IBT
DOMESTIC
-Buyers & sellers belonging to the same country
-Within the geographical country
-known as home trade or internal business
✓ Lower level of risk
✓ More issues in currency
Ex. Meralco
INTERNATIONAL
-It involves cross-border transactions of goods
and services between two or more countries.
-Outside the geographical boundaries of a
country
-known as multi-national or transnational
companies
✓ Higher level of risk
✓ Less issues in currency
Ex. IKEA
NATURE OF INTERNATIONAL BUSINESS
• All value-adding activities including
sourcing, manufacturing, and
marketing, can be performed in
international locations.
• The subject of cross-border trade can be
products, services, capital, technology,
know- how, and labor.
• Firms internationalize via exporting,
foreign direct investment, licensing,
franchising, and collaborative ventures.
SERVICE INDUSTRY SECTORS THAT
ARE RAPIDLY
INTERNATIONALIZING
-Architectural, construction and engineering
-Banking, finance, and insurance
INTERNATIONAL FINANCIAL
SERVICE SECTOR
- Banking and financial services are the
most active international services.
GLOBALIZATION - is the integration of
capital, technology, and information across
national borders, in a way that is creating a
single global market and, to some degree, a
global village.
(1492-1800) – centered around countries; how
much horsepower, wind power, and steam power
a country had and how creatively it was
deployed; world from “large to medium.”
(1800-2000) – MNCs as dynamic force driving
change; interrupted by two world wars; world
from “medium to small.”
(2000 to date) – convergence of the personal
computer, fiber-optic Internet connections, and
software creating a “flat- world platform” that
allows small groups and even individuals to go
global; world from “small to tiny.”
THOMAS L. FRIEDMAN (THE WORLD IS
FLAT)
“The central logic of globalization exactly
mirrors the logic of the Internet.
We are all increasingly connected, but nobody's
in charge.”
TEN FLATTENERS
1. Collapse of the Berlin wall (11/9/89) -
The event not only symbolized the end
of the cold War, but it also allowed
people from other side of the wall to join
the economic mainstream. “11/9/89” is a
discussion about the Berlin Wall coming
down, the “fall” of communism, and the
impact that Windows powered PCs
(personal computers) had on the ability
of individuals to create their own
content and connect to one another.
2. The Revolution: Worl Wide Web -
Netscape and the Web broadened the
audience for the Internet from its roots
as a communications medium used
primarily by “early adopters and geeks”
to something that made the Internet
accessible to everyone from five-year-
olds to ninety-five-year-olds. The
digitization that took place meant that
everyday occurrences such as words,
files, films, music, and pictures could be
accessed and manipulated on a computer
screen by all people across the world.
3. Workflow Software - technologies that
allowed work to flow. The ability of
machines to talk to other machines with
no humans involved, as stated by
Friedman. Friedman believes these first
three forces have become a “crude
foundation of a whole new global
platform for collaboration”. There was
an emergence of software protocols
(SMTP – simple mail transfer protocol;
HTML – the language that enabled
anyone to design and publish documents
that could be transmitted to and read on
any computer anywhere) Standards on
 Standards. This is what Friedman called
the “Genesis moment of the flat world.”
The net result “is that people can work
with other people on more stuff than
ever before.” This created a global
platform for multiple forms of
collaboration. The next six flatteners
sprung from this platform.
4. Outsourcing - has allowed companies
to split service and manufacturing
activities into components which can be
subcontracted and performed in the most
efficient, cost-effective way. This
process became easier with the mass
distribution of fiber optic cables during
the introduction of the World Wide Web.
5. Offshoring - internal relocation of a
company’s manufacturing or other
processes to a foreign land to take
advantage of less costly operations
there. China’s entrance in the WTO
(World Trade Organization) allowed for
greater competition in the playing field.
Now countries such as Malaysia,
Mexico, Brazil must compete against
China and each other to have businesses
offshore to them.
6. Open Source - Communities uploading
and collaborating on online projects.
Examples. blogs, and Wikipedia.
Friedman considers the phenomenon
“the most disruptive force of all”.
7. Supply-Chaining - Friedman compares
the modern retail supply chain to a river,
and points to Wal-Mart as the best
example of a company using technology
to streamline item sales, distribution,
and shipping.
8. Insourcing - uses UPS as a prime
example for insourcing, in which the
company’s employees perform services
beyond shipping for another company.
9. In-forming - The growth of search
engines is tremendous, for example,
Google.
10. The Uploading - Wireless, Voice over
Internet, and file sharing. Personal
digital devices like mobile phones, all
analog content and processes (from
entertainment to photography to word
processing) can be digitized and
therefore shaped, manipulated and
transmitted; virtual – these processes
can be done at high speed with total
ease.
4 RISKS IB
Commercial risk – firms’ potential loss or
failure from poorly developed or executed
business strategies, tactics, or procedures.
These may be economic, compliance, security,
reputation, operational and competitive risks.
Ex. A company's financial data is hacked,
exposing the company to financial loss and
damaging its reputation.
Cross-Cultural risk- a situation or event where
a cultural miscommunication puts some human
value at stake.
Ex. KFC’s Finger-lickin’ good” wrongfully
translated into “Eat your fingers off” in Chinese
when it opened their first restaurant in China.
Currency risk - risk of adverse unexpected
fluctuations in exchange rates. It is a form of
financial risk that arises from the change in price
of one currency against another.
Ex. If you are a U.S. investor and you have
stocks in Canada, the return that you will rea
lize is affected by both the change in the price of
the stocks and the change in the value of the
Canadian dollar against the U.S. dollar.
✓ Also known as foreign exchange risk.
Country risk - potentially adverse effects on
company operations and profitability holes by
developments in the political, legal, and
economic environment in a foreign country
Ex. Coca Cola’s business fell off in Germany
when the government enacted recycling plan.
New laws required consumers to return
nonreusable soft drink containers to stores for a
refund of 0.25 euros. Rather than cope with
unwanted returns, big supermarket chains pulled
Coke from their shelves.
✓ Also known as political risk
PARTICIPANTS IN IB
Multinational enterprise (MNE) - A large
company with substantial resources that
performs various business activities through a
network of subsidiaries and affiliates located in
multiple countries.
Ex. Caterpillar, Kodak
Small and medium-sized enterprise (SME) - A
company defined (in the U.S.) as having 500
or fewer employees.
Born global firm. - a young entrepreneurial
company that initiates international business
activity very early in its evolution, moving
rapidly into foreign markets. ‘Born Global’ and
SMEs.
TYPES OF PARTICIPANTS IN IB
Focal firm – initiator of an IB transaction ex.
MNEs and SMEs
Distribution channel intermediary –
Specialist firm that provides distribution,
logistics and marketing services in the
international value chan.
Facilitator – Firm that provides special
expertise in banking, the law customs
clearance, market research, or another field.
Governments – Active in IB as supplier,
buyers and regulators
WHY DO FIRMS INTERNATIONALIZE?
-Seek opportunities for growth through
market diversification
WHY DO NATIONS TRADE?
-Nations trade to grow their economies and
offer people more choices. By specializing in
what they do best and accessing resources
globally, they can make more and better
products.
ADAM SMITH (FATHER OF MODERN
ECONOMICS)
- “never to attempt to make at home what it
will cost him more to make than to buy. The
tailor does not attempt to make his own
shoes but buys them of the shoemaker. The
shoemaker does not attempt to make his own
clothes but employs a tailor. The farmer
attempts to make neither the one nor the
other..”
Imports
–Goods produced abroad and sold domestically
Exports
–Goods produced domestically and sold abroad
ABSOLUTE ADVANTAGE - refers to the
ability to produce more or better goods and
services than somebody else.
✓ The ability to produce a good using
fewer inputs than another producer.
• Individual - exists when a person can
produce more of a certain good/service
than someone else in the same amount
of time (or can produce a good using the
least amount of resources.)
• National - exists when a country can
produce more of a good/service than
another country can in the same time
period.
COMPARATIVE ADVANTAGE - refers to the
ability to produce goods and services at a lower
opportunity cost, not necessarily at a greater
volume or quality.
✓ The ability to produce a good at a lower
opportunity cost than another producer.
SOCIETAL IMPLICATION
- Large banks and international
investment brokers have disrupted the
economies of nations with aggressive
currency trading or by manipulating
stock markets.
INTERNATIONAL BUSINESS CONSIST
OF?
transactions that are devised and carried out
across national borders to satisfy the objectives
of individuals, companies, and organizations.
TYPES OF IB
• Export-import trade - products sold to
another country versus products
purchased by a home country
• Foreign direct investment - (FDI)
(typically long-term):An
internationalization strategy in which the
firm establishes a physical presence
abroad through acquisition of productive
assets such as capital, technology, labor,
land, plant, and equipment.
• Licensing - is an agreement through
which a licensee leases the rights to a
legally protected piece of intellectual
property from a licensor the entity which
owns or represents the property for use
in conjunction with a product or service.
• Franchising - is a method of distributing
products or services involving a
franchisor, who establishes the brand’s
trademark or trade name and a business
system, and a franchisee, who pays a
royalty and often an initial fee for the
right to do business under the
franchisor's name and system.
• Management contracts - is defined as an
agreement between a firm or investor
 and a management company that
enables the latter to coordinate and
oversee all operational functions of the
former. It helps to lower the burden of
operating a firm, which otherwise would
have to expend additional staffing and
capital for the same.
THE NATURE OF FDI (foreign direct
investment) – asset ownership and long-time
frame
DRAMATIC GROWTH OF FDI since 1980’s
Developed economies = Australia, Canada,
Japan, the United States, and most countries in
Western Europe.
Developing economies = Parts of Africa, Asia,
Latin America, and the Middle East.
Of particular significance is the growth of FDI
into developing economies despite widespread
poverty and less investment capital than
advanced economies.
The improved lives of billions are directly linked
to world trade and investment.
INTERNATIONAL INVESTMENT
International Portfolio investment (typically
short-term): Passive ownership of foreign
securities such as stocks and bonds, to generate
financial returns.
GEOGRAPHY – The climate, terrain, seaports
and natural resources of a country will influence
its business activities.
CULTURAL SOCIAL FACTOR –
Religion – transcends other cultural
characteristics because it can affect
lifestyles, beliefs, values and attitudes.
Values – ideas, beliefs and customs to which
people are emotionally attached.
Attitudes – positive or negative evaluations,
feelings, and tendencies that individuals
harbor.
toward objects or concepts.
Customs – common established practices
and manners or types of behavior that are
regarded as appropriate in a particular
society.
ECONOMIC CONDITIONS - Economic
System is a means by which governments
organize and distribute available resources,
services, and goods across a geographic region
or country. It regulates the factors of
production, including land, capital, labor, and
physical resources. An economic system
encompasses many institutions, agencies,
entities, decision-making processes, and patterns
of consumption that comprise the economic
structure of a given community.
Types of economic
A market economy, a command economy, and
a mixed economy.
Pure market economy - All productive
activities are privately owned, as opposed to
being owned by the state.
Pure command economy - In such a system,
there is no private ownership of resources or
means of production, and all economic activities
are controlled and coordinated by the
government.
Mixed economy – Governments tend to take
over troubled firms they consider to be vital to
national interests. (For example, Renault was
taken over by the government, reasoning out that
the social costs of the unemployment which
could results if it collapsed were unacceptable.)
POLITICAL AND LEGAL FACTORS
Type of government – a set of fundamental
principles followed by a government to ensure
effective governance.
Democracy – a form of government in which
the supreme power is retained by the people, but
which is usually exercised indirectly through a
system of representation and delegated authority
periodically renewed.
Republic – a representative democracy in which
the people's elected deputies (representatives),
not the people themselves, vote on legislation.
Monarchy – a government in which the
supreme power is lodged in the hands of a
monarch who reigns over a state or territory,
usually for life and by hereditary right; the
monarch may be either a sole absolute ruler or a
sovereign - such as a king, queen, or prince
- with constitutionally limited authority.
Dictatorship – a form of government in which a
ruler or small clique wield absolute power (not
restricted by a constitution or laws).
Communist – a system of government in which
the state plans and controls the economy and a
single
- often authoritarian - party holds power; state
controls are imposed with the elimination of
private ownership of property or capital while
claiming to make progress toward a higher
social order in which all goods are equally
shared by the people (i.e., a classless, stateless
society in the best interests of all its citizens).
Political Stability – is a qualitative condition of
public development, expressed as public order,
achieved by controlling and balancing
stakeholders in a society to achieve specific
goals, ideals, and targets. It is also a reflection of
good governance, which is defined as the act of
overseeing the performance of the state
apparatus.
Governments often attempt to directly create
value by producing public goods, which have
two identifying factors:
• Non-rivalrous: An individual's
consumption of goods doesn't prevent
anyone else from accessing them.
• Non-excludable: Nobody is prevented
from using the good
Primary challenges: Corruption
3 primary forms of corruption
• Extortion: Public officials using their
power to obtain wealth through threats
or force-
• Theft: Public officials appropriating
government assets for personal gain
• Capture: Firms paying government
officials to influence political decision-
making for profit
Free trade - refers to a situation where a
government does not attempt to restrict what its
citizens can buy from another country or what
they can sell to another country; smaller
industries might shrink and die since the
domestic economy will tend to produce what is
good.
Protectionism - is when governments set trade
restrictions to help domestic industries; may be
associated with increasing the price of the good
to create a shortage of that good; domestic
producer benefit but consumer pays the price.
7 MAIN INSTRUMENTS OF TRADE
POLICY
1. Tariffs - is a tax levied on imports that
effectively raises the cost of imported
products relative to domestic products.
✓ Increase government revenues;
✓ Provide protection to domestic
producers against foreign competitors by
increasing the cost of imported foreign
goods.
✓ Force consumers to pay more for certain
imports.
2. Subsidies -: a government payment to a
domestic producer; may be in the form
of cash, grants, or tax breaks to improve
the supply of certain goods and
services. Subsidies help domestic
producers. Compete against low-cost
imports (Example: fertilizer subsidies
to help farmers) Gain export markets.
3. Import quotas. - A direct restriction on
the quantity of some good that may be
imported into a country
Tariff rate quota.
A hybrid of a quota and a tariff where a
lower tariff is.
applied to imports within the quota than
to those over the quota.
Quota rent.
The extra profit that producers make
when supply is artificially limited by an
import quota.
4. Voluntary export restraints(VER) -
Quota on trade imposed by the
exporting country, typically at the
request of the importing country’s
government
5. Local content requirements - refer to a
specific fraction of a product that needs
to be manufactured domestically.
6. Administrative policies - bureaucratic
rules that are designed to make it
difficult for imports to enter a country.
7. Antidumping duties - selling goods in a
foreign market below their cost of
production, or selling goods in a foreign
market at below their “fair” market
value
Nontariff barriers include:
1. Subsidies
2. Quotas
3. Voluntary export restraints
4. Antidumping duties