Module - 1 An Introduction To International Business

Module -1
An Introduction to International
Business
Contents
Understanding Globalization
MNC -Concept, need & role.
Multinationals as global Intermediaries,
International Business –
Basics: Definition, Concepts, Various forms of International
Business
Similarities and differences between International and Domestic
Business
Essentials for companies entering in International Business.
Theories of International Business and their implication
and relevance.
IPER,MBA-I,IBE,M-1,BY:MS.GAZAL SHARMA
Global world has a long history of –
Trade,
Migration,
People in search of work and
Movement of capital.
Silk Routes Link the World
Vibrant Pre-modern Trade and Cultural Links between distant

parts
Trade And Cultural Exchange always went hand in hand.
Food Travels: Spaghetti and Potato
Potatoes, soya, groundnuts, maize, tomatoes, chillies, sweet
potatoes,
and so on were not known to our ancestors until about five
centuries ago
A World Economy Takes Shape
Changing pattern of food production and consumption
in industrial Europe.
Population growth from the late eighteenth century
had increased the demand for food grains in Britain.
As urban centres expanded and industry grew,
Demand for agricultural products went up, pushing up
food grain prices.
A global agricultural economy had taken shape,
accompanied by complex changes in labour movement
patterns, capital flows, ecologies and technology.
Globalization
Globalizationis the process of

rapid MARKET INTEGRATION AND
INTERCONNECTION between
countries.
More and more Goods and

Services, Investments and
Technology are moving between
countries
Globalization of Business:
A historical Perspective
Globalization: A Holistic Approach
•Economic Globalization
(Inflation rate, subsidies, tariffs, subsidies etc.)
•Financial Globalization
•Cultural Globalization
(Language, religion, customs, values etc.)
•Political Globalization
(Political stability of the nation and monetary regulations)
Dimensions of Economic Globalization
Dimensions of Economic Globalization
•Globalization of production
•Globalization of markets
•Globalization of competition
•Globalization of technology
•Globalization of industries
Factors Influencing Globalization
Movers of Globalization
Economic liberalization
Technological breakthrough
International economic integrations
Move towards free marketing systems
Rising research & development costs
Global expansion of business operations
Advents in logistics management
Emergence of the global customer segment
Factors Restraining Globalization
Regulatory controls
Emerging trade barriers
Cultural factors
Nationalism
War and civil disturbances
Management myopia
Criticism of Globalization
•Developed versus Developing Countries: Unequal Players in
Globalization
•Widening Gap between the Rich and the Poor
•Wipes out Domestic Industry
•Leads to Unemployment and Mass Lay-offs
•Brings in Balance of Payments Problems
•Increased Volatility of Markets
•Diminishing Power of Nation States
•Loss of Cultural Identity
•Shift of Power to Multinationals
International Business
The exchange of goods and services among
individuals and businesses in multiple countries.
The national border are crossed by the enterprises
to expand their business activities like
manufacturing, mining, construction, agriculture,
banking, insurance, health, education, transportation,
communication etc.
Concepts of International Business
1. International Trade: Exports of goods and services
by a firm to a foreign-based buyer (importer)
2. International Marketing: It focuses on the firm-

level marketing practices across the border, including
market identification and targeting, entry mode
selection, and marketing mix and strategic decisions to
compete in international markets.
Contd..
3. International Investments: Cross-border transfer
of resources to carry out business activities.
4. International Management: Application of
management concepts and techniques in a cross-country

environment and adaptation to different social-cultural,
economic, legal, political and technological environments.
Contd..
5. Global Business: Conduct of business activities in
several countries using a highly coordinated and single
strategy across the world.
Differences between Domestic and
International Business
Difference in Currencies
Mobility of Factors of Production(specially
labor and capital)
Sovereign Political Entities
 Imposition of tariffs and customs duties on imports and
exports;
 Quantitative restrictions like quotas;
 Exchange control;
 Imposition of more local taxes etc.
Contd…
Difference In market characteristics (Demand,
Channel of Distribution, promotion etc.)
Difference in documentation
Difference in monetary system(different rate in
transactions)
Different Legal Systems
Difference in Natural and Geographical
Conditions
Importance of IBE
Helps in expansion: Geographic expansion may be used as a
business strategy. Even though companies may expand their
business at home.
Helps in managing product life cycle: Every product has to pass
through different stages of product life cycle-when the product
reaches the last stages of life cycle in present market, it may get
proper response at other markets.
Technology advantages: Some companies have outstanding
technology advantages through which they enjoy core competency.
This technology helps the company in capturing other markets.
Contd…
New business opportunities: Business opportunities in overseas
markets help in expansion of many companies. They might have
reached a saturation point in domestic market.
Proper use of resources: Sometimes industrial resources like
labor, minerals etc. are available in a country but are not
productively utilized.
Availability of quality products: When markets are open, better
quality goods will be available every where. Foreign companies will
market latest products at reasonable prices. Good product will be
available in the markets.
Contd…
Earning foreign exchange: International business helps in

earning foreign exchange which may be used for strategic
imports. India needs foreign exchange to import crude oil, deface
equipment, raw material and machinery.
Helps in mutual growth: Countries depend upon each other for
meeting their requirements. India depends on gulf countries for
its crude oil supplies.
Investment in infrastructure: International business necessitates
proper development of infrastructure.
Similarities between international
and domestic business
1) Satisfaction of the basic need of the customer as prime
importance
2) Creation of goodwill through sales services and liberal
guarantees
3) R & D
4) Technique of marketing (Product, Price and costs in both the
markets)
Multinationals
MNC’s : An Introduction
Until the 19th Century , production was within

countries.
What crossed the boundaries were raw materials,

food stuff and finished products
Trade was the main channel connecting distant

countries.
MNC
MNC is a company that owns or
controls production in more than one
nation.
MNCs set up offices and factories for
production in regions to get cheap
labour & other resources.
This is done so that the cost of
production is low and the MNCs can earn
greater profits.
Where MNCs set up production ??
Where it is close to the markets;
Where There is skilled and unskilled labour
available at low costs;
Where the availability of other factors of
production is assured.
In addition, MNCs might look for government
policies that look after their interests.
Multinational Enterprise
For a firm to be an MNE, the following criteria need to be

fulfilled:
• Should operate in more than two or more countries
• Should own or control operations in multiple
countries.
• Should generate a substantial portion of its revenues
by its foreign operations.
• Should employ workforce from multiple countries.
Significance of MNEs
MNEs are considered powerful drivers of

globalization.
They account for about two-third of world trade and
about one-third of the total world trade is intra-firm
trade.
The universe of MNEs is considered to be large,
diverse, and expanding.
Types of Multinationals
On the basis of Investment

Associates: An enterprise in which a non-resident
investor owns between 10 to 50 per cent
Subsidiaries : An enterprise in which a non-resident
investor owns more than 50 percent
Branches: Enterprises wholly or jointly owned by a
non-resident investor
 On the Basis of Operations
1. Horizontally integrated multinationals(operations in
multiple nations for same or similar products)
H.I.M have manufacturing operations located in different
countries to produce same or similar products.
2. Vertically integrated multinationals(Products as inputs

for its own unit in other nations)
V.I.M have manufacturing operations in certain countries to
produce products that serve as inputs to its production in
other country/countries.
.
 On the Basis of Management Orientation
Ethnocentric firms
The headquarters of the parent company, located in the
home country, exert high level of control over the
subsidiaries through centralized decision-making
Polycentric firms
Highly oriented to overseas markets wherein subsidiaries
have autonomy in decision-making.
Contd..
Regiocentric firms(Decision making based on regions
and their requirement)
Foreign affiliates consolidate their decision-making and
organization on regional basis and the level of
integration is high within the regions.
Geocentric firms(same approach in Decision Making
between HO and Subsidies)
Organization of geocentric firms is relatively more
complex and inter-dependent than that of the other
types.
The firm follows a collaborative approach to decision-
making between headquarters and subsidiaries.
Goals of an MNC
Manufacture in locations with greatest competitive advantage.

Buy and sell anywhere in the world.
Utilize changes in labor cost, productivity, currency fluctuations.
Expand or contract based on worldwide scenario.
Rising return on investment in capital.
Achieve greater sales.
Minimize risk in relation to profits.
Encounter fewer barriers.
Positive Effects of MNEs
Bring in FDI
Transfer of technology
Promote competition
Promote research and development
Benefit customers
Promote exports in the host economies
Negative Effects of MNEs
Influencing host-country government

decisions
Transfer of inappropriate technology
Cultural imperialism
Exploitation of host country resources
Contd..
Promotes unhealthy market competition
Promotes hostile mergers & acquisitions
Crowding out domestic entrepreneurship
Limited benefits to host countries
Circumventing host countries’ regulatory
framework
Response Strategies to Globalization
Forces for Emerging Market Companies
•Defender
•Extender
•Dodger
•Contender
Theories of International Trade
• To understand the traditional arguments of how and
why international trade improves the welfare of all
countries
• To review the history and compare the implications of
trade theory from the original work of Adam Smith to
the contemporary theories of Michael Porter
• To examine the criticisms of classical trade theory and
examine alternative viewpoints of which business and
economic forces determine trade patterns between
countries
Evolution of Trade Theories
Mercantilism
Factor Endowments
Absolute advantage (Classical)
Comparative advantage
International Product Cycle
New Trade Theory
National competitive advantage
Mercantilism: mid-16th century
Theory of Mercantilism
Measures the wealth of a nation by its accumulated reserves.
Nation should aim at creating trade surplus.
Limitations:
International trade is a zero sum game.
Its only a short run possibility..
Results in restrictive International trade environment.
Theory of Absolute Advantage
Adam Smith: Wealth of Nations(1776)
Wealth of a nation is measured by level of improvement in quality of
life.
Emphasis on productivity and free trade to increase global efficiency
through specialization:
Labor becomes more skilled through repeated task.
Long production runs provide incentive for efficient work methods
Theory of comparitive
advantage
David Ricardo(1817):
A country benefits from trade even if it is less efficient than other nations in
production of two commodities.
Should focus on production and export of commodities with relative
advantage.
Limitations of theories of
Specialization
Assumes countries are driven only by motive of

maximization of production and consumption.
Two country two commodity model unrealistic.
Logistics cost is overlooked.
Size of the economy and production run not considered.
Factor Endowment(Hecksher- Ohlin)
Explains the reasons for differences in
relative prices of a commodity and
competitive advantage.
A nation exports the commodity whose
production requires intense use of the
factor relatively abundant and cheap.
Country Similarity Theory
Staffan. B. Linder studied International Trade pattern in two groups :
Primary products and manufactured products.
Based on following principles:
Preference Similarity: two countries with similar demand patterns.
Demand patterns in countries with higher per capita income is similar.
Countries prefer proximity of geographical locations.
International Product Life Cycle
Theory
Explains the shifting of markets and

production locations in world trade.
International trade patterns tend to follow a

cyclical pattern.
Theory of Competitive Advantage
Michael Porter: Diamond Model

Consists of :
Factor Conditions: Presence of high quality inputs such as Human resources,
Capital Resources, physical infrastructure, administrative resources.
Demand Conditions: Nature of demand, size, growth.
Related and supporting industries such as local suppliers, quality, as they
determine the efficiency and competitiveness.
Firm’s Strategy, Structure and Rivalry.

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Module -1

Vibrant Pre-modern Trade and Cultural Links between distant

Globalizationis the process of

More and more Goods and

International economic integrations

Move towards free marketing systems

Rising research & development costs

Global expansion of business operations

Advents in logistics management

Emergence of the global customer segment

Emerging trade barriers

War and civil disturbances

2. International Marketing: It focuses on the firm-

4. International Management: Application of

management concepts and techniques in a cross-country

strategy across the world.

Earning foreign exchange: International business helps in

Until the 19th Century , production was within

What crossed the boundaries were raw materials,

Trade was the main channel connecting distant

For a firm to be an MNE, the following criteria need to be

MNEs are considered powerful drivers of

On the basis of Investment

2. Vertically integrated multinationals(Products as inputs

Manufacture in locations with greatest competitive advantage.

Promote research and development

Promote exports in the host economies

Influencing host-country government

Assumes countries are driven only by motive of

Two country two commodity model unrealistic.

Logistics cost is overlooked.

Size of the economy and production run not considered.

Explains the shifting of markets and

International trade patterns tend to follow a

Michael Porter: Diamond Model

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