INTERNATIONAL BUSINESS

M.Com 1st year

Vishnupriya college of management studies
INTRODUCTION
 International business is a term used to collectively describe all
commercial transactions that take place between two or more
nations.

 I B includes any type of business activity that crosses national

borders.

 Transaction of economic resources includes capital, skills, people

etc for international production of physical goods and services
such as finance, banking, insurance, construction etc.,.

 Foreign business refers to domestic operations within a foreign

country.

 I B has become massive in scale and has come to exercise a major

influence over political, economic and social from many types of
MEANING AND DEFINITION
 Meaning:
I B refers to the type of business that conducts business
transactions all over the world. These transaction includes the transfer of
goods, services, technology, managerial knowledge and capital to other
countries.

 Definition:
According to Harcourt Brace & Co, “International business
consists of transactions that are devised and carried out across national
borders to satisfy the objectives of individuals and organizations”.
NATURE OF INTERNATIONAL BUSINESS

1. Accurate information

2. Large scale operations

3. Market segmentation based on geographic segmentation

4. International business for integration of economies

5. International business generates enthusiastic competition

6. International business gives a lot of importance to science &

technology
CHARACTERISTICS OF INTERNATIONAL
BUSINESS

i. Performs several operations

ii. Integration of economies

iii. Dominated by developed countries and MNC’s

iv. Benefits to participating countries

v. Intense competition

vi. Particular role of science and technology.

vii. International restrictions

viii. Responsive character.

SCOPE OF INTERNATIONAL BUSINESS
 International Marketing

 International investment

 Management of foreign exchange

 International finance

 Management of international human resources.

 Management of cultural diversity

 Management of international production and logistics

 International strategic management

IMPORTANCE OF INTERNATIONAL
BUSINESS

 Earn foreign exchange

 Optimum utilization of resources

 Achieve its objectives

 To spread business risks

 Improve organization’s efficiency

 Get benefits from government

 Expand and diversify

 Increase competitive capacity

DRIVERS OF INTERNATIONAL BUSINESS
Globalization of markets

Globalization of production

Falling barriers to trade and investment

Technological innovation

Multinational enterprises

Rising aspirations and wants

 INTERNATIONAL BUSINESS V/S DOMESTIC BUSINESS

International Business Domestic Business

 Exchange activities takes place  Exchange activities takes place

b/w two countries. within a countries.

 Unlimited and across boundary.  Limited territory and single

 More benefits. boundary.

 More options, routes to enter the  Lesser benefits.

IB to d/f countries  Less option, no restrictions to

 Complicated customs, tariff & enter the business in d/f states.

procedures.  More easier.

 Sharing of latest technology.  Lack of technology.

ROUTES OF GLOBALIZATIONS

Import and export trade

Licensing

Franchising

Joint Venture & strategic alliance

Foreign direct investment

Turnkey project
STAGES OF INTERNATIONALIZATION

 Stage: 1 Domestic companies

 Stage: 2 International companies

 Stage: 3 Multinational companies

 Stage: 4  Global companies

 Stage: 5  Transitional companies

THEORIES OF INTERNATIONAL BUSINESS

1. Mercantilism theory

2. Theory of Absolute advantage

3. Theory of comparative advantage

4. National competitive advantage

1. MERCANTILISM THEORY
 The trade theory that states the nations should accumulate finance, wealth, usually

in the form of gold, by encouraging export and discouraging import.

 Great Britain, France, The Netherlands, Portugal and Spain used mercantilism

during the 1500s to the late 1700s.

 Zero-sum game.

 Mercantilist countries paid the colonies little for export and charged them high

for import.

 The main problem with it is that all countries engaged in export but was

restricted from import, prevention from development of international trade.

 CONT’D…, MERCANTILISTS POLICIES HAVE INCLUDES

o High tariffs, especially on manufactured goods.

o Monopolizing markets with staple ports.

o Exclusive trade with colonies.

o Forbidding trade to be carried in foreign ships.

o Export subsidies.

o Banning all export of gold and silver

o Promoting manufacturing with research or direct subsidies.

o Limiting wages

o Maximizing the use of domestic resources

o Restricting domestic consumption with non-tariff barriers to trade.

2. THE ABSOLUTE ADVANTAGE THEORY
This theory was developed by the Scottish economist Adam Smith in
1776.

Smith stated that tariffs and quotas should not restrict international
trade; it should be allowed to flow according to market force.

Smith argued that a country should concentrate on production of

goods in which it holds an absolute advantage.

The theory of absolute advantage destroys the mercantilistic idea

that international trade is a zero-sum game.

According to the theory, international trade is a positive-sum game,

because there are gains for both countries for an exchange.
CONT’D…….
 This theory measures the nation’s wealth by the living
standards of its people and not by gold and silver.

 The theory refers to the ability of a party to produce

more goods or services than competitors, using the same
amount of resources.

 Adam smith first described the principles of absolute

advantage in the context of international trade, using
labor as the only input.

 Adam smith also stated that the wealth of nations

depends upon the goods and services available to their
citizens, rather than their gold reserves.
ASSUMPTIONS OF THE THEORY
i. Trade is between two countries.

ii. Only 2 commodities are traded.

iii. Free trade exists between the countries.

iv. The only element of cost of production is

labor.

v. There are no trade barriers.

IMPLICATIONS OF THE THEORY
 By trading between two countries, living of standards of
people of both the countries can be increased.

 Inefficiency in producing certain products in some

countries can be reduced.

 Global efficiency and effectiveness can be increased by

trading etc..

 By trading, two countries can have more quantities of both

the products.
CRITICISM
 Importantly, most of the developing countries do not have
absolute advantage of producing any product.

 It considers only one element of production, Labor and

ignores all other elements like; technology, natural
resources and transportation.

 This theory does not deal with country-by-country

differences in specialization.
COMPARATIVE COST ADVANTAGE THEORY
 It was developed by David Ricardo in 1817.

 It is based on relative productivity differences and incorporates the

concept of opportunity cost.

 According to this theory, “It is common that some countries have the
advantage of producing same goods at a lower cost compared to others
because of availability of cheap labor, skilled labor, cheap raw
materials, good climatic conditions etc.

 A country should export those products for which it is relatively more

productive than that of other countries and import those goods for
which other countries are relatively more productive than it is”.
ASSUMPTION
 The only elements of cost of production is labor.

 Production is the subject to the law of constant returns.

 There are no trade barriers.

 Trade is free from cost of transportation.

 Only 2 countries and 2 products are considered/involved.

IMPLICATIONS
 Efficient allocation of global resources.

 Global production can be maximized at low cost.

 Uniform product price prevails among world markets.

 Optimization of demand for resources and products among

world nations.
DRAWBACKS

 All countries are not free of trade barriers.

 Consideration of labor cost only but not others, particularly

transportation cost.

 Fails to consider money value of cost of production.

 THEORY OF NATIONAL COMPETITIVE
ADVANTAGE
 It was introduced by Michael Porter.
 This strategic analysis typically focused on two
views; 1. Resource-based view
2. industry view.
 This model of determining factors of national
advantage is known as “Porter’s Diamond”.
FOUR PILLARS OF THE THEORY

Factor Conditions

Related &
Demand Conditions
Supporting
industries

Strategy, structure
& Rivalry
REASONS FOR GOING INTERNATIONAL BUSINESS

 Opportunities for small business.

 Finding Successful foreign partnerships.
 Diversification
 Profit advantages
 Business Growth opportunities
 Competition
 Government policies and regulations.
 Monopoly
 Spin-off benefits
 Business tactical visions
 ADVANTAGES OF INTERNATIONAL BUSINESS

 Faster growth
 New technologies
 Spur of foreign competition
 Increase wages levels.
 Access to a large talent pool
 More profits
 Maximum utilization of resources
 Ensures peace among nations
 Economies of large scale production
 Enhanced prestige
DISADVANTAGES OF INTERNATIONAL BUSINESS

 Political and legal differences

 Cultural differences
 Economic differences
 Differences in the currency unit
 Differences in the languages
 Differences in marketing structure
 Trade restriction
 High costs of distance
 Differences in trade practices
 Import of harmful goods.
International Business
Environment
MEANING OF INTERNATIONAL BUSINESS
ENVIRONMENT

 It can be defined as the environment in different

sovereign countries, with factors exogenous to the
home environment of the organization,
influencing decision making on resource use and
capability.
 Economic Environment
 Socio-Cultural Environment

 Political and Legal Environment

 Technological Environment
 ECONOMIC ENVIRONMENT

 Economic environment refers to that entire environment

factor which ha a bearing functioning of the business unit.
 These factors include gross national product, corporate profits,
inflation rate, employment, balance of payment, interest rates
consumer income etc.
 Components of the economic environment;
a. Income and wealth
b. Employment levels
c. Productivity
IMPORTANCE OF ECONOMIC ENVIRONMENT

Capitalizing emerging opportunities.

Activating management.

Image building

Basis of strategy

Intellectual stimulation

Condition learning
IMPACT OF ECONOMIC ENVIRONMENT ON
BUSINESS

 Demand and offer

 Marginal and complete power

 Cash as well as finance

 Financial development and growth.

 Income and employment

 Common Price Level

 Industry Cycles
 FACTORS OF ECONOMIC ENVIRONMENT

 Growth strategy: Types of strategy:

A. MERGER AND ACQUISITION

B. JOINT VENTURE

C. STRATEGIC ALLIANCE

 Economic System: Types of economic system

a. Capitalism

b. Socialism

c. Mixed Economic

 Economic Policies: Different Policies;

a. Monetary policy d. Foreign Trade
b. Fiscal Policy e. Foreign Investment Policy
c. Industrial Policy
CONT’D………

 Industry

 Agriculture

 Infrastructure

 Financial and Fiscal Factor

 Removal of regional imbalance

 Price and distribution control

 Economic reforms

 Per capita and National income

 SOCIO-CULTURAL ENVIRONMENT

 Social environment of business means all factors which

effects business socially. Different factors like family,
educational institutions and religion affects business
directly or indirectly.
 Cultural is a set of learned core values, beliefs,
standards, knowledge, moral, laws and behaviors shared
by individuals and societies determines how an individual
acts, feel and views oneself and others.
 Socio-cultural environment refers to the sum of all
learned attitudes and behaviors that influence how a
person thinks and behaves.
ELEMENTS OF SOCIETIES AND ITS EFFECT
ON BUSINESS

 Family
 Educational institutions

 Religion
FACTORS OF THE SOCIO-CULTURAL ENVIRONMENT

 Language

 Material Culture

 Aesthetics

 Social Organization

 Religious beliefs, attitudes, values, space and time.

CROSS CULTURAL ENVIRONMENT
 It means the interaction of people from different
backgrounds in the business world.

 Cross cultural is a vital issue in international business, as

the success of international trade depends upon the
smooth interaction of employees from different cultures
and regions.

 In an ever-expanding global economy, cross-culture and

adaptability will continue to be important factors in the
business world.
CROSS-CULTURE INCLUDES;
 Cross-cultural HR

 Cross-cultural Team-building

 Cross-cultural synergy

 Cross-cultural Awareness training

 Cross-cultural training for expatriate relocation

 Cross-cultural negotiations

 Cross-cultural PR consultancy

 Cross-cultural language training

 POLITICAL ENVIRONMENT
 Political environment means the set of activities of
the government which include plans, policies,
programs and controls which directly or indirectly
involve with the business.
 Political risk can be defined as the impact of political
change on the export firm’s operations and decision-
making process.
 Political risk is of a macro nature when political
inspired environmental changes affect all foreign
investment.
 POLITICAL FACTORS INFLUENCE IN
INTERNATIONAL BUSINESS

 Economic system

 Government system

 Trade agreements

 Formal trade barriers

 Informal trade barriers

 TECHNOLOGICAL ENVIRONMENT

 Technology refers to the methods or technique fro

converting inputs to outputs in accomplishing a specific
task.
 The term ‘method’ and ‘technique’ refers to not only to the
knowledge but also to the skills and the means for
accomplishing a task.
 It is application of scientific knowledge for practice
purpose.
 Technology is the usage and knowledge of tools, techniques,
crafts, systems or methods of organization.
 BENEFITS OF TECHNOLOGY
 Benefits in communication; Speed, clarity, proximity,
dissemination.

 Benefits in education: Personalized learning experience,

immediate response, self-paced, greater access.

 Benefits in healthcare: secure environment, flexibility,

cost and time-saving, medical devices, vulnerable
population.
DRAWBACKS OF TECHNOLOGY

 Dependency
 Challenges

 Lack of knowledge.
FEATURES OF TECHNOLOGY

 Technology continuously keeps changing.

 Reaching beyond requirement

 It is widespread

 Technology is self-reinforcing.

 Tremendous growth

 Helpful for mankind

 BENEFITS OF TECHNOLOGICAL
ENVIRONMENT

 Convenience

 Speed

 Communication

 Accuracy

 Development
 STEPS FOR TECHNOLOGICAL
DEVELOPMENT IN INDIA

 Establishment of technological and research

institute

 Positive technical policy

 High growth rate of information technology in

India.

 Incentive for promoting technology in India

 NATURAL ENVIRONMENT
 Natural environment includes natural resources, weather,
climatic conditions, port facilities, topographical factors
such as soil, sea, rivers, rainfall etc.

 Geographical conditions between markets may

sometimes call for changes in the marketing mix.

 Govt policies aimed at the preservation of environmental

purity and ecological balance, conservation of non-
replenish resources.
ELEMENTS OF NATURAL ENVIRONMENT

 Water on earth

 Atmosphere, climate and weather

 Effects of global warming

 Ecosystem
 GLOBALIZATION OF INDIAN BUSINESS ENVIRONMENT

 India’s economic integration with the rest of the

world was very limited because of the restrictive
economic policies followed until1991.

 Globalization refers to the ongoing social, economic,

and political process that deepens the relationships
and broadens the interdependencies amongst
nations—their people, their firms, their
organizations, and their governments. ... Global
events and competition affect almost all firms—
FACTORS FAVORING GLOBALIZATION IN INDIAN
BUSINESS ENVIRONMENT

 Human Resources
 Wide Base
 Growing Entrepreneurship
 Growing Domestic Market
 Niche Market
 Expanding markets
 Transactional of world economy
 NRIs
 Economic liberation
 Competition
 OBSTACLES TO GLOBALIZATION IN INDIAN BUSINESS
ENVIRONMENT

 Government policy and procedure

 High Cost

 Poor Infrastructure

 Obsolescence

 Resistance to change

 Poor quality image

 Supply problems

 Small size

 Lack of experience

 Limited R&D and marketing research

 Trade barriers