OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE

__________________________________________________

CHAPTER 1- INTRODUCTION TO INTERNATIONAL BUSINESS

Objectives:
a.) Know how the concept of international business evolved;
b.) State the nature of international business;
c.) Describe the influences and goals of international business; and
d.) Identify the problems of international business.

A. INTRODUCTION
- International business is all commercial transactions private and governmental
between two or more countries. Private companies undertake such transactions for
profits; governments may or may not do the same in their transactions. These
transactions include sales, investments and transportation.
- Study of international business has become important because (i) It comprises a
large and growing portion of the world’s total business. (ii) All companies are affected
by global events and competition, whether large or small, since most sell output to
and secure raw materials and supplies from foreign countries. Many companies also
compete against products and services that come from outside India.
- The company’s external environment conditions such as physical, societal and
competitive affect the way business functions such as marketing, manufacturing and
supply chain management are carried out. When a company operates internationally,
foreign conditions are added to domestic ones making the external environment more
diverse and complex.

B. GLOBAL, MULTINATIONAL AND TRANSNATIONAL COMPANY

- Multinational companies have investment in other countries, but do not have
coordinated product offerings in each country. More focused on adapting their
products and service to each individual local market. A Multinational Corporation
(MNC) or Multinational Enterprise (MNE) is a corporation enterprise that manages

Page 1
 OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE
__________________________________________________
production or delivers services in more than one country. It can also be referred to as
an international corporation. They play an important role in globalization.
- Global companies have invested and are present in many countries. They market
their products through the use of the same coordinated image/brand in all markets.
Generally one corporate office that is responsible for global strategy. Emphasis on
volume, cost management and efficiency.
- Transnational companies are much more complex organizations. They have invested
in foreign operations, have a central corporate facility but give decision-making, R&D
and marketing powers to each individual foreign market.

C. EVOLUTION OF INTERNATIONAL BUSINESS

- The analytical framework of international business is build around the activities of
Multinational Enterprises (MNEs) enunciated by the process of internationalisation.
The FDI on the part of an MNE attempts to overcome the obstructions to trade in
foreign countries. The strategies relating to the functional areas, such as production,
marketing, finance and price policies, are adopted by the MNEs in such a manner
that an amicable relationship between home and host nations is created.
- Foreign direct investment can be distinguished from the other forms of international
business, such as exporting, licencing, joint ventures and management contracts.
Basically, it reacts to the restrictions in foreign trade, licensing, etc. and its growth at
the global level has taken place mainly due to the imperfections in the world markets
and protective trade policies pursued by different countries for the sake of protecting
their economies.
- The ways in which the MNEs have provided challenges to the imperfections and
restraints in the world markets from an important part of the conceptual methods
underlying the expanding role of international business.
- Before the emergence of the MNEs, foreign trade and international business were
regarded as synonymous, and international trade doctrines based on labour cost
differentials and free trade guided the international transactions among different
trading partners. The multinationals undertook FDI abroad, and their innovative
efforts in technological development and management techniques, in a way, refuted

Page 2
 OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE
__________________________________________________
the traditional trade theories. Several FDI theories Notes have been developed in
support of international business for the improvement and welfare of world
economies.
- The fast growth of international business has also been conducive to foster close
international economic relations among different countries of the world. Now, the
world economy is not only interdependent but also inter-linked, and any kind of R&D
taking place in any part of the world has its impact on the entire global economy.
- The multinationals are to keep a constant surveillance on the fluctuating foreign
exchange rates and inflation as these have a direct bearing on the profitability of
international operations. The socio-cultural, political and economic environments of
host countries also affect the investment decisions of foreign investors.
- The business across the borders of the countries had been carried on since times
immemorial. But, the business had been limited to the international trade until the
recent past. The post-World War II period witnessed an unexpected expansion of
national companies into international or multinational companies. The post 1990's
period has given greater fillip to international business.
- In fact, the term international business was not in existence before two decades. The
term international business has emerged from the term 'international marketing',
which, in turn, emerged from the term 'export marketing'. International Trade to
International Marketing: Originally, the producers used to export their products to the
nearby countries and gradually extended the exports to far-off countries. Gradually,
the companies extended the operations beyond trade. For example, India used to
export raw cotton, raw jute and iron ore during the early 1900s. The massive
industrialization in the country enabled us to export jute products, cotton garments
and steel during 1960s.
- India, during 1980s could create markets for its products, in addition to mere
exporting. The export marketing efforts include creation of demand for Indian
products like textiles, electronics, leather products, tea, coffee, etc., arranging for
appropriate distribution channels, attractive package, product development, pricing,
etc. This process is true not only with India, but also with almost all developed and
developing economies. International Marketing to International Business: The

Page 3
 OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE
__________________________________________________
multinational companies which were producing the products in their home countries
and marketing them in various foreign countries before 1980s, started locating their
plants and other manufacturing facilities in foreign/host countries. Later, they started
producing in one foreign country and marketing in other foreign countries. For
example, Unilever established its subsidiary company in India, i.e. Hindustan Liver
Limited (HLL), HLL produces its products in India and markets them in Bangladesh,
Sri Lanka, Nepal, etc. Thus, the scope of the international trade is expanded into
international marketing and international marketing is expanded into international
business.
- The 1990s and the new millennium clearly indicate rapid internationalization and
globalization. The entire globe is passing at a dramatic pace through the transition
period. Conducting and managing international business operations is a crucial
venture due to variations in political, social, cultural and economic factors, from one
country to another country. For example, most of the African consumers prefer high
quality and high priced products due to their higher ability to buy. Therefore, the
international businessman should produce and export less costly products to most of
the African countries and vice versa to most of the European and North American
countries. High priced Palmolive soaps are exported and marketed in developing
countries like Ethiopia, Pakistan, Kenya, India, Cambodia, etc.

D. NATURE OF INTERNATIONAL BUSINESS

- The study of international business focuses on the particular problems and
opportunities that emerge because a firm is operating in more than one country. In a
very real sense, international business involves the broadest and most generalised
study of the field of business, adapted to a fairly unique across the border
environment. Many of the parameters and environmental variables that are very
important in international business are either largely irrelevant to domestic business
or are so reduced in range and complexity as to be of greatly diminished significance.
- Thus, it might be said that domestic business is a special limited case of international
business.

Page 4
 OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE
__________________________________________________
- The distinguishing feature of international business is that international firms operate
in environments that are highly uncertain and where the rules of the game are often
ambiguous, contradictory, and subject to rapid change, as compared to the domestic
environment. In fact, conducting international business is really not like playing a
whole new ball game, however, it is like playing in a different ball park, where
international managers have to learn the factors unique to the playing field. Managers
who are astute in identifying new ways of doing business that satisfy the changing
priorities of foreign governments have an obvious and major competitive advantage
over their competitors who cannot or will not adapt to these changing priorities.
- The guiding principles of a firm engaged in (or commencing) international business
activities should incorporate a global perspective. A firm’s guiding principles can be
defined in terms of three board categories products offered/market served,
capabilities, and results. However, their perspective of the international business is
critical to understand the full meaning of international business. That is, the firm’s
senior management should explicitly define the firm’s guiding principles in terms of
an international mandate rather than allow the firm’s guiding principles in terms as an
incidental adjunct to its domestic activities. Incorporating an international outlook into
the firm’s basic statement of purpose will help focus the attention of managers (at all
levels of the organisation) on the opportunities (and hazards) outside the domestic
economy.

E. INFLUENCES AND GOALS OF INTERNATIONAL BUSINESS

- Companies engage in international business to:
- Expand Sales: Companies’ sales are dependent on (a) the consumers’ interest in
their products or service and (b) the consumers’ willingness and ability to buy them.
The number of people and the extent of their purchasing powers are higher for the
world as a whole than for a single country. Hence companies increase the potential
market for their sales by pursuing global markets. Thus, higher sales means higher
profits because of economies of scale. So, increased sales are a major motive for a
company’s expansion into international business.

Page 5
 OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE
__________________________________________________
- Acquire Resources: Manufacturers and distributors also look for foreign capital,
technologies and information that they can use at home, to reduce their costs.
Sometimes, a company operates abroad to acquire something not readily available
in the home country so as to improve its product quality and differentiate itself from
competitors, potentially increasing market share and profits.
- Minimise Risk: Companies seek out foreign markets to minimise swings in sales
and profits arising out of business cycle recessions and expansions which occur
differently in different countries.
- Understanding a Company’s Physical and Social Environments
- To operate within a company’s external environment, its mangers should have in
addition to knowledge of business operations, a working knowledge of basic social
sciences, political sciences, law, anthropology, sociology, psychology, economies
and geography.
- Politics helps shape business worldwide because political leaders control shaping of
international business. Political disputes can disrupt trade and investments; even
small conflicts have far-reaching effects.
- Domestic law includes regulations in both the home and host countries on matters
such as taxation, employment and foreign exchange transactions.
- International law in the form of legal agreements between two countries governs how
the earnings are taxed by both. International law may also determine how and
whether companies can operate in certain locales.
- The related sciences of anthropology, sociology, and psychology describe, in part,
peoples’ social and mental developments, behaviour and interpersonal activities.
Managers of international companies can better understand societal values, attitudes
and beliefs concerning themselves and others. The understanding enables to
function better in different countries.

F. PROBLEMS OF INTERNATIONAL BUSINESS

- 1.) Political and Legal Differences: The political and legal environment of foreign
markets is different from that of the domestic. The complexity generally increases as
the number of countries in which a company does business increases. It should also

Page 6
 OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE
__________________________________________________
be noted that the political and legal environment is not the same in all provinces of
many home markets.
- 2.) Cultural Differences: The cultural differences, is one of the most difficult
problems in international marketing. Many domestic markets, however, are also not
free from cultural diversity.
- 3.) Economic Differences: The economic environment may vary from country to
country.
- 4.) Differences in the Currency Unit: The currency unit varies from nation to nation.
This may sometimes cause problems of currency convertibility, besides the problems
of exchange rate fluctuations. The monetary system and regulations may also vary.
- 5.) Differences in the Language: An international marketer often encounters
problems arising out of the differences in the language. Even when the same
language is used in different countries, the same words of terms may have different
meanings. The language problem, however, is not something peculiar to the
international marketing.
- 6.) Differences in the Marketing Infrastructure: The availability and nature of the
marketing facilities available in different countries may vary widely. For example, an
advertising medium very effective in one market may not be available or may be
underdeveloped in another market.
- 7.) Trade Restrictions: A trade restriction, particularly import controls, is a very
important problem, which an international marketer faces.
- 8.) High Costs of Distance: When the markets are far removed by distance, the
transport cost becomes high and the time required for affecting the delivery tends to
become longer. Distance tends to increase certain other costs also.
- 9.) Differences in Trade Practices: Trade practices and customs may differ
between two countries.

Page 7
 OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE
__________________________________________________

REFERENCES:

Dutta, B. (2010). International Business Management: Text and Cases.

New Delhi: Excel Books

Jain, S. C. International Marketing. Singapore: Thompson Learning

Black and Sundaram. International Business Environment. New Delhi:

Prentice Hall of India

Gosh, B. Economic Environment of Business. New Delhi: South Asia Book

Bhalla, V. K. and Ramu, S. S. International Business Environment &

Management, New Delhi: Anmol Publication Pvt. Ltd.

LINKS
TOPICS
Global, Multinational and Transnational
Company
Evolution of International Business
Nature of International Business
Influences and Goals of International
Business
Problems of International Business
LINKS FOR VIDEO
https://youtu.be/OGg9K1wymWk
https://youtu.be/0_XjKxtOlRM
https://youtu.be/lMdhfBQUhtI
https://youtu.be/bHMxgUL9sfA
https://youtu.be/pthVlaF6RmI

Page 8