Why Study International Business?

In today's economy, most economic boundaries have already disappeared and those remaining

will continue to diminish. This phenomenon is partially due to the proliferation of electronic

communication, which allows instantaneous information transfer for sales, marketing,

manufacturing and outsourcing. Furthermore, growing distribution networks, supply chains, and

transportation hubs simplify the movement of products. And, the broad networks of worldwide

financial institutions reduce currency issues. Thus, businesses operating in the Midwest can

service the needs of customers around the world.

Ultimately, most business professionals will in some way be impacted by international influences.

All individuals planning a career in business must understand the intricacies of doing business

with partners from other countries—whether the business is conducted in the United States or

outside our borders. Culture, language, political systems, geography, and socio-economic factors

all influence a person's business practices. Knowing that you need to research not only the

company you wish to do business with but, also, the culture, tradition, and business practices of

those you will be working with is vital to business success in this global marketplace.

In order to be prepared for a career in any facet of the business world (accounting, finance,

marketing, information technology, law, healthcare, etc.), knowledge and understanding of global

issues is critical. Thus, you should study international business to be prepared for diverse

business opportunities, knowing in advance that respect for and knowledge of your counterparts

can give you a competitive advantage.

Wikipedia

International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics,and transportation) that take place between two or more nations. Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons.[1] It refers to all those business activities which involves cross border transactions of goods, services, resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc.[2]

A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with operations in more than a country. An MNE is often called multinational corporation (MNC) or transnational company (TNC). Well known MNCs include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national markets.

Areas of study within this topic include differences in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local culture, corporate culture, foreign exchange market, tariffs, import and export regulations, trade agreements, climate, education and many more topics.

Each of these factors requires significant changes in how individual business units operate from one country to the next.

The conduct of international operations depends on companies' objectives and the means with which they carry them out. The operations affect and are affected by the physical and societal factors and the competitive environment.

Operations

Objectives: sales expansion, resource acquisition, risk minimization

Means

Modes: importing and exporting, tourism and transportation, licensing and franchising, turnkey operations, management contracts, direct investment and portfolio investments.

Functions: marketing, global manufacturing and supply chain management, accounting, finance, human resources

Overlaying alternatives: choice of countries, organization and control mechanisms

Physical and societal factors

Political policies and legal practices Cultural factors Economic forces Geographical influences

Competitive factors

Major advantage in price, marketing, innovation, or other factors. Number and comparative capabilities of competitors Competitive differences by country

There has been growth in globalization in recent decades due to the following eight factors:

Technology is expanding, especially in transportation and communications. Governments are removing international business restrictions. Institutions provide services to ease the conduct of international business. Consumers know about and want foreign goods and services. Competition has become more global. Political relationships have improved among some major economic powers. Countries cooperate more on transnational issues. Cross-national cooperation and agreements .

Studying international business is important because:

Most companies are either international or compete with international companies. Modes of operation may differ from those used domestically. The best way of conducting business may differ by country. An understanding helps you make better career decisions.

An understanding helps you decide what governmental policies to support.

Managers in international business must understand social science disciplines and how they affect all functional business fields.

Tom Travis, the managing partner of Sandler, Travis & Rosenberg, PA. and international trade and customs consultant, uses the Six Tenets when giving advice on how to globalize one's business. The Six Tenets are as follows[3]:

1. Take advantage of trade agreements: think outside the border o Familiarize yourself with preference programs and trade agreements. o Read the fine print. o Participate in the process. o Seize opportunities when they arise.

2. Protect your brand at all costs o You and your brand are inseparable. o You must be vigilant in protecting your intellectual property both at home and

abroad. o You must be vigilant in enforcing your IP rights. o Protect your worldwide reputation by strict adherence to labor and human

rights standards. 3. Maintain high ethical standards

o Strong ethics translate into good business. o Forge ethical strategic partnerships. o Understand corporate accountability laws. o Become involved with the international business self-regulation movement. o Develop compliance protocols for import and export operations. o Memorialize your company's code of ethics and compliance practices in

writing. o Appoint a leader.

4. Stay secure in an insecure world o Security requires transparency throughout the supply chain. o Participate in trade-government partnerships. o Make the most of new security measures. o Secure your data. o Keep your personnel secure.

5. Expect the Unexpected o The unexpected will happen. o Do your research now. o Address your particular circumstances.

6. All global business is personal o Go to the source. o Keep communications open. o Keep the home office operational. o Fly the flag at your overseas locations. o Relate to offshore associates on a personal level. o Be available to overseas clients and customers 24/7.

According to C.K. Prahalad & S. Hart,2002, The fortune at the bottom of the pyramid, Strategy & Business, 26: 54-67, and (2) S.Hart, 2005, Capitalism at the Crossroads (p. 111), Philadelphia: Wharton School Publishing.

Top Tier: Per capita GDP/GNI > $20,000 Approximately one billion people

Second Tier: Per capita GDP/GNI $2,000-$20,000 Approximately one billion people

Base of the Pyramid Per capita GDP/GNI < $2,000 Approximately four billion people

Modes of ibThe oldest mode of international business is foreign trade. A firm imports its necessary inputs from the

cheapest source, while its exports its output to different countries in order to earn maximum amount of

foreign  exchange. In this case, no overseas manufacturing is involved

The other mode of international business is licensing. When a firm lacks capital and detailed knowledge about a foreign market, it allows its technology, patent, trade mark and other proprietary advantages to be used for a fee by a licensee or technology importing firm. As compared to export, this mode requires less time or depth of involvement in foreign markets. This method is also used when the host government put restrictions on the inflow of foreign capital investment.

The third mode is known as management contracting. In this mode, the company sells abroad a particular resource, like management skills. The contract is meant for a given number of years during which the seller of management skills manages the affaires of the company located in the host country for a specific fee.

Joint ventures are the fourth mode. They represent a partnership agreement in which the venture is owned jointly by the international company and a company of the host country. Naturally, the joint venture allows the two firms to apply their respective comparative advantages in a given project. For example technology and marketing ability of German firms and raw material availability of Australia firms have led to joint-venture agreements between the two countries.

An international company may acquire existing operations in a foreign country in order to penetrate the foreign market. The greatest benefit of this mode is that the acquiring company does not have to begin operations from scratch, and so does not have to labor hard to grab the market. The quantum of investment, however, in this case is quite large.

Cont.........

Finally, an international company invests in the majority equity shares of the company of the host

country. This way, the company in the host country becomes a subsidiary of the international

company. This mode is

 better than the acquisition inasmuch as the operations can be tailored exactly to the firm's need and

what is more, the size of the investment is often lower than in case of acquisition. However, the

benefits begin to appear only when the consumer base is firmly established. The importer of goods

has normally to pay for the import in convertible currencies which they buy with their own currency.

Some time money is not the only way to do the business, in other words in exchange of useful good

or raw materials the exchange is done.

When a company innovates a specific technology and its product is mature in the markets abroad or

when the company wants to reap the location advantage in foreign country, it sets up an affiliate

there. Whatever the motivation behind foreign investment or foreign manufacturing, the company

evaluates the cash inflow and outflow during his life of the project and makes investments only

account foreign exchange risk and the political risk involved.

IIND as per 2008

The six major modes of international business are imports and exports, tourism and transportation,

licensing and franchising, turnkey operations, management contracts, and direct and portfolio

investment.

Imports and exports are the most common mode of international business, particularly in smaller

companies even though they are less likely to export. Large companies are more likely to engage in

other modes of

 international business in conjunction with importing and exporting. Companies may import and export

merchandise, defined as tangible goods brought into or out of (respectively) a country. While exports

and imports apply mainly to goods, they can also apply to services, or nonproducts.

Most service imports and exports revolve around tourism and transportation. The revenue gained

from international tourism and transportation is best seen in hotels, airlines, travel agencies, and

shipping companies. For many countries, especially in the Caribbean and Southeast Asia, their

income on foreign tourism is more important than their income from exports. The same holds true in

countries such as Norway and Greece, who earn a considerable amount from foreign shipping.

Many companies enter into international licensing agreements, allowing other countries around the

world to use their assets (ie: trademarks, patents, copyrights, or expertise) under contract, receiving

royalty payments in return. Similarly, many companies engage in franchising, a mode of business

where the franchisor allows the franchisee to use a trademark that is an essential part of the

franchisee's business. For example, Gloria Vanderbilt has franchised her name out to several clothing

companies, forming the Gloria Vanderbilt line. The franchisor also assists on a continuing basis in the

operation of the business-for example, by providing components, management services, and

technology.

Companies also pay fees that may be incurred on an international level for engineering services

handled through turnkey operations and management contracts. A turnkey operation involves

construction of facilities,

 performed under contract, which is then transferred to the owner when the company is ready to begin

operating. Management contracts are initiated when one company supplies personnel to perform

general or specialized management functions for another company. This is most evident in Disney's

theme parks in France, Japan, and China.

Finally, international business occurs within direct and portfolio investments. By investing in a foreign

company, the investor takes ownership in a foreign property for a financial return. A foreign direct

investment (the more common of the two) gives the investor a controlling interest in the foreign

company. When two or more companies share in an FDI, it is known as a joint venture. When a

government joins a company in an FDI, it becomes a mixed venture. Conversely, a portfolio

investment is a noncontrolling interest in a company that usually involves either taking stock in a

company or making loans to a company in the form of bonds, bills, or notes that the investor

purchases. Portfolio investments are particularly popular with multinational enterprises as they offer a

safe means towards short-term financial gain.

Modes of Entry into International Markets (Place)How does an organization enter an overseas market?

Background

A mode of entry into an international market is the channel which your organization employs to gain entry to a new international market. This lesson considers a number of key alternatives, but recognizes that alteratives are many and diverse. Here you will be consider modes of entry into international markets such as the Internet, Exporting, Licensing, International Agents, International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and International Sales Subsidiaries. Finally we consider the Stages of Internationalization.

It is worth noting that not all authorities on international marketing agree as to which mode of entry sits where. For example, some see franchising as a stand alone mode, whilst others see franchising as part of licensing. In reality, the most important point is that you consider all useful modes of entry into international markets - over and above which pigeon-hole it fits into. If in doubt, always clarify your tutor's preferred view.

The Internet

The Internet is a new channel for some organizations and the sole channel for a large number of innovative new organizations. The eMarketing space consists of new Internet companies that have emerged as the Internet has developed, as well as those pre-existing companies that now employ eMarketing approaches as part of their overall marketing plan. For some companies the Internet is an additional channel that enhances or replaces their traditional channel(s). For others the Internet has provided the opportunity for a new online company. More

Exporting

There are direct and indirect approaches to exporting to other nations. Direct exporting is straightforward. Essentially the organization makes a commitment to market overseas on its own behalf. This gives it greater control over its brand and operations overseas, over an above indirect exporting. On the other hand, if you were to employ a home country agency (i.e. an exporting company from your country - which handles exporting on your behalf) to get your product into an overseas market then you would be exporting indirectly. Examples of indirect exporting include:

Piggybacking whereby your new product uses the existing distribution and logistics of another business.

Export Management Houses (EMHs) that act as a bolt on export department for your company. They offer a whole range of bespoke or a la carte services to exporting organizations.

Consortia are groups of small or medium-sized organizations that group together to market related, or sometimes unrelated products in international markets.

Trading companies were started when some nations decided that they wished to have overseas colonies. They date back to an imperialist past that some nations might prefer to forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist as mainstream businesses that use traditional business relationships as part of their competitive advantage.

Licensing

Licensing includes franchising, Turnkey contracts and contract manufacturing.

Licensing is where your own organization charges a fee and/or royalty for the use of its technology, brand and/or expertise.

Franchising involves the organization (franchiser) providing branding, concepts, expertise, and infact most facets that are needed to operate in an overseas market, to the franchisee. Management tends to be controlled by the franchiser. Examples include Dominos Pizza, Coffee Republic and McDonald's Restaurants.

Turnkey contracts are major strategies to build large plants. They often include a the training and development of key employees where skills are sparse - for example, Toyota's car plant in Adapazari, Turkey. You would not own the plant once it is handed over.

International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are individuals or organizations that are contracted to your business, and market on your behalf in a particular country. They rarely take ownership of products, and more commonly take a commission on goods sold. Agents usually represent more than one organization. Agents are a low-cost, but low-control option. If you intend to globalize, make sure that your contract allows you to regain direct control of product. Of course you need to set targets since you never know the level of commitment of your agent. Agents might also represent your competitors - so beware conflicts of interest. They tend to be expensive to recruit, retain and train. Distributors are similar to agents, with the main difference that distributors take ownership of the goods. Therefore they have an incentive to market products and to make a profit from them. Otherwise pros and cons are similar to those of international agents.

Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between companies that market internationally. Sometimes the relationships are between competitors. There are many examples including:

Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot. Research and Development (R&D) arrangements. Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom. Marketing agreements.

Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain independent and separate.

Joint Ventures (JV)

Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a proportion of the new business. There are many reasons why companies set up Joint Ventures to assist them to enter a new international market:

Access to technology, core competences or management skills. For example, Honda's relationship with Rover in the 1980's.

To gain entry to a foreign market. For example, any business wishing to enter China needs to source local Chinese partners.

Access to distribution channels, manufacturing and R&D are most common forms of Joint Venture.

Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually owning an overseas manufacturing plant i.e. the organization invests in plant, machinery and labor in the overseas market. This is also known as Foreign Direct Investment (FDI). This can be a new-build, or the company might acquire a current business that has suitable plant etc. Of course you could assemble products in the new plant, and simply export components from the home market (or another country). The key benefit is that your business becomes localized - you manufacture for customers in the market in which you are trading. You also will gain local market knowledge and be able to adapt products and services to the needs of local consumers. The downside is that you take on the risk associated with the local domestic market. An International Sales Subsidiary would be similar, reducing the element of risk, and have the same key benefit of course. However, it acts more like a distributor that is owned by your own company.

Internationalization Stages

So having considered the key modes of entry into international markets, we conclude by considering the Stages of Internationalization. Some companies will never trade overseas and so do not go through a single stage. Others will start at a later or even final stage. Of course some will go through each stage as summarized now:

Indirect exporting or licensing Direct exporting via a local distributor Your own foreign presences Home manufacture, and foreign assembly Foreign manufacture

Link account

edit preferences

1.Exporting:

It means the sale abroad of an item produced ,stored or processed in the

supplying firm’s home country. It is a convenient method to increase the

sales. Passive exporting occurs when a firm receives canvassed

them. Active exporting conversely results from a strategic decision to

establish proper systems for organizing the export fuctions and for

procuring foreign sales.

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Advantages Of Exporting:

a. Need for limited finance;If the company selects a company in the host country to distribute thecompany can enter international market with no or less financialresources but this amount would be quite less compared to that wouldbe necessary under other modes.b. Less Risks;Exporting involves less risk as the company understand the culture ,customer and the market of the host country gradually. Later afterunderstanding the host country the company can enter on a full scale.c. Motivation for exporting:Motivation for exporting are proactive and reactive. Proactivemotivations are opportunities available in the host country. Reactivemotivators are those efforts taken by the company to export theproduct to a foreign country due to the decline in demand for itsproduct in the home country.

2.Licensing :In this mode of entry ,the domestic manufacturer leases the right to useits intellectual property (ie) technology , copy rights ,brand name etc toa manufacturer in a foreign country for a fee. Here the manufacturer in thedomestic country is called licensor and the manufacturer in the foreign iscalled licensee. The cost of entering market through this mode is lesscostly. The domestic company can choose any international location andenjoy the advantages without incurring any obligations and responsibilitiesof ownership ,managerial ,investment etc.

Advantages;

1. Low investment on the part of licensor.

2. Low financial risk to the licensor

3. Licensor can investigate the foreign market without much efforts on

his part.

4. Licensee gets the benefits with less investment on research and

development

5. Licensee escapes himself from the risk of product failure.

Disadvantages:

1. It reduces market opportunities for both

2. Both parties have to maintain the product quality and promote the

product . Therefore one party can affect the other through their

improper acts.

3. Chance for misunderstanding between the parties.

4. Chance for leakages of the trade secrets of the licensor.

5. Licensee may develop his reputation

6. Licensee may sell the product outside the agreed territory and after the

expiry of the contract.

3.Franchising

Under franchising an independent organization called the franchisee

operates the business under the name of another company called the

franchisor under this agreement the franchisee pays a fee to the franchisor.

The franchisor provides the following services to the franchisee.

1. Trade marks

2. Operating System

3. Product reoutation

4. Continuous support system like advertising , employee training ,

reservation services quality assurances program etc.

Advantages:

1. Low investment and low risk

2. Franchisor can get the information regarding the market culture,

customs and environment of the host country.

3. Franchisor learns more from the experience of the franchisees.

4. Franchisee get the benefits of R& D with low cost.

5. Franchisee escapes from the risk of product failure.

Disadvantages:

1. It may be more complicating than domestic franchising.

2. It is difficult to control the international franchisee.

3. It reduce the market opportunities for both

4. Both the parties have the responsibilities to maintain product quality

and product promotion.

5. There is a problem of leakage of trade secrets.

4.Turnkey Project:

A turnkey project is a contract under which a firm agrees to fully

design , construct and equip a manufacturing/ business/services facility

and turn the project over to the purchase when it is ready for operation for

a remuneration like a fixed price , payment on cost plus basis. This form

of pricing allows the company to shift the risk of inflation enhanced costs

to the purchaser. Eg nuclear power plants , airports,oil refinery , national

highways , railway line etc. Hence they are multiyear project.

5.Mergers & Acquistions:

A domestic company selects a foreign company and merger itself with

foreign company in order to enter international business. Alternatively the

domestic company may purchase the foreign company and acquires it

ownership and control. It provides immediate access to international

manufacturing facilities and marketing network.

Advantages:

1. The company immediately gets the ownership and control over the

acquired firm’s factories, employee, technology ,brand name and

distribution networks.

2. The company can formulate international strategy and generate more

revenues.

3. If the industry already reached the stage of optimum capacity level or

overcapacity level in the host country. This strategy helps the host

country.

Disadvantages:

1. Acquiring a firm in a foreign country is a complex task involving

bankers, lawyers regulation, mergers and acquisition specialists from

the two countries.

2. This strategy adds no capacity to the industry.

3. Sometimes host countries imposed restrictions on acquisition of local

companies by the foreign companies.

4. Labour problem of the host country’s companies are also transferred to

the acquired company.

6.Joint Venture

Two or more firm join together to create a new business entity that is

legally separate and distinct from its parents. It involves shared ownership.

Various environmental factors like social , technological economic and

political encourage the formation of joint ventures. It provides strength in

terms of required capital. Latest technology required human talent etc. and

enable the companies to share the risk in the foreign markets. This act

improves the local image in the host country and also satisfies the

governmental joint venture.

Advantages:

1. Joint venture provide large capital funds suitable for major projects.

2. It spread the risk between or among partners.

3. It provide skills like technical skills, technology, human skills ,

expertise , marketing skills.

4. It make large projects and turn key projects feasible and possible.

5. It synergy due to combined efforts of varied parties.

Disadvantages:

1. Conflict may arise

2. Partner delay the decision making once the dispute arises. Then the

operations become unresponsive and inefficient.

3. Life cycle of a joint venture is hindered by many causes of collapse.

4. Scope for collapse of a joint venture is more due to entry of

competitors changes in the partners strength.

5. The decision making is slowed down in joint ventures due to the

involvement of a number of parties.7.Acquisitions & Mergers:

A mergers is a voluntary and permanent combination of business

whereby one or more firms integrate their operations and identities

with those of another and henceforth work under a common name and

in the interests of the newly formed amalgamations.

Motives for acquisitions: 1. Removal of competitor

2. Reduction of the Co failure through spreading risk over a wider

range of activities.

3. The desire to acquire business already trading in certain

markets & possessing certain specialist employees &

equipments.

4. Obtaining patents, license & intellectual property.

5. Economies of scale possibly made through more extensive

operations.

6. Acquisition of land, building & other fixed asset that can be

profitably sold off.

7. The ability to control supplies of raw materials.

8. Expert use of resources.

9. Tax consideration.

10. Desire to become involved with new technologies &

management method particularly in high risk industries.

8.Wholly Owned Subsidiary

Subsidiary means individual body under parent body. This Subsidiary orindividual body as per their own generates revenue. They give their ownrent, salary to employees, etc. But policies and trademark will beimplemented from the Parent body. There are no branches here. Only thecertain percentage of the profit will be given to the parent body.A subsidiary, in business matters, is an entity that is controlled by a bigger

and more powerful entity. The controlled entity is called a company,

corporation, or limited liability company, and the controlling entity is called

its parent (or the parent company). The reason for this distinction is that alone company cannot be a subsidiary of any organization; only an entityrepresenting a legal fiction as a separate entity can be a subsidiary. Whileindividuals have the capacity to act on their own initiative, a business entitycan only act through its directors, officers and employees.The most common way that control of a subsidiary is achieved is throughthe ownership ofshar es in the subsidiary by the parent. These shares givethe parent the necessary votes to determine the composition of the board ofthe subsidiary and so exercise control. This gives rise to the common

presumption that 50% plus one share is enough to create a subsidiary. Thereare, however, other ways that control can come about and the exact rulesboth as to what control is needed and how it is achieved can be complex (seebelow). A subsidiary may itself have subsidiaries, and these, in turn, mayhave subsidiaries of their own. A parent and all its subsidiaries together arecalled a group, although this term can also apply to cooperating companiesand their subsidiaries with varying degrees of shared ownership.Subsidiaries are separate, distinctlegal entities for the purposes oftaxationandr egulation. For this reason, they differ fromdivisions, which arebusinesses fully integrated within the main company, and not legally orotherwise distinct from it.Subsidiaries are a common feature of business life and most if not all major

businesses organize their operations in this way. Examples includeholding

companies such as Berkshire Hathaway, Time Warner, or Citigroup as well

as more focused companies such asI BM, or Xerox Corporation. These, andothers, organize their businesses into national or functional subsidiaries,sometimes with multiple levels of subsidiaries.