Section One

The Nature of International Business

by Ball, McCulloch, Frantz,

Geringer, and Minor
 1
This chapter covers:
•Internationalization of
markets
•Various names given to
firms in multiple countries

The Rapid Change of •Effect of the internet on

international business

International Business •Drivers leading firms to

globalization of product
•Differences between
domestic and international
businesses
•Three environments of
international business

International Business
by Ball, McCulloch, Frantz,
Geringer, and Minor
McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter Objectives
 Appreciate the dramatic internationalization of markets.
 Understand the various names given to firms that have
substantial operations in more than one country.
 Appreciate the profound effect of the Internet on many
international business firms.
 Understand the five kinds of drivers that are leading
international firms to the globalization of their operations.
 Comprehend why international business differs from
domestic business.
 Describe the three environments--domestic, foreign, and
international--in which an international company operates

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 International Business Experience
 Seventy-nine percent of CEOs believe all business
majors should have an introductory international
business course
 Seventy percent will consider expertise in foreign
language and international exposure in hiring
decisions
 The majority of CEOs consider courses related to
international business relevant to their company
 Managers wanting to advance will need to have
foreign experience
1-3
 International Business Terminology
 The United Nations
 uses transnational instead of multinational to
describe a firm doing business in more than one
country.
 Business people
 define a transnational as a company formed by a
merger of two firms of approximately the same size
that are from two different countries
 Unilever (Dutch-English)
 Dunlop-Pirelli (English-Italian)

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 Definitions
 International Business
 is a business whose activities are carried out across
national borders.
 includes international trade and foreign
manufacturing
 also includes a growing service industry in areas such
as
 transportation, tourism, advertising, construction,
retailing, wholesaling, and mass communication.

1-5
 Definitions
 Foreign Business
 domestic operations within a foreign country
 A Multidomestic Company
 has multicountry affiliates, each of which formulates
its own business strategy based on perceived market
differences.
 A Global Company
 attempts to standardize and integrate operations
worldwide in all functional areas.
 International Company
 describes both global and multidomestic companies
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Global Company- By Whose Definition?
 Have a worldwide presence in its market
 Allen-Edmonds produces all shoes in Port Washington,
Wisconsin – ships to over 33 nations
 Standardize operations worldwide in one or more functional
areas
 P&G has operations in more than 70 countries and sells
essentially the same products in over 140 countries
 Integrate operations worldwide
 Multicultural multinationals respond to local markets,
produce products worldwide, exploit knowledge and
technology on a global basis
1-7
History of International Business
 Phoenician and Greek merchants sent abroad before
time of Christ
 1600’s British East India Company established
branches in Asia
 1700’s American colonial traders begin operations
 FDI prior to Civil War by Colt Fire Arms and Ford
 1800’s Singer Sewing Machine first foreign
production
 1914 at least 37 American companies producing
overseas
1-8
 Globalization
 Economic Globalization
 is the international integration of goods, technology,
labor, and capital.
 refers to the implementation of global strategies
which link and coordinate a firm’s international
activities on a worldwide basis.
 definition continues to broaden to include
 political, social, environmental, historical, geographical,
and cultural implications

1-9
 Globalization Forces
 There are five major kinds
of drivers that are leading
international firms to the
globalization of their
operations.
 Political
 Technological
 Market
 Cost
 Competitive

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 Globalization Forces
 Political

 There is a trend toward the unification and

socialization of the global community.

 Preferential trading agreements

 NAFTA
 European Union

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 Globalization Forces
 Technological
 Advancements in computers and communication
technology are permitting an increased flow of ideas
and information across borders.
 The Internet and network computing enables small
companies to compete globally.
 Business to business commerce is experiencing
significant savings by using the Internet for business
exchanges.
 Web is used to find suppliers
 Web is used to process purchase orders

1-12
 Globalization Forces
 Market
 As companies globalize,
they also become global
customers.
 Companies follow
customers abroad
 Saturation of the home
market
 Customer tastes and
lifestyles are
converging

1-13
 Globalization Forces
 Cost
 Economies of scale to reduce unit cost are always a
management goal.
 Globalizing product lines can reduce development,
production, and inventory costs can help achieve
economies of scale.
 Companies can also locate production in countries where
production costs are lower.

1-14
 Globalization Forces
 Competitive

 Competition continues to increase in intensity.

 Newly industrialized and developing countries

 Companies are defending their home markets from

competitors by entering the competitors’ home markets
to distract them.

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 Explosive Growth
 Foreign Direct Investment
 One commonly used measure of growth
 Refers to direct investment into equipment,
structures, and organizations in a foreign
country sufficient to obtain management
control
 World stock of FDI rose from $519 billion in 1980 to
$6.6 trillion in 2001.

1-16
 Explosive Growth
 Exporting
 Refers to the transportation of any domestic
good or service to a destination outside the
home country or region
 The level of world merchandise exports more
than tripled from 1980 to 2002.
 The level of service exports worldwide more
than quadrupled in the same period.

1-17
 Number of International Companies

 In 2002, the United Nations estimated there were

over 63,800 companies with a total of over 866,000
foreign affiliates accounting for two-thirds of world
trade.

 Foreign affiliates’ sales were $17.7 trillion in 2002.

 Growth due in part to liberalization of government

policies toward foreign investment
1-18
 2002 Top International Firms
 Ranking Nation or Firm  Total Sales for 2002 ($billion)
1. United States $10,207.0
2. Japan 4,323.9
3. Germany 1,876.3
4. United Kingdom 1,510.8
5. France 1,362.1
6. China 1,234.2
7. Italy 1,100.7
8. Canada 702.0
9. Mexico 597.0
10. Spain 296.5
1-19
 The Globalization Debate
 Supporting  Globalization Concerns
 Free trade advances  produces uneven results
economic development across nations and people
 Increases gap between
 Reduces poverty,
rich and poor
improves education,
health and life
 has negative effects on
expectancy labor and labor standards
 Jobs migrate to
 Expanded trade creates
developing nations
more and better jobs  contributes to decline in
 Must manage the costs environment and health
and transition of workers conditions
1-20
 Forces in the Environment
 Environment
 The sum of all forces
surrounding and
influencing the life and
development of the firm.
 Forces can be classified as
 External forces

 Management can
exert influence but
cannot control
 Internal forces
 Management must
administer and adapt
1-21
 External Environmental Forces
 Competitive  Legal
 Kind, number, location  Laws governing business
 Distributive  Physical
 For goods and services  Topography, climate
 Economic  Political
 GNP, labor cost  Form of government
 Socioeconomic  Sociocultural
 Characteristics of  Attitudes, beliefs
population  Labor
 Financial  Skills, attitudes
 Interest rates, inflation,  Technological
taxes  Equipment, skills
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 Internal Environmental Forces
 Factors of production
 Capital, raw material,
and people
 Activities of the
organization
 Personnel, finance,
production, and
marketing

1-23
 Domestic Environment

 Composed of all the uncontrollable forces

originating in the home country that surrounds and
influences the life and development of the firm
 Managers most familiar
 May affect foreign operations

1-24
 Foreign Environment

 Operates differently than the domestic environment

for the following reasons
 Different force values
 Changes difficult to assess
 Particularly political and legal forces
 Forces interrelated

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 International Environment
 The International Environment is
 the interaction between the domestic environmental
forces and the foreign environmental forces.
 the interaction between the foreign environmental
forces of two countries when an affiliate in one
country does business with customers in another.
 Decision making is more complex

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 International Business Model
Figure 1.2 here
 International business
transactions take place across
national borders and may
involve three environments.
 Domestic
 Foreign
 International

1-27
 United States Commercial Service
 The U.S. Commercial Service offers four ways to
grow your international sales:
 world-class market research

 trade events that promote your product or service to

qualified buyers
 introductions to qualified buyers and distributors

 counseling through every step of the export process

[Link]/comm_svc/
 The Language of Trade (Examples)
 AD VALOREM EQUIVALENT  AGREEMENT ON RULES OF
— The duty collected under a ORIGIN — A WTO agreement
specific tariff or a compound addressing the rules that
tariff expressed as a percentage determine the country of origin
of the value of the imported of an imported product. Rules
item. Since a specific tariff is of origin play an important role
calculated on the basis of units in international trade due to the
(of volume or weight), rather fact that the application of
than value, and since prices can duties and other restrictions on
change over time, the ad entry often depends on the
valorem equivalent could differ deemed source of the imports.
when calculated for different The agreement provides for
time periods. harmonization in the practices
of WTO members in
determining the country of
[Link]/products/p
origin of products.
ubs
 Top Five Global Companies*
 Europe  Asia
 BP  Toyota Motor
 Royal Dutch/Shell  Nippon Telegraph
Group and Telephone
 Daimler Chrysler  Hitachi
 Total  Honda Motor
 Allianz  Sony

*According to Fortune 500

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