International Business
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International Business

International business consists of trades and or transactions at a global level. These trades and or transactions include the trade of goods, services, technology, capital and or knowledge (ideas). International business consists of importing and/or exporting. The term "international business" refers to business activities which involve cross-border transactions of goods and services between two or more countries. Transactions of economic resources include capital, skills, and people for the purpose of the international production of physical goods and services such as finance, banking, insurance, and construction. International business can also be referred to as globalization. Globalization refers to the tendency of international trade, investments, information technology and outsourced manufacturing to weave the economies of diverse countries together.[1] In order to conduct business overseas, multinational companies need to separate national markets into one huge global marketplace. Two macro factors underline the trend of greater globalization. The first macro-factor is falling of barriers to make cross-border trade easier such as the free flow of goods and services, and capital. The second macro-factor is technological change, particularly the developments in communication, information processing, and transportation technologies.

"International business" can also be defined as the study of the internationalization process of multinational enterprises. A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or with operations in several countries. Well-known MNEs include fast-food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer-electronics producers like Samsung, LG and Sony, and energy companies such as Exxon Mobil, Shell, and BP. As the previously mentioned examples demonstrate, multinational enterprises can conduct business in different types of markets. Therefore, in order to conduct business overseas, companies should be aware of all the factors that might affect any business activities, including, but not limited to: difference in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local cultures, corporate cultures, foreign-exchange markets, tariffs, import and export regulations, trade agreements, climate, education. Each of these factors may require changes in how companies operate from one country to the next.

Background

One of the first scholars to engage in developing a theory of multinational companies was Stephen Hymer.[] Throughout his academic life, he developed theories that sought to explain foreign direct investment and why firms become multinational.

There were three phases in Hymer's work. The first phase was his dissertation in 1960 called the International Operations of National Firms. In this thesis, Hymer departs from neoclassical theory and opens up a new area of international production. At first, Hymer started analyzing neoclassical theory and the financial investment wherein the main reason for capital movement is the difference in interest rates. Then he started analyzing the characteristics of foreign investment by large companies for production and direct business purposes, calling this Foreign Direct Investment. By analyzing the two types of investments Hymer distinguished financial investment from direct investment. The main distinguishing feature was control. Where portfolio investment is a more passive approach, and the main purpose is financial gain, with foreign direct investment a firm has control over the operations abroad. So the traditional theory of investment based on differential interest rates does not explain the motivations for FDI.

According to Hymer, there are two main determinants of FDI wherein an imperfect market structure is the key element. The first is the firm-specific advantages which are developed at the specific companies home country and, profitably, used in the foreign country. The second determinant is the removal of control wherein Hymer wrote: "When firms are interconnected, they compete in selling in the same market or one of the firms may sell to the other," and because of this "it may be profitable to substitute centralised decision-making for decentralised decision-making."

The second phase is his neoclassical article in 1968. This paper includes a theory of internationalization and explains the direction of growth of the international expansion of firms. In a later stage, Hymer went to a more Marxist approach where he explains that MNC as agents of an international capitalist system causing conflict and contradictions, causing among other inequality and poverty in the world. Hymer is the father of the theory of MNE", and explains the motivations for companies doing direct business abroad.

Among modern economic theories of multinationals and foreign direct investment are internalization theory and John Dunning's OLI paradigm. Hymer and Dunning are considered founding fathers of international business as a specialist field of study.

Physical and social factors of competitive business and social environment

The conduct of international operations depends on a company's objectives and the means with which they carry them out. The operations affect and are affected by the physical and societal factors and the competitive environment.

Operations

Each firm develops its own approach to succeed within international trades. However, they all have something in common which is to increase their economic value when engaging in international transactions. In order to do so, they have to develop different strategies, as a mean,to maximize value , lower cost, and increase profits . The firm's value creation is the difference between P (the price that the firm can charge for that product given competitive pressure) and C (the cost of producing that product). Value creation can be categorized as: Primary activities (R&D, production, marketing and sales, customer service) and as Support activities (Information systems, logistics, human resources). All of these activities must be managed effectively and be consistent with the firm strategy. However, the success of firms that extend internationally depends on the goods or services sold and on the firm's core competencies (Skills within the firm that competitors cannot easily match or imitate). For a firm to be successful, the firm's strategy must be consistent with the environment in which the firm operates. Therefore, the firm needs to change its organizational structure to reflect changes in the setting in which they are operating and the strategy they are pursuing.

Once a firm decides to enter a foreign market, the question arises as to the best mode of entry. There is no right decision when entering a market. it all depends on the firm's objectives and goals. There are six different mode to enter a foreign market. The first entry mode is exporting. Exporting is manufacturing the product in a centralized location and exporting it to other national markets. In this way, the firm may realize substantial scale economies from its global sales revenue. As an example, many Japanese automakers made inroads into the U.S. market through exporting. A second entry mode is something called a Turnkey project. A Turnkey Project is when a company allows a contractor to handle every detail of the project in a foreign market, including the training of operating personnel. At completion of the contract, the contractor hands a plant that is ready for full operation. This is a way of exporting process technology to other countries. Licensing and franchising are two more entry modes and are pretty similar definition wise. Licensing is the ability for a licensor to grant the rights to intangible property to the licensee for a specified period of time, and in return, receives a royalty fee from the licensee. Franchising on the other hand, is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to its business strategy and methods. Lastly, a joint venture and wholly owned subsidiary are two more entry modes in international business. A joint venture is when a firm created is jointly owned by two or more companies (Most joint venture are 50-50 percent partnership). This is in contrast with a wholly owned subsidiary, when a firm owns 100 percent of the stock of a company in a foreign country because it has either set up a new operation or acquires an established firm in that country.

Types of Operations

Exports and imports of merchandise:

  • Service exports and imports
  • Merchandise exports: goods exported, not including services.[2]
  • Merchandise imports: The import goods are the ones brought into a country.
  • Service exports and imports are not product purchasing. It is only about services. Services exports and imports can be divided into three most important categories
  • "Tourism and transportation, service performance, asset use".[3]
  • Exports and Imports of products, goods or services are usually a country's most important international economic transactions.[3]

Choice of entry mode in international business

Strategic variables impact the choice of entry mode for multinational corporation expansion beyond their domestic markets. These variables are global concentration, global synergies, and global strategic motivations of MNC.

  • Global concentration: many MNC share and overlap markets with a limited number of other corporations in the same industry.
  • Global synergies: the reuse or sharing of resources by a corporation and may include marketing departments or other inputs that can be used in multiple markets.
  • Global strategic motivations: other factors beyond entry mode that are the basic reasons for corporate expansion into an additional market. These are strategic reasons that may include establishing a foreign outpost for expansion, developing sourcing sites among other strategic reasons.[4]

Means of businesses

Physical and social factors

  • Geographical influences: There are many different geographical factors that affect international business. The geographical size, the climatic challenges happening throughout the world, the natural resources available on a specific territory, the population distribution in a country, etc. are some of the influences that have an effect on the international trade.[6]
  • Social factors: Political policies: political disputes, particularly those that result in the military confrontation, can disrupt trade and investment.
  • Legal policies: domestic and international laws play a big role in determining how a company can operate overseas.
  • Behavioural factors: in a foreign environment, the related disciplines such as anthropology, psychology, and sociology are helpful for managers to get a better understanding of values, attitudes, and beliefs.
  • Economic forces: economics explains country differences in costs, currency values, and market size.[3]

Risks

  • Strategic

A firm must be prepared, aware of the competition and ready to face it in the international market. Several companies (competitors) could substitute for products or services of an unpopular firm. A brilliant and innovative strategy will help a firm succeed.[7]

  • Operational risk

A company has to be conscious about the production costs in order to not waste time and money. If the expenditures and costs are controlled, it will create an efficient production and help the internationalization.[7]

  • Political risk

How a government governs a country can affect the operations of a firm. The government might be corrupt, hostile, totalitarian, etc., and has a negative image around the globe. A firm's reputation can change if it operates in a country controlled by that type of government.[7] Also, an unstable political situation can be a risk for multinational firms. Elections or any political event that is unexpected can change a country's situation and put a firm in an awkward position.[8]

  • Technological risk

Technological progress brings many benefits, but some disadvantages, including "lack of security in electronic transactions, the cost of developing new technology ... the fact that this new technology may fail, and, when all of these are coupled with the outdated existing technology, [the fact that] the result may create a dangerous effect in doing business in the international arena."[7]

  • Environmental Risk

Companies that establish a subsidiary or factory abroad need to be conscious about the externalities they will produce. Negative externalities can be noise, pollution, etc. The population might want to fight against the company to keep a natural and healthy environment/country. This situation can change the customer's perception of the firm and create a negative image of it.[7]

  • Economic risk

These are the economic risks explained by Professor Okolo: "This comes from the inability of a country to meet its financial obligations. The changing of foreign-investment or/and domestic fiscal or monetary policies. The effect of exchange-rate and interest rate make it difficult to conduct international business."[7] Moreover, it can be a risk for a company to operate in a country and they may experience an unexpected economic crisis after establishing the subsidiary.[8]

  • Financial risk

According to Professor Okolo: "This area is affected by the currency exchange rate, government flexibility in allowing the firms to repatriate profits or funds outside the country. The devaluation and inflation will also impact the firm's ability to operate at an efficient capacity and still be stable."[7] Furthermore, the taxes that a company has to pay might be advantageous or not. It might be higher or lower in the host countries. Then "the risk that a government will discriminatorily change the laws, regulations, or contracts governing an investment--or will fail to enforce them--in a way that reduces an investor's financial returns is what we call 'policy risk.'"[8]

  • Terrorism

A terrorist attack is a violent attack against a company or country that was done with the intention of hurting or damaging that company or country. Hate is usually the motivating factor and can be based on religion, culture, political ideas, etc. The World Trade Center attack on 9/11 is an example of a terrorist attack that affected the entire United States in addition to the companies that operated in those buildings.[9] It can be difficult to operate in a place where the environment is tense and scary and in countries that are likely to be attacked.[10]

  • Planning risk
  • Price risk
  • Customer satisfaction risk
  • Mismanagement risks
  • Competitive risks
  • Location risks

A company has to choose the right location for the subsidiary abroad. It needs to make the right choice before outsourcing or offshoring its activities. There are many criteria to take into account: If there is enough of a labor force to work for the firm, what the regulations are, what the laws and policies of the host country are, if the area is safe, etc. It is important to know the data of the host country, such as the crime rate. Also, are the host country citizens willing to have this foreign company on their territory or not?[11]

  • Bribery

Bribery is a worldwide phenomenon. Multinational enterprises must be conscious and concerned about it. Companies operating on the international market have a role in combating bribery, as do governments, trade unions, etc. The countries participating in international trade need to prevent bribery, not support it, offer it, give it, promise it, etc.[] Societal risk

Factors that influenced the growth in globalization of international business

There has been growth in globalization in recent decades due to (at least) the following eight factors:

Importance of international business education

  • Most companies are either international or compete with international companies.
  • Modes of operation may differ from those used domestically.
  • The best way of conducting business may differ by country.
  • An understanding helps one make better career decisions.
  • An understanding helps one decide what governmental policies to support.

Managers in international business must understand social science disciplines and how they affect all functional business fields.

In order to maintain and achieve successful business operations in foreign nations, you must understand how variations in culture and traditions across nations effect business practices. This idea is known as cultural literacy. Considering strategy when entering foreign markets can become complicated when you only have your own home country's culture to refer to. This can create a blind spot during the decision making process and result in ethnocentrism. Education on international business introduces the student to new concepts that can be applicable in international dilemmas such as marketing and operations.

Importance of language/cultural studies in international business

A considerable advantage in international business is gained through the knowledge and use of language. Advantages of being an international businessperson who is fluent in the local language include the following:

  • Having the ability to directly communicate with employees and customers
  • Understanding the manner of speaking within business in the local area to improve overall productivity
  • Gaining respect of customers and employees from speaking with them in their native tongue

In many cases, it is truly impossible to gain an understanding of a culture's buying habits without first taking the time to understand the culture. Examples of the benefit of understanding local culture include the following:

  • Being able to provide marketing techniques that are specifically tailored to the local market
  • Knowing how other businesses operate and what might or might not be social taboos
  • Understanding the time structure of an area. Some societies are more focused on "being on time" while others focus on doing business at "the right time".
  • Associating with people who do not know several languages.
  • Language barriers can have an impact on transaction costs. Linguistic distance is defined as the amount of variation one language has from another. For example, English, French, and Spanish are all languages derived from Latin. When evaluating dialogue in these languages, you will discover many similarities. However, languages such as English and Chinese or English and Arabic vary way more and contain no similarities. The alphabet and writing of these languages are also different. The large the linguistic distance there, the wider language barriers to cross and these differences can reflect on transaction costs and make foreign business operations more expensive.

Importance of studying international business

The international business standards focus on the following:

  • raising awareness of the interrelatedness of one country's political policies and economic practices on another;
  • learning to improve international business relations through appropriate communication strategies;
  • understanding the global business environment--that is, the interconnectedness of cultural, political, legal, economic, and ethical systems;
  • exploring basic concepts underlying international finance, management, marketing, and trade relations; and
  • identifying forms of business ownership and international business opportunities.

By focusing on these, students will gain a better understanding of Political economy. These are tools that would help future business people bridge the economic and political gap between countries.

There is an increasing amount of demand for business people with an education in international business. A survey conducted by Thomas Patrick from University of Notre Dame concluded that bachelor's degree and master's degree holders felt that the training received through education were very practical in the working environment. Business people with an education in international business also had a significantly higher chance of being sent abroad to work under the international operations of a firm.

The following table provides descriptions of higher education in international business and its benefits.

Masters Doctorate
Who is this degree for People interested in management careers with multinational companies People who are interested in academic or research careers
Common career paths (with approximate median annual salary) - Chief executives ($167,000)*

- General or operations managers ($95,000)*

- University business professors ($75,000)*

- Economists ($91,000)*

Time to completion 1-2 years full-time 3-5 years in addition to master's or other foundational coursework
Common graduation requirements - Roughly 15-20 graduate level courses

- Internship or study abroad program

- Foreign language requirement

Most (or all) of the master's degree requirements, plus:

- At least 12 more graduate level courses

- Ph.D. qualifier exams

- Dissertation prospectus (proposal)

- Dissertation

- Teaching requirement

Prerequisites Bachelor's degree and work experience, quantitative expertise Bachelor's or master's degree in business or related field
Online availability Yes Limited

References

  1. ^ Staff, Investopedia (2003-11-20). "Globalization". Investopedia. Retrieved . 
  2. ^ What is Merchandised Exports. The Law Dictionary. Accessed 30 September 2015.
  3. ^ a b c Daniels, J., Radebaugh, L., Sullivan, D. (2007). International Business: environment and operations, 11th edition. Prentice Hall. International Business can also be referred as globalization. Globalization refers to the shift toward a more integrated and interdependent economy In order to conduct business overseas, multinational companies need to separate national markets into one huge global marketplace. Two macro factors underline the trend of greater globalization. The first is falling of barriers to make cross-border trade easier such as the free flow of goods and services, and capital. The second factor is technological change, particularly the developments in communication, information processing, and transportation technologies. Usually, private companies undertake transactions for profit; governments undertake such transactions for profit and for political reasonsISBN 0-13-186942-6
  4. ^ Kim, W. C., & Hwang, P. (1992). Global strategy and multinationals' entry mode choice. Journal of International Business Studies, 23(1), 29. Accessed 30 September 2015.
  5. ^ Luthans, F., Doh, J. P. (2015). International Management: Culture, Strategy and Behavior, 9th edition. McGraw Hill. ISBN 0-07786244-9
  6. ^ Witiger, (2012). The Physical/Geographic Environment. Accessed 30 September 2015.
  7. ^ a b c d e f g Okolo, S. (n.d.). Global Business: Risks in International Business. [online] Globalpaarisite.blogspot.com.es. Available at: http://globalpaarisite.blogspot.com.es/2012/08/risks-in-international-business.html [Accessed 10 May 2015].
  8. ^ a b c J. Henisz, W. and A. Zelner, B. (2010). Hidden Risks in Emerging Markets. Harvard Business Review. Accessed 9 May 2015.
  9. ^ Yourdictionary.com, (n.d.). Terrorism dictionary definition | terrorism defined. [online] Available at: http://www.yourdictionary.com/terrorism [Accessed 9 May 2015].
  10. ^ Okolo, S. (n.d.). Global Business: Risks in International Business. [online] Globalpaarisite.blogspot.com.es. Available at: http://globalpaarisite.blogspot.com.es/2012/08/risks-in-international-business.html [Accessed 10 May 2015].
  11. ^ Martinez, M. (2014). Expansion Comes with Risk. Pinkerton. Accessed 9 May 2015.
  • Daniels, J., Radebaugh, L., Sullivan, D. (2014). International Business: environment and operations, 15th edition. Prentice Hall.
  • Daniels, John D., Lee H. Radebaugh, and Daniel P. Sullivan. Globalization and business. Prentice Hall, 2002.

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