Study Notes on International Business

Chapter 1: What is International Business?

The Nature of International Business

  • Definition: All value-adding activities can be performed in international locations. This includes:

    • Sourcing

    • Manufacturing

    • Marketing

  • International Trade Involves:

    • Products

    • Services

    • Capital

    • Technology

    • Know-how

    • Labor

  • Firms Internationalize Through Various Entry Strategies:

    • Exporting

    • Foreign Direct Investment (FDI)

Key Concepts in International Business

  • International Business:

    • Performance of trade and investment activities by firms across national borders.

  • Globalization of Markets:

    • Ongoing economic integration and growing interdependency of countries worldwide.

    • Example: Apple Global Chain

  • International Trade:

    • Exchange of products and services across national borders; typically through importing and exporting.

  • Exporting:

    • Sale of products or services to customers located abroad, from a base in the home country or a third country.

  • Importing or Global Sourcing:

    • Procurement of products or services from suppliers located abroad for consumption in the home country or a third country.

  • International Investment:

    • Transfer of assets to another country or the acquisition of assets in that country, also known as Foreign Direct Investment (FDI).

    • Considered the best for economic growth.

  • International Portfolio Investment:

    • Passive ownership of foreign securities such as stocks and bonds, aimed at generating financial returns.

    • Example: A US citizen buys Egyptian stocks.

The Four Risks of International Business

Cross-Cultural Risk

  • Cultural Differences:

    • Arises from differences in language, lifestyle, attitudes, customs, and religion, where miscommunication jeopardizes valued behaviors.

  • Negotiation Patterns:

    • Example: Mexicans are friendly and emphasize social relations, while Americans are more direct and get to business quickly.

  • Decision-Making Styles:

    • Varies by culture; for instance, Japanese decision-making may take considerable time, whereas Canadians may be more decisive.

  • Ethical Practices:

    • Standards of right and wrong vary significantly across countries; for example, bribery may be more accepted in some African nations, but is generally frowned upon in Sweden.

Country Risk (Political Risk)

  • Arises from various factors such as:

    • Government intervention, protectionism, barriers to trade and investment.

    • Bureaucracy, red tape, administrative delays, corruption.

    • Lack of legal safeguards for intellectual property rights.

    • Legislation unfavorable to foreign firms.

    • Economic failures and mismanagement.

    • Social and political unrest and instability.

  • Examples of Country Risk:

    • The U.S. imposes tariffs on imports of sugar and other agricultural products.

    • Conducting business in Russia often requires paying bribes to officials.

    • Venezuela’s government has significantly interfered with foreign firms.

Currency Risk (Financial Risk)

  • Currency Exposure:

    • General risk associated with unfavorable exchange rate fluctuations.

  • Asset Valuation:

    • Risk that exchange rate fluctuations will adversely affect the value of firm’s assets and liabilities.

  • Foreign Taxation:

    • Income, sales, and taxes vary globally affecting company performance and profitability.

  • Inflation:

    • High inflation complicates business planning and pricing of products.

  • Examples of Currency Risk:

    • The Japanese yen has seen significant fluctuations since 2000.

    • The U.S. has relatively high corporate income taxes.

    • Brazil and Turkey have experienced extremely high inflation.

Commercial Risk

  • Risks include:

    • Weak partner relationships

    • Operational problems

    • Timing of market entry

    • High competitive intensity

    • Poor execution of strategy

  • General commercial risks can lead to sub-optimal formulation and implementation in a firm’s international value-chain activities.

Conclusion on the Four Risks of International Business

  • Risks are always present in international business but are manageable.

  • It is essential for managers to understand and anticipate these risks, taking proactive steps to mitigate their effects.

  • Some risks can be extremely challenging to address.

Why do Firms Participate in International Business?

  • Firms seek opportunities for growth through market diversification.

    • Examples: Harley-Davidson, IKEA, H&M.

  • Higher Margins and Profits:

    • Often, foreign markets yield greater profitability.

  • New Ideas:

    • Gain insights about products, services, and business methods.

    • Example: GM enhanced knowledge for making small, fuel-efficient cars in Europe.

  • Serve Key Customers Abroad:

    • e.g., When Toyota launched operations in Britain, many suppliers followed.

  • Proximity to Supply Sources:

    • Firms can benefit from global sourcing advantages or gain flexibility in sourcing products.

    • Example: Apple sources parts and components globally.

  • Access to Lower-Cost or Better-Value Production Factors:

    • Example: Sony manufactures extensively in China.

  • Economies of Scale:

    • Companies aim to improve efficiency in sourcing, production, marketing, and R&D.

  • Competitive Strategy:

    • Firms may seek to confront international competitors or thwart competition in the home market.

    • Example: Haier established U.S. operations partly to gain insight about Whirlpool, a major rival.

  • Invest in Foreign Partnerships:

    • Building potentially rewarding relationships with foreign entities.

  • Role of Non-Governmental Organizations (NGOs):

    • Many NGOs engage in cross-border activities focusing on social issues, education, politics, and research advocacy.