Chapter 3

International Entrepreneurship
Opportunities

McGraw-Hill/Irwin
Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
 Introduction
 Entrepreneurs find it difficult to both manage and
expand the venture they created, especially in the
global marketplace.
 To expand a venture entrepreneurs need to:
 Access their abilities in the management area to
identify methods for domestic expansion (i.e.
penetration strategies, market development
strategies etc.) and even international
expansion (exporting, Franchising, JV etc.)

 Determine when it may be necessary to turn the

reins (control over operation) to someone else
as business growing locally & internationally.
 Factors Contributing to International
Expansion (Why Go Global?)
 Globalization effect – Opening of the once-controlled
economies to market-oriented enterprise i.e. the opening of
Eastern Block and Central Europe, China, & USSR – create
opportunity for expansion.
 Increasing number of countries becoming market-oriented
and developed less distinction between local and global
market – market demand.
 Self-interest of organizations themselves as well as impact
of a variety of external events and forces i.e. stiff
competition & market saturation (i.e. European Union (EU).
 Majority population presence in developing countries –
business opportunity to expand market base .
 Most of these are in need of major investment in
infrastructure development, training, education etc.
 Nature of International Entrepreneurship
 International entrepreneurship: doing
business across national boundary.
 Activities necessary for ascertaining and
satisfying the needs and wants of target
consumers often take place in more than one
country beside making profit and business
grow.

 With a commercial history of only 300 years,

the United States is a relative newcomer to
the international business arena.
 Importance of International Business to the
Firm
 A successful entrepreneur must be able to:
 Fully understand differentiating factors between domestic
and international business & to respond accordingly.
 An entrepreneur entering the international market should
address the following factors:
 Differences in managing international and domestic
business.
 Strategic issues to be resolved in going global –
responsibility, communication & control system,
organizational structure & degree of standardization.
 Options available for engaging in international business –
Methods to enter international market.
 Assessing decision to enter into an international market –
when to enter international market?.
 Understanding Global Entrepreneurship
 Different aspects of global entrepreneurship
can be understood through the following
formula:
 GE = C1 + PL + E + DC + C2 + C3
 Where
 GE = Global entrepreneurship
 C1 = Culture
 PL = Politics and legal environment

E = Economy and economic integration

 DC = Distribution channels
 C2 = Change
 C3 = Communication
(each vary significantly from one country to the
 International versus Domestic
Entrepreneurship
 Economics.
 State of economic development.
 Balance of payments; balance of trade.
 Type of economic system.
 Political-legal environment.
 Cultural environment.
 Technological environment.
 Economics
 Creating a business strategy for a multi-country area
means dealing with differences in:
 Levels of economic development.
 Currency valuations.
 Government regulations.
 Banking, venture capital, marketing, and distribution systems.

(will influence business plan & strategy as well a method of doing

business in global market)

 Another problem entrepreneurs face is raising capital

(private investment) varies greatly by countries.
 Stage of Economic Development
 Certain factors significantly impact a firm’s
ability to successfully engage in international
business:
 Fundamental infrastructures i.e. roads, electricity,
communication system, banking facilities etc.
 Adequate educational systems for training and skills
development.
 A well-developed legal system (proper structure) i.e.
legal process.
 Established business ethics and norms.

(give impact to successfully engage in international

business)
 Balance of Payments

 “The difference between the value of a country’s

imports and exports over time.”

 With the present system of flexible exchange

rates, a country’s balance of payments
affects the valuation of its currency.
 Valuation of one country’s currency affects
business transactions between countries.
 Type of System
 Difficulties in doing business in economies that
are developing, or in transition.
 Reflects gaps in countries’ basic knowledge of
the Western system regarding:
 Business plans.
 Product promotion, marketing, and profits.
 Widely variable rates of return.
 Nonconvertibility of the currency.
 Differences between accounting systems.
 Communications.
(some go for barter trade – i.e. Malaysia trade it
oil palm with India for rail road, Russian for
jets equipments etc.)
 Political Environment
 Political system needs to be analyzed according to:
 Degree of collectivism (go for majority, i.e. Socialism &
Marxism) versus individualism (individual freedom) -
culture.
 Degree of democracy (government is by the people)
versus totalitarianism (one political party).
 Political risk analysis: prior to entering into business in
another country, an assessment of that country’s political
policies and its stability.
 Types of political risks:
 Operating risk – interference in the venture operation.
 Transfer risk – risks in attempting to transfer assets
or funds out of the country.
 Ownership risk - the country takes over the venture
property and employees (nationalization).
 Other risks:
 Conflict and changes in the solvency of the country
i.e. civil war, guerilla, terrorism.
 Legal Environment (1of 2)
 Laws of a country to regulate behavior as well as
the processes by which the laws are enforced:

 Business practices in a country.

 Manner in which business transactions are executed.
 Rights and obligations involved in any business
transaction between parties.

 A global entrepreneur should:

 Have an overall sense (understanding) of the legal
system of a country.
 Hire counsel when it comes to specifics i.e. property
rights, contract law, product safety, product liability.
 Legal Environment (2 of 2)
 Several areas that are critical for every
global entrepreneur:
 Property rights of the individual and the
business – to purchase and use the property.
 Contract law – business transaction refer to the
duties of parties involved i.e. purchase & return
goods.
 Product safety – base on specific country
regulation/standard – low safety standard v.v.
 Product liability – who takes the responsibility
i.e. China Toys having hazardous materials for
kids! – how much it costs to compensate the
victims?
 Cultural and Technological Environment
 Cultural environment
 An increasingly important aspect of the cultural
environment in some countries concerns bribes and
corruption.
 Significant problems can occur when careless
translation occurs i.e. KFC “finger lickin’ good.” in
Chinese “Eat your fingers off.”

 Technological environment
 Variation and availability of technology are often
surprising, particularly to an entrepreneur from a
developed country.
 New products in a country are created based on the
conditions and infrastructure operant in that country.
 Cultural Determinants

Religion

Social Structure
Political Philosophy

Culture Norms
Language and Value System
Economics and
economic philosophy

Manners and Education

Customs

Figure 4.1
 Culture (1 of 2)
 Social Structure – radically affects lifestyles, living
standards, and consumption patterns. For example
India is known for having hierarchical and relatively
rigid social class system.

 Religion – are reflected in the values and attitudes of

individuals (i.e. demand for halal products) and the
overall society.

 Economics and Economic Philosophy – in favor of

trade or trade restrictions, attitudes toward balance of
payment (BOP) and balance of trade, convertible or
inconvertible currency, imports duties, subsidization,
tariffs etc. To protect own industry and maximizes the
gain of more exports and less imports.
 Culture (2 of 2)
 Education – formal & informal level of
education the focus either science or art
stream. Level of technology and products
produce – influence consumer ability to operate
the products properly.
 Manners and Customs – i.e. to complete an
agreement may take a longer time in Middle
East. To give a gift - what are the rules? i.e.
types of gift and how to wrap it and when is the
right time to give a gift?
 Economic System and Development (1of 2)
 Four broad categories of economic systems
 Market economy – “productive activities are privately owned and
the output of the economy are not planned.” Sp & Dd determine
Price, no restriction on Sp and rigorous competition  efficiency.
 Command economy (Communist) – reverse to market economy.
 Mixed economy – In between (partly own by private and partly own
by the government), normally government control health & public
transport industry.
 State-directed economy – government plays a significant role in the
investment activities of private enterprise through an established
industrial policy (economics policies), have say to meet the
policies.

 Measures useful for determining and comparing the economic

development of a country with other countries:
 Gross national product per head of population (GNP) - total output
annually/per head.
 Purchasing power parity (PPP) – cost of living.
 Economic System and Development (2 of 2)
 An interesting trend since the late 1980s is the
increase in market-based economies paralleling
the spread of democracy.

 It has opened up new and exciting markets

unavailable before this time “the fall of Eastern
Block, the fall USSR, China open its market etc.

 It has occurred because of better economic

results achieved under market-based economic
systems.
 Available Distribution Systems
 In determining the best
channel of distribution system
for a country, several factors
need to be considered:
 Overall sales potential.
 Amount and type of competition.
 Cost of the product.
 Geographical size and density of
the country.
 Investment policies of the
country.
 Exchange rates and any controls.
 Level of political risk.
 Overall marketing plan.
Each of these factors
affects the choice of the
distribution system that wil
yield the greatest sales and
profit results in the country
i.e. number of channel
levels or members: option
available – either using the
direct marketing channel
(no intermediaries) or
indirect marketing channel
(with at least one or more
intermediaries).
 Barriers to International Trade: GATT
 General Agreement on Tariffs and Trade
was established in 1947 under U.S. Trade agreement between USA
leadership. Israel. And between USA and
 Objective: liberalizing trade by
Canada.
eliminating or reducing tariffs,
subsidies, and import quotas.
 Renewed support is reflected in three
events:
 World trading system strained (not
comfortable) by persistent trade
deficit of the United States the
world’s largest economy.
 Economic success of countries
perceived as not playing by rules i.e.
Japan & China (closed to imports &
foreign investments) strained
world’s trading system.
 In response to these pressures,
many countries have established
bilateral voluntary export restraints
(control) to circumvent (to
overcome) GATT.
 Barriers to International Trade:
Trade Blocs and Free Trade Areas
 Free Trade Area (FTA) i.e. 10 years agreement between
USA & Israel to phase out tariffs &
 North American Free quotas

Trade Agreement Trade agreement between USA,

Canada & Mexico – to reduced
(NAFTA) trade barriers, quotas, & to
encourage investment.

 Treaty of Asunción Trade agreement between USA,

Argentina, Brazil Paraguay, &
Uruguay – create FTA among
members country.
 European Community
Members country are not allowed t
(EC) enter agreement with other non-
members country.
 Entrepreneur’s Strategy and Trade Barriers
 Trade barriers pose problems for
the entrepreneur who wants to
become involved in international
business.
 Increase entrepreneurs’ costs
of exporting products or Other option is to establish
semifinished products to a production facilities in the
country. country.
 Voluntary export restraints
may limit entrepreneurs’ The same option is to establish
ability to sell products in a production facilities in the
country from production country in order to compete.
facilities outside the country.
 Entrepreneurs may have to
locate assembly or production
facilities in a country to Have no other choice but to
conform to local content abide with the country
regulations of the country. regulations to sets up
productions facilities in that
country.