CHAPTER 1
The Challenging World of International Business
Learning Objectives
LO1-1 Understand what international business is and why it is important.
LO1-2 Comprehend why and how international business differs from domestic business.
LO1-3 Appreciate that international business has a long and important history in the world’s
development.
LO1-4 Appreciate the dramatic internationalization of markets.
LO1-5 Understand the five kinds of drivers, all based on change, that are leading firms to
internationalize their operations.
LO1-6 Recognize the key arguments for and against the globalization of business.
LO1-7 Explain the reasons for entering foreign markets.
LO1-8 Recognize that globalization of an international firm occurs over at least seven dimensions and
that a company can be partially global in some dimensions and completely global in others.
NOTE:
International business statistics, data, and facts about countries, regions, governments, and companies can
change rapidly and dramatically. We recommend that you update this information regularly.
As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the
International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles,
videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to
the ever-changing topic of international business.
iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video
service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop
to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and
discussion questions. Key concepts for each video are identified to save you time! Visit
www.mhhe.com/ball13e, or talk to your McGraw-Hill sales representative for more information about
iGlobe or the IB Newsletter.
Overview
Global competition continues to increase at a rapid pace. The huge increase in imports due to the
reduction in trade barriers, coupled with increased foreign investment, means that all firms face
competitors from any place in the world. This increasing internationalization of business requires
managers to have a global business perspective gained through experience and education.
International business differs from domestic business in that it involves three environments–domestic,
foreign, and international–instead of one. Although the kinds of forces are the same in the domestic and
foreign environments, their values often differ, and changes in the values of the foreign forces can be at
times more difficult to assess
International businesspeople must know enough about the differences in the environmental forces of the
markets in which they operate to be able to decide if a concept or a technique (1) can be transferred to
another country as is, (2) must be adapted to local conditions, or (3) cannot be used elsewhere.
Suggestions and Comments
Students find the definitions in this chapter helpful. Stress that building, understanding, and correctly
using the terms associated with international business helps them move toward understanding and being
able to articulate IB’s complexity. This will assist them in comprehending and being able to perform
effectively within a world that is increasingly international in its context and forces.
Students tend to be aware marginally of their consumer-level dependence on international business. To
arouse their early interest in the importance of this course, we use one or more of the student involvement
exercises listed in the following section.
Student Involvement Exercises
1. One professor starts the course by asking students this question: “If I snapped my finger (snap
your finger) and every piece of clothing we are wearing today that was NOT manufactured in
the U.S. disappeared, how we would be dressed?” The obvious answer is “naked.” Then
move into a discussion of our dependence on foreign manufactured goods as a segue into your
orientation for this course.
2. Hold up a common object such as a lead pencil. Where do the materials come from? Rubber
comes from the Far East, the copper and tin from which the brass ferrule is made may come
from Chile and Malaysia respectively, etc.
3. Ask if anyone in class is influenced by international business. The response is often negative,
except for foreign students. This can open up a discussion to show our dependence on imports
(Smart Phones, iPads, laptop computers, Blu-ray, Flat Screen HDTVs, cars, etc.), outsourcing,
and foreign direct investment. For example, foreign ownership of grocery chains in the U.S.
has grown significantly in the last five years (Trader Joe’s, Stop&Shop, Aldi, Food Lion,
Hannaford).
4. Research other American brands and businesses that are owned by foreign companies. They
might be surprised who really owns what in the U.S. and how brand identification and
ownership may be different. The chapter’s Worldview, “Are You Really Buying American?,”
and Mini-case 1.1 at the end of the chapter, “Ownership of Companies and Brands,” provide
opportunities to explore these issues in more depth.
Course Project
You can start the class off on an international business project here or wait until the class has started so
students have an understanding of IB. Here is a summary of a possible project:
International Business Project
Objective: To create a foreign market entry business plan for taking an American consumer product into a
foreign country.
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Project Outline
1. Size of market (demographics, socioeconomic state, urban/rural).
2. Sociocultural acceptance of product – is adaptation necessary?
3. Legal/bureaucratic environment (imports, local manufacture, taxation).
4. Competition in market.
5. Economic and political climate for foreign business.
6. Methods for marketing and distribution.
7. Managerial and labor climate.
8. Financial viability (profit margin, currency translation, profit repatriation).
Project Report
The report will essentially cover all topics in the outline plus an executive summary, introduction (country
and product), and recommendations. The report will be word-processed, about 20 pages (double-spaced)
and will have an appendix that contains exhibits and a complete bibliography of sources. Examples are
maps of the country, tables, and charts.
Project Presentation
The project will be presented to the class in the week prior to the exam week. Thirty minutes will be
allotted to each team. Each member will participate in the presentation. Develop appropriate visual
supports.
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Guest Lecturers
Any of the following business people could describe the challenges presented by the rapidly changing
aspects of international business by discussing the pace of change in their own industry:
1. Personnel managers who staff the overseas subsidiaries and international divisions for a
local firm to talk about job possibilities.
2. Retired executives who have worked as expatriates.
3. Bankers from the international division of a local bank. Often, they share leads to firms in
your area that are engaged in international business.
4. Executives from a local international or multinational firm.
You might also be able to contact a foreign exchange student in advance and ask him/her to discuss the
nature of his/her home country and some of the differences that he/she has observed here.
Worldview
The focus of this Worldview explores “Are You Really Busying American?” From bumper stickers to
tee shirts, the slogan “Buy American” has become a common refrain from some American consumers.
What does it mean to buy American? Is the Honda Accord made in Marysville, Ohio less American than
the Nike Air athletic shoe made in China? What about that Dodge Ram truck? Nothing is more American
than a pick-up truck, but Dodge is now controlled by Italy’s Fiat. The globalization of markets has created
cross-border investments linking the workers and consumers of the world to one another in a way that
was unimaginable 50 years ago. This Worldview examines the nationality of the companies that own a
variety of common American brands. This serves as a starting point for a stimulating class discussion,
which might be expanded through discussion questions such as: “Is there such a thing as an ‘American
made product’?” and “As a consumer, are you more patriotic when you purchase an American made
product?”
Global Debate
The focus of this Global Debate explores “The Globalization Debate and You” and hints at a range of
issues regarding the pros and cons of globalization. This serves as a starting point for a stimulating class
discussion on globalization. Ask students to discuss how they view globalization and the reasons for their
views. Potential discussion questions can include: “Discuss the benefits of globalization and the concerns
regarding the globalization of markets as outlined in the textbook? Are you concerned with the
internationalization of markets? If so why?, “ or “If international business is not a new topic, what about
the globalization is it new? What are the roots of globalization? Is globalization accelerating? Why or
why not?,” or “How have you benefited personally or been negatively impacted by the forces of
globalization? Please be specific in your response.” A summary of the class discussion would offer an
appreciation of the many issues related to globalization and the many views on this complex issue in
which we are all involved.
The Global Path Ahead
The focus of this The Global Path Ahead explores a student’s initial extended international experience,
in which he taught English in Dalian, China, for 5 months, as part of an AIESEC internship. It can be
valuable to discuss the experiences he had, and ask the class what they might expect from a similar
experience: what would be different and how, what would be very similar, what might be the most
difficult, etc. It is worth considering a question such as, “Ryan suggests that the most important thing,
when going abroad, is to keep an open mind. Do you agree with this recommendation? How easy is this
to accomplish? What might you need to do, or not do, in order to ‘keep an open mind’ in a different
culture?”
At least some of your students are likely to be interested in exploring international job opportunities, but
we find that many of them feel that such opportunities are limited or are hard to find. In that respect, the
“Resources for Your Global Career” section at the end of The Global Path Ahead has a broad range of
valuable insights and linkages to assist students in finding opportunities to work abroad and in preparing
themselves to perform well if and when they are able to exploit such opportunities. It may even be a
useful expenditure of class time to visit one or two of the websites listed, such as the Riley Guide or the
Expertise in Labour Mobility sites, to illustrate some of the resources that are readily available to the
students. Remind students that each chapter will contain a vignette in The Global Path Ahead box, as
well as a variety of “Resources for Your Global Career” suggestions.
Mini-Case 1.1, “Ownership of Companies and Brands”
This mini-case provides an opportunity for students to test their knowledge about who the owners are of
some common brand names, and which country(ies) the owners are based in. Putting these on PowerPoint
slides, projecting them, asking students to give their answers, and then presenting the actual answers can
be a good basis for discussing the internationalization of business in our everyday lives. The answers are:
1. 7-Eleven Stores is owned by Seven and I Holdings Co. of Japan.
2. Chesebrough-Pond (Vaseline) is owned by Unilever of the Netherlands.
3. Meybelline costmetics is owned by L’Oreal of France.
4. Diesel clothing is produced by Diesel S.p.A. of Italy.
5. Aquafresh toothpaste is owned by GlaxoSmithKline plc of the United Kingdom.
6. Baby Ruth candy bars are produced by Nestle of Switzerland.
7. Holiday Inn motels are owned by InterContinental Hotels Group plc of the United Kingdom.
8. Arrowhead water is owned by Nestle of Switzerland.
9. Columbia Pictures motion picture studios are owned by Sony of Japan.
10. Arco gasoline is owned by BP of the United Kingdom.
11. Nerds candy is owned by Nestle of Switzerland.
12. Popsicle frozen treats are owned by Unilever, a British-Dutch multinational.
13. Random House is owned by Bertelsmann of Germany.
14. Ralston Purina pet foods are owned by Nestle of Switzerland.
15. Motel 6 is owned by Accor of France.
16. Pinkertons is owned by Securitas AB of Sweden.
17. Ban deodorant is owned by Kao Corporation of Japan.
18. RCA Records is owned by Sony of Japan.
19. Thinkpad laptop computers are owned by Lenovo of China.
20. Norelco electric shavers are owned by Philips of the Netherlands.
Lecture Outline
Opening Section
The chapter begins with the assertion that all managers need to have a basic knowledge of international
business to be able to meet the challenge of global competition. This is a good time to encourage students
to begin to consider themselves as a potential international businessperson. Refer students to The Global
Path Ahead on pages 24-27 to explore international job opportunities.
I. What is International Business?
A. Definitions of terms used in this text
1. An international business is a business whose activities are carried out across
national borders.
2. A foreign business is the operations of a company outside its home or domestic
market.
3. A multidomestic company (MDC) is an organization with multi-country affiliates,
each of which formulates its own business strategy based on perceived market
differences.
4. A global company (GC) is an organization that attempts to standardize and integrate
operations worldwide in all functional areas.
5. An international company (IC) is a global or multidomestic company.
B. Additional terminology for international businesses used by UN, academic writers
1. Transnational company – a company that combines the characteristics of global and
multinational firms; responsive to different global environments.
2. Multicultural multinational is a newer name for a transnational company.
II. What is Different About International Business?
An international firm operates across borders and deals with 3 environments – domestic, foreign,
and international.
A. Influence of External and Internal Environmental Forces
Forces in the Environments:
1. External Forces (uncontrollable)
a. Competitive g. Physical
b. Distributive h. Political
c. Economic i. Sociocultural
d. Socioeconomic j. Labor
e. Financial k. Technological
f. Legal
2. Internal Forces (controllable): such as:
a. Factors of production – capital, raw materials, and people
b. Activities of the organization – personnel, finance, production, and marketing
B. The Domestic Environment
All the uncontrollable home country factors that surround and influence the firm.
C. The Foreign Environment
1. All uncontrollable forces originate outside of home country and surround and influence
the firm.
a. Forces Have Different Values
b. Forces Can Be Difficult to Assess
c. The Forces Are Interrelated
D. The International Environment
1. Interactions between:
a. Domestic and foreign environmental forces
b. Between the environmental forces of 2 countries when an affiliate in 1 country has
customers in another
2. International organizations affect the international environment and include:
a. Worldwide bodies – World Bank
b. Regional economic groups of nations – NAFTA, EU
c. Organizations bound by industry agreements – OPEC
3. Decision Making is More Complex
a. Multiple forces make decision making more complex.
b. Not only are there many sets of forces, but the differences among them sometimes
are extreme.
4. Self-Reference Criterion
a. Managers are frequently unfamiliar with other cultures. Moreover, many have the
tendency to refer unconsciously to their own cultural values. Self-reference criterion,
as this is called, is probably the biggest cause of international business blunders.
III. A Brief History of International Business
A. International trade and the international firm are not new aspects of business.
1. Phoenician and Greek merchants were selling abroad before the time of Christ
2. China, world’s leading manufacturer for 1,800 years until about 1840, established
integrated trading systems
3. Trade impacted politics, the arts, agriculture, industry, and public health throughout
recorded history
4. The Ottoman Empire profoundling influenced international trade
a. Control ultimately spanned Europe, North Africa, and the Middle East.
b. Influenced emerging trading roots for people, goods, money, animals, and
microorganisms, from England to China, across the Mediterranean and Northern
Africa, and through Central Asia and the Indian Ocean region.
c. By raising cost of Asian trade for Europeans, they spawned a search for sea
routes to Asia.
5. British East India Company (1600) established foreign branches.
6. “Age of Mercantilism” in the 17th and 18th centuries.
7. Number of multinational companies existed in late 1800s.
8. By 1914, at least 37 American companies had production facilities in two or more
overseas locations. At that time, American foreign direct investment was $2.53
billion, which amounted to 7% of nation’s GNP.
9. Level of intracompany trade of multinationals in 1930, as a percentage of overall
world trade, may have exceeded the proportion at the end of the 20th century.
10. International firms have become the objects of much discussion, especially the
increasing globalization of their production and their markets. What are the reasons
for globalization?
IV. Growth of International Firms and International Business
There has been explosive growth in the size and number of U. S. and foreign international
concerns. One variable used to measure this growth is the increase in total foreign direct
investment (FDI).
A. Expanding Number of International Companies
1. According to UNCTAD, there are 82,000 transnational companies with international
production, having 810,000 foreign affiliates employing 78 million people. These
transnationals account for 25% of global output and two-thirds of world trade.
Foreign affiliates’ sales have grown 700% in the past 20 years.
2. Since the 1980s, there has been a marked liberalization of government policies and
attitudes toward foreign investment in both developed and developing nations.
3. Critics of large global firms cite such statistics as the following to “prove” that host
governments are powerless before them: In 2010, only 23 nations had GNIs greater
than the total annual sales of Wal-Mart Stores (world’s largest IC by sales volume).
B. Foreign Direct Investment and Exporting are Growing Rapidly (Fig. 1.1)
1. The world stock of outward FDI is estimated to have risen to $19.0 trillion by the
beginning of 2010— 9 times larger than in 1990.
2. World merchandise exports in 2010 were $15.24 trillion, about 2.35 times larger than
in 2000 and 8 times larger than 1980.
3. World service exports are growing faster than merchandise exports, reaching $3.7
trillion in 2010, 10 times larger than in 1980.
C. What is Driving the Globalization of Business?
No widely accepted definition, but it has political, social, environmental, historical,
geographic, and cultural implications. Technological and political globalization may be
developing.
V. What Is Globalization?
Although there are many definitions of globalization (political, technical, social), the most
common definition in IB is economic globalization—the international integration of goods,
technology, information, labor, and capital; or the process of making this integration happen.
VII. The Drivers of Globalization
There are five major kinds of drivers: (1) political, (2) technological, (3) market, (4) cost, (5)
competitive.
1. Political – there is a trend toward unification and socialization of the global
community. The reduction of barriers to trade and foreign investment and the
privatization of industry are hastening the opening of new markets by international
firms.
2. Technological – advances in computers and communications technology are
permitting an increased flow of ideas and information across borders. This enables
small firms to compete globally.
3. Market – As companies globalize, they also become global customers.
4. Cost – Globalizing product lines help to achieve economies of scale, which reduce
development, production, and inventory costs. Company can also locate where the
costs of factors of production are lower.
5. Competitive – One of the competitive driving forces for globalization is the fact that
companies are defending their home markets from foreign competitors by entering
the competitors’ home markets to distract them.
A. Arguments Supporting Globalization (see Global Debate box)
1. Free Trade Enhances Socioeconomic Development
2. Free Trade Promotes More and Better Jobs
B. Concerns with Globalization (see Global Debate box)
1. Globalization Has Produced Uneven Results Across Nations and People
2. Globalization Has Had Deleterious Effects on Labor and Labor Standards
3. Globalization Has Contributed to a Decline in Environmental and Health Conditions
VIII. Motives For Entering Foreign Markets
Motives are: (1) desire for increased profits and sales, or (2) protect profits and sales from
competition
A. Increase Profits and Sales
1. Enter New Markets
a. Viable markets have rising per capita GDP and population growth
b. Not in markets where economy is growing faster than in home country
2. New Market Creation
a. Produce locally
b. Assemble abroad
3. Faster-Growing Markets
4. Improved Communications
5. Obtain Greater Profits
6. Greater Revenue
7. Lower Cost of Goods Sold
8. Higher Overseas Profits as an Investment Motive
B. Protect Markets, Profits, and Sales
1. Protect Domestic Markets by Following Customers Overseas
2. Attack in Competitor’s Home Market
3. Using Foreign Production to Lower Costs
4. Protect Foreign Markets
5. Lack of Foreign Exchange
6. Local Production by Competitors
7. Downstream Markets
8. Protectionism
9. Guarantee Supply of Raw Materials
10. Acquire Technology and Management Know-How
11. Geographic Diversification
12. Satisfy Management’s Desire for Expansion
IX. The Seven Dimensions For Globalizing A Business
A. The seven dimensions for globalization (standardization) are:
1. Product
2. Markets
3. Promotion
4. Where value is added to the product
5. Competitive strategy
6. Use of non-home-country personnel
7. Extent of global ownership of the firm
X. Organization Of This Book
A. The nature of international business and related institutions
B. Understand External Forces, uncontrollable
C. Review how IB managers cope with external forces through functional specialties