Introduction, Drivers and Benefits of International Business

Narendra Kumar

08 Dec, 2020

The International business means the buying & selling of the goods & services across the border. These business activities may be government or private enterprises. Here national border is crossed by the enterprises to expand their own business activities such as the manufacturing, mining, construction, agriculture, banking, insurance, health, education, transportation, communication & so on. The business enterprise who goes for the international business has to take a very wide & long view before making any decision, it has to refer to the social, political, historical, cultural, geographical, physical, ecological & economic aspects of another country where it had to business. International business by its nature is the primary determinant of international trade, 1 of the results of the increasing success of international business ventures is globalization. International Business is the process of focusing on the resources of the globe & objectives of organizations on global business opportunities & threats. The International business is defined as the global trade of goods/services or investment. In this article, we will discuss the Introduction, Drivers, and Benefits of International Business deeply.

Drivers of International Business

• Higher Rate of Profits: The basic objective of the business is to achieve profits. When the domestic markets don’t promise a higher rate of profits, business firms search for foreign markets where there is a scope for a higher rate of the profits. Therefore the objective of profit affects & motivates the business to expand operations to the foreign countries. For example, Hewlett Packard in the USA earns more than half of its profits from the foreign markets as compared to that of domestic markets.
• Expanding the Production Capacities beyond the Demand of Domestic Country: Some of the domestic companies expand their production capacities more than the demand for the product in the domestic countries. In such cases, these companies are forced to sell their extra production in foreign developed countries. Toyota of Japan is an example.
• Limited Home Market: When a size of the home market is limited either due to the smaller size of the population or due to the lower purchasing power of all people or both, the companies internationalize their operations. For example, most of the Japanese automobiles & electronics firms entered the USA, Europe & even African markets due to the smaller size of the home market. ITC entered the European market due to the lower purchasing power of the Indians with regard to high-quality cigarettes.

• Political Stability vs. Political Instability: The Political stability doesn’t simply mean that the continuation of the same party in power, but it means that continuation of the same policies of the Government for a quite long period. It is viewed that the USA is a politically stable country; countries like the UK, France, Germany, Italy & Japan are also politically stable. Most of the African countries & some of the Asian countries are politically unstable countries. Business firms prefer to enter the politically stable countries & are restrained from locating their own business operations in politically unstable countries. In fact, business firms shift their operations from politically unstable countries to politically stable countries.
• Availability of Technology & Competent Human Resources: The Availability of advanced technology & competent human resources in some countries act like pulling factors for business firms from other countries. For example, American & European companies, in recent years, have been depended on Indian companies for the software products & the services through their business process outsourcing (BPO). This is due to the cost of human resources in India is almost/approximately 10 to 15 times less compared to the US & European labor markets.
• High Cost of Transportation: Initially the companies enter foreign countries for their marketing operations. But the home companies in any country enjoy their higher profit margins as compared to the foreign firms on account of the cost of transportation of the products. Under such conditions, the foreign companies are inclined to increase their profit margin by locating their manufacturing facilities in foreign countries through Foreign Direct Investment (FDI) route to satisfy the demand of either one of the countries or the group of neighboring countries. For example, Mobil which was supplying petroleum products to Ethiopia, Kenya, Eritrea, Sudan etc., from its refineries in Saudi Arabia, established its refinery facilities in Eritrea in order to reduce the cost of transportation.
• Availability of Raw Materials: The source of highly qualitative raw materials & bulk raw materials is a major factor in attracting companies from various foreign countries. For example, Vedanta Resources is a London Stock Exchange (LSE) listed UK based company operating principally in India due to the availability of raw materials such as iron ore, copper, zinc & lead.

• Liberalization & Globalization: Most of the countries around the globe liberalized their economies &opened their countries to the rest of the globe. These change in the policies attracted multinational companies to the extent their operations to these countries.
• Growth in Market Share: Some of the large-scale business firms^[1] would like to enhance their market share in the global market by expanding & intensifying their operations in various foreign countries. The Smaller companies expand internationally for survival while the larger companies expand to increase their market share. For example Ball Corporation, the 3rd largest beverage can manufacturer in the USA, bought the European packaging operations of Continental Can Company.

Benefits of International Business

• High Living Standards: Comparative cost theory indicates that the countries which have the advantages of raw materials, human resources, natural resources & climatic conditions in producing particular goods can produce the products at low-cost & also of high quality. Customers in various countries can buy more products with the same amount of money. In turn, it can also enhance the living standards of the people through enhanced purchasing power & by consuming high-quality products.
• Increased Socio-Economic Welfare: International business enhances consumption level, the economic welfare of the people of the trading countries. For example, the people of China are now enjoying a variety of products from various countries like Coca-Cola, McDonald’s range of products, electronic products of Japan & coffee from Brazil. Thus the Chinese consumption levels & socio-economic welfare has enhanced.
• Wider Market: International business widens the market &increases the market size. Therefore, the companies need not depend on the demand for the product in a single country or customer’s tastes & the preferences of a single country. Due to the enhanced market Air France now mostly depends on the demand for air travel of the customers from the countries other than France. This is factual in case of most of the MNCs like Toyota, Honda, Xerox & Coca-Cola.
• Reduced Effects of Business Cycles: The stages of the business cycles vary from country to country. Therefore, MNCs shift from the country experiencing a recession to the country experiencing ‘boom’ conditions. This enables international firms to escape recessionary conditions.
• Reduced Risks: Both commercial & political risks are reduced for the companies engaged in the international business due to spread in the different countries. Multinationals which were operating in erstwhile USSR were affected only partly due to their safer operations in other countries. But the domestic companies of the then USSR collapsed entirely.
• Large-scale Economies: Multinational companies due to wider &larger markets produce larger quantities, which provide the benefits of large-scale economies like reduced cost of production, availability of expertise, quality etc.
• Potential Untapped Markets: International business provides the chance of exploring & exploiting the potential markets which are untapped so far. These markets provide an opportunity for selling the product at a higher price than in the domestic markets. For example, Bata sells shoes in the UK at £ 100 (approx. Rs. 8000) whose price is around Rs. 1200 in India.
• Provides the Opportunity to Domestic Business: International Business firms provide opportunities for domestic companies. These opportunities comprise technology, management expertise, market intelligence, product developments, etc. For example, Japanese firms like Honda, Yamaha, and Suzuki & Kawasaki have a combined to form Joint Ventures with Indian companies to form a Hero Honda, Birla Yamaha, Maruti Suzuki & Kawasaki Bajaj to share the technology & the product development expertise.
• Division of Labour & Specialization: International business leads to division of labor &specialization. For example, Brazil specializes in coffee, Kenya in tea, Japan in automobiles & electronics, India in textile garments etc.
• Economic Growth of the World at large: Specialization, a division of labor, enhancement of productivity, posing challenges, development to meet them, innovations & creations to meet the competition leads to the overall economic growth of the world nations. The International business particularly helped the Asian countries like Japan, Taiwan, Korea, Philippines, Singapore, Malaysia & the United Arab Emirates.
• Optimum & Proper Utilization of World Resources: the international business provides for the flow of the raw materials, natural resources & human resources from the countries where they are in excess supply to those countries where they are in short supply or need most. For example the flow of human resources from India, consumer goods from the UK, France, Italy & Germany to developing countries. This, in turn, helps in the optimum & proper utilization of world resources.
• Cultural Transformation: International business benefits are not purely economic or commercial; they are even social &cultural. These days, we observe that the West is slowly tending towards the East & vice versa. It does mean that the good cultural factors & values of the East are acquired by the West & vice versa. Therefore there is a close cultural transformation & integration.