MBMG604: INTERNATIONAL BUSINESS MANAGEMENT

NOTES/STUDY MATERIAL

Introduction to International Business Management

International Business Management is the process of planning, organizing, and controlling business
activities that are conducted across international borders. It involves understanding international
markets, legal systems, cultures, currencies, and economic environments.

Definition of International Business

1. The exchange of goods and services among individuals and businesses in multiple countries.

2. A specific entity, such as a multinational corporation or international business company that

engages in business among multiple countries.

Overview of International Business

International Business conducts business transactions all over the world. These transactions

include the transfer of goods, services, technology, managerial knowledge, and capital to other

countries. International business involves exports and imports.

International business consists of transactions that are devised and carried out across national

borders to satisfy the objectives of individuals, companies, and organizations. These transactions

take on various forms, which are often interrelated. Primary types of international business are

export–import trade and direct foreign investment. The latter is carried out in varied forms,

including wholly owned subsidiaries and joint ventures. Additional types of international

business are licensing, franchising, and management contracts.

International Business refers to commercial activities that occur across country boundaries. It
includes:

• Exporting and importing of goods and services.

• Licensing and Franchising to foreign partners.

• Joint Ventures and Strategic Alliances with international firms.

• Foreign Direct Investment (FDI) – setting up subsidiaries abroad.

• Global Supply Chain Management, international marketing, and HR

Key Features:

• Cross-border transactions

• Multinational operations

• Multicurrency and multilegal systems

• Multicultural workforce and customers

Why Go International?

1. Market Expansion:

o Saturated domestic markets push firms to explore new customer bases.

2. Economies of Scale:

o Spreading fixed costs across larger production volumes.

3. Access to Resources:

o Natural resources, skilled labor, and raw materials may be cheaper abroad.

4. Diversification of Risk:

o Reduces dependency on a single market.

5. Technology and Innovation:

o Exposure to global innovation and R&D.

6. Government Incentives:

o Many countries offer tax breaks and incentives to attract foreign firms.

7. Improved Brand Image:

o Being international enhances reputation and brand equity.

Domestic vs. International Business

Basis Domestic Business International Business

Scope Within a single country Across multiple countries

Currency Single currency Multiple currencies with exchange rate risks

Legal Systems Uniform national laws Varied legal and regulatory frameworks

Cultural Differences Limited Significant and complex

Language Common language Multilingual challenges

Political Risk Relatively Stable Includes foreign policies and diplomatic

relations

Documentation Simple Extensive (customs, shipping, legal compliance)

International Business Environment

Understanding the external environment is crucial for international success:

1. Economic Environment:

o GDP, inflation, unemployment, currency stability.

 2. Political-Legal Environment:

o Government policies, trade regulations, political stability.

3. Cultural Environment:

o Language, religion, values, customs, attitudes.

4. Technological Environment:

o Infrastructure, internet penetration, innovation.

5. Geographical and Ecological Factors:

o Climate, natural disasters, sustainability.

6. Legal Environment:

o Business laws, property rights, dispute resolution mechanisms.

Stages in Globalization Process

1. Domestic Stage:

o Focus only on local market; minimal international awareness.

2. International Stage:

o Export/import begins; minor international presence.

3. Multinational Stage:

o Significant presence in multiple countries; local subsidiaries.

4. Global Stage:

o Fully integrated operations; global strategy and coordination.

5. Transnational Stage (Modern view):

o Combines global efficiency with local responsiveness and innovation. It's

characterized by a company retaining centralized operations in one country while
expanding internationally by acquiring new operations and assets abroad,

Theories of International Trade

1. Classical Theories:

• Absolute Advantage (Adam Smith):

o Countries should specialize in goods they can produce more efficiently.

• Comparative Advantage (David Ricardo):

o Trade is beneficial even if one country is better in all goods; focus on relative
efficiency.

2. Factor Proportions Theory (Heckscher-Ohlin):

• Countries export goods that use their abundant factors (e.g., labor, capital).
3. Product Life Cycle Theory (Raymond Vernon):

• Products go through introduction, growth, maturity, and decline; production moves to other
countries over time.

4. New Trade Theory:

• Trade can arise even without factor differences due to scale economies and network effects.

5. National Competitive Advantage (Porter):

• Competitive industries depend on innovation, home demand, and supportive industries.

Porter’s Diamond Model

Michael Porter’s framework identifies four key elements that determine a nation’s competitive
advantage:

1. Factor Conditions:

o Specialized labor, infrastructure, and resources.

2. Demand Conditions:

o Sophisticated and demanding home consumers drive innovation.

3. Related and Supporting Industries:

o Competitive local suppliers and industries increase efficiency.

4. Firm Strategy, Structure, and Rivalry:

o Domestic competition motivates firms to innovate and improve.

Implications for International Business:

• Nations develop advantages in industries where these conditions are favourable.

• Companies should leverage these strengths in international expansion.

International Organizational Structures

Firms adopt structures to manage their international operations effectively:

1. International Division Structure:

o A separate division manages all international activities.
2. Global Functional Structure:
o Organization is divided by business functions (e.g., marketing, finance)
globally.
3. Global Product Structure:
o Divisions are based on product lines, each handling global operations.
4. Geographic/Regional Structure:
o Organized based on countries or regions (e.g., Asia, Europe).
5. Matrix Structure:
o Dual reporting relationships – combines product and geographic approaches
for flexibility and responsiveness.