1 International Business: Introduction, Nature and Growth

Shafali Nagpal

 

Learning Outcome :

 

This module will help the students to understand –

  • Concept and nature of international business
  • Importance of international business
  • Advantages of international business for the economy of the country and for the whole world.

 

INTRODUCTION

 

What is business? The exchange of goods or services in exchange of any goods or services or in monetary terms. This exchange process is taking place way back since the existence of human being. Earlier Barter System was adopted in which commodities were exchanged which either of them required. For example A required wheat and had some extra rice with him and B requires rice and has wheat with him in excess so, A exchange rice with wheat from B so that both of them were satisfied. With the development of human, means and methods of production also developed and overall trade developed and the concept of exchange i.e barter system also changed because of its limitations and so generally acceptable payment system was developed. Numerous things were used as mode of exchange for example livestock’s, shekel, cowry shells, precious metals, coins and notes.

 

Business is associated with human since very beginning. Now a days as the human is developing, crave for new and improved products came into stipulation and it was not possible for everyone to thrive the entire demand by themselves. This intensified the need for globalization.

 

With the development, consumerism raised and expansion of the business started across borders at faster pace. With the technological advancement, business stretched and global boundaries were shrunken and scope of international business increased.

 

Let us understand the meaning and concept of International business.

 

International business can be defined as the exchange of goods and services among individuals and businesses in multiple countries. According to Business dictionary, International Business firm is defined as “A specific entity, such as a multinational corporation or international business company that engages in business among multiple countries”.

 

According to Wikipedia, International business is a term used to collectively describe all commercial transactions (private and government, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundaries. Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons.

 

International business is not only beneficial for the business units but also it joins different countries through trade but it makes the countries dependent on each other which develops sense of humanity i.e. need of each other. As the population is growing, demand for goods and services are increasing which has widened the scope of international business. To fulfill basic needs of life we require money, and industries need base and consumers. Globalization solves the problem of both. If we observe the world’s geography we can perceive that the natural resources are unsymmetrical i.e. all the resources are not allocated to every country and if a particular product is fabricated by a peculiar raw material which is not obtainable in the country where the company is situated, international trade turns out be very crucial for the survival of the company.

 

There are four components on which a business can persist and we must decide whether to go international or not. They are –

  • Internationalization of Market Presence – It is very crucial for a business to comprehend that what are their limitation and constructive areas i.e. whether they are able to fabricate ample to proffer the requirement of their market and then beyond boundaries, then such business units should make their global presence. Business units should also have a check on their competitors so that they can have a exact synopsis of the market. For example if a company XYZ Ltd. produces toothpaste and the response for their product is very impressive and they can also tap similar market in other countries, then they should tap the international market as well as they should have an eye on their rivals who produce same type of product.
  • Internationalization of Supply Chain – This is also a very crucial aspect for the internationalization. This advises that a company should select a location for production in its supply chain such that the cost of production can be minimal. It is not mandatory for a company to manufacture everything at single place. Business entity should select a location such that raw material, transportation and other things are easily available. For example Toyota has a good supply chain, Toyota manufactures two-third of its cars in Japan and remaining in the subsidiaries spread over in 25 countries also company exports 35% of its cars in foreign market.
  • Internationalization of Capital Base – It refers to the extent to which company is accessing the optimal sources of capital on a worldwide basis. What sources of capital would be available to its business after internationalization. Selection of going international will depend on the sources and terms of funds available in different countries.
  • Internationalization  of  Corporate  Mindset  –  This  factor  tells  how  a  company should diversify it. It is very important to understand the culture of country where business is to be done and should follow them to grow and develop its market which ultimately gives monetary benefit and trust of the market. For example, Indian company will have its own cultural background which will be different from Japanese company, like, in India senior management has their separate office and has a separate space but in Japanese culture there are no separate offices for senior management. The cross cultural differences are to be studied before going international. It has been viewed that many companies fail in their establishments in other countries due to cultural differences.

 

DIMENSIONS OF INTERNATIONALIZATION OF BUSINESS 

 

INTERNATIONAL BUSINESS AND DOMESTIC BUSINESS 

 

International business is not a new phenomenon, it has existed since ages. Trade among countries increased with means of transportation and technological development. Internationalization is generally an expansion strategy of a business. Going global benefits the supplier, consumer as well as the country. Supplier gets a fair price for their product, consumers get a better product among different choices and country incurs taxes which increases the wealth of the country.

 

Difference transpire primarily in currencies, interest rates, inflation rates, taxation systems, government policies and regulations, language, culture, geographic and economic barriers. These differences are the major concern for the Multinational companies as the subsidiaries of these companies are located in different countries which has its own domestic business and to grow these MNC needs to set such atmosphere that underline both the cultures i.e. where head office is situated and branch unit is located.

 

Also the payments for the goods and services which are sold to foreign buyers are in different currency then used in the domestic market. For example if India sells product A to a buyer of America the payment will be made in the currency generally acceptable in the international market i.e. dollars, yen, pound etc. This payment sometimes suffers losses as well as attracts gains also due to the fluctuations in the conversion rate of the currencies. For example A from India sold a machine to X of Japan and the payment has to be made in dollars after one month. At the time of the transaction 1$ was equal to Rs. 65.00 but after one month it declined to Rs. 63.00 so there will be a loss of Rs. 2.00 per dollar to A whereas if it rose to Rs. 67.00 A will have a profit of Rs. 2.00 per dollar.

 

Also laws and policies risk plays an important role. Every country has its own laws which may be favorable or unfavorable to a business. For example, laws related to production of aluminum utensils in USA and India vary to a great extent. Thus establishment of such business in both countries will be different. Other than policies, interest rate, taxation policies and inflation rates will also affect the business. Difference between domestic and International business is explained in next module.

 

GROWTH OF INTERNATIONAL BUSINESS 

 

Trade is a means to satisfy human needs. As the demand of the human intensified, the requirement for the expansion of trade was desired. As the trade increased national restrictions were necessary to be framed. Also using a common currency for international business also enabled business transactions to be carried out and creation of systematic law, central market location and effective communication system also boosted the international trade, all these development helped in the functioning of the market place and curtailment of risk.

 

International trade gave rise to the foreign investment which helped the countries to develop the business systems. Investments not only expanded the business but also improved the conditions of the country as well as the citizens of the country. Total global financial assets rose from $250 billion in 1970 to almost $70 trillion in 2010. The composition of international financial flows has also changed: the share of portfolio equity investments is much larger.*

 

*Source: http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm

 

After the Second World War Europe and Japanese infrastructure was demolished, at that time US companies through different strategies were able to strengthen their status. Different institutions played an important role in the development of the international trade in the long run. Some of them were International Monetary Fund (IMF), The World Bank, World Trade Organization (WTO), The World Bank etc which provided stable worldwide environment in which MNCs could conduct their business.

 

Following charts shows increase in the international business over past 50 years. Chart 1 shows many fold increase in the financial links and global trade.

Chart-1 Source: http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm

 

International marketing is also an important aspect of international business. International marketing is not the same thing as international trade. Only a part of the international trade flow represents the international marketing. International marketing is just the application of the marketing principles for different countries.

 

Now a day’s every country and every industry it may be small or big try to get global for growth and development. Chart 2 shows the share of GDP of the Advanced, emerging economies and other developing economies.

Chart-2 Source: http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm

 

India is inviting foreign investments in the country for the development of the country and as we can see that the GDP of the country is increasing at very fast pace and it is expected that International business in India will grow at 7% annually. As the population of the country is very large and number of jobs per person is very low, this industrialization and FDI in the country will give birth to the new opportunities and exploration of new business possibilities.

 

IMPORTANCE AND ADVANTAGES OF INTERNATIONAL BUSINESS 

 

International business is not only important for the business but also helps in the development of the country. There are two factors which motivate and provoke the business entities to go international –

  • Pull Factor – Pull means attracting, pull factors are the factors which attracts the business units to the international markets through the opportunities and the profitability.
  • Push Factor – Push factors are just opposite to the pull factors due to the problems to the domestic market problems such as saturation and increased competition in the domestic market which force the business units to go international.

 

There are several factors which are advantageous for the business units. They are explained as under –

 

INTERNATIONAL BUSINESS 

 

  • Profits – Profit is one of the most important factor for which all of the business units focuses. Domestic business after a period comes to saturation i.e. there is no opportunities for the growth of the business, going international helps the business units to locate new markets and new opportunities. Sometimes it is possible that companies earn more profits than the domestic market. It also helps the business to increase the turnover of the business in the long run which increase the goodwill and reputation of the company.
  • Foreign Investment – Foreign investment is also crucial point of going international. Foreign investment helps the business in financial aspect and capital is very important for the business units to undergo the long term plans. Without capital companies cannot survive or expand. Investors invest in the business units from different countries to set a unit in different countries which can reduce the cost of production of the company by providing raw material at low cost, cheap labour etc.
  • Growth Opportunities – There are several opportunities for the business units in different countries. MNCs are interested in the developing countries as there is a vast scope of development as the countries are growing at a rapid tempo as well as labour are available at a cheap rate. Also as the population is increasing the demand for the goods and services are increasing. For example India is the second largest populated country in the world so most of the MNCs build their offices in India due to cheap labour as well as the market for their product is vast and Indian customer demand for more and more.
  • Competition – Competition is also one of the leading force behind internationalization. When companies are easily selling their goods and services in the domestic market without threat of any competition, business units show no interest in expanding the market overseas. But as the competition increases  the market share reduces as the market is still the same but the products to be offered to the same market increased which ultimately reduces the profit share of the companies. So the companies are forced to search new markets for which they tend to globalize. Many companies globalize to give competition to the local producers so that they can get rid off of the local suppliers and the big businesses are only left in the market.
    • Governments Policies and Regulations – Establishment of new industries help in the development of the country. For this government prefer new policies and laws to entice new industries in their country. Industries to go international and accumulate the advantage provided by the government through policies and regulations like FDI, SEZ, and Economic Zones etc. For example in some part of India it was announce that if the industries are manufactured in the Special Economic Zones then several assistance would be provided to the companies such as Tax free income, discounted land etc.
  • Expansion and  Future  Growth  –  Many  companies  are  not  satisfied  with  just domestic market, they intend to acquire more and more market share and to construct a brand which is known worldwide. To survive the cut throat competition, organizations go international, also through research and market study, now a days it is very expedient for the companies to search the new markets and internal business research help the organizations to diagnose the areas where if the units are installed it will be very beneficial for the company with low cost factors and increase profits.

 

SUMMARY

 

International business is not only the export and import of the goods and services, it is exchange of the culture and tradition between two countries. International business is very important for any economy as it provides with the products which are not available in the domestic market but is very imperative for the survival. For example drugs for cancer are not manufactured in every country but victims of cancer are found in every country so international trade is required to proffer it to the whole world.

 

International trade gives rise to the development of the infrastructure and the economy as a whole. It contributes towards GDP, Balance of Payment, Exports, overall development of the country. It also benefits the host country through investment, revenue generation, production, employment.

 

It is beneficial but not to everyone, it boost the companies who have large capital source but every company does not have the funding to expand the business to the global level, for them local market is the only source of survival but big industries dominate the local market and impact the profits of the small industries and ultimately threats their survival. To support these small business units now government supports them with different strategies for the growth of the industries.

 

But the laws and regulations of every country are different and culture and traditions are also different for different countries. To enhance and have uniformity in laws and regulations at international level various organizations like WTO, IMF, World Bank etc came into existence to boost the trade and business among the countries. And in past years international business has increased many folds.

 

Few important sources to learn more about International Business

  • Terpstra, Vern and Sarathy, Ravi, “International Marketing”, 7th edition, The Dryden Press, 1997.
  • Onkvisit, Sak and Shaw, John J, “International Marketing: Analysis and strategy”, Ist edition, Merrill Publishing Company, 1993
  • Cherunilam Francis, “International Economics”, Tata McGraw Hill Publishing Co. Ltd., New Delhi
  • Keegan, W.J., “Global Marketing Management”, 5th edition, Prentice Hall of India Pvt. Ltd., New Delhi, 1996.
  • Philip R. Cateora, and John L. Graham, “International Marketing”, 10th edition, Tata McGraw Hill Publishing Co. Ltd., New Delhi, 2001.
  • Aswathappa, “International Business”, 4th Edition, Tata McGraw Hill Publishing Co. Ltd., New Delhi, 2010.
  • William J. Stanton, Michael J. Etzel, and Bruce J. Walker,” Fundamentals of Marketing,” McGraw Hill International, USA, 10th edition, 1996.
  • Philip Kotler, Swee Hoon Ang, Siew Meng Leong, and Chin Tiong Tan, “Marketing Management –An Asian perspective”, Prentice Hall, Simon & Schuster (Asia) Pte. Ltd., Singapore, 1996, pp. 107-143
  • www.businessintellectuals.com
  • http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm