Chapter 06: International Business

Chapter 06: International Business

Layout of Chapter:

1.                  Why firms conduct International Business

2.                  Basic Concepts of International Business

3.                  Barriers to International Business

4.                  Regulation of International Business

5.                  Approaches to International Business

6.                  Adapting to Foreign Markets.

1.                  WHY FIRMS CONDUCT IB?

International Business (IB):

The performance of business activities across national boundaries.  E.g. Coca-cola, Microsoft, Toyota, etc.

A country with a surplus of some product may decide to sell this surplus to other nations. Such sales will enable the country to purchase other products that it may not have the ability to produce. Scarcity of resources is perhaps the major reason why nations trade with each other.

      Absolute Advantage: When a country can produce a product more efficiently than any other nation. E.g. South Africa has an absolute advantage in the production of Diamonds. However, absolute advantage is rare because usually at least two countries can efficiently supply a specific product.

      Comparative Advantage: When a country can produce one product more efficiently and at a lower cost than other products, in comparison than other nations. E.g. Countries with low labour costs, such as China and South Asian or South American countries have a competitive advantage in producing labour-intensive products such as shoes and clothing.

Comparative advantage shifts frequently, mainly due to competition. USA held comparative advantages in producing TV, automobiles, and electronics appliances; later it shifted to Japan, Germany, and South Korea. Recently Malaysia, China, and India have gained that competitive advantage.

2.                  BASIC CONCEPTS OF IB

Exporting: Selling domestic-made goods in another country.

Importing: Purchasing goods made in another country.

Balance of Trade (BoT): The difference between the amount a country exports and the amount it imports. It is measured in monetary terms, such as Tk, $, ₤, €, etc.

o        Favorable Balance            = Trade Surplus (Export – Import) =  (+)ve

o        Unfavorable Balance         = Trade Deficit (Export – Import)        =          (–)ve

Balance of Payment (BoP): The total flow of money into and out of a country. It is determined by a country’s balance of trade, foreign aid, foreign investments, military spending, and money spent by tourist in other countries.

o        Favorable BoP                  =          Inflow – Outflow          = (+)ve

o        Unfavorable BoP   =          Inflow – Outflow          = (–)ve

Exchange Rates: The rate at which one country’s currency can be exchanged for that (currency) of another country.

Governments and market conditions determine exchange rates.

Devaluation / Revaluation = Reduce / Increase value of currency by the government in relation to currencies of other nations.

o        Fixed Exchange Rate = An unvarying exchange rate set by government policy. E.g. Gold Standard.

o        Floating Exchange Rate = An exchange rate that fluctuates with market conditions.

3.                  BARRIERS TO IB

v      Cultural & Social Barriers: A nation’s culture and/ or social forces can restrict international business activities.

E.g. When McDonald’s opened its first restaurant in Rome, it was met with protest. The people of Rome objected to the smell of hamburgers frying. McDonald’s overcame this objection by changing the exhaust system of the restaurant.

Similar case in India, where the company changed its menu to exclude beef.

Culture consists of a country’s general concepts and values and tangible items such as food, clothing, buildings.

Social Forces include Family, Education, Religion, and customs.

v      Political Barriers: Political instability is unfavourable for IB. Such countries may change their attitude toward foreign firms at any time. Countries of Africa, Central America, and the Middle East are politically unstable countries and therefore, unfavourable for IB. The US and West European countries are more attractive because of their political stability.

v      Tariffs and Trade Regulations: A nation can restrict trade through import tariffs, quotas and embargoes, and exchange controls.

·         Import Tariffs – A duty or tax, levied against goods brought into a country. Used to discourage imports / foreign competitors from entering a domestic market.

·         Quotas and Embargoes – A Quota is a limit on the amount of a product that can leave or enter a country.

An Embargo is a total ban on certain imports and exports.

·         Exchange Control – Restrictions on the amount of a certain currency that can be bought or sold in a nation.

4.                  Regulation of International Business

Several organizations exist to facilitate IB: (See Table 6.4, page 201)

GATT               :           General Agreement on Tariffs and Trade (1947)

EC                   :           European Community (1957)

OPEC             :           Organization of Petroleum Exporting Countries (1960)

IMF                  :           International Monetary Fund (1944)

WB                  :           World Bank (1946)

LAFTA :           Latin American Free Trade Association (1960)

SAPTA            :           South Asian Preferential Trade Agreement

IDB                  :           Islamic Development Bank

ADB                 :           Asian Development Bank

5.                   Approaches to IB

Business firms wishing to engage in international business may adopt any of the following approaches:

·         Exporting – The simplest way to engage in IB. It requires the lowest level of resources and commitment.

·         Licensing – In a Licensing agreement, one firm (the licensor) agrees to allow another firm (the licensee) to sell the licensor’s product and use its brand name. In return, the licensee pays the licensor a commission or royalty.

·         Joint Ventures – Firms may also form joint ventures, i.e. create partnership between a foreign and a local company.

·         Trading Companies – Buying from one country and then selling it to another, without being involved in manufacturing.

·         Counter trading – complex bartering agreements between two or more countries. This process allows a country with limited cash/ foreign currency to participate in international trade.

·         Direct Ownership – Purchase one or more business operations in a foreign country. It requires large investment in production facilities, research, personnel and marketing activities.

·         Multinational Corporations – A firm that operates on a global basis, committing assets to operations or subsidiaries in foreign country.

6.                  Adapting to Foreign Markets

·         Product – Some products have to be changed to be suitable to another country.

·         Price – Prices of products may be set differently in various countries.

·         Distribution – In some cases, products can be distributed through existing systems, but if appropriate distribution systems do not exist, firms must develop them.

·         Promotion – Advertising & publicity often must be modified because of differences in language, laws and culture.