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Unit - I

INTRODUCTION TO INTERNATIONAL BUSINESS

Meaning and Definition of International Business – Theories of International Trade – Economic

Theories – Forms of International Business - Nature of International Business

International business is defined as commercial transactions that occur across country borders.
When a company sells products in the US, Japan and throughout Europe, this is an example of
international business.

1. The exchange of goods and services among individuals and businesses in multiple countries.
2. A specific entity, such as a multinational corporation or international business company that
engages in business among multiple countries. International Business conducts business
transactions all over the world. These transactions include the transfer of goods, services,
technology, managerial knowledge, and capital to other countries. International business
involves exports and imports.

International Business is also known, called or referred as a Global Business or an International

Marketing.

Features of International Business

1. Large scale operations : In international business, all the operations are conducted on a
very huge scale. Production and marketing activities are conducted on a large scale. It
first sells its goods in the local market. Then the surplus goods are exported.
2. Intergration of economies : International business integrates (combines) the economies
of many countries. This is because it uses finance from one country, labour from another
country, and infrastructure from another country. It designs the product in one country,
produces its parts in many different countries and assembles the product in another
country. It sells the product in many countries, i.e. in the international market.
3. Dominated by developed countries and MNCs : International business is dominated by
developed countries and their multinational corporations (MNCs). At present, MNCs
from USA, Europe and Japan dominate (fully control) foreign trade. This is because they
have large financial and other resources. They also have the best technology and research
and development (R & D). They have highly skilled employees and managers because
they give very high salaries and other benefits. Therefore, they produce good quality
goods and services at low prices. This helps them to capture and dominate the world
market.
4. Benefits to participating countries : International business gives benefits to all
participating countries. However, the developed (rich) countries get the maximum
benefits. The developing (poor) countries also get benefits. They get foreign capital and
technology. They get rapid industrial development. They get more employment
opportunities. All this results in economic development of the developing countries.

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Therefore, developing countries open up their economies through liberal economic

policies.
5. Keen competition : International business has to face keen (too much) competition in the
world market. The competition is between unequal partners i.e. developed and
developing countries. In this keen competition, developed countries and their MNCs are
in a favourable position because they produce superior quality goods and services at very
low prices. Developed countries also have many contacts in the world market. So,
developing countries find it very difficult to face competition from developed countries.
6. Special role of science and technology : International business gives a lot of importance
to science and technology. Science and Technology (S & T) help the business to have
large-scale production. Developed countries use high technologies. Therefore, they
dominate global business. International business helps them to transfer such top high-end
technologies to the developing countries.
7. International restrictions : International business faces many restrictions on the inflow
and outflow of capital, technology and goods. Many governments do not allow
international businesses to enter their countries. They have many trade blocks, tariff
barriers, foreign exchange restrictions, etc. All this is harmful to international business.
8. Sensitive nature : The international business is very sensitive in nature. Any changes in
the economic policies, technology, political environment, etc. has a huge impact on it.
Therefore, international business must conduct marketing research to find out and study
these changes. They must adjust their business activities and adapt accordingly to survive
changes.

Nature of International Business

1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

Scope of International Business

1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange
Need for International Business
1. To achieve higher rate of profits
2. Expanding the production capacity beyond the demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions

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6. Availability of technology and managerial competence

7. Cost of manpower, transportation
8. Nearness to raw material
9. Liberalisation, Privatisation and Globalisation (LPG)
10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO), decreasing costs in
telecommunications and transportation; and freer capital markets

Reasons for Recent International Business Growth

1. Expansion of technology
2. Business is becoming more global because
•Transportation is quicker
•Communications enable control from afar
•Transportation and communications costs are more conducive for international operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources enable
Companies to take better advantage of international opportunities

Problems in International Business

1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy

Forms of international business

1. Exporting: Exporting means producing/procuring in the home market and

selling in the foreign market. Exporting is not an activity just for large
multinational enterprises; small firms can also make money by exporting. In
recent days, exporting has become easier though it remains a challenge for
many firms.
2. Licensing: A licensing is an agreement whereby a licencor grants the rights to
intangible property (patents, intentions, formulas, processes, designs,
copyrights and trademarks) to another entity (licensee) for a specified period
and in return the licencor receives a royalty/fee from the licensee.
3. Franchising: Franchising is basically o specialized form of licensing in which
the franchiser not only sells intangible property to the franchisee but also
insists that the franchisee agrees to abide by strict rules as to how it does
business.

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4. Joint venture: A joint venture entails establishing a firm that is jointly owned
by two or more independent firms.

Forms of International Business

5. Management Contracts: A firm in one country agrees to operate facilities or

provide other management services to a firm in another country for an agreed
upon fees.
6. Turnkey projects: In a turnkey project, the contractor agrees to handle every
details of the project for a foreign client, including the training of operating
personnel. At completing of the contract the foreign client handles the ‘key’ of
a plant that is ready for full operation
7. Strategic international alliances: A strategic international alliance is a
business relationship established by two or more companies to cooperate out of
mutual need and to share risk in achieving a common objective.
8. Direct foreign investment: Direct foreign investment is another important
form of international business. Companies may manufacture locally to
capitalize on low cost labor, to avoid high import taxes, to reduce the high cost
of transportation to market, to gain access to raw materials or gaining market
entry.

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Main Difference Between Domestic and international Business are as follows :

S.No International Business Domestic Business

1. It is extension of Domestic Business and The Domestic Business Follow the
Marketing Principles remain same. marketing Principles
2. Difference is customs, cultural factors No such difference. In a large countries
languages likeIndia, we have many
languages.
3. Conduct and selling procedure changes Selling Procedures remain unaltered
4. Working environment and management No such changes are necessary
practices change to suit local conditions.
5. Will have to face restrictions in trade These have little or no impact on
practices, licenses and government rules. Domestic trade.
6. Long Distances and hence more Short Distances, quick business is
transaction time. possible.
7. Currency, interest rates, taxation, Currency, interest rates, taxation,
inflation and economy have impact on inflation and economy have little or no
trade. impact on Domestic Trade.
8. MNC’s have perfected principles, No such experience or exposure.
procedures and practices at international
level
9. MNCs take advantage of location No such advantage once plant is built it
economies wherever cheaper resources cannot be easily shifted.
available.
10. Large companies enjoy benefits of It is possible to get this benefit through
experience curve collaborators.
11. High Volume cost advantage. Cost Advantage by automation, new
methods etc.
12. Global Standardization No such advantage
13. Global business seeks to create new No such advantage
values and global brand image.
14. Can Shift production bases to different No such advantage and get competition
countries whenever there are problems in from some spurious or SSI Unit who get
taxes or markets patronage of Government.

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Theories of International Business

1. Mercantilism
• 1630, Thomas Mun: “…to increase our wealth…sell more to strangers yearly than we
consume of theirs in value”
2. Absolute Advantage
• 1776, Adam Smith. A country has an absolute advantage in the production of a product
when it is more efficient than any other country in producing it
• If two countries specialize in production of different products (in which each has an absolute
advantage) and trade with each other, both countries will have more of both products
available to them for consumption
3. Comparative Advantage
• 1817, David Ricardo - Even if one country has an absolute advantage in producing two
products over another country, trading with that other country will still yield more output for
both countries than if the more efficient producer did everything for themselves.
• The country with the absolute advantage in producing both products would still produce both
products, but less of the one they would trade for, allowing them to essentially allocate more
resources to producing the product that they’re comparatively most efficient at producing
• Assumes many things:
o Only 2 countries and 2 goods
o No transportation costs
o No price differences for resources in both countries
o Resources can move freely from producing one product to producing another product
o Constant returns to scale
o Fixed stock of resources
o Free trade does not affect production efficiency
o No effects of trade on income distribution within a country
• There are some descriptions of potential outcomes of relaxing some of these assumptions, but
I’ll leave this as a thought exercise for you, the reader
4. Heckscher-Ohlin Theory
• 1919, Eli Heckscher and 1933, Bertil Ohlin – Comparative advantage arises from differences
in national factor endowments, such as land, labor, or capital, as opposed to Ricardo’s theory
which stresses productivity
• 1953, Wassily Leontief – The Leontief Paradox – theorized that since the U.S. has abundant
capital compared to other nations, they would expor capital-intensive goods and import
labor-intensive goods. Data showed that was not the case.
• Therefore, Ricardo’s theory seemed to be more predictive.
• However, controlling for technological differences (e.g. eliminating them) does yield a
predictive model based on factor endowments
5. The Product Life-Cycle Theory

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