IBM/U1 Topic 1 International Business- Introduction, Concept, Definition
With the globalization of the world economy, there has been a concomitant rise in the number of companies that operate globally. Though international business as a concept has been around since the time of the East India Company and continued into the early decades of the 20th century, there was a lull in the international expansion of companies because of the Two World Wars. After that, there was a hesitant move towards internationalizing the operations of multinational companies.
What really provided a fillip to the global expansion of companies was the Chicago School of Economic Thought propelled by the legendary economist, Milton Friedman, which championed neoliberal globalization. This ideology, which started in the early 1970s gradually, became a major force to reckon with in the 1980s and became the norm in the 1990s. The result of all this was the frenzied expansion of global companies across the world.
Thus, international businesses grew in scope and size to the point where at the moment; the global economy is dominated by multinationals from all countries in the world. What was primarily a phenomenon of western corporations has now expanded to include companies from the East (from countries like India and China). This module examines the phenomenon of international businesses from different aspects like the characteristics of international business, their effect on the local, target economies, and the ways and means with which they would have to operate and succeed in the global competition for ideas and profits.
Above all, international businesses have to ensure that they blend the global outlook and the local adaptation resulting in a “Glocal” phenomenon wherein they would have to think global and act local. Further, international businesses need to ensure that they do not fall afoul of local laws and at the same time repatriate profits back to their home countries. Apart from this, the questions of employability and employment conditions that dictate the operations of global businesses have to be taken into consideration as well.
Considering the fact that many third world countries are liberalizing and opening up their economies, there can be no better time than now for international businesses. This is balanced by the countervailing force of the ongoing economic crisis that has dealt a severe blow to the global economy. The third force that determines international businesses are that not only is the third world countries eager to welcome foreign investment, they seek to emulate the international businesses and become like them. Hence, these aspects would be discussed in detail in the subsequent articles.
Finally, international businesses have to ensure that they have a set of operating procedures and norms that are sensitive to the local culture and customs and at the same time, they stick to their brand that has been developed for global markets. This is the challenge that we discussed earlier as “Glocal” orientation.
Any business that involves operations in more than one country can be called an international business. International business is related to the trade and investment operations done by entities across national borders.
Firms may assemble, acquire, produce, market, and perform other value-addition-operations on international scale and scope. Business organizations may also engage in collaborations with business partners from different countries.
Apart from individual firms, governments and international agencies may also get involved in international business transactions. Companies and countries may exchange different types of physical and intellectual assets. These assets can be products, services, capital, technology, knowledge, or labor.
Internationalization of Business
Let’s try to explore the reasons why a business would like to go global. It is important to note that there are many challenges in the path of internationalization, but we’ll focus on the positive attributes of the process for the time-being.
There are five major reasons why a business may want to go global −
- First-mover Advantage− It refers to getting into a new market and enjoy the advantages of being first. It is easy to quickly start doing business and get early adopters by being first.
- Opportunity for Growth− Potential for growth is a very common reason of internationalization. Your market may saturate in your home country and therefore you may set out on exploring new markets.
- Small Local Markets− Start-ups in Finland and Nordics have always looked at internationalization as a major strategy from the very beginning because their local market is small.
- Increase of Customers− If customers are in short supply, it may hit a company’s potential for growth. In such a case, companies may look for internationalization.
- Discourage Local Competitors− Acquiring a new market may mean discouraging other players from getting into the same business-space as one company is in.
Advantages of Internationalization
There are multiple advantages of going international. However, the most striking and impactful ones are the following four.
International businesses having products that don’t really sell well enough in their local or regional market may find a much better customer base in international markets. Hence, a business house having global presence need not dump the unsold stock of products at deep discounts in the local market. It can search for some new markets where the products sell at a higher price.
A business having international operations may also find new products to sell internationally which they don’t offer in the local markets. International businesses have a wider audience and thus they can sell a larger range of products or services.
Competition can be a local phenomenon. International markets can have less competition where the businesses can capture a market share quickly. This factor is particularly advantageous when high-quality and superior products are available. Local companies may have the same quality products, but the international businesses may have little competition in a market where an inferior product is available.
Protection from National Trends and Events
Marketing in several countries reduces the vulnerability to events of one country. For example, the political, social, geographical and religious factors that negatively affect a country may be offset by marketing the same product in a different country. Moreover, risks that can disrupt business can be minimized by marketing internationally.
Learning New Methods
Doing business in more than one country offers great insights to learn new ways of accomplishing things. This new knowledge and experience can pave ways to success in other markets as well.
Although globalization and internationalization are used in the same context, there are some major differences.
- Globalization is a much larger process and often includes the assimilation of the markets as a whole. Moreover, when we talk about globalization, we take up the cultural context as well.
- Globalization is an intensified process of internationalizing a business. In general terms, global companies are larger and more widespread than the low-lying international business organizations.
- Globalization means the intensification of cross-country political, cultural, social, economic, and technological interactions that result in the formation of transnational business organization. It also refers to the assimilation of economic, political, and social initiatives on a global scale.
- Globalization also refers to the costless cross-border transition of goods and services, capital, knowledge, and labor.
Factors Causing Globalization of Businesses
There are many factors related to the change of technology, international policies, and cultural assimilation that initiated the process of globalization. The following are the most important factors that helped globalization take shape and spread it drastically.
The Reduction and Removal of Trade Barriers
After World War II, the General Agreement on Tariffs and Trade (GATT) and the WTO have reduced tariffs and various non-tariff barriers to trade. It enabled more countries to explore their comparative advantage. It has a direct impact on globalization.
The Uruguay Round of negotiations (1986–94) can be considered as the real boon for globalization. It is considerably a large set of measures which was agreed upon exclusively for liberalized trade. As a result, the world trade volume increased by 50% in the following 6 years of the Uruguay Round, paving the way for businesses to span their offerings at an international level.
Over the last 25 years, sea transport costs have plunged 70%, and the airfreight costs have nosedived 3–4% annually. The result is a boost in international and multi-continental trade flows that led to Globalization.
Growth of the Internet
Expansion of e-commerce due to the growth of the Internet has enabled businesses to compete globally. Essentially, due to the availability of the Internet, consumers are interested to buy products online at a low price after reviewing best deals from multiple vendors. At the same time, online suppliers are saving a lot of marketing costs.
Growth of Multinational Corporations
Multinational Corporations (MNCs) have characterized the global interdependence. They encompass a number of countries. Their sales, profits, and the flow of production is reliant on several countries at once.
The Development of Trading Blocs
The ‘regional trade agreement’ (RTA) abolished internal barriers to trade and replaced them with a common external tariff against non-members. Trading blocs actually promote globalization and interdependence of economies via trade creation.