International business

Updated on Jan 27, 2024

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International business comprises all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundaries. Usually, private companies undertake transactions for profit; governments undertake them for profit and for political reasons. The term "international business" refers to all those business activities which involve cross-border transactions of goods, services, and resources between two or more nations. Transactions of economic resources include capital, skills, people etc. for the purpose of the international production of physical goods and services such as finance, banking, insurance, construction etc.

A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or with operations in several countries. Well-known MNEs include fast-food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer-electronics producers like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. As shown, multinational enterprises can make business in different types of market.

Areas of study within this topic include differences in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local culture, corporate culture, foreign-exchange market, tariffs, import and export regulations, trade agreements, climate, education and many more topics. Each of these factors may require changes in how individual business units operate from 1 country to the next.

Background

International business can be defined as the study of multinational companies. One of the first scholars to engage in developing a theory of multinational companies was Stephen Hymer. Throughout his academic life he developed theories that sought to explain foreign direct investment and why firms become multinational.

There were three phases in Hymer's work. The first phase was his dissertation in 1960 called the International Operations of National Firms. In this thesis, Hymer departs from neoclassical theory and opens up a new area of international production. At first Hymer started analyzing neoclassical theory and the financial investment wherein the main reason for capital movement is difference in interest rates. Then he started analyzing the characteristics of foreign investment by large companies for production and direct business purposes, calling this Foreign Direct Investment. By analyzing the two types of investments Hymer distinguished financial investment from direct investment. The main distinguishing feature was control. Where in portfolio investment is a more passive approach, and the main purpose is financial gain, with foreign direct investment a firm has control over the operations abroad. So the traditional theory of investment based on differential interest rates does not explain the motivations for FDI.

According to Hymer there are two main determinants of FDI wherein an imperfect market structure is the key element. The first is the firm specific advantages which are developed at the specific companies home country and, profitably, used in the foreign country. The second determinant is the removal of control wherein Hymer wrote: ‘’When firms are interconnected, they compete in selling in the same market or one of the firms may sell to the other,’’ and because of this ‘‘it may be profitable to substitute centralised decision making for decentralised decision making’’

The second phase is his neoclassical article in 1968. This paper includes theory of internationalization and explains the direction of growth of the international expansion of firms. In a later stage Hymer went to a more Marxist approach where he explains that MNC as agents of an international capitalist system causing conflict and contradictions, causing among other inequality and poverty in the world. Hymer is the father of the theory of MNE", and explains the motivations for companies doing direct business abroad.

Among modern economic theories of multinationals and foreign direct investment are internalization theory and John Dunning's OLI paradigm. Hymer and Dunning are considered founding fathers of international business as a specialist field of study.

The conduct of international operations depends on a company's objectives and the means with which they carry them out. The operations affect and are affected by the physical and societal factors and the competitive environment.

Operations

Objectives: sales expansion, resource acquisition, risk minimization, diversification of their revenue stream

Types of operations

Exports and imports of merchandise:

Service exports and imports

Merchandise exports: goods exported, not including services.

Merchandise imports: The import goods are the ones brought into a country.

Service exports and imports are not product purchasing. It is only about services. Services exports and imports can be divided into three most important categories

"Tourism and transportation, service performance, asset use".

Exports and Imports of products, goods or services are usually a country’s most important international economic transactions.

Choice of entry mode in international business

Strategic variables impact the choice of entry mode for multinational corporation expansion beyond their domestic markets. These variables are global concentration, global synergies, and global strategic motivations of MNC.

Global concentration: many MNC share and overlap markets with a limited number of other corporations in the same industry.

Global synergies: the reuse or sharing of resources by a corporation and may include marketing departments or other inputs that can be used in multiple markets.

Global strategic motivations: other factors beyond entry mode that are the basic reasons for corporate expansion into an additional market. These are strategic reasons that may include establishing a foreign outpost for expansion, developing sourcing sites among other strategic reasons.

Means of businesses

Entry modes: Export/import, wholly owned subsidiary, merger or acquisition, alliances and joint ventures, licensing (listed in order of least to most risky)

Modes: importing and exporting, tourism and transportation, licensing and franchising, turnkey operations, management contracts, direct investment and portfolio investments.

Functions: marketing, global manufacturing and supply chain management, accounting, finance, human resources

Overlaying alternatives: choice of countries, organization and control mechanisms

Geographical influences: There are many different geographical factors that affect international business. In fact, the geographical size, the climatic challenges happening lately, the natural resources available on a specific territory, the population distribution in a country, etc. are some of the influences that have an effect on the international trade.

Social factors: Political policies: political disputes, particularly, that result in the military confrontation can disrupt trade and investment.

Legal policies: domestic and international laws play a big role in determining how a company can operate overseas.

Behavioural factors: in a foreign environment, the related disciplines such as anthropology, psychology, and sociology are helpful for managers to get a better understanding of values, attitudes and beliefs.

Economic forces: economics explains country differences in costs, currency values,and market size.

Risks

Strategic

A firm must be prepared, aware for the competition and ready to face it in the international market. Several companies (competitor) would be good to be the substitute for products or services of an unpopular firm. A brilliant and innovative strategy will help and make successful a firm.

Operational risk

A company have to be conscious about the production costs to not waste time and money. If the expenditures and costs are controlled, it will create an efficient production and help for the internationalization.

Political risk

How a government governs a country can affect the operations of a firm. The government might be corrupted, hostile, totalitarian, etc. that has a negative image around the globe. A firm’s reputation can change if it operates in a country controlled by that type of government. Also, an unstable political situation can be a risk for multinational firms. Elections, any other political event that is unexpected can change a country situation and put a firm in an awkward position.

Technological risk

Technological progress bring many benefits, but some disadvantages. Indeed, "Lack of security in electronic transactions, the cost of developing new technology, and the fact that these new technology may fail, and when all of these are coupled with the outdated existing technology, the result may create a dangerous effect in doing business in the international arena."

Environmental Risk

Companies that establish subsidiary or factory abroad need to be conscious about the externalities they will produce. Negative externalities can be noise, pollution, etc. The population might want to fight against the company to keep a natural and healthy environment/country. This situation can change the customer’s perception on the firm and create a negative image of it.

Economic risk

These are the economic risks explained by Professor Okolo : "This comes from the inability of a country to meet its financial obligations. The changing of foreign-investment or/and domestic fiscal or monetary policies. The effect of exchange-rate and interest rate make it difficult to conduct international business". Moreover, it can be a risk for a company to operate in a country and they experience an unexpected economic crisis after establishing the subsidiary.

Financial risk

According to Professor Okolo : "This area is affected by the currency exchange rate, government flexibility in allowing the firms to repatriate profits or funds outside the country. The devaluation and inflation will also impact the firm's ability to operate at an efficient capacity and still be stable". Furthermore, the taxes that a company has to pay might be advantageous or not. It might be higher or lower in the host countries. Then, ""The risk that a government will discriminatorily change the laws, regulations, or contracts governing an investment—or will fail to enforce them—in a way that reduces an investor’s financial returns is what we call "policy risk."

Terrorism

A terrorist attack against a company or country is meant to hurt or damage it by violence. It is hate that push people to do it and it is usually based on a religion, culture, political ideas, etc. The World Trade Center attack on 9/11 is an example of terrorist attack that affected the United States and also companies that we established in these buildings. Therefore, it can be hard to operate where the environment is tensed and scary and in countries that are likely to be attacked.

Planning risk

Price risk

Customer satisfaction risk

Mismanagement risks

Competitive risks

Location risks

A company has to choose the right location for the subsidiary abroad. It needs to make the right choice before outsourcing or offshoring its activities.There are many criteria to take into account. If there is enough labour force that could work for the firm, the regulations, laws and policies of the host country, if the area is safe, etc. It is important to know the data of the host country, such as, the crime rate. Also, the host country citizens are willing to have this foreign company on their territory or not.

Bribery

Bribery is a worldwide phenomenon. Multinational enterprises must be conscious and concerned about it. Companies operating on the international market have a role on combating bribery, also, with governments, trade unions, etc. because the countries participating in the international trade need to prevent, not support it, offer it, give, promise, combat, etc. Societal risk

Factors that influenced the growth in globalization of international business

There has been growth in globalization in recent decades due to (at least) the following eight factors:

Technology is expanding, especially in transportation and communications.

Governments are removing international business restrictions.

Institutions provide services to ease the conduct of international business.

Consumers want to know about foreign goods and services.

Competition has become more global.

Political relationships have improved among some major economic powers.

Countries cooperate more on transnational issues.

Cross-national cooperation and agreements.

Importance of International Business Education

Most companies are either international or compete with international companies.

Modes of operation may differ from those used domestically.

The best way of conducting business may differ by country.

An understanding helps you to make better career decisions.

An understanding helps you decide what governmental policies to support.

Managers in international business must understand social science disciplines and how they affect all functional business fields.

Importance of language/cultural studies in International Business

A considerable advantage in International Business is gained through the knowledge and use of language. Advantages of being an International Businessperson who is fluent in the local language include the following:

Having the ability to directly communicate with employees and customers

Understanding the manner of speaking within business in the local area to improve overall productivity

Gaining respect of customers and employees from speaking with them in their native tongue

In many cases it is truly impossible to gain an understanding of a culture's buying habits without first taking the time to understand the culture. Examples of the benefit of understanding local culture include the following:

Being able to provide marketing techniques that are specifically tailored to the local market

Knowing how other businesses operate and what might or might not be social taboos

Understanding the time structure of an area. Some societies are more focused on "being on time" while others focus on doing business at "the right time"

Associate with other people whom do not know several languages.

Importance of studying International Business

The International Business standards focuses on the following:

raising awareness of the interrelatedness of one country's political policies and economic practices on another;

learning to improve international business relations through appropriate communication strategies;

understanding the global business environment—that is, the interconnectedness of cultural, political, legal, economic, and ethical systems;

exploring basic concepts underlying international finance, management, marketing, and trade relations; and

identifying forms of business ownership and international business opportunities.

By focusing on these, students will gain a better understanding of Political economy. These are tools that would help future business people bridge the economical and political gap between countries.

There is an increasing amount of demand for business people with an education in International Business. A survey conducted by Thomas Patrick from University of Notre Dame concluded that Bachelor's degree holders and Master's degree holders felt that the training received through education were very practical in the working environment. Business people with an education in International Business also had a significantly higher chance of being sent abroad to work under the international operations of a firm.

The following table provides descriptions of higher education in International Business and its benefits.