International Business: The New Realities
Fifth Edition
Chapter 1
Introduction: What is
International Business?
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Learning Objectives
1.1 Describe the key concepts in international business.
1.2 Understand how international business differs from
domestic business.
1.3 Identify major participants in international business.
1.4 Describe why firms internationalize.
1.5 Appreciate why you should study international business.
1.6 Learn the CKR Intangible Soft Skills™ and the CKR Tangible
Process Tools™ to improve your employability and success
in the workplace.
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Instagram: A Global Phenomenon
• Instagram exemplifies the globalization of business and converging
lifestyles worldwide.
• Instagram has more than 700 million active monthly users.
• Instagram is available in 33 languages and enjoys a massive
following worldwide. Some 80 percent of users live outside the
firm’s home country, the United States.
• Instagram uses foreign direct investment to establish offices around
the world.
• Instagram illustrates how converging lifestyles, modern
communications technologies, and entrepreneurship are facilitating
the emergence of global enterprises.
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The Nature of International Business
• All value-adding activities-including sourcing, manufacturing,
and marketing-can be performed in international locations.
• International trade can involve products, services, capital,
technology, know-how, and labor.
• Firms internationalize through various entry strategies, such as
exporting and foreign direct investment.
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Dimensions of International Business
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Key Concepts in International Business (1 of 3)
• International business: Performance of trade and investment
activities by firms across national borders.
• Globalization of markets: Ongoing economic integration and
growing interdependency of countries worldwide.
• International trade: Exchange of products and services across
national borders; typically through exporting and importing.
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Key Concepts in International Business (2 of 3)
• Exporting: Sale of products or services to customers located
abroad, from a base in the home country or a third country.
Boeing and Airbus export billions in commercial aircraft every
year.
• Importing or global sourcing: Procurement of products or
services from suppliers located abroad for consumption in the
home country or a third country. Toyota imports many parts
from China when it manufactures cars in Japan.
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Key Concepts in International Business (3 of 3)
International investment: Transfer of assets to another country
or the acquisition of assets in that country. Also known as
“foreign direct investment” (FDI), we will focus on this type of
investment.
International portfolio investment:
Passive ownership of foreign
securities such as stocks and bonds,
in order to generate financial
returns.
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Globalization of Markets
• Unprecedented growth of international trade. In 1960, global
trade was $300 billion per year. Today, world exports amount
to some $16 trillion annually!
• Trade between nations, accompanied by substantial flows of
capital, technology, and knowledge.
• Development of sophisticated global financial systems and
mechanisms that facilitate the cross-border flow of products,
money, technology, and knowledge.
• Greater collaboration among nations through multilateral
regulatory agencies such as the World Trade Organization
(WTO) and the International Monetary Fund (IMF).
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The ‘Flows’ of International Business
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World Trade Is Growing Faster than GDP
Source: Based on data from the International Monetary Fund, World Economic Outlook Database October, 2017
www.imf.org
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Leading Countries in International Merchandise Trade, by
Total Annual Value, $Billions
Sources: Based on data from the World Bank, World Development Indicators, World Bank, Washington, World Trade Based on
data from the World Trade Organization, Statistics Database, Geneva: World Trade Organization (2017),
www.wto.org ; UNCTAD, World Investment Report, New York: United Nations (2017), www.unctad.org
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Leading Countries in International Merchandise Trade,
Total Value as a % of G D P
Sources: Based on data from the World Bank, World Development Indicators, World Bank, Washington, World Trade Based on
data from the World Trade Organization, Statistics Database, Geneva: World Trade Organization (2017),
www.wto.org ; UNCTAD, World Investment Report, New York: United Nations (2017), www.unctad.org
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Top 25 Countries in International Merchandise Trade
Sources: Based on data from the World Bank, World Development Indicators, Washington, DC: World Bank (2017), UNCTAD,
www.worldbank.org ; World Trade Organization, Statistics Database, Geneva: World Trade Organization (2017),
www.wto.org; World Investment Report, New York: United Nations (2017), www.unctad.org
. Note: The exhibit reflects the value of each country’s combined exports and imports as a percentage of total world trade.
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FDI Inflows into World Regions (in Billions of
U.S. Dollars per Year)
Sources: UNCTAD, UNCTADSTAT Database, Inward FDI Flows, Annual (2017); OECD, FDI Flows (2017),
https://data.oecd.org/fdi/ fdi-flows.htm ; World Bank, Foreign Direct Investment, Net Inflows (BoP, Current US$) (2017),
http://data.worldbank.org
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Service Industries That are Rapidly
Internationalizing
Industry Representative Activities Representative Companies
Architectural, construction, Construction, power utilities, design, AB, Bechtel Group, Halliburton,
and engineering engineering services, Kajima, Philip Holzman, Skanska AB
for airports, hospitals, dams
Banking, finance, and Banks, insurance, risk evaluation, Bank of America, CIGNA, Barclays,
insurance management HSBC, Ernst & young
Education, training, and Management training, technical training, Berlitz, Kumon Math & Reading
publishing language training Centers, NOVA, Pearson, Elsevier
Entertainment Movies, recorded music, Internet- based Time Warner, Sony, Virgin,
entertainment MGM
Information services E-commerce, e-mail, funds transfer, data Infosys, EDI, Hitachi, Qualcomm,
interchange, data processing, computer Cisco
services
Professional business Accounting, advertising, legal, management Leo Burnett, EYLaw, McKinsey,
services consulting A. T. Kearney, Booz Allen Hamilton
Transportation Aviation, ocean shipping, railroads, Maersk, Santa Fe, Port Authority of
trucking, airports New Jersey, SNCF (French
railroads)
Travel and tourism Transportation, lodging, food and beverage, Carlson Wagonlit, Marriott, British
aircraft travel, ocean carriers, railways Airways
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Leading Countries in International Services Trade,
by Total Annual Value, $Billions
Sources: Based on data from the World Bank, World Development Indicators, Washington, DC: World Bank (2017),
www.worldbank.org ; World Trade Organization, Statistics Database, Geneva: World Trade Organization (2017), www.wto.org
; UNCTAD, “International Trade in Goods and Services,” UNCTADSTAT (2017), www.unctad.org
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Leading Countries in International Services
Trade, Total Value as a % of GDP
Sources: Based on data from the World Bank, World Development Indicators, Washington, DC: World Bank (2017),
www.worldbank.org ; World Trade Organization, Statistics Database, Geneva: World Trade Organization (2017),
www. wto.org ; UNCTAD, “International Trade in Goods and Services,” UNCTADSTAT (2017), www.unctad.org
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International and Domestic Business: How
They Differ
• International business….
– is conducted across national borders.
– uses distinctive business methods.
– is in contact with countries that differ in terms of culture,
language, political system, legal system, economic
situation, infrastructure, and other factors.
• Stated differently, when they venture abroad, firms
encounter four major types of risk.
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The Four Risks of International Business
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Cross-Cultural Risk (1 of 2)
• Cultural Differences. Risk arising from differences in language,
lifestyle, attitudes, customs, and religion, where a cultural
miscommunication jeopardizes a culturally-valued mindset or
behavior.
• Negotiation Patterns. Negotiations are required in many
types of business transactions. E.g., where Mexicans are
friendly and emphasize social relations, Americans are
assertive and get down to business quickly.
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Cross-Cultural Risk (2 of 2)
• Decision-Making Styles. Managers make decisions continually
on the operations and future direction of the firm. For
example, Japanese take considerable time to make important
decisions. Canadians tend to be decisive, and “shoot from the
hip”.
• Ethical Practices. Standards of right and wrong vary
considerably around the world. For example, bribery is
relatively accepted in some countries in Africa, but is generally
unacceptable in Sweden.
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Ethical Connections
• In the fashion industry, hundreds of factory workers die
annually from dangerous working conditions.
• In the production of faded denim jeans, thousands of garment
workers develop deadly lung diseases from constant exposure
to crystalline silica used to sandblast jeans to give them the
worn, vintage look.
• Illegal in Europe and the United States, such production
methods are still widely used in low-income countries, from
where the jeans are then distributed to affluent consumers
worldwide.
Source: G. Brown, “Fashion Kills: Industrial Manslaughter in the Global Supply Chain,” E H S Today,
September 2010, p. 59.
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Country Risk (Political Risk) (1 of 2)
• Government intervention, protectionism, and barriers to trade
and investment.
• Bureaucracy, red tape, administrative delays, corruption.
• Lack of legal safeguards for intellectual property rights.
• Legislation unfavorable to foreign firms.
• Economic failures and mismanagement.
• Social and political unrest and instability.
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Country Risk (Political Risk) (2 of 2)
Examples
• The U.S. imposes tariffs on imports of sugar and other
agricultural products.
• Doing business in Russia often requires paying bribes to
government officials.
• Venezuela’s government has interfered much with the
operations of foreign firms.
• Argentina has suffered high inflation and other economic
turmoil.
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Currency Risk (Financial Risk) (1 of 2)
• Currency exposure. General risk of unfavorable exchange rate
fluctuations.
• Asset valuation. Risk that exchange rate fluctuations will
adversely affect the value of the firm’s assets and liabilities.
• Foreign taxation. Income, sales, and other taxes vary widely
worldwide, with implications for company performance and
profitability.
• Inflation. High inflation, common to many countries,
complicates business planning, and the pricing of inputs and
finished goods.
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Currency Risk (Financial Risk) (2 of 2)
Examples
• The Japanese yen has fluctuated a lot since 2000.
• The U.S. has relatively high corporate income taxes.
• Brazil and Turkey have experienced very high inflation.
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Commercial Risk
• Weak partner
• Operational problems
• Timing of entry
• Competitive intensity
• Poor execution of strategy
General commercial risks such as these lead to sub-optimal
formulation and implementation of the firm’s international
value-chain activities.
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The Four Risks of IB: Conclusion
• Always present but manageable.
• Managers need to understand, anticipate, and take proactive
action to reduce their effects.
• Some risks are extremely challenging.
Example
• The global financial crisis generated many commercial,
currency, and country risks, affecting banks and other firms
worldwide. This led to steep declines in national stock markets
and normal business activity.
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Who Participates in International Business? (1 of 2)
• Multinational enterprise (MNE): A large company with substantial
resources that performs various business activities through a
network of subsidiaries and affiliates located in multiple countries
(e.g., Caterpillar, Samsung, Unilever, Vodafone, Disney).
• Small and medium-sized enterprise (SME): Typically, companies
with 500 or fewer employees, comprising over 90% of all firms in
most countries. SMEs increasingly engage in international business.
• Born global firm: A young, entrepreneurial SME that undertakes
substantial international business at or near its founding.
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Geographic Locations of the 500 Largest
Multinational Enterprises
Sources: Scott Decarlo, “Global 500,” Fortune (2017), http://fortune.com
, pp. 18-19; Fortune, “Global 500,” Special Section, July 21, 2014, pp. F1-F8.Note: The exhibit shows country name, total revenues
of Global 500 firms in U.S. dollars, and total number of Global 500 firms.
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Who Participates in International Business? (2 of 2)
• Non-governmental organizations: Many of these non-profit
organizations conduct cross-border activities. They pursue
special causes and serve as advocates for social issues,
education, politics, and research.
Examples
• The Bill and Melinda Gates Foundation and the British
Welcome Trust both support health and educational
initiatives.
• CARE is an international non-profit organization dedicated to
reducing poverty.
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Non-governmental Organizations
The British Wellcome Trust funds nongovernmental organizations (NGOs)and research initiatives
to work in collaboration with private businesses to develop remedies for diseases in Africa and
other less developed areas.
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Why Do Firms Internationalize?
Seek opportunities for growth through market diversification.
E.g., Harley-Davidson, IKEA, H&M.
Earn higher margins and profits. Often, foreign markets are
more profitable.
• Gain new ideas about
products, services, and
business methods. E.g., GM
refined its knowledge for
making small, fuel-efficient
cars in Europe.
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Why Do Firms Participate in IB? (1 of 3)
Serve key customers that have relocated abroad. E.g., When
Toyota launched its operations in Britain, many of its
suppliers followed suit.
• Be closer to supply sources,
benefit from global sourcing
advantages, or gain flexibility
in the sourcing of products.
E.g., Apple sources parts and
components from the best
suppliers worldwide.
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Why Do Firms Participate in IB? (2 of 3)
• Gain access to lower-cost or better-value factors of production.
E.g., Sony does much manufacturing in China.
• Develop economies of scale in sourcing, production, marketing,
and R&D. E.g., Airbus lowers its overall costs by sourcing,
manufacturing, and selling aircraft worldwide.
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Why Do Firms Participate in IB? (3 of 3)
• Confront international competitors more effectively or thwart
the growth of competition in the home market. Chinese
appliance maker Haier established operations in the United
States, partly to gain competitive knowledge about Whirlpool,
its chief US rivals.
• Invest in a potentially rewarding relationship with a foreign
partner. French computer firm Groupe Bull partnered with
Toshiba in Japan to gain insights for developing information
technology.
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IB Contributes to National Economic Well-
being
A popular shopping street in Beijing, China
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Why Study International Business? (1 of 2)
• Facilitator of the global economy and interconnectedness. IB
brings nations closer together.
• Contributor to national economic well-being. IB fuels economic
growth and rising living standards.
• A competitive advantage for the firm. IB provides companies
with many benefits, leading to profitability and competitive
advantages.
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Why Study International Business? (2 of 2)
• A competitive advantage for you. Working internationally
offers a range of enlightening experiences, new knowledge,
and other benefits that enhance careers….and it’s exciting!
• An opportunity to support ethics, sustainability and corporate
citizenship. Firms must be ethical and socially responsible in
their dealings because IB affects numerous constituents, often
in unintended ways.
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You Can Do It: Mary Lyles (1 of 2)
Mary is a real person, who got her undergraduate degree from
a state university a few years ago. Read her profile in Chapter
1.
Mary’s majors: International business and Spanish.
• Success factors: Networking,
setting goals, developing a
global mindset.
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You Can Do It: Mary Lyles (2 of 2)
• Mary’s jobs since college:
– Buyer and private label project manager
– Sourcing analyst for Starbucks
– Senior sourcing analyst for Starbucks
• Dealing with cultural differences is challenging.
• Mary’s passion for international business is paying off.
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Career Preparation: Travel Abroad
• Traveling internationally requires thorough preparation.
• Documents required for international travel include a passport
and a visa.
• It is best to comply with security, safety, and health care
requirements of countries that your visit.
• Adapt to differences in currency and electricity standards in
the countries your visit.
• Understand local laws and obtain an international driving
permit if you intend to drive a car abroad.
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