INTERNATIONAL BUSINESS READING MATERIALS

ART ONE
BACKGROUND FOR INTERNATIONAL BUSINESS

Chapter 1
International Business: An Overview

Objectives

! Define international business and describe how it differs from domestic business.
! Explain why companies engage in international business and why its growth has
accelerated.
! Introduce different modes a company can use to accomplish its global objectives.
! Illustrate the role social science disciplines play in understanding the environment of
international business.
! Provide an overview of the primary patterns for companies international expansion.
! Describe the major countervailing forces that affect international business.

Chapter Overview

More and more foreign countries are becoming a source of both production and sales for many
firms. Chapter 1 examines the reasons for this, as well as the various modes used by firms to
engage in international business. The chapter describes the evolution of firm strategy as part of the
internationalization process, plus the countervailing forces that firms are likely to encounter during
that process. In addition, the elements of the external international business environment are briefly
introduced, prior to their being considered in detail in the following three chapters.

Chapter Outline

OPENING CASE: Star Wars: Episode II Attack of the Clones

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This case sets forth the global mindset of Lucasfilm with respect to the production and distribution
of Star Wars: Episode IIAttack of the Clones. It describes the advantages gained by using multi-country
production locations and an international cast and crew. In addition, it explains the reasons behind the
simultaneous release of the film in nine countries on the first day, plus another large group of countries
the following day. The case also describes the strategic adjustments that Lucasfilm made to
accommodate national technical and cultural differences, as well as the additional revenue sources
associated with the sales of rights to produce and sell products associated with characters and scenes
from the movie.

Teaching Tip: Carefully review the PowerPoint slides for Chapter 1. For additional visual
summaries of key chapter points, also review text Figures:

1.2International Business: Operations and Influences

1.4Means of Carrying Out International Operations

1.5Physical and Societal Influences on International Business

1.6The Competitive Environment and International Business

1.7The Usual Pattern of Internationalization.

Finally, note the atlas that follows the chapter (pages 30-41).

I. INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS

International business involves all commercial transactionsprivate and governmental
(public)between two or more countries. Global events and competition affect almost all firms,
large or small. However, the international environment is more complex and diverse than a firms
domestic environment.
A. Why Companies Engage in International Business

1. Expand Sales. Companies may increase the potential market for their
sales by pursuing international consumer and industrial markets.
2. Acquire Resources. Foreign-sourced goods, services, components,
capital, technology and information can make a firm more competitive
both at home and abroad.
3. Minimize Risk. Firms may pursue foreign markets in order to minimize
cyclical effects on sales and profits; they may also wish to counter the
potential advantages that competitors might gain by participating in
foreign market opportunities.
B. Reasons for Recent International GrowthFrom Carrier Pigeons to the
Internet
1. Expansion of Technology. Vast improvements in transportation and
communication technology have significantly increased the efficiency of
international business operations.

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 2. Liberalization of Cross-Border Movements. The reduction of trade
barriers via the General Agreement of Tariffs and Trade and other such
mechanisms has provided increased access to many foreign markets.
3. Development of Supporting Services. Services provided by governments,
banks and other businesses greatly facilitate the conduct and reduce the risks
of doing business internationally.
4. Consumer Pressures. Because of innovations in transportation and
communications technology, consumers are better informed and thus
demand higher-quality, more cost-competitive products.
5. Increase in Global Competition. Companies may choose to operate
internationally in order to gain access to foreign opportunities and improve
their overall operational flexibility and competitiveness.

II. MODES OF INTERNATIONAL BUSINESS

A firm can engage in international business through various operating modes, including exporting and
importing merchandise and services (see Chapters 5 and 6 regarding international trade), licensing and
management contracts (see Chapter 14 regarding collaborative arrangements), foreign direct and
portfolio investments (see Chapters 8 and 11 regarding foreign direct investment) and strategic alliances
with other companies (see Chapter 14 regarding collaborative arrangements).
A. Merchandise Exports and Imports
Merchandise exports consist of tangible (visible) products, i.e., goods, which are sent to
a foreign country for use or resale. Merchandise imports consist of tangible (visible)
products, i.e., goods, brought into a country for use or resale.

B. Service Exports and Imports

Service exports and imports represent intangible (invisible), i.e., non-merchandise,
products. The firm or individual exporting a service will receive international earnings;
the firm or individual importing a service will make an international payment.

1. Tourism and Transportation. When an American flies to Germany on

Lufthansa (a German airline) and stays in a German-owned hotel,
payments made to Lufthansa and the hotel represent service export
earnings for Germany and service import payments for the United States.
2. Performance of Services. Some services, such as turnkey
operations (construction of facilities, performed under contract, that are
transferred to the owner when they are ready for operation)
and management contracts (arrangements in which one firm provides
personnel to perform management functions for another), yield export
earnings to service providers in the form of fees paid by foreign clients.
3. Use of Assets. Firms may receive export earnings, i.e., royalties, by
allowing foreign clients to use their assets (trademarks, patents, copyrights
and other expertise). Licensing represents a transaction in which a licensor
(exporter) sells the rights to the use of its intellectual property to a licensee
(importer) in exchange for a fee. Franchising is a special form of

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 licensing in which the licensor is granted more control over the licensee in
exchange for the provision of additional support and services.
C. Investments
Foreign investment consists of the direct and portfolio ownership of assets in a foreign
country.

1. Direct Investment. Foreign direct investment (FDI) occurs when an

investor gains a controlling interest in a foreign operation. Sole ownership
represents 100% ownership of an operation; however, effective control
can be realized with just a minority stake if the remaining ownership is
widely dispersed. A joint venture represents a direct investment in which
two or more partners share ownership. A mixed venture represents a
commercial operation in which ownership is shared by a government and
a business.

2. Portfolio Investment. Portfolio investment is a non-controlling interest in

a venture made in the form of either debt or equity.
D. International Companies and Terms Used to Describe Them
1. There are numerous forms of collaborative arrangements through which
companies work together internationally, such as licensing, management
contracts, or long-term contractual arrangements. A strategic alliance is
more narrowly defined to indicate that the agreement is of critical
importance to the competitive viability of one or more partners.
2. A multinational enterprise (MNE) is a firm that takes a global approach
to foreign markets and production, i.e., it takes a corporate perspective in
its worldwide selection of markets and production sites. The
terms multinational corporation (MNC) and transnational company
(TNC) may also be used in this context.
3. A global company (also known as a globally integrated
company) integrates its operations on a worldwide basis. A multidomestic
company (also known as a locally responsive company) tailors its
strategies to national and/or regional preferences by granting decision-
making authority to local managers.

EXTERNAL INFLUENCES ON INTERNATIONAL BUSINESS

A. Understanding a Companys Physical and Societal Environments

To effectively operate in the external environment, a firms managers must

understand not only business operations, but they also must have a working
knowledge of the basic social sciences, such as law, political science, anthropology,
sociology, psychology, economics and geography.
B. The Competitive Environment

The competitive environment varies by industry and country. Likewise, a

companys competitive situation may differ in terms of its relative strength and in
terms of which competitors it faces from one country to another. Thus, a firms
competitive strategy directly influences how and where it can best operate.

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IV. EVOLUTION OF STRATEGY IN THE INTERNATIONALIZATION PROCESS
Typically, a firms commitment to international operations evolves as part of its overall growth
and operating strategies over time. Nonetheless, more start-up companies are becoming
international very early in their lives because of advancements in communications and
managerial knowledge about foreign locations.

A. Patterns of Expansion
1. Passive to Active Expansion. Most companies think only of domestic
opportunities until a foreign opportunity presents itself.
2. External to Internal Handling of Operations. After initially relying on
intermediaries, a firm will learn enough about foreign operations to consider
them less risky than at the onset. It then may choose to handle at least some
of those operations internally.
3. Deepening Mode of Commitment. Usually firms begin their international
operations via importing or exporting. Once they have successfully built
export markets, however, they often move into some type of foreign
production to meet foreign demand.
4. Geographic Diversification. Initially companies tend to expand to those
foreign locations that are geographically close and culturally similar. Later
they move to more distant countries perceived to have less similar
environments to their home countries in order to expand on the one hand,
but minimize risk on the other.

B. Leapfrogging of Expansion
Many start-up firms are now beginning with a global focus because of the international
education and experience of their founders. Technological advances in the Internet and
other forms of communication give these companies access to both worldwide markets and
resources.

V. COUNTERVAILING FORCES
Countervailing forces influence the conditions in which companies operate and their options for
operating internationally. Rivalries among countries, cross-national treaties and agreements and
ethical dilemmas can inhibit a firms quest for maximum global profits.

A. Globally Standardized versus Nationally Responsive Practices

Trends that influence the worldwide growth in international business often favor the
use of a global strategy, i.e., standardization, thus capturing gains from economies of
scale. On the other hand, a firm may choose to use a multidomestic strategy, i.e., to be
nationally responsive, thus increasing its effectiveness by adjusting to the different
conditions it encounters in the various countries in which it operates.

B. Country versus Company Competitiveness

At one time the performance of a country and that of its domestic companies were
considered to be mutually dependent and beneficial. However, many companies now
choose to compete by seeking maximum production efficiency on a global scale, even if
it means moving production activities abroad. If as a result high-value activities increase
sufficiently in the home country, it will realize an economic gain; if not, the countrys
economic position will deteriorate. Countries continue to entice both domestic and

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 foreign firms to locate activities within their borders through regulations, on the one
hand, and incentives on the other.

C. Sovereign versus Cross-National Relationships

Although governments act in their own self-interest, they may choose to
cooperate with one another and even cede limited sovereignty through treaties and
other agreements.
1. Countries enter into a variety of bilateral and multilateral treaties and
agreements with other countries regarding commercial activities in order
to gain reciprocal advantages for themselves and their domestic firms.
2. Countries enact treaties and agreements to coordinate activities along their
shared borders and deal with problems that a single country acting alone
cannot solve.
3. Countries enact treaties and agreements to deal with areas of concern that
lie outside the territory of all countries, i.e., the non-coastal areas of the
oceans, outer space and Antarctica.

ETHICAL DILEMMAS AND SOCIAL RESPONSIBILITY:

Sorting through the World of Right and Wrong in International Business

Firms take many actions that elicit almost universal agreement about what is right or wrong. In the
international arena, however, religious beliefs, social attitudes, laws, regulations and policies may vary
significantly. No set of workable corporate guidelines is universally accepted and observed. An MNE may
find it has either more or less latitude in making decisions in the foreign countries in which it
operates. Cultural relativism holds that ethical truths depend upon the groups holding them; thus
intervention in local traditions is seen as unethical. On the other hand, normativism holds that there are
universal standards of behavior everyone should follow, thus making non-intervention unethical. From a
business standpoint, two possible objectives are to (a) proactively create competitive advantages
though socially responsible behavior that leads to trust and commitment and (b) avoid being perceived
as irresponsible.

LOOKING TO THE FUTURE:

Seizing That Window of International Business Opportunity

At this time there is much confusion about the future growth of international business. Nonetheless, a
firm that wants to capitalize on international opportunities must not wait too long. By envisioning
different ways in which the future may evolve, a company can be better prepared to develop the
facilities and people needed to succeed in an uncertain environment.

WEB CONNECTION

Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to
the topics presented in Chapter 1. Refer your students to the on-line study guide, as well as the
Internet exercise for Chapter 1.

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_________________________

CLOSING CASE: Disney Theme Parks [See Map 1.1]

1. What do you think motivated Disney to set up parks abroad, and what might be the pros and
cons from the standpoint of the Walt Disney Company?

Surely Disney was motivated to expand internationally in order to increase sales and profits.
Initially, Tokyo Disneyland was established in response to a proposal from Japans Oriental Land
Company, i.e., Disney was pulled into the international arena. The pros associated with Disneys
international expansion include a larger market for all Disney-related products: theme park
visitors, Disney merchandise and licensing royalties. In addition, much of the expansion has
been done in collaboration with joint venture partners, thus reducing the risk to Disney. The
cons reflect the costs and risks associated with foreign direct investment activities, including
cultural differences such as those encountered in France as well as trade and investment
barriers.

2. Why do you suppose Disney made no financial investment in Japan, one of $140 million in France
and then one of over $300 million in Hong Kong?

The Oriental Land Company initially proposed the Tokyo park to Disney; because Disney did not
want to provide any financing, the land company owns the park and pays Disney royalties from
the operation. Given the success of that operation, Disney actively sought to enter the European
market, although it collaborated with numerous partners in the development of that operation.
In Hong Kong, Disney sees a gateway to China, as well as the fact that Hong Kong is Asias largest
tourist destination. The Hong Kong government holds a 57 percent interest in the joint venture,
while Disney owns 43 percent.

3. What factors in the external environment have contributed to Disneys success, failure and
adjustment in foreign theme park operations?

Market demand for theme park entertainment, as evidenced first by foreign visitors to Disneys
US parks and then by visitors to its foreign operations, is substantial. Nonetheless, both the level
of demand and Disneys ultimate profitability are sensitive to upturns and downturns in the
economic environment. Likewise, cultural differences have proven both beneficial (in Japan) and
problematic (in France), and winter weather proved troublesome in France. Disney has adjusted
to these factors by limiting its financial exposure via licensing and joint venture operations,
adjusting prices in response to local conditions, adding features that are particularly desirable to
host country visitors and adjusting its policies to be culturally compatible with host country
traditions. In addition, Disneys collaboration with the governments of France and Hong
Kong has been crucial to the successful development of those respective operations.

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4. Should Disney set up a park in Shanghai? If so, what types of operating adjustment might it make
there?

This is an excellent question for a class debate. Shanghai would provide additional access to the
Chinese market; however, the possibility that Shanghai would siphon off potential visitors to
the Hong Kong park is very real. If, as Disney says, the two parks would attract different types of
visitors, Disney would likely have to adjust part of its product offering and perhaps its pricing
policies as well in order to maximize its earnings at each park.

Additional Exercises: The Internationalization Process

Exercise 1.1. Ask students to name companies, both domestic and foreign, that operate
internationally. Take time to explore the extent and nature of those firms operations. Also
discuss a logical pattern of expansion for each type of operation. Conclude the discussion by
examining the list and asking if there are any particular types of firms that seem to lend
themselves to global operations and strategies more easily than others. Have the students
explain why this might be so.

Exercise 1.2. Explore the impact of standardization, containerization and computerization upon
the foreign trade process. Then ask students to discuss the role technology has played in other
areas of the foreign trade, licensing and foreign direct investment processes.

Exercise 1.3. Ask students to develop a list of products (both goods and services) with global
potential, i.e., those that require little or no adjustment in foreign markets. If adjustments are
required, what would they be? Conclude the discussion by having the students develop a second
list of products that would either require substantial adjustments or would have little if any
potential in a global setting. Explore the reasons for this.

What is International Business? Meaning

International Business conducts business transactions all over the world. These transactions
include the transfer of goods, services, technology, managerial knowledge, and capital to other
countries. International business involves exports and imports.
International Business is also known, called or referred as a Global Business or an International
Marketing.

An international business has many options for doing business, it includes,

1. Exporting goods and services.
2. Giving license to produce goods in the host country.

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 3. Starting a joint venture with a company.
4. Opening a branch for producing & distributing goods in the host country.
5. Providing managerial services to companies in the host country.

Features of International Business

The nature and characteristics or features of international business are:-

1. Large scale operations : In international business, all the operations are conducted on a
very huge scale. Production and marketing activities are conducted on a large scale. It first
sells its goods in the local market. Then the surplus goods are exported.
2. Intergration of economies : International business integrates (combines) the economies of
many countries. This is because it uses finance from one country, labour from another
country, and infrastructure from another country. It designs the product in one country,
produces its parts in many different countries and assembles the product in another country.
It sells the product in many countries, i.e. in the international market.
3. Dominated by developed countries and MNCs : International business is dominated by
developed countries and their multinational corporations (MNCs). At present, MNCs from
USA, Europe and Japan dominate (fully control) foreign trade. This is because they have
large financial and other resources. They also have the best technology and research and
development (R & D). They have highly skilled employees and managers because they
give very high salaries and other benefits. Therefore, they produce good quality goods and
services at low prices. This helps them to capture and dominate the world market.
4. Benefits to participating countries : International business gives benefits to all participating
countries. However, the developed (rich) countries get the maximum benefits. The
developing (poor) countries also get benefits. They get foreign capital and technology.
They get rapid industrial development. They get more employment opportunities. All this
results in economic development of the developing countries. Therefore, developing
countries open up their economies through liberal economic policies.
5. Keen competition : International business has to face keen (too much) competition in the
world market. The competition is between unequal partners i.e. developed and developing
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 countries. In this keen competition, developed countries and their MNCs are in a favourable
position because they produce superior quality goods and services at very low prices.
Developed countries also have many contacts in the world market. So, developing
countries find it very difficult to face competition from developed countries.
6. Special role of science and technology : International business gives a lot of importance to
science and technology. Science and Technology (S & T) help the business to have large-
scale production. Developed countries use high technologies. Therefore, they dominate
global business. International business helps them to transfer such top high-end
technologies to the developing countries.
7. International restrictions : International business faces many restrictions on the inflow and
outflow of capital, technology and goods. Many governments do not allow international
businesses to enter their countries. They have many trade blocks, tariff barriers, foreign
exchange restrictions, etc. All this is harmful to international business.
8. Sensitive nature : The international business is very sensitive in nature. Any changes in the
economic policies, technology, political environment, etc. has a huge impact on it.
Therefore, international business must conduct marketing research to find out and study
these changes. They must adjust their business activities and adapt accordingly to survive
changes.

IMPORTANCE OF INTERNATIONAL BUSINESS

The points below highlight the importance of international business:

1. EARN FOREIGN EXCHANGE: International business exports its goods and services
all over the world. This helps to earn valuable foreign exchange. This foreign exchange is
used to pay for imports. Foreign exchange helps to make the business more profitable and
to strengthen the economy of its country.
2. OPTIMUM UTILISATION OF RESOURCES: International business makes optimum
utilisation of resources. This is because it produces goods on a very large scale for the
international market. International business utilises resources from all over the world. It
uses the finance and technology of rich countries and the raw materials and labour of the
poor countries.

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 3. ACHIEVE ITS OBJECTIVES: International business achieves its objectives easily and
quickly. The main objective of an international business is to earn high profits. This
objective is achieved easily. This it because it uses the best technology. It has the best
employees and managers. It produces high-quality goods. It sells these goods all over the
world. All this results in high profits for the international business.
4. TO SPREAD BUSINESS RISKS: International business spreads its business risk. This
is because it does business all over the world. So, a loss in one country can be balanced by
a profit in another country. The surplus goods in one country can be exported to another
country. The surplus resources can also be transferred to other countries. All this helps to
minimise the business risks.
5. IMPROVE ORGANISATION'S EFFICIENCY: International business has very high
organisation efficiency. This is because without efficiency, they will not be able to face the
competition in the international market. So, they use all the modern management
techniques to improve their efficiency. They hire the most qualified and experienced
employees and managers. These people are trained regularly. They are highly motivated
with very high salaries and other benefits such as international transfers, promotions, etc.
All this results in high organisational efficiency, i.e. low costs and high returns.
6. GET BENEFITS FROM GOVERNMENT: International business brings a lot of foreign
exchange for the country. Therefore, it gets many benefits, facilities and concessions from
the government. It gets many financial and tax benefits from the government.
7. EXPAND AND DIVERSIFY: International business can expand and diversify its
activities. This is because it earns very high profits. It also gets financial help from the
government.
8. INCREASE COMPETITIVE CAPACITY: International business produces high-
quality goods at low cost. It spends a lot of money on advertising all over the world. It uses
superior technology, management techniques, marketing techniques, etc. All this makes it
more competitive. So, it can fight competition from foreign companies.

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