Course Code AECC20

Course Description INTERNATIONAL BUSINESS & TRADE

Module Title An Overview of International Business

I. INTRODUCTION:
This material contains the managerial approach to international business to prepare the
students to be effective participants in the worldwide marketplaces especially that many
businesses are growing and in need of the potential employees who can largely contribute
to the organization and develop to be a great individual that possesses good values and
attitudes in terms of work ethics. Also, students should attain “cultural literacy” in
international business. They should be able to speak comfortably and be knowledgeable
about the global economy. This subject serves as accompaniment on their first step in a
long journey to being an effective businessperson and informed citizen in a globalizing
world.

II. DISCUSSION

What is International Business?

International business consists of business transactions between parties from more than
one country. The parties involved in such transactions may include private individuals,
individual companies, groups of companies, or governmental agencies.

Domestic business involves transactions occurring within the boundaries of a single

country, whereas international business transactions cross national boundaries.
International business can differ from domestic business for a number of other reasons,
including the following:

● The countries involved may use different currencies, forcing at least one party to convert
its currency into another.

● The legal systems of the countries may differ, forcing one or more parties to adjust their
practices to comply with local law. Occasionally, the mandates of the legal systems may
be incompatible, creating major headaches for international managers.

● The cultures of the countries may differ, forcing each party to adjust its behavior to meet
the expectations of the other.

● The availability of resources differs by country. One country may be rich in natural
resources but poor in skilled labor, whereas another may enjoy a productive, well-trained
workforce but lack natural resources. Thus, the way products are produced and the types
of products that are produced vary among countries.
The CAGE model developed by Pankaj Ghemawat, of IESE Business School in
Barcelona, is a useful framework for understanding the operating challenges facing
international businesses because of these national differences:

● Cultural distance (the “C” in CAGE) refers to differences in cultural, linguistic, religious,
and social values that can affect the way firms do business within a country.

● Administrative distance refers to differences in the public administration of countries.

It can be affected by past colonial ties, common legal heritages, use of a common
currency, political alliances, or attitudes toward the proper balancing between the role of
the private sector and the role of the public sector.

● Geographic distance refers to the physical, communications, and transportation links

between countries and how the geographic connectedness of countries affects their
economic integration.

● Economic distance refers to the differences in the economic resource bases of

countries. Although natural resources are a component of economic distance, human
resources, infrastructure, creation of new knowledge, and promotion of technological
innovation are in fact much more important causes of economic distance.

International Business Activities

The Early Era of International Business

International business originally consisted of international trade.

•2000 B.C.E – Trade between nations started at this date. Tribes in Northern America
took dates and clothing to Babylonia and Assyria in the Middle East and traded them for
spices and olive oil. This trade continued to expand over the years, encompassing more
regions and a growing list of resources and products.
• 776 B.C.E – The first Olympic Game was held in Greece.
• 500 B.C.E – Chinese merchants were actively exporting silk and jade to India and
Europe, and common trade routes were being established.
• 3rd Century B.C.E –power. First Greece and then the Roman Empire prospered in part
because of exploitation of international trade. Ancient wars were fought to maintain trade
dominance.
• 146 B.C.E – Over a period of 100 years, Rome fought three bloody wars with Carthage
to maintain its trade supremacy, finally defeating the Carthaginians. The victorious
Romans burned the city and plowed salt into the soil so that crops could not grow, to
ensure that Carthage would never again rise as a rival.
• Middle Ages - Italy became a focal point for international business because of its central
location in what was then the world market. The political and military strength of Venice,
Genoa, and Florence reflected their roles as major centers of international commerce and
banking that linked trade routes between Europe and China.
• 1453 – These trade routes were severed when the Turks conquered Constantinople
(now Istanbul) and gained control of the Middle East. Europe’s trade with China had been
particularly profitable, so European governments became interested in finding new ocean
routes to the Far East. Backed by the Spanish government, Christopher Columbus sailed
west from Europe looking for such routes. His landing in the Caribbean islands served
instead to identify an important new source of resources and, eventually, led to the
colonization of the Americas by European countries.
As this colonization took place, new avenues of trade opened. Settlers throughout the
Americas sold raw materials, precious metals, and grains to Europe in exchange for tea,
manufactured goods, and other commodities. Most of the American territories eventually
became independent countries and important contributors to the world economy.
• 1600-1670 – Another phenomenon of great importance to international business
developed during the colonial period and the subsequent Age of Imperialism: the growth
of foreign direct investment (FDI) and multinational corporations (MNCs), both of which
involve foreigners supplying and controlling investments in a host country. European
capitalists from such imperialist powers as the United Kingdom, France, the Netherlands,
Spain, Belgium, and Portugal nurtured new businesses in their colonial empires in the
Americas, Asia, and Africa, establishing networks of banking, transportation, and trade
that persist to this day. The earliest of these firms included the Dutch East India Company
(established in 1600), the British East India Company (1602), and the Hudson’s Bay
Company (1670).
• 19th Century – The invention and perfection of the steam engine, coupled with the
spread of railroads, dramatically lowered the cost of transporting goods over land and
thereby made larger factories more economical. This development in turn broadened the
extent of FDI. The forerunners of such large contemporary MNCs as Unilever, Ericsson,
and Royal Dutch Shell took their first steps on the path to becoming international giants
by investing in facilities throughout Asia, Europe, and the Americas during this period.
New inventions promoting technological change further stimulated FDI.

Exporting and Importing

Exporting is the selling of products made in one’s own country for use or resale in other
countries. Importing is the buying of products made in other countries for use or resale
in one’s own country.

Exporting and importing activities often are divided into two groups. One group of
activities is trade in goods—tangible products such as clothing, computers, and raw
materials. Official U.S. government publications call this type of trade merchandise
exports and imports; the British often refer to it as visible trade. The other group of
activities is trade in services— intangible products such as banking, travel, and
accounting activities. In the United States this type of trade is called service exports and
imports; in the United Kingdom it is often called invisible trade. Exports are often critical
to a firm’s financial health

International Investments
capital supplied by residents of one country to residents of another. Such investments are
divided into two categories: foreign direct investments and foreign portfolio
investments. Foreign direct investments (FDI) are investments made for the purpose of
actively controlling property, assets, or companies located in host countries. (The country
in which the parent company’s headquarters is located is called the home country; any
other country in which the company operates is known as a host country.) Foreign
Portfolio Investments (FPI)are purchases of foreign financial assets (stocks, bonds, and
certificates of deposit) for a purpose other than control.

Other Forms of International Business Activity

International licensing is a contractual arrangement in which a firm in one country

licenses the use of its intellectual property (patents, trademarks, brand names, copyrights,
or trade secrets) to a firm in a second country in return for a royalty payment.

International franchising, a specialized form of international licensing, occurs when a

firm in one country (the franchisor) authorizes a firm in a second country (the franchisee)
to use its operating systems as well as its brand names, trademarks, and logos in return
for a royalty payment. For example, McDonald’s Corporation franchises its fast-food
restaurants worldwide.
International management contract is an arrangement wherein a firm in one country
agrees to operate facilities or provide other management services to a firm in another
country for an agreed on fee. Management contracts are common, for instance, in the
upper end of the international hotel industry.

More formally, we can define an international business as any organization that

engages in cross-border commercial transactions with individuals, private firms, or public
sector organizations. But note that we have also used the term international business to
mean cross border commercial transactions.

The term multinational corporation (MNC) is used to identify firms that have extensive
involvement in international business. A more precise definition of an MNC is a firm “that
engages in FDI and owns or controls value-adding activities in more than one country.”
The Contemporary Causes of Globalization

Globalization can be defined as “the inexorable integration of markets, nation-states,

and technologies. . . in a way that is enabling individuals, corporations and nation-states
to reach around the world farther, faster, deeper, and cheaper than ever before.”
Globalization has led to an intensification of the role of international trade in the
economies of the world.

Strategic Imperatives

1. To Leverage Core Competencies– One major motive for globalization is the

opportunity to leverage a core competency that a firm has developed in its home market.
A core competency is a distinctive strength or advantage that is central to a firm’s
operations. By using its core competency in new markets, the firm is able to increase its
revenues and profits.
2. To Acquire Resources and Supplies– Another important reason for going
international is to acquire resources such as materials, labor, capital, or technology. In
some cases organizations must go to foreign sources because certain products or
services are either scarce or unavailable locally.
3. To Seek New Markets –Seeking new markets is also a common motive for
international expansion. When a firm’s domestic market matures, it becomes increasingly
difficult to generate high revenue and profit growth.
4. To Better Compete with Rivals – Finally, businesses sometimes enter foreign
markets to better compete with industry rivals.

Globalization and Emerging Markets

During the Cold War between the United States and the Soviet Union, many scholars
divided the world into three regions:
• the First World, consisting of the rich, major trading nations from Western Europe, North
America, Australia, and parts of Asia, most of which were allied diplomatically with the
United States;
• the Second World, consisting of the Soviet Union and allied Communist states;
• and the Third World, consisting primarily of the low-to medium-income countries
populating Latin America, Africa, and most of Asia. .