INTERNATIONAL BUSINESS UNIT 1

LESSON 1 INTRODUCTION TO INTERNATIONAL BUSINESS

 Concept of International Business
According to Hill (2005) – “international business is any firm that engages in international trade or investment”
 Characteristics of International Business
Guided by Profit: Business is always guided by profit motive and international business is no
exception
Facilitating Exchange: Scope of international business includes facilitating exchange (not donation
or charity). The exchange includes everything on this earth and even beyond.
Type of Transaction: Trade, Income, and Investment: The IMF Balance of payments manual divides
the transactions according to standard categories.

 Importance of International Business

 Expanded Market Opportunities: One of the primary advantages of international business is the access it
provides to a broader customer base.
 Diversified Revenue Streams: International business enables companies to diversify their sources of
revenue. This diversification helps mitigate risks associated with economic fluctuations in individual
countries.
 Benefit of Economies of Scale: When a company starts operating globally it starts to achieve economies of
scale. Large-scale production lowers the cost per unit which in turn positively affects profitability.
 Access to More Resources and Inputs: Companies can source raw materials, skilled labor, and technology
from different countries, ensuring a more efficient and cost-effective production process.
 Innovation: Conducting a business internationally helps the company to expose itself to new markets,
business practices, knowledge and innovation.
 Diversity of Talent Pool: International business allows companies to tap into a diverse talent pool. Hiring
employees from different backgrounds brings a variety of perspectives, skills, and experiences to the
organization.
 Brand Building: Establishing a presence in international markets can help in building a well-known
international brand, which will further build a global reputation and contribute to increased customer loyalty
and brand value.

 Challenges under International Business

 Language and Cultural Barriers: Interacting with people from different cultures and languages is one of the
main obstacles in international business.
 Legal Complexities: Compliance with a wide variety of legal and regulatory frameworks is required while
operating in international markets.
 Political and Economic Stability: Political and economic instability in international markets may cause
serious obstacles for enterprises.
 Logistics and Supply Chain Management: International trade includes tricky and challenging logistics and
supply chain management. Managing various suppliers, transportation providers, custom procedures, and
regulatory environments can all pose as logistical issues.
 Currency Fluctuations and Financial Risks: Currency fluctuations have the potential to reduce the
profitability of transactions between countries. Currency changes can cause pricing uncertainty, reducing
revenue and profit margins.
 Market Adaptability: Entering foreign markets implies confronting increased competition from both
domestic and international firms.
  International Business vs. Domestic Business

Basis Domestic Trade International trade

Definition Domestic business refers to economic transactions International business refers to economic
that take place within the borders of a particular transactions that take place outside of a
country. country's borders.
Buyer and Seller In domestic business, both the buyer and seller are In international business, the buyer and
from the same country. seller are from separate nations.
Currency Because both the buyer and seller are from the Because the buyer and seller are not from
same country, domestic firms use the same the same country, global businesses use
currency. separate currencies.
Homogeneity There is greater homogeneity in preferences, tastes, There is more heterogeneity under
culture, language, demands, etc. international businesses.

Capital Investment Capital investment is lower for enterprises engaged Capital investment is higher for enterprises
in domestic business. engaged in international trade.

Restrictions Domestic business is subject to fewer constraints International business is subject to more
than any international company. constraints when compared to domestic
company.
Business Research When compared to multinational organizations, International corporations face more
domestic enterprises find business research to be difficulties and involve a costly business
less complex and less expensive. research than domestic firms.

 Different Modes of Entry in International Business

 Exports: Export deals with physical movement of goods and services from one country to another. The
practice of manufacturing items domestically and selling them to buyers worldwide is also known as export.
 Exports are majorly classified into two categories:
Direct exports: direct exports, as the name implies, are transactions involving the direct purchase
and sale of commodities between two or more countries and no intermediaries are involved in this
process.
Indirect Exports: Indirect exports are opposite to direct exports. These indicate that an intermediary
is engaged in the purchase and sale of goods between the two countries.

 International licensing and Franchising:

 Licensing: A licensing agreement is a contract in which a licensor gives another party the right to use its
intangible property for a predetermined amount of time in exchange for a royalty payment.
 Franchising: Similar to licensing but involves a broader range of support services, including marketing and
operational assistance.

 Contract Manufacturing
Many businesses focus mostly on marketing operations and outsource their product development. The process of
finding a manufacturing facility to make goods at a competitive price anywhere in the world is known as contract
manufacturing.

 Joint Venture
A joint venture (JV) is a business arrangement where two or more independent entities come together to collaborate
on a specific project or undertake a shared business venture.
  Types of joint ventures:
Equity Joint Venture: Partners contribute capital and share ownership in the new entity.
Contractual Joint Venture: Collaboration is based on a contractual agreement without establishing
a new legal entity.
Cooperative Joint Venture: Entities cooperate while retaining their separate identities.

 Foreign Direct Investment

Foreign Direct Investment (FDI) refers to the investment made by an individual, business, or government from one
country into business interests located in another country.
 Automatic Route: The foreign entity does not need the government’s or the RBI’s prior approval while using
this route.
 Government Route: The foreign entity must compel the government’s permission in order to proceed via
the government route. It should proceed by submitting an application via the Foreign Investment Facilitation
Portal under Department of Promotion of Industry and Internal Trade (DPIIT).

 Mergers and Acquisitions

Indian organizations are beginning to recognize mergers and acquisitions as essential components of their business
strategy and use them as tools for significant expansion.
 Mergers: A merger occurs when two companies of roughly equal size and strength decide to unite, forming
a new entity. Mergers are often pursued to combine complementary strengths, resources, and expertise,
with the goal of achieving increased efficiency and market dominance.
 Acquisitions: An acquisition is the taking over of another business, generally a smaller one. The target
company’s assets, liabilities, and operations are taken over by the purchasing company, and it additionally
gains ownership of the business.

 Take-overs
This is a strategy whereby a company identifies a healthy unit with strong brand name and network and brings it
under the management of another unit in order to become a leader in the field and guarantee success. Since there
may be many parties wanting to takeover a well-known company, competition becomes inevitable.

 Turnkey Projects
A turnkey project is a contract under which a company is fully involved from concept, i.e., planning to completion. It
covers right from supply of manpower, capital, and erection of plant, installation and commissioning up to the trial
operation of a project. A turnkey project is a type of construction or business project where a contractor or provider
is responsible for delivering a completed project that is ready for use.

 Globalization
“Globalization (or globalization) is the process of international integration arising from the interchange of world
views, products, ideas and mutual sharing, and other aspects of culture.”
 Significance of Globalization
Employment: The creation of special economic zones has boosted the number of available
employment options for the population of different countries.
Compensation: Compensation has increased in both level and amount when compared to
domestic enterprises. People are witnessing a whole different work environment when compared
to domestic workplaces.
Rise in Standard of Living: People’s standard of living has changed since the arrival of
globalization. Their shopping habits have changed, raising their level of living.
Increased Investment: As a result of globalization, there has been an increase in cross-border
investments. This has resulted in firms investing and establishing branches in many nations
throughout the world.
 Infrastructure Development: Technological progress has aided in the improvement of countries’
infrastructure. Countries are achieving comprehensive development with the help of new
technologies from around the world.
Foreign Exchange Reserves: With the help of globalization, there is a consistent supply of capital in
international financial flows. This capital movement assists governments in building foreign
exchange reserves.
Promotes Mutual Cultural Understanding: Critics see the increasing capacity to travel and
encounter various cultures as a good aspect of globalization, that can contribute to international
cooperation and peace.

 Impact of Globalization
 Cross-cultural Communication: One significant impact is the increased requirement for cross-cultural
communication skills across the organization.
 Increased Competition: Globalization has also boosted competitiveness and competition, as companies
from all over the world may now compete more easily with one another.
 Increased Outsourcing: The rise of outsourcing and offshoring is another important facet of globalization.
Many businesses have relocated operations overseas in quest of lower costs or new consumer markets,
which also requires managers navigating complex legal systems and cultural differences existing around the
globe.
 Digitization: The digital age has also had a huge impact on how firms operate on a global scale. Because
organizations may interact instantly across borders, they must be able to respond swiftly and effectively
while preserving consistency across multiple locations.
 Mobility: With the introduction of globalization modern transport techniques have come into picture.
 Establishment of Business Standards: Globalization encourages an atmosphere in which best practices are
communicated across industries, resulting in a global improvement in standards.

 Drivers of Globalization
 Liberalization of Capital Markets: With the digitization of capital, investments have flowed more freely
across international borders. Liberalization of capital markets has clearly created many opportunities,
though risks have also increased due to currency fluctuations and interlinked financial markets.
 Advances in Technology and Accelerating Information Flows: Rapid technological progress has had direct
impacts on globalization. Shift to manufacturing from agriculture, especially for the developing countries,
has been the direct impact.
 Mobility of People: The mobility of people has increased a lot. This is because of several factors. The
populations of industrialized countries are getting older. The cheaper workers in emerging economies have
received the best education, which makes them competitive in world labor market.
 Mobility of Products: Barriers to trade are falling, largely due to the efforts of GATT and the WTO. In general,
the possibility of selling any product anywhere in the world is becoming a reality.
 Decline in Transportation Costs: The mobility of people and cargo is partly because of the decline in
transportation costs. Increased capacities and new technologies have reduced costs to the point that
materials that were too bulky to transport long distances are now manufactured in a single location and
shipped to the rest of the world.
 Increased Interdependencies: The utility derived from a particular product may depend on network effects
across countries. To illustrate, the utility of the telephone increases with the number of users in all countries.
As mobility and communication increases, these global externalities become greater at the international
level.
 Global Consolidation: Through mergers and acquisitions, rapid consolidation of business across borders can
be observed. As firms compete more in multiple geographical markets and face the same competitors, size
has become a critical factor.
 Internationalization
The new period of industrialization and supportive government policies led in the growth of various horizons and
opportunities for the corporations. Every company wants to be more international.
 Reasons for Internationalization
Diversification: It means expanding into new and sometimes related industries in order to increase
the company’s growth and profitability. Diversification can take place through vertical integration,
merger, acquisition, etc.
Economies of Scale: When entering a larger international market from a smaller local market,
business organizations tend to develop globally and engage in international trading in order to
achieve economies of scale.
Incentives from the Government: Foreign investment is encouraged by some governments.
Internationalization gives incentives to firms who wish to invest directly in these nations.
Market Growth: Global expansion will boost profitability and expand the firm’s operations. The firm
gains an opportunity to expand the market size, and number of customers by performing
internationalization.
Joint Venture Opportunities: International business offers the possibility of entry into various joint
ventures. The company gains quick access to a large and improved customer base, distribution tools,
as well as knowledge and technology.

 Stages of Internationalization
 Domestic Operations: If a company only operates in its own nation, it is considered to have a domestic
market. The majority of foreign enterprises that are big multinationals now begin their operations as
domestic firms only.
 Foreign Operations: Firm expands its market to other nations through opting for exports. As we all know,
Indian companies export nuts, spices, textiles, jute, and rice all over the world. Domestic enterprises that
are ethnocentric begin their internationalization by exporting items to high-demand overseas countries.
 Joint Ventures or Subsidiaries: Subsidiaries or joint ventures are business partnerships in which a company
physically moves some of its operations from its home country to a foreign country. The firm under this
agreement seeks mutual cost and profit sharing, as well as management involvement.
 Multinational Operations: At this point, a company has evolved into a full-fledged multinational corporation
(MNC), with many production facilities spread around the globe. Although crucial decisions in this system
are always made at corporate headquarters.
 Transnational Operations: Transnational firms are those that achieve both global efficiency and local
response. In terms of decision-making, these companies are highly decentralized. Every international
company unit is free to make decisions with little oversight from corporate headquarters.