International business

MINISTRY OF SCIENCE AND HIGHER EDUCATION OF THE RUSSIAN FEDERATION SOUTHERN FEDERAL UNIVERSITY




P. V. Pavlov




                INTERNATIONAL
                BUSINESS




Textbook







Rostov-on-Don - Taganrog Southern Federal University Press 2019

    UDC 339.5, 339.7, 339.9
    BBC 65.5, 65.2/4
Published by the decision of the Department of Enterprise Economics Institute of management in Economic, Ecological and Social systems, Southern Federal University
(Protocol № 10 of 09.01.2018)
Reviewers:
    Alexey Yu. Arkhipov, Doctor of Economics, Professor, Head of the Department of International Business, Southern Federal University (105/42, B.Sadovaya Str., 344000, Rostov-on-Don, Russia; e-mail: arkhipov@sfedu.ru);
Sebastian M. Bakalarczyk, PhD, Professor, Lodz University of Technology (266 Piotrkovska Str., 90-924 Lodz, Poland; e-mail:
sebastian.bakalarczyk@p.lodz.pl);
Sergey F. Sutyrin, Honorary Figure of Higher Education, Doctor of Economics, Professor, Head of the Department of World Economy,
            St. Petersburg State University (7-9, Universitetskaya Emb.,
            199034, St. Petersburg, Russia; e-mail: s.sutyrin@spbu.ru)

            Pavlov, P. V.
             International Business : textbook / P. V. Pavlov ; Southern Federal University. - Rostov-on-Don ; Taganrog : Southern Federal University Press, 2019. - 294 p.
            ISBN 978-5-9275-3129-5


         The course “International Business” is aimed to provide the future specialists with theoretical and practical knowledge in the field of organization, management and regulation of international business in the conditions of Russian and world practice.
       The textbook is for undergraduate and graduate students majoring in Management, Economics, Customs, as well as employees of commercial enterprises, customs officers and credit institutions, insurance and transport organizations, etc.
      Author's edition.
UDC 339.5, 339.7, 339.9
                                                                  BBC 65.5, 65.2/4 ISBN 978-5-9275-3129-5
© Southern Federal University Press, 2019
© Pavlov P. V., 2019

CONTENTS

ABBREVIATIONS.................................................... 6
INTRODUCTION .................................................... 7
TOPIC 1. CONCEPT AND MODERN STATUS OF INTERNATIONAL BUSINESS ....................................................... 10
     Concept, Causes and Prerequisites for Emergence and
     DEVELOPMENT OF INTERNATIONAL BUSINESS ..................... 10
     CLASSIFICATION FACTORS FOR DOING INTERNATIONAL BUSINESS ... 19
     INTERNATIONAL BUSINESS ENVIRONMENT ........................ 22
     TOPIC 1 REVIEW QUESTIONS .................................. 31
TOPIC 2. STRATEGIES IN INTERNATIONAL BUSINESS....................32
     COMPANY STRATEGY AND ITS IMPLEMENTATION STAGES ............ 32
     WAYS OF ENTERING FOREIGN MARKETS .......................... 36
     INTERNATIONAL PRODUCTION ACTIVITY OF COMPANIES ............ 51
     OUTSOURCING ............................................... 66
     TOPIC 2 REVIEW QUESTIONS .................................. 74
TOPIC 3. MODELS OF INTERNATIONAL BUSINESS........................75
     EXPORT-IMPORT MODEL OF INTERNATIONAL BUSINESS ............. 76
     LICENSED MODEL OF INTERNATIONAL BUSINESS .................. 77
     INVESTMENT MODEL OF INTERNATIONAL BUSINESS ................ 81
     INTERNATIONAL INDUSTRIAL COOPERATION AND JOINT ENTERPRISE . 83
     TOPIC 3 REVIEW QUESTIONS .................................. 93
TOPIC 4. COMPETITIVENESS IN INTERNATIONAL BUSINESS ............. 94
     COMPETITION: ITS CONCEPT AND TYPES ........................ 94
     PORTER’S THEORY OF COMPETITIVE ADVANTAGE OF NATIONS ....... 95
     Assessment of International Competitiveness of Countries and
     COMPANIES: COMPARATIVE CHARACTERISTICS ................... 109
     NATIONAL COMPETITIVE DEVELOPMENT STAGES .................. 117
     TOPIC 4 REVIEW QUESTIONS ................................. 120
TOPIC 5. ROLE OF FOREIGN INVESTMENT IN INTERNATIONAL BUSINESS DEVELOPMENT .......................................... 121
     IDEA AND FORMS OF FOREIGN INVESTMENT ..................... 121
     Dynamics and Structure of Foreign Investment in Global
     ECONOMY .................................................. 131

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     TOPIC 5 REVIEW QUESTIONS .............................. 134
TOPIC 6. MARKETING AND ELECTRONIC COMMERCE IN
INTERNATIONAL BUSINESS.......................................135
     INTERNATIONAL MARKETING ............................... 135
     E-COMMERCE ............................................ 141
     BASIC E-COMMERCE MODELS AND THEIR IMPLEMENTATION FEATURES ... 144
     TOPIC 6 REVIEW QUESTIONS .............................. 149
TOPIC 7. LOGISTICS IN INTERNATIONAL BUSINESS ................150
     LOGISTICS, ITS DEFINITION AND PARTICIPANTS ............ 150
     LOGISTICS TRANSPORT INFRASTRUCTURE .................... 153
     BASIC DELIVERY TERMS: INCOTERMS 2010 ...................162
     TOPIC 7 REVIEW QUESTIONS .............................. 168
TOPIC 8. PRICING IN INTERNATIONAL BUSINESS ..................169
     FUNDAMENTALS AND FEATURES OF PRICING IN GLOBAL MARKET . 169
     PRICING IN GLOBAL COMMODITY MARKETS OF VARIOUS TYPES .. 175
     FOREIGN TRADE PRICING: PRACTICE AND METHODS ........... 180
     TOPIC 8 REVIEW QUESTIONS ................................... 194
TOPIC 9. FINANCING AND PAYMENTS CONDITIONS IN
INTERNATIONAL BUSINESS...........................................195
     FORMS OF FINANCING INTERNATIONAL BUSINESS ACTIVITIES .. 195
     Financing of Company’S International Operations with
     PARTICIPATION OF INSURANCE AND EXPORT FINANCE INSTITUTIONS .200
     FORMS OF PAYMENTS IN INTERNATIONAL BUSINESS ............201
     TOPIC 9 REVIEW QUESTIONS ...............................217
TOPIC 10. INTERNATIONAL TAX PLANNING.........................218
     INTERNATIONAL TAX PLANNING MAIN CATEGORIES .............218
     TAX RESIDENCY OF INDIVIDUALS ...............................222
     TAX RESIDENCE OF LEGAL ENTITIES ............................225
     INTERNATIONAL DOUBLE TAXATION ..............................226
     ELIMINATION OF DOUBLE TAXATION .............................229
     TOPIC 10 REVIEW QUESTIONS ..............................231
TOPIC 11. LEGAL EXECUTION OF AGREEMENTS IN
INTERNATIONAL BUSINESS...........................................232
     LEGAL REGULATION OF TRANSACTIONS ...........................232
     INTERNATIONAL COMMERCIAL TRANSACTION PROCEDURE .............234

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     CONTRACT CONTENT ...................................... 241
     TOPIC 11 REVIEW QUESTIONS ............................. 249
TOPIC 12. FEATURES OF INTERNATIONAL BUSINESS
MANAGEMENT OF DIFFERENT COUNTRIES ........................250
     BUSINESS CULTURE AND ETHICS IN INTERNATIONAL BUSINESS . 250
     THE USA IN THE INTERNATIONAL BUSINESS ................. 255
     EUROPEAN UNION COUNTRIES IN INTERNATIONAL BUSINESS . 260
     PRC IN INTERNATIONAL BUSINESS .........................266
     LATIN AMERICAN COUNTRIES IN INTERNATIONAL BUSINESS .... 273
     RUSSIA IN INTERNATIONAL BUSINESS ................... 275
     TOPIC 12 REVIEW QUESTIONS ............................. 280
REFERENCES .............................................. 281
     BOOKS AND ARTICLES ................................. 281
     INTERNET RESOURCES ................................. 284
     ONLINE COURSES (COURSERA PLATFORM) ................. 286
ANNEX. World’s Leading Companies’ Mission Statements .... 287

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ABBREVIATIONS

AMA       American Marketing          JIT      Just in Time              
          Association                                                    
APEC      Asia-Pacific Economic       JV       Joint Venture             
          Cooperation                                                    
ASEAN     Association of South-East   LDCs     Least Developed Countries 
          Asian Nations                                                  
B2B       Business-To-Business        M&As     Mergers and Acquisitions  
B2C       Business-To-Customer        M2B      Marketing-To-Business     
B2G       Business-To-Government      MERCOSUR Southern Common Market    
BQP       Balance of Payments         NAFTA    North   American   Free   
                                               Trade Area                
C2C       Consumer-To-Consumer        NASA     National Aeronautics and  
                                               Space Administration      
CIS       Commonwealth of             OECD     Organisation for Economic 
          Independent States                   Cooperation          and  
                                               Development               
EAEU      Eurasian Economic Union     OPEC     the Organization of the   
                                               Petroleum      Exporting  
                                               Countries                 
EC        E-commerce                  PJSC     Public     Joint     Stock
                                               Company                   
ECOWAS    Economic Community of       PR       Public Relations          
          Western African States                                         
EU        European Union              PSAs     Production Sharing        
                                               Agreements                
FDI       Foreign Direct Investment   R&D      Research and Development  
FEA       Foreign Economic Activity   SA       Strategic Alliance        
FIG       Financial and Industrial    SACU     South African Customs     
          Group                                Union                     
G2B       Government-To-Business      SCE      Supply Chain Execution    
GDP       Gross Domestic Product      SCP      Supply Chain Planning     
GNP       Gross National Product      SWF      Sovereign Wealth Funds    
ICC       International  Chamber  of  TNCs     Transnational Corporations
          Commerce                                                       
IMF       International Monetary Fond TNI      Transnationality Index    
INCOTERMS International    Commercial UN       United Nations            
          Terms                                                          
IPC       International Production    UNCTAD   United Nations Conference 
          Company                              on Trade and Development  
ISA       International Strategic     WEF      World Economic Forum      
          Alliance                                                       
ITP       International Tax Planning  WTO      World Trade Organization  

    The following symbols are used in this Textbook:
    $ - United States dollar(s)
    Billion means one thousand million.


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        INTRODUCTION


     Internationalization of economies has become an important factor determining the current state of the World Economy. The economic interdependence of countries is increasing. Over the past 30 years, the number of countries participating in the World Economy has increased fivefold. The total number of participants in international business operations has increased dramatically. International business is becoming more and more diverse; hence a challenging task to provide adequate training for qualified managers who could work at different national enterprises involved in international economic relations.
     This is facilitated by “International Business” course.
     “International Business” as a course aims at the following, and facilitates:
     -       getting acquainted with the main provisions of doing business in foreign countries and regions;
     -       studying the features of the development of business abroad in comparison with the Russian specific features;
     -       developing the ability to select the optimal features of doing business on the example of Russian and foreign models.
     The “International Business” as a course is aimed to provide for:
     -       the study of problems arising when enterprises enter foreign markets, and the specificity of building the marketing policy of an enterprise;
     -       mastering the methods of developing the foreign economic strategy of an enterprise, choosing a country and a foreign partner for international business;
     -       gaining knowledge about the procedure of entering the world market of Russian enterprises, state regulation of foreign economic activity (FEA), the implementation of foreign exchange operations and international payments, the creation and operation of joint ventures (JVs);
     -       mastering modern tools and methods of interaction between the subjects

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of international business and other subjects of the national economy participating in its organization;
         -       the formation of practical skills for choosing a marketing strategy and the development of the sales policy of an enterprise on the foreign market;
         -       familiarization with the foreign trade operations peculiarities concerning trading various types of goods and services;
         -       the study of the main forms of international payments and ways of improving the monetary and financial relations in international business;
         -       getting acquainted with the main forms and features of business interaction with foreign partners.
         While mastering the course of “International Business”, students attain the following knowledge concerning:
         -      the content of the concept of international business and its forms;
         -      features of legal regulation of domestic and foreign business;
         -       the main trends in the development of modern international business in comparison with the domestic one;
         -      the main marketing strategies for entering the foreign market;
         -      features of promotion of goods in foreign markets;
         -      procedures for concluding foreign trade transactions;
         -       features of foreign trade operations in the areas of trade in various types of goods and services in the markets of different countries;
         -      basic forms of international settlements;
         -       basic forms and features of business communication with foreign partners.
         While mastering the course of “International Business”, students attain the following skills:
         -      planning, evaluating, analyzing the international activity of the firm;
         -      assessing the opportunities of foreign markets;

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     -       planning the strategy for a company's penetration into foreign markets.
     -       formulating the tasks of the enterprise in world markets;
     -       justifying the ways of the subjects of international business to enter the international environment;
     -        considering the problems of doing business and managing it from the point of view of competition in the international environment;
     -        navigating in sources of the international information and using it in business;
     While mastering the course of “International Business”, students also acquire:
     -        the skills of a comparative analysis of the prospects of domestic and foreign markets;
     -       concepts used in international business;
     -       methodology for selecting a foreign market;
     -        modern tools and methods of interaction of subjects of international business with other subjects of the national economy participating in its organization;
     -        the principles of pricing, monetary and financial relations in international trade and approaches to their application in practice; the fundamentals of drafting sales contracts that protect the legal and financial interests of the company;
     -       logistics and international transport, customs regulation, foreign trade cargo.

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        TOPIC 1. CONCEPT AND MODERN STATUS OF INTERNATIONAL BUSINESS

        Concept, Causes and Prerequisites for Emergence and Development of International Business

          The XX and XXI centuries saw transnationalization, international economic integration of countries, and redistribution of economic influence between developed and developing countries beginning to play a dominant role in enhancing export-import operations. M. Castells defines globalization as an economy capable of operating as a single system in real time on a planet-wide scale.¹ In the course of globalization, the economic boundaries of countries are becoming increasingly blurred, the development of electronic payment systems creates even more favorable conditions for the functioning of world markets and for an increase in trade flows.
    With globalization, companies begin to participate in international trade; they become subjects of international business.
         There are many definitions of the concept of international business.
         John D. Daniels and Lee H. Radebaugh give the following definition: “International business includes all business transactions involving two or more countries, whether the transactions are conducted by private or governmental organizations”. They define three aspects that motivate firms to do international business: the expansion of sales, the acquisition of resources and the diversification of sales and supply sources. ²
         V.K. Pospelov believes that “... international business means the specific production and economic activities of groups of companies, firms and enterprises with common economic and business interests, which covers two or more states

    ¹ Castells, M. The Information Age: Economy, Society and Culture, Vol. 1: The Rise of the Network Society: 2nd edition / Blackwell, 2009.

    ² Daniels, J.D., Radebaugh, L.H., Sullivan D.P. International Business Environments and Operations: 15th edition / Pearson, 2015.

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    or economic activities of the domestic parent company and its foreign affiliates or subsidiaries, and also independent enterprises”. ³
         According to N.L. Shlyk and S.Yu. Titova, “fundamental element of international business is FEA of countries in its various types and forms”. ⁴
         V.A. Chernenko believes that “international business involves business operations with several partners outside the country. The area of business activity of economic entities is carried out on the world market: the goods market, the services market, the financial market, and the labor market”. ⁵
         R.Griffin and M.Pustay argue that “international business consists of business transactions between parties from more than one country. Examples of international business transactions include buying materials in one country and shipping them to another for processing or assembly, shipping finished products from one country to another for retail sale, building a plant in a foreign country to capitalize on lower labor costs, or borrowing money from a bank in one country to finance operations in another”.⁶
         S.F. Sutyrin and A.I. Pogorletsky proceed from the fact that “... international business today in most cases is an entrepreneurial activity that is simultaneously conducted in the markets of two or more states”. ⁷
         B.G. Dyakin considers international business as “... one of the main processes in the system of processes occurring in the global economy. ... International business relations as a transformed form of international economic relations distinguish international business, and put it on a par with other

      ³ International Business: Textbook / V.K. Pospelov, ed. / INFRA, 2014.

      ⁴ Shlyk, N.L. International Business: The Basics of Modern Development: Textbook / Khabarovsk, 2016.

      ⁵ International Business: Textbook / V.A. Chernenko, ed. / Publishing House of St. Petersburg State University of Service and Economics, 2017.

      ⁶ Griffin, R.W., Pustay, M.W. International Business: a Managerial Perspective: 5th edition / Prentice Hall, 2007.

      ⁷ International Business: Theory and Practice: a Textbook for Bachelors: A Textbook for University Students Enrolled in Economic Fields and Specialties / A.I. Pogorletsky, S.F. Sutyrin, eds. / Urait, 2014.

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     processes of the world economy, predetermining its unique place, significance and role”. ⁸
          For a more accurate understanding of the term “international business”, it is necessary to understand the processes occurring in the modern world, primarily with world trade.
          Conceptually, the causes of world trade were explained by many scientists. Theories of absolute advantage⁹, and comparative advantage¹⁰ have become widely known. Early in the 20th century, the theory of explaining comparative advantages from international trade on the basis of production factors developed by Swedish economists E. Heckscher, B. Ohlin, gained further development in the studies of P. Samuelson and W. Stolper, became popular.¹¹
          Among contemporaries there are also many scholars who substantiate new original concepts of international trade. As an example, we can cite the theory developed by the American economist M. Porter, described in the book “The Competitive Advantage of Nations”.¹² Due to its complexity and logical justification, the theory of the national competitive advantage has aroused much interest, and is characterized as progressive. The study of M. Porter has something in common with technological theories, since he attributes the dominant role in achieving competitive advantage to introducing innovations into production (which does not necessarily have to be the result of a significant technological breakthrough, but can even be expressed as a combination of minor improvements).
           If representatives of two different countries participate in business, then they have to deal with two legislative bases: domestic and foreign. If

    ⁸ Dyakin, B.G. International Business. Volume 6. The Processes Occurring in the Global Economy: The Role of International Business. Monograph / TEIS, 2013.

    ⁹ Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations / The University of Chicago press, 1976.

    ¹⁰ Ricardo, D. On The Principles of Political Economy and Taxation / London: John Murray, 1817.

    ¹¹ Samuelson, P., Stolper, W. Protection and Real Wages // The Review of Economic Studies, 9(1), 1941.

    ¹² Porter, M.E. The Competitive Advantage of Nations // Harvard Business Review, 68, 1990.

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    international economic activity of a company is carried out in several states, then we have to deal with several legislative bases, which, of course, requires more attention to business organization and management.
       An important difference between international and national business is also the fact that the national entrepreneur acts in a system of coordinates shared by all national producers.
      This applies both to business culture and to a certain system of values, which is sometimes called a national mentality. In contrast, in the international business entrepreneur deals with different business cultures and different mentalities. Lack of attention to these aspects can result in failure; the examples in the history of international business are many.
      International business involves not only the sale on the foreign market of an increasing share of the company’s products, but also the division of the production process between legal entities and individuals located in different countries, different departments of a company or a company located in different jurisdictions.
      Thus, the definition of international business can be formulated as follows: international business means the specific production and economic activities of groups of companies, firms and enterprises that have common economic or business interests covering two or more states, or the economic activity of the parent company home countries and its foreign affiliates or subsidiaries and affiliates.
      The main factors for the emergence and development of modern international business are the desire to ensure a) preservation of the company’s position in the domestic economy and b) increase in the company’s profits by winning and holding positions in the economy of another country or on the world market. This aspiration is fueled by intense competition, both domestically and internationally.

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