THE WORLD OF INTERNATIONAL BUSINESS

Proverbs 23:7
“For as he thinketh in his heart, so is he. If you believe that you will build a thriving business in
your heart, you will.”

Module 1 – We Live in a Global Economy

Learning Objectives
1. Distinguish between domestic business and international business;
2. Point out the reasons why international business is important;
3. Interpret that international trade is not just an event;
4. Relate the basic international business activities;
5. Distinguish the factors of the international business environment;
6. Classify important skills for international business and describe the importance of
international business for workers, consumers, and citizens.

OUTLINE
1.1 THE FOUNDATION OF INTERNATIONAL BUSINESS
What is International Business?
Why is International Business Important?
When did International Business Start?

1.2 INTERNATIONAL BUSINESS BASICS

The Fundamentals of International Trade
The International Business Environment
The Global Business World

SUMMARY
REVIEW QUESTIONS
REFERENCES
2 The World of International Business

1.1 The Foundation of International Business Back to top

WHAT IS INTERNATIONAL BUSINESS? Back to top

In the early days, families of every nation around the globe depended on the natural resources for
the food they eat and the clothes they wear. As the population increased, so as their needs and
wants. As their need rises, the people began to depend on each other. Firms started to grow,
improving production and distribution of goods and services. That dependence grew as more
people specialized in their fields of work. Today, some nations have complex business systems.
These systems are based on specialization that makes a variety of goods and services available.

In the way people within a country depended on each other for the production of goods and
services, countries also depend on other countries. Other industrialized nations have extensive
production and distribution facilities, like the United States, Japan, countries in western Europe
and Canada. These countries have the highest level of economic independence, but still they are
dependent on other countries goods and services.

Production, distribution, acquisition of goods and services and other business activities take place
within a country’s borders. These business activities that takes place within a country is called
domestic business. If you purchase goods that are made and services that are offered in your
country, you are said to be participating in a domestic business. However, if you buy from a local
store some goods made from other countries, you are involved in a global economy. Business
activities that needed to create, ship, and sell goods and services across national borders is called
international business. Other terms of international business include international trade, global
business, and foreign trade.

WHY IS INTERNATIONAL BUSINESS IMPORTANT? Back to top

International business allows you to purchase items made from other countries like shoes, designer
bags, clothes, and TV. Without global business, life would probably be different. People around
the world would not have the opportunity to enjoy goods and services made from other countries.

International business is important for many reasons:

• It provides a source of raw materials, parts and demand for foreign products.
Products made in a country often include materials that came from other countries around
the world. For example, Japanese companies buy oil from other countries to use it in their
factories; American made cars have parts that were manufactured from Japan and Korea.

Global dependency exists when items that businesses or consumers need and want are
produced in other countries. For example, drought causes crop failures in an African
country. This results the African country to acquire food from other countries.

• It allows new market and investment opportunities.

3 Module 1 We Live in a Global Economy

Other companies involved in a global economy, like McDonalds, expand business

opportunities to increase sales and profits with foreign trade. Many people invest in large
or small businesses to earn money for themselves. As many companies expand to other
countries, they create new investment opportunities. Some investors also provide funds
either to foreign companies which is just getting started or growing enterprises.

• It can help improve political relations

International business activities help promote goodwill and improve mutual understanding,
communication and respect among people in different nations. Countries that trade with
one another are less likely to have wars with each other.

WHEN DID INTERNATIONAL BUSINESS START? Back to top

Countries such as China, India, and Japan began trading products with other countries as early as
15,000 years ago. Several thousand years ago, there were evidences that Africans traded with
South Americans. During the ancient times, Phoenicians developed trade in the Mediterranean.
The conquests of Alexander the Great opened up trade with China and India. Later, trade along
the Mediterranean Sea was dominated by the Roman Empire.

The next few centuries had limited foreign activity. After the fall of the Roman empire, the Vikings
travelled as far as Iceland, Greenland, and Russia to trade. In the early middle ages, Islamic empires
of Iran connected the Iberian Peninsula, North Africa and the Arabian Peninsula. Charlemagne
created the Holy Roman Empire out of most of Europe.

The 11th century saw renewed interest in global commerce as some European countries such as
England, France, Spain, and Portugal were shipping products by water. By the 15th and 16th
centuries, explorers such as Columbus and Magellan sought a shorter water route to India,
venturing west instead of sailing east around Africa. 400 years from 1500 to 1900, many European
countries established colonies from Africa, Asia, North and South America. These colonies
provided new markets for selling products for European businesses with low-cost raw materials.

For years, most European countries maintained strong economic and political control over their
colonies until these colonies achieved their independence.

Figure 1.1 Selected Countries and their Colonial Heritage

Country Colonized By Year of Independence

Australia United Kingdom 1901
Brazil Portugal 1822
Cambodia France 1953
Canada France, United Kingdom 1867
4 The World of International Business

Chad France 1960

Chile Spain 1818
Cyprus Turkey, United Kingdom 1960
El Salvador Spain 1821
Iceland Norway, Denmark 1944
Mexico Spain 1821
Mozambique Portugal 1975
Namibia Germany, South Africa 1990
South Africa United Kingdom, Netherlands 1910
United States United Kingdom, France, Spain, 1776
Russia
Vietnam France 1955

Various inventions created between 1769 and 1915 expanded interest and opportunities in
international business which include the cotton gin, the steam engine, and the telephone. These
inventions from this period improved production, distribution and communication and also helped
create new global industries.

Recent world events continue to highlight the importance of international business. Expanded trade
among companies in different countries increased interdependence. Conflicts such as the first and
second world war demonstrated the need for political cooperation. During these times, it limited
the global business activities. World peace is important if countries want to achieve economic
benefits from international trade.

1.2 International Business Basics Back to top

THE FUNDAMENTALS OF INTERNATIONAL TRADE Back to top

Different countries have different resources, depending on the geographical area. This means one
country can produce more grains than others, more gems to mine, or more trees to make furniture.
That is, a country has more to produce than it can consume or use. If a country has abundant
resources, finished goods, or services, businesses look for trade opportunities. That’s what happens
when companies in different countries want to trade goods and services.

These foreign trades of goods and services usually takes place in the form of cash payments on
bought or sold items. It can be viewed from two sides – the buyer and the seller. For the buyer,
5 Module 1 We Live in a Global Economy

products bought from businesses in other countries are called imports. For the seller, products that
are sold in other countries are called exports.

Although the process sounds simple, obstacles can arise when doing business. These obstacles, or
trade barriers are restrictions that reduce free trade among countries. These barriers could appear
in several forms:

• Import taxes increase the cost of foreign products.

• Quotas restrict the number of imports.
• Laws prevent certain products from coming into a country.

THE INTERNATIONAL BUSINESS ENVIRONMENT Back to top

Buying and selling goods and services is similar in most parts of the world. That is, consumers try
to satisfy their needs and wants at a fair price. Businesses try to sell products at a price that covers
cost and provides a fair profit. So why is international business any different from local business?

International Business Environment Factors

GEOGRAPHIC CONDITIONS CULTURAL & SOCIAL FACTORS

● Climate ● Language
● Terrain and seaways ● Education
● Natural resources ● Religion
● Agriculture products ● Values and customs
● Social relationships

POLITICAL & LEGAL FACTORS ECONOMIC CONDITIONS

● Type of government ● Type of economic system
● Political stability ● Education level
● Government policies toward ● Type of industries
business ● Technology

• Geographic Conditions

The climate, terrain, seaports, and natural resources of a country influence business activities. Very
hot weather limits the types of crops that can be grown. It also restricts the types of businesses that
can operate in that climate. A hot, sunny climate is critical for growing tropical fruit, but not
6 The World of International Business

suitable for a ski resort. Mountainous terrain offers opportunities for mining but limits the amount
of land available for crops. A country with many rivers or seaports is able to easily ship products
for foreign trade. Countries with few natural resources must depend on imports.

• Cultural and Social Factors

In some societies, hugging is an appropriate business greeting. In other societies, a handshake is

often the custom in dealing business. These differences represent different culture. Culture is the
accepted behaviors, customs, traditions, and values of a society. A society’s culture has a strong
influence on business activities.

The main cultural and social factors that affect international business are language, education,
religion, values, customs and social relationships. These relationships include interactions among
families, labor unions, and other organizations.

• Political and Legal Factors

Each day, we encounter examples of government influence on business. Regulation of fair

advertising, enforcement of contracts, and safety inspections of food and medications are few
examples.

In general, different countries have different degrees of freedom when it comes to business
activities. In some places, the government restricts the activities of consumers and business
operators. The most common political and legal factors that affect international business activities
include the type of government, the stability of the government, and the government policies
toward business.

• Economic Conditions

Everyone faces the problem of limited resources to satisfy numerous needs and wants. This basic
economic problem is present for all of us. We continually make decisions about the use of our
time, money and energy. Similarly, every country plans the use of its resources, natural or artificial,
its labor force and wealth to the best interest of its people.

Factors that influence the economic situation of a country include the type of economic system,
the availability of natural resources, and the general education level of the country’s population.
Other economic factors include the types of industries and jobs in the country, the stability of the
country’s money supply, and the available technology for producing and distributing goods and
services.

THE GLOBAL BUSINESS WORLD Back to top

International business is an important field of study. Certain basic skills and knowledge are needed
in our global economy.
7 Module 1 We Live in a Global Economy

International Business Skills

Some skills are needed in every type of job. These skills will continue to be important as business
activities among countries increase. In addition, knowledge of specific subjects is important for
success in the global business.

• History
Your awareness of the past can help you better understand today’s international business
relations.

• Geography
Geography is more than names on a map. Knowledge of geography will help you
understand how the climate and terrain of a country can affect transportation, housing, and
other business activities.

• Foreign language
As countries increasingly participate in foreign trade activities, your ability to
communicate effectively with people from other societies increases in importance.

• Cultural awareness
Understanding that cultures vary from nation to nation allows people to more sensitive to
customs and traditions of all societies.

• Study skills
Asking questions, taking notes, and doing research are the tools necessary to keep up to
date on changes in international business.

The Global Citizen

As a country becomes more involved in international business, the lives of its citizens change.
Consumers have more choices because the selection of goods and services is no longer limited to
items produced in their own country. There might be more products, different products, or products
that cost less. Career opportunities expand for workers as international business creates demand
for additional workers and different kinds of jobs. Some business owners benefit from international
trade by expanding an existing business or starting a new one. Other business owners might see
new or stronger competition.

As a consumer and worker involved in international business, you have an obligation to act
responsibly like following ethical business practices. The decisions you make are likely to have an
impact locally and around the world.
8 The World of International Business

Summary Back to top

• International business includes all the business activities needed to create, ship, and sell
goods and services across national borders. International business is also referred to as
global business, international trade, and foreign trade.
• International business is important as a source of raw material and a supplier of foreign
products. It allows for new market and investment opportunities, and paths to improved
political relations.
• Trading products started more than 15,000 years ago. The Roman Empire dominated
international business for more than 600 years. The 11 th century saw renewed interest in
global commercialism. From 1500 to 1900, several European countries established
colonies in Africa, Asia, North America and South America.
• Trade activities are viewed from two sides – the buyer and the seller. Products bought from
businesses in other countries are called imports. Products sold in other countries are called
exports.
• The four major categories of the international business environment are geographic
conditions, cultural and social factors, political and legal factors, and economic conditions.
• Success in learning about international business requires knowledge of history, geography,
foreign language, culture and study skills.
• As a worker, you have new career opportunities created by international business. As a
consumer, you have more buying choices. As a citizen, you must have an increased
awareness of the world.

Review Questions Back to top

1. Define domestic business, international business and global dependency.

2. How does domestic business differ from international business?
3. How are you affected by international business?
4. What factors affect a country’s decision to trade goods and services with another
country?
5. Define imports, exports, and trade barriers.
6. What cultural factors affect international business activities?
7. Name the factors that influence a country’s economic conditions.
8. How could geography create international business opportunities?
9. What responsibilities do you believe people have as citizens in our global economy?
10. What actions might a country take to encourage other countries to buy its goods and
services?
9 Module 1 We Live in a Global Economy

References
Les Dlabay, James Calvert Scott. (2012). International Business Fourth Edition. Cengage Learning Asia
Pte Ltd.

Back to top