International Business

Performance of trade and investment activities by firms across national borders

Globalization of Markets

Ongoing economic inegration and growing interdependency of countries worldwide

International Trade

Exchange of products and services across national borders, typically through exporting and importing

Exporting

The strategy of producing products or services in one country and selling and distributing them to customers located in other countries

Importing or Global Sourcing

Procurement of products or services from suppliers located abroad for consumption in the home country or a third country

International Investment

The transfer of assets to another country or the acquisition of assets in that country

Factors of Production

Assets of international investments: capital, technology, managerial talent, and manufacturing infrastructure

Recession

A condition in which national economies undergo a sustained period of negative growth

The most conventional international business transactions

International trade & Investment

The two essential types of cross-border investment

International portfolio investment & Foreign direct investment

International Portfolio Investment

Passive ownership of foreign securities for the purpose of generating financial returns (ie: stocks and bonds)

Foreign Direct Investment (FDI)

An internationalization strategy in which he firm establishes a physical presence abroad through acquisition of productive assets (ie: capital, technology, labor, land, plant, & equipment)

Gross Domestic Product (GDP)

The total value of products and services produced in a country over the course of a year

Cross-Cultural Risk

A situation or event where a cultural misunderstandin puts some human value at stake

Four types of risk for internationalizating firms

Cross-cultural risk, country risk, currency risk, and commercial risk

Country Risk (Political Risk)

Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a counry's political and/or legal environments

Currency Risk (Financial Risk)

Potential harm that arises from changes in the price of one currency relative to another

Commercial Risk

Firm's potential loss or failure from poorly developed or executed business strategies, tacticsm, or procedures

Focal Firms

The companies that directly initiate and implement international business activity

The two critical focal firms in international business

The Multinational enterprise and the small and medium-sized enterprise

Most important type of focal firm

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

Small and medium-sized enterprises (SMEs)

A company with 500 or fewer employees (U.S. and Canada definition)
Less than 250 employees (European Union)

In most nations, this type of firm constitute the great majority

Small and medium-sized enterprises

Born global firm

A young entrepeneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets (found in advanced countries)

5 ways SMEs succeed in international business despite resource limitations

1. More innovative and adaptable and have quicker response times for new ideas and technologies and meeting customer needs.
2. Better able to serve niche markets around the world that hold little interest for MNEs
3. Usually avid users of information and

Reasons firms internationalize

1. Increase sales and profits
2. Better serve customers
3. Access lower-cost or superior production factors
4. Optimize sourcing activities
5. Develop economies of scale
6. Confront competitors more effectively
7. Develop rewarding relationships with fore

The North American Free Trade Agreement (NAFTA)

Launched in 1994 and has integrated the economies of U.S., Canada, and Mexico into giant market of about 450 million consumers

The Dominican Republican Central American Free Trade Agreement (DR-CAFTA)

Is invigorating the economies of U.S., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic

Key concepts in international trade and investment (24)

1. International trade
2. Exporting
3. Importing or global sourcing
4. International investment
5. International portfolio investment
6. Foreign direct investment

Difference between international and domestic business (24)

International firms are constantly exposed to the four categories of risk that they must manage

Participants of international business (24)

MNE and SMEs

Two megatrends that have altered the international business environment

Technological advances and globalization of markets

Four phases of globalization

1. 1st phase: 1830s to late 1800s (peaking in 1880)
2. 2nd phase: 1900 to 1930
3. 3rd phase: 1948 to 1970s
4. 4th phase: 1980s to present

First phase of globalization

Introduction of railroads and ocean transport. Rise of manufacturing.

Second phase of globalization

Rise of electricity and steel production. Emergence and dominance of early MNEs.

Third phase of globalization

Formation of General Agreement on Tariff and Trade (GATT); conclusion of WWII; Marshall Plan to reconstruct Europe

Fourth phase of globalization

Privatization of state enterprises in transition economies; revolution in information, communication, and transportation tech; growth of emerging markets

Led to GATT and series of negotiations that reduced barriers to international trade and investment

The Bretton Woods Conference of twenty-three nations in 1947.

GATT was eventually transformed into...

World Trade Organization (WTO)

A multilateral governing body empowered to regulate international trade and investment. Includes 149 member nations and aims to ensure fairness and efficiency in global trade and investment.

6 Dimensions of market globalization

1. Integration and interdependence of national economies
2. Rise of regional economic integration blocs
3. Growth of global investment and financial flows
4. Convergence of buyer lifestyles and preferences
5. Globalization of production activities
6. Glob

Value Chain

The sequence of value-adding activities performed by the firm in the course of developing, producing, marketing, and servicing a product

5 Drivers of Market Globalization

1. Worldwide reduction of barriers to trade and investment
2. Market liberalization and adoption of free markets
3. Industrialization, economic development, and modernization
4. Integration of world financial markets
5. Advances in technology

Most important driver of globalization since 1980s

Technological advances

Contagion

The tendency of a financial or monetary crisis in one country to spread rapidly to other countries, due to ongoing integration of national economies

Sovereignty

The ability of a nation to govern its own affairs

Offshoring

The relocation of manufacturing and other value-chain activities to cost-effective locations abroad

Globalization effect on environment

Harms by promoting increased manufacturing and economic activity that results in pollution, habitat destruction, and deterioration of the ozone layer

Stages in Firm's Value Chain

R&D, Procurement (sourcing), Manufacturing, Marketing, Distribution, and Sales & Service

Four types of participant in international business

1. Focal firm
2. Distribution Channel Intermediary
3. Facilitator
4. Governments

Distribution Channel Intermediary

A specialist firm that provides various logistics and marketing services for focal firms as part of the international supply chain (in home country and abroad)

Facilitator

A firm or an individual with special expertise in banking, legal advice, customs clearance, or related support services that assists focal firms in the performance of international business transactions

Freight Forwarder

A specialized logistics service provider that arranges international shipping on behalf of exporting firms

Licensor

A firm that enters a contractual agreement with a foreign partner to allow the partner the right to user certain intellectual property for a specified period of time in exchange for royalties, or other forms of compensation

Franchisor

A firm that grants another the right to use an entire business system in exchange for fees, royalties, or other forms of compensation

Turnkey Contractors

Focal firms or a consortium of firms that plan, finance, organize, manage, and implement all phases of a project and then hand it over to a foreign customer after training local personnel

Build-own-transfer venture

A type of turnkey contract in developing economies where the contractors acquire an ownership stake in the facility for a period of time until it is turned over to the client

International Collaborative Venture

A cross-border business alliance in which partnering firms pool their resources to create a new venture, sharing the associated costs and risks

2 types of international collaborative venture

1. Joint Venture Partner
2. Project-based, Nonequity Venture Partner

Joint Venture Partner

A focal firm that creates and jointly owns a new legal entity through equity investment or pooling of assets

Project-based, Nonequity Venture Partner

A collaboration in which the partners create a project with a relatively narrow scope and a well-defined timetable, without creating a new legal entity

Foreign Distributor

A foreign market-based intermediary that works under contract for an exporter, takes title to, and distributes the exporter's products in a national market or territory, often performing marketing functions such as sales, promotion, and after-sales servic

Agent

An intermediary that handles orders to buy and sell commodities, products, and services in international business transactions for a commission

Manufacturer's Representative

An intermediary contracted by the exporter to represent and sell its merchandise or services in a designated country or territory

Trading Company

An intermediary that engages in import and export of a variety of commodities, products, and services

Export Trading Company (ETC)

(1982) provides firms with incentives to engage in joint exporting through the formation of export trading companies; few were formed

Export Management Company (EMC)

A domestically based intermediary that acts as an export agent on behalf of a client company

Logistics Service Provider

A transportation specialist that arranges for physical distribution and storage of products on behalf of focal firms, as well as controlling information between the point of origin and the point of consumption

Customs Brokers

Specialist enterprises that arrange clearance of products through customs on behalf of importing firms

Commercial Banks

Make possible the exchange of foreign currencies and provide financing to buyers and sellers who usually require credit to finance transactions

Export Import Bank

A federal agency that assists exporters in financing sales of their products and services in foreign markets

Insurance Companies

Provide coverage against commercial and political risks

International Business Consultants

Advise internationalizing firms on various aspects of doing business abroad and alert them to foreign market opportunities

Central Banks

The monetary authorities in each country that issue currency and regulate national money supplies

Sovereign Wealth Fund (SWF)

A state-owned investment fund that undertakes systematic, global investment activities

Culture

Learned, shared, and enduring orientation patterns in a society. (Is demonstrated through values, ideas, attitude, behaviors, and symbols

Ethnocentric Orientation

Using our own culture as the standard for judging other cultures

Polycentric Orientation

A host-country mind-set in which the manager develops a strong affinity with the country in which she or he conducts business

Geocentric Orientation

A global mind-set in which the manager is able to understand a business or market without regard to country boundaries

What culture IS NOT

1. Not right or wrong
2. Not about individual behavior
3. Not inherited

Socialization

The process of learning the rules and behavioral patterns appropriate to one's society

Acculturation

The process of adjusting and adapting to a culture other than one's own

Iceberg Concept of Culture's 3 layers of awareness

1. High Culture
2. Folk Culture
3. Deep Culture

High Culture

Cultural makeup that is visible

Folk Culture

Cultural makeup that we are aware of

Deep Culture

Cultural makeup that we are unaware of

3 Cultures employees are socialized into

1. National Culture
2. Professional Culture
3. Corporate Culture

Cultural Metaphor

A distinctive tradition or institution strongly associated with a particular society (ex: American football)

Stereotypes

Generalizations about a group of people that may not be factual, often overlooking real, deeper differences

Idiom

An expression whole symbolic meaning is different from its literal meaning

E. T. Hall

Made distinction between high- and low-context cultures

Low-context Culture

A culture that relies on elaborate verbal explanations, putting much emphasis on spoken words (ex: German, Swiss, Scandinavian, North American)

High-context Culture

A culture that emphasizes nonverbal messages and views communication as a means to promote smooth, harmonious relationships (ex: Chinese, Korean, Japanese, Vietnamese)

Geert Hofstede's five dimensions of national culture

1. Individualism vs. Collectivism
2. Power Distance
3. Uncertainty Avoidance
4. Masculinity vs. Femininity
5. Long-term vs. Short-term Orientation

Individualism vs. Collectivism

Describes whether a person functions primarily as an individual or as part of a group

Power Distance

Describes how a society deals with the inequalities in power that exist among people

Uncertainty Avoidance

The extent to which people can tolerate risk and uncertainty in their lives

Masculinity vs. Femininity

Refers to society's orientation bases on traditional male and female values

Long-term vs. Short-term Orientation

Refers to the degree to which people and organizations defer gratification to achieve long-term sucess

Dimensions of Culture

Subjective and Objective

Monochronic

A rigid orientation to time, in which the individual is focused on schedules, punctuality, and time as a resouce

Polychronic

A flexible, nonlinear orientation to time, whereby the individual takes a long-term perspective and emphasizes human relationships

Described as the "mirror" of culture

Language

Self-reference Criterion

The tendency to view other cultures through the lens of our own culture

Critical Incident Analysis (CIA)

A method for analyzing awkward situations in cross-cultural encounters by developing objectivity and empathy for other points of view

3 Guidelines for cross-cultural success

1. Acquire factual knowledge about the culture, and try to speak the language
2. Avoid cultural bias
3. Develop cross-cultural skills

4 Traits of Cross-cultural Proficiency

1. Tolerance for ambiguity
2. Perceptiveness
3. Valuing personal relationships
4. Flexibility and adaptability

Ethics

Moral principles and values that govern the behavior of people, firms, and governments regarding right and wrong

Corruption

The abuse of power to achieve illegitimate personal gain

Corporate Social Responsibility (CSR)

A manner of operating a business that meets or exceeds the ethical, legal, commercial, and public expectations of stakeholders, shareholders, employees, and communities

Sustainability

Meeting humanity's needs without harming future generations

Intellectual Property

Ideas or works created by individuals or firms

Intellectual Property Rights

The legal claim through which the proprietary assets of firms and individuals are protected from unauthorized use by other parties

Relativism

The belief that ethical truths are not absolute but differ from group to group

Normativism

The belief that ethical behavioral standards are universal, and firms and individuals should seek to uphold them around the world

Ethical dilemma

A predicament with major conflicts among different interests and in which determining the most appropriate course of action is confounded by a set of solutions that are equally justifiable

Corporate Governance

The system of procedures and processes by which corporations are managed, directed, and controlled

5 Standards to examine ethical dilemmas

1. Utilitarian approach
2. Rights approach
3. Fairness approach
4. Common good approach
5. Virtue approach

Utilitarian Approach

The best ethical action is the one that provides the most good or does the least harm

Rights Approach

The decision maker chooses the action that best protects and respects the moral rights of everyone involved

Fairness Approach

Everyone should be treated equally and fairly

Common Good Approach

Actions should be based on the welfare of the entire community or nation

Virtue Approach

Ethical actions should be consistent with certain ideal virtues that provide for the full development of our humanity

Code of Ethics

A formal statement that describes what management expects of employees in the face of ethical challenges