Sixteenth Edition, Global Edition

International Business
Chapter 1
International Business
and Globalization
 Learning Objectives (1 of 2)
1-1 Relate globalization and international
business (IB) to each other and explain why
their study is important

1-2 Grasp the forces driving globalization and IB

1-3 Discuss the major criticisms of globalization

 Learning Objectives (2 of 2)
1-4 Assess the major reasons companies seek to
create value by engaging in IB

1-5 Define and illustrate the different operating

modes for companies to accomplish their
international objectives

1-6 Recognize why national differences in

companies’ external environments affect how
they may best improve their IB performance
 • Instagram exemplifies the globalization of business and
Instagram: lifestyles worldwide.

A Global • Instagram has more than 700 million active monthly users.
• Instagram is available in 33 languages and enjoys a massi
Phenomenon worldwide. Some 80 percent of users live outside the
country, the United States.
• Instagram uses foreign direct investment to establish offices
world.
• Instagram illustrates how converging lifestyles, modern com
technologies, and entrepreneurship are facilitating the em
global enterprises.
 • All value-adding activities-including sourcing, manufacturing
marketing-can be performed in international locations.
The Nature of
International • International trade can involve products, services, capital, te
know-how, and labor.
Business
• Firms internationalize through various entry strategies, such
exporting and foreign direct investment
Dimensions of
International
Business
 • International business: Performance of trade and investment acti
by firms across national borders.

Key Concepts • Globalization of markets: Ongoing economic integration and gr

interdependency of countries worldwide.
in International • International trade: Exchange of products and services across na
Business (1 of 2) borders; typically through exporting and importing.
– International Trade: USD 22.3 trillion U.S. 2021
– Petroleum Trade: USD 611.94 billion in 2021

• Exporting: Sale of products or services to customers located ab

from a base in the home country or a third country.
For example; Boeing and Airbus export billions in commercial a
every year.
 • Importing or global sourcing: Procurement of produc
from suppliers located abroad for consumption in the ho
a third country.
Key Concepts For example; Toyota imports many parts from C
manufactures cars in Japan.
in International
• International investment: Transfer of assets to another
Business (2 of 2) acquisition of assets in that country. Also known as
investment” (FDI), we will focus on this type of investmen
– USD 1 815 billion

• International portfolio investment: Passive ownership of

securities such as stocks and bonds, in order to generate
returns.
 • Trade between nations, accompanied by substanti
technology, and knowledge.

Globalization • Development of sophisticated global financial system

of Markets that facilitate the cross-border flow of products,
and knowledge.

• Greater collaboration among nations through mu

agencies such as the World Trade Organizatio
International Monetary Fund (IMF).
World Trade Is
Growing Faster
than GDP

Source: Based on data from the International Monetary Fund, World Economic Outlook Database October, 2017
Leading Countries in International
Merchandise Trade, by Total Annual
Value, $Billions

Sources: Based on data from the World Bank, World Development Indicators, World Bank, Washington, World Trade Based on data
from the World Trade Organization, Statistics Database, Geneva: World Trade Organization (2017),
 Top 25 Countries
in International
Merchandise
Trade

Sources: Based on data from the World Bank, World Development Indicators, Washington, DC: World Bank (2017), UNCTAD,
FDI Inflows into World
Regions (in Billions of
U.S. Dollars per Year)

Sources: UNCTAD, UNCTADSTAT Database, Inward FDI Flows, Annual (2017); OECD, FDI Flows (2017),
Service Industries
That are Rapidly
Internationalizing
Leading Countries in
International Services
Trade, by Total Annual
Value, $Billions

Sources: Based on data from the World Bank, World Development Indicators, Washington, DC: World Bank (2017),
International and • International business;
– is conducted across national borders.
Domestic Business: – uses distinctive business methods.
How They Differ – is in contact with countries that differ in terms of culture,
language, political system, legal system, economic situation,
infrastructure, and other factors.

• Stated differently, when they venture abroad, firms encounter four

major types of risk.
The Four Risks of
International Business
 1- Cultural Differences; Risk arising from differences in language, lifesty
attitudes, customs, and religion, where a cultural miscommunicati
Cross-Cultural jeopardizes a culturally-valued mindset or behavior.

Risk (1 of 2) 2- Negotiation Patterns; Negotiations are required in many types

business transactions. E.g., where Mexicans are friendly and emphas
social relations, Americans are assertive and get down to business quickly.

3- Decision-Making Styles; Managers make decisions continually

the operations and future direction of the firm.
For example, Japanese take considerable time to make important decision
Canadians tend to be decisive.
Cross-Cultural Risk (2 of 2)
4- Ethical Practices; Standards of right and wrong vary considerably
around the world.
For example, bribery is relatively accepted in some countries in Africa,
but is generally unacceptable in Sweden.
Country Risk 1. Government intervention, protectionism, and barriers to trade

(Political Risk) (1 of 2) investment.

2. Bureaucracy, red tape, administrative delays, corruption.

3. Lack of legal safeguards for intellectual property rights.

4. Legislation unfavorable to foreign firms.

5. Economic failures and mismanagement.

6. Social and political unrest and instability.

 Examples

Country Risk • The U.S. imposes tariffs on imports of sugar and other

(Political Risk) (2 of 2) agricultural products.

• Doing business in Russia often requires paying bribes to

government officials.

• Venezuela’s government has interfered much with the

operations of foreign firms.

• Argentina has suffered high inflation and other economic

turmoil.
 1- Currency exposure; General risk of unfavorable exchange rate
Currency Risk fluctuations.

(Financial Risk) 2- Asset valuation; Risk that exchange rate fluctuations will adversely
(1 of 2) affect the value of the firm’s assets and liabilities.

3- Foreign taxation; Income, sales, and other taxes vary widely

worldwide, with implications for company performance and profitability.

4- Inflation; High inflation, common to many countries, complicates

business planning, and the pricing of inputs and finished goods.
Currency Risk Examples
(Financial Risk) • The Japanese yen has fluctuated a lot since 2000.

(2 of 2) • The U.S. has relatively high corporate income taxes.

• Brazil and Turkey have experienced very high inflation.

 1. Weak partner

Commercial Risk 2. Operational problems

3. Timing of entry

4. Competitive intensity

5. Poor execution of strategy

General commercial risks such as these lead to sub-optimal formulation

and implementation of the firm’s international value-chain activities.
 • Always present but manageable.
• Managers need to understand, anticipate, and take proactive action to
The Four Risks reduce their effects.
of IB: Conclusion • Some risks are extremely challenging.

Example
• The global financial crisis generated many commercial, currency, and
country risks, affecting banks and other firms worldwide. This led to
steep declines in national stock markets and normal business activity.
 • Multi-national Enterprise (MNE): A large company with
Who Participates substantial resources that performs various business activities through
a network of subsidiaries and affiliates located in multiple countries
in International (e.g., Caterpillar, Samsung, Unilever, Vodafone, Disney).

Business? (1 of 2) • Small and Medium-Sized Enterprise (SME): Companies with

500 or fewer employees, comprising over 90% of all firms in most
countries. S M E s increasingly engage in international business.

• Born-Global Firm; A young, entrepreneurial SME that undertakes

substantial international business at or near its founding.
 • Non-governmental organizations; Many of these non-profit
Who organizations conduct cross-border activities. They pursue special
causes and serve as advocates for social issues, education, politics, and
Participates research.

in International
Business? (2 of 2)
 • Seek opportunities for growth through market diversification.
For Example; IKEA, H & M.
Why Do
Firms • Earn higher margins and profits. Often, foreign markets are more
profitable.
Internationalize?
• Gain new ideas about products, services, and business methods.

For Example; GM refined its knowledge for making small, fuel-

efficient cars in Europe.
 • Serve key customers that have relocated
abroad.
Why Do E.g., When Toyota launched its operations in Britain, many
of its suppliers followed suit.
Firms Participate
in IB? (1 of 3) • Be closer to supply sources, benefit from global
sourcing advantages, or gain flexibility in the
sourcing of products.
E.g., Apple sources parts and components from the best
suppliers worldwide.

• Gain access to lower-cost or better-value factors

Why Do Firms Participate in I B? (2 of 3)
• Develop economies of scale in sourcing, production,
marketing, and R&D.
E.g., Airbus lowers its overall costs by sourcing, manufacturing, and
selling aircraft worldwide.

• Confront international competitors more effectively or

thwart the growth of competition in the home market. E.g.;
Chinese appliance maker Haier established operations in the United
States, partly to gain competitive knowledge about Whirlpool, its chief U
S rivals.
 • Invest in a potentially rewarding relationship with a foreign
partner.
E.g.; French computer firm Groupe Bull partnered with Toshiba in Japan
to gain insights for developing information technology.
Why Do Firms
Participate in I B? (3 of 3)
Why Study International Business? (1 of 2)
1. Facilitator of the global economy and interconnectedness. I B brings
nations closer together.

2. Contributor to national economic well-being. IB fuels economic growth

and rising living standards.

3. A competitive advantage for the firm. I B provides companies with many

benefits, leading to profitability and competitive advantages.

4. A competitive advantage for you. Working internationally offers a range

of enlightening experiences, new knowledge, and other benefits.
5. An opportunity to support ethics, sustainability and corporate citizenship.
Firms must be ethical and socially responsible in their dealings because I
B affects numerous constituents, often in unintended ways.
Globalization of
Markets and the
Internationalization
of the Firm
Learning
1.1 Understand market globalization as an organizing framework.
Objectives 2.2 Learn the driving forces of globalization.
2.3 Understand the impact of technological advances and
globalization.
2.4 Learn the dimensions of globalization.
2.5 Understand firm-level consequences of market globalization.
2.6 Understand the societal consequences of globalization.

.
 • Globalization and technological advances have altered the
international business landscape more than any other trends.
Overview on
Globalization • Globalization: refers to the interconnectedness of national
economies and the growing interdependence of buyers,
of Markets producers, suppliers, and governments around the world.

• Globalization allows firms to view the

world as one large marketplace for goods,

services, capital, labor, and knowledge.
Phases of Globalization (1 of 2)
Phases of Globalization (2 of 2)
 A- Driving Forces of Market Globalization
The Driving
Forces, 1.Worldwide reduction of barriers to trade and investment

Dimensions, and 2.Market liberalization and adoption of free trade (e.g., in China,

Consequences of former Soviet Union countries, and elsewhere)

Market 3.Industrialization, economic development, and modernization

Globalization (1 of 4) 4.Integration of world financial markets

5.Advances in technology
 • Worldwide reduction of barriers to trade and investment.
Driving Over time, national governments have greatly reduced
Forces of trade and investment barriers. The trend is partly
facilitated by the World Trade Organization (WTO)
Market
Globalization • Market liberalization and adoption of free markets. Free
market reforms in China, India, and other nations
opened about 1/3 of the world to freer trade
(1 of 3)
Driving Forces • Industrialization, economic development, and modernization. These
of Market trends transformed many developing economies from producers of low-
value to higher-value goods, such as electronics and computers
Globalization
• Simultaneously, rising living standards have made such countries more
(2 of 3) attractive as target markets for sales and investment.

• Integration of world financial markets. Enables firms to raise capital,

borrow funds, and engage in foreign currency transactions wherever they
go. Banks now provide a range of
services that facilitate global transactions.
Driving Forces of • Advances in technology. Reduces the cost of doing business
internationally, by allowing firms to interact cheaply with suppliers,
Market distributors, and customers worldwide. Facilitates the
internationalization of companies, including countless small firms.
Globalization
(3
of 3) Digital Technologies;

• Profound advances have occurred in computers, digital technologies,

telephony, and the Internet.

• MNEs leverage digital technologies s to optimize their performance,

managing operations around the world.

• Digital technologies opened the global marketplace to firms that

Driving Manufacturing and Transportation Technologies
Forces of • Revolutionary developments facilitate low-scale and low-cost
Market manufacturing; firms can make products cost-effectively even in
short production runs. Online platforms are increasing the
Globalization productivity of business and industrial activity.

• In transportation, key advances include fuel-efficient jumbo jets,

giant ocean-going freighters, and containerized shipping. The cost of
(3 of 3)
international transportation has declined substantially, spurring rapid
growth in global trade.

• Collectively, technological advances have greatly reduced the costs

of doing business internationally.
Declining Cost of Global Communication
and Growing Number of Internet Users

•www.itu.in
Souris: IMF, World Economic Outlook (Washington, DC: International
t Monetary
Fund, (2017)
Copyright © 2020 Pearson Education, Inc. All Rights Reserved
The Driving Forces, Dimensions, and
Consequences of Market Globalization (2 of 4)
2- Dimensions of Market Globalization

1.Integration and interdependence of national economies

2.Rise of regional economic integration blocs

3.Growth of global investment and financial flows

4.Convergence of buyer lifestyles and preferences

5.Globalization of production activities

6.Globalization of services
Dimensions of Market Globalization (1of 3)
• Integration and interdependence of national economies. Results
from firms’ collective international activities. Governments
contribute by lowering trade and investment barriers.

• Rise of regional economic integration blocs. Free trade areas are

formed by two or more countries to reduce or eliminate barriers to
trade and investment,
such as; the EU, NAFTA, and GCC
• Growth of global investment and financial flows. Associated with
rapid growth in foreign direct investment (FDI), currency trading and
global capital markets.
Dimensions of Market Globalization (2 of 3)
• Convergence of buyer lifestyles and preferences. Facilitated by
global media, which emphasize lifestyles found in the U.S.,
Europe, or elsewhere. Firms market standardized products.
• Globalization of production. To cut costs, firms manufacture in
low labor-cost locations such as Mexico and Eastern Europe.
• Globalization of services. Banking, hospitality, retailing, and
other service industries are rapidly internationalizing. To cut
costs, Firms outsource business processes and other services
in the value chain to vendors overseas.
The Driving C:1- of Market Globalization: Internationalization of
the Firm’s Value Chain
Forces,
Dimensions, 1.Countless new business opportunities for internationalizing firms

and 2.New risks and intense rivalry from foreign competitors

Consequences 3.More demanding buyers who source from suppliers worldwide

of Market 4.Greater emphasis on proactive internationalization
Globalization (3
of 4) 5.Internationalization of firm’s value chain
The Driving Forces, Dimensions,
C:2- of Market Globalization
and Consequences of Market
Globalization (4 of 4)
1.Contagion: Rapid spread of financial or monetary crises from one
country to another

2.Loss of national sovereignty

3.Offshoring and the flight of jobs

4.Effect on the poor

5.Effect on the natural environment

6.Effect on national culture