Unit-1

Meaning of International Business

Manufacturing and trade beyond the boundaries of one's own country known as international
business. International business is defined as those business activities that take place across
the national frontiers. It involves not only the international movements of goods and services,
but also of capital, personnel technology and intellectual property like patents, trademarks,
know-how and copyrights.

Distinguish Between Domestic Business and International Business

Domestic Business

Domestic business involves those economic transactions that take place inside the
geographical boundaries of a country. Both the buyer and seller belong to the same country in
this form of business. Domestic business is also known as ‘Internal Business’ or ‘Home
Trade’. It is relatively easier to conduct business research in domestic business when
compared to companies from abroad, and the degree of risk is also much lower. The selling
process, currency, type of customers, taxation laws, and other regulations are more or less
uniform, which can significantly benefit any organisation.

International Business

International business involves those economic transactions that take place outside the
geographical boundaries of a country. The buyer and seller do not belong to the same country
in this form of business. Companies involved in international business are known as
‘Multinational’ or ‘Transnational’ companies. It is much more difficult to conduct business
research on international business firms when compared to domestic companies, and the
degree of risk is also higher. The selling process, currency, type of customers, taxation laws
and other regulations are different for the buyer and seller, which can be a hindrance for any
organisation to conduct business.

Differences between Domestic and International Business

The main differences between Domestic and International Business are as follows:

Domestic Business International Business

 Definition

Domestic business involves those economic International business involves those economic
transactions that take place within the transactions that take place outside the
geographical boundaries of a country. geographical boundaries of a country.

Buyer and Seller

Both the buyer and seller belong to the same The buyer and seller belong to different countries
country in domestic business. in international business.

Currency

Domestic businesses deal with the same currency International businesses deal with different
since both the buyer and seller are from the same currencies since the buyer and seller are not from
country. the same country.

Customers

There is greater homogeneity in terms of the There is greater heterogeneity in terms of the
nature of customers of domestic businesses. nature of customers of international businesses.

Geographical Boundaries

Geographical boundaries limit domestic Geographical boundaries do not limit international

businesses. businesses.

Business Research

Business Research is less complex and relatively Business Research is more complex and relatively
cheaper for domestic businesses compared to expensive for international businesses compared to
international organisations. domestic companies.

Capital Investment

Capital investment is lower for companies that are Capital investment is higher for companies that are
involved in domestic business. involved in international business.

Factors of Production

The domestic business has greater mobility of The international business has lesser mobility of
factors of production compared to international factors of production compared to domestic
business. business.

Restrictions

Domestic business involves lesser restrictions International business involves greater restrictions
than international business. than domestic business.

Quality Standards

The quality standards for domestic business tend The quality standards for international business
to be relatively lower than international business. tend to be relatively higher than domestic business.

Conclusion

The difference between Domestic and International Business indicates that a company must
do both to survive and grow in the market. Both these forms of businesses have their
advantages, for any organisation that wants to succeed in these markets must design its
business strategies accordingly.

Reasons for International Business

 Uneven Distribution of Natural Resources: Due to unequal distribution of natural
resources, all countries cannot produce goods at a low cost. As a consequence, it has an
impact on their productivity levels. Therefore, the countries with less quantity of a
natural resource either purchase the resource or the actual product itself from the
countries with an abundance of these. For example, crude oil is exported from the USA
as it is found in abundance there.
 Availability of Productivity Factors: The numerous production variables, like labor,
capital, and raw materials, that are required to produce and distribute diverse
commodities and services are found in different quantities in different countries. It
gives rise to buying and selling of productivity factors among the countries. For
 example, due to unemployment in India, foreign countries can employ labor at chap
rates from India.
 Specialization: Some countries specialize in producing goods and services for which
they have advantages such as education, favorable climatic circumstances, and so on. It
results in the business between different countries for the purchase and sale of
specialized products. For example, the Indian market specializes in handcraft products
which increases its exports to other countries.
 Cost Advantages: Production costs vary according to geographical, political, and
socioeconomic situations in different countries. Some countries are in a better position
to manufacture certain commodities at a lower cost than others. Firms participate in
international trade to purchase products that are cheaper in other countries and to sell
things that they can supply at a lower cost. For example, China sells various goods at a
low price to different countries all over the world because of the cost advantage.
Complexities of International Business
a. Difference in languages and problem of distance: Each country has its own language in
which its traders wish to prepare their trade documents right from trade enquiry or the letter
of quotation to the payment documents. This works as a serious barrier between the traders of
the different countries. Moreover, the distance between the trading countries increases the
cost of transportation of goods, making the price high and also creating a risk of fraud, etc. as
the traders may not have face to face contact between them.
b. Import-export restrictions: At times many countries put certain restrictions on their
foreign trade to make their Balance of Payment (BOP) favourable. They impose heavy tariffs
or import duties, volume restrictions on both of their imports as well as their exports. This
hampers the smooth conduct of International trade.
c. Lack of proper information about the foreign market: In most of the cases new traders
do not have adequate information about foreign markets whatever information is provided by
different agencies are either inadequate or does not fulfil their requirements. Thus, they fail to
have clarity about the opportunities available to them for exports and imports.
d. Heavy documentation: International Trade requires so many legal formalities and many
documents, which makes the trade procedure very cumbersome as well complex. Therefore
most of the small traders trade only through third parties rather than going directly and have
to pay commission to them which reduce, their profit margins, increase the cost of
transactions.
e. Payment problems: There may arise payment problem between traders of both countries
as they both want to transact in their own currency and fluctuations in foreign exchange may
also add on to the problem of payment and due to this risk may also arise for both the traders.
Modes of Entry into International Business
1. Exporting

The traditional mode of entering into international business is Exporting. Exporting is the
simplest way to get started in foreign business. As a result, most businesses begin their global
expansion in this manner. The act of selling goods and services produced domestically in
other countries is known as exporting. Exports are classified into two types:

Direct exports are transactions in which a company sells its products directly to a buyer in
another country. At this company, you will gain firsthand market knowledge.
Indirect exports include hiring a third party's skills to facilitate the transaction. The fee is the
amount charged by the intermediary for its services.
2. Licensing

In this mode of entry, a manufacturer from the home country rents the right to their
intellectual properties, such as technology, copyrights, brand names, and so on, to a
manufacturer from a foreign country. To obtain the license, you must pay a set fee. Lessees
are manufacturers who lease, and licensees are manufacturers from the country that receives
the license. Essentially, the licensee is purchasing another company's assets (know-how or
R&D). The licensor may grant these rights non-exclusively to a single licensee or exclusively
to one or more licensees.
3. Franchising

A separate company known as the franchisee operates under the brand of a different
organisation known as the franchisor in this model.
Because of franchising, a franchisee can use a name, procedure, method, or trademark.
Furthermore, the franchisor company provides raw materials, assists the franchisee with
business operations, or does both.
4. Management Contracts

A company essentially rents out its knowledge or know-how to a government or business in

the form of individuals who enter the foreign setting and manage the business under
management contracts and do contract manufacturing.
This strategy of entering international markets is frequently used with a new facility after a
company has been seized by the national government or when a business is experiencing
difficulties.
5. Foreign Direct Investment

A corporation can enter a foreign market through foreign direct investment by investing
significantly there. Foreign direct investment can be used to enter the global market through
mergers and acquisitions, joint ventures, and greenfield investments. This strategy is
appropriate when there is sufficient demand, market size, or market growth potential to
justify the investment.
6. Joint Endeavors

A joint venture is one of the preferred ways to enter the global market for companies that
don't mind sharing their brand, knowledge, and expertise.
Companies that want to expand into international markets can form joint ventures with local
companies in those markets, in which both joint venture partners share the benefits and risks
of the business.
The investment, costs, profits, and losses are allocated to the two corporate units in
accordance with a predetermined ratio.
This method of entering the global market is suitable for countries where the government
prohibits 100 percent foreign ownership in certain industries.
Globalisation
The term globalisation refers to the integration of the economy of the nation with the world
economy. It is a multifaceted aspect. It is a result of the collection of multiple strategies that
are directed at transforming the world towards a greater interdependence and integration.

It includes the creation of networks and pursuits transforming social, economical, and
geographical barriers. Globalisation tries to build links in such a way that the events in India
can be determined by the events happening distances away.

Features of Globalisation

1. Free Trade – Globalisation has helped improve trade volumes between nations with
minimal interference. The reason is that governments are not micromanaging every
minute aspect of business transactions. The Gross Domestic Product (GDP) of
countries that have accepted globalisation has also increased significantly, thus
 bringing in greater prosperity. It has also resulted in better cooperation between
governments that leads to further improvement in trade.
2. Liberalization – One of the main characteristics of globalisation is the improvement
in the business climate for corporations. It has helped entrepreneurs to set up
businesses and transact both within and outside the country. The rules and regulations
for companies are relaxed significantly to allow for more trade between nations due to
globalisation. Flexibility in trade regulations pushes governments to make further
concessions to industries. Both Liberalization and Globalisation are dependent on
each other.
3. Increase in Employment – Every industry is responsible for generating both direct
and indirect jobs. And when production increases, it has a positive effect on
employment. Globalisation helps companies increase their production capacity and set
up operations in different parts of the world. It also helps boost work opportunities in
countries where these corporations have set up operations.
4. Increased connectivity between nations – Globalisation has helped countries
improve trade relations with each other. It has increased interaction between people
and businesses. Better connectivity also boosts a country’s economy and enhances the
standard of living for its citizens.
5. Interdependence – With the advent of globalisation, countries have become more
reliant on each other. Businesses get the opportunity to import cheaper raw materials
to produce their commodities. They are also being allowed to export to countries that
have more demand for their finished goods. It has helped reduce trading barriers and
build overall economic prosperity.
6. Cultural Exchange – Improvement in people to people contacts have encouraged the
intermingling of cultural practices and customs. It has allowed people to exchange
ideas, behaviours and values with other countries. Communities are less isolated as a
result of globalisation. For example, several American eateries have penetrated
different parts of the world. Similarly, cuisine from far off countries is now readily
available in the United States.
7. Urbanization – One of the consequences of globalisation is the increase in urban
centres. When many foreign/local companies set up businesses in a particular area, it
becomes a hotbed of economic activity. The people who work in those companies
need infrastructure near their workplace in terms of housing, transport, shops and
 other establishments. Globalisation leads to the building of urban centres in and
around industrial areas.
8. Standard of Living – With increased economic activity and opportunities for
employment, people have more money in their pockets. They also have more options
to choose from because of improved job opportunities. It is one of the main reasons
why globalisation allows more and more people to improve their standard of living.
9. Production Cost – In a globalized world, companies are free to establish their
operations in areas where the cost of production is low. The cheap availability of land,
labour and raw materials has become very important. So it makes sense for companies
to go where these resources are present in abundant quantities and at discounted rates.
It helps them gain over their rivals by lowering costs and improving profit margins.
10. Outsourcing – One of the characteristics of globalisation is that it allows companies
to bring in third parties from outside the country to manage specific processes. They
take this step to reduce internal costs, improve the quality of services or both.
Outsourcing is a boon for several human resource-rich countries that are looking to
generate employment. Countries like India and the Philippines have benefitted
immensely as a result of this practice.
Driving Forces of Globalisation
The three main areas of drivers for globalization are market, government; cost and
competition. These external drivers affect the main conditions for the potential of
globalization across industries, which are mainly uncontrollable by individual firms.
Market drivers include areas such as common customer needs and transferable
marketing, whereby the emergence of global markets for standardized products has
enabled corporations to cater demands in new markets with existing products.
Government influence is also a major driver, with policies leading to reductions in
trade barriers and a shift towards an open market economy. With access to new
markets and human capitals, in the area of cost advantage drivers, companies are able
to gain new economies of scale by selling at higher quantities, as well as explore the
advantage of low cost production through outsourcing and import. In the case of
competitive drivers, the growing trade between nations along with foreign direct
investment (FDI) has helped to increase interdependence among countries and
organizations, as well as exposing firms to new competitors.
Trade Liberalization
As a way to regulate their international economic position, trade policies has been used by
various governments to control what goes in (imports) and out (exports) of the country. Most
of the restrictive policies are for imports with the use of barriers such as tariffs and non-tariff
barriers, whilst for exports, it tend to be stimulatory. One of the key features and drivers of
globalization has been the liberalization of barriers on trade in goods and services. An
important motivation for such action is usually related with market access, as many
governments reciprocate each other’s liberalization decision, each can benefit from the
market access provided for its export industries by the other reciprocating government. For
example, since major reforms to liberalize market since the 1978 and trade, China
experienced some of the highest GDP growth (around 10%) in the world for decades where
millions were lifted out of poverty.
Although there has been a general shift towards trade liberalization around the world,
countries still have differing policies and levels of liberalization depending on stages of
development, culture and other political factors. One prominent international organization
that promotes trade liberalization and brought major reductions in trade barriers is the World
Trade Organization (WTO), which has the competencies to both enforce existing trade
agreement and to pursue new possibilities of liberalization. Preferential trading agreement
can also take place between countries, such as the European Union (EU) and the North
American Free Trade Agreement (NAFTA), where members have a common foreign trade
policy and substantially reduce internal trade barriers among themselves. Also, though
international trade is getting more liberalized, it has not produced similar level of benefit to
all countries. For example, the influx of cheap, subsidized agriculture goods from western
countries into poorer developing countries in the south after market liberalization, have
devastated many local producers and increase in poverty, as it was the case for the Mexican
corn famers.
Differences in Cost between Countries
As a number of factors such as stage of development, location and demography varies
between countries, the cost of factors of production: land, capital and labor, will undoubtedly
differ as well. These differences also increase international trade and investment, thus further
driving globalization. For example, in the southern city of Guangzhou, China, 10,000
laborer’s work legal hours stitching shoes for Nike at $95 a month. Therefore, it gives great
incentive for companies such as Nike to outsource manufacturing work to China and other
low cost economies, where goods can be made at a fraction of the cost as opposed to
industrialized countries.
As seen in the clothing industries, much of manufacturing has moved to the developing
world, where there are small barriers to entry, labor intensive and only requires low levels
of economic development in the host country. Also, low cost labor does not only apply to low
skilled works, a highly skilled professional in emerging economies can still be much cheaper
to employ compared to ones in developed countries while producing similar quality of result.
For example, the Intel Centrino Duo mobile platform was almost all developed in Intel’s
India development center. When the wages increase as the economy grows, production may
be moved to another low cost economy. Of course, the variation in cost is not unique only in
human capital, but also in many other areas such as raw materials, which can be influence by
geographic location of the country. The cost advantage from outsourcing and importing can
be negated by shipping and distribution cost, but when the difference is high enough, as it
was shown in the huge variation in salaries between China and US; it will still be cheaper to
import.
Rapid Change in Technology
Technological advancement in the past few decades have led to major improvements to
global connectivity, mobility and communication, which in turn helped to facilitate, drive and
be driven by globalization. Examples of technology change facilitating globalization can be
seen in all sectors, from agricultural, production lines, to finance.
In particular, one of the most prevalent changes is in information technology, ranging from
mobile phones to the internet, where people are able to connect to each other from different
localities throughout the world and access all sorts of information. It is based upon the
convergence of communications and computer technologies, shifting from analogue to digital
systems. For example, a director in the US can conduct a meeting with managers based in
India through video conferencing, saving time and money from such long distance travel. For
instance, the Bank of America Corp has 400 video-conferencing systems, and the Cleveland
banking company saves $200,000 a month in travel expense by using video conferencing
according to one of its spokesperson. Although there are concerns of a digital divide between
places that are connected and those that not, the recent development in mobile technology can
help to overcome obstacles in communication access growth in poor countries that lack fixed
line infrastructures.
In another area, innovations in transportation technologies have accelerated geographical
mobility, as speed and efficiency of transportation are dramatically lowered. For instance,
development in aviation technology from propeller aircraft in the 1950s to jet passenger
aircraft by 1960s has cut travelling time by hours, resulting in greater convenience and
international mobility. Overall advances in both transportation and communications
technologies have made today’s complex global economic system possible by overcome the
frictions of space and time.
Globalisation and its impact on India

Effect of Globalisation in India

India is one of the countries that succeeded significantly after the initiation and
implementation of globalisation. The growth of foreign investment in the field of corporate,
retail, and the scientific sector is enormous in the country.

It also had a tremendous impact on the social, monetary, cultural, and political areas. In
recent years, globalisation has increased due to improvements in transportation and
information technology. With the improved global synergies, comes the growth of global
trade, doctrines, and culture.

Globalisation in the Indian economy

Indian society is changing drastically after urbanisation and globalisation. The economic
policies have had a direct influence in forming the basic framework of the economy.

Economic policies established and administered by the government also performed an

essential role in planning levels of savings, employment, income, and investments in the
society.

Cross country culture is one of the critical impacts of globalisation on Indian society. It has
significantly changed several aspects of the country, including cultural, social, political, and
economical.

However, economic unification is the main factor that contributes maximum to a country’s
economy into an international economy.

Advantages of Globalisation in India

Increase in employment: With the opportunity of special economic zones (SEZ), there is an
increase in the number of new jobs available. Including the export processing zones (EPZ)
centre in India is very useful in employing thousands of people.
Another additional factor in India is cheap labour. This feature motivates the big companies
in the west to outsource employees from other regions and cause more employment.

Increase in compensation: After globalisation, the level of compensation has increased as

compared to the domestic companies due to the skill and knowledge a foreign company
offers. This opportunity also emerged as an alteration of the management structure.

High standard of living: With the outbreak of globalisation, the Indian economy and the
standard of living of an individual has increased. This change is notified with the purchasing
behaviour of a person, especially with those who are associated with foreign companies.
Hence, many cities are undergoing a better standard of living along with business
development.

Impact of Globalisation

Outsourcing: This is one of the principal results of the globalisation method. In outsourcing,
a company recruits regular service from the outside sources, often from other nations, that
was earlier implemented internally or from within the nation (like computer service, legal
advice, security, each presented by individual departments of the corporation, and
advertisement).

As a kind of economic venture, outsourcing has increased, in recent times, because of the
increase in quick methods of communication, especially the growth of information
technology (IT).

Many of the services such as voice-based business processes (commonly known as BPS,
BPO, or call centres), accountancy, record keeping, music recording, banking services, book
transcription, film editing, clinical advice, or teachers are being outsourced by the companies
from the advanced countries to India.
Debate on Globalisation