Historic View Point of International Business13/03/2020
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.