ebook International Business

POLITEKNIK SEBERANG PERAI DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

ACKNOWLEDGEMENT

Praise to Allah the Almighty for giving me the strength in making this module as a
reality. I would like to record my utmost gratitude to my colleagues in Polytechnic Seberang
Perai who contributed ideas and helped me to complete this International Business module and
the Higher Ministry of Education for giving me the scholarship to pursue my MBA (International
Business) thus realizing my dream. Thank you all! Hopefully this module can be use as
guideline to International business course journey.

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

TABLE OF CONTENT

CHAPTER 1 OVERVIEW OF INTERNATONAL BUSINESS 4
CHAPTER 2 POLITICAL AND LEGAL SYSTEM IN INTERNATIONAL 19

CHAPTER 3 INTERNATIONAL ORGANIZATIONAL DESIGN 39
CHAPTER 4 ENTRY AND EXPANSION 60
CHAPTER 5 THE CULTURE ENVIRONMENT 86

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

CHAPTER 1
OVERVIEW OF INTERNATIONAL

BUSINESS

LEARNING OUTCOMES

At the end of this chapter, you will be able to:
 Explain international business overview
 Explain the influence of external and Internal Environment Forces.
 Elaborate the drivers of globalization in international business
 Discuss the implication of International Business to functional areas

1.0 Introduction
Globalization influence our daily experiences and activities. The growing of population and
the changes of environment, each countries need to exchange the physical and intellectual
assets to assure all people or citizen fulfil their need and demand. Simultaneously,
business transaction has become easier than ever before.

1.1 Explain international business overview
International Business is all business transactions that involve two or more countries. It
comprises a large and growing portion of the world’s total business. Any firm that engages
in International trade or investment is known as international business. A business that is
primarily based in a single country but acquires some meaningful share of its resources or
revenues (or both) from other countries.

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

Specifically, business activities that involve the exchange many physical and intellectual
assets including product, resources, goods, services, knowledge, skills, or information
across national boundaries. A specific entity such as a multinational enterprises or
international business company that engages in business among multiple countries.

Name the location of each brand:

BRAND COUNTRY

IKEA SWEEDEN

COCA COLA USA

NESCAFE SWITZERLAND

LIPTON UNITED KINGDOM

MILO AUSTRALIA

UBER USA

DHL GERMANY

FEDEX USA

HUAWEI CHINA

AL JAZZIRA QATAR

LOUIS VUTTON FRANCE

SAMSUNG SOUTH KOREA

SONY JAPAN

1.2 Meaning of Domestic Business

Trading that is aimed at a single market and referred to as domestic trading. The firm faces only
one set of competitive, economic, and market issue and essentially must deal with only one set
of customers.

The difference between Domestic and international business are as follows:
a. Distance
The distance involved in export of goods in external trade is generally greater than on
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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

the domestic trade.

b. Language differences
There are differences in the languages of the nations of the world. The overseas traders
should be very careful in preparing the publicity material in the languages of the trading
country

c. Cultural difference
A producer should have full knowledge about the market of his products. For exporting
goods particularly a thorough research is undertaken.

d. Documentations
In the home trade there are few documents involved in the exchange of goods.

e. Payments
In the internal trade, the goods are exchanged in the currency unit of the country. In
case of foreign trade currencies differ widely throughout the world and those also vary
in value.

f. Transport and insurance cost
The transport and insurance costs are less in case of domestic trade. For the exports, on
the other hand the cost of transport is high and the insurance is complicated.

g. Technical difference
In the national market the difference in the technical specification for goods and their
requirements is not wide.

h. Tariff barriers
In the national trade, there are no custom duties, exchange restrictions, fixed quotas or
other tariff barriers.

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1.2 Explain the influence of external and Internal Environment Forces.
The international business environment can be defined as the environment in different
sovereign countries, with factors exogenous to the home environment of the organization,
influencing decision-making on resource use and capabilities.

International environments can be divided into external and internal environment.
1.2.1 External Environment
a) Economic Environment Defined
The economic environment consists of external factors in a business' market and the
broader economy that can influence a business.

The economic environment can be divide into the microeconomic environment,
which affects business decision making such as individual actions of firms and consumers
and the macroeconomic environment, which affects an entire economy and all of its
participants.
Many economic factors act as external constraints on your business, which means that you
have little control over them.

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

Economic factors exert huge impacts on firms working in an international business
environment. The economic environment relates to all the factors that contribute to a
country's attractiveness for foreign businesses, such as monetary systems, inflation, and
interest rates.

Why Is the Economic Environment Important?

The economic environment of business will play a pivotal role in determining the success or
failure of a business.

The example: If interest rates are too high, the cost of borrowing may not permit a business
to expand. On the other hand, if unemployment rate is high, businesses can obtain labor at
cheaper costs.

However, if unemployment is too high, this may result in a recession and less discretionary
consumer spending resulting in insufficient sales to keep the business going.

Tax rates will take a chunk of your income and currency exchange rates can either help or
hurt the exporting of your products to specific foreign markets.

b) Political Environment & Legal Environment

The political environment in IB consists of a set of political factors and government activities
in a foreign market that can either facilitate or hinder a business' ability to conduct business
activities in the foreign market. The political environment in a country influences the
legislation and government rules and regulations under which a foreign firm operates. There
is often a high degree of uncertainty when conducting business in a foreign country, and this
risk is often referred to as political risk or sovereign risk.

c) Cultural Environment

To understand the customers of a particular region, studying their social and cultural
environment is very important. The environment shapes the values, behaviors, attitudes and
aspirations of people. The study of social hierarchy, social norms and customs, regional/

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religion based groups and their behavior helps us to understand the cultural environment of
a place. This helps a marketer to position the products appropriately. Miscommunication
about culture may effect to failure product in international business. Example: Arab Saudi as
especially in Mecca and Madinah respect to woman, they not allow to display the
advertising about free hair woman poster or picture.
d) Competition environment
A competitive environment is the dynamic external system in which a business competes and
functions. The more sellers of a similar product or service, the more competitive the
environment in which you compete. Look at fast food restaurants - there are so many to
choose from; the competition is high. The unique features of their product will offer the
competitor advantage. In other hand, if you compare to airlines, they can target or position
their services with different target customer the servicing Hawaii, very few actually fly to the
islands.

Direct competitors are businesses that are selling the same type of product or service as
you. For example, McDonalds is a direct competitor with Burger King. Indirect competitors
are businesses that still compete even though they sell a different service or product. The
products or services offered by indirect competitors tend to be those that can be substituted
for one another.
Again, considering travel, you have the option to travel by plane, train, or car. Therefore,
airlines are also competing with train lines and buses (assuming the travel does not go
overseas).
f) Technology Environment
The technological environment comprises factors related to the materials and machines
used in manufacturing goods and services.

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1.2.2 Define the Internal environments in international business

a) Capital

It refer to the fund ownership bring to operates in the international business activities.
Including cash and asset brought to the company as initial outlay. There different amount of
capital depend on different size, strategy and company functional. There two type of capital
such as finance and asset.

b) Raw Material

Raw material define as input to produce the company product or services. Each process
need sources in a compilation process such as component, parts, tools and supply chain
from many countries to produced finish good. A global supply chain is the integrated
network of sourcing, production, organized on a worldwide. For example automobile
industries is a combination many Small medium international enterprises (SMIEs) to support
their production line likes tire, steering, engine, body, screw, signal lamp, hand break and
others. Construction’s company required expertise from other country.

c) People

Demand in international product based on population and demographic factor. People also
involve in decision making, labor and operator to the global business. All the decision
related with people should be consider as important and unique. For example:
communication or business meeting conducted between Russian and Malaysian look more
complicated compare to same county meeting. The miscommunication about culture may
face to risk in business deal.

d) Personnel Management

Personnel management refer to manage Human Resources department. It involves the
administrative tasks that address the hiring and compensation of a company's employees. As
a person to in charge this task, they need to survey or studying each countries character
before make decision to joint international business. If company fail to understand culture

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environment they may face with miscommunication about their habit, lifestyle and difficult
to train workers to apply company objective and mission.
e) International Finance
Involve in time decision, distance, corporate/ governance, currency and interest rate. Refer to
f) Production
Production in International business refer to process to produce product and assembly all
the raw material, components, part, tools and semi process goods to finished good. Each
level of production need many supplier from multiple country. Company need to assure
their supply chain can work efficient and effectively. It refer to logistic, shipping and
inventory.
g) International marketing

Top management has to decide marketing ideas about how to evaluate local market
characteristics which affect the advertising and promotion of products.

1.3 Elaborate the drivers of globalization in international business
Globalization described social, technological, cultural & political changes resulting from
interdependency & integration among people & business from all over the world. It can be
described as an ongoing process in which regional economies, societies and cultures become
integrated with and interdependent on one another. Globalization is the process that arises
spontaneously in the market and acts by developing a progressive international division of
labor, eliminating restrictions, reducing transportation and communication cost.

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Exhibit 1: Based on boing 787 Forbes, April 17 2006
1.3.1 Reasons motives for entering foreign market in international business

a. To Expand Sales
Companies’ sales are dependent on two factors: the consumers’ interest in their
product or services and the consumers’ ability and willingness to buy them.

b. Acquire Resources: products, services, technology flexibility, and information
Most country need to exchange resources, integrations labor cost to get efficiency
and effective production.

c. Cost efficiency: This is the primary rational for sourcing business abroad. To reveal
typical labor cost per hour of workers in various labor cost in emerging market such
as Indonesia and Mexico is far less in advanced economies.

d. Minimize Competitive Risk
Companies move internationally for defensive reasons. Profits from one market can
be used to expand operations in other markets

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e. Diversify Sources of Sales and Supplies
Firms diversify market segment according to demographic factors in target countries
(age, gender, income) & diversify their supply sources by sourcing raw materials,
from other countries (Example: firms involved in apparel industry can sell their
products to buyers from various age groups (children to adults) using same raw
materials in their production process

FIVE (5) Advantages of Globalization
Financial: globalization has resulted in the emergence of worldwide financial markets and
better access to external financing for borrowers.
Economic: globalization help companies to have better access to much wider markets,
based on freedom of exchange of goods and capital.
Political: globalization could mean the creation of a world government which regulates the
relationships among governments and guarantee the rights arising from social and
economic globalization
Technological: globalization has contributed to the development of a global
telecommunication infrastructure and greater technologies such as social networking
websites such as Facebook, twitter, wireless telephone etc.
Cultural: globalization has contributed to the growth of cross-cultural contacts. Some of the
examples are in the aspect of foods; Malaysian may enjoy foreign foods from local market.

FIVE (5) Disadvantages of Globalization
Competition:
Since the world market has become more integrated, which creates a more companies in
various industries and create intense competition.

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May put smaller companies at disadvantage as they do not have resources to compete at
global scale.
Environment:
Many factories are built in developing countries that have resulted higher levels of pollution
Which increased inequality and environmental degradation. In Midwestern United States,
globalization had lowered the quality of life.
Economic/ Financial Crisis:
Economic depression or financial crisis may effect across the globe because globalization had
created interdependence between countries.
For instance, European Financial Crisis 2008 had effected all European countries and countries
and countries around the world
Legal and ethical issues:
Piracy or copyright infringement is unauthorized use of material that is governed by
intellectual property rights (music, video, paintings, and books)
Violates the copyrights owners’ exclusive rights such as the right to reproduce perform the
copyrighted work
Example: unlawful downloading and sharing recorder music
The political norms and rules that govern their functions (constitution, election law)
Concept in which theoretically regarded as a way of the government makes a policy
And also to make them more organized in their administration

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1.4 Discuss the Implication of International Business to Functional areas

Marketing Strategies: Marketing Orientations, segmentation and targeting

1.4.1 Marketing Strategies

The international marketer must deal with two levels of uncontrollable uncertainty. Each

foreign country in which a company operates adds its own unique set of uncontrollable

example: Whether pan-European advertising is possible and when global advertising is most

effective and when modified advertising is necessary. Other than that marketers need to

understand the effects of a single European market on advertising and what the impact is of

limited media, excessive media, and government regulations on advertising and promotion

budgets.

Marketing
(Uncontrollable)

Competitive

Political Domestic
/legal Environment
(Uncontrollable)
Competitive Structure Economic
Foreign
Cultures Environment (
Uncontraollable)
Political
Climate

Geography Economic Technology
and Climate
Infrastuctu Environmental
re Uncontrollable
country market

Structure of Distribution

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1.4.2 What is international finance and why does it play a special role in international
business?

i) Time
Distance and different legal, mental and cultural situations cause time delays which make
finance necessary

ii) Mental/corporate governance different:
Unknown (formal) laws and legal norms and Informal: Unknown business customs, business
culture, language, other signals“, impossibility of enforcing legal rights (duration, cost,
corruption etc. as consequence: higher risk and higher barriers to financing

iii) Currency different
Convertibility
Exchange rate changes (positive and negative)
Interest rate differences

iv) Finance as Marketing as instrument
Time barriers and longer delivery times effect for finance, Non availability of foreign exchange
in developing + transformation countries.

1.4.3 Global Supply Chain Production in International Business
i) Production transforms inputs into a more highly valued and desirable product or service.
The goal: to use capital, energy, knowledge, and labor are used to build processes that make
low-cost, high-quality goods compare to others country.
ii) Logistics moves and stores goods so they are available for use in operations or for sale to
customers. Logistics seeks to leverage critical activities like transportation, warehousing, and

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order processing to make sure materials and products are where they need to be when they
need to be at the lowest cost.
1.4.4 Human Resources in International Business
Determine the productivity and quality of the system; provide the creativity and passion
that determines success; requires education and training to interact with International
people or human resources. The decision in what types of organization design should
company apply.
The International Impact on world’s economy

a. Advances in communication, technology and transportation
b. Economy of scale ( sourcing, marketing, R&D)
c. Reduction of poverty rate
d. Increase or decreasing cost of living
e. The dis-survival of infants industries
f. Cost of living
g. Mass unemployment
h. Be closer to supply sources

CHAPTER REVIEW:
o What is International Business
o Briefly explain Difference between domestic and international

tradeDiscusss the benefit of international business
o Explain the reason why companies are moving towards the international

businessDiscuss the international environments in international business.
o Discuss All About the globalization

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QUESTIONS
1. Before firms go international, they should consider the risk for the company. Describe the
external environment to international business as stated below :
i.Economic Environment [5 marks]
ii.Political Environment [5 marks]
iii.Cultural Environment [5 marks]
2.List down THREE(3) uncontrollable forces and TWO(2) controllable forces that influence
international business. : [15marks]
3.5 positive impact of globalization in International Business: [15marks]
4. Described social, technological, cultural and political changes resulting from interdependency
and integration among people and business from all over the world.

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CHAPTER 2

POLITICAL AND LEGAL SYSTEM IN
INTERNATIONAL

LEARNING OUTCOMES

At the end of this chapter, you will be able to explain :
 Explain the political environment in international business
 Identify three major types of political systems
 Describe the relationship between political and economic
 Highlight country risk produced by political systems in
 Study the managing of country risks in international
 Discuss the legal environment in international business
 Identify the types of legal systems in international business
 Compare among types of legal systems in international

2.0 Introduction
Learning Objectives: In this chapter, we intend to introduce the students to the nature of country
risk, political and legal environments in international business, political systems, legal systems,
participants in political and legal systems, types of country risk produced by political systems and
finally managing country risk.

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The Nature of Country Risk
Country risk is exposure to potential loss or adverse effects on company operations and
profitability caused by developments in a country’s political and/or legal environments. Also
referred to as political risk, it is one of the four major types of international business risks that
we talked about in a previous lecture. While the immediate cause of country risk is a political or
legal factor, underlying such factors may be economic, social or technological developments.

Some of the dimensions of country risk prevalent in international business would include:
harmful or unstable political system; laws and regulations unfavorable to foreign firms;
inadequate or underdeveloped legal system; bureaucracy and red tape; corruption and other
ethical blunders; government intervention, protectionism, barriers to trade and investment; and
mismanagement or failure of the national economy.
Government intervention, protectionism, and barriers to trade and investment are particularly
notable in international business. Mismanagement or failure of the national economy can lead
to financial crises, recessions, market downturns, currency crises, and inflation.

Political and Legal Environments in International Business
A political system is a set of formal institutions that constitute a government. It includes

legislative bodies, political parties, lobbying groups, and trade unions. The principal functions of
a political system are to provide protection from external threats, establish stability based on
laws, and govern the allocation of valued resources among the members of a society. A political
system also defines how these groups interact with each other.

A legal system is a system for interpreting and enforcing laws. The laws, regulations, and
rules establish norms for conduct. A legal system incorporates institutions and procedures for
ensuring order and resolving disputes in commercial activities, as well as taxing economic output
and protecting intellectual property and other assets. Adverse developments in political and legal
systems give rise to country risk. They can result from installation of a new government, shifting
values or priorities, and the creation of new laws or regulations. For

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example, a new import tariff may increase the cost of a key component used to manufacture a
product. A modification in labor law may alter the hours the firm’s employees are allowed to
work. The installation of a new political leader may lead to government takeover of corporate
assets. At one point, the Beijing government announced that foreign investments in China’s
internet industry were illegal. By this time Western firms had already invested millions of dollars.
Even where Western firms obtain favorable judgments in the courts, they may not be enforced.

2.1 Political Systems
The important part of any business decisions is accessing the political environment in which a
firm operates.

Political-legal Environment is a collection of factors, such as the general state of politics, the
degree of politicalisation of business and economic issues, the level of political morality, the law
and order situation, political stability, the political ideology and practices of the ruling party.

The purposefulness and efficiency of governmental agencies, the extent and nature of
governmental intervention in the economy and the industry.Government policies (fiscal,
monetary, industrial, labour and export-import policies), specific legal enactments and
framework in which the enterprise has to function and the degree of effectiveness with which
they are implemented, public attitude towards business in general and the enterprise in
particular, and so on.

Recent history has witnessed three major types of political systems:

a. Totalitarianism
Well-known totalitarian states from the past would include Nazi Germany (1933-1945), Spain
(1939-1975), China (1949-1980’s), and the Soviet Union (1981-1991).
Under totalitarianism, the state attempts to regulate most aspects of public and private behavior.
A totalitarian government seeks to control not only all economic and political matters but the

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

attitudes, values, and beliefs of the citizenry. Totalitarian states are generally either theocratic
(religion-based) or secular (non-religion-based). Usually there is a state party led by a dictator.
Party membership is mandatory for those seeking to advance within the social and economic
hierarchy. Power is maintained by means of secret police, propaganda disseminated through
state-controlled mass media, regulation of free discussion and criticism, and the use of terror
tactics.

Nazi Germany
The Nazis also made stipulations as to what people were allowed to do in their daily lives.
For example, artists had to create paintings portraying Nazi values, jazz music was banned, and
books written by people deemed undesirable under the Hitler regime were burned. Youth
organizations indoctrinated girls and boys with Nazi ideology from a young age, and the Nazi
police organization, known as the SS, intimidated and terrorized people in an attempt to control
them.

The final quality of Hitler's regime that signaled the Nazi government held total control was the
extensive use of propaganda. Hitler's picture was everywhere, newspapers were censored, and
radio broadcasts were controlled by the government.

Hitler saluting at a Nazi rally Stalinist Soviet Union under Josef Stalin. Stalin came to power
following the death of Vladimir Lenin. Stalin gained control by blackmailing many of the leaders
in the communist government and eventually murdered his main rival, Leon Trotsky.

Artists painted pictures and authors wrote novels that glorified Stalin, and people were expected
to have a picture of him in their homes, often replacing former pictures of Jesus and other
religious figures. He took on the nickname 'Uncle Joe' in an effort to give off a kind and friendly
personality. In reality, Stalin ran a country in which he held total, oppressive control.

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Education was strictly controlled by the state, and children were expected to join age-appropriate
organizations in which they were indoctrinated with the Stalinist brand of communist ideology.
Stalin placed restrictions on what families were allowed to do, for example, on divorces and
abortions. If citizens spoke against Stalin or the government, they were often sent to Soviet work
camps called gulags.

b. Socialism
Socialism’s fundamental tenet is that capital and wealth should be vested in the state and

used primarily as a means of production rather than for profit. Socialism is based on a collectivist
ideology in which the collective welfare of people is believed to outweigh the welfare of the
individual. Socialism means direct control and management of the industries and social services
by the workers through a democratic government based on their nationwide economic
organization.

Socialists argue that capitalists receive a disproportionate amount of society’s wealth relative to
workers. They believe that in a capitalist society, the pay of workers does not represent the full
value of their labor, and thus governments should control the basic means of production,
distribution, and commercial activity.

Socialism has manifested itself in much of the world as social democracy and has been
most successful in western countries. In social democratic regimes, such as Italy and Norway, the
government frequently intervenes in the private sector and in business activities. Its refer to the
collective ownership by all people of the factories, mills, mines, railroads, land and all other
instruments of production. Means production to satisfy human needs, not as under capitalism,
for sale and profit. Under socialism, all authority will originate from the workers, integrally united
in Socialist Industrial Unions. In each workplace, the rank and file will elect whatever committees
or representatives are needed to facilitate production. Within each shop or office division of a
plant, the rank and file will participate directly in formulating and implementing all plans
necessary for efficient operations.

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Besides electing all necessary shop officers, the workers will also elect representatives to a local
and national council of their industry or service—and to a central congress representing all the
industries and services. This all-industrial congress will plan and coordinate production in all areas
of the economy.

c. Democracy

Democracy is characterized by two key features:
Private property rights, or the ability to own property and assets and to increase one’s asset.
Property includes tangibles as well as intangibles base by accumulating wealth.
i. Limited government. The government performs only essential functions that serve all citizens,
such as conducting national defense, maintaining law and order and diplomatic relations, and
constructing and maintaining infrastructure such as roads, schools, and public works. State
control and intervention in the economic activities of private individuals or firms is minimal.
Under democracy, however, the individual pursuits of people and firms are sometimes at odds
with equality and justice.Virtually all democracies include elements of socialism, such as
government intervention in the affairs of individuals and firms. Socialist tendencies emerge
because of abuses that occur in purely democratic systems. For example the subprime financial
crisis led the American government to intervene and support banks. Many countries, including
Canada, France and the USA, are best described as having a mixed political system –characterized
by a strong private sector and a strong public sector, with considerable government regulation
and control.

2.2 The Relationship between Political Systems and Economic Systems

Each political system tends to be associated with a particular type of economic system. Generally
speaking, totalitarianism is associated with command economies, democracy with market
economy, and socialism with mixed economies.

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a. Command Economy
Also known as a centrally planned economy, a command economy makes the state a dominant
force in the production and distribution of goods and services. Today, countries such as China
and Russia still exhibit some characteristics of command economies. However, the system is
gradually dying out in favor of market economies and mixed economies.

b. Market Economy
In market economy, market forces –the interaction of supply and demand- determine prices.
Government intervention in the marketplace is limited, and economic decisions are left to
individuals and firms. Market economies are closely associated with capitalism, in which the
means of production are privately owned and operated. The task of the state is to establish a
legal system that protects private property and contractual agreements. However, the
government may also intervene to address the inequalities that market economies sometimes
produce.

c. Mixed Economy
A mixed economy exhibits the features of both a market economy and a command economy. It
combines state intervention and market mechanisms for organizing production and distribution.
Most industries are under private ownership and entrepreneurs freely establish, own, and
operate corporations. But the government also controls certain functions, such as pension
programs, labor regulation, minimum wage levels, and environment regulation. State-owned
enterprises operate in key sectors such as transportation, telecommunications, and energy.

2.5 Highlight country risk produced by political systems in international business

How do political systems create challenges for firms engaged in international business? Here are
some specific risks brought out by political systems:

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

a. Government Takeover of Corporate Assets
Governments seize corporate assets in tow major ways: confiscation and expropriation.
Confiscation is the seizure of corporate assets without compensation. Expropriation is seizure
with compensation. In Venezuela, ExxonMobil and ConocoPhillips were forced to abandon multi-
billion investments in the local oil industry.
A third category of takeover, nationalization, describes government’s seizing not firm but an
entire industry, with or without compensation. In 2006, the government of Bolivia nationalized
much of the oil and gas industry in that country. In the decades following World War TT,
confiscation and expropriation were the main country risks, particularly in developing countries.
This has become less common in recent years as governments in developing countries have
adopted institutional reforms that aim to attract FDI to foster economic growth.

Core common today is the so-called ‘creeping expropriation’, a subtle form of country risk
in which governments modify laws and regulations after foreign MNEs have made substantial
local investments in property and plants. Examples include abrupt termination of contracts and
the creation of new laws that favor local firms. Governments in Bolivia, Kazakhstan, Russia, and
Venezuela have modified tax regimes to extract revenues from foreign coal, oil, and gas
companies.

b. Expropriation

Is the seizure of foreign assets by a government with payment of compensation to the owners. It
is involuntary transfer of property, with compensation, from a privately owned firm to a host
country government.Expropriation may generate some funds for the owners.
Procedures to get paid from the government are sometimes protracted and the final amount
remains low. If no compensation is paid, conflicts may erupt between the host country and the
country of the expropriated firm.

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Expropriation involves taking or depriving a property owner of his or her legal rights to a piece of
real estate or some other type of property.
Generally, expropriation occurs when a government confiscates a person’s land for use by the
general public.
For example, if the government is building a highway system that runs through a person’s land,
the government may decide to confiscate the land in order to complete the highway.

c. Embargoes and Sanctions

Most countries are signatories to international treaties and agreements that specify rules,
principles, and standards of behavior in international business. Nevertheless, governments may
unilaterally resort to sanctions and embargoes to respond to offensive activities of foreign
countries. A sanction is a type of trade penalty imposed on one or more countries by one or more
other countries. Sanctions typically take the form of tariffs, trade barriers, import duties, and
import or export quotas. They generally arise in the contexts of an unresolved trade or policy
dispute.
An embargo is an official ban on exports to or imports from a particular country, in order to
isolate it and punish its government. It is generally more serious than a sanction and is used as a
political punishment for some disapproved policies or acts. For example, the US has enforced
embargoes against Iran and North Korea, at times labeled as state sponsors of terrorism.

c. Boycotts against Firms or Nations

Consumers and special interest groups occasionally target particular firms perceived to have
harmed local interests. A boycott is a voluntary refusal to engage in commercial dealings with a
nation or a company. Many US citizens boycotted French products following French’s decision
not to support the US-led invasion of Iraq in the early 2000s.
War, Insurrection, and Violence

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War, insurrection, and violence pose significant problems for business operations. Violent
conflict among drug cartels and security services along the US-Mexico border has led some firms
and financiers to withdraw investments from Mexico. To minimize losses from violent acts, firms
can purchase risk insurance.

2.1.4. Studying the managing of country risks in international business
a. Proactive Environment Scanning
Initially, managers develop a comprehensive understanding of the political and legal
environment in target countries. They then engage in scanning to assess potential risks and
threats to the firm. One of the best sources of intelligence in the scanning process is employees
working in the host country. They are knowledgeable about evolving events and can evaluate
them in the context of local history, culture, and politics. Embassy and trade association officials
regularly develop and analyse intelligence on the local political scene. Some consulting firms,
such as Business Entrepreneurial Risk Intelligence, specialize in country-risk assessment and
provide guidelines for appropriate strategic responses.

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b. Strict adherence to ethical standards

Firms that engage in questionable practices or operate outside the law invite redress from the
governments of the host countries where they do business.

c. Alliances with Qualified Partners
A practical approach to reduce country risk is to enter target markets in collaboration with a
knowledgeable and reliable local partner. Qualified local partners are better informed about
local conditions and better situated to establish stable relations with the local government.
For example, firms often enter China and Russia by partnering with local firms who assist in
navigating the complex legal and political landscape

d. Protection through Legal Contracts

A legal contract spells out the rights and obligations of each party. International contractual
disputes arise and firms generally employ any of these three approaches:
i. Conciliation: it is a formal process of negotiation with the objective to resolve differences in a
friendly manner. The parties in a dispute employ a conciliator, who meets separately with each
in an attempt to resolve their differences.
ii. Arbitration: it is a process in which a neutral third party hears both sides in a case and decides
in favor of one party or the other, based on an objective assessment of the facts. Compared to
litigation, arbitration saves time and expense, while maintaining the confidentiality of
proceedings.
iii. Litigation: it is the most adversarial approach and occurs when a party files a lawsuit against
another in order to achieve desired ends. The most adversarial approach, it is common in the
United States.

SUMMARY
Political decisions often affect a business environment and create uncertain conditions within a
country this situation is known as political risk

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Political risk can cause a firm to suffer enormous losses and also affect the economic growth of
the country

2.2 Discuss the legal environment in international business
The legal system of a country refers to the rules that regulate behaviour along with the
processes by which the laws are enforced and through which redress for grievances is obtained.
The Rule of Law is Common in the advanced economies.
The legal system is:
(i) applied to all citizens equally;
(ii) issued via recognized government authorities;
(iii) enforced fairly and systematically by police forces and formally organized judicial bodies.

Economic activity suffers and uncertainty increases when the rule of law is weak.
Existence of a legal system where rules are clear, publicly disclosed, fairly enforced, and widely

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respected by individuals, organizations, and the government. Legal systems provide a framework
of rules and norms of conduct that mandate, limit, or permit specified relationships among
people and organizations and provide punishment for those who violate these rules and norms.
Legal systems are dynamic.

Prevailing political systems tend to influence their respective legal systems as well. In well-
developed legal systems, such as in Australia, Canada, the USA, Japan, and most European
countries, laws are widely known and understood. They are effective and legitimate because they
are applied to all citizens equally, and are enforced systematically and fairly by police forces and
formally organized judicial bodies.
In these countries, a culture of law exists in which citizens consistently respect and follow the
rule of law. Rule of law refers to a legal system in which rules are clear, publicly disclosed, fairly
enforced, and widely respected by individuals, organizations, and the government.

a. Common Law/Case
Based on tradition and custom and also known as case law, common law is a legal system that
originated in England and spread to English colonies including the United States, Australia,
Canada, India, New Zealand, Hong Kong & Malaysia and former members of the British
Commonwealth. The basis of common law is previous cases, and legal precedents set by the
nation’s courts through interpretation of statutes, legislation, and past rulings. Because common
law is more open to interpretation by courts, it is more flexible than other legal systems. Thus,
judges in a common-law system have substantial power to interpret laws based on unique
circumstances of individual cases, including commercial disputes and other business situations.
Common Law is based on the cumulative wisdom of judges’ decisions Courts make common law
as they decided individual cases. Thus, common law is relatively flexible.

b. Civil law
Based on detailed set of laws organized into codes found in France, Germany, Italy, Japan,
Turkey, and much of Latin America. Its origins go back to Roman law and the Napoleonic

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Code.Based on an all-inclusive system of laws that have been “codified”—clearly written by
legislative bodies. The codified rules emerge as specific laws and codes of conduct produced by
a legislative body or some other supreme authority. Laws are more ‘cast in stone’ and not
strongly subject to interpretation by courts.
A key difference is that common law is mainly judicial in origin and based on court decisions,
whereas civil law is mainly legislative and based on laws passed by national and state legislatures.

A key difference between common law and civil law is that the former is primarily judicial in origin
and based on court decisions, whereas the latter is primarily legislative in origin and based on
laws passed by national and local legislatures. In reality, however, common-law systems generally
contain elements of civil law and vice versa. The two systems complement each other, and
countries that employ one also tend to employ some elements of the other.

c. Religious law

This legal system is strongly influenced by religious beliefs, and moral values viewed as mandated
by a supreme being. Among the most important religious systems is Islamic law, also known as
the shariaa (based on the Qur’an and the teachings –sunna- of the Prophet Mohammed). There
is generally no differentiation between religious life and secular life; Islamic law governs
relationships among people, between people and the state.It spells out norms of behavior
regarding politics, economics, banking, contracts, marriage, and many other social issues. Many
Muslim countries, however, currently maintain a dual system, wherein both religious and positive
law coexist.

To comply with Islamic law, financial institutions employ a variant of international banking known
as ‘Islamic finance’, based on the principles of shariaa. Many western banks have subsidiaries
Muslim countries that comply with the shariaa. Instead of requiring interest payments, they
charge administrative fees or take equity positions in the projects they finance. Via the United
Nations Conference on Trade and Development Strongly influenced by religious beliefs, ethical

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codes, and moral values and viewed as mandated by a supreme being. Most important religious
legal systems are based on Hindu, Jewish, and Islamic law. Islamic law spells out norms of behavior
regarding politics, economics, banking, contracts, marriage, and many other social and business
issues. Ownership of intellectual Determined by registration Determined by prior use property
Enforcing agreements Commercial agreements Proof of agreement is sufficient become
enforceable only for enforcing contracts if notarized or registered Specificity of contracts
Contracts tend to be brief Contracts tend to be very detailed, because many potential with all
possible contingencies problems are already spelled out covered in the civil code Compliance
with contracts Noncompliance is extended Acts of God (floods, lightning, to include
unforeseeable hurricanes, etc.) are the only human acts such as labor justifiable excuses for non-
strikes and riots compliance with the provisions of contracts

d. Socialist law or Soviet law jun18

- Denotes a general type of legal system which has been used in communist and formerly
communist states. It is based on the civil law system, with major modifications and additions from
Marxist-Leninist ideology.

There is controversy as to whether socialist law ever constituted a separate legal system or not.
If so, prior to the end of the Cold War, socialist law would be ranked among the major legal
systems of the world.

e. Mixed Systems

Two or more legal systems operating together. The contrast between civil and common law has
blurred as countries combine both systems. Totalitarianism is most associated with religious law
and socialist law. Democracy is associated with common law, civil law, and mixed systems.
Example Legal systems in Lebanon, Morocco, and Tunisia share elements of civil law and Islamic
law. Legal systems in South Africa and the Philippines mix elements of civil law and common law.

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Legal systems in Indonesia and most Middle East countries share elements of civil law and Islamic
law. The legal system of the former Soviet Union was based on civil law, with elements of socialist
principles (law) that emphasized state ownership of property.

Differentiation from other major legal systems
The table below contains essential disparities (and in some cases similarities) between the
world's four major legal systems.

Common law Civil law Socialist law Islamic law
Other names Social
Anglo-American, Continental, Romano- Religious law,
Source of law Sharia
Lawyers English, judge-made, Germanic

Judges' legislation from the
qualifications
bench

Case law, Statutes/legislation Statutes/legislat Religious

statutes/legislation ion documents, case

law

Judges act as Judges dominate trials Judges Secondary role

impartial referees; dominate trials

lawyers responsible

for presenting case

Experienced lawyers Career judges Career Religious as well as
bureaucrats, legal training
(appointed or Party members

elected)

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Degree of High High; separate from the Very limited Ranges from very
judicial limited to high
independence executive and the
Allowed in Maliki
legislative branches of school, not allowed
in other schools
government
Courts and other
Juries Provided at trial May adjudicate in Often used at government
level branches are
conjunction with judges lowest level theoretically
subordinate to the
in serious criminal Shari'a. In practice,
courts historically
matters made the Shari'a,
while today, the
Policy-making Courts share in Courts have equal but Courts are religious courts are
role balancing power generally
separate power subordinate to subordinate to the
executive.
the legislature Many Muslim
countries have
Examples Australia, UK (except All European Union Soviet Union adopted parts of
and other Sharia Law.
Scotland), India states (except UK and communist Examples include
regimes Saudi Arabia,
(except Goa), Ireland), All of Afghanistan, Iran,
UAE, Oman, Sudan,
Nigeria, Ireland, continental Latin

Singapore, Hong America (except

Kong, USA (except Guyana and

Louisiana), Canada Belize),Quebec, All of

(except Quebec), East Asia (except Hong

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New Zealand, Kong), Congo, Malaysia, Pakistan
Pakistan, Malaysia, Azerbaijan, Kuwait, and Yemen.
Bangladesh Iraq, Russia, Turkey,
Egypt, Madagascar,
Lebanon, Switzerland,
Indonesia, Vietnam,
Thailand

2.6 Types of Country Risk Produced by Legal Systems
Legal systems in both the host country and the home country pose various challenges to firms.
Country Risk Arising from the Host Country Legal Environment
Governments in host countries can impose a variety of legal stipulations on foreign companies
doing business there.

a. Foreign Investment Laws
Many countries impose restrictions on inward FDI. In Malaysia, firms wishing to invest in local
business must obtain permission from the Malaysian Industrial Development Authority, which
screens proposed investments to ensure they fit national policy goals.

b. Controls on Operating Forms and Practices
Governments impose laws and regulations on how firms can conduct production, marketing, and
distribution activities within their borders, which may limit firms’ efficiency. In China’s huge
telecommunications market, the government requires foreign investors to seek joint-ventures
with local firms.

c. Marketing and Distribution Laws
These laws determine which practices are allowed in advertising, promotion, and distribution.
For example, France, New Zealand, and Norway prohibit cigarette advertising on TV.

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d. Laws on Income Repatriation
Repatriation restrictions limit the amount of net income or dividends that firms can remit to their
home-country headquarters.

e. Environmental Laws
Governments can enact laws to preserve natural resources; to combat pollution and the abuse
of air, earth, and water resources and to ensure health and safety.

f. Contract Laws
International contracts attach rights, duties, and obligations to contracting parties. In 1980, the
UN instituted the Convention on Contracts for the International Sale of Goods (CISG). Unless
excluded by the express terms of a contract, the CISG is deemed to supersede any otherwise
applicable domestic law (s) regarding an international transaction.

g. Internet and E-Commerce Regulations

Firms that undertake e-commerce in countries with weak laws face considerable risk. In China,
for example, the government has developed legislation to ensure security and privacy due to the
rapid spread of the Internet and e-commerce. Many consumer-privacy laws have yet to be
enacted, and progress has been delayed.

h. Inadequate or Underdeveloped Legal Systems
Regulations to protect intellectual property may exist in paper but not be adequately enforced.
Country Risk Arising from the Home Country Legal Environment
Country risk also arises due to the home country legal system.

i. Extraterritoriality. It refers to the application of home country laws to persons or conduct
outside national borders. In most cases, such laws are intended to prosecute individuals or firms
located abroad for some type of wrongdoing. A French court ordered yahoo to bar access to Nazi-

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relate items on its Web site in France and to remove related messages and images from its sites
accessible in the US.

j. The Foreign Corrupt Practices Act (FCPA). Passed by the US government in 1977, the FCPA
makes it illegal for a firm to offer bribes to foreign parties for the purpose of securing or retaining
business. Some US managers argue that FCPA harms their interest because foreign competitors
often are not constrained by such laws.

k. Anti-boycott Regulations. Anti-boycott regulations prevent companies from participating in
restrictive trade practices or boycotts imposed by foreign countries against other countries. For
example, some Arab nations have long boycotted Israel because of political disagreements and
made it a requirement for any foreign company that wishes to do business with the Arab
countries to also observe this boycott. The anti-boycott regulations passed by the US Congress in
1977 effectively prohibit US firms from participating in the boycott of Israel when operating in
these Arab nations.

l. Transparency in Financial Reporting. Transparency is the degree to which firms reveal
substantial information about their financial condition and accounting practices. In an effort to
curb corruption, the US Congress passed the 2002 Sarbanes-Oxley Act to promote greater
transparency in accounting practices and enhance corporate responsibility. However, a drawback
of this Act is the cost of compliance to develop sophisticated internal accounting controls. In an
effort to avoid these rigid financial requirements, some European firms are reducing their
business investments in the US, and several have deregistered from the US Stock markets.

QUESTIONS
1. Distinguish between totalitarianism, socialism, and democracy and show the implications of
each for internationalizing firms.
2. Who are the major actors in political and legal systems and which participant do you believe is
most influential in international business?

3.Describe THREE(3) types of economic system in the world.

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CHAPTER 3

INTERNATIONAL BUSINESS ORGANIZATON
DESIGN

LEARNING OUTCOMES

At the end of this chapter, you will be able to:
 Apply organization design in international business
 Explain of the international company in international business
 Associate types for Multinational Enterprises in international business
 Describe each of several types of MNEs
 Compare Small and Medium-Sized International Enterprises(SMIEs) in international
business
 Define Small and Medium-Sized International Enterprises(SMIEs)
 Highlight constraints on Small a

3.1 Apply organization design in international business
Organization design (or organization structure) is the overall pattern of structural components
and configurations used to manage the total organization.

The reporting relationships inside the firm, “the boxes and lines” that specify the linkages
among people, functions, and processes, allowing the firm to carry out its operations.
In large MNEs, these linkages are extensive and include the firm's subsidiaries, affiliates,
suppliers, and other partners worldwide.

A fundamental issue: How much decision-making should the firm retain at headquarters and
how much it should delegate to foreign subsidiaries and affiliates? It is the choice between
centralization and decentralization.

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Function of International Design
• Allocates organizational resources
• Assigns tasks to its employees
• Informs employees about firm’s rules, procedures, and expectations
• Collects and transmits information

3.1.1 Explain of the international company in international business and the most
experienced global firms:

•Encourage local managers to identify with broad objectives of the firm

•Visit subsidiaries periodically to share corporate values and priorities

•Rotate employees within the corporate network to promote development of a global
perspective

•Encourage country managers to interact and share experiences with each other
through regional and global meetings

•Provide incentives and penalties to promote compliance with headquarters’ goals

Alternative Organizational Arrangements
Export Department

A unit within the firm charged with managing the firm’s export operations
•Most closely associated with home replication strategy
•The firm’s resource commitment is small. Export activities are unified under one department,
providing efficiencies in selling, distribution, and shipping.

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•But headquarters has minimal control over foreign operations, a strong potential to rely too
much on intermediaries, and few opportunities to learn about foreign markets.

Global corporate form – Geographic regions
The global area design organizes the firm’s activities around specific areas or regions of the world.

Disadvantages

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• Firm may sacrifice cost efficiencies
• Diffusion of technology is slowed
• Design unsuitable for rapid technological change
• Duplication of resources
• Coordination across areas is expensive
a. Global corporate form-product
The global product design assigns worldwide responsibility for specific products or
product groups to separate operating divisions within a firm.
Product Structure Management of international operations is organized by major
product line
•Each product division is responsible for producing and marketing a specific group of
products worldwide.
•The firm develops expertise with specific products on a global basis, ensuring scale
economies and knowledge sharing among units worldwide for a given product line.
•However, it can result in duplicating the firm’s support functions in each product
division. There is also potential for excessive focus on products and too little on
developing the firm’s markets.

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b. Global corporate form – Geographic regions
Management and control are decentralized to individual geographic regions, whose managers
are responsible for operations within their region

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•Often used by firms that market relatively standardized products across entire regions or
groups of countries
•Results in greater responsiveness to customer needs and wants in each market, providing a
good balance between global integration and local adaptation
•However, managers’ orientation is more regional than global, which affects development and
management of products. Global economies of scale may suffer.

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Nestlé uses a geographic area structure for organizing its international operations. In Africa,
Nestlé conducts advertising in local languages. This large ad for Nido milk powder is in
Cameroon.
c. Global corporate form – Function
Functional Structure Management of international operations is organized by functional
activity.
•For example, oil companies tend to organize their worldwide operations along two major
functional lines – production and marketing of petroleum products.
•The approach implies a small central staff that provides strong central control and
coordination with a focused global strategy and concentrated functional expertise.
The global functional design calls for a firm to create departments or divisions that have
worldwide responsibility for the common organizational functions—finance, operations,
marketing, R&D, and human resources management.

•However, coordination becomes unwieldy when the firm has many product lines, and the
approach may not respond well to specific buyer needs in individual markets.

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d. Hybrids forms Matrix organizations
Most firms create a hybrid design, rather than pure design, that best suits their purposes,
given the firms’ size, strategy, technology, environment, and culture, and blends elements
of all the designs discussed
Nissan’s Hybrid Design

e. Global Matrix Structure
A global matrix design, the most complex of designs, is the result of superimposing one form
of organization design on top of an existing, different form. Blends the geographic area,

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product, and functional structures to leverage the benefits of a purely global strategy while the
firm remains responsive to local needs.
•Simultaneously leverages the benefits of global strategy and responsiveness to local needs
•Emphasizes inter organizational learning and knowledge sharing among the firm’s units
worldwide
•However, the dual reporting chain of command means employees may receive contradictory
instructions from multiple managers, which can lead to conflicts.
•Managing many subsidiaries, products, or operations in numerous foreign markets is complex

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DPP20013 –INTRODUCTION OF INTERNATIONAL BUSINESS

Advantages
• Brings together the functional area and product expertise
• Promotes organizational flexibility
• Provides access to all advantages of other designs

Disadvantages
• Appropriate for firms with many products and unstable environments employees
accountable to multiple supervisors. Decisions may take longer.
• Appropriate for firms with many products and unstable environments
• Employees accountable to multiple supervisors
• Decisions may take longer
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f. Strategic Business Units

3.2 Associate types for Multinational Enterprises in international business

What is a Multinational Enterprise?
Multinational Enterprises has at least one plant or joint venture abroad. The internationally leaning
company has foreign sales and/or a representative office and/or a licensing agreement abroad. MNEs are
called enterprise because as businesses move into many emerging markets, joint ventures, strategic alliances
simply operating agreements with enterprises which may not be publicly traded or even privatelyowned (and
therefore, not corporations), but actually part of government.
Why it is important to study the MNEs?

• MNEs face significant foreign exposure and risk.
• Firms with total domestic also face indirect financial risk through their relationship with

customers and suppliers.

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• Therefore, became increasingly important even for the managers of a totally domestic
operations to also learn about international financial risk, especially those related to foreign
exchange rates and the credit risks related to trade payments.

The Multidomestic Company
(MDC) is an organization with multicounty affiliates, each of which formulates its own business strategy
based on perceived market differences.
The transactional firm – has subsidiaries that fulfill a variety of strategic roles typically performed by HQ.
The multinational firm – engages in FDI and owns or controls value adding activities in more than one
country.
The global firm – has integrated international subsidiaries controlled by headquarters.

3.2.1 Identify terms of MNEs in international business
Multinational Enterprise (MNE) – a firm with foreign direct investment, service or manufacturing, over
which it maintains effective control.
International firm – a firm engaged in trade activities but without an FDI component.
Small and Midsize International Enterprises (SMIE) – Most of these firms do not have FDI presence and
donot qualify as MNEs. However SMIEs contributes to International Business around the world.

3.2.2 Describe each of several types of MNEs

A large company with substantial resources that performs various business activities through a
network of subsidiaries and affiliates located in multiple countries.

a. Multidomestic firm

The multidomestic firm has multiple international subsidiaries independent of headquarters.
Multidomestic company is a company that has its branches in many different countries, in which
the company has the same purpose to market their products or services.

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