Anda di halaman 1dari 41

DPP 2013

Introduction to International
Business
UNIT 1
OVERVIEW OF INTERNATIONAL
BUSINESS
LEARNING OUTCOMES
At the end of this lesson, students should be able to:
1. 1 Explain international business
define international business and domestic business
differentiate among international business and domestic
business
describe the reasons firms involved in international
business
DEFINITION OF
INTERNATIONAL BUSINESS &
DOMESTIC BUSINESS
International Business:
The exchange of goods and services for money which takes place
among countries internationally (with several countries
in the world) . It includes any type of business activity that crosses
national borders.

Domestic Business:
The exchange of goods and services for money which takes place
within the geographical boundaries of the country
is called domestic business
INTERNATIONAL BUSINESS
International Business is one whose manufacturing and trade occur
beyond the borders of the home country. It involves two or more
countries.
The company conducting international business is known as a
multinational or transnational company.
The company enjoys a large customer base from different countries
and does not have to depend on a single country for resources.
The company has to face many barriers to entry in the international
market such as tariffs and quota, political, socio cultural, economic
and other factors that affect the international business.
DOMESTIC BUSINESS
Domestic Business involves business transactions that occurs
within the geographical limits of the country.
Its commercial activities are performed within a nation/ country.
Also known as internal business or home trade.
Both the producer and customers of the firm reside in the same
country.
It enjoys privileges such as low transaction cost, less period
between production and sale of goods, low transportation cost
and encourages small-scale enterprises.
DIFFERENCES BETWEEN
INTERNATIONAL BUSINESS
AND DOMESTIC BUSINESS
COMPARISON INTERNATIONAL BUSINESS DOMESTIC BUSINESS
Meaning Engaged in economic Economic transactions are
transactions with several conducted within the geographical
countries in the world boundaries of the country
Area of Operation Whole world Within the country
Quality Standards Very high Quite low
Currencies Deals in multiple currencies Deals in single currency
Capital investment Huge Less
Restrictions Many Few
Nature of Customers Heterogeneous Homogeneous
Business Research Difficult to conduct research Easy to conduct research
Mobility of factors of Restricted Free
production
REASONS FIRMS INVOLVED
IN INTERNATIONAL
BUSINESS
International marketplace offers opportunities for all types of
companies (large or SME Small and Medium Enterprises).
Management needs to have desire and commitment to develop
and build business in international markets as a guarantee of
company survival.
Companies that do international business grow faster, fail less
and become more competitive that companies that dont.
REASONS FIRMS INVOLVED
IN INTERNATIONAL
BUSINESS
Conducting activities of international business and its
management is far more difficult than conducting a domestic
business.
However, firms may want to involve in international business
because of the following reasons:
to expand sales
to acquire resources
minimize competitive risks
other related reasons
REASONS FIRMS INVOLVED
IN INTERNATIONAL
BUSINESS
TO EXPAND SALES
Expanding globally will likely improve overall revenue because of the larger
potential customers . Domestic markets are small and entering new market will
expand the customers base.
Especially for companies that have unique product or technological advantage
not available to international competitors may result in business success
abroad (may expand sales to other countries).
Domestic market may become saturated and firms go global to achieve their
ambitious sales and profit targets.
Domestic markets are growing slowly firms go global to achieve high growth
rates by expanding sales from international markets.
The tendency of higher price for imported products (sold as a premium products
or brands) more sales brings more profits.
REASONS FIRMS INVOLVED
IN INTERNATIONAL
BUSINESS
TO ACQUIRE RESOURCES
Resources such as materials, labor, technology may be abundant in some
countries.
Some countries may have the resources such as deposits of minerals, metals,
and land for agricultural production. So firms enter international business to
get access to these resources.
It is often cheaper to employ a workforce in countries where the cost of living
is lower. Firms may enter into the countries to produce their products at lower
costs.
Some companies have outstanding technology advantages through which
they enjoy core competency. This technology helps the company in capturing
other markets.
REASONS FIRMS INVOLVED
IN INTERNATIONAL
BUSINESS
MINIMIZE COMPETITIVE RISKS
firms may expand internationally to offset the risk of stagnating growth in
their home country as well as in other countries where they are
operating.
It is normal for firms to expand internationally into countries that have
better growth rates than their home country.
Firms may spread the risk across countries by going global and diversify
their businesses to reduce the risks.
By going global, firms reduce their reliance on local and national markets.
The downturns in consumer demand at home country can be offset by
upturns in consumer demand in international markets.
REASONS FIRMS INVOLVED
IN INTERNATIONAL
BUSINESS
ECONOMIES OF SCALE
Firm may enter into international business to expand their
size. Large firms are more efficient than small ones because
they can gain from greater scale of economy.
Firms can achieve economies of scale by producing increased
output which leads to lower average costs.
REASONS FIRMS INVOLVED
IN INTERNATIONAL
BUSINESS
OTHER RELATED REASONS
Increased innovation - expanding internationally may help finance
research and innovation new product development.
Government incentives government may give incentives to firms to
export. form of loans, export expertise, negotiation by countrys leaders
To replicate business for a different locale and culture with a different
market, demands, needs and expectations.
Helps in managing product life cycle Every product has to pass through
different stages of product life cycle when the product reaches the last
stages of life cycle in present market, it may get greater response at
other markets.
LEARNING OUTCOMES
At the end of this lesson, students should be able to:
1.2. Explain the different types of risks in international business
Discuss the international environment in international business
Economic environment
Political environment
Cultural environment
Competition environment
1.2 TYPES OF RISKS
INTERNATIONAL ENVIRONMENT IN
INTERNATIONAL BUSINESS
Economic environment
Political environment
Cultural environment
Competition environment
1.2 TYPES OF RISKS
ECONOMIC ENVIRONMENT
Economic conditions, economic policies and economic system
- important external factors that constitute the economic
environment of a business.
Economic conditions such as the nature of the economy,
the stage of development of the economy, economic
resources, the level of income, the distribution of income
important determinants of business strategies
For example, companies in developing countries may
have to reduce the price of their goods because of the
1.2 TYPES OF RISKS
ECONOMIC ENVIRONMENT
Economic policies of the government has a very great impact on
business. For example:
Restrictive import policy or policy of protecting the home
industries
Government policies of giving incentives and positive support
may affect companies involve in international business.
Economic system
Free market economies (capitalist economies) or
Centrally planned economies (communist countries)
Mixed economic system
1.2 TYPES OF RISKS
POLITICAL ENVIRONMENT
Political environment has close relationship with
economic system and economic policy.
Government may impose laws that regulate the
conduct of business such as standards of products,
packaging, promotions (Some European countries
restrain use of children in advertising) etc. American
government asks for fuller disclosure of the relevant
facts about products.
Government may also impose regulations to protect
1.2 TYPES OF RISKS
CULTURAL ENVIRONMENT
Should be taken into consideration when formulating
business strategies.
Include customs, language, beliefs and values,
traditions, taboos, tastes and preferences aspects.
For example, even though they use the same basic
products,
the buying or consumption habits of the people
Conditions of use
Purpose of use
Perceptions of the products attributes may differ
1.2 TYPES OF RISKS
COMPETITION ENVIRONMENT
Technology has formed a basis for competition,
superior technology has resulted in improved quality
of producing goods, improved efficiency by
automation and mechanization.
Protectionism policy (economic trade policies)
protect domestic business from competition or
foreign take-over by restricting or regulating trade
between foreign nations, for example: subsidies (to
protect existing business), tariffs (increase the price
of foreign competitors goods), quotas (prevent
1.2 TYPES OF RISKS
INTERNATIONAL BUSINESS RISKS
Business risk implies the possibilities of some
unfavourable happening such as loss due to some
uncertain future occurrence.
International business risk may be defined as the
possibility of loss caused by some unfavourable or
undesirable event in international business
operations.
The degree of risk differs from one company to
another and from one country to another.
1.2 TYPES OF RISKS
INTERNATIONAL BUSINESS RISKS
Political risk
Exchange risk
Credit risk
Transport risk
Market risk
Cultural risk
1.2 TYPES OF RISKS
POLITICAL RISKS
Political risk arises due to uncertain political activities
and events.
Political actions and instability may make it difficult for
companies to operate efficiently in these countries -
may not be able to effectively operate to its full capacity
to maximise profit in an unstable country, such as
government intervention, protectionism (national
economic policies to restrict free trade) and barriers to
trade and investment.
1.2 TYPES OF RISKS
EXCHANGE RISKS
Currency of one country is not in circulation in the
other country, therefore one currency is exchanged
with another currency at some rate of exchange. This
exchange rate keeps on fluctuating and may cause
risk of loss to companies involved in international
business value of firms assets, liabilities and
income may be substantially reduced.
Other aspects of currency risk involved are foreign
taxation and inflation.
1.2 TYPES OF RISKS
CREDIT RISKS
Credit risk refers to the risk of loss to a debtors non-
payment of a loan or other line of credit (either the
principal or interest or both).
It is difficult to ascertain the credit-worthiness of a
foreign buyer. When a foreign buyer goes bankrupt,
the company faces great loss.
1.2 TYPES OF RISKS
TRANSPORT RISKS
Transport risk are faced due to the long distance
between countries.
Goods that are despatched by shipping or airways
may be exposed to many types of risk.
1.2 TYPES OF RISKS
MARKET RISKS
Competition in international business is severe and
market conditions may change frequently.
Firms may not be able to compete in international
markets.
Timing of entry
Competitive intensity
Operational problems
Poor execution of strategy
1.2 TYPES OF RISKS
CULTURAL RISKS
Culture of a country is different from another country.
Aspects such as language, value of time, customs
and lifestyles may differs and may result in firms
facing additional risks. For example, language
differences may impede effective communication.
Negotiation patterns may differ.
Decision-making styles and ethical practices may
differ.
1.2 TYPES OF RISKS
POLITICAL RISKS
Political risk arises due to uncertain political activities
and events.
Political actions and instability may make it difficult
for companies to operate efficiently in these
countries , company may not be able to effectively
operate to its full capacity to maximise profit in an
unstable country.
LEARNING OUTCOMES
At the end of this lesson, students should be able to:
1.3. Indicate the impact of globalization in international business
Describe the significance of globalization
Define globalization
Describe the impact of globalization towards international
business
1.3 IMPACT OF
GLOBALISATION
DEFINITION OF GLOBALISATION
The process of interaction and integration among the people,
companies and governments of different nations, a process driven by
international trade and investment and aided by information
technology.
Globalisation is the closer integration of countries and peoples of the
world which has been brought about by the enormous reductions of
costs of transport and communications and the breaking down of
artificial barriers to the flow of goods, services, capital, knowledge
and to a lesser extent, people across borders.
Globalisation is an umbrella term for a complex series of economic,
social, technological, cultural and political changes seen as increasing
1.3 IMPACT OF
GLOBALISATION
DEFINITION OF GLOBALISATION
The opening of local and nationalistic perspectives to a broader
outlook of an interconnected and interdependent world with free
transfer of capital, goods and services across national frontiers.
All those processes by which people of the world are incorporated
into a single world society (global society).
A process of global economic, political and cultural integration that
has made the world become a small village, the borders have been
broken down between countries.
1.3 IMPACT OF
GLOBALISATION
IMPACT OF GLOBALISATION ON INTERNATIONAL
BUSINESS
Globalisation links countries closer than ever before
and reinforce economic development.
Globalisation has certain advantages such as
economic processes, technological developments,
political influences, health systems, social and
natural environment factors.
New challenges brought by globalization
environmental deterioration, instability in commercial
1.3 IMPACT OF
GLOBALISATION
IMPACT OF GLOBALISATION ON INTERNATIONAL
BUSINESS
Economic and Trade Processes Field
Education and Health systems
Culture effects
1.3 IMPACT OF
GLOBALISATION
IMPACT OF GLOBALISATION ON INTERNATIONAL
BUSINESS
Globalisation of the world economy and the differences
between countries present both opportunities and
challenges to international businesses.
Business managers need to take account of the
globalised business environment when making
international strategic decisions and in managing
ongoing international operations.
1.3 IMPACT OF
GLOBALISATION
IMPACT OF GLOBALISATION ON INTERNATIONAL
BUSINESS
Economic and Trade Processes Field
Globalisation helps developing countries to increase their
economic growth (enter into more and larger markets around
the world), solve poverty problems (decrease poverty).
International business create job opportunities for the poor
people.
Globalisation lead to more access to capital flow, technology,
human capital, imports and larger export markets.
Goods and people are transported easier and faster and
decrease possibility of war between countries.
Globalisation help raise free trade between the countries and
1.3 IMPACT OF
GLOBALISATION
IMPACT OF GLOBALISATION ON INTERNATIONAL
BUSINESS
Economic and Trade Processes Field
Globalisation leads to increased competition company that
produces with less cost and sells cheaper is able to increase its
market share.
Rapid changes of technology to exploit new business
opportunities may increase sales and product quality.
Companies need to adapt quickly to accommodate customer/
market expectations (need to have efficient technology
management and efficient R&D management).
Increase the speed of and information transfer easily
transferred and exchanged from one country to another enable
1.3 IMPACT OF
GLOBALISATION
IMPACT OF GLOBALISATION ON INTERNATIONAL
BUSINESS
Education and Health systems
Globalisation has created jobs that require higher skills set
people gain higher education to satisfy the new needs of
employers.
Globalisation has enable the government to provide more money
for health and education to the poor (decrease the rate of
illiteracy).
Globalisation facilitates the spread of new diseases by travelers
between countries may affect the living standards and life
expectancy of these countries.
Globalisation create competition whereby highly educated and
1.3 IMPACT OF
GLOBALISATION
IMPACT OF GLOBALISATION ON INTERNATIONAL
BUSINESS
Culture effects
Developing countries may imitate other culture of developed
countries such as America or European countries.
Globalisation may destroy own culture, traditional, identity,
customs and language.