It’s important to understand the nature of international business. The term ‘international business’ comes from the word ‘international marketing’. Businesses in many countries used to export raw materials to nearby countries. Soon, these businesses expanded beyond the trade of raw materials to exporting processed and finished goods. Due to various factors such as the need for cheap labour, other resources and more customers, companies expanded their operations even further through outsourcing from and investing in other countries. As a result, International business became broad. Nowadays, it includes the import and export of goods, franchising, outsourcing, portfolio and foreign direct investments. World economies have become interlinked due to international businesses. This article outlines the nature of international business. For the scope of international business, check this other article.
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Developing countries import and export more from each other and there has been a large flow of capital from developed countries such as the USA, UK and Japan into developing countries. Countries are becoming more open to international trade, financial flows and foreign direct investment. Due to globalisation, efficiency gains in trade as well as rapid growth in knowledge and innovation have benefited international businesses. For some people globalisation presents the prospect of a world too interdependent to engage in war. On the other hand, the expansion of international businesses, due to globalisation, have raised concerns due to high inequality across countries, environmental degradation as well as the international dominance of rich nations. This is the nature of international business. As much as there are advantages to the growth of international businesses the risks and costs associated with these businesses cannot be overlooked.
How International Businesses Differ From Local Businesses
International businesses face unique opportunities and challenges. Marketing, investment and human resource management go beyond domestic borders. To understand the nature of international business, let’s outline how international businesses differ from local businesses.
|Nature of International Business
|Nature of Local Business
|The nature of international business means that a large amount of money is required to invest in most international businesses compared to investing in local businesses.
|Investing in local businesses does not require large sums of money compared to investing in international businesses.
|The general macroeconomic environment differs from one country to another. This poses unique challenges when a business establishes itself in different countries.
Dealing with varying political and legal issues from different countries creates unique challenges for a foreign firm expanding its operations in another country.
|Local businesses that are familiar with the local environment can easily adapt.
Local businesses only face challenges associated with the domestic country’s legal and political systems.
|Strategic planning in international markets can be challenging given that an international business has to consider the different cultures, populations and the general economic climate in different countries.
|Strategic planning in the domestic market is much simpler and straight forward given that a firm is only dealing with the domestic environment.
|Transactions carried out by international businesses are done in multiple currencies and this exposes them to foreign currency risks. This is part of the nature of international business. On the other hand, international businesses increase the level of foreign currency reserves in a country.
|A local business only transacts using the local currency.
|Due to the nature of International businesses, it means they are directly affected by tariffs and quotas.
|Local businesses are indirectly affected by tariffs and quotas or not affected at all in some cases.
|Research and Development is expensive to conduct for international businesses due to the complexity of the markets the businesses they serve.
|Research and development costs are relatively cheaper for local businesses.
|Human resource management for international businesses is complicated because of language, cultural and religious differences in different countries.
|Human resource management for local businesses is less complicated for local businesses.
|International businesses operate at a large scale
They make use of specialised machinery and attract highly skilled workers
|Local businesses operate at a smaller scale
Most highly skilled workers are employed by large corporations
|International businesses are mainly dominated by multinational corporations from developed countries such as the USA, UK and Japan.
There are some multinationals from developing countries such as China and India
|Local businesses can be large corporations, government owned or small to medium enterprises.
|Because of the nature of international businesses, they can earn large sums of revenue from various countries
|The earning potential of local businesses is limited to the number of domestic customers in a country
|International businesses’ sensitivity to business cycles is low because the stages of business cycles change from one country to another. That way international businesses can escape recessions in some countries.
|Local businesses are exposed to business cycle fluctuations unlike international businesses.
Advantages And Disadvantages Of International Business
Advantages of International Business
- Many argue that international business promotes competition and improves the allocation of scarce resources where countries have a comparative advantage.
- The host country can enjoy a variety of products and services brought about by imports from other countries which cannot be produced in that particular country.
- Firms in the local market are forced to improve productivity by adapting to technological changes due to the competition brought about by international businesses.
- International businesses are known to create employment in the local market and raise living standards.
- Knowledge and technical skills can be transferred to developing countries where such skills are in short supply.
- Cultural integration
- International businesses’ benefits are not only economic, they are social and cultural benefits as people from various cultures work and integrate in the business and workplace. International business exposes people from different countries to different customs and traditions.
Disadvantages of International Business
- Some scholars argue that international businesses transfer income from poorer nations to rich nations. This is because the major international businesses that originate from developed countries sell finished goods and those from developing countries mainly export raw materials.
- The low-priced products that come with international businesses are a threat to local businesses.
- Natural resource depletion and land degradation.
- Exploitation of untapped markets, this occurs in 2 ways
- Dumping, where substandard or low-quality products are sold at very low prices.
- Price discrimination, where a product is overpriced in an untapped market.
The integration of national economies into expanding national markets.
The production of products or services at a lower opportunity cost compared to other products than can be produced.
An economic cycle that describes fluctuations in production over time. A business cycle is characterised by 4 phases which are; a recession, recovery, growth and decline.