LESSON 1: NATURE OF INTERNATIONAL BUSINESS
AND TRADE
enquiry do not have as their major point of interest the
special problems that arise when business activities cross
national boundaries.
HISTORY OF INTERNATIONAL BUSINESS
DIFFERENTIATING INTERNATIONAL, MULTINATIONAL,
GLOBAL AND TRANSNATIONAL BUSINESS
INTERNATIONALIZATION
P. SUBBA RAO (2008): the origin of international business
goes back to human civilization.
19th century: the concept of international business started
FIRST PHASE OF GLOBALIZATION
START: 1870
ENDED: The World War I (1914) driven by the industrial
revolution in UK, Germany and USA.
SHARP INCREASE IN TRADE the import of raw material
by colonial empires from their colonies and exporting
finished goods to their overseas possessions
GDP was as high as 22.1 in 1913. Later various
governments initiated and imposed a number of barriers to
trade to protect their domestic production that led to decline
in the ratio of trade to GDP to 9.1 during 1930s.The
international trade between two world wars has been
described as “a vast game of beggar-my-neighbor.”
IMF AND WORLD BANK: need for international
cooperation in global trade and balance of payment affairs:
resulted in
The term “international business” has emerged from the
term “international marketing”, which, in turn, emerged from
the term “international trade.”
PRE-REQUISITES
CHARACTERISTICS
• Familiarity with the national
culture, industry structure,
government requirements, and
other
aspects
of
doing
business in that country
• Relationships with relevant
customers,
suppliers
and
regulators
• Superior knowledge or skills
whether
advanced
technological expertise or
specific
marketing
competencies
• Scale economies in Research
and
Development
(R&D),
production or some part of the
value chain
• Must have the organizational
capability to leverage its
strategies
assets
more
effectively through its own
subsidiaries
than
through
contractual
relations
with
outside parties
• Derives directly from the
international product cycle
theory
• Products are developed
for domestic market and
only subsequently sold
abroad
• Technology and other
knowledge are transferred
from parent company to the
overseas operators
• Offshore manufacturing is
seen as a means to protect
the
company’s
home
market
•
Regard
themselves
fundamentally as domestic
company with some foreign
appendages
• Managers assigned to
overseas operations are
often the domestic misfits
who happen to know a
foreign language or who
have
previously
lived
abroad
• Decisions related to the
foreign operations tend to
be
made
in
an
opportunistic or ad hoc
manner
DEFINITION OF INTERNATIONAL BUSINESS & TRADE
INTERNATIONAL BUSINESS includes any type of
business activity that crosses national borders.



At one end of the definitional spectrum, it is an
organization that buys and/or sells goods and
services across two or more national boundaries,
even if management is located in a single country.
At the other end of the spectrum, it is a business
equated only with those big enterprises, which
have operating units outside their own country.
In the middle are institutional arrangements that
provide for some managerial direction of
economic activity taking place abroad but stop
short of controlling ownership of the business
carrying on the activity (for example joint ventures
with locally owned business or with foreign
governments)
International trade and finance: traditional form
Multinational business operations: newest form
sometimes the foreign operations and the comparative
business are used as synonymous for international
business.
FOREIGN BUSINESS refers to domestic operations within
a foreign country.
COMPARATIVE BUSINESS focuses on similarities and
differences among countries and business systems for
focuses on similarities and differences among countries and
business operations and comparative business as fields of
MULTINATIONALIZATION
PRE-REQUISITES
CHARACTERISTICS
• Exposure of the organization
to foreign environments and
the growing importance of
sales and profits from these
sources increase and can
provide marginal significance
• Leveraging opportunities,
they have to do more than ship
out old equipment technology
or product lines that had been
developed for the home market
• Recognized differences
among national markets
and
operating
environments
• Adopt a more flexible
approach
to
their
international operations by
modifying their products,
strategies
and
even
management
practices
country by country
•
Develop
national
companies
that
are
increasingly sensitive and
responsive to their local
environments
•
Very
responsive
marketing approaches in
the
different
national
markets
• Worldwide strategy is built
on the foundation of the
multiple,
nationally
responsive strategies of
the companies worldwide
subsidiaries
• Managers tend to be
highly
independent
entrepreneurs,
often
nationals of the host
country. They are often
able to build up significant
local
growth
and
considerable
independence
from
headquarters
GLOBALIZATION
PRE-REQUISITES
CHARACTERISTICS
• Operating environment of • Views the world as its unit
improving transportation and of analysis
communication facilities and • Underlying assumption is
falling trade barriers
that national tastes amid
• Creating products for a world preferences are more
market and manufacturing similar than different or that
them on a global scale in a few they can be made similar
highly efficient plants, often at by providing customers
the corporate center
with standardized products
• Requires considerably more with adequate cost and
central
coordination
and quality advantages over
control than others
those national varieties
• Typically associated with an • Make and sell “the same
organization structure in which thing, the same way,
various product or business everywhere
manufacturing activities are
typically managed from the
headquarters
• Strategic decisions are taken
at the center
TRANSNATIONALIZATION
PRE-REQUISITES
CHARACTERISTICS
• Host governments increase
both the restrictions and the
demands they place on global
companies
• Companies are required to
invest, transfer technology,
and meet local content
requirements and so forth
•
Customers
rejecting
homogenized global products
and reasserting their national
preferences without relaxing
their expectation of highquality
levels and the local costs of the
global products had offered
• Increased volatility in
international economic and
political
environments,
especially the rapid changes in
the currency exchanges
• Emerging requirement for
companies to become more
responsive to local needs
while retaining their global
efficiency
• Key activities and resources
are neither centralized in the
parent
company
nor
decentralized so that each
subsidiary can carry out its
own tasks on a local-for-local
basis
• Resources and activities
are
dispersed
but
specialized, so as to
achieve efficiency and
flexibility at the same time
• Dispersed resources are
integrated
into
an
independent network of
worldwide operations
BENEFITS AND IMPORTANCE OF INTERNATIONAL
BUSINESS

Survival

Growth of overseas markets

Sales and profit

Diversification

Inflation and price moderation

Employment

Standards of living
ADVANTAGES
AND
DISADVANTAGES
INTERNATIONAL BUSINESS
OF
ADVANTAGES OF INTERNATIONAL BUSINESS
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
High-living standards
Increased Socio-economic Welfare
Wider Market
Reduced Effects of Business Cycles
Reduced risks
Large-scale economies
Potential untapped markets
Provides the opportunity for and Challenge to
Domestic Business
Division of Labor and Specialization
Economic Growth of the world
Optimum and proper utilization of world resources
Cultural transformation
Knitting the world into a closely interactive
traditional village
DISADVANTAGES OF INTERNATIONAL BUSINESS