International Business

1International Business 3e

INTERNATIONALBUSINESS

An Overview of International Business

Dr. Hamid Khodadad Hosseini Tarbiat Modares University

A MANAGERIAL PERSPECTIVE

Prentice Hall © 2002 International Business 3e

1


ObjectivesTo define internal business (IB) and describe how it

differs from domestic businessTo explain why companies engage in IB and why its

growth has acceleratedTo introduce different modes a company can use to

accomplish its global objectivesTo illustrate the role social science disciplines play in

understanding the environment of IBTo provide an overview of the primary patterns for

companies’ international expansionTo describe the major countervailing forces that affect

IB


Changes which dramatically altered the landscape of global business

– Emerging markets in Eastern Europe

– The European Monetary Union

– The rapid move away from traditional distribution structures in Japan, Europe, and many emerging markets

– The growth of middle-income households the world over– The continued strengthening and creation of regional market groups such as EU,

NAFTA, AFTA, APEC, FTAA, …– The successful completion of GATT and the creation of WTO– The continuing privatization and deregulation of telecommunications throughout

the world– The restructuring, reorganizing and refocusing of companies– The transformation of the internet from a toy to a major international business


Why Study International Business?

• Almost any large organization you work for will have international operations or be affected by the global economy.

• Small businesses also are becoming more involved in international business.

• Studying international business will help you keep pace with your future competitors.

• Studying international business will help you stay abreast of the latest business techniques and tools, many of which are developed outside the country.

• You need to study international business to obtain cultural literacy.


The Contemporary Causes of Globalization

• Several basic motives have compelled firms to become more global in both their orientation and actions:– To leverage core competencies– To acquire resources and supplies– To seek new markets– To better compete with rivals


International Business vs. Domestic Business

International business can differ from domestic business for a number of reasons, including the following:– The countries involved may use different currencies, forcing at

least one party to convert its currency into another.

– The legal systems of the countries may differ, forcing one or more parties to adjust their practices to comply with local law.

– The cultures of the countries may differ, forcing each party to adjust its behavior to meet the expectations of the other.

– The availability of resources differs by country; the way products are produced and the types of products that are produced vary among countries.


The International Operations

Price

PlacePromotion

Product

Controllable (s)

Political/Legal Forces

Competitive Structure

Economic Climate

Cultural Forces

Domestic- Environment

(Uncontrollable)

Political/Legal Forces

Cultural Forces

Geography and

InfrastructureStructure of Distribution

Level of Technology

Competitive Forces

Economic

Forces

Foreign- Environment

(Uncontrollable)

Environment

Uncontrollable

Country Market A

Environment

Uncontrollable

Country Market A

Environment

Uncontrollable

Country Market A


Reasons for Growth of IBExpansion of technology— transportation and communication

are quicker and less costlyLiberalization of cross-border movements

• Government barriers reduced because:– desire for better access to greater variety of goods

and services– domestic producers forced to be more competitive– lowered trade barriers to their own exports

Development of supporting services by business and governments to:

• Ease the flow of goods and services sold abroad• Reduce risks of IB

Increase in global competition— firms have become more global to maintain competitiveness


International Companies—terminology

Strategic alliance— collaborative arrangement of critical importance to the competitive viability of one or more partners

Multinational enterprise (MNE)— company with global approach to foreign markets and production

Globally integrated company— integrates operations located in different countries

Multidomestic company— foreign-country operations act fairly independently


External Influences on IBPhysical and societal factors— must understand

• Politics that affect whether and how IB occurs• Domestic and international law determines what

managers can do in IB• Economics• Geography—determine location and availability of world’s

resourcesCompetitive environment

• Varies by industry, company, and country– strategies differ across companies

» e.g., importance of controlling labor costs» e.g., influence of local and international competitors

– size of market differs across countries


Evolution of Strategy in International ProcessRisk minimization— foreign operations viewed as risky

international commitments evolve graduallyPatterns of expansion

• Passive to active pursuit of IB opportunities – initially wait for foreign opportunity• External to internal handling of IB

– rely on intermediaries at first• Limited to extensive modes of operations

– begin with importing or exporting operation• Few to many foreign locations• Similar to dissimilar business environments

Leapfrogging of expansion— new companies begin with international focus

• Possible because of founder’s experience and technological advances that help define foreign markets


Countervailing Forces— complicate decision makingGlobal standards—export suited to many countries

– results in economies of scale– based on global strategy

Nationally responsive practices— adjust product or service to unique local conditions

– multidomestic approach advisableCountry versus company competitiveness

• Companies compete by seeking maximum efficiency on a global scale

• Countries compete with each other to attain economic, political, and social goals

– no consensus on measures of goal attainment• Relationship unclear between country and company

performance– high-value activities— produce high profits or

performed by well-paid employees


Countervailing Forces (cont.)Sovereignty—freedom from external control

• Countries will cede in order to:– gain reciprocal advantages

» bilateral or multilateral commercial treaties or agreements

– attack problems that cannot be solved by a single country

» problem is too big or widespread» problem results from conditions that spill over

from another country– deal with areas of concern that lie outside the

territory of all countries (noncoastal areas of the ocean, outer space, Antarctica)

» technologically advanced countries believe that companies should reap benefits from exploitation

» other countries want to share the spoils


International Business

International business consists of business transactions between parties from more than one country.


International Business Involvement:

Pressure for local Responsiveness

Cos

t P

ress

ure

High

HighLow

Global Business

TransnationalBusiness

International Business

MultidomesticBusiness



• No Direct Business: A company Does not actively cultivate

customers outside national Boundaries.

• Infrequent International Business: Temporary surpluses caused by variations in

production levels or demand may result in infrequent business overseas. So, as domestic demand increases and absorbs surpluses, foreign sales activity is withdrawn.

A. Irregular International Business :



B. Regular International Business :

• International strategy: Companies that pursue an international strategy try

to create value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products.

An international strategy makes sense if a company has a valuable distinctive competency that indigenous competitors in foreign markets lack.




Multidomestic strategy: Companies pursuing a multidomestic strategy orient

themselves toward achieving maximum local responsiveness and transfer skills and products developed at home to foreign markets. They extensively customize both their product offering and their marketing strategy to different national.

Also they also have a tendency to establish a complete set of value-creation activities - including production, marketing, and R&D - in each major national market in which they do business.




• Global strategy: In this situation, companies are pursuing a

low-cost strategy. Global companies tend not to customize their product offering and marketing strategy to local conditions because customization raises costs.

Instead, global companies prefer to market a standardized product worldwide so that they can reap the maximum benefits from the economies of scale that underlie the experience curve.




• Transnational strategy:

The strategy makes When a company faces high pressures for cost reductions and high pressures for local responsiveness.

Companies that pursue a transnational strategy are trying to simultaneously achieve low-cost and differentiation advantages.


International Business:The Choice of Entry Mode

• Importing and exporting• International investments

– Foreign direct investments (FDI)– Portfolio investments

• Licensing• Franchising• Management contracts


Importing and Exporting

• Exporting is the selling of products made in one’s own in one’s own country.


International Investments

• Foreign direct investments (FDI) are investments made for the purpose of actively controlling property, assets, or companies located in host countries.

• Portfolio investments are purchases of foreign financial assets (stocks, bonds, and certificates of deposit) for a purpose other than control.


Licensing

• Licensing is a legal arrangement whereby a firm in one country licenses the use of its intellectual property (patents, trademarks, brand names, copyrights, or trade secrets) to a firm in a second country in return for a royalty payment.


Franchising

• Franchising, a specialized form of licensing, occurs when a firm in one country (the franchisor) authorizes a firm in a second country (the franchisee) to utilize its operating systems as well as its brand names, trademarks, and logos, in return for a royalty payment.


Management Contracts

• A management contract is an arrangement wherein a firm in one country agrees to operate facilities or provide other management services to a firm in another country for an agreed-upon fee.


Environmental Change and Globalization

• Firms would not have been able to expand their international activities to the extent we have observed in the post-World War II period without significant changes in two key areas:

– The political environment

– The technological environment


The Internet and International Business

• The growth of the Internet and other information technologies affect international business in at least three different ways:– The Internet and associated technologies facilitate

international trade in services.– The Internet tends to level the playing field between larger

and smaller enterprises.– The Internet holds considerable potential as an efficient

networking mechanism among businesses.


Overall Review

• International business encompasses any business transaction that involves parties from more than one country.

• Studying international business is important for several reasons.

• International business activity can take various forms.• An international business is one that engages in

commercial transactions with individuals, private firms, and/or public-sector organizations that cross national boundaries.

• International business has grown dramatically in recent years because of strategic imperatives and environmental changes.



Chapter 2Global Marketplaces and Business

Centers



30

Dr. Hamid Khodadad Hosseini Tarbiat Modares University


Chapter Objectives

• Evaluate the impact on business of the political and economic characteristics of the world’s various marketplaces.

• Appreciate the uses of national income data in making business decisions.

• Discuss North America as a major marketplace and business center in the world economy.

• Describe Western Europe as a major marketplace and business center in the world economy.

After studying this chapter you should be able to:


Chapter Objectives (cont.)

• Discuss the problems facing the economies of the former communist countries of Eastern and Central Europe.

• Discuss Asia as a major marketplace and business center in the world economy.

• Assess the development challenges facing African, Middle Eastern, and South American countries.



The First Rule: Know the Territory

• Advertisements for the Energizer Bunny were spectacular failures when they were run on Hungarian television. Most viewers there assumed that the ads were for toy bunnies.


The ‘Triad’ and the ‘Quad’

• The Triad– Japan, the European Union, and the United States

• The Quad– the Triad plus Canada

Much of the world’s current economic activity is concentrated in a group of countries called:


The Marketplaces of North America

• The United States

• Canada

• Mexico

• Greenland

• The countries of Central America and the Caribbean


North America


Invoicing Currency

The U.S. dollar serves as the invoicing currency, that is, the currency in which the sale of goods and services is denominated, for about half of all international transactions and is an important component of foreign-currency reserves worldwide.


Flight Capital

Because of its political stability and military strength, the United States also attracts flight capital, that is, money sent out of a politically or economically unstable country to one perceived as a safe haven.


The Marketplaces of Western Europe

• Members of the European Union (EU)

• Other countries in the region

These countries can be divided into two groups:


Western Europe


The Marketplaces of Eastern and Central Europe

• Eastern Europe– The fifteen separate countries that resulted from the

disintegration of the Soviet Union in 1991

• Central Europe– Albania, Austria, and the former Soviet satellite states of

Bulgaria, Czechoslovakia, Hungary, Poland, Romania, Bosnia-Herzegovina, Croatia, Macedonia, and Slovenia


Eastern Europe


Central Europe


The Marketplaces of Asia

• Japan• Australia and New Zealand• The Four Tigers

– South Korea, Taiwan, Singapore, and Hong Kong

• China• India• Southeast Asian countries

– Thailand, Malaysia, and Indonesia


The Marketplaces of Africa and the Middle East

• Africa– Many experts believe South Africa will be the

dominant economic poser and the continent’s growth engine in the 21st Century.

• Middle East– The term Middle East is used to describe the

region located between southwestern Asia and northeastern Africa.


Africa and the Middle East


The Marketplaces of South America

• Major South American economies include:– Brazil, Argentina, Chile, and Colombia

• Many South American countries suffer from huge income disparities and widespread poverty among their peoples, leading to political instability and continual cries for reform.


South America


Chapter Review

• To compete successfully in the international marketplace, managers need a basic understanding of the world’s markets and their interrelationships.

• The Quad countries—Japan, members of the EU, the United States, and Canada—are of particular importance to MNCs.

• The North American market is one of the world’s largest and richest.

• Another large, rich market for international businesses is Western Europe, particularly the 15-member EU.


Chapter Review (cont.)

• Asia is home to several of the fastest-growing economies of the postwar period.

• Many African countries regained their independence during the 1950s and 1960s. Their economies primarily rely on natural resources and agriculture.

• While many of the South American countries are rich in natural resources and farmlands, the continent’s economic development since World War II has been hindered by chronic political unrest and import-substitution policies.



Chapter 4The Role of Culture



Dr Hamid khodadad Hosseini

51


Chapter Objectives

• Discuss the primary characteristics of culture.• Describe the various elements of culture and

provide examples of how they influence international business.

• Identify the means by which members of a culture communicate with each other.

• Discuss how religious and other values affect the domestic environments in which international businesses operate.



Chapter Objectives (cont.)

• Describe the major cultural clusters and their usefulness for international managers.

• Explain Hofstede’s primary findings about differences in cultural values.

• Explain how ethical conflicts may arise in international business.



E-Culture

• The rise of the Internet is altering the world’s business cultures. It is affecting attitudes toward risk taking, decision making, organizational hierarchy, compensation, and education.

• Many European and Asian firms have structures that may not serve them well in the Internet economy. Conversely, the culture of many U.S. companies seems better adapted to the Internet’s quick pace.


Culture

Culture is the collection of values, beliefs, behaviors, customs, and attitudes that distinguish one society from another.


Characteristics of Culture

• Culture reflects learned behavior that is transmitted from one member of society to another.

• The elements of culture are interrelated.• Because culture is learned behavior, it is

adaptive; that is, the culture changes in response to external forces that affect the society.

• Culture is shared by members of the society and indeed defines the membership of the society.


Elements of Culture

• Social structure

• Language

• Communication

• Religion

• Values and attitudes

The basic elements of culture are:


Social Structure

• Individuals, families and groups– In all human societies, there are individuals living in family

units and working with each other in groups. Societies differ, however, in the way they define family and in the relative importance they place on the individual’s role within groups.

• Social stratification– All societies categorize people to some extent on the basis of

their birth, occupation, educational achievements, and/or other attributes. But the importance of these categories in defining how individuals interact with each other within and between these groups varies by society.


Social Structure (cont.)

• Social mobility– Social mobility tends to be higher in less stratified

societies. Social mobility (or lack thereof) often affects individuals’ attitudes and behaviors toward such factors as labor relations, human capital formation, risk taking, and entrepreneurship.


Language

• Language organizes the way members of a society think about the world. It filters observations and perceptions, and thus affects unpredictably the messages that are sent when those individuals try to communicate.

• The presence of more than one language group is an important signal about the diversity of a country’s population and suggests that there may also be differences in income, work ethic, and/or educational achievement.


World Languages


Africa’s Colonial Heritage


Language (cont.)

• Language as a competitive weapon– Linguistic ties often create important competitive advantages

because the ability to communicate is so important in conducting business transactions.

• Lingua franca– As a result of British economic and military dominance in the

nineteenth century and U.S. dominance since World War II, English has emerged as the predominant common language, or lingua franca, of international business.


Language (conc.)

• Translation– Some linguistic differences may be overcome through

translation. Translators must be sensitive to subtleties in the connotations of words and focus on the translating of ideas, not the words themselves.

• Saying no– In contract negotiations, Japanese businesspeople often use

yes to mean “Yes, I understand what is being said.” Misunderstandings can be compounded because directly uttering no is considered very impolite in Japan.


Communication

• Nonverbal communication– Members of a society communicate with each

other using more than words. In fact, some researchers believe 80 to 90 percent of all information is transmitted among members of a culture by means other than language.

• Gift giving and hospitality– Gift giving and hospitality are important means of

communication in many business cultures.


Religion

• Often religions impose constraints on the roles of individuals in society. The caste system of Hinduism traditionally has restricted the jobs individuals may perform, thereby affecting the labor market and foreclosing business opportunities.

• The impact of religion on international businesses varies from country to country depending on the country’s legal system, its homogeneity of religious beliefs, and its toleration of other religious viewpoints.


Major World Religions


Values and Attitudes

• Culture also affects and reflects the secular values and attitudes of members of a society. Values are the principles and standards accepted by members of a society; attitudes encompass the actions, feelings, and thoughts that result from those values.

• Time– In Anglo-Saxon cultures, the prevailing attitude is

“time is money.” This contrasts sharply with attitudes in Latin American cultures, for example.


Values and Attitudes (cont.)

• Age– Youthfulness is considered a virtue in the United

States. However, in Asian and Arab cultures, age is respected and a manager’s stature is correlated with age.

• Education– A country’s formal system of public and private

education is an important transmitter and reflection of the cultural values of its society.


Values and Attitudes (conc.)

• Status– In some societies, status is inherited as a result of

the wealth or rank of one’s ancestors. In others, it is earned by the individual through personal accomplishments or professional achievements.


Hall’s Low Context-High Context Approach

• A low-context culture is one in which the words used by the speaker explicitly convey the speaker’s message to the listener.

• A high-context culture is one in which the context in which a conversation occurs is just as important as the words that are actually spoken, and cultural clues are important in understanding what is being communicated.


The Cultural Cluster Approach

• The cultural cluster approach is another technique for classifying and making sense of national cultures. A cultural cluster comprises countries that share many cultural similarities. Many clusters are based on language similarities.


A Synthesis of Country Clusters


Hofstede’s Five Dimensions

• Social orientation

• Power orientation

• Uncertainty orientation

• Goal orientation

• Time orientation


Social Orientation

• Social orientation is a person’s beliefs about the relative importance of the individual and the groups to which that person belongs.

• The two extremes of social orientation are individualism and collectivism.


Power Orientation

• Power orientation refers to the beliefs that people in a culture hold about the appropriateness of power and authority differences in hierarchies such as business organizations.

• The extremes of the dimension of power are power respect, and power tolerance.


Uncertainty Orientation

• Uncertainty orientation is the feeling people have regarding uncertain and ambiguous situations.

• The extremes of the uncertainty dimension are uncertainty acceptance, and uncertainty avoidance.


Goal Orientation

• Goal orientation is the manner in which people are motivated to work toward different kinds of goals.

• The extremes of the goal dimension are aggressive goal behavior, and passive goal behavior.


Time Orientation

• Time orientation is the extent to which members of a culture adopt a long-term versus a short-term outlook on work, life, and other aspects of society.

• Some cultures, such as those of Japan and Taiwan, have a long-term, future orientation that values dedication and perseverance. Other cultures, such as Pakistan and West Africa, tend to focus on the past and present, emphasizing respect for traditions and fulfillment of social obligation.


Acculturation

Acculturation is the process by which a person not only understands a foreign culture but also modifies and adapts his/her behavior to make it compatible with that culture.


Cultural Differences and Ethics

• Cultural differences often create ethical problems. Acceptable behavior in one culture may be viewed as immoral in another.


Chapter Review

• Understanding cultural differences is critical to the success of firms engaging in international business.

• A society’s culture also reflects its values, beliefs, behaviors, customs, and attitudes.

• A society’s culture comprises numerous elements.

• Language is an important cultural element, for it allows members of the society to communicate with each other.


Chapter Review (cont.)

• Religion influences attitudes toward work, investment, consumption, and responsibility for one’s behavior. Religion may also influence the formulation of a country’s laws.

• A society’s culture reflects and shapes its values and attitudes, including those toward time, age, status, and education.

• Researchers have grouped countries according to common cultural characteristics.


Chapter Review (conc.)

• Hofstede has identified five basic cultural dimensions along which people may differ: social orientation, power orientation, uncertainty orientation, goal orientation, and time orientation.

• Cultural differences often create ethical dilemmas for international businesspeople.

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