International Business Management Tutorial
International Business ManagementAbout the TutorialInternational Business is a subject that teaches how to nurture a local business and makeit global. It explains the business practices and strategies required to succeed ininternational markets.In this tutorial, it has been our endeavor to cover the multidimensional aspects ofInternational Business in an easy-to-understand manner.AudienceThis tutorial is specially designed for the students of Management, Commerce, HumanResources, Marketing, and Business Law.PrerequisitesTo understand this tutorial, it is advisable to have a foundation level knowledge of businessand management studies. However, general students who wish to get a brief overviewInternational business may find it quite useful.Copyright & Disclaimer Copyright 2019 by Tutorials Point (I) Pvt. Ltd.All the content and graphics published in this e-book are the property of Tutorials Point (I)Pvt. Ltd. The user of this e-book is prohibited to reuse, retain, copy, distribute or republishany contents or a part of contents of this e-book in any manner without written consentof the publisher.We strive to update the contents of our website and tutorials as timely and as precisely aspossible, however, the contents may contain inaccuracies or errors. Tutorials Point (I) Pvt.Ltd. provides no guarantee regarding the accuracy, timeliness or completeness of ourwebsite or its contents including this tutorial. If you discover any errors on our website orin this tutorial, please notify us at contact@tutorialspoint.comi
International Business ManagementTable of ContentsAbout the Tutorial . iAudience . iPrerequisites . iCopyright & Disclaimer . iTable of Contents . iiPART 1: THE INTERNATIONAL BUSINESS ECOSPHERE . 11.IB – Introduction . 2A Global Village . 2What is International Business? . 2Internationalization of Business . 3Advantages of Internationalization . 3Globalization . 4Factors Causing Globalization of Businesses . 42.IB – Country Attractiveness . 6Adapting to Changing Needs . 6Country Attractiveness . 7Business Environments . 73.IB – Protectionism. 104.Liberalization . 12Liberalization Vs Deregulation . 12Arguments, Counterarguments, and Discussions . 12Liberalization, Privatization, and Globalization . 13Revolutionary Economic Trends . 13PART 2: INTERNATIONAL TRADE . 145.General Agreements on Tariffs and Trade . 15General Agreements on Tariffs and Trade . 15GATT – Major Principles. 15Role of GATT in Promoting International Trade . 156.World Trade Organization . 17Reasons behind the Formation of WTO . 17Role of WTO in Promoting International Trade . 18Role of Developing Countries . 197.Global Trade – Major Challenges . 208.IB – Modern Theories. 22The Heckscher and Ohlin Model . 22The Samuelson and Jones Model . 22The Krugman and Obsfeld Model . 23The Michael Porter Model . 239.Global Competetiveness . 24ii
International Business ManagementFactors Affecting Global Competitiveness . 2410. Regional Trading Blocs . 25What are Regional Trading Blocs? . 25Regional Trading Blocs – Advantages . 25Regional Trading Blocs – Disadvantages . 2611. Major Trade Blocs . 27ASEAN . 27EU . 27MERCOSUR. 27NAFTA . 28PART 3: STRATEGIC APPROACHES . 2912. Strategic Compulsions. 30Areas of Strategic Compulsions . 30Standardization Vs Differentiation . 31Strategic Options . 31Factors that Affect Strategic Options. 3213. Global Portfolio Management. 34Factors Affecting Global Portfolio Investment . 34Modes of Global Portfolio Management . 35Drawbacks of Global Portfolio Management . 3614. IB – Modes of Entry. 37Exporting. 37Licensing . 37Franchising . 38Turnkey Project . 38Mergers & Acquisitions. 38Joint Venture . 38Wholly Owned Subsidiary . 3915. IB – Organizational Structures. 40Centralization vs. Decentralization . 40Use of Subsidiary Board of Directors . 40Organizational Structures . 40Mixed Matrix . 4616. IB – Control Mechanisms . 48Objectives of Control . 48Types of Control Mechanisms . 48Approaches to Control Mechanisms. 49Constraints of Control Approaches. 5017. IB – Performance Issues . 52Effective Performance Measurement System. 53Performance Evaluation System. 53Financial and Non-Financial Measures of Evaluation . 54Types of Performance Evaluation Systems . 54iii
International Business ManagementUNIT 4: BUSINESS OPERATIONS . 5518. IB – Production Issues . 56Factors that Affect Production . 56Facility or Location. 56Scale of Operations. 57Cost of Production . 57Make-or-Buy Decisions . 5719. IB – Supply Chain Issues . 59Globalization and its Effect on Supply Chain . 5920. Global Marketing Mix . 60Global Marketing Mix: Consumer Products . 60Global Marketing Mix: Price. 61Global Marketing Mix: Promotion . 62Global Marketing Mix: Distribution . 64Application of 4 P’s . 6521. IB – Financial Aspects . 67Foreign Investment by International Companies . 67International Investment Outcomes. 68Factors for Investment Decisions . 68Funding the International Business . 69Sources of Funds . 69Foreign Exchange Risks . 69Hedging Forex Risks – Internal Techniques . 70Hedging Forex Risks – External Techniques . 7022. IB – HRM Issues. 72Recruitment and Selection . 72Development & Training . 72Performance Evaluation . 73Management of Expatriates. 73PART 5: MISCELLANEOUS . 7523. IB – Adverse Effects. 7624. IB – Conflict Management . 78Types of Conflicts . 78Factors Causing Conflicts . 79Conflict Management . 79Five A’s Technique . 8125. IB – Negotiations. 83Role of International Agencies in Negotiations . 8426. IB – Ethical Issues . 86Employment Practices and Ethics. 86Human Rights . 86Environmental Pollution . 86Corruption. 87iv
International Business ManagementMoral Obligations . 87v
International Business ManagementPart 1: The International Business Ecosphere1
International Business Management1. IB – INTRODUCTIONA Global VillageThe world is fast becoming a global village where there are no boundaries to stop freetrade and communication. Keeping pace with it, the way we do business has changed inan unprecedented manner. The competition, in the global marketplace, is at its peak whereall companies want to sell their goods to everyone, everywhere on the globe.Figure: A Global Village without BoundariesFor example, the faucet we see in our bathroom may be from Italy. The towels we usemay be a Brazilian product. The automobile we drive may be a Japanese or German brand.The air conditioners we use may be from France. It is almost impossible to stay isolatedand be self-sufficient in this day and age. That is why multinational companies are a reality.What is International Business?Any business that involves operations in more than one country can be called aninternational business. International business is related to the trade and investmentoperations done by entities across national borders.2
International Business ManagementFirms may assemble, acquire, produce, market, and perform other value-additionoperations on international scale and scope. Business organizations may also engage incollaborations with business partners from different countries.Apart from individual firms, governments and international agencies may also get involvedin international business transactions. Companies and countries may exchange differenttypes of physical and intellectual assets. These assets can be products, services, capital,technology, knowledge, or labor.Note: In this tutorial, we are primarily focusing towards business operations of theindividual firm.Internationalization of BusinessLet’s try to explore the reasons why a business would like to go global. It is important tonote that there are many challenges in the path of internationalization, but we’ll focus onthe positive attributes of the process for the time-being.There are five major reasons why a business may want to go global: First-mover Advantage: It refers to getting into a new market and enjoy theadvantages of being first. It is easy to quickly start doing business and get earlyadopters by being first. Opportunity for Growth: Potential for growth is a very common reason ofinternationalization. Your market may saturate in your home country and thereforeyou may set out on exploring new markets. Small Local Markets: Start-ups in Finland and Nordics have always looked atinternationalization as a major strategy from the very beginning because their localmarket is small. Increase of Customers: If customers are in short supply, it may hit a company’spotential for growth. In such a case, companies may look for internationalization. Discourage Local Competitors: Acquiring a new market may mean discouragingother players from getting into the same business-space as one company is in.Advantages of InternationalizationThere are multiple advantages of going international. However, the most striking andimpactful ones are the following four.Product FlexibilityInternational businesses having products that don’t really sell well enough in their local orregional market may find a much better customer base in international markets. Hence, abusiness house having global presence need not dump the unsold stock of products atdeep discounts in the local market. It can search for some new markets where the productssell at a higher price.A business having international operations may also find new products to sellinternationally which they don’t offer in the local markets. International businesses havea wider audience and thus they can sell a larger range of products or services.3
International Business ManagementLess CompetitionCompetition can be a local phenomenon. International markets can have less competitionwhere the businesses can capture a market share quickly. This factor is particularlyadvantageous when high-quality and superior products are available. Local companiesmay have the same quality products, but the international businesses may have littlecompetition in a market where an inferior product is available.Protection from National Trends and EventsMarketing in several countries reduces the vulnerability to events of one country. Forexample, the political, social, geographical and religious factors that negatively affect acountry may be offset by marketing the same product in a different country. Moreover,risks that can disrupt business can be minimized by marketing internationally.Learning New MethodsDoing business in more than one country offers great insights to learn new ways ofaccomplishing things. This new knowledge and experience can pave ways to success inother markets as well.GlobalizationAlthough globalization and internationalization are used in the same context, there aresome major differences. Globalization is a much larger process and often includes the assimilation of themarkets as a whole. Moreover, when we talk about globalization, we take up thecultural context as well. Globalization is an intensified process of internationalizing a business. In generalterms, global companies are larger and more widespread than the low-lyinginternational business organizations. Globalization means the intensification of cross-country political, cultural, social,economic, and technological interactions that result in the formation oftransnational business organization. It also refers to the assimilation of economic,political, and social initiatives on a global scale. Globalization also refers to the costless cross-border transition of goods andservices, capital, knowledge, and labor.Factors Causing Globalization of BusinessesThere are many factors related to the change of technology, international policies, andcultural assimilation that initiated the process of globalization. The following are the mostimportant factors that helped globalization take shape and spread it drastically.The Reduction and Removal of Trade BarriersAfter World War II, the General Agreement on Tariffs and Trade (GATT) and the WTO havereduced tariffs and various non-tariff barriers to trade. It enabled more countries toexplore their comparative advantage. It has a direct impact on globalization.4
International Business ManagementTrade NegotiationsThe Uruguay Round of negotiations (1986–94) can be considered as the real boon forglobalization. It is considerably a large set of measures which was agreed upon exclusivelyfor liberalized trade. As a result, the world trade volume increased by 50% in the following6 years of the Uruguay Round, paving the way for businesses to span their offerings at aninternational level.Transport CostsOver the last 25 years, sea transport costs have plunged 70%, and the airfreight costshave nosedived 3–4% annually. The result is a boost in international and multi-continentaltrade flows that led to Globalization.Growth of the InternetExpansion of e-commerce due to the growth of the Internet has enabled businesses tocompete globally. Essentially, due to the availability of the Internet, consumers areinterested to buy products online at a low price after reviewing best deals from multiplevendors. At the same time, online suppliers are saving a lot of marketing costs.Growth of Multinational CorporationsMultinational Corporations (MNCs) have characterized the global interdependence. Theyencompass a number of countries. Their sales, profits, and the flow of production is relianton several countries at once.The Development of Trading BlocsThe 'regional trade agreement' (RTA) abolished internal barriers to trade and replacedthem with a common external tariff against non-members. Trading blocs actually promoteglobalization and interdependence of economies via trade creation.5
International Business Management2. IB – COUNTRY ATTRACTIVENESSThe International business environment includes various factors like social, political,regulatory, cultural, legal and technological factors that surround a business entity invarious sovereign nations. There are exogenous factors relative to the homeenvironment of the organization in the international environment. These factors influencethe decision-making process on the use of resources and capabilities. They also make anation either more or less attractive to an international business firm.We will take up the most important factors and see how they affect the operational processof a business.Adapting to Changing NeedsFirms do not have any control over the external business environment. Therefore, thesuccess of an international company depends upon its ability to adapt to the overallenvironment.Its success also depends on the ability to adjust and manage the company’s internalvariables to leverage on the opportunities of the external environment. Moreover, thecompany’s capability to control various threats produced by the same environment, alsodetermines its success.A term called ‘country attractiveness’ is often discussed in the international businessfraternity. It is important to consider attractiveness before we move on to discussenvironmental factors.6
International Business ManagementCountry AttractivenessCountry attractiveness is a measure of a country’s attractiveness to the internationalinvestors. In international business, investment in foreign countries is the most importantaspect and hence firms want to determine how suitable a country is in terms of its externalbusiness environments.International business firms judge the risks and profitability of doing business in aparticular country before investing and starting a business ther
International Business Management i About the Tutorial International Business is a subject that teaches how to nurture a local business and make it global. It explains the business practices and strategies required to succeed in international markets.
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