International Business Overview
Manufacturing and trading beyond the boundaries of one’s own country are known as international business. International business is also called international trade. But this is partially true. No doubt, international trade comprises exports and imports of goods. However, the scope of international business has expanded significantly. International trade in services such as international travel and tourism, transportation, telecommunications, banking, warehousing, distribution, and advertising has increased significantly.
Other equally important developments are the increase in foreign investment and the production of goods and services abroad. The World Trade Organisation, established by the governments of various countries, is one of the major contributors to the expansion of intercountry ties and business relations. New methods of communication and the development of faster and more efficient transportation needs have enabled most countries to do their international business efficiently. The international business contributes to the development of both importing and exporting countries, which is why it holds great importance.
International Business
Concepts of International Business
Some of the important concepts of international business are discussed below:
Merchandise Exports and Imports: Merchandise refers to tangible goods, i.e., the goods that can be seen or touched. Now, if we talk about merchandise exports, it means sending tangible goods abroad. On the other hand, merchandise imports mean buying tangible goods from abroad.
Service Exports and Imports: Also known as invisible trade, involves the export and import of services. Services included are tourism, transport, communication, marketing etc.
Licensing and Franchising: Licensing is permitting another party in a foreign country to produce and sell goods under the home country's trademark, copyright or patent in lieu of some fees. For example, Pepsi and cola. Franchising is similar to licensing only but is associated with services, e.g., Mcdonald's.
Foreign Investment: Foreign investment refers to the investment of funds in foreign countries in exchange for financial return.
Importance of International Business
Through international trade, it becomes possible for people to consume goods and services of other countries and improve their standard of living.
International companies export goods and services around the world. This allows in earning valuable foreign exchange.
When firms get involved in external trade, it increases the firm’s production capacity. Due to the advantage of economies of scale, the cost of production decreases.
International business improves business vision and makes firms more competitive and diversified.
Types of External/International Trade
Export - It refers to selling goods and services to foreign countries.
Import - It refers to buying of goods and services from foreign countries.
Entrepot (Re-Export) - It refers to the import of goods not for consumption in the home country but for exporting them to another country.
Types of Trade
Benefits of International Business
The Importance of international business to nations and firms is discussed below:
1. Benefits to Nations
Earning of Foreign Exchange: It helps a country to earn foreign exchange and can be used to import capital goods, technology etc.
More Efficient Use of Resources: Every country has some resources, e.g., labour resources, technological capabilities, water resources, etc. So, countries can choose the goods they produce efficiently with their own resources and import the rest of the goods.
Improving Growth Prospects and Employment Potential: Through external trade, countries can increase their production capacity to supply goods to foreign countries.
Increase in the Standard of Living: Through international trade, it becomes possible for people to consume goods and services of other countries and improve their standard of living.
2. Benefits to Firms
Prospect for Higher Profit: If prices in the domestic market are low, then firms can sell their products in other countries (International market) where prices are high and can earn higher profit.
Increased Capacity Utilisation: When firms get involved in external trade, it increases the firm’s production capacity. Due to the advantage of economies of scale, the cost of production decreases.
Prospects for Growth: Firms can enhance or expand their business by approaching the international market.
Decrease Competition: If there is high competition in the domestic market, then companies can sell their products in the international market or in any other country where there is less competition.
Improved Business Vision: It improves business vision and makes firms more competitive and diversified.
Case Study
Sumit operated a small fireworks production unit. He exported about 70% of his products to the United States. He was associated with relevant government agencies that obtained export licences without following procedures. He was able to avoid paying the necessary excise duty. He hired immature and illiterate people, even children, from nearby huts. He provided poor workers with drugs, rations, and interest-free loans. He hired a teacher to teach the children in the evenings. As the economy grew, demand for the company's products increased by almost 20%. Due to increased profits, he decided to expand his business further. How has international business proved beneficial for companies like Sumit's? Explain.
Ans: International business has the following advantages for companies:
Higher Profit Prospects – Low domestic prices allow companies to make higher profits by shipping their products to high-priced countries.
Increased Production Capacity – Companies can plan to expand overseas and take orders from foreign companies to take advantage of excess manufacturing capacity and improve operating revenues. Large-scale production creates economies of scale, resulting in lower production costs and higher profit margins per unit.
Growth Prospects – As domestic demand saturates, companies can look to foreign markets where demand is strong and recovering rapidly, especially in developing countries. Businesses can greatly enhance their growth prospects by expanding into foreign markets.
Summary
The introduction to the international business started with companies increasingly making investments in foreign countries and undertaking the production of goods and services in foreign countries to come closer to foreign customers and serve them more effectively at lower costs. In conclusion, international business is a much broader concept that includes cross-border trade and goods and services production.
FAQs on International Business: An Overview of Worldwide Trade
1. What is international business, and how does it differ from domestic business?
International business refers to all commercial transactions, including trade, investments, and transportation, that take place between two or more countries. Unlike domestic business, which occurs within a single country's borders, international business involves crossing national boundaries and dealing with different currencies, legal systems, and cultural contexts. The scope is much broader, covering not just the import and export of goods but also services, capital, and personnel.
2. What is the fundamental difference between international trade and international business?
While often used interchangeably, these terms have distinct meanings. International trade specifically refers to the export (selling) and import (buying) of tangible goods across borders. International business is a much broader concept that encompasses international trade as well as trade in services (like tourism and banking), foreign investments, and the overseas production of goods and services. Therefore, trade is just one component of international business.
3. What are the primary modes of entry for a firm into international business?
A firm can enter international business through several modes, each with varying levels of risk and commitment. Key modes include:
- Merchandise Exports and Imports: The most common mode, involving sending and receiving physical goods.
- Service Exports and Imports: Trading in intangible services like tourism, transport, and IT support.
- Licensing and Franchising: Permitting a foreign company to use your brand, patent, or business model in exchange for a fee.
- Foreign Investment: This involves investing funds in a foreign country, which can be a Direct Investment (FDI) to acquire assets or a Portfolio Investment (FPI) to acquire shares.
4. How does engaging in international business benefit a nation's economy?
International business is crucial for a country's economic growth and development. The primary benefits include:
- Earning Foreign Exchange: Exports bring in valuable foreign currency, which can be used to import essential capital goods and technology.
- Efficient Use of Resources: Countries can specialise in producing goods they can make efficiently and import what other nations produce more efficiently, leading to better resource allocation.
- Growth and Employment: Access to global markets allows for production on a larger scale, which boosts economic growth and creates more jobs.
- Improved Standard of Living: Citizens gain access to a wider variety of quality goods and services from around the world, improving their overall standard of living.
5. What are the key advantages for an individual firm when it goes international?
Firms are motivated to enter international markets for several strategic advantages:
- Prospect for Higher Profits: Companies can sell their products in foreign markets where prices are higher, thus earning greater profits than in a saturated or competitive domestic market.
- Increased Capacity Utilisation: By catering to global demand, firms can utilise their excess production capacity, leading to economies of scale and lower per-unit costs.
- Growth Prospects: When the domestic market is small or saturated, international markets offer significant opportunities for business expansion and growth.
- Improved Business Vision: Operating globally forces a firm to become more competitive, innovative, and diversified to meet international standards and consumer tastes.
6. How do licensing and franchising differ as strategies for international expansion?
Both are contractual modes of entry, but they differ in their application. Licensing is a contractual agreement where a firm (the licensor) allows a foreign company (the licensee) to use its intellectual property, such as patents, trademarks, or technology, to produce and sell goods for a fee or royalty. It is primarily used for goods (e.g., Pepsi licensing a foreign bottler). Franchising is similar but is typically associated with services. The franchisor grants a franchisee the right to use its entire business system—including brand name, operational processes, and marketing—in exchange for fees. McDonald's is a classic example of franchising.
7. Why is conducting business internationally considered more complex than operating domestically?
Operating across national borders introduces several complexities not present in domestic business. Key challenges include:
- Foreign Currency Fluctuations: Dealing with multiple currencies exposes firms to exchange rate risks.
- Legal and Political Differences: Each country has unique laws, tariffs, trade barriers, and political climates that firms must navigate.
- Cultural and Language Barriers: Differences in language, customs, and business etiquette can lead to misunderstandings and marketing failures.
- Logistical and Transportation Challenges: Moving goods and services across long distances and through different customs jurisdictions is inherently more complex and costly.
8. What is meant by entrepôt trade in the context of international business?
Entrepôt trade, also known as re-exporting, is a specific type of international trade where goods are imported into a country not for domestic consumption, but for the purpose of being processed, packaged, or simply stored before being exported to another country. For example, a country might import raw materials, process them into finished goods, and then export those goods. This type of trade is common in countries with major port facilities like Singapore and Dubai.
