INTERNATIONAL BUSINESS - INTRODUCTION
The beverages you drink might be produced in India, but with the collaboration of a USA
company. The tea you drink is prepared from the tea powder produced in Srilanka. The television
you watch might have been produced with Japanese technology.
Most of you have the experience of browsing internet and visiting different websites,
purchasing the goods and services without visiting those manufacturing countries. All these
activities have become a reality due to the operations and activities of International Business. Thus,
international business is the process of linking the global resources with global people.
EVOLUTION:
The origin of International Business goes back to human civilization. Sindh civilization had
many traces of having a trade relationship with the Eastern civilization. Later the concept of
International Business a broader concept of integration of economies goes back to 19 th century.
The first phase was took with the end of first World War in 1919. the import of raw
materials by colonial countries emperor from colonies and exporting them finished goods again to
the colonies. There is an increase in the level of international business.
But after second world war in 1945, the most of the colonial governments refused to export
the raw materials and import finished goods for the purpose of protecting the domestic companies.
There is a decrease in international business.
The consequences of World War II had made the world countries to feel the need of
international co-operation of global trade which led to the formation of various organizations like
International Monetary Fund (IMF) and International Bank for Reconstruction and
Development(IBRD), now called AS World Bank.
NATURE:
Globalization is an attitude of mind it is a mindset which views the entire world as a
single market so that the corporate strategy is based on the dynamics of global business
environment. The concept of globalization has filled up the concept of International business. In
fact, the term International Business was not popular before 2 decades. International Business is
come from the word International marketing and International Marketing is come from the word
International Trade.
International Trade International Marketing:
Originally, the producers used to export their products to the nearby countries and gradually
extended the export to far-off countries. Gradually the companies extended the operations beyond
trade.
International Marketing International Business:
s which are producing in home country band marketing them in foreign countries,
now started locating their plants and other manufacturing facilities in foreign/ host countries.
Later they started producing in one country and marketing in other foreign countries.
A true global companies views the entire world as a single market. There is a great renovision,
given by Arvindh Mills:
Source raw material wherever they are cheapest.
Manufacture wherever in the world is most cost effective.
Sell in those markets where the prices are highest.
Raise finance globally.
To manage all these, take the best talent from all over the world.
And you will have achieved the stature of a true multinational.
MEANING:
International Business refers to the exchange of goods and services between two parties of
different countries.
International Business may be understood as those business transactions involve crossing of
national boundaries.
International Business is the process of focusing on the resources of the globe and objectives
of the organization on the global business opportunities and threats in order to produce/buy/sell or
exchange of goods and services worldwide.
FEATURES:
1. Large Scale Operations:
In International business, all the operations are conducted on a very huge scale. Production
and marketing activities are conducted on a very large scale. It first sell its goods in the local market
and then the surplus goods are exported.
2. Integration of Economies:
International Business integrates (combines) the economies of many countries. This is
because it uses finance from one country, labour from other country and infrastructure from another
country. It designs the product in one country, produces its parts in many different countries and
assembles in another country and sells in many countries.
3.
International Business is dominated by developed countries and their multinational
companies. Europe and Japan dominate the foreign trade, this is because they have high financial
and other resources.
4. Benefits to Participating countries:
International Business gives benefits to all participating countries. However, the developed
countries get the maximum benefits, the developing countries also get benefits. They get foreign
capital and technology. They get rapid industrial development. They get more employment
opportunities.
5. Keen Competition:
International Business has to face competition in the world market. The competition is
between unequal partners. In this situation, the developed countries are in favorable position as they
produce the superior quality goods and services, but developing countries find difficulty to face
competition.
6. Special role of science and technology:
International Business gives a lot of importance to science and technology. Science and
Technology helps the business to have a large scale production. Developed countries use high
technology. International business helps them to transfer top-end technology to the developing
countries.
7. International Restrictions:
International Business faces many restrictions on the inflow and outflow of capital,
technology and goods. Many government do not allow international business to enter their
countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is
harmful to international business.
8. Sensitive Nature:
The International Business is very sensitive in nature. Any changes in the economic policies,
technology, political environment has a huge impact. Therefore it must conduct marketing research
to find out and study these changes. They must adjust their business activities and adopt accordingly
to survive changes.
9. International Business need accurate information to make appropriate decision.
10. International Business house need not only accurate but also timely information.
11. International Business house segments their markets based on the geographic market segment.
REASONS FOR THE EMERGENCE OF INTERNATIONAL BUSINESS:
To achieve higher rate of profits
The basic objective of the business firm is to earn profit. The domestic markets do not
promise a higher rate of profits. Business firms search for foreign market which hold promise for
higher rate of profits. Thus the objective of profits affects and motivates the business to expand its
operations to foreign countries.
Expanding the production capacity
Domestic companies expanded their production capacities more than the demand for product
in domestic countries. In such cases, these companies are forced to sell their excessive production in
foreign developed market.
Severe competition in home country
competition from other business firm in the home country. The weak companies which could not
meet the domestic countries started entering the markets of developing countries.
Limited home market
When the size of the home market is limited either due to the smaller size of the population
or due to lower purchasing power of the people or both, the companies internationalize their
operations.
Political Stability v/s Political Instability
Business firms prefer to enter the politically stable countries and are restrained from locating
their business operations in politically instable countries. In fact, business firms shift the operations
from politically instable countries to the politically stable countries.
Availability of Technology and Managerial Competency
Availability of advanced technology and competent human resource in some countries acts
as pulling factors for business firms from the home country. The developed countries due to these
reasons attract companies from developing world. In fact, American and European countries depend
on Indian Companies for softwa
High cost of transportation
Initially companies enter foreign countries trough their marketing operations. At this stage,
the companies realize the challenge from the domestic companies. Added to this, the home
companies enjoy higher rate of profit margins where as the foreign firms suffer from lower profit
margins. The major factor for this situation is the cost of transportation,
Under such conditions, the foreign companies are inclined to increase their profit margin by
locating their manufacturing unit in foreign countries where there is enough demand either in one
country or in a group of neighboring countries.
Nearness to Raw materials
The source of highly qualitative raw materials and bulk raw materials is a major factor for
attracting the companies from the various foreign countries. Most of the US based companies open
their manufacturing unit in Middle East countries due to the availability of petroleum. These
companies, thus, reduces the cost of transportation.
Availability of Quality HR at less cost
This is the major factor, in recent times, for software, high technology and tele-
communication companies to locate their operations in India. India is a major source for high
quality and low cost human resources unlike USA and other developed countries.
Liberalization and Globalization
Most of the countries in the globe liberalized their economies and opened their countries to
the rest of the globe. These changed policies attracted the multinational companies to extend their
operations to these countries.
To increase market share
Some of the large-scale business firms would like to enhance their market share in the global
market by expanding and intensifying their operations in various foreign countries.
To achieve higher rate of economic development
International Business helps the governments to achieve higher growth rate of the economy,
increases the total and per-capita income , GDP, industrial growth, employment and income levels.
STAGES OF INTERNATIONALISATION:
Every company in the International Business will pass through the 5 different stages of
Internationalization. They are:
Domestic Company
International Company
Multi-National Company
Global Company
Transnational Company
Stage 1: Domestic Company
Domestic Company limits its operations, mission and vision to the national
boundaries. This company focus its view on the domestic market opportunities, supplies and
customers. These companies analyze the national environment of the country, formulate the
strategies to exploit the opportunities offered by environment. They never think of growing
Stage 2: International Company
Domestic companies which grows beyond their production capacities, think of
internationalizing their operation. Those companies which decide to exploit the opportunities
outside the domestic country are stage 2 companies.
These companies believe that the practices the people and products of domestic
business are superior to those of other countries. The focus of these companies is domestic but
extends the wings to the foreign countries. These companies select the strategy of locating a branch
in foreign markets and extend same domestic operations into foreign markets.
Stage 3: Multi-National Company
International companies turn into the Multi-National companies when they start
responding to the specific needs of different country market regarding product, price and promotion.
This stage is also referred as Multi-Domestic companies. These companies formulate different
strategies for different markets. They operate like a domestic market of country concerned in each
of their market.
Stage 4: Global Company
A global company is the one, which has either global strategy. Global Company
either produces in home country or in a single country and focuses on marketing these products
globally or produces globally and focuses on marketing these products domestically.
Stage 5: Transnational Company
It produces, markets, invests and operates across the world. It is an integrated global
enterprise that links global resources with global markets at profits. There is no pure Transnational.
APPROACHES TO INTERNATIONAL BUSINESS:
Douglas Wind and Pelmutter advocated four approaches of International Business. They are:
Ethnocentric Approach
Polycentric Approach
Regiocentric Approach
Geocentric Approach
Ethnocentric Approach:
The domestic companies normally formulates their strategies, their product design and their
operations towards the national markets, customers and competitors. The company exports the same
products designed for domestic markets to foreign countries. Thus maintenance of domestic
approach towards International business is Ethnocentric Approach.
Polycentric Approach:
The company establishes a foreign subsidiary company and decentralizes all the operations and
delegates decision-making and policy making authority to its executives. In fact company appoints
executives and personnel who direct reports to managing Director of that company. Company
appoints key personnel from he home country and all other vacancies are filled by people of host
country.
Regiocentric Approach:
The company after operating successfully in a foreign country, thinks of exporting to the
neighboring countries of the host country. At this stage, the foreign subsidiary considers the
regional environment for formulating policies. It markets more or less the same product design,
under polycentric approach in other country of region with the different market strategy.
Geocentric Approach:
Under this approach, the entire world is just like a single country for the company. They select
the employees from entire globe and operate with a number of subsidiaries. Each subsidiary
functions as an autonomous company in formulating policies, strategies, product design, etc,.
DIFFERENCES BETWEEN DOMESTIC AND INTERNATIONAL BUSINESS:
Basis Domestic Business International Business
Approach DB ocentric
Approach. or Regiocentric Approach.
Operating Db formulates the strategies, IB formulates the strategies, product
Activities product design towards the design towards the International
national markets, customers and markets, customers and competitors.
competitors.
Geographic
scope the national boundaries of the the national boundaries of 2
domestic country countries up to a maximum of the
entire globe.
Operating Operating style including Operating style can be spread to the
Style production, marketing is limited to entire globe.
the domestic country
Environment It analyses and scan the domestic It analyses and scan the relevant
environment. international environment.
Quotas Quotas imposed by various Quotas imposed by various countries
countries on import and export not on import and export significantly
influence the domestic business. influence the international business.
Tariffs Tariff rates of various countries do Tariff rates of various countries do
not affect the domestic business affect the international business.
Foreign Foreign exchange rates and their Foreign exchange rates and their
Exchange fluctuations do not directly and fluctuations directly and
rates. significantly affect the domestic significantly affect the international
business. business.
Culture Mostly domestic culture of the Mostly cultures of the various
country affects the business countries affect the operations of the
operations international business.
Export- Domestic business is not affected International business is affected by
Import the procedure of the various
procedure countries.
Human Domestic business normally International business normally
Resources employs the people from the same employs the people from various
country countries.
Markets and Meets the needs of the domestic Meets the needs of the markets and
customers markets and customers customers of the different countries.
Business transaction with in the Business transaction between two
country. different countries.
ADVANTAGES:
1. High Living Standard
Customers in various countries can buy more products with the same amount of money in the
International Markets. In turn, it can also enhance the living standard of the people through
enhanced purchasing power and by consuming high quality products.
2. Increased Socio-Economic Welfare
International business enhances the consumption level, and economic welfare of the trading
countries.
3. Wider Markets
International business widens the market and increases the market size. Therefore, the
companies need not depend on the demand for the product in one single country or cus
taste and preferences.
4. Reduced effects of Business Cycle
The stages of business cyc
country experiencing a recession to the country experiencing the boom conditions. Thus,
international business firms can escape from the recessionary conditions.
5. Reduced Risks
Both commercial and political risks are reduced for the companies engaged in international
business due to spread in different countries.
6. Large Scale Economics
MNC due to the wider and larger markets produce larger quantities, which provide the benefit
of large-scale economies like reduced cost of production, availability of expertise, etc.
7. Potential Untapped Markets
International business provides the chance of exploring and exploiting the potential markets
which are untapped so far. These markets provides the opportunity of selling the product at a
higher price than in domestic markets.
8. Provides the opportunities for and challenge to domestic business
International Business firms provides the opportunities to the domestic companies. These
opportunities include technology, management expertise, market intelligence, etc,.
9. Division of Labour and Specialisation
International business leads to division of labour and specialization. Brazil specializes in coffee,
Kenya in tea, Japan in automobiles.
10. Economic Growth of the world
Specialisation, division of labour, enhancement of productivity, posing challenges, development
to meet them, innovations and creations to meet the competition lead to ovrall economic growth
of the world nations.
11. Optimum and proper utilization of world resources
International business provides for the flow of raw materials, natural resources and human
resources from the countries where they are in excess supply to those countries which are in
short supply or need most.
12. Cultural Transformation
International business benefits are not purely economical or commercial, they are even social
and cultural. There is a close cultural transformation and integration.
13. Knitting the world into a closely interactive Traditional Village
International business ultimately knits the global economies, societies and countries into a
closely interactive and traditional village where one is for all and all are for one.
DISADVANTAGES:
1. Political Factors
Political instability is the major factor that discourages the spread of international business.
2. Huge Foreign Indebtedness
The developing countries with less purchasing power are lured into a debt trap due to the
operations of MNCs in these countries.
3. Exchange Instability
Currencies of countries are depreciated due to imbalances in the balance of payments, political
instability and foreign indebtedness. This, in turn, leads to instability in the exchange rates of
domestic currencies in terms of foreign currencies.
4. Entry Requirements
Domestic governments impose entry requirements to multinational.
5. Tariff Quotas and Trade Barriers
Governments of various countries impose tariffs, import and export barriers in order to protect
the domestic business. Further these barriers are imposed based on the political and diplomatic
relations between or among various governments.
6. Corruption
Corruption has become an international phenomenon. The higher rate bribes and kickbacks
discourage the foreign investors to expand their operations.