DIB 5018 INTRODUCTION TO INTERNATIONAL BUSINESS

Topic 1 / Chapter 1: The Emerging Global Economy

Definition of International Business:
Involves any business transaction between parties from more than one country

How Domestic Business Different with International Business

Boundaries:
Domestic business involves transactions occurring within the boundaries
of a single country, whereas international business transactions cross
national boundaries.

Currencies:
The countries involved may use different currencies, forcing at least one
party to convert its currency into another.

Culture:
The cultures of the countries may differ, forcing each party to adjust its
behavior to meet the expectations of the other.

Legal Systems:
The legal systems of the countries may differ, forcing one or more parties
to adjust their practices to comply with local law.

Availability of Resources:
The availability of resources differs by country. One country may be rich
in natural resources but poor in skilled labor, whereas another may enjoy a
productive, well-trained workforce but lack natural resources.

Skills and Knowledge:

5 IB Activities:
o Exporting and Importing:
Exporting involves selling products made in own country for use/resale in
other countries; importing involves buying products made in other
countries for use/resale in own country.

o International Investments:
Capital supplied by residents of one country to residents of another
country, include foreign direct investment and portfolio investment.
o International Licensing:
 A contractual arrangement in which a firm in one country licenses the use
of its intellectual property to a firm in a second country.

o International Franchising:
When a firm in one country (the franchisor) authorizes a firm in a second
country (the franchisee) to utilize its operating systems as well as its brand
names, trademarks and logos.

o International Management Contract:

An arrangement wherein a firm in one country agrees to operate facilities
or provide other management services to a firm in another country.

*Difference between IL and IF: IF we can see the physical building in the host country,
IL produce it products by licensing to customers, no building

Globalization:
Allowed firms to expand into markets that, until recently, were insulated from the
international marketplace

Causes of Globalization
i. Strategic Imperatives:
To leverage core competencies, acquire resources and supplies, seek new
markets, and to better compete with rivals

ii. Environmental Causes:

Changes in the political environment, and technological advances.

Emerging Market: Countries whose recent growth or prospects for future growth
exceed that of traditional markets
i. BRIC: Brazil, Russia, India, China
ii. BIG 10: Brazil, India, Poland, China, Indonesia, Argentina, Mexico, South
Africa, South Korea, Turkey
iii. Non-High-Income Countries: Africa, Asia, Eastern Europe, Latin America

Global Marketplace during Cold War:

During the cold war between the United States and the Soviet Union, many
scholars divided the world into three regions:
i. First World:
 Consisting of the rich, major trading nations from Western Europe, North
America, Australia, and parts of Asia, most of which were allied
diplomatically with the United States.

ii. Second World:

Refers to the former communist-socialist, industrial states. Consisting of
the Soviet Union and allied Communist States

iii. Third World:

Consisting primarily of the low- to medium-income countries populating
Latin America, Africa, and most of Asia

Servic
Goods
es
Tangible intangible

UK:
US: SVC
Merchandis
imp/exp
e exp/imp

British: UK:
Visible Invisible
Trade Trade
Topic 2 / Chapter 2: Global Marketplaces and Business Centers

North America:
Central America
NAFTA: Canada, U.S, Mexico
Caribbean Island: because of offshore banking

Western Europe:
a. Members of EU (27)

Germany Italy Poland

France Romania Sweden
Greece Spain Austria
Hungary Bulgaria Finland
Czech Republic Croatia Lithuania
Republic of Ireland Belgium Cyprus
Slovakia Malta Portugal
Estonia Slovenia Latvia
Denmark Netherlands Luxembourg
b. Economically, Germany is the EUs most important member
c. Politically, France exerts strong leadership within the EU

Characteristic of Russia:
a. Difficult transformation from communism to a free-market system
b. Worlds second largest oil producer and exporter
c. Strong prospects for continued economic growth

Common characteristics of stan countries

- Russian Influence
- Language and Religion
- Scarce Arable Land
- Low Per Capita Income
- Fossil Fuel Reserves

Marketplace of Asia:
- Japan
- Australia
- New Zealand
- China
- India
- Thailand
- Malaysia
 - Indonesia
- 4 Tigers:
a. Singapore
b. Taiwan
c. Hong Kong
d. South Korea
*Enjoy position of being among the fastest industrializing nations in the world

Africa: Middle East Cradle of Civilization place where everything start:

religion, languages

South America: Brazil, Argentina (famous because of football and entertainment)

Chaebol:
Tight cooperation between the government and large conglomerates
E.g.: Hyundai, LG, Samsung
Topic 3 / Chapter 3: Legal, Technological, Accounting & Political Environments
Legal System
1. Common Law:
Based on the cumulative wisdom of judges decisions on individual cases
through history

2. Civil Law:
Based on a codification or detailed listing, of what is and is not permissible. /
Based on a detailed set of laws organized into codes

3. Religious Law:
Based on the officially established rules governing the faith and practice of a
particular religion. / The law is based on religious teachings

4. Bureaucratic Law:
Legal system based on interpretations, actions, and decisions of government
employees

Laws Affecting IB:

a. Sanctions:
Boycott particular products

b. Embargos:
Boycott all products of the whole country

c. Export Control:
May be used for both civilian and military purposes such as nuclear

d. Extraterritoriality:
Refers to a governments attempt to regulate business activities outside its
borders

Laws Affecting Foreign Firms:

- Nationalization:
Transfer of property from privately owned firm to the government.

- Expropriation:
In expropriation, a country takes control of a private asset but reimburses the
previous owner for its value.

- Confiscation:
In confiscation, no amount is paid by the country seizing the asset.

- Privatization:
 The transfer of ownership of resources from the public to the private sector

- Repatriation:
To return to a home country

Impacts MNCs on Host Countries

(Positive and Negative Impacts)

Technology:
- Technology Transfer:
The transmittal of technology from one country to another

- Intellectual Property Rights:

Often forms the basis of a firms competitive advantage. E.g.: patents, copyrights,
trademarks, brand names

Accounting The Roots of National Differences

i. Sources of Capital

ii. Legal Systems:

Common Laws vs Civil Laws
Common Law: Judge serve as neutral referee. Lawyers responsible for
developing their clients, cases and choosing which evidence to submit
Civil Law: Judge takes on many of the tasks as the lawyer,
determining, for e.g., the scope of evidence to be collected and
presented to the court.

iii. Cultures Values and Attitudes

iv. International Political Ties:

Most members of the British Commonwealth have adopted the accounting
principles and procedures of the UK. Former colonies of France and the
Netherlands have adopted those of their colonial rulers

v. Economic System
Centrally planned economy:
The accounting system is driven by the need to provide output-
oriented information to the state planners
 Market oriented system:
Managers and investors require profit- and cost-oriented information

Political Risk:
- Ownership Risk:
The property of a firm is threatened through confiscation

- Operating Risk:
The ongoing operations of a firm and the safety of its employees are
threatened through changes in law, environmental standards and terrorism

- Transfer Risk:
The government interferes with a firms ability to shift funds into and out of
the country

Categories Political Risk:

1. Macro-political: affects all firm in a country
2. Micro-political: affects only a specific firm or firms within a specific industry
Topic 4 / Chapter 4: The Role of Culture
Definition:
The collection of values, beliefs, norms, behavior, customs, and attitudes that
distinguish one society from another.

Characteristics of Culture:
1. Learned Behavior:
Transmitted from one member of a society to another / transmitted inter-
generationally

2. Inter-related
E.g.: Japans group-oriented, hierarchical society stresses harmony and
loyalty, which historically translated into lifetime employment and minimal
job switching

3. Adaptive:
The culture changes in response to external forces that affect the society

4. Shared
Defines the membership of the society. Individuals who share a culture are
members of a society and those who do not, are outside the boundary.

Elements of Culture
i. Social Structure:
The overall framework that determines the roles of individuals within the
society, the stratification of the society, and individuals mobility within
the society
Individuals, Families, and Groups
Societies differ in the way they define family and in the relative
importance they place on the individuals role within groups
Social Stratification
Categorization of people to some extent on the basis of their birth,
occupation, educational achievements etc.
Social Mobility
The extent to which individuals can move out of the strata into which
they are born

ii. Language:
Primary delineator of cultural groups because it is an important means by
which a societys members communicate with each other
Lingua Franca: The main language
Back Translation: One person translates a document, then a second
person translates the translated version back into the original language
iii. Communication
 Nonverbal Communication
Facial expressions
Hand gestures
Intonation
Eye contact
Body positioning
Body posture

iv. Religion

v. Values and Attitudes:

Culture affects and reflects the secular values and attitudes of the
members of a society
Cultural differences in:
i. Time
Attitudes about time differ dramatically across cultures. In
Anglo-Saxon cultures, the prevailing attitude is time is
money. Time represents the opportunity to produce more and
to raise ones income, so it is not to be wasted

ii. Age
Important cultural differences exist in attitudes toward age

iii. Education
Formal system of public and private education

iv. Status
By which status is achieved, whether it is inherited or can be
accomplished

Cultural Management
i. High-Context Culture
The context in which a conversation occur is just as important as the
words that are actually spoken
ii. Low-Context Culture
The words used by the speaker explicitly convey the speakers message to
the listener
iii. Cultural Cluster
Anglo
Sub-Sahara Africa
Germanic Europe
Latin Europe
Middle East
Nordic Europe
 Southern Asia
Eastern Europe
Confusion Asia
Latin America

Hofstedes Five Dimensions

INDIVIDUALISM Social Orientation COLLECTISM

The interests of the individual The interests of the group take
take precedence precedence

RESPECT Power Orientation TOLERANCE

Authority is inherent in ones Individuals assess authority in
position within a hierarchy view of its perceived rightness
of their own personal interests

ACCEPTANCE Uncertainty Orientation AVOIDING

Positive response to change and Prefer structure and a
new opportunities consistent routine

AGGRESSIVE Goal Orientation PASSIVE

Value material possessions, Value social relevance, quality
money, and assertiveness of life, and the welfare of others

LONG-TERM Time Orientation SHORT-TERM

Value dedication, hard work, Value traditions, social
and thrift obligations
Topic 5 / Chapter 6: International Trade and Investment
Trade:
The voluntary exchange of goods, services, assets, or money between one person
or organization and another
International Trade
Trade between residents of two countries

Classical Country-Based Trade Theories

1. Mercantilism: referred to as an unfavorable balance of trade (Export
Import)
Gold and Silver
Increased Exports
Reduced Imports
Neo-mercantilists or Protectionist

2. Absolute Advantage
The production of a product when it is more efficient than any other country
in producing it.
Output per Hour of Labor
France Japan
Wine 2 1
Clock Radios 3 5
*France should produce wine, Japan should produce clock radios

3. Comparative Advantage
A country should produce and export those goods and services for which it is
relatively more productive than other countries are and import those goods
and services for which other countries are relatively more productive than it
is.
Output per Hour of Labor
France Japan
Wine 4 1
Clock Radios 6 5
*France should export wine to Japan and Japan should export clock radios
to France.
Opportunity cost for France: Clock Radios
Opportunity cost for Japan: Wine

4. Relative Factor Endowment

Heckscher-Ohlin Theory
The pattern of international trade is determined by differences in factor
endowments rather than differences in productivity.
 Leontief Paradox

Modern Firm Based Theories

i. Product Life-Cycle Theory
Changes occur in the input requirements of a new product
As it becomes established in a market
As it gets standardized in production
ii. Linders Country Similarity Theory
Inter-industry Trade
The exchange of goods produced by one industry in country A for
goods produced by a different industry in country B
Intra-industry Trade
Trade between two countries of goods produced by the same industry.
E.g.: Japan:ToyotaGermany:BMW
iii. New Trade Theory
The ability of firms to attain economies of scale might have important
implications for international trade
Economies of SCALE
Unit cost reductions associated with a large scale of output

Owning Intellectual Property Rights

A firm that owns an intellectual property right often gains advantages
over its competitors
Investing in Research and Development
R&D is a major component of the total cost of high-tech products.
Large entry costs, other forms are hesitant to compete against
established firms
Achieving Economies of SCOPE
When a firms average costs decrease as the number of different
products it sells increases
Exploiting the Experience Curve
Production costs decline as the firm gains more experience in
manufacturing and managing the product
iv. Porters Theory of National Competitive Advantage
Factor Conditions
A countrys factors of production affect its ability to compete
Demand Conditions
Firms continually develop and fine-tune products that can be
marketed internationally
Related and Supporting Industries
The emergence of an industry often stimulates the development
of local suppliers eager to meet that industrys business needs.
Firm Strategy, Structure, and Rivalry
 The domestic market in which firms compete

International Investments Theories

1. Ownership Advantage:
A firm owning a valuable asset that creates a competitive advantage
domestically can use that advantage to penetrate foreign markets through FDI

2. Internalization Theory
Answers the questions of why FDI?

3. Dunnings Eclectic Theory

FDI will occur when three conditions are satisfied:
a. Ownership Advantage:
The firm must own some unique competitive advantage (core competency)
that overcomes the disadvantages of competing with foreign firms on their
home market

b. Location Advantage:
Undertaking the business activity must be more profitable in a foreign
location than undertaking it in a domestic location

c. Internalization Advantage:
The firm must benefit more from controlling the foreign business activity
than from hiring an independent local company to provide the service
Topic 6 / Chapter 9: Formulation of National Trade Policies
Protect Domestic Firms import barriers
Help domestic firms increase foreign sales export subsidies government-to-
government negotiations guaranteed loan programs
The National Defense Argument: A country must be self-sufficient in critical raw
materials, machinery, and technology or else be vulnerable to foreign threats
The Infant Industry Argument: Theory promotes an economic policy that protects
young industries in less developed economies until they become established,
financially stronger, and capable of withstanding competitive pressures.
Maintenance of Existing Jobs: To maintain existing employment levels
Strategic Trade Theory: Applies to those industries capable of supporting only a
few firms worldwide Oligopoly
Tariff: A tax placed on a good that is traded internationally
Export Tariff: A tax that are levied on goods as they leave the country
Transit Tariff: A tax that are levied on goods as they pass through one country
bound for another
Import Tariff: A tax collected on imported goods
- Ad valorem tariff: is assessed as a percentage of the market value of the
imported good.
- A specific tariff: is assessed as a specific dollar amount per unit of weight or
other standard measure
- A compound tariff: has both an ad valorem component and a specific
component.
Nontariff Barriers: Any government regulations, policy, or procedure other than a
tariff that has the effect of impeding international trade
Types of non-tariff barriers:
a. Quotas: A numerical limit on the quantity of a good that may be imported into
a country during some time period (e.g. a year)
Tariff rate quota (TRQ): Imposes a low tariff rate on a limited amount
of imports of a specific good
b. Numerical Export Controls: Quantitative barriers to trade in the form of
numerical limits on the amount of a good it will export
A Voluntary Restraint (VER): A promise by a country to limit its
exports of a good to another country to a pre-specified amount of
percentage of the affected market. Used to resolve or avoid trade
conflicts with an otherwise friendly trade partner
Embargos: Boycott all products of the whole country
* Nontariff is difficult to eliminate because it relate to legal systems and laws
Other nontariff Barriers:
a. Product and Testing Standard: A requirement that foreign goods meet a
countrys product standards or testing standards before the goods can be
offered for sale in that country
b. Restricted Access to Distribution Networks: Restricting foreign suppliers
access to the normal channels of distribution may also function as an NTB.
c. Public-Sector Procurement Policies: Public-sector procurement policies that
give preferential treatment to domestic firms are another form of NTB.
d. Local-Purchase Requirements: Requiring foreign firms to purchase goods or
services from local suppliers
e. Regulatory Controls: Conducting health and safety inspections, enforcing
environmental regulations, requiring firms to obtain licenses before beginning
operations or constructing new plants, and changing taxes and fees for public
services
f. Currency Controls: Many countries, particularly developing countries and
those with centrally planned economies, raise barriers to international trade
through currency controls.
g. Investment Controls: Controls on foreign investments and ownership. Such
controls often make it difficult for foreign firms to develop an effective
presence in such markets
Topic 8 / Chapter 8: Foreign Exchange and International Financial Market
Foreign Exchange: A commodity that consists of currencies issued by countries
other than ones own
Direct Quote: the price of the foreign currency in terms of home country
e.g.: Malaysia is home country, $xx / RMxx
Indirect Quote: the price of home currency in terms of the foreign currency
e.g.: Malaysia is home country, RMxx / $xx
Major Player:
- International Banks
- Corporate Treasurers
- Pension Funds
- Hedge Funds
- Insurance Companies
- Central Banks
- Treasury Departments
Clients of Foreign Exchange
- Commercial customers: Engage in foreign-exchange transactions as part of
their normal commercial activities
- Speculators: Deliberately assume exchange rate risks by acquiring positions in
a currency, hoping that they can correctly predict changes in the currencys
market value
- Arbitrageurs: attempt to exploit small differences in the price of a currency
between markets
Convertible Currencies: Currencies that are freely tradable
Inconvertible Currencies: Currencies that are not freely tradable because of
domestic laws or the unwillingness of foreigners to hold them
Arbitrage of Goods Purchasing Power Parity: If the price of a good differs
between two markets, people will tend to buy the good in the market offering the
lower price, the cheap market, and resell it in the market offering the higher
price, the expensive market
Arbitrage of Money:
- Two Point/Geographic Arbitrage: involves profiting from price differences in
two geographically distinct markets.
- Three-Point Arbitrage: buying and selling of three different currencies to
make a riskless profit.
- Covered Interest Arbitrage: arbitrage that occurs when the difference between
two countries interest rates is not equal to the forward discount/premium on
their currencies.
Forms of International Banks:
- Correspondent Relationship: a financial institution that provides services on
behalf of another (agent), equal or unequal financial institution (e.g.: MEPS
RM1.06)
 - Subsidiary Bank: it is separately incorporated from the parent (e.g.: CIMB
GroupCIMB Commerce, CIMB investment, CIMB Islamic
- Branch Bank: it is not separately incorporated
- Affiliate Bank: an overseas operation in which it takes part ownership in
conjunction with a local or foreign partner
Transaction currency
Topic 9 / Chapter 11: International Strategic Management
Definition: comprehensive, ongoing management planning process aimed at
formulating and implementing strategies that enable a firm to compete effectively
in the global marketplace.
Challenges of ISM:
- Global Efficiencies: International firms can capture location efficiencies by
operating facilities anywhere in the world that yields the lowest production or
distribution costs or that best improves the quality of service they offer their
customers
Economies of SCALE: Lower the cost of production by building
factories to serve more than one country.
Economies of SCOPE: By broadening their product lines in each of
the countries they enter.
- Multinational Flexibility: Dynamic changes in global marketplaces (social,
political, economic, technological etc.)
- Worldwide Learning: Firms may learn from the differences and transfer the
learning to its operations in other nations
Strategic Alternatives:
- Home Replication: An MNE takes what it does best (exceptionally well) in its
home market and attempts to duplicate it in foreign market
- Multidomestic Strategy: a collection of relatively independent operating
subsidiaries, each of which focuses on a specific domestic market
- Global Strategy: the corporation views the world as a single marketplace
- Transnational Strategy: Attempts to combine the benefits of global scale
efficiencies (global strategy) with the benefits of local responsiveness
(multidomestic strategy)
Developing International Strategies:
- 2 stages:-
Strategy Formulation: The firm establishes its goals and the strategic
plan that will lead to the achievement of those goals (deciding what to
do)
Strategy Implementation: The firm develop the tactics for achieve the
formulated international strategies (actualizing the plan)
- 5 steps in Developing Mission Statement:
Step 1: Develop a Mission Statement: Define the firms values,
purpose, and direction
Step 2: Perform a SWOT Analysis: Assess the firms external and
internal environments to identify strengths, weaknesses, opportunities
and threats
Step 3: Set Strategic Goals: Exploit the firms strengths and
environmental opportunities. Neutralize external threats and overcome
firms weaknesses
 Step 4: Develop Tactical Goals and Plans: Devise the means to achieve
strategic goals and to guide the firms daily activities
Step 5: Develop a Control Framework: Formulate managerial and
organizational systems and processes.
Levels of International Strategy:
- Corporate Strategy: Deals with the overall organization.
Single-Business Strategy: Calls for a firm to rely on a single business,
product or service for all its revenue
Related Diversification: Allows the firm to leverage a distinctive
competence in one market in order to strengthen its competitiveness in
others
Unrelated Diversification: A firm operates in several unrelated
industries and markets.
- Business Strategy: Focuses on specific businesses, subsidiaries, or operating
units within the firm
(1) Differentiation: strategy to establish and maintain the image that
its products or services differ fundamentally from other products or
services in the same market segment
(2) Cost Leadership: Lower costs than its competitors
(3) Focus: A firm to target specific types of products for certain
customer groups or regions
- Functional Strategy:
International Financial Strategy: Deals with issues like the firms
desired capital structure, investment policies, foreign exchange
holdings, risk-reduction techniques, debt polices etc.
International Marketing Strategy: Concerns the distribution and selling
of the firms products or services
International Operations Strategy: Guides decisions on issues as
sourcing, plant location, plant layout and design, technology, and
inventory management
International Human Resource Strategy: Focuses on the people who
work for an organization
International R&D Strategy: Concerned with the magnitude and
direction of the firms investment in creating new products and
developing new technologies
Topic 10a / Chapter 12: Strategies for Analyzing and Entering Foreign Markets
Foreign Market Analysis:
- 3 steps:
Assess alternative markets:
Topic 10b / Chapter 13: International Strategic Alliances
Strategic Alliances: Two or more companies cooperate to create a new business
Joint Venture: Two or more companies merge together to form a new company
Benefits of SA:
- Ease of Market Entry
- Shared Risk
- Shared Knowledge and Expertise
- Synergy and Competitive Advantage
Functional Alliances:
- Production Alliances: two or more firms manufacture products or provide
services in a shared or common facility. A production alliance may utilize a
facility one partner already owns.
- Marketing Alliances: two or more firms share marketing services or expertise
- Financial Alliances: formed by firms that want to reduce financial risks
associated with a project
- R&D Alliances: the partners agree to undertake joint research to develop new
products or services
Implementation of SA:
- Selection of Partners
- Form of Ownership
- Joint Management Considerations
Pitfall of SA:
- Incompatibility of Partners: incompatibility can lead to outright conflict,
although typically it merely leads to poor performance of the alliance.
- Access of Information: For a collaboration to work effectively, one partner (or
both) may have to provide the other with information it would prefer to keep
secret
- Distribution of Earnings: The partners must agree on the ratio of earnings that
will be distributed as opposed to being reinvested in the business
- Loss of Autonomy: Just as firms share risks and profits, they also share
control, thereby limiting what each can do.
- Changing Circumstances: The economic conditions that motivated the
cooperative arrangement may no longer exist, or technological advances may
have rendered the agreement obsolete.