International business

International business refers to the trade of goods, services, technology, capital and/or knowledge across national borders and at a global or transnational scale.
It involves cross-border transactions of goods and services between two or more countries. Transactions of economic resources include capital, skills, and people for the purpose of the international production of physical goods and services such as finance, banking, insurance, and construction. International business is also known as globalization.
To conduct business overseas, multinational companies need to bridge separate national markets into one global marketplace. There are two macro-scale factors that underline the trend of greater globalization. The first consists of eliminating barriers to make cross-border trade easier (e.g. free flow of goods and services, and capital, referred to as "free trade"). The second is technological change, particularly developments in communication, information processing, and transportation technologies.
Overview
The discourse surrounding international business has seen a transition in terminology over the years, reflecting shifts in understanding and the expanding scope of cross-border commerce. Initially, phrases such as "foreign trade" and "foreign exchange" were prevalent, embodying a static view of cross-border interactions. However, the term "foreign" often evoked notions of remoteness or strangeness, failing to capture the dynamic essence of international engagements.
As commerce evolved with the advent of firms engaging in substantial direct investments across borders, newer terms emerged to encapsulate the changing landscape. The mid-19th century marked the rise of companies owning and controlling production facilities in various countries, a departure from the earlier norm where firms held minor or passive ("portfolio") investments abroad. This paradigm shift necessitated a fresh nomenclature, leading to the introduction of the term "multinational enterprise" (MNE), referring to entities with substantial operations in multiple nations.
"International business" is also defined as the study of the internationalization process of multinational enterprises. A multinational enterprise (MNE) is a company that has a worldwide approach to markets, production and/or operations in several countries. Well-known MNEs include fast-food companies such as: McDonald's (MCD), YUM (YUM), Starbucks Coffee Company (SBUX), etc. Other industrial MNEs leaders include vehicle manufacturers such as: Ford Motor Company, and General Motors (GMC). Some consumer electronics producers such as Samsung, LG and Sony, and energy companies such as Exxon Mobil, and British Petroleum (BP) are also multinational enterprises.
Multinational enterprises range from any kind of business activity or market, from consumer goods to machinery manufacture; a company can become an international business. Therefore, to conduct business overseas, companies should be aware of all the factors that might affect any business activities, including, but not limited to: difference in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local cultures, corporate cultures, foreign-exchange markets, tariffs, import and export regulations, trade agreements, climate, and education. Each of these factors may require changes in how companies operate from one country to another. Each factor makes a difference and a connection.
One of the first scholars to engage in developing a theory of multinational companies was Canadian economist Stephen Hymer. Throughout his academic life, he developed theories that sought to explain foreign direct investment (FDI) and why firms become multinational.
There were three phases of internationalization according to Hymer's work. The first phase of Hymer's work was his dissertation in 1960 called the International Operations of National Firms. In this thesis, the author departs from neoclassical theory and opens up a new area of international production. At first, Hymer started analyzing neoclassical theory and financial investment, where the main reason for capital movement is the difference in interest rates. After this analysis, Hymer analyzed the characteristics of foreign investment by large companies for production and direct business purposes, calling this Foreign Direct Investment (FDI). By analyzing the two types of investments, Hymer distinguished financial investment from direct investment. The main distinguishing feature was control. Portfolio investment is a more passive approach, and the main purpose is financial gain, whereas in 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; where 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 where 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 centralized decision-making for decentralized decision-making".
Hymer's second phase is his neoclassical article in 1968 that includes a 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 things inequality and poverty in the world. Hymer is the "father of the theory of MNEs", 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 (standing for ownership, location and internationalization). Dunning was widely known for his research in economics of international direct investment and the multinational enterprise. His OLI paradigm, in particular, remains as the predominant theoretical contribution to study international business topics. Hymer and Dunning are considered founders of international business as a specialist field of study.
Physical and social factors of competitive business and social environment
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
All firms that want to go international have one goal in common; the desire to increase their respective economic values when engaging in international trade transactions. To accomplish this goal, each firm must develop its individual strategy and approach to maximize value, lower costs, and increase profits. A firm's value creation is the difference between (the value of the product being sold) and (the cost of production per each product sold).
Value creation can be categorized as: primary activities (research and development, production, marketing and sales, customer service) and as support activities (information systems, logistics, human resources). All of these activities must be managed effectively and be consistent with the firm strategy. However, the success of firms that extend internationally depends on the goods or services sold and on the firm's core competencies (Skills within the firm that competitors cannot easily match or imitate). For a firm to be successful, the firm's strategy must be consistent with the environment in which the firm operates. Therefore, the firm needs to change its organizational structure to reflect changes in the setting in which they are operating and the strategy they are pursuing.
Once a firm decides to enter a foreign market, it must decide on a mode of entry. There are six different modes to enter a foreign market, and each mode has pros and cons that are associated with it. The firm must decide which mode is most appropriately aligned with the company's goals and objectives. The six different modes of entry are exporting, turnkey projects, licensing, franchising, establishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary in the host country.
The first entry mode is exporting. Exporting is the sale of a product in a different national market than a centralized hub of manufacturing. In this way, a firm may realize a substantial scale of economies from its global sales revenue. As an example, many Japanese automakers made inroads into the U.S. market through exporting. There are two primary advantages to exporting: avoiding high costs of establishing manufacturing in a host country (when these are higher) and gaining an experience curve. Some possible disadvantages to exporting are high transport costs and high tariff barriers.
The second entry mode is a turnkey project. In a turnkey project, an independent contractor is hired by the company to oversee all of the preparation for entering a foreign market. Once the preparation is complete and the end of the contract is reached, the plant is turned over to the company fully ready for operation.
Licensing and franchising are two additional entry modes that are similar in operation. Licensing allows a licensor to grant the rights to an intangible property to the licensee for a specified period of time for a royalty fee. Franchising, on the other hand, is a specialized form of licensing in which the "franchisor" sells the intangible property to the franchisee, and also requires the franchisee operate as dictated by the franchisor.
Lastly, a joint venture and wholly owned subsidiary are two more entry modes in international business. A joint venture is when a firm created is jointly owned by two or more companies (Most joint venture are 50-50 partnerships). This is in contrast with a wholly owned subsidiary, when a firm owns 100 percent of the stock of a company in a foreign country because it has either set up a new operation or acquires an established firm in that country.
Types of operations
Exports and import
Merchandise exports: goods exportednot including services.
Merchandise imports: The physical good or product that is imported into the respective country. Countries import products or goods that their country lacks in. An example of this is that Colombia must import cars since there is no Colombian car company.
Service exports: , the fastest growing export sector. The majority of the companies create a product that requires installation, repairs, and troubleshooting, Service exports is simply a resident of one country providing a service to another country. A cloud software platform used by people or companies outside the home country.
"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.
Top imports and exports in the world
Data is from the CIA World Factbook, compiled in 2017:
Choice of entry mode in international business
Strategic variables affect 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 MNEs 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. This includes, among other things, brand name recognition.
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
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
Physical and social factors
Geographical influences: There are many different geographic factors that affect international business. These factors are: the geographical size, the climatic challenges happening throughout the world, the natural resources available on a specific territory, the population distribution in a country, etc.
Social factors: Political policies: political disputes, particularly those 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
Faulty Planning
To achieve success in penetrating a foreign market and remaining profitable, efforts must be directed towards the planning and execution of Phase I. The use of conventional SWOT analysis, market research, and cultural research, will give a firm appropriate tools to reduce risk of failure abroad. Risks that arise from poor planning include: large expenses in marketing, administration and product development (with no sales); disadvantages derived from local or federal laws of a foreign country, lack of popularity because of a saturated market, vandalism of physical property due to instability of country; etc. There are also cultural risks when entering a foreign market. Lack of research and understanding of local customs can lead to alienation of locals and brand dissociation. Strategic risks can be defined as the uncertainties and untapped opportunities embedded in your strategic intent and how well they are executed. As such, they are key matters for the board and impinge on the whole business, rather than just an isolated unit.
Operational risk
A company has 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 the internationalization. Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies; employee errors, systems failure, fraud or other criminal activity, or any event that disrupts business processes.
Political risk
How a government governs a country (governance) can affect the operations of a firm. The government might be corrupt, hostile, or totalitarian; and may have 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 or any unexpected political event can change a country's situation and put a firm in an awkward position. Political risks are the likelihood that political forces will cause drastic changes in a country's business environment that hurt the profit and other goals of a business enterprise. Political risk tends to be greater in countries experiencing social unrest. When political risk is high, there is a high probability that a change will occur in the country's political environment that will endanger foreign firms there. Corrupt foreign governments may also take over the company without warning, as seen in Venezuela.
Technological risk
Technological improvements bring many benefits, but some disadvantages as well. Some of these risks include "lack of security in electronic transactions, the cost of developing new technology ... the fact that this new technology may fail, and, when all of these are coupled with the outdated existing technology, [the fact that] the result may create a dangerous effect in doing business in the international arena."
Environmental risk
Companies that establish a subsidiary or factory abroad need to be conscious about the externalizations they will produce, as some may have negative effects such as noise or pollution. This may cause aggravation to the people living there, which in turn can lead to a conflict. People want to live in a clean and quiet environment, without pollution or unnecessary noise. If a conflict arises, this may lead to a negative change in customer's perception of the company. Actual or potential threat of adverse effects on living organisms and environment by effluents, emissions, wastes, resource depletion, etc., arising out of an organization's activities is considered to be risks of the environment. As new business leaders come to fruition in their careers, it will be increasingly important to curb business activities and externalizations that may hurt the environment.
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 may experience an unexpected economic crisis after establishing the subsidiary. Economic risks is the likelihood that economic management will cause drastic changes in a country's business environment that hurt the profit and other goals of a business enterprise. In practice, the biggest problem arising from economic mismanagement has been inflation. Historically many governments have expanded their domestic money supplying misguided attempts to stimulate economic activity.
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 affect 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 indiscriminately 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.'" Exchange rates can fluctuate rapidly for a variety of reasons, including economic instability and diplomatic issues.
Terrorism
Terrorism is a voluntary act of violence towards a group(s) of people. In most cases, acts of terrorism is derived from hatred of religious, political and cultural beliefs. An example was the infamous 9/11 attacks, labeled as terrorism due to the massive damages inflicted on American society and the global economy stemming from the animosity towards Western culture by some radical Islamic groups. Terrorism not only affects civilians, but it also damages corporations and other businesses. These effects may include: physical vandalism or destruction of property, sales declining due to frightened consumers and governments issuing public safety restrictions. Firms engaging in international business will find it difficult to operate in a country that has an uncertain assurance of safety from these attacks.
Bribery
Bribery is the act of receiving or soliciting of any items or services of value to influence the actions of a party with public or legal obligations. This is considered to an unethical form of practicing business and can have legal repercussions. Firm that want to operate legally should instruct employees to not involve themselves or the company in such activities. Companies should avoid doing business in countries where unstable forms of government exist as it could bring unfair advantages against domestic business and/or harm the social fabric of the citizens.
Factors towards globalization
There has been growth in globalization in recent decades due to the following 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 have increased.
Importance of international business education
Most companies are either international companies or compete with other international companies.
Modes of operation may differ from those used domestically.
The best way of conducting business may differ by country.
An understanding helps one make better career decisions.
An understanding helps one decide what governmental policies to support.
Managers in international business must understand social science disciplines and how they affect different functional business fields.
To maintain and achieve successful business operations in foreign nations, persons must understand how variations in culture and traditions across nations affect business practices. This idea is known as cultural literacy. Without knowledge of a host country's culture, corporate strategizing is more difficult and error-prone when entering foreign markets compared with the home country's market and culture. This can create a "blind spot" during the decision making process and result in ethnocentrism. Education about international business introduces the student to new concepts that can be applicable in international strategy in topics such as marketing and operations.
Importance of language and cultural studies
A considerable advantage in international business is gained through the knowledge and use of language, thereby mitigating a language barrier. A study by Lohmann (2011) in Economics Letters delved into the impact of language barriers on trade. The findings suggest that fluency in the local language can significantly enhance trade interactions. 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 plays a crucial role. 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 timeliness ("being on time") while others focus on doing business at "the right time".
Associating with people who do not know several languages.
Language barriers can affect transaction costs. Linguistic distance is defined as the amount of variation one language has from another. For example, French, and Spanish are both languages derived from Latin. When evaluating dialogue in these languages, you will discover many similarities. However, languages such as English and Chinese or English and Arabic vary much more strongly and contain far fewer similarities. The writing systems of these languages are also different. The larger the linguistic distance there, the wider language barriers to cross. These differences can reflect on transaction costs and make foreign business operations more expensive.
Importance of studying international business
The international business standards focus on the following:
raising awareness of the inter-relatedness 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 interconnections 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 economic 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 and master's degree holders felt that the training received through education were very practical in the working environment. Increasingly, companies are sourcing their human resource requirement globally. For example, at Sony Corporation, only fifty percent of its employees are Japanese. 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.
References
Daniels, J., Radebaugh, L., Sullivan, D. (2018). International Business: environment and operations, 16th edition. Prentice Hall.
Daniels, John D., Lee H. Radebaugh, and Daniel P. Sullivan. Globalization and business. Prentice Hall, 2002.
Further reading
External links
The International Trade Centre ITC is the joint agency of the World Trade Organization and the United Nations
The U.S. Government's export promotion and finance portal A government resource for U.S. exporters
UK Trade & Investment - a government resource for UK exporters