International business consists of

transactions that are devised and carried out

across national borders to satisfy the
objectives of individuals, companies, and
organizations.

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 IB Is the study of transactions taking place
across national borders for the purpose of
satisfying the needs of individuals and
organizations.
 These economic transactions consist of trade,

as in case of
 exporting and importing
 Foreign direct investment
 Export-import trade
Foreign direct
investment

Licensing

Franchising

Management contracts

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 How will an idea, good, or service fit
into the international market?
 Should trade or investment be used to
enter a foreign market?
 Should supplies be obtained
domestically or abroad?
 What product adjustments are
necessary to be responsive to local
conditions?
 What are the threats from global
competitors, and how can these
threats be counteracted?
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 Exports are goods and services produced by a
firm in one country and then sent to another
country, for eg. Chinese companies produce
textile products and export them to US.
 Imports are goods and services produces in one
country and bought in by another country.
 Goods = cloths , oil , cars
 Services= international airlines , reservation
system, hotels,
 One of the major US export is its entertainment
and pop culture such as movies and television.
 In 2000 the worlds largest importers and
exporters were the US, Germany , Japan , UK and
France
 FDI is equity funds invested in other nations. The
FDI is undertaken by MNEs who exercise control
of their foreign affiliates.
 Like imports exports FDI is the driver of IB and
many companies use FDI to establish foot holds
in the world market place by setting up
operations in foreign markets or by acquiring
businesses there.
 Industrialized countries have invested very large
amounts of money in other industrialized nations
as well as smaller amounts in less developed
countries ,such as those in eastern Europe or
newly industrialized countries such as Koreas
and Singapore. how ever most of the worlds FDI
is invested both by and with in three major
groups . The US ,Western Europe and Japan.
 Multinationals enterprises are companies having
headquarters in one country but having operations in
other countries.
 Approx 80 % of all FDI is made by the 500 largest
firms in the world.

Exxon (US)
Wal-Mart (US)
Ford motors (US)
Daimler Chrysler(Germany)
Royal Dutch/Shell Group (B)
General Electric (US)
Mitsubishi Japan
Citigroup US etc. etc.
 More and more firms around the world are
going global, including:
◦ Manufacturing firms
◦ Service companies (i.e. banks, insurance,
consulting firms)
◦ Art, film, and music companies

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 International business:
◦ causes the flow of ideas, services,
and capital across the world
◦ offers consumers new choices
◦ permits the acquisition of a wider
variety of products
◦ facilitates the mobility of labor,
capital, and technology
◦ provides challenging employment
opportunities
◦ reallocates resources, makes
preferential choices, and shifts
activities to a global level
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 Globalization refers to more integrated and
inter dependent world economy,
 Globalization of Markets
 Globalization of Production.
 International business has created a
network of global links that bind
countries, institutions, and individuals
with trade, financial markets, technology,
and living standards.
◦ For example, a reduction in coffee production
in Brazil would affect individuals and
economies worldwide.

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 Because of globalization, for the first time
in history, the availability of international
products and services can be accessed by
individuals in many countries, from diverse
economic backgrounds.

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 The Globalization of markets refers to the
merging of historically distinct and separate
national markets into one huge global market
place.
 Consumer products such as Coca Cola, Sony,

MacDonald's, these firms are not only the

benefactors but also the facilitators of
Globalization.
 By offering the same basic product

worldwide, they help to create a global

market.
 The most global markets currently are not
markets for consumer products where
national differences in tastes and preferences
are still often important enough to act as a
brake on Globalization.
 But markets for industrial goods and

materials that serve a universal need the

world over, these includes the markets of
commodities such as aluminum, Oil, wheat,
the markets of industrial products such as
microprocessors, DRAMs, comp memory
chips, commercial jet aircrafts,
 The rivalry of Coca cola with PepsiCo is
Global
 Ford and Toyota
 Boeing and Airbus
 One firm moves to the nation that is not

currently served by rivals , the rivals follows

to prevent their competitor from gaining
advantage.
 The globalization of production refers to the
sourcing of goods and services from
locations around the globe to take advantage
of national differences in the cost and quality
of factors of production (labor, energy, land
and capital).
 Boeing : Outsourcing so much production to
foreign suppliers ,these suppliers are the best
in the world at their particular activity.
 A global web of suppliers leads to a final
better product.
Free trade means trade without barriers.
Barriers are tariffs, non tariff barriers like quotas,
technical, Administrative barriers and dumping.

Tariff: it is a tax on imports of the country by the

government. Tariff is historically the most important
barrier to trade in the world.

Excise Tax or Duty: A tax (sometimes called duty)

imposed on the production or sale of certain goods,
normally luxury items or products such as alcohol and
cigarettes whose consumption is discouraged by the
government. Excise tax or duty is not a tariff because it
is a tax locally produced luxury products and alcohol
and cigarettes.

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Custom duty: A customs duty is a tariff or tax
on the import of or export of goods. In
England, customs duties were traditionally
part of the customary revenue of the king,
and therefore did not need parliamentary
consent to be levied.
Customs: Is an authority or agency in a country
responsible for collecting and safeguarding
customs duties and for controlling the flow of
goods including animals, hazardous items in
and out of a country. Depending on local
legislation and regulations, the import or
export of some goods may be restricted or
forbidden, and the customs agency enforces
these rules.
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 The following are the non tariff barriers
1: Import Quotas
2: Voluntary export restraints (VERs)
3: Technical and administrative barriers
4: dumping
1: Import quota: import quota is a non-tariff barrier
which is also known as quantitative barrier. It is a
direct quantitative restriction on the amount of a
commodity allowed to be imported or exported.
2: Voluntary export restraints (VERs): one of the most
important of the nontariff trade barriers, or NTBs,
is voluntary export restraints (VERs). These refer to
the case where an importing country induces
another nation to reduce its exports of a commodity
“ voluntary”, under the threat of higher all-round
trade restrictions, when these exports threatens an
entire domestic industry.
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3: Technical barriers: are the safety
regulations for automobiles and electrical
equipments. Similarly administrative
barriers are health regulations for hygienic
production and packaging of imported food
products and labeling requirement,
environmental regulations, child labor are
the different barriers to trade.
4: Dumping: trade barriers may also result
from dumping. Dumping is the export of a
commodity at below cost or at least the sale
of a product at a lower price abroad than
domestically.

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 Protectionism

Protectionism is the economic policy of restraining
trade between states through methods such as tariffs
on imported goods, restrictive quotas, and a variety of
other government regulations designed to discourage
imports and prevent foreign take-over of domestic
markets and companies.


This policy contrasts with free trade, where
government barriers to trade and movement of capital
are kept to a minimum. In recent years, it has become
closely aligned with anti-globalization. The term is
mostly used in the context of economics, where
protectionism refers to policies or doctrines which
protect businesses and workers within a country by
restricting or regulating trade with foreign nations.

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 Economic integration means the commercial
policy of discriminatively reducing or
eliminating trade barriers only among the
nations joining together. There different
degrees in economic integration like
Preferential trade agreement, A free trade
area, A custom union, A common market, An
economic union.
 All these various degrees lead to free trade
and resulting in common benefit among the
member nations.

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Prefrential trade agreement: PTA provide lower
barriers on trade among member nations than
on trade with non member nations. This is the
loosest form of economics integration. British
commonwealth Preference Scheme established
in 1932 by UK with former British empire
countries.
A free trade area: A free trade area is the form of
economics integration where in all barriers are
removed on trade among members, but each
nation retain its own barriers to trade with
nonmembers. For example EFTA formed in
1960 by UK, Austria, Denmark, Norway,
Portugal, Sweden and Switzerland, NAFTA
formed in 1993 by US, Mexico and Canada.
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A custom union: In this form of integration
there is no tariff or other barriers on trade
among members but in addition it harmonize
trade policies towards the rest of the world.
For example European union or European
common market formed in 1957.

Common market: A common market goes

beyond custom union by also allowing the
free movement of labor and capital among
member nation. The EU achieved the status
of a common market at the beginning of
1993. The European Union is composed of 27 sovereign Member States: Austria,
Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal,
Republic of Ireland, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.[

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An Economic Union: this is the most advance type of
economic integration in which member countries
make a uniform fiscal and monetary policy. For
example Benelux which is the economic union of
Belgium, Netherlands and Luxembourg.
 fiscal policy is the use of government expenditure and revenue collection
to influence the economy.[1]
 Fiscal policy can be contrasted with the other main type of
macroeconomic policy, monetary policy, which attempts to stabilize the
economy by controlling interest rates and the money supply
Trade creation: when a country import a product from
anther country at lower cost which it can produce
with maximum cost is known as creation. Trade
creation leads greater welfare of both nations.
Trade Diversion: when a country switch its imports
from a nonmember country producing at low cost to
a member country producing at higher cost is known
as trade diversion.
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 Governments intervene in trade and
investment to achieve political, social, or
economic objectives.
 Barriers benefit specific interest groups, such
as domestic firms, industries, and labor
unions.
 Jobs are created by protecting industries from
foreign competition.
 Government intervention alters the competitive
landscape- by hindering or helping the ability
of its firms to compete internationally
 Government intervention is an important
dimension of country risk .
International Business: Strategy,
Management, and the New
Realities 26
 Protectionism refers to national economic policies
designed to restrict free trade and protect domestic
industries from foreign competition.
 Government intervention arises typically in the
form of tariffs (duty), nontariff trade barriers (e.g.
quota), and investment barriers (target FDI).
 Tariff is a tax imposed on imports, effectively
increasing the cost to the buyer.
 A nontariff trade barrier refers to a government
policy, regulation, or procedure that impedes trade.
 Quota is a quantitative restriction placed on
imports of a specific product over a specified
period of time.

International Business: Strategy,

Management, and the New
Realities 28
 Customs refer to checkpoints at
ports of entry in a country where
government officials inspect
imported products and levy
tariffs.
Governments impose trade and
investment barriers to achieve
political, social, or economic
objectives
International Business: Strategy,
Management, and the New
Realities 29
U.S. tariffs on imported steel:
 2000s- The Bush administration imposed tariffs on
the import of foreign steel into the U.S. because
competition from foreign steel manufacturers had
bankrupted several U.S. steel firms, and this was to
give the U.S. steel industry time to restructure and
revive itself.
 Higher material costs made these firms less
competitive- increased the production costs for
firms that use steel, such as Ford, Whirlpool, and
General Electric- and reduced prospects for selling
their products in world markets.
 The steel tariffs were removed within two years.

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Management, and the New
Realities 30
Japanese voluntary export restraints:
 1980s- The number of Japanese vehicle
imports were voluntarily controlled by Japan
to help insulate the U.S. auto industry.
 In this protected environment, Detroit
automakers had less of an incentive to
improve quality, design, and overall product
appeal.
 Thus, government intervention motivated
by protectionism has weakened Detroit’s
ability to compete in the global auto
industry.
International Business: Strategy,
Management, and the New
Realities 31
 Protectionist policies may lead to price
inflation- when supply is restricted, domestic
prices increase.
 By restricting variety, tariffs may also reduce
the choices available to buyers.
 In a complex world, there are adverse
unintended consequences- thus due
diligence- careful planning and
implementation- is paramount when
considering government intervention.

International Business: Strategy,

Management, and the New
Realities 32
1. Tariffs and other forms of intervention can
generate a substantial amount of revenue.
2. Intervention can ensure the safety,
security, and welfare of citizens.
3. Intervention can help a government pursue
broad-based economic, political, or social
objectives.
4. Intervention can help better serve the
interests of the nation’s firms and
industries.
International Business: Strategy,
Management, and the New
Realities 33
 Trade dispute - the U.S. government imposed a
$50 per ton duty on the import of Mexican
cement after U.S. cement makers lobbied the
U.S. Congress.
 Mexican imports can reach 10 percent of U.S.
domestic cement consumption.
 The U.S. is one of the world’s largest cement
consumers and, suffers from shortages, which
are irritated by import restrictions.
 Mexico proposed substituting import quotas
instead of the high cement import tariffs.

International Business: Strategy,

Management, and the New
Realities 34
 Defensive: barriers safeguard
industries, workers, special interest
groups, protect infant industries and
to promote national security (export
controls).
 Offensive :barriers pursue a strategic

or public policy objective, such as

increasing employment or generating
taxes.
International Business: Strategy,
Management, and the New
Realities 35
 Proponents argue that firms in advanced economies
cannot compete with those in developing countries
that employ low-cost labor, thus governments
should impose trade barriers to block imports.

 Critics counter that protectionism is at odds with the

theory of comparative advantage, which argues for
more international trade, not less- trade barriers
interfere with country-specific specialization of
labor, which in turn delivers superior living
standards.

 Blocking imports reduces the availability and

increases the cost of products sold in the home
market.

International Business: Strategy,

Management, and the New
Realities 36
 Emerging industry firms may lack experience,
technological expertise and economies of
scale.
 An infant industry may need protection from
foreign competitors, e.g. temporary trade
barriers on foreign imports.
 Infant industry protection has allowed some
countries to develop modern industrial sectors.
Drawbacks:
 Difficult to remove - tend to persist
indefinitely.
 Tend to remain dependent on government
protection.
 Industry inefficiencies result in higher prices.
International Business: Strategy,
Management, and the New
Realities 37
 Countries impose trade restrictions on
products viewed as critical to national
defense and security, such as military
technology and computers.
 Trade barriers can help retain domestic
production in security-related products-
computers, weaponry, and certain
transportation equipment.
 Export controls- governments manage or
prevent the export of certain products or
trade with specific countries; e.g. many
countries do not allow the export of
plutonium to North Korea because it can be
used to make nuclear weapons.
International Business: Strategy,
Management, and the New
Realities 38
Governments seek to protect certain occupations,
industries, and public assets central to national
culture:
 Switzerland imposed trade barriers to preserve its
long-established tradition in watch making.
 Japanese restrict the import of rice because it is
central to the nation’s diet and food culture.
 U.S. opposed Japanese investors’ purchase of the
Pebble Beach golf course in California, New York’s
Rockefeller Center, and the Seattle Mariners
baseball team, all considered to be part of the
national heritage.
 France does not allow significant foreign ownership
of its TV stations because of concerns that foreign
influences will taint French culture.
International Business: Strategy,
Management, and the New
Realities 39
 Intervention encourages the development of
industries that bolster the nation’s economy.
 Countries with many high-value-adding
industries —such as IT, pharma, automotive, or
financial services — create better jobs and higher
tax revenues. Examples:
 Germany, Japan, Norway, South Korea—devise
policies that promote the development of
relatively desirable industries.
 Deciding which industries to support is
challenging; it is difficult to predict which
industries will produce comparative advantages.
May result in continuous subsidization of
underperforming industries.
International Business: Strategy,
Management, and the New
Realities 40
 Import barriers may be imposed to protect
employment in designated industries.
 By insulating domestic firms from foreign
competition, national output is stimulated,
leading to more jobs in the protected
industries.
 Most effective- import-intensive industries that
employ much labor to produce normally
imported products.
Example- A joint venture between Shanghai
Automotive Industry Corporation (SAIC) and
Volkswagen created jobs in China.
International Business: Strategy,
Management, and the New
Realities 41
 Primary types are tariffs and nontariff trade
barriers.
 Nontariff trade barriers such as quotas, local
content requirements, and bureaucratic
procedures, can be more of a challenge for
firms as they may be applied is it discretionary
form of market protection.
 The United Nations estimates that trade
barriers alone cost developing countries over
$100 billion in lost trading opportunities with
developed countries every year.

International Business: Strategy,

Management, and the New
Realities 42
3. Take advantage of foreign trade zones.
FTZs (or free ports) create jobs and stimulate local
economic development. FTZs are areas where imports
receive preferential tariff treatment.
Example- A successful experiment with FTZs has
been the maquiladoras—export-assembly plants in
northern Mexico. They produce components typically
destined for the U.S. Maquiladoras enable firms from
the U.S., Asia, and Europe to tap low-cost labor,
favorable taxes and duties, and government
incentives, while serving the U.S. market.
4. Seek favorable customs classifications for exported
products. Reduce exposure to trade barriers by
appropriately classifying products according to the
harmonized product code.

International Business: Strategy,

Management, and the New
Realities 45
5. Take advantage of investment incentives and other
government support programs. Government assistance in
the form of subsidies and incentives helps reduce the
impact of protectionism.
6. Lobby for freer trade and investment. Increasingly,
nations are liberalizing markets in order to create jobs and
increase tax revenues:
◦ Mid-2000s -the Doha round of WTO negotiations sought
to make trade more equitable for developing countries.
◦ To increase the effectiveness of their lobbying efforts,
foreign firms may hire former government officials.
◦ In the long run, firms should take a seat with public-
sector decision makers who negotiate interventionist
activities with foreign governments.

International Business: Strategy,

Management, and the New
Realities 46