INTERNATIONAL BUSINESS International business How it should

INTERNATIONAL BUSINESS

International business How it should be understood ? Why we need to study it ?

INTERNATIONAL BUSINESS means: business transactions between parties from more than one country, including buying, shipping, processing, assembling, building, borrowing and lending money, financing international operations, . . etc. International business = Cross-border commercial transactions with individuals, private firms and government and public sector agencies and organizations International business vs. Domestic business

What are the reasons that International business differs from Domestic business ? q The countries involved may use different currencies q q q The legal systems of the countries are different Natural resources and their availability vary by countries The cultures of the countries may differ In principle basic skills and knowledge are very similar when business is conducted internationally or domestically

International business studying is important because of: Organization you work or conduct when operates in international markets: • is involved in international operations • is continously exposed to all risks resulted from global economy (effect of globalization) Your success depends upon the rule: always you should be „a nose” ahead of your rivals

International business studying. . (cont. ) • Global cultures and political systems become increasingly intertwined • Because of that understanding and appreciating similaritis and differencies are higly important • Such knowledge helps to gain respect and confidence in doing international business • Lack of it may effect your image: you may be found as ignorant, provincial or simply unable properly conduct international business

INTERNATIONAL BUSINESS ACTIVITY • Exporting and importing these can be subdivided into two groups: 1. merchandise export and import tangible goods, visible trade (computers, cars, raw materials, etc. ) 2. service export and import intangible products, invisible trade (banking, accouting, consulting, etc. )

INTERNATIONAL BUSINESS ACTIVITY - cont. • International investments - capital supplied by resident of one country to residents of another country In practice - flow of capital (funds) across borders International investments - usually are divided into two categories: q foreign direct investments (FDI) q portfolio investments

INTERNATIONAL BUSINESS ACTIVITY - cont. • FDI - in principle - investments which the main target is active controll of property, assets or companies in host countries Host country - the country in which the company operates Home country - the country in which the company’s headquarter is located

INTERNATIONAL BUSINESS ACTIVITY - cont. n Portfolio investments - purchases of foreign financial assets basically as the short-time capital allocation for the purpose other than control these transactions are often utilized by pension funds, investment/mutual funds or hedge funds to rise the rates of return on their assets portfolio

INTERNATIONAL BUSINESS ACTIVITY - cont. • Licensing - legal arrangement by which the firm in one country licenses the use of its intellectual property to an entrprise in another country patents, trademarks, brand names, copyrights, trade secrets

INTERNATIONAL BUSINESS ACTIVITY - cont. n Frenchising - a type of licensing - legal arrangement by which the firm in one country authorises an entrprise in another country the use of its operating systems, brand names, trade marks and logos in return for a royalty payments

INTERNATIONAL BUSINESS ACTIVITY - cont. • Management contract - legal arrangement by which the firm in one country agrees to provide operations or other management sevices to a firm in another country for agreed-upon fee Marriott, Hilton - worldwide well known brand names - often don’t own these hotels but operate them under management contracts; Outsourcing: accounting and consulting services, tax advisory service, long term finance management, „private banking”

Every firm that engages in any of these types of transactions can be named as international business International business Cross-border commercial transactions Organization involved in cross-border comm. trans. Multinational corporations (MNCs) Multinational enterprises (MNEs) Multinational organizations (MNOs)

Multinational corporations (MNCs) - companies that have extensive involvment in international business (mostly in FDI in more than one country) Multinational enterprises (MNEs): some MNCs are not true corporations, e. g. E&Y, KPMG, Deloitte, Lloyd’s of London or true enterprises, e. g. IOC, Red Cross Refering to both types of organizations the term Multinational organizations (MNOs) should be used

International business vs. globalization • Last decades are characterized by continuous and dynamic growth of international business. • There are two reasons of this phenomenon: > strategic imperatives stimulating globalization > environmental changes, which facilitate globalization • This results in motives have compelled firms to become more global in their strategy of development and operations.

International business vs. Globalization, cont. • Strategic imperatives include: > leveraging a firm’s core business (competencies) > acquiring resources (at low costs) and supplies > expantion and entering new markets > competing with rivals (industrial)

International business vs. Globalization, cont. • Leveraging firm’s core business competencies: motive for globalization related to opportunity given by implementation of core competencies developed in a firm’s home market. Core business competency: distinctive strength or advantage that is „a core” to firm’s operations. By implementing its core business competencies in foreign markets the firm may increase its revenues and finally profits as well. (Nokia, ABB, Motorola, Singapore Airlines, . . . . )

International business vs. Globalization, cont. • Aquire resources and supplies - one of the firm’s major motive for going international. Resources: materials, capital, labour, know-how; crude oil, metals ores, venture capital, low costs of labour, special economic zones and tax relifs, . . . . Supplies: coffe & cocoa from SA to NA, Europe, oil &gas from ME and Asia to W-Europe and China, timber wood from Canada to Japan, . . . .

International business vs. Globalization, cont. • Seeking and entering new markets in case when a firm’s home market matures international expantion is the only way to increase its revenues (sale) and profits which are decisive considering further growth. Other bonuses of international expansion: market diversification decreases different types of risk, increases sale, lowers costs of production, . . .

International business vs. Globalization, cont. • Worldwide competition strategy with industrial and business rivals is easier when firms or businesses enter foreign markets and actively operate in those markets. Very often MNCs use profits from those markets to attack or counterattack their rivals: Coca-Cola vs. Pepsi-Cola, Sony vs. Kodak vs. Fuji, . . . .

International business vs. Globalization, cont. • Environmental changes and globalizations Political and technological changes made the most important impact on the dynamic growth of international operations (especially after WWII). n Political changes: the major trading powers (countries) negotiated different agreements: reductions in tariffs and quotas on imported products and elimination of barriers on FDI within their borders. GATT, WTO, EEU, NAFTA; actually ab. 100 local/regional economic accords exist.

International business vs. Globalization, cont. • Technological changes: improvements in communication systems, transportation and information processing made international business feasible, easier and more effective. n Internet age challenges and what we can expect next ?

International business and National Trade Policy • At present - global economy effects firms which continously must deal with both: domestic and foreign competitors. • How firms react ? • Discussing domestic market - domestic firms operate and compete in it usually ask their national government for protection against the foreigners. • Different point of view: many firms benefit from international trade because foreign markets mean large number of new clients, business challenges, and overall development.

International business and National Trade Policy • How we can characterize export and import using national trade policy point of view and country development ? • Export generates domestic jobs and has positive impact on the rate of unemployment as well as on central budget and GDP; many governments provide very active promotion of their domestic firms in international markets. • Import is necessary when considering continous development of the national economy (patents, know-how, capital, FDI, raw materials, etc. ; it has positive effect on internal and external competitivness of the country. • The balance between export and import is the basis of continous and sustainable development of each country.

National Trade Policy - principles of formulation Government policy toward international trade is based on two trade policies: • Intervention policy - when national government plays active role in protection of the country’s domestic firms against goods and services imported to the domestic market; In practice: governments use to tax foreign goods entering the domestic market - this is the most popular and widely applied instrument of trade policy.

National Trade Policy - principles of formulation, cont. • Policy of help - when national government assists the country’s domestic firms to increase their foreign sales - export promotion policy ; In practice: governments usually directly help the country’s domestic firms through export subsidies , guaranteed loan programs and government-togovernment negotiations.

National Trade Policy - principles of formulation, cont. • Conclusion: National Trade Policy can be formulated on the basis of the following issue: the government should promote „free” or „fair” trade. Free trade - when national government influence on the exporting and importing decisions of the country’s firms and individuals is minimal. Fair trade (managed trade) - when national government provides domestic export firms an equitable or equivalent share in foreign markets. Level playing field - the level of on which domestic and foreign firms can compete on equal terms.

National Trade Policy - principles of formulation, cont. Strategies of Free trade, Fair trade and Level playing fields affect the size and profitability of foreign makets as well as investment and in practice form in domestic markets barriers towards foreign firms trying to enter domestic markets. These barriers are the most efficient tools in establishing levels of prices of imported goods and services. Conclusion: National trade policy erects terms for FDI

National Trade Policy - principles of formulation, cont. The argument for free trade: voluntary exchange makes parties to the transaction better off and allocates recources to their highest values use. Conclusion: the welfare of a country and its citizens will be best promoted when they will be allowed to exchange goods, services and assets as they will see them fit. In practice: there are evidences that , under certain circumstances, deviations from free trade are considered as appropriate. Sometimes special-interest groups are against free trade and want to push government to intervene and focus the trade policy on the needs of individual industries when that policy is formulated at national level. They want to protect their industries from foreign competition.

National Trade Policy - principles of formulation, cont. Industry - Level Arguments 1. The National Defense Argument - this has been often used as a reason to support govrnmental protection of certain, specific industries. It holds that a country must be self-sufficient in critical raw materials, machinery, technology or else that provide resistance to foreign threats. Examples: heavy industry (coal & steel) , armament industry, liquid & gas fuels ind. , power production & distr. , shipbuilding ind. , etc.

National Trade Policy - principles of formulation, cont. 2. The Infant Industry Argument: a new independent country’s industries usually need government protection until they achive a comparative advantage that would ultimately allow them effectively compete in international markets. This argument is often used as a bolster support for import protection or export subsidies for these industries. Very often these industries when once are granted protection are quite reluctant to give the protection up and being protected usually end up in their old age; the result: their competitivness in international markets is gradually decreasing.

National Trade Policy - principles of formulation, cont. 3. Maintanance of Existing Jobs. Well developed domestic firms may feel threatened by import from low-wages countries. That results in demands adressed to government to react actively against foreign competition which can effect unemployment and finally human and economic misery of the country (reduction of employment, production, shuting down factories). Possible government reactions: tariffs, quotas, subsidies, economic development programmes, special industrial policy, etc.

National Trade Policy - principles of formulation, cont. 4. Strategic Trade Theory. It applies to those industries capable of supporting only a few firms worldwide because of (among others) product, high development costs (R&D costs) or strong/great experience effects: nuclear power stations, aircraft, aerospace, electronic and armament industries, etc. National government can provide its country better off when adopts trade policies that improve the competitiveness of its domestic firms in „oligopolistic” industries. A few firms operate in highly concentrated industries can earn monopoly profits.

National Trade Policy - principles of formulation, cont. National Trade Policies: 1. Economic Development Programs: - Export promotion strategy, - Import substitution strategy. 2. Industrial policy: national government identifies key domestic industries critical to the country’s future economic growth followed by formulation promotion programs which may increase its competitiveness; these industries usually possess high growth potential, e. g. IT related ind. , aerospace, biotechnology, ceramics, mechatronics and nanotechnology, etc.

Barriers to International Trade • Tariffs: imposed on export, transit and import of goods. Import tariffs: - ad valorem, - specific, - compound. • Harmonized Tariff Schedule (HTS) • Significance of tariffs: - raising revenues of the national governments, - act as a trade barriers.

Nontariff barriers (NTB) • Quotas - tariff rate quota (TRQ) • Numerical Export Controls: quantitative barrier to trade which limits the amount of goods to be exported. Another version: a voluntary export restraint (VER) - a promise by a country to limit its export to a prespecified amount or percentage of the affected market. • Embargo • Product and testing standards • Restricted access to distribution network • Public-sector procurement polices • Currency control • Regulatory controls • Investment controls

Promotion of International Trade • Subsidies - export stimulation by offering subsidies to reduce firms’ costs of doing business • Foreign Trade Zones - a geographical area where imported or exported goods receive preferential tariff treatment; small FTZ - warehouses or big FTZ - factory site, usually preferentially located or situated considering trade partners, regional development, suitable infrastructure, etc. • Export Financing Program - major trading countries have created government-owned agencies to assist their domestic firms in arranging financing export sales: direct loans and loan guarantees: Eximbank, NIB, Kf. W Bank, OPIC, MIGA, Euler-Hermes, COFACE, KUKE, etc.

Unfair Trade Practicies Control Two types of unfair practices: • government subsidies, • unfair pricing practices. Actions desined to overcome: • countervailing duties (CVD) - ad valorem tariff on an imported good that is imposed by the importing country to counter the impact of foreign subsidies, • antidumping regulations - domestic firms protection against discriminatory or predatory pricing practicies of foreign firms.