Concept of International Business
International business can be described as the business carried on across the national borders between
two or more nations. The concept of international business stems from the business processes
intersected by the national borders. The international business processes are not confined to the
geopolitical boundaries in the conventional sense, the term *national border* is to be used in a wider
perspective. A more flexible concept of the national border is the contact line between people and the
Multinational Enterprises (MNEs) possessing a distinctive character attributable to their different social,
cultural & economic environments.
Today, global events and competition affect almost all companies which get materials, technology, capital
and human resources from different countries and also market their products to them.
According to Daniels, Radebaugh & Sullivan, “International Business includes all commercial
transactions-private and governmental-between two or more countries. These transactions include
sales, investments and transportation.” Private companies undertake such transactions for profit,
whereas government of a country may or may not do the same in their transactions. IB is significant both
at the macro-economic and micro-economic levels.
Scope of International Business
Activities
IB involves those business activities that involve crossing of national boundaries. Such
activities may include:
1. Import & Export of commodities & Manufactured Goods.
2. Investment of Capital in manufacturing, extractive, agricultural, transportation &
communication assets.
3. Supervision of Employees in different countries.
4. Investment in International Services like Banking, Advertising, Tourism, Retailing, and
Construction.
5. Transactions involving copyrights, patents, trademarks and process technology.
The study of IB focuses on the particular problems and opportunity that emerge because of
a firm operating in more than one country. The guiding principle of a firm engaged in IB
activities should incorporate a global perspective. A firm’s guiding principles can be defined
in terms of three broad categories namely – products offered, markets served, capabilities
and results.
A 3-pronged approach may be adopted for understanding the scope of IB.
a) First Approach deals with – transmission of resources from one country to another – in
form of shipment of goods, transfer of funds, & Movement of People.
b) Second is concerned with the relationship of the MNEs with the host countries.
c) The third involves elements of conflict arising from the national sentiments and the
nationalistic attitudes guiding both the parent and the host countries.
Opportunities for MNEs
Resource transmission is based on mutual benefits expected from the trade flows between
the trading nations and the investment activities undertaken by the MNEs abroad. Trade
across borders and investment in other countries provide opportunities to the MNEs to take
the advantage of their superior technology, innovative-ness and economies of scale.
Because of the diverse economic systems prevailing in the different countries, leaves MNEs
with the choices between conformity and innovation. It may pursue the strategy of
introducing changes in a gradual manner, acceptable to the host governments, keeping in
view the employment and welfare of the people. Despite the efforts of the MNEs to follow a
balanced approach, areas of conflicts do arise because of different national interests.
Threats for MNEs
The MNEs are often seen as penetrating into the host country markets for exploiting their
economies. The objectives of foreign investors and socio-economic objectives of the host
governments may come in conflict. The conflicts relating to equity participation , use of local
inputs, employment, expansion of exports etc. may be resolved through negotiations with
the governments of host nations.
1. IB has many dimensions. it’s not merely the border crossing which is sufficient to
comprehend the numerous problems faced by the MNEs in the overseas markets.
2. Different countries follow different business laws, tax systems, etc., and have
different political, economic and cultural environments. The strategies of the MNEs
aiming at the efficient management and optimum returns are shaped by the
external factors. An MNE, having company specific advantage on which it may have
some control, has to confront and manage the foreign environments which may not
be within its control.
3. The formulation of policies to achieve efficiency on the functional areas such as
production, finance, marketing and human resource management, has to take into
account all these realities.
Issues faced in management of international business :-
a) Study of trade and the FDI theories
b) Financial matters which are, in turn, affected by the financial factors such as
fluctuation in foreign exchange rates, changes in the political and economic
conditions and inflation.
Basic Entry Decisions with respect to
IB
The process of internationalization of business could be managed with different
strategies. These include:
1. Importing & Exporting
The oldest strategy of internationalization by business firms is to engage in
export & import of goods & services. Export means producing goods in one’s
own country & selling them to another country whereas import involves
bringing goods into the home country from aboard. Exports & Imports-
subject to tariffs, duties and other regulations which have to be taken care by
the firm’s management.
2. Licensing (Franchising)
Under this strategy, a company in one country (licensor) enters into an
agreement with another country (licensee) to use manufacturing,
processing , trademark or name patents, technical assistance, manufacturing
knowledge, trade secrets or some other skill provided by the licensor for an
agreed compensation (royalty). The approach is appropriate when foreign
production is preferable to production at home, but the licensor does not wish
to engage in foreign production itself. Factors – excessive transportation
costs, government regulations and production costs in the home country.
Franchising – a firm allows some firm in a foreign market to use its trade mark
and formula. Franchising Firm (the franchiser) grants for a fee an independent
foreign firm (the franchisee) the use of trademark or other asset – essential
to the operation of franchised business. Approach combines a proven,
operating formula given by the franchiser with local knowledge &
entrepreneurial initiative (possessed by the franchisee).
The major advantage of licensing is that profitability can be increased by
extending the brand into new markets. This strategy is frequently used for
entry into less-developed countries where older technology is still acceptable
and in fact may be state of art.
The primary disadvantage of licensing is inflexibility. A firm can tie up control
of its product or expertise for a long period of time. And if the licensee does
not develop the market effectively, the licensing firm can lose profits. The
second disadvantage is that license can take the knowledge and skill that it
has been given access to for a foreign market and exploit them in the
licensing firm’s home market. When this happens, a firm which used to be a
business partner, becomes a business rival.
3. Strategic Alliance
Denotes cooperative arrangement between two or more firms for a mutual
benefit – for eg. Joint Venture – a partnership arrangement in which the foreign
operation is owned in part by the domestic company and in part by a foreign
company. Two or more partners’ sharing in a project through participation in
equity capital.
Joint Ventures may take many forms depending on what is shared the degree of
sharing that occurs, the number of partners involved, the type of project and the
time frame. There are many options in this type of strategic alliance.
It might also involve non-equity arrangements. Such types of alliances have
been entered into by different airlines to reduce costs & provide better customer
services. It has both advantages & disadvantages. For example, they can allow
quick entry into the market by taking advantage of the existing strengths of
participants. Japanese automobile manufacturers employed this strategy to
enter the U.S. market by using the already established distribution systems. Of
U.S. automobile manufacturers. Strategic Alliances are also an effective way of
gaining access to technology or raw materials. And they allow the firms to share
the risk & cost of the new venture. One major disadvantage of this approach lies
with the shared ownership of joint ventures. Although it reduces the risk for each
participant, it also limits the control & the returns that each firm can enjoy.
4. Direct Investment
Many firms make direct investments in foreign countries to capitalize on lower
labor costs and potentials of huge market. It involves building production
facilities in a foreign country. Thus, FDI takes place when a company registered
in one country builds or acquires production facilities or subsidiaries in a foreign
country.
Thus, major benefits of foreign direct investment are
- Complete managerial control over operations and profits do not have to be
share as in case of a Joint Venture.
- Purchasing an existing firm provides additional benefits as the existing firm
already has the human resources, plant and organizational infrastructure are
already in place.
- Acquisition is also a way to purchase the brand-name identification of a
product as was done by Coca cola when it acquired Indian Brands “ Thumbs
Up” & “Limca” from Parle Drinks.
However, direct investment also increases the complexity in decision-making
and economic and political risks. Adjusting management style with the foreign
culture may be another significant problem.
Unit 2 Theories of International Trade
Classical Country Based Theories Modern Firm Based Theory
Mercantilism Country Similarity
Absolute Advantage Product Lifecycle
Comparative Advantage Global Strategic Rivalry
Heckscher-Ohlin Theory (Factor Proportion Porter’s National Competitive Advantage
Theory)
Heckscher-Ohlin Theory (Factor-Price Equalization Theorem)
The HO Theorem states that a country which is capital abundant will export the
capital intensive good & country which is labor abundant will export labor intensive
goods.
Eli-Heckscher and Bertil Ohlin developed the factor-proportions theory based on
countries production factors-land, labor and capital. Countries with more people
relative to the land would go for production of goods which require abundant of
semi-skilled workers and require less space per workers.
Countries where there is little capital available for investment and where the
amount of investment per worker is low, managers might expect cheap labor rates
and export competitiveness in products requiring large amounts of labor relative to
capital. Countries where capital is high, will produce more technically advanced
products compared to countries with low capital.
Country Similarity
- Steffan Linder in 1961
- Consumers in countries that are in the same or similar stage of development
would have similar preferences so Linder suggested that companies first
produce for domestic consumption and when they explore exporting, the
companies often find that markets that look similar to their domestic one, in
terms of customer preferences, offer the most potential for success.
This theory emphasizes that, trade takes place among countries that have similar
characteristics specially among industrial or developed countries. The reason is
trade takes place among industrial countries where acquired advantage(product
technology) as opposed to natural advantage (agricultural product & raw
materials).
The theory says that once a company has developed a new product in response to
observed market conditions in the home market, it will turn to markets, it sees as
most similar to those at home.
a) Similarity in Economic Size
b) Similarity to Location – The distance between two countries accounts for
many of these world trade relationships. For example, Finland is a major
exporter to Russia because transport costs are cheap & fast compared to
transport to other countries.
c) Cultural Similarity – as expressed through language & religion, also helps
explain much of the direction of the trade
d) Similarity to Political & Economic Interests – Political relationships & economic
agreements among countries may discourage or encourage trade between
them or their companies eg. Agreement among EU Countries to remove all
trade barriers with each other.
Product Life Cycle Theory
a. Raymond Vernon – in 1960s
b. The theory originating in the field of marketing states that a product life cycle has
3 distinct stages –
1. New Product
2. Naturing Product
3. Standardized Product
c. The theory assumed that the production of new product will occur completely in
the home country of its innovation.
PLC theory states that certain kinds of products go through a continuum, or cycle, that consists of four
stages – introduction, growth, maturity, and decline.
Industrialization started in the developed countries after the industrial revolution. Then when the
industries grew at rapid rate, they moved to another parts of the country to trade and formed colonies.
After the independence of the colonial countries, the third world started to set up industries and moved
from agriculture to the industrial sector. Thus, began the introduction phase of the countries which are
now known as developing countries by the time, the developed countries reached the maturity stage
and started to innovate new technology. Thus, every economy moves from these four stages in their
production life.
Global Strategic Rivalry Theory
- Emerged in 1980’s & was based on the work of economist Paul Krugmen &
kelvin Lancaster, their theory focused on MNCs and their efforts to gain
competitive advantage against other global firms in their industry. Firms will
encounter global competition in their industry and in order to prosper they
must develop competitive advantage.
- The critical base that firms can obtain a sustainable competitive advantage
are called barriers to entry for that country.
Governments alter their absolute and comparative advantages so that they can
develop a specific skills in the country by importing. There are two basic
approaches to government policy:
1) policies that will affect industry in general
2. Policies that will affect a specific industry.
General : It makes alteration which affects factor proportions, efficiency and
innovation. It can improve human skill through education, providing
infrastructure, promoting highly competitive market, inducing consumers to
demand higher quality of products and services.
Specific: It generally targets a particular industry for which global demand never
reaches expectations.
