Chapter 1

An Overview of
International
Business

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 International Business

 International business consists of all

commercial transactions—including sales,
investments, and transportation—that take
place between two or more countries

 Increasingly foreign countries are a source

of both production and sales for domestic
companies

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 Studying International Business is
Important
• Most companies are either international or
compete with international companies
• Modes of operations may differ from those used
domestically
• The best way of conducting business may differ
by country
• An understanding helps you make better career
decisions
• An understanding helps you decide what
government policies to support

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 Differences in Domestic and
International Business

Boundaries Currencies

Legal Systems Cultures

Resources Skills and Knowledge

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Main Terminologies in
International Business

Multinational Company
Transnational Company
Global Company
Multi-domestic Company
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 Multinational Company
• Use globalization approach in a foreign market.
• Has FDI and business operations across
multiple markets.
• Headquarters in home country, its subsidiaries
are in host countries.
• Motorola, Siemens, Dell, Toyota, Petronas & etc.

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 Transnational Company
• Combines the characteristics of both a global
company (uses global effectiveness strategy) and a
multi-domestic company (local requirement).
• Operates a business which embarks on activities
according to the needs of local customers.
• Decision not necessarily depend on the
headquarters’ requirements but more on local
needs.
• Management are more complex (coordination & two
way communication between HQ and subsidiaries).
• Uses centralized decision-making process for its
production and department development.
• Nokia.
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 Global Company
• The world is its market.
• It will try to fulfill the needs and requirements of
global customers by offering standardized
services or products.
• It also develops global advertising strategies
across different countries in order to achieve
economies of scale through an integrated
productive production system.
• Uses centralized approach to control its
production and marketing strategies of its
business operations overseas.
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 Multi-domestic Company
• A company with many subsidiaries which
operates freely from its headquarters.
• Each subsidiary focuses on a domestic market.
• The subsidiary is free to plan its own marketing
campaign and production techniques to enhance
its production and sales.
• Authority and decision making is left to each
subsidiary.
• McDonalds.

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Factors Contributing to Rapid Growth of
International Business
1. Increase in and expansion of technology
2. Liberalization of cross-border trade and
resource movements
3. Development of services that support
international business
4. Growing consumer pressures
5. Increased global competition
6. Changing political situations
7. Expanded cross-national cooperation
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 Motives Companies Engage in
International Business
• To Expand Sales: pursuing international sales
increases the potential market and potential
profits
• To Acquire Resources: may give companies
lower costs, new and better products, additional
operating knowledge
• To Diversify or Reduce Risks: international
operations may reduce operating risk by
smoothing sales and profits, preventing
competitors from gaining advantage
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 Modes of Operation in International
Business

• Merchandise exports and imports

• Service exports and imports
 Tourism and Transportation
 Service Performance
 Asset Use
• Investments
 Foreign Direct Investment (FDI)
 Portfolio Investment

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 Modes of Operation in International
Business (cont.)
• Exporting involves selling products made
in one’s own country for use or resale in
other countries
• Importing involves buying products made
in other countries for use or resale in one’s
own country. Many companies begin their
international operations with either
importing or exporting since the risk
involved is minimal
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 Modes of Operation in International
Business (cont.)
• Merchandise exports and imports refers
to trade in goods (also known as visible
trade)
• Service exports and imports refers to
trade in intangible products (also known as
invisible trade)

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 Modes of Operation in International
Business (cont.)
• International investments, in which
residents of one country supply capital to
those of a second country. Foreign direct
investments (FDI) are investments made
for the purpose of actively controlling
property, assets, or companies located in
foreign host countries

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 Modes of Operation in International
Business (cont.)
• Portfolio investments involve purchases
of foreign financial assets (stocks, bonds,
certificates of deposit) for purposes other
than control

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 Modes of Operation in International
Business (cont.)
• A licensing agreement allows a firm in
one country to use all or some of the
intellectual property of a firm in a second
country in exchange for a royalty payment.
• A franchising agreement allows a firm in
one country to use the brand names,
logos, and operating techniques of a firm
in a second country in exchange for a
royalty payment
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 Modes of Operation in International
Business (cont.)
• Management contracts involve an
agreement in which a firm in one country
agrees to operate facilities or provide other
management services for an agreed-upon
fee

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 Modes of Operation in International
Business (cont.)
• Manufacturing contracts is signed when
a firm contracts the production of their
products to other firms to produce the
products.
• The purpose of a manufacturing contract
is to reduce production cost and human
resource.

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 Modes of Operation in International
Business (cont.)
• Turnkey Projects kicks off when a
country signs a contract with a firm from
another country to complete a project such
as the construction of a flyover or building.
• Once the project is completed, then it will
be handled over to the company who is
initially offered the project.

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 Globalization

Globalization is the ongoing process that

deepens and broadens the relationships and
interdependence among countries. International
Business is a mechanism to bring about
globalization

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 Globalization (cont.)

Trend toward greater economic, cultural, political and

technological interdependence among national institutions
and economies

Globalization of markets Globalization of production

Convergence in buyer Dispersal of production

preferences in markets activities worldwide to
around the world minimize costs or maximize
quality

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 What’s Wrong with Globalization

• Threats to national sovereignty

• Economic growth and environmental stress
• Growing income inequality and personal stress
• Off-shoring – the transferring of production
abroad – is controversial in terms of who
benefits when costs are reduced and whether
the process exchanges good jobs for bad ones

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 Globalization of Markets
• The globalization of markets refers to the
merging of historically distinct and separate
national markets into one huge global
marketplace
• In many markets today, the tastes and
preferences of consumers in different nations are
converging upon some global norm
• Examples of this trend include Coca Cola,
Starbucks, Sony PlayStation, and McDonald’s
hamburgers

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 The Drivers of Market Globalization

• Worldwide reduction of barriers to trade and

investment
• Market liberalization and adoption of free markets
• Industrialization, economic development, and
modernization
• Integration of world financial markets
• Advances in technology

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 Benefits of Global Markets

Reduces
marketing costs

Creates new market

opportunities

Levels income
stream
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 Globalization of Production
• The globalization of production refers to the
sourcing of goods and services from locations
around the globe to take advantage of national
differences in the cost and quality of factors of
production (labor energy, land, and capital)
• The goal for companies is to lower their overall
cost structure or improve the quality or
functionality of their product and gain competitive
advantage
• Examples of companies doing this include
Boeing and Vizio
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Benefits of Global Production

Lower-cost labor

Technical expertise

Production inputs

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 Future of International Business and
Globalization

• Further globalization is inevitable

• International business will grow primarily along
regional rather than global lines
• Forces working against further globalization and
international business will slow down both trends

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