Drivers of International Business

Management > International Business Management > Introduction to International Business > Drivers of International Business

The production of goods and services has increased around the world due to a number of factors, particularly globalization. Many companies have gone beyond their national borders to have operations, even in remote corners of the world. McDonald’s, Subway, Kellogg’s, Walmart, Tesco, Coca Cola, and Pepsi are some of the best examples in this regard. The drivers of international business are as follows.

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.

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.

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.

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.

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.

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.

Technology and Communication:

Technology is the principal drivers of international business. The Availability of advanced technology & competent human resources in some countries acts like pulling factors for business firms from other countries.  Advanced information technology has transformed our economic life as well as in the businesses sector. 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).

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.

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.

Liberalization of Economic Policies:

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. Interestingly, countries which were very hostile or unfriendly to foreign investment a few years ago, are inviting other countries for inward (FDI).  China is a very good example in this regard.

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. Regional trading blocs like SAARC 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.

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.

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Management > International Business Management > Introduction to International Business > Drivers of International Business