Agribusiness Management and Trade 3(3+0)

Lesson-36 Meaning and Concept of International Business

36.2 CONCEPT OF INTERNATIONAL BUSINESS

International business implies conduct of business activities beyond the national boundaries. It is a wider term comprising of all the commercial transactions taking place between two countries. These transactions, including sales, investment and transportation may take place by government or private companies with or without an objective to make profit¹.

Some of the widely used terms in this context are explained below.

International Trade: It refers to exports and imports of goods and services by a firm to a foreign-based buyer (importer) or from a seller (exporter).

Import: It is buying goods or services by a home country from foreign country

Export: It is selling goods or services from home country to foreign country

The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Import in the receiving country is the export to the sending country.

Terms of Trade: It refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods An improvement of a nation's terms of trade benefits that country in the sense that it can buy more imports for any given level of exports.

International Marketing: It focuses on firm-level marketing practices across the border, including market identification and targeting, entry mode selection, and marketing mix and strategic decisions to compete in international markets.

International Investments: It implies cross-border transfer of resources to carry out business activities. It may either be portfolio investment with short-term objectives of capital investments with long-term objectives.

International Management: It refers to application of management concepts and techniques in a cross-country environment and adaptation to different social-cultural, economic, legal, political and technological environment.

International Business: This may be defined as all those activities that involve cross-border transactions of goods, services, and resources between two or more nations. Transaction of economic resources include capital, skills, people, etc. for international production of physical goods and services such as finance, banking, insurance, construction, etc. An international transaction involves both international trade and international investments.

Global Business: Global business refers to the conduct of business activities in several countries, using a highly coordinated and single strategy across the world.

As the differences in the terms ‘international business’ and ‘global business’ are more semantic in nature, both the terms are generally used interchangeably in business literature.

36.3 WHY TO GO INTERNATIONAL?

There are many reasons to the question why firms go international. The factors which motivate of provoke firms to extend their business from domestic market to international market may be broadly categorized into two groups, namely, the pull factors and push factors. The pull factors, most of which are proactive reasons, are those forces of attraction which pull the business to foreign markets. In other words, companies are motivated to internationalise because of the attractiveness of the foreign market. Such forces include relative profitability and marketing opportunity. On the other hand, push factors are those forces which arise out of compulsions of domestic market, like saturation of the market, which prompt companies to internationalise. Most of such factors are reactive reasons.

The factors motivating firms to extend their business to international markets may also be classified under three heads, viz., market seeking motives, economic motives, and strategic motives.

a.  Market Seeking Motives:

Marketing opportunities due to life cycles: These are the opportunities arising from the differences in the stages of business cycles in different countries. When marketing opportunities for a product or service get saturated in a domestic or international market, a firm can make use of such challenges and convert them into marketing opportunities either by expanding overseas or by shifting its operations from one country to another.

Uniqueness of product or service: Product with unique attributes are unlikely to meet any competition in the overseas markets. This offers enormous opportunities for marketing abroad. For example, Himalayan herbs and medicinal plants from India and the value-added Business Process Outsourcing (BPO) services and software development at competitive prices provide Indian firms an edge for overseas expansion. (Joshi, 2009).

b.  Economic Motives

Profitability: Higher profits from overseas business operations form a significant motive for international expansion. Such differences in profitability between countries may be due to many factors, among which some are listed below.

1. Price difference

2. Export incentives in home country government

3. Fiscal incentives by  host country government

4. Low cost of raw materials, human resources, capital etc., in host country

5. Low intensity of competition in host country

Economies of Scale:  Large size production capacities necessitate domestic firms to dispose off their goods in international markets. When the production is too large to be consumed in domestic market, firms have to export the products to the foreign markets.

c.  Strategic Motives:

Growth: For companies from smaller countries like Singapore, Hong Kong, Scandinavia, etc., the expansion of business to overseas is must for survival. However, for companies from larger countries US, China and India, growth is hardly a motive for international expansion.

Risk: International expansion of business is also used as a risk mitigating strategy so as to offset the economic uncertainties in the home country. Operating in several countries reduces dependence on any particular market and spreads the business risks.

36.4   DOMESTIC AND INTERNATIONAL BUSINESS a distinction

The basic difference in domestic and international business arises from the differences in environment of their operations. These differences are summerised as under:

Economic Environment: Within the nation economic environment is more or less the same in all the regions of the country. For instance, the government policies with respect to interest rates, taxes, wages or prices are the same within the country. Market structures – the degree of competition of monopoly in production – and consumer taste patterns and preferences are more or less the same throughout the country. All of them would add up to creating a certain economic environment or investment climate within the nation. But between nations, they could all differ very significantly. This would make the character of international business different from that of domestic business.

Socio-cultural Environment: Cultural factors play an important role in operating business internationally. Values and beliefs differ from one country to other. A popular example of cultural differences with regards to time is no doubt this: Everyone would agree that Germans are well-known for their punctuality. In many African and South American countries, however, scheduled appointments are often treated like a general guideline rather than something one has to strictly abide by.

Legal Environment: Firms involved in global business must be familiar with and obey the laws of their home country, the local laws of each country in which they do business, and international laws..  For example, countries may well have different laws covering employees such as minimum wages, overtime, insurances, maximum work weeks, and so on. There are also often differing rules regarding product testing and safety. Businesses must also follow those international laws which govern international trade.  For example, dumping which is a practice of selling exported products at a very low price, in some instance, lower than the cost of production with the ultimate intention to drive local competitors out of the market. Under the pressure of local companies, governments may find it necessary to intervene to prevent such practice by adopting antidumping laws and regulations.

Political Environment: Perhaps the most important considerations for global business firms are the political and legal forces operative in the countries in which they plan to conduct business.  Some foreign governments are unstable, that is, there may be frequent, dramatic and unpredictable regime changes and/or political unrest. When this occurs industries may be nationalized; private property may be seized or destroyed; normal business operations may be suspended, the workforce may go on strike. Even within relatively stable governments, as different administrations come to power different business regulations and attitudes may be adopted.

Technology: This comprises factors related to the materials and machines used in manufacturing goods and services. The organization's receptivity and willingness to adapt to new technology, as well as the willingness of its consumers to do likewize, influences decisions made in an organization. As firms have no control over the external environment, their success depends upon how well they adapt to it. A firm's ability to design and adjust its internal variables to take advantage of opportunities offered by the external environment, and its ability to control threats posed by the same environment, determines its success.

36.5  STAGES IN INTERNATIONALISATION

Most companies pass through different stages of internationalization. There are, of course, many companies which have international business since their very beginning, including 100 per cent export oriented companies. Even in the case of many of the hundred percent export oriented companies, the development of their international business would pass through different stages of evolution.

A firm which is entirely domestic in its activities normally passes through different stages of internationalization before it becomes a truly global one. In many firms overseas business initially starts with a low degree of commitment or involvement; but they gradually develop a global outlook and embark upon overseas business in a big way.

Each term is distinct and has a specific meaning which define the scope and degree of interaction with their operations outside of their “home” country.

• International companies are importers and exporters, they have no investment outside of their home country.

• Multinational companies have investment in other countries, but do not have coordinated product offerings in each country. More focused on adapting their products and service to each individual local market.

• Global companies have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. Generally one corporate office that is responsible for global strategy. Emphasis on volume, cost management and efficiency.

• Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.

36.6  INTERNATIONAL BUSINESS DECISIONS

When a firm plans to go international, it has to make a series of strategic decisions. They are broadly the following (Fig. pp-23).

International Business Decision: The first decision a company has to make, of course, is whether to take up international business or not. This decision is based on a serious consideration of a number of important factors, such as the present and future overseas opportunities, present and future domestic market opportunities, the resources of the company, company objectives, etc.

Market Selection Decision: Once it has been decided to go international the next important step is the selection of the most appropriate market. For this purpose, a thorough analysis of the potentials of the various overseas markets and their respective marketing environments is essential. Company resources and objectives may not permit a company to do business in all the overseas markets. Further, some markets are not potentially good and it may be suicidal to waste company resources in such markets. A proper selection of the overseas markets therefore is very important.

Entry and Operating Decisions: Once the market selection decision has been made, the next important task is to determine the appropriate mode of entering the foreign market.

Marketing Mix Decision: The foreign market is characterised by a number of uncontrollable variables. The marketing mix consists of internal factors which are controllable. The success of international marketing , therefore, depends to a large extent on the appropriateness of the marketing mix. The elements of the marketing mix- product, promotion, price and physical distribution-should be suitably designed so that theymay be adapted to the characteristics of the overseas market.

International Organisation Decision: A company which wants to do direct exporting has also to decide about its organizational structure so that the exporting function may be properly performed. This decision should necessarily be based on a careful consideration of such factors as the expected volume of export business, the nature of the overseas market, the nature of product, the size and resources of the company, and the length of its export experience. The nature of the organization structure of the company will depend on a number of factors like its international orientation, nature of business, size of business, future plans, etc.