What is International Business?

Management > International Business Management > Introduction to International Business > What is International Business?

The world is fast becoming a global village where there are no boundaries to stop free trade and communication. Keeping pace with it, the way we do business has changed in an unprecedented manner. The competition, in the global marketplace, is at its peak where all companies want to sell their goods to everyone, everywhere on the globe. International business is mainly concerned with the issues that are related to international companies and governments’ cross border transactions. It is a broad term including not only movement of goods and services but various other aspects.

International business can be defined as any business that crosses the national borders of a country. It includes importing and exporting; the international movement of goods, services, employees, technology, licensing, and franchising of intellectual property (trademarks, patents, copyright and so on). International business includes investment in financial and immovable assets in foreign countries. Contract manufacturing or assembly of products for local sale or for export to other countries, the establishment of foreign warehousing and distribution systems, and import of goods from one foreign country to a second foreign country for subsequent local sale is part of international business. Apart from individual firms, governments and international agencies may also get involved in international business transactions. Companies and countries may exchange different types of physical and intellectual assets. These assets can be products, services, capital, technology, knowledge, or labour.

Scope of International Business Activities:

Global Integration of Business:

To help the business in the global integration in fields of trade, investment, factor, technology, and communication.

Import and Export:

The fundamental and the largest international business activity in many countries is the foreign trade comprising exports and imports. Physical goods/commodities or merchandise leave the country in the form of export. Imports are those goods brought across the national borders into a country.

Global Services:

The international firms also trade in services banking, insurance, consulting, travel and transportation, etc. earn in the form of fees and royalties. The fees are earned through short or long term contractual agreements such as consultancy or management contracts or turnkey projects. Royalties are received from the use of one company’s name, trademark, patent or process by someone else. Similarly, a firm can earn royalties from abroad by licensing the use of its name, trademark, patent, technology information, Franchise in overseas markets.

Portfolio Investment:

Portfolio investments are financial investments made in foreign countries. The investor purchases debt or equity in the expectation of financial return on the investment.

Foreign Direct Investment:

Foreign direct investment or direct investment is one in which the investor is given collecting interest in foreign company. FDI may be in the form of a Joint Venture or a wholly-owned subsidiary. A wholly-owned subsidiary can be established in foreign markets either in the form of a totally new operation or acquisition of an established firm and use the firm to promote its products. The subsidiary, if it is established starting from the ground up is called a Greenfield investment.

Reasons for International Business:

The countries cannot produce equally well or cheaply all that they need. There is not even a single country, which is in a better position to produce better quality products at a lower cost because there is an unequal distribution of natural resources among different countries. The availability of different factors of production such as land, labour, capital, and raw material are not the same everywhere. The difference in labour, productivity, and production cost due to socio-economic, geographical and political reasons make International Business important.

Objectives of International Business:

To take first-mover advantage:

It refers to getting into a new market and enjoying the advantages of being first. It is easy to quickly start doing business and get early adopters by being first. International markets can have less competition where the businesses can capture a market share quickly. This factor is particularly advantageous when high-quality and superior products are available. Local companies may have the same quality products, but international businesses may have little competition in a market where an inferior product is available. A company with unique competencies and capabilities gain benefits in the international market. For example, Intel’s (USA) competencies and capabilities in semiconductors and chips have propelled it to global market leadership in microprocessors.

To earn foreign exchange:

The international business exports its goods and services all over the world. It helps a country to earn valuable foreign exchange which can be used to pay for imports. Foreign exchange helps to make the business more profitable and to strengthen the economy of the country. Local and foreign It increases investment in the business which is important for the economic stability of the country.

To overcome the limitations of the domestic market:

Some demographic trends such as contraction in birth rate decline in domestic demand, fully tapped market potential, etc. have adverse effects on some businesses. When domestic market is small or saturated, international business is the alternative for growth. Recession in the home market drives companies to explore foreign markets. Foreign markets both developed country & developing country provide substantial growth opportunities for the firms from a developing country. MNCs are interested in developing countries due to fast-rising in disposable income and population.

To take advantage of the low-cost production:

A company can take advantage of low-cost production outside its domestic operations by identifying a nation where the labour is cost-effective and in abundant supply. For example, countries like China, India, the Philippines, and Mexico offer such low-cost production opportunities.

To take advantage of Government Policies:

Many Governments provide incentives to a domestic company to export and invest in foreign countries. The government gives permission to companies to earn foreign exchange for their imports and make payments for royalty, dividend etc. as per foreign exchange requirements

To diversify risk:

Any company can dilute its business risk by spreading its operations to a number of different and diverse countries rather than depending on any one market or region. For example, during the 1997 Asian financial crisis, companies with exposure in European and American countries were able to sustain far better than their counterparts in Asia.

To Increase Monopoly:

Monopoly Power may arrive from patent rights, technological advantages, product differentiation, etc. Another reason for internationalization is exclusive market information

To discourage local competitors:

Acquiring a new market may mean discouraging other players from getting into the same business-space as one company is in.

To acquire product flexibility:

International businesses having products that don’t really sell well enough in their local or regional market may find a much better customer base in international markets. Business can search for some new markets where the products sell at a higher price. A business having international operations may also find new products to sell internationally which they don’t offer in the local markets. International businesses have a wider audience and thus they can sell a larger range of products or services.

To acquire new knowledge and technology:

Doing business in more than one country offers great insights to learn new ways of accomplishing things. This new knowledge, technology, and experience can pave ways to success in other markets as well.

To increase the number of customers:

If customers are in short supply, it may hit a company’s potential for growth. In such a case, companies may look for internationalization. Expanding into markets of foreign countries leads to exposure to more customers, better revenues, increased profits, and lateral growth. This scenario is ideal when the company has already established products in its domestic market.

To increase strategic resources:

A company utilizes many valuable resources available in a foreign country either by importing from that country or by setting up a subsidiary, manufacturing, or production plant in that country. These resources can be human or natural resources like minerals. For example, India has an abundance of skilled engineers, and many global companies take advantage of this resource by either setting up a subsidiary in India or through their partners

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Management > International Business Management > Introduction to International Business > What is International Business?