International Business

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International business

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Performance of trade and investment activities by firms across national borders

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Globalization of markets

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Ongoing economic integration and growing interdependency among countries worldwide

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International trade

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

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4 Economic Risks

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Cross cultural risk: A situation or event where a cultural miscommunication puts some human value at stake
Country risk: Potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country.
Currency risk: Risk of adverse fluctuations in exchange rates.
Commercial risk: Firm's potential loss or failure from poorly developed or executed business strategies, tactics or procedures.

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International Portfolio Investment

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Passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns

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Foreign Direct Investment (FDI)

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Internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant and equipment

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Porter's diamond

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How to gain national competitive advantage in an industry. Four points are: Firm strategy, structure and rivalry; demand conditions; related and supporting industries; factor conditions.

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GDP

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the total value of goods produced and services provided in a country during one year.

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Value chain

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Sequence of value adding activities performed by the firm in the process of developing, producing, marketing, and servicing a product.

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Why and how firms internationalize

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Internationalization process model of the firm suggests a gradual, evolutionary path to internationalization. slow and incremental nature of internationalization by the firm results from the uncertainty and uneasiness that managers have about cross-border transactions. Stages: domestic focus, preexport stage, experimental involvement, active involvement, and committed involvement (FDI)

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How firms can gain and sustain international competitive advantage.

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Since the MNE has traditionally been the major player in international business, many scholars have offered explanations of what makes these firms pursue and succeed in internationaliztion.

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Countertrade

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international business transaction where all or partial payments are made in kind (Exchange) rather than cash. Instead of receiveing money in payment for exported products, the firm receives other products or commodities.

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Advantages of exporting

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Increase overall sales volume, improve market share, and generate profit margins that are often more favorable.
Increase economies of scale adn therefore reduce per-unit costs of manufacturing.
Diversify customer base, reducing dependence on home markets
Stabilize fluctuations in sales associated with economic cycles or seasonality of demand.

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Disadvantages of exporting

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Fewer opportunities to learn about customers, competitors, and so on.
Exporting usually requires the firm to acquire new capabilities and dedicate organizational resources to properly conduct export transactions.
Exporting is much more sensitive to tariff and other trade barriers, as well as fluctuations in exchange rates.

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Indirect exporting

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Contracting with intermediaries located in the firm's home country to perform export functions

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Direct exporting

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Contracting with intermediaries located in the foreign market to perform export functions

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Importing= global sourcing = global procurement

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Firms buy products and services from foreign sources and bring them into the home market

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Examples of countertrade transactions

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Goodyear traded tires for minerals, textles and agricultural products.
Coca Cola sourced tomato paste from Turkey, oranges from Egypt, and beer from Poland in order to contribute to national exports in the countries it conducts business.

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Types of Countertrade

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Barter: direct exchange of goods without any money
Compensation deals: involve payment both in goods and cash

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Counterpurchase

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Seller agrees to sell its product at a set price and receives cash payment from the buyer.

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Problems in countertrade

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Low quality in the goods that the customer offers.
Difficult to put a market value
Both parties tend to pad prices
Time consuming transactions
Bureaucratic transactions.

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Why firms consider countertrade

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When the alternative is no trade at all, firms will want to consider countertrade.
it may help firms get a foothold in new markets and help them cultivate new customer relationships
Develop new sources of supply
Repatriate profits frozen in a foreign subsidiary operation's blocked accounts.

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Key players in international business

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MNCs: Multinational corporations, that have direct investments in multiple countries.
SMEs: Small companies and individuals become increasingly active in internatioanl trade and investment
Born-Global Firm: takes a global perspective on its market and engages in international business from or near its inception

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Globalization index

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Economic integration
Personal contact
Technological connectivity
Political engagement

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Economic integration

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Combines data on trade and FDI inflows and outflows

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Personal contact

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tracks international travel and tourism, international telephone calls and personal transfer

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Technological connectivity

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Counts the number of internet users, internet hosts and secure servers through which encrypted transactions are carreid out

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political engagement

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includes each country's membership in a variety of representative international organization, personell an d financial contributions to UN peacekeeping missions.

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drivers of market globalization

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Worldwide reduction of barriers to trade and investment
Transition to market-based economies and adoption of free trade in China, former Soviet Union countries, and elsewhere
Industrializaion, economic development and modernization
integration of world financial markets
advances in technology

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dimensions of market globalization

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integration and interdependence of national economies
rise of regional economic integration blocs
growth of global investment and financial flows
convergence of buyer lifestyles and preferences
globalization of firms' production activities

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societal consequences of market globalization

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loss of national sovereignty
offshoring and the flights of jobs
effect on the poor
effect on the natural environment
effect on national culture

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internationalization of the firm's value chain

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countless new business oportunities for internationalizing firms
new risks and intense rivalry from foreign competitors
more demanding buyers who source from suppliers worldwide
greater emphasis on proactive internationalization
internationalization of firm's value chain

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stages in the firm's value chain

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research and development, procurement, manufacturing, marketing, distribution and sales and service

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three participants in IB

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Focal firm - initiator of IB transaction, including MNEs and SMEs
Intermediary - specialist firm providing logistics and marketing services in the international supply chain
facilitator - a firm providing special expertise in legal advice, banking, customs clearance, market research and similar areas

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Joint venture

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focal firm creates and jointly owns a new legal entity together with foreign partners

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project-based collaborative venture

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focal firm collaborates with foreign partners on a project with a relatively narrow scope

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comparative advantage

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superior features of a country that provide it with unique benefits in global competition

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competitive advantage

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distinctive assets or competencies of a firm

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mercantilism

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the belief that national prosperity is the result of a positive balance of trade, maximize exports and minimze imports

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absolute advantage principle

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a country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country

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comparative advantage principle

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it is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is the relative efficiency with which it can produce th eproduct

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porter's diamond

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nation's competitiveness in an industry depends on the industry's capacity to innovate and upgrade, which in turn depends on four main determinants

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factor conditions

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basic factors/ advanced factors. basic factors are nation's resources and advanced are the result of investing in education and innovation. basic factors can spark initial production, but advanced account for sustained competitive advantage

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demand conditions

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sophisticated home market buyers drive companies to improve existing products and develop entirely new products and technologies

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related and supporting industries

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companies in an internationally competitive industry do not exist in isolation, supporting industries form 'clusters' of economics activity in the geographic area. each industry reinforces the competitiveness of every other industry in the cluster