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Assignment No.2

International Business (IB&F)

Introduction & Definition:

International business refers to the trade of goods, services, technology, capital and/or knowledge
across national borders and at a global or transnational level.

It involves cross-border transactions of goods and services between two or more countries.
Transactions of economic resources include capital, skills, and people for the purpose of the
international production of physical goods and services such as finance, banking, insurance, and
construction. International business is also known as globalization.

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.

The study of international business involves understanding the effects that the above activities have
on domestic and foreign markets, countries, governments, companies, and individuals. Successful
international businesses recognize the diversity of the world marketplace and are able to cope with
the uncertainties and risks of doing business in a continually changing global market.

An international businesses strategy, organization, and/or functional decisions categorize it as:

 A multi-domestic company with independent subsidiaries that act as domestic firms; OR

 Global operations with integrated subsidiaries; OR
 A combination of the two.

Importance of International Business:

International business has many advantages and benefits for a Production or manufacturing
company. With local markets being saturated, many companies think of expansion via international
business. So the question which pops up is – What is the importance of international business and
what are the benefits of International business? Let us discuss the same.

1) Market expansion

Everyone wants to expand their market share and to sell more and more products. The importance
of International business lies in the fact that you get a new market to enter and to expand in. No
matter what was your position in the old market, the new market is a new playing field for any
company.
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2) Non-availability of product in new market:

A major advantage the company can have is that the product it produces is not available in the
international market which the company is targeting. The firm, therefore, has a “production
advantage” which it can use to maximum benefit. As a result, it is one of the benefits of the
International business that the firm can establish a monopoly or a duopoly in the target market,
thereby generating a lot of revenue.

3) Cost advantage

Many times, there is a cost advantage of exporting products to a different country. This cost
advantage is apparent in the way China is operating in today’s business environment. The benefits of
International business are huge to Chinese companies because their cost of production is very low.
One of the major contributors is their low Labour cost due to which Chinese equipments are able to
match any rates in the International market.

4) Product Differentiation

If your products are differentiated and the differentiation is possible only in one’s own country, then
a company should definitely expand to International markets.

Furthermore, if a company is capable of product design and implementation as well as establishing

new products and services, then this company has various benefits of International business already
available. Expanding to international market sounds logical if you can differentiate your products
from existing market products.

Objectives or Goals of International Business:

1.To Achieve Higher Rate of Profits:

The basic objective of business is to achieve profits. When the domestic markets do not promise a
higher rate of profits, business firms search for foreign markets that hold promise for higher rate of
profits. Thus the objective of profit affects and motivates the business to expand operations to
foreign countries.

2.Expanding the Production Capacities beyond the Demand of the Domestic Country:

Some of the domestic companies expand their production capacities more than the demand for the
product in domestic countries. These companies, in such cases, are forced to sell their excess
production in foreign developed countries. Toyota of Japan is an example.

3.Severe Competition in Home Country:

The countries oriented towards market economies since 1960s experienced severe competition
from other business firms in the home countries. The weak companies which could not meet the
competition of the strong companies in the domestic country started entering the markets of the
developing countries.
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Literature Review:

What is International Business? Meaning

International Business conducts business transactions all over the world. These transactions include
the transfer of goods, services, technology, managerial knowledge, and capital to other countries.
International business involves exports and imports.

International Business is also known, called or referred as a Global Business or an International

Marketing.

An international business has many options for doing business, it includes,

 Exporting goods and services.

 Giving license to produce goods in the host country.
 Starting a joint venture with a company.
 Opening a branch for producing & distributing goods in the host country.
 Providing managerial services to companies in the host country.

Features of International Business

The nature and characteristics or features of international business are:-

Large scale operations:

In international business, all the operations are conducted on a very huge scale. Production and
marketing activities are conducted on a large scale. It first sells its goods in the local market. Then
the surplus goods are exported.

Integration of economies:

International business integrates (combines) the economies of many countries. This is because it
uses finance from one country, labour from another country, and infrastructure from another
country. It designs the product in one country, produces its parts in many different countries and
assembles the product in another country. It sells the product in many countries, i.e. in the
international market.

Dominated by developed countries and MNCs :

International business is dominated by developed countries and their multinational corporations

(MNCs). At present, MNCs from USA, Europe and Japan dominate (fully control) foreign trade. This is
because they have large financial and other resources. They also have the best technology and
research and development (R & D). They have highly skilled employees and managers because they
give very high salaries and other benefits. Therefore, they produce good quality goods and services
at low prices. This helps them to capture and dominate the world market.
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Benefits to participating countries:

International business gives benefits to all participating countries. However, the developed (rich)
countries get the maximum benefits. The developing (poor) countries also get benefits. They get
foreign capital and technology. They get rapid industrial development. They get more employment
opportunities. All this results in economic development of the developing countries. Therefore,
developing countries open up their economies through liberal economic policies.

Keen competition:

International business has to face keen (too much) competition in the world market. The
competition is between unequal partners i.e. developed and developing countries. In this keen
competition, developed countries and their MNCs are in a favourable position because they produce
superior quality goods and services at very low prices. Developed countries also have many contacts
in the world market. So, developing countries find it very difficult to face competition from
developed countries.

Special role of science and technology:

International business gives a lot of importance to science and technology. Science and Technology
(S & T) help the business to have large-scale production. Developed countries use high technologies.
Therefore, they dominate global business. International business helps them to transfer such top
high-end technologies to the developing countries.

International restrictions:

International business faces many restrictions on the inflow and outflow of capital, technology and
goods. Many governments do not allow international businesses to enter their countries. They have
many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is harmful to
international business.

Sensitive nature:

The international business is very sensitive in nature. Any changes in the economic policies,
technology, political environment, etc. has a huge impact on it. Therefore, international business
must conduct marketing research to find out and study these changes. They must adjust their
business activities and adapt accordingly to survive changes.

Challenging Aspect:

The challenging aspect of international business, however, is that many 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.
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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.

The Benefits of International Business and the Concept of Comparative Advantage:

Participation in international business allows countries to take advantage of their comparative

advantage.

The concept of comparative advantage means that a nation has an advantage over other nations in
terms of access to affordable land, resources, labor, and capital. In other words, a country will export
those products or services that utilize abundant factors of production. Further, companies with
sufficient capital may seek another country that is abundant in land or labor, or companies may seek
to invest internationally when their home market becomes saturated.

Participation in international business allows countries to take advantage of specialized expertise

and abundant factors of production to deliver goods and services into the international marketplace.
This has the benefit of increasing the variety of goods and services available in the marketplace.

International business also increases competition in domestic markets and introduces new
opportunities to foreign markets. Global competition encourages companies to become more
innovative and efficient in their use of resources.

For consumers, international business introduces them to a variety of goods and services. For many,
it enhances their standard of living and increases their exposure to new ideas, devices, products,
services, and technologies.

The Growth of International Business:

The prevalence of international business has increased significantly during the last part of the
twentieth century, thanks to the liberalization of trade and investment and the development of
technology. Some of the significant elements that have advanced international business include:

 The formation of the World Trade Organization (WTO) in 1995

 The inception of electronic funds transfers
 The introduction of the euro to the European Union
 Technological innovation that facilitates global communication and transportation
 The dissolution of a number of communist markets, thus opening up many economies to
private business.

The Challenges and Considerations of International Business

Because nation-states have unique government systems, laws and regulations, taxes, duties,
currencies, cultures, practices, etc. international business is decidedly more complex that business
that operates exclusively in domestic markets.

The major task of international business involves understanding the sheer size of the global
marketplace. There are currently more than 200 national markets in the world, presenting a
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seemingly endless supply of international business opportunities. However, the diversity between
nations presents unique considerations and a plethora of hurdles, such as:

 National wealth disparities: Wealth disparities among nations remain vast.

 Regional diversity according to wealth and population: North America is home to just 5
percent of the world’s population, yet it controls almost one-third of the world’s gross
domestic product.
 Cultural/linguistic diversity: There are more than 10,000 linguistic/cultural groups in the
world.
 Country size and population diversity: There were about 60 countries at the start of the
twentieth century; by 2000, this number grew to more than 200.

Some of the challenges considered by companies and professionals involved in international

business include:

Economic Environment

The economic environment may be very different from one country to the next. The economy of
countries may be industrialized (developed), emerging (newly industrializing), or less developed
(third world). Further, within each of these economies are a vast array of variations, which have a
major effect on everything from education and infrastructure to technology and healthcare.

Political Environment

The political environment of international business refers to the relationship between government
and business, as well as the political risk of a nation. Therefore, companies involved in international
business must expect to deal with different types of governments, such as multi-party democracies,
one-party states, dictatorships, and constitutional monarchies.

Cultural Environment

The cultural environment of a foreign nation remains a critical component of the international
business environment, yet it is one of the most difficult to understand. The cultural environment of a
foreign nation involves commonly shared beliefs and values, formed by factors such as language,
religion, geographic location, government, history, and education.

It is common for many international firms to conduct a cultural analysis of a foreign nation as to
better understand these factors and how they affect international business efforts.

Competitive Environment

The competitive environment is constantly changing according to the economic, political, and
cultural environments. Competition may exist from a variety of sources, and the nature of
competition may change from place to place. It may be encouraged or discouraged in favor of
cooperation, and the relationship between buyers and sellers may be friendly or hostile. The level of
technological innovation is also an important aspect of the competitive environment as firms
compete for access to the newest technology.
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To ensure success in a foreign market, international businesses must understand the many factors
that affect the competitive environment and effectively assess their impact.

Benefits of International Business

International Business is important to both Nation and Business organizations. It offers them various
benefits.

Benefits to Nation

 It encourages a nation to obtain foreign exchange that can be utilized to import merchandise
from the global market.
 It prompts specialization of a country in the production of merchandise which it creates in
the best and affordable way.
 Also, it helps a country in enhancing its development prospects and furthermore make
opportunity for employment.
 International business makes it comfortable for individuals to utilise commodities and
services produced in other nations which help in improving their standard of life.

Benefits to Firms

 It helps in improving profits of the organizations by selling products in the nations where
costs are high.
 It helps the organization in utilizing their surplus resources and increasing profitability of
their activities.
 Also, it helps firms in enhancing their development prospects.
 International business also goes as one of the methods for accomplishing development in
the firms confronting extreme market conditions in the local market.
 And it enhances business vision as it makes firms more aggressive, and diversified.