Chapter 2 The Nature of International Business.pptx

This presentation is for the Masters of Business Administration class students.

1. Chapter Two The Nature of International Business

2. Points of Focus Introduction Domestic Versus International Business Types of International Business Methods of Going International Business Advantages and Disadvantages of International Business Discussion Questions Summary

3. Introduction The nature of international business refers to the characteristics, complexities, and dynamics involved in conducting business activities across national borders. It encompasses all forms of economic transactions, including trade in goods and services, investments, and the movement of resources, capital, and technology between different countries.

4. Introduction….Cont’d The student of business is certainly familiar with the nature of doing business in a domestic market economy International business students can benefit greatly from understanding the nature , dimensions, and variables that constitute a country’s culture and how these affect work and organizational processes in international business.

5. Introduction….Cont’d In international business a firm needs to identify: Its potential market Locate adequate and available sources of supplies of raw materials and labor Raise initial amounts of capital Hire personnel Develop a marketing plan Establish channels of distribution, and Identify retail outlets.

6. Introduction….Cont’d International business people struggle with establishing an international component, but they must also contend with the fact that international business activities are conducted in environments and arenas that differ from domestic business The differences of environment range along a continuum . For example , economies can range from being market oriented to centrally planned , and political systems from democracies to autocracies

7. Introduction….Cont’d The nature of international business can be understood through the following key aspects Globalization International business is shaped by the process of globalization Globalization has facilitated greater cross-border interactions and interconnectedness

8. Introduction….Cont’d Multinational Corporations (MNCs ) MNCs play a significant role in international business. MNCs engage in foreign direct investment (FDI), establish subsidiaries or joint ventures, and form global supply chains to leverage resources and capitalize on market opportunities.

9. Introduction….Cont’d Trade and Comparative Advantage International trade is a fundamental component of international business. Countries engage in trade to benefit from comparative advantage. Trade allows countries to access a wider range of products, expand markets, and achieve economies of scale. Cultural Diversity and Cross-cultural Management International business involves interacting with diverse cultures, languages, customs, and business norms.

10. Introduction….Cont’d Political and Legal Environment The political and legal framework of each country shapes the nature of international business . Governments influence trade policies, regulations, taxation, intellectual property rights, and investment regulations, which impact the ease of doing business across borders. International businesses must understand and comply with diverse legal frameworks and navigate political risks .

11. Introduction….Cont’d International Financial Transactions International business involves financial transactions, including foreign exchange markets, international banking, cross-border investments, and fundraising through global capital markets. Companies need to manage foreign exchange risks, ensure access to financing, and understand global financial systems and regulations

12. Introduction….Cont’d Sustainability and Corporate Social Responsibility (CSR ) International businesses face increased scrutiny regarding their environmental and social impacts . CSR practices, including environmental sustainability, ethical sourcing, and social responsibility, are vital considerations in international business. Technological Advancements Technology and innovation are integral to international business. Advances in information and communication technologies have revolutionized global connectivity, supply chain management, and electronic commerce.

13. Introduction….Cont’d Market Entry Modes and Strategy International businesses adopt various market entry modes, including exporting, licensing, joint ventures, strategic alliances, and setting up wholly-owned subsidiaries. The choice of market entry mode depends on factors such as market characteristics, risks, resources, and company objectives. Ethical and Legal Challenges International business operations often encounter ethical dilemmas, bribery, corruption, compliance with anti-corruption. Companies must navigate these challenges while upholding ethical standards, ensuring legal compliance, and maintaining reputational integrity.

14. Introduction….Cont’d

15. Domestic Business Vs International Business

16. Domestic Business Vs International Business Meaning Domestic business refers to business transactions transacted within the geographical boundaries of a country International business refers to the business transactions transacted in beyond the boundaries of a country

17. Domestic Business Vs IB……Cont’d Participants in Business People / organizations within the country participate in business activities People/organizations outside the country participate in business activities

18. Domestic Business Vs IB……Cont’d Mobility of Factor of Production The factors of production i.e. labour ,, capital, technology, material, etc., move freely within the boundaries of the country The factors of production i.e. labour ,, capital, technology, material, etc., move across the boundaries of the country.

19. Domestic Business Vs IB……Cont’d Nature of Consumers Consumers are relatively homogenous in nature in terms of culture, behavior ,taste, preferences, legal system, customs and practices, etc., Consumers are relatively heterogeneous in nature in terms of culture, behavior ,taste, preferences, legal system, customs and practices, etc. prevailing across the countries,

20. Domestic Business Vs IB……Cont’d Business System Domestic business is governed by the rules, laws, policies taxation system of a single country International business is governed by rules, laws and policies ,tariffs and quotas etc., of multiple countries

21. Domestic Business Vs IB……Cont’d Currency Used Domestic business transactions are settled by local currency of a country. International business transactions are settled by foreign currencies.

22. Domestic Business Vs IB……Cont’d Mode of Transport The goods involved in domestic business are mainly transported by roadways and railways. The goods involved in international business is mainly transported by water and airways.

23. Domestic Business Vs IB……Cont’d Risk Exposure The risks involved in domestic business are relatively less. The risks involved in international business are more due to distance, difference in socio-economic and political conditions. change in foreign exchanges value, etc.,

24. Domestic Business Vs IB……Cont’d Scope of Market The scope of market is limited to national boundaries of a country. The scope of international business is very wide and extends beyond the frontiers of a country.

25. Domestic Business Vs IB……Cont’d Payment of Excise duty Payment of excise duty involves simple procedures and it is relatively low in domestic trade The process of payment of excise is complicated in international business and the rate of excise duty is relatively high.

26. Types of International Business

27. Types of International Business On the basis of sale and purchase of goods and services, international trade can be divided into three kinds. They are export trade, import trade and entrepot trade. It has been exhibited in the chart drawn below

28. Types of International Business….Cont’d A) Export Trade When the firm of country sells goods and services to a firm of another country it is called export trade. Export trade indicates selling of goods and services from the home country to a foreign country. For Example; the sale of handicraft, leather products, agricultural goods, herbal products, etc., by Ethiopian company to other countries is known as export trade.

29. Types of International Business….Cont’d B) Import Trade When the business firm of a country purchases goods from the firm of another country it is called import trade. Importing means purchase of foreign products and bringing them into one’s home country. For example when Ethiopian enterprise purchases petroleum products, electrical goods, machinery, and medical equipment's etc., from other countries, it is termed as Import Trade

30. Types of International Business….Cont’d C) Entrepot Trade When the firm of country imports goods for the purpose of exporting the same goods to the firms of some other country with or without making any change in the goods meant for export it is known as entrepot trade For example, If an Ethiopian company imports crude oil from Iran and exports it as petroleum after refining it in Ethiopia, to Uganda it is called Entrepot trade. In this context crude is converted into petrol and exporter as petrol to Uganda Now you must be thinking why Ethiopia comes between Iran and Uganda. Why does not Uganda directly import crude oil from Iran?. Let us explore what could be the possible reasons for this.

31. Types of International Business….Cont’d Necessity for Entrepot Trade A country cannot import goods directly from the others because of the following reasons. The country may not have any accessible trade routes connecting the importing country The goods imported may require further processing or finishing before exporting, and these facilities may be lacking in the exporting or importing country There may not have any bilateral trade agreement between both the country Importer and exporter may not share good economic relation with each other

32. Types of International Business….Cont’d Features of Entrepot Trade The following are the special features of Entrepot trade Import duty is not levied on such goods These goods are reprocessed and repacked for re- export Such goods are kept in the Bonded warehouse till they are re-exported.

33. Methods of Going International Business

34. Methods of Going IB…..Cont’d Exporting and Importing Exporting denotes selling of goods and services from the home country to a foreign country. Similarly importing refers to purchasing of products from foreign country and bringing them into home country  The prime advantage of exporting is that it involves very little risk and low allocation of resources for the exporter, who is able to use domestic production toward foreign markets and thus increase sales and reduce inventories. The exporter is not involved in the problems inherent in the foreign operating environment; the most that could be lost is the value of the exported products or an opportunity if the venture fails to establish the identity or characteristics of the product in the foreign market.

35. Methods of Going IB…..Cont’d Exporting and Importing Exporting also provides an easy way to identify market potential and establish recognition of a name brand .

36. Methods of Going IB…..Cont’d Contract Manufacturing (or) Outsourcing Contract manufacturing is another method firms use to enter the foreign arena It connotes a type of international business where a firm enters into a contract with one or a few local manufacturers in foreign countries in order to get certain components of goods produced according to its specifications . It is also called outsourcing or contract manufacturing  Contract manufacturing has the advantage of expanding the supply or production expertise of the contracting firm at minimum cost.

37. Methods of Going IB…..Cont’d Licensing and Franchising Licensing is contractual agreement wherein one firm grants access to its plants, trade secrets or technology to another firm in a foreign country, for a fee called royalty, e.g. McDonald, Pisa Hut, etc., The firm which grants such permission is called Licensor or Franchisor and other  firm  to  whom  the license is granted is called Licensee or Franchisee The licensee is buying the assets of another firm in the form of know-how or R & D. The licensor can grant these rights exclusively to one licensee or nonexclusively to several licensees.

38. Methods of Going IB…..Cont’d Licensing and Franchising…….. Licensing provides advantages to both parties. The licensor receives profits in addition to those generated from operations in domestic markets. These profits may be additional revenues from a single process or method used at home that the manufacturer is unable to utilize abroad The licensee benefits from acquiring the rights to a process and acquires state-of-the-art technology while avoiding the R & D costs.

39. Methods of Going IB…..Cont’d FRANCHISING Franchising is similar to licensing, except that in addition to granting the franchisee permission to use a name, process, method, or trademark, the firm assists the franchisee with the operations of the franchise or supplies raw materials, or both . The franchisor generally also has a larger degree of control over the quality of the product than it does under licensing agreements.

40. Methods of Going IB…..Cont’d   Joint Venture A Joint venture is a business agreement wherein parties agree to develop a new entity and assets subscribing to equity shares and thereby exercising control over enterprise and consequently sharing revenues, expenses and the assets. It can be established under three different ways namely ·           Foreign Investors buying an interest in local company ·           Local firm acquiring an interest in the existing foreign firm ·           Both the foreign and local firms jointly forming a new enterprise.  

41. Methods of Going IB…..Cont’d Foreign Direct Investment (FDI) FDI means investment made by a company or individual in one country in the business interest in another country in the form of either establishing new business operations or acquiring business assets in the other country. When a company invests directly within foreign shores , it is making a very real commitment of its capital, personnel, and assets beyond domestic borders

42. Methods of Going IB…..Cont’d Foreign Direct Investment (FDI) While this commitment of resources increases the profit potential of an MNC dramatically by providing greater control over costs and operations of the foreign firm, it is also accompanied by an increase in the risks involved in operating in a foreign country and environment.

43. Foreign Direct Investment [FDI] FDI involves the ownership and control of a company in a foreign country Differs from portfolio investments, which are of a financial nature (stocks, bonds, etc.) FDI may be made in one of two ways: New venture Acquisition

44. Why FDI? Sell products already sold successfully at home (1960s). Lowering production costs by producing in low-cost countries for sale in other countries (1970s & 80s). Gaining access to new technology (1990s). Overall, four sets of factors may be identified:  Supply side Demand side  ‘Process’ related Risk Factors

45. Supply Side Factors Lower production costs. National comparative advantage: wages, real estate, etc. Lower delivery costs. Transportation, Tariffs, etc. Acquisition of raw materials. Control rather than buy in market. Portfolio of production sources. Risk reduction: Suppliers, Material types, Production, Distribution (e.g., railroad strike). Access to technology and skills. Invest in areas where key competitive advantages can be obtained

46. Factors in Choosing FDI for Resource Acquisition Savings through vertical integration Savings through rationalized production Gain access to cheaper or different resources and knowledge Need to lower costs as product matures Gain governmental investment incentives

47. Demand Side Factors New markets. Other options must be considered! exports, licensing, etc. Restriction of imports. Quotas may restrict access to market. Local presence. Customer confidence, after sales service, adaptation to local conditions, etc. “Buy National” rules. Especially governments (including U.S.) Customer biases may have similar effect. Good corporate citizen. Build image by hiring locals, paying local taxes, participating in society, etc. Response to rivals’ threats. Enter competitors’ (home) markets.

48. Factors in Choosing FDI for Expansion of Sales Transportation Lack of domestic capacity Low gains from economies of scale Trade restrictions Country-of-origin effects such as barriers Lower production costs abroad Changes in comparative costs

49. Factors in Choosing FDI for Risk Minimization Diversification of customer base (same as sales expansion) Diversification of supplier base (same as resource acquisition) Following customers Preventing competitors’ advantage

50. Foreign Direct Investment and Control International businesses want to control their foreign operations so they achieve their global objectives Control must accompany investment Defining direct investment is arbitrary Companies are reluctant to transfer vital resources to another organization without control Capital Patents Trademarks Management know-how

51. Control and Costs Control inherent in FDI may: Decrease operating costs Increase rate of technology transfer Parent and subsidiary share common corporate culture Company can use its’ own managers Company can avoid protracted negotiations with another company Company can avoid problems of enforcing and agreement

52. Methods for Making FDI Assets employed: usually an international capital movement that crosses borders Acquisition: purchase of existing company Easy to execute Useful if local requirements mandate localized adoption to operate Foreign personal may be hard to hire Best if international company is attempting to acquire knowledge Gain goodwill and brand identification Building: using local resources to start from construct facilities and build a labor pool

53. FDI in Developed Countries Most FDI is from developed countries TO developed countries Markets are larger in developed countries Political turmoil in emerging economies has discouraged investors Developed countries are committed to liberalizing direct investments among members Taxes Access to local capital Government procurement

54. Advantage and Disadvantage of International Business

55. Advantage and Disadvantage….Cont’d Advantages of International Business Geographical Specialization Countries across the world differ significantly in terms of natural resources, capital equipment, manpower, technology and land and so on. Some countries  are rich in mineral resources hydro-electric power metallic resources, and so on while some other countries may possess advanced technique of manufacturing, efficient working population, capital equipment and so on. International business is required to exchange the surplus resources resulting from geographical specialization for deficit resources in other countries

56. Advantage and Disadvantage….Cont’d 2. Optimum use of Natural Resources International business operates on a simple principle that a country which can produce more efficiently and trade the surplus production with other countries has to procure what it cannot produce  more efficiently. This enables the countries to optimally utilize the scarce resources available with them

57. Advantage and Disadvantage….Cont’d .Economic Development. International business helps the developing countries greatly in achieving rapid economic development by importing machinery, equipment, technology, talent, and so on. For example., China, India, Brazil and South Korea which were once slower in their economic development are achieving faster economic development due to international business. Even the developed countries like Japan, USA, UK, etc., have achieved remarkable economic progress through the import of raw materials and export of manufactured goods.  

58. Advantage and Disadvantage….Cont’d Generation of Employment. International business generates employment  opportunities  by  assisting the expansion and growth of agricultural and industrial activities. It provides direct employment to those  people  who  are hired by export and import firms and generates indirect employment to number of intermediary firms like, clearing and forwarding agent, indent houses transport organizations, outsourcing agencies, etc.

59. Advantage and Disadvantage….Cont’d Higher Standard of Living. On  account  of  international  business,  the citizens of the country can buy more varieties of goods and services which cannot be produced cost effectively within the home country. This exchange of goods and services among the countries enhances the standard of living of people. Price Equilisation International business helps to stabilize the prices of various commodities which are fluctuating on a daily basis in the world market. Whenever the price of a commodity rises sharply in a particular country, the same commodity is imported from some other foreign countries to prevent  the sharp rise in prices in the home country. Thus international business prevents violent fluctuations of prices of various commodities and helps maintain prices of various commodities at stable level in each and every country.  

60. Advantage and Disadvantage….Cont’d Prospects for Higher Profit. International business helps the firms which produce goods in excess to sell them at relatively higher price to various countries in the international market. This enables them to earn higher profit. Capacity Utilisation . International business enables the firms across the country to sell their goods and services on a large scale in the international market. As a result their machinery and equipments are used to their full capacity. In short very  prospect  of  selling  goods  in  international  market  besides  selling the goods in home market keeps the machineries, tools, equipment, and factory fully engaged all through the year.

61. Advantage and Disadvantage….Cont’d Disadvantage Economic Dependence. International trade is more likely to make the country too much dependent on imports from foreign countries. The former may not take any efforts to produce goods and services indigenously to substitute imported goods and thus becoming self sufficient. As a result the importing country may become economically slave to exporting country and end up becoming colony of the exporting country. Inhibition of Growth of Home Industries. International business may discourage the growth of indigenous industry. Unrestricted imports and severe competition from foreign companies may ruin the home industries altogether.

62. Advantage and Disadvantage….Cont’d Import of Harmful Goods. International business may lead to import of luxurious goods, spurious goods, dangerous goods, etc. It may harm the well-being of people. Shortage of Essential Goods in Home Country. Moreover the export of essential commodities out of the greed of earning more foreign exchange may result in absolute shortage of these goods at home country and people may have to buy these commodities at exorbitant price in the local market.

63. Group Discussion Question

64. Group Discussion Question A country’s international business efficiency and effectiveness is one of the preconditions for economic growth and development. Inefficient international business can affect every part of human activity. In Ethiopia, the performance of international business in terms balance of trade is low compared to developed and most of the developing countries. Given this information

65. Group Exercises….Cont’d What are the factors that contributing to the poor international business performance in Ethiopia? How can we mitigate the contributing factors to inefficient and ineffective international business?

66. Instruction Discuss in group thoroughly and develop your group report on the agreed points, which you should share to your class mates in presentation format Try to link the contributing factors for poor international trade and the mitigation strategies your group designed Show the challenges and opportunities of the implementation of the designed mitigation strategies in Ethiopian business environment

67. Summary I ntroduction Domestic Versus International Business Types of International Business Methods of Going International Business Advantages and Disadvantages of International Business Discussion Questions

68. The End of Chapter 2