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International Business

© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 1: 1All Rih!" R#"#r$#d

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PART I

International Business andGlobalization

1

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LEARNING OBJECTIVES

To explain the meaning and concept ofinternational business

To distinguish links between international

business and globalization

To discuss globalization and its effect oninternational business

To argue the impacts of globalization and itsinfluence on international business

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1.1 INTRODCTION


International business activities encompass thingsthat we buy such as imported handbags, and

commonly used services such as insurance Involves transactions across international borders,

where business is conducted between countries. Itrefers to the performance of trade and investmentactivities by firms across national borders

International business is conducted not only bythe private sector, but also by the public sector orthe government

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1.1 INTRODCTION !"ont#$

lobalization

The movement towards a borderless world and theinterdependence of global economies

The wave of globalization has forced firms from all overthe world to change and adapt to a new environment

The surge of globalization covers almost all humanactivities, including international business activities

The phenomenon of globalization has brought changesnot only in firms! business strategies, but also incountries! economic systems

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1." PARTICIPANTS AND GRO%T& O'

INTERNATIONAL BSINESS

#a$or participants can be classified into two ma$ortypes of firms that direct, initiate and implementinternational business activities% multinationalcorporations '(s), and small and medium*sized enterprises &+#s)

#ultinational corporations '(s) ortransnational companies &T'(s)

-arge firms with substantial resources that areheavily engaged in international business in variouscountries through a network of subsidiaries andaffiliates located in multiple countries

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+#s

efinition varies from one country to another

In the /nited +tates, +#s are companies that

have 0 or fewer employees In #alaysia, +#s are those with " or fewer

employees

The globalization of markets and advances in

various technologies have enabled +#s topursue business opportunities around the globe

In Italy, +outh 2orea, Taiwan, and (hina, +#scontribute more than 03 of total national export

1."PARTICIPANTS AND GRO%T& O'

INTERNATIONAL BSINESS !"ont#$

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1." PARTICIPANTS AND GRO%T& O'

INTERNATIONAL BSINESS !"ont#$

4ecent trends indicate that firms from developingeconomies are also actively participating in theglobal market

#ore #'(s have emerged from developingcountries like (hina, Brazil and 4ussia, and theirparticipation in the global market is increasinglysignificant

The growth and expansion of firms involved ininternational business are carried out through twoma$or forms of activities%

International trade International investment

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1.5 BAC(GROND O' GLOBALI)ATION

lobalization can be traced back through thedevelopment of human population and the growthof civilization

This process has accelerated in the past 0 years In the 16th century, the establishment of the

utch ast India (ompany, the first multinationalcompany '(), marked the growth of businessenvironment in globalization

lobalization was also achieved by the Britishmpire, which is recognized as the largest empirein history, due to its total size and power

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1.5 BAC(GROND O' GLOBALI)ATION

!"ont#$

The peak growth of business and internationaltrade in the 17th century marked the period as8The 9irst ra of lobalization!

+ince the +econd :orld :ar, globalization wasdriven by economists, business interests, andpoliticians who acknowledged the costsassociated with protectionism and declining

international economic integration

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International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 1: 11

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1.; I*PACTS O' GLOBALI)ATION

lobalization has greatly impacted the whole worldand offers hope to poor countries

The greatest beneficiaries of globalization are

consumers in countries that were previouslyprotected from global competition

lobalization expands the range of choice,improves product

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!"ont#$

=s more trades promote economic growth, growthin turn helps to reduce poverty

Improves the

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!"ont#$

=ccess to better technology > (ountries that open their markets to international trade

and investment gain access to a much higher level oftechnology

=ccess to capital

> ngagement in the global economy provides capital tostimulate future growth

evelopment of infrastructure

> ?penness to the global economy can provide theinfrastructure a developing economy needs for growth

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!"ont#$

Improved economic policies

−ngagement in the global economy encouragesgovernments to follow more reasonable economicpolicies

Improve the function of the government

−The extent of a country!s government exploitation isrestricted while other roles are increasing

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1.0 *ODERN GLOBALI)ATION

escribes social, technological, cultural, and politicalchanges resulting from interdependency and integrationamong people and businesses all over the world

The International #onetary 9und &I#9) defines globalization

as a growing economic interdependence of countriesworldwide through the increasing volume and variety ofcross*border transactions in goods and services, freeinternational capital laws, and more rapid and widespreaddiffusion of technology

lobalization is a process of economic integration of theentire world through the removal of barriers to free tradeand capital mobility, as well as through the diffusion ofknowledge and information

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1.0 *ODERN GLOBALI)ATION !"ont#$

=part from economics, globalization also means the freeexchange of thoughts and ideas, and greater mobility ofpeople

#odern globalization does not only centre its activitieson goods traded between nations, it also addressesissues that were not included previously such asfinancial services, technological services and culturaldiffusion

=reas that encompass modern globalization include%industrial globalization, financial globalization, politicalglobalization, information globalization and culturalglobalization

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1.@ DEBATES ON GLOBALI)ATION

The proponentsAsupporters of globalization &pro*globalization)

lobalization is viewed as a beneficial process

lobalization has caused efficiency in allocatingresources, and all countries involved in internationaltrade gain benefits

lobalization has enabled people to en$oy lower

prices of goods and services, greater choices ofgoods and services, greater opportunities foremployment, and higher productivity

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!"ont#$

lobalization encourages countries to have more politicaland economical freedom, and also has significantlyimproved the

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!"ont#$

?pponents of globalization

lobalization is viewed as a destructive process

lobalization is a process that is customized mainly

towards corporate interests without concern forhuman rights and environmental issues

−-abour rights such as child labour and minimum wagehave been neglected, particularly in developingnations, and immigration control is getting stricter

Benefits of globalization are not spread evenly

−lobalization brings more benefits to developednations

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!"ont#$

lobalization is another way for the /+ to overpowerdeveloping and less developed nations

−-oans provided to countries experiencing economiccrises are considered as a means for the /+ to

undermine the domestic affairs of a nation 4ecession in one area can easily spread and affect

the economies of other countries

oor countries are often exploited or pushed aroundin global trade forums

xploitation by #'(s in -(s

−:ork force is taken advantage of and low wages areimplemented

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-arge disparities between wealth exist

−The gap between the richer and the poorer countrieswidens

nvironmental restrictions loosen

−#'(s begin to destroy the environment to gain profit

1.@DEBATES ON GLOBALI)ATION !"ont#$

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1.6 INDSTRIAL AND 'INANCIAL

GLOBALI)ATION

Industrial globalization

(oncerned with the rise and expansion of #'(s andT'(s

Includes a firm!s forward and backward activities− = firm!s global forward activities C globalization of a

market

− = firm!s global backward activities C globalization of

production Industrial globalization can be seen clearly through

the increase of international trade and exporting*importing activities

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GLOBALI)ATION !"ont#$

9inancial globalization

(oncerned with the emergence of worldwide financialmarkets and better access to external financing forcorporate, national, and subnational borrowers

9inancial globalization can be seen through an increasein investment activities, particularly in the investmentportfolio

lobalization of markets 4efers to the merging of national markets into one huge

global marketplace

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GLOBALI)ATION !"ont#$

The expansion of markets has also resulted inchanges in the cultures of many countries, with theresult that material culture all over the world isbeginning to look similar

lobalization of production

4efers to the sourcing of goods and services fromlocations around the world to take advantage ofnational differences in the cost and

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1.6.1 Globalization o+ *ar,ets

4efers to the integration of local markets into alarge global market

(onducting transaction cross border is much

easier as trade barriers between countries havebeen removed

(onsumer tastes and preferences are becomingoverwhelmingly global due to these effects ofglobalization

This creates global markets for standardizedconsumer products

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1.6." Globalization o+ Produ"tion

4efers to the sourcing of goods and services fromall over the world where the production costs arelower with similar

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1.D DRIVERS O' INTERNATIONAL

BSINESS

rivers of international business can be classifiedinto three broad categories% conomic drivers

−Include factors that are related to the market, cost,resources, and competition

olitical drivers

−Include factors like governmental and legal drivers

Technological drivers

−Include innovations such as microprocessordevelopment, the revolution of global communicationsby developments in satellite, optical fibre, and wirelesstechnologies, and now the Internet and the :::

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1.D.1 E"ono-i" Dri.ers

Include factors that are related to the market, cost,resources, and competition

These drivers are primarily uncontrollable by businessesworldwide

The costs of operating in some developing countries aremuch lower than in a developed country, thus making itvery lucrative for firms to operate in developing countries

=vailability and abundance of resources in othercountries is also another factor that has driven #'(s and

T'(s to globalize their production through outsourcingand foreign direct investment, where they set up theirown firms abroad

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1.D." Politi"al Dri.ers !"ont#$

The lowering of trade barriers has facilitated theglobalization of production

vidence also suggests that foreign direct

investment is playing an increasing role in theglobal economy

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1.D.5 Te"/nolo0i"al Dri.ers

Technological changes =dvances in communications, information processing,

and transportation technology, including the Internet andthe :orld :ide :eb &:::)

4apid growth of the Internet 9acilitates the global sharing of information and

resources, provides an efficient channel for advertising,marketing, and the direct distribution of certain goodsand information services

Transportation technology evelopment of commercial aircraft has shortened the

travelling time

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1.D.5 Te"/nolo0i"al Dri.ers !"ont#$

lobal firms heavily rely on technologicalinnovations to enhance their capabilities Technology is a ma$or driver of industrial and

financial globalization

4apid growth of I(T

#anufacturing technologies have made productionprocess more efficient thus increasing profits,lowering costs and improve learning effects

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1.7 RIS(S IN INTERNATIONAL

BSINESS

9irms will generally encounter four types of riskswhen they operate in foreign countries%

(ross*cultural risks

(ountry risks

(urrency risks

(ommercial risks

The firms must manage these risks to avoidfinancial losses or product failures

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1.7.1 Cross"ultural Ris,

4efers to a situation or event wheremisinterpretation arises as a conse

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1.7." Countr2 Ris,

=lso known as political risk

4efers to potentially adverse effects on companyoperations and profitability caused by

developments in the political, legal, and economicenvironment in a foreign country

Includes

The possibility of interference by the host country

government in a firm!s business activities

-aws and regulations that potentially hinder companyoperations and performance

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> (ritical legal dimensions include property rights,intellectual property protection, product liability, andtaxation policies

Earmful economic conditions, often due to high

inflation, financial crisis, and recession

1.7." Countr2 Ris, !"ont#$

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1.7.5 Curren"2 Ris,

=lso known as financial risk

4efers to the risk of adverse fluctuations inexchange rates

=rises because international transactions are oftenconducted in more than one national currency

:hen currencies fluctuate extensively, the value ofthe firm!s assets, earnings, and operating incomecan be reduced, resulting in a dramatic increase in

the cost of importing components if the value of thecurrency in which the imports are denominatedrises sharply

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1.7.5 Curren"2 Ris, !"ont#$

Inflation and other harmful economic conditionsexperienced in one country may haveimmediate conse

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1.7.; Co--er"ial Ris,

4efers to a firm!s potential loss or failure frominefficient management or weak businessstrategies, approaches, or practices

#anagers may make bad choices in such areasas the selection of business partners, timing ofmarket entry, pricing, creation of product features,and promotional themes

:hile such failures also exist in domesticbusiness, the conse

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1.1 C&ALLENGES IN

INTERNATIONAL BSINESS

Three main challenges that international firmsmay encounter%

hysical

+ocial

(ompetitive

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1.1.1 P/2si"al C/allen0es

eography plays a vital role for international firmsparticularly those involved in natural resources such asoil, timber, gold, iron, tin, and gas

hysical landscape also sometimes can be challenging

as they can affect firms! business operations and mayincrease the operating costs

These geographical conditions also may influence thefirms! decision in setting up their foreign operations

(ountries that are regularly hit by natural disasters suchas floods, heavy snow, and hurricanes are consideredrisky investments for international firms and might beavoided as foreign locations

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1.1." So"ial C/allen0es

+ocial challenges include culture, legal,nationalization, and different political systems

Three key social issues are politics, law, and

economics

olitics actually shapes worldwide businessactivities, because political leaders have thefinal say on how international businesses

should operate

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1.1.5 Co-3etiti.e C/allen0es

In the international business environment,competitive factors are very important for firmsto secure their customers and compete withtheir rivals before penetrating overseas markets

(ompetitive challenges may vary for differentindustries

(ompetitive challenges include firm strategy,

price, cost*effectiveness, firm size, market sizeand competitors

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