IBM/U1 Topic 3 Meaning and Importance of International Competitive Advantage
Participation in international business allows countries to take advantage of their comparative advantage.
The concept of comparative advantage means that a nation has an advantage over other nations in terms of access to affordable land, resources, labor, and capital. In other words, a country will export those products or services that utilize abundant factors of production. Further, companies with sufficient capital may seek another country that is abundant in land or labor, or companies may seek to invest internationally when their home market becomes saturated.
Participation in international business allows countries to take advantage of specialized expertise and abundant factors of production to deliver goods and services into the international marketplace. This has the benefit of increasing the variety of goods and services available in the marketplace.
International business also increases competition in domestic markets and introduces new opportunities to foreign markets. Global competition encourages companies to become more innovative and efficient in their use of resources.
For consumers, international business introduces them to a variety of goods and services. For many, it enhances their standard of living and increases their exposure to new ideas, devices, products, services, and technologies.
The Growth of International Business
The prevalence of international business has increased significantly during the last part of the twentieth century, thanks to the liberalization of trade and investment and the development of technology. Some of the significant elements that have advanced international business include:
- The formation of the World Trade Organization (WTO) in 1995
- The inception of electronic funds transfers
- The introduction of the euro to the European Union
- Technological innovation that facilitates global communication and transportation
- The dissolution of a number of communist markets, thus opening up many economies to private business
Today, global competition affects nearly every company—regardless of size. Many source suppliers from foreign countries and still more compete against products or services that originate abroad. International business remains a broad concept that encompasses the smallest companies that may only export or import with one other country, as well as the largest global firms with integrated operations and strategic alliances around the globe.
The Challenges and Considerations of International Business
Because nation-states have unique government systems, laws and regulations, taxes, duties, currencies, cultures, practices, etc. international business is decidedly more complex that business that operates exclusively in domestic markets.
The major task of international business involves understanding the sheer size of the global marketplace. There are currently more than 200 national markets in the world, presenting a seemingly endless supply of international business opportunities. However, the diversity between nations presents unique considerations and a plethora of hurdles, such as:
- National wealth disparities: Wealth disparities among nations remain vast.
- Regional diversity according to wealth and population: North America is home to just 5 percent of the world’s population, yet it controls almost one-third of the world’s gross domestic product.
- Cultural/linguistic diversity: There are more than 10,000 linguistic/cultural groups in the world.
- Country size and population diversity: There were about 60 countries at the start of the twentieth century; by 2000, this number grew to more than 200.
Some of the challenges considered by companies and professionals involved in international business include:
The economic environment may be very different from one country to the next. The economy of countries may be industrialized (developed), emerging (newly industrializing), or less developed (third world). Further, within each of these economies are a vast array of variations, which have a major effect on everything from education and infrastructure to technology and healthcare.
A nation’s economic structure as a free market, centrally planned market, or mixed market also plays a distinct role in the ease at which international business efforts can take place. For example, free market economies allow international business activities to take place with little interference. On the opposite end of the spectrum, centrally planned economies are government-controlled. Although most countries now function as free-market economies, China—the world’s most populous country—remains a centrally planned economy.
The political environment of international business refers to the relationship between government and business, as well as the political risk of a nation. Therefore, companies involved in international business must expect to deal with different types of governments, such as multi-party democracies, one-party states, dictatorships, and constitutional monarchies.
Some governments may view foreign businesses as positive, while other governments may view them as exploitative. Because international companies rely on the goodwill of the government, international business must take the political structure of the foreign government into consideration.
International firms must also consider the degree of political risk in a foreign location; in other words, the likelihood of major governmental changes taking place. Just a few of the issues of unstable governments that international companies must consider include riots, revolutions, war, and terrorism.
The cultural environment of a foreign nation remains a critical component of the international business environment, yet it is one of the most difficult to understand. The cultural environment of a foreign nation involves commonly shared beliefs and values, formed by factors such as language, religion, geographic location, government, history, and education.
It is common for many international firms to conduct a cultural analysis of a foreign nation as to better understand these factors and how they affect international business efforts.
The competitive environment is constantly changing according to the economic, political, and cultural environments. Competition may exist from a variety of sources, and the nature of competition may change from place to place. It may be encouraged or discouraged in favor of cooperation, and the relationship between buyers and sellers may be friendly or hostile. The level of technological innovation is also an important aspect of the competitive environment as firms compete for access to the newest technology.