nature scope importance of international business

Fundamental of foreign trade

1. Unit:1 Importance - nature and scope of International business; Modes of entry into International Business. Internationalization process and managerial implications

2. International Business International business refers to those business activities that take place beyond the geographical boundaries of a country. It involves not only the international movements of goods and services but also capital, technology, IP like patents, trademarks, copyright, etc.   For example,  India selling agricultural products to foreign countries is an international business. Advancements in technology and better communication facilities have increased international business with great success in various countries. International business provides a wide market range to organizations and gives them an opportunity to satisfy the needs of customers all over the world.  The term international business refers to the commercial transaction and the exchange of goods and services and also ideas and intellectual property between two countries is referred to as an international business. International business between two or other countries is dependent on the different factors of those countries like political, economic, legal and social factors. Difference between the cultural factor of the countries also affects international business. The scope importance of International business is much more in the growth of the economy of the country and the global economy along with improving better job opportunities. International business is crucial for the global economy.

3. As international business provides immense growth opportunities for the development of the economy. However international business has certain challenges for which the business needs to adapt itself according to the situational needs. Most importantly international business plays a very vital role in the development and growth of the economy of both countries. According to Robock and Simmonds,  “International business is defined as a field of  management   training  (that) deals with the special features of business activities that cross national boundaries”. As per Czinkotra Grosse and Kujawa ,  “International business is defined as transactions devised and carried out across international borders to satisfy corporations and individuals”. International business comprises all commercial transactions private and governmental between two or more nations. Private companies undertake such transactions for profits, and governments may or may not do the same in their transactions. These transactions include investments, sales and transportation. At one end IB is defined as, the organisation that buys and/or sells goods and services across two or more national boundaries, even if management is located in a single country. On the other end, multinational business is defined as it is equated only with those big enterprises that have operating units outside their own country.

4.  Reason for International Business Uneven Distribution of Natural Resources:  Due to unequal distribution of natural resources, all countries cannot produce goods at a low cost. As a consequence, it has an impact on their productivity levels. Therefore, the countries with less quantity of a natural resource either purchase the resource or the actual product itself from the countries with an abundance of these.  For example,  crude oil is exported from the USA as it is found in abundance there.  Availability of Productivity Factors:  The numerous production variables, like labor, capital, and raw materials, that are required to produce and distribute diverse commodities and services are found in different quantities in different countries. It gives rise to buying and selling of productivity factors among the countries.  For example,  due to unemployment in India, foreign countries can employ labor at chap rates from India.  Specialization:  Some countries specialize in producing goods and services for which they have advantages such as education, favorable climatic circumstances, and so on. It results in the business between different countries for the purchase and sale of specialized products.  For example,  the Indian market specializes in handcraft products which increases its exports to other countries.  Cost Advantages:  Production costs vary according to geographical, political, and socioeconomic situations in different countries. Some countries are in a better position to manufacture certain commodities at a lower cost than others. Firms participate in international trade to purchase products that are cheaper in other countries and to sell things that they can supply at a lower cost.  For example,  China sells various goods at a low price to different countries all over the world because of the cost advantage. 

5. Scope of International Business The scope of international business is wider than domestic business as it includes the following:  Imports and Exports of Merchandise:  Merchandise refers to physical products, such as those that can be seen and felt. Therefore, imports and exports of merchandise mean the transfer or exchange of tangible goods from and to different countries of the world. It is also called trade in goods as it excludes buying and selling of services.  Imports and Exports of Services:  Imports and exports of services involve intangible goods that cannot be seen, felt, or touched. It is also known as invisible trade. Services such as tourism and travel, transportation, communication, etc. are imported and exported.  Licensing and Franchising:  Licensing is a contractual agreement between two firms, where the licensor (one firm) grants the licensee (another firm), access to trademarks, copyrights, patents, etc. in a foreign country in exchange for a fee. The fee charged by the licensor is known as royalty. For example, Microsoft grants a license to different companies in exchange for royalty.  Franchising is also similar to licensing. However, it provides services rather than access to patents, etc. For example, Subway has various franchises all over the world where it provides the same services to the customers.  Foreign Investment:  It means investing money into a foreign country in exchange for a profit. Foreign investment can be of two types Direct and Portfolio Investment.  Direct investment occurs when a firm invests directly in the machinery and plant in another country to produce and market goods and services in that country.  A portfolio investment is a foreign investment where a company buys shares of another company in a different country or lends money to another company. The return on portfolio investment is received in the form of dividends or interest respectively.

6. Importance of International Business The scope and Importance of International business are crucial for the growth of the economy in generating employment, earning foreign currency and many more ways. The importance of international business can be understood through the following points: Economic growth  - By promoting more trade, investment and  entrepreneurship  among the countries plays an important role in the growth of the economy. Through international business job opportunities are generated which increases the income of the individuals. More innovation and technology  - Another importance of international business is that In today's globalization era, everything is conducted through technological support which is also required for companies to improve and speed up their activity. Political cooperation  - Economic interdependence between two countries leads a better negotiation, communication or resolving disputes between two countries which leads to cooperation in various policies like trade policy, environmental policies etc. Cultural exchange  - International business between two different countries promotes the exchange and also understanding of people with different cultures who interact, learn from one another and respect each other's culture. Employment opportunity  - More employment opportunities are created through international business which helps in improving the standard of living of people of one country along with the other countries involved. Proper utilization of resources  - Resources are properly used when the rest of the extra goods are exported to the other country while already meeting the needs of the consumers as per their needs.

7. Nature of International Business The complexity of the  international business environment  implies that international businesses carry more risks than purely domestic ones. By understanding the nature of international business companies can easily navigate the challenges that arise, ensuring compliance with regulations and reducing the risk of legal complications. The nature of international business is explained by the following points:

8. 1) Involvement in Commercial Activity Multinational business includes commercial activities that occur across national borders. It concerns the international movements of goods, capital,  services , employees and technology; importing and exporting cross borders transactions in intellectual property (patents, trademarks, know-how, copyright materials, etc.) via licensing and  franchising : investments in financial and physical assets in foreign countries etc. 2) Surrounded by Political Risk International managers are required to consider the political risk of operating in foreign environments, factor changes in  foreign exchange   values  into their decisions, and be aware of how national and cultural forces affect their  marketing  measures. All these changes make global business risky and complex. 3) Proactive or Reactive International expansion commonly can be seen as either proactive or reactive. Proactive international ventures take advantage of perceived opportunities; reactive ventures respond to actions taken by other parties or safeguard against perceived threats. 4) Differs from Domestic Business Multinational business differs from purely  domestic business  because it involves operating effectively within different national sovereignties; under widely disparate economics; with people living within different value systems and organisations ; as part of an industrial revolution set in the contemporary world, often over a greater geographical distance; & in national markets varying greatly in population and area. 5) Large-Scale Operations In global business, all the processes are conducted on a very massive scale. Marketing and production are conducted on a large scale. It first sells its goods in the regional market. Then the surplus goods are exported.

9. 6) Integration of Economies The multinational business incorporates (combines) the economies of many countries. This is because it utilizes finance from one country, labour from another country, and infrastructure from yet another country. It designs the product in one country, produces its parts in many foreign countries and assembles the product in another country. It sells the product worldwide, i.e., in the international market. 7) Dominated by Developed Countries and MNCs Global business is dominated by developed nations and their  multinational companies (MNCs). At present, MNCs from the U.S.A., Europe and Japan dominate (fully control) foreign trade. This is because they have enormous economic and other resources. They also have the finest technology and  research  and development (R&D) resources. They have highly skilled employees and managers because they give high salaries and additional benefits. Hence, they produce good quality goods and services at lower costs. This helps them to capture and dominate the entire market of the world. 8) Benefits to Participating Countries International business offers benefits to all participating countries. However, the rich and developed nations get the maximum benefits. The developing (poor) countries also get benefits. They get foreign capital and technology. These countries have rapid industrial development. They get more employment opportunities. All this results in the financial development of developing countries. Hence, developing countries open up their economies through liberal financial  policies .

10. 9) Keen Competition The multinational business has to face keen and too much competition in the world market. The competition is between unequal partners, i.e., developed and developing nations. Developed countries and their MNCs are in a good position in this keen competition because they produce superior quality goods and services at meagre prices. Developed countries also have many connections in the world market. So, developing countries find it very tough to face competition from developed countries. 10) Special Role of Science and Technology The multinational business gives a lot of significance to science and technology. Science and Technology (S&T) help the business to have large-scale production. Developed countries use high technologies. Therefore, they dominate global business. The multinational business helps them to transfer high-end technologies to developing countries. 11) International Restrictions A global business has to deal with many regulations on the inflow and outflow of goods from various countries. They have many tariff barriers, trade blocks, foreign exchange restrictions, etc. All this is harmful to capital, technology and goods. Many governments do not allow global businesses to enter there to global business. 12) Sensitive Nature Multinational business is very sensitive. Any changes in economic policies, technology, political environment, etc., have a huge impact on it. Thus,  multinational companies  must conduct marketing  research  to find and study these changes. They must adjust their business activities and adapt accordingly to survive changes in the  business environment .

11. Important Ways to Export and Import i ) Direct Importing/ Exporting:   The company handles all of the necessary paperwork for the shipment and  financing  of goods and services and deals directly with foreign  suppliers  or purchasers. ii) Indirect Importing/ Exporting:  The company uses a middleman to handle all the paperwork and negotiate with foreign suppliers or customers. The firm’s involvement is limited. . Exporting and , Gulab sold sweets to a store in Canada. Purchasing Importing Exporting and Importing  is a very common mode to enter into International business. Selling goods and services to a company in a foreign country is referred to as  Exporting .  For instance   goods  from a foreign company is known as  Importing .  For instance , the purchase of dolls from a Chinese company by an Indian dolls dealer. Exports and imports are the typical way through which businesses begin their activities overseas before moving on to other kinds of  international trade .

12. 2. Contract Manufacturing According to  Contract Manufacturing , every well-known company in a nation accepts responsibility for promoting the goods and services created by a business in another nation. Here, the company is specialised in the manufacturing process but lacks marketing skills, whereas the other company, due to its established reputation, is capable of selling those items and services. Offering these items and services is not the primary business of these organisations , but they do it for the benefit of their name and reputation, as well as to provide high-quality products at a low cost to their customers. Contract manufacturing  is a type of international business, in which a firm enters into a contract with another firm in a foreign country to manufacture certain components or goods as per its specifications. Multinational firms , like Maybelline, Loreal, Levis , and others use contract manufacturing to have their products or component parts produced in developing nations. Contract manufacturing is also known as international outsourcing.

13. 3. Licensing When a corporation from one country (the Licensor) grants a license to a company from another country (the Licensee) to use its  brand ,  patent ,  trademark , technology, copyright, marketing skills; etc., to assist the other firm sell its products, this contractual agreement is referred to as  Licensing . The licensor corporation receives returns in proportion to sales. Returns may take the form of royalties or fees. In other nations, the government determines how the returns are fixed. This cannot exceed 5% of revenues in several developing nations. For instance,  Pepsi and Fanta are made and distributed globally by local bottlers in other nations under the licensing system. The company that provides such authorisation is known as the  Licensor  while the other company in a different country that receives these rights is known as the  Licensee . The mutual sharing of knowledge, technology, and/or patents between the companies is called  Cross-licensing . 4. Franchising The franchise is the unique right or freedom that a producer grants to a certain person or group of people to establish the same business at a specific location. The producers use this contemporary business model to market their products in far-off locations. In general, producers who have a good reputation use this system. Individuals are motivated by their  goodwill  and try this mode of business in order to earn profit. Franchising   is a contractual agreement that involves the grant of rights by one party to another for use of technology, trademark, and patents in return for the agreed payment for a certain period of time.  

14. The business that gives the rights (i.e., the parent company) is referred to as the  Franchisor , and the business that purchases the rights is referred to as the  Franchisee . 5. Joint Ventures A  joint venture  is formed when two or more businesses decide to work together for a common goal and mutual benefit. These two commercial entities could be private, public, or foreign-owned. Joint ventures are those types of businesses that are established in international trade where both domestic and foreign  entrepreneurs  are partners in ownership and management. The trade is carried out in collaboration with the importing nation’s firm.  For instance,  the Joint venture of the Indian company Maruti with the Japanese Company Suzuki.  6. Wholly Owned Subsidiary When a foreign company establishes a business unit or acquires a full stake in any domestic company, then they are called a  Wholly-owned Subsidiary . Wholly owned subsidiaries are set by a foreign company to enjoy full control over their overseas operations. A wholly-owned subsidiary in a foreign country may be established in two ways: Setting up of wholly-owned new firm in the foreign land, also called  Green Field  Venture . Acquiring an established firm in a foreign country and using that firm to do business in a foreign country.

15. Case Study - Different Modes of Entering International Business In 1994, the corporation began offering free coffee to visitors in several Beijing hotels to promote the Starbucks brand. This campaign demonstrated that their goods had a sizable market in China, particularly among foreigners. People in the area who attempted to emulate Western culture expressed a desire to drink coffee. Western brands and goods enticed the younger generation as well. These factors prompted Starbucks executives to investigate and comprehend the Asian country's economic environment . Even though Starbucks encountered numerous challenges when attempting to enter the Chinese market, by 2012, they had successfully expanded their business into over 20 large or medium-sized Chinese cities, with over 560 stores opened. The incredible achievement is due to meticulous marketing analysis and various marketing methods used at various times. These strategies typically refer to joint ventures and license agreements as two distinct methods of entering international markets.

16. Internationalization process and managerial implications Internationalization is the process of tailoring a product, service or operational offering for entry and growth into international markets. Globalization may be the ultimate end goal, but internationalization helps your business get there. In ecommerce, internationalization means getting a business to a place where it can successfully trade in different markets. This is typically achieved with a targeted international website and supported by  localized promotion and digital marketing strategies . Internationalization requires a sound understanding of cultural nuances and traditions, and of the varying market preferences of your target.  Internationalisation  is the process of a company branching out to foreign markets to capture a greater market share. The trend towards internationalisation contributes to  globalisation  - the state where economies worldwide become integrated due to cross-border trade and  investments .  Internationalisation may require companies to adapt their product features and branding to match the cultural and technological needs of the local market.

17. Why businesses utilize internationalization Internationalization gives businesses access to a world of new opportunities. There are various reasons why a business may want to internationalize, including: Expand reach into a global market to increase revenue.  Increase competitiveness on a global scale by accelerating international growth. Demonstrate an understanding of the  needs and nuances of different locales  and audiences across the globe. Identify new opportunities around the world, particularly across niche markets. Diversify target markets to mitigate the risks associated with turbulent local markets. Gain access to overseas investment opportunities.

18. Internationalization vs. globalization The concepts of internationalization and globalization are often used interchangeably. But in practice, they are two sides of the same coin. Internationalization concerns the details around the localization of a product or website, whilst globalization focuses on factors such as business operations, infrastructure and  logistics . In short: internationalization is in the detail, whilst globalization is the broader end goal

19. Domestic Company ¶ At the inception, a  Domestic Company  confines its operations, vision, and strategic planning within the national boundaries. Such companies are primarily concentrated on leveraging domestic market opportunities, catering to local customer needs, and navigating through the national environmental constraints. The overarching belief driving their strategy is encapsulated in the adage, "If it is not happening in the home country, it is not happening." Examples of domestic companies include giants like  Reliance Industries Limited  and  Tata Motors Limited , which initially focused on mastering the home market before considering any global footprint.

20. International Company ¶ Transitioning from a domestic outlook, an  International Company  ventures beyond its national borders, extending its operational wings to foreign countries. This stage is characterized by the strategic decision to tap into overseas markets by establishing branches or subsidiaries, thus stepping into the realm of international business. The move is driven by the desire to explore opportunities outside the domestic sphere, marking the company's initial foray into the global market.

21. Multi-National Company ¶ The evolution continues as international companies transform into  Multi-National Companies (MNCs) . This transition is signified by a shift towards addressing the specific needs of different country markets with tailored product offerings, pricing strategies, and promotional activities. MNCs, or Multi-Domestic companies as they are sometimes called, adopt a localized approach, formulating distinct strategies for diverse markets to resonate with the local customer base. This stage emphasizes the importance of understanding and integrating into the cultural and consumer fabric of each market they enter.

22. Global Company ¶ A further evolution is seen in the emergence of the  Global Company , which adopts a comprehensive global strategy. Whether by producing in a single country and marketing products globally or by leveraging global production for domestic marketing, global companies strive for efficiency and market penetration on a worldwide scale. The strategy here pivots towards exploiting global synergies, emphasizing the integration of global operations to achieve a seamless flow of goods and services across borders.

23. Transnational Company ¶ The pinnacle of internationalization is represented by the  Transnational Company , which epitomizes the zenith of global integration. These companies are distinguished by their ability to produce, market, invest, and operate across the world, linking global resources with global markets to optimize profits. Despite the complexity, transnational companies like  Coca-Cola ,  Apple ,  McDonald's , and  Nike  manage to maintain centralized control while operating extensively across international borders. They aim to combine global efficiency with local responsiveness, navigating the delicate balance between global standardization and local adaptation.

24. Internationalization process and managerial implications Internationalisation can affect various business functions, including  human resources , finance, marketing, operations, and  management . Human resources Internationalisation processes can lead to changes in the Human and Resources department of the company. Managers  may need to go under training or get advice from advisors to hire an international workforce. Multinational companies may also face cultural and legal problems when hiring and motivating foreign workers. Offshoring may trigger resentment among underpaid workers in developing countries. Licensing and franchising may require the company to develop thorough training programs to maintain the quality and culture of the original business.

25. Finance The expansion to other territories requires a substantial investment which incurs many risks for the international business. Setting up a manufacturing facility broad or acquiring a foreign business can take up a lot of financial resources. However, there’s no guarantee this will generate a positive return. Offshoring can reduce costs of production but there might be hidden costs when the company switched back to producing locally. Franchising, licensing, and exporting are much less risky ways in terms of finance for a global business. Marketing A lot of marketing decisions are associated with the internationalisation process. Extensive  market research  has to be carried out to ensure the product is needed abroad Some customers may prefer a product made in a certain country than the other, e.g. Made in the UK. Introducing new products to a foreign market also uses up a considerable amount of market. There are also marketing costs to competing with businesses in the host country.

26. Operations The method of becoming an international business can have an effect on operations  management . When offshoring is adopted, the product manager must ensure the product quality is as good or better than when produced locally. A multinational business may need to carry out more collaborative work to ensure cohesion in the processes and culture of all markets around the world.

27. McDonald's Started as a humble brand selling hamburgers, McDonald’s had grown into a successful  multinational company  with 39,000 locations in over 100 countries. The company’s internationalisation strategy is based on franchising, the practice of granting a business operation (franchisee) to market the company’s products. Around 93% of restaurants are operated by independent local business owners. 3 Nike Nike’s first move to internationalisation began in 1975 when it opened its first office in Taiwan. It now has branches all over the world. Like other multinational companies, Nike shoes, apparel, and other accessories are not made in the US but outsourced to lower labour cost countries in Asia and Latin America. As of today, the company has over 700 plants in 42 countries. 4 Starbucks Starbucks is a multinational chain of coffeehouses headquartered in Washington. For 50 years, the company has successfully branded itself in 83 countries with 32,938 stores opened. Part of Starbucks’ success lies in its ability to adapt to the culture and infrastructure of the foreign markets. For example, in Japan, Starbucks’ coffeehouse resembles the traditional tea house of the Japanese. They also include matcha, the religious drink in Japan, to appeal to the local customers.