ACHARYA INSTITUTE OF GRADUATE STUDIES

(NAAC Re Accredited ‘A’ Grade & Affiliated to Bengaluru City University)

Soldevanahalli, Bengaluru-560107
DEPARTMENT OF MANAGEMENT

Unit 1: INTRODUCTION TO INTERNATIONAL BUSINESS

Meaning of International Business:

International business refers to commercial activities that go beyond the geographical limits of
a country.

Therefore, it includes not only the international movement of goods and services but also the
capital, personnel, technology, and intellectual property such as patents, trademarks, technical
knowledge, and copyrights.

It is a business that takes place outside the border, that is, between two countries. This includes
the international movement of goods and services, capital, personnel, technology, and
intellectual property rights such as patents, trademarks, and know-how. It refers to the purchase
and sale of goods and services that exceed the geographical limits of the country.

It comes in three types:

1.Export Trade: It is the sale of goods and services to foreign countries.

2.Import trade: Purchase goods and services from other countries.
3. Entrepot Trade: Import of goods and services for re-export to other countries.

Scope of International Business:

1. International trade: International business includes the import and export of goods.

2. Service export and import: It is also known as invisible commerce. Invisible commerce
items include tourism, transportation, telecommunications, banking, warehousing, distribution,
and advertising.

3. Licenses and franchises: A license is a contractual arrangement that allows one company
(licensor) access to its patents, copyrights, trademarks, or technologies to another foreign
company (licensee) at a rate called royalties. Pepsi and Coca-Cola are produced and sold
worldwide under a licensing system. A franchise is similar to a license, but a term used in
connection with the provision of services. For example, McDonald’s operates fast-food
restaurants around the world through its franchise system.

4. Foreign investment: It involves investing funds abroad in exchange for economic

profitability.

There are two types of foreign investment.

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Assistant Professor
AIGS
(A) Foreign Direct Investment (FDI)- Investing in foreign assets such as plants and machinery
for the purpose of producing and marketing goods and services abroad.
(B) Portfolio Investment- Investing in foreign company stocks or obligations to earn income
through dividends or interest.

Features of International Business:

1. It includes two countries: international business is only possible when there are
transactions in different countries.

2. Use of currencies: Each country has its own different currency. This causes currency
exchange problems as foreign currencies are used to carry out transactions.

3. Legal obligations: Each country has its own laws regarding foreign trade, which must be
complied with. Moreover, in the case of international transactions, there is more government
intervention.

4. High risk: International companies face great risks due to long distances, the risk of
fluctuations between the two currencies, and the risk of obsolescence.

5. Heavy document: Subject to a series of steps. Many documents need to be completed and
sent to the other party.

6. Time consumption: The time interval from sending and receiving goods to payment is
longer than that of domestic transactions.

7. Lack of personal contact: Lack of direct and personal contact between importers and
exporters.

Importance of International Business

• Through international trade, it becomes possible for people to consume goods and
services of other countries and improve their standard of living.
• International companies export goods and services around the world. This allows in
earning valuable foreign exchange.
• When firms get involved in external trade, it increases the firm’s production capacity.
Due to the advantage of economies of scale, the cost of production decreases.
• International business improves business vision and makes firms more competitive and
diversified.

Stages of Internationalization

These are the various stages of internationalization which explained below:

1. Domestic Company
2. International Company
3. Multinational Company
4. Global Company
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Assistant Professor
AIGS
 5. Transitional Corporation
Domestic Company

First Stages of Internationalization: Most international companies have their origin as

domestic companies. The orientation of a domestic company essentially is ethnocentric. A
purely domestic company operates domestically because it never considers the alternative of
going international.
The growing stage-one company, when it reaches growth limits in its primary market,
diversifies into new markets, and product technologies instead of focusing on penetrating
international markets. However, if factors like domestic market constraints, foreign market
prospects, increasing competition, etc.

International Company

Second Stages of Internationalization: International company is normally the second stage

in the development of a company towards the transitional corporation. The orientation of the
company is basically ethnocentric and the marketing strategy is an extension.
the marketing mix developed for the home market is extended into foreign markets.
International companies normally rely on international business.

Multinational Company

Third Stages of Internationalization: When the orientation shifts from ethnocentric to

polycentric, the international company becomes multinational. In other words, when a
company decides to respond to market differences, it evolves into a stage three multinational
that pursues a multi-domestic strategy.
The focus of the stage three company is multinational that pursues a multinational or, in
strategic terms, multi-domestic. The marketing strategy of the multidimensional company is
adaptation. In multinational companies, each foreign subsidiary is managed as if it were an
independent city-state.

The subsidiaries are part of an area structure in which each country is part of a regional
organization that reports to the world headquarters.

Global Company

Fourth Stages of Internationalization: The global company will have either a global
marketing strategy or a global sourcing strategy but not both. It will either focus on global
markets and source from the home or a single country to supply these markets, or it will focus
on the domestic market and source from the world to supply its domestic channel.
Transitional Corporation

Fifth Stages of Internationalization: The transitional corporation is much more than a

company with sales, investments, and operations in many countries. This company, which is
increasingly dominating markets and industries around the world, is an integrated world
enterprise that links global resources with global markets at a profit.

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Assistant Professor
AIGS
Characteristics of a Transnational Corporation
1. Geocentric orientation.
2. Thinks globally and acts locally.
3. Global strategy but allows value addition to the customer.
4. Allows adaptation to add value to its global offer.
5. Assets are distributed throughout the world.
6. Independent and specialized.
7. R&D integrated.
8. Production spread but specialized and integrated.

Theories of international trade

Mercantilism
The Mercantilism theory is the first classical country-based theory, which was propounded
around the 17-18th century. This theory has been one of the most talked about and debated
theories. The country focused on the motto that, on a priority basis, it must look after its own
welfare and therefore, expand exports and discourage imports. It stated that an attempt should
be made to ensure that only the necessary raw materials are imported and nothing else. The
theory also propounded the view that the first thing a nation must focus on is the accumulation
of wealth in the form of gold and silver, thus, strengthening the treasure of the nation.

To put it simply, it can be stated that the classical economists behind the theory of Mercantilism
firmly believed that a country’s wealth and financial standing are largely demonstrated by the
amount of gold and silver it holds. Hence, economists believe that it is best to increase the
reserve of precious metals to maintain a wealthy status. For this theory to work, the aim to be
fulfilled was that a country must produce goods in such a large quantity that it exports more
and should be less dependent on buying goods and other materials from others, thereby strongly
encouraging exports and strictly discouraging imports.

This theory is often called the protectionist theory because it mainly works on the strategy of
protecting oneself. Even in the 21st century, we find certain countries that still believe in this
method and allow limited imports while expanding their exports. Japan, Taiwan, China, etc.
are the best examples of such countries. Almost every country at some point in time follows
this approach of protectionist policies, and this is definitely important. But supporting such
protectionist policies comes at a cost, like high taxes and other such disadvantages.

Absolute advantage
In 1776, the economist Adam Smith criticised the theory of mercantilism in his publication,
“The Wealth of Nations”, and propounded the theory of Absolute advantage. Smith firmly
believed that economic growth in reference to international trade firmly depends on
specialisation and division of labour. Specialisation ensures higher productivity, thereby

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Assistant Professor
AIGS
increasing the standard of living of the people of the country. He proposed that the division of
labour in small markets would not cater for specialisation, which would otherwise become easy
in the case of larger markets. This increase in size fostered a more refined specialisation and
thus increased productivity all around the globe.

Smith’s theory proposes that governments should not try to regulate trade between countries,
nor should they restrict global trade. His theory also encapsulated the consequences of the
involvement and restraint of the government in free trade. Also, he firmly believed that it is the
standard of living of the residents of a country that should determine the country’s wealth and
the amount of gold and silver that a country’s treasure has. He states that trading should depend
on market factors and not the government’s will.

Smith was firmly against the mercantilist theory, and he argued that diminishing importation
and just focusing on exports was not a great idea, and thus restricting global trade is not what
needs to be done. He proposed that even though we might succeed in forcing our country’s
people to buy our own goods, however, we may not be able to do so with foreigners, and hence
it is better that we make it a two-way trade and just focus on exports.

In relation to the restrictions imposed on import, Smith stated that even though the restrictions
on import may benefit some domestic industries and merchants when looked at from a broad
spectrum, it will result in decreasing competition. Along with this, it will increase the monopoly
of some merchants and companies in the market. Another disadvantage is that the increase in
the monopoly will cause inefficiency and mismanagement in the market.

Smith completely denied the promotion of trade by the government and restrictions on free
trade. He reiterated that it is wasteful and harmful to the country. He proposed that free trade
is the best policy for trading unless, otherwise, some unfortunate or uncertain situations arise.

Comparative advantage
The theory of comparative advantage flourished in the 19th century and was propounded by
David Ricardo. This theory strengthened the understanding of the nature of trade and
acknowledges its benefits. The theory suggests that it is better if a country exports goods in
which its relative cost advantage is greater than its absolute cost advantage when compared
with other countries. For instance, let’s take the examples of Malaysia and Indonesia. Let’s say
Indonesia can produce both electrical appliances and rubber products more efficiently than
Malaysia. The production of electrical appliances is twice as much as that of Malaysia, and for
rubber products, it is five times more than that of Malaysia. In such a condition, Indonesia has
an absolute productive advantage in both goods but a relative advantage in the case of rubber
products. In such a case, it would be more mutually beneficial if Indonesia exported rubber
products to Malaysia and imported electrical appliances from them, even if Indonesia could
efficiently produce electrical appliances too.

What Ricardo proposed is that even though a country may efficiently produce goods, it may
still import them from another country if a relative advantage lies therein. Similar is the case
with export, even if a country is not very efficient in certain goods from other countries, it may
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Assistant Professor
AIGS
still export that product to other countries. This theory basically encourages trade that is
mutually beneficial.

Heckscher-Ohlin theory (Factor Proportions theory)

The theories founded by Smith and Ricardo were not efficient enough for the countries, as they
could not help the countries determine which of the products would benefit the country. The
theory of Absolute Advantage and Comparative Advantage supported the idea of how a free
and open market would help countries determine which products could be efficiently produced
by the country. However, the theory proposed by Heckscher and Ohlin dealt with the concept
of comparative advantage that a country can gain by producing products that make use of the
factors that are present in abundance in the country. The main basis of their theory is on a
country’s production factors like land, labour, capital, etc. They proposed that the approximate
cost of any factor of resource is directly related to its demand and supply. Factors which are
present in abundance as compared to demand will be available at a cheaper cost, and factors
which are in great demand and less availability will be expensive. They proposed that countries
produce goods and export the ones for which the resources required in their production are
available in a much greater quantity. Contrary to this, countries will import goods whose raw
materials are in shorter supply in their own country as compared to the one from which they
are importing.

For example, India has a large number of labourers, so foreign countries establish industries
that are labour-intensive in India. Examples of such industries are the garment and textile
industries.

EPRG Framework
The most challenging task a company may face while entering the international market is
the degree of standardization or customization in its operations. The question of
standardization or adaptation or customization will be affecting all business operations
and marketing mix decisions. However, in the era of globalization, where consumers have
access to all the products and services and have their own taste and preferences, scope of
customization has increased. Whether a company chooses standardization or
customization of its operations depends upon its attitude towards different cultures and
environments.
The attitude towards standardization or customization can be explained with the EPRG
Framework of international marketing. EPRG framework is based upon four approaches
of a company towards international marketing.

E stands for Ethnocentric

Pstands for Polycentric
R stands for Regiocentric
G stands for Geocentric

Ethnocentric Approach: Ethnocentric approach or home country orientation is the

approach where a company simply markets its product or services internationally in the
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Assistant Professor
AIGS
same manner as they do domestically. Companies believe that consumer’s needs and
market conditions are more or less homogeneous in international markets. Companies
prefer an ethnocentric approach in order to avoid the expense of developing new marketing
techniques to serve foreign consumers. All functions are planned and carried out from
home base only with little or almost no difference in product formulation or specifications.
Polycentric Approach: In Polycentric approach, companies go for customization for each
foreign market. They will customize the products according to each country depending
upon the consumers taste or preferences or cultural or any legal or political factors i.e.
depending upon their local marketing conditions and then enter into that market.
Companies customize the marketing mix to meet the specific needs of each foreign market.
Regiocentric Approach: In a regiocentric approach, company’s target a group of
countries having similar market characteristics, and then enter into the market. Once the
company is established in various markets, attempts are made to form market clusters
based on geographical and psychic proximity. The production and distribution of products
are made to serve the whole region with an effective economy of operation, close control
and coordination.
Geocentric Approach: In geocentric approach, the company identifies the needs of
consumers worldwide and then enters into the market with standard products with
standardized marketing mix for all the markets it serves. Companies have to identify the
similarities in consumption patterns that can be targeted. The companies coordinate their
distribution network to distribute their products in various regional and national markets
by establishing manufacturing and processing facilities around the world.

What is a Tariff Barrier?

There is a common misconception that many people believe that the concept of tariffs is just
like those taxes usually paid for purchasing every product. But, this is not the case with the
term 'tariff barrier.' There's a lot more intricate and detailed implementation of this policy.
However, it should not shock you simply due to its unusual form and meaning than the 'taxes.'

In simple terms, the tariff is a tax, but it is a tax on all goods imported from foreign countries.
Or, you could simply understand it as a 'border tax.' The government authorities most
commonly levy these tariffs on imported goods that protect domestic industries from heavy
competition from foreign markets. Apart from this, tariffs also act as a source of revenue for
the government in the form of taxes and duties.

Moreover, imposing tariff restrictions keeps the cost of foreign goods competitive for the
nation's independence from foreign imported goods. Additionally, this sort of trade barrier
policy is used to penalise countries that don't follow the government's foreign policy.

A government can impose tariff restraints in several different forms. Some of the most common
tariff barriers are as follows:

• Ad-Valorem Tariffs
• Specific Tariffs
• Import Quotas
• Compound Duties
• Protective Tariffs
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Assistant Professor
AIGS
 • Licences
• Voluntary Export Duties
• Transit Duties.

What is a Non-Tariff Barrier?

Non-tariff trade barriers are restrictions that do not necessarily involve paying taxes and duties.
In other words, these barriers are obstacles to trading in import of foreign goods other than the
measures adopted in tariff policy. To put the concept of the non-tariff barrier more simply and
concisely, it is a type of 'non-tax' policy.

Sometimes, a non-tariff barrier policy may have the same effect as the barriers of tariffs. Still,
in this case, only restrictions such as prohibitions, conditions, and formalities are implemented,
which makes importing foreign goods difficult and restrained. Non-tariff barriers are, however,
not implemented in combination with tariff barriers.

Non-tariff barriers usually take the form of restrictions that are listed below:

• Quotas
• Voluntary Export Restraints
• Embargoes
• Technical Barriers to Trade
• Licensing
• Anti-dumping duties
• Countervailing Duties
• Safeguards
• Government Procurement
• Procedures and Formalities

Sushma M
Assistant Professor
AIGS