IB COURSE NOTES – CHAPTER 1

CHAPTER 1 – Learning Objectives

1. What is international business?

2. What are the key concepts in international trade and investment?

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3. How does international business differ from domestic business?

4. Who participates in international business?

5. Why do firms internationalize?

6. Why study international business?

QUESTION

International business is defined as the performance of across national borders.

A) marketing and fiduciary;

B) trade and investment;

C) finance and operational;

D) manufacturing and sales The Nature of International Business activities by firms.

What are examples of VALUE-ADDING ACTIVITIES? What the VALUE CHAIN? All value-adding activities? ”including sourcing, manufacturing, and marketing?”can be performed in international locations. Where can these activities be performed? SEE ABOVE Key elements to international trade? Products, services, capital, technology, know-how, and labor. What are the different entry strategies (to engage in intl trade or investment)? What are examples of VALUE-ADDING ACTIVITIES? What the VALUE CHAIN? All value-adding activities? ”including sourcing, manufacturing, and marketing”can be performed in international locations.

ENTRY MODES: Firms internationalize through various entry strategies, such as exporting and foreign direct investment.

QUESTIONS

What are examples of factors of production?

What is an example of FDI?

Difference in Foreign Direct Investment and Portfolio Investment?

International investment: Transfer of assets to another country or the acquisition of assets in that country.

Also known as “foreign direct Investment” (FDI). We will focus on this type of investment. International portfolio investment: Passive owner-ship of foreign securities, such as stocks and bonds, in order to generate financial returns. Dan Freehold and his business partner, Bethany Quinn, are successful investors engaged in a variety of enterprises. Recently Dan and Bethany have decided to expand their foreign investing operations. They hold a meeting for individuals interested in participating in certain overseas ventures.

At the meeting, Dan explains to the attendees that Freehold direct investment projects differ from international trade in that:

A) the firm itself is crossing international borders to purchase foreign assets;

B) the firm is restricting its investments to stocks and does not ector;

D) the firm is engaging in the transfer of products across national borders.

Key Concepts in International Business International business? International business refers to cross-border business.

Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale. They seek foreign customers and engage in collaborative relationships with foreign business partners. While international business is performed mainly by individual firms, governments and international agencies also undertake international business activities. In this book, we are mainly oncerned with the international business activities of individual firms. Globalization of markets?

The growth of international business activity coincides with the broader phenomenon of globalization of markets, which refers to the ongoing economic integration and growing interdependency of countries worldwide, and which results in a worldwide diffusion of products, technology, and knowledge. International trade? International trade refers to an exchange of products and services across national borders by either importing or exporting. Exporting? Exporting involves the sale of products or services to customers located abroad from base in the home country or a third country. Importing or Global Sourcing? Importing is the procurement of products or services from suppliers located abroad for consumption in the home country or a third country. While exporting represents the outbound flow of products and services, importing is an inbound activity. Both finished products and intermediate goods, such as raw materials and components, are subject to importing and exporting.

QUESTION

Which of the following is another term for importing?

A) capital investment;

B) supply side development;

C) global sourcing;

D) unilateral procurement.

The “Flows” of International Business – The unprecedented growth of international trade easily confirms the globalization of markets. In 1960, cross-border trade was modest”about $100 billion per year. Today, it accounts for a substantial proportion of the world economy, amounting to some $13 trillion annually. International trade in services accounts for about one-quarter of all international trade and is growing rapidly. In recent years, services trade has been growing more quickly than products trade. As with products, larger, advanced economies account for the greatest proportion of world services trade.

This is expected, because services typically comprise more than two-thirds of the GDPs of these countries. Although services trade is growing rapidly, the value of merchandise trade is still much larger. Trade between nations is frequently accompanied by substantial flows of capital, such as Foreign Direct Investment (FDI) and knowledge. World Trade Is Growing Faster than GDP The exhibit contrasts the growth of total world exports to the growth of total world gross domestic product (GDP) since 1970. GDP is the total value of products and services produced in a country over the course of a year.

During this period, world ifference in the growth of exports versus GDP is due to advanced (or developed) economies, such as Britain and the United States, now sourcing many of the products they consume from low-cost manufacturing locations, such as China and Mexico. For example, although the United States once produced most of the products it consumed, today it depends much more on imports. Rapid integration of world economies is fueled by such factors as advances in information and transportation technologies, decline of trade barriers, liberalization of markets, and the remarkable growth of emerging market economies.

QUESTION

Which of the following best explains why export growth has outpaced the growth of domestic production during the last few decades?

A) Both world exports and domestic production have grown significantly over the past 30 years.

B) The cost to import products is generally higher than the cost to produce domestic products.

C) Growth in gross domestic product in most countries has steadily increased since 1970.

D) Advanced economies now source many of their consumable products from low-cost manufacturing nations.

Foreign Direct Investment (FDI) Inflows into World Regions (in Billions of U. S. Dollars per Year) This exhibit illustrates the dramatic growth of FDI into various world regions since the 1980s. The exhibit reveals that the dollar volume of FDI has grown immensely since the 1980s, especially in developed economies such as Japan, Europe, and North America. FDI inflows were interrupted in 2001 as investors panicked following the September 1 1, 2001 terrorist attacks in the United States, but investments returned shortly thereafter. Particularly significant is the growth of FDI into developing economies, which are nations with lower incomes in parts of Africa, Asia, and Latin America.

Developing economies collectively comprise a substantial and growing proportion of international trade and investment.

SERVICE INDUSTRY

Highly internationalized? What are examples of different service industries? (think of the more official term) (and example companies? ) – Building stuff Money Movies etc. People moving around What moves people/stuff around – Learning stuff TRADE DEFICIT Does the US have a trade deficit? Or surplus? What is the difference? consider GOODS TRADE vs. SERVICES TRADE… International and Domestic Business: How They Differ 1. KEY DIFFERENCES IN INTL vs. DOMESTIC BUSINESS: Differences in Language… Business systems… Political Systems… Cultures…. Infrastructures… The Four Risks of International Business Cultural differences: Risks arise from differences in language, lifestyle, attitudes, customs, and religion, where a cultural miscommunication Jeopardizes a culturally valued mindset or behavior. Negotiation patterns: Negotiations are required in many types of business transactions; e. g. , Mexicans are friendly and emphasize social relations, whereas Americans are assertive and get down to business quickly. Decision-making styles: Managers constantly make decisions about the operations and future direction of the firm.

For example, Japanese take considerable time to make important decisions, whereas Canadians tend to be decisive and “shoot from the hip. ” Ethical practices: Standards of right and wrong vary considerably around the world. For example, bribery is relatively acceptable in some countries in Africa, but is generally unacceptable in Sweden. Country Risk (Political Risk) Country risk (also known as political risk) refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country.

Country risk also includes the ossibility of foreign government intervention in firms’ business activities by restricting access to markets, imposing bureaucratic procedures, and limiting the amount of income that firms can bring home from foreign operations. For example, Singapore and Ireland are characterized by substantial economic freedom”that is, a fairly liberal economic environment. By contrast, the Chinese and Russian governments regularly intervene in business affairs. Examples The U. S. imposes high tariffs on imports of sugar and other 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. Critical legal dimensions that potentially hinder company operations and performance, include property rights, intellectual property protection, product liability, and taxation policies. Potentially harmful economic conditions such as high inflation, national debt, and unbalanced international trade can also result in negative financial results for the firm. WHAT IS/ARE (examples of)? Government intervention? Protectionism? Examples of barriers to trade and investment? Bureaucracy, red tape? Examples of corruption? Lack of IPR protection? Legislation unfavorable to foreign firms Economic failures? Social and political unrest and instability? Who Participates in International Business?

DEFINITIONS and EXAMPLES: multinational corporation is a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries.

MNEs carry out research and development (R&D), procurement, manufacturing, and marketing activities wherever in the world the firm an reap the most advantages. For example, Alcon is a Swiss pharmaceutical firm that established major R&D facilities in the United States to take advantage of the countrys superior know-how in the chemicals sector. Verizon Wireless has located much of its technical support operations in India, to take advantage of high-quality, low-cost customer support personnel located there. In addition to a home office or headquarters, the typical MNE owns a worldwide network of subsidiaries. It collaborates with numerous suppliers and independent business partners abroad (sometimes termed affiliates). The largest MNEs have been firms in the oil industry (such as Exxon-Mobil and Royal Dutch Shell) and the automotive industry (General Motors and Honda), as well as retailing (Wal-mart). Small and medium-sized enterprise (SME)? Many small and medium-sized (usually defined as having less than 500 employees) enterprises (SMEs) participate in international business as well.

SMEs constitute the great majority of all firms in most nations, but tend to have limited managerial and other resources and primarily use exporting to expand internationally. However, with the globalization of markets, many more SMEs are ursuing international opportunities and now account for about one-third of exports from Asia and about a quarter of exports from the affluent countries in Europe and North America. Born global firm? One type of contemporary international SME is the born global firm, a young entrepreneurial company that initiates international business activity very early in its evolution.

Born globals are found in advanced economies, such as Australia and Japan, and in emerging markets, such as China and India. How do SMEs succeed in international business despite resource limitations? First, compared to large MNEs, smaller firms are often more innovative and adaptable and have quicker response times when it comes to implementing new ideas and technologies and meeting customer needs. Second, SMEs are better able to serve niche markets around the world that hold little interest for MNEs. Third, smaller firms are usually avid users of information and communication technologies, including the Internet.

Fourth, because they usually lack substantial resources, smaller firms minimize overhead or fixed investments. Fifth, smaller firms tend to thrive on private knowledge that they possess or produce. WHO ELSE PARTICIPATES IN INTL BUS? NGOs (non-govermental orgs) Geographic Locations of the 500 Largest Multinational Enterprises FROM A FEW YEARS AGO! The exhibit shows the geographic distribution of the world’s largest MNEs, drawn from Fortune’s Global 500 list. These firms are concentrated in the advanced economies.

The United States is home to 140 of the top 500 MNEs, a number that has declined over time as other countries’ firms increase in size. Japan has the second- (26 firms). Collectively, the European Union countries have more top 500 firms than the United States. In recent years, large MNEs have begun to appear in emerging arket countries, such as China, Mexico, and Russia. China currently hosts 37 of the top 500 MNEs, a fairly recent development. The new global challengers make the best use of home-country natural resources and low-cost labor to succeed in world markets.

For example, the Mexican firm Cemex is one of the world’s largest cement producers. In Russia, Lukoil has big ambitions in the global energy sector. MORE RECENT NUMBERS GLOBAL 500 FIRMS (per ctry) Per Fortune Global 500 (a few yrs ago – what are the stats now? ) US = 132 CHINA = 73 JAPAN = 68 What does this tell us? What will these numbers be in 10 years? Non- overnmental Organizations Mauritania, 2012 OULY 2012): Some 35,000 children are acutely malnourished in Mauritania, with numbers expected to reach 90,000 by year’s end. The country is one of eight facing the nutrition crisis in Africa’s Sahel region.

UNICEF support includes screenings to identify malnutrition and providing therapeutic foods to treat it, but needs far exceed current funding. Seven-month-old Kumbaba, who is severely malnourished, visits a nutrition centre, in Ka?©di, Gorgol Region. UNICEF = United Nations Children’s Fund Why do Firms Participate in 1B? To seek opportunities for growth through market diversification. Many firms”for example, Gillette, Siemens, Sony, and Biogen”derive more than half of their sales from international markets, and frequently firms can extend the marketable life of products or services that have reached maturity in the home market.

For example, the first ATM was installed outside a London branch of Barclays Bank in 1967. The machines were next adopted in the United States and Japan. As growth of ATMs began to slow in these countries, they were marketed throughout the rest of the world. Today, there are more than 1. 5 million ATMs worldwide; a new one is installed somewhere every few minutes. To earn higher margins and profits. For many types of products and services, market growth in mature economies is sluggish or flat, resulting in slim profit margins. High- growth emerging markets may be underserved.

Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. For example, compared to their home markets, bathroom fixture manufacturers American Standard and Toto (of Japan) have found more favorable competitive environments in rapidly industrializing countries such as Indonesia, Mexico, and Vietnam. To gain new ideas about products, services, and business methods. Unique foreign environments expose firms to new ideas for products, processes, and business methods.

For example, Just-in-time inventory techniques the world. To better serve key customers that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. For example, when Nissan opened its first factory in the United Kingdom, many Japanese auto parts suppliers followed, establishing their own operations there. To be closer to supply sources, benefit from global sourcing dvantages, or gain flexibility in product sourcing.

Companies in extractive industries, such as petroleum, mining, and forestry, establish international operations where these raw materials are located. One example is the aluminum producer Alcoa, which established operations in Brazil, Guinea, Jamaica, and elsewhere to extract aluminum’s base mineral, bauxite, from local mines. Some firms internationalize to gain flexibility from a greater variety of supply bases. Dell Computer has assembly facilities in Asia, Europe, and the Americas that allow management to quickly shift production from one region to another as needed.

To gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, and labor at lower costs, higher quality, or better value. For example, some Taiwanese computer manufacturers established subsidiaries in the United States to access low-cost capital from U. S. stock exchanges and venture capitalists. More commonly, firms venture abroad in search of skilled or low-cost labor. For example, the Japanese firm Canon relocated much of its production to China to profit from that countrys inexpensive and productive workforce.

To develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale reduce the per-unit cost of manufacturing due to operating at high volume. By expanding internationally, the firm greatly increases the size of its customer base. For example, the per-unit cost of manufacturing 100,000 cameras is much cheaper than the per unit cost of manufacturing Just 100 cameras. Economies of scale are also present in R&D, sourcing, marketing, distribution, and after-sales service. To confront international competitors more effectively or to thwart the growth of competition in the home market.

Multinational competitors are invading markets worldwide by confronting competitors in international markets or preemptively entering a competitor’s home market to destabilize and curb its growth. One example is Caterpillar’s entry into Japan in the early 1970s, Just as its main rival in the earthmoving equipment industry, Komatsu, was getting started. This preemptive move hindered Komatsu’s international expansion for at least a decade, and Caterpillar would certainly have had to face a more potent rival sooner. To invest in a potentially rewarding relationship with a foreign partner.

Firms often have ong-term strategic reasons for venturing abroad. Joint ventures or project-based alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term, profit-making opportunities. For example, Black and Decker entered a Joint venture with Baja], an Indian retailer, to position itself for expected long-term sales in the huge Indian market. To seek opportunities for growth through market diversification E. g. , Harley-Davidson, Sony, Whirlpool. To earn higher margins and profits To gain new ideas about products, services, and business methods E. , GM refined its knowledge about making small, fuel-efficient cars in Europe. To better serve key customers that have relocated abroad E. g. , when Toyota launched its operations in Britain, many of its suppliers followed suit. To be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products E. g. , Dell sources parts and components from the best suppliers worldwide. To gain access to lower-cost or better-value factors of production E. g. , Sony does much of its manufacturing in China.

To develop economies of scale in sourcing, production, marketing, and R E. g. , Boeing lowers its overall costs by sourcing, manufacturing, and selling aircraft To confront international competitors more effectively or to thwart the growth of competition in the home market Chinese appliance maker Haier established operations in the United States, partly to gain competitive knowledge about Whirlpool, its chief US rival. To invest in a potentially rewarding relationship with a foreign partner French computer firm Groupe Bull partnered with Toshiba in Japan to gain insights for developing information technology.

QUESTION

One of the major consequences of international trade between nations is:

A- Reduced competition for businesses.

B-Higher prices for consumers.

C-A decreased variety of consumer products.

D-The possibility for total world output to increase.

Which one of the following statements concerning international trade and protection is true?

A-US imports raise living standards in the US.

B-The US cannot compete with nations whose labor costs are lower.

C- Protection is necessary in order to keep US money in the US.

D-When 2 nations trade, one must gain while the other must lose.