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• International business is the exchange of goods, services, resources, knowledge, and skills among individuals and businesses in two or more countries
• International business focuses on any commercial activity or transaction between companies, organizations, individuals, or government entities that crosses borders into different countries and regions
• The term international business refers to any business that operates across international borders
• Nature of International Business:

  • Accurate Information and timely
  • The size of the international business
  • Market segmentation
  • International markets have more potential than domestic markets
  • Involvement in Commercial Activity
  • Surrounded by Political Risk (character/description)
• International business occurs in many different formats:

  • The movement of goods from country to another (exporting, importing, trade)
  • Contractual agreements that allow foreign firms to use products, services, and processes from other nations (licensing, franchising)
  • The formation and operations of sales, manufacturing, research and development, and distribution facilities in foreign markets
• Firms combine aspects of both multi-domestic and global operations:

  • Multi-domestic – A strategic business model that involves promoting products and services in various markets around the world and adapting the product/service to the cultural norms, taste preferences, and religious customs of the various markets
  • Multinational – A business strategy that involves selling products and services in different foreign markets without changing the characteristics of the product/service to accommodate the cultural norms or customs of the various markets
• International Finance:

  • Sometimes known as international macroeconomics, is the study of monetary interactions between two or more countries, focusing on areas such as foreign direct investment and currency exchange rates
• Specific areas of study in Intl. Finance:

  • The Mundell-Fleming Model
  • International Fisher Effect
• The International Fisher Effect (IFE) states that differences in nominal interest rates between countries can be used to predict changes in exchange rates
• Optimum currency area theory states that certain geographical regions would maximize economic efficiency if the entire area adopted a single currency
• Purchasing power parity is the measurement of prices in different areas using a specific good or a specific set of goods to compare the absolute purchasing power between different currencies
• Factors That Affect International Business:

  • Economic factors
  • Legal
  • Political
  • Environmental
  • Social factors
  • Technological
  • Competitive environment
  • Currency controls
  • Technological environment
  • Administrative policies
  • Behavioral factors
  • Competitors
  • Demographics
  • Dissolution of communist markets
  • Employment law
  • Demand
  • Taxation
  • Cultural differences
  • Sociocultural
  • Ethical factors
  • Gender
• Business trends in the Philippines in 2024:

  • Transition to organized e-commerce platforms: The Internet Transactions Act (ITA) is expected to catalyze a shift from informal commerce to more organized e-commerce platforms
• Businesses must be agile and adaptable to thrive in this evolving digital ecosystem. The ITA will challenge enterprises to elevate their e-commerce strategies. Enhanced internet infrastructure will unlock opportunities for market expansion and customer outreach. The increase in digital payment options, the integration of AI and machine learning for personalized experiences, and the emphasis on sustainable practices reflect a growing and maturing market with a conscious drive toward inclusivity and responsibility
• an example of a multi-domestic product?

  • The company's products are

  adapted to local tastes and

  preferences in each market.

  • e.g. Unilever's Lipton tea brand is

  marketed differently in different

  countries. Lipton sells green tea in

  Japan, while in the United States, it

  sells black tea
• Multinational – A business strategy that

  involves selling products and services in

  different foreign markets without changing

  the characteristics of the product/service to

  accommodate the cultural norms or

  customs of the various markets.
• International Finance

  *Sometimes known as international

  macroeconomics, is the study of monetary

  interactions between two or more countries,

  focusing on areas such as foreign direct

  investment and currency exchange rates.
• The Mundell-Fleming Model, which studies the

  interaction between the goods market and the

  money market, is based on the assumption that

  price levels of said goods are fixed.
• e.g. The Mundell–Fleming model applied to

  a small open economy facing perfect

  capital mobility, in which the domestic

  interest rate is exogenously determined by

  the world interest rate, shows stark

  differences from the closed economy model.

  Consider an exogenous increase in

  government expenditure. (developed

  by:Marcus Fleming and Robert Mundel)
• Mundell-Fleming Model (MFM) describes

  the workings of a small economy open to

  international trade in goods and financial

  assets, and provides a framework for

  monetary and fiscal policy analysis.
• Importance of Mundell-Fleming model

  The Mundell–Fleming model has been used

  to argue that an economy cannot

  simultaneously maintain a fixed exchange

  rate, free capital movement, and an

  independent monetary policy. An economy

  can only maintain two of the three at the

  same time.
• International Fisher Effect is an international

  finance theory that assumes nominal interest rates

  mirror fluctuations in the spot exchange rate

  between nations
• International Fisher Effect

  named after famous economist Irving Fisher

  related with investment

  investor invests with the expectation of getting return on his investment

  returns can be divided into two: nominal and real return
• Nominal Return is offered by the company/borrower 12% or 14%

  Real return is the inflation adjusted rate of return
• The International Fisher Effect (IFE) states

  that differences in nominal interest rates

  between countries can be used to predict

  changes in exchange rates.
• According to the IFE, countries with higher

  nominal interest rates experience higher

  rates of inflation, which will result in

  currency depreciation against other

  currencies.
• In practice, evidence for the IFE is mixed

  and in recent years direct estimation of

  currency exchange movements from

  expected inflation is more common.
• IFE in Action

  • suppose the GBP/USD spot exchange rate

  is 1.5339 and the current interest rate is 5%

  in the U.S. and 7% in Great Britain. The

  IFE predicts the country with the higher

  nominal interest rate (Great Britain in this

  case) will see its currency depreciate. The

  expected future spot rate is calculated by

  multiplying the spot rate by a ratio of the

  foreign interest rate to the domestic interest

  rate: 1.5339 x (1.05/1.07) = 1.5052.
• • The IFE expects the GBP to depreciate

  against USD (it will only cost $1.5052 to

  purchase one GBP compared to $1.5339

  before) so investors in either currency will

  achieve the same average return (i.e. an

  investor in USD will earn a lower interest

  rate of 5% but will also gain from

  appreciation of the USD).
• GBP…e.g….

  Pound sterling equals

  71.47 Philippine peso

  GBP could be defined as the short form of the

  British pound sterling which is the official currency

  of countries such as the United Kingdom, the South

  Sandwich Islands, the British Overseas Territories

  of South Georgia and the British Antarctic Territory.

  Other currencies such as the Falkland Islands

  pound, Jersey pound, Scotland notes etc. are

  attached to the British pound.
• 3. optimum currency area theory states that

  certain geographical regions would maximize

  economic efficiency if the entire area adopted a

  single currency.
• Optimum currency area theory (OCA)

  states that specific areas not bounded by

  national borders would benefit from a

  common currency. In other words,

  geographic regions may be better off using

  the same currency instead of each country

  within that geographic region using its own

  currency
• A currency union is an agreement among

  members of that union (countries or other

  jurisdictions) to share a common currency,

  and a single monetary and foreign

  exchange policy.
• Which country has same currency as India?

   In India, the Indian Rupee is the official

  currency. Similarly, in Pakistan, Maldives,

  Sri Lanka, and Nepal the Rupee is used as

  the official currency.
• 4. Purchasing power parity is the measurement

  of prices in different areas using a specific good or

  a specific set of goods to compare the absolute

  purchasing power between different currencies.
• 5. Interest rate parity describes an equilibrium

  state in which investors are indifferent to interest

  rates attached to bank deposits in two separate

  countries
• Comparative Advantage

  a nation has an advantage over other

  nations in terms of access to:

  1. affordable land,

  2. resources,

  3. labor, and

  4. capital.