What is International Business?

International business consists of trades and transactions at a global level. These include the
trade of goods, services, technology, capital and/or knowledge.
It involves cross-border transactions of goods and services between two or more countries.
Transactions of economic resources include capital, skills, and people for the purpose of the
international production of physical goods and services such as finance, banking, insurance, and
construction

International business encompasses all commercial activities that take place to promote the
transfer of goods, services, resources, people, ideas, and technologies across national boundaries.
International business occurs in many different formats:

 The movement of goods from country to another (exporting, importing, trade)

 Contractual agreements that allow foreign firms to use products, services, and processes
from other nations (licensing, franchising)
 The formation and operations of sales, manufacturing, research and development, and
distribution facilities in foreign markets

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The study of international business involves understanding the effects that the above activities
have on domestic and foreign markets, countries, governments, companies, and individuals.
Successful international businesses recognize the diversity of the world marketplace and are able
to cope with the uncertainties and risks of doing business in a continually changing global
market.
An international businesses strategy, organization, and/or functional decisions categorize it as:

 A multi-domestic company with independent subsidiaries that act as domestic firms; OR

 Global operations with integrated subsidiaries; OR
 A combination of the two

The challenging aspect of international business, however, is that many firms combine aspects of
both multi-domestic and global operations:
Multi-domestic – A strategic business model that involves promoting products and services in
various markets around the world and adapting the product/service to the cultural norms, taste
preferences and religious customs of the various markets.
Multinational – A business strategy that involves selling products and services in different
foreign markets without changing the characteristics of the product/service to accommodate the
cultural norms or customs of the various markets.

Scope of International Business

1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange

OR

Scope of International Business

International business is much broader than international trade. It includes not only international trade
(i.e., export and import of goods and services), but also a wide variety of other ways in which the firms
operate internationally. International Management professionals are familiar with the language, culture,
economic and political environment, and business practices of countries in which multinational firms
actively trade and invest.

Major forms of business operations that constitute international business are as follows.

(i) Merchandise exports and imports: Merchandise means goods that are tangible, i.e., those that can
be seen and touched. When viewed from this perceptive, it is clear that while merchandise exports means
sending tangible goods abroad, merchandise imports means bringing tangible goods from a foreign
country to one’s own country.

(ii) Service exports and imports: Service exports and imports involve trade in intangibles. It is because
of the intangible aspect of services that trade in services is also known as invisible trade.

(iii) Licensing and franchising: Permitting another party in a foreign country to produce and sell goods
under your trademarks, patents or copy rights in lieu of some fee is another way of entering into
international business. It is under the licensing system that Pepsi and CocaCola are produced and sold all
over the world by local bottlers in foreign countries.

(iv) Foreign investments: Foreign investment is another important form of international business.
Foreign investment involves investments of funds abroad in exchange for financial return. Foreign
investment can be of two types: direct and portfolio investments.

The Importance Of International Business

We might wonder why do plenty of foreign brand and international companies are
widely spread all over the country. This is because international business is in great
demand worldwide.

Different countries and companies are given the chance to expand and to share
their products and services to others beyond their own territory.

In fact, there is an actual give and take scenario between two or more nations that
sign a mutual agreement of trading. Below are the lists on what make international
business important.

It acquires more sales:

Businessmen will have the chance to expand their companies and to be known to
other countries. Undoubtedly, this will increase their profits rather than restricting
their business within their own borders.

Our local country will also benefit from this since new products, technologies, and
services are being offered for us to use.

And, because we allow them to export their goods and services to us, we are also
given the chance to export our own products to them. In this way, both our local
businessmen and government will also earn.

It opens new opportunities:

If there are increasing numbers of foreign companies in our country, they will need
more manpower to help them in running the business. We will be given the chance
to use and to share our skills and knowledge, once we are hired.

In return, we will gain income to provide the needs of our family. The agreement
also implies that we can go to their country to work, to study, or to live.

It gives new technologies:

Other countries have invented different technologies which can help us in our daily
living like modern appliances and computers.

For those countries that lack the means to create new high quality technologies can
also have an access to enjoy the benefits once these technologies are exported to
them.

Another example is the invention of rear projection screens. These will help us in
disseminating and advertising in our country.

It utilizes the resources:

Countries that are rich in fuel, minerals, and many more can utilize their resources
by sharing these to others. Instead of keeping these resources, they can share these
to other countries so that others will also have the benefits. In return of their
resources, they can have more income for their government.

It provides quality products:

Different countries have their own unique and useful products and services that
they can offer to us. In this way, we can choose the best ones that are helpful to us.
There are wide varieties of choices when it comes to brands, prices, designs, and
features.

It helps in earning foreign exchange:

Investors are welcomed to invest from both local and international. More investors
mean that the economic status of our country will become stable. This helps a lot,
especially those fellow citizens that need assistance from the local government.
It acquires investment in infrastructure:
Countries that deal with international business need to invest in infrastructure. This
will help them in transporting and communicating with other business partners and
customers. This will also help the people since these infrastructural developments
are open to be used by the public.

Reason for expansion

These motivations include market motive, economic motives and strategic motives.

Market motives

It includes the motive of business firms to expand its market internationally throughout the year. The

business firms need to internationalize their highly specialized product and hence they expand their

business in an international arena. Especially those products which are specialized or unique and

which have a competitive advantage in the international market are internationalized. Without

internationalization, the expected profit could not be achieved and the big business firms seek to sell

their products in international markets.

Similarly, the expansion of international business helps the business firms to make accessible the

unique products to the entire customer no matter where they are. This will also be helpful to sell

products all season long because the market of seasonal products varies as the season varies and

internationalization makes possible to sell all season long as it varies country wise.

Economic motives

It is applicable when the business firms go internationally to increase their output by increasing

revenue at a lower cost. Some business firms try to expand their business in international because

to gain high profit through the concept of economies of scale. By economies of scale we mean, the

higher output or production leads to lower manufacturing cost and higher profit.

Similarly, some organizations need a large number of diverse resources to meet their organizational

goals. In such situation, they need to import the variety of resources from other countries which
increases the cost of production. International trade and investments are the vehicle of international

business which enables the firms to take profit from the inter-country difference in price of the cost of

production. Internationalizing the business can lead to lower cost of production in such instance.

Additionally, the business firm requires a large number of resources for inventing new products and

globalization helps them in obtaining the resources at most optimum cost. In this way, the firms can

lower their cost in research and development activities.

Strategic motives

Some organizations are looking to grow their business area through market development which is

the process of expanding new market in the new place. The strategic motive leads the business

firms to capitalize the products of home country in international markets. By selling the products in

international market the organizations may increase their cash inflows.

The firms also may go in international market as first moves before any other major competitor

enters the market and increase their profit by gaining strategic benefits such as technological

leadership, customer loyalty, brand image or competitive position. For example, Volkswagen, a

leading auto business, was the second automaker to enter the china and the first to locate in all-

important market of Shanghai gaining monopoly for years.

Content: Domestic Business Vs International Business

Definition of Terms
Domestic business is the kind of trade that is limited geographically within a country.
A domestic business involves commercial exchanges that are only done within that country.
A domestic business which can also be referred to as an internal business involves a
producer and a client, who live within the same nation. This means that the laws, business
practices and customs used in a business transaction shall be of the designated country.

International business on the other hand is a business whose production and

consumer base is drawn from more than one country. An international business does not
fall so much to the dispensation of local law, but within international agreements for
business practice. International business involves transactions between two or more than
two countries.

Comparison Chart

BASIS FOR INTERNATIONAL

DOMESTIC BUSINESS
COMPARISON BUSINESS

Meaning A business is said to be International business is one

domestic, when its which is engaged in economic
economic transactions are transaction with several
conducted within the countries in the world.
geographical boundaries of
the country.

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 Homogeneous Heterogeneous

customers

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

research.

Mobility of factors Free Restricted

of production
What Is International Trade?
International trade is the exchange of goods and services between countries. This type of trade
gives rise to a world economy, in which prices, or supply and demand, affect and are affected by
global events. Political change in Asia, for example, could result in an increase in the cost of
labor, thereby increasing the manufacturing costs for an American sneaker company based in
Malaysia, which would then result in an increase in the price that you have to pay to buy the
tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in
you having to pay less for your new shoes.

Trading globally gives consumers and countries the opportunity to be exposed to goods and
services not available in their own countries. Almost every kind of product can be found on the
international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water.
Services are also traded: tourism, banking, consulting and transportation. A product that is sold
to the global market is an export, and a product that is bought from the global market is
an import. Imports and exports are accounted for in a country's current account in the balance of
payments.

International Trade Theories

7 – Types of International Trade Theories

1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher-Ohlin Theory
5. Product Life Cycle Theory
6. Global Strategic Rivalry Theory
7. National Competitive Advantage Theory

Above are the 7 different types of international trade theories, which are presented
by the various authors in between 1630 and 1990.

1. Mercantilism

The oldest of all international trade theories, Mercantilism, dates back to 1630. At
that time, Thomas Mun stated that the economic strength of any country depends
on the amounts of silver and gold holdings. Greater are the holdings, more
economically independent a country is.
Furthermore, the idea of favoring greater exports and promoting efforts to
minimize imports also belongs to the same theory. Well! The thinking behind this
concept is evident since you pay for the imports from the pay that you get from
exports. So, if you a country has a lot to pay for the imported products then it will
get from exported products, its economy will get inclined towards declination.
Even though the view is old but the roots of modern thinking towards the
financials is deeply embedded in it.

2. Absolute Advantage

The Theory of Absolute Advantage is based on the notion of increasing the

efficiencies in the production processes. In 1776, Adam Smith, a renowned
financial expert of the time being, proposed the theory that the manufacturing a
product with high efficiency as compared to any other country on the globe is
highly advantageous.

The concept can just be understood by the idea that if two countries specialize in
exactly same kind of product. But the product of one country being better in
quality or lower in price will bring tremendous absolute advantage to the country
as compared to the other one. From another point of view, if two countries
specialize in entirely different products, then they can quickly increase their
influence in their localities by having trade with each other (by creating absolute
advantages at both ends).

3. Comparative Advantage

As compared to absolute advantage, Comparative Advantage favors relative

productivity. According to this concept, as put forward by David Ricardo in 1817,
a country with maximum absolute advantage in the creation of more than one
product as compared to other, can still trade with another country with less
efficient ways to create that product, that’s readily available in first, to boost its
productivity.

To illustrate this idea with an example, let’s say that I have expertise in two fields
like graphics designing and writing, where designing lets me earn a lot more than
writing. Keeping in mind that I can work on only one side at a time, I will most
likely hire a writer, and we both will work in a comparative atmosphere.

4. Heckscher-Ohlin Theory
Both the Absolute as well as Comparative international trade theories assume that
the choice of the product that can prove itself to be of great advantage is led by free
and open markets instead of using the resources available inland. That’s what
caused Bertil Ohlin and Eli Heckscher to put forward the idea of determination of
the prices that relies on the differences in supply and demands.

This can just be understood as, if the supply of a product grows greater than it is in
demand in the market, its price falls and vice versa. So, export of a country should
mainly consist of the product that is abundantly available in it, and imports should
count the products that are in high demand. Since, this concept ensures utilization
the country’s factors like labor, land and funding sources for the purpose of
product manufacturing that’s why it is also known by the name of “factor
proportion theory.”

5. Product Life Cycle Theory

In the 1970s, Raymond Vernon introduced the notion of using a product’s life
cycle to explain global trade patterns, in the field of marketing. According to
theory, as the demand for a newly created product grows, the home country starts
exporting it to other nations. Where when the demand grows, local manufacturing
plants are opened to meet the request. And the scenario covers the whole globe
time to time, thus making that product a standardization.

You can take the example of computers in consideration to understand how this
works. The earlier personal computers appeared in 1970’s available only in a few
countries and from 1980’s to 1990’s, the product was moving through the stage of
maturity where the production spread to many other nations. And now in 21st
century, every third house has a PC in it.

6. Global Strategic Rivalry Theory

The continuous evolutionary behavior of international trade theories brings us back

in the 1980’s whereKalvin Lancaster and Paul Krugman introduced the concept of
strategies, based on global level rivalries, targeting multinational corporations and
the struggle needed in achieving higher advantages as compared to other
international companies.

According to the concept, a new firm needs to optimize a few factors that will lead
the brand in overcoming all the barriers to success and gaining an influential
recognition in that global market. In all these factors, a thorough research and
timed developmental steps are crucial. Whereas, having the complete ownership
rights of intellectual properties is also necessary. Furthermore, the introduction of
unique and useful methods for manufacturing as well as controlling the access to
raw material will also come handy in the way.

7. National Competitive Advantage Theory

Michael Porter in 1990’s suggested that the success of any business in international
trade depends on upgradable and innovational capacities of the industry as well as
four other factors, which determine how that firm is going to perform in this global
level race. The main concept behind this theory gives the feel of holding factor
proportion as well as many other international trade theories in it.

One of those factors is the availability of resources in the local market and their
prices which are necessary for providing a sustainable and stable environment for
the trade to grow. Moreover, the ability of the firm to face competitors and its
capacity to upgrade itself also determines the success rate of that brand.
Furthermore, keeping the track of the change in demand and the behavior of local
suppliers is also important.