Introduction to international business

Introduction to international business

This course introduces the concept of international business to students embarking on a undergraduate programme that considers the relevance of undertaking business beyond the national borders.

Quite often, most of the business education is done in the local setting with information coming from the outside regarding business but there is still a lack of effective knowledge of the international environment.

Most countries now trade beyond their borders as this is an obligatory requirement for any economy. Initially international business was well developed from advanced economies that constituted the dominant power of the past namely western European nations and the United States.

At some other time, developing economies also started to trade more significantly with the developed nations. This effort encouraged the conceptualisation of international business in a different way where smaller countries with lower bargaining and economic power could trade their surplus abroad and assist in the development of their domestic economy.

In a similar way, one can understand the role and importance of international business to emerging economies. These are small sized economies from developing nations that form part of the lower, middle and upper-middle income economies. Although much consideration was initially given to BRICS (Brazil, Russia, India, China and South Africa) followed by MINT (Mexico, Indonesia, Nigeria and Turkey), many other economies can also form part of this group known as emerging markets. We could well first develop the concept of such markets prior to engaging in further discussion.

An emerging market economy is one in which the country is becoming a developed nation and is determined to develop its business through many socio-economic factors. It constitutes rapidly growing and volatile economies of certain Asian, African, and Latin American countries. The emerging market economy the term was originally coined by Antoine W. Van Agtmoel of the International Finance Corporation of the World Bank—the emerging economy being defined as an economy with low to middle per capita income and it constitutes 80 percent of the global population and represents about 20 percent of the world economies low-income and rapidly growing countries that use economic liberalisation as their primary engine of growth. However, such economies have a potential to become a developed country. They are the economies that promise huge potential for growth together with some risks. An emerging economy reflects the characteristics of a developed market, but does not satisfy standards to be termed a developed market.

This text portrays international business from the emerging market point of view bearing in mind that students might have a subjective view where the global economy is merely the presence of big players like countries of the selected G8 or advanced economies of the west. There has been keen interest from developing economies to move ahead and make the best of business. It is also seen that within emerging markets there are upcoming giants like China and India whose economies have grown more than tenfold over the past twenty years since the liberalization of global business.

There are also strong economies like Nigeria, South Africa and Brazil that are making important strides. There might also be resilient small economies like Mauritius, the Seychelles or Botswana that are making excellent effort to boost their trade through wider opening to international business. These concepts now bring us forward to understand the relevance of international business for emerging economies.

International Business as a subject

International Business is a modern subject that is important for students at all levels. It has become imperative for them to understand the business implications at international level. In practically every business course, knowledge of international business has become a prerequisite to learning and appreciating how business takes place in the global marketplace. This course builds a foundation of the essential aspects of international business, namely the economic forces, historical, geographical and socio-cultural implications. It is assumed that all these aspects will create an eagerness for the prospective student to learn and discover the challenging nature of international business.

International Business has become a concern for emerging economies particularly since the past decade. Many countries are stepping to international trade with a more focused approach. Globalisation of the world economy and new conditions under the new economic order, have enforced developing and emerging economies to develop strategic plans related to international trade. They have to position themselves with regards to such conditions and gain the benefits. Definitely, international business is characterised with complexity and increasing difficulty for small economies. Limited by resources, emerging economies have to develop business strategies that will help them integrate global business and seek economic benefits.

The scope of International Business

International Business covers the following areas:

  1. The international environment and the challenges affecting the emerging economies.
  2. The major trade theories-Absolute Advantage Theory, Competitive Advantage.
  3. An overview of external trade and investment.
  4. Country assessment and analysis-Investment in a foreign country.
  5. Cross-cultural management-Language and Communication barriers.
  6. The impact of physical/geographical forces in the foreign environment on international business.
  7. The influence of Economic and Socio-economic forces on market size and investment opportunities.
  8. The Multinational Organisation-Legal issues.

International Business as an individual subject

International subject is taught as a separate subject for the following reasons:

  1. Its scope is wide-encompassing:
  2. The world is a global village.
  3. The subject deals with key aspects of economics, politics and social sciences.
  4. International business is a fast developing subject.
  5. There is competition in the international environment.
  6. There might be opportunities for students to be engaged at international business level.

The relevance of International Business to students

International Business can represent an opportunity to students who are aiming at working in the international department of a firm. A knowledge of international business can open doors to students who wish to have a better idea of international business and find employment in an international setting.

All economies have limited resources. For emerging economies with limited resources and there is a need for students to have an appreciation of International Business because it remains one of the key issues that will have positive influence on the development of their country. We have noticed that with more and more trade opportunities with Europe, the United States of America and new markets, developing nations are getting additional revenue. It is impossible to believe that by closing doors, countries will benefit financially and economically.

The subject makes students understand the importance of international business to emerging economies and highlights certain measures to promote its growth.

International Business helps us understand the external forces such as geographic, economic, political, legal, in the foreign environment. An understanding of such factors will improve the potential of developing nations as a competitive country in their respective regions.

The subject enhances cross-cultural awareness in international business management. Students are able to understand the complexity of international business because of the differences that exist in the world as a result if various cultures, traditions and modes of living.

Students will be able to acquire a greater degree of international stance and understanding of the international marketplaces. The domestic market has limited scope and financial returns to offer to the country. It is important to have a knowledge of the international marketplace in order to exploit the advantages from the large international environment.

The subject helps us understand the motivations for going abroad and the different forms of entry in venturing abroad. It is not easy to have access to foreign markets because of the complexity affecting each business situation. Different modes of entry exist and this equips the international businessman to have some knowledge beforehand which can avoid inconveniences and unexpected problems.

International Business helps the student obtain current knowledge of international trade practices and procedures. Everything is not similar or homogeneous everywhere. Differences exist and contrast at the international level. Procedures vary and must be clearly understood.

International Business helps the student understand the international economic factors, multilateral institutions and regional groupings (Mercosur, CAN, ASEAN, IOR, COI, SADC) that affect international business. Regional grouping has become the trend in international trade at this moment as it helps to fight back protectionism and problems such as quotas, tariffs and related issues.

At a later stage, students will learn about the importance of social responsibilities and ethical issues confronting multinational enterprises. Business have to be more conscious of the need to care for the community that they serve.

Students will be able to apply international business in an integrative manner, the knowledge and skills learned in this module to prepare a country analysis report.

International Business relevance for an exporting business

Businesses and exporting firms also benefit from the international business. There are some reasons developed that initiate domestic firms to consider the relevance of trading beyond borders .

  1. Insufficiency of domestic demand

    If the domestic demand for the product is not sufficient to consume the production, the domestic firm may take a decision to enter the foreign market. In this way it can balance the production and demand.

  2. To utilise installed capacity

    If the installed capacity of the firm is much more than the level of demand of the product in the domestic market, it can enter the international market and utilise its unutilised installed capacity. In this way it can export the surplus production.

  3. Legal restrictions

    Sometimes the government of a nation imposes certain restrictions on the growth and expansion of certain firms or on the production and distribution of certain commodities in the domestic market in order to achieve certain social objectives.

  4. Relative profitability

    The export business is more attractive for its higher rate of profitability. The higher profitability rate also gives extra strength to the firm.

  5. Less business risk

    A diversified export business helps the exporting firm in mitigating the risk of sharp fluctuations in the business activity of the firm.

  6. Increased productivity

    Due to certain social and technological developments the industrial production has increased to a great extent. The production will be higher at cheaper rate. The surplus production can be exported.

  7. Social responsibility

    In order to meet the social responsibility some business firms take the decision to contribute to the National Exchequer or treasury by exporting their products.

  8. Technological improvements

    Technological improvements also attract the business firm to enter foreign markets. It introduces new products with latest technological improvements and faces the competition successfully in the international markets.

  9. Product obsolescence

    If a product becomes obsolete in domestic market it may be in demand in international markets. The firm has to make a survey for introducing the product in those markets.

The nature of International Business

International business refers to the business strategy that is linked to trade activities done beyond the local confinements of a country. It refers to business done between different nations in view of making transactions through means of exchange; goods or services for capital. International business is of a more strategic concern than local business and there is much higher capital involvement than domestic business.

A few broad ideas about the nature of international business are outlined below.

  1. International business requires sufficient knowledge and preparation of the international market.
  2. Emerging economies have so far been major importers of goods and services (except China) and have to devise strategies to modify this model.
  3. International business is risky because it involves playing the game with already strong competitors in business established since long.
  4. International business operates in an uncertain environment characterised by changes in economic or government policies along with international trade conventions.
  5. International business requires heavy financial input and infrastructure that developing economies need to have prior to becoming suitable contenders.

The variance between domestic and international business

Domestic Business

  1. Domestic business is related to the local environment and it is carried only inside the country.
  2. Domestic business is less costly as it involves a low capital outlay.
  3. Domestic business is less risky as the business manager has an awareness of the local context.
  4. Functional managers may be sufficient at domestic level.
  5. The business environment is fairly stable and less rapid to changes.
  6. At local level, the firm is already conversant with local rules and regulations.
  7. The market size is smaller and probably more homogeneous at local level.
  8. At domestic level, firms may operate alone as sole businesses.

International Business

  1. International Business is concerned with activities done at international level, i.e., beyond the local confinements of a country.
  2. International Business is much costlier than domestic business. There is a high capital outlay.
  3. International Business is risky as competition is aggressive at international level.
  4. Specialist people are needed and strategic managers may be required for international business.
  5. The business environment is unstable and highly changing at international level.
  6. At international level, the firm must comply with the rules and regulations governing the international market forces.
  7. The market size is very large and not homogeneous at international level.
  8. International Business may require partnership among firms. Mergers are
    also possible.

The International business process

The International Business comprises inputs, process and outputs that allow the flow from the production to the sales and ultimately an expected financial return for any firm.

The three environments in which international companies operate.

International Companies operate generally in three environments:

The local environment

Local business is driven by specific local conditions and market characteristics. It operates in a larger economic context. At the local level, the business must compete for employees, resources from suppliers at a competitive price, local advertising and marketing channels. The most successful businesses are well managed creating a compelling value proposition relative to its local competitors. Business intelligence and local community buyer values are critical for management pricing, inventory, and marketing strategies. A domestic business operates in a larger economic context. The overall economy influences local businesses dramatically. Many of these forces are beyond the control of local businesses often determine success and failure. Access to capital, levels of consumer spending, the overall health of the economy, ability to lease space and equipment, unusual weather, all present challenges to local businesses. Finally, the regulatory environment places controls, regulations, and taxes on local businesses that directly affect profitability and business sustainability.

The foreign environment

The foreign environment consists of geographical, economic, financial, socio-cultural, political, legal and ecological forces outside the home country. A firm should examine these components of the environment for each one of the foreign countries in which it operates. All the components and elements of the foreign environment might not be relevant to a decision maker. Much depends on the nature of the firm and its decisions. For a small firm interested in exporting, analysis of the commercial policy and the economic environment would be sufficient. But for a multinational corporation interested in setting up a manufacturing plant in a foreign country, geographic as well as socio-cultural, legal and political environments would be as important as the economic environment.

The global environment

The definition of global business environment is multiple sovereign nations outside the organisation’s home environment influencing how the organisation makes decisions for how to use its resources. The company’s operating situation depends on both external and internal factors. Factors within a business environment typically includes suppliers and clients, technology improvements, government activities, economic trends, owners and competition, laws, social trends and market trends. The social environment of the host country plays a major role, so the company must fully understand the social norms of that country to function efficiently and effectively. Social norms include things like the culture and language of the host country.

Case Study: The Importance of the International Business Environment

A vibrant international trade environment benefits all participating parties. Countries with high levels of international trade have stronger economies, better standards of living and steadier growth. Exports boost the economic development of a country, reduce poverty and raise the standard of living. The world’s strongest economies are heavily involved in international trade and have the highest living standards, according to the Operation for Economic Co-operation and Development (OECD).

Countries like Switzerland, Germany, Japan and the Scandinavian countries have high volumes of imports and exports relative to their gross domestic product and offer high standards of living. Nations with lower ratios of international trade, such as Greece, Italy, Spain and Portugal, face serious economic problems and challenges to their living standards. Even with low wages, less developed countries can use this advantage to create jobs related to exports that add currency to their economy and improve their living conditions.

Exporting opens new markets for a company to increase its sales. Economies rise and fall, and a company that has a good export market is in a better position to weather an economic downturn. Furthermore, businesses that export are less likely to fail. It is not only the exporting companies that increase sales; the companies that supply materials to the exporters also see their revenues go up, leading to more jobs.

A company that increases its exports needs to hire more people to handle the higher workload. Businesses that export have a job growth 2 to 4 percent higher than companies that don’t; these export-related jobs pay about 16 percent more than jobs in companies with fewer exports. The workers in these export-related jobs spend their earnings in the local economy, leading to a demand for other products and creating more jobs. Imported products result in lower prices and expand the number of product choices for consumers. Lower prices have a significant effect, particularly for modest and low-income households. Studies show that lower import prices save the average American family of four around $10,000 per year.

Besides lower prices, imports give consumers a wider choice of products with better quality. As a result, domestic manufacturers are forced to lower their prices and increase product lines to meet the competition from imports. Even further, domestic retailers may have to import more components of their products to stay price competitive.

International business removes rivalry between different countries and promotes international peace and harmony. Mutual trade creates a dependence on each other, improves confidence and fosters good faith. A good example of co-dependency of nations is the relationship between the United States and China. Even though these countries have significant political differences, they try to get along because of the huge amount of trade between them.

Their relationship evolved and changed a lot over the past decades. Not too long ago, it was characterised by mutual tolerance, intensifying diplomacy and bilateral economic relationships. This was a win-win for both parties. In July 2016, more than 800 hundred Chinese products became subject to a 25 percent import tax. The new tariff policy is expected to affect U.S.-China relations. Financial experts believe that there’s no going back to how things were.

A policy of a free international trade environment strengthens the economies of all countries. The competition from imports and exports leads to lower prices, better quality of products, wider selections and improved standards of living. While international trade may lead to the loss of some jobs, it has a stronger synergistic effect on the creation of new jobs and improved economic conditions.