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Course: International Business
Topic: Unit I - Introduction to International Business
(Part-1)
SAGE School of Management
Dr. Khushboo Sabharwal Gupta
Assistant Professor
INTERNATIONAL BUSINESS
Unit I
• Meaning, Distinction between domestic and international
business. • Reason, problems, importance of International Business.
• Globalization: Importance, Impact essential condition.
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Text Books:
1. Gupta C.B., International Business, S. Chand Publishing, 2014.
2. Bhalla V.K., International business, S. Chand Publishing, 2013.
3. Gupta S., International Business, McGraw Hill, 2015.
4. Aswathappa K., International Business, McGraw Hill, 2008.
5. Sinha V.C., International Business, SBPD, 2020.
Reference Books:
1. Sharan V., International Business: concepts, environment and strategy, Pearson, 2011. 2.
Daniels J.D., Radebaugh L.H., Sullivan D.P., International business, Prentice Hall; 2014.
3. Hill C.W., Wee CH, Udayasanker K., International business: an Asian perspective, Mc-Graw Hill Education
(Asia); 2012.
4. Rao Subba, International Business: Text & Cases, Himalaya Publishing Pvt. Ltd.
5. Ricky W.G., Michael P.W., International business: A managerial perspective, Prentice Hall; 2005. 6.
Sinha P.K., Sinha S., International Business Management: A Global Perspective, Excel Books, 2008.
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Terms used in International Business Culture – the accepted
behaviors, customs, and values of a society or a system of
learned, shared, unifying, and interrelated beliefs, values, and assumptions.
Domestic business – making, buying, and selling goods and services within a
country.
Exports – products sold to other countries.
Imports - products brought from businesses in other countries.
Trade barriers - Trade barriers are government policies which place restrictions on
international trade. Trade barriers can either make trade more difficult and expensive
(tariff barriers) or prevent trade completely restrictions that reduce free trade among
countries.
TERMS USED IN INTERNATIONAL BUSINESS
International business - all business activities needed to create, ship, and sell goods and
services across national borders.
Business - is the economic activity carried on for the purpose of earning profit.
Domestic Business
Business transaction taking place within the geographical boundaries of a nation is known
as domestic or national business. It is also referred to as internal business or home trade.
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INTERNATIONAL BUSINESS
• International Business – the business is done across the geographical boundaries of
a country that type of business is called international business.
• Manufacturing and trade beyond the boundaries of one’s own country is known as
international business. International or external business can, therefore, be defined
as those business activities that take place across the national frontiers.
DEFINITION OF INTERNATIONAL BUSINESS
According to International Business Journual
“International Business is a commercial enterprise that performs economical
activity beyond the bounds of its location, has branches in two or more foreign
countries and makes use of economic, cultural, political, legal and other difference
between countries”
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Concept of International Business
i. The purpose of international business is to satisfy the needs of the customers who may be
individuals, organisations and governments.
ii. International Business may be carried on by individuals, organisations and governments.
Individuals and organisations carry on international business with the profit motive.
i. The scope of international business is very vast. It includes not only exchange of goods
and services but also transfer of knowledge, skills, people, technology, capital,
information and other resources.
Concept of International Business
• International Business forms:
i) International trade
ii) Foreign direct investment
• International Business transactions may be carried out by an enterprise remaining in the
home country through imports and exports. This is known as international trade.
• The enterprise may be establish an entity aboard to carry on business. This is called
foreign direct investment.
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Distinction between Domestic and International Business
International business differ from domestic business in several ways. Some of these are
1. Nationality of parties: In domestic business, both the buyer and sellers from the same
country. International business buyer and seller belong to different countries.
2. Mobility of productive factors: Factors of production such as labour and capital
generally less mobile between countries than within a country. There are legal
restrictions on their movement across nation (socio-cultural environment, economic
conditions and geographical factors also restrict their movement from country to
country).
Distinction between Domestic and International Business
3. Heterogeneity of customers: Buyers from different countries differ in their tastes,
preference, communication patterns, beliefs and purchase behaviours.
4. Political systems: Political environment differs from country to country and keep on
changing. A businessman is familiar with the political conditions of his country.
5. Business Laws and Policies: Each country evolves its own business law and
regulations. Import quota system, tariff and taxation policies, subsidies and other
controls differ from country to country.
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Distinction between Domestic and International Business
6. Business Systems and Practices: Business systems and practices differ from
country to country. Firms interested in international business must adapt their
business policies and programmes as per the conditions prevailing in
international markets.
7. Currency differences: International business involves the use of foreign
currencies. The exchange rate keep fluctuating.
8. Payment problems: In international business payment of goods and service have
to be made through special means such as letter of credit, documentary bills etc.
S. No. Basis of Difference Domestic Business International Business
1 Geographical Confined to the boundaries of Carried across the
coverage one country boundaries of a country
2 Language use Local language is used Foreign language used
3 Nationality of parties Both the buyer and seller belong to The buyer and seller
the same country belong to different
countries
4 Usual mode of Roadways and railways Shipping and airlines
transaction
5 Documents and Few documents and formalities More documents and
formalities involved are involved formalities are involved
6 Currency for payment Local currency Foreign currency
7 Government Very little restrictions Restrictions such as
restrictions tariffs, quotas, etc.
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Features of International Business
The following are the features of international business
a. Involvement of Countries
International business can take place only when transactions occur across different
countries
b. Use of Foreign Exchange
Where countries trade with one another, it has to exchange the goods and services on the
basis of foreign currency.
Features of International Business
c. Legal Obligations
• Foreign trade is to be conducted strictly in accordance with the export and import
policy of the country concerned.
• The consent of the government is to be mandatorily obtained with reference to export
and import of certain goods and services. Thus government intervention is direct in
respect of international transactions.
f. Difference in Economic Environment
• The economic environment of countries involved in international business differs
significantly in terms of legal framework, institutional set-up, monetary fiscal and
commercial policy, resources availability, production techniques, etc.
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Features of International Business
d. Exposure to Risk
International business imposes huge risks on the parties thereto due to long
distances, fluctuation of value of currency, obsolescence, sanctioned, war, etc.,
e. Heavy Documentation Work
International business necessitates fulfillment of a lot of formalities. Parties to
international business have to execute a number of documents in the matters of
conducting International business.
Reasons for International Business
1. Higher profitability - International business may in some cases be more profitable than
domestic business.
• A product/service may be sold aboard at a higher price than what is available in the domestic
market.
For example: Ready-made garments (US)
2. Better Growth Opportunities - A major which motivate firms to go international is to take
advantage of growth opportunities in foreign markets.
• As income and population in developing countries like India are increasing, more and more
multinational corporation from developed countries such as the United States, Germany,
Japan are setting up business in developing countries. (e.g. Infosys, Wipro, Mahindra &
Mahindra, Bharti, Airtel, Reliance Industries so on)
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Reasons for International Business
3. Saturation of Domestic market: In some advanced courtiers, demand for several
products stagnates over a period of time. For example; all household in the United States
have consumed durables like television, refrigerators, cars, etc. the market potential for these
products has been fully tapped.
4. Economies of Scale: The optimum scale of operations has increased due to technological
advances in several industries. In order to attain the optimum size companies have to explore
foreign markets, besides the domestic market. For example: LG, Samsung, Eletrolux and
Whirpool have made huge investments in India, China, Brazil and Mexico.
Reasons for International Business
5. Growing Competition: Rapidly increasing competition has been a major driving force
behind international business.
• Until economic liberalization in July 1991 the home market in India was largely protected
against foreign competition. Therefore, Indian companies had little motivation to seek
business opportunities abroad. They did not take foreign market seriously due to the
sellers market within the country.
• In 1991 competition within the country as well as from foreign firms has increased
considerably. As result , several Indian companies have entered foreign firms has
increased considerably.
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Reasons for International Business
6. Counter-Competition: Some companies adopt an offensive competitive strategy
for internationalization. This strategy called counter-competition involves
penetrating the home market of the potential foreign competitor to reduce its
competitive strength and to protect the domestic from foreign competition.
7. Monopoly Power: firms which enjoys monopoly power or dominant position in
terms of patent rights, technology, product differentiation and other services go
international to take advantage of their power.
Exclusive market information is another driving force behind international business.
Reasons for International Business
• This include knowledge about foreign customers and market place not known to the
other companies. Such special knowledge may be acquired through international
research, special contacts and spotting a business opportunity abroad through
international research.
8. Government Policies and regulations: Both positive and negative aspects of
government policies and regulations can also lead to internalization of business.
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Complexity or Problems of International Business
• Political Instability: frequent changes in political parties in power and consequent
changes in government policies also have adverse impact on international business.
• Exchange Rate Fluctuations: Each country has its own currency. The rate at which
one currency is exchanged for another currency is called exchange rate.
• Foreign Indebtedness: The operations of multinational corporations in developing
countries create a debt trap for these countries due to their low purchasing power.
Complexity or Problems of International Business
• Entry Regulation: Governments in domestic countries impose entry restrictions on
multinational corporations.
• Tariff and Non-Tariff Barriers: to protect domestic industry, governments of different
countries impose tariff, quotas and trade barriers. These barriers are imposed depending
on political relations among various countries.
• Bureaucracy: Bureaucratic attitudes and practices of government in many countries
create considerable delays in granting permission, sanctions and licences to foreign
companies. Such practices discourage multinationals.
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Complexity or Problems of International Business
• High Cost: A country which wants to internationalise its operation has to incur high costs
and make large investment survey, product modification, quality upgradation, managerial
training etc. such high cost investment discourage the growth of international business.
• Corruption: High rates of bribes and kickbacks in some countries discourage the foreign
companies to enter these countries.
• Technological Piracy: during 1950s and 1960s, copying the original technology,
producing imitative and piracy in other areas of business were common in Japan, Korea
and India. Foreign companies refrain from internationalising their operations due to fear of
piracy.
Advantages of International Business
1. Geographical Specialization
• Countries across the world differ significantly in terms of natural resources, capital
equipment, manpower, technology and land and so on. Some countries are rich in mineral
resources hydro-electric power metallic resources, and so on while some other countries
may possess advanced technique of manufacturing, efficient working population, capital
equipment and so on.
• International business is required to exchange the surplus resources resulting from
geographical specialisation for deficit resources in other countries
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Advantages of International Business
2. Optimum use of Natural Resources
International business operates on a simple principle that a country which can
produce more efficiently and trade the surplus production with other countries has to
procure what it cannot produce more efficiently. This enables the countries to
optimally utilize the scarce resources available with them
Advantages of International Business
3. Economic Development.
• International business helps the developing countries greatly in achieving rapid economic
development by importing machinery, equipment, technology, talent, and so on.
• For example., China, India, Brazil and South Korea which were once slower in their
economic development are achieving faster economic development due to international
business.
• Even the developed countries like Japan, USA, UK, etc., have achieved remarkable
economic progress through the import of raw materials and export of manufactured
goods.
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Advantages of International Business
4. Generation of Employment.
International business generates employment opportunities by assisting the
expansion and growth of agricultural and industrial activities. It provides direct
employment to those people who are hired by export and import firms and generates
indirect employment to number of intermediary firms like, clearing and forwarding
agent, indent houses transport organizations, outsourcing agencies, etc.
Advantages of International Business
5. Higher Standard of Living.
On account of international business, the citizens of the country can buy more varieties of
goods and services which cannot be produced cost effectively within the home country.
This exchange of goods and services among the countries enhances the standard of living of
people.
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Advantages of International Business
6. Price Equilisation
• International business helps to stabilize the prices of various commodities which are
fluctuating on a daily basis in the world market. Whenever the price of a commodity rises
sharply in a particular country, the same commodity is imported from some other foreign
countries to prevent the sharp rise in prices in the home country.
• Thus international business prevents violent fluctuations of prices of various commodities and
helps maintain prices of various commodities at stable level in each and every country.
Advantages of International Business
7. Prospects for Higher Profit
International business helps the firms which produce goods in excess to sell them at relatively higher
price to various countries in the international market. This enables them to earn higher profit.
8. Capacity Utilisation
International business enables the firms across the country to sell their goods and services on a large
scale in the international market. As a result their machinery and equipments are used to their full
capacity.
In short very prospect of selling goods in international market besides selling the goods in home
market keeps the machineries, tools, equipment, and factory fully engaged all through the year.
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Advantages of International Business
9. International Peace
• International business makes countries across the world become inter-dependent
while these countries are independent in their functioning.
• This facilitates the exchange of culture, ideas and mutual understanding. It
develops and strengthens cultural and social relations among the people of
different countries. All these collectively contribute to maintain international
peace.
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