International Business

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester: Sixth Semester
Name of the Subject:
International Business

Definition of Globalization
The broadening set of interdependent
relationships among people from different
parts of a world that happens to be divided
into nations

All commercial transactions—including sales,
investments, and transportation—that take
place between two or more countries
Definition of International Business

Domestic Environment -All the uncontrollable forces in
the home country that surround and influence the firm’s life
and development
•Shortage of foreign currency
•FDI in home country
Foreign Environment -All the uncontrollable forces
originating outside the home country that surround and
influence the firm
•different values(Conflict: bypass country A to serve B)
•difficult to assess (Clause: quality of welfare/life)
•Interrelated (Technology vs. mass labor)
Characteristics of International Business…

Domestic Environment -All the uncontrollable forces in
the home country that surround and influence the firm’s life
and development
Shortage of foreign currency
FDI in home country
Foreign Environment- All the uncontrollable forces
originating outside the home country that surround and
influence the firm
different values(Conflict: bypass country A to serve B)
difficult to assess (Clause: quality of welfare/life)
Interrelated (Technology vs. mass labor)

When operating abroad companies may have to
adjust their usual methods of carrying out business.
Foreign conditions often dictate a more suitable
method, and the operating modes used for
international business differ from those used on a
domestic level.
Difference Between International and
Domestic Operations

To operate within a company’s external environment, its
managers must have knowledge of business operations and
a working knowledge of social sciences, and how they affect
all functional business fields
Physical and Social Factors Affecting
International Business Operations

•Increase in and expansion of technology
•Liberalization of cross-border trade and resource
movements
•Development of services that support international
business
•Growing consumer pressures
•Increased global competition
•Changing political situations
•Expanded cross-national cooperation
Factors in Increased Globalization

•Threats to national sovereignty
•Growth and environmental stress
•Growing income inequality
The Criticisms of Globalization

•Expanding sales
•Acquiring resources
•Minimizing risk
Reasons That Firms Engage in
International Business

•Collaborative arrangements
•Strategic Alliance
•Multinational Enterprise (MNE)
Types of International Organizations

•Merchandise exports and imports
•Service exports and imports
•Tourism and Transportation
•Service Performance
•Asset Use
•Investments
Modes of Operation in International
Business

A company’s competitive strategy influences how
and where it can best operate.
A company’s competitive situation may differ in
terms of its relative strength and which competitors
it faces.
Competitive Factors Affecting International
Business

Competitive Factors Affecting International
Business

•Further globalization is inevitable.
•International business will grow primarily
along regional rather than global lines.
•Forces working against further globalization
and international business will slow down
both trends.
Future of International Business and
Globalization

Globalization
Refers to the increased flow of trade, people,
investment, technology, culture, ideas among
countries and creates a more integrated and
interdependent world
Globalization has been around since the 15th
century when European exploration & colonization
created global empires & markets, but most
historians and economists agree that today is
special by the extent of interdependence and the
speed by which it has occurred.

• Two factors underlie globalization
▫ “Decline in barriers to the free flow
of goods, services, and capital” that
has occurred since the end of World
War II
▫ Technological change
Drivers of Globalization

Lowering of trade barriers made
globalization possible;
Technology has made it a transforming
movement
•“World Wide Web” has exploded in last 20
years
•Computers can move money around world
= “finance capital”
•Silicon Valley is 9th largest economy in
world!
The Role of Technology

Figure 1.3: Internet Use rs per 1000 People, 1990-
2003
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
InternetUsersper1000people
Japan United States European Monetary Union World
Internet Usage Growth

Descriptive: the natural order of trade
Laissez-faire conditions
Which products, how much, and with whom a country will
trade in the absence of restrictions
Prescriptive: questions whether governments should interfere
with the free movement of goods and services
•Both types of theories
–provide insights about markets for exports and
potentially successful export products
–help companies determine where to locate production
facilities
General Types of Trade Theories

Initial trade theory that formed the foundation of
economic thought from 1500 – 1800
Based on concept that a nations wealth is measured
by its holding of treasure (gold)
Nations should accumulate financial wealth by
encouraging exports and discouraging imports.
Favorable balance of trade: country is exporting
more than it is importing
Unfavorable balance of trade: country is importing
more than it is exporting, i.e. a trade deficit
Mercantilism

Nations often imposed restrictions on imports since
they did not want “their” treasure moving to another
country to pay for the imports
•Intended to benefit colonial powers
–colonies supplied commodities to the mother
country
–mother country tried to run trade surpluses with
their own colonies
Mercantilism faded after 1800

In 1752, David Hume pointed out that:
Increased exports lead to inflation and
higher prices
Increased imports lead to lower prices
Result: Country A sells less because of high
prices and Country B sells more because of
lower prices
In the long run, no one can keep a trade
surplus
Mercantilism-Zero-Sum Game

Current term to describe the approach of
countries that try to run favorable balances
of trade to achieve some social or political
gains
Neomercantilism

Adam Smith argued (Wealth of Nations, 1776):
Capability of one country to produce more of a
product with the same amount of input than
another country can vary
A country should produce only goods where it is
most efficient, and trade for those goods where it
is not efficient
Trade between countries is, therefore, beneficial
Assumes there is an absolute balance among
nations
Example: Ghana/cocoa
Theory of Absolute Advantage

Absolute advantage holds that different countries
produce some goods more efficiently than other
countries
A nation with an absolute advantage can produce
greater output of a good or service than other
nations using the same amount of, or fewer,
resources.
Thus, global efficiency can be increased through
international free trade
Absolute Advantage

Under the concept of absolute advantage countries
could increase efficiency because:
•Labor could become more skilled by
repeating the same tasks
•Labor would not lose time in switching from
the production of one kind of product to
another
•Long production runs would provide
incentives for the development of more
effective working methods
Country Specialization

Countries have inherent advantages
Climate
Natural resources
Labor forces
Two countries that have opposite natural
advantages should favor trade with one
another
Natural Advantage

Most contemporary trade is manufactured goods
and services rather than agricultural goods or
natural resources
Countries with an acquired advantage produce
manufactured goods and services competitively
Product technology- Danish Silver tableware
Process technology – Japanese steel
Acquired Advantage

David Ricardo (Principles of Political Economy, 1817):
Extends free trade argument
Efficiency of resource utilization leads to more
productivity
Should import even if country is more efficient in the
product’s production than country from which it is buying
Look to see how much more efficient
If only comparatively efficient, than import
Makes better use of resources
Trade is a positive-sum game
Theory of Comparative Advantage

•There are still global gains to be made if a country
specializes in products it produces more efficiently
than other products
•Regardless of whether other countries can produce
those same products even more efficiently
•A country has a comparative advantage when it is
unable to produce a good more efficiently than other
nations, but produces the good more efficiently than
it does any other good.
Comparative Advantage

•Full employment
•Economic efficiency is sought
•Division of gains
•Two countries/two commodities
•Transportation costs
•Mobility
•Statics and dynamics
•Services
•Country size/variety of resources
Basic Assumptions

•Export goods that intensively use factor
endowments which are locally abundant
•Corollary: import goods made from locally
scarce factors
• Note: Factor endowments can be impacted
by government policy - minimum wage
•Patterns of trade are determined by differences in
factor endowments - not productivity
Heckscher (1919)-Olin (1933) Theory

•Countries produce and export goods that require
resources (factors) that are abundant and import
goods that require resources in short supply.
•Land-labor relationship
•Labor-capital relationship
•Technological complexities
•Leontief Paradox

As products mature, both location of sales
and optimal production changes
Affects the direction and flow of imports and
exports
Globalization and integration of the economy
makes this theory less valid
Product Life-Cycle -Theory - R. Vernon (1966)

Economic similarity of industrial countries
Most of the world’s trade occurs among countries
that have similar characteristics
country similarity theory—once a company has
developed a new product to serve needs in a
local market, it will turn to markets it sees as
most similar to those at home
Similarity in location, culture, political and
economics interest
Country-Similarity Theory

most trade takes place among industrial
countries because:
growing importance of acquired advantage as
opposed to natural advantage
markets in industrial countries can support
products and their variations
importance of industrial markets due to their
size
incomes are high and people buy more
Few emerging countries trade with each other

Similarity of location
• Distances among countries accounts for many world trade
relationships
• Methods to overcome distance disadvantages are difficult to
maintain
Cultural similarity
• Importers and exporters find it easier to do business in a
country perceived as being similar
• Historic colonial relationships explain much of international
trade
Similarity of political and economic interests
• Political relationships and economic agreements among
countries may discourage or encourage trade between them or
their companies
• Military conflicts disrupt trade patterns
• Political animosity may interfere with trading channels

There are gains to be made from
specialization and increasing EOS
The companies first to the market can create
barriers to entry
First-mover advantage
Government may play a role in assisting its
home companies.
New Trade Theory

•Governmental role and influence in affecting
the acquired advantage of production within
their borders
•Alter conditions for industries in general
•change conditions that affect factor
proportions, efficiency, and innovation
Strategic Trade Policy

•Corporate goals
•Mission statement
•Strategies and objectives
Elements That Affect a
Global Marketing Organization

Corporate worldview
Ethnocentric orientation
Ideas emanating from home market considered superior
HQ tells subsidiaries what to do
Polycentric orientation
Each market considered unique
Local subsidiaries given leeway to develop and implement their
own strategies
Geocentric orientation
All national units—including domestic ones—must consider what
is best for whole organization
HQ holds power but keeps channels for good ideas—and senior
management—open for subsidiaries
Elements That Affect a
Global Marketing Organization

International divisions
•Created when international sales coordination
extends beyond capacity of international
specialist or export department
•Directly involved in the development and
implementation of global strategy
•Actively seeks out opportunities in foreign
countries
•Regional or local offices = close contact with
market
Types of Organizational Structures

Types of Organizational Structures
Geographic organizational structures
•Appropriate when company needs intimate
knowledge of its customers and their
environments
•Gives company opportunity to understand the
local culture, economy, politics, laws, and
competitive situation
Two Types
Regional management centers
Country-based organizations

Types of Organizational Structures (cont.)
Regional management centers
•Focus on regions of world
•Market similarity and size
•Allows company to locate marketing and
manufacturing efforts in such a way as to
take advantage of regional agreements
such as NAFTA
•Puts company in closer contact with
distributors, customers, and subsidiaries

Country-based organizations
•Separate unit for each country
•Extremely sensitive to local customs, laws,
and needs
•Expensive!!!
•Many companies are phasing out country-
based structures and are moving toward
regional centers

Functional organizational structures
•Top executives in marketing, finance,
production, accounting, and research and
development all have worldwide
responsibilities
•Best for narrow or homogeneous product lines
with little variation between products or
geographic markets

Product organizational structures
•Each product group is responsible for marketing,
sales, planning, and (in some cases) production
and research and development
•Other functions such as legal, accounting,
and finance can be included in the product
group or performed by corporate staff
•Common for companies with several unrelated
product lines

Matrix organizational structures
Developed to overcome drawbacks of geographic,
functional, and product organization structures
Allows for two or more dimensions of theoretical weight,
e.g., importance to product and geography
Complexity can cause duplication of authority, confusion
of responsibility and power struggle
Requires change in management structure from
traditional authority to influence system based on
technical competence, interpersonal sensitivity, and
leadership

Staffing policy:
•Selecting individuals with requisite
skills to do a particular job.
•Tool for developing and promoting
corporate culture.
The Strategic Role of International HRM

Ethnocentric:
All key management positions are filled by
parent-company nationals.
Polycentric:
Host-country nationals manage subsidiaries,
parent-company nationals have key positions at
headquarters.
Geocentric:
Seek best people for key jobs, regardless of
nationality.
Types of Staffing Policy

Staffing
Philosophy
Strategy Fit
(??)
Pros Cons
Ethnocentric
 key overseas
positions
staffed by
home
managers
International  puts qualified
managers in
place
 creates global
culture
 transfer of core
competences
 local manager
resentment
 cultural myopia
 immigration
barriers
 costly
Polycentric
 key overseas
positions
staffed by local
managers
Multidomestic  alleviates
cultural myopia
 inexpensive to
implement
 limits career
mobility
 isolates HQ
from overseas
subs
Geocentric
 best for job
gets it
Global and
Transnational
 uses HR
efficiently
 builds strong
global culture
and informal
management
network
 costly
 immigration
barriers

Expatriate failure:
Premature return of the expatriate manager to
his/her home country.
Cost of failure is high:
Estimate - 3X the expatriate’s annual salary plus
the cost of relocation (impacted by currency
exchange rates and assignment location).
The Expatriate Problem

Reasons of failure of Expatriate-
•Spouse cannot adjust culturally
•Cultural adjustment
•Other family adjustment problems
•Manager’s lack of personal or emotional
maturity
•Manager’s inability to cope with broader
responsibility overseas

Self-orientation:
Strengthen self-esteem, self-confidence and mental well-
being.
Others-orientation:
Enhance ability to interact with host-country nationals.
Perceptual ability:
The ability to empathize - understand why people in host-
country behave the way they do.
Cultural toughness:
How well an expatriate adjusts to a particular posting
tends to be related to the country of assignment.
Expatriate Selection

Cultural:
Seeks to foster an appreciation of the host-
country’s culture.
Language:
Can improve expatriate’s effectiveness, relate
more easily to culture and fostered a better firm
image.
Practical:
Ease into day-to-day life of the host country.
Training for Expatriate Managers

Problems:
Unintentional bias.
Host-nation biased by cultural frame of
reference.
Home-country biased by distance and lack of
experience working abroad.
Expatriate managers believe that headquarters
unfairly evaluates and appreciates them.
Many believe a foreign posting does not
benefit their career
Performance Appraisal

•Key issue: degree to which organized labor can limit the
choices of an international business.
•Labor concerns:
•Counter bargaining power with threat to move jobs off-
shore.
•Keep high-skill work at home and ship low-skill work to
foreign plants.
•Importing employment practices and contractual
agreements from the home-country
International Labor Relations

•Decentralize: labor laws, union power and nature
of collective bargaining varies from country to
country.
•Centralize:
•Want to rationalize global operations.
•Need to control labor costs and maximize threat
of move to lower cost country.
•Before move, get new union approval for work
practices.
Multinationals’ Approach to Labor Relations

International Business

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