HRM 305: INTERNATIONAL BUSINESS
Chapter 1: Introduction to International Business
Topics Covered in This Chapter
• What is International Business?
• The Importance of Studying International Business
• Why Companies Engage in International Business
• Reasons for Recent International Business Growth and Development
• Terms Used to Describe International Companies
• External Influences (Environmental Forces) on International Business
• Evolution of Strategy in the Internationalization Process
1. What Is International Business?
1.1 Definition
International business refers to all commercial transactions — private and governmental — that take place
between two or more countries or regions across political boundaries. It includes sales, investments, logistics, and
transportation undertaken for profit by private firms, and undertaken by governments for profit or for political
reasons.
"International business consists of all commercial transactions — private and governmental — between
two or more countries." — Daniels & Radebaugh
Griffin and Pustay define it in a similar but more operational way: international business is any commercial
transaction — private or governmental, between parties of two or more countries — that crosses national
boundaries. Such transactions may take the form of trade (exports and imports of goods and services) or
investment (foreign direct investment or portfolio investment).
1.2 Scope of International Business
International business is broader than international trade. International trade refers narrowly to the exchange of
goods and services across borders (exports and imports), whereas international business also covers international
investment, licensing, franchising, management contracts, turnkey projects, and the cross-border movement of
capital, technology, and people.
• International Trade — export and import of tangible goods and intangible services between nations.
• International Investment — Foreign Direct Investment (FDI), where a firm acquires a controlling interest in
a foreign enterprise, and Portfolio Investment, which is the purchase of foreign financial assets (stocks,
bonds) without control.
• Other Modes — licensing, franchising, management contracts, turnkey projects, and strategic alliances that
allow firms to operate internationally without full ownership.
1.3 Domestic Business vs. International Business
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Basis Domestic Business International Business
Geographic scope Confined to one country Spans two or more countries
Currency Single currency Multiple currencies; exchange-rate risk
Regulatory environment One legal/political system Multiple, often conflicting, legal and
political systems
Culture Relatively homogeneous Culturally diverse markets and
workforces
Competition Domestic competitors Domestic plus global competitors
Risk Lower complexity Higher complexity: political, economic,
currency, and cultural risk
2. The Importance of Studying International Business
Both core texts stress that virtually no manager, in any country, can afford to ignore the effects of international
business on their organization. The following reasons justify the systematic study of the subject:
• Global interdependence: Almost every domestic firm today is directly or indirectly affected by
international events, foreign competitors, and global supply chains — even firms that never sell abroad may
buy raw materials, parts, or components from foreign sources.
• Managers must think globally: Managers increasingly need a global mindset to identify opportunities and
threats, compare the way business is conducted abroad, and adapt strategies to differing environments.
• Best method of operation may differ across borders: Domestic business methods do not always transfer
abroad; the study of international business helps managers understand when and how to adapt operating,
marketing, financial, and human-resource practices to local conditions.
• Career and employment opportunities: Knowledge of international business broadens career
opportunities — in exporting/importing firms, multinational corporations, banks, consulting firms, and
government trade agencies.
• Understanding cultural, political, and legal diversity: Studying the subject sensitizes managers to
cultural differences, legal systems, and political risks that materially affect decision-making.
• Improved decision-making and competitiveness: Firms that understand global markets can make superior
sourcing, location, pricing, and investment decisions, gaining a competitive edge.
• National economic welfare: International trade and investment contribute to a nation's GDP, employment,
and standard of living, making the subject relevant to citizens and policymakers, not only to managers.
3. Why Companies Engage in International Business
Daniels and Radebaugh identify several underlying motives — often summarised as the desire to expand sales,
acquire resources, diversify sources of sales and supply, and minimize competitive risk. Griffin and Pustay
similarly discuss the pursuit of new markets, resources, efficiency, and knowledge. The principal reasons are:
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3.1 Expand Sales
A company's sales depend on consumer interest in its products and their willingness and ability to buy them.
Because the number of potential customers is larger in the world as a whole than in any single country, firms
expand internationally to increase sales and profits beyond what the saturated domestic market can offer.
3.2 Acquire Resources
Firms venture abroad to gain access to resources unavailable or more costly at home — raw materials, energy,
land, labour, capital, and technology. Access to lower-cost or higher-quality resources helps firms compete more
effectively both at home and abroad.
3.3 Diversify Sources of Sales and Supplies
Operating in multiple countries allows a company to avoid the sharp swings in sales and profits caused by
economic cycles, seasonal demand, or competitive changes confined to a single market. Similarly, sourcing inputs
from more than one country reduces the risk of disruption from natural disasters, labour disputes, or political
turmoil in a single supply location.
3.4 Minimize Competitive Risk
Companies often move internationally defensively — to counter the advantages a competitor might otherwise
gain in a foreign market. If a rival captures a lucrative foreign market unopposed, it may use the profits and
experience gained there to strengthen its position in other markets, including the firm's home market. International
expansion neutralizes this threat.
3.5 Other Motivating Factors (Griffin & Pustay)
• Pursuit of efficiency — locating production where labour, capital, or other inputs are cheapest (comparative
and absolute advantage).
• Pursuit of knowledge — learning from customers, competitors, and suppliers in foreign markets (e.g., firms
entering Japan to learn quality-management techniques).
• Pursuit of safety — spreading assets and operations across countries to reduce overall firm risk (portfolio
diversification of operations).
• Following key customers or suppliers abroad, especially in industries such as automotive components and
banking.
• Taking advantage of government incentives — tax holidays, subsidies, and special economic zones offered
by host governments to attract foreign investment.
4. Reasons for Recent International Business Growth and Development
The rapid globalization of business over the past several decades is explained by both texts through a set of
converging forces. These are commonly grouped as follows:
4.1 Expansion of Technology
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• Advances in transportation technology — jet aircraft, containerized shipping, and improved logistics have
drastically cut the time and cost of moving goods and people across borders.
• Advances in communication technology — the internet, mobile telecommunication, and digital
collaboration tools allow instantaneous coordination of dispersed operations and real-time information flow
across the globe.
• Product and process technology diffuses faster internationally, enabling even small firms to compete
globally (‘born-global’ firms).
4.2 Liberalization of Cross-Border Trade and Resource Movements
Governments have progressively reduced barriers — tariffs, quotas, and restrictions on capital and labour
movement — that once discouraged international transactions. Multilateral efforts under the GATT and later the
World Trade Organization (WTO), together with regional trade agreements, have lowered the cost and risk of
operating internationally.
4.3 Development of Services That Support International Business
A supporting infrastructure of international banking, insurance, freight forwarding, credit rating, and
legal/consulting services has emerged, reducing the transaction costs and risks that once discouraged firms from
trading and investing abroad.
4.4 Growing Consumer Pressures
Improved communication and travel have made consumers aware of foreign products, increasing global demand
for foreign goods and services and encouraging firms to source and compete globally to meet more sophisticated
and homogenized tastes.
4.5 Increased Global Competition
The pressures of international competition force firms to expand abroad defensively — to achieve economies of
scale, to match competitors' cost positions, and to avoid ceding ground to rivals in emerging markets.
4.6 Changing Political Situations
The opening of formerly closed economies (such as China, the former Soviet bloc, and Eastern Europe) to market
forces, along with political stability reforms in developing nations, has created vast new markets and production
bases for international business.
4.7 Expanded Cross-National Cooperation
Governments increasingly cooperate through multilateral and regional treaties — the WTO, the IMF, the World
Bank, and regional blocs such as the EU, ASEAN, NAFTA/USMCA, and SAARC — to further common
economic interests, harmonize standards, and jointly address problems (e.g., pollution, terrorism, illegal
migration) that spill across borders and affect trade.
5. Terms Used to Describe International Companies
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As firms deepen their global involvement, the terminology used to classify them evolves. The core texts
distinguish among the following categories:
• International Company: A firm based primarily in one home country that engages in some international
activities such as exporting, importing, or licensing, but whose operations and orientation remain largely
domestic.
• Multinational Corporation (MNC) / Multinational Enterprise (MNE): A firm that owns and manages
business operations (production or service facilities) in two or more countries, coordinating strategy across
borders while typically retaining strong ties to, and control from, its home-country headquarters.
• Global Company: A firm that either integrates production and marketing on a worldwide, standardized
basis (a global strategy) or concentrates activities in a few locations to serve the entire world market
centrally, treating the world as a single, largely undifferentiated market.
• Transnational Company: A firm that attempts to combine global-scale efficiency with local
responsiveness, integrating worldwide activities through a network of interdependent subsidiaries rather
than a rigid home-country hierarchy — sometimes described as operating without a single dominant
national identity.
• Multinational Enterprise vs. Multinational Corporation: The two terms are frequently used
interchangeably; 'enterprise' is sometimes preferred to include state-owned entities and non-corporate
organizational forms engaged in international operations.
• Born-Global Firm: A relatively young, often small or medium-sized firm that internationalizes rapidly and
from or near its founding, rather than following the traditional gradual, stage-by-stage expansion path —
enabled largely by digital technology and global communication networks.
Quick Distinction
• International company → operates mainly at home, with limited cross-border activity.
• Multinational company (MNC/MNE) → owns and manages operations in several countries.
• Global company → standardizes products/strategy and treats the world as one market.
• Transnational company → balances global integration with local responsiveness.
6. External Influence on International Business (Environmental Forces)
International business does not occur in a vacuum; it is shaped by a range of external, uncontrollable
environmental forces that differ from country to country. Both texts introduce these forces in Chapter 1 as the
framework that later chapters (cultural, political, legal, and economic environments) develop in depth.
6.1 Physical and Environmental Forces
Geography, climate, natural-resource endowment, and topography influence what a country can produce
efficiently, its transportation costs, and the location decisions of international firms.
6.2 Cultural / Behavioral (Sociocultural) Forces
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Differences in language, religion, values, attitudes, customs, and social organization affect consumer behaviour,
negotiation styles, management practices, and workforce expectations across countries. Understanding cultural
awareness and the dynamics of cultures is essential for firms operating internationally.
6.3 Political Forces
The sovereignty of nations, the stability of government policies, and the degree of political risk (expropriation,
civil unrest, changes in leadership or ideology) directly affect the safety and profitability of international
operations. Governments may either encourage international business (through incentives) or restrict it (through
tariffs, quotas, or ownership limits).
6.4 Legal Forces
Differences in legal systems (common law, civil law, religious law), the bases and jurisdiction of international
legal disputes, mechanisms for international dispute resolution, protection of intellectual property rights, and
domestic commercial law all create a complex legal environment that international firms must navigate
simultaneously across multiple jurisdictions.
6.5 Economic Forces
Key macroeconomic indicators — GDP growth, inflation, exchange rates, income levels, and infrastructure
development — shape market potential, cost structures, and risk levels, and are central to assessing a country's
attractiveness for trade or investment.
6.6 Competitive Forces
The number, strength, and strategic behaviour of competitors (domestic and foreign) in a given market influence
entry-mode choice, pricing, and marketing strategy.
Environmental Force Illustrative Elements Managerial Relevance
Physical/geographic Climate, resources, topography, distance Location & logistics decisions
Cultural (behavioral) Language, religion, values, customs Marketing, HR, negotiation
Political Government stability, sovereignty, risk Entry-mode & investment decisions
Legal Contract law, IP protection, dispute Compliance & risk management
resolution
Economic Growth, inflation, exchange rates Market attractiveness & pricing
Competitive Rival firms, market structure Strategy & positioning
7. Evolution of Strategy in the Internationalization Process
Firms rarely become global overnight. Both texts describe internationalization as an evolutionary process in
which a company's strategic orientation, structure, and mode of operation change as its international commitment
deepens.
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7.1 Stages of Internationalization
1. Domestic Stage — the firm focuses entirely on its home market; any foreign sales are incidental, arising
from unsolicited orders rather than deliberate strategy.
2. International Stage — the firm begins deliberate exporting/importing or licensing abroad, but foreign
operations remain an extension of, and subordinate to, domestic strategy.
3. Multinational Stage — the firm establishes production or marketing subsidiaries in several countries,
adapting products and strategies to each local market (multi-domestic strategy).
4. Global Stage — the firm integrates operations worldwide, standardizing products and coordinating strategy
centrally to capture economies of scale, treating the world as a single market.
5. Transnational Stage — the most advanced stage, in which the firm balances global efficiency with local
responsiveness through an integrated network of subsidiaries that share knowledge and resources across
borders.
7.2 The Uppsala (Stages) Model of Internationalization
A widely cited process model in the internationalization literature holds that firms typically expand abroad
incrementally, gaining experiential market knowledge step by step, and choosing entry modes that involve
progressively greater commitment and risk:
• Stage 1: No regular export activity.
• Stage 2: Export via independent agents/representatives.
• Stage 3: Establishment of a foreign sales subsidiary.
• Stage 4: Establishment of foreign production/manufacturing facilities.
Firms also tend to enter psychically close countries first — those with smaller differences in language, culture,
business practices, and level of economic development — before venturing into psychically distant markets, as
this reduces perceived risk and uncertainty.
7.3 The EPRG Framework (Management Orientation)
Perlmutter's EPRG framework, discussed alongside the internationalization process, classifies firms according to
top management's strategic orientation toward international operations:
Orientation Description
Ethnocentric Home-country practices and standards are viewed as superior; foreign operations
are extensions of domestic strategy, and key decisions are centralized at
headquarters.
Polycentric Each foreign market is treated as unique; subsidiaries are given considerable
autonomy to adapt strategy to local conditions.
Regiocentric Strategy is coordinated on a regional basis, treating a group of countries with
similar characteristics as a single market.
Geocentric The firm adopts a truly global, world-oriented outlook, integrating operations
worldwide while remaining responsive to local needs — associated with the
transnational/global stage.
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7.4 Entry Modes Reflecting Strategic Evolution
As commitment and risk tolerance grow, firms typically move along a continuum of entry modes: exporting →
licensing/franchising → joint ventures/strategic alliances → wholly owned subsidiaries (via greenfield investment
or acquisition) → fully integrated global/transnational operations. Later chapters of the syllabus (Chapter 5:
Strategies for Analyzing and Entering Foreign Markets) develop each of these entry modes in detail.
Chapter 1 — Key Takeaways
• International business covers all cross-border commercial transactions — trade, investment, and other modes of
operation.
• Studying it is essential because virtually every firm and manager is affected by global interdependence.
• Firms internationalize to expand sales, acquire resources, diversify risk, and counter competitors.
• Technology, liberalization, support services, consumer demand, competition, political change, and cross-national
cooperation together explain the recent acceleration of globalization.
• Firms are classified along a spectrum: international → multinational → global → transnational.
• Physical, cultural, political, legal, economic, and competitive forces external to the firm shape international
strategy.
• Internationalization is an evolutionary process — from domestic to transnational orientation — often following
incremental stages (Uppsala model) and reflected in management orientation (EPRG framework) and entry-mode
choice.
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