INTERNATIONAL BUSINESS MANAGEMENT

MS. VIDHYA.J
ASSISTANT PROFESSOR, SSM
UNIT 1: INTRODUCTION TO INTERNATIONAL BUSINESS

 Evolution of International Business, Drivers of Globalization, Difference Between Domestic and International
Business, International Business Approaches, Advantages and Problems in International Business, Theories of
International Trade
INTERNATIONAL BUSINESS
Evolution of International Business
International Business focuses on global resources,opportunities to
buy /sell world wide
 The first phase of Globalisation began around 1870 and ended with
World War – I
 The International trade between two world Wars has been described
as “a vast game of beggar-my-neighbour”.
 The GDP was as high in 1913
 GATT was replaced by GATT in 1995
 International trade to International Marketing
 International Marketing to International Business
A HISTORICAL PERSPECTIVE

 The Multinational Phase

 Foreign markets could be penetrated easily
 Since production was often localized, products could be adapted to local markets
 Multinational Marketing

 Marketing to different countries with local adaptation of products and promotions

 The Global Phase
 The appearance of strong foreign competitors in the U.S. was a major force behind the
emergence of the global perspective
 Japanese companies had entered the U.S. market with spectacular success in markets such as autos and consumer electronics
A HISTORICAL PERSPECTIVE

 The Antiglobalization Phase

 The antiglobalization forces gained steam throughout the year 2000
 Questioning of the economic and social benefits of globalization continued

 The antiglobalization arguments involve a mix of economic, political, and social issues
 One main complaint is that globalization has failed to lift the standard of living of many third-world countries
while multinational companies have profited significantly
 Local to Global …and Back?

Local

LEVEL OF
LOCALIZATION

Global
Multi-national phase Global phase Anti-globalization
phase

1980 2000

TIME
 Key Concepts

 Global Marketing
 Refers to marketing activities coordinated and integrated across multiple country
markets
The integration can involve standardized products, uniform packaging,
identical brand names, synchronized product introductions, similar advertising
messages, or coordinated sales campaigns across markets in several countries
 International Marketing
 An older term encompassing all marketing efforts in foreign countries, whether
coordinated or not, involving recognition of environmental differences and foreign
trade analysis
KEY CONCEPTS

 “Foreign” Marketing
 Many global companies have banned use of the term “foreign” in their
communications
 These companies want to avoid the sense that some countries are separate and strange
 The companies want their employees to view the world as an integrated entity and not favor the home country over
others

 Multidomestic Markets
 Product markets in which local consumers have preferences and
functional requirements widely different from one another’s and others’
elsewhere
 The typical market categories include products and services such as foods, drinks, clothing, and entertainment
KEY CONCEPTS

 Global Markets
 Markets in which buyer preferences are similar across countries
 Within each country, several segments with differing preferences may exist, but the country borders are not important
segment limits

 Global Products
 The key to success of the globally standardized products is that they are often
the best-value products because they offer higher quality and more advanced
features at better prices
 Global products tend to be stronger on the intangible extras such as status and brand image
 Global products embody the best in technology with designs from leading markets and are manufactured to the highest
standards
 Multi-domestic vs Global markets

High Multi-domestic High-tech

markets

LEVEL OF PRODUCT
STANDARDIZATION
Entertainment

Low Food

Global
markets
SIMILARITY OF PREFERENCES Highly similar
Widely different
KEY CONCEPTS

 Global Brands
 Brands which are available, well known, and highly regarded
through the world’s markets
 Examples of global brands include Swatch, Mercedes, Nestlé, Coca-Cola, Nike, McDonald’s, Sony,
and Honda

 In global markets, with standardized products, a global brand

name is necessary for success
 This is why many firms consolidate their brand portfolios around a few major brands as
globalization proceeds
KEY CONCEPTS

 Leading Markets
 Characterized by strong and demand customers
 Free from government regulation measures
 Products and services incorporate the latest technology
 Companies are strong at the high-end of the product line
 Not necessarily the largest markets, although they often are
DRIVERS TOWARD GLOBALIZATION

 Five Major Globalization Drivers

 Market Drivers
 Customer needs, global customers and channels, transferable marketing

 Competitive Drivers
 Competitors who go global provide reasons for firms to follow

 Cost Drivers
 Economies of scale, economies of scope, and sourcing

 Technology Drivers
 The Internet, global patent diffusion

 Government Drivers
 ISO 9001 – a global standard of quality certification
 Globalization Drivers
Market Drivers Competitive Drivers
• Common customer needs
• Global competition
• Global customers
• Global distribution
• Global channels
• Transferable marketing Globalization
Potential

Cost Drivers Technological Drivers

• Production technology
• Economies of scale • Telecommunications
• Economies of scope Government Drivers • Internet
• Sourcing advantages • Free trade
• Global standards
• Regulations
ADVANTAGES & DISADVANTGES OF GLOBALIZATION
 DIFFERENCE BETWEEN DOMESTIC BUSINESS AND
INTERNATIONAL BUSINESS
 Domestic business  International Business

 Polycentric
 Ethnocentric
 Min two countries and max entire
 Geographic scope globe
 Operating style  Spread to the entire globe
 Influence domestic business  Operate within the quotas

 Tariffs  Tariff rates influence the

International Business
 Foreign exchange rates
 They need to follow the export-
 Culture import procedures
 Export import procedures  Must understand market and
 Human Resources customers
STAGES OF INTERNATIONALISATION

Domestic Company
InternationalCompany
Multinational Company
Global Company
Transnational Company
INTERNATIONAL BUSINESS APPROACH
Ethnocentric
approach

Polycentric
approach
IB Regiocentric
A approach

Geocentric approach
1. ETHNOCENTRIC APPROACH

 This approaches to international business focus on the values, ethics, and belief of the home country. All the
strategies first formulated for the domestic nation or domestic business focus on the international business is
secondary.
 This approach is very beneficial for small businesses during the early days of internationalization as the
investment needed in business is low.
 ◉ Examples of Ethnocentric Approach – Indian clothes, dresses, food, and beverage are exported to foreign
nations where a large number of Indian live.
2. POLYCENTRIC APPROACH

 As per this approach, the business focuses on each host country because they consider that each country is unique
in terms of customer demand, customer preference, and taste so if businesses want to succeed in each country they
should adapt according to the host country’s requirements.
 Examples of Polycentric Approach – McDonald, Starbucks, Google Doodle
3. REGIOCENTRIC APPROACH

 Under this approach, businesses divide the whole world into different regions based on their common regional,
social & cultural environment, economic, and political factors.
 Marketing strategies and business plans are formulated in regional headquarters for the entire group of counties or
region
 Example of Regiocentric Approach – Firms divide groups or regions on the basis of unique similarities like
SAARC countries, the Baltic region, and the Scandinavian region.
 Examples of Geocentric Approach – Pepsi, Coca-cola, HSBC
4. GEOCENTRIC APPROACH

 According to the Geocentric approach, businesses consider the whole world is the same as one country for their
business operation.
 Businesses select the best talent from the entire globe and operate with their large number of a subsidiary that is
located around the globe that coordinate with the head office.
 Examples of Geocentric Approach – Apple, Dell, KFC, Nestle, Unilever
 WHAT IS TRADE THEORIES?

Trade theories are simply different theories to explain international

trade.
International Trade is the concept of exchanging goods and
services between two countries.
Trade theories explains how goods are traded among various nations
& which goods are advantageous for trading.
For example- USA have advantage in car manufacturing, India in
spices, etc.
 Classification Of Trade Theories

Traditional
Modern Theories
Theories

1. Mercantilism theory 6. Product life cycle

2. Absolute advantage 7. New trade theory
theory

3. Comparative advantage 8. Porter`s diamond

theory
4. Factor endowment

5. Leontief paradox
 1. MERCANTILISM THEORY

⮚This theory was given by Thomas Mun.

⮚ Popular in the 16th and 18th Century.
⮚ It is based on zero sum game.
⮚ During that time, Wealth of nations was measured by stock of gold
and other kinds of metals.
⮚ Primary goal is to increase the wealth of nation by acquiring gold.
⮚ This theory says that a country should increase gold by promoting
exports and discouraging imports.
 Assumptions
1. There is a finite amount of wealth in the world.
2. A nation can only grow rich at the expense of other nations.
3. A nation should try to achieve & maintain a favorable trade
balance ( exporting more than its import).

Disadvantages
1. Mercantilism hardly paid attention to the welfare of ordinary
workers.
2. Mercantilism was one way traffic. It focus on export but not
import, it is not easy to be self-sufficient. Many countries of
Europe fails to be self-sufficient which increased their miseries.
 2. ABSOLUTE ADVANTAGE THEORY
⮚ This theory was given by Adam Smith in 1776 and argued mercantilist
theory.
⮚ This trade theory is based on positive sum game and expansion of trade.
⮚ Absolute advantage is when a country can produce a product more
effectively than other country.
⮚ Export goods of production advantage and import goods of production
disadvantage.
⮚ Example – India has an absolute advantage in producing cotton and brazil
has in producing coffee. In this both countries should supply production
advantage to each other.
LIMITATIONS

1. Fails to explain how free trade can be

advantageous to two countries when one
country can produce all goods.

2. Country not having absolute advantage can’t

gain from free trade

3. Differences in climatic conditions & natural

resources won’t lead to absolute advantage
 3. COMPARATIVE ADVANTAGE THEORY
⮚It is developed by David Ricardo in 1817.

⮚This theory is the extension of absolute advantage theory. i.e. If a country

has advantage in production of both commodities, then compare the
efficiency of both goods.

⮚Produce and Export the good which can be produced more efficiently.

⮚Example – India can produce both truck and car efficiency but for export,
India need to compare these goods with each other to find which goods has
more efficiency. If car producing has more efficiency then India should
produce and export manufactured cars.
LIMITATIONS

1. Ricardo's Theory was based on only two countries & only two
commodities, but international trade is among many countries with many
commodities
2. Assumption of full employment helps theory to explain trade on the
basis of comparative advantage. Cost of production in terms of labor,
may change as countries, at different levels of employment move
towards full employment.
3. Even if any country stopped production, nobody in the industry wants
to lose their job.
4. Another serious defect is that transportation costs are not
considered in determining comparative cost differences
 4. FACTOR ENDOWMENT THEORY
⮚ Given by Eli Heckscher and Berlin Ohlin in 1993.
⮚ Also known as factor Proportion theory or Heckscher & Ohlin theory.
⮚ This theory is based on a country’s available production factors i.e. land,
labor, etc. in the country.
⮚ It stated that countries would produce and export those goods which make
intensive use of factors that are locally available in large quantities. In contrast,
import those factors that are in short supply or locally scarce.
⮚ Example – India has large quantities in labour so India should export labour
intensive goods i.e. coal mining and import capital intensive goods i.e. oil.
LIMITATIONS

1. Ignores price differences, transport costs, economies of

scale, external economies etc
2. Gives undue importance to supply & less
importance to demand
3. Assumes that there is no
unemployment
 5. PRODUCT LIFE CYCLE THEORY
⮚ It is given by Raymond Vernon in the Mid 1960’s and Theory consist of
technology based products.
⮚ A product goes through the life cycle i.e. Introduction, Growth, Maturity,
Decline.
⮚ Country where the product is first launched is Innovator and At the end of cycle
the innovator becomes the importer.
⮚ Example- America has started production of any new product that is
introduction phase, after some time company has reached into growth phase
where the demand has increased and starts export. In last, that product becomes
global standard product so to meet global demand and to decrease cost of goods.
America starts to produce goods in developing country like India for mass
production and starts importing of goods from India to meet demand.
 LIMITATIONS

⮚ Most appropriate for technology-based products

⮚ Some products not easily characterized by stages of maturity
⮚ Most relevant to products produced through mass
production
 6. NEW TRADE THEORY
⮚It is given by Paul Krugman in 1980.

⮚This theory tells about some of the necessary factor. A countries

having these factor can become exporter.

⮚Those three necessary factors are

1. Economies of sale – Reduction in per unit cost
2. Product differentiation i.e. color, durability, brand etc.
3. First mover advantage i.e. Capturing market
LIMITATIONS

1. Can only treat a situation when there are many firms with different
production processes.
2.Assumes that all firms are well-formed, which may not be true in
every case.
 7. PORTER’S DIAMOND MODEL
⮚Developed by Michael Porter in his book ‘The Competitive
Factor
Advantage of Nations’ in 1990.
Conditions
⮚It is also known as National Advantage Trade Theory.

⮚Explains factors that are available to a nation. Related &

Demand DIAMOND
Supporting
⮚Four factors together forms “PORTER’S DIAMOND MODEL”. Conditions MODEL Industries
⮚These factors can give competitive advantage to the economy of
country.
Strategy,
⮚Export goods from that industry where the diamonds is favorable.
Structure, Rivalry
LIMITATIONS

1. In his book, Porter was optimistic about future of Korea & less
optimistic about future of others.
2. Other factors may influence success – there may be events that
could not have been predicted, such as new technological
developments or government interventions.
ADVANTAGES OF INTERNATIONAL BUSINESS

 High living standards

 Increased socio-economic welfare
 Wider market
 Reduced effects of business cycle
 Reduced risks
 Large scale economies
 Potential untapped markets
 Provides the opportunity for and challenge to domestic business
 Division of labor and specialization
 Economic growth of the world
 Optimum and proper utilization of world resources
 Cultural transformation
 Knitting the world into a closely interactive traditional village
PROBLEMS IN INTERNATIONAL BUSINESS

 Political factors
 Huge foreign indebtedness
 Exchange instability
 Entry requirements
 Tariffs,quotas and trade barriers
 Corruption
 Bureaucratic practices of Government
 Technological pirating
Thank you