Understanding International Business

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Chapter 2

• Understanding International Business Management

2
International Business

• Any sort of business activity that crosses
  national boundaries.
• The economic system of exchanging good and
  services, conducted between individuals and
  businesses in multiple countries.
• Activities relating to industry and commerce
  performed on an international level.

3
International Management

• International Management- Process of applying
  management concepts and techniques in a
  multinational environment.

4
What is the deference between domestic and
International business?
Domestic Business
International Business
Same

• Basic Functions
• Processes

Difference
Environment within which these functions are
performed and processes are carried out.
5
Why Internationalization? -The Trends

• Intense competition among industries, firms and
  countries on a global level is a recent
  development.
• The present trends are towards the increasing
  globalization and interdependence of firms,
  markets and countries.
• In a bid to meet commitments to institutions like
  WTO, IMF and WB, country after country is pulling
  down barriers to foreign trade and investment.

6

• There is a growth of organization and
  administrative structures to manage resources and
  risks across national boundaries.
• Quantitative restrictions on foreign trade are
  being dismantled speedily and tariff barriers are
  on the decline.
• New opportunities to foreign investors and
  entrepreneurs are being provided to operate in
  the countries.

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Reasons to become international
Desire for continued growth
Domestic market saturation
Unsolicited foreign order
Potential to exploit new technological advantage
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Internationalization

• Pull factors Push Factors
• (Proactive reasons) (Reactive reasons)
• Pull factors are forces of attraction which pull
  the business to the foreign markets.
• Push factors are forces of compulsion which
  prompt companies to internationalize.

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Pull Factors Push Factors

• Relative Profitability Domestic
  market constraints
• Growth Prospects Competition

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Profit Advantage

• Even when international business is less
  profitable than the domestic, it would increase
  the total profit.
• The AC per unit will be lowest if the plants is
  operated at optimum capacity OQ1
• Domestic demand constraint makes it to produce
  OQ and hence AC is OC or QR much higher than OC1
  or Q1I. AC to the extent of CC1 can be reduced by
  exporting QQ1 amount and the profitability will
  increase per unit by CC1 per unit.

11
R
AC
C C1
I
0 Q Q1
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Growth Opportunities

• MNCS are getting increasingly interested in a
  number of developing countries due to the rapid
  rise of income and population in these countries.
• 1 billion people estimated to be added to the
  world population between 1999 and 2014.
• For going international is to take advantage of
  the opportunities in other countries

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Domestic Market Constraints

• Domestic demand constraints drive many companies
  to expand the market beyond the national border.

TS DS
FS
Sale
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• For Example
• Nestle derives only about 2 of its total sales
  from its to home market, Switzerland.
• For Philips, only 8 of the total sales coming
  from the home market, Holland, but many different
  subsidiaries of Philips have contributed much
  larger share of the total revenues than the
  parent company.

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Competition

• Protected market does not normally motivate
• Companies to seek business outside the home
  market.
• Economic liberalization brings competition from
  foreign firms as well as from those within the
  country.
• Companies take an offensive international
  competitive strategy by way of counter
  competition.
• To penetrate the home market of the potential
  foreign competitor so as to diminish its
  competitive strength to protect domestic market
  share.

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Dimensions of Internationalization

• Inward-looking Outward-looking
• (Impact of global (Nature of
• competitors on competition in foreign
• domestically market)
• oriented firms)

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Inward-looking( Impact of global competitors on
domestically oriented firms)

1. Importing/sourcing
2. Acting as Licensee from a foreign company
3. Establishing JV inside the home country with
   foreign companies
4. Managing as a wholly owned subsidiary of a
   foreign firm.

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Outward-Looking(Nature of competition in foreign
market)

1. Exporting
2. Acting as Licensor to a foreign company
3. Establishing JV outside the home country with
   foreign companies
4. Establishing wholly owned business outside the
   home country.

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Managerial Issues on Production and Sourcing

• From where should the firm supply the target
  market?
• To what extent should the firm itself undertake
  production?
• To the extent that it does not, what and where
  should it buy from others?
• To the extent that a firm opts to do at least
  some manufacturing, how should it acquire
  facilities.
• Should the firm produce in one plant or many,
  related or autonomous?
• What sort of technology should it use?
• Where should research and development be located?
  

20
Review

• Define International business.
• Discuss the forces driving companies towards
  International business.