Paper: 08, International Business Operations

Module: 01, International Business: Introduction, Nature and Growth

EEeEnvironment

Prof. S P Bansal
Principal Investigator Vice Chancellor
Maharaja Agrasen University, Baddi

Prof YoginderVerma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Dr Shafali Nagpal
Paper Coordinator Human Resource Development Centre
BPSMV, KhanpurKalan, Sonipat

Dr Shafali Nagpal
Content Writer Human Resource Development Centre
BPSMV, KhanpurKalan, Sonipat
Items Description of Module
Subject Name Management
Paper Name International Business Operations
Module Title International Business: Introduction, Nature and Growth
Module Id Module no.-01
Pre- Requisites Business and its activities
Objectives To study the basic concepts of International business, its nature and its importance
Keywords International Business, growth, dimensions and advantages

QUADRANT-I

Module 01 : International Business: Meaning, Nature &

Importance
1.Learning Outcome
2.Introduction
3.Dimensions of International business
4.International business and Domestic business
5.Growth of International business
6.Importance and Advantages of International business
7.Summary
8.Learning Outcome

Learning Outcome :
This module will help the students to understand -

 Concept and nature of international business

 Importance of international business
 Advantages of international business for the economy of the
country and for the whole world.

INTRODUCTION
What is business? The exchange of goods or services in exchange of any goods or services or
in monetary terms. This exchange process is taking place way back since the existence of
human being. Earlier Barter System was adopted in which commodities were exchanged
which either of them required. For example A required wheat and had some extra rice with
him and B requires rice and has wheat with him in excess so, A exchange rice with wheat
from B so that both of them were satisfied. With the development of human, means and
methods of production also developed and overall trade developed and the concept of
exchange i.e barter system also changed because of its limitations and so generally acceptable
payment system was developed. Numerous things were used as mode of exchange for
example livestock’s, shekel, cowry shells, precious metals, coins and notes.

Business is associated with human since very beginning. Now a days as the human is
developing, crave for new and improved products came into stipulation and it was not
possible for everyone to thrive the entire demand by themselves. This intensified the need for
globalization.

With the development, consumerism raised and expansion of the business started across
borders at faster pace. With the technological advancement, business stretched and global
boundaries were shrunken and scope of international business increased.

Let us understand the meaning and concept of International business.

International business can be defined as the exchange of goods and services among
individuals and businesses in multiple countries. According to Business dictionary,
International Business firm is defined as “A specific entity, such as a multinational
corporation or international business company that engages in business among multiple
countries”.

According to Wikipedia, International business is a term used to collectively describe all

commercial transactions (private and government, sales, investments, logistics, and
transportation) that take place between two or more regions, countries and nations beyond
their political boundaries. Usually, private companies undertake such transactions for profit;
governments undertake them for profit and for political reasons.

International business is not only beneficial for the business units but also it joins different
countries through trade but it makes the countries dependent on each other which develops
sense of humanity i.e. need of each other. As the population is growing, demand for goods
and services are increasing which has widened the scope of international business. To fulfill
basic needs of life we require money, and industries need base and consumers. Globalization
solves the problem of both. If we observe the world’s geography we can perceive that the
natural resources are unsymmetrical i.e. all the resources are not allocated to every country
and if a particular product is fabricated by a peculiar raw material which is not obtainable in
the country where the company is situated, international trade turns out be very crucial for the
survival of the company.
There are four components on which a business can persist and we must decide whether to go
international or not. They are –

 Internationalization of Market Presence – It is very crucial for a business to

comprehend that what are their limitation and constructive areas i.e. whether they are
able to fabricate ample to proffer the requirement of their market and then beyond
boundaries, then such business units should make their global presence. Business
units should also have a check on their competitors so that they can have a exact
synopsis of the market. For example if a company XYZ Ltd. produces toothpaste and
the response for their product is very impressive and they can also tap similar market
in other countries, then they should tap the international market as well as they should
have an eye on their rivals who produce same type of product.
 Internationalization of Supply Chain – This is also a very crucial aspect for the
internationalization. This advises that a company should select a location for
production in its supply chain such that the cost of production can be minimal. It is
not mandatory for a company to manufacture everything at single place. Business
entity should select a location such that raw material, transportation and other things
are easily available. For example Toyota has a good supply chain, Toyota
manufactures two-third of its cars in Japan and remaining in the subsidiaries spread
over in 25 countries also company exports 35% of its cars in foreign market.
 Internationalization of Capital Base – It refers to the extent to which company is
accessing the optimal sources of capital on a worldwide basis. What sources of capital
would be available to its business after internationalization. Selection of going
international will depend on the sources and terms of funds available in different
countries.
 Internationalization of Corporate Mindset – This factor tells how a company
should diversify it. It is very important to understand the culture of country where
business is to
be done and should follow them to grow and develop its market which ultimately
gives monetary benefit and trust of the market. For example, Indian company will
have its own cultural background which will be different from Japanese company,
like, in India senior management has their separate office and has a separate space but
in Japanese culture there are no separate offices for senior management. The cross
cultural differences are to be studied before going international. It has been viewed
that many companies fail in their establishments in other countries due to cultural
differences.

DIMENSIONS OF INTERNATIONALIZATION OF BUSINESS

Internationalisation of
Capital

Internationalisation of Internationalisation of
Internationalisation
Corportae Mindset Market Presence

Internationalisation of
Supply Chain
 INTERNATIONAL BUSINESS AND DOMESTIC BUSINESS
International business is not a new phenomenon, it has existed since ages. Trade among
countries increased with means of transportation and technological development.
Internationalization is generally an expansion strategy of a business. Going global benefits
the supplier, consumer as well as the country. Supplier gets a fair price for their product,
consumers get a better product among different choices and country incurs taxes which
increases the wealth of the country.

Difference transpire primarily in currencies, interest rates, inflation rates, taxation systems,
government policies and regulations, language, culture, geographic and economic barriers.
These differences are the major concern for the Multinational companies as the subsidiaries
of these companies are located in different countries which has its own domestic business and
to grow these MNC needs to set such atmosphere that underline both the cultures i.e. where
head office is situated and branch unit is located.

Also the payments for the goods and services which are sold to foreign buyers are in different
currency then used in the domestic market. For example if India sells product A to a buyer of
America the payment will be made in the currency generally acceptable in the international
market i.e. dollars, yen, pound etc. This payment sometimes suffers losses as well as attracts
gains also due to the fluctuations in the conversion rate of the currencies. For example A
from India sold a machine to X of Japan and the payment has to be made in dollars after one
month. At the time of the transaction 1$ was equal to Rs. 65.00 but after one month it
declined to Rs. 63.00 so there will be a loss of Rs. 2.00 per dollar to A whereas if it rose to
Rs. 67.00 A will have a profit of Rs. 2.00 per dollar.

Also laws and policies risk plays an important role. Every country has its own laws which
may be favorable or unfavorable to a business. For example, laws related to production of
aluminum utensils in USA and India vary to a great extent. Thus establishment of such
business in both countries will be different. Other than policies, interest rate, taxation policies
and inflation rates will also affect the business. Difference between domestic and
International business is explained in next module.
 GROWTH OF INTERNATIONAL BUSINESS
Trade is a means to satisfy human needs. As the demand of the human intensified, the
requirement for the expansion of trade was desired. As the trade increased national
restrictions were necessary to be framed. Also using a common currency for international
business also enabled business transactions to be carried out and creation of systematic law,
central market location and effective communication system also boosted the international
trade, all these development helped in the functioning of the market place and curtailment of
risk.

International trade gave rise to the foreign investment which helped the countries to develop
the business systems. Investments not only expanded the business but also improved the
conditions of the country as well as the citizens of the country. Total global financial assets
rose from $250 billion in 1970 to almost $70 trillion in 2010. The composition of
international financial flows has also changed: the share of portfolio equity investments is
much larger.*

*Source: http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm

After the Second World War Europe and Japanese infrastructure was demolished, at that time
US companies through different strategies were able to strengthen their status. Different
institutions played an important role in the development of the international trade in the long
run. Some of them were International Monetary Fund (IMF), The World Bank, World Trade
Organization (WTO), The World Bank etc which provided stable worldwide environment in
which MNCs could conduct their business.
Following charts shows increase in the international business over past 50 years. Chart
1shows many fold increase in the financial links and global trade.

Chart-1 Source: http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm

International marketing is also an important aspect of international business. International

marketing is not the same thing as international trade. Only a part of the international trade
flow represents the international marketing. International marketing is just the application of
the marketing principles for different countries.

Now a day’s every country and every industry it may be small or big try to get global for
growth and development. Chart 2 shows the share of GDP of the Advanced, emerging
economies and other developing economies.
Chart-2 Source: http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm

India is inviting foreign investments in the country for the development of the country and as
we can see that the GDP of the country is increasing at very fast pace and it is expected that
International business in India will grow at 7% annually. As the population of the country is
very large and number of jobs per person is very low, this industrialization and FDI in the
country will give birth to the new opportunities and exploration of new business possibilities.

IMPORTANCE AND ADVANTAGES OF INTERNATIONAL BUSINESS

International business is not only important for the business but also helps in the development
of the country. There are two factors which motivate and provoke the business entities to go
international –

 Pull Factor – Pull means attracting, pull factors are the factors which attracts the
business units to the international markets through the opportunities and the
profitability.
  Push Factor – Push factors are just opposite to the pull factors due to the problems to
the domestic market problems such as saturation and increased competition in the
domestic market which force the business units to go international.

There are several factors which are advantageous for the business units. They are explained
as under –

INTERNATIONAL
BUSINESS

PROFITS

EXPANSION AND
COMPETITION FUTURE GROWTH

FOREIGN
INVESTMENTS

GOVERNMENT
GOWTH POLICIES &
OPPORTUNITIES REGULATIONS

 Profits – Profit is one of the most important factor for which all of the business units
focuses. Domestic business after a period comes to saturation i.e. there is no
opportunities for the growth of the business, going international helps the business
units to locate new markets and new opportunities. Sometimes it is possible that
 companies earn more profits than the domestic market. It also helps the business to
increase the turnover of the business in the long run which increase the goodwill and
reputation of the company.
 Foreign Investment – Foreign investment is also crucial point of going international.
Foreign investment helps the business in financial aspect and capital is very
important for the business units to undergo the long term plans. Without capital
companies cannot survive or expand. Investors invest in the business units from
different countries to set a unit in different countries which can reduce the cost of
production of the company by providing raw material at low cost, cheap labour etc.
 Growth Opportunities – There are several opportunities for the business units in
different countries. MNCs are interested in the developing countries as there is a vast
scope of development as the countries are growing at a rapid tempo as well as labour
are available at a cheap rate. Also as the population is increasing the demand for the
goods and services are increasing. For example India is the second largest populated
country in the world so most of the MNCs build their offices in India due to cheap
labour as well as the market for their product is vast and Indian customer demand for
more and more.
 Competition – Competition is also one of the leading force behind
internationalization. When companies are easily selling their goods and services in
the domestic market without threat of any competition, business units show no
interest in expanding the market overseas. But as the competition increases the
market share reduces as the market is still the same but the products to be offered to
the same market increased which ultimately reduces the profit share of the
companies. So the companies are forced to search new markets for which they tend to
globalize.
Many companies globalize to give competition to the local producers so that they can
get rid off of the local suppliers and the big businesses are only left in the market.

 Governments Policies and Regulations – Establishment of new industries

help in the development of the country. For this government prefer new
policies and laws to entice new industries in their country. Industries to go
international and accumulate the advantage provided by the government
through policies and regulations like FDI, SEZ, and Economic Zones etc. For
example in some part of India it was announce that if the industries are
 manufactured in the Special Economic Zones then several assistance would
be provided to the companies such as Tax free income, discounted land etc.
 Expansion and Future Growth – Many companies are not satisfied with just
domestic market, they intend to acquire more and more market share and to construct
a brand which is known worldwide. To survive the cut throat competition,
organizations go international, also through research and market study, now a days it
is very expedient for the companies to search the new markets and internal business
research help the organizations to diagnose the areas where if the units are installed it
will be very beneficial for the company with low cost factors and increase profits.

SUMMARY

International business is not only the export and import of the goods and services, it is
exchange of the culture and tradition between two countries. International business is very
important for any economy as it provides with the products which are not available in the
domestic market but is very imperative for the survival. For example drugs for cancer are not
manufactured in every country but victims of cancer are found in every country so
international trade is required to proffer it to the whole world.

International trade gives rise to the development of the infrastructure and the economy as a
whole. It contributes towards GDP, Balance of Payment, Exports, overall development of the
country. It also benefits the host country through investment, revenue generation, production,
employment.

It is beneficial but not to everyone, it boost the companies who have large capital source but
every company does not have the funding to expand the business to the global level, for them
local market is the only source of survival but big industries dominate the local market and
impact the profits of the small industries and ultimately threats their survival. To support
these small business units now government supports them with different strategies for the
growth of the industries.

But the laws and regulations of every country are different and culture and traditions are also
different for different countries. To enhance and have uniformity in laws and regulations at
international level various organizations like WTO, IMF, World Bank etc came into existence
to boost the trade and business among the countries. And in past years international business
has increased many folds.