International business

Eighth Edition
PART 1
THE WORLD OF
INTERNATIONAL
BUSINESS
Chapter 1
An introduction
to international
business
 Lecture outline
• Introduction
• What is international business?
• Globalization
• Technology and innovation
• Socio-political developments
• What are institutions?
• Multinational enterprises
• Foreign direct investment
• International business in the modern era
• Outsourcing, offshoring and nearshoring
 What is International Business?
• The study of transactions taking place across national borders for
the purpose of satisfying the needs of individuals and
organizations.
• Examples:
 U.S. company selling cars to Germany.
 China investing in factories in India.
• Globalization and International Business:
Globalization makes the world more interconnected through trade,
technology, and travel, leading to more international business.
• Example: A cup of coffee may involve coffee beans from Brazil,
sugar from India, and a cup made in China.
 What is International Business?
• Key Elements:
• International Trade: Exporting and importing goods across borders (e.g.,
Japan selling cars to the U.S.).
• Multinational Enterprises (MNEs): Companies operating in multiple countries
(e.g., Google, Coca-Cola).
• Global Supply Chains: MNEs using suppliers from various countries to
produce products (e.g., assembling cars with parts from Thailand, Germany,
and Japan).
• Growth: Over the last century, the number of international businesses has rapidly
grown, with firms expanding globally (e.g., Samsung).
• Global vs. International Firms:
• International firms operate in multiple countries but not everywhere (e.g.,
Coca-Cola).
• Global firms operate worldwide but are rare.
 What is Globalization?
• Definition: Globalization is the increasing connection and
interdependence of countries, businesses, and people worldwide. It
affects everything from the products we buy to how economies grow.
• Economic Globalization: The growing interdependence of locations
and economic actors across countries and regions (e.g., smartphones
with parts from the U.S., South Korea, and China).
• Economic Actors:
• Small businesses, large corporations, non-profits, governments.
• All aim to achieve specific goals, such as profit, research, or
reducing poverty.
• Example: A small bakery in Italy and a giant like Amazon both work
towards making profits and providing jobs, contributing to
globalization.
 Outcomes of Globalization
• Interdependence of Locations:
• Countries, regions, and cities are more connected.
• Example: A company may move operations due to tax differences across
countries.
• Interdependence of Firms:
• Companies collaborate globally through partnerships and joint ventures.
• Example: Japanese car manufacturers working with U.S. electronics
firms for electric vehicle technologies.
• Global vs. Local Markets:
• Some products succeed globally, while others remain local due to
cultural preferences.
• Example: Coca-Cola struggles in Indonesia where unsweetened tea is
more popular.
Outcomes of Globalization
• Global vs. Regional Strategies:
• Some companies standardize globally; others customize for local
markets.
• Example: Nestlé adapts instant noodle flavors to local tastes, while
HSBC shifted focus to its core market in Asia.
 Interdependence in Globalization
• Definition: Interdependence means mutual reliance between countries,
companies, or individuals. In globalization, this reliance is becoming stronger.
• Key Examples:
• Soccer Team: Players depend on each other for success, similar to how
countries/companies depend on one another in global trade.
• Brexit: The UK and EU's deep interdependence through trade and
regulations made separation complex.
• USA and India: The USA is more central in the global economy, while
India is more dependent, showing unequal interdependence.
• MNEs: Companies like Apple and Toyota rely on global supply chains and
partners to produce and sell products worldwide.
• Central and Peripheral Economies: Central economies (e.g., USA, China)
have more influence, while peripheral economies (e.g., African nations) are
more dependent.
 Understanding Interdependence in
Globalization
• What is Interdependence?
• Mutual reliance between countries, companies, or individuals.
• Varies in balance: Equal vs one-sided.
• Examples of Interdependence
• Soccer Team: Performance depends on all players.
• Brexit: Complex trade & regulatory ties between the UK and EU.
• USA & India: Unequal interdependence; USA is more central.
• Degrees of Interdependence
• Centrality: Importance in the global economy.
•
Understanding Interdependence in
Globalization
• Characteristics of Central Economies
• Influence in global trade, finance, & innovation (e.g., USA, China).
• MNEs (e.g., Apple) wield more power than some countries.
• Peripheral Countries
• Less global influence, more dependent on central economies (e.g.,
Africa and MNEs).
• Interdependence in Companies
• Global Supply Chains: Firms like Apple rely on international suppliers for
production
 Regional Integration
• Definition: Countries in a geographic area form agreements to boost
trade and investment within the region.
• Examples: European Union (EU) and East African Community (EAC)
• Why Engage in Regional Integration?
• Increase FDI and Trade: Easier cross-border trade and investment.
• Economies of Scale: Shared resources = cost savings.
• Bargaining Power: Smaller countries gain influence collectively.
• How It Works
• Formal agreements on trade and investment, reducing barriers.
• Example: NAFTA/USMCA (USA, Canada, Mexico).
 Regional Integration

• Relation to Globalization
• Globalization: Natural, global connections via MNEs and
governments.
• Regional Integration: Planned, formal agreements within regions.
• Benefits
• Faster Economic Growth, Increased Trade & Stronger Relationships.
• Challenges
• Economic Differences, Political Differences & Shifts in Benefits (e.g.,
Brexit).
 Mapping Globalization
• Key Forces Driving Globalization
• Socio-Political Factors: Government policies impact global market
success.
• Example: Trade agreements or tax incentives.
• Technology and Innovation: Drives competitiveness and efficiency.
• Example: The internet enabled Amazon to expand globally.
• Push and Pull Factors in Globalization
• Push Factors: Drive companies away from home markets.
• Rising costs & Saturated markets
 Mapping Globalization
• Pull Factors: Attract companies to foreign markets.
• Cheaper inputs & Barriers to exports
• Balancing Push and Pull Factors
• Upstream (Production): Cheaper inputs abroad vs. rising costs at home.
• Downstream (Markets): Seeking growth abroad vs. export barriers.
• Example: Car Manufacturer
• Push Factor: Rising steel costs push relocation.
• Pull Factor: High tariffs pull production to foreign markets (e.g., India).
 Technology and Innovation in Globalization
• What is Technology?
• Technology: Practical use of scientific knowledge to solve problems.
• Example: Smartphones combine communication and computing for
daily use.
• Invention vs. Innovation
• Invention: Creating new ideas/products (e.g., lightbulb).
• Innovation: Commercializing inventions (e.g., Edison’s lightbulb in
homes).
• How Technology & Innovation Drive Globalization
• Communication, Transportation & Economic Growth
Technology and Innovation in Globalization

• Economic Impact of Innovation

• Increased Productivity: Automation improves efficiency (e.g., factories).
• Diffusion of Knowledge: Innovation spreads across industries (e.g.,
electric cars by Tesla).
• Global Impact
• 5G technology benefits industries globally, enhancing connectivity and
growth.
 New Technologies and Their Impact
• Waves of Technological Change
• First Industrial Revolution: Factories, water power, mass production (e.g.,
textiles).
• Second Industrial Revolution: Electricity, cars, telegraphs (e.g., telephones).
• ICT Revolution: Internet, computers, mobile phones (e.g., Amazon's global
reach).
• Why Some Technologies Matter More
• Enable efficient global operations, scaling, and communication (e.g., steam
power, electricity for trade).
 The Knowledge-Intensive, Multi-Technology Firm
• Changing Skills and Knowledge
• Traditional skills are no longer enough; jobs require specialized, non-
intuitive skills (e.g., microprocessor design taught at universities).
• Multi-Technology Products and Firms
• Modern products require multiple technologies (e.g., cars now include
computers, GPS, communication systems).
• Firms must have expertise in various areas to create complex products
(e.g., smartphone manufacturing involves electronics, software, and
design).
The Knowledge-Intensive, Multi-Technology Firm
• Competitiveness and Knowledge Integration
• Firms need to combine multiple technologies to remain competitive (e.g.,
Tesla integrates battery tech, autonomous driving, and renewable energy).
• Challenges of Multi-Technology Firms
• Increased Competition: More global players lead to smaller margins (e.g.,
Samsung vs. Xiaomi in smartphones).
• High R&D Costs: Developing new tech is expensive, making it hard to
balance costs and profits (e.g., pharmaceutical R&D).
• Balancing Costs and Technology: Companies must lower costs while
maintaining tech advantage (e.g., Intel vs. AMD in processors).
 Socio-Political Developments in Economic
Interdependence
• Key Factors:
• Political Stability:
• Stable policies help businesses plan and invest securely.
• Example: Predictable tax policies encourage investment.
• Property Rights:
• Protecting ownership is essential for business growth.
• Enforceable Contracts:
• Businesses need contracts to be legally binding to ensure trust.
• Example: Contracts ensure fair transactions.
 Socio-Political Developments in Economic
Interdependence
• International Contract Challenges:
• Different legal systems complicate international deals, increasing costs.
• Example: Dutch-Brazilian contracts may involve multiple legal systems.
• Trade and Infrastructure:
• Poor infrastructure and border delays reduce efficiency and raise costs.
• Example: Trucks facing long waits at borders in South America.
• Institutional Importance:
• Effective institutions (courts, regulatory bodies) are crucial for smooth
business operations.
• Example: Inconsistent rules in Mercosur create delays.
 Institutions: Key Concepts
• Definition: Rules and customs shaping behavior in society, divided into:
• Formal Institutions: Written laws and regulations (e.g., traffic laws,
company policies).
• Informal Institutions: Unwritten norms, customs, traditions (e.g., social
customs, corporate culture).
• Examples:
• Formal: Traffic laws, company regulations.
• Informal: Cultural greetings, unwritten dress codes.
• Impact on Economic Activity:
• Institutions provide stability for business operations by defining
 Institutions: Key Concepts
• Institutional Change:
• Formal Change: Quick, e.g., new laws.
• Informal Change: Slow, e.g., social norms.
• Institutional Inertia:
• Formal rules change faster than informal behaviors, e.g., workplace
discrimination policies vs. actual bias.
• International Context:
• Institutions differ across countries, requiring companies to adapt to
both formal and informal rules.
 Institutions and Supranational Agreements

• International Institutions:
• Set global rules for trade and finance to ensure fairness and resolve
disputes.
• General Agreement on Tariffs and Trade (GATT),
• GATT which had existed since 1947.
• Key agreements:
• Reduced tariffs on goods, Lowered agricultural subsidies
• TRIPS (Intellectual Property Rights), GATS (Trade in Services)
 Institutions and Supranational Agreements

• World Trade Organization (WTO):

• Oversees global trade since 1995
• Example: WTO settled a dispute between the US and EU over banana
imports.
• In another case, the WTO settled a dispute between the US and Japan
over Kodak & Fuji. This time, the WTO ruled in Japan’s favor.
• Basel Accords I, II, & II (Banking Regulations):
• Set international rules to manage banking risks.
• Example: Banks must hold enough capital to cover loan risks, ensuring
stability during financial downturns
 Globalization and Liberalization
• Increasing global connectivity and interdependence of countries and
businesses.
• Liberalization:
• Reducing government restrictions to facilitate free movement of
goods, capital, and investment across borders.
• Types of Capital Flows:
• FDI, International Bank Lending, International Bonds, Portfolio
Investment, Development Aid, and Monetary Flows: Currency
exchanges for trade.
 Globalization and Liberalization
• Bretton Woods Agreement (1944):
• Established the IMF and World Bank, regulating international financial
systems.
• Challenges of Globalization:
• Economic Control Loss: Countries may face instability due to reliance on
foreign capital (e.g., Asian Financial Crisis).
• Global Financial Crises: Interconnected financial markets create global
risk (e.g., 2008 mortgage crisis).
• Example of Liberalization:
• Relaxed regulations allow FDI (e.g., German company investing in India),
boosting both economies.
 Multinational Enterprise (MNE)
• Definition:
• A company that operates in multiple countries with ongoing and
significant business activities.
• Engages in Foreign Direct Investment (FDI) by setting up assets
(factories, offices) in other countries.
• Examples: McDonald's, Apple.
 Multinational Enterprise (MNE)
• Evolution of MNEs:
• Past: Vertically integrated (controlled all steps of production).
• Example: Ford owned plantations, foundries, and mines in the 1920s.
• Present: Outsourcing and forming alliances with global partners.
• Example: Nike outsources shoe production to factories in Vietnam.
• MNEs & Globalization:
• Operate through Global Value Chains (GVCs) and Global Production
Networks (GPNs).
• Example: Apple designs in the US, manufactures in China, and sources
components from multiple countries.
 Multinational Enterprise (MNE)
• Ownership & Control:
• Past: Centralized control from headquarters in the home country.
• Present: Decentralized, with decision-making spread across countries.
• Example: Anheuser-Busch InBev has headquarters in Belgium but is
controlled by Brazilian partners.
• MNEs & Employment:
• Direct employment from the largest MNEs is about 75 million people globally
(~2.5% of the workforce).
• Indirect employment brings the total closer to 200 million.
• Impact varies by sector and region:
• Example: $1 million investment in tourism (Caribbean) creates 6 jobs, while in
 Proto-globalization: Early Interconnected
Economies & Birth of MNEs
• Early Interconnected Economies:
• Roman Empire:
• Common laws, unified currency, and trade across vast regions via roads and sea routes.
• Goods like silk, spices, and salt traded across regions.
• Diplomacy and trade agreements ensured safe and stable trade networks.
• Moneylenders facilitated currency exchange, reducing the need for large gold transactions.
• Birth of MNEs:
• First Multinational Enterprises (Late 1500s):
• British East India Company and Dutch East India Company were state-backed and monopolized
trade in Asia.
• These companies were the earliest MNEs, with European headquarters and operations in multiple
countries.
• Allowed risk-sharing through investment (early form of stock markets).
• By the 1700s, most trade was still done by small businesses, but these large companies were the
 Industrial Revolution and the Rise of
Modern MNEs
• Technological Advancements: Steam power, railways, and factories enabled
economic growth and easier transportation, boosting international trade.
• Global Expansion: European firms expanded abroad (especially in colonies) to
secure raw materials (cotton, coal, rubber), leading to the rise of modern
Multinational Enterprises (MNEs) with central headquarters controlling global
operations.
• Free-Standing Companies: In the 1800s, private companies invested in overseas
production, coordinating operations from their home offices (e.g., British textile
factories in India).
Industrial Revolution and the Rise of Modern MNEs

• Spread of Industrial Technologies: Innovations like electricity,

telegraphs, and telephones helped companies like Siemens and Singer
expand manufacturing across borders.
• Modern MNEs: By the early 1900s, global MNEs expanded due to:
• The need for raw materials.
• The search for new markets.
• Examples: Siemens (Germany), Singer (US). Japan industrialized
early, becoming a global player.
 Foreign Direct Investment (FDI) Overview
• Definition: FDI occurs when a company or individual from one country invests in
and controls a business in another country, unlike foreign portfolio investment (which
lacks management control).
• Example: Toyota opening a factory in the U.S., managing production, hiring, and
operations is FDI. Buying shares in a foreign company, like Tesla, without control, is
foreign portfolio investment.
• Measuring FDI and MNE Activity
• FDI Flows: Tracks new money invested during a specific year.
• Inward FDI: Money coming into a host country (e.g., Apple invests in India).
• Outward FDI: Money going out from a home country to a foreign subsidiary.
 Foreign Direct Investment (FDI) Overview

• FDI Stock: Reflects the accumulated value of investments over time,

offering a clearer view of long-term contributions (e.g., Toyota’s factory
expansion in the U.S. over 30 years).
• Limitations
• FDI stock can underestimate older investments by not accounting for
property appreciation or local financing.
 Multinational Enterprises (MNEs)
Before World War II
• FDI Growth (1914):
• Estimated global FDI: US$40–50 billion (about 1/3 of all foreign investment).
• Main Source: Britain (45% of global FDI); Western Europe contributed over 80%.
• Investment Destinations:
• Key regions: Latin America, Asia, U.S., Canada.
• Focus on primary sectors (natural resources), railroads, and limited
manufacturing.
• FDI Allocation:
• Primary Sector: 55% (agriculture, mining, plantations).
• Railroads: 20% (infrastructure development in Latin America & U.S.).
• Manufacturing: 15% (mostly in developed countries).
 Multinational Enterprises (MNEs)
Before World War II
• Vertical Integration: Companies controlled entire supply chains,
from raw material production to manufacturing (e.g., British rubber
plantations in Malaysia for UK tire factories).
• Notable MNEs (pre-WWII & today):
• Shell, BP (oil), Unilever (consumer goods), Nestlé (food), Ford
(automobiles), HSBC (banking), Philips (electronics).
• Example: Unilever invested in African palm oil plantations,
shipping the raw material to Europe for soap production, illustrating
vertical integration.
 The Rise of the Modern Multinational
Enterprise (MNE)
• Early MNEs & Vertical Linkages:
• MNEs internationalized by managing the entire production process across
countries (e.g., raw materials, manufacturing, and sales in different
locations).
• Early examples: Ford (cars), Singer (sewing machines), IG Farben
(chemicals).
• Technology's Role:
• Technological advances (railways, shipping lines, internal combustion
engines, electricity, telegraph, and telephones) allowed for global mass
production and efficient logistics.
 The Rise of the Modern Multinational
Enterprise (MNE)
• Growth of Corporations & Professional Management:
• Larger companies transitioned to professional management, enabling them to
operate efficiently across borders.
• Economic Challenges (Early 20th Century):
• Post-WWI recession, the Great Depression, and commodity price drops hurt
economies reliant on exports.
• Nationalism & Import Substitution:
• Developing countries, especially in Latin America, adopted import substitution
policies to reduce dependence on foreign MNEs.
• Rising nationalism and protectionism led to trade barriers, tariffs, and
nationalization, altering FDI patterns.
 International Business in the Modern Era
• Post-WWII Changes:
• U.S. Dominance (After 1945): The U.S. emerged as a global leader, shaping international trade and finance
(e.g., Marshall Plan rebuilding Europe and Japan).
• The Cold War: Divided the world into U.S.-led capitalist nations and USSR-led communist nations,
influencing global politics and conflicts (e.g., Korean and Vietnam Wars).
• Bretton Woods Agreement (1944): Established a new economic system and institutions like the IMF and
World Bank to support global trade and economic stability.
• Growth of International Trade: The General Agreement on Tariffs and Trade (GATT) reduced barriers to
trade, boosting global commerce.
• Decolonization (1945–1960): Newly independent nations, like India, entered the global economy, engaging
in international trade.
• China’s Closed Economy: China isolated itself post-1949 but began opening up in the late 1970s,
becoming a global economic powerhouse.
• Key Impact: WWII reshaped global business, with the U.S. leading, new trade rules, and the rise of newly
independent and emerging economies.
 1990–2017: The Rise of New Players
and Forms of Activity
• 1950s U.S. Dominance:
• Post-WWII, the U.S. was the global economic leader, producing half the
world's goods and controlling 80% of global FDI.
• U.S. brands like General Motors and Coca-Cola became global, while
Europe and Japan rebuilt with U.S. aid.
• 1960s Growth of Europe & Japan:
• Europe and Japan recovered, with companies like Toyota and Shell
challenging U.S. dominance.
• Developed nations continued to dominate FDI, with Latin America
attracting investment in mining and agriculture.
 1990–2017: The Rise of New Players
and Forms of Activity
• 1980s Triad Emergence:
• The global economy became balanced among North America, Europe,
and Japan, producing 75% of the world’s manufactured goods.
• By 1990, 77% of global FDI went to developed countries, with China and
India accounting for only 1%, still emerging as global players.
• Key Players: U.S., Europe, Japan (Triad) with rising importance of
developing nations in Asia and Latin America.
 The Continuing Importance of State-
Owned Enterprises (SOEs)
• 1. Privatization of SOEs:
• Starting in the 1990s, many developing countries privatized SOEs to
improve efficiency and attract investment.
• Example: Mexico privatized industries like airlines and energy in the
1990s.
• 2. Importance of SOEs in China:
• China retained large SOEs, with many still focused on domestic markets,
particularly in protected sectors like banking and energy.
• Example: China National Petroleum Corporation (CNPC) is a massive
state-owned oil company primarily operating within China.
 The Continuing Importance of State-
Owned Enterprises (SOEs)
• SOEs in Other Developing Countries:
• SOEs remain key players in energy and resources sectors, often supported by government backing.
• Examples: PETRONAS (Malaysia), Petrobras (Brazil), Indian Oil Corporation (India).
• 4. Subsidies and Protection for SOEs:
• Governments protect SOEs with subsidies and favorable regulations, though global trade
agreements like the WTO have reduced these protections over time.
• Example: India provided subsidies to Indian Oil to grow and compete globally.
• 5. International Expansion of SOEs:
• Many SOEs, especially in energy and resources, have expanded internationally.
• Example: PETRONAS operates in multiple countries and is a key global player in oil and gas.
• Key Role: SOEs remain vital in the global economy, especially in developing countries, contributing
significantly to industries like energy, utilities, and natural resources.
 Emerging Economy MNEs: Significant but
Exaggerated
• Emerging Market MNEs (EMNEs):
• Rapid growth of EMNEs may be overstated, with much of the "FDI" being financial investments without real control.
• Example: Middle Eastern sovereign funds investing in U.S. companies.
• Acquisitions by Oil Countries & China:
• Oil-rich nations and China invest abroad but often don’t actively manage these firms.
• Example: Russian oil firms buying stakes in European energy companies as passive investments.
• Growth of FDI from Developing Countries:
• FDI from developing countries grew from 6.2% (1990) to 22.3% (2017), but much of this is from a few nations like China and
BRICS countries.
• Tax Havens & Distorted Data:
• Tax havens (e.g., British Virgin Islands) inflate FDI data without real economic impact.
• Example: BVI reported $661 billion FDI in 2017, largely tax-motivated.
• Round-Trip Investing:
• Companies route money through tax havens and return it as "foreign investment" for tax benefits.
• Example: Indian firms using Mauritius for tax incentives.
• Distorted FDI Data:
• FDI data is misleading due to tax avoidance strategies, showing exaggerated investment levels.
• Example: Google reduced its tax rate by routing profits through Bermuda.
 Small and Medium-Sized Enterprises
(SMEs) in the Global Economy
• SMEs vs. Large Firms:
• SMEs: Typically under $5 million in annual sales, play key roles as
suppliers to large MNEs like Volkswagen.
• Large MNEs: Globally recognized but rely on SMEs for specialized
products and services.
• Advantages of SMEs:
• Flexibility & Innovation
• How SMEs Overcome Challenges:
• Form partnerships and alliances to access markets, technology, and skills.
• Efficiently use external networks to outsource and collaborate.
 Small and Medium-Sized Enterprises
(SMEs) in the Global Economy
• Challenges for SMEs:
• Limited manpower and finances; must be strategic in international
expansion.
• Regulatory complexities, especially in countries like India, can restrict
growth.
• SMEs and Innovation:
• SMEs are often more innovative, especially in skilled industries.
• In the U.S., SMEs make up 99.7% of companies and employ over
half of private-sector workers.
 Outsourcing, Offshoring, and Nearshoring
• Outsourcing is a process where business contracts work with third part
provider which can be in their own home country or across borders.
• Offshoring is moving a company's operations to a distant location, while
Nearshoring involves relocating operations to a nearby country in the
same region
• Global Value Chains (GVCs) & Production Networks:
• Companies break production across countries for efficiency.
• Example: Apple designs in the U.S., manufactures components in
South Korea/Taiwan, assembles in China (Foxconn).
 Outsourcing, Offshoring, and Nearshoring
• Producer-Driven vs. Buyer-Driven Chains:
• Producer-Driven: Companies control production (e.g.,
pharmaceuticals).
• Buyer-Driven: Retailers control marketing but outsource production
(e.g., H&M in Bangladesh).
• Outsourcing & Non-Equity Modes (NEMs):
• MNEs use contracts (NEMs) to control operations without owning
firms.
• Example: Nestlé sources from farmers but doesn't own the farms.
 Outsourcing, Offshoring, and Nearshoring
• Outsourcing in Different Industries:
• Common in electronics, automotive, garments, and services like IT.
• Example: India and the Philippines are top locations for outsourced
IT and customer support.
• Challenges of Outsourcing:
• Risks include loss of control or over-reliance on suppliers.
• R&D is often kept in-house for technology protection (e.g., Intel).
• Strategic Alliances:
• MNEs collaborate on specific projects without full ownership.
• Example: Two car companies collaborating on electric vehicle