International business

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International business refers to the trade of goods, services, technology, capital and/or knowledge across national borders and at a global or transnational level.

Goods and services outcome of human efforts to meet the wants and needs of people

Goods are items that are tangible, such as pens, salt, apples, and hats. Services are activities provided by other people, who include doctors, lawn care workers, dentists, barbers, waiters, or online servers. Taken together, it is the production, distribution, and consumption of goods and services which underpins all economic activity and trade. According to economic theory, consumption of goods and services is assumed to provide utility (satisfaction) to the consumer or end-user, although businesses also consume goods and services in the course of producing other goods and services.

Contents

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.

Financial transaction agreement, or communication, carried out between a buyer and a seller to exchange an asset for payment

A financial transaction is an agreement, or communication, carried out between a buyer and a seller to exchange an asset for payment.

Globalization or globalisation is the process of interaction and integration among people, companies, and governments worldwide. As a complex and multifaceted phenomenon, globalization is considered by some as a form of capitalist expansion which entails the integration of local and national economies into a global, unregulated market economy. Globalization has grown due to advances in transportation and communication technology. With the increased global interactions comes the growth of international trade, ideas, and culture. Globalization is primarily an economic process of interaction and integration that's associated with social and cultural aspects. However, conflicts and diplomacy are also large parts of the history of globalization, and modern 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.

Market (economics) mechanisms whereby supply and demand confront each other and deals are made, involving places, processes and institutions in which exchanges occurs (for physical venues, use Q132510 or Q330284)

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and resource allocation in a society. Markets allow any trade-able item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale.

Trade barrier Restrictions limiting international trade

Trade barriers are government-induced restrictions on international trade.

Free trade policy in which countries governments do not restrict imports from, or exports to, other countries

Free trade is a trade policy that does not restrict imports or exports as well as the idea of the free market as applied to international trade. In government, free trade is predominantly advocated by political parties that hold liberal economic positions while economically left-wing and nationalist political parties generally support protectionism, the opposite of free trade.

Overview

"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), Microsoft (MSFT), 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.

Economic policy refers to the actions that governments take in the economic field

The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the economy.

A language barrier is a figurative phrase used primarily to refer to linguistic barriers to communication, i.e. the difficulties in communication experienced by people or groups speaking different languages, or even dialects in some cases.

Accounting standard the specific accouning discipline followed (IFRS, US GAAP, Chinese AS, France GAAP, Germany GAAP,  Russian GAAP, UK GAAP, etc.)

Financial statements prepared and presented by a company typically follow an external standard that specifically guides their preparation. These standards vary across the globe and are typically overseen by some combination of the private accounting profession in that specific nation and the various government regulators. Variations across countries may be considerable, making cross-country evaluation of financial data challenging.

One of the first scholars to engage in developing a theory of multinational companies was Canadian economist Stephen Hymer. [1] Throughout his academic life, he developed theories that sought to explain foreign direct investment (FDI) and why firms become multinational.

Stephen Herbert Hymer was a Canadian economist. His research focused on the activities of multinational firms, which was the subject of his PhD dissertation The International Operations of National Firms: A Study of Direct Foreign Investment, presented in 1960, but published posthumously in 1976, by the Department of Economics from Massachusetts Institute of Technology. Charles P. Kindleberger, his thesis supervisor, submitted it for publication, as mentioned by him on the introduction of Hymer's thesis dissertation.

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.

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 . [2] 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 V (the value of the product being sold) and C (the cost of production per each product sold). [3]

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). [4] 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, [5] turnkey projects, licensing, franchising, establishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary in the host country. [6]

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. [7]

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. [8]

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. [9]

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. [10]

Types of operations

Exports and import

  • Merchandise exports: goods exportednot including services. [11]
  • 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: As of 2018, 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". [12]
  • Exports and Imports of products, goods or services are usually a country's most important international economic transactions. [12]

Top imports and exports in the world

Data is from the CIA World Factbook, compiled in 2017: [13]

Partner NameExport (US$ Thousand)Import (US$ Thousand)Import Partner Share (%)Export Partner Share (%)
World14,639,041,733.8814,748,663,389.75100.00100.00
United States1,456,000,0001,292,436,125.648.7613.29
Japan634,900,000661,678,484.034.493.20
Germany1,322,000,0001,145,973,941.197.776.26
France507,000,000488,825,071.863.313.68
United Kingdom407,300,000359,480,074.292.444.17

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.

Means of businesses

Physical and social factors

Risks

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. [17] 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. [18]

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. [17] 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. [19]

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. [17] 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. [20] 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. [21]

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." [17]

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. [22]

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." [17] 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. [20] 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. [21]

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." [17] 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.'" [20]

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. [17]

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.

Importance of international business education

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. Advantages of being an international businessperson who is fluent in the local language include the following:

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:

Importance of studying international business

The international business standards focus on the following:

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. [23] 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.

MastersDoctorate
Who is this degree forPeople interested in management careers with multinational companiesPeople who are interested in academic or research careers
Common career paths (with approximate median annual salary)- Chief executives ($167,000)*

- General or operations managers ($95,000)*

- University business professors ($75,000)*

- Economists ($91,000)*

Time for completion1–2 years full-time3–5 years in addition to master's or other foundational coursework
Common graduation requirements- Roughly 15-20 graduate level courses

- Internship or study abroad program

- Foreign language requirement

Most (or all) of the master's degree requirements, plus:

- At least 12 more graduate level courses

- Ph.D. qualifier exams

- Dissertation prospectus (proposal)

- Dissertation

- Teaching requirement

PrerequisitesBachelor's degree and work experience, quantitative expertiseBachelor's or master's degree in business or related field
Online availabilitynoLimited

Related Research Articles

A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country's national borders, and their aims include increased trade balance, employment, increased investment, job creation and effective administration. To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

In economics, internationalization is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization. There are several internationalization theories which try to explain why there are international activities.

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade are reduced or eliminated among the participating states.

Export shipping the goods and services out of the port of a country

An export in international trade is a good or service produced in one country that is bought by someone in another country. The seller of such goods and services is an exporter; the foreign buyer is an importer.

Non-tariff barriers to trade Type of trade barriers

Non-tariff barriers to trade (NTBs) or sometimes called "Non-Tariff Measures (NTMs)" are trade barriers that restrict imports or exports of goods or services through mechanisms other than the simple imposition of tariffs.

Company competition, or competitiveness, pertains to the ability and performance of a firm, sub-sector or country to sell and supply goods and services in a given market, in relation to the ability and performance of other firms, sub-sectors or countries in the same market. It involves one company trying to figure out how to take away market share from another company.

PEST analysis describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. It is part of an external analysis when conducting a strategic analysis or doing market research, and gives an overview of the different macro-environmental factors to be taken into consideration. It is a strategic tool for understanding market growth or decline, business position, potential and direction for operations.

International finance is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.

Financial risk Any of various types of risk associated with financing

Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent.

Foreign exchange risk is a financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company. The exchange risk arises when there is a risk of appreciation of the base currency in relation to the denominated currency or depreciation of the denominated currency in relation to the base currency. The risk is that there may be an adverse movement in the exchange rate of the denomination currency in relation to the base currency before the date when the transaction is completed.

In international economics, international factor movements are movements of labor, capital, and other factors of production between countries. International factor movements occur in three ways: immigration/emigration, capital transfers through international borrowing and lending, and foreign direct investment. International factor movements also raise political and social issues not present in trade in goods and services. Nations frequently restrict immigration, capital flows, and foreign direct investment.

Global marketing is “marketing on a worldwide scale reconciling or taking commercial advantage of global operational differences, similarities and opportunities in order to meet global objectives".

Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Political risk can be understood and managed with reasoned foresight and investment.

Foreign direct investment in Iran Investment in Iran

Foreign direct investment in Iran (FDI) has been hindered by unfavorable or complex operating requirements and by international sanctions, although in the early 2000s the Iranian government liberalized investment regulations. Iran ranks 62nd in the World Economic Forum's 2011 analysis of the global competitiveness of 142 countries. In 2010, Iran ranked sixth globally in attracting foreign investments.

Megacorpstate is a form of market structure that designs new strategies to systematize the cartel power in the world. This particular market framework consists of oligopolistic interdependent nations-states and multinational corporations, which have established alliance to own majority of the market power. The most prominent organizations within the structure are OPEC and the Seven Sisters that include Exxon, Mobil, Socal, Royal Dutch-Shell, BP, Texaco and Gulf. Regardless of its great influence, Megacorpstate does not have a major recognition in the world. The main reason for its unfamiliarity is its disinclination to characterize itself as a separate market structure.

Foreign market entry modes or participation strategies differ in the degree of risk they present, the control and commitment of resources they require, and the return on investment they promise.

The analysis of the global environment of a company is called global environmental analysis. This analysis is part of a company’s analysis-system, which also comprises various other analyses, like the industry analysis, the market analysis and the analyses of companies, clients and competitors. This system can be divided into a macro and micro level. Except for the global environmental analysis, all other analyses can be found on the micro level. Though, the global environmental analysis describes the macro environment of a company. A company is influenced by its environment. Many environmental factors, especially economical or social factors, play a big role in a company’s decisions, because the analysis and the monitoring of those factors reveal chances and risks for the company’s business. This environmental framework also gives information about location issues. A company is thereby able to determine its location sites. Furthermore, many other strategic decisions are based on this analysis. One may also apply the BBW model. In addition, the factors are analyzed to evaluate external business developments. It is finally the task of the management to adapt the firm to its environment or to influence the environment in an adequate way. The latter is mostly the more difficult option. There are different instruments to analyze the company’s environment which are going to be explained afterwards.

Internalization theory is a branch of economics that is used to analyse international business behaviour.

References

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Further reading