Chapter two discusses the nature of international business, emphasizing its complexities and the need for firms to navigate various environments and cultural differences while conducting transactions across borders. Key aspects include globalization, the role of multinational corporations, and the impact of political and legal frameworks, along with methods of market entry such as exporting, licensing, and foreign direct investment. The chapter also contrasts domestic and international business, highlighting risks, market scope, and advantages such as resource optimization and economic development.

1. Chapter Two
The Nature of International Business

2. Points of Focus
• Introduction
• Domestic Versus International Business
• Types of International Business
• Methods of Going International Business
• Advantages and Disadvantages of International Business
• Discussion Questions
• Summary

3. Introduction
•The nature of international business refers to the
characteristics, complexities, and dynamics involved in
conducting business activities across national borders.
•It encompasses all forms of economic transactions,
including trade in goods and services, investments, and
the movement of resources, capital, and technology
between different countries.

4. Introduction….Cont’d
•The student of business is certainly familiar with the
nature of doing business in a domestic market
economy
•International business students can benefit greatly
from understanding the nature, dimensions, and
variables that constitute a country’s culture and how
these affect work and organizational processes in
international business.

5. Introduction….Cont’d
•In international business a firm needs to identify:
• Its potential market
• Locate adequate and available sources of supplies of raw
materials and labor
• Raise initial amounts of capital
• Hire personnel
• Develop a marketing plan
• Establish channels of distribution, and
• Identify retail outlets.

6. Introduction….Cont’d
• International business people struggle with establishing an
international component, but they must also contend with the
fact that international business activities are conducted in
environments and arenas that differ from domestic business
• The differences of environment range along a continuum.
• For example, economies can range from being market
oriented to centrally planned, and political systems from
democracies to autocracies

7. Introduction….Cont’d
•The nature of international business can be
understood through the following key aspects
•Globalization
•International business is shaped by the process of
globalization
•Globalization has facilitated greater cross-border
interactions and interconnectedness

8. Introduction….Cont’d
•Multinational Corporations (MNCs)
•MNCs play a significant role in international business.
•MNCs engage in foreign direct investment (FDI),
establish subsidiaries or joint ventures, and form
global supply chains to leverage resources and
capitalize on market opportunities.

9. Introduction….Cont’d
•Trade and Comparative Advantage
•International trade is a fundamental component of
international business.
•Countries engage in trade to benefit from comparative
advantage.
•Trade allows countries to access a wider range of products,
expand markets, and achieve economies of scale.
•Cultural Diversity and Cross-cultural Management
•International business involves interacting with diverse
cultures, languages, customs, and business norms.

10. Introduction….Cont’d
•Political and Legal Environment
• The political and legal framework of each country shapes
the nature of international business.
• Governments influence trade policies, regulations,
taxation, intellectual property rights, and investment
regulations, which impact the ease of doing business
across borders.
• International businesses must understand and comply
with diverse legal frameworks and navigate political risks.

11. Introduction….Cont’d
•International Financial Transactions
•International business involves financial transactions,
including foreign exchange markets, international
banking, cross-border investments, and fundraising
through global capital markets.
•Companies need to manage foreign exchange risks,
ensure access to financing, and understand global
financial systems and regulations

12. Introduction….Cont’d
•Sustainability and Corporate Social Responsibility (CSR)
• International businesses face increased scrutiny regarding their
environmental and social impacts.
• CSR practices, including environmental sustainability, ethical
sourcing, and social responsibility, are vital considerations in
international business.
•Technological Advancements
• Technology and innovation are integral to international business.
Advances in information and communication technologies have
revolutionized global connectivity, supply chain management,
and electronic commerce.

13. Introduction….Cont’d
• Market Entry Modes and Strategy
• International businesses adopt various market entry modes,
including exporting, licensing, joint ventures, strategic alliances,
and setting up wholly-owned subsidiaries.
• The choice of market entry mode depends on factors such as
market characteristics, risks, resources, and company objectives.
• Ethical and Legal Challenges
• International business operations often encounter ethical
dilemmas, bribery, corruption, compliance with anti-corruption.
• Companies must navigate these challenges while upholding
ethical standards, ensuring legal compliance, and maintaining
reputational integrity.

14. Introduction….Cont’d

15. Domestic Business Vs International Business

16. Domestic Business Vs International Business
Meaning
• Domestic business refers to business transactions transacted within the
geographical boundaries of a country
• International business refers to the business transactions transacted in
beyond the boundaries of a country

17. Domestic Business Vs IB……Cont’d
Participants in Business
• People / organizations within the country participate in business
activities
• People/organizations outside the country participate in business
activities

18. Domestic Business Vs IB……Cont’d
Mobility of Factor of Production
• The factors of production i.e. labour,, capital, technology, material, etc.,
move freely within the boundaries of the country
• The factors of production i.e. labour,, capital, technology, material, etc.,
move across the boundaries of the country.

19. Domestic Business Vs IB……Cont’d
Nature of Consumers
• Consumers are relatively homogenous in nature in terms of culture,
behavior ,taste, preferences, legal system, customs and practices, etc.,
• Consumers are relatively heterogeneous in nature in terms of culture,
behavior ,taste, preferences, legal system, customs and practices, etc.
prevailing across the countries,

20. Domestic Business Vs IB……Cont’d
Business System
• Domestic business is governed by the rules, laws, policies taxation
system of a single country
• International business is governed by rules, laws and policies ,tariffs and
quotas etc., of multiple countries

21. Domestic Business Vs IB……Cont’d
•Currency Used
• Domestic business transactions are settled by local currency of a
country.
• International business transactions are settled by foreign currencies.

22. Domestic Business Vs IB……Cont’d
Mode of Transport
• The goods involved in domestic business are mainly transported by
roadways and railways.
• The goods involved in international business is mainly transported by
water and airways.

23. Domestic Business Vs IB……Cont’d
Risk Exposure
• The risks involved in domestic business are relatively less.
• The risks involved in international business are more due to distance,
difference in socio-economic and political conditions. change in foreign
exchanges value, etc.,

24. Domestic Business Vs IB……Cont’d
Scope of Market
• The scope of market is limited to national boundaries of a country.
• The scope of international business is very wide and extends beyond
the frontiers of a country.

25. Domestic Business Vs IB……Cont’d
Payment of Excise duty
• Payment of excise duty involves simple procedures and it is relatively
low in domestic trade
• The process of payment of excise is complicated in international
business and the rate of excise duty is relatively high.

26. •Types of International Business

27. Types of International Business
• On the basis of sale and purchase of goods and services,
international trade can be divided into three kinds. They are
export trade, import trade and entrepot trade. It has been
exhibited in the chart drawn below

28. Types of International Business….Cont’d
•A) Export Trade
• When the firm of country sells goods and services to a firm of another
country it is called export trade.
• Export trade indicates selling of goods and services from the home
country to a foreign country.
• For Example; the sale of handicraft, leather products, agricultural
goods, herbal products, etc., by Ethiopian company to other countries is
known as export trade.

29. Types of International Business….Cont’d
•B) Import Trade
• When the business firm of a country purchases goods from the firm of
another country it is called import trade.
• Importing means purchase of foreign products and bringing them into
one’s home country.
• For example when Ethiopian enterprise purchases petroleum products,
electrical goods, machinery, and medical equipment's etc., from other
countries, it is termed as Import Trade

30. Types of International Business….Cont’d
• C) Entrepot Trade
• When the firm of country imports goods for the purpose of exporting
the same goods to the firms of some other country with or without
making any change in the goods meant for export it is known as
entrepot trade
• For example, If an Ethiopian company imports crude oil from Iran and
exports it as petroleum after refining it in Ethiopia, to Uganda it is called
Entrepot trade. In this context crude is converted into petrol and
exporter as petrol to Uganda
• Now you must be thinking why Ethiopia comes between Iran and
Uganda. Why does not Uganda directly import crude oil from Iran?.
• Let us explore what could be the possible reasons for this.

31. Types of International Business….Cont’d
•Necessity for Entrepot Trade
• A country cannot import goods directly from the others because of the
following reasons.
1. The country may not have any accessible trade routes connecting the
importing country
2. The goods imported may require further processing or finishing
before exporting, and these facilities may be lacking in the exporting
or importing country
3. There may not have any bilateral trade agreement between both the
country
4. Importer and exporter may not share good economic relation with
each other

32. Types of International Business….Cont’d
•Features of Entrepot Trade
• The following are the special features of Entrepot trade
1. Import duty is not levied on such goods
2. These goods are reprocessed and repacked for re- export
3. Such goods are kept in the Bonded warehouse till they are re-
exported.

33. Methods of Going International Business

34. Methods of Going IB…..Cont’d
• Exporting and Importing
• Exporting denotes selling of goods and services from the home country
to a foreign country. Similarly importing refers to purchasing of
products from foreign country and bringing them into home country
• The prime advantage of exporting is that it involves very little risk and
low allocation of resources for the exporter, who is able to use
domestic production toward foreign markets and thus increase sales
and reduce inventories.
• The exporter is not involved in the problems inherent in the foreign
operating environment; the most that could be lost is the value of the
exported products or an opportunity if the venture fails to establish the
identity or characteristics of the product in the foreign market.

35. Methods of Going IB…..Cont’d
• Exporting and Importing
• Exporting also provides an easy way to identify market potential and
establish recognition of a name brand.

36. Methods of Going IB…..Cont’d
• Contract Manufacturing (or) Outsourcing
• Contract manufacturing is another method firms use to enter the
foreign arena
• It connotes a type of international business where a firm enters into a
contract with one or a few local manufacturers in foreign countries in
order to get certain components of goods produced according to its
specifications.
• It is also called outsourcing or contract manufacturing
• Contract manufacturing has the advantage of expanding the supply or
production expertise of the contracting firm at minimum cost.

37. Methods of Going IB…..Cont’d
• Licensing and Franchising
• Licensing is contractual agreement wherein one firm grants access to its
plants, trade secrets or technology to another firm in a foreign country,
for a fee called royalty, e.g. McDonald, Pisa Hut, etc.,
• The firm which grants such permission is called Licensor or Franchisor
and other firm to whom the license is granted is called Licensee or
Franchisee
• The licensee is buying the assets of another firm in the form of know-
how or R & D. The licensor can grant these rights exclusively to one
licensee or nonexclusively to several licensees.

38. Methods of Going IB…..Cont’d
• Licensing and Franchising……..
• Licensing provides advantages to both parties.
• The licensor receives profits in addition to those generated
from operations in domestic markets.
• These profits may be additional revenues from a single
process or method used at home that the manufacturer is
unable to utilize abroad
• The licensee benefits from acquiring the rights to a process
and acquires state-of-the-art technology while avoiding the R
& D costs.

39. Methods of Going IB…..Cont’d
•FRANCHISING
• Franchising is similar to licensing, except that in addition to
granting the franchisee permission to use a name, process,
method, or trademark, the firm assists the franchisee with
the operations of the franchise or supplies raw materials, or
both.
• The franchisor generally also has a larger degree of control
over the quality of the product than it does under licensing
agreements.

40. Methods of Going IB…..Cont’d
• Joint Venture
• A Joint venture is a business agreement wherein parties agree to
develop a new entity and assets subscribing to equity shares and
thereby exercising control over enterprise and consequently sharing
revenues, expenses and the assets. It can be established under three
different ways namely
· Foreign Investors buying an interest in local company
· Local firm acquiring an interest in the existing foreign firm
· Both the foreign and local firms jointly forming a new enterprise.

41. Methods of Going IB…..Cont’d
•Foreign Direct Investment (FDI)
• FDI means investment made by a company or individual in one
country in the business interest in another country in the form
of either establishing new business operations or acquiring
business assets in the other country.
• When a company invests directly within foreign shores, it is
making a very real commitment of its capital, personnel,
and assets beyond domestic borders

42. Methods of Going IB…..Cont’d
•Foreign Direct Investment (FDI)
• While this commitment of resources increases the profit
potential of an MNC dramatically by providing greater control
over costs and operations of the foreign firm, it is also
accompanied by an increase in the risks involved in operating
in a foreign country and environment.

43. Foreign Direct Investment [FDI]
• FDI involves the ownership and control of a company in a foreign
country
• Differs from portfolio investments, which are of a financial nature
(stocks, bonds, etc.)
• FDI may be made in one of two ways:
 New venture
 Acquisition

44. •Why FDI?
• Sell products already sold successfully at home (1960s).
• Lowering production costs by producing in low-cost countries for sale in
other countries (1970s & 80s).
• Gaining access to new technology (1990s).
• Overall, four sets of factors may be identified:
 Supply side
 Demand side
 ‘Process’ related
 Risk Factors

45. Supply Side Factors
• Lower production costs.
• National comparative advantage:
wages, real estate, etc.
• Lower delivery costs.
• Transportation, Tariffs, etc.
• Acquisition of raw materials.
• Control rather than buy in market.
• Portfolio of production sources.
• Risk reduction: Suppliers, Material types, Production, Distribution (e.g., railroad strike).
• Access to technology and skills.
• Invest in areas where key competitive advantages can be obtained

46. Factors in Choosing FDI for Resource Acquisition
• Savings through vertical integration
• Savings through rationalized production
• Gain access to cheaper or different resources and knowledge
• Need to lower costs as product matures
• Gain governmental investment incentives

47. Demand Side Factors
• New markets.
• Other options must be considered!
exports, licensing, etc.
• Restriction of imports.
• Quotas may restrict access to market.
• Local presence.
• Customer confidence, after sales service, adaptation to local conditions, etc.
• “Buy National” rules.
• Especially governments (including U.S.)
• Customer biases may have similar effect.
• Good corporate citizen.
• Build image by hiring locals, paying local taxes, participating in society, etc.
• Response to rivals’ threats.
• Enter competitors’ (home) markets.

48. Factors in Choosing FDI for Expansion of Sales
• Transportation
• Lack of domestic capacity
• Low gains from economies of scale
• Trade restrictions
• Country-of-origin effects such as barriers
• Lower production costs abroad
• Changes in comparative costs

49. Factors in Choosing FDI for Risk Minimization
• Diversification of customer base (same as sales expansion)
• Diversification of supplier base (same as resource acquisition)
• Following customers
• Preventing competitors’ advantage

50. Foreign Direct Investment and Control
• International businesses want to control their foreign operations so they achieve their global
objectives
• Control must accompany investment
• Defining direct investment is arbitrary
• Companies are reluctant to transfer vital resources to another organization without control
• Capital
• Patents
• Trademarks
• Management know-how

51. Control and Costs
• Control inherent in FDI may:
• Decrease operating costs
• Increase rate of technology transfer
• Parent and subsidiary share common corporate culture
• Company can use its’ own managers
• Company can avoid protracted negotiations with another company
• Company can avoid problems of enforcing and agreement

52. Methods for Making FDI
• Assets employed: usually an international capital movement that crosses borders
• Acquisition: purchase of existing company
• Easy to execute
• Useful if local requirements mandate localized adoption to operate
• Foreign personal may be hard to hire
• Best if international company is attempting to acquire knowledge
• Gain goodwill and brand identification
• Building: using local resources to start from construct facilities and build a labor
pool

53. FDI in Developed Countries
• Most FDI is from developed countries TO developed countries
• Markets are larger in developed countries
• Political turmoil in emerging economies has discouraged
investors
• Developed countries are committed to liberalizing direct
investments among members
• Taxes
• Access to local capital
• Government procurement

54. Advantage and Disadvantage of International Business

55. Advantage and Disadvantage….Cont’d
• Advantages of International Business
• Geographical Specialization
• Countries across the world differ significantly in terms of natural
resources, capital equipment, manpower, technology and land and so
on.
• Some countries are rich in mineral resources hydro-electric power
metallic resources, and so on while some other countries may possess
advanced technique of manufacturing, efficient working population,
capital equipment and so on.
• International business is required to exchange the surplus resources
resulting from geographical specialization for deficit resources in other
countries

56. Advantage and Disadvantage….Cont’d
• 2. Optimum use of Natural Resources
• International business operates on a simple principle that a country
which can produce more efficiently and trade the surplus production
with other countries has to procure what it cannot produce more
efficiently.
• This enables the countries to optimally utilize the scarce resources
available with them

57. Advantage and Disadvantage….Cont’d
• .Economic Development.
• International business helps the developing countries greatly in achieving
rapid economic development by importing machinery, equipment,
technology, talent, and so on.
• For example., China, India, Brazil and South Korea which were once slower
in their economic development are achieving faster economic
development due to international business. Even the developed countries
like Japan, USA, UK, etc., have achieved remarkable economic progress
through the import of raw materials and export of manufactured goods.
•

58. Advantage and Disadvantage….Cont’d
• Generation of Employment.
• International business generates employment opportunities by
assisting the expansion and growth of agricultural and industrial
activities. It provides direct employment to those people who are
hired by export and import firms and generates indirect employment
to number of intermediary firms like, clearing and forwarding agent,
indent houses transport organizations, outsourcing agencies, etc.

59. Advantage and Disadvantage….Cont’d
• Higher Standard of Living.
• On account of international business, the citizens of the country can buy more varieties of
goods and services which cannot be produced cost effectively within the home country. This
exchange of goods and services among the countries enhances the standard of living of
people.
• Price Equilisation
• International business helps to stabilize the prices of various commodities which are
fluctuating on a daily basis in the world market. Whenever the price of a commodity rises
sharply in a particular country, the same commodity is imported from some other foreign
countries to prevent the sharp rise in prices in the home country. Thus international
business prevents violent fluctuations of prices of various commodities and helps maintain
prices of various commodities at stable level in each and every country.
•

60. Advantage and Disadvantage….Cont’d
• Prospects for Higher Profit.
• International business helps the firms which produce goods in excess
to sell them at relatively higher price to various countries in the
international market. This enables them to earn higher profit.
• Capacity Utilisation.
• International business enables the firms across the country to sell their
goods and services on a large scale in the international market. As a
result their machinery and equipments are used to their full capacity.
In short very prospect of selling goods in international market
besides selling the goods in home market keeps the machineries,
tools, equipment, and factory fully engaged all through the year.

61. Advantage and Disadvantage….Cont’d
Disadvantage
• Economic Dependence.
• International trade is more likely to make the country too much dependent on
imports from foreign countries. The former may not take any efforts to produce
goods and services indigenously to substitute imported goods and thus becoming
self sufficient. As a result the importing country may become economically slave
to exporting country and end up becoming colony of the exporting country.
Inhibition of Growth of Home Industries.
• International business may discourage the growth of indigenous industry.
Unrestricted imports and severe competition from foreign companies may ruin
the home industries altogether.

62. Advantage and Disadvantage….Cont’d
• Import of Harmful Goods.
• International business may lead to import of luxurious goods,
spurious goods, dangerous goods, etc. It may harm the well-being of
people.
Shortage of Essential Goods in Home Country.
• Moreover the export of essential commodities out of the greed of
earning more foreign exchange may result in absolute shortage of
these goods at home country and people may have to buy these
commodities at exorbitant price in the local market.

63. Group Discussion Question

64. Group Discussion Question
•A country’s international business efficiency and
effectiveness is one of the preconditions for
economic growth and development. Inefficient
international business can affect every part of
human activity. In Ethiopia, the performance of
international business in terms balance of trade is
low compared to developed and most of the
developing countries.
•Given this information

65. Group Exercises….Cont’d
1. What are the factors that contributing to
the poor international business
performance in Ethiopia?
2. How can we mitigate the contributing
factors to inefficient and ineffective
international business?

66. Instruction
•Discuss in group thoroughly and develop your group
report on the agreed points, which you should share to
your class mates in presentation format
•Try to link the contributing factors for poor international
trade and the mitigation strategies your group designed
•Show the challenges and opportunities of the
implementation of the designed mitigation strategies in
Ethiopian business environment

67. Summary
• Introduction
•Domestic Versus International Business
•Types of International Business
•Methods of Going International Business
•Advantages and Disadvantages of International
Business
•Discussion Questions

68. •The End of Chapter 2