Management > International Business Management > Introduction to International Business > Drivers of International Business
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International business has become a cornerstone of the global economy, as companies increasingly look to expand beyond domestic borders to reach new customers and tap into diverse resources. This trend is fuelled by several key drivers that make international markets attractive to companies of all sizes. Understanding these drivers allows companies to make strategic decisions about global expansion and navigate the complex landscape of international trade. This article delves into the primary drivers of international business, highlighting why companies pursue opportunities across borders and how these factors impact their success.
Drivers of International Business
Limited Home Market:
When the size of the home market is limited either due to the smaller size of the population or due to the lower purchasing power of all people or both, the companies internationalize their operations. Similarly, a company, which is mature in its domestic market, is driven to sell in more than one country because the sales volume achieved in its own domestic market is not large enough to fully capture the manufacturing economies of scale. For example, ITC Indian cigarette major captured the European market.
Market Expansion and Revenue Growth
One of the primary drivers of international business is the desire to expand into new markets and capture a larger share of the global customer base. By entering foreign markets, companies can significantly increase sales and diversify their revenue streams. When companies operate in multiple regions, they are less dependent on any one economy, reducing the risk associated with economic downturns in specific countries. For example, Starbucks’ global presence has allowed it to spread risk and benefit from demand across regions, even when one market experiences fluctuations. Expanding into international markets provides companies with additional revenue sources and mitigates the risks associated with single-market dependency.
Emerging Markets:
Compared to developed countries, developing countries are growing at a healthy pace, thus reducing the barriers of trade. Emerging markets provide an unexplored marketplace with unlimited potential and scope for business. Any company with good or innovative products and services cannot afford to ignore the opportunities provided by these emerging markets. Car manufacturers like Toyota, Suzuki, Mercedes, etc. have set the production facilities in India.
Cost Efficiency and Economies of Scale
Achieving cost efficiency is another powerful motivator for companies to expand internationally. Many companies establish production facilities in countries with lower labour costs, which helps reduce overall production expenses. For instance, Nike outsources much of its manufacturing to countries in Asia where labour costs are lower, resulting in more cost-effective production. International business also enables companies to achieve economies of scale by increasing production volume and spreading fixed costs over a larger output. As production increases, per-unit costs decline, enhancing profitability. Global expansion allows companies to optimize production processes, reduce costs, and become more competitive.
Excess of Production:
Some of the domestic companies expand their production capacities more than the demand for the product in the domestic market. In such cases, these companies are forced to sell their extra production in foreign developed countries. For example, Nokia is an international company based in Finland whose production capabilities were very large compared to the population of Finland. Similarly, Toyota of Japan has a large export market.
Access to Resources and Talent
Another major driver of international business is the need for specific resources and skilled labour that may be more accessible or cost-effective in certain countries. Some regions offer abundant natural resources that are essential for production, such as minerals, metals, or agricultural products. For example, oil companies often establish operations in the Middle East to access natural reserves, while tech companies may set up in regions with skilled engineers and technical talent. International markets also provide companies with access to skilled labour, technical expertise, and specialized knowledge. Tesla, for example, has established operations in Germany to access a highly skilled workforce and leverage the country’s automotive engineering expertise.
Competitive Advantage and Innovation
Many companies enter international markets to gain a competitive edge and foster innovation. By establishing a presence in new regions, businesses can become early movers and secure a foothold before competitors enter the market. This first-mover advantage can lead to brand recognition, customer loyalty, and favorable positioning in the market. Additionally, companies can access innovation and emerging technologies by investing in research and development (R&D) hubs worldwide. Pharmaceutical companies, for example, often establish R&D centers in different countries to leverage local expertise and drive innovation in drug development. Being present in multiple markets allows companies to diversify their knowledge sources and stay competitive.
Growth in Market Share:
Some companies would like to enhance their market share in the global market by expanding & intensifying their operations in various foreign countries. The Smaller companies expand internationally for survival while the larger companies expand to increase their market share. For example,Coca Cola has bottling plants almost all over the world.
Technology and Digital Transformation
Advancements in technology and digital connectivity have significantly reduced the barriers to international expansion. Digital platforms and e-commerce have enabled businesses to reach customers globally with ease, reducing the need for physical stores in every country. Companies like Amazon leverage digital tools to manage international operations and optimize logistics across multiple regions. Through digital marketing, companies can target customers in foreign markets with localized advertisements, creating personalized shopping experiences. Technology has not only simplified the process of international business but also made it more cost-effective, allowing companies to reach new markets efficiently.
Transportation
We live in a ‘global village’. Improvement in transportation technology in air, sea and rail systems helped in the growth of the international business. The transport system has reduced the travelling time and increase the efficiency of transferring goods. A businessman from Mumbai can go to Dubai to do his ‘business’ and come back to Mumbai on the same day. Similarly, goods can be transported beyond the national border on the same day. The costs of ocean shipping have come down, due to containerization, bulk shipping, and other efficiencies. The lower unit cost of shipping products around the global economy helps to bring prices in the country of manufacture closer to those in export markets.
Improved Communication:
Advanced communication technology, such as the internet allowed the customer to get information for new goods and services easily. Besides, falling communication costs allow information move quickly and inexpensively, For example, American & European companies, in recent years, have been depended on Indian companies for the software products & the services through their business process outsourcing (BPO).
Changing Demographics:
Most developed countries face challenges in sourcing workforce as the average age of the population is getting older. In the next 10 years, most of the industrialized nations will have to depend on sourcing its workforce from countries like India, China and other countries, where the population is young, with an abundance of skilled labour. India is the chief source of workforce with English speaking graduates and other diploma holders.
Trade Liberalization and Globalization
Most of the countries around the globe liberalized their economies &opened their countries to the rest of the globe. Old forms of non-tariff protection such as import licensing and foreign exchange controls have gradually been dismantled. Borders have opened, and average import tariff levels have fallen. These change in the policies attracted multinational companies to the extent their operations to these countries. Many of the world trades are currently done through free trade, bilateral, and multilateral agreements. Trade liberalization, including the reduction of tariffs and trade barriers, has facilitated international business growth. Free trade agreements (FTAs) between countries reduce import/export taxes, making it easier and more profitable for companies to operate internationally. For example, the North American Free Trade Agreement (NAFTA) has enabled smoother trade and investment flows between the United States, Canada, and Mexico. FTAs encourage foreign investment by creating a favourable business environment, and countries with liberal trade policies often attract multinational companies seeking easier access to local markets. Globalization and trade liberalization have made it easier for businesses to expand across borders and access new opportunities.
Risk Mitigation and Economic Stability
Expanding internationally provides companies with a means to manage and mitigate economic risks. By diversifying revenue streams across multiple markets, companies can protect themselves against downturns in any single economy. This diversification helps stabilize earnings and enables companies to maintain steady growth, even during economic turbulence in specific regions. Additionally, some companies use currency hedging strategies to benefit from currency fluctuations. For example, an exporter can offset losses in one currency by gaining from another. By operating internationally, companies gain more financial flexibility and greater resilience to local economic changes.
Trading Blocs:
Formation of various regional and international trading blocs like the European Union, World Trade Organisation, South Asian Free Trade Agreement and the North American Free Trade Agreement have resulted in increased regional cooperation. These trading blocs promote business within their scope by facilitating free trade zones, which literally eliminates any trade or investment barriers. Trading blocs like BRICS also facilitate easy movement of goods, services, and human resources within the region, thus providing a uniform opportunity to all the countries (in the region) for proper allocation of resources.
Differences in Tax System:
The desire of businesses to benefit from lower unit labour costs and other favourable production factors abroad has encouraged countries to adjust their tax systems to attract foreign direct investment (FDI). Many countries have started tax holiday schemes for foreign investment projects.
Higher Rate of Profits:
The main objective of any business is to achieve profits. When the domestic markets don’t promise a higher rate of profits, business firms search for foreign markets where there is a scope for a higher rate of the profits. TCS of India earns more profit through its global operations than through the domestic operations.
Political Stability:
The Political stability means that continuation of the same policies of the Government for a quite long period. Business firms prefer to enter the politically stable countries & are restrained from locating their own business operations in politically unstable countries.
Global Marketplace:
International business has become easier since the advent of the internet and the emergence of e-business. In order to do business internationally, a company must have a good product, the right strategy, and an appetite to take a risk at the global marketplace.
Cultural Exchange
People travel to different countries and share their cultural beliefs and practices with each other. Through this process, cultural assimilation takes place which drives globalization and international business. McDonald’s and KFC were unknown to India a few years back, now they have become part of India’s life.
Growing Middle-Class and Consumer Demand
Emerging markets offer promising opportunities due to rapid urbanization and rising income levels among the middle class. As more people enter the middle class, demand for a broader range of products and services grows. Companies like Unilever have capitalized on the growing consumer base in developing economies by tailoring products to meet local needs and price points. Urbanization and lifestyle changes in countries across Asia, Africa, and Latin America have led to increased demand for consumer goods, healthcare, and technology. Companies are attracted to these regions to capture new demand and establish a presence in high-growth areas.
Conclusion
The drivers of international business are essential forces that propel companies to expand beyond their domestic markets, shaping the landscape of global commerce. Understanding these drivers is crucial for organizations aiming to thrive in an increasingly interconnected world. One of the primary drivers is globalization. The growing interconnectedness of economies has facilitated the movement of goods, services, and capital across borders. This trend has opened up new markets for businesses, allowing them to reach a broader customer base and diversify their revenue streams. Technological advancements also play a pivotal role. Innovations in communication, transportation, and information technology have significantly reduced barriers to entry in international markets. Companies can now operate more efficiently and connect with customers and suppliers worldwide, enabling quicker responses to market demands.
Market demand is another critical driver. As consumers become more sophisticated and exposed to global trends, the demand for diverse products and services increases. Companies are motivated to enter international markets to satisfy these evolving consumer preferences and capture new growth opportunities. Furthermore, competitive pressures drive businesses to look beyond their borders. To remain competitive, companies often seek new markets to sustain growth, reduce costs through economies of scale, and enhance their product offerings. This drive for competitiveness pushes firms to innovate and adapt to various international environments. Resource availability is also a significant factor. Businesses may seek international expansion to access raw materials, labour, or technology that may be scarce or costly in their home markets. By tapping into global resources, companies can optimize their operations and enhance their supply chains. Finally, government policies and trade agreements serve as important enablers of international business. Favourable trade agreements, reduced tariffs, and supportive regulations can incentivize companies to enter foreign markets, providing a more favourable environment for business operations.
In conclusion, the drivers of international business—including globalization, technological advancements, market demand, competitive pressures, resource availability, and government policies—are interconnected and dynamic. Companies that effectively leverage these drivers can enhance their international strategies, adapt to changing market conditions, and achieve sustainable growth in the global arena. By understanding these forces, businesses can better position themselves for success in an ever-evolving international landscape.
Related Topics:
Introduction to International Business
- Need of Study of International Business
- Scope of International Business
- Objectives of International Business
- Features of International Business
- Comparison of Domestic Business and International Business
- Advantages of International Business
- Disadvantages of International Business
- Factors Affecting International Business
- Forms of International Business
- Transformation of Business: Domestic to Global
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