Basics of International Business

James P. Neelankavil, Anoop Rai

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317476115
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The field of international business is dynamic, complex, and challenging, vulnerable to fast-breaking events such as economic shifts, political turmoil, and natural disasters. This concise and affordable textbook will help future international business executives acquire the skills to function effectively under these challenging conditions. "Basics of International Business" incorporates coverage of the ongoing turmoil in the world financial markets. It's designed to familiarize students with the external environments that affect international businesses, to show them how to recognize the processes in identifying potential foreign markets, and to help them understand the functional strategies that can be developed to succeed in this highly competitive environment. The text focuses on 'must-know' core concepts in international business. The concepts, theories, and techniques are organized around seven major topical areas: introduction and overview of international business; environmental variables of culture, politics, and economics; entry strategies for new markets and countries; international trade and foreign direct investments; integration of functional areas; specific functioning areas (marketing, finance, accounting, etc.); global outsourcing and its role in international operations. The text is filled with helpful charts, chapter summaries, exercises, and applied cases. A detailed instructor's manual including course outlines, classroom exercises, and a complete test bank is available to adopters on the MES website.

1	Introduction and Overview

International business involves understanding the external environment, conducting country risk analysis, deciding on an entry strategy, managing the strategic functions, understanding the effects of foreign exchange transactions, and recognizing the value of global outsourcing.

LEARNING OBJECTIVES

• To understand the growth and importance of international business

• To understand the scope of international business

• To recognize the differences among various international organizations

• To understand the importance of international business research

• To understand the ethical considerations in international operations

• To understand stakeholder theory and corporate social responsibility in an international setting

• To understand the causes and effects of corruption

Businesses have engaged in international trade for thousands of years. In fact, international business has played a major role in shaping world history, from nations’ attempts to control trading routes to their colonization of countries. International trade (exports and imports) has grown from US$50 billion just 50 years ago to US$12 trillion in 2006.¹ Between 2000 and 2006, international trade grew at an annual rate of 13 percent for a total growth rate of 87 percent over the course of just six years. The following sections discuss some of the critical activities involved in international companies’ business operations, including (1) the reasons for pursuing overseas markets, (2) the various forms of entry into foreign markets, (3) the types of organizations that are involved in international operations, (4) the need for information and functional strategies among international companies, and (5) the ethical and corporate social responsibility considerations in international operations.

In the new world order, Chinese, European, Japanese, South Korean, and U.S. companies will not only be competing with each other; they will also be competing with highly competitive companies from many parts of the world, including companies from other Asian countries, Latin American countries, and central European countries. Because of these changes, the World Economic Forum’s Global Competitiveness Index (GCI) will reflect the emergence of many countries that were not on the previous lists. For example, Brazil and Russia have both moved up to the top half of the list. One surprising element is that the United States—even with its recent economic turmoil due to the 2008 credit crisis—is still ranked number one on the index.

International business management is a complex, multidimensional field. The intense competition for world markets, global expansion, and dramatic changes in technology have made the task of managing an international firm very challenging. Phenomenal growth in many Asian and Latin American countries is shifting the world economic order from the West to other parts of the world. Singapore, which a few years ago was labeled a newly industrialized country (NIC), is now a fully industrialized country. China has been experiencing double-digit economic growth rates for nearly a decade and projections point to a sustained growth rate of greater than 8 percent for the coming decade. India’s real gross domestic product (GDP) grew by 7.5 percent in 2005, by 8.1 percent in 2006, and by an estimated 8.5 percent in 2007.² China and India are expected to be major economic powers of the twenty-first century. On a macroeconomic level, these countries pursue different strategies: China follows a state-driven export-oriented economy; India, however, follows a market-oriented consumption-driven economy. Both countries have been successful in their pursuit of economic growth.

The emergence of China and India as major forces in international trade is not an isolated random occurrence. Countries such as Brazil, South Korea, and Taiwan are leading exporters of high value goods, including automobiles, commercial airplanes, and computer hardware. South Korea is one of the world’s leading shipbuilders. These countries present a vast and untapped market for goods and services. Such growth, coupled with stagnant and saturated markets in most of the industrialized nations, is forcing many companies to seek their own growth in these emerging markets. For example, Hewlett-Packard (HP) has weathered the softening of demand for its computers through its expanding international operations. HP generates approximately 65 percent of its revenues from overseas markets.³ Similarly, domestic sales for Power Curbers, a U.S.-based machinery manufacturer, are expected to decline by 10 percent, but this decline is offset by the firm’s foreign sales, which are growing at a much higher rate.⁴ Hence, the foreign expansion of U.S. companies into overseas markets is driven by both large and small to medium-sized companies, and most U.S. companies have recognized the immense potential for growth in foreign markets. According to the Standard & Poor’s 500 stock index (S&P 500), more than half of these companies’ sales are expected to come from abroad.⁵

Rising input costs in industrialized countries are another motivation for companies to expand their operations into overseas markets. An assembly line worker in the Volkswagen plant in Wolfsburg, Germany, earns $25 an hour and works 33 to 35 hours per week compared to a factory worker in China who earns $2 to $3 a day and works 45 to 48 hours per week. (Minimum wage standards in China vary from province to province. For example, in Shenzhen the minimum wage is $101.25 per month, in Shanghai it is $86.25 per month, and in Fujian it is $53.75 per month.)⁶ The availability of low-cost resources such as labor and raw materials in foreign markets makes global expansion attractive to international firms. For example, Motorola, a U.S.-based electronics company, has set up two large manufacturing plants in China to tap into the low-cost but highly trained workforce. Motorola has invested more than $3 billion in China and is the largest foreign investor in China’s electronics industry. It employs 9,000 Chinese workers and has committed itself to improving China’s technological base. Similarly, Intel is building a chip manufacturing facility at Dalian at a cost of $2.5 billion. Table 1.1 presents hourly, weekly, or monthly labor costs for 16 selected countries.

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Table 1.1

Average Hourly, Weekly, and Monthly Wage Rates in the Manufacturing Sector for Selected Countries (US$), 2006

#	Country	Hourly Wage Rate	Weekly Wage Rate	Monthly Wage Rate
1	Austria	19.38	—	—
2	Australia	—	870.00	—
3	Canada	17.76	—	—
4	Czech Republic	—	—	884.32
5	China	—	—	102.00^a
6	Ireland	19.04	758.10	—
7	Japan	—	—	3,569.10
8	Netherlands	—	1,082.72	—
9	Philippines	5.32	—	—
10	Romania	—	—	383.83
11	Singapore	—	—	2,364.70
12	South Korea	—	—	2,799.35
13	Spain	16.97	—	2,382.50
14	Taiwan	—	—	1,298.40
15	United Kingdom	19.25^b	—	—
16	United States	16.50–25.00^c	—	—

Source: ILO Statistics and Database, available at http://www.ilo.org/ (accessed June 19, 2007).

Notes: The International Labor Organization (ILO) reports labor rates in hourly, weekly, and monthly rates depending on how each country reports the data. The ILO reports rates in local currency. Rates have been translated in U.S. dollars using the average exchange rate for the year.

^a As reported by China Labor Watch, July 2006, pp. 1–4.

^b UK Statitistics Authority, “Wage Rates.” Available at http://www.statistics.gov.uk/ (accessed June 19, 2007).

^c U.S. Bureau of Labor Statistics, available at http://www.bls.gove/oes (accessed June 19, 2007).

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As shown in Table 1.1, wage rates range widely from country to country. China’s monthly wage rate, one of the lowest at $102.00, is one-thirty-fifth of Japan’s monthly rate of $3,569.10. It is no wonder, then, that international companies seek out countries where they can benefit from these low wage rates, provided the skill and productivity levels of the workers from the low-wage-rate countries are comparable to those of higher-wage-rate countries.

Businesses are adapting to a more global philosophy, as well. Globalization implies that the countries of the world are more interdependent on each other and that the people in these countries are affected by events and conditions outside their own country. Take for exampl...