2 International Business: Meaning, Difference and Effects

Shafali Nagpal

 

Learning Outcome: 

 

After completing this module the students will be able to:

  • Introduction
  • Domestic Vs. International Business
  • Approaches to International Business
  • Benefits of International Business
  • Adverse effects of International Business
  • Barriers to International Business
  • Summary

 

Introduction 

 

In the present times of multi-polar world, where more and more economies of the world are moving towards a free markets regime, there is increasing movement of goods and services across the nations. In order to understand International Business, it is pertinent to review the concepts of business activities. The study of international business aims at understanding the business operations, as they operate in an international context. It refers to all those business activities which involve cross border transactions of goods, services, resources between two or more than two nations. Transactions of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc.

 

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.

 

Although the same principles apply to the business of goods and services in domestic and foreign business, there are some special considerations which must be borne in mind while preparing strategies for penetration in foreign markets. Even advanced countries like USA and the UK have highly developed markets faced with severe competition in international markets from other countries like Japan and Germany.

 

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”.

 

This broad definition includes from, a very small firm that exports or imports or both, a small quantity to only one country, as well as the very large global firm with integrated operations and strategic alliances around the world. Within this broad array, distinctions are often made among different types of international firms, and these distinctions are helpful in understanding a firm’s strategy, organization, and functional decisions (for example, its financial, administrative, marketing, human resource, or operations decisions). One distinction that can be helpful is the distinction between multi-domestic operations, with independent subsidiaries which act essentially as domestic firms, and global operations, with integrated subsidiaries which are closely related and interconnected. These may be thought of as the two ends of a continuum, with many possibilities in between. Firms are unlikely to be at one end of the continuum, though, as they often combine various aspects of multi-domestic operations with aspects of global operations.

 

The ultimate success of firm depends primarily on how well it performs outside in the market place. This requires knowledge of the market. Therefore, the first task of the firm is to study its prospective *(Source:http://www.businessdictionary.com/definition/internationalbusiness.html#ixzz283w hM3Wo) buyers. Who and where are they? The second task of the firm is to develop the products or services that satisfy customer needs and wants. The third is to set prices and terms for these products that appear reasonable to buyer while at the same time returning fair products conveniently available to buyer. In addition, firms must monitor the marketing activities of domestic and international competitors to achieve a success.

 

As a firm moves across the nations, it is confronted with increasing uncertainties and risks. There are differences in tastes and preferences of consumers, language barriers, culture, diverse economic conditions, laws and other multitude of factors. There are increasing investments in terms of money and the marketers have to wait and work  hard  before getting success. Moreover, international business has diverse forms and methods and their choice depends on many factors. Although, international business entails similar basic concepts and practices as the domestic business, these concepts and practices cannot be applied into the international business as there is risk of their being a failure. Therefore, a firm has to carefully analyse various factors before launching itself into the international markets.

 

Domestic Business Vs International Business 

 

Both in domestic as well as international business, begins with consumers and ends with consumers. The success of business depends upon satisfying the basic requirements of the consumers. It is also necessary to build goodwill both in local and in global markets. The striking difference between international and domestic business lies in the environment in which the two take place. The important points of differences are:

 

(a)  Trade across sovereign countries:

 

Each country is a sovereign political entity and therefore, several restrictions are imposed by them for importing and exporting the goods and services in order to safeguard their national interest. The traders in international business have to observe such restriction. There may be of the following categories:

 

i) Imposition of tariffs and customer duties on import and export of goods and services in order to make them costly in importing country and ban their entry in the country completely. By the efforts of WTO there has been a significant reduction in tariff globally and on regional basis due to the emergence of regional economic groupings.

 

ii) Quantitative restrictions are also imposed with an intention to restrict trade in some specific commodities with the objective of protection of home industries from the competition of the foreign commodities.

 

iii) Exchange control is another restriction imposed by almost every sovereign state. The Government in some cases does not ban the entry of goods in the country but the importer is not allowed the necessary foreign exchange to make payment for the goods imported.

 

(b) Diverse Legal Systems: 

 

The sovereign countries have different sets of legal set up. They have  different documentation systems, tariffs, and practices. The international marketers have to understand these differences and also comply with them.

 

(c) Different Monetary Systems: 

 

Each Country has its own monetary system and the exchange rates for each country’s currency are fixed under the rules framed by the international monetary fund, therefore they are more or less fixed. Recently, the value of rupee has undergone significant devaluation against dollars. While the exporters gained from this, the importers suffered the losses. They have to cater for such uncertainties.

 

(d) Lower mobility of factors of production: 

 

Mobility of different factors of production is less between nations than in the home country itself. However, with the advent of air transport, the mobility of human resources has increased manifold.

 

(e) Difference in market characteristics: 

 

Market characteristics are different in each segment i.e. demand pattern, channels of distribution, methods of promotion etc. are quite different from market to market. If we take each country a separate market, we can assume different market characteristics there. These differences are accentuated due to the existence of government controls and regulations. However, this is a difference of degree only.

 

(f)  Difference in procedures and documentation: 

 

The laws of the country and customs of trade in each country demand different procedures and documentary requirements for the import and export of the goods and services. The traders residing in the territory have to comply with these regulations and customs if they want to import or export of goods and services.

 

Having seen the above points of differences, we can say that the two business systems, international and domestic are quite different. As each country has to protect its own interest political and financial, it has to put certain restrictions on foreign trade import to a trader are quite different as compared to domestic business. Restrictions are also there in domestic business, but the procedures, systems and the rules and regulations are applied equally in all the parts of the country and these are well-known to the traders concerned.

 

Approaches to International Business

 

The differences in international orientation and approach can be used to categorize the international business into different forms. A domestic company may initially start with ethnically close markets and extend its operations across the world in its final stage. There are following concepts explaining internalization of business:

a) Domestic marketing extension (Ethnocentric) concept.

b) Multi domestic market (Polycentric) concept

c) Global marketing (Regiocentric) concept

 

a) Domestic Marketing Extension (Ethnocentric) concept:

 

The companies guided by this are casual players in overseas markets. For them the overseas markets serve as conduits for directing surplus production. They use overseas markets as a buffer for checking the demand fluctuations in the domestic market. The main focus of the company remains domestic markets. This concept is usually preferred by small companies, or even by large companies operating in a competitive industry. The overseas operations of such companies are usually restricted to exports in certain niches such as approach is also known as ethnocentric in the EPRG scheme.

 

b) Multi domestic marketing (polycentric) concept: As the overseas operations of the companies grow, they recognize the need for a different approach to international business. The operations of companies can acquire forms of overseas joint ventures, licensing agreements, overseas manufacturing and marketing. The subsidiaries operating in overseas markets are recognized as independent business units with autonomy to operate in their markets. Within their respective markets, the subsidiaries behave as domestic companies, deriving only strategic guidelines from their head offices. The companies usually become multinational corporations at this stage. The controls are decentralized to facilitate local operations under the EPRG schema, such firms are classified as polycentric.

 

c) Global Marketing (Regiocentric) Concept: As the companies direct their approach to become a global company, they acquire a global perspective in their operations. Such companies look for lucrative business and investment opportunities on global basis. They derive synergy by sourcing the resources from across the globe by selecting those markets which can provide the inputs to business in most cost-effective manner. Such companies do not treat the SBUs operating in different markets as totally independent entities, but as the SBUs which are contributing towards the growth of the company as a whole. Certain degree of the controls and policy matters may extend to all the SBUs, although allowances may be made to accommodate regional diversities. Under the EPRG schema, global companies are often classified as regiocentric or geocentric companies.

 

Benefits of International Business 

 

There are several benefits of international business, which can be studied from diverse perspectives, both macro and micro level perspectives. The macro-level implications accrue to the nations and economies, while the micro-level advantages are for the individual firms. The following discussion explains the macro and micro level benefits of international business.

 

Macro level benefits:

 

International trade results in macro-economic effects for each economy. The imports and exports influence the employment, national income and technology. The direct and indirect benefits emanating from international business are listed below:

 

i) Increase in national Income: A country’s export activity promotes industrial and trade activity that generates employment and income for various sections of society. The multiplier effect of income increases the level of output and growth rate of economy. Especially the export of wage-goods can help a developing country to break the vicious circle of poverty and raise the real income of the country.

 

ii) Efficiency: While exporting, the countries try to attain specialization in production of goods. In this process, there is optimum and efficient utilization of the resources. The limited domestic business may act as a deterrent to the growth of industry and a resultant under- utilization of resources. The international trade can help industry grow and achieve scale and experience economies.

 

iii) Employment generation: Exports constitute a significant portion of different nations and breed opportunities for more and gainful employment. In addition to reducing direct unemployment, foreign trade reduces underemployment, e.g. exports of Swiss watches engages the farmers in the watch industry during their free time resulting into gainful utilization of their skills.

 

iv) Increased linkages: The staple theory of economic growth recognizes that foreign trade results into increased backward and forward linkages with other sectors of the economy. The industrial and trade linkages cause the development of new industries and enhance efficiency of existing industries.

 

v) Optimal utilization of resources: International business makes possible the utilization of agricultural resources as the farmers get a greater access to the overseas markets. This transforms even the subsistence sector into monetized sector raising the standards of living of rural populations. The strengths of Indian agriculture are likely to open new vistas of business opportunities in the days to come as the world trade is likely to become more liberalised as a result of WTO provisions.

 

vi) Educative effect: Exports and international business exposes the executives to overseas market which develops greater skills in them. This removes a great hindrance, often acknowledged as greater than scarcity of capital goods. The entrepreneurial and management expertise generally helps an economy grow faster, and traditional factors of production can be used more effectively.

 

vii) Promotes Foreign Direct Investment: The level of international business of a country often becomes a basis for the flow of foreign direct investment in a country. In today’s economic environment, it is difficult to grow in absence of FDI. Several economies have grown following the heavy investments from other parts of the world.

 

viii) Stimulates Competition: International business fosters healthy competition and helps in checking inefficient monopolies. It is established that growth of competitive economies is higher than the growth rate of protective economies. In recent times, the nations have realized the benefits of healthy competition. Several developing and erstwhile communist countries are promoting the same. Switching over to market-led growth which invokes substantially international operations in business, services and technology.

 

ix) Technology Sourcing: In today’s rapidly changing world, it is important to keep pace with the changing technology. This is possible only when there exist linkages with other national economies through international trade and business. The technology-driven industries such as information technology telecommunications, automobiles derive immense synergy by their participation in trade across the world.

 

Micro-level effects: 

 

An individual firm can reap several benefits by resorting to international business.

 

i) Growth: By all standards, domestic markets have a limitation of growth potential. After a particular level, it is very difficult for a firm to achieve growth. So, it is left with the option of either product innovation or extending operations to other markets. The latter option is a better way of sustaining growth as the product life can increase significantly when it is sold into the world markets.

 

ii) Fighting Competition: As the protectionist measures by nations are being reduced, firms operating in domestic market only are facing increased levels of competition. Instead of utilizing their resources in fighting competitions, firms continue to look at markets in other countries to cope up with domestic competition. Hence, international business operations provide avenues for both survival and growth.

 

iii) Increased efficiency: By operating on global scale, a firm can select for its expansion lucrative opportunities. Also, it can reduce its product costs through global sourcing and utilize world level technology and talent for business operations. All this makes the business operations more efficient and as a result it can realize higher return per unit investment. This boosts up shareholder’s value and the company image.

 

iv) Scale economics: Higher level operations on account of international operations produce benefits of scale and thus enhance the profitability of firm.

 

v) Innovation: By operating in large markets, companies can afford to invest in research and technology development. It is established that compared to traditional and mind set firms, innovation driven firms can compete effectively.

 

vi) Risk Cover: By operating on global scale, the fluctuations of demand levels in an individual country does not make much difference on the aggregate sales. Consequently, the uncertainties arising out of risk factors on the operations localized to a country are reduced. Even the financial risks, physical risks, politico-legal risks etc. can be managed more effectively by virtue of global operations.

 

Global symbiosis 

 

Over a period of time, the mind set for achieving self sufficiency as a national goal has given way to attaining synergies from global interdependence. The countries have realised the benefits accruing from fostering a healthy symbiotic relationship based on mutual gains for both countries. The goal of self sufficiency of yesteryear’s was right in those times, but with contemporary changes sweeping business and society, an order based on synergies out of mutual benefits is more likely to be accepted. The low levels of national populations along with limited means of communication and transportation encouraged self-sufficiency as a national goal. A faster industrial growth followed by efficient transportation and logistics and the revolution in information technology have resulted in a closely knitted world. Today, all nations depend on each other for capital, technology, markets and supplies. Concomitant with this is a worldwide struggle for markets, fuels and raw material.

 

The market power of nations has shifted. The West is no longer supremely dominant and the world has acquired a multi-polar character in contrast to bipolar character of the yesteryears. Russia has shifted from being a centrally planned economy to a more open market based economy. She continues to derive advantages from the strengths of the factors such as natural resources and a trained manpower. She also continues to be the biggest oil producer. China with population over one billion is getting organized to face the challenges in the emerging world economic order. She has made a conscious transition towards a market based economy. A number of less developed countries are building industry that combines significant technology, low cost labour and cheap resources to produce products and services that are marketed worldwide. In the past five years, their manufactured exports have more than doubled. Taiwan now sells TVs and steel to Japan. And Japan has moved ahead. In the 1980s Japan was making fourth generation computers, the highest of the high technologies. The phenomenal growth of information technology sector in India is an example of how opportunities for India are created as a result of global interdependence.

 

Adverse effects of foreign trade 

 

It has often been argued that international trade has a strong backwash effect as less developed countries i.e. its operations are fundamentally biased in favour of the richer and progressive regions and is in disfavour of less developed countries. It has also been pointed out by the economists that international trade leads to international transfer of income from poor to rich countries. The UN reports on human resource indicators shows a widened gap in the living standards of the people of rich and poor nations. This widening of gap  has increased in the last decade ever since globalization of the world economies started. Also, international trade can adversely affect the process of capital formation in underdeveloped countries.

 

However, there is still a lack of empirical evidence to prove that the development of export sector has been at the cost of domestic sector. Foreign trade has not always stood in the way of domestic investment. The adverse effects seem to have been exaggerated. It may be mentioned that in today’s environment, globalization is a reality and it is important to accept it in the right perspective instead of nurturing the old protectionist beliefs.

 

Barriers to International Business 

 

Despite difficult distances, high cost of transportation, diverse languages, customs, traditions and national level laws, risk and uncertainties, exchange control etc., one of the basic factors that must be taken into account in international business is the Exporting Country’s foreign trade regulations. These may block or hinder exports to all or some countries. Exporters, may be required to follow elaborate and time-consuming procedures including the preparation of numerous documents. The immediate effect of such trade regulations, whether in the form of increased custom tariffs or other import charges is an increase in the price of imported goods in the market of importing country. The increase gives the domestic producers of the import competing product a relative edge that may by sufficient to stimulate domestic sales or to protect their share of market. Trade restrictions also have direct adverse effects on the exporting country.

 

(a) Tariff Barriers: 

 

Tariff in international trade refers to the duties or taxes imposed on international traded commodities when they cross the national boundaries which makes the product costlier than the product available in local market. These include export duties, import duties, transit duties, countervailing (subsidies) duties, and anti-dumping.

 

(b) Non-tariff Barrier: 

 

A non-tariff barrier is any measure other than a tariff that raises an attack to the free flow of goods in the overseas market. Non-tariff barriers are normally erected in the form of prior import deposits, import quota/licensing, foreign exchange regulations, exchange formalities, Government procurements, State trading, health and safety measures, canalization of trade, preferential arrangements, trading blocks, technical and administrative regulations and economic and political wars.

 

Summary 

 

In the present day business environment, there is increasing movement of goods and services across the nations and even the firms engaged in only domestic business need to be aware of the international business scene. The Indian economy as is true of the economies of other industrialized nations is so intricately linked to international economics that even strictly domestic business is affected by what takes place in other countries. Although basic business decisions do not change as marketers expand their business from the domestic field to the international field, the environment can be profoundly different. The major aspects of the international business environment include the economic, cultural, legal and political environment. A company may use direct investment, exports, licensing, joint ventures etc. to foray in foreign markets. Benefits of international business include increase in sales and profits, increase in employment opportunities, increase in standard of living, and increase in market share etc. whereas tariffs and non-tariff measure act as barriers to international business effort.

 

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”, 5 th 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