INTERNATIONAL

BUSINESS
Meaning & Definition
The term “international business” refers to all those business
transactions which involve cross border transactions of goods, services,
resources between two or more nations.
Transactions of economic resources include capital, skill, people etc. for
international production of physical goods and services such as finance,
banking, insurance, construction etc.
IB comprises of all transactions (Private & Government, Sales,
Investments, logistic & transportation) that takes place between two or
more regions, countries, nations beyond their political boundaries.
Usually private companies undertake such transactions for profit;
Government undertake them for profit & for political reasons.
• According to Michael R. Czinkota,” International business consists of
transactions that are devised and carried out across national borders
to satisfy the objectives of the individuals, companies and
organizations.”
• According to Roger Bennett,” International business involves
commercial activities that cross national frontiers”.
Thus, it involves not only the international movement of goods and
services, but also of capital, personnel, technology and intellectual
property like patents, trademarks, knowhow and copyrights etc.
It is a business which takes place outside the boundaries of a country,
i.e., between two countries. It includes the international movements of
goods and services, capital, personnel, technology and intellectual
property rights like patents, trademarks and knowhow. It refers to the
purchase and sale of goods and services beyond the geographical limits
of a country.
Types of IB

(i) Export Trade – It is selling of goods and services to foreign

countries.
(ii) Import Trade – It is buying goods and services from other
countries.
(iii) Entreport Trade – It is import of goods and services for re-export to
other countries.
 Nature of IB
• International Restrictions
In international business, there is a fear of the restrictions which are imposed by the government of
the different countries. Many country’s governments don’t allow international businesses in their
country. They have trade blocks, tariff barriers, foreign exchange restrictions, etc. These things are
harmful to international business.
• Benefits To Participating Countries
It gives benefits to the countries which are participating in the international business. The richer or
developed countries grow their business to the global level and they get maximum benefits. The
developing countries get the latest technology, foreign capital, employment opportunities, rapid
industrial development, etc. This helps developing countries in developing their economy. Therefore,
developing countries open up their economy for foreign investments.
• Large Scale Operations
International business contains a large number of operations at a time because it is conducted on a
large scale globally. Production of the goods at a large scale, they have to fulfill the demand at a global
level. Marketing of the product is also conducted at a large scale to make them aware of the product.
First, they fulfill the domestic demand and then they export the surplus in the foreign markets.
• Integration Of Economies
International Business combines the economies of many countries. The companies use the
finance, labor, resources, and infrastructure of the other countries in which they are
working. They produce the parts in different countries, assembles the product in other
countries and sell their product in other countries.
• Dominated By Developed Countries
International business is dominated by developed countries and their MNC’s. Countries like
U.S.A, Europe, and Japan all are the countries that are producing high-quality products, they
have people working for them on high salaries. They have large financial and other
resources like the best technology and Research and Development centers. Therefore, they
produce good quality products and services at low prices. They help them to capture the
world market.
• Market Segmentation
International business is based on market segmentation on the basis of the geographic
segmentation of the consumers. The market is divided into different groups according to the
demand of the consumers in different countries. It produces goods according to the demand
of the consumers of the different market segmentations.
• Sensitive Nature
International Business is highly affected by economic policies, political
environment, technology, etc. It can play a positive role to improve the
business and can also be negative for the business. It totally depends
on the policies made by the government, it can help in expanding the
business and maximizing the profits and vice-versa.
 Scope of IB
• Foreign Investments
Foreign investment is an important part of international business. Foreign
investment contain investments of funds from the abroad in exchange for
financial return. Foreign investment is done through investment in foreign
countries through international business. Foreign investments are two types
which are direct investment and portfolio investment.
• Exports And Imports Of Merchandise
Merchandise are the goods which are tangible. (those goods which can be seen
and touched.) As mentioned above merchandise export means sending the
home country’s goods to other countries which are tangible and merchandise
imports means bringing tangible goods to the home country.
• Licensing And Franchising
Franchising means giving permission to the new party of the foreign country in
order to produce and sell goods under your trademarks, patents or copyrights
in exchange of some fee is also the way to enter into the international
business. Licensing system refers to the companies like Pepsi and Coca-Cola
which are produced and sold by local bottlers in foreign countries.
• Service Exports And Imports
Services exports and imports consist of the intangible items which cannot be
seen and touched. The trade between the countries of the services is also
known as invisible trade. There is a variety of services like tourism, travel,
boarding, lodging, constructing, training, educational, financial services etc.
Tourism and travel are major components of world trade in services.
• Growth Opportunities
There are lots of growth opportunities for both of the countries, developing
and under-developing countries by trading with each other at a global level.
The imports and exports of the countries grow their profits and help them to
grow at a global level.
• Benefiting From Currency Exchange
International business also plays an important role while the currency exchange
rate as one can take advantage of the currency fluctuations. For example, when
the U.S. dollar is down, you might be able to export more as foreign customers
benefit from the favourable currency exchange rate.
• Limitations Of The Domestic Market
If the domestic market of a country is small then the international business is a
good option for the growth of the business in the host country.
Depression of domestic market firms will force to explore foreign markets.
 Stages of Internationalization
1- Domestic Company- A domestic corporation is a company that conducts its
affairs in its home country. Typically, a domestic corporation can easily conduct
business in other states or parts of the country where it has filed its articles of
incorporation.
• Example- Allen Solly has currently its major operations in India only.

2-International Company- An international company has no fdi and makesits

wares only in its home country. It’s involvement outside its borders is
essentially limited to importing and exporting goods.

2- Multinational Company (MNCs)- A multinational company is one which is

incorporated in one country (called the home country); but whose operations extend
beyond the home country and which carries on business in other countries (called the
host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located
in the home country.
Ex- McDonald
3- Global Company- The word global literally means worldwide, or all over the
world. A global company is one that does business in at least one country outside
of its country of origin. A global business is a company that operates facilities in
many countries around the world. This is different from an international business,
which sells products worldwide but has facilities only in its home country.
4- Transnational Company- I

International Business Environment

• An international business environment is the surrounding in which international companies
run their businesses. It brings along it with many differences.
• Thus, it is mandatory for the people at the managerial level to work on the factors that
make an International Business Environment.
1- Political Environment
The political environment refers to the type of the government, the government relationship
with a business, & the political risk in the country. Doing business internationally, therefore,
implies dealing with a different type of government, relationships, & levels of risk.
• Therefore, in analyzing the political-legal environment, an organization may broadly
consider the following aspects:
• The Political system of the business;
• Approaches to the Government towards business i.e. Restrictive or facilitating;
• Facilities & incentives offered by the Government;
• The Restrictions on importing technical know-how, capital goods & raw
materials;
• Procedural formalities required in setting the business.
2- Economic Environment
• The economic environment can be very different from one nation to
another. Countries are often divided into three main categories: the more
developed or industrialized, the less developed or third world, & the
newly industrializing or emerging economies.
• Within each category, there are major variations, but overall the more
developed countries are the rich countries, the less developed the poor
ones, & the newly industrializing (those moving from poorer to richer).
These distinctions are generally made on the basis of the gross domestic
product per capita (GDP/capita). Better education, infrastructure, &
technology, healthcare, & so on are also often associated with higher levels
of economic development.
3- Social Environment
• Social factors, such as demographics and culture can impact the industry
environment by influencing peak buying periods, purchasing habits, and
lifestyle choices. Society is important as people’s culture and lifestyle can
influence when, where and how they are likely to engage with products
and services. Social factors can include:
• Religion & ethics
• Consumer buying patterns
· Demographics
· Health
· Opinions and attitudes
· Brand preferences
For example, customers living in one country may not be interested in the
same products and services as those residing in another country.
4- Technological Environment
The technological environment comprises factors related to the
materials & machines used in manufacturing goods & services.
Receptivity of organizations to new technology & adoption of new
technology by consumers influence decisions made in an
organization.
• Technology often is seen as giving firms a competitive
advantage; hence, firms compete for access to the newest in
technology, & international firms transfer technology to
be globally competitive.
 Challenges of International Business
1- International Company Structure-
One fundamental consideration is the structure of your organization and the location of
your teams.
• For instance, will your company be run from one central headquarters? Or will you
have offices and representatives “on the ground” in key markets abroad? If so, how will
these teams be organized, what autonomy will they have, and how will they coordinate
working across time zones? If not, will you consider hiring local market experts who
understand the culture of your target markets, but will work centrally?
• Coca-Cola offers one example of effective multinational business structure. The
company is organized into continental groups, each overseen by a President. The
central Presidents manage Presidents of smaller, country-based or regional
subdivisions. Despite its diverse global presence, the Coca-Cola brand and product is
controlled centrally and consistent around the world.
• While Coca-Cola is a vast international brand, the structure of your business and the
number, nationality, and level of expertise of your team will vary depending on your
industry, product, and the size of your business.
2- Increasing opportunities for business abroad has led to geographic
diversification on a large scale. It has created a problem of balancing
between the geographic expansion and control over operations, i.e.,
parent control over subsidiaries. ‘Final decisions on what to do and
what not to do, what to internalize and what not, may need to be
taken centrally, but subsidiary managers can and must be allowed to
play a vital role in ensuring these decisions fully reflect locally
available knowledge.’ These subsidiary managers should not be
treated as a source of ‘bounded reliability’.
3- Foreign laws & regulation-
Along with getting your company structure in place, gaining a comprehensive
understanding of the local laws and regulations governing your target markets is key.
From tax implications through to trading laws, navigating legal requirements is a central
function for any successful international business. Eligibility to trade is a significant
consideration, as are potential tariffs and the legal costs associated with entering new
markets.
4- International Accounting-
• Of the main legal areas to consider when it comes to doing international business, tax
compliance is perhaps the most crucial. Accounting can present a challenge to
multinational businesses who may be liable for corporation tax abroad. Different tax
systems, rates, and compliance requirements can make the accounting function of a
multinational organization significantly challenging.
• Accounting strategy is key to maximizing revenue, and the location where your business is
registered can impact your tax liability. Being aware of tax treaties between countries
where your business is trading will help to ensure you’re not paying double taxes
unnecessarily.
5- Cost calculation and global pricing strategy
Setting the price for your products and services can present challenges when doing
business overseas and should be another major consideration of your strategy. You
must consider costs to remain competitive, while still ensuring profit.
Swedish furniture giant Ikea, known in Europe for its low-cost value, struggled
initially in China due to local competitor costs of labor and production being much
cheaper. By relocating production for the Chinese market and using more locally
sourced materials, the company was able to successfully cut prices to better reflect
its brand and boost sales among target consumers.
 Difference b/w domestic & international
business
BASIS FOR COMPARISON DOMESTIC BUSINESS INTERNATIONAL BUSINESS

Meaning A business is said to be domestic, when its International business is one which is
economic transactions are conducted within engaged in economic transaction with
the geographical boundaries of the country. several countries in the world.

Area of operation Within the country Whole world

Quality standards Quite low Very high

Deals in Single currency Multiple currencies

Capital investment Less Huge

Restrictions Few Many

Nature of customers Homogeneous Heterogeneous

Business research It can be conducted easily. It is difficult to conduct research.

Mobility of factors of production Free Restricted

Modes of entry into IB
• Direct Exporting- Direct exporting refers to the sale in the foreign market by
the manufacturer himself. A manufacturer does not use any middlemen in
the channel between the home country and overseas market.

• Indirect Exporting- Indirect exporting refers to the transfer of the selling

responsibility to other organization by the manufacturer. In indirect
exporting, the manufacturer utilizes the services of various types of
independent marketing middlemen. Thus, a manufacturer is not required to
work very hard and foreign sales are handled in the same way as the
domestic sales.

• Piggy Backing- It is focused on finding organizations that can benefit

mutually from a relationship that offers complementary products or services.
These are organizations that aren’t competing with each other in the
marketplace but rather can give each other a leg up while sharing the cost of
advertising.
Contractual
 Franchising- It is a system in which semi- independent business
owners (franchisees) pay fees and royalty to a parent company
(franchiser) in return for the right to be identified by its trademark, to
sell its product or services, and often to use its business format or
system.
• Advantages- 1. It is less risky.
2- Advantage of expertise of franchiser.
3- Highly motivated employees.
• Disadvantages- 1. Difficult in keeping trade secrets.
2- Franchisee may become a future competitor.
3- A wrong franchisee may ruin company’s name & goodwill.
Licensing
Licensing is a method in which a firm gives permission to a person to use its
legally protected product or technology (trademarked or copyrighted) and to
do business in a particular manner, for an agreed period of time and within
an agreed territory. It is a very easy method to enter foreign market as less
control and communication is involved. The financial risk is transferred to the
licensee and there is better utilization of resources.
• Ex- In May 2018, Nestle and Starbucks entered into a $7.15 billion coffee
licensing deal. Nestle (the licensee) agreed to pay $7.15 billion in cash to
Starbucks (the licensor) for exclusive rights to sell Starbucks’ products
(single-serve coffee, teas, bagged beans, etc.) around the world through
Nestle’s global distribution network. Additionally, Starbucks will receive
royalties from the packaged coffees and teas sold by Nestle.
• The licensing agreement provided Starbucks with the ability to drive brand
recognition outside of its North American operations through Nestle’s
distribution networks. For Nestle, the company gained access to Starbucks’
products and strong brand image.
 Advantages of Licensing

 Licensing is a rapid entry strategy, allowing almost instant access to the market with the right partners lined up.

 Licensing is low risk in terms of assets and capital investment. The licensee will provide the majority of the infrastructure in most situations.

 Localization is a complex issue legally, and licensing is a clean solution to most legal barriers to entry.

 Cultural and linguistic barriers are also significant challenges for international entries. Licensing provides critical resources in this regard, as
the licensee has local contacts, mastery of local language, and a deep understanding of the local market.

Disadvantages of Licensing

 Loss of control is a serious disadvantage in a licensing situation in regards to quality control. Particularly relevant is the licensing of a brand
name, as any quality control issue on behalf of the licensee will impact the licensor’s parent brand.

 Depending on an international partner also creates inherent risks regarding the success of that firm. Just like investing in an organization in
the stock market, licensing requires due diligence regarding which organization to partner with.

 Lower revenues due to relying on an external party are also a key disadvantage to this model. (Lower risk, lower returns.)
  Management contracts- Practice by which one company supplies another
with managerial expertise for a specified period of time.
• Management contract is an agreement between investors or owners of a project,
and a management company hired for coordinating and overseeing a contract. The
company assists its client for a specified period for a fee. A company usually enters
into a management contract when it believes a foreign company can manage its
existing or new operation more efficiently.
• For example, the British Airport Authority (BAA) has contracts to manage airports in
Indianapolis (US), Naples (Italy) and Melbourne (Australia) because it has developed
successful airport management skills.
Two types of knowledge can be transferred through management contracts-
1- The specialised knowledge of technical managers.
2-The business management skill of general managers.
  Turnkey Project- The term turn-key project (Turn-key delivery) describes a projec
( or the delivery of such) in which the supplier or provider is responsible to
the client for the entire result of the project and presents it to the client
completely finished and ready to use. In fact, the client should be able “just
to turn the key.” The supplier of a turn-key project is called the general
contractor (or main supplier, direct supplier or main contractor).
Ex- In highway projects the BOOT “BUILT OWN OPERATE AND
TRANSFER “ OR DBFOT “DESIGN BUILT FINANCE OPERATE AND
TRANSFER” kind of project methodology has been adopted. PPP
“PUBLIC PRIVATE PARTNERSHIP”
- Gandhinagar Railway Station development (under progress) by
Indian Railway Station Development Corporation Limited (NEW
DELHI).
Advantages of Turnkey Projects
 Turnkey projects are a way of earning great economic returns from the know-how
required to assemble and run a technologically complex process.
 Turnkey projects make sense in a country where the political and economic
environment is such that a longer term investment might expose the firm to
unacceptable political and/or economic risk.

Disadvantages of Turnkey Projects

 By definition, the firm that enters into a turnkey deal will have no long-term interest in
the foreign country.

 The firm that enters into a turnkey project may create a competitor.

 If the firm’s process technology is a source of competitive advantage, then selling this
technology through a turnkey project is also selling competitive advantage to potential
and/ or actual competitors.
• Example- Google and NASA developing Google Earth; Renault-Nissan;
Maruti Suzuki (4 wheeler); Song Ericssion.
• Advantages of Joint Venture – 1. Better resources: such as specialized staff
and technology. All the equipment and capital that you needed for your
project can now be used.
2- Both parties share the risks and costs.
3- Joint ventures can be flexible.
4- Helps in building relationships and networks.
• Disadvantages – 1. Great imbalance
• 2. Clash of cultures- A clash of cultures and management styles may result in
poor co-operation and integration. People with different beliefs, tastes, and
preferences can get in the way big time if left unchecked.
3- It may be hard to exit the partnership as there is a contract involved.
4- Lack of clear communication
  Strategic Alliance
• A strategic alliance is an arrangement between two companies to undertake a mutually
beneficial project while each retains its independence. The agreement is less complex
and less binding than a joint venture, in which two businesses pool resources to create a
separate business entity. Example- Strategic Partnerships between Spotify and Uber.
• Advantages – 1. It is not a merger or an acquisition.
2. It expands networking opportunities.
3. It allows all parties to reach their goals faster.
• Disadvantages – 1. Poor Management of the business alliances
2. Benefits are unequal.
3. Barriers in work culture and language.
4. Legal issues
 Foreign Direct Investment- A foreign direct investment (FDI) is an investment made by
a firm or individual in one country into business interests located in another country.
Generally, FDI takes place when an investor establishes foreign business operations or
acquires foreign business assets in a foreign company. Apple’s investment in China is an
example of an FDI.
• Advantages-1.Brings in financial resources for economic development.
1. Brings in new technologies, skills, knowledge, etc.
2. Generates more employment opportunities for the people.
3. Brings in a more competitive business environment in the country.
• Disadvantages- 1. It can affect domestic investment, and domestic companies
adversely.
2. Small companies in a country may not be able to withstand the onslaught of MNCs in
their sector. There is the risk of many domestic firms shutting shop as a result of
increased FDI.
3. FDI may also adversely affect the exchange rates of a country.
 Merger & Acquisition- Mergers is the combination of two companies to
form one, while Acquisitions is one company taken over by the other. M&A
is one of the major aspects of corporate finance world. The reasoning
behind M&A generally given is that two separate companies together
create more value compared to being on an individual stand. With the
objective of wealth maximization, companies keep evaluating different
opportunities through the route of merger or acquisition.
Example- Vodafone India- Idea merger
Example- Walmart’s acquisition of Flipkart