INTERNATIONAL BUSINESS AND TRADE

TOPIC 1: INTRODUCTION TO INTERNATIONAL BUSINESS AND TRADE

International Business is the purchasing and selling of goods, commodities, and

services outside its national borders. Such trade modes might be owned by the state- or
privately-owned organization. It means collective description of commercial transactions that
occurs between two or more nations beyond the boundaries of the home nation. Very often
private companies are part of these transactions to incur maximum profit.

International business is all commercial transactions, private and governmental

between two or more countries. Private companies undertake such transactions for profits;
governments may or may not do the same in their transactions. These transactions include
sales, investments, and transportation.

International trade is the purchase and sale of goods and services by companies in
different countries. Consumer goods, raw materials, food, and machinery all are bought and
sold in the international marketplace.

International trade allows countries to expand their markets and access goods and
services that otherwise may not have been available domestically. As a result of international
trade, the market is more competitive. This ultimately results in more competitive pricing and
brings a cheaper product home to the consumer. Some countries engage in national treatment
of imported goods, treating them the same as those same products produced domestically.

Key Takeaways:

 Trading globally gives consumers and countries the opportunity to be exposed to

goods and services not available in their own countries, or more expensive
domestically.
 The importance of international trade was recognized early on by political economists
such as Adam Smith and David Ricardo.
 Still, some argue that international trade can be bad for smaller nations, putting them
at a greater disadvantage on the world stage.

The benefits of international trade for a business are a larger potential customer base,
meaning more profits and revenues, possibly less competition in a foreign market that hasn't
been accessed yet, diversification, and possible benefits through foreign exchange rates.

International business is important for several reasons:

1. Access to new markets: International business provides access to new markets, which
can help companies expand their customer base and increase their revenue. By doing
business internationally, companies can take advantage of opportunities in different
countries and regions.
2. Diversification of risk: International business can help companies diversify their risk
by operating in different countries and regions. This can help to reduce the impact of
economic or political instability in any one market.
3. Increased competitiveness: International business can help companies become more
competitive by allowing them to take advantage of economies of scale and access to
new technologies, as well as helping them to develop new products and services.
 4. Access to resources: International business can provide access to resources that may
not be available domestically, such as raw materials, talent, and technology.
5. Cultural understanding: International business can help to develop cultural
understanding and appreciation, which can be important in building relationships and
trust with customers, suppliers, and other stakeholders from different parts of the
world.

The world economies have become more intertwined through globalization and
international trade is a major part of most economies. It provides consumers with a variety of
options and increases competition so that businesses must produce cost-efficient and high-
quality goods, benefiting these consumers.

Nations also benefit through international trade, focusing on producing the goods they
have a comparative advantage in. Though some countries limit international trade through
tariffs and quotas to protect domestic businesses, international trade has been shown to
benefit economies.

I. Business Competition, Business Innovation, and Economies of Scale

A. Business Competition

Competition in business is the contest or rivalry among the companies selling similar
products and/or targeting the same target audience to get more sales, increase revenue, and
gain more market share as compared to others. Competition is a fact of doing business.
Businesses see competition in the form of price, quality, design, sales, location, and almost
every business process.

Types of Competition

1. Direct Competition- Direct competitors are vendors that sell the same products to the
same audience and compete for the same potential market.

An excellent example of direct competitors is Burger King and McDonald’s business

rivalry. Both companies –

 Operate in the same industry (fast food),

 Offer similar products (burgers and related fast-food products),
 Satisfy the same need,
 Use the same channels of distribution (retail chains, takeaway, and home delivery),
 Target the same audience (working individuals).

2. Indirect Competition- Indirect competitors are vendors that sell products or services
that are not necessarily the same but satisfy the same consumer need.

An example of indirect competitors would be McDonald’s and Pizza Hut. Even

though these two vendors sell products that are different, they are competitors as they –

 Operate in the same industry,

 Target the same audience,
 Satisfy the same need.
 3. Potential or Replacement Competition- Replacement competitors (also called
potential competitors) are vendors who could replace the business’ offering altogether
by providing a new solution. The smartphone was a replacement competitor of digital
cameras. Even though these two products had different uses, smartphones had the
ability to provide a totally new solution to the existing photography need of the
customers.

Benefits of Business Competition

 Boosts innovation: Competition keeps the business on its toes and makes it
imperative for it to innovate and improve.
 Helps business find its competitive advantage: Businesses often track, analyze,
and study what their business rivals provide and how do they provide it, to
improve their offerings and cater better to their customers.
 Makes businesses serve customers better: Rivalry among the companies is often
won by the company that stands out and serves the customers better than others.
This makes the market players put customers on the top of their priority lists.
 Makes employees more efficient: Competition increases the pressure on the
employees considerably and makes them give their best to the organization.
 Boosts constant business development: Constant holistic business development is
what usually makes the business tackle competition in the long run.

Disadvantages of Business Competition

 Reduces the business’s market share: A rise in competition makes the business share
its market with other players. This is often unwelcome by the existing businesses.
 Puts pressure on business: Competitions puts much pressure on businesses to up their
game and results in many of them failing because of their inability to compete with
the big market players.
 Employees feel pressurized: Increased competition adds much pressure to employees
to perform well and think outside of the box. Many employees can’t cope with this
increased pressure.
 Makes business spend unnecessarily: Competition often makes a business overspend
on marketing and other promotional strategies to woo the customers, business
partners, and employees. This adds to the expense and is often unnecessary.
 Customers get confused: Customers are often confused by many similar products
available on the market. Competition makes them doubt their choice and often
puzzles them.

B. Business Innovation

Innovation is doing something different to create value. Business innovation refers to

the process of introducing new ideas, methods, products, or services that result in significant
improvements or advancements within an organization.

Innovation often involves transforming creative ideas into new solutions that drive
business growth, improve efficiency, and meet customers’ changing needs while improving
decision-making and problem-solving across the organization.
Benefits of Business Innovation

 Gain a competitive advantage. Innovation can help you develop unique products and
services that set you apart from competitors. Over 80% of digitally mature companies
cite innovation as one of their core strengths.
 Meet customer demands. Sixty-five percent of fast-growing companies say they
collaborate with their customers on potential innovations. Businesses that try to better
understand and respond to customer needs through ongoing innovation do a better job
attracting new customers and retaining existing clients.
 Drive business growth. You’ll position your company to better identify and seize new
opportunities. You may also create opportunities to diversify revenue streams or
expand into new markets.
 Increase efficiency and productivity. Innovation can result in increased productivity
as you find ways to improve existing processes, streamline operations, and implement
new forms of technology.
 Better equipped to deal with changes. Rather than reacting to changes that catch you
off guard, you’ll be better prepared to identify emerging trends and anticipate shifts in
the market in advance.
 Attract and retain talent. You can create an environment that engages your workers
and results in higher levels of job satisfaction and employee retention. Many top
companies give their employees a designated amount of time each week to work on
product innovations.
 Promote resilience and sustainability. Your business will be equipped to navigate
economic downturns and changing consumer behavior.

Types of Innovation

1. Incremental Innovation- Incremental innovation involves making small, incremental

improvements to existing products, services, or processes. While it may not result in
the creation of a new product or fresh concept, it can enhance value creation and
produce a positive impact.
2. Radical Innovation- Radical innovation usually involves making a breakthrough or
invention that creates a new market or significantly changes an existing market. These
innovations are more noticeable and represent a higher-risk, higher-return pursuit.
3. Disruptive Innovation- Disruptive innovation creates a new market or value network
that displaces an existing market or value network. Rather than introducing a new
product to serve an existing market, disruptive innovation represents the creation of
an entirely new market that disrupts the status quo.
4. Architectural Innovation- Architectural innovations make major changes to a product
or service’s architecture to attract new markets and consumers. In other words, it
repackages an existing product, service, or idea to fill a new need or attract a fresh
clientele.

C. Economies of Scale

Economies of scale are cost advantages reaped by companies when production

becomes efficient. Companies can achieve economies of scale by increasing production and
lowering costs. This happens because costs are spread over a larger number of goods. Costs
can be both fixed and variable.
The size of the business generally matters when it comes to economies of scale. The
larger the business, the more the cost savings. Economies of scale can be both internal and
external. Internal economies of scale are based on management decisions, while external ones
have to do with outside factors.

Internal functions include accounting, information technology, and marketing, which

are also considered operational efficiencies and synergies.

Economies of scale are an important concept for any business in any industry and
represent the cost-savings and competitive advantages larger businesses have over smaller
ones.

Types of Economies of Scale

1. Internal Economies of Scale- Internal economies of scale happen when a company

cuts costs internally, so they're unique to that firm. This may be the result of the sheer
size of a company or because of decisions from the firm's management. There are
different kinds of internal economies of scale. These include:

 Technical: large-scale machines or production processes that increase productivity

 Purchasing: discounts on cost due to purchasing in bulk
 Managerial: employing specialists to oversee and improve different parts of the
production process
 Risk-Bearing: spreading risks out across multiple investors.
 Financial: higher creditworthiness, which increases access to capital and more
favorable interest rates
 Marketing: more advertising power spread out across a larger market, as well as a
position in the market to negotiate

Larger companies are often able to achieve internal economies of scale—lowering their
costs and raising their production levels—because they can, for example, buy resources in
bulk, have a patent or special technology, or access more capital.

2. External Economies of Scale- External economies of scale, on the other hand, are
achieved because of external factors, or factors that affect an entire industry. That
means no one company controls costs on its own. These occur when there is a highly-
skilled labor pool, subsidies and/or tax reductions, and partnerships and joint ventures
—anything that can cut down on costs to many companies in a specific industry.

Economies of scale are the advantages that can sometimes occur because of increasing
the size of a business. For example, a business might enjoy an economy of scale concerning
its bulk purchasing. By buying many products at once, it could negotiate a lower price per
unit than its competitors. Economies of scale can be achieved in two ways. First, a company
can realize internal economies of scale by reorganizing the way their resources—such as
equipment and personnel—are distributed and used within the company. Second, a company
can realize external economies of scale by growing relative to their competitors using that
increased scale to engage in competitive practices such as negotiating discounts for bulk
purchases.
 II. Global Company, Multinational Company, and Transnational Company

A. Global Company

A global corporation, also known as a global company, is coined from the base term
‘global’, which means all around the world. It makes sense to assume that a global company
is a company that does business all over the world. There aren’t many companies in the world
that can boast of having a business presence in every major country. They probably can be
numbered on the fingers of both hands. The global company definition, therefore, should be a
little more lenient to accommodate this fact, which would enable more companies to call
themselves global companies. Really, a global company is any company that operates in at
least one country other than the country where it originated. Realistically, expanding to even
just one additional country is a lot of work and is therefore a great achievement. If you are
operating in one country, selling your products around the world, and shipping them to
customers in countries in Europe while you’re in the United States, that doesn’t necessarily
mean you’re a global company. It takes more than that to earn the name of a global company.

To be a global company, you need to introduce not only your products, but also your
company to people who live in another country. You need to conduct significant research to
figure out which country is your best choice for expansion and how to introduce yourself.
Probably, you'll have to send some of your employees to that country to speak with people
face-to-face and to experience that country on a first-hand basis before you decide whether
the country is right for your company. Once you expand to another country and establish
yourself successfully, it's only natural that you will want to try an additional country, and
another, and yet another. That is how global companies have started, and now they have a
massive list of countries in which they do business.

Benefits of Global Corporation

 Increase customer base. When you expand your business into another country, your
customer base expands along with it.
 Reduce operating costs. If the manufacturing or labor costs are lower in another
country, expanding to that country enables you to save on your operating costs. This
can improve your bottom line. In fact, reducing operating costs is a key reason why
many global companies expand.
 Bogged down by seasonality. If you sell a seasonal product that experiences
fluctuating sales at different times of the year, then you can expand to countries that
have seasons opposite to those in your base country, enabling you to have high sales
figures all year.
 Boost the growth rate of your company. If your company has been growing rapidly
in your locale, chances are that this growth may eventually stall, because of market
saturation. In that instance, you can expand to another country so you can maintain
rapid growth.
 Create new jobs. Expanding into another country involves a lot, such as hiring
representatives and employees of your company in the new country, as well as setting
up offices and various facilities, and so on. You’re likely to employ locals and, in the
process, you will create new job opportunities in the country where you are
 expanding. This helps boost the local economy and it also gives your company a good
reputation.

B. Multinational Company

A multinational corporation (MNC) is a company that has business operations in at

least one country other than its home country. By some definitions, it also generates at least
25% of its revenue outside of its home country. Generally, a multinational company has
offices, factories, or other facilities in different countries around the world as well as a
centralized headquarters which coordinates global management. Multinational companies can
also be known as international, stateless, or transnational corporate organizations or
enterprises. Some may have budgets that exceed those of small countries.

C. Transnational Company

A transnational corporation (TNC) is "any enterprise that undertakes foreign direct

investment, owns or controls income-gathering assets in more than one country, produces
goods or services outside its country of origin, or engages in international production".
Variously termed multinational corporations (MNCs) and multinational enterprises (MNEs),
transnational corporations are formal business organizations that have spatially dispersed
operations in at least two countries.

Multinational Company Vs Transnational Company

A Multinational corporation (MNC) is a type of company that operates in multiple

countries with a centralized management at the headquarters in the home country.
corporations also operate globally but without a centralized system, means each firm in the
respective country has its own management which is the decision-making body.

For example, McDonald’s is an example of a Transnational company and Coca-Cola is an

example of Multinational company, both operate globally but one does not have a centralized
system and the other has centralized system of management.

Key Similarities Between Multinational and Transnational Corporations

Multinational and Transnational corporations share some key similarities, such as

their ability to operate in multiple countries around the world. However, there are also other
important similarities between Multinational corporations and Transnational corporations:

 Multinational Corporations have operations in more than one country. Transnational

corporations also have operations in more than one country, but typically focus on a
single market.
 Multinational corporations and Transnational corporations are highly complex
organizations with a wide range of activities. They operate in many countries around
the world and employ many people.
 Both Multinational corporations and Transnational corporations often have distinctive
brands that help them to stand out from their competitors. They may also have strong
international networks that enable them to share best practices and collaborate on
projects.
  Multinational corporations and Transnational corporations can be powerful drivers of
economic growth. They can contribute significantly to innovation, competitiveness,
and job creation.

Difference Between Multinational and Transnational Corporations

Multinational and Transnational corporations are two different types of businesses. Here’s a
quick overview of the main differences:

 Size: A Multinational corporation is typically larger because it has subsidiary firm in

other countries. However, A Transnational corporation does not have subsidiary firm.
 Focus: A Multinational corporation typically has a broad focus, such as manufacturing
or finance. A Transnational corporation may have a narrower focus, which is
regarding a particular market in a country or region.
 Headquarters: The headquarters of a multinational corporation are usually located in a
major home country, while the headquarters of a Transnational corporation may be in
multiple countries.
 Internal structure: A Multinational corporation typically has a few business divisions,
each of which is responsible for an individual product line, service line or part of the
overall business. A Transnational corporation may have fewer divisions, but each
division will be focused on a particular market.
 Research and Development: Multinational corporations do R&D in the home country
and then distribute the product to the other countries where they have their subsidiary
firms. However, in the case of Transnational corporation R&D happens in each firm
of the country, which helps them be more focused on a regional market.
 Product focus: Multinational corporations often produce goods and services that can
be used in several different markets. A Transnational corporation may only produce
goods or services that can be sold in a specific market, such as cotton products,
snacks, etc.
 Decision Making: Multinational corporations have centralized management in their
home country due to which it takes time to decide. However, as the Transnational
corporations do not have centralized management, then the management of the firm in
a particular country can make the decisions which are faster and more effective the
multinationals.

III. Evolution and Nature of International Business and Trade

A. Evolution of International Business

Historical research on multinational enterprises has long been important in international

business studies. When the discipline of international business first developed in the late
1950s, historical evidence was frequently used to build generalizations and propose theories.
However, over time, that tradition eroded, as the discipline moved toward using more
quantitative and econometric reasoning. International business and business history share
important commonalities, such as the topics they address. These include multinational
patterns of international trade and foreign investment; the boundaries and competitiveness of
the multinational enterprise; changes in organizational strategy and structure of multinational
enterprises and the connections between the two; coordination and management of the
activities of the multinational enterprise; impact of multinationals on knowledge and capital
flows in host countries; and investment, resilience, and survival in high-risk environments.
Nonetheless, the approaches followed can be quite distinct. While both disciplines consider
the firm and other institutional forms as the unit of analysis, the way context and the
environment are integrated in the analysis, the methodologies followed, the types of
comparative analysis carried out, the temporal dimensions adopted, and the way in which
theory is used are quite distinct. There are possible ways forward for international business
history to be more integrated and provide new dimensions in international business studies.
These include using history as a generator of theory to understand phenomena such as the
origins of competitiveness and as a way to uncover phenomena that can be fully understood
only after the situation has occurred, such as the impact of entrepreneurship on economic
development; as a way to check false claims that certain phenomena is new; and to inform
discussions on complex phenomena and grand challenges such as globalization and
deglobalization, investment in high risk environments, and climate change.

B. Nature of International Business

The nature of an international business includes the following factors:

 Import and export of goods.

 Export & import of services; also includes transferring intellectual property rights.
 The spread of licensing and franchising across different countries.
 Foreign investments include both direct and portfolio investments.

Characteristics of International Business

The following factors enumerate the characteristics of international business:

 Operations at a large scale: International businesses are conducted on a large scale

globally. Their business activities are significant in size, including manufacturing,
promotion & selling of their products. These businesses serve the demands of local as
well as foreign markets.
 Earn through the foreign exchange: Since the currencies of different countries are
involved in transactions in international businesses; thus, international businesses act
as an essential source for generating enough foreign exchange reserves for the
nations.
 High-risk probability: The uncertainty related to international business is high.
Global companies operate with large-scale resources, capital investment, workforce,
and business activities spread over large distances.
 Multiple middlemen are involved in the processes: Due to the large size of
international businesses, the scale of operations requires many intermediaries to carry
out different functions. The essential services of these people help them to expand and
grow.
 International restrictions: International businesses must face many limits in carrying
out their operations worldwide. Due to the variable regulations in the different
countries, sometimes they are not allowed the inflow/outflow of goods, resources, and
technology. International businesses must face multiple foreign exchange barriers and
trade blocks/barriers that are harmful to their operations.
 Intense competition: International businesses must face a lot of competition from
companies already established in the local country. The match can be quality, price,
design advancement, and packing. They must invest in advertising their products to
confront the competition in the international market.
Features of International Business

 Involves many countries: International business can be carried out only when
transactions occur across different countries.
 Legal obligations: The countries have specific laws related to foreign trade, which the
global business needs to comply with, making the process and financial transactions
complex.
 Heavy documentation: These businesses are subjected to the set rules and regulations;
therefore, many documents must be maintained and shared with other parties.
 Time-consuming activities: The time between sending manufactured goods or
services and receiving the payment is higher than the domestic business.
 Lack of Personal Contact: Since the customers and producers operate globally, there
is a lack of direct & personal contact between them.

IV. Benefits of International Business and Trade

International Business is important to both Nation and Business Organizations. It offers

them various benefits. Benefits to Nation and Benefits to Firms

Benefits to Nation

 It encourages a nation to obtain foreign exchange that can be utilized to import

merchandise from the global market.
 It prompts specialization of a country in the production of merchandise, which it
creates in the best and affordable way. In addition, it helps a country in enhancing its
development prospects and furthermore makes opportunity for employment.
 It makes it comfortable for individuals to utilize commodities and services produced
in other nations, which help in improving their standard of life.

Benefits to Firms

 It helps in improving profits of the organizations by selling products in the nations

where costs are high.
 It helps the organization in utilizing their surplus resources and increasing
profitability of their activities.
 In addition, it helps firms in enhancing their development prospects.
 IB also goes as one of the methods for accomplishing development in the firms
confronting extreme market conditions in the local market.
 Moreover, it enhances business vision as it makes firms more aggressive and
diversified.

V. Problems and Challenges of International Business and Trade

 Political and Legal Differences: The political and legal environment of foreign
markets is different from that of the domestic. The complexity generally increases as
the number of countries in which a company does business increases. It should also be
noted that the political and legal environment is not the same in all provinces of many
 home markets. Example: The political and legal environment is not the same in all
the states of India.
 Cultural Differences: The cultural differences are one of the most difficult problems
in international marketing. Many domestic markets, however, are also not free from
cultural diversity.
 Economic Differences: The economic environment may vary from country
to country.
 Differences in the Currency Unit: The currency unit varies from nation to nation.
This may sometimes cause problems of currency convertibility, besides the problems
of exchange rate fluctuations. The monetary system and regulations may also vary.
 Differences in the Language: An international marketer often encounters problems
arising out of the differences in the language. Even when the same language is used in
different countries, the same words of terms may have different meanings. The
language problem, however, is not something peculiar to international marketing.
Example: The multiplicity of languages in India.
 Differences in the Marketing Infrastructure: The availability and nature of the
marketing facilities available in different countries may vary widely. For example, an
advertising medium that is very effective in one market may not be available or may
be underdeveloped in another market.
 Trade Restrictions: A trade restriction, particularly import controls, is a very
important problem which an international marketer face.
 High Costs of Distance: When the markets are far removed by distance, the transport
cost becomes high, and the time required for affecting the delivery tends to become
longer. Distance tends to increase certain other costs also.
 Differences in Trade Practices: Trade practices and customs may differ between two
countries.