chapter one
The Rapid Change of
International Business
McGraw-Hill/Irwin
International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reser
Learning Objectives
• Appreciate the dramatic internationalization of markets
• Understand the various names given to firms that have
operations in more than one country
• Understand the five kinds of drivers, all based on change,
that are leading international firms to globalize
• Comprehend why international business differs from
domestic business
• Describe the three environments—domestic, foreign, and
international--in which an international firm operates
1-3
International Business Terminology
• International business
• Foreign business
• Multidomestic company (MDC)
• Global company (GC)
• International company (IC)
1-4
International Business Terminology,
cont’d.
• International Business
– A business whose activities are carried out
across national boarders
• Foreign Business
– The operations of a company outside its
home or domestic market
• Multidomestic Company
– An organization with multicountry affiliates
• Each formulates its own business
strategy on perceived market differences
1-5
International Business Terminology,
cont’d.
• Global Company
– an organization that attempts to standardize
and integrate operations worldwide in most
of all functional areas
• International Company
– A global or multidomestic company
1-6
History of International Business
• Early traders
– Well before the time of Christ, Phoenician
and Greek merchants
– China stimulated the emergence of an
internationally integrated trading system
• “all roads lead to China”
• 17th Century mercantilism/colonialism
– British East India Company
– Dutch East India Company
– Portugal and France
1-7
Globalization
• Globalization
– Coined by Theodore Levitt
• “as if the entire world (or major regions of
it) were a single entity; [such an
organization] sells the same things in the
same way everywhere”
• Economic Globalization
– International integration of goods,
technology, information, labor, and capital
– Process of making this integration happen
1-8
Table 1.1 Globalization Rankings: The KOF Index
of Globalization and the A.T Kearney/Foreign
Policy Globalization Index
1-9
Globalization Forces
• Political forces
– Reduction of barriers to trade and foreign
investment by governments
– Privatization of former communist nations
• Technological forces
– Advances in computers and communications
technology
– Internet and network computing
1-10
Globalization Forces, cont’d.
• Market forces
– Globalizing companies become global customers
• Cost forces
– Goal for economies of scale to reduce unit costs
• Competitive forces
– Increase in intensity due to explosive growth in
international business
1-11
Explosive Growth
• Foreign Direct Investment and Exporting
– FDI - Direct investment in equipment,
structures, and organizations in a foreign
country
• level sufficient to obtain significant
management control (Table 1.2)
– Exporting – transportation of any domestic
goods/services to a destination outside a
country or region
1-12
Table 1.2 FDI Indicators and Multinational
Company Statistics (billions of dollars and
percentages)
1-13
Explosive Growth
• Number of International Companies
– UNCTAD - United Nations agency in charge
of all matters relating to FDI and
international corporations.
• 1995 – 45,000 parent companies with
280,000 foreign affiliates ($7 trillion in
sales)
• 2004 – 70,000 parent companies with
690,000 foreign affiliates ($19 trillion in
sales)
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Table 1.3 Ranking of International Companies
and nations according to GNI (Atlas Method) or
Total Sales
Note: Belgium (B), China (PRC), France (F), Germany (G), Italy (It), Netherlands (N), Switzerland (S), United Kingdom (U.K.), and United
States (U.S.). Source: World Development Indicators database, [Link] (July 4, 2006); and Fortune
2005 Global 500, [Link] (July 4, 2006).
1-15
Globalization Debate And You
• World Trade Organization (1999,
Seattle)
– Extensive public protests about globalization and the
liberalization of international trade
• Debate –
– Waged by diametrically opposed groups with extremely
different views on consequences of globalization
– Dramatic reductions in worldwide poverty are contrasted with
anecdotal stories of people losing their livelihoods under the
growing power of multinationals
1-16
Environments of International
Business
• Environment
– All the forces influencing the life and
development of the firm
• Forces
– External Forces (Uncontrollable) – Forces
over which management has no direct
control
– Internal Forces (Controllable) – Forces that
management can use to adapt to external
forces
1-17
External Forces
• Competitive
– Kind, number, location
• Distributive
– For distributing goods and services
• Economic
– GNP, unit labor cost, personal consumption
expenditure
• Socioeconomic
– Characteristics of human population
• Financial
– Interest rates, inflation rates, taxation
1-18
External Forces, cont’d.
• Legal
– Laws governing how international firms must operate
• Physical
– Topography, climate, and natural resources
• Political
– Forms of government, and international organizations
• Sociocultural
– Attitudes, beliefs, and opinions
• Labor
– Skills, attitudes of labor
• Technological
– Equipment and skills that affect how resources are converted to
products
1-19
Internal Environmental Forces
• Factors of Production
– Capital, raw materials, and people
• Activities of the organization
– Personnel, finance, production, and marketing
1-20
Why Is International Business
Different?
• Domestic Environment
– All the uncontrollable forces in the home country
that surround and influence the firm’s life and
development
• Foreign Environment
– All the uncontrollable forces originating outside the
home country that surround and influence the firm
• different values
• difficult to assess
• interrelated
1-21
Why Is International Business
Different? cont’d.
• International Environment
– Interaction between domestic and foreign
environmental forces or between sets of
foreign environmental forces
– Increased complexity for decision-making
• Decision making more complex
1-22
International Business Model
1-23