BS Chapter 01

International Business
Oxford Fajar Sdn. Bhd. (008974-T) 2010
All Rights Reserved

Ch. 1: 1
PART I
1
International Business and
Globalization
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Ch. 1: 2
LEARNING OBJECTIVES
To explain the meaning and concept of

international business
To distinguish links between international

business and globalization
To discuss globalization and its effect on

international business
To argue the impacts of globalization and its

influence on international business
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Ch. 1: 3
1.1 INTRODUCTION
International
Business
International business activities encompass things

that we buy such as imported handbags, and
commonly used services such as insurance
Involves transactions across international borders,

where business is conducted between countries. It
refers to the performance of trade and investment
activities by firms across national borders
International
business is conducted not only by

the private sector, but also by the public sector or
the government
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Ch. 1: 4
1.1 INTRODUCTION (cont.)
Globalization
The movement towards a borderless world and the

interdependence of global economies
The wave of globalization has forced firms from all over

the world to change and adapt to a new environment
The surge of globalization covers almost all human

activities, including international business activities
The phenomenon of globalization has brought changes

not only in firms business strategies, but also in
countries economic systems
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Ch. 1: 5
1.2 PARTICIPANTS AND GROWTH OF

INTERNATIONAL BUSINESS
Major
participants can be classified into two major

types of firms that direct, initiate and implement
international business activities: multinational
corporations (MNCs), and small and mediumsized enterprises (SMEs)
Multinational
corporations (MNCs) or
transnational companies (TNCs)
Large firms with substantial resources that are

heavily engaged in international business in various
countries through a network of subsidiaries and
affiliates located in multiple countries
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Ch. 1: 6

INTERNATIONAL BUSINESS (cont.)
SMEs
Definition varies from one country to another
In the United States, SMEs are companies that

have 500 or fewer employees
In Malaysia, SMEs are those with 200 or fewer

employees
The globalization of markets and advances in

various technologies have enabled SMEs to
pursue business opportunities around the globe
In Italy, South Korea, Taiwan, and China, SMEs

contribute more than 50% of total national export
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Ch. 1: 7

INTERNATIONAL BUSINESS (cont.)
Recent
trends indicate that firms from developing

economies are also actively participating in the
global market
More MNCs have emerged from developing
countries like China, Brazil and Russia, and their
participation in the global market is increasingly
significant
The growth and expansion of firms involved in
international business are carried out through two
major forms of activities:
International trade
International investment
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Ch. 1: 8
1.3 BACKGROUND OF GLOBALIZATION

Globalization
can be traced back through the

development of human population and the growth
of civilization
This
process has accelerated in the past 50 years
In
the 17th century, the establishment of the

Dutch East India Company, the first multinational
company (MNC), marked the growth of business
environment in globalization
Globalization
was also achieved by the British

Empire, which is recognized as the largest empire
in history, due to its total size and power
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Ch. 1: 9
1.3 BACKGROUND OF GLOBALIZATION

(cont.)
The
peak growth of business and international

trade in the 19th century marked the period as
The First Era of Globalization
Since
the Second World War, globalization was

driven by economists, business interests, and
politicians who acknowledged the costs
associated with protectionism and declining
international economic integration
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Ch. 1: 10
1.4 IMPACTS OF GLOBALIZATION
Globalization has greatly impacted the whole world

and offers hope to poor countries
The greatest beneficiaries of globalization are

consumers in countries that were previously
protected from global competition
Globalization expands the range of choice,

improves product quality, and exerts downward
pressure on prices
It delivers an immediate gain to workers by raising

the value of wages
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(cont.)
As more trades promote economic growth, growth
in turn helps to reduce poverty
Improves the quality of life
By facilitating the spread of modern medicine. This

has helped to extend life expectancy and reduce
infant mortality in rich and poor countries
Benefits to Developing and Less Developed

Countries (LDCs):
Access to larger markets

They gain access to much larger markets, both for
imports and exports. Consumers enjoy many choices of
goods and services, raising their real standard of living
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(cont.)
Access to better technology

Countries that open their markets to international trade
and investment gain access to a much higher level of
technology
Access to capital
Engagement in the global economy provides capital to
stimulate future growth
Development of infrastructure
Openness to the global economy can provide the
infrastructure a developing economy needs for growth
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Ch. 1: 13

(cont.)
Improved economic policies

Engagement in the global economy encourages
governments to follow more reasonable economic
policies
Improve the function of the government

The extent of a countrys government exploitation is
restricted while other roles are increasing
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Ch. 1: 14
1.5 MODERN GLOBALIZATION
Describes social, technological, cultural, and political

changes resulting from interdependency and integration
among people and businesses all over the world
The International Monetary Fund (IMF) defines globalization

as a growing economic interdependence of countries
worldwide through the increasing volume and variety of
cross-border transactions in goods and services, free
international capital laws, and more rapid and widespread
diffusion of technology
Globalization is a process of economic integration of the

entire world through the removal of barriers to free trade
and capital mobility, as well as through the diffusion of
knowledge and information
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1.5 MODERN GLOBALIZATION (cont.)
Apart from economics, globalization also means the free

exchange of thoughts and ideas, and greater mobility of
people
Modern globalization does not only centre its activities

on goods traded between nations, it also addresses
issues that were not included previously such as
financial services, technological services and cultural
diffusion
Areas that encompass modern globalization include:

industrial globalization, financial globalization, political
globalization, information globalization and cultural
globalization
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Ch. 1: 16
1.6 DEBATES ON GLOBALIZATION

The
proponents/supporters of globalization (proglobalization)
Globalization is viewed as a beneficial process
Globalization has caused efficiency in allocating

resources, and all countries involved in international
trade gain benefits
Globalization has enabled people to enjoy lower

prices of goods and services, greater choices of
goods and services, greater opportunities for
employment, and higher productivity
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Ch. 1: 17

(cont.)
Globalization encourages countries to have more political

and economical freedom, and also has significantly
improved the quality of life worldwide
The percentage of poverty in developing countries has been
alleviated significantly in the last twenty years
More people have gained access to improved
infrastructures like electricity, telecommunication services,
and clean water
Global literacy increased by 30% in 2000 since the 1950s
Life expectancy has improved tremendously in developing
countries
Infant mortality has decreased in developing countries as health

care has improved
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(cont.)
Opponents
of globalization
Globalization is viewed as a destructive process
Globalization is a process that is customized mainly

towards corporate interests without concern for
human rights and environmental issues
Labour rights such as child labour and minimum wage
have been neglected, particularly in developing
nations, and immigration control is getting stricter
Benefits of globalization are not spread evenly

Globalization brings more benefits to developed
nations
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Ch. 1: 19

(cont.)
Globalization is another way for the US to overpower

developing and less developed nations
Loans provided to countries experiencing economic
crises are considered as a means for the US to
undermine the domestic affairs of a nation
Recession in one area can easily spread and affect

the economies of other countries
Poor countries are often exploited or pushed around

in global trade forums
Exploitation by MNCs in LDCs

Work force is taken advantage of and low wages are
implemented
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1.6 DEBATES ON GLOBALIZATION (cont.)
Large disparities between wealth exist

The gap between the richer and the poorer countries
widens
Environmental restrictions loosen

MNCs begin to destroy the environment to gain profit
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1.7 INDUSTRIAL AND FINANCIAL

GLOBALIZATION
Industrial globalization
Concerned with the rise and expansion of MNCs and

TNCs
Includes a firms forward and backward activities

A firms global forward activities globalization of a
market
A firms global backward activities globalization of
production
Industrial globalization can be seen clearly through

the increase of international trade and exportingimporting activities
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Ch. 1: 22

GLOBALIZATION (cont.)
Financial
globalization
Concerned with the emergence of worldwide financial

markets and better access to external financing for
corporate, national, and subnational borrowers
Financial globalization can be seen through an increase

in investment activities, particularly in the investment
portfolio
Globalization
of markets
Refers to the merging of national markets into one huge

global marketplace
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Ch. 1: 23

GLOBALIZATION (cont.)
The expansion of markets has also resulted in

changes in the cultures of many countries, with the
result that material culture all over the world is
beginning to look similar
Globalization
of production
Refers to the sourcing of goods and services from

locations around the world to take advantage of
national differences in the cost and quality of factors
of production
The idea is to compete more effectively by offering a

product with good quality and low cost
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Ch. 1: 24
1.7.1 Globalization of Markets

Refers
to the integration of local markets into a

large global market
Conducting
transaction cross border is much

easier as trade barriers between countries have
been removed
Consumer
tastes and preferences are becoming

overwhelmingly global due to these effects of
globalization
This creates global markets for standardized

consumer products
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Ch. 1: 25
1.7.2 Globalization of Production

Refers
to the sourcing of goods and services from

all over the world where the production costs are
lower with similar quality of production
The
purpose of global production is to compete

more effectively by offering a product with good
quality and lower cost
The
globalization of production services

increases the firms productivity and profits by
providing cost effective assistance at a
convenient location
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Ch. 1: 26
1.8 DRIVERS OF INTERNATIONAL

BUSINESS
Drivers of international business can be classified

into three broad categories:
Economic drivers
Include factors that are related to the market, cost,
resources, and competition
Political drivers
Include factors like governmental and legal drivers
Technological drivers
Include innovations such as microprocessor
development, the revolution of global communications
by developments in satellite, optical fibre, and wireless
technologies, and now the Internet and the WWW
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Ch. 1: 27
1.8.1 Economic Drivers
Include factors that are related to the market, cost,

resources, and competition
These drivers are primarily uncontrollable by businesses
worldwide
The costs of operating in some developing countries are
much lower than in a developed country, thus making it
very lucrative for firms to operate in developing countries
Availability and abundance of resources in other
countries is also another factor that has driven MNCs and
TNCs to globalize their production through outsourcing
and foreign direct investment, where they set up their
own firms abroad
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Ch. 1: 28
1.8.2 Political Drivers

Includes
drivers
factors like governmental and legal
The
role played by the government, particularly in

creating economic or regional integration and
providing incentives for foreign direct investment,
has driven industrial and financial globalization to
grow exponentially
The
falling of barriers to international trade

enables firms to view the world as their market.
The lowering of barriers to trade and investments
also allows firms to base production at the
optimal location for each activity
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Ch. 1: 29
1.8.2 Political Drivers (cont.)

The
lowering of trade barriers has facilitated the

globalization of production
Evidence
also suggests that foreign direct

investment is playing an increasing role in the
global economy
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Ch. 1: 30
1.8.3 Technological Drivers

Technological
Advances in communications, information processing,

and transportation technology, including the Internet and
the World Wide Web (WWW)
Rapid
changes
growth of the Internet
Facilitates the global sharing of information and

resources, provides an efficient channel for advertising,
marketing, and the direct distribution of certain goods
and information services
Transportation
technology
Development of commercial aircraft has shortened the

travelling time
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Ch. 1: 31
1.8.3 Technological Drivers (cont.)

Global
firms heavily rely on technological

innovations to enhance their capabilities
Technology is a major driver of industrial and

financial globalization
Rapid
growth of ICT
Manufacturing technologies have made production

process more efficient thus increasing profits,
lowering costs and improve learning effects
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Ch. 1: 32
1.9 RISKS IN INTERNATIONAL

BUSINESS
Firms
will generally encounter four types of risks

when they operate in foreign countries:
Cross-cultural risks
Country risks
Currency risks
Commercial risks
The
firms must manage these risks to avoid

financial losses or product failures
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Ch. 1: 33
1.9.1 Cross-cultural Risk

Refers
to a situation or event where

misinterpretation arises as a consequence from
differences in human values
Represented
through differences in language,

lifestyles, mindsets, customs, and religion
Such
challenges hinder effective communication

and cause misunderstandings
Miscommunication
due to cultural differences

gives rise to inappropriate business strategies
and ineffective relations with customers
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Ch. 1: 34
1.9.2 Country Risk

Also
known as political risk
Refers
to potentially adverse effects on company

operations and profitability caused by
developments in the political, legal, and economic
environment in a foreign country
Includes
The possibility of interference by the host country

government in a firms business activities
Laws and regulations that potentially hinder company

operations and performance
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Ch. 1: 35
1.9.2 Country Risk (cont.)

Critical legal dimensions include property rights,
intellectual property protection, product liability, and
taxation policies
Harmful economic conditions, often due to high

inflation, financial crisis, and recession
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Ch. 1: 36
1.9.3 Currency Risk

Also known as financial risk
Refers to the risk of adverse fluctuations in
exchange rates
Arises because international transactions are often
conducted in more than one national currency
When currencies fluctuate extensively, the value of
the firms assets, earnings, and operating income
can be reduced, resulting in a dramatic increase in
the cost of importing components if the value of the
currency in which the imports are denominated
rises sharply
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Ch. 1: 37
1.9.3 Currency Risk (cont.)
Inflation and other harmful economic conditions

experienced in one country may have
immediate consequences for exchange rates
due to the growing interconnectedness of
national economies
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1.9.4 Commercial Risk

Refers
to a firms potential loss or failure from

inefficient management or weak business
strategies, approaches, or practices
Managers
may make bad choices in such areas

as the selection of business partners, timing of
market entry, pricing, creation of product features,
and promotional themes
While
such failures also exist in domestic

business, the consequences are often more
costly when committed abroad
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1.10 CHALLENGES IN
INTERNATIONAL BUSINESS
Three
main challenges that international firms

may encounter:
Physical
Social
Competitive
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Ch. 1: 40
1.10.1 Physical Challenges
Geography plays a vital role for international firms

particularly those involved in natural resources such as
oil, timber, gold, iron, tin, and gas
Physical landscape also sometimes can be challenging

as they can affect firms business operations and may
increase the operating costs
These geographical conditions also may influence the

firms decision in setting up their foreign operations
Countries that are regularly hit by natural disasters such

as floods, heavy snow, and hurricanes are considered
risky investments for international firms and might be
avoided as foreign locations
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Ch. 1: 41
1.10.2 Social Challenges

Social
challenges include culture, legal,

nationalization, and different political systems
Three
key social issues are politics, law, and

economics
Politics
actually shapes worldwide business

activities, because political leaders have the
final say on how international businesses
should operate
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Ch. 1: 42
1.10.3 Competitive Challenges

In
the international business environment,

competitive factors are very important for firms
to secure their customers and compete with
their rivals before penetrating overseas markets
Competitive
challenges may vary for different
industries
Competitive
challenges include firm strategy,

price, cost-effectiveness, firm size, market size
and competitors
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Ch. 1: 43

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International Business

Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved

All Rights Reserved

To explain the meaning and concept of

To distinguish links between international

To discuss globalization and its effect on

To argue the impacts of globalization and its

All Rights Reserved

International business activities encompass things

Involves transactions across international borders,

business is conducted not only by

All Rights Reserved

1.1 INTRODUCTION (cont.)

The movement towards a borderless world and the

The wave of globalization has forced firms from all over

The surge of globalization covers almost all human

The phenomenon of globalization has brought changes

All Rights Reserved

1.2 PARTICIPANTS AND GROWTH OF

participants can be classified into two major

Large firms with substantial resources that are

All Rights Reserved

1.2 PARTICIPANTS AND GROWTH OF

Definition varies from one country to another

In the United States, SMEs are companies that

In Malaysia, SMEs are those with 200 or fewer

The globalization of markets and advances in

In Italy, South Korea, Taiwan, and China, SMEs

All Rights Reserved

1.2 PARTICIPANTS AND GROWTH OF

trends indicate that firms from developing

1.3 BACKGROUND OF GLOBALIZATION

can be traced back through the

process has accelerated in the past 50 years

the 17th century, the establishment of the

was also achieved by the British

All Rights Reserved

1.3 BACKGROUND OF GLOBALIZATION

peak growth of business and international

the Second World War, globalization was

All Rights Reserved

1.4 IMPACTS OF GLOBALIZATION

Globalization has greatly impacted the whole world

The greatest beneficiaries of globalization are

Globalization expands the range of choice,

It delivers an immediate gain to workers by raising

All Rights Reserved

1.4 IMPACTS OF GLOBALIZATION

By facilitating the spread of modern medicine. This

Benefits to Developing and Less Developed

Access to larger markets

All Rights Reserved

1.4 IMPACTS OF GLOBALIZATION

Access to better technology

All Rights Reserved

1.4 IMPACTS OF GLOBALIZATION

Improved economic policies

Improve the function of the government

All Rights Reserved

1.5 MODERN GLOBALIZATION

Describes social, technological, cultural, and political

The International Monetary Fund (IMF) defines globalization

Globalization is a process of economic integration of the