What is International Business?
International business is all commercial transactions (private/Governmental)
between two countries.
OR
When business activities are performed on an international level, these can be
termed as international business.
OR
International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations
OR
International business includes any type of business activity that crosses national borders.
OR
international business is defined as organization that buys and/or sells goods and services across two or more national boundaries, even if management is located in a single country.
OR
ECONOMIC TRANSACTION.
TWO COUNTRIES / ACROSS NATIONAL BOUNDRIES.
FEATURES:
Operating units outside the country
Institutional arrangement
Massive in scale
Influence political,social and economic development.
GROWING IMPORTANCE:
Interdependence
Intense competition
Globalization
Price difference
Development in ICT.
INTERNATIONAL BUSINESS VERUS DOMESTIC BUSINESS:
DIFFERENT LEGAL SYSTEMS.
Different political systems
Different social environment
Different currencies
Different business practices
Different technology
Wider market
High transportation cost
Higher counter party risk.
Need for International Business:
1. More and more firms around the world are going global, including:
1. Manufacturing firms
2. Service companies (i.e. banks, insurance, consulting firms)
3. Art, film, and music companies
2. International business:
1. causes the flow of ideas, services, and capital across the world
2. offers consumers new choices
3. permits the acquisition of a wider variety of products
4. facilitates the mobility of labor, capital, and technology
5. provides challenging employment opportunities
6. reallocates resources, makes preferential choices, and shifts activities to a
global level
To achieve higher rate of profits
Expanding the production capacity beyond the demand of the domestic country
Severe competition in the home country
Limited home marketPolitical conditions
Availability of technology and managerial competence
Cost of manpower, transportation
Nearness to raw material
Liberalisation, Privatisation and Globalisation (LPG)
To increase market share
Increase in cross border business is due to falling trade barriers (WTO), decreasing
costs in telecommunications and transportation; and freer capital markets
Nature of International Business
1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets
Scope of International Business
1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange
TYPES OF INTERNATIONAL BUSINESS:
EXPORT-IMPORT TRADE
FOREIGN DIRECT INVESTMENT
LICENSIng
FRANCHISING
MANAGEMENT CONTRACTS
Recent Changes in International BusinessTotal world trade declined dramatically after 2000, but is again on the rise.The rate of globalization is accelerating.Regionalization is taking place, resulting in trading blocs.The participation of countries in world trade is shifting.
Importance of international business
Every company is trying to expand its business by entering foreign markets.
International business helps in the following ways:-
1. Helps as growth strategy: - Geographic expansion may be used as a
business strategy. Even though companies may expand their business at
home.
2. Helps in managing product life cycle: - every product has to pass through
different stages of product life cycle-when the product reaches the last stages
of life cycle in present market, it may get proper response at other markets.
3. Technology advantages: - some companies have outstanding technology
advantages through which they enjoy core competency. This technology
helps the company in capturing other markets.
4. New business opportunities: - business opportunities in overseas markets
help in expansion of many companies. They might have reached a saturation
point in domestic market.
5. Proper use of resources: -Sometimes industrial resources like labor,
minerals etc. are available in a country but are not productively utilized.
6. Availability of quality products: - when markets are open, better quality
goods will be available every where. Foreign companies will market latest
products at reasonable prices. Good product will be available in the markets.
7. Earning foreign exchange: - international business helps in earning foreign
exchange which may be used for strategic imports .India needs foreign
exchange to import crude oil, deface equipment, raw material and machinery.
8. Helps in mutual growth: - countries depend upon each other for meeting
their requirements. India depends on gulf countries for its crude oil supplies.
9. Investment in infrastructure: - international business necessitates proper
development of infrastructure. A company entering international business
must invest in roads.
Complexities involved in international business
International business by multinational so the complexities are also related to
their working. Some of these complexities are discussed as follow:-
1. Controlling the market:- multinational try to control the market of the host
country. Whenever they enter a new country, the first strategy is to eliminate
the competitors either by taking over their business or forcing them out of
market by following price reduction policies.
2. Exhausting natural resources: - multinational corporations set up their
production facilities in those countries where natural resources are available
in sufficient quantities.
3. Importance to luxuries: - multinational corporations enter those areas where
margin of profits is high.
4. Trade practices:- since multinational corporations have their head office in
one country and the trade practices followed there are adhered to.
5. Economic development: - it is generally felt that the entry of businessmen
from outside may help in the economic development of that country . The
actual practice in many countries is different.
6. Shifting of investment: - international business is related to profitability of its
operations. If a business is getting sufficient profits in a particular country then
the investment remain there.
SPECIAL DIFFICULTIESIN INTERNATIONAL BUSINESS
What make international business strategy different from the domestic are
the differences in the marketing environment.The important special problems
in international marketing are given below:
1. POLITICAL AND LEGAL DIFFERENCES The political and legal
environment of foreign markets is different from that of the domestic.The
complexity generally increases as the number of countries in which a
company does business increases.It should also be noted that the political
and legal environment is not the same in all provinces of many home
markets.For example, the political and legal environment is not exactly the
same in all the states of India.
2. CULTURAL DIFFERENCES The cultural differences, is one of the most
difficult problems in international marketing.Many domestic markets, however,
are also not free from cultural diversity.
3.ECONOMIC DIFFERENCES The economic environment may vary from
country to country.
4.DIFFERENCESIN THE CURRENCY UNIT The currency unit varies from
nation to nation.This may sometimes cause problems of currency
convertibility, besides the problems of exchange rate fluctuations.The
monetary system and regulations may also vary.
5. DIFFERENCESIN THE LANGUAGE An international marketer often
encounters problems arising out of the differences in the language.Even when
the same language is used in different countries, the same words of terms
may have different meanings.The language problem, however, is not
something peculiar to the international marketing.For example:the multiplicity
of languages in India.
6. DIFFERENCESIN THE MARKETING INFRASTRUCTURE The availability
and nature of the marketing facilities available in different countries may vary
widely.For example, an advertising medium very effective in one market may
not be available or may be underdeveloped in another market.
7. TRADE RESTRICTIONS A trade restriction, particularly import controls, is
a very important problem, which an international marketer faces.
8. HIGH COSTSOF DISTANCE When the markets are far removed by
distance, the transport cost becomes high and the time required for affecting
the delivery tends to become longer. Distance tends to increase certain other
costs also.
9. DIFFERENCESIN TRADE PRACTICES Trade practices and customs may
differ between two countries
advantages:
survival
standard of living
GROWTH OF OVERSEASMARKETs
SALESAND PROFIT
DIVERSI FICATION
EMPLOYMENt
International Trade Theories
1. Mercantilisms theory
The foundation of the theory dates back to nearly 500 years ago
The theory focused on increasing trade surplus – which meant
increasing treasure (normally in form of gold) During colonial rule the
theory was used to benefit colonial power. Colonies were forced to
import costly finished /manufactured goods from the ruling country and
export the raw material at cheap price.
Now instead of treasure (gold ) the country with the trade surplus holds
the currency of the country with the trade deficit (- or investments in the
currency). In other words it grants credit to the country with deficit trade
– this of advantage only if it oods/services with the credit.
Neo-mercantilism seeks to achieve social and political objectives by
trade surplus
Absolute advantagism
Adam Smith proposed that consumer in a country will benefit by buying
foreign products if they are cheaper than domestic ones.
What the theory implies is – every country will specialise in producing
those items that give it competitive advantage.
The specialisation will make the labour more efficient in producing
those items. Economy of scale will also help them in producing those
items at lower cost.
The competitive advantage is either – natural OR ACQUIRED.
Natural advantagism theory
Natural advantage can be due to
- natural resources available. Eg:- availability of petroleum in middle
eastern countries.
- climate. Eg:- climate helps in the production of tea in north east india.
- land fertility and suitability. Eg:- jute in Bangladesh.
Companies can gain by processing the raw agricultural product and
convert it to a form that is more efficiently and economically transported
– thus save transportation cost.
4. Acquired advantage theory
Certain countries have acquired the skill and technology to produce
certain items better than others . Eg:- Japanese in producing steel and
electronic goods .
Comparative advantage theory:
A country must choose to produce the items it produces best and
import the rest even if it has absolute advantage in all the products –
this is justifiable due to allocation of limited resources.
Limitations of the theory lies in its assumption of full utilisation of its
resources. Eg:- Full employment may not be a valid assumption
- Another reason why the strategy advocated by this theory may not
be totally satisfactory – for the risk associated with over specialisation
in certain items and overdependence on imports of certain items.
- The other limitations of the theories of specialisation are: sharing of
gains between the countries may be a point of dispute.
- Transort cost may offset the benefits of specialisation.
- Resources are not as mobile as the assumes.
Theory of country size
Larger countries ( in terms of land) are likely to have more variety of
resources than smaller ones. So they are more self sufficient hence
trade less.
The transportation cost of procuring items from neighbouring countries
is higher than processing it from a domestic source within the country.
Domestic demand is often large enough for an economic scale of
production.
7. Factor Proportion theory
According to this theory the factors ( of production) which are
more in existence are cheaper while the scarcer factors are
costlier.
- The production factors are – labour land and capital.
Countries produce items requiring the factors available with them (- how ever
technology also decides the amount of the factors required for a given output
Product life cycle theory of trade
Phases of ‘Product life cycle’ are 1. Introduction 2. Growth 3. Maturity
4. Decline.
The production starts in the country where the product was first
researched and developed. These countries are always industrialised
and advanced.
Then the product shifts to other countries ( developing countries) as the
product reaches the stage of maturity in the country where it originated.
Some exception to the PLC theory of trade are –
(a) When products have very short cycles because of rapid innovation.
(b) Products where the cost is of little concern to the customer
(c) Products requiring specially skilled labour – which takes time to develop.
Reasons for Recent International Business Growth
. Expansion of technology
2. Business is becoming more global because
•Transportation is quicker
•Communications enable control from afar
•Transportation and communications costs are more conducive for international operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources enable
Companies to take better advantage of international opportunities
Problems in International Business
1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy
Features of international business:
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.
Intergration 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.
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.
Meaning of international business environment
Intrenational business enviorment is combination of
intrenational+business+enviorment=IBE.
Firstly meaning of international
It mean that between the two or more nation
2nd Business
It include the all economics activies ,perform by the individual or a
group ,which is related to production of goods or services for the
purpose of earn profit .
3rd Env
Env means that total set of sorrounding.those are around togather is know as env.
Meaning of ibe
It mean that the enviourment which is related to international business is
known as a i.b.e.
I.B means the business between the two or more countries./amongst
countries.
IN other word the factor affect/ influncing the business
Environmental impact of factors in International business: Cultural, political, legal and economic
CULTURE AND SOCIAL ENVIRONMENT:( NOTE BOOK ALSO)
Social and culture env factor in various of the global effect the I.B. It include,
attitude of the people of the work , wealth ,family size, marriage, education,
religions, human responsiblties, etc.
Culture
Is the thought and behaivour pattern member and society learn through
languages and other form coustm ,habbits norms,value.
Culture can be defined a s a "sum of total knowledge, beliefs, art, morals,
laws, customs and any other capabilities and habits acquired by man as a
member of society.
“ It is a distinctive way of life of a group of people, their complete design of
living.
Culture thus refers to a man's entire social heritage - a distinctive life
style of a society and its total value system which is intricately related to the
consumption pattern of the people and management philosophies and
practices.
EXAMPLE OF CULTURE IS : different dressing style in christen weeding nd
indian weeding (explain krna hai)
Symbol examples:
a) FOOD Vegetarian food – large cultures in India
Sea foods – for subcultures in the Far East
Avoidance of beef – by Hindus and Sikhs
b) CLOTHING :
By sheer logic, clothing preference should depend on climate and weather. The
preferences in these cases appear to be culturally inherited.
c.) HOUSING: cultural influences effect the choice of location, material, construction
of the houses
characterstics of culture
1. Culture is prescriptive. It prescribes the kinds of behavior considered acceptable in
the society.
2. Culture is socially shared. Culture, out of necessity, must be based on
social interaction and creation. It cannot exist by itself. It must be shared
by members of a society, thus acting to reinforce culture’s prescriptive
nature.
3. Culture facilitates communication. Culture usually imposes common habits
of thought and feeling among people. Thus, within a given group culture
makes it easier for people to communicate with one another.
4. Culture is learned. Culture is not inherited genetically-it must be learned
and acquired. Socialization or enculturation occurs when a person absorbs
or learns the culture in which he or she is raised. In contrast, if a person
learns the culture of a society other than the one in which he or she was
raised, the process of acculturation occurs.
5. Culture is subjective. People in different cultures often have different ideas
about the same object. What is acceptable in one culture may not
necessarily be so in another.
6. Culture is enduring. Because culture is shared and passed along from
generation to generation, it is relatively stable and somewhat permanent.
Old habits are hard to break, and people tend to maintain its own heritage
in spite of a continuously changing world. (why India and China, despite
severe overcrowding, have a great difficulty with birth control)
7. Culture is cumulative. Culture is based on hundreds or even thousands of
years of accumulated circumstances. Each generation adds something of
its own to the culture before passing the heritage on to the next
generation.
8. Culture is dynamic. Culture is passed along from generation to
generation, but one should not assume that culture is static and immune to
change. Far from being the case, culture is constantly changing-it adapts
itself to new situations and new sources of knowledge.
Cultural Dimensions:
Meaning of Time:
Workweek in Middle East
punctuality
Language of friendship
Dinner Invitation in India :real friendship
In china : social gathering
USA : dinner is a necessity
Culture also affects what should not be purchased. Muslims do not
buy Pork/ do not smoke or drink.
Technological Environment
Relationship between business and technology exist
Technology is systematic application of scientific or other organized
knowledge to practical task.
Technology feed itself. Technology makes more technology possible
Social Impact of Technology:
Technology reaches people through business
High expectation of consumer
System complexity
Social change
Technological Phases
Need to Spend on Research & Development
Technology transfer
Jobs tend to become more intellectual
Problem of techno structure : ESOP
Need for multi professional
Increased regulation & stiff opposition
Rise and decline of product & organization
Insatiable demand of capital
The Economic Environment
This element comprises the nature of the economic system and institutions of
a particular country or region. It also takes into account the nature of human
and natural resources within the target market. A firm will function very
differently in a libertarian environment than within a highly statist one. Here,
the activities and functions of local economic elites are also very important.
Features of an Economy
GDP
Inflation
Unemployment
Debt
Income distribution
Poverty
Labor costs
Productivity
Balance of payments
Elements of the Economic Environment
GDP: the total value of all final goods and services produced in a country in a given
year equal to total consumer, investment, and government spending, plus the value
of exports, minus the value of imports.
Inflation : rise in the general level of prices of products over a period of time. Thus, it
is a measure of the increase in the cost of living
Unemployment is a measure of the number of workers who want to work but do not
have jobs
Including other economic factors:
All these factors need to be considered in any global business venture:
Tax Systems
Investment Considerations and Allowances
Commodity Prices – oil, energy, metals
Monetary and Fiscal Policies – interest rates, tax regimes, government aid
Internal Regulation and Bureaucracy – can be stifling!
Exchange Rates
Economic policy refers to the actions that governments take in the economic field. It
covers the systems for setting interest rates and government budget as well as the
labor market, national ownership, and many other areas of government interventions
into the economy.
Trade policy, which refers to tariffs, trade agreements and the international
institutions that govern them
Tax policy: The taxes used to collect government income
fiscal policy is the use of government revenue collection (taxation) and expenditure
(spending) to influence the economy.
Monetary policy is the process by which the monetary authority of a country controls
the supply of money, often targeting a rate of interest for the purpose of promoting
economic growth and stability
What are the different economic systems?
There are three types of economic systems
Capitalist (Market allocation of resources) system
Socialist ( Command allocation of resources) system
Mixed system
Market allocation
Consumer allocates the resources. Consumer with his monetary strength decides
the goods/services that he wants.
Command allocation
Product , technology is decided by the state.
Generally demand exceeds supply so market mix is relevant
Countries relying on this system are generally shifting towards market
allocation system
Mixed system : In reality all market allocation systems are mixed because
Government spending is a command allocation.
Economic conditions: Status of a country's financial position at a specific period of
time. May be defined through use of statistics involving unemployment rates, stock
market data, and GDP information, among other metrics.
Prosperity Phase ( Expansion or Boom or Upswing of economy.)
When there is an expansion of output, income, employment, prices and profits, there
is also a rise in the standard of living. This period is termed as Prosperity phase.
Recession Phase : from prosperity to recession (upper turning point)
The turning point from prosperity to depression is termed as Recession Phase.
During a recession period, the economic activities slow down. When demand starts
falling, the overproduction and future investment plans are also given up.
Depression Phase : Contraction or Downswing of economy.
When there is a continuous decrease of output, income, employment, prices and
profits, there is a fall in the standard of living and depression sets in.
Recovery Phase : from depression to prosperity (lower turning Point).
The turning point from depression to expansion is termed as Recovery or Revival
Phase.During the period of revival or recovery, there are expansions and rise in
economic activities. When demand starts rising, production increases and this
causes an increase in investment. There is a steady rise in output, income,
employment, prices and profits. The businessmen gain confidence and become
optimistic (Positive). This increases investments.
The Political Environment
Closely tied to the economic environment is the political one, itself also dealing with
the nature of systems and institutions. Many variables to consider here are the
stability of the political system, the existence of local or international conflict, the role
of state enterprises and the nature of the bureaucracy
It is rightly said that a foreign business firm operates only as a guest and at the
convenience of the host country government.
The government reserves the right of allowing a foreign firm to operate in the country
as well as laying down the manner in which a foreign firm can conduct business.
Political system ( from note book)
Political risk (from note book also)
The risk that political decisions or events in a country negatively affect the
profitability or sustainability of an investment
Types:
Systemic
Procedural
Distributive
Catastrophic
Systemic Risks—risks that impact all firms who operate in the particular
political system. Example= recently exam is INDIA Vs PAKISHT ANd INDIA
Vs CHINA
Procedural Risk—Each day, people, products, and funds move from point to
point in the global market. Each move creates a procedural transaction
between the units involved, whether units of a company or units of a country.
Political actions sometimes create frictions that interfere with these
transactions.
Distributive Risk—As foreign investors generate more profits in the local economy,
the host country may begin to question the distributive justice of the rewards of
operating in its market. In other words, as the business grows more successful,
officials may question whether they are receiving their “fair” share of the growing
profits
Catastrophic Risk—includes random political developments that adversely affect the
operations of every company in a country.
Political Stability:
Stability of the government and government policies are a major concern for
the international firm.
Since business decisions, these days involve huge investments and are
irreversible, what the foreign firms look in for is politically stable countries.
Political instability can result from either change in the type of government, a
shift in political parties that form the government or change in the government
policies without change in the government or shifts in political parties.
LEGAL ENVIRONMENT
Every business firm operates within the jurisdiction of legal system.
This is true of domestic as well as international firms.
But the problem for the international firms is that the laws that they face in
their home countries might be different from those encountered in the host
countries.
Different laws exist in different countries not only in the area of marketing mix
variables but also for other business decisions like location of plant, level of
production, employment of people, raising money from the market, accounting
and taxation, property rights including immovable property and patent and
trade marks, cancellation of agreements
Legal environment affects international business:
1. Laws (FROM NOTE BOOK)
2. Legal issues
3. Dispute settlement.( FROM NOTE BOOK)
LEGAL ISSUES:
Establishment of trade :
- Trade can be established only when conditions are
suitable for its growth, in a target country. It can
survive and grow if there is an assurance that foreigners will be
treated fairly. In order to ensure this
treaties are signed between countries regarding
commerce and navigation.
Companies are guided both by the laws of the host
country and the home country. ( Eg: Bribery laws of the
US is applicable to all the US MNCs operating in other
countries)
Jurisdiction:
- The company should clearly understand the extent to which it is subject to the
jurisdiction of host country courts. Normally, all the economic activity within a nation
in governed by the nation’s laws. But which nation’s laws apply when a transaction
crosses boundaries/ The parties involved must clarify such points at the point of
making the deal. The contract must specify these points, to take care of any conflict
of laws arising later.
3. Intellectual property rights :
Various types of disputes can arise over issues related to trade marks and
patents like –
- Counterfeiting is unauthorised copying and production of a product.
- Associative counterfeit is an imitation with slight variation in the product
name (a well known brand name) to dupe the customer.
- Piracy is unauthorised publication of a copy right (particularly software and
entAntitrust :
Antitrust laws are intended to promote free competition. But at times the
laws in the host country may go contrary to the basic principle of ‘Antitrust’, with an
objective to provide protection to local manufactures.
5. Licensing and Trade secrets:
Licensing is a contract that allows a licensee to use patents, trademarks,
trade secrets, technology against royalty payments. In certain countries the
permissible amount of royalties is governed by the government.
Disputes arise if the license agreement not clearly specify the scope ( to
make/ use/ sell) of the license, the method of pricing the assets, the rights to
sublicense etc. Disputes also arise due to misinterpretation of the
agreement.ertainment industries)
ECOLOGICAL ENVIRONMENT
Ecology refers to the pattern and balance of relationships between plants,
animals, people and their environment.
Earlier there was hardly any concern for the depletion of resources and
pollution of the environment.
Smoke stemming from the chimneys and the dust and grime associated with
factories were accepted as a necessary price to be paid for the development.
But in recent years, the magnitude and nature of the 'pollution overload' have
assumed such alarming proportions that pressures have built up all over the
world to do something urgently lest the situation gets out of control
Very recently, the United States government imposed a ban on exports of
marine products from countries including India which did not have special
devices fitted into fishing trawlers to free the tortoises trapped during fishing
expeditions.
Similarly, restrictions have been put on garment exports using cloth
processed through the use of AZO dyes.
Germany today is perhaps the country with most stringent environmental laws
in the world. The concept of industrial progress and development has also
undergone paradigm shifts.
Corporations today are judged in terms of not only financial returns, but also
conservation of environmental resources and reduction in pollution levels.
Green technologies, green products and green companies are highly valued
in today's global market place.
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