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I. CONCEPTS, THEORIES AND PRINCIPLES OF INTERNATIONAL BUSINESS AND
GLOBALIZATION
Learning Objectives: At the end of this chapter, the students should be able to:
- understand the different theories on international trade;
- know the underlying concepts of globalization; and
- trace the development of international trade.
WHAT IS INTERNATIONAL BUSINESS?
International Business refers to the performance of trade and investment activities across national borders. Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale.
The growth of international business activity coincides with the broader phenomenon of globalization of markets. The globalization of markets refers to the ongoing economic integration and growing interdependency of countries world- wide. While internationalization of the firm refers to the tendency of companies to systematically increase the international dimension of their business activities, globalization refers to a macrotrend of intense economic interconnectedness between countries.
WHAT ARE THE KEY CONCEPTS IN INTERNATIONAL TRADE AND INVESTMENT?
1. International Trade โ refers to an exchange of products and services across national borders. Trade involves both products (merchandise) and services (intangibles). 2. Exporting โ an entry strategy involving the sale of products or services to customers located abroad, from a base in the home country or a third country. 3. Importing or Global Sourcing โ the procurement of products or services from suppliers located abroad for consumption in the home country or a third country. 4. International Investment โ refers to the transfer of assets to another country, or acquisition of assets in that country. With trade, products and services cross national borders. With investment, by contrast, the firm itself crosses borders to secure ownership of assets located abroad. 5. International Portfolio Investment โ refers to the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. 6. Foreign Direct Investment (FDI) โ refers to an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant and equipment.
HOW DOES INTERNATIONAL BUSINESS DIFFER FROM DOMESTIC BUSINESS?
Firms engaged in international business operate in business environments characterized by unique economic conditions, political systems, laws and regulations, and national culture. For example, the economic environment of Philippines differs sharply from that of China. The legal environment of Canada does not resemble that of Saudi Arabia.
Four (4) Risks in Internationalization
1. Cross-cultural risk โ refers to a situation or event where a cultural miscommunication puts some human value at stake. Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and/or religion.
2, Country risk (also known as political risk) โ refers to the potentially adverse effects on company operations and profitably caused by developments in the political, legal, and economic environment in a foreign country. It includes the possibility of foreign government intervention in firms; business activities.
3. Currency risk (also referred to as financial risk) โ refers to the risk of adverse fluctuations in exchange rates. Fluctuation is common for exchange rates, or the value of one currency in terms of another. Currency risk arises because international transactions are often conducted in more than one national currency. 4. Commercial risk โ refers to the firmโs potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes.
WHO PARTICIPATES IN INTERNATIONAL BUSINESS?
1. Multinational Enterprises (MNE)
Multinational enterprises (also known as multinational corporations) have historically been the most important type of local firm. A multinational enterprise is a large company with substantial resources that performs various activities through a network of subsidiaries and affiliates located in multiple countries.
2. Small and Medium-sized Enterprise (SME)
A company with 500 or fewer employees in the United States, although this number may need to be adjusted downward for other countries.
3. Born Global Firm
One type of contemporary international SME is the born global firm, a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets.
4. Non-Governmental Organizations (NGOs)
In addition to profit-seeking local firms in international business, there are numerous non-profit organizations that conduct cross-border activities. These include charitable groups and non-governmental organizations (NGOs). They pursue special causes and serve as an advocate for the arts, education, politics, religion, and research. They operate internationally to either conduct their activities or raise funds.
WHY DO FIRMS PURSUE INTERNATIONALIZATION STRATEGIES?
- Seek opportunities for growth through market diversification. Substantial market potential exists outside the home country. When they diversify into foreign markets,
QUESTIONS:
- Distinguish between international business and globalization of markets.
- What is the difference between exporting and importing?
- What makes international business different from domestic business?
- Who are the major participants in international business?
- Why should you care about international business?
REFERENCES:
Cavisgil, S., Knight, G, & Riesenberger, J. (2018). International Business: The New Realities (4th^ Edition). Pearson Publishing
Cullen, J. & Parboteeah, K. (2010). International Business (2010 Edition). Taylor and Francis Group
Dlabay, L. & Scott, J.C. (2011). International Business (2011 Edition). Philippines: Cengage Learning Pte. Ltd. Reprinted
