International Business Environment

MBA-IBInternational Business EnvironmentUNIT – IINTERNATIONAL BUSINESS – AN OVERVIEWContent Outline• Introduction• Definition and meaning of international business• Scope of international business• Special difficulties in international business• Benefits of international business• Understanding of international business environment• Framework for analyzing the international business environment• Summary• Review QuestionsINTRODUCTIONOne of the most dramatic and significant world trends in the past two decadeshas been the rapid, sustained growth of international business. Markets havebecome truly global for most goods, many services, and especially for financialinstruments of all types. World product trade has expanded by more than 6percent a year since 1950, which is more than 50 percent faster than growth ofoutput the most dramatic increase in globalization, has occurred in financialmarkets. In the global forex markets, billions of dollars are transacted each day,of which more than 90 percent represent financial transactions unrelated to tradeor investment. Much of this activity takes place in the so-called Euromarkets,markets outside the country whose currency is used.This pervasive growth in market interpenetration makes it increasingly difficultfor any country to avoid substantial external impacts on its economy. Inparticular massive capital flows can push exchange rates away from levels thataccurately reflect competitive relationships among nations if national economicpolicies or performances diverse in short run. The rapid dissemination rate ofUnit I1AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmentnew technologies speeds the pace at which countries must adjust to externalevents. Smaller, more open countries, long ago gave up illusion of domesticpolicy autonomy. But even the largest and most apparently self-containedeconomies, including the US, are now significantly affected by the globaleconomy. Global integration in trade, investment, and factor flows, technology,and communication has been tying economies together.Why then are these changes coming about, and what exactly are they? It is inpractice, easier to identify the former than interpret the latter. The reason is thatduring the past few decades, the emergence of corporate empires in the worldeconomy, based on the contemporary scientific and technological developments,has led to globalization of production. As a result of international production,co-operation among global productive units, the large-scale capital exports, “theexport of production” or “production abroad” has come into prominence asagainst commodity export in world economy in recent years. Globalcorporations consider the whole of the world their production place, as well astheir market and move factors of production to wherever they can optimally becombined. They avail fully of the revolution that has brought about instantworldwide communication, and near instant-transformation. Their ownership istransnational;theirmanagementistransnational.Theirfreelymobilemanagement, technology and capital, the modern agent for stepped-up economicgrowth, transcend individual national boundaries. They are domestic in everyplace, foreign in none-a true corporate citizen of the world. The greaterinterdependence among nations has already reduced economic insularity of thepeoples of the world, as well as their social and political insularity.DEFINITION OF INTERNATIONAL BUSINESS:International business includes any type of business activity that crosses nationalborders. Though a number of definitions in the business literature can be foundbut no simple or universally accepted definition exists for the term internationalUnit I2AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmentbusiness. At one end of the definitional spectrum, international business isdefined as organization that buys and/or sells goods and services across two ormore national boundaries, even if management is located in a single country. Atthe other end of the spectrum, international business is equated only with thosebig enterprises, which have operating units outside their own country. In themiddle are institutional arrangements that provide for some managerial directionof economic activity taking place abroad but stop short of controlling ownershipof the business carrying on the activity, for example joint ventures with locallyowned business or with foreign governments.In its traditional form of international trade and finance as well as its newestform of multinational business operations, international business has becomemassive in scale and has come to exercise a major influence over political,economic and social from many types of comparative business studies and froma knowledge of many aspects of foreign business operations. In fact, sometimesthe foreign operations and the comparative business are used as synonymous forinternational business. Foreign business refers to domestic operations within aforeign country. Comparative business focuses on similarities and differencesamong countries and business systems for focuses on similarities and differencesamong countries and business operations and comparative business as fields ofenquiry do not have as their major point of interest the special problems thatarise when business activities cross national boundaries. For example, the vitalquestion of potential conflicts between the nation-state and the multinationalfirm, which receives major attention is international business, is not like to becentered or even peripheral in foreign operations and comparative business.SCOPE OF INTERNATIONAL BUSINESS ACTIVITIESThe study of international business focus on the particular problems andopportunities that emerge because a firm is operating in more than one country.In a very real sense, international business involves the broadest and mostUnit I3AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmentgeneralized study of the field of business, adapted to a fairly unique across theborder environment. Many of the parameters and environmental variables thatare very important in international business (such as foreign legal systems,foreign exchange markets, cultural differences, and different rates of inflation)are either largely irrelevant to domestic business or are so reduced in range andcomplexity as to be of greatly diminished significance. Thus, it might be saidthat domestic business is a special limited case of international business.The distinguishing feature of international business is that international firmsoperate in environments that are highly uncertain and where the rules of thegame are often ambiguous, contradictory, and subject to rapid change, ascompared to the domestic environment.In fact, conducting internationalbusiness is really not like playing a whole new ball game, however, it is likeplaying in a different ballpark, where international managers have to learn thefactors unique to the playing field. Managers who are astute in identifying newways of doing business that satisfy the changing priorities of foreigngovernments have an obvious and major competitive advantage over theircompetitors who cannot or will not adapt to these changing priorities.The guiding principles of a firm engaged in (or commencing) internationalbusiness activities should incorporate a global perspective. A firm’s guidingprinciples can be defined in terms of three board categories productsoffered/market served, capabilities, and results. However, their perspective ofthe international business is critical to understand the full meaning ofinternational business. That is, the firm’s senior management should explicitlydefine the firm’s guiding principles in terms of an international mandate ratherthan allow the firm’s guiding principles in terms as an incidental adjunct to itsdomestic activities. Incorporating an international outlook into the firm’s basicstatement of purpose will help focus the attention of managers (at all levels ofUnit I4AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmentthe organization) on the opportunities (and hazards) outside the domesticeconomy.It must be stressed that the impacts of the dynamic factors unique to the playingfield for international business are felt in all relevant stages of evolving andimplementing business plans.The first broad stage of the process is toformulate corporate guiding principles.As outlined below the first step informulating and implementing a set of business plans is to define the firm’sguiding principles in the market place. The guiding principles should, amongother things, provide a long-term view of what the firm is striving to becomeand provide direction to divisional and subsidiary managers vehicle, some firmsuse “the decision circle” which is simply an interrelated set of strategic choicesforced upon any firm faced with the internationalization of its markets. Thesechoices have to do with marketing, sourcing, labor, management, ownership,finance, law, control, and public affairs.Here the first two marketing andsourcing-constitute the basic strategies that encompass a firm’s initialconsiderations. Essentially, management is answering two questions: to whomare we going to sell what, and from where and how will we supply that market?We then have a series of input strategies-labor, management, ownership, andfinancial. They are in their efforts to develop their own business plans. As anobligation addressed essentially to the query, with what resources are we goingto implement the basic strategies? That is, where will we find the right people,willingness to carry the risk, and the necessary funds? A third set of strategies-legal and control-respond to the problem of how the firm is to structure itself ofimplement the basic strategies, given the resources it can muster.A finalstrategic area, public affairs, is shown as a basic strategy simply because itplaces a restraint on all other strategy choices.Unit I5AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business EnvironmentEach strategy area contains a number of subsidiary strategy options.Thedecision process that normally starts in the marketing strategy area is an iterativeone.As the decision maker proceeds around the decision circle, previousselected strategies must be readjusted. Only a portion of the possible feedbackadjustment loops is shown here.Although these strategy areas are shown separately but they obviously do notstand-alone.There must be constant reiteration as one moves around thedecision circle. The sourcing obviously influences marketing strategy, as wellas the reverse. The target market may enjoy certain preferential relationshipswith other markets. That is, everything influences everything else. Inasmuch asthe number of options a firm faces is multiplied as it moves into internationalmarket, decision-making becomes increasingly complex the deeper the firmbecomes involved internationally. One is dealing with multiple currency, legal,marketing, economic, political, and cultural systems.Geographic anddemographic factors differ widely.In fact, as one moves geographically,virtually everything becomes a variable: there are few fixed factors.For our purposes here, a strategy is defined as an element in a consciouslydevised overall plan of corporate development that, once made andimplemented, is difficult (i.e. costly) to change in the short run. By way ofcontrast, an operational or tactical decision is one that sets up little or noinstitutionalized resistance to making a different decision in the near future.Some theorists have differentiated among strategic, tactical, and operational,with the first being defined as those decisions, that imply multi-yearcommitments; a tactical decision, one that can be shifted in roughly a year’stime; an operational decision, one subject to change in less that a year. In theinternational context, we suggest that the tactical decision, as the phrase is usedhere, is elevated to the strategic level because of the rigidities in the internationalenvironment not present in the purely domestic-for example, work forceUnit I6AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmentplanning and overall distribution decisions.Changes may be implementeddomestically in a few months, but if one is operating internationally, law,contract, and custom may intervene to render change difficult unlessimplemented over several years.SPECIAL DIFFICULTIES IN INTERNATIONAL BUSINESSWhat make international business strategy different from the domestic are thedifferences in the marketing environment. The important special problems ininternational marketing are given below:1. POLITICAL AND LEGAL DIFFERENCESThe political and legal environment of foreign markets is different from that ofthe domestic. The complexity generally increases as the number of countries inwhich a company does business increases.It should also be noted that thepolitical and legal environment is not the same in all provinces of many homemarkets. For example, the political and legal environment is not exactly thesame in all the states of India.2. CULTURAL DIFFERENCESThe cultural differences, is one of the most difficult problems in internationalmarketing. Many domestic markets, however, are also not free from culturaldiversity.3. ECONOMIC DIFFERENCESThe economic environment may vary from country to country.4. DIFFERENCES IN THE CURRENCY UNITThe currency unit varies from nation to nation.This may sometimes causeproblems of currency convertibility, besides the problems of exchange ratefluctuations. The monetary system and regulations may also vary.5. DIFFERENCES IN THE LANGUAGEAn international marketer often encounters problems arising out of thedifferences in the language. Even when the same language is used in differentUnit I7AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmentcountries, the same words of terms may have different meanings. The languageproblem, however, is not something peculiar to the international marketing. Forexample: the multiplicity of languages in India.6. DIFFERENCES IN THE MARKETING INFRASTRUCTUREThe availability and nature of the marketing facilities available in differentcountries may vary widely. For example, an advertising medium very effectivein one market may not be available or may be underdeveloped in anothermarket.7. TRADE RESTRICTIONSA trade restriction, particularly import controls, is a very important problem,which an international marketer faces.8. HIGH COSTS OF DISTANCEWhen the markets are far removed by distance, the transport cost becomes highand the time required for affecting the delivery tends to become longer.Distance tends to increase certain other costs also.9. DIFFERENCES IN TRADE PRACTICESTrade practices and customs may differ between two countries.BENEFITS OF INTERNATIONAL BUSINESSSURVIVALBecause most of the countries are not as fortunate as the United States in termsof market size, resources, and opportunities, they must trade with others tosurvive; Hong Kong, has historically underscored this point well, for withoutfood and water from china proper, the British colony would not have survivedalong.The countries of Europe have had similar experience, since mostEuropean nations are relatively small in size.Without foreign markets,European firms would not have sufficient economies of scale to allow them tobe competitive with US firms. Nestle mentions in one of its advertisements thatits own country, Switzerland, lacks natural resources, forcing it to depend onUnit I8AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmenttrade and adopt the geocentric perspective. International competition may notbe matter of choice when survival is at stake.However, only firms withpreviously substantial market share and international experience could expandsuccessfully.GROWTH OF OVERSEAS MARKETSDeveloping countries, in spite of economic and marketing problems, areexcellent markets. According to a report prepared for the U.S. CONGRESS bythe U.S. trade representative, Latin America and Asia/Pacific are experiencingthe strongest economic growth.American markets cannot ignore the vastpotential of international markets. The world is more than four times larger thanthe U.S. market.In the case of Amway corps., a privately held U.S.manufacturer of cosmetics, soaps and vitamins, Japan represents a larger marketthan the United States.SALES AND PROFITForeign markets constitute a larger share of the total business of many firms thathave wisely cultivated markets aboard. Many large U.S. companies have donewell because of their overseas customers. IBM and Compaq, foe ex, sell morecomputers aboard than at home.According to the US dept of commerce,foreign profits of American firms rose at a compound annual rate of 10%between 1982 and 1991, almost twice as fast as domestic profits of the samecompanies.DIVERSIFICATIONDemand for mast products is affected by such cyclical factors as recession andsuch seasonal factors as climate.The unfortunate consequence of thesevariables is sales fluctuation, which can frequently be substantial enough tocause lay offs of personnel.One way to diversify a companies’ risk is toconsider foreign markets as a solution for variable demand. Such markets, evenout fluctuations by providing outlets for excess production capacity.ColdUnit I9AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.MBA-IBInternational Business Environmentweather, for instance may depress soft drink consumption. Yet not all countriesenter the winter season at the same time, and some countries are relatively warmyear round. Bird, USA, inc., a Nebraska manufacturer of go carts, and minicars, for promotional purposes has found that global selling has enabled thecompany to have year round production. It may be winter in Nebraska but itssummer in the southern hemisphere-somewhere there is a demand and thatstabilizes the business.INFLATION AND PRICE MODERATIONThe benefits of export are readily self-evident.Imports can also be highlybeneficial to a country because they constitute reserve capacity for the localeconomy. Without imports, there is no incentive for domestic firms to moderatetheir prices. The lack of imported product alternatives forces consumers to paymore, resulting in inflation and excessive profits for local firms.Thisdevelopment usually acts a s prelude to workers demand for higher wages,further exacerbating the problem of inflation.Import quotas imposed on Japanese automobiles in the 1980’s saved 46200 USproduction jobs but at a cost of $160,000 per job per year. This cost was a resultof the addition of $400 to the prices of US cars, and $1000 to the prices ofJapanese imports. This windfall for Detroit resulted in record high profits forUS automakers. Not only do trade restrictions depress price competition in theshort run, but they also can adversely affect demand for year to come.EMPLOYMENTTrade restrictions, such as high tariffs caused by the 1930’s smoot-hawley bill,which forced the average tariff rates across the board to climb above 60%,contributed significantly to the great depression and have the potential to causewide spread unemployment again.Unrestricted trade on the other handimproves the world’s GNP and enhances employment generally for all nations.Unit I10AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.