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CHAPTER 1
An Overview of International Business
Chapter Objectives
After studying this chapter, students should be able to:
1. Discuss the meaning of international business.
2. Explain the importance of understanding international business.
4. Discuss the causes of globalization.
5. Comprehend the growing role of emerging markets in the global
economy.
LECTURE OUTLINE
OPENING CASE: The Business of the Olympics
The opening case explores the relationship between international business and the
Olympic Games.
Key Points
• The Olympic Games have come to reflect international business at its most intense.
• The Olympics are governed by the International Olympic Committee (IOC), which
decides where the games will be held, which sports will be represented, and
oversees the selection of judges and referees.
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• Running the Olympics requires large revenues, and host cities, along with the IOC,
are constantly seeking additional sources of funds, such as television coverage and
corporate sponsors.
Additional Case Application
An exercise that can help students make the connection between the Olympics and
international business is to ask them to imagine the Olympics without the involvement of
CHAPTER SUMMARY
Chapter One introduces the topic of international business by initially asking “what is
international business” and then moving on to ask “why is it important to study
international business?” The chapter then provides an introductory definition and
explanation of some of the basic international business terminology, such as importing,
exporting, and multinational corporation.
The chapter moves on to explore the evolution of international business going back to
WHAT IS INTERNATIONAL BUSINESS?
• International business involves any business transaction between parties from
more than one country. It includes such activities as buying and selling raw
materials, inputs or finished products across borders, operating plants in other
countries to take advantage of local resources, and borrowing money in one country
to finance operations in a second country.
• International business is different from domestic business in that it necessarily
involves transactions that cross national borders while domestic business does not.
Thus, at least one party will have to adjust to a different legal, economic, and cultural
system; convert its currency into the other party’s currency; and make changes in
how products are produced or the types of products that are produced.
Teaching Note:
Instructors may wish to pause for a moment at this point and ask
students why a particular foreign company chose to invest in the
WHY STUDY INTERNATIONAL BUSINESS?
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Teaching Note:
It is interesting to ask the question “why study international
business” before actually discussing the material in the text.
Instructors will probably find that, with a little prompting, students will eventually
come up with all or most of the reasons listed below.
• Students need to study international business for a number of different reasons.
First, students will almost certainly work for a company that is either foreign owned,
domestically owned but has some foreign operations, or domestically owned but is
affected by the global economy. Thus, if students are to be successful and
• Cultural literacy is another reason for studying international business. Because
business today often means international business, it is critical that students
develop the type of cultural literacy that will enable them to be conversant with the
• Finally, since not all business techniques and tools are developed in the United
States, students need to study international business so that they are aware of
developments taking place in other parts of the globe, such as the use of just-in–
time (JIT) systems.
BRINGING THE WORLD INTO FOCUS
A Rose by Any Other Name
This box discusses differences in terminology used by companies around the
world to denote the concept of limited liability in business. The box provides an
INTERNATIONAL BUSINESS ACTIVITIES
• International business can take various forms. Exporting involves selling products
made in one’s own country for use or resale in other countries. Importing involves
buying products made in other countries for use or resale in one’s own country.
Many companies begin their international operations with either importing or
exporting since the risk involved is minimal.
• Merchandise exports and imports refers to trade in goods (also known as visible
trade) while service exports and imports refers to trade in intangible products
(also known as invisible trade). See Figure 1.1 here.
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• Exporting is important to both large and small firms. For example, the text notes
that 70 percent of Boeing Aircraft Company’s sales of $33.4 billion in commercial
aircraft sales were to foreign customers, and that Task Force Tips, a small Indiana
manufacturer of fire hose nozzles, exports one third of its production.
BRINGING THE WORLD INTO FOCUS
The Early Era of International Business
International business has been around for centuries. In fact, its origins can be
traced back as far as 2000 B.C. to the trading that took place between North
African tribes and parts of the Middle East. Greece and the Roman Empire owe
part of their early prosperity to international trade and its associated political and
military power. Some significant trading relationships that endure today were
developed during the Middle Ages.
• International investments, in which residents of one country supply capital to those
of a second country, constitute the second major form of international business
activity. Foreign direct investments (FDI) are investments made for the purpose of
actively controlling property, assets, or companies located in foreign host countries.
The country from which the investment flows is referred to as the home country.
The country to which the investment flows is referred to as the host country.
Portfolio investments involve purchases of foreign financial assets (stocks, bonds,
certificates of deposit) for purposes other than control.
• Other forms of international business activity. A licensing agreement allows a
firm in one country to use all or some of the intellectual property of a firm in a second
country in exchange for a royalty payment. A franchising agreement allows a firm
in one country to use the brand names, logos, and operating techniques of a firm in a
second country in exchange for a royalty payment. Management contracts involve
an agreement in which a firm in one country agrees to operate facilities or provide
other management services for an agreed-upon fee.
There are several ways to describe the extent of a firm’s international orientation. At the
broadest level is the international business: an organization that engages in commercial
transactions with individuals, private firms, or public sector organizations that cross borders.
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THE ERA OF GLOBALIZATION
Globalization can be defined as “the inexorable integration of markets, nation-states, and
technologies…in a way that is enabling individuals, corporations, and nation-states to
reach around the world farther, faster, deeper, and cheaper than ever before.” This is
evidenced by the dramatic growth of international trade over the last several decades. You
CONTEMPORARY CAUSES OF GLOBALIZATION
Today, firms expand internationally for a variety of reasons. Some of the reasons are
strategic, others are environmental.
Strategic Imperatives
• To leverage core competencies. That is, firms that have skills that help them
compete successfully in one country will often expand in order to further benefit from
those skills.
• To acquire resources and supplies. The price and availability of materials, land,
labor, capital, and technology varies across countries. Firms may be able to acquire
resources or produce more efficiently by expanding internationally.
The Environmental Causes of Globalization
• Changes in the political environment. The collapse of trade barriers (especially since
WWII) and the establishment of new trade agreements (e.g., NAFTA, CAFTA-DR,
GATT/WTO) have promoted greater international trade and investment.
Globalization and Emerging Markets
• International business activity has expanded geographically with the collapse of
European communism and policy changes in China and India. The markets beyond
North America, Western Europe, and Japan are often referred to as emerging
markets. Some scholars limit emerging markets to Brazil, Russia, India, and China
(BRIC countries). Others use different categorizations. Table 1.2, which provides
demographic information on emerging markets, should be discussed here.
EMERGING OPPORTUNITIES
Is Globalization Good for Us?
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This box considers the conflicting aspects of globalization as described by Thomas
L. Friedman in his book The Lexus and the Olive Tree. The economic integration
associated with globalization may lead to many economic benefits (i.e., the Lexus),
but it may also create costs as traditional values and norms (the olive tree) are
forsaken.
AN OVERVIEW OF THE BOOK
• The text takes the perspective of the manager or employee who is or will be
competing in the international marketplace and identifies the major similarities and
differences between doing business domestically and doing business internationally.
• The text develops the more macro, general issues before moving on to explore the
more micro, specific areas that managers face on a regular basis. In doing so,
CHAPTER REVIEW
1. What is international business? How does it differ from domestic business?
International business involves any business transaction between parties from more than
one country. It differs from domestic business in that international business transactions
cross national borders while domestic transactions do not. More specifically, international
2. Why is it important for you to study international business?
There are at least five reasons why it is important to study international business. First,
students will probably work for a company with international operations or one that is
affected by the global economy. Second, students may actually work for a firm that is
3. What are the basic forms of international business activity?
The basic forms of international business activity are importing and exporting, international
investments, licensing, franchising, and management contracts. Exporting involves selling
products made in one’s own country for use or resale in other countries, while importing
involves buying products made in other countries for use or resale in one’s own country.
International investments include foreign direct investment and portfolio investments.
4. How do merchandise exports and imports and service exports and imports differ?
5. What is portfolio investment?
6. What are the basic reasons for the recent growth of international business activity?
A number of factors have led to the recent growth of international business. The more
important factors include market expansion, resource acquisition, competitive forces,
technological change, and social change. Market expansion has led to growth in
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global marketplace. (LO 1.4, AACSB: Communication Skills, Learning Outcomes: Discuss
trends in and the debate over globalization)
QUESTIONS FOR DISCUSSION
1. Why do some industries become global while others remain local or regional?
There are a number of factors that play a role in determining which industries become
global, which become regional, and which remain local. The airline industry, for example, is
considered a global industry. One of the main reasons for this status is the cost of
2. What is the impact of the Internet on international business? Which companies and which
countries will gain as Internet usage increases throughout the world? Which will lose?
The Internet has had a significant impact on international business in at least three ways.
First, the Internet facilitates international trade in services (e.g., banking, education, and
3. Which markets are more important to international business – the traditional markets of
North America, the European Union, and Japan or the emerging markets? Defend your
4. Does your college or university have any international programs? Does this make the
institution an international organization? Why or why not?
Students who attend a college or university that has international programs will probably find
this question interesting. Students who do not have international programs available to
them can still find the question worth considering if they use a little imagination. The text
5. What are some of the differences in skills that may exist between managers in a domestic
firm and those in an international firm?
6. Would you want to work for a foreign-owned firm? Why or why not?
The answer to this question is, of course, based on a student’s opinion and therefore can
generate a lot of discussion. Some students may already work for a foreign-owned firm;
BUILDING GLOBAL SKILLS
Essence of the exercise
This exercise is designed to help students realize just how extensive the effect of international
business is by asking them to consider the country of origin of items that are part of their daily
lives, such as their cars, clocks, coffee makers, and computers. The exercise requires students
to compile a list of products they use on a regular basis and find out more about the companies
that produce them.
Answers to the follow-up questions:
1. Discuss the relative impact of international business on your daily lives.
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If this exercise is used at the beginning of class, prior to coverage of the chapter material,
2. Compile a combined list of the 10 most common products the average college student might
use.
3. Try to identify the brands of each product that are made by domestic firms.
Students will probably identify different brands; some of the more common ones that are
4. Try to identify brands of each item that are made by foreign firms.
Students will probably have more difficulty with this question. Again, using the products
5. Does your list of 10 products include items that have components that are both domestic–
made and foreign-made?
The answer to this question will probably require a bit of guesswork. However, of the
Other Applications
Instructors can develop a “quiz” to be handed out on the first day of class, perhaps even
before discussing the chapter material. The quiz should be in multiple-choice format and
should ask students to identify the country of origin of various companies and/or products.
Instructors will probably find that students are amazed to find out that products they think
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CLOSING CASE
Demography Is Destiny
The closing case describes the challenges facing countries as their population ages and
eventually shrinks.
Key Points:
• Changes in national demographics have led to changes in labor policies in various
countries, such as France, the U.S., England, and China.
• The traditional population pyramid (broad base of youngsters, shrinking in size as
age increases) is becoming a population oval or rectangle as disease and famine are
tamed.
• The populations of many major economic powers are predicted to become older and
smaller over the next two decades.
Case Questions
1. What challenges do graying populations create for companies?
The challenges are primarily in maintaining their workforce and forecasting changes
2. What opportunities do graying populations create for firms?
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3. How will demographic changes affect the competitiveness of countries in the
international marketplace?
The burden of caring for the elderly will be borne disproportionately by countries with
low or negative population growth rates. These countries will have a smaller labor
4. What has been the impact of the one-child policy on China’s economic fortunes?
Perhaps the policy worked too well. China’s working age population is expected to
start shrinking in 2015. The one-child policy means that as parents retire from the