INTRODUCTION TO INTERNATIONAL BUSINESS - INTERNATIONAL BUSINESS

Notes 8 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Prajwal Hallale

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:INTERNATIONAL BUSINESS

Unit – I
INTRODUCTION TO INTERNATIONAL BUSINESS

Meaning and Definition of International Business – Theories of International Trade
– Economic Theories – Forms of International Business - Nature of International
Business

International business is defined as commercial transactions that occur across country
borders. When a company sells products in the US, Japan and throughout Europe, this is an
example of international business.
1. The exchange of goods and services among individuals and businesses in multiple
countries.
2. A specific entity, such as a multinational corporation or international business company
that engages in business among multiple countries. International Business conducts business
transactions all over the world. These transactions include the transfer of goods, services,
technology, managerial knowledge, and capital to other countries. International business
involves exports and imports.
International Business is also known, called or referred as a Global Business or an
International Marketing.
Features of International Business
1. Large scale operations : In international business, all the operations are conducted on a
very huge scale. Production and marketing activities are conducted on a large scale. It first
sells its goods in the local market. Then the surplus goods are exported.
2. Intergration of economies : International business integrates (combines) the economies
of many countries. This is because it uses finance from one country, labour from another
country, and infrastructure from another country. It designs the product in one country,
produces its parts in many different countries and assembles the product in another country. It
sells the product in many countries, i.e. in the international market.
3. Dominated by developed countries and MNCs : International business is dominated by
developed countries and their multinational corporations (MNCs). At present, MNCs from
USA, Europe and Japan dominate (fully control) foreign trade. This is because they have
large financial and other resources. They also have the best technology and research and
development (R & D). They have highly skilled employees and managers because they give
very high salaries and other benefits. Therefore, they produce good quality goods and
services at low prices. This helps them to capture and dominate the world market.
4. Benefits to participating countries : International business gives benefits to all
participating countries. However, the developed (rich) countries get the maximum benefits.
The developing (poor) countries also get benefits. They get foreign capital and technology.
They get rapid industrial development. They get more employment opportunities. All this
results in economic development of the developing countries.
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Therefore, developing countries open up their economies through liberal economic policies.
5. Keen competition : International business has to face keen (too much) competition in the
world market. The competition is between unequal partners i.e. developed and developing
countries. In this keen competition, developed countries and their MNCs are in a favourable
position because they produce superior quality goods and services at very low prices.
Developed countries also have many contacts in the world market. So, developing countries
find it very difficult to face competition from developed countries.
6. Special role of science and technology : International business gives a lot of importance
to science and technology. Science and Technology (S & T) help the business to have large-
scale production. Developed countries use high technologies. Therefore, they dominate
global business. International business helps them to transfer such top high-end technologies
to the developing countries.
7. International restrictions : International business faces many restrictions on the inflow
and outflow of capital, technology and goods. Many governments do not allow international
businesses to enter their countries. They have many trade blocks, tariff barriers, foreign
exchange restrictions, etc. All this is harmful to international business.
8. Sensitive nature : The international business is very sensitive in nature. Any changes in
the economic policies, technology, political environment, etc. has a huge impact on it.
Therefore, international business must conduct marketing research to find out and study these
changes. They must adjust their business activities and adapt accordingly to survive changes.
Nature of International Business
1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

Scope of International Business
1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange
Need for International Business
1. To achieve higher rate of profits
2. Expanding the production capacity beyond the demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions
6. Availability of technology and managerial competence
7. Cost of manpower, transportation
8. Nearness to raw material
9. Liberalisation, Privatisation and Globalisation (LPG)
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10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO), decreasing costs
in telecommunications and transportation; and freer capital markets

Reasons for Recent International Business Growth
1. Expansion of technology
2. Business is becoming more global because
•Transportation is quicker
•Communications enable control from afar
•Transportation and communications costs are more conducive for international operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources enable
Companies to take better advantage of international opportunities

Problems in International Business
1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy
Forms of international business
1. Exporting: Exporting means producing/procuring in the home market and selling in the
foreign market. Exporting is not an activity just for large multinational enterprises; small
firms can also make money by exporting. In recent days, exporting has become easier though
it remains a challenge for many firms.
2. Licensing: A licensing is an agreement whereby a licensor grants the rights to intangible
property (patents, intentions, formulas, processes, designs, copyrights and trademarks) to
another entity (licensee) for a specified period and in return the licensor receives a royalty/fee
from the licensee.
3. Franchising: Franchising is basically o specialized form of licensing in which the
franchiser not only sells intangible property to the franchisee but also insists that the
franchisee agrees to abide by strict rules as to how it does business.
4. Joint venture: A joint venture entails establishing a firm that is jointly owned by two or
more independent firms.
5. Management Contracts: A firm in one country agrees to operate facilities or provide
other management services to a firm in another country for an agreed upon fees.
6. Turnkey projects: In a turnkey project, the contractor agrees to handle every details of the
project for a foreign client, including the training of operating personnel. At completing of
the contract the foreign client handles the ‘key’ of a plant that is ready for full operation
7. Strategic international alliances: A strategic international alliance is a business
relationship established by two or more companies to cooperate out of mutual need and to
share risk in achieving a common objective.
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8. Direct foreign investment: Direct foreign investment is another important form of
international business. Companies may manufacture locally to capitalize on low cost labor, to
avoid high import taxes, to reduce the high cost of transportation to market, to gain access to
raw materials or gaining market entry.
Main Difference Between Domestic and international Business are as follows :
Sl no
International Business
Domestic Business
1
It is extension of Domestic Business
and Marketing Principles remain
same.
The Domestic Business Follow the
marketing Principles
2
Difference is customs, cultural factors
No such difference.
In a large countries languages like India,
we have many languages.
3
Conduct and selling procedure
changes
Selling Procedures remain unaltered
4
Working environment and
management practices change to suit
local conditions.
No such changes are necessary
5
Will have to face restrictions in trade
practices, licenses and government
rules.
These have little or no impact on
Domestic trade.

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Long Distances and hence more
transaction time.
Short Distances, quick business is
possible.
7
Currency, interest rates, taxation,
inflation and economy have impact on
trade.
Currency, interest rates, taxation,
inflation and economy have little or no
impact on Domestic Trade.
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8. MNC’s have perfected principles,
procedures and practices at
international level
No such experience or exposure.
9
MNCs take advantage of location
economies wherever cheaper resources
available.
No such advantage once plant is built it
cannot be easily shifted.
10
Large companies enjoy benefits of
experience curve
It is possible to get this benefit through
collaborators.
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High Volume cost advantage.
Cost Advantage by automation, new
methods etc.
12
Global Standardization
No such advantage
13

Global business seeks to create new
values and global brand image.
No such advantage
14
Can Shift production bases to different
countries whenever there are problems
in taxes or markets
No such advantage and get competition
from some spurious or SSI Unit who get
patronage of Government.

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Theories of International Business
1. Mercantilism • 1630, Thomas Mun: “…to increase our wealth…sell more to strangers
yearly than we consume of theirs in value”
2. Absolute cost Advantage
• 1776, Adam Smith. A country has an absolute advantage in the production of a product
when it is more efficient than any other country in producing it
• If two countries specialize in production of different products (in which each has an
absolute advantage) and trade with each other, both countries will have more of both products
available to them for consumption
3. Comparative Advantage
• 1817, David Ricardo - Even if one country has an absolute advantage in producing two
products over another country, trading with that other country will still yield more output for
both countries than if the more efficient producer did everything for themselves.
• The country with the absolute advantage in producing both products would still produce
both products, but less of the one they would trade for, allowing them to essentially allocate
more resources to producing the product that they’re comparatively most efficient at
producing
• Assumes many things:
 Only 2 countries and 2 goods
 No transportation costs
 No price differences for resources in both countries
 Resources can move freely from producing one product to producing another product
 Constant returns to scale o Fixed stock of resources
 Free trade does not affect production efficiency
 No effects of trade on income distribution within a country
4. Heckscher-Ohlin Theory
• 1919, Eli Heckscher and 1933, Bertil Ohlin – Comparative advantage arises from
differences in national factor endowments, such as land, labor, or capital, as opposed to
Ricardo’s theory which stresses productivity
• 1953, Wassily Leontief – The Leontief Paradox – theorized that since the U.S. has
abundant capital compared to other nations, they would expor capital-intensive goods and
import labor-intensive goods. Data showed that was not the case.
• Therefore, Ricardo’s theory seemed to be more predictive.
• However, controlling for technological differences (e.g. eliminating them) does yield a
predictive model based on factor endowments
5. The Product Life-Cycle Theory
• 1960′s, Raymond Vernon – attempts to explain global trade patterns. First, new products
are introduced in the United States.Then, as demand grows in the U.S., it also appears in
other developed nations, to which the U.S. exports. Then, other developed nations begin to
produce the product as well, thus causing U.S. companies to set up production in those
countries as well, and limiting exports from the U.S. Then, it all happens again, but this time
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production comes online in developed nations. Ultimately, the U.S. becomes an importer of
the product that was initially introduced within its borders.
• Weakness –
Not all new products are created in the United States. Many come from other countries first,
such as video game consoles from Japan, new wireless phones from Europe, etc. Several
new products are introduced in several developed countries simultaneously
6. New Trade Theory
• 1970′s – Via the achievement of economies of scale, trade can increase the variety of goods
available to consumers and decrease the average cost of those goods. Further, the ability to
capture economies of scale before anyone else is an important first-mover advantage.
• Nations may benefit from trade even when they do not differ in resource endowments or
technology
• Example – If two nations both want sports cars and minivans, but neither can produce them
at a low enough price within their own national markets, trade can allow each to focus on one
product, allowing for the achievement of economies of scale that will increase the variety of
products in both countries at low enough prices
• Example – Airbus spent $14 billion to develop a new super-jumbo jet. Demand is
estimated at 400-600 units over the next 20 years, and Airbus will need to sell at least 250 of
them to become profitable in this line of business. Boeing estimates the demand to be much
lower, and has chosen not to compete. Airbus will have the first mover advantage in this
market, and may never see competition in this market segment.
• New trade theory is not at odds with Comparative Advantage, since it identifies first mover
advantage as an important source of comparative advantage
• Debate – should government provide subsidies that spawn industries such that companies
can gain first mover advantages? Later chapter (and blog post) covers this. 7. National
Competitive Advantage – Porter’s Diamond
• 1990, Michael Porter – seeks to answer the question of why a nation achieves international
success in a particular industry.
Based on four attributes:
1. Factor endowments
– natural resources, climate, location, demographics
– communication infrastructure, sophisticated and skilled labor,
research facilities, and technological know-how

ctors are the most significant for competitive advantage
2. Demand conditions – if customers at home are sophisticated and demanding, companies
will have to produce innovative, high quality products early, which leads to competitive
advantage
3. Relating and supporting industries – If suppliers or related industries exist in the home
country that are themselves internationally competitive, this can result in competitive
advantage in the new industry.
4. Firm strategy, structure, and rivalry
nations are characterized by different management ideologies, which can either
Firm strategy, structure, and rivalry
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help or hurt them in building competitive advantage
firms better international competitors
(REFER TEXT BOOK FOR GRAPH AND ILLUSTRATION)

SECTION-A CONCEPTUAL TYPE (SHORT ANSWER) QUESTIONS
1. Define International Trade.
2. What do you mean by Tariff?
3. What do you mean by Non-Tariff Barriers?
4. What is Comparative Advantage?
5. What do you mean by Absolute Advantage?
1. What is Product Life Cycle?
2. Define Opportunity Cost?
3. What is H.O Model?
4. Comparative Cost model is better than Absolute Cost model. Do you agree?
5. Define Quota?
SECTION B ANALYTICAL TYPE QUESTIONS
1. Define the, concept of International Trade? Also explain the salient features of
International Trade.
2. What are the International Trade Theories? Explain any three theories of International
Trade?
3. Write a note on the following:
(i) Absolute Cost Theory
(ii) Comparative Cost Theory
(iii) Product Life Cycle (PLC) Theory
4. What are the Tariff and Non Tariff Barriers in International Trade? Explain
5. What is the difference between Absolute advantage and Comparative advantage?
SECTION-C DESCRIPTIVE TYPE QUESTIONS
1. How is international business broader in scope compared to international
2. trade and international market?
3. Explain the nature of internationa! business.
4. Why is international business a crucial venture?
5. Why do business firms of a country go to other countries? Give your answer
6. with suitable examples.
7. Explain stages of internationalisation.
8. State the different approaches to international business.
9. What are the competitive advantages of international business?
10. Why is international business not a bed of roses? Elucidate your answer with
suitable examples.

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