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Introduction to International Business

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  • Last Updated : 16 Jun, 2022
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Manufacturing or Trade across geographical boundaries of one’s country is known as International Business. International Business or External Business doesn’t only include international movement of goods and services but also the movement of capital, personnel, technology, and intellectual property like patents, trademarks, and copyrights. It isn’t limited only to the export and import of goods but services such as international travel and tourism, transportation, communication, banking, warehousing, distribution, and advertising.

International Business vs Domestic Business:

1. Nationality of Buyers and Sellers: People or organizations from one country are involved in domestic business whereas, in international business, people and organizations of different countries take participation.

2. Nationality of other Stakeholders: Stakeholders such as suppliers, employees, and shareholders belong to one country in domestic or internal business, and in international business, they can be from different countries.

3. Mobility of Factor of Production: The degree of mobility of factors of production like labor and capital is comparatively more within a country and less across different countries.

4. Customer Heterogeneity Across Markets: Domestic markets are homogeneous but international markets are relatively less homogeneous due to differences in language, culture, preferences, customs, etc. across countries.

5. Difference in Business Systems and Practices: The difference in business systems and practices in international business is much more than domestic business because different countries have different socio-economic development, economic infrastructure, and market support services.

6. Political System and Risks: Domestic businesses have less impact on them from the political environment of the country because they understand and can predict its impact on business operation whereas international businesses face a different political environment across countries which are quite difficult to predict.

7. Business Regulations and Policies: Domestic businesses have to follow rules, regulations, and policies of a single country whereas international businesses have to follow rules, regulations, and policies of multiple countries.

8. Currency Used in Business Transactions: International business transactions involve the use of currencies of different countries whereas domestic currency is only used in domestic business.

Scope of International Business:

  1. Merchandise Exports and Imports: International Business allows firms to export and import goods across different countries.
  2. Service Exports and Imports: With the help of international business, firms can offer services to people belonging to different countries.
  3. Licensing and Franchising: Firms can enter into international business using licensing and franchising. Licensing is permitting another party of a foreign country to produce and sell products under its trademarks, patents, or copyright against some fee. Franchising is similar to licensing but it terms of service.
  4. Foreign Investments: A firm can enter into international business by investing in firms located abroad in exchange for some financial return.

Benefits of International Business to Nations:

  1. Earning of Foreign Exchange: International Business helps a country to collect and earn foreign currency from the investment offered by a foreign firm in the domestic market. Foreign currency helps in meeting imports of any country from foreign countries.
  2. More Efficient Use of Resources: International business allows firms to use the resources present in different countries more efficiently.  Firms can bring the newest technologies from which the resources can be utilized more efficiently. 
  3. Improving Growth Prospects and Employment Potentials: By setting up new industries and businesses in different countries, the international business helps in improving the economic growth and employment potential in those countries. Larger scale production contributes to the GDP as well as generates employment.
  4. Increased Standard of Living: In the presence of an international business, people of any country can consume goods and services produced in some other countries. It helps in improving the standard of living of those people and the country in general.

Benefits of International Business to Firms:

  1. Prospects for Higher Profits: International business gives scope to firms a whole new market to target. Firms can sell their products in markets where prices are relatively high and earn more profits.
  2. Increased Capacity Utilization: The products produced by a firm more than the demand in the domestic market can be sold to a foreign market with the help of international business. The capacity to produce more can be utilized with an expansion in the market.
  3. Prospects for Growth: Firms can improve the prospects of their growth by getting into the international market. The demand for a certain product in the domestic market is limited but in the international market, firms can reach new highs.
  4. Way Out to Intense Competition in Domestic Market: When the competition in the domestic market increases, firms can move out of the domestic boundaries to find a new market. By this, they can counter the intense competition in the domestic market.
  5. Improved Business Visions: Every firm’s vision is to grow, become more competitive, diversify and gain strategic advantage over its competitors. The international business allows firms to grow and build themselves with greater prospects.

Modes of Entry into International Business:

A firm can enter into international business in different manners or ways. Here, the ‘mode’ refers to the ways through which a firm can enter into international business. They are mentioned below:

1. Exporting and Importing: 

Exporting goods and services refers to sending them from the home country to a foreign country. Similarly, Importing goods and services means purchasing or bringing them from the foreign market to the home country. This is the easiest way a firm can get into international business as it requires almost no investment in setting up a production unit in the foreign country, only distribution channels are made to successfully import or export goods. There are two ways a firm can export or import:

  • Direct Exporting/Importing: In Direct Exporting/Importing a firm directly deals with the customer/supplier of the foreign country.
  • Indirect  Exporting/Importing: In Indirect Exporting/Importing a firm doesn’t deal with the customer/supplier directly but with the help of some middlemen.

2. Contract Manufacturing:

Contract Manufacturing or Outsourcing can be defined as a type of international business where a firm establishes a contract with one or a few local manufacturers in foreign countries to produce goods as per the firm’s specifications and requirements. It can be done in three ways:

  • Some intermediate products can be produced through contract manufacturing such as automobile components from which final products can be made later.
  • Assembling of products such as laptops, computers, or mobile phones can be done through contract manufacturing.
  • Complete manufacturing of products such as garments.

3. Licensing and Franchising:

Licensing and Franchising is yet another way a firm can enter into international business. Licensing can be defined as a contractual agreement in which one firm (Licensor) allows another firm (Licensee)  of a foreign country to use its patents, copyrights, trade secrets, or technology. Licensee in return gives some amount of royalty or commission to the licensor. When there is a mutual exchange of knowledge, technology or patents happens between firms then it is called cross-licensing. 

Franchising is almost the same as licensing. In franchising business also, a firm enters into a contract with a firm of a foreign country but it is done for service-oriented industries. Franchising business is also slightly different from licensing from the point of view of stringent rules and regulations. In the franchising business, strict rules and regulations are made as to how the franchisees should operate while running the business.

4. Joint Ventures:

A joint venture can be referred to as a unit jointly established by two or more two firms. It is a form of association between two or more firms. A foreign firm collaborates with one or some domestic firms to set up a company jointly owned by both or all of them. A joint venture may be brought up in three ways:

  • A foreign company buying a stake in a domestic company.
  • A domestic company buying a stake in an existing foreign company.
  • Both the foreign and domestic companies jointly establish a new firm.

5. Wholly Owned Subsidiaries:

When a foreign company establishes a business unit or acquires a full stake in any domestic company, then they are called wholly-owned subsidiaries. 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.

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