International Business

Lecture-5
 Learning Objectives
1) To understand The meaning and scope of international business
2) To explain why firms become involved in international business
3) To define the basic concepts of international business
4) To list the various barriers to international business
5) To identify the ways in which international business is regulated
6) List and describe the different approaches firms take to conduct business internationally
7) Explain how a firm can adapt to foreign markets
8) Debate the advantages and disadvantages of trade protectionism.
9) Discuss the changing landscape of the global market and the issue of offshore outsourcing.
 What is international business?
International business is the performance of business activities across national
boundaries. Every nation in the world participate in international business to some
extent. Involvement in international business has increased since 2nd world war and
growing as we move into 21st century.
International business occurs in many different formats:
• The movement of goods from country to another (exporting, importing, trade)
• Contractual agreements that allow foreign firms to use products, services, and
processes from other nations (licensing, franchising)
• The formation and operations of sales, manufacturing, research and development,
and distribution facilities in foreign markets (Foreign direct Investment)
 Why firms conduct international business?
1) Scarcity of resources: No nation, not even a technologically advanced can produce all the products its people want and need.
2) No country is completely self-sufficient
3) New market for product or services
4) Acquire Resource
5) Free trade: The movement of goods and services among nations without political or economic barriers.
6) Diversification
7) Absolute advantage: A nation has a absolute advantage if it can produce a product more efficiently than any other nation. The
advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than
all other countries.
8) Comparative advantage: When a country can produce one product more efficiently and at a lower cost than other products in
comparison to other nation. It shifts frequently. Theory that states that a country should sell to other countries those products that
it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or
efficiently.
 Basic concepts of International Business
Some basic concepts are important for understanding international business which are given
below…………….
1) Exporting and importing: Exporting is selling domestic-made products in another
country. Importing is purchasing goods made in another country. Bangladesh has a
export volume $36.66 billion in last fiscal year.
2) Balance of Trade: A country’s balance of trade is the difference between the amount it
exports and the amount it imports.
Trade surplus: A nation that exports more than it imports maintains a favorable
balance of trade which is called trade surplus.
Trade deficit: A nation that imports more than it exports has an unfavorable balance of
trade which is trade deficit.
 Basic concepts of International Business
3) Balance of payments: A country’s balance of payments is the total flow of money
into and out of the country. The balance of payments is determined by …………
o Balance of trade
o Foreign trade
o Foreign investment
o Military spending
o Money spend by tourist in other countries
4) Dumping: Selling products in a foreign country at lower prices than those charged in
the producing country.
 Basic concepts of International Business
5) Exchange rate: The rate at which one country’s currency can be exchanged for
that of another country is called the exchange rate. Determinants of exchange
rate………
1) Governments
2) Market conditions
Devaluation of currency by governments reduces the value of a nation’s currency
in relation to currencies of other nations.
Revaluation increases the value of a country’s currency in relation to that of other
currencies.
 Basic concepts of International Business
There are two types of exchange rate which are………..
i. Fixed exchange rate: An unvarying exchange rate set by government
policy.
ii. Floating exchange rate: An exchange rate that fluctuates with market
conditions. This rate is determined by market demand and supply
conditions.
6) Countertrading A complex form of bartering in which several countries
may be involved, each trading goods for goods or services for services.
 Forces Affecting Trading in Global Markets
Firms desiring to enter international business face obstacles among which some are more severe than others. Most
common barriers to effective international business are following………..
1) Cultural and social barriers : The word culture refers to the set of values, beliefs, rules, and institutions held by a specific
group of people. Culture can include social structures, religion, manners and customs, values and attitudes, language, and
personal communication. If you hope to get involved in global trade, it’s critical to be aware of the cultural differences
among nations.
2) Political barriers
3) Physical and Environmental Forces
4) Tariffs and Trade restrictions
❖ Import tariff
❖ Quotas and embargoes
❖ Exchange control
 Approaches or Strategies to International
Business
A firm that decides to enter international business must select an approach or appropriate
strategy among them some require relatively low levels of commitment while others requires
much higher level of commitment like…………
Exporting
Licensing and franchising: Licensing is a global strategy in which a firm (the licensor) allows a
foreign company (the licensee) to produce its product in exchange for a fee (a royalty).
Franchising is a contractual agreement whereby someone with a good idea for a business sells
others the rights to use the business name and sell a product or service in a given territory in a
specified manner.
Contract Manufacturing: A foreign company’s production of private-label goods to which a
domestic company then attaches its brand name or trademark; part of the broad category of
outsourcing.
 Approaches or Strategies to International
Business
Joint venture and Strategic Alliances: Joint venture is a partnership in which two or more companies (often
from different countries) join to undertake a major project. Strategic Alliances is a long-term partnership
between two or more companies established to help each company build competitive market advantages.
Trading companies
Countertrading
Foreign Direct Investment: Foreign direct investment (FDI) is the buying of permanent property and
businesses in foreign nations. The most common form of FDI is a foreign subsidiary, a company owned in a
foreign country by another company, called the parent company. The subsidiary operates like a domestic firm, with
production, distribution, promotion, pricing, and other business functions under the control of the subsidiary’s
management.
Multinational corporations: An organization that manufactures and markets products in many different
countries and has multinational stock ownership and multinational management.
STRATEGIES FOR REACHING GLOBAL
MARKETS
 Adapting to foreign markets
Firms engaged in international market must adapt to foreign market because of
differences from country to country. So a firm need to gear its product offering,
prices, distribution systems and methods of promotion to foreign countries.
1) Product
2) Price
3) Distribution
4) Promotion
 Regulation of International Business
For regulating international business a number of laws and organizations have been developed which are given below….
1) Legislation
2) International organizations
GATT( General Agreement on tariffs and Trade): In 1948, government leaders from 23 nations formed the General Agreement on Tariffs
and Trade (GATT), a global forum for reducing trade restrictions on goods, services, ideas, and cultural programs. In 1986, the Uruguay
Round of the GATT convened to renegotiate trade agreements. After eight years of meetings, 124 nations voted to lower tariffs an average
of 38 percent worldwide and to expand new trade rules to areas such as agriculture, services, and the protection of patents.
World Bank: The international organization that replaced the General Agreement on Tariffs and Trade, and was assigned the duty to
mediate trade disputes among nations.
IMF: The IMF works with governments around the world to modernize their economic policies and institutions, and train their
people.
3) Economic communities or common markets: A common market (also called a trading bloc) is a regional group of countries with a
common external tariff, no internal tariffs, and coordinated laws to facilitate exchange among members. The European Union (EU),
Mercosur, the Association of Southeast Asian Nations (ASEAN) Economic Community, and the Common Market for Eastern and
Southern Africa (COMESA) are common markets.
 Trade Protectionism
• Trade protectionism is the use of government regulations to limit the import
of goods and services.
• It allows domestic producers to survive and grow
• Producing more jobs for locals.
Trade Protectionism
International Trade Barriers