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Subject ECONOMICS

Paper No and Title 11, Global Business Environment

Module No and Title 2, International Business

Module Tag BSE_P11_M2

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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TABLE OF CONTENTS
1. Learning Outcomes

2. Introduction

3. Concept of International Business

3.1 Environment of international business

4. Reasons for International Business Expansion

5. Domestic versus International Business

6. Managing Business in the Globalization Era

7. Summary

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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1. Learning Outcomes
After studying this module, you shall be able to

 Explain the concept of International Business and its environment.

 Identify the reasons for expansion of International Business.
 Differentiate between Domestic and International Business.
 Analyze how business activities can be managed in the era of Globalization.mes New
Roman size 14)

2. Introduction
International business has been playing a crucial role for centuries. The world we share is
becoming increasingly interconnected in complex and interesting ways. From the history of
international business, we learn that present-day global companies- characterized by explosive
growth and closer central control of foreign operations- are markedly different from their
predecessors. Markets have become truly global for most goods, many services and especially for
financial instruments of all types. Even the largest and most apparently self-contained economies,
including U.S, are now significantly affected by global economy. Global integration in trade,
investment, and factor flows, technology, and communication has been tying economies together.
In this text, it will be cleared that all managers need to have a basic knowledge of international
business to be able to meet the challenge of global competition.

3.Concept of international Business and its Environment

International business refers to all commercial transactions beyond national boundaries i.e. all
business activities occur between two or more regions, countries or nations. Business transactions
include activities related to private and governmental, sales, technology, skilled labour,
investments, logistics and transportation. The main aim behind undertaking these activities is
profit from the perspective of private companies and government undertakes these for profit as
well as for political reasons. In other words, we can say international business not only includes
international trade of goods and services but also foreign investment, especially foreign direct
investment.

At one end of definitional spectrum, international business is defined as organization that buys
and/or sells goods and services across two or more national boundaries, even if management is
located in a single country. At the other end of the spectrum, international business is equated
only with those big enterprises, which have operating units outside their own country.
International business is also known as GLOBAL BUSINESS.

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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International business differs from domestic business in that a firm operating across borders must
deal with the forces of three kinds of environment-

International Business Environment: It includes-

1. Micro environment: It consists of the factors that lie in the immediate environment of the
company and affect the performance of the company. These are more linked with the company.
These forces need not to affect all the firms that exist in a particular industry. Some of them
might be related to a particular firm only; for eg – a person may supply a particular product to a
particular firm which could be entirely different from the supply source of other firm. It includes-

a) Suppliers: - Suppliers are those who supply the inputs like raw materials and
components to the company. it is considered as an important force. Because of the
sensitivity of the supply, many companies give high importance; to vendor development.

b)Customers :- Decision on customers segment by a company should be taken in such a

way , it takes care of the some important factors like – profitability, dependability,
stability of demand, growth prospects and the extent of competition.

c) Competitors: - There always exist some competition among the firms in a particular
market. A firm is not only a competitor for other firms, but they also compete for the
discretionary income of the consumer, e.g. a firm producing a particular product ( say A )
faces competition not only from the other firms producing same product but also from the
manufacturers producing other products ( not A ).

d) Market intermediaries: - firms act like an intermediary that aid the company in
promoting, selling and distributing its goods to final buyers like middleman such as
agents and merchants who help the company in identifying customers or help them in
promoting sales.
BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT
ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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2.Macro environment: It consists of the larger societal forces , which are more uncontrollable
than micro forces, that affect all the Economic environment, Political & legal environment,
Socio-culture environment, Demographic environment, Natural environment, Physical and
technological environment and International environment.

 Economic environment: - It consists of economic condition, economic policies and the

economic system. It influences international business decisions because these decisions
vary from country to country, depending on their respective economic system, e.g-level
of income and inflation, health of industrial, financial and other factors, fiscal and
monetary policies and so on.

 Political and legal environment: -The political and legal environment consists of a set
of laws & political factors and government activities in a foreign market that can either
facilitate or hinder a business' ability to conduct business activities in the foreign market.
Political environment includes Political ideology of government like foreign investment,
tariff, foreign trade, liberalization, globalization, price controls and Political stability in
the country.

 Socio-culture environment: - It includes a set of beliefs, customs, practices and behavior

that exist with-in a population. e.g. the buying and consumption habits of the people, their
language, beliefs and values, customs and traditions, taste and preferences, education etc.
for a business to be successful; its strategy should be the one that is appropriate in the
socio-cultural environment.

 Demographic environment: -A demographic environment is a set of demographic

factors such as gender or ethnicity. Companies use demographic environments to identify
target markets for specific products or services. Marketers have to take both sides of the
demographic environment coin into account when deciding what strategy to apply.

 Natural environment:- It involves natural resources that are needed as input or that are
affected by production activities. It has become a cause of concern because of continuous
demand by the consumers. Like pollution level , water scarcity ,use of renewable
resources etc.

 Technological and physical environment: It includes introduction of new technology,

creation of new product and market opportunities. Physical factors may be defined as
uncontrollable factors which should be taken care of. For instance geographical factors,
weather and climate conditions.

 International environment: - From point of view of certain categories of business,

international environment has its own importance. Since it’s directly related to import
and export activities of a particular country, it is considered as a crucial factor by the
industries.

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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4. Reasons for International Business Expansion

Every firm has a desire to expand its sales and revenue, to minimize input cost and to have least
business and financial risk. There are some other factors that have provided a favorable
atmosphere to expand their activities. Which are as following:-

 Technological improvement: Due to the introduction of new technology or improved

technology, business is becoming more and more global. For. E.g. improvement in
transportation and communication has played a very important role in expanding business
internationally.

 Liberalization: removal/reduction of trade barriers has opened doors to foreign

multinationals and allowed them to set up their organizations. It helps in easing the
movement of goods, services and resources and taking advantages of international
opportunities.

 Emergence of supportive institutions:- there has been a huge development of

supporting institutional arrangements made by business and government which has
resulted in easy flow of goods and has reduced risk to some extent.

 Low cost input: - labour is considered as one of the important input factors for business.
In developing countries, the labour costs are low as compared to developed countries
which give incentive to developed countries to shift/diversify production activities in
developing countries and consequently earn higher profit.

 Global competition:- firms always find it favorable to operate internationally due to

certain reasons-
a) Helps in introducing new product globally
b) Large scale of operation
c) International identification of domestic companies, competitors and suppliers

5. Domestic versus International Business

Domestic Business includes all the business transactions conducted within a border of a
particular nation or a commercial entity. It has the advantage of dealing with its local factors e.g.
currency, customs, culture, regulations and tax system.

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

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On the other hand, international business includes all the commercial activities conducted
beyond national boundaries i.e. all business activities occurs between two or more regions,
countries or nations.

Undertaking business activities globally is more complex than domestic business activities.
There can be a numbers of aspects to differentiate international business from domestic business
like less mobility of factors of production, heterogeneous customers, variations in business and
political activities and so on. Following are the main factors that show why international business
activities are said to be more complex and difficult activity than domestic one.

 Scope: The scope of international business is much wider than domestic one. It not only
includes export material but also trade in services, licensing and franchising as well as
foreign investments. On the other hand, domestic business is limited to a particular
territory. Although firms may have many small business units in different areas but all
are trading inside a single boundary.

 Benefit to nations: International business helps nations to gain foreign currency, efficient
use of domestic resources and employment opportunities. In contrast, domestic business
does not need foreign currency. It also helps in creating employment opportunities. The
main benefit of doing business is perfection in utilization of resources and earning more
benefits.

 Benefit to firms: Through international business firms can earn higher profits, greater
utilization of production capacities, improved business vision etc. Profits by domestic
business activities are generally less than international business transactions.

 Fluctuations in market: Firms can bear the market fluctuations if it is operating

globally, and can withstand with huge losses because of widespread business operations.
Though losses in one area can be stabilized by profits from other area. Whereas, firms
doing business domestically have to face this situation which results in low profits and in
some cases losses too.

 Technological benefit: International business provides firms to share latest technology

across the globe which as a result, improve the mode and quality of production process.

 Improvement in political relations: International business results in cross national

cooperation and agreements because of healthy political relations among nations.

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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Here is tabular representation showing difference between both.

6. Managing Business in the era of Globalization

Globalization has become the buzzword that has changed human lives around the world in a
number of ways. The growing integration of societies and national economies has been among
the most fervently discussed topics during recent years. Firms, in the era of globalization,
determine its strategies and behavior so that it can respond to environmental changes. The high
degree of economic integration also poses economic and financial constraints in the path of
business operations. Globalization offers challenges as well as opportunities for business
enterprises. Some of them are as follows:

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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Introduction of foreign companies in domestic territory raises level of competition

Reduction in tariffs gives way to ease of market access which enables foreign markets
accessible as well as increases competition

Removal of trade barriers and liberal investment regime enables companies to invest
everywhere and expand their business activities outside the domestic area.

It motivates integration of business operation globally.

Development of capabilities across the world.

Managing its business across highly divergent and fast-moving markets requires a laser-
like focus on execution and operational work.

Companies must develop highly flexible business models that enable them to face and
respond to new opportunities and threats.

They must make efforts to ensure a strong talent pipeline that will provide them with the
skills and capabilities to thrive in constantly changing conditions and to take steps
according to it.

Firms can expand their scale of production by being global. In other words, they can reap the
benefit of economies of scale by expanding its activities internationally. Global companies
can be differentiated by their strong global position in terms of global assets, capabilities,
brands, and their relative resilience to shocks and even to business cycle. The global
strategies adopted by business enterprises may include-

 Global conception of markets

 Multi-regional integration strategy
 Changes in external organization of multinational firms- worldwide network
structure etc.
 Changes in internal organization- global outsourcing, greater transparency and
corporate governance regulations etc.

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS
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7. Summary
 International business refers to the conduct of business activities across national borders.
 Intensified competition among domestic private and public sector companies and
multinational companies consequent upon Globalization along with strides in information
technology brought paradigm shift in the policies and practices of international business.
 The recent global economic recession changed the magnitude and direction of
international business and the status of some of the countries from the global leader to
follower and vice versa.
 Reasons for expanding business operations over-seas include technological enhancement,
liberalization, availability of inputs at a very low cost, existence of supportive institutions
and worldwide competitions.
 International business includes much wider activities than domestic business activities.
 Globalization, on the one hand, offers opportunities but on the other hand also puts
challenges for businesses, which sometimes affect the activities of the firm to a great
extent.

BUSINESS PAPER No. :11, GLOBAL BUSINESS ENVIRONMENT

ECONOMICS MODULE No. :2, INTERNATIONAL BUSINESS