MODULE 1.

INTERNATIONAL BUSINESS AND TRADE

SESSION TOPIC 1:  Overview of International Business

LEARNING OUTCOMES:
The following specific learning objectives are expected to be realized at the end of the session: 
1. Know the definition of international business
2. Discuss the distinctions between domestic and international business
3. Enumerate the theories if international trade and investment
4. Discuss the international business environment

KET POINTS:

International Business Political Environment Competitive Environment

Economic Environment Cultural Environment International Trade and Investment

CORE CONTENT:
Introduction 
International business is defined as business transactions that take place across national
borders. This broad definition includes the very small firm that exports a small quantity to only one
country, as well as the very large global firm with integrated operations and strategic alliances around the
world.

IN-TEXT ACTIVITIES:

International Business

It is defined as business transactions that take place across national borders. This broad
definition includes the very small firm that exports a small quantity to only one country, as well as the very
large global firm with integrated operations and strategic alliances around the world. Within this broad
array, distinctions are often made among different types of international firms, and these distinctions are
helpful in understanding a firm's strategy, organization, and functional decisions. One distinction that can
be helpful is the distinction between multidomestic operations, with independent subsidiaries that act
essentially as domestic firms, and global operations, with integrated subsidiaries that are closely related
and interconnected. These may be thought of as the two ends of a continuum, with many possibilities in
between. Firms are unlikely to be at one end of the continuum, though, as they often combine aspects of
multidomestic operations with aspects of global operations.

International business grew over the last half of the twentieth century and the first decades of the
twenty-first century, partly because of liberalization of both trade and investment, and partly because
doing business internationally had become easier. In terms of liberalization, the General Agreement on
Tariffs and Trade (GATT) negotiation rounds resulted in trade liberalization, and this was continued in
1995 with the formation of the World Trade Organization (WTO), which is responsible for the regulation of
trade on the global level. Other regional trade agreements include the North American Free Trade
Agreement (NAFTA) between the United States, Canada, and Mexico, and the MERCOSUR between
South American countries. At the same time, most governments liberalized worldwide capital movements,
particularly with the advent of electronic funds transfers.

Another proposed trade accord, the Trans-Pacific Partnership (TPP), was put together largely
during the presidency of Barack Obama (b. 1961) and would have included enough member nations to
account for roughly one-third of all world trade. During the presidential election of 2016, however, the TPP
became a political hot-button issue, with both major candidates disavowing it, effectively scuttling the
accord, at least for the time being.

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 With the election of U.S. President Donald Trump (b. 1946) in 2016, international business as a
whole entered an uncertain period, as Trump brought a new protectionist philosophy to the country's
international trade policy, implementing new tariffs on trade with China that threatened to ignite a full trade
war with the Asian economic superpower. At the same time, Trump was working to renegotiate, or
eliminate, NAFTA, along with numerous other trade agreements.

Domestic versus International Business

Domestic and international enterprises, in both the public and private sectors, share the business
objectives of functioning successfully to continue operations. Private enterprises seek to function
profitably as well. Why, then, is international business different from domestic? The answer lies in the
differences across borders. Nation states generally have unique government systems, laws and
regulations, currencies, taxes and duties, and so on, as well as different cultures and practices. An
individual traveling from his or her home country to a foreign country needs to have the proper
documents, to carry foreign currency, to be able to communicate in the foreign country, to be dressed
appropriately, and so on. Doing business in a foreign country involves similar issues and is thus more
complex than doing business at home. The following sections will explore some of these issues.
Specifically, comparative advantage is introduced, the international business environment is explored,
and forms of international entry are outlined.

Theories of International Trade and Investment

In order to understand international business, it is necessary to have a broad conceptual

understanding of why trade and investment across national borders take place. Trade and investment can
be examined in terms of the comparative advantage of nations.

Comparative advantage suggests that each nation is relatively good at producing certain products
or services. This comparative advantage is based on the nation's abundant factors of production—land,
labor, and capital—and a country will export those products/services that use its abundant factors of
production intensively. Simply, consider only two factors of production, labor and capital, and two
countries, X and Y. If country X has a relative abundance of labor and country Y a relative abundance of
capital, country X should export products/services that use labor intensively, and country Y should export
products/services that use capital intensively.

This is a very simplistic explanation, of course. There are many more factors of production, of
varying qualities, and there are many additional influences on trade such as government regulations. The
term “comparative advantage” can also be applied in slightly different references. For example, during
2008 and 2009, when the United States as well as much of the Western world was experiencing shaky
economic conditions, the banks and economy of Canada remained relatively stable. Thus, Canada's
banking system could be said to have a comparative advantage over others. Should a situation arise in
which a multinational company was trying to decide where to house its financial sector, it may very well
use this information to place it within Canada.

In another example, by the early twenty-first century it had become quite common for U.S. firms
to move their manufacturing operations to Mexico, which had a distinct comparative advantage when it
came to labor costs. Reports note that, as of 2018, starting pay for Mexican assembly-line workers was
then around $2.50 an hour, compared with more than $9.00 per hour for their U.S. counterparts. Analysts
estimated that companies could save as much as $20,000 per worker per year by making the move.
Mexico had a distinct comparative advantage when it came to labor costs, and companies that exploited
this advantage by relocating to the country helped change the face of U.S. manufacturing.

The idea of comparative advantage is a starting point for understanding what nations are likely to
export or import. The concept of comparative advantage can also help explain investment flows.
Generally, capital is the most mobile of the factors of production and can move relatively easily from one
country to another. Other factors of production, such as land and labor, either do not move or are less
mobile. The result is that, where capital is available in one country, it may be used to invest in other
countries to take advantage of their abundant land or labor. Firms may initially develop expertise and
specific advantages based on abundant resources at home, but as resource needs change, the stage of

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the product life cycle matures, and home markets become saturated, these firms find it advantageous to
invest internationally.

It is also important to remember that how a business divides itself and its responsibilities, so to
speak, between domestic and international, will vary based on circumstances. There are typically two
ways in which a business can handle the idea of breaking down core missions amongst various locations,
and these are the global and the multidomestic strategies.

A global strategy involves a high degree of concentration of resources and capabilities in the
central office and centralization of authority in order to exploit potential scale and learning economies.
Customization at the local level is thus necessarily low. The multidomestic strategy represents the
opposite view of international strategy. Resources are dispersed throughout the various countries where
the firm does business, decision-making authority is pushed down to the local level, and each business
unit is allowed to customize products and market offerings to specific needs. The corporation as a whole
foregoes the benefits that could be derived from centralization and coordination of diverse activities.

The International Business Environment

International business is different from domestic business because the environment changes
when a firm crosses international borders. Typically, a firm understands its domestic environment quite
well but is less familiar with the environment in other countries and must invest more time and resources
into understanding the new environment. The following considers how the economic, political, cultural,
and competitive environment can vary from nation to nation.

The Economic Environment

The economic environment can be very different from one nation to another. Countries are often
divided into three main categories: the developed countries, the least developed countries, and
developing or emerging economies. Within each category there are major variations, but overall the more
developed countries are the rich countries, the less developed the poor ones, and the newly
industrializing those moving from poorer to richer. These distinctions are usually made on the basis of
gross domestic product per capita (GDP/capita). Better education, infrastructure, technology, health care,
and so on are also often associated with higher levels of economic development.

When discussing emerging economies, the “BRIC” nations hold a prominent place. The BRIC
countries refer to the emerging economies in Brazil, Russia, India, and China. The term was used first by
the Goldman Sachs investment bank in 2003 in a paper that argues that these rapidly developing nations
would surpass the richest countries in the world by 2050. In the second decade of the twenty-first century,
economic growth in the BRIC countries began to fluctuate as a drop in oil prices and a devaluation of the
Chinese yuan, and a Brazilian recession, among other factors, took their toll. By 2018 growth had
returned, and analysts expected continued economic expansion for the BRIC countries for several more
years.

In addition to level of economic development, countries can be classified as free-market, centrally

planned, or mixed. Free-market economies are those where government intervenes minimally in business
activities, and market forces of supply and demand are allowed to determine production and prices.
Centrally planned economies are those where the government determines production and prices based
on forecasts of demand and desired levels of supply. Mixed economies are those where some activities
are left to market forces and some, for national and individual welfare reasons, are government
controlled. In the late twentieth century and early twenty-first century there has been a substantial move
to free-market economies but most countries maintain some government control of business activities.
The People's Republic of China (PRC) has implemented market-based economic reforms since the death
of Chairman Mao in 1976, after which the Communist Party's control over citizens was diminished. In the
early twenty-first century the PRC has a mixed economy that incorporates many aspects of a free-market
environment while retaining government control over industries that are considered to be of vital strategic
importance to the state.

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 Clearly, the level of economic activity combined with education, infrastructure, and so on, as well
as the degree of government control of the economy, affect virtually all facets of doing business, and a
firm needs to understand this environment if it is to operate successfully internationally.

The Political Environment

The political environment refers to the type of government, the government relationship with
business, and the political risk in a country. Doing business internationally thus implies dealing with
different types of governments, relationships, and levels of risk.

There are many different types of political systems, such as multiparty democracies, one-party
states, constitutional monarchies, and dictatorships (military and non-military). Also, governments change
in different ways, for example, by regular elections, occasional elections, death, coups, war. Government-
business relationships also differ from country to country. Business may be viewed positively as the
engine of growth, it may be viewed negatively as the exploiter of the workers, or somewhere in between
as providing both benefits and drawbacks. Specific government-business relationships can also vary from
positive to negative depending on the type of business operations involved and the relationship between
the people of the host country and the people of the home country. To be effective in a foreign location an
international firm relies on the goodwill of the foreign government and needs to have a good
understanding of all of these aspects of the political environment.

A particular concern of international firms is the degree of political risk in a foreign location.
Political risk refers to the likelihood of government activity that has unwanted consequences for the firm.
These consequences can be dramatic as in forced divestment, where a government requires the firm to
give up its assets, or more moderate, as in unwelcome regulations or interference in operations. In any
case the risk occurs because of uncertainty about the likelihood of government activity occurring.
Generally, risk is associated with instability, and a country is thus seen as more risky if the government is
likely to change unexpectedly, if there is social unrest, if there are riots, revolutions, war, terrorism, and so
on.

Firms naturally prefer countries that are stable and that present little political risk, but the returns
need to be weighed against the risks, and firms often do business in countries where the risk is relatively
high. In these situations, firms seek to manage the perceived risk through insurance, ownership and
management choices, supply and market control, financing arrangements, and so on. In addition, the
degree of political risk is not solely a function of the country but also depends on the company and its
activities; a risky country for one company may be relatively safe for another. Furthermore, countries that
can be said to have little political risk may have a strict regulatory environment. In the United States
regulations make for a stable business environment, but the compliance burden—particularly since the
Sarbanes-Oxley Act was passed in 2002—can be so expensive as to deter foreign companies from doing
business in the United States.

The Cultural Environment

The cultural environment is one of the critical components of the international business
environment and one of the most difficult to understand. This is because the cultural environment is
essentially unseen. It can be described as a shared, commonly held body of general beliefs and values
that determine what is right for one group. National culture is described as the body of general beliefs and
values that are shared by a nation. Beliefs and values are generally seen as formed by factors such as
history, language, religion, geographic location, government, and education; thus, firms begin a cultural
analysis by seeking to understand these factors.

Firms want to understand what beliefs and values they may find in countries where they do
business. Scholars have proposed several models of cultural values. The best known is that developed
by the social psychologist Geert Hofstede (b. 1928) in 1980. This model proposes four dimensions of
cultural values: individualism, uncertainty avoidance, power distance, and masculinity. Individualism is the
degree to which a nation values and encourages individual action and decision making. Uncertainty
avoidance is the degree to which a nation is willing to accept and deal with uncertainty. Power distance is
the degree to which a nation accepts and sanctions differences in power. Masculinity is the degree to
which a nation accepts traditional male values or traditional female values. Hofstede's model of cultural
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values has been used extensively because it provides data for a wide array of countries. Many academics
and managers have found this model helpful in exploring management approaches that would be
appropriate in different cultures. For example, in a nation that is high on individualism one expects
individual goals, individual tasks, and individual reward systems to be effective, whereas the reverse
would be the case in a nation that is low on individualism. While this model is popular, there have been
many attempts to develop more complex and inclusive models of culture.

The Competitive Environment

The competitive environment can also change from country to country. This is partly because of
the economic, political, and cultural environments; these factors help determine the type and degree of
competition that exists in a given country. Competition can come from a variety of sources. It can be
public or private sector, come from large or small organizations, be domestic or global, and stem from
traditional or new competitors. For the domestic firm the most likely sources of competition may be well
understood. The same is not the case when one moves to compete in a new environment. For example,
in the United States most business is privately owned and competition is among private sector
companies, while in the People's Republic of China some businesses remain under the direction of the
state. Thus, a U.S. company in the PRC could find itself competing with organizations owned by state
entities. This could change the nature of competition dramatically.

The nature of competition can also change from place to place in a variety of ways: competition
may be encouraged and accepted or discouraged in favor of cooperation; relations between buyers and
sellers may be friendly or hostile; barriers to entry and exit may be low or high; regulations may permit or
prohibit certain activities. To be effective internationally, firms need to understand these competitive
issues and assess their impact. In addition to trade liberalization, there has been an effort to negotiate
trade facilitation, which focuses on the cost of trade and customs procedures.

An important aspect of the competitive environment is the level, and acceptance, of technological
innovation in different countries. Technology often is seen as giving firms a competitive advantage;
hence, firms compete for access to the newest in technology, and international firms transfer technology
to be globally competitive. It is easier than ever for even small businesses to have a global presence
thanks to the internet, which greatly expands their exposure, their market, and their potential customer
base. For economic, political, and cultural reasons, some countries are more accepting of technological
innovations, others less accepting.

SESSION SUMMARY:

In order to understand international business, it is necessary to have a broad conceptual

understanding of why trade and investment across national borders take place. Trade and investment can
be examined in terms of the comparative advantage of nations.

There is a thin difference between domestic and international business. The different business
environments help companies/businesses determine what suited to the nature of business they have.

REFERENCES

Refer to the references listed in the syllabus of the subject. 

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