled, risk-averse, unwilling to change, and who experienced a greaterthan-average ‘psychic distance’ from foreign Countries were less likely to engage in export activities than others. Psychic distance concerns matters such as differences in language, business practices, culture and level of economic development. Gripsrud (1990) found neverthe- less that physically distant markets could become so important that certain firms would enter them anyhow. His survey of 107 Norwegian exporters of fishery products to Japan concluded that this was more likely for larger than for smaller companies, and that the greater the company's general experi- ence of exporting the less important was psychic distance. Several other studies support the latter proposition (see Anderson 1993), and also the hypothesis that the majority of SMEs with limited export experience do not approach foreign market selection in a systematic manner. Sharkey ef al (1989) examined groups of firms at three stages of the internationalisation process (non-exporters, marginal expoiters ait ative exporters), concledin ived_strategic limitations) significantly determ termined firms’ levels of export development; non-exporters and marginal exporters regarded these as more problematic than did active exporters. Specific factors inhibiting exporting have, been found to include inade- quate knowledge of (i) export procedures arid how to obtain information foreign markets, and Gi) Row to commuancatentvoveign customers (Kedia and Chokar 1986). Other problems cited in. the literature include transport difficulties, lack of exposure to forgign.cultures, complex paperwork and lack of staff time, lack of skilled personnel to undertake the expectations of high costs and low export sales, the need to modify products, Geabutoe and ES eee difficulties, and absence of foreign contacts (Ramaseshan std Soutar 196): LaonidGH"s (1995) survey suggested that fear of intense competition in foreign markets was the biggest impedi- ment to export activity, with attitudes towards risk and innovation also assuming importance. Note how these barriers to exporting might be considerably lessened by