undefined | unit 1 overview of international business

Unit I

Overview of International Business

Q1) Explain international business.

A1)

Business transaction taking place within the geographical boundaries of a nation is known as domestic or national business. It is also referred to as internal business or home trade. Manufacturing and trade beyond the boundaries of one’s own country is known as international business. International or external business can, therefore, be defined as those business activities that take place across the national frontiers. It involves not only the international movements of goods and services, but also of capital, personnel, technology and intellectual property like patents, trademarks, know-how and copyrights.

The scope of international business has substantially expanded. International trade in services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising has considerably grown. The other equally important developments are increased foreign investments and overseas production of goods and services. Companies have started increasingly making investments into foreign countries and undertaking production of goods and services in foreign countries to come closer to foreign customers and serve them more effectively at lower costs. All these activities form part of international business. To conclude, we can say that international business is a much broader term and is comprised of both the trade and production of goods and services across frontiers.

Q2) Define international business.

A2)

Definition of International Business

Roger Bennet defines, International business involves commercial activities that cross national frontiers

According to John D. Daniels and Lee H. Radebaugh, International business is all business transactions-private and governmental- that involve two or more countries. Private companies undertake such transactions for profits, governments may or may not do the same in their transactions.

Q3) Explain difference between international and domestic business.

A3) Difference between international and domestic business

Some of the significant difference between domestic business and international trade are-

Basis of difference	Domestic business	International trade
Meaning	It takes place within the national boundary.	It takes place among different countries of the world.
Currency involves	It involves domestic currency.	It involves foreign currency only.
Foreign exchange reserve	It leads decrease in foreign exchange reserve due to outflow of foreign currency.	It leads to increase in foreign exchange reserve due to inflow of foreign currency.
Operating cost	It involves less operating cost.	It involves high operating cost.
Mode of payment	Payment is made in cash or cheque.	Payment is made through bills of exchange, letters of credit, telegraphic transfer etc.
Mode of transportation	Transportation is made through roadways, waterways and airways.	Transportation is made through waterways and airways.
Risk	It involves less degree of risk.	It involves high degree of risk.
Legal formalities	It involves less legal formalities.	It involves long procedure and other legal formalities.
Mobility of factors of production	The degree of mobility of factors of production is high within the country.	The degree of mobility of factors of production is less.
Tariff	Only domestic tariffs are imposed.	Tariffs of both the trading countries are applicable.

Q4) Explain Advantages and Disadvantages of International Business.

A4)

Advantages and Disadvantages of International Business

Advantages-

1) Increased Revenues:

The revenues of the companies which are trading internationally are much more than the companies which are trading in the domestic country. The customers of the MNC’s are more because they have customers all over the world and their reach to customers is higher than the domestic companies. This leads to higher selling of goods in the global market and it leads to increased revenues of the company.

2) Reaching New Customers:

International business is all about reaching new customers in the market of different countries. The domestic companies are restricted to their home customers and MNC’s are having a large customer base all over the world. MNC’s reach customers at a global level because they expand their business in different countries. Products of MNC’s are reached to the customers globally.

3) Accessing New Talent:

The success of a company depends on the employees and management who are working with the company. This plays an important role in decision making and actions of the company. Expanding to the international level could give you access to talented, valuable employees and business partners who helps you in taking the enterprise to new heights.

4) Optimum Utilization of Available Resources:

International business reduces the wastage of resources as it works in the different countries and uses the resources of all the countries, they are working in. This leads to the optimum utilization of resources. Every country which is producing the goods are producing it at maximum advantage.

5) Benefits To Consumers:

In the international market, consumers can choose between domestic goods and international goods. Consumers can have a good quality of products at a low price compared to that of the quality and price of domestic products. Consumers have a large variety of goods to choose from according to their taste and preference.

6) Product Flexibility:

If there is product whose demand is less in the domestic market then it can be sold in the international market if there is demand for it in the foreign markets. The companies have to find countries in which the demand for their product is higher and they can also sell it on the higher prices if there is high demand. It can also offer a wide range of products in the global market.

7) Brand Image:

If the company deals in the international market and target the customers of the different countries globally then the brand name is popularized among the country and it enhances your brand image in the foreign market. Image of the brand is enhanced by international growth and the rapid market boost leads to brand image development. It can also lead to expansion of property, copyrights, trademarks to new countries.

Disadvantages-

1) Language Barriers:

Language barriers are one of the major disadvantages of international business. Different countries have their distinct local languages and culture, which makes it quite difficult to communicate efficiently with peoples. These differences create barriers in developing better trade relations among nations.

2) Economic Dependence:

International business leads to more dependence of under-developed countries on developed countries. They import large amounts of goods for their development from these developing nations. Too much reliance on other nations led to exploitation of the economy and industrial development of importing countries.

3) Mis-Utilization Of Natural Resources:

Another major disadvantage of international business is that it may exhaust the natural resources of nations due to the excessive exports. Several nations make over-utilization of their resources for the sake of earning more profits which will have adverse effects on their economy in the long run.

4) Exploitation Of Home Industry:

International business leads to exploitation of home industries of an importing country. Developed nations even adopt dumping policy and sell their products at prices below the cost of production. This excessive foreign competition and unrestricted imports create a threat for the survival of domestic industries.

5) Servicing Customers:

International business finds it difficult in providing after-sale services to its customers. Differences in cultures and languages create main problems in communicating to people for solving their issues. Companies are required to communicate as per different time zones, distinct languages, and should set up 24×7 customer service centers.

6) Rivalry Among Nations:

International business may also lead to tension among nations due to intense competition of exporting more and more products. This can hamper international peace and can often lead to war among nations.

Q5) Explain Advantages of International Business.

A5)

Advantages of International Business

Advantages-

1) Increased Revenues:

2) Reaching New Customers:

3) Accessing New Talent:

4) Optimum Utilization of Available Resources:

5) Benefits To Consumers:

6) Product Flexibility:

7) Brand Image:

Q6) Explain Disadvantages of International Business.

A6)

Disadvantages-

1) Language Barriers:

2) Economic Dependence:

3) Mis-Utilization of Natural Resources:

4) Exploitation of Home Industry:

4) Servicing Customers:

5) Rivalry Among Nations:

Q7) Explain Approaches to International Business.

A7)

Douglas Wind and Pelmutter advocated four approaches of international business. They are:

1) Ethnocentric Approach: The excessive production more than the demand for the product, either due to competition or due to change in customer preferences push the company to exports the excessive production to the foreign countries. The company export the same product designed for domestic market to foreign market under this approach. Thus, maintenance of domestic approach towards international business is called ethnocentric approach.

2) Polycentric Approach: The company establishes a foreign subsidiary company and decentralized all the operations and delegates decision making and policy making authority to its executives. The executives of the subsidiary formulate the policies and strategies, design the product based on the host country’s environment and the preferences of the local customer. Thus, this approach mostly focuses on the conditions of the host country in policy formulation, strategy implementation and operations.

3) Regiocentric Approach: The foreign subsidiary considers the regional environmental for formulating policies and strategies. It markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies.

4) Geocentric Approach: Under this approach, the entire world is just like a single country for the company. They select the employees from the entire globe and operate with the number of subsidiaries. Each subsidiary functions like an independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc.

Q8) Explain Changing Environment of International Business.

A8)

The environment of international business is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. The environment can be classified in terms of domestic, foreign, and international spheres of impact.

The domestic environment – is familiar to managers and consists of those uncontrollable external forces that affect the firm in its home market.

The foreign environment - can be taken as those factors which operate in those other countries within which the MNC operates.

The international environment - is conceived as the interaction between domestic and foreign factors and indeed they cover a wide spectrum of forces

The most important factors are as follows

Adapting to Changing Needs:

Firms do not have any control over the external business environment. Therefore, the success of an international company depends upon its ability to adapt to the overall environment.

Its success also depends on the ability to adjust and manage the company’s internal variables to leverage on the opportunities of the external environment. Moreover, the company’s capability to control various threats produced by the same environment, also determines its success.

Country Attractiveness:

Country attractiveness is a measure of a country’s attractiveness to the international investors. In international business, investment in foreign countries is the most important aspect and hence firms want to determine how suitable a country is in terms of its external business environments.

International business firms judge the risks and profitability of doing business in a particular country before investing and starting a business there. This judgment includes studying the environmental factors to arrive at a decision.

Business Environments:

There are numerous types of business environments, however the political, the cultural, and the economic environments are the prime ones. These factors influence the decision-making process of an international business firm. It is important to note that the types of environments we discuss here are interlinked; meaning one’s state affects the others in varying dimensions.

The Political Factors:

The political environment of a nation affects the legal aspects and government rules which a foreign firm has to experience and follow while doing business in that nation. There are definite legal rules and governance terms in every country in the world. A foreign company that operates within a particular country has to abide by the country’s laws for the duration it operates there.

Political environment can affect other environmental factors −

Political decisions regarding economy can affect economic environment. Political decisions may affect the socio-cultural environment of a nation. Politicians may affect the rate of emergence of new technologies. Politicians can exert influence in the acceptance of emerging technologies.

There are four major effects of political environment on business organizations −

Impact on Economy − The political conditions of a nation have a bearing on its economic status. For example, Democratic and Republican policies in the US are different and it influences various norms, such as taxes and government spending.

Changes in Regulation − Governments often alter their decisions related to business control.

Political Stability − Political stability effects business operations of international companies. An aggressive takeover overthrowing the government could lead to a disordered environment, disrupting business operations.

Mitigation of Risk − There are political risk insurance policies that can mitigate risk. Companies with international operations leverage such insurances to reduce their risk exposure.

The Economic Factors:

Economic factors exert a huge impact on international business firms. The economic environment includes the factors that influence a country's attractiveness for international business firms.

Business firms seek predictable, risk-free, and stable mechanisms. Monetary systems that acknowledge the relative dependence of countries and their economies are good for a firm. If an economy fosters growth, stability, and fairness for prosperity, it has a positive effect on the growth of companies.

Inflation contributes hugely to a country's attractiveness. High rate of inflation increases the cost of borrowing and makes the revenue contract in domestic currency. It exposes the international firms to foreign-exchange risks.

Absolute purchasing power parity is also an important consideration. The ratio of exchange rate between two particular countries is identical to the ratio of the price levels. The law of one price states that the real price of a product is same across all nations.

Relative purchasing power parity (PPP) is valuable for foreign firms. It asks how much money is needed to buy the same goods and services in two particular countries. PPP rates prompt international comparisons of income.

The Cultural Factors:

Cultural environments include educational, religious, family, and social systems within the marketing system. Knowledge of foreign culture is important for international firms. Marketers who ignore cultural differences risk failure.

Language − There are nearly 3,000 languages in the world. Language differences are important in designing advertising campaigns and product labels. If a country has several languages, it may be problematic.

Colors − It is important to know how people associate with colors. For example, purple is unacceptable in Hispanic nations because it is associated with death.

Customs and Taboos − It is important for marketers to know the customs and taboos to learn what is acceptable and what is not for the marketing programs.

Values − Values stem from moral or religious beliefs and are acquired through experiences. For example, in India, the Hindus don’t consume beef, and fast-food restaurants such as McDonald's and Burger King need to modify the offerings.

Aesthetics − There are differences in aesthetics in different cultures. Americans like suntans, the Japanese do not.

Time − Punctuality and deadlines are routine business practices in the U.S. However, Middle East and Latin American people are far less bound by time constraints.

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