International Business and Management

Study Notes
Chapter 1: Overview of International Business and
Management
1. Definition of International Business

 Concept: Involves the exchange of goods, services, technology, managerial knowledge,

and capital across national borders to satisfy the objectives of individuals, companies, and
organizations.
 Forms:
o Export-Import Trade: Involves selling goods to or buying from foreign markets.
o Direct Foreign Investment: Establishing wholly owned subsidiaries or joint
ventures abroad.
o Licensing, Franchising, and Management Contracts: Agreements to use
proprietary assets or business models in foreign markets.
 Key Characteristics:
o Transactions are devised and carried out across national borders.
o Focuses on participant satisfaction to foster business relationships.
o International executives face unique macro-environmental factors, differing laws,
cultures, and societies compared to domestic business.
 Types of International Firms:
o Multi-domestic Operations: Independent subsidiaries acting as domestic firms in
each country.
o Global Operations: Integrated subsidiaries with interconnected operations
globally.
o Firms often combine aspects of both, existing on a continuum between multi-
domestic and global.
 Growth Factors:
o Trade and Investment Liberalization: Facilitated by GATT and WTO (formed
1995).
o Capital Movement Liberalization: Enabled by electronic funds transfers.
o Introduction of the Euro (2002): Replaced national currencies in 25 EU
countries by March 2005, impacting global trade dynamics.

2. International Business Management

 Definition: The process of planning, coordinating, and controlling business transactions

conducted across multiple countries.
 Scope: Managing operations for organizations active in more than one country, ensuring
alignment with global objectives.
3. Importance of International Business

 Benefits:
1. Earn Foreign Exchange: Exports generate foreign currency, used for imports,
enhancing profitability and national economic strength.
2. Optimum Resource Utilization: Produces goods on a large scale, utilizing global
resources (finance and technology from rich countries, raw materials and labor
from poorer ones).
3. Achieve Objectives: High profits achieved through advanced technology, skilled
employees, and global market access.
4. Spread Business Risks: Diversifying operations globally balances losses in one
country with profits in another.
5. Improve Efficiency: High organizational efficiency through modern management
techniques, skilled staff, and competitive pressures.
6. Government Benefits: Gains financial and tax benefits due to foreign exchange
contributions.
7. Expand and Diversify: High profits and government support enable business
expansion and diversification.
8. Increase Competitive Capacity: High-quality, low-cost goods, global
advertising, and superior technology enhance competitiveness.

4. International Business Trade Theories

 Purpose: Nations trade to achieve mutual gains, as no country is entirely self-sufficient.

 Reasons for Trade:
o Unique resource endowments create differing production possibilities and
commodity prices.
o Trade enables access to goods not producible domestically.
 Key Theories:
o Absolute Advantage (Adam Smith):
 A country should export goods it produces more cheaply than others and
import goods where it lacks cost advantage.
 Example: In Case I, Italy has an absolute advantage in automobiles (20 vs.
Korea’s 10), while Korea has it in fertilizers (20 vs. Italy’s 10).
o Comparative Advantage:
 A country should specialize in goods with lower opportunity costs and
import those with higher opportunity costs.
 Example: In Case II, Italy has an absolute advantage in both automobiles
(20 vs. 10) and fertilizers (30 vs. 20), but a comparative advantage in
automobiles (opportunity cost ratio 2:1 vs. 1.5:1 for fertilizers), so it
specializes in automobiles and trades with Korea.

5. International Business Orientations (EPRG Schema)

 Ethnocentric Orientation:
 o Assumes home country practices are superior, applying domestic strategies
abroad.
o Overseas operations are secondary, focused on disposing surplus domestic
production.
o No significant product modification or market research for foreign markets.
 Polycentric Orientation:
o Views each host country as unique, adapting strategies to local differences.
o Subsidiaries operate independently with country-specific marketing plans.
 Regiocentric Orientation:
o Treats a region as a unified market, integrating strategies regionally but
maintaining ethnocentric or polycentric views for other regions.
 Geocentric Orientation:
o Synthesizes ethnocentric and polycentric approaches, viewing the world as a
single market.
o Requires experienced management and significant commitment for integrated
global strategies.

6. Barriers to International Business

 Language Barriers:
o Product messaging must translate effectively; errors (e.g., Mercedes-Benz’s
“Bēnsǐ” meaning “rush to death” in Chinese) can harm brand image.
o Solution: Hire interpreters and consult native speakers.
 Cultural Differences:
o Varying holidays, traditions, and norms (e.g., Spain’s siesta vs. U.S. 9-5 workday)
require cultural understanding to build relationships.
 Managing Global Teams:
o Challenges include language, cultural differences, time zones, and technology
access.
o Solution: Regular video conferencing check-ins to enhance engagement (Gallup:
3x engagement with regular manager check-ins).
 Currency Exchange and Inflation Rates:
o Fluctuating exchange rates (e.g., CAD to USD at 0.74) and inflation affect pricing
and costs.
o Solution: Monitor rates closely to adjust strategies.
 Foreign Politics, Policy, and Relations:
o Political decisions impact taxes, labor laws, and infrastructure, requiring close
monitoring.
 Tariff and Non-Tariff Barriers:
o Tariffs: Taxes on imports/exports to generate revenue or discourage imports,
increasing costs and inflation.
o Non-Tariff Barriers: Include quotas, quality standards, embargoes, and
monetary restrictions, limiting market access.
Chapter 2: The International Business Environment
1. Overview

 Definition: External factors affecting an organization’s business activities, uncontrollable

by the firm, requiring strategic adaptation.
 Key Components:
1. Geographic Environment
2. Political Environment
3. Socio-Cultural Environment
4. Economic Environment
5. Technological Environment

2. Geographic Environment

 Elements:
o Climate: Affects product types, usage, and distribution (e.g., high humidity
requires better packaging).
o Physical Terrain: Impacts distribution (e.g., Amazon’s rainforests hinder
transportation).
o Natural Resources: Availability influences production decisions (e.g., U.S.
petroleum dependency increased from 36% in 1973 to 56% in 2004).
o Population: Size, growth, structure, density, and urbanization indicate market
potential and distribution challenges.
 Implications:
o High temperatures reduce work efficiency (e.g., 20% capacity at 35°C).
o Urban areas are easier for distribution and communication compared to dispersed
rural populations.

3. Socio-Cultural Environment

 Importance: Influences customer behavior, managerial decisions, and intermediaries.

 Key Factors:
o Material culture, language, education, values, attitudes, social organization, and
political-legal structures.
o Cultural differences affect purchase behavior; acculturation is key to success.
 Management Approach:
o Use culture as a competitive tool, not just an obstacle.
o Study cultures broadly (patterns) and narrowly (product-specific behaviors).
o Avoid cross-cultural miscommunication due to misperception, misinterpretation,
or misevaluation.
4. Economic Environment

 Significance: Determines market potential through income levels and production

capabilities.
 Perspectives:
o Global Economy: Interdependence through international trade.
o National Economy: Characteristics like population, GNP, GNP/capita, PPP,
consumption patterns, and infrastructure.
 Key Indicators:
o Population: Indicates market size, especially for consumer goods.
o GNP and GNP/capita: Reflect economic development and living standards.
o PPP: Measures purchasing power across countries.
o Consumption Patterns: Vary by income (Engel’s Law: higher income reduces
food expenditure proportion).
o Infrastructure: Transportation, communication, and financial systems affect
distribution and promotion.

5. Political Environment

 Dimensions:
o Host-Country Environment: Local political groups may oppose foreign firms
for job displacement concerns.
o International Environment: Relations between countries affect trade (e.g., U.S.
restrictions on North Korea).
o Home-Country Environment: Domestic policies limit foreign operations.
 Management Strategies:
o Develop contingency plans for political changes.
o Accommodate host country interests (e.g., employ locals, share ownership).
o Maintain political neutrality and monitor situations.

6. Legal Environment

 Dimensions:
o Local laws, international laws (e.g., IMF, WTO, UNCITRAL), and foreign
market laws.
 Key Aspects:
o Product Regulations: Vary by country (e.g., safety, labeling requirements).
o Pricing: Price controls and resale-price maintenance differ globally.
o Distribution: Few legal constraints, but channel availability varies.
o Promotion: Advertising regulations (e.g., Germany restricts comparative ads).
 Enforcement: Varies by country; impartiality affects foreign firms’ legal standing.

7. Technological Environment

 Impact: Drives innovation and market changes, creating opportunities and threats.
  Trends:
o Emerging Technologies: AI enhances decision-making; e-commerce requires
agility.
o Globalization: Technology breaks geographical barriers (Baldwin’s
convergence).
o Cross-Cultural Considerations: Requires cultural intelligence to adapt
technologies locally.
 Management: Monitor technological trends, adopt innovations, and balance benefits
with environmental/social impacts.

Chapter 3: Company Resource Analysis, Market Selection,

and Business Entry Mode Decisions
1. International Business Market Analysis

 Process:
1. Select Indicators and Collect Data: Choose socioeconomic/political indicators
(e.g., per capita income, population) based on company goals.
2. Determine Indicator Importance: Use constant-sum allocation (100 points
across indicators).
3. Rate Countries: Score countries on each indicator (1-7 scale).
4. Compute Overall Score: Sum weighted scores to identify attractive markets.
 Key Indicators: Per capita income, population, risk factors, competition level.

2. Selecting a Business Entry Mode

 Criteria:
o External (Environment-Specific):
 Market Size and Growth: Large/growing markets justify higher
commitments (e.g., joint ventures).
 Risk: Political/economic instability reduces resource commitment.
 Government Regulations: Trade barriers limit entry options.
 Competitive Environment: Dominant competitors influence entry
strategy.
 Local Infrastructure: Poor infrastructure discourages heavy investment.
o Internal (Firm-Specific): Company objectives, control needs, resources, and
flexibility.

3. Entry Mode Strategies

 Exporting:
o Types: Indirect (via home-country middleman), cooperative (using partner’s
distribution), direct (own export organization).
o Advantages: Low risk, instant market expertise (indirect), control over operations
(direct).
  Licensing:
o Offers proprietary assets for royalty fees (1/8% to 15% of sales).
o Advantages: Low resource demand, navigates import barriers, reduces
political/economic risk.
 Franchising:
o Grants rights to use trademarks/business models for fees.
o Advantages: Low investment, motivated franchisees, local market knowledge.
 Joint Ventures:
o Shares equity/resources with partners to form a new entity.
o Types: Majority, fifty-fifty, minority; cooperative or equity-based.
o Advantages: Higher returns, control, synergy from local expertise.
 Wholly Owned Subsidiaries:
o Full ownership via acquisitions or Greenfield operations.
o Advantages: Full control, all profits retained, strong market commitment.
o Risks: Perceived as threats to host country sovereignty.
 Foreign Direct Investment (FDI):
o Establishes physical presence abroad (e.g., manufacturing plants).
o Types: Wholly owned, joint ventures, equity participation; Greenfield,
acquisitions, mergers.
o Incentives: Fiscal (tax rebates), financial (land/loans), non-financial
(infrastructure support).

Chapter 4: International Business Product Policy

1. Product Classifications

 Local Products: Available in a portion of a national market (e.g., regional rollout).

 National Products: Offered in a single national market, tailored to local preferences.
 International Products: Sold in multinational regions (e.g., Euro products like Renault).
 Global Products and Brands:
o Global Products: Designed for global markets, may or may not carry the same
name.
o Global Brands: Carry consistent name/image globally (e.g., Sony Walkman).
o Strategy: Standardize name/image for global brand consistency or adapt for local
preferences.

2. Product Strategies

 Product/Communication Extension (Dual Extension):

o Sells same product with same marketing globally; cost-effective but risks market
failure due to environmental differences.
 Product Extension/Communication Adaptation:
o Same product, adapted marketing (e.g., bicycles as recreation in U.S.,
transportation in Ethiopia).
o Low cost, avoids R&D/tooling expenses.
  Product Adaptation/Communication Extension:
o Adapted product, same marketing (e.g., Exxon’s gasoline formulations with “Put
a tiger in your tank”).
 Dual Adaptation:
o Adapts both product and communication (e.g., Unilever’s fabric softener with
different names/packages in Europe).
 Product Invention:
o Develops new products for low-income markets to meet affordability needs.

3. International Product Life Cycle (IPLC)

 Stages:
1. Local Innovation (Stage 0): Product developed for domestic market; high costs,
few competitors.
2. Overseas Innovation (Stage 1): Exports to advanced nations; declining costs due
to economies of scale.
3. Maturity (Stage 2): Local production in advanced nations; stable exports as
LDCs demand grows.
4. Worldwide Imitation (Stage 3): Declining exports; rising costs as competitors in
advanced nations gain share.
5. Reversal (Stage 4): Innovating nation imports; LDCs gain comparative
advantage in labor-intensive production.
 Characteristics: Efficiency shifts from developed to developing nations; product
becomes standardized.

4. Product Standardization vs. Adaptation

 Standardization:
o Advantages: Cost savings, economies of scale, consistent brand image, suitability
for similar markets or high-tech products.
o Examples: McDonald’s consistent quality, universal products like watches or
diamonds.
 Adaptation:
o Reasons: Differences in technical standards, consumer preferences, income
levels, cultural factors, or government regulations.
o Mandatory Modifications: Government standards, electrical/measurement
systems, product standards.
o Examples: Adapting margarine vitamins (Italy vs. UK), voltage for electronics,
metric units for EU markets.

Chapter 5: Pricing and Terms of Payment in International

Business
1. Introduction
  Role of Price: Only revenue-generating marketing mix element; indicates value when
paired with perceived quality.
 Challenges: Complex due to diverse market conditions, regulations, and exchange rates.

2. Factors Affecting International Pricing

 Company Factors:
o Objectives and Policies: Align pricing with goals (e.g., ROI, market share,
premium image).
o Costs: Variable and fixed costs set price floor; must cover production and selling
costs.
o Pricing Objectives: Include ROI, skimming, penetration, stabilization, cash
recovery, preventing entrants, differentiation.
 Market Factors:
o Competition and Market Structure: Price differentials must reflect perceived
value; oligopolies require competitive pricing.
o Customer Demand and Income: Price sensitivity varies by income (e.g., low-
income markets need adjusted products).
o Distribution Channels: Channel length and margins increase final price.
 Environmental Factors:
o Regulations: Taxes, tariffs, import licenses, and antidumping laws affect pricing.
o Exchange Rates: Currency fluctuations impact competitiveness (e.g., weaker
currency lowers foreign prices).
o Inflation: Varies by country; high inflation requires frequent price adjustments.
o Price Controls: Government regulations on essential goods limit pricing
flexibility.

3. Pricing Strategies

 Standardized vs. Adapted Pricing:

o Standardized: Uniform prices globally; cost-driven but less flexible for market
variations.
o Adapted: Localized prices reflect market conditions; more successful for
committed firms.
o Note: Standardizing pricing policies (e.g., competitive pricing) differs from
uniform prices.
 Full Cost vs. Marginal Pricing:
o Full Cost (Cost-Plus): Includes all production and marketing costs; may lead to
uncompetitive prices.
o Marginal (Dynamic Incremental): Based on variable costs; risks dumping
accusations but supports market entry.
 Skimming vs. Penetration Pricing:
o Skimming: High prices for innovative products to maximize profits in price-
insensitive markets.
o Penetration: Low prices to gain market share quickly; includes:
 Expansionistic: Very low prices for mass market.
  Pre-emptive: Low prices to deter competitors.
 Extinction: Very low prices to eliminate competitors.

4. Price Escalation

 Definition: Final price in foreign markets exceeds domestic price due to transportation,
taxes, tariffs, distribution margins, and administrative costs.
 Mitigation Strategies:
o Shorten distribution channels or negotiate lower margins.
o Lower production costs (cheaper materials, optional features, downsizing).
o Assemble/manufacture locally to reduce transportation and import duties.
o Reclassify products for lower tariffs or repackage for tax benefits.
o Use free trade zones to defer import duties.

5. Counter Trade

 Definition: Non-cash or partially cash-based trade arrangements.

 Non-Cash Forms:
o Barter: Direct goods exchange without money.
o Clearing Agreements: Governments trade preset goods, settling imbalances in
goods or currency.
o Switch Trading: Third party uses surplus credits to buy goods from deficit
country.
 Cash Forms: Product buy-back, compensation, counter purchase.

6. Transfer Pricing

 Definition: Pricing for transactions between subsidiaries of the same company.

 Purpose: Manipulate profits, duties, and incomes to:
o Minimize tax liabilities (high prices from low-tax to high-tax countries).
o Avoid host country restrictions (low prices from restricted countries).
o Reduce tariffs (low transfer prices to high-tariff countries).
o Limit profit sharing in joint ventures (high prices to reduce shared profits).
 Factors: Market conditions, competition, economic conditions, import restrictions,
customs duties, price controls, taxation, exchange controls.

7. Methods of Payment

 Advance Payment:
o Importer pays before goods are delivered; low risk for exporter, high risk for
importer.
o Requires evidence of demand, payment to supplier, and compliance with import
licenses.
 Open Account:
 o Exporter ships goods and invoices importer; high risk for exporter, beneficial for
importer.
o Used in buyer’s markets; mitigated by export credit insurance.
 Consignment Sale:
o Exporter retains ownership until goods are sold; used for vehicles, dresses,
artworks.
 Documentary Collection:
o Exporter’s bank delivers documents to importer’s bank against payment (Sight
Draft) or acceptance (D/P).
o Less secure than documentary credit but simpler and cheaper.