Chapter 1 Governments undertake international business for both political and profit reasons Globalization refers to the broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations What is International Business International business consists of all commercial transactions including sales investments and transportation that take place between two or more countries o The goal of private business is to make profits o Government business may or may not be motivated by profits Globalization enables us to get more variety better quality or lower prices International business comprises a large and growing portion of the world s total business As a manager in almost any industry you ll need to consider both 1 where to obtain the inputs you need of the required quality and at the best possible price and 2 where you can best sell the product or service that you ve put together from those inputs The best way of doing business abroad may not be the same as the best way at home o Company operating internationally will engage in modes of business that differ from those in which it engages domestically o Physical social and competitive conditions differ among countries and affect the optimum ways to do business Factors in Increased Globalization Seven factors contributed to increased growth in globalization o Increase in and expansion of technology o Liberalization of cross border trade and resource movements o Development of services that support international business o Growing consumer pressures o Increased global competition o Changing political situations o Expanded cross national cooperation Expanded Cross National Cooperation Governments realize that their own interests can be addressed through international cooperation by means of treaties agreements and consultation They are willing to pursue such policies because of these three needs o To gain reciprocal advantages Companies petition their governments to act on their behalf because they don t want to be at a disadvantage when operating internationally Governments join international organizations and sign treaties and agreements on a variety of commercial activities Why Companies Engage in International Business Three major operating objectives that underlie the reasons Treaties and agreements may be bilateral involving only two countries or multilateral involving more than two countries o To attack problems jointly that one country acting alone cannot solve Countries coordinate activities along mutual borders Cooperate to solve problems that they either cannot or will not solve by themselves The resources needed to solve the problem may be too great for one country to manage Sometimes no single country is willing to pay for a project that will also benefit another country One country s policies may affect those of other countries o To deal with areas of concern that lie outside the territory of any nation Three global areas belong to no single country the noncoastal areas of the oceans outer space and Antarctica All of these areas have commercial viability o Expanding sales Bigger potential customer base Additional sales from abroad may enable a company to reduce its per unit costs by covering its fixed costs over a larger number of sales Many of the world s largest companies derive more than half their sales from outside their home countries Many smaller companies also engage in international business o Acquiring resources Producers and distributors seek out products services resources and components from foreign countries Look for anything that will give them a competitive advantage Firms gain competitive advantage by improving product quality with resources and knowledge they find abroad o Minimizing risk Operating in countries with different business cycles can minimize swings in sales and profits By obtaining supplies of products from different countries companies may be able to soften the impact of price swings or shortages in any one country Companies often go into international business for defensive reasons Modes of Operations in International Business Merchandise exports and imports o The most popular modes of international business o Merchandise exports tangible products that are sent out of a country o Merchandise imports goods brought into a country Service exports and imports o Service exports service sent out of a country that generates non product international o Service imports service brought into a country that generates non product earnings international earnings o Services constitute the fastest growth sector in international trade o Most important service exports and imports Tourism and transportation Important sources of revenue for airlines shipping companies travel agencies and hotels Economies of some countries depend heavily on revenue from these sectors Service performance Some services including banking insurance rental engineering and management services net companies earnings in the form of fees payments for the performance of these services Turnkey operations operating facilities that are constructed under contract and transferred to the owner when the facility is ready to begin operations Management contracts arrangements in which one company provides personnel to perform general or specialized management functions for another Asset use Licensing agreements agreements in which one company gives rights to another for the use usually for a fee of such assets as trademarks patents copyrights or other know how Royalties payments for the use of intangible assets Franchising mode of business in which one party the franchisor allows another the franchisee to use a trademark as an essential asset of the franchisee s business Investments o Foreign investment ownership of foreign property in exchange for a financial return such as interest and dividends o 2 forms Direct investment also foreign direct investment Investor takes a controlling interest in a foreign company Joint venture investment in which two or more companies share the ownership FDI is also common among smaller companies about 79 000 companies worldwide control about 790 000 FDIs in all industries Portfolio investment Non controlling financial interest in another entity 2 forms stock in a company or loans to a company or country in the form of bonds bills or notes purchased by the investor Types of International Organizations Companies can work together on an international