globalization and international business transactions

Introduction
Globalization and International Business
Transactions

Evaluation
• Midterm Exams 20%
• Draft Report (500-1000 words) 20% Deadline 13 April
• Presentation 30% (During May)
• Final Report 30% (Deadline 14 June)

• Political Environment
• Culture
• Legal Environment
• Economic Environment
• Government influence (trade policies e.g., tariffs, subsidies and quotas, fiscal-monetary policy)
• Capital market and Exchange rates
• Exports-Imports and risks
• Trade agreements
• International institutions (IMF, WTO)

Reading List
• John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, Reid W.
Click (2022). INTERNATIONAL BUSINESS Environments & Operations,
17th EDITION, Pearson, Chapter 1
• Czinkota, M. R., Ronkainen, I. A., & Moffett, M.H. (2011).
International business. 8th Edition, John Wiley, Chapter 1

Factors in International Trade and
Business Operations
Figure 1.1 Factors in ITBO Operations

Factors in International Trade and Business
Operations
The conduct of a company’s international operations depends
on two factors: its objectives and the means by which it
intends to achieve them. Likewise, its operations affect,
and are affected by, two sets of factors: physical/social
and competitive, as you can see from this exhibit.
• Long Description:
• The details of the flow chart are as follows:
• The institutional and physical factors of operating
environment impact objectives and strategy of operations.
• The objectives and strategy of operations impact the
institutional and physical factors of operating
environment.
• The competitive factors of operating environment impact
means, which include modes, functions, and overlying

• Operating environment
• Institutional and physical factors
• Geographic influences
• Cultural factors
• Political policies and legal practices
• Economic forces
• Competitive factors
• Competitive product strategy
• Company resources and experience
• Competitors in each market
• Operations
• Objectives
• Sales expansion
• Resource acquisition
• Risk reduction

• Strategy
• Means
• Modes
• Merchandise exports and imports
• Service exports and imports
• Investments
• Functions
• Marketing
• Manufacturing and supply-chain management
• Accounting and finance
• Human resources
• Overlying alternatives
• Choice of countries
• Organization and control mechanisms.

• EU Farmers protest
• EU standards Turkish agricultural products

Free Zones
• Free zones are specific areas within a country
that are considered to be outside the customs
territory. Free Zones are enclosed areas with
specific regulations that provide favourable
conditions for businesses to boost the export
of goods and services.
• Free zones provide a more convenient and
flexible business environment to boost trade
volume and exports for certain industrial and
commercial activities compared to other areas
of the country.
• Since 1985, 18 free zones have been established
to boost and encourage export-focused

Activities of Free Zones
• In general, all kind of activities can be performed in Free Zones such as:
• Manufacturing
• Research and Development (R&D)
• Software
• General trading
• Storing
• Packing
• Banking and insurance
• Assembly and disassembly
• Maintenance services.

Objectives of Free Zones
• Promoting export oriented investment and production.
• Accelerating foreign direct investment and technology access.
• Directing enterprises towards export.
• Developing international trade.

Benefits of Free Zones
• Strategic Location
• Exclusion from corporate and income tax
• Easy Access to Europe Union countries
• Supply Chain Management
• Lower Costs
• Access to Domestic and Foreign Markets
• Reduced Bureaucratic Procedure

FREE ZONES IN Turkiye DATE OF EST.
1 MERSIN FREE ZONE 1985
2 ANTALYA FREE ZONE 1985
3 AEGEAN FREE ZONE 1987
4
ISTANBUL ATATURK AIRPORT
FREE ZONE
1990
5 TRABZON FREE ZONE 1990
6 ISTANBUL THRACE FREE ZONE 1990
7 ADANA YUMURTALIK FREE ZONE 1992
8
ISTANBUL INDUSTRY & TRADE
FREE ZONE
1992
9 SAMSUN FREE ZONE 1995
10 EUROPE FREE ZONE 1996
11 RIZE FREE ZONE 1997
12 KAYSERI FREE ZONE 1997
13 IZMIR FREE ZONE 1997
14 GAZIANTEP FREE ZONE 1998
15 TUBITAK-MRC FREE ZONE 1999
16 DENIZLI FREE ZONE 2000
17 BURSA FREE ZONE 2000
18 KOCAELI FREE ZONE 2000

The Relationship Between
Globalization and ITBO
• What is globalization?
• The connection between globalization and
ITBO

Globalization is the widening and deepening of
interdependent relationships among people from
different nations. The term sometimes refers to the
elimination of barriers to international movements of
goods, services, capital, technology, and people that
influence the integration of world economies.
Globalization enables us to get more variety, better
quality, or lower prices. The global connections
between supplies and markets result from the
activities of international business, which are all
commercial transactions that take place among
countries.
The global connections between supplies and markets
result from the activities of international trade and
business operations (ITBO), which are all commercial

In the world economy today, we see
• a shift away from self-contained national economies
with high barriers to cross-border trade and investment
• a move toward a more integrated global economic system
with lower barriers to trade and investment
• about $7.5 trillion in foreign exchange transactions
taking place everyday
• the establishment of international institutions

The effects of this trend can be seen
•in the cars people drive
•in the food people eat
•in the jobs where people work
•in the clothes people wear
•in many other ways

What Is Globalization?
Question: What is globalization?
• Globalization refers to the trend towards a more
integrated global economic system
Two key facets of globalization are:
• the globalization of markets
• the globalization of production

Country Focus: Outsourcing American
Healthcare
• Summary
• This feature explores the practice of outsourcing medical work to
other countries. In recent years, pressures to cut costs in the
medical industry have led to the practice of outsourcing. Today,
not only is paperwork outsourced to countries such as India, but
also the reading of x-rays. In some cases, patients, in an effort
to curb costs, are now choosing to have medical procedures
conducted in foreign countries.
• Suggested Discussion Questions
• 1. A decade ago the idea that medical procedures might move
offshore was unthinkable. Today it is a reality. What trends have
facilitated this process? Is the globalization of health care good
or bad for the American economy?
• Discussion Points: Advances in technology are a primary key to
making the outsourcing of medical work possible in recent years.
In particular, the Internet makes it possible to quickly transmit
large amounts of data to countries such as India where the
information can be processed and returned. In addition, the high
cost of medical care in countries like the U.S. is prompting people
to consider cheaper alternatives. The cost to repair a leaky heart
valve in India is about $10,000 including airfare, while in the

• 2. Is the globalization of health care good or bad for
patients? Who might benefit from the globalization of health
care? Who might lose?
• Discussion Points: This is a difficult question. We may argue
that the outsourcing of medical procedures to nations where
salaries of medical professional are lower clearly benefits
consumers. However, we can suggest that the level of care in
countries such as India may not be up to the standards found
in the United States, and that the process takes some control
out of the hands of the consumers. Certainly, health care
professionals in the United States see the outsourcing trend
in a negative light, however, medical insurance companies view
any means of cutting costs as a positive move. Most students
will probably agree that the current trend to outsource
medical procedures is just the beginning. The rising cost of
health care is likely to continue to put pressure on the
industry to find cheaper alternatives to handling not only
direct patient care, but also the paperwork involved. Most
students will probably agree that outsourcing to cut costs in
the paperwork end of the process makes sense, but may draw the
line at the outsourcing of medical procedures. Others
however, might point out that the care being offered by some
hospitals in countries like India is on par with American

The Globalization of Markets
• The globalization of markets refers to the merging of
historically distinct and separate national markets
into one huge global marketplace
• In many markets today, the tastes and preferences of
consumers in different nations are converging upon some
global norm
• Examples of this trend include Coca Cola, Starbucks,
Sony PlayStation, and McDonald’s hamburgers

The Globalization of
Production
• 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 (labour energy,
land, and capital)
• The goal for companies is to lower their overall cost
structure or improve the quality or functionality of
their product and gain competitive advantage
• Examples of companies doing this include Boeing and
Vizio

The Forces Driving Globalization
and ITBO
• Globalization
• Has been growing
• Is less pervasive than generally
thought
• Has economic and noneconomic dimensions

The Emergence
of Global Institutions
Several global institutions have emerged to
• help manage, regulate, and police the global market
place
• promote the establishment of multinational treaties to
govern the global business system

The Emergence
Notable global institutions include
• the World Trade Organization (WTO) which is responsible
for policing the world trading system and ensuring that
nations adhere to the rules established in WTO treaties
• In 2008, 151 nations accounting for 97% of world trade were
members of the WTO
• the International Monetary Fund (IMF) which maintains
order in the international monetary system

The Emergence
• the World Bank which promotes economic development
• the United Nations (UN) which maintains international
peace and security, develops friendly relations among
nations, cooperates in solving international problems
and promotes respect for human rights, and is a center
for harmonizing the actions of nations

Drivers of Globalization
Question: What is driving the move toward greater
globalization?
• There are two macro factors underlying the trend
toward greater globalization
1. declining trade and investment barriers
2. technological change

Declining Trade
and Investment Barriers
• International trade occurs when a firm exports goods or
services to consumers in another country
• Foreign direct investment (FDI) occurs when a firm
invests resources in business activities outside its
home country
• During the 1920s and 1930s, many nations erected
barriers to international trade and FDI to protect
domestic industries from foreign competition

Declining Trade
• After WWII, advanced Western countries began removing trade and
investment barriers
• Under GATT (the forerunner of the WTO), over 100 nations
negotiated further decreases in tariffs and made significant
progress on a number of non-tariff issues
• Under the WTO, a mechanism now exists for dispute resolution and
the enforcement of trade laws, and there is a push to cut tariffs
on industrial goods, services, and agricultural products

Declining Trade
• Lower trade barriers enable companies to view the world
as a single market and establish production activities
in optimal locations around the globe
• This has led to an acceleration in the volume of world
trade and investment since the early 1980s

The Role of
Technological Change
• The lowering of trade barriers made globalization of
markets and production a theoretical possibility,
technological change made it a tangible reality
• Since World War II, there have been major advances in
communication, information processing, and
transportation

The Role of
• The development of the microprocessor has lowered the cost of
global communication and therefore the cost of coordinating and
controlling a global organization
• Web-based transactions have grown from virtually zero in 1994 to
$250 billion in 2007 in the U.S. alone, and Internet usage is up
from fewer than 1 million users in 1990 to 1.3 billion users in
2007 and 5.3 billion users in 2022 globally.
• Commercial jet aircraft and super freighters and the introduction
of containerization have greatly simplified trans-shipment from
one mode of transport to another

The Role of
Question: What are the implications of technological
change for the globalization of production?
• Lower transportation costs make a geographically
dispersed production system more economical and allow
firms to better respond to international customer
demands

The Role of
Question: What are the implications of technological
change for the globalization of markets?
• Low cost communications networks have helped create
electronic global marketplaces
• Low cost transportation have enabled firms to create
global markets, and have facilitated the movement of
people from country to country promoting a convergence
of consumer tastes and preferences

The Changing Demographics
of the Global Economy
In the 1960s:
• the U.S. dominated the world economy and the world
trade picture
• the U.S. dominated world FDI
• U.S. multinationals dominated the international
business scene
• about half the world-- the centrally planned economies
of the communist world-- was off limits to Western
international business
Today, much of this has changed.

Country Focus: India’s
Software Sector
• Summary
• This feature explores the growth of India’s software
industry. Starting from nothing just twenty-five
years, the industry now generates revenues of nearly
$40 billion, and exports of $31.3 billion. With global
spending on information technology expected to be some
$260 billion in 2009, Indian companies are primed to
capture a significant share of the pie, forcing their
Western counterparts to make changes to their
strategies.
• 1. What factors have contributed to the growth of
India’s software industry?
• Discussion Points: Four key factors have contributed to
the growth of India’s software industry. First is the
huge number of engineers in India. Some 400,000
engineers graduate from Indian universities every year.
A second factor is India’s low wage structure. Indian

• 2. How has India’s software industry changed in
recent years? What are the implications of these
changes for American companies like IBM and
Microsoft?
• Discussion Points: There has been a gradual shift
in the Indian software industry in recent years.
Initially, Indian firms focused on the low end of
the industry to supply basic software development
and testing services to Western firms. Today
however, many companies have moved into higher end
services to compete for large software development
projects, business outsourcing contracts, and
information technology consulting services. This
new competitive threat is forcing American firms
like IBM and Microsoft to rethink their global
strategies. Some Western companies are now
investing in India with the goal of capturing some

The Changing World Output
and World Trade Picture
• In the early 1960s, the U.S. was the world's dominant
industrial power accounting for about 40.3% of world
manufacturing output
• By 2007, the U.S. accounted for only 20.7%
• Other developed nations experienced a similar decline

The Changing World Output
and World Trade Picture
• Rapid economic growth is now being experienced by countries such
as China, Thailand, Republic of Korea, Singapore, Taiwan, Hong
Kong and Malaysia
• Further relative decline in the U.S. share of world output and
world exports seems likely
• Forecasts predict a rapid rise in the share of world output
accounted for by developing nations such as China, India,
Indonesia, Thailand, and South Korea, and a decline in the share
by industrialized countries such as Britain, Japan, and the United
States
• So companies may find both new markets and new competitors in the
developing regions of the world

The Changing World Output and World Trade
Picture
The Changing Demographics of World GDP and Trade

Year-on-year growth rates (%) in the value of exports to all countries by
source country

The Changing Foreign
Direct Investment Picture
•The share of world output generated by developing
countries has been steadily increasing since the 1960s
•The stock of foreign direct investment (total cumulative
value of foreign investments) generated by rich
industrial countries has been on a steady decline
•There has been a sustained growth in cross-border flows
of foreign direct investment
•The largest recipient of FDI has been China

Percentage Share of Total FDI Stock, 1980 - 2006

FDI Inflows, 1988 - 2007

The Changing Nature of
the Multinational Enterprise
• A multinational enterprise is any business that has
productive activities in two or more countries
• Since the 1960s,
• there has been a rise in non-U.S. multinationals
• there has been a rise in mini-multinationals

Management Focus: China’s Hisense
– An Emerging Multinational
• Summary
• This feature examines the growth of Hisense which began in
1969 as a state-owned factory with just 10 employees. Over
the years, the company emerged as one of China’s leading
makers of television sets. In 1994, China relaxed its hold
on the company and Zhou Houijan was appointed CEO. Under
Zhou’s leadership Hisense has become as one of China’s
premier manufacturers of consumer appliances and
telecommunications equipment.
• 1. What makes Hisense different from other manufacturers of
consumer electronics? What factors have contributed to its
success?
• Discussion Points: The success of Hisense can be attributed
to not only its low cost structure, but also the company’s
skill in product innovation. In fact, Hisense believes that

• 2. Why has Hisense established multiple R&D
centers? How do these R&D centers fit into the
firm’s global strategy?
• Discussion Points: In 1994, Hisense established
its first R&D center in China. Since then, the
company has also established R&D centers in
South Africa and Europe, and is scheduled to
open an R&D center in the United States in the
near future. Being innovative is central to
Hisense’s strategy.
• Having multiple R&D centers allows Hisense to
be closer to its markets, and should help the
company better serve customer needs and
preferences.

• The globalization of the world economy has resulted in a decline
in the dominance of U.S. firms in the global marketplace
• In 1973, 48.5 % of the world’s 260 largest MNEs were U.S. firms
• By 2006, just 24 of the world’s 100 largest non-financial MNEs
were from the U.S., 13 were from France, 12 from Germany, 12
were from Britain, and 9 were from Japan, and 7 of the world’s
largest 100 MNEs were from developing economies

• While most international trade and investment is
conducted by large MNEs, many small and medium-size
firms are expanding internationally
• The Internet has made it easier for many smaller
companies to build international sales

The Changing World Order
• Today, many markets that had been closed to Western firms are
open
• The collapse of communism in Eastern Europe has created a host
of export and investment opportunities
• Economic development in China has created huge opportunities
despite continued Communist control
• Free market reforms and democracy in Latin America have created
opportunities for new markets and new sources of materials and
production

The Global Economy
of the Twenty-First Century
• A more integrated global economy presents new
opportunities for firms, but it can also result in
political and economic disruptions that may throw plans
into disarray

The Globalization Debate
Question: Is the shift toward a more integrated and
interdependent global economy a good thing?
• Many experts believe that globalization is promoting
greater prosperity in the global economy, more jobs,
and lower prices for goods and services
• Others feel that globalization is not beneficial

Antiglobalization Protests
Question: What are the concerns of critics of
globalization?
• Anti-globalization protesters now turn up at almost
every major meeting of a global institution
• Protesters fear that globalization is forever changing
the world in a negative way

Globalization, Jobs, and
Income
• Critics of globalization worry that jobs in advanced economies
are being lost to low-wage nations
• Supporters of globalization disagree, claiming that the benefits
of free trade outweigh its costs
• While some jobs may be lost, the economy as a whole is better
off
• Supporters argue that free trade will result in countries
specializing in the production of those goods and services that
they can produce most efficiently, while importing goods and
services that they cannot produce as efficiently, and that in
doing so, all countries will gain

• Country Focus: Protesting Globalization in
France
• Summary
• This feature describes the anti-globalization
protests in France in 1999. The protests, led
by activist Jose Bove, started when the U.S.
retaliated against EU bans on beef imports by
imposing a 100% tariff on some EU products.
Bove and his associates targeted McDonald’s,
and also California winemaker Mondavi as
symbols of their opposition to American
investments. Still, despite the protests,
foreign investment in France is at record
highs, and ironically, so are French
investments abroad.

• 1. Consider the trade war that initiated the
protests led by Bove. The EU instituted
restrictions on the import of hormone treated beef
because it was feared that the product might lead
to health problems. The WTO stated that the
restrictions were prohibited under WTO agreements
and ordered the EU to lift the restrictions or
face retaliatory measures. In your opinion, did
the WTO act appropriately? Should a government
be permitted to make decisions as to what products
are or are not available to consumers? Should the
WTO? What do you think would have happened if the
WTO had ruled in favour of the EU?
• Discussion Points: We may argue that the European
Union’s restrictions against hormone treated beef
were nothing more than thinly veiled
protectionism. Accordingly, we feel that the
World Trade Organization was justified in its
ruling.
• However, we may suggest that the European Union
was looking out for its citizens when it

Globalization, Labour Policies,
and the Environment
•Critics of globalization argue that that free trade encourages
firms from advanced nations to move manufacturing facilities
offshore to less developed countries with lax environmental and
labour regulations
•Supporters of free trade point out that tougher environmental
regulation and stricter labour standards go hand in hand with
economic progress and that as countries get richer as a result
of globalization, they raise their environmental and labour
standards
• Free trade does not lead to more pollution and labour
exploitation, it leads to less

Globalization and
National Sovereignty
• Critics of globalization worry that economic power is shifting
away from national governments and toward supranational
organizations such as the WTO, the European Union (EU), and the UN
• Supporters of globalization argue that the power of these
organizations is limited to what nation-states collectively agree
to grant
• The organizations must be able to persuade members states to
follow certain actions
• Without the support of members, the organizations have no power

Globalization and the World’s
Poor
• Critics of globalization argue that the gap between rich and poor
has gotten wider and that the benefits of globalization have not
been shared equally
• Supporters of free trade suggest that the actions of governments
have made limited economic improvement in many countries
• Many of the world’s poorest nations are under totalitarian
regimes, suffer from endemic corruption, have few property
rights, are involved in war, and are burdened by high debt

Managing in the Global Marketplace
Question: What does the shift toward a global economy
mean for managers within an international business?
• Managing an international business (any firm that
engages in international trade or investment) differs
from managing a domestic business in four key ways

Managing in the Global Marketplace
1.Countries differences require companies to vary their
practices country by country
2.Managers face a greater and more complex range of
problems
3.International companies must work within the limits
imposed by governmental intervention and the global
trading system
4.International transactions require converting funds
and being susceptible to exchange rate changes

Factors in Increased Globalization
• Rise in and application of technology
• Liberalization of cross-border trade
and resource movements
• Services that support ITBO
• Growth in consumer pressures
• Increase in global competition
• Changes in political situations and
government policies
• Expansion of cross-national
cooperation

• These factors include the rise in and application of technology. Many of the
proverbial “modern marvels” and efficient means of production have come
about fairly recently. These include new products, such as handheld mobile
communications devices, as well as new applications of old products, such as
Indian guar beans in oil and natural gas mining. Thus, much of what we trade
today either did not exist or was unimportant in trade a decade or two ago.
Strides in communications and transportation now allow us to discover,
desire, and demand goods and services from abroad.
• To protect its own industries, every country restricts the entry and exit of not
only goods and services but also the resources—workers, capital, tools, and
so on—needed to produce them. Over time, however, most governments
have reduced such restrictions, primarily for three reasons: their citizens want
a greater variety of goods and services at lower prices, competition spurs
domestic producers to become more efficient, and they hope to induce other
countries to lower their barriers in turn.

• Companies and governments have developed services that facilitate global
commerce. For example, because of bank credit agreements—clearing
arrangements that convert one currency into another and insurance that
covers such risks as nonpayment and damage en route—most producers can
be paid relatively easily for their sales abroad.
• Today, only a few countries are heavily isolated economically or do business
almost entirely within a political bloc. In fact, political changes sometimes
open new frontiers. And governments support programs, such as improving
airport and seaport facilities, to foster efficiencies for delivering goods
internationally.
• Increased competitive pressures can persuade companies to buy or sell
abroad. For example, a firm might introduce products into markets where
competitors are already gaining sales, or seek supplies where competitors are
getting cheaper or more attractive products.

Governments have come to realize that their own interests can be addressed
through international cooperation by means of treaties, agreements, and
consultation. The willingness to pursue such policies is due largely to three
needs: to gain reciprocal advantages, to attack problems jointly that one country
acting alone cannot solve, and to deal with areas of concern that lie outside the
territory of any nation
More consumers know more today about products and services available in
other countries, can afford to buy them, and want the greater variety, better
quality, and lower prices offered by access to them. However, this demand is
spread unevenly because of uneven affluence, both among and within countries
as well as from year to year.

The Criticisms of
Globalization and ITBO
Objective 1.4
• Threats to national sovereignty
• Environmental stress
• Growing income inequality and personal
stress

Anti-globalization forces regularly protest at home and at
international conferences about governmental policies. We
focus here on three issues: threats to national
sovereignty, environmental stress, and growing income
inequality and personal stress.
You’ve probably heard the slogan “Think globally, act
locally,” which means giving precedence to local interests
over global ones. Some observers worry that the
proliferation of international agreements, particularly
those that undermine local regulations on how goods are
produced and sold, will diminish a nation’s sovereignty –
its freedom to “act locally” and without externally imposed
restrictions.
By opening its border to trade, it must either forgo its
labour and environmental priorities to be competitive or
face the downside of fewer jobs and less economic output.

Similarly, critics complain that large
international corporations are powerful enough to
dictate their operating terms, exploit legal
loopholes to avoid political oversight and taxes,
and counter the small economies’ best interests by
favoring their home countries’ political and
economic interests. Finally, critics charge that
globalization homogenizes products and how they are
made, social structures, and even language, thus
undermining the cultural foundation of sovereignty.
Much critique of globalization revolves around the
economic growth it brings. One argument is that
growth in both production and international travel
consumes more nonrenewable natural resources and
increases environmental damage. In addition,

• By various measurements, income inequality, with
some notable exceptions, has been growing both
among and within many countries. Critics claim
that globalization has affected this disparity by
helping to develop a global superstar system,
creating access to a greater supply of low-cost
labor, and developing competition that leads to
winners and losers.
• Some workers have lost economic and social
standing as manufacturing jobs have shifted to
other countries. The challenge, therefore, is to
maximize the gains from globalization while
simultaneously to minimize the costs borne by the
losers.
• Some repercussions of globalization can’t be
measured in strictly economic terms, such as

Why Companies Engage in ITBO
Objective 1.5
• Sales expansion
• Resource acquisition
• Risk reduction

Pursuing international sales usually increases the
potential sales and potential profits. Obviously, there
are more potential consumers I the world than in any single
country.
Foreign locations may give companies lower costs, new or
better products and components, and additional operating
knowledge.
International operations may reduce operating risk by
smoothing sales, profits, and supplies and preventing
competitors from gaining advantage. Selling in countries
with different timing of business cycles can decrease
swings in sales and profits. Moreover, by obtaining
supplies of products or components both domestically and
internationally, companies may be able to soften the impact
of price swings or shortages in any one country.
Finally, companies often go international for defensive

ITBO Operating Modes
Objective 1.6
• Merchandise exports and imports
• Service exports and imports
• Investments

When pursuing ITBO, an organization must decide on suitable
modes of operations.
Merchandise exports and imports are the most popular modes.
These are tangible products that are sent out of and brought into a
county.
Service exports and imports are referred to as invisibles. The
provider and receiver of payment makes a service export; the
recipient and payer makes a service import. Services constitute the
fastest growth sector in international trade and take many forms
including tourism and transportation, service performance, and asset
use.

Dividends and interest from foreign investments are also service
exports and imports because they represent the use of assets
(capital). In foreign direct investment (FDI), sometimes referred to
simply as direct investment, the investor takes a controlling interest
in a foreign company. When two or more companies share
ownership of an FDI, the operation is a joint venture. A portfolio
Investment is a noncontrolling financial interest in another entity. It
consists of shares in or loans to a company (or country) in the form
of bonds, bills, or notes purchased by the investor.

Types of International Trade
and Business Organizations
• International company
• Any company operating in more
than one country
• Multinational enterprise (MNE)
• Transnational company (TNC)
TNCs are corporations that operate in many companies and who do not
have a centralised management system. In other words, they don't have a
central headquarters in one country which makes all the decisions
globally ( e.g., Coca-Cola)
MNCs are corporations that operate in many companies and who do have a
centralised management system (McDonald’s, Starbucks, Apple)

Why Do Companies’ External
Environments Affect How They May
Best Operate Abroad? (1 of 3)
Objective 1.7
• Physical factors
• Geography influences
• Demographic influences

The conditions in a company’s external environment
may affect its international operations. A good
understanding of what one will encounter helps
reduce operating risks, and smart companies develop
the means to implement international strategies by
examining physical factors, institutional factors,
and competitive factors.
Physical factors such as geography and demography,
can affect how companies market products, employ
personnel, and even maintain accounts. Managers
who are knowledgeable about geography can better
determine the location, quantity, quality, and
availability of the world’s natural resources and
conditions. Geographic barriers—mountains,
deserts, jungles, and land-locked areas—often

Objective 1.7
• Institutional factors
• Political policies
• Legal policies
• Behavioural factors
• Economic forces

Institutions refer to “systems of established and
prevalent social rules that structure social
interactions. Language, money, law, systems of
weights and measures, table manners and firms (and
other organizations) are thus all institutions”.
Politics often determines where and how IB can take
place.
Each country has its own laws regulating business.
Agreements among countries et international law.
Domestic and international laws play a big role in
determining how a company can operate abroad.
Domestic law includes both home- and host-country
regulations on such matters as taxation,
employment, and foreign-exchange transactions.
International law determines how earnings are taxed

Countries’ behavioural norms influence how
companies operate there.
Economics helps explain why countries exchange
goods and services, why capital and people travel
among countries doing business, and why one
country’s currency has a certain value compared to
another’s. Economics also helps explain why some
countries can produce goods or services for less.
And it provides the analytical tools to determine
the impact of an international company’s operations
on the economies of both host and home countries,
as well as the impact of the host country’s
economic environment on a foreign firm.

Objective 1.7
• Competitive factors
• Competitive product strategy
• Company resources and experience
• Competitors faced in each market

In addition to its physical and social environments,
every globally active company operates within a
competitive environment. Some of these factors
include product strategy, resource base and
experience, and competitor capability.
Products compete by means of cost or differentiation
strategies, the latter usually by developing a
favorable brand image, usually through advertising or
from long-term consumer experience with the brand; or
developing unique characteristics, such as through R&D
efforts or different means of distribution.
Other competitive factors are a company’s size and
resources compared to those of its competitors. In
large markets, companies must invest much more to
secure national distribution than in small markets.

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