INTRODUCTION TO INTERNATIONAL BUSINESS

1. Definition of international business

International business involves commercial activities that cross national frontiers. It concerns the
international movement of goods, capital, services, employees and technology; importing and
exporting; cross-border transactions in intellectual property (patents, trademarks, know-how, copyright
materials, etc.) via licensing and franchising; investments in physical ; financial assets in foreign
countries; contract manufacture or assembly of goods abroad for local sale or for export to other
nations; buying and selling in foreign countries; the establishment of foreign warehousing and
distribution systems; and the import to one foreign country of goods from a second foreign country for
subsequent local sale.
Why firms engage in international business
Businesses undertake international operations in order to expand sales, acquire resources from foreign
countries, or diversify their activities (Anderson 1993). Specific reasons for doing business abroad
include the saturation of domestic markets: discovery of lucrative opportunities in other countries: the
need to obtain materials, products or technologies not available in the home nation; increases in the
flow of information about conditions in foreign states; desires to expand the volume of a firm's
operations in order to obtain economies of scale: or the need to find an outlet for surplus stocks of
output. Further motives for operating internationally are as follows:

a) Commercial risk can be spread across several countries.

b)Involvement in international business can facilitate the 'experience curve' effect, i.e. cost reductions
and efficiency increases attained in consequence of a business acquiring experience of certain types of
activity, function or project. These effects differ from economies of scale in that they result from longer
experience of doing something rather than producing a greater volume of output. Moreover, the firm's
management is exposed to fresh ideas and different approaches to solving problems. Individual executives
develop their general management skills and personal effectiveness; become innovative and adopt
broader horizons. All these factors can give a firm a competitive edge in its home country.

c) Economies of scope (as opposed to economies of scale) might become available. Economies of scale
are reductions in unit production costs resulting from large-scale operations. Common examples are
discounts obtained on bulk purchases, benefits from the application of the division of labour, integration
of processes, the ability to attract high calibre labour and the capacity to establish research and
development facilities. Similar benefits might occur from 'economies of scope', i.e. unit cost reductions
resulting , from a firm undertaking a wide range of activities, and hence being able to provide common
services and inputs useful for each activity. Note how economies of scale might not be available if the
firm has to modify its products, promotional strategies and business methods substantially for each
country in which it operates, and that the extra costs of foreign marketing, establishment of subsidiaries
in other countries, market research, etc., could erode the benefits obtained from a higher volume of
output.

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 d) The costs of new product development could require so much expenditure that the firm is compelled
to adopt an international perspective.
e) There might be intense competition in the home market but little in certain foreign countries.
f) A company's overall strategies and plans can be anchored against a wider range of (international)
opportunities. Sudden collapses in market demand in some countries may be offset by expansions
elsewhere.
g)Cross-border trade is today much easier to organize than in the past. International telephone and fax
facilities are much better than previously and facilities for international business travel are more
extensive. Hence it is simpler to visit potential foreign customers, partners and/or suppliers, to select
the best locations for operations, and thereafter to control international activities.

Why enter overseas markets?

The reasons for entering overseas markets can be categorized into “push” and “pull” factors:
Push factors
 Saturation in domestic markets
 Economic difficulty in domestic markets
 Near the end of the product life cycle at home
 Risk diversification
 Excess capacity
Pull factors
 The attraction of overseas markets
 Increase sales
 Enjoy greater economies of scale
 Extend the product life cycle
 Exploit a competitive advantage
 Personal ambition
Factors in the choice of which overseas market(s) to enter:
 Size of the market (population, income)
 Economic factors (state of the economy)
 Cultural linguistic factors (e.g. preference for countries with similar cultural background)
 Political stability (there is usually a preference for stable areas)
 Technological factors (these affect demand and the ease of trading)
Constraints and difficulties in entering overseas markets;

 Resources
 Time
• Market uncertainty
• Marketing costs
• Cultural differences
• Linguistic differences
• Trade barriers
 Regulations and administrative procedures
 Political uncertainties

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  Exchange rates (transactions costs & risks)
 Problems of financing
 Working capital problems
 Cost of insurance
 Distribution networks

All the basic tools and concepts of domestic business management are relevant to international
business. However, special problems arise in international business not normally experienced when
trading or manufacturing at home. In particular:
 Deals might have to be transacted in foreign languages and under foreign laws, customs and
regulations.
 Information on foreign countries needed by a particular firm may be difficult (perhaps
impossible) to obtain.
 Foreign currency transactions will be necessary. Exchange rate variations can be very wide and
create many problems for international business.
 Numerous cultural differences may have to be taken into account when trading in other nations.
 Control and communication systems are normally more complex in foreign than for domestic
operations.
 Risk levels might be higher in foreign markets. The risks of international business include
political risks (of foreign governments expropriating the firm's local assets, of war or revolution
interfering with trade, or of the imposition of restrictions on importers' abilities to pay for
imports); commercial risks (market failure, products or advertisements not appealing to foreign
customers, etc.); and financial risks - of adverse movements in exchange rates, tax changes, high
rates of inflation reducing the real value of a company's foreign working capital, and so on.
 International managers require a broader range of management skills than do managers who
are concerned only with domestic problems.
 Large amounts of important work might have to be left to intermediaries, consultants and
advisers.
 It is more difficult to observe and monitor trends and activities (including competitors' activities)
in foreign countries.
Why study international business?

Nowadays the great majority of large enterprises operate internationally (as do an increasing number of
small to medium sized firms), so that an awareness of the major issues in international business is a
valuable asset for any manager in a company that deals with suppliers, customers, contractors,
licensees, etc., in other countries. The study of international business helps the individual supplement
his or her knowledge of general business functions (accounting and finance, personnel, marketing, etc.)
through examining issues, practices, problems and solutions relating to these functions in foreign states.
Also, it develops a person's sensitivity to foreign cultures, values and social norms, thus enabling the
individual to adopt broader perspectives and hence improve his or her overall managerial efficiency.

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Note how firms involved in international business necessarily operate in multifaceted, multicultural
environments.

Entry strategies to foreign market:

Exporting, Licensing, Joint Venture, Direct Investment and Exporting
Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting
is a traditional and well-established method of reaching foreign markets. Since exporting does not
require that the goods be produced in the target country, no investment in foreign production facilities
is required. Most of the costs associated with exporting take the form of marketing expenses.
Exporting commonly requires coordination among four players:
Exporter, Importer, Transport provider and Government
Licensing

Licensing essentially permits a company in the target country to use the property of the licensor. Such
property usually is intangible, such as trademarks, patents, and production techniques. The licensee
pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has the potential to provide a
very large ROI. However, because the licensee produces and markets the product, potential returns
from manufacturing and marketing activities may be lost.

Franchising

This is a special form of licensing which allows the franchisee to sell a highly publicized product or
service using the parent’s brand name or trademark, carefully developed procedures and marketing
strategies. In exchange the franchisee pays a fee to the parent company typically based on the volume
of sales of franchisor in its defined market area e.g. Coca Cola

Foreign Branching

This is an extension of the company in its foreign market- a separately located strategic business unit
directly responsible for fulfilling the operational duties assigned to it by corporate management
including sales, customers’ service and physical distribution. Host countries may require that branch
companies to be domesticated i.e. have managers in middle and higher level positions to come from the
host country.

Joint Venture

There are five common objectives in a joint venture: market entry, risk/reward sharing, technology
sharing and joint product development, and conforming to government regulations. Other benefits
include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when:

 The partners' strategic goals converge while their competitive goals diverge;

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  the partners' size, market power, and resources are small compared to the industry leaders;
and
 Partners' are able to learn from one another while limiting access to their own proprietary skills.
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing,
technology transfer, local firm capabilities and resources, and government intentions.

International Business Terms

Organization structures have given rise to the following companies:

International companies are importers and exporters and have no investment outside their country.
Multinational companies have investment in other countries, but do not have coordinated product
offerings in each country. They more focused on adapting their products and services to each individual
local market.
Global companies have invested and are present in many countries. They market their products through
the use of the same coordinated image/ brand in all markets. Generally one corporate office that is
responsible for global strategy. Emphasis is on volume, cost management and efficiency.
Transnational companies are much more complex organizations they have invested in foreign
operations have a central corporate facility but give decision making, R&D and marketing powers to
each individual foreign market.
Multidomestic industries: firms compete in each national market independently of other national
markets. Involves products tailored to individual countries innovation comes from local R&D. There is
decentralization of decision making within the organization
These corporations have been oriented into four types:
Ethnocentric: governance is top down, strategy is global integration, products development is
determined primarily by the needs of home country customers and people of home country are
developed for key positions everywhere in the world.
Polycentric: governance is bottom up where each subsidiary decides on local objectives, strategy is
national responsiveness, local products are developed based on local needs and people of local
nationality are developed for key positions in their own country.
Regiocentric: governance is mutually negotiated between regions and its subsidiaries, strategy is
regional integration and national responsiveness, products are standardized within region but not across
regions, regional people are developed for key positions anywhere in the region,
Geocentric: governance is mutually negotiated at all levels of the corporation, strategy is global
integration and national responsiveness, global products with local variation, best people everywhere in
the world are developed for key positions everywhere in the world.

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EVOLUTION OF INTERNATIONAL BUSINESS

The Exploration Era to 1500

The history of business dates back to prehistoric times. Villages formed to allow early divisions of labor
to provide goods and services for communities. As expertise accumulated in the production of goods,
infrastructures (mainly roads) were built to link communities, and local markets evolved into regional
markets, attracting increased varieties of merchants and manufacturers. As regional markets took
shape, road and transportation systems developed to link major commercial centers, and national
markets for products emerged. The ancient civilizations of Latin America (the Incas, Mayas, and Aztecs),
Egypt (the Pharaohs, pyramids), Western Europe (the Greeks and the Romans), and Asia (India and
China) illustrate humankind’s early efforts to innovate and use technology to upgrade standards of
living. But in those days, advances in technologies and living standards were slow to move beyond
national frontiers. As commerce extended throughout countries, merchants began to look to foreign
markets for trading opportunities, and so the seeds of international business were sewn. In its early
years, international commerce was limited to the reliability of seafaring ships, and land routes were
popular. From the 6th century BC, the Silk Road, running from the Middle East to China, was a major
commercial conduit carrying artifacts, metals, and semiprecious stones across Asia, as well as new ideas
such as Buddhism and Islam. Later, the Romans demonstrated the importance of supply routes as they
managed an empire stretching from Britain across Europe to reach the Middle East and North Africa.
Trade routes were established and roads built to equip its armies; a common currency (the Dinarius)
was used to lubricate commercial dealings.
Major steps forward occurred in the 12th and 13th centuries as compasses for navigational use,
advances in sails and rigging, and hinged rudders revolutionized ocean travel. Italian explorer Marco
Polo reached China by the late 13th century. Vasco de Gama, a Portuguese navigator, circumnavigated
the South African Cape of Good Hope to reach India in 1498, and Columbus officially was the first
European to discover the Americas in 1492. To replenish ships and to provide bases for further
exploration, trading outposts were built. As the commercial potential of the Americas and Asia unfolded,
regular trading routes were established. To finance transcontinental trade, new corporate forms
emerged in Italy and later in Europe such as joint stock companies. Intercontinental trade prospered
until nationalistic concerns took over, and European countries saw merit in taking political control of the
new foreign markets.
Modern-day effects. While the rudiments of an international trading system were taking shape, other,
long-lasting cultural transplants were occurring as religious spheres of influence were established. The
Romans adopted Christianity in the 4th century and spread it throughout their European empire. Islam
diffused throughout the Middle East and North Africa and along the Silk Road to Asia. Buddhism moved
eastward from India to East Asia, and Confucianism and Taoism moved westward from China to East
Asia, also through trade and via the Silk Road. These early movements established the major spheres of
religious influence that we have today.
1500–1900: The Colonial Era
The Colonial Era saw military conquests, colonization, and the advent of regular international trade
taking technologies to other nations, as the major European powers competed to establish empires in
the Americas, Africa, and Asia. Foreign influences were magnified through diffusion catalysts: ideas,

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philosophies, and technical innovations that increased the speed, efficiency, and effectiveness of the
movements of ideas and goods between and within nations. These diffusion catalysts included the
following:
The development of mega languages. For ideas and technologies to travel, there had to be common
means of communication between markets. In early times, these were Greek, Latin, and Mandarin
Chinese. In later years, use of English and European languages facilitated the transfer of ideas and
technologies among countries.
Advances in arms and military capabilities. The advent of cannons and firearms gave colonizing powers
significant advantages over local populations, enabling them to subdue and maintain control of colonies
with limited manpower and resources.
Writing and printing technologies extended the spread of knowledge beyond personal experiences and
oral transmissions. “Potted” knowledge, in the form of books, brought about a broadening of individual
knowledge bases. Formal education systems, emphasizing literacy and technical skills, led to a wider
dissemination of skills via schools, guilds, and universities. Knowledge became increasingly mobile and
transferable.
Transportation innovations. The steam engine revolutionized industry and travel with its applications to
factories (1781), ships (1783), rail (1803–1829), and buses (1824). The steam engine brought
international markets closer together and provided access to remote corners of large national markets.
As the colonizing powers took these innovations to foreign markets, the transportation of goods over
wider areas created regional and national markets for merchandise.
Advances in communications complemented transportation innovations. The 19th century saw the
advent of the electronic telegraph and the telephone. Both facilitated information flows between and
within national markets, and aided market supply and demand mechanisms. These factors, along with
national print media, gave the world a connectivity it had never before experienced.

1900–Today: The Era of the International Corporation

By the end of the 19th century, much of the world had been explored and colonized. While foreign
influences had introduced new technologies and lifestyles into the developing world, there had been
some notable early backlashes, especially in the Americas with U.S. independence in 1776 and Latin
America’s between 1810 and 1824. As the 20th century unfolded, independence movements gained
momentum in Africa, the Middle East, and Asia
1900–1945: Company internationalization. But the next globalization wave was waiting in the wings,
and companies began to replace countries as the major catalysts of economic and cultural change. A
Belgian company established the first foreign subsidiary in Prussia (today’s Germany) in 1837, and
commensurate with their overseas interests, most European investments up to 1945 were colonies-
based. As a result of their industrialization and colonization efforts then, Western Europe was the center
of international business at the turn of the last century. In recognition of this trend, Japanese trading
companies such as Mitsui and the Yokohama Specie Bank had set up offices in Western Europe in the
1880s, along with numerous Japanese shipping and insurance companies.
1945–1980: Era of increasing international competition. It was not until the 1950s that corporations
began to reassert themselves in international markets. The United States, whose economy had suffered
least in World War II, was the first to reinitiate foreign investments, and during the 1950s and 1960s U.S.
firms established secure footholds in Canada and in the re-emerging Western European economy. The
1960s and 1970s saw the revitalization and expansion of Japanese and European firms in the
international marketplace as market blocs such as the European Economic Community (today’s
European Union) and free trade movements increased the number of opportunities in the worldwide

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marketplace. During this period, the Cold War political rivalry between the United States and the USSR
dampened commercial prospects.

THE GLOBALIZATION ERA SINCE 1980

During the 1980s, the world marketplace changed yet again. The collapse of communism and the
industrialization of developing markets led to significant increases in global commerce. The
internationalization of North American, Western European, and Japanese firms had contributed to an
upsurge of commercial activities in the developing world, and by the 1990s, developing market
competitors were entering world markets, including Petróleos de Venezuela; Daewoo, Samsung,
Hyundai, and LG Group (Korea); Cemex and Gruma (Mexico); and Petroleo Brasileiro, Vale do Rio Doce,
and Cervejaria Brahma (Brazil). As the new millennium got underway, companies from the developing
and transition economies (China, Argentina, Philippines, South Africa, Malaysia, Singapore, and India,
among others) were internationalizing and heightening competition in the world marketplace.
Cumulatively, they invested $193 billion abroad in 2006—16 percent of world investment flows.

The Major Catalysts of Post-1980 Globalization

International trade. The world hasmoved irrevocably toward free trade since 1945 through the efforts
of the General Agreement on Tariffs and Trade (GATT, a United Nations agency) until 1995, and since
that time, through GATT’s replacement, the World Trade Organization (WTO). The results have been
dramatic. Since 1945, tariffs have fallen from an average of over 40 percent for industrial goods to less
than 4 percent. World trade expanded from $2 trillion in 1980 to about $10 trillion in 2005. The
expansion of world trade has been aided by the UN’s International Monetary Fund (IMF), which
monitors foreign exchange rate values among nations and provides aid to countries with international
debt problems. Increasingly efficient air and ocean transportation systems have also aided international
trade expansion.
Trade blocs. For some countries, the worldwide liberalization of trade and commerce did not occur fast
enough, and countries got together to form trade blocs to facilitate commercial interactions among
members. The European Economic Community (now the European Union) was formed in 1957. Since
then, trade blocs have been formed in North America (North American Free Trade Area), South America
(the Mercosur and Andean Pact groups), and also in Asia and Africa.
Foreign direct investments (FDI) occur when international companies make investments in factories,
plants, and machinery in nondomestic markets. As firms have increased their international
commitments, FDI has grown from $615 billion in 1980 to over $12 trillion in 2006. Nation-states,
recognizing the economic stimulus FDI provides, have increasingly worked to make their economies
more attractive to international corporate investors.

Throughout history, there have been three major reasons for international business expansion. In early
times (16th through 20th centuries), explorers looked for new resources (often gold, silver, or mineral
deposits). Then, as countries began to develop, businesspeople began to regard distant nations as
markets (the Colonial Era). Finally, as free trade movements took hold after 1945, efficiency-seeking
companies looked to overseas markets as manufacturing sites to lower global costs of doing business.
Today, all three major motives (resource seekers, market-seekers, efficiency-seekers) are reasons why
firms invest abroad.

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Global movements toward capitalism. The demise of communism in the 1980s and 1990s left little
competition for capitalism to be the world’s dominant economic and political philosophy. Since that
time, Latin America, Eastern Europe, and Asia have slowly opened up their markets and become active
participants in the global marketplace. Within national markets, former government-owned industrial
monopolies such as airlines, telecommunications, energy, and utilities have been sold back into the
private sector (privatization), and their markets deregulated to allow companies to compete for market
share and profits.
Technology and global media. The advent of satellite, computer, and Internet technologies has
transformed worldwide communications and facilitated information flows among nations, companies,
and individuals. At the nation-state level, it has become increasingly difficult for countries to isolate their
citizens from outside influences, and consumers worldwide have begun to enjoy the benefits of the
international marketplace. Companies now have superior abilities to coordinate activities, products, and
strategies across markets, and individuals have increased access to new ideas, philosophies, products,
and lifestyles.
Globalization and the Developing World
Up to 1985, the Triad nations of North America, Western Europe, and Japan were dominant in world
commerce, and are still today the major providers of global capital. But as developing markets opened
up to trade and investments, new ideas and technologies began to contribute to economic and cultural
change. Trade and investments brought many new (and affordable) products to developing nations. The
advent of global media made information more readily available to developing nation publics that,
coupled with moves toward democratization, have made politicians more accountable to their electors.

But the diffusion of technologies and consequent modernization processes have barely affected many
emerging markets, where large percentages of national populations still reside in agriculturally based
rural areas, largely untouched by modernization trends. As the United Nations noted,

Modernization, Westernization, and Americanization

Transfers of technology and foreign intrusions into national cultures have been occurring for hundreds
of years. Starting with the European colonization movement of the 16th century, and proceeding
through the industrial revolutions of the 18th and 19th centuries, the spread of technology has
jumpstarted modernization movements in many countries as scientific and technological advances have
upgraded national lifestyles and aided efficient resource use. In contrast, Westernization can be defined
as the inculcation of (mainly) U.S. and European values on national cultures. As major international
traders throughout the 20th century, U.S. and European influences on other nations’ lifestyles has been
extensive, and as U.S. power has increased, so “Americanization” has become synonymous with
Westernization. Hollywood movies dominate the world market with 70 percent market share in the
European Union and over 50 percent of the Japanese market.

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INTERNATIONAL BUSINESS THEORIES

THEORIES OF INTERNATIONAL TRADE

Theoreticians seek general explanations of phenomena in order to 'see the wood from the trees' and to
make sense of what otherwise would be a bewildering array of seemingly random items of information.
Theories of international business attempt to answer two questions: why nations trade, and what
determines the pattern of international investment.

1. Comparative cost theory

In his famous book The Wealth of Nations (published in 1776) Adam Smith put forward the theory that
international trade would occur in situations where nations had 'absolute advantages' over rival states,
i.e. they Could produce with a given amount of labour and capital larger outputs of certain items than
any other country. The flaw in this argument is that it fails to explain why countries with an absolute
disadvantage in all their products (i.e. countries which produce less of everything made within the
country, using a given amount of labour and capital, than other nations) still engage in international
trade. A possible resolution of this question was suggested by the eminent economist David Ricardo,
who in 1817 alleged that trade among nations resulted from differences in the 'comparative' advantages
of countries in the production of various items, not differences in absolute

Table 1.1 Item A Item B

3 days labour 4 days labour

Country 1

Country 2 6 days labour 5 days labour

advantage. Ricardo assumed that the cost of producing any good depended only on the amount of labour
used in its production, and that firms and workers could not move freely between nations (a reasonable
assumption for the early 1800s).

The theory is illustrated by Table 1.1, which shows the time needed to produce two hypothetical items
in two different countries. It takes more days of labour to produce both items in country 2 than in
country 1, so that country 2 has an absolute disadvantage in the production of each item. Ricardo
assumed (importantly) that one unit of item A would be exchanged for one unit of item B, i.e. that a
person in country 1 with a single unit of A could sell it to someone in country 2 in return for a single unit
of B, and vice versa.

In this example trade will still benefit both countries because country 1 has a comparative advantage in
the production of item A (it can produce a unit of item A in fewer days than it takes to produce item B)
while country 2 has a comparative advantage in item B. If country 1 makes and exchanges a unit of A in
return for a unit of B from country 2 then it obtains for an outlay of 3 days labour an item that would

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require 4 days labour if it were produced at home. Equally, country 2 benefits from the transaction as it
receives for a cost of 5 days labour an item that would need 6 days if produced domestically. Hence
trade is profitable for all concerned.

Although fascinating, Ricardo's solution rests on the severe assumptions that:

 Firms in country 2 cannot move their operations to country 1 where both items can be produced
at lower cost.

 Only the amount of labour used in production determines the cost of an item. This ignores the
impact of technical advances on the use of capital equipment.

 Items exchange for each other at a predetermined and constant ratio.

Also, the theory does not explain why certain goods are cheaper in certain countries. This issue was
addressed by E. Heckscher and B. Ohlin in the 1930s.

2. The Heckscher-Ohlin theory of international trade

According to the Heckscher-Ohlin theory, goods prices differ because production costs differ, and
production costs themselves depend on the amount and costs of labour, capital and natural resources
used when making various products. Each country possesses a specific mix of labour, capital and other
'factor endowments': some have abundant supplies of labour; others are rich in natural resources, etc. If
an item embodies a large amount of labour, and if labour is cheap and plentiful in the producing
country, then that product will be cheap by international comparison and thus likely to be exported to
the rest of the world. In general, a country will export those items which incorporate relatively large
amounts of its most abundant factor, and import those products which include relatively small amounts of
the factor with which it is least endowed. In other words, differences in factor endowments determine
differences in comparative advantage, which themselves shape the pattern of international trade.

Empirical performance of international trade theories

The comparative cost, Heckscher-Ohlin and other hypotheses relating to international trade have been
tested extensively and, alas, no firm conclusions have emerged. Indeed, much empirical evidence flatly
rejects the fundamental propositions of these theories. Extensions and modifications of conventional
international trade theory have led to increasingly complex models, which themselves give rise to
further problems and contradictory results.

Factors that might confound orthodox trade theories include:

a) The rapid pace of technological development, which causes national advantage to shift frequently and
in unpredictable ways.

b) Skilful marketing that can increase foreign demand for relatively expensive exported goods.

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c) Governments regularly seeking to improve national balance of payments positions via the imposition
of tariffs, import and exchange controls, etc.

d) The fact, that trade theories regard nation states as independent trading units. In reality large
multinational companies shift goods, services and capital among their subsidiaries in various countries
at prices quite different to those at which a firm in one country would sell to a customer in another.

e) Poorer countries often having national economic development plans which encourage the
importation of capital goods that otherwise would not have a market in these nations.

f) Multinational companies frequently shifting from exporting to particular countries to local production
in those countries.

g) Sparcity and inaccuracy of the information upon which firms base their international trading
decisions.

3. The work of Michael Porter

Observing that traditional economic theories fail to explain why certain countries have succeeded in
the post-Second World War era, M. E. Porter put forward a fresh hypothesis concerning the basic
determinants of the national competitive advantages that lead to international trade. Porter's analysis
begins from the following propositions:

a) The capacity to automate complete production processes means that workforce costs and
competencies are not as critically important to successful operations as they once were.

b) Companies today are increasingly international in outlook and able to shift operations from country
to country at will.

c) The rise of the multinational corporation has broken the link between corporate efficiency and the
quality and availability of resources (labour, capital, etc.) within the firm's own country. An MNC is not
dependent on the resource base of just one nation; it operates wherever and whenever conditions are
favourable.

d) The workforces and capital market arrangements of many industrialized countries are today broadly
comparable, so that companies have greater choice over where they can locate activities. Hence the
pressures of supply and demand will tend in the long term to equalise the costs of skilled labour and
capital in these countries. Today, automated equipment can easily be substituted for labour, and
modern technology enables the creation of synthetic substitutes for expensive raw materials.

These new realities, Porter argues, mean that firms need constantly to seek new sources of competitive
advantage. In particular they need to operate internationally in order to fine-tune their competitive
strengths and to identify and then remove weaknesses. Selling to the most demanding consumers
causes a firm to achieve quality and service levels it would not otherwise attain. The key determinant of
contemporary national competitive advantage, Porter suggests, is product and process innovation - not

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cheap labour or an abundance of natural resources. Indeed, lack of the latter can actually spur a country
to a high level of technological innovation.

According to Porter, six sets of variables determine a nation's ability to compete internationally, namely:

1) Demand conditions: the strength and nature of domestic demand; consumer desires, perceptions and
levels of sophistication.

2) Factor conditions: skilled labour, road and rail infrastructure, natural resources, etc.

3) Firm strategy, structure and rivalry: the organisation and management of companies and the extent
of domestic competition.

4) Related and supporting industries: extent of supply industries, ancillary business services, input
component manufacturers and so on.

5) Government policies, including rules on business competition, state intervention in industry, regional
development, health and education and (importantly) vocational training.

6) Luck and chance.

Porter analysed data on the world's major industrial and trading nations and arrived at the following
conclusions:
a)Lack of national resources (e.g. of oil, labour, minerals, etc.) can spur a country to a high level of
innovation.
b) To be successful nations must move from having factor-driven to having investment-driven
economies, followed by a further move to an innovation- driven economy. The latter contrasts with the
'wealth-driven' economies of certain countries, which have complacent businesses and are in decline
despite per capita GDP continuing to rise.

c) The creation of domestic monopolies through mergers and takeovers creates moribund economic
environments that are not conducive to innovation; even though domestic monopolies may have to
compete fiercely on the international level.
d) Nations with governments that have been heavily involved with industries have generally been the
least successful.

4. Mercantilism
Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic
theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver
holdings. In its simplest sense, mercantilists believed that a country should increase its holdings of gold
and silver by promoting exports and discouraging imports. In other words, if people in other countries
buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in
gold and silver. The objective of each country was to have a trade surplus, or a situation where the value
of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the
value of imports is greater than the value of exports. A closer look at world history from the 1500s to the

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late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states,
whose rulers wanted to strengthen their nations by building larger armies and national institutions. By
increasing exports and trade, these rulers were able to amass more gold and wealth for their countries.
One way that many of these new nations promoted exports was to impose restrictions on imports. This
strategy is called protectionism and is still used today.

5. Leontief Paradox
In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy
closely and noted that the United States was abundant in capital and, therefore, should export more
capital-intensive goods. However, his research using actual data showed the opposite: the United States
was importing more capital-intensive goods. According to the factor proportions theory, the United
States should have been importing labor-intensive goods, but instead it was actually exporting them. His
analysis became known as the Leontief Paradox because it was the reverse of what was expected by the
factor proportions theory. In subsequent years, economists have noted historically at that point in time,
labor in the United States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labor-intensive goods. Over the decades, many economists
have used theories and data to explain and minimize the impact of the paradox. However, what remains
clear is that international trade is complex and is impacted by numerous and often-changing factors.
Trade cannot be explained neatly by one single theory, and more importantly, our understanding of
international trade theories continues to evolve.

THEORIES OF INTERNATIONAL INVESTMENT

1. The product life cycle theory of international investment

The product life cycle (PLC) hypothesis asserts that, like people, products are conceived and born,
mature, decline and eventually die. Hence, a product has a 'life cycle' comprising a series of stages. The
introductory phase is characterized by high expenditures (for market research, test marketing, launch
costs, etc.) and possibly by financial losses. Early customers will be attracted by the novelty of the item.
Typically, these customers are younger, better educated and more affluent than the rest of the
population. No competition is experienced at this stage. There is extensive advertising during the intro-
duction, the aim being to create product awareness and loyalty to the brand.

There should now follow a period of growth, during which conventional consumers begin to purchase
the product. Competition appears at this stage. Then the product enters its maturity phase. Here the
aim is to stabilise market share and make the product attractive (through improvements in design and
presentation) to new market segments. Extra features might be added, quality improved, and
distribution systems widened. Competition intensifies; appropriate strategies now include extra
promotional activity, price cutting to improve market share, and finding new uses for the product.
Eventually, the market is saturated and the product enters its phase of decline. Public tastes might have
altered, or the product may be technically obsolete. Sales and profits fall. The product's life should now
be terminated, otherwise increasing amounts of time, effort and resources will be devoted to the
maintenance of a failing product.

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It could be, however that, a product that has reached the end of its life cycle in one country may have a
fresh lease of life elsewhere. Indeed, L. T. Wells advanced the theory that product life cycles explain the
pattern of direct foreign investment in developing countries by western MNCs. According to the
argument, an item is introduced to a developing country and, at first, has little or no serious
competition. Then the product is imitated by local suppliers so that several companies now sell the item.
Hence, product differentiation via the addition of new features, provision of service facilities, etc.,
becomes necessary in order to secure a competitive edge. Local competitors might even improve upon
the product and begin to export their versions of it to the originating firm's own country. Competition
intensifies, and price cutting occurs until the product is no longer profitable for the foreign exporter to
supply. Note how foreign imitators might enjoy lower labour and other local production costs, and
spend nothing on new product development. The exporter conversely has to pay transport costs plus
import duties. Thus the exporting company is likely to establish its own local manufacturing facilities in
order to be able to compete on price with local firms. Also it must quickly create a strong brand image
and effective communications with agents and distributors 'in the field'. Thus direct foreign investment
(DFI) in less developed economies by firms from richer nations was the only way they could compete
against locally based low-cost imitating businesses.

Empirical evidence tended to support this theory during the 1950s and early 1960s, but not thereafter,
possibly for the following reasons:

a) New product innovation is today so rapid that product life cycles are too short for it to be worthwhile
establishing foreign production facilities dedicated to a particular item.

b) Although firms in less developed countries may be able to produce products cheaper than western
rivals they cannot necessarily transport, market and distribute them efficiently.

c) In practice, MNCs often launch new products in developed and underdeveloped countries
simultaneously.

d) MNCs frequently choose low-cost countries as production sites for the worldwide sale of a good, i.e.
no production occurs in economically advanced nations.

e) As alternatives to DFI, Western firms may engage in licensing or contract manufacturing in order to
produce goods in less developed countries.

There are, moreover, a number of fundamental problems with the basic PLC hypothesis itself. The
length of life of a new product cannot be reliably predicted in advance, and many products cannot be
characterized in life cycle terms (basic foodstuffs, or industrial materials for instance). Importantly,
variations in marketing effort will affect the durations of life cycle phases and determine the timing of
transitions from one stage to the next. Products do not face inevitable death within predetermined
periods: the termination of a product's life is very much a management decision. In many cases a
product's lifespan may be extended by skilful marketing. Also, management can never be sure of the
phase in its life cycle in which a product happens to be at a particular time. How, for instance, could

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management know that a product is near the start and not the end of its growth phase, or that a fall in
sales is a temporary event rather than the start of a product's decline?

The expected demise of a product can become a self-fulfilling reality; management may assume wrongly
that sales are about to decline and consequently withdraw resources from the marketing of that
product. Hence, in the absence of advertising, merchandising, promotional activity, etc., sales do fall and
the product is withdrawn! Yet another problem is the enormous number of (sometimes random) factors
that can influence the durations of phases, turning points and levels of sales. Competitors' behavior may
be the primary determinant of the firm's sales, regardless of the age of the product.

2. Market imperfections and monopolistic advantage theories

These assert that large firms engage in international business in order to create near monopoly
conditions for their operations. Thus, for example:

 Cross-border patent licensing agreements carve up foreign markets and prevent competition in
relation to the patented item.

 Foreign production in countries with very low labour and other costs followed by the export of
the resulting output to the parent company's home nation enables the company to undercut its
domestic competitors and drive them out of business.

 Acquisition of foreign sources of raw materials and/or other inputs or of foreign distribution
outlets means that the firm 'internalises' the entire procurement, supply and distribution system
within a single organisation, hence reducing uncertainties and risks and restricting competition.

More generally, 'imperfections' in foreign market conditions are said to explain international investment
by companies. Stephen Hymer, for example, has argued that firms only invest abroad if they have
attributes not possessed by local foreign rivals and there are barriers ('market imperfections') that
prevent these rivals from obtaining the attributes of the foreign company. Attributes could relate to
economies of scale in production, marketing or organizational management skills; preferential access to
finance or raw materials; or the use of a superior technology. These advantages must be of a magnitude
sufficient to offset the costs of operating abroad (need to conduct research into the local market,
foreign exchange risks, transport costs, etc.) and, subsequent writers have suggested, may be 'firm
specific', 'ownership specific', or 'location specific'.

Ownership-specific factors relate to such matters as the extent of a company's share capital, receipt of
government grants and subsidies, and proprietary rights over intellectual property. Location-specific
advantages include low prices for locally purchased inputs, low transport costs, easy communications,
availability of local business support services (advertising agencies, market research firms, etc.), a skilled
and low-cost labour force, and the avoidance of trade restrictions imposed by the host country govern-
ment in order to reduce imports. Other relevant factors are market size and rate of growth and the
extent of local competition. Examples of firm-specific advantages are the ownership of well-known

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brands, special marketing skills, attractive product features, patents, economies of scale or access to
capital markets.

3. Dunning's eclectic theory of international production

John Dunning's 'eclectic theory' of foreign investment asserts that the likelihood of a firm investing
abroad depends essentially on firm-specific factors, location-specific factors that make it advantageous
to invest in a particular country, and 'internalization' advantages which cause the internal transfer of
labour, capital and technical knowledge within the firm to be more cost- effective than using outsiders,
such as licensees, import agents, distributors and so on.

Internalization
Arguably, firms invest directly in other countries in order to cut out the use of (expensive) suppliers and
distributors. Hence all stages in the supply process are brought under a common ownership so that the
full benefits of research and development can be obtained (by avoiding the use of licensees), and
working capital better utilized. Also foreign government import regulations might be avoided through
producing in a local subsidiary rather than exporting direct. All aspects of marketing will be controlled by
the supplying firm, and there are no intermediate sales or value added taxes. Knowledge can be
transferred around the company at will. Note however that extra costs have to be incurred by a firm
that does things for itself rather than using outsiders. Internal communication and administration costs
increase and there are additional costs associated with having to operate in unfamiliar environments.
Problems with theoretical models of DFI
While interesting in themselves, none of the models previously outlined is sufficiently general to explain
all aspects of the foreign investment behaviour of international companies. Each theory purports to give
reasons for certain investment activities, but contradictory evidence can be advanced against all of them
in certain circumstances. The theories are partial and incomplete and adopt different ideological
perspectives. In particular, these theories tend to ignore the influences of the psycho-social and other
human aspects of international managerial behaviour, and of the governments of nation states.
Theories of international investment sometimes contradict each other, and should really be regarded as
'opinions' rather than as theories capable of empirical verification. Arguably, moreover, the field of
international business is so complex and fast changing and covers so many disparate elements that no
general theory can be valid for very long.

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International business competitive Forces (A comparative analysis)

Absolute and Comparative Advantage

Comparative advantage emphasizes nationally “endowed” factors, differences in international

technology/productivity, external economies, and international policies. Comparative advantage focuses
on the relative productivity differences. The literature on international trade and policy contains a
number of reasons why a country may have an advantage in exporting a commodity to another country.
For convenience, most of these reasons may be classified into (1) technological superiority, (2) resource
endowments, (3) demand patterns, and (4) commercial policies.

Technological Superiority
Adam Smith’s principle of “absolute advantage” and David Ricardo’s principle of “comparative
advantage”, in general, are based on the technological superiority of one country over another country
in producing a commodity. Absolute advantage refers to a country having higher (absolute) productivity
or lower cost in producing a commodity compared to another country. However, absolute advantage in
the production of a commodity is neither necessary nor sufficient for mutually beneficial trade. For
example, a country may be experiencing absolute disadvantage in the production of all commodities
compared to another country, yet the country may derive benefits by engaging in international trade
with other countries, due to relative (comparative) advantage in the production of some commodities
vis-à-vis other countries. Likewise, absolute advantage in the production of a commodity is not
sufficient, since the country may not have relative (comparative) advantage in the production of that
commodity. David Ricardo’s principle of comparative advantage does not require a higher absolute
productivity but only a higher relative productivity (a weaker assumption) in producing a commodity.
Pre-trade relative productivities/costs determine the pre-trade relative prices. Pre-trade relative prices
in each country determine the range of possible terms of trade for the trading partners. Actual terms of
trade within this range, in general, depend on demand patterns, which, in turn determines the gains
from trade for each trading partner.

The Ricardian model assumes constant productivity, as there is only one factor of production (labour),
and therefore constant (opportunity) costs that leads to complete specialization. However, increasing
opportunity costs that often arise in multi-factor situations (law of diminishing returns) due to limited
quantity of some factors specific to an industry can easily be accommodated to allow for incomplete
specialization. Thus, in the Ricardian model, technological differences in two countries are the major
source of movement of commodities across national boundaries.

While the principle of comparative advantage as expounded by David Ricardo was couched in terms of
technological superiority, the principle, when phrased in terms of comparing opportunity cost or relative
prices of goods and services between countries is sufficiently general to encompass a variety of
circumstances. Furthermore, although Ricardo’s explanation of comparative advantage was in static
terms, comparative advantage is a dynamic concept. A country’s comparative advantage in a product
can change over time due to changes in any of the determinants of comparative advantage including

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resource endowments, technology, demand patterns, specialization, business practices, and
government policies.

Resource Endowments
Availability of resources in a country provides another source of comparative advantage for countries
that do not necessarily possess a superior technology. Under certain restrictive assumptions,
comparative advantage can be obtained due to differences in relative factor endowments. As
propounded by Hecksher and Ohlin, a country has a comparative advantage in the production of that
commodity which uses the relatively abundant resource in that country more intensively. For example,
newsprint uses natural resources (forest products) more intensively compared to textiles. Textiles use
labour (L) more intensively compared to newsprint. Canada is relatively abundant in natural resources
(R) compared to India. (R/L) Canada > (R/L) India. This implies R will be relatively cheaper in Canada as
compared to India. Thus, Canada has a comparative advantage in newsprint and will therefore specialize
and export newsprint to India. Likewise, India has a comparative advantage in textiles and will therefore
specialize and export textiles to Canada.

Human skills: Human skills can also be considered a resource. Countries with relatively abundant human
skills will have a comparative advantage in products that use human skills more intensively. Certain
products such as electronics require a highly skilled labour force (such as engineers, programmers,
designers, and other professional personnel). Such products may gain comparative advantage in
countries (such as Taiwan, Singapore, Hong Kong) that are relatively better endowed with such skilled
labour. (Keesing, 1966). Government policies aimed at better education and training can create such an
endowment.

Economies of Scale: Economies of scale can provide comparative advantage by lowering production
costs. External economies that operate by shifting the average cost of firms downward can in fact occur
due to an industrial policy or a proactive role of the government in providing better infrastructure
and/or a better educated or trained labour force. Such economies of scale are consistent with Ricardian
and Factor Proportions models. Economies of scale (internal) achieved through the existence of a large
home market and/or some policy-induced accessibility to a larger market outside the nation (say due to
a customs union) also imply lower production costs. This may boost or create a comparative advantage
for the industry experiencing such economies of scale.

Technological Gap (Benefits of an Early Start) and Product Cycle: Industrially advanced nations in
general had an early start in most manufactured products and services, which allowed them to enjoy
large national and international markets. Industrially advanced nations were thus able to export new
products until such time that the products were produced by other low factor cost countries. Vernon’s
(1966) Product Cycle hypothesis emphasizes the importance of the nature and size of home demand for
new products in highly industrialized countries. Since, initially, the new product involves
experimentation of the features of the product as well as the production process, the countries that
have sufficient home demand for such products produce and export them. As the specific nature of
demand becomes more universal and the technology more easily available to others, the nation loses

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comparative advantage in that product. Meanwhile, the firms are likely to have developed another
product that enables the nation to gain comparative advantage in that product.

Demand Patterns: Demand Considerations

The role of demand and the size of the home market for products are already evident in (1) establishing
the equilibrium terms of trade and therefore the division of gains from trade; (2) economies of scale;
and (3) product cycle hypothesis. In addition, Linder (1961) emphasized the role of demand in the home
market as a stepping stone towards success in international markets. According to Linder,
manufacturers initiate the production of a new product to satisfy the local market. In this step, they
learn the necessary skills for making the product by more efficient techniques, which in turn, give these
nations comparative, advantage in the product vis-à-vis other countries. Linder’s thesis postulates
exporting the product to countries with similar tastes/demand patterns. The theory, coupled with
market imperfections and product differentiation can explain a large portion of intra-industry trade
among the industrialized nations.

National and International Policies

National policies towards infrastructure, export promotion, education and training, R&D policy related
to export industries can go a long way in creating and sustaining comparative advantage. Industrial
policies such as production subsidies, tax preferences, restricted tendering of Government contracts,
anti-trust policy, and a number of other means are often used to provide an advantage to domestic
industries. Likewise, the commercial policies aimed at restricting imports through tariffs, quotas,
voluntary export restraints, import licensing, local content rules, restriction on outsourcing, escape
clauses, etc. have been used to the advantage of domestic import competing industries. Policy driven
benefits realized by the industries through internal and/or external economies, in the long run, may
become a source of comparative advantage to these industries. The 1965 Auto-Pact between Canada
and the USA is a good example of targeting individual industries to influence production and trade
through national policies. The trade creation and trade diversion effects of customs unions/free trade
areas are well known in the literature. Further, the policies pursued by international organizations such
as the World Bank, the IMF and the WTO can also become a source of comparative
advantage/disadvantage to some industries in countries affected by such policies.

Dynamic Gains /Comparative Advantage

International trade, through a better allocation of resources, increases incomes, saving, and investment,
thus enabling a country to realize higher growth even in fully employed economies. In addition, for
developing countries, trade can enable them to transform consumption goods and raw materials into
capital goods as well as gain technological know-how from technologically advanced countries. Trade
can also provide demand stimulus to the lagging (excess capacity of some factors of production)
economies. Furthermore, specialization through trade benefits not only the export industry, but all
other industries (through increased demand for their products) related to the export industries. Lastly,
by increasing the size of national market and thereby the size of production facilities, domestic firms can

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reap both external and internal economies of scale. International trade also implies more competitive
pressures on domestic firms that stimulate research and development.
All these considerations yielding comparative advantage to the nation may be seen as a framework of a
number of forces that can be portrayed. Obviously, the firms specializing within the industries that have
comparative advantage are on a much stronger footing to derive competitive advantage in producing
standardized or differentiated products within that industry. In this framework, technology, resources,
demand and the trade-enhancing policies are depicted as four forces influencing the comparative
advantage of a nation in a commodity/service vis-à-vis other countries. Dynamic elements influencing
comparative advantage are also included in these forces.

Competitive advantage/absolute advantage

Competitive advantage relies heavily on the firm-specific factors such “created” factors, “created”
demand for the product, and internal economies achieved through innovation. Smith offered a new
trade theory called absolute advantage, which focused on the ability of a country to produce a good
more efficiently than another nation. Absolute advantage looks at the absolute productivity.

Porter (1985) emphasized competitiveness at the level of a firm in terms of competitive strategies such
as low cost and/or product differentiation. A number of writers on competitive advantage have focused
on the determinants/sources of competitive advantage such as important attributes of the firm:
rareness, value, inability to be imitated, and inability to be substituted (Barney, 1991); important
potential resources classified as financial, physical, legal, human, organizational, informational, and
rational (Hunt and Morgan, 1995); ability in developing superior core competencies in combining their
skills and resources (Prahalad and Hamel, 1990); a set of dynamic capabilities—capabilities of possessing
and allocating and upgrading distinctive resources. Luo (2000). A number of studies have also analysed
the role of individual factors such as intellectual property rights, trade secrets, data bases, the culture of
organization, etc. (Hall, 1993), ethics capability (Buller and McEvoy, 1999), corporate reputation
(Ljubojevic, 2003), diversity in workplace (Lattimer, 2003) and corporate philanthropy (Porter and
Kramer, 2002). The central focus of these contributions is still on firm-specific factors of competitive
advantage.

Porter’s National Competitive Advantage Theory

Porter identified four determinants that he linked together. The four determinants are (1) local market
resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary
industries, and (4) local firm characteristics.

1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor
proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as
key factors in determining what products a country will import or export. Porter added to these basic
factors a new list of advanced factors, which he defined as skilled labor, investments in education,
technology, and infrastructure. He perceived these advanced factors as providing a country with a
sustainable competitive advantage.

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2. Local market demand conditions. Porter believed that a sophisticated home market is critical to
ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose
domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the
development of new products and technologies. Many sources credit the demanding US consumer with
forcing US software companies to continuously innovate, thus creating a sustainable competitive
advantage in software products and services.

3. Local suppliers and complementary industries. To remain competitive, large global firms benefit from
having strong, efficient supporting and related industries to provide the inputs required by the industry.
Certain industries cluster geographically, which provides efficiencies and productivity.

4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and
industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local
firms will spur innovation and competitiveness.

Industry analysis and structure

Business strategy involves identifying and exploiting the resources and capabilities of the firm in the
marketplace for the purpose of gaining competitive advantage and superior financial performance.
Inherent in this definition is the need to continuously renew these resources and capabilities, to
determine a set of goals and objectives for the enterprise when it does gain competitive advantage, to
understand the structure of the marketplace and of the competitive situation faced by the firm, and to
devise, assess, and choose among a set of strategic options for the firm. A fully developed strategy must
also be suitable to the macro-environment of the enterprise and must develop organizational solutions
to execute otherwise abstract plans.
The major aspects of strategy analysis include: setting goals and objectives, performing competitive and
industry analysis, analyzing resources and capabilities, developing strategic options, choosing a strategy,
and implementing that strategy, with feedback loops among all the processes.

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The Strategic Analysis Process

International business involves a specific set of issues whose strategic resolution ties into the generic
strategic analysis and involve (1) increasing geographic spread (often referred to as
‘internationalization’), (2) achieving local adaptation (often referred to as ‘responsiveness’), (3) building
global integration (sometimes referred to as ‘globalization’ or ‘global strategy’), and (4) multi-business,
multi-country, and often multi-firm issues such as international strategic alliances and global mergers
and acquisitions.

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International Strategy Issues

Although the last international issue of multi-business/multi-firm/multinational moves tends to require

heavy emphasis on all five strategic analysis processes. We see heavy reliance on goal setting, industry
analysis, and resource assessment as firms expand internationally. Adaptation and integration are driven
largely by issues developed through competitive analysis and resource assessment, while integration
must also consider issues revealed by different means of assessing strategic conditions and
opportunities.

Resources and Capabilities for Geographic Spread

The concept of resources and capabilities developed in the strategy literature (e.g. Wernerfelt, 1984;
Grant, 1991) applies very well to the international strategy issue of geographic spread. Companies that
own or access unique resources and capabilities—demonstrating unique core competencies in Hamel
and Prahalad's terms—find that international expansion gives them vast new opportunities to leverage
these expensive and valuable skills

Risk and Return in International Strategy

Another consideration in international expansion is risk reduction, whether financial, business, or

environmental. International expansion offers the opportunity to move into markets that are not
perfectly in phase with the home market.

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Industry and Competitor Analysis for Geographic Spread

Classic industry and competitor analysis (Porter 1980 and 1985) can be applied to geographic spread.
Firms usually need an initial competitive advantage that they can leverage into international markets.
Then, in addition to the initial competitive advantage, companies need to conduct classic industry
analysis in each market, as by using Porter's (1980) five forces framework to establish for each potential
foreign market what the likely prospects are for above average returns.

Industry structure analysis WBA/ Term paper

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