Year: 2020

Multinational Companies

The multinational or multi-domestic organization offers a very high degree of local responsiveness. It is a decentralized federation of local businesses, linked together through personal control by expatriates who occupy key positions abroad

Global Companies

Global organizations offer scale efficiencies and cost advantages. With global scale facilities, the global organization seeks to produce standardized products. It is often centralized in its home country, with overseas operations considered as delivery pipelines to tap into global market opportunities. There is tight control of strategic decisions, resources, and information by the global hub.

International Companies

International companies have the ability to transfer knowledge and expertise to overseas environments that are less advanced. They are coordinated federations of local businesses, controlled by sophisticated management systems and corporate employees. The attitude of the parent company seems to be parochial, fostered by the superior know-how at the center of the organization.

Transnational Companies

Global competition is forcing many businesses to shift to a transnational model. This organization combines local responsiveness with global efficiency and the ability to tranfer know-how better, cheaper, and faster. The transnational company is made up of a network of specialized or differentiated units, which focus on managing intgrative linkages between local businesses as well as with the center. The subsidiary becomes a distinctive asset, rather than simply an arm of the parent company. Manufacturing and technology development are located wherever it makes sense, an there is an explicit focus on leveraging local know-how in order to exploit worldwide operations.                                                  

The General Agreement on Tariffs and Trade (GATT) was created after World War II to aid global economic recovery through reconstructing and liberalizing global trade. GATT’s main objective was to reduce barriers to international trade through the reduction of tariffs, quotas and subsidies. It has since been superseded by the creation of the World Trade Organization (WTO).

The General Agreement on Tariffs and Trade (GATT) was formed in 1947 with a treaty signed by 23 countries, and signed into international law on January 1, 1948. GATT remained one of the focal features of international trade agreements until it was replaced by the creation of the World Trade Organization on January 1, 1995. By this time, 125 nations were signatories to its agreements, which covered about 90% of global trade.

The aim behind GATT was to form rules to end or restrict the most costly and undesirable features of the pre-war protectionist period, namely quantitative trade barriers such as trade controls and quotas. The agreement also provided a system to arbitrate commercial disputes between nations, and the framework enabled a number of multilateral negotiations for the reduction of tariff barriers. GATT was regarded as a significant success in the post-war years.

Key Achievement of GATT

One of the key achievements of GATT was that of trade without discrimination. Every signatory member of GATT was to be treated as equal to any other. This is known as the most-favored nation principle (and it has been carried through into the WTO). A practical outcome of this was that once a country had negotiated a tariff cut with some other countries (usually its most important trading partners), this same cut would automatically apply to all GATT signatories. Escape clauses did exist, whereby countries could negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts.

Most nations adopted the most-favored nation principle in setting tariffs, which largely replaced quotas. Tariffs (preferable to quotas but still a trade barrier) were in turn cut steadily in rounds of successive negotiations. The average tariff rate fell from around 22% when GATT was first signed in Geneva in 1947, to around 5% by the end of the Uruguay Round (concluded 1993). The Uruguay Round also negotiated the creation of the WTO, a formal organization that has absorbed and extended GATT.

Structure and Basic Information

After World War II, the United Kingdom (UK) and the United States (US) submitted proposals to the Economic and Social Council (ECOSOC) of the United Nations regarding the establishment of an international trade body that was to be named the International Trade Organization (ITO). That is, perhaps, why the GATT is often referred to as a UN related body and its documents are sometimes mistakenly referred to as UN documents.

ECOSOC convened a conference, the United Nations Conference on Trade and Employment in 1946, to consider the UK and US proposals. A Preparatory Committee drafted the ITO Charter and it was approved in 1948 at the conference in Havana, Cuba. The Charter is often referred to as the Havana Charter or the ITO Charter.

The first round of trade negotiations took place while the Preparatory Committee was still working on drafting the Charter because the participants were anxious to begin the process of trade liberalization as soon as possible. Their results were incorporated into the General Agreement, which was signed in 1947.

Since the original signatory nations expected the agreement to become part of the more permanent ITO Charter, the text of the GATT contains very little “institutional” structure. This lack of detail within the agreement has created increasing difficulties as the GATT membership and rules governing trade between so many of the world’s nations have grown. The GATT has function as an international organization for many years even though it has never been formalized as such.

ECOSOC established an Interim Commission for the ITO that is referred to as ICITO. Unfortunately, when time came for the members to ratify the ITO Charter, the Congress of the United States refused and the ITO never became a reality.

The GATT survived, but remained intact only due to the Protocol of Provisional Application of the General Agreement of Tariffs and Trade which was concluded in 1947 and which came into force in 1948.

The GATT completed 8 rounds of multilateral trade negotiations (MTNs). The Uruguay Round (the 8th round) concluded with the signing of the Final Action April 15, 1994, in Morocco and produced the World Trade Organization (WTO) and it annexes.

The contracting party’s means:

(i) When you see: CONTRACTING PARTIES in capital letters it is referring to the members acting jointly.

(ii) When you see: contracting parties in lower case letters, it is referring to individual member states.

(iii) When you see the words: Contacting Parties, they will be in press releases or in published works concerning the GATT.

The Basic Functions of the GATT

1. Most-Favored-Nation (MFN) Treatment

This is the fundamental principle of the GATT and it is not a coincidence that it appears in Article 1 of the GATT 1947. It states that each contracting party to the GATT is required to provide to all other contracting parties the same conditions of trade as the most favourable terms it extends to any one of them, i.e., each contracting party is required to treat all contracting parties in the same way that it treats its “most-favoured nation”.

2. Reciprocity

GATT advocates the principles of “rights” and “obligations”. Each contracting party has a right, e.g. access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with trade concessions on a MFN basis. In a way, this is closely associated with the MFN principle.

3. Transparency

Fundamental to a transparent system of trade is the need to harmonize the system of import protection, so that barriers on trade can be reduced through the process of negotiations. The GATT therefore, limited the use of quotas, except in some specific sector such, as agriculture and advocated import regimes that are based on “tariff-only”.

In addition, the GATT and now the WTO, required many notifications from contracting parties on their agricultural and trade policies so that these can be examined by other parties to ensure that they are GATT/WTO compatible.

4. Tariff Binding and Reduction

When GATT was established, tariffs were the main form of trade protection and negotiations in the early years focused primarily upon tariff binding and reduction. The text of the 1947, GATT lays out the obligations on the contracting parties in this regard.

In general, companies go international because they want to grow or expand operations. The benefits of entering international markets include generating more revenue, competing for new sales, investment opportunities, diversifying, reducing costs and recruiting new talent.

Going international is a strategy that is influenced by a variety of factors and is typically implemented over time. Sometimes, a government will incentivize companies to enter their country’s market in an effort to build their economies.

Improving Profit Margins

Improving profit margins is one of the most common reasons for entering international markets. When growth strategies are used up on the national level, the next path is often to seek out international growth. Distributing your products in additional countries increases your customer base. As you offer compelling solutions and build loyalty across international markets, revenue strengthens and escalates as well.

There are also significant cost savings that can be associated with going international. A company may want to reduce costs by relocating closer to a supplier or benefit from lower production costs by expanding operations to another country. Doing business internationally may open up new investment opportunities. Further, a lower cost of acquiring customers may be another compelling reason to expand internationally.

Competing for New Sales

Closely connected to the goal of improved profit margins is the desire to increase sales. Even if company operators generally are satisfied with revenue levels, international expansion can further improve overall revenues. The race to expand internationally is often about gaining a presence in foreign markets. Being the first to arrive in a new market can provide significant advantages.

If you don’t enter a ripe market with your solution, competitors do. Not only do you miss the revenue source, but you lose out on other valuable assets that you could use to promote your company at home and abroad. In some cases, a strong domestic company gets overrun by a lesser player that succeeds globally and grows big through global synergy.

Bear in mind that in the modern economy, many companies are already global thanks to technology. Companies develop specific international strategies in order to gain competitive advantages in the new global economy.

Diversifying the Business

The international expansion allows a company to diversify its business in a couple of key ways. First, you spread the risk of slowing demand across multiple countries. If one market never gains or loses interest in your offerings, you can pick up the slack with success in other countries. In addition, you can connect with suppliers in international markets and take advantage of raw materials and resources unavailable in domestic markets.

Also, companies often enhance innovation and develop additional variations of their solutions when they operate in multiple countries. Product diversification similarly insulates you from the risks of declining interest in a particular item.

Examples of Diversification

For example, Xiaomi, one of the most popular smartphone manufacturers in China, seeks to expand in India over the next few years. In addition to mobile devices, the company is planning to sell electric folding bikes, self-balancing scooters, fitness bands and other products. This will allow it to reach a wider audience and diversify its operations.

Diversifying your brand’s offerings and its customer base are two popular reasons for international business expansion. Sometimes, a product isn’t a bad product, but a bad fit for the market where it was originally launched. Launching that product again in a different market, toward people with a different culture and a different budget can mean an entirely different, much more positive reception for that product.

Recruiting New Talent

Operating in international markets also gives businesses access to a larger and more diversified talent pool. Employees who speak different languages and understand different cultures enhance connections with a broader customer base. Having an international brand that is well reputed will invite top talent to the company. Businesses can also structure global work teams in a way that allows for synergy in building a global brand.

International business

International business refers to all commercial activities such as trade of goods, services, technology, knowledge and capital across national borders. The cross border transactions take place between individuals, business firms and government agencies. Thus, international business refers to cross border transactions of goods and services taking place between two or more countries. Also, International business occurs in different forms:

• Cross border transactions of goods and services from one country to another
• Contractual agreements to use products, services and processes of other nations
• Operating sales, manufacturing, research and development activities in foreign markets.

External Factor influences on International Business

Various companies are involved in transacting their goods, services and capital across the national borders and are affected by number of factors. various restrictions are also imposed on companies that are transacting their business at international level. various internal and external factors directly impact the working of these business firms. Various external environment factors directly affecting the working of large MNCs include social conditions of economy, political and legal factors, etc. However, internal factors can be controlled by the management team of companies by taking various strategic initiatives.

Following is the detail discussion on various external factors that are affecting the working of international corporations:

(i) Political factors

Various political factors affect the international factors. Political factors such as changes in tax rates, policies and actions of government, political stability of country, foreign trade regulations etc. affects the working of an international business firm. Lack of political stability in the country directly impacts the operations of business firm. Also, various tax policies and government initiatives sometimes hinders the expansion of business in other countries. Thus, effective political environment of business influences the growth of business firm.

(ii) Economic factors

Economic factors relates to the economic system of the country where the firm has its operations. Various econocmical factors such as inflation rate, interest rate, income distribution, employment level, allocation of government budget, etc., directly impacts the operations of business firm. Various economic factors such as purchasing power of customers also determines the demand of various products and services.

(iii) Legal factors

Legal factors relate to the legal environment of the country in which firm operates. Different laws prevail in different countries and international business firms have to abide by the laws of each country. Laws relating to age and disability discrimination, wage rates, employment and environment laws affects the working of business firms. Along with this, various international lending agencies affects the legal culture and working policies of business firm

(iv) Social factors

Social factors such as education, awareness and trends and status of people in the society affects the consumer behavior to purchase various goods and services. Also, Social environment and culture such as customs, lifestyles and values differs from country to country which further directly impacts the international business.

(v) Environmental factors

Environment factors such as weather, climate change, temperature etc. affects the business firm and the demand pattern of various goods and services. increasing environment awareness has made this external environment factor a significant issue to be considered by business firms. Move towards environment friendly products and services also has affected the demand pattern of various goods and services.

(vi) Technical factors

Technological changes in the industry has both positive and negative impacts on the working of business firms. Technological changes and development of automated work processes helps in increasing the efficiency of business processes. However, technological changes also threaten the demand of various products and services in the industry.

Internal factor influences on international business

(i) Impact of customers on business

Customers are important micro environment factor of business that impacts the operations of business organization. Customers have gained lot of importance in 21st century. Business firms in current times cannot successfully run a business without fulfillment of needs and wants of customers. Also, customer preferences changes at regular pace which influences the working of business firms. Thus, customer focus and engagement have become key factor for business firm to be considered while determining the type of products and services to be offered to customers. Customer engagement also influences the competitive position of business firm. For instance, Woolworths has taken various initiatives to provide convenient services to customer. Woolworths also has developed online portal to provide convenient shopping facility to customers. Various store innovation has also been done by Woolworths to ensure that customer do not face any difficulty in shopping. Woolworths also ensures that customers get fresh fruits and vegetables. Along with this, Woolworths is known for providing superior services to customers at reasonable prices. All these initiatives have helped Woolworths to achieve competitive position in industry. In addition to this, Woolworths also has adopted number of rapid prototyping techniques to try new ideas with customers and to gain their feedback from customers regarding various products and services.

(ii) Suppliers factors affecting business

Suppliers provides various raw materials, technology, human resources and other components to the company. international business firms operate on large scale and procure resources and other supplies from number of suppliers. It is must for international business firm to have well managed supply chain. Business firms should remain in touch with various suppliers to reduce their operational cost and to ensure that various raw materials required in business are readily available. However, growing concern for quality products and need for sustainable and ethical products has increased the bargaining power of number of suppliers. Location, price charged by suppliers, quality of products provided by suppliers etc. affects the selection of suppliers by the business firm. Also, price charged by various suppliers directly impacts the cost structure of various goods produced by the business organization. For instance, Woolworths has developed effective supply chain management system by developing effective relations with number of suppliers and procuring timely supplies from suppliers. Various products of suppliers such as fresh fruits and vegetables are directly stored in the retail stores of the company. Thus, Woolworths ensures that fresh and quality produce is procured from suppliers.

(iii) Competitors factors affecting business

Various competitive factors also affect the working of company. Large number of competitors exist in the industry and initiatives undertaken by competitors directly influences the working of company. Market share of the competitors also affects the profitability of business firm. However, larger competition in the market signified huge demand for the product in the market. Products and services provided by competitors also creates new demand trends in the industry by creating demand for new products and services which further reduces the demand of firm products and services in the industry. Rapid change in the needs of customers is also the result of actions taken by competitors. This further influences the business organization to bring some innovation and develop products according to the needs of customers. Thus, it is must for business firms to provide differentiated products to customers to gain larger market share. For instance, Woolworths has reduced its prices as a result of reduced prices of ALDI and coles stores. Also, Woolworths also has taken number of initiatives to move toward more uniform pricing policies.

(iv) Industry rivalry affecting business

Rivalry among the existing competitors also affects the operations of business firms. Behavior of competitors affects the operations of business organization. Competitive rivalry also pressurizes business firms to offer quality produce to customers at reasonable prices. Also, competitive rivalry influences business firms to increase their spending on product and service innovation. For instance, huge competition exists in the retail industry and various dominating firms such as Coles supermarkets, Wes farmers, ALDI, etc. are competing against one another to achieve higher market share in the retail industry.

Due to increasing globalization the past decades, even smaller companies have been able to cross national borders and do business abroad. Consequently, many terms have been given to companies operating in multiple countries: multinationals, global businesses, transnational companies, international firms et cetera. The aim of this article is to clearly define these different terms and see how they differ from each other, because they do differ! An often used framework to distinguish multiple forms of internationally operating businesses is the Bartlett & Ghoshal Matrix (1989). Bartlett and Ghoshal clustered these businesses based on two criteria: global integration and local responsiveness. Businesses that are highly globally integrated have the objective to reduce costs as much as possible by creating economies of scale through a more standarized product offering worldwide. Business that are highly locally responsive have as extra objective to adapt products and services to specific local needs. It seems that these strategic options are mutually exclusive, but there are companies trying to be both globally integrated and locally responsive as can be seen in some examples below. Together these two factors generate four types of strategies that internationally operating businesses can pursue: Multidomestic, Global, Transnational and International strategies.

1. Multidomestic: Low Integration and High Responsiveness

Companies with a multidomestic strategy have as aim to meet the needs and requirements of the local markets worldwide by customizing and tailoring their products and services extensively. In addition, they have little pressure for global integration. Consequently, multidomestic firms often have a very decentralized and loosely coupled structure where subsidiaries worldwide are operating relatively autonomously and independent from the headquarter. A great example of a multidomestic company is Nestlé. Nestlé uses a unique marketing and sales approach for each of the markets in which it operates. Furthermore, it adapts its products to local tastes by offering different products in different markets.

2. Global: High Integration and Low Responsiveness

Global companies are the opposite of multidomestic companies. They offer a standarized product worldwide and have the goal to maximize efficiencies in order to recude costs as much as possible. Global companies are highly centralized and subsidiaries are often very dependent on the HQ. Their main role is to implement the parent company’s decisions and to act as pipelines of products and strategies. This model is also known as the hub-and-spoke model. Pharmaceutical companies such as Pfizer can be considered global companies.

3. Transnational: High Integration and High Responsiveness

The transnational company has characteristics of both the global and multidomestic firm. Its aim is to maximize local responsiveness but also to gain benefits from global integration. Even though this seems impossible, it is actually perfectly doable when taking the whole value chain into considerations. Transnational companies often try to create economies of scale more upstream in the value chain and be more flexible and locally adaptive in downstream activities such as marketing and sales. In terms of organizational design, a transnational company is characterised by an integrated and interdependent network of subsidiaries all over the world. These subsidiaries have strategic roles and act as centres of excellence. Due to efficient knowledge and expertise exchange between subsidiaries, the company in general is able to meet both strategic objectives. A great example of a transnational company is Unilever.

4. International: Low Integration and Low Responsiveness

Bartlett and Ghoshal originally didn’t include this type in their typologies. Other authors on the other hand have attributed the name to the lower left corner of the matrix. An international company therefore has little need for local adaption and global integration. The majority of the value chain activities will be maintained at the headquarter. This strategy is also often referred to as an exporting strategy. Products are produced in the company’s home country and send to customers all over the world. Subsidiaries, if any, are functioning in this case more like local channels through which the products are being sold to the end-consumer. Large wine producers from countries such as France and Italy are great examples of international companies.

1. Exporting

Exporting is the marketing and direct sale of domestically produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.

While relatively low risk, exporting entails substantial costs and limited control. Exporters typically have little control over the marketing and distribution of their products, face high transportation charges and possible tariffs, and must pay distributors for a variety of services. What is more, exporting does not give a company firsthand experience in staking out a competitive position abroad, and it makes it difficult to customize products and services to local tastes and preferences.

Exporting is a typically the easiest way to enter an international market, and therefore most firms begin their international expansion using this model of entry. Exporting is the sale of products and services in foreign countries that are sourced from the home country. The advantage of this mode of entry is that firms avoid the expense of establishing operations in the new country. Firms must, however, have a way to distribute and market their products in the new country, which they typically do through contractual agreements with a local company or distributor. When exporting, the firm must give thought to labeling, packaging, and pricing the offering appropriately for the market. In terms of marketing and promotion, the firm will need to let potential buyers know of its offerings, be it through advertising, trade shows, or a local sales force.

Among the disadvantages of exporting are the costs of transporting goods to the country, which can be high and can have a negative impact on the environment. In addition, some countries impose tariffs on incoming goods, which will impact the firm’s profits. In addition, firms that market and distribute products through a contractual agreement have less control over those operations and, naturally, must pay their distribution partner a fee for those services.

2. Licensing and Franchising

A company that wants to get into an international market quickly while taking only limited financial and legal risks might consider licensing agreements with foreign companies. An international licensing agreement allows a foreign company (the licensee) to sell the products of a producer (the licensor) or to use its intellectual property (such as patents, trademarks, copyrights) in exchange for royalty fees. Here’s how it works: You own a company in the United States that sells coffee-flavored popcorn. You’re sure that your product would be a big hit in Japan, but you don’t have the resources to set up a factory or sales office in that country. You can’t make the popcorn here and ship it to Japan because it would get stale. So you enter into a licensing agreement with a Japanese company that allows your licensee to manufacture coffee-flavored popcorn using your special process and to sell it in Japan under your brand name. In exchange, the Japanese licensee would pay you a royalty fee.

Licensing essentially permits a company in the target country to use the property of the licensor. Such property is usually intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance as well.

Because little investment on the part of the licensor is required, licensing has the potential to provide a very large return on investment. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost. Thus, licensing reduces cost and involves limited risk. However, it does not mitigate the substantial disadvantages associated with operating from a distance. As a rule, licensing strategies inhibit control and produce only moderate returns.

3. Contract Manufacturing and Outsourcing

Because of high domestic labor costs, many U.S. companies manufacture their products in countries where labor costs are lower. This arrangement is called international contract manufacturing or outsourcing. A U.S. company might contract with a local company in a foreign country to manufacture one of its products. It will, however, retain control of product design and development and put its own label on the finished product. Contract manufacturing is quite common in the U.S. apparel business, with most American brands being made in a number of Asian countries, including China, Vietnam, Indonesia, and India.

Thanks to twenty-first-century information technology, nonmanufacturing functions can also be outsourced to nations with lower labor costs. U.S. companies increasingly draw on a vast supply of relatively inexpensive skilled labor to perform various business services, such as software development, accounting, and claims processing. For years, American insurance companies have processed much of their claims-related paperwork in Ireland. With a large, well-educated population with English language skills, India has become a center for software development and customer-call centers for American companies.

4. Partnerships and Strategic Alliances

Another way to enter a new market is through a strategic alliance with a local partner. A strategic alliance involves a contractual agreement between two or more enterprises stipulating that the involved parties will cooperate in a certain way for a certain time to achieve a common purpose. To determine if the alliance approach is suitable for the firm, the firm must decide what value the partner could bring to the venture in terms of both tangible and intangible aspects. The advantages of partnering with a local firm are that the local firm likely understands the local culture, market, and ways of doing business better than an outside firm. Partners are especially valuable if they have a recognized, reputable brand name in the country or have existing relationships with customers that the firm might want to access. For example, Cisco formed a strategic alliance with Fujitsu to develop routers for Japan. In the alliance, Cisco decided to co-brand with the Fujitsu name so that it could leverage Fujitsu’s reputation in Japan for IT equipment and solutions while still retaining the Cisco name to benefit from Cisco’s global reputation for switches and routers. Similarly, Xerox launched signed strategic alliances to grow sales in emerging markets such as Central and Eastern Europe, India, and Brazil.

Strategic alliances and joint ventures have become increasingly popular in recent years. They allow companies to share the risks and resources required to enter international markets. And although returns also may have to be shared, they give a company a degree of flexibility not afforded by going it alone through direct investment.

There are several motivations for companies to consider a partnership as they expand globally, including (a) facilitating market entry, (b) risk and reward sharing, (c) technology sharing, (d) joint product development, and (e) conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when (a) the partners’ strategic goals converge while their competitive goals diverge; (b) the partners’ size, market power, and resources are small compared to the industry leaders; and (c) partners are able to learn from one another while limiting access to their own proprietary skills.

What if a company wants to do business in a foreign country but lacks the expertise or resources? Or what if the target nation’s government doesn’t allow foreign companies to operate within its borders unless it has a local partner? In these cases, a firm might enter into a strategic alliance with a local company or even with the government itself. A strategic alliance is an agreement between two companies (or a company and a nation) to pool resources in order to achieve business goals that benefit both partners. For example, Viacom (a leading global media company) has a strategic alliance with Beijing Television to produce Chinese-language music and entertainment programming.

An alliance can serve a number of purposes:

• Enhancing marketing efforts
• Building sales and market share
• Improving products
• Reducing production and distribution costs
• Sharing technology

5. Acquisitions

An acquisition is a transaction in which a firm gains control of another firm by purchasing its stock, exchanging the stock for its own, or, in the case of a private firm, paying the owners a purchase price. In our increasingly flat world, cross-border acquisitions have risen dramatically. In recent years, cross-border acquisitions have made up over 60 percent of all acquisitions completed worldwide. Acquisitions are appealing because they give the company quick, established access to a new market. However, they are expensive, which in the past had put them out of reach as a strategy for companies in the undeveloped world to pursue. What has changed over the years is the strength of different currencies. The higher interest rates in developing nations has strengthened their currencies relative to the dollar or euro. If the acquiring firm is in a country with a strong currency, the acquisition is comparatively cheaper to make. As Wharton professor Lawrence G. Hrebiniak explains, “Mergers fail because people pay too much of a premium. If your currency is strong, you can get a bargain.

6. Foreign Direct Investment and Subsidiaries

Many of the approaches to global expansion that we’ve discussed so far allow companies to participate in international markets without investing in foreign plants and facilities. As markets expand, however, a firm might decide to enhance its competitive advantage by making a direct investment in operations conducted in another country.

Also known as foreign direct investment (FDI), acquisitions and greenfield start-ups involve the direct ownership of facilities in the target country and, therefore, the transfer of resources including capital, technology, and personnel. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

Multinational Corporations or Multinational Companies are corporate organizations that operate in more than one country other than home country. Multinational Companies (MNCs) have their central head office in the home country and secondary offices, facilities, factories, industries, and other such assets in other countries.

These companies operate worldwide and hence also known as global enterprises. The activities are controlled and operated by the parent company worldwide. Products and services of MNCs are sold around various countries which require global management.

Features of a Multinational Company (MNC)

1. High Turnover and Many Assets

MNCs operate on a global scale. Which means they have huge assets in almost all countries in which they operate. Their turnovers can also be incomprehensibly large. For example, Apple has a market capitalization of 1 trillion dollars. This is bigger than the entire economy of Saudi Arabia!

2. Control

MNCs have unity of control. So while they have many branches in many countries, the main control will remain with the head office in its country of origin. The business operations in the host country have their own management and offices, but the ultimate control will still remain at the head office.

3. Technological Advantages

As we saw earlier, an MNC has at its disposal huge amounts of wealth and investments. This allows them to use the best technology available to boost their products and their company. Most companies also invest huge money in their Research & Development Department to invent and discover new technological marvels.

4. Management by Professionals

An MNC is run by very competent and capable individuals. They have suitable managers to take care of their business operations, technology, finances, expansion etc. And they are also able to attract the top talent to their corporations due to their resources and their reputations.

5. Aggressive Marketing

MNCs can spend a lot of their money on marketing, advertising, and promotional activities. They target an international audience, so effective marketing becomes necessary. Aggressive marketing allows them to capture the market and sell their products globally.

Merits of MNCs

(i) Access to Consumers

Access to consumers is one of the primary advantages that the MNCs enjoy over companies with operations limited to smaller region. Increasing accessibility to wider geographical regions allows the MNCs to have a larger pool of potential customers and help them in expanding, growing at a faster pace as compared to others.

(ii) Accesses to Labor

MNCs enjoy access to cheap labor, which is a great advantage over other companies. A firm having operations spread across different geographical areas can have its production unit set up in countries with cheap labor. Some of the countries where cheap labor is available is China, India, Pakistan etc.

(iii) Taxes and Other Costs

Taxes are one of the areas where every MNC can take advantage. Many countries offer reduced taxes on exports and imports in order to increase their foreign exposure and international trade. Also countries impose lower excise and custom duty which results in high profit margin for MNCs. Thus taxes are one of the area of making money but it again depends on the country of operation.

(iv) Overall Development

The investment level, employment level, and income level of the country increases due to the operation of MNC’s. Level of industrial and economic development increases due to the growth of MNCs.

(v) Technology

The industry gets latest technology from foreign countries through MNCs which help them improve on their technological parameter.

(vi) R&D

MNCs help in improving the R&D for the economy.

(vii) Exports & Imports

MNC operations also help in improving the Balance of payment. This can be achieved by the increase in exports and decrease in the imports.

(viii) MNCs help in breaking protectionalism and also helps in curbing local monopolies, if at all it exists in the country.

Demerits of MNCs

(i) Laws

One of the major disadvantage is the strict and stringent laws applicable in the country. MNCs are subject to more laws and regulations than other companies. It is seen that certain countries do not allow companies to run its operations as it has been doing in other countries, which result in a conflict within the country and results in problems in the organization.

(ii) Intellectual Property

Multinational companies also face issues pertaining to the intellectual property that is not always applicable in case of purely domestic firms

(iii) Political Risks

As the operations of the MNCs is wide spread across national boundaries of several countries they may result in a threat to the economic and political sovereignty of host countries.

(iv) Loss to Local Businesses

MNCs products sometimes lead to the killing of the domestic company operations. The MNCs establishes their monopoly in the country where they operate thus killing the local businesses which exists in the country.

(v) Loss of Natural Resources

MNCs use natural resources of the home country in order to make huge profit which results in the depletion of the resources thus causing a loss of natural resources for the economy

(vi) Money flows

As MNCs operate in different countries a large sum of money flows to foreign countries as payment towards profit which results in less efficiency for the host country where the MNCs operations are based.

(vii) Transfer of capital

Transfer of capital takes place from the home country to the foreign ground which is unfavorable for the economy.

International business is defined as the transactions that are carried out across national borders to fulfill the objectives of individuals, companies and organizations. The different modes by which international business is being done are import-export trade, foreign direct investment, licensing, franchising and management contracts. Over the last five decades international trade and investment have grown faster than the domestic economies. International business facilitates flow of idea, services and capital across the globe.

International business is not a new phenomenon but has been practiced around the world for thousands of years. Through the routes established in the Mediterranean, the Phoenicians, Mesopotamians, and Greeks did trading. As sophisticated business techniques emerged, facilitating the flow of goods, resources and funds between countries flourished. This growth was further stimulated by colonization activities. The Industrial Revolution further stimulated the growth of international business by providing methods of production for mass ,markets and efficient methods for utilizing raw materials. The inventions and technological developments from Industrial revolution further accelerated the smooth flow of goods, services and capital between the countries. The production grew at unprecedented levels by 1880’s as the industrial revolution was in full swing in Europe and the United States. Growth continued in an upward spiral as mass production was realized and the manufactures were pushed to seek foreign markets for their products.

Factors leading to Growth in International Business

(i) Development and expansion of technology

The introduction of telegraph in 1837, the telephone in 1876, the wireless in 1895, the aero plane in 1903, the television in 1926, the liquid fuelled rocket in 1927, the coaxial cable in 1930’s and digital computer in 1946 were all the key events that triggered the growth of international business. Next to air transport, electronic communication, digital information processing has been the other principal area of technological innovation. All these technological advancements provided the platform for companies to set off increased number of international business activities.

(ii) Liberalization of cross border activities

The governmental barriers for international business have been lowered after the Second World War. The European Union, NAFTA, ASEAN and other regional economic blocs throughout the world provide fewer restrictions on cross border movements. The European Union was awarded the Nobel prize for peace 2012 in recognition for its constructive handling of peace, improving relations between nations through trade, reconciliation and human rights in Europe over the past six decades. The European commission president Jose Manuel Barrosa at the outset of receiving prize said that, “we honor this prize and will preserve what had been achieved. This achievement will propel the quest for shaping a better organized world with the values of freedom, democracy and human rights.”

Governments and companies have developed services that facilitate further international business. For instance Mail, which is a government monopoly, could be transferred by an airline other than that of the country of origin could go through many different countries before reaching the final destination with the stamp of the country of origin. Also banking institutions have developed effective and efficient means for companies to receive payment for their foreign sales. The banks can assist in the payment of any currency through various international transactions upon the receipt of goods /services.

International trade has a rich history starting with barter system being replaced by Mercantilism in the 16th and 17th Centuries. The 18th Century saw the shift towards liberalism. It was in this period that Adam Smith, the father of Economics wrote the famous book ‘The Wealth of Nations’ in 1776 where in he defined the importance of specialization in production and brought International trade under the said scope. David Ricardo developed the Comparative advantage principle, which stands true even today.

All these economic thoughts and principles have influenced the international trade policies of each country. Though in the last few centuries, countries have entered into several pacts to move towards free trade where the countries do not impose tariffs in terms of import duties and allow trading of goods and services to go on freely.

The 19th century beginning saw the move towards professionalism, which petered down by end of the century. Around 1913, the countries in the west say extensive move towards economic liberty where in quantitative restrictions were done away with and customs duties were reduced across countries. All currencies were freely convertible into Gold, which was the international monetary currency of exchange. Establishing business anywhere and finding employment was easy and one can say that trade was really free between countries around this period.

The First World War changed the entire course of the world trade and countries built walls around themselves with wartime controls. Post world war, as many as five years went into dismantling of the wartime measures and getting back trade to normalcy. But then the economic recession in 1920 changed the balance of world trade again and many countries saw change of fortunes due to fluctuation of their currencies and depreciation creating economic pressures on various Governments to adopt protective mechanisms by adopting to raise customs duties and tariffs.

The need to reduce the pressures of economic conditions and ease international trade between countries gave rise to the World Economic Conference in May 1927 organized by League of Nations where in the most important industrial countries participated and led to drawing up of Multilateral Trade Agreement. This was later followed with General Agreement of Tariffs and Trade (GATT) in 1947.

However once again depression struck in 1930s disrupting the economies in all countries leading to rise in import duties to be able to maintain favorable balance of payments and import quotas or quantity restrictions including import prohibitions and licensing.

Slowly the countries began to grow familiar to the fact that the old school of thoughts were no longer going to be practical and that they had to keep reviewing their international trade policies on continuous basis and this interns lead to all countries agreeing to be guided by the international organizations and trade agreements in terms of international trade.

Today the understanding of international trade and the factors influencing global trade is much better understood. The context of global markets have been guided by the understanding and theories developed by economists based on Natural resources available with various countries which give them the comparative advantage, Economies of Scale of large scale production, technology in terms of e commerce as well as product life cycle changes in tune with advancement of technology as well as the financial market structures.

For professionals who are occupying management or leadership positions in Organizations, understanding the background to the international trade and economic policies becomes necessary as it forms the backdrop for the business organizations to charter their course for growth.

Different nations all over the world are experiencing an essential change in the way they deliver and market various items, products and services. The national economies that were accomplishing the objective of self-sustainability are currently developing route towards International Business. The factor for this crucial change is the development of correspondence, innovation, communication, infrastructure and so on.

Introduction to Modern International Business

Business activities done across national borders is Modern International Business. The International business is the purchasing and selling of the goods, commodities and services outside its national borders. Such trade modes might be owned by the state or privately owned organization.

In which, the organization explores trade opportunities outside its domestic national borders to extend their own particular business activities, for example, manufacturing, mining, construction, agriculture, banking, insurance, health, education, transportation, communication and so on.

Nations that were away from each other, because of their geological separations and financial and social contrasts are now connecting with each other. World Trade Organization established by the administration of various nations is one of the major contributory factors to the expanded connections and the business relationship among the countries.

The national economies are dynamically getting borderless and fused into the world economy as it is clear that the world has today come to be known as a ‘global village’. Numerous more organization are making passage into a worldwide business which presents them with opportunities for development and tremendous benefits.

India was trading with different nations for quite a while, yet it has quickened its progress of incorporating with the world economy and expanding its foreign trade and investment.

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, Modern 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, Modern international businesses have to ensure that they blend the global outlook and the local adaptation resulting in a “Global” 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, Modern  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.

In conclusion, Modern international businesses are facing the best of times and the worst of times at the same time and hence, the savvy and astute among them would succeed in this “Shift Age”.

Benefits of Modern International Business

International Business is important to both Nation and Business organizations. It offers them various benefits.

Benefits to Nation

• It encourages a nation to obtain foreign exchange that can be utilized to import merchandise from the global market.
• It prompts specialization of a country in the production of merchandise which it creates in the best and affordable way.
• Also, it helps a country in enhancing its development prospects and furthermore make opportunity for employment.
• International business makes it comfortable for individuals to utilise commodities and services produced in other nations which help in improving their standard of life.

Benefits to Firms

• It helps in improving profits of the organizations by selling products in the nations where costs are high.
• It helps the organization in utilizing their surplus resources and increasing profitability of their activities.
• Also, it helps firms in enhancing their development prospects.
• International business also goes as one of the methods for accomplishing development in the firms confronting extreme market conditions in the local market.
• And it enhances business vision as it makes firms more aggressive, and diversified.