INTERNATIONAL BUSINESS AND TRADE
First Part of Module 1
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Module 1: Introduction to International Business
Overview
This module introduces students to the fundamentals of international business,
focusing on its definition and scope, the role of globalization, and the distinctions
between domestic and international business. By understanding these topics, students
will gain insights into the complexities and opportunities of operating in the global
business environment.
Learning Objectives
At the end of this module, students will be able to:
1. Define international business and explain its components and significance in the
global economy.
2. Analyze the impact of globalization on international trade and business
operations.
3. Compare and contrast domestic and international business environments.
Module Topics
Definition and Scope of International Business
Definition of International Business: International business refers to all commercial
transactions (private and governmental) that involve two or more countries. These
include trade, investments, and collaborations.
Components of International Business:
1. Exporting and importing goods and services.
Exporting- The process of selling goods or services produced in one country to
another country.
Importing- The process of buying goods or services produced in another country
for use or resale in the domestic market.
Significance in International Business:
a) Exporting
1) Provides access to new markets, leading to increased sales and revenue. it
allows businesses to reach new customer bases in foreign markets. This
expansion leads to higher sales volumes and, consequently, increased revenue.
2) Diversification of Customer Base – Companies that export can sell their
products to international consumers, reducing the risk of market saturation in
their home country.
3) Tapping into High-Demand Markets – Some products may be in higher
demand in foreign countries than in the domestic market. For example, the
Philippines exports tropical fruits like bananas and pineapples to countries where
these are scarce.
4) Boosts Profitability – Access to multiple markets means businesses can
generate revenue from various sources, stabilizing cash flow and improving
financial health.
5) Helps businesses achieve economies of scale in production. Exporting
allows businesses to scale up their production, leading to lower costs per unit
due to economies of scale. When companies produce in larger quantities, they
can spread their fixed costs (such as machinery, research, and development)
over a greater number of products, reducing the overall cost of production.
How?
1. Lower Production Costs – As production volumes increase, the cost per unit
decreases because fixed costs are distributed more efficiently.
2. Optimized Use of Resources – Exporting enables companies to utilize their
manufacturing capacity fully, ensuring that facilities and labor are used
efficiently.
3. Competitive Pricing – With lower costs, companies can price their products
more competitively in international markets, improving market penetration.
Example:
Vietnam has become a leading exporter of textiles and garments due to its ability
to produce large volumes of clothing at low costs. By exporting to countries like
the US and Europe, Vietnamese manufacturers achieve economies of scale,
making their products more competitive in price.
6. Reduces dependence on the domestic market. Relying solely on the
domestic market can be risky, especially during economic downturns, political
instability, or changes in consumer preferences. Exporting allows businesses
to spread their risks across multiple markets, ensuring they are not overly
dependent on one economy.
How?
1) Economic Stability – If a company exports to multiple countries, a decline in sales
in one market can be balanced by stable or growing sales in another.
2) Protection Against Seasonal Demand – Some products have seasonal demand
in the domestic market but may be in demand year-round in foreign markets.
3) Less Vulnerability to Local Market Fluctuations – A company can continue
operations even if its domestic economy faces challenges like inflation,
recession, or policy changes.
Example:
The Philippine business process outsourcing (BPO) industry exports services to
global clients, reducing dependence on the domestic market. Even if local
demand for call center services declines, the industry remains strong due to
demand from the US, Europe, and Australia.
Importing
1. Allows countries to obtain goods and services unavailable locally.
Not all countries have the necessary resources, climate, or expertise to produce certain
goods or services. Importing enables economies to access essential products that
would otherwise be difficult or impossible to produce domestically.
How ?
1) Access to Specialized Goods – Some raw materials, technologies, or food
products are region-specific and must be imported to meet domestic demand.
2) Overcoming Resource Limitations – Countries with scarce natural resources rely
on imports for energy, food, and raw materials.
3) Enhancing Consumer Choices – Importing allows consumers to access a wider
variety of products, improving quality of life.
Example:
The Philippines imports crude oil because it lacks sufficient domestic petroleum
production. Countries like Saudi Arabia and the UAE supply the Philippines with
crude oil, which is refined for local use.
Japan imports tropical fruits like bananas and pineapples from the Philippines
due to its colder climate, which prevents domestic cultivation.
2. Encourages innovation by introducing new products and technologies.
Importing allows businesses to acquire new technologies, innovative products, and
advanced machinery, helping them stay competitive in the global market. Exposure
to international goods often leads to improvements in domestic production and
innovation.
How?
1) Technology Transfer – Importing advanced machinery and equipment allows
businesses to improve production efficiency.
2) Knowledge Sharing – Businesses learn new techniques and business models
by studying imported products.
3) Enhancing Domestic Industries – Imported products can inspire local
businesses to develop better alternatives or adapt foreign innovations to local
needs.
Example:
The Philippine automotive industry imports high-tech components from
Japan and Germany to assemble modern vehicles locally.
The rise of e-commerce in the Philippines was influenced by international
platforms like Amazon and Alibaba, which introduced new online business
models that local companies have adapted.
3. Reduces production costs through access to cheaper raw materials.
Importing raw materials from countries where they are abundant and cheaper
helps businesses reduce costs, making their products more competitive. This is
particularly beneficial for industries that rely on bulk production.
How?
1) Lower Input Costs – Businesses can source materials from the most cost-
effective global suppliers.
2) Higher Profit Margins – Reduced material costs lead to better pricing strategies
and higher profitability.
3) Improved Production Quality – Importing higher-quality raw materials from
specialized countries enhances the final product.
Example:
The Philippine textile industry imports cotton from India and China, as these
countries produce high-quality cotton at lower costs than local alternatives.
Food manufacturers in the Philippines import wheat from the US and Canada to
produce bread and flour-based products, as the country does not produce wheat
locally.
Entrepôt Trade:
Entrepôt trade refers to the practice of importing goods into a country without paying
duties or taxes, storing them temporarily, and then re-exporting them to other countries.
The goods do not go through significant processing but may be repackaged, sorted, or
consolidated before being shipped to their final destination.
Key Features of Entrepôt Trade:
1. No Import Duties or Taxes – Goods are stored in duty-free zones or special
economic zones (SEZs).
2. Minimal Processing – Items may be repackaged, relabeled, or sorted, but not
significantly altered.
3. Strategic Location – Usually occurs in port cities or trade hubs with excellent
logistics infrastructure.
4. Boosts Trade Efficiency – Helps facilitate global trade by reducing costs and
improving supply chain efficiency.
Example of Entrepôt Trade in Action:
A company in China exports electronic parts to Singapore (a duty-free hub).
The goods are stored and later re-exported to Europe without being taxed in
Singapore.
Benefits of Entrepôt Trade:
✔ Reduces transportation & logistics costs
✔ Increases global trade efficiency
✔ Encourages foreign investment in trade hubs
✔ Provides employment & economic growth in entrepôt citi
Challenges
While importing provides numerous advantages, businesses and countries face several
challenges when engaging in international trade. These challenges can impact costs,
operational efficiency, and market competitiveness. Below is a detailed discussion of
three major challenges associated with importing.
1. Compliance with trade regulations and tariffs.
Each country has its own set of import regulations, tariffs, and trade policies,
which businesses must comply with to avoid penalties, delays, or shipment rejections.
These regulations may include:
a) Customs duties and tariffs – Governments impose taxes on imported goods to
protect domestic industries.
b) Import restrictions and quotas – Some countries set limits on the quantity of
specific goods that can be imported.
c) Product standards and certifications – Imported products must meet local safety,
health, and environmental standards.
How This Affects Businesses:
1) Increases Costs – Higher import duties can make foreign goods more expensive,
affecting pricing strategies.
2) Delays in Supply Chain – Complex customs procedures can slow down
shipments, disrupting business operations.
3) Legal Risks – Non-compliance with regulations can result in fines, shipment
confiscation, or business restrictions.
Example:
The Philippines imposes high import tariffs on rice to protect local farmers,
making imported rice more expensive than locally produced rice.
Some Philippine food businesses importing dairy products from Europe must
comply with strict health and safety standards set by the FDA (Food and Drug
Administration).
2. Currency exchange rate fluctuations.
International trade transactions are conducted in different currencies, making
businesses vulnerable to exchange rate fluctuations. A weakening domestic currency
can increase import costs, while a strengthening currency can reduce costs but affect
pricing and competitiveness.
How This Affects Businesses:
1) Unpredictable Costs – Fluctuating exchange rates can make it difficult to forecast
expenses accurately.
2) Profit Margin Impact – Sudden currency depreciation increases the cost of
imports, reducing profitability.
3) Financial Risks – Businesses may face financial losses if they do not manage
currency risk effectively.
Example:
If the Philippine peso weakens against the US dollar, it becomes more expensive
for Filipino businesses to import raw materials like oil, electronics, and machinery
from the US.
Companies that import goods from China may see price fluctuations due to
changes in the exchange rate between the Philippine peso (PHP) and Chinese
yuan (CNY).
3. Cultural and linguistic barriers in international transactions.
When conducting import transactions with foreign suppliers, differences in language,
business practices, and cultural norms can lead to misunderstandings,
miscommunication, and operational inefficiencies.
How This Affects Businesses:
1) Misinterpretation of Contracts – Poor translation or misunderstanding of legal
terms can lead to disputes.
2) Delays in Communication – Time zone differences and language barriers can
slow down negotiations and decision-making.
3) Different Business Etiquette – Cultural differences in negotiation styles and
payment expectations can affect relationships with suppliers.
Example:
Filipino importers dealing with Chinese suppliers may face challenges due to
differences in business culture, negotiation styles, and language barriers, which
could lead to delays in order fulfillment.
2. Foreign Direct Investment (FDI)
FDI occurs when a company or individual from one country invests in a business
in another country, establishing operations or acquiring tangible assets, such as
factories or machinery.
Types of FDI
1. Horizontal FDI - Investing in the same business activity in a foreign country (e.g.,
Coca-Cola setting up bottling plants abroad). This type of investment allows the
company to expand its market presence and increase its sales by establishing
production or operational facilities abroad.
Example:
Coca-Cola setting up bottling plants in various countries to expand its market
reach, produce locally, and meet local demand.
McDonald’s opening new restaurant franchises in different countries to offer the
same fast-food products in international markets.
Significance/BENEFITS:
1) Market Expansion: It helps businesses access new markets and increase their
customer base.
2) Economies of Scale: By producing goods closer to the target market, companies
can lower production and shipping costs.
3) Risk Diversification: Expanding into new markets reduces reliance on a single
domestic market.
2. Vertical FDI - occurs when a company invests in different stages of production
within the same industry but at different points along the supply chain. This can be
either backward (upstream) or forward (downstream) integration. Vertical FDI helps
businesses gain control over their supply chain or distribution network.
Significance:
1) Cost Reduction: By controlling various stages of production, companies can
reduce costs and improve efficiency.
2) Supply Chain Control: Vertical FDI gives businesses more control over the
quality, cost, and timing of their supply chain.
3) Access to Key Resources: This type of FDI can provide access to cheaper raw
materials or specialized labor in foreign countries.
Example:
A U.S. electronics company invests in a manufacturing plant in China to produce
components and a distribution center in Europe to sell the finished products.
Apple sourcing raw materials from various countries and setting up
manufacturing plants in places like China and Vietnam to assemble products.
3. Greenfield Investment - Establishing a new operation in a foreign country.
A Greenfield Investment involves a company establishing a new business
operation from the ground up in a foreign country. This means building new facilities,
hiring local employees, and creating an entirely new market presence. Greenfield
investments are usually a long-term commitment for companies aiming for significant
market penetration and growth.
Significance:
1) Complete Control: Companies have full control over the operations and decision-
making process in a new market.
2) Local Market Customization: Greenfield investments allow businesses to tailor
products and services to the specific needs of the local market.
3) Long-Term Growth: They represent a long-term commitment to market
development and expansion.
Example:
Toyota establishing a new manufacturing plant in Thailand to produce cars
locally for Southeast Asian markets.
Google building new data centers in various countries to expand its cloud
services globally.
4. Mergers and Acquisitions - Mergers and Acquisitions involve companies acquiring
or merging with existing businesses in foreign countries. This type of FDI enables a
company to quickly gain access to an established market, customer base, and
operational infrastructure without starting from scratch.
Significance:
1) Quick Market Access: M&A allow businesses to enter a foreign market rapidly
and benefit from the existing market presence and infrastructure.
2) Synergies: Merging with or acquiring a local company may lead to cost savings,
better market access, and operational synergies.
3) Increased Market Share: Companies can gain a larger share of the market by
combining resources and customer bases.
Example:
Walmart acquiring Flipkart, an Indian e-commerce company, to enter the growing
Indian market.
AB InBev, the world’s largest beer company, acquiring Anheuser-Busch to
expand its reach in the global beer market.
Benefits of FDI
1. Boosts the host country's economy by creating jobs and introducing
technology.
2. Offers investors access to new markets and reduces production costs.
3. Promotes international collaboration and business expansion.
Challenges:
1. Navigating political and economic instability.
2. Adhering to foreign laws and regulations.
3. Managing cultural and operational differences.
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