Year: 2020

International Business Ethics

International business ethics emerged quite late globally compared to the business ethics that came up in 1970’s. It was only in late 1990’s that the international business ethics came to the fore especially so after the economic developments that occurred on a global scale.

In 1990’s many businesses from the developing countries expanded their operations and became multinational. The transactions between businesses and the governments increased as a result, which gave rise to many practical issues. Culture and its relativity was one factor more prominent than the others. Other ethical issues in the context of international business are generally dealt with the laws of the land; although all of them fall within the ambit of international business ethics.

Globalization diminished the barriers between countries on the globe and also called for universalization of values for trade to occur smoothly. Universal values were perceived to control the behaviour in the commercial space. This lead to ethical issues in the international business perspective, those that were unknown till date.

Other theoretical issues arise from the diversity of business ethical traditions in various countries across the globe. In addition, comparisons made on the basis of corruption rankings of a certain state or on the basis of gross domestic product of a certain economy also lead to ethical issues in the international arena.

Since religion brings in a wholly different perspective to the way we look upon things; the comparison of ethical traditions from the perspective of the latter also gives birth to ethical problems. For example, trade in Christian dominated countries is different from the trade in Islamic countries. Again depending upon how strong or profound the impact of the religion is, business practices are influenced proportionally.

In the international business arena, ethical problems also arise out mere international business transactions. Fair trade movement, transfer pricing, bioprospecting and biopiracy are examples of transactions that fall within the ambit of international business ethics. Similarly issues like child labor and cultural imperialism are controversial enough to call upon the attention of international business ethics.

Yet another arena for strong requirement of ethics would be when multinationals bargain to take advantage of international differences; For example when rich nations outsource their services to poor and developing nations at cheaper cost. Western nations were up till recently outsourcing many of services to third world nations where they could hire manpower for the cheapest prices. This led to a severe competition between developing nations with each one offering cheaper labour than the other.

Dumping is yet another way by which large companies are trying to kill the domestic players. Foreign players often sell goods and services at a cheaper price making it hard for the small players to survive the competition. Consumer durables and FMCG are biggest examples of such practices. The bigger threat here is the resulting monopoly which places the customer in a losing position. The international trade commission began for its search of its anti dumping laws from the year 2009.

All these are ways in which business at the international level can lead to ethical dilemmas. In absence of international business ethics it may become almost impossible to regulate business and create winning situations for people in the market place.

Ethical issues in Business

Business ethics is both part of the prescriptive (normative) ethics establishing standards of conduct, recommending certain behaviours, as well as descriptive ethics, describing the moral attitudes and behaviours of entrepreneurs. In principle, the practical goal of business ethics is to solve ethics problems in business.

Ethical factor in area of business communication

• Proper marketing techniques, telling truth about products and services,
• Informing customers, employees and partners about company’s mission statement and goals,
• Respecting religious and social values of employees, customers and partners,
• Negligence in informing shareholders about company’s situation, managerial ethics
• Insider trading, hiding information about mergers, acquisitions, investments, etc.

Ethical factors concerning production processes

• Eliminating unsafe working conditions,
• Avoiding processes and technologies that jeopardize the safety of the employees and public,
• Producing product safe for customers,
• Waste product utilization and recycling,
• Profiting from products bad for health (drugs, cigarettes, alcohol) and people (gambling),

Social Responsibility

Social responsibility is a form of management that considers ethical issues in all aspects of the business. Strategic decisions of a company have both social and economic consequences. Social responsibility of a company is a main element of the strategy formulation process. There is a misconception that corporate social responsibility is less relevant to small businesses; however, there is growing recognition of the importance of social responsibility for smaller firms.

Integrating social responsibility in strategic management requires sound knowledge of the types of social responsibilities a company deals with. Economic responsibilities are the most basic type of social responsibilities. The company is expected to provide goods to the society at reasonable prices, create jobs and pay due taxes.

Legal responsibilities reflect the obligation to comply with the laws that regulate business activities; ethical responsibilities mirror the company’s notion of the right business behavior. Some actions might not be illegal but can be unethical. Making and selling cigarettes is a case in point.

Finally, discretionary responsibilities are those that are voluntarily adopted by the business. For example, companies that adopt the good citizenship approach, actively support charities, public service advertising campaigns and other public interest issues

Corporate social responsibility is self-regulation by a company with the objective of embracing responsibility for the company’s actions and creating a positive impact through its activities on its customers, employees, communities and the environment. A company may build into its mission, strategy and everyday operations elements that serve to promote specific goals, for example, using recycled paper or organic hand soap in the offices to help save the environment.

Benefits for the Company

Although direct effects haven’t been proved and much criticism has risen around CSR, companies identify some obvious benefits. Implementing the values and goals of CSR improve the judgment and reputation of the business among customers. In a strong, competitive market it also makes the business stand out from its rivals. CSR may also prompt current and potential employees to commit themselves to the company and promote its values in their private lives.

Good Example

The Body Shop is the most cited example of establishing CSR early in an exceptional way. The natural-cosmetics company promotes social and environmental issues. It implemented a shared campaign with Greenpeace to save the whales; a campaign against overly skinny models to avoid perpetuating bulimia and anorexia; and an initiative called Community Fair Trade to help people sell their products in developing countries. It also regularly sponsors local charity and community events.

Cautionary Example

H&M, the clothing store implemented the CSR strategy of producing clothing items from organic cotton. The organic-clothing line gave consumers a positive image towards H&M for years. But this image was easily destroyed when three different reports in one year accused the company of using genetically modified cotton from India in its products. Today, H&M’s new line represents only low prices but not organic clothing.

1. Expo-documents against acceptance Department

Exports are often looked after by a company’s marketing or sales department in the initial stages when the volume of exports sales is low. However, with increase in exports turnover, an independent exports department is often setup and separated from domestic marketing, as shown in Fig.1

Exports activities are controlled by a company’s home-based office through a designated head of export department, i.e. Vice President, Director, or Manager (Exports). The role of the HR department is primarily confined to planning and recruiting staff for exports, training and development, and compensation.

Sometimes, some HR activities, such as recruiting foreign sales or agency personnel are carried out by the exports or marketing department with or without consultation with the HR department.

2. International division structure

As the foreign operations of a company grow, businesses often realize the overseas growth opportunities and an independent international division is created which handles all of a company’s international operations (Fig. 2). The head of international division, who directly reports to the chief executive officer, coordinates and monitors all foreign activities.

The in-charge of subsidiaries reports to the head of the international division. Some parallel but less formal reporting also takes place directly to various functional heads at the corporate headquarters.

The corporate human resource department coordinates and implements staffing, expatriate management, and training and development at the corporate level for international assignments. Further, it also interacts with the HR divisions of individual subsidiaries.

The international structure ensures the attention of the top management towards developing a holistic and unified approach to international operations. Such a structure facilitates cross-product and cross-geographic co-ordination, and reduces resource duplication.

Although an international structure provides much greater autonomy in decision-making, it is often used during the early stages of internationalization with relatively low ratio of foreign to domestic sales, and limited foreign product and geographic diversity.

3. Global Organizational Structures

Rise in a company’s overseas operations necessitates integration of its activities across the world and building up a worldwide organizational structure.

While conceptualizing organizational structure, the internationalizing firm often has to resolve the following conflicting issues:

• Extent or type of control exerted by the parent company headquarters over subsidiaries.
• Extent of autonomy in making key decisions to be provided by the parent company headquarters to subsidiaries (centralization vs. decentralization)

It leads to re-organization and amalgamation of hitherto fragmented organizational interests into a globally integrated organizational structure which may either be based on functional, geographic, or product divisions. Depending upon the firm strategy and demands of the external business environment, it may further be graduated to a global matrix or trans-national network structure.

(a) Global functional division structure

It aims to focus the attention of key functions of a firm, as shown in Fig. 3, wherein each functional department or division is responsible for its activities around the world. For instance, the operations department controls and monitors all production and operational activities; similarly, marketing, finance, and human resource divisions co-ordinate and control their respective activities across the world.

Such an organiza­tional structure takes advantage of the expertise of each functional division and facili­tates centralized control. MNEs with narrow and integrated product lines, such as Caterpillar, usually adopt the functional organizational structure.

Such organizational structures were also adopted by automobile MNEs but have now been replaced by geographic and product structures during recent years due to their global expansion.

The major advantages of global functional division structure include:

• Greater emphasis on functional expertise
• Relatively lean managerial staff
• High level of centralized control
• Higher international orientation of all functional managers

The disadvantages of such divisional structure include:

• Difficulty in cross-functional coordination
• Challenge in managing multiple product lines due to separation of operations and marketing in different departments
• Since only the chief executive officer is responsible for profits, such a structure is favoured only when centralized coordination and control of various activities is required.

(b) Global product structure

Under global product structure, the corporate product division, as depicted in Fig. , is given worldwide responsibility for the product growth.

The heads of product divisions do receive internal functional support associated with the product from all other divisions, such as operations, finance, marketing, and human resources. They also enjoy considerable autonomy with authority to take important decisions and operate as profit centres.

The global product structure is effective in managing diversified product lines.

Such a structure is extremely effective in carrying out product modifications so as to meet rapidly changing customer needs in diverse markets. It enables close coordination between the technological and marketing aspects of various markets in view of the differences in product life cycles in these markets, for instance, in case of consumer electronics, such as TV, music players, etc.

However, creating exclusive product divisions tends to replicate various functional activities and multiplicity of staff. Besides, little attention is paid to worldwide market demand and strategy. Lack of cooperation among various product lines may also result into sales loss. Product managers often pursue currently attractive markets neglecting those with better long-term potential.

(c) Global geographic structure

Under the global geographic structure, a firm’s global operations are organized on the basis of geographic regions, as depicted in Fig. It is generally used by companies with mature businesses and narrow product lines. It allows the independent heads of various geographical subsidiaries to focus on the local market requirements, monitor environmental changes, and respond quickly and effectively.

The corporate headquarter is responsible for transferring excess resources from one country to another, as and when required. The corporate human resource division also coordinates and provides synergy to achieve company’s overall strategic goals between various subsidiaries based in different countries.

Such structure is effective when the product lines are not too diverse and resources can be shared. Under such organizational structure, subsidiaries in each country are deeply embedded with nationalistic biases that prohibit them from cooperating among each other.

(d) Global matrix structure

It is an integrated organizational structure, which super-imposes on each other more than one dimension. The global matrix structure might consist of product divisions intersecting with various geographical areas or functional divisions. Unlike functional, geographical, or product division structures, the matrix structure shares joint control over firm’s various functional activities.

Such an integrated organizational structure facilitates greater interaction and flow of information throughout the organization. Since the matrix structure has an in-built concept of interaction between intersecting perspectives, it tends to balance the MNE’s prospective, taking cross-functional aspects into consideration.

It facilitates ease of technology transfer to foreign operations and of new products to different markets leading to higher economies of scale and better foreign sales performance. Matrix structure is used successfully by a large number of MNEs, such as Royal Dutch/Shell, Dow Chemical, etc.

In an effort to bring together divergent perspectives within the organization, the matrix structure may also lead to conflicting situations. It inhibits a firm’s ability to respond quickly to environmental changes in case an effective conflict resolution mechanism is not in place.

Since the structure requires most managers to report to two or multiple bosses, Fayol’s basic principle of unity of command is violated and conflicting directives from multiple authorities may compel employees to compromise with sub-optimal alternatives so as to avoid conflict which may not be the most appropriate strategy for an organization as a whole.

(e) Transnational network structure

Such a globally integrated structure represents the ultimate form of an earth-spanning organization, which eliminates the meaning of two or three matrix dimensions. It encompasses elements of function, product, and geographic designs while relying upon a network arrangement to link worldwide subsidiaries.

This form of organization is not defined by its formal structure but by how its processes are linked with each other, which may be characterized by an overall integrated system of various inter-related sub-systems.

The trans-national network structure is designed around ‘nodes’, which are the units responsible for coordinating with product, functional and geographic aspects of an MNE. Thus, trans-national network structures build-up multi­dimensional organizations which are fully networked.

4. Evolution of Global Organizational Structures

Organizational structures often exhibit evolutionary patterns, as shown in Fig., depending upon their strategic globalization. The historical evolution of organizational patterns indicates that in the early phase of internationalization, most firms separate their exports departments from domestic marketing or have separate international divisions.

Companies with emphasis on global business strategies move towards global product structures whereas those with emphasis on location base strategies move towards global geographic structures.

Subsequently, a large number of companies graduate to a matrix or trans-national network structure due to dual demands of local adaptations pressures and globalization. In practice, most companies hardly adopt either pure matrix or trans-national structures; rather they opt for hybrid structures incorporating both.

International Business conducts business transactions all over the world. These transactions include the transfer of goods, services, technology, managerial knowledge, and capital to other countries. International business involves exports and imports.

International Business is also known, called or referred as a Global Business or an International Marketing.

An international business has many options for doing business, it includes,

• Exporting goods and services.
• Giving license to produce goods in the host country.
• Starting a joint venture with a company.
• Opening a branch for producing & distributing goods in the host country.
• Providing managerial services to companies in the host country.

International Business Organizations

The exciting world of international business beckons the brightest minds and sharpest business performers to excel in relationships, governance, and financial acuity in order to create a better future for all people. World changers need spaces in which to gather to share ideas, spur one another on, create relational opportunism, mingle with industry and governmental leaders, and dream of advanced systems to enhance our daily lives. Many such venues exist but it’s not always easy to know which ones with which to associate. This article discusses key places for the entrepreneur to consider.

A plethora of international business organizations exist to promote education and facilitate business transactions around the world. The following organizations are among the most active and well known. Whether you are a business person transacting international business or a student looking to learn and eventually get in on the action, these organizations will open the door to your forward-looking international worldview.

1. World Trade Organization

The World Trade Organization (WTO) is the premier worldwide group geared toward the politics of international trade. Government officials meet together within the WTO context to negotiate trade agreements and negotiate the politics of international business. The WTO receives significant media attention while also proactively publishing data related to accessing international markets. Check out their annual World Trade Report for research, analysis, and featured member nation stories.

The WTO’s student-friendly approach contributes internships, a youth ambassador program, and essay awards for young economists in the hope of promoting business and friendship for young international professionals. The newly created Youth Ambassador Programme gives young leaders a voice at the international trade table to offer their unique opinions and perspectives. The internship program for post-graduate university students develops knowledge, understanding, and experience in global trade policy and compliance. Internships can last up to 24 weeks and take place exclusively in beautiful Geneva, Switzerland. Interns also receive a stipend.

2. International Chamber of Commerce

The International Chamber of Commerce (ICC) promotes world business by providing forums, leadership development, and advocacy for nations who desire for their citizens to enjoy a higher global standard of living while living in a world of peace. The ICC conducts training events, arbitration conferences, financial summits and numerous other programs to promote their agenda of building peace and prosperity on earth.

ICC online training modules expose students and business professionals to certification level expertise developed as ICC constituents intermingle on the world stage at G20 Summits and United Nations forums. The ICC maintains policy commissions in the areas of the digital economy, competition, the environment and energy policy, intellectual property, and taxation, among other topics. Dispute resolution, antitrust compliance, international sales contracts, arbitration provision and anti-crime initiatives are just a sampling of the services proffered by the International Chamber of Commerce.

Students can benefit specifically with the Young Arbitrators Forum (YAF). YAF is a place for young professionals to learn from seasoned international practitioners about issues related to arbitration and arbitration career development. Events are held regularly all around the world.

3. International Association of Business Communicators

The International Association of Business Communicators (IABC) is a networking association for communication professionals. The IABC promotes professional development and communication standards worldwide. They tout a membership of 15,000 professionals in over 80 countries.

4. International Business Organization

The International Business Organization (IBO) is a group that serves the international community who wants to do business in or immigrate to the United States of America with a special purview related to the state of Florida. The IBO can assist with real estate information, immigration services, health insurance, and unique networking contacts.

5. The Federation of International Trade Associations

The Federation of International Trade Associations (FITA) is an online clearinghouse of 8,000 international trade Web sites. FITA is comprised of 450 association members and 450,000 linked company members. FITA brings together trade agents, distributors, and service providers that contribute toward import and export activities. Their market research tools and leads increase the capacity of members to conduct international trade ethically and legally.

Check out their Web site tools of the trade including customs and tariffs, intellectual property rights, trade barriers, logistics, and more. This fully-orbed research driven site will help you to determine, among other things, how to import horses into China, how to franchise overseas, how to fight against fraudulent individuals in Nigeria, and how to invest in Afghanistan.

The IBO Web site provides country profiles for more than half of the nations of the world. Profiles contain demographics, country overview, currency and communications information, and basic economic data.

6. The World Technology Network

The World Technology Network (WTN) brings innovative individuals together from the science and technology communities to share ideas, discover synergies, and create momentum within the realm of emerging technologies. Add in financiers and futurists and the organization builds capacity for creating roadmaps into the rest of the 21st Century. The community also includes marketers, writers, entrepreneurs, government officials, and policy analysts – people who are bent on creating dynamic systems to enhance world productivity and efficiencies.

WTN’s headline event, The World Technology Summit & Awards ceremony, has taken place annually for twelve years. Awards are presented in the following categories: arts, biotechnology, communication technology, design, education, energy, entertainment, environment, ethics, finance, health and medicine, IT hardware, IT software, law, marketing communications, materials, media and journalism, policy, social entrepreneurship, and space. Awards are presented in these categories to both individuals and corporations who best represent WTN goals and ideologies.

7. International Assembly for Collegiate Business Education

The International Assembly for Collegiate Business Education (IACBE) is a professional accrediting organization related to business education. They promote business educational standards and opportunities for students and the professional educational community. Members include colleges and universities who are committed to strengthening business educational capacities worldwide.

IACBE member services range from mentoring and consulting platforms to the Journal for Excellence in Business Education. The International Business Education Consortium enables members to share curriculum ideas, provide fresh experiences for business students, create international teaching opportunities for faculty, and establish new revenue tuition streams for member institutions.

8. International Executives Association

The International Executives Association is an elite type networking group for companies and their respective top level employees. Their focus on inspiration and camaraderie refreshes business executives enabling them to prosper as they share business leads and referrals with one another. Most local chapters are located in Canada and the United States.

9. Business Council for International Understanding

Started in 1955 as an initiative by President Dwight Eisenhower, the Business Council for International Understanding (BCIU) exists to foster dialogue among world business and political leaders. The BCIU organizes trade mission tours for cross-fertilization of business opportunities both internationally and domestically-hosted, roundtables for senior executives and politicians, and private meetings for high level officials of influence. A commercial training program geared toward embassy personnel and diplomats-in-training shows the diplomatic community how to promote business interests wherever they serve in the world by understanding the local business conditions and applying international standards for success. BCIU meets annually in New York for an awards gala.

BCIU provides fascinating internship opportunities for college juniors and seniors to obtain experience in both private sector and governmental contexts. Responsibilities include database management, research, writing, and communications. A key benefit is networking with interns from different cultural backgrounds.

10. Coalition of Services Industries

The Coalition of Services Industries (CSI) represents the needs for the service industries in the United States, industries such as banking, hospitality, logistics, telecommunications, and insurance. They also promote international policies that will benefit these industries seeking to develop business worldwide. Special working groups have developed around the themes of financial services, insurance, telecommunications, media, and information technology. In addition, groups focus on the emerging economies of China and India.

Take the time to explore these organizations and you’ll see a world that contains unlimited possibilities. Determine what it is that you are looking for and then narrow down your search based upon geography, association fees, personal and professional goals, membership opportunities and requirements, and the capacity for association members to influence you to influence your sphere of the world.

Political Environment

The political environment refers to the type of the government, the government relationship with a business, & the political risk in the country. Doing business internationally, therefore, implies dealing with a different type of government, relationships, & levels of risk.

There are many different types of political systems, for example, multi-party democracies, one-party states, constitutional monarchies, dictatorships (military & non-military). Therefore, in analyzing the political-legal environment, an organization may broadly consider the following aspects:

• The Political system of the business
• Approaches to the Government towards business i.e. Restrictive or facilitating
• Facilities & incentives offered by the Government
• Legal restrictions for instance licensing requirement, reservation to a specific sector like the public sector, private or small-scale sector
• The Restrictions on importing technical know-how, capital goods & raw materials
• The Restrictions on exporting products & services
• Restrictions on pricing & distribution of goods
• Procedural formalities required in setting the business

Economic Environment

The economic environment relates to all the factors that contribute to a country’s attractiveness for foreign businesses. The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the more developed or industrialized, the less developed or third world, & the newly industrializing or emerging economies.

Within each category, there are major variations, but overall the more developed countries are the rich countries, the less developed the poor ones, & the newly industrializing (those moving from poorer to richer). These distinctions are generally made on the basis of the gross domestic product per capita (GDP/capita). Better education, infrastructure, & technology, healthcare, & so on are also often associated with higher levels of economic development.

Clearly, the level of economic activity combined with education, infrastructure, & so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, & a firm needs to recognize this environment if it is to operate successfully internationally. While analyzing the economic environment, the organization intending to enter a particular business sector may consider the following aspects:

• An Economic system to enter the business sector.
• Stage of economic growth & the pace of growth.
• Level of national & per capita income.
• Incidents of taxes, both direct & indirect tax.
• Infrastructure facilities available & the difficulties thereof.
• Availability of raw materials & components & the cost thereof.
• Sources of financial resources & their costs.
• Availability of manpower-managerial, technical & workers available & their salary & wage structures.

Technological Environment

The technological environment comprises factors related to the materials & machines used in manufacturing goods & services. Receptivity of organizations to new technology & adoption of new technology by consumers influence decisions made in an organization.

As firms do not have any control over the external environment, their success depends on how well they adapt to the external environment. An important aspect of the international business environment is the level, & acceptance, of technological innovation in different countries.

The last decades of the twentieth century saw major advances in technology, & this is continuing in the twenty-first century. Technology often is seen as giving firms a competitive advantage; hence, firms compete for access to the newest in technology, & international firms transfer technology to be globally competitive.

It is easier than ever for even small business plan to have a global presence thanks to the internet, which greatly grows their exposure, their market, & their potential customer base. For the economic, political, & cultural reasons, some countries are more accepting of technological innovations, others less accepting. In analyzing the technological environment, the organization may consider the following aspects:

• Level of technological development in the country as a whole & specific business sector.
• The pace of technological changes & technological obsolescence.
• Sources of technology.
• Restrictions & facilities for technology transfer & time taken for the absorption of technology.

Cultural Environment

The cultural environment is one of the critical components of the international business environment & one of the most difficult to understand. This is because the cultural environment is essentially unseen; it has been described as a shared, commonly held body of general beliefs & values that determine what is right for one group, according to Kluckhohn & Strodtbeck.

National culture is described as the body of general beliefs & the values that are shared by the nation. Beliefs & the values are generally seen as formed by factors such as the history, language, religion, geographic location, government, & education; thus firms begin a cultural analysis by seeking to understand these factors. The most well-known is that developed by Hofstede in1980.

His model proposes four dimensions of cultural values including individualism, uncertainty avoidance, power distance & masculinity.

Individualism is the degree to which a nation values & encourages individual action & decision making.

Uncertainty avoidance is the degree to which a nation is willing to accept & deal with uncertainty.

Power distance is the degree to which a national accepts & sanctions differences in power.

This model of cultural values has been used extensively because it provides data for a wide array of countries. Many academics & the managers found that this model helpful in exploring management approaches that would be appropriate in different cultures.

For example, in a nation that is high on individualism one expects individual goals, individual tasks, & individual reward systems to be effective, whereas the reverse would be the case in a nation that is low on individualism.

• While analyzing social & cultural factors, the organization may consider the following aspects:
• Approaches to society towards business in general & in specific areas;
• Influence of social, cultural & religious factors on the acceptability of the product;
• The lifestyle of people & the products used for them;
• Level of acceptance of, or resistance to change;
• Values attached to a particular product i.e. the possessive value or the functional value of the product;
• Demand for the specific products for specific occasions;
• The propensity to consume & to save.

Competitive Environment

The competitive environment also changes from country to country. This is partly because of the economic, political, & cultural environments; these environmental factors help determine the type & degree of competition that exists in a given country. Competition can come from a variety of sources. It can be a public or a private sector, come from the large or the small organizations, be domestic or global, & stem from traditional or new competitors, GST registration. For a domestic firm, the most likely sources of competition might be well understood. The same isn’t the case when a person moves to compete in the new environment.

International Legal Environment

Firms operating internationally face major challenges in conforming to different laws, regulations, and legal systems in different countries. The legal framework to protect small and medium enterprises (SMEs), mainly to achieve social objectives, adversely influences the expansion of manufacturing capacities and achieving economies of scale in certain countries.

International managers need to develop basic understanding of the types of legal systems followed in the countries of their operations before entering into legal contracts.

Four Major Participants of International Business

1. Exporting

Exporting is often the first choice when manufacturers decide to expand abroad. Simply stating, exporting means selling abroad, either directly to target customers or indirectly by retaining foreign sales agents or/and distributors. Either case, going abroad through exporting has minimal impact on the firm’s human resource management because only a few, if at all, of its employees are expected to be posted abroad.

2. Licensing

Licensing is another way to expand one’s operations internationally. In case of international licensing, there is an agreement whereby a firm, called licensor, grants a foreign firm the right to use intangible (intellectual) property for a specific period of time, usually in return for a royalty. Licensing of intellectual property such as patents, copyrights, manufacturing processes, or trade names abound across the nations. The Indian basmati (rice) is one such example.

3. Franchising

Closely related to licensing is franchising. Franchising is an option in which a parent company grants another company/firm the right to do business in a prescribed manner. Franchising differs from licensing in the sense that it usually requires the franchisee to follow much stricter guidelines in running the business than does licensing. Further, licensing tends to be confined to manufacturers, whereas franchising is more popular with service firms such as restaurants, hotels, and rental services.

One does not have to look very far to see how important franchising business is to companies here and abroad. At present, the prominent examples of the franchise agreements in India are Pepsi Food Ltd., Coca-Cola, Wimpy’s Damino, McDonald, and Nirula. In USA, one in 12 business establishments is a franchise.

However, exporting, licensing and franchising make companies get them only so far in international business. Companies aspiring to take full advantage of opportunities offered by foreign markets decide to make a substantial direct investment of their own funds in another country. This is popularly known as Foreign Direct Investment (FDI). Here, by international business means foreign direct investment mainly. Let us discuss some more about foreign direct investment.

4. Foreign Direct Investment (FDI)

Foreign direct investment refers to operations in one country that ire controlled by entities in a foreign country. In a sense, this FDI means building new facilities in other country. In India, a foreign direct investment means acquiring control by more than 74% of the operation. This limit was 50% till the financial year 2001-2002.

There are two forms of direct foreign investment: joint ventures and wholly-owned subsidiaries. A joint venture is defined as “the participation of two or more companies jointly in an enterprise in which each party contributes assets, owns the entity to some degree, and shares risk”. In contrast, a wholly-owned subsidiary is owned 100% by the foreign firm.

An international business is any firm that engages in international trade or investment. International trade refers to export or import of goods or services to customers/consumers in another country. On the other hand, international investment refers to the investment of resources in business activities outside a firm’s home country.

1. Insufficiency of Domestic Demand

If the domestic demand for the product is not sufficient to consume the production, the firm may take a decision to enter the foreign market. In this way he can equalize the production and demand.

2. To Utilize Installed Capacity

If the installed capacity of the firm is much more than the level of demand of the product in the domestic market, it can enter the international market and utilize its un-utilized installed capacity. In this way it can export the surplus production.

3. Legal Restrictions

Sometimes the Government of a country imposes certain restrictions on the growth and expansion of certain firms or on the production and distribution of certain commodities in the domestic market in order to achieve certain social objectives.

4. Relative Profitability

The export business is more attractive for its higher rate of profitability. The higher profitability rate also gives extra strength to the firm.

5. Less Business Risk

A diversified export business helps the exporting firm in mitigating the risk of sharp fluctuations in the business activity of the firm.

6. Increased Productivity

Due to certain social and technological developments the industrial production has increased to a great extent. The production will be higher at cheaper rate. The surplus production can be exported.

7. Social Responsibility

In order to meet the social responsibility some business firms take the decision to contribute to the National Exchequer by exporting their products.

8. Technological Improvements

Technological improvements also attract the business firm to enter foreign markets. It introduces new products with latest technological improvements and faces the competition successfully in the international markets.

9. Product Obsolescence

If a product becomes obsolete in domestic market it may be in demand in International markets. The firm has to make a survey for introducing the product in those markets.

10. International Collaboration

Developed countries fix their import quotas for different countries and for different commodities. A county can export various commodities to these developed countries to the extent of its quota.

11. International Business Brings Various Countries Closer

Better business relations are established among the countries. Government and non-government business commissions or business representatives visit other countries from time to time. The local representatives and other related persons came into contact with foreign representatives and come to know their habits and customs.

12. Helps in Maintaining Good Political Relations

The economic relations between two countries help each other to improve their political relations. Various countries having different political ideologies import or export their products. To conclude it is now undisputable that export business contributes to the national economy, national exchequer, individual exporting firms and maintains international, economic cultural and political relations among various countries. Countries have come closer on account of international business.

Importance of International Business: On the view of National Economy

1. It is important to meet imports of industrial needs.
2. Debt Servicing: This means to grant loan for and for their industrial development.
3. For rapid economic growth.
4. For profitable use of natural resources.
5. To face competition successfully-better quality goods production having lower or moderate prices. To improve the image of the producer as well as of the country in the minds of foreign customers.
6. Increase in employment opportunities.
7. To increase national income.
8. Increase in standard of living of the people.

Trade refers to the exchange of goods and services for money, which can be undertaken within the geographical limits of the countries or beyond the boundaries. The trade which takes place within the geographical boundaries of the country is called domestic business, whereas trade which occurs between two countries internationally, is called international business.

Entities engaged in international business often face more difficulties than the entities which conduct domestic business. Although international business enjoys large customer base as they operate in multiple countries. Here is an article which compiles the important differences between domestic and international business.

Domestic Business

The business transaction that occurs within the geographical limits of the country is known as domestic business. It is a business entity whose commercial activities are performed within a nation. Alternately known as internal business or sometimes as home trade. The producer and customers of the firm both reside in the country. In a domestic trade, the buyer and seller belong to the same country and so the trade agreement is based on the practices, laws and customs that are followed in the country.

There are many privileges which a domestic business enjoys like low transaction cost, less period between production and sale of goods, low transportation cost, encourages small-scale enterprises, etc.

International Business

International Business is one whose manufacturing and trade occur beyond the borders of the home country. All the economic activities indulged in cross-border transactions comes under international or external business. It includes all the commercial activities like sales, investment, logistics, etc., in which two or more countries are involved.

The company conducting international business is known as a multinational or transnational company. These companies enjoy a large customer base from different countries, and it does not have to depend on a single country for resources. Further, the international business expands the trade and investment amongst countries.

However, there are several drawbacks which act as a barrier to entry in the international market like tariffs and quota, political, socio-cultural, economic and other factors that affect the international business.

Comparison

Differences between Domestic and International Business

The most important differences between domestic and international business are classified as under:

1. Domestic Business is defined as the business whose economic transaction is conducted within the geographical limits of the country. International Business refers to a business which is not restricted to a single country, i.e. a business which is engaged in the economic transaction with several countries in the world.
2. The area of operation of the domestic business is limited, which is the home country. On the other hand, the area of operation of an international business is vast, i.e. it serves many countries at the same time.
3. The quality standards of products and services provided by a domestic business is relatively low. Conversely, the quality standards of international business are very high which are set according to global standards.
4. Domestic business deals in the currency of the country in which it operates. On the contrary, the international business deals in the multiple currencies.
5. Domestic Business requires comparatively less capital investment as compared to international business.
6. Domestic Business has few restrictions, as it is subject to rules, law taxation of a single country. As against this, international business is subject to rules, law taxation, tariff and quotas of many countries and therefore, it has to face many restrictions which are barriers in the international business.
7. The nature of customers of a domestic business is more or less same. Unlike, international business wherein the nature of customers of every country it serves is different.
8. Business Research can be conducted easily, in domestic business. As against this, in the case of international research, it is difficult to conduct business research as it is expensive and research reliability varies from country to country.
9. In domestic business, factors of production are mobile whereas, in international business, the mobility of factors of production are restricted.

Carrying out the activities of international business and its management is far more difficult than conducting a domestic business. Due to changes in political, economic, socio-cultural environment across the nations, most business entities find it difficult to expand their business globally. To become a successful player in the international market firms need to plan their business strategies as per the requirement of the foreign market.