INTRODUCTION TO

INTERNATIONAL BUSINESS

Prof. Bimal Jaiswal

Faculty of Commerce
University of Lucknow

Dr. Richa Banerjee

Department of Business Administration
University of Lucknow

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 Dedicated to
Our Parents
Mrs. M. JAISWAL Mrs. NANDITA BANERJEE
Mr. SIYA RAM Mr. SUBRATO BANERJEE
(Parents of Bimal Jaiswal) (Parents of Richa Banerjee)
Preface

Introduction to International Business – In its First edition introduces the

undergraduate and the postgraduate students to the emerging and challenging

field of international business. This is an introductory textbook of International

Business with the primary objective of enabling students to acquire and develop

knowledge and basic understanding of the concepts and problems of international

business in general. This book provides a thorough understanding about domestic

business vis-a-vis international business operations, the mode of entering the global

markets and surviving in the long-run. It attempts to provide an overview of the

international bodies, agreements, treaties and their contribution in developing

international trade. The book gives detailed explanation about the functioning and

importance of Regional Groupings and Emphasizing the roles they play in enhancing

international business. Subsequently, it presents the role played by the International

Financial Institutions in providing financial assistance for expansion of trade all

over the world.

This book attempts to present the subject in a simple, lucid and logical manner

for the students to grasp easily. Suitable tables and diagrams have been used

wherever required for better explanation to the target audience.

This book is best suited to all the students of undergraduate and postgraduate

level of B.Com, B.Com (Hons.), BBA, MBA and M.Com.

We are highly thankful to those who gave their valuable suggestions, with

the hope that their future suggestions would encourage us to come out with next

edition. We sincerely hope that the students and the teachers will find the book

quite useful.

Suggestions and corrections for improvement of the book are welcome.

BIMAL JAISWAL
RICHA BANERJEE
 Contents
Chapter No. Description Page No.
Chapter - 1 INTRODUCTION 1-19
Concept, Features and Evolution/Historical View Point of International
Business, Features of International Business, Factors Encouraging and
Modes of International Business, Difference between Domestic and
International Business, Advantage of Domestic Trade, Disadvantages
of Domestic Trade, Scope of International Business in India, Sectors
having Potential for International Business in India, Reasons for
Entering into International Business, Advantages of International
Business, Disadvantages of International Business, International
Business Approaches, Operations and Influencing Factors of
International Business, Conclusion. References, Short and Long
Questions.
Chapter - 2 INTERNATIONAL BUSINESS ENTRY STRATEGIES 20-31
Concept of International Business Strategies/Strategic Decision,
International Business Entry Strategies – Exporting; Licensing and
Franchising; Contract Manufacturing; Management Contracts; Turnkey
Projects; Green Field Strategy; Mergers and Acquisitions; Joint
Ventures; Assembly Operations; Fully Owned Subsidiaries; Strategic
Alliance; Third Country Location, Counter Trade, References, Short
and Long Questions.
Chapter - 3 MULTINATIONAL CORPORATION 32-43
Concept, MNC’s Operating Model, Code of Conduct, Multinationals in
India, Reasons for Growth of MNCs, Need for Multinationals in India,
Categories of MNCs, Merits and Demerits of MNC’s, Perspective
towards MNC’s, References, Short and Long Questions.
Chapter - 4 THE CHANGING ENVIRONMENT OF INTERNATIONAL BUSINESS 44-52
Globalization Features, Essence of Globalization, Stimulators of
Globalization, Highlights of 2011 BCG Global Challengers Report,
Changing World Output, Reasons for Change in the Export Scenario,
Changing Foreign Direct Investment Picture, Main Causes of Change
in Foreign Direct Investment, Rise of Multinational Firms (Outside Us),
Rise of Mini- multinationals, References, Short and Long Questions.
Chapter - 5 GATT & WORLD TRADE ORGANISATION 53-80
Introduction to GATT, Major Provisions of GATT, GATT Proposal, New
Areas: TRIPs, TRIMS, GATS, Financial Services, Problems of GATT, WTO-
Ministerial Conference, Objectives, Functions, Benefits and Drawbacks
of WTO, WTO and India, Benefits to India, Organization Structure,
Understanding WTO, Trade Without Discrimination, Encouraging
Development and Economic Reform, Implementation of Current WTO
Agreements, UNCTAD – Objectives, Membership, Organization
 Structure, Main Activities of UNCTAD, UNCTAD Report ’08, References,
Short and Long Questions.
Chapter - 6 REGIONAL BLOCKS 81-114
Introduction, Reasons for Economic Integrations, Levels of Regional
Economic Integration – Free Trade Area, Customs Union, Common
Market, Economic Union, Political Union, Preferential Trade Area,
Limitation of Regional Economic Integration, Trade Creation and Trade
Diversion, ECONOMIC INTEGRATION- Regional Economic Integration
in Europe, NAFTA, ASEAN, SAPTA/SAFTA, SAARC, References, Short and
Long Questions.
Chapter - 7 INTERNATIONAL ECONOMIC FORUMS 115-124
The G8/G7 Nations – Structure and Activities, Criticisms; G-20- Structure
and Activities; Bric, References, Short and Long Questions.
Chapter - 8 NATIONAL FINANCIAL INSTITUTIONS 125-147
EXIM Bank- Salient Policies and Features, Objectives, Functions,
Organization Set Up, Assistance Programme, ECGC – Background,
Need for Export Credit Insurance, Objectives, Functions, Organization
Structure, Insurance Policies and Guarantees Issued by ECGC, Risk
Covered, Commercial Banks, References, Short and Long Questions..
Chapter - 9 INTERNATIONAL FINANCIAL INSTITUTIONS 148-160
World Bank – Organization, Membership, Capital, Objectives/
Functions, Bank’s Lending Operations, World Bank and India; IMF-
Membership, Organization Structure, Objectives, Functions, IMF and
India – Recent Scenario; ADB – Fund Sources, Membership,
Management, Functions, Bank Operations, Appraisal of ABD,
References, Short and Long Questions.
Chapter - 10 EXPORT HOUSES AND EXPORT ASSISTANCE 161-170
Export Houses, Trading Houses and Star Trading Houses, 100% Export
Oriented Units (EOU), Special Economic Zone (SEZ), The Export
Processing Zones: Export Processing Zones (EPZs), The Agricultural
and Food Processed Products Export Development Authority (APEDA),
References, Short and Long Questions.
Chapter - 11 FOREIGN DIRECT INVESTMENT 171-197
Concept, Significance and Role of FDI, Key Highlights, Determinants
of International Investments, Global Trends of Foreign Direct
Investment, FDI by Region: FDI Performance Index, Effect of FDI in
Future International Business, Adverse Impacts of Foreign Direct
Investment, Type of FDI in India, Factors Responsible for FDI in India,
Countrywise Analysis of FDI, FDI in Major Sectors in India, FDI Status
in Different States of India, Overseas FDI by Indian Corporations,
Business Process Outsourcing, Role of BPO, References, Short and
Long Questions.
Chapter - 12 FOREIGN TRADE POLICY 198-213
FTP 2009-14 – Objectives, Strategies Adopted in India’s Foreign Trade
Policy, Highlights of the Foreign Trade Policy 2009-14, Foreign Trade
Policy 2015-20 – Vision, Mission, Objectives and Strategies Adopted
in FTP 2015-20, Highlights of the Foreign Trade Policy 2015-2020,
Scheme under the Foreign Trade Policy 2015-20. Requiring Special
Mention, Highlights of Midterm Review of FTP 2015-20, References,
Short and Long Questions.
Chapter - 13 GLOBALIZATION AND PRIVATIZATION 214-228
Concept of Globalization, Globalization of Business, Reasons for
Globalization of Business, Trends in Globalization, Benefits of
Globalization, Drawbacks of Globalization, Effects of Globalization,
Governmental steps taken towards Globalization, Globalization in
Indian Context, Impact of Globalization on Indian Industry,
PRIVATIZATION: Concept, Pre-requisites for Privatization, Objectives,
Ways of Privatization, Arguments in Fav our and Against of
Privatization, DISINVESTMENT: Objectives, Methods of Disinvestment
References, Short and Long Questions.
Chapter - 14 PORTFOLIO INVESTMENT 229-236
Concept, Portfolio Investment Scheme, Advantages and
Disadvantages, Portfolio Investment Process, FDI and FPI, References,
Short and Long Questions.
Chapter - 15 FUTURE TRENDS IN INTERNATIONAL BUSINESS 237-241
Expected Scenario, Other Future Trends, References, Long Questions.
 & KDSWHU 1

,1752'8&7,21
INTERNATIONAL BUSINESS: CONCEPT
When the businesses go global i.e. across the national boundaries it
becomes International Business. It involves all commercial transactions private
and governmental between two or more countries. The term International
Business involve the exchange of goods, raw materials, services etc across
the national boundaries of two or more regions or countries.
“Exchange of goods and services across the national boundary of a country
is called INTERNATIONAL BUSINESS”.
No country whether developed or developing, produces all commodities
to meet its requirement. It needs to import items that are not produced
domestically. At the same time, it tries to export all items that are produced
over and above its domestic requirement.
The tea we drink is prepared from the tea leaves in Sri Lanka, the perfume
we use might have been produced in France. The electronic appliances we
use are of Japanese technology. We get all these even without visiting or
knowing the country of the company where they are produced is just because
of trade across the boundaries of nations.
 2 Introduction to International Business

In the words of Peter F. Drucker and Mitchell “Globalisation for better or worse, has changed
the way the world does business. Though still in its early stages, it is all but unstoppable. The
challenge that individual and business face is learning how to live with it, manage it and take
advantage of the benefit it offers. Therefore, in all situations global competitiveness should be
made a strategic goal. No institution whether business, a university or a hospital can hope to
survive, let alone succeed, unless it matches up to the standards set by the leaders in the field
at any place in the world.”
The term International Business is the outcome of Globalisation and Liberalisation. The period
before 1980’s witnessed the individual economies with limited interaction among them. The
interaction was limited to the extent of export and import of goods and services. But when
came the concept of Globalisation and liberalization, global economy changed from the mere export
and import of goods to investment across the boundaries of a nation, capital deployment, global
depository receipts (GDR), technology transfer, cultural transformation, free movement of labour
and capital, intellectual property right (IPR), e-business, expansion of marketing operations,
generation of foreign direct investments, etc.
This transformation is the result of the opening of National Political Boundaries for the purpose
of business expansion. Thus, International Business can be summarized as the Process of
concentrating on limited resources of the world and objectives of the business houses on global
business opportunities and threats.

Evolution/Historical View Point of International Business

The business across the borders of the countries had been carried out since a number
of decades. The origin of international business goes back to human civilization. Every country
is abundant in different types of natural resources and is specialized in making goods which
are based on those resources at a cheaper price. Example – Brazil is specialized in production
of coffee. India is specialized in producing jute products, cotton textile, etc.
Every country is not self-sufficient. It needs trade with other country for getting raw material
or market for their finished goods. The main reason of Britishers coming to our country was
not ruling over us. It was international trade. India was rich in natural resources. So, Britishers
set up their colonies in India to get raw material from India and a market for their finished
goods. Traders used to transport silk and spice through the sea route in the 14th and 15th century.
In 1700s, fast sailing ships called clippers with special crew used to transport tea from China
and spices from Dutch East Indies to different European countries.
But, the business at that time was restricted to international trade which included export
and import of goods and services between countries. The post-world War-II era gave birth to
the concept of multinational companies wherein apart from export and import, many other activities
are carried out between nations like strategic alliances, commodity trading, currency trading,
international financial market etc. The post 1990s period has given greater fillip to international
business.
The term international business in real sense came into existence two decades ago. Moreover,
the term international business has originated from the word International Marketing, which in
turn, has been originated from the term ‘Export Marketing’.
Introduction 3

The transition from International Trade to International Business took place when the
multinational companies started setting up their plants and other manufacturing infrastructure
facilities in foreign/host countries after 1980s. Later on, they started producing or manufacturing
in one country where manufacturing facilities and resources were available and marketing in other
foreign countries.
Example: Unilever established its subsidiary company in India i.e. Hindustan Lever Limited
(HLL). It produces its products in India and markets them in the nearby neighbouring countries
like Bangladesh, Sri Lanka, and Nepal etc. A numbers of United States based companies
have established their plants in China, South Korea, Bangkok etc. thus serving the domestic and
international requirements.
Thus, IB is the process of focusing on the resources of the globe and objectives of the
organization on global business opportunities and threats in order to produce, buy, sell or exchange
goods and services world-wide.
International Business not only includes exchange of goods and services but also investments
(foreign direct investment).

Features of International Business

International Business are those activities that involve the transfer of resources, goods,
services, knowledge, skills or information across international boundaries. The main features of
International Business are as follows:
• Flow of Capital Across Countries: International Business is shaped by the flow of capital
across borders rather than by the flow of goods and services. The trends in the international
money market and capital market construct the financial statement of the country like balance
of payment and contribute in shaping the fiscal and monetary policies of the government.
The government, in turn, modifies its policies which in turn determine the flow of capital
across the countries.
• Accurate and timely information required: Huge investment is done while entering into
an international market, even lot many surveys and researches are done which involve time
and money both. Therefore, international business needs accurate and timely information
in order to make effective, appropriate and quick decisions.
Example: Europe is considered the most opportunistic leather market and based on this
information BATA could enter into various European markets, India was known first for
tapping the European market.
• Market Expansion: The goal or objective of international business is market expansion rather
than profit maximization. Deeper penetration in different markets is the major objective
of international business. Efforts should be made for having a foothold in the market so
that the process of expansion becomes easy.
• Size of International Business: Availability of capital should not be the limitation for
international business as it will lead to compromises. The size of international business should
be large so as to make a deeper presence in the foreign or international market. Larger
the size of business of a multinational company, deeper is its impact in International Market,
as its operations are expanded all over the globe.
 4 Introduction to International Business

• Wider scope: The whole world is to be considered as a market for business. Boundaries
of nations are not the limitations. International Business has a wider scope as compared
to the international trade or International Marketing. In fact, International Business includes
International Marketing, International Investment, technology exchange, management of foreign
exchange, International Finance, management of International cultural exchange, management
of International Human Resource, International Marketing, Production and Logistics Management
etc. Hence, its scope is wide and covers all aspects of the system.
• More Potential than Domestic Markets: International markets possess more potential as
compared to the domestic market. This is due to the fact that International Business has
its presence across the globe which widens it horizons, scope, customer base etc.
Example: IBM’s sale is more in foreign countries than in U.S.A., high quality fruits like
apple and mangoes are exported from India as Indian market has less potential with respect
to high price goods.
• Market Segmentation: A firm working at international level should always do market
segmentation before entering in any country. It may be geographical or development of market
segmentation. International Business has to segment its market in order to carve its presence
in any prospective market. Market segmentation refers to the process of dividing the market
into smaller segments based on various factors like geographic factors, demographic factors,
social factors, cultural factors etc. Generally, International Business segments its market on
geographic factors.
Example: Hilton Hotels customize rooms and lobbies according to their locations. North
Eastern hotels are more cosmopolitan whereas, South Western hotels are more rustic. Nescafe
coffee has many flavours depending upon taste and liking of the people of different countries
people.
• Inter-Country Comparison: International Business studies the business opportunities, threats,
consumer tastes, preferences, behaviour, cultures of societies, human resources, technological
advancements and management styles of various countries. This helps in making a comparative
study between various components of two countries which leads to an assessment of inter-
country similarities and differences. The inter-country comparisons also help in analyzing
the market potentials of various countries.
• To increase sales and acquire scarce resources.
• To diversify sources of sales and supply.
• Growth opportunities in other countries.
• Potentially untapped markets.
FACTORS ENCOURAGING • Limited domestic Market.
INTERNATIONAL BUSINESS
• To increase market size.
• To increase profit.
• To reduce cost of transportation.
• Encourage cultural transformation.
Introduction 5

MODES OF INTERNATIONAL BUSINESS

1. Import and Export of goods and services.
2. Investment in foreign countries.
Difference between Domestic and International Business

Basis Domestic International Business

Meaning Domestic company formulates
strategy, product design etc.
towards the national markets,
customers and competitors.
Environment Domestic Environmental Scanning
i.e. detailed analysis of domestic
business environment and its factors. and its factors.
Tariffs The tariff rates of various countries
do not directly and significantly
influence the domestic business.
Foreign FER and their fluctuation do not
Exchange directly affect the domestic business
Rates
Culture Mostly domestic culture of the
country affects the business
operations including product design.
Scope It involves inter – firm transaction
i.e. within a firm and firms of
same industry of a country.
IB enters foreign market by
establishing foreign subsidiary. They
treat the entire world as a single
market for production, marketing,
investment and drawing various
inputs.
Analysis and scanning of
International Business environment
The tariff rates of various countries
has direct impact on international
trade.
It directly affects the business as
the conversion rates are affected
Mostly culture of various countries
affects the business operations
including products design of
International Business.
It involves intra firm transaction
between parent and subsidiaries in
different countries.

Advantages of Domestic Trade

1. Strong Customer Base: As firms in the domestic market are well aware about the likings
and disliking of the citizens of the nation, it helps them to cater to the exact needs and
requirement of the market. The makes the market to be loyal to the domestic firms as
they have been fulfilling these needs since long and hence, they develop a strong customer
base.
2. Easy Market Analysis: The international firms may be spending huge amount of money
various techniques to forecast demand of the market, but this expenditure need not be incured
by domestic firms as they are well aware about the culture and taste of their market.
3. Better Customer Service: The most important requirement for the company to survive
and stay in the competition is the efficiency with which the after sales service are provided.
 6 Introduction to International Business

Domestic firms, due to better knowledge and understanding of their customer base, are
able to provide better customer service.
4. Easy Prediction of Cyclical Changes: Economic upturns and downturns are common in
nature. Domestic organizations are always in a better position to understand such cyclical
changes in their domestic boundaries. These firms are in better situation to cope up with
such economic cycles and can develop strategies to overcome any negative circumstance
in the future.
5. Easy to Communicate: Interacting and communicating with the people within the domestic
boundaries becomes eases for indigenous firms. This is possible because the domestic firms
are aware about the language, type of media, presentation, choice of words, etc., about
the customers. They can better place and position their products than international firms.
6. Enhances Standard of Living: By catering to the needs of people of the country, by knowing
their taste, preferences, spending ability, buying behaviour etc., the domestic businesses
produces and offers such variety of goods and services, which betters the quality of life
of the people and raises their living standards.
7. Generates Employment: The most pertinent role played by the domestic firms are that
they are the ones responsible for generating a huge number of employment opportunities.
By opening up new businesses and expansion of businesses, the people of the nation get
a lot of jobs as per their capabilities and skills. This also motivates people to be educated
and skilled to avail these jobs.
8. Growth of Industries within Nation: The firms which work within the domestic, legal
and regulatory environment. Generally, the government in power provides various incentives,
reliefs, facilities like tax holidays, subsidies etc., to promote the sitting up of industries in
the rural and backward areas in order to have a balanced regional development.

9. Money remains within domestic boundaries: The best part of domestic organisations are
that whatever profits they earn, they remain within the domestic boundaries. The overall
profitability of the industry increases and these earned profits can be reinvested by the firms
to expand their production capacities, thereby leading to earning of more profits.
10. Development of Infrastructure: When more and more organisations are set up within the
national boundaries, then some degree of competition exits. In order to support such mild
degree of competition, it necessitates the government to provide better infrastructural facilities
like roads, transportation, financial institutions, electricity etc.
11. Tax Benefits: Every nation wants to build a strong industrial base, if it wishes to grow
in future. For this purpose, the government of the nation thrives to promoted development
and setting up of more and more industries by providing various types of rebates, tax-
holiday, subsidies etc. New businesses get a lot of tax-benefits and can enjoy the benefits
attached with the tax system of the nation.
12. Lesser Financial Requirements: Setting up of businesses abroad requires a lot of formalities
to be done on part of the businessman and thereby, a lot of expenditure as well. But, this
is not so in case of domestic businesses. Such businesses can be started with lesser financial
Introduction 7

and other resources requirement as the formalities to be done are quite less. Thus, loans
are easily available if the business plan is promising enough.

Disadvantages of Domestic Trade

1. Limited Market Size: The domestic trade has the biggest disadvantage of limited expansion
of its customer base. Even if a firm wishes to expand, branching out can be done to a
limited extent. This restricts the profitability of the firms and sooner or later, they become
incompetent and their survival it difficult.
2. Limited access to Raw materials: Another major short coming of domestic trade is that
it has limited access to the raw materials. It can be dependent either on domestic availability
or have to pay higher prices for acquiring such raw materials. This problem is overcome
in case of international trade.
3. Huge Financial Requirements: Lack of financial resources is another setback for the
domestic firms. These firms have limited access to finance because of which they have
of face a lot of hardships, due to this, they are unable to invest in R&D, product development,
advertising, PR etc. Similarly, newer technologies cannot be used for betterment of production.
4. Restricted Growth: The international firms may after exploring the domestic market, move
to international markets. But this is not possible for domestic firms. They have the ability
of exploring only the markets within their national boundaries. Once that market reaches
saturation, these firms have no choice but to clip their wings, In other words, they cannot
expand their production and sales beyond a specific limit. Thus, their growth becomes
restricted.
5. Poor Infrastructural Base: As the domestic economy may not have proper basic key
industries and other infrastructural facilities like telecommunication, power, banking,
transportation etc., development of domestic businesses becomes quite restricted. Due to
this, the firms cannot open their new units at all the places, where the basic infrastructure
is lacking.
6. Limited Technological Upgradation: Shortage of funds and limited access to outside
technologies, the domestic firms have to be highly dependent on the traditional and indigenous
technologies. They are unable to spend on the research and development activities because
of which they stay behind their international competitors and cannot enjoy economies of
scale.
7. Impact of Unstable Political and Legal Environment: The domestic firms have been well
aware about the legal environment in which they operate. If the legal rules and regulation
are too stringent for opening up new units, expanding production capacity, ceilings on profits
etc. the domestic firms may not be able to survive in long-run. Similarly, if the political
environment is unstable. Then also a lot of changes have to be done by the firms to meet
the requirements of the party in power.
8. Lesser Choice or Offerings: Due to limited funds and restricted access to better and new
technology, the domestic firms may not be able to offer a wide range of goods and services
to meet the customer requirements. They may not enjoy the benefits related to bulk production
and marketing also.
 8 Introduction to International Business

9. Professional Management: Professional management of business may not be enjoyed due

to lack of funds. Professional trainers do not provide their services free of cost. Similarly,
professional managers will also contribute only when their skills and knowledge can be
acquired at a certain price.
10. Poor access to cheap labour: An international firm may easily procure cheap labour and
use them for producing cost effective products. The wages provided by such firms are
quite good as compared to domestic firms, which makes easy and cheap availability of
labour resources for such organisations. On the other hand, the human resources available
within the domestic boundaries have to adhere to stricter regulations regarding wage payments.
This limits their access to good quality labour.
11. More Exposure to Risks: The domestic firms are more prone to risks than international
firms. This is so because the operations of foreign firms are spread all over the world
and they are not dependent on a single nation for their survival. They have the advantage
of spreading business risk and thereby offsetting the losses from one area with the profits
from another area. But the domestic firms have no option to spread the risk than to absorb
it all by itself only.

SCOPE OF INTERNATIONAL BUSINESS IN INDIA

• The scope of International Business in India is more than 7% annually.
• As India is a developing country and it is developing at a great pace there is a huge scope
of International Business in India
• Due to diverse cultural differences in different regions of the country, a company cannot
formulate a single strategy for India.
• Different parts of the country are well known for its different traits. The Eastern part of
India is known as “hand of intellectuals”, whereas Southern part is known for its “technology
acumen”. The Western part is known as “commercial capital of the country” whereas
Northern part is “hub of political power”.

Sectors having potential for International Business in India

‰ Information Technology and Electronic hardware.
‰ Telecommunication.
‰ Pharmaceuticals and Biotechnology.
‰ Research and Development (R&D).
‰ Banking Financial institutions.
‰ Capital market.
‰ Chemical and Hydrocarbons.
‰ Infrastructure.
‰ Agriculture and food processing.
‰ Retailing.
‰ Manufacturing.
‰ Power and Non-Conventional energy.
Introduction 9

From Organisation View From Government View

• Geographic Expansion. • Interdependency of
R
• Technological Advantage.  nation
E • Forex earnings
• Labour Advantage.
enhanced
• New Business Opportunities. S
• Diplomatic relation
• Multiple Incentives U
 • Better trade terms
• Develop corporate image L
REASONS FOR • Increased growth rate
ENTERING INTO • Economies of Scale T
INTERNATIONAL • Innovative Learning S
BUSINESS
• Competitive Advantage
• Long-term Security
• Increased Turnover and Sales
• Management of PLC
• Job creation
• Saturation of Domestic Market

• Geographic Expansion: Companies after exploring their domestic market may think of
expanding their business beyond the domestic boundaries as well. If the company’s products
or services are able to fulfil the requirements of foreign customers, then the domestic firms
may move beyond their home for the purpose of growth. For example, Arvind Mills expanded
their business by opening up new units or setting up warehouses abroad. In the same way
Ranbaxy, Cipla, Dr. Reddy’s growth are mainly attributed to geographical expansion.
• Technological Advantages: Some countries enjoy technological advantage over other nations
which make them to explore and fulfil the needs of new market and thus, it becomes important
for such companies to find new countries where their technological advantage can be
encashed. For example, companies like Biocon, Infosys are known for their core competencies
in biotechnology and IT respectively. Similarly, Honda, Hyundai, Volvo etc. have marched
ahead in different nations due to their technological advantage only.
• Labour Advantage: Many companies have highly competitive and productive labour force.
Their unique skills are nurtured by the organisations as they may not be available all over
the world. Companies are attracted towards such nations having rich source of skilled and
specialized labour and thus move beyond their domestic boundaries. For example, in India
skilled artisans work in diamond industry, handicrafts, wood work, carpet weaving industries
and other nations are attracted towards India to utilize such skills.
• Declining Trade Barriers: Government imposes trade barriers on international trade in order
to protect domestic businesses from excessive competition. Reduction in trade barriers is
another significant driver of globalisation. After Uruguay round of GATT, all its member
 10 Introduction to International Business

countries had to reduce trade barrier to promote free flow of goods and services across
the countries.
• Declining Investment Barriers: Now a days, governments of various countries are
promoting foreign direct investment which will help to increase the level of production in
the country and also to raise the level of employment in the host country. It will help
in improving the living standards of the people of the country.
• Regional Integration: The regional integration of the countries increases the size of the
market, quality of production, aggregate demand for foreign production and services,
employment. So, ultimately it increases the economic activity of the region. The significant
regional integration includes European Union, NAFTA, SAARC, ASEAN, APEC etc.
• Generation of Increased Profits: The basic objective of any business is to earn or maximize
profits. Similarly, when domestic markets are unable to promise higher rates of profits due
to weak economic position of the country or less purchasing power of the people, the
business houses are not able to meet their expected demand and profits. Therefore, the
business firm searches for a foreign market where it can earn higher rate of profits and
hence international business becomes significant in such a situation.
• Utilization of Production Capabilities: Generally, the engineering set up has high production
capacity but if the demand in the country is less than the produced capacity then the business
houses will not be able to reach their break-even point. Thus they have to cross national
boundaries for utilizing their produced goods. International business is significant as it expands
the production capacities of the domestic companies beyond the demand for the products
in the domestic market. The production capacities of the countries are moulded to cater
to the needs of its international consumers, like electrical goods of Japan and China are
having wider market in foreign countries.
• Utilization of Technologies and Managerial Capabilities: International business is needed
to use the best and the latest technology across nations. International business firm has
an option to maximize its returns using the appropriate technology and managerial competence
of other countries. Availability of advanced technology and managerial competence insome
countries act as pulling or attracting factors for business firms from home country.
Example: Many countries like USA, India etc. depends on Japan for advanced technological
and managerial expertise.
• To Avoid Tariffs and Import Duties: Protective policies of the government also hinder
in international trade. Before globalisation, the government used to levy tariffs or import
duties on the goods to protect the domestic companies from exploitation. But with the advent
of globalisation and International Business, the business firms try to avoid tariff’s and import
duties and prefer direct investment to go global.
Example: Companies like Honda, Toyota, Sony, and Coca-Cola have gone for direct
investment in various countries by opening their branches or entering into joint ventures.
By doing so, these firms go global and also avoid the tariff and import duties.
• Availability and Nearness to Raw Materials: If the basic raw material is not available
in the local market then automatically it will make the goods costly in the hands of consumers.
Thus, nearness to raw material is another factor which gives birth to the need of International
Introduction 11

Business. The source of highly qualitative raw material and bulk raw material serves as
a major factor for attracting companies from various foreign countries.
• New Business Opportunities: The international market offers every size and nature of
organization to explore the untapped market. There still exist many countries having a good
number of customers who have the capacity and ability to pay but there is no supply or
limited supply of some goods. Therefore, these markets always welcome companies to set-
up their units in their countries so as to serve the markets and fulfil their needs. For example,
Latin America, Sub Saharan, Africa etc.
• Multiple Incentives: When the companies are involved in international business, they enjoy
a wide variety of incentives fiscal, physical, or infrastructural. The host country will provide
every possible kind of facilities and amenities so that new units open up and serve their
markets. Incentives provided may be like competitive pricing, access to import materials,
tax benefits on earnings, economies of scale etc. For example, Aditya Birla Group enjoyed
such benefits in Thailand and Indonesia.
• Develop Corporate Image: Building good corporate image is of prime importance for the
companies nowadays if they wish to enter new markets and are new in the industry. Once
they are accepted in the new markets, profits flow smoothly and the image built makes
them easy to enter into other countries as well. For example, companies like Xiaomi, Samsung,
LG built their image in India first and then penetrated to different nations as well.
• Economies of Scale: When the companies seek to exploit a unique differentiating advantage
like brand patented product etc., they find it easier to expand beyond the local markets,
with minimal adjustments. This makes the businesses to offer the products which are most
widely acceptable around the world and by increasing the production and sales, these
companies enjoy economies of large-scale production.
• Competitive Advantage: Market entry at international level may be a competitive move
as well. Many organisations enter the foreign market as a strategy to overcome the
competitor’s move and explore the advantages of another market. This may also take a
form of following the competitors move wherein one company follows the others in another
market so as to not let the other gain any significant advantage alone, thereby intensifying
the competition and making resource allocation much more effective and efficient.
• Long term Security: Businesses would be less vulnerable to cyclical fluctuations in business.
If one market is unable to give the desired return due to poor demand, the other market
may offset such loss, with a heavier demand. Thus moving towards International Business
helps in diversifying the risk of loss. The markets which are more prone to fluctuations
and intense competition may not pose a great threat for the companies which have expanded
their business to other nations – it provides security from losses.
• Innovative Learning: The companies going global try to understand the creative and
innovative practices of the other countries also. With this new and innovative thinking they
may develop better strategies for new product development, new ways of working, branding,
marketing, product designing, financial structuring etc. Thus, the company develops as a
global player.
 12 Introduction to International Business

• Increased Turnover and Sales: After satisfying the needs of the domestics markets,
companies try to become international by understanding the culture and needs of foreign
markets and thereby, bringing the modifications in their basic product to suit the requirements
of the other nations. This increases the acceptability of the company’s product in foreign
market, thereby increasing the sales and consequently the profits.
• Management of PLC: Every product of the company passes through different stages of
their lifecycle starting from introduction to decline. At the decline stage, it becomes important
on the part of the company to analyse how to encash on the product at declining stage.
Here the companies may think of entering into another market for which the product is
new. For e.g. Enfield India reached declining stage in India for 350cc motorcycle, but entered
in Kenya, West Indies, Mauritius etc. where same bikes became popular.
• Job Creation: The most important reason for internationalisation of the firms is the idea
of employment generation. With the setting up or opening up of new units or businesses
in other nations, a lot of employment opportunity is generated for the host country. New
factories and offices require human resources with required skills and knowledge to perform
various tasks and activities.
• Saturation of Domestic Market: Survival of any firm depends upon the demand for its
products and satisfaction of its customers. There may be a time when the market reaches
the saturation level wherein the company finds it difficult to increase or push the sales
in the same market. So, moving out of the domestic boundaries seems as a feasible solution
for the survival of the firm. Thus many firms adopt this as a strategy to remain in the
competition and ultimately, keep going.
• Interdependence of Nations: Nations have been dependent on each other since time
immemorial. No country is self-sufficient and is not endowed with all the resources to survive.
Therefore, the countries are dependent on each other. This interdependency takes the form
of internationalisation of firms. For e.g. India depends on Gulf countries for crude oil and
Gulf nations depend on India for tea, rice, etc. Thus, nations depend on each other for
primary or value added finished products.
• Enhanced Forex Exchange: Foreign exchange is a necessary requirement for maintenance
of BOP equilibrium. When companies open up branches or units in other nation, the profit
or the revenue earned is in the currency of that nation. The firms transfer their earnings
from host country to home country thereby transferring foreign exchange and increasing
the reserves of the home country.
• Better Trade Terms: As the countries are inter-dependent on each other for some resource
or the other, this necessitates on the part of the nations to have better and fair trade terms
with each other. Unnecessary entry and exit barriers, restrictions on transfers, immobility
of capital and human resources, unfair trade practices are not followed. This makes the
firm to expand their operations internationally.
• Increased Growth Rate: When the companies become international, there is an increase
in profits, better sales, more employment, better wages, increased production, effective
utilisation of resources, increased forex reserve, increased living standard, wide choice of
goods etc. All these lead to better economic growth.
Introduction 13

Advantages of International Business

“Nations trade with each other because they benefit from it. Other motives may be
involved, of course, but the basic motivation for international trade is that of gain. The
gain from international trade, like the gain from all trades, exists because specialization
increases productivity”.
– James C. Ingram

The Competitive Advantages of International Business

• Higher standard of living: Based on the comparative cost theory, International Business
possesses the advantage of increasing the standard of living of the people. The comparative
cost theory indicates that the countries which have advantage over the availability of various
resources are able to produce the products at low cost and of high quality. With this advantage
of comparative cost people from various countries can purchase more products with same
amount of money. This enhances their purchasing power and in turn helps in increasing
their standard of living.
• Free Flow of Capital: International business leads to free flow of capital from one country
to another. This helps the investors to get a fair interest rate or dividend and also helps
the global companies to acquire finance at lower cost of capital. Further, IB enables the
flow of capital to needy countries from surplus countries, which in turn increases global
investment.
• Increased Consumer Income: Multinational companies pay higher wages or they have
increased the average wage level of employees. Employment opportunities are created in
the international market due to MNC’s which increases the purchasing power of consumer
because of increase in their income and it ultimately increases the national income of the
country and boosts its economy.
Countries with open economy grow at faster rate than closeeconomy.
Example: Communist Russia.
• Advantages Due to Product Life-Cycle: It might be possible that a product which is
in matured phase or declining in one country might be at introductory phase in another
country. So, in that case manufacturer of that product might take advantage of product
life cycle in another country.
Example: Most of the technological products which are launched in India had passed through
matured/declining phase in USA.
• Advantage Due to Economies of Scale or Comparative Advantage: As per the comparative
cost advantage theory of trade, a country will produce that product in which it has
comparative advantage due to skilled labour, cheap raw material, latest technology etc.It
will help in gaining advantage due to economies of scale when it produces products at
large scale. It also creates division of labour and specialisation.
Example: Brazil produces coffee, Kenya produces tea, Japan is specialized in automobile
and electronics.
 14 Introduction to International Business

• Optimum and Proper Utilization of World Resources: International trade helps in free
movement of factors of production. When countries produce products through comparative
advantage, wasteful duplication of resources is prevented. Resources will move from the
countries where they are in excess to those where they are in short supply.
• Deficiency in Production to Remain Competitive: Companies when works at international
level try to produce products of high quality at cheaper price. To fight with this competition,
domestic company will also produce good quality product to gain a larger share in the
market. Hence, consumer will have good quality product to consume.
• Free Flow of Technology: International business provides a pool of innovations and
opportunities to the developing countries to use the new and latest technology and be with
the advancement of technology.
Example: India uses various imported defence machinery; aircrafts and other imported
technology.
• Reduction in Effects of Business Cycles: International business helps in reducing the effects
of business cycle. Different countries have variation in business atmosphere. Thus, international
companies shift their business from the country experiencing recession to the country having
boom and hence, IB firms reduces the impact of recessionary conditions.
• Spread of Production Facilities throughout the Globe: To avail the locational benefits,
the international companies establish their manufacturing units throughout the globe.
• Reduced Risk: When a company is operating in more than one country, both commercial
and political risks are reduced to a certain extent and this is due to the diversification of
business in different countries. It is just the method of not keeping all your eggs in one
basket.
• Identifying Potential Untapped Market: There are various markets which are unexplored
which means demand exist but no firm is able to satisfy the needs and requirement of
that market. IB provides the opportunity for identifying such markets. Such incipient markets
provide opportunities to sell the products at higher price as compared to domestic market.
• Division of Labour and Specialization: International business results in division of labour
and specialization, efficient use of resources, maximization of output and lead to innovation.
Each region will produce those goods for which its factor endowment are richly available;
and exchange them for goods from those regions which could produce them cheaper, like
for example India is known for IT and engineering goods, Brazil for coffee, Japan and
China for electrical goods.
• Challenge to the Domestic Business: International business provides opportunities, challenges
and acts as motivational factor to the domestic business. The opportunities include technology,
management expertise, skilled human resource, etc. and the challenges include increased
competition, low cost and quality products etc. But these opportunities and challenges help
the domestic firms to develop.
• Cultural Exchange and Demand for Variety of Products: International Business reduces
the physical distance among nations and enables people from different countries to acquire
culture of other countries. It can be called as cultural transformation where exchange and
Introduction 15

adaption of culture will take place. It changes living style and consumption habits. Due
to the cultural exchange the demand for variety of products is generated.
Example: Noodles, pizzas and various other food items like KFC and the fast food chain
of McDonald etc.
• Social Development: International Business enhances the consumption level and economic
welfare of the people of the trading country. International Business will make the availability
of all goods and services at all places of the world which automatically enhance and change
the society conceptualisation. As stated earlier, IB helps in increasing the standard of living
of people and creates social development.
• Employment Generation: With the coming of business, employment is also generated. As
IB increases the market area, therefore, employment is generated which helps in satisfying
the demands of the market. International Business results in shift of manufacturing facilities
in low-wage developing countries. It creates job opportunities for the developing countries.
However, the developed countries can enhance employment generation by specializing in high
technology products.
• Balanced Development of World Economy: With the free flow of capital, technology, human
resources and locating manufacturing facilities in developing countries, the whole world is
getting developed. Developing countries are getting access to new technology which is
changing the social atmosphere whereas developed countries are getting cheap labour for
fulfilling their requirements of sophisticated goods, all this helps in balanced development
of the world economy.

Disadvantages of International Business

Along with various advantages, international business is also bringing some disadvantages. Few
have been discussed below:
• International Business Kills Domestic Business: If a company is trying to enter into
international market then it certainly means that its cost of entering is less than cost of
same goods produced in the target country. The international companies from the developed
countries utilize the emerging opportunities of the developing countries, use the advantages
of technology and skilled human resource and leave behind the domestic companies or
businesses at their mercy. The domestic business houses of the developing countries fail
to compete with the advanced technologies of multinational companies of the developed
countries and ultimately face losses.
Example: Dumping of goods from China, South Korea, and USA has lead to closing down
of many small industries in India.
• High cost: A firm when it wants to enter into foreign market has to curtail certain increased
costs like establishment of facilities abroad, hiring of additional staff, maintaining quality
of the product as per that country’s quality norms, transportation cost etc.
• Foreign Regulation and Standards: A firm has to work according to the regulation and
standards of that country.
Example: Quality standard of product, packaging and labelling norms, etc.
 16 Introduction to International Business

• Delays in payment: International trade may cause delays in payment, which adversely affects
the firm’s cash flow.
• Complex Organizational Structure: International business usually requires changes to the
firm’s operating structure. Training/retraining of management may be needed to facilitate
restructuring.
• Unemployment and Underemployment: Certain times, the MNCs produce the goods in
their home countries or in those countries where production is economical and target
the products in the developing countries. This leads to reduction of manufacturing
operations in domestic industries thereby reducing employment opportunities in the domestic
market.
• Huge Foreign Indebtness: The developing economies are trapped into the circle of huge
foreign indebtness by the multinationals. The developing economics with less purchasing
power have to establish infrastructural facilities for multinationals to operate which increase
their indebtness for host countries.
• Political Instability: International Business contributes in the development of national
economies. Condition of political unrest or instability has negative impact on International
Trade. Example: Civil wars in Fiji, Malaysia and Sri Lanka, Iran, Iraq war etc. has lead
to tremendous changes in government policies which also affect international trade. Facilitating
these companies is solely in the hand of ruling government. Therefore, their entry and
exist not only affect the national economy but also adversely affect the stability of the
government.
• Exchange Instability: Due to different status of balance of payment of different countries
at different time periods, its currency might be unstable in the market.It may lead to instability
in terms of foreign currencies.
Example: Zambia, India and Pakistan had depreciated their currency several times. It
discourages International trade.
• Tariffs, Quotas and Trade Barriers: A country can restrict international trade through import
tariffs, quotas, embargoes and exchange control.
Example: Before 1998, China, Pakistan and USA imposed tariff, Quotas and barriers on
imports from India.
• Drain of Natural Resources: The multinational firms and businesses exploit the natural
resources of the host company to facilitate manufacturing facilities and sell the final products
to other countries. This leads to a drain of natural resources of the host country.
• Technological Pirating: Imitation of the product and its technology is a great threat to
international trade.
Example: Business of pirated CDs is at boom in India which is discouraging the business
of CDs.
• Cultural and social Barriers: Culture of a country is a general concept of values. Selling
of product becomes different when culture of one country differs significantly from another
country.
Introduction 17

Example: McDonald has met with protest in Rome due to objection of people to the smell
of hamburger’s frying and hence they changed the exhaust system of the restaurant. Social
factors include family, education, religion and customs.
Example: Change in the appearance of Barbie to launch it in India so that Indian children
could connect to it.

International Business Approaches

Douglas Wind and Pelmutter advocated four approaches of International Business:
• Ethnocentric Approaches: Under this approach, the domestic company does not formulate
any different marketing strategy for the foreign market. It views foreign markets as an
extension to its domestic market just like a new region.
This approach can be used by a small company or a company which is new in the field
of international business but it may be harmful in a long run because here the same product
is marketed to foreign country without any modification.
• Polycentric Approach: In this, the company adapts an altogether different approach for
foreign markets. They formulate strategies according to the environment of foreign country/
host country. Companies establish foreign subsidiaries and empower its executives there which
formulate marketing strategies.
• Regiocentric Approach: After working successfully in a foreign country, the firm now wants
to enter into neighboring countries in that region. In a company with a regiocentric orientation,
management views regions as unique and seek to develop an integrated regional strategy.
It markets more or less the same product to different countries but adapts different marketing
strategies too.
• Geocentric Approaches: A company with geocentric approach views the entire world as
a potential market and tries to develop integrated world market strategies. The company
opens different subsidiaries in different countries and each subsidiary works as an independent
company. It formulates strategies, policies and designs the product as per the environment
of that country.

Operations and Influences of International Business

Borderless global economy enlarges international business: The period of globalization,
liberalization and privatization has brought several developments in the world trade through
International Business. The knitting of world into a small village has removed national boundaries
and reduced the restrictions for movement of goods and services across the boundaries. This
has improved the efficiency of resources to become more effective and efficient.
A firm having objective such as expansion, diversification, high profit, resource mobilisation
etc., has to establish itself in the international market through international operations that may
be different from those used domestically. While approaching toward international business, the
firm has to be very much acquainted with international environmental factors because if they
are not taken due care of then effort will not be beneficial. As the taste of water changes from
mile to mile, in the same way the environmental factors are also very dynamic, which changes
 18 Introduction to International Business

as the trade moves from country to country. The change factors will have direct impact on
all functional areas of the business.
Therefore, there is direct relationship between environmental factors and the various functional
areas of a business firm. A figure below shows the interrelationship among the operations and
influences of International Business.

Objective External Environment

• Sales Expansion  • Geographic
• Resource Acquisition • Historical
• High Profit • Political
• Diversification • Legal and Judicial
• Utilise inherent Capacities • Economic
 • Cultural
OPERATIONS AND • Demographic
INFLUENCING
FACTORS OF
INTERNATIONAL Operational Means Competitive Environment
BUSINESS • Import • Speed of product changes
• Export • Optimum product size
• Transport  • Number of customers
• Licensing • Amount bought by
• Franchising each customer
• Turnkey • Homogeneity of customers
• Management Contract • Local vs. International
 Competitors
• Direct Investment
• Cost of Moving Products
• Portfolio Investment
• Unique capabilities of
Competitors
Source: International Business Environment and Operations by John D Daniels and
Lee H Radebaugh.

Conclusion
Like every other thing, international business has also its pros. and cons. But advantages
of International business outweigh its limitations. A country cannot survive alone because of
lack of resources. It has to do trade with other countries because without international trade,
economy of a country cannot grow at a faster pace. It depends on the stage of development
of the country that when it attains amount of development, its domestic manufacturers to have
established themselves than it can allow foreign competitors to enter into their market.
The comparison between domestic and international business helps us to understand why
firms expand internationally. However, the analysis may prove wrong in case where no feasible
Introduction 19

foreign opportunities for firms are available or when foreign projects are riskier than domestic
firms resulting in higher cost of capital.

References
1. International Business – S. Shajahan First edition.
2. International Economics–H.L Bhatia - first edition 200.
. International Business – P SubhaRao , First edition.
4. The International Economy – Ellsworth, Fourth edition.
5. International Business Management – N. Venkateshwar first edition 2009.
. Global Business Management – ManabAdikary.
7. International Business – Ebrahim Bahman.

Short Answers
1. Name the modes of international business.
2. List the factors encouraging international business.
3. Differentiate between domestic and international business.
4. List the reasons for entering into international business.

Long Answers
1. What do you understand by concept and features of international business?
2. Discuss the evolution/Historical viewpoint of international business.
3. Analyze the advantages and disadvantages of the domestic markets.
4. Elucidate the scope of international business in India.
5. Elaborate on the advantages and disadvantages of international business.
6. Discuss the various approaches to international business.
7. Write down the influencing factors of international business.