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The introductory presentation to International Business II
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© Luis Pachon
International Business IIIntroduction to the course
© Luis Pachon
Task In pairs answer the following questions:
1. What is International Business?
2. Why should we study international business?
3. What does shape the profit-related activities across national boundaries?
4. What are the differences between domestic and international business?
5. Why do companies go international?
© Luis Pachon
The Importance of International Business
What is International Business? International business is all
commercial transactions—private and governmental—between two or more countries. Private companies undertake such transactions for profit; governments may or may not do the same in their transactions.
© Luis Pachon
The Importance of International Business
Why should we study international business?
1. International business comprises a large and growing portion of the world’s total business. Today, global events and competition affect almost all companies—large or small—because most sell output to and secure supplies from foreign countries. Many companies also compete against products and services that come from abroad.
© Luis Pachon
The Importance of International Business
Why should we study international business?
2. A company operating in the international business field will engage in modes of business, such as exporting and importing, that differ from those it is accustomed to on a domestic level.
© Luis Pachon
Growth of International Business What does shape the profit-related
activities across national boundaries?
.
Globalization
Regional Trading Blocs EU
NAFTA
CIS
Information Technology
Workforce diversity
Emerging Economies
Political Instability
© Luis Pachon
Growth of International Business
The paradigm of the “Global Village” Countries differ
Culture Political Systems Economic Systems Legal Systems Economic Development
© Luis Pachon
International Business Vs Domestic Business.
Systems are different. Issues are more complex. Conversion of Money into
different currencies. Constraints and limitations
from foreign governments.
© Luis Pachon
Why do companies go international?
First consider:Mission•What is the purpose of the company’s existence?
Objectives
•What is the company trying to accomplish?
Strategies
•Means to achieve the objectives.
© Luis Pachon
Why do companies go international?
Minimize Competitive
Risk.
Acquire Resources.
Expand Sales.
Diversify sources of sales and supplies.
© Luis Pachon
Minimize Competitive Risk
It’s a defensive reason. Protection against domestic
companies that might gain advantages abroad.
That rival company could use those advantages to improve the domestic operations later.
Prevent a competitor to gain advantages.
© Luis Pachon
Acquire Resources
Products, services, and components produced in foreign countries.
Foreign capital, technologies, and information they can use at home.
Cost reduction sweatshops.
© Luis Pachon
Expand Sales
By reaching international markets, companies increase their sales faster than when they focus on a single market.
These sales depend on the consumers’: interest in the product their ability to purchase the product.
Higher
Sales
Higher
Profit
Go International !
© Luis Pachon
Diversify Sources Of Sales And Supplies
Minimize fluctuations in sales and profits
Sales increase in a country that is expanding economically and decrease in another that is in recession.
Avoid the full impact of price fluctuations or shortages in any one country.
© Luis Pachon
Additional Factors
Increase in Global Competition. Development and Expansion of
Technology. Liberalization of Cross-Border
Movements. Development of Supporting
Services. Consumer pressures.
© Luis Pachon
Increase in Global Competition
New products quickly become known globally.
companies can produce in different countries.
Suppliers Competitors and Customers of domestic companies
have become international as well.
© Luis Pachon
Development and Expansion of Technology
Internet Commercial transatlantic supersonic travel Faxing - E-mailing Teleconferencing Overseas direct-dial telephone service Sales over the Internet (electronic commerce; e-
commerce sales). Transportation and communication costs are more
conducive for international business operations.
© Luis Pachon
Liberalization of Cross-Border Movements
The European Union, the NAFTA, and other regional economic blocs throughout the world provide fewer restrictions on cross-border movements.
© Luis Pachon
Development of Supporting Services
Companies and governments of various countries, alike, have developed services that ease international business.
Mail (Government monopoly) Banking
© Luis Pachon
Consumer Pressures
Tastes have changed. Consumers know about products
and services available in other countries.
More, new, better and differentiated products.
Spend on R&D.
© Luis Pachon
Modes of International Business
Merchandise Exports and Imports The most common
international economic transaction.
Tangible products.
© Luis Pachon
Modes of International Business
Service Exports and Imports. Tourism and transportation Movies
Crew Performance of Services Fees
(Turnkey operations - Manufacturing Contracts)
Use of Assets Royalties (Licensing – franchising)
© Luis Pachon
Modes of International Business
Investments FDI
Joint Venture (companies) Mixed Venture (government + company)
Portfolio Investment Non-controlling interest in a company.
Stocks
Loans
Financial Benefits.
© Luis Pachon
EXPORTING
Send a firm’s products or services to international destinations. Indirect: without the firm’s ultimate
involvement Cost CEM (ads), MEA (no ads, own name)
Direct: Import without intermediaries Export department. Export Sales Subsidiary
© Luis Pachon
COUNTERTRADE
Arrangements in which the flow of goods and services in both directions is the core of the transaction.
© Luis Pachon
CONTRACT MANUFACTURING
Contractual agreement between a company and a foreign producer under which the foreign producer manufactures the company’s product. The company controls promotion
and distribution. Pharmaceutical industry.
© Luis Pachon
LICENSING
In this agreement, the international company, the licensor, agrees to make available to another company abroad , the licensee, use of its: Patents and trademarks Manufacturing process Know-how Trade secrets Managerial and technical services.
© Luis Pachon
FRANCHISING
Is a form of licensing. Transfer of technology, business
system, brand name, trademark and other property rights.
Franchisor: developed the business, lends the names and brands.
Franchisee: buys the rights (fees or royalties) to operate the business under the name of the franchisor.
© Luis Pachon
MANAGEMENT SERVICE CONTRACTS
It is a long term agreement, in which the legal owners of the property and real estate enter into a contract with an outsider firm to run and operate the business. The Firm gets regular payments as
well as commissions.
© Luis Pachon
TURNKEY PROJECTS
The international company engages in the design and construction of the entire operation, once it is finished, the management goes to local personnel in exchange of a substantial fee. Airports, dams, electric power
stations, roads, factory complexes: steel mills, refineries, chemical plants and automobile plants.
© Luis Pachon
FOREIGN DIRECT INVESTMENT
Serve a local market better (HFDI) Copy and paste from the HQ plant. As it is “there” it substitutes trade.
Lower cost imputs (VFDI) Splitting the value chain activities to
low-cost location.
© Luis Pachon
FOREIGN MODE OF ENTRY CHOICES
Decision to Internationalize
Wholly Owned International
Choices
Acquisition
Greenfield Investments
Cooperative International
Choices
Equity Joint Ventures
Nonequity Strategic Alliances / Licensing