International Business is a subject that teaches how to nurture a local This tutorial is specially designed for the students of Management, Commerce, Human . This book is a part of the course by Jaipur National University, Jaipur. This book contains the course content for International Business Management. JNU, Jaipur. CHAPTER 1 Basic Concepts of Strategic Management 2. The Study of. B Suggested Case Analysis Strategic Ma Fundamentals of Business Process.
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Why firms engage in international business Businesses undertake international International managers require a broader range of management skills than do . college texts: one on strategic management and the other on international business. Professor Hill has served on the editorial boards of several academic. International Business Management (Admn ). Globalization International institution set up to promote general economic. development in the.
Hence, in the absence of advertising, merchandising, promotional activity, etc. Yet another problem is the enormous number of sometimes random factors that can influence the durations of phases, turning points and levels of sales. Competitors' behavior may be the primary determinant of the firm's sales, regardless of the age of the product.
Market imperfections and monopolistic advantage theories These assert that large firms engage in international business in order to create near monopoly conditions for their operations. Thus, for example: More generally, 'imperfections' in foreign market conditions are said to explain international investment by companies.
Stephen Hymer, for example, has argued that firms only invest abroad if they have attributes not possessed by local foreign rivals and there are barriers 'market imperfections' that prevent these rivals from obtaining the attributes of the foreign company. Attributes could relate to economies of scale in production, marketing or organizational management skills; preferential access to finance or raw materials; or the use of a superior technology. These advantages must be of a magnitude sufficient to offset the costs of operating abroad need to conduct research into the local market, foreign exchange risks, transport costs, etc.
Ownership-specific factors relate to such matters as the extent of a company's share capital, receipt of government grants and subsidies, and proprietary rights over intellectual property. Location-specific advantages include low prices for locally downloadd inputs, low transport costs, easy communications, availability of local business support services advertising agencies, market research firms, etc.
Other relevant factors are market size and rate of growth and the extent of local competition. Dunning's eclectic theory of international production John Dunning's 'eclectic theory' of foreign investment asserts that the likelihood of a firm investing abroad depends essentially on firm-specific factors, location-specific factors that make it advantageous to invest in a particular country, and 'internalization' advantages which cause the internal transfer of labour, capital and technical knowledge within the firm to be more cost- effective than using outsiders, such as licensees, import agents, distributors and so on.
Internalization Arguably, firms invest directly in other countries in order to cut out the use of expensive suppliers and distributors. Hence all stages in the supply process are brought under a common ownership so that the full benefits of research and development can be obtained by avoiding the use of licensees , and working capital better utilized.
Also foreign government import regulations might be avoided through producing in a local subsidiary rather than exporting direct. All aspects of marketing will be controlled by the supplying firm, and there are no intermediate sales or value added taxes.
Knowledge can be transferred around the company at will. Note however that extra costs have to be incurred by a firm that does things for itself rather than using outsiders.
Internal communication and administration costs increase and there are additional costs associated with having to operate in unfamiliar environments.
Problems with theoretical models of DFI While interesting in themselves, none of the models previously outlined is sufficiently general to explain all aspects of the foreign investment behaviour of international companies. Each theory purports to give reasons for certain investment activities, but contradictory evidence can be advanced against all of them in certain circumstances. The theories are partial and incomplete and adopt different ideological perspectives.
In particular, these theories tend to ignore the influences of the psycho-social and other human aspects of international managerial behaviour, and of the governments of nation states. Theories of international investment sometimes contradict each other, and should really be regarded as 'opinions' rather than as theories capable of empirical verification.
Arguably, moreover, the field of international business is so complex and fast changing and covers so many disparate elements that no general theory can be valid for very long.
Comparative advantage focuses on the relative productivity differences. The literature on international trade and policy contains a number of reasons why a country may have an advantage in exporting a commodity to another country. For convenience, most of these reasons may be classified into 1 technological superiority, 2 resource endowments, 3 demand patterns, and 4 commercial policies. Absolute advantage refers to a country having higher absolute productivity or lower cost in producing a commodity compared to another country.
However, absolute advantage in the production of a commodity is neither necessary nor sufficient for mutually beneficial trade. Likewise, absolute advantage in the production of a commodity is not sufficient, since the country may not have relative comparative advantage in the production of that commodity. Pre-trade relative prices in each country determine the range of possible terms of trade for the trading partners. Actual terms of trade within this range, in general, depend on demand patterns, which, in turn determines the gains from trade for each trading partner.
The Ricardian model assumes constant productivity, as there is only one factor of production labour , and therefore constant opportunity costs that leads to complete specialization. However, increasing opportunity costs that often arise in multi-factor situations law of diminishing returns due to limited quantity of some factors specific to an industry can easily be accommodated to allow for incomplete specialization.
Thus, in the Ricardian model, technological differences in two countries are the major source of movement of commodities across national boundaries. While the principle of comparative advantage as expounded by David Ricardo was couched in terms of technological superiority, the principle, when phrased in terms of comparing opportunity cost or relative prices of goods and services between countries is sufficiently general to encompass a variety of circumstances.
Resource Endowments Availability of resources in a country provides another source of comparative advantage for countries that do not necessarily possess a superior technology. Under certain restrictive assumptions, comparative advantage can be obtained due to differences in relative factor endowments.
As propounded by Hecksher and Ohlin, a country has a comparative advantage in the production of that commodity which uses the relatively abundant resource in that country more intensively. For example, newsprint uses natural resources forest products more intensively compared to textiles. Textiles use labour L more intensively compared to newsprint.
Canada is relatively abundant in natural resources R compared to India. This implies R will be relatively cheaper in Canada as compared to India. Thus, Canada has a comparative advantage in newsprint and will therefore specialize and export newsprint to India.
Likewise, India has a comparative advantage in textiles and will therefore specialize and export textiles to Canada. Human skills: Human skills can also be considered a resource. Countries with relatively abundant human skills will have a comparative advantage in products that use human skills more intensively. Certain products such as electronics require a highly skilled labour force such as engineers, programmers, designers, and other professional personnel.
Such products may gain comparative advantage in countries such as Taiwan, Singapore, Hong Kong that are relatively better endowed with such skilled labour.
Keesing, Government policies aimed at better education and training can create such an endowment. Economies of Scale: Economies of scale can provide comparative advantage by lowering production costs. Such economies of scale are consistent with Ricardian and Factor Proportions models. This may boost or create a comparative advantage for the industry experiencing such economies of scale.
Industrially advanced nations in general had an early start in most manufactured products and services, which allowed them to enjoy large national and international markets. Industrially advanced nations were thus able to export new products until such time that the products were produced by other low factor cost countries.
Since, initially, the new product involves experimentation of the features of the product as well as the production process, the countries that have sufficient home demand for such products produce and export them. Meanwhile, the firms are likely to have developed another product that enables the nation to gain comparative advantage in that product. Demand Patterns: Demand Considerations The role of demand and the size of the home market for products are already evident in 1 establishing the equilibrium terms of trade and therefore the division of gains from trade; 2 economies of scale; and 3 product cycle hypothesis.
In addition, Linder emphasized the role of demand in the home market as a stepping stone towards success in international markets. According to Linder, manufacturers initiate the production of a new product to satisfy the local market. The theory, coupled with market imperfections and product differentiation can explain a large portion of intra-industry trade among the industrialized nations. Industrial policies such as production subsidies, tax preferences, restricted tendering of Government contracts, anti-trust policy, and a number of other means are often used to provide an advantage to domestic industries.
Likewise, the commercial policies aimed at restricting imports through tariffs, quotas, voluntary export restraints, import licensing, local content rules, restriction on outsourcing, escape clauses, etc. The Auto-Pact between Canada and the USA is a good example of targeting individual industries to influence production and trade through national policies.
In addition, for developing countries, trade can enable them to transform consumption goods and raw materials into capital goods as well as gain technological know-how from technologically advanced countries.
Trade can also provide demand stimulus to the lagging excess capacity of some factors of production economies. Furthermore, specialization through trade benefits not only the export industry, but all other industries through increased demand for their products related to the export industries. International trade also implies more competitive pressures on domestic firms that stimulate research and development. All these considerations yielding comparative advantage to the nation may be seen as a framework of a number of forces that can be portrayed.
Obviously, the firms specializing within the industries that have comparative advantage are on a much stronger footing to derive competitive advantage in producing standardized or differentiated products within that industry. Dynamic elements influencing comparative advantage are also included in these forces. Smith offered a new trade theory called absolute advantage, which focused on the ability of a country to produce a good more efficiently than another nation.
Absolute advantage looks at the absolute productivity. Luo A number of studies have also analysed the role of individual factors such as intellectual property rights, trade secrets, data bases, the culture of organization, etc. Hall, , ethics capability Buller and McEvoy, , corporate reputation Ljubojevic, , diversity in workplace Lattimer, and corporate philanthropy Porter and Kramer, The central focus of these contributions is still on firm-specific factors of competitive advantage.
The four determinants are 1 local market resources and capabilities, 2 local market demand conditions, 3 local suppliers and complementary industries, and 4 local firm characteristics. Local market resources and capabilities factor conditions. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure.
He perceived these advanced factors as providing a country with a sustainable competitive advantage. Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services.
Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry.
A healthy level of rivalry between local firms will spur innovation and competitiveness. Industry analysis and structure Business strategy involves identifying and exploiting the resources and capabilities of the firm in the marketplace for the purpose of gaining competitive advantage and superior financial performance. Inherent in this definition is the need to continuously renew these resources and capabilities, to determine a set of goals and objectives for the enterprise when it does gain competitive advantage, to understand the structure of the marketplace and of the competitive situation faced by the firm, and to devise, assess, and choose among a set of strategic options for the firm.
A fully developed strategy must also be suitable to the macro-environment of the enterprise and must develop organizational solutions to execute otherwise abstract plans. The major aspects of strategy analysis include: We see heavy reliance on goal setting, industry analysis, and resource assessment as firms expand internationally. Adaptation and integration are driven largely by issues developed through competitive analysis and resource assessment, while integration must also consider issues revealed by different means of assessing strategic conditions and opportunities.
Resources and Capabilities for Geographic Spread The concept of resources and capabilities developed in the strategy literature e. Wernerfelt, ; Grant, applies very well to the international strategy issue of geographic spread. Companies that own or access unique resources and capabilities—demonstrating unique core competencies in Hamel and Prahalad's terms—find that international expansion gives them vast new opportunities to leverage these expensive and valuable skills Risk and Return in International Strategy Another consideration in international expansion is risk reduction, whether financial, business, or environmental.
International expansion offers the opportunity to move into markets that are not perfectly in phase with the home market. Firms usually need an initial competitive advantage that they can leverage into international markets. Then, in addition to the initial competitive advantage, companies need to conduct classic industry analysis in each market, as by using Porter's five forces framework to establish for each potential foreign market what the likely prospects are for above average returns.
Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Elections or any unexpected political event can change a country's situation and put a firm in an awkward position. Political risk tends to be greater in countries experiencing social unrest. When political risk is high, there is a high probability that a change will occur in the country's political environment that will endanger foreign firms there.
Corrupt foreign governments may also take over the company without warning , as seen in Venezuela. Some of these risks include "lack of security in electronic transactions , the cost of developing new technology This may cause aggravation to the people living there, which in turn can lead to a conflict. People want to live in a clean and quiet environment, without pollution or unnecessary noise.
If a conflict arises, this may lead to a negative change in customer's perception of the company. Actual or potential threat of adverse effects on living organisms and environment by effluents, emissions, wastes, resource depletion, etc.
As new business leaders come to fruition in their careers, it will be increasingly important to curb business activities and externalizations that may hurt the environment.
The effect of exchange-rate and interest rate make it difficult to conduct international business. In practice, the biggest problem arising from economic mismanagement has been inflation. Historically many governments have expanded their domestic money supplying misguided attempts to stimulate economic activity. The devaluation and inflation will also affect the firm's ability to operate at an efficient capacity and still be stable. It might be higher or lower in the host countries.
Then "the risk that a government will indiscriminately change the laws, regulations, or contracts governing an investment—or will fail to enforce them—in a way that reduces an investor's financial returns is what we call 'policy risk. In most cases, acts of terrorism is derived from hatred of religious, political and cultural beliefs. Terrorism not only affects civilians, but it also damages corporations and other businesses.
These effects may include: physical vandalism or destruction of property , sales declining due to frightened consumers and governments issuing public safety restrictions. Firms engaging in international business will find it difficult to operate in a country that has an uncertain assurance of safety from these attacks. This is considered to an unethical form of practicing business and can have legal repercussions. Firm that want to operate legally should instruct employees to not involve themselves or the company in such activities.
Factors towards globalization[ edit ] There has been growth in globalization in recent decades due to the following factors. This list is incomplete ; you can help by expanding it. The government might be corrupt , hostile, or totalitarian ; and may have a negative image around the globe.
A firm's reputation can change if it operates in a country controlled by that type of government. Elections or any unexpected political event can change a country's situation and put a firm in an awkward position.
Political risk tends to be greater in countries experiencing social unrest. When political risk is high, there is a high probability that a change will occur in the country's political environment that will endanger foreign firms there. Corrupt foreign governments may also take over the company without warning , as seen in Venezuela. Some of these risks include "lack of security in electronic transactions , the cost of developing new technology This may cause aggravation to the people living there, which in turn can lead to a conflict.
People want to live in a clean and quiet environment, without pollution or unnecessary noise. If a conflict arises, this may lead to a negative change in customer's perception of the company.
Actual or potential threat of adverse effects on living organisms and environment by effluents, emissions, wastes, resource depletion, etc. As new business leaders come to fruition in their careers, it will be increasingly important to curb business activities and externalizations that may hurt the environment.
The effect of exchange-rate and interest rate make it difficult to conduct international business.
In practice, the biggest problem arising from economic mismanagement has been inflation. Historically many governments have expanded their domestic money supplying misguided attempts to stimulate economic activity.
The devaluation and inflation will also affect the firm's ability to operate at an efficient capacity and still be stable. It might be higher or lower in the host countries. Then "the risk that a government will indiscriminately change the laws, regulations, or contracts governing an investment—or will fail to enforce them—in a way that reduces an investor's financial returns is what we call 'policy risk.
In most cases, acts of terrorism is derived from hatred of religious, political and cultural beliefs. Terrorism not only affects civilians, but it also damages corporations and other businesses. These effects may include: physical vandalism or destruction of property , sales declining due to frightened consumers and governments issuing public safety restrictions.
Firms engaging in international business will find it difficult to operate in a country that has an uncertain assurance of safety from these attacks. This is considered to an unethical form of practicing business and can have legal repercussions. Firm that want to operate legally should instruct employees to not involve themselves or the company in such activities.