UNIT-I

International Business :-
International business refers to the trade of goods, services, technology, capital and/or
knowledge at a global level. It involves cross-border transactions of goods and services
between two or more countries. Transactions of economic resources include capital, skills, and
people for the purpose of the international production of physical goods and services such as
finance, banking, insurance, and construction. International business is also known
as globalization.
"International business" is also defined as the study of the internationalization process of
multinational enterprises. A multinational enterprise (MNE) is a company that has a worldwide
approach to markets, production and/or operations in several countries. Well-known MNEs
include fast-food companies such as: McDonald's (MCD), YUM (YUM), Starbucks Coffee
Company (SBUX), Microsoft (MSFT), etc.

Nature/Characteristics of International Business-

1. Entrepreneur:- There must be someone to take initiate for establishing a business. The
person who recognizes the need for a product or service is known as entrepreneur. The
entrepreneur is a key figure in the process of economic growth. The quality of entrepreneurship
exiting in any region determines to a large growth. The quality of entrepreneurship existing in
any region determines to a large extent the development of that region. The entrepreneur
visualizes a business, combines various factors of production and puts them into a going
concern.

2. Economic Activities:- A Business includes only economic activities. All those activities
relating to the production and distribution of goods and services are called economic activities.
These activities are under-taken with economic motive. Business is carried on with a profit
motive. Any activity undertaken without economic consideration will not be a part business.
So, business covers only economic activities.

3. Exchange of Goods and Services: A business must involve exchange of goods and
services. The goods to be exchanged my either be produced or procured from other sources.
The exchange of goods and services is undertaken with profit motive. Production or purchasing
of goods and services for personal consumption do not constitute business. The purchase of
goods by a retailer constitutes business while the purchase of goods by a consumer is not
business. The purchase of goods should be to sell them again. The same principle is applicable
to services. If a person cooks his food at home it is not business, but if the same person cook at
a restaurant, it is business, because he exchange his services for money.

4. Profit Motive:- The profit motive is an important element of business. Any activity
undertaken without profit motive is not business. A businessman tries to earn more and more
profits out of his business activities. The incentive for earning profits keeps a person in business
and is also necessary for the continuity of the business. This does not mean that there will not
be losses in business. The object of starting a business is to earn profit through there may be
losses. The profit motive does not entitle a businessman to start exploiting the consumers. The
responsibility of business towards society restricts a businessman from earning exorbitant
profit. The business activity will flourish more when the business serves the society.

5. Risk and Uncertainty:- The business involves larger element of risk and uncertainty. In fact
a business tries to foresee any future uncertainties and plan his business activities accordingly.
The factors on which business depends are never certain, so the business opportunities will also
be uncertain. These may be shift in

demand, strike by employees, floods, war, fall in prices, fluctuations in money market etc. If a
businessman is able to foresee uncertainties and is able to bear them then he will successful,
otherwise he may be forced out of business. The risk element in business keeps a person
vigilant and he tries to ward off his risk by executing his policies properly.

6. Continuity of Transactions:- In business, only those transactions are included which have
regularity and continuity. An isolated transaction will not be called business, even if the person
earns from that deal. A person builds a house for himself, but later on sells it on profit. We will
not sell them, this will be called business. So the transactions should have continuity and
regularity, otherwise they will not be a part of business.

7. Creation of Utility:- The goods are provided to the consumers as per their likings and
requirements. Business crates various types of utilities ion goods so that consumers may use
them. The utility may be form utility, place utility, time utility etc. When raw materials are
converted into finished goods, it creates from utility. The goods are transported from the places
of production to the ultimate consumers; it creates place utility. In the present industrial world,
production is not done only for the present but it is undertaken for the future also. The process
of storing goods when they are not required and supplying them at a time when they are needed
is called creation of time utility. So the business creates many utilities in goods so that the
consumers may use them according to their preferences and needs.

8. Organization:- Every enterprise need an organization for its successful working. Various
business activities are divided into departments, sections, and jobs. An organization creates the
framework for managerial performance and helps in coordinating various business activities.
A proper organization is helpful in the smooth running of the business and helps to achieve its
objectives.
 9. Financing:- Business enterprises cannot move a step without finance. The finances are
required for providing fixed and working capital. The availability of other factors of production
also depends upon the availability of finances. After estimating its financial requirements, the
businessman tries to find out the sources from which these requirements will be met. A proper
capital structure is must for the success of the business.

10. Consumer Satisfaction:- The utilities of business is to supply goods to the consumers. The
foods are produced for the consumers. If the consumer is satisfied, then he will purchase the
same thing again, otherwise he will for in for an alternative commodity. The business should
try to satisfy the consumer so that the demand for his products is maintained. The existence
and expansion of business depends upon the liking of the consumers for the products of that
business. The businessman should try to produce goods according to the likings and tastes of
consumers. The commodities should be made available when they are needed. Business and
consumers exist for each other.

11. Satisfying Social Need:- The business should aim at serving the society at large. The
business is a socio-economic institution. It must look to the public good. A great emphasis is
laid, now-a-days, on the social aspect of business and social obligations of business. It is not
only the public which needs business but business also needs public support. S business must
serve public purpose.

The scope of International Business

International business is much broader than international trade. It includes not only
international trade (i.e., export and import of goods and services), but also a wide variety of
other ways in which the firms operate internationally. International Management professionals
are familiar with the language, culture, economic and political environment, and business
practices of countries in which multinational firms actively trade and invest.

Major forms of business operations that constitute international business are as follows.

1. Merchandise exports and imports: Merchandise means goods that are tangible, i.e., those
that can be seen and touched. When viewed from this perceptive, it is clear that while
merchandise exports means sending tangible goods abroad, merchandise imports means
bringing tangible goods from a foreign country to one’s own country.

2. Service exports and imports: Service exports and imports involve trade in intangibles. It
is because of the intangible aspect of services that trade in services is also known as invisible
trade.

3. Licensing and franchising: Permitting another party in a foreign country to produce and
sell goods under your trademarks, patents or copy rights in lieu of some fee is another way of
entering into international business. It is under the licensing system that Pepsi and Coca Cola
are produced and sold all over the world by local bottlers in foreign countries.

4. Foreign investments: Foreign investment is another important form of international

business. Foreign investment involves investments of funds abroad in exchange for financial
return. Foreign investment can be of two types: direct and portfolio investments.

Barriers/Restraining Forces of international Business

1. Cultural and social barriers: A nation’s cultural and social forces can restrict
international business. Culture consists of a country’s general concept and values and
tangible items such as food, clothing, building etc. Social forces include family,
education, religion and custom. Selling products from one country to another country
is sometimes difficult when the culture of two countries differ significantly.
2. Political barriers: The political climate of a country plays a major impact on
international trade. Political violence may change the attitudes towards the foreign
firms at any time. And this impact can create an unfavorable atmosphere for
international business.
3. Tariffs and trade restrictions: Tariffs and trade restrictions are also the barriers
to international trade. They are discussed below:
o Tariffs: A duty or tax, levied on goods brought into a country. Tariffs can be
used to discourage foreign competitors from entering a digestive market. Import
tariffs are two types-protective tariffs and revenue Tariffs.
o Quotas: A limit on the amount of a product that can leave or enter a
country.
o Embargoes: A total ban on certain imports or exports.
4. Boycotts: A government boycott is an absolute prohibition on the purchase and
importation of certain goods from other countries. For example, Nestle products were
boycotted y a certain group that considered the way nestle promoted baby milk formula
to be misleading to mothers and harmful to their babies in fewer development countries.
 5. Standards: Non-tariff barriers of this category include standards to protect health,
safety and product quality. The standards are sometimes used in an unduly stringent or
discriminating way to restrict trade.
6. Anti-dumping Penalties: It is one kind of practice whereby a producer
intentionally sells its products for less than the cost of the product in order to undermine
the competition and take control of the market.
7. Monetary Barriers: There are three such barriers to consider:
o Blocked currency: Blocked currency is used as a political weapon is response
to difficult balance payments situation. The blockage is accomplished by
refusing to allow importers to exchange their national currency for the seller’s
currency.
o Differential exchange rate: The differential exchange rate is a particularly
ingenious method of controlling imports. It encourages the importance of goods
the government deems desirable and discourage importation of goods the
government does not want. The essential mechanism requires the importer to
pay the varying amount of domestic currency for foreign currency with which
to purchase products in different categories. Such as desirable and less desirable
products.
o Government approval for securing foreign exchange: Countries experiencing
severe shortages of foreign exchange often use it. At one time or another, most
Latin American and East European countries have required all foreign exchange
transactions to be approved by the central bank. Thus importers who want to
buy foreign goods must apply of ran exchange permit that is permission to
exchange an amount of local currency for foreign currency.

Modes of Entry in International Business

1. Exporting-
Exporting is a cross border sale of domestically grown or produced goods .
There are three types of exporting: indirect exporting, direct exporting and cooperative
exporting. Indirect exporting is the most low risk entry mode as there is effectively no exposure
to the foreign market and its associated risk. The organization is merely selling their product
to an agent in the foreign market who then sells the product on to an intermediary. A direct
export is the same as an indirect export except that it doesn't involve an agent who sells the
good to the intermediary. Direct exporting is a very common entry mode used by organizations
who want exposure to a foreign market, but want to limit the risks associated with other types
of entry modes. Cooperative exporting is another exporting option that organizations can use
as a foreign market entry strategy. Organizations use this entry mode by entering an agreement
with another foreign or local organization to use its distribution network.

2. Licensing-
International licensing is a cross border agreement that permits organizations
in the target country the rights to use the property of the licensor. This property is generally
intangible and includes: trademarks, patents, and production techniques. The licensee is
required to pay a fee in exchange for the rights specified in the contract between the parties.
Licensing is commonly chosen because it's low risk, has low exposure to economic and
political conditions, has high return on investment and is preferred by local governments.

3. Franchising-
Franchising is a foreign market entry strategy where a semi-independent
business owner (the franchisee) pays fees and royalties to the franchiser to use a company's
trademark and sell its products and/or services . The terms and conditions of a franchise
package vary depending on the contract, however it generally includes: equipment, operations
and management manual, staff training, and location approval. Franchising is commonly used
and a largely successful method of cross border market entry, however organizations pursuing
this entry mode need to consider both the positive and negative aspects of franchising.

4. Joint Venture-
An organization may choose a joint venture as their foreign market entry
mode for a number of different reasons, for example: to divide the risk with other parties, to
leverage of each other's strengths etc. However if a joint venture is to be successful the two or
more organizations that form the joint venture must/should have common objectives in regards
to: the market of entry, acceptable levels of risk/reward of the market entered, the sharing of
technology, joint product development and the following of local government laws.

5. Wholly Owned Subsidiary-

A wholly owned subsidiary is the process whereby an
organization enters a foreign market with 100% ownership of the foreign entity. The two ways
that wholly owned subsidiaries come about is through either acquisition or Greenfield
operations. Acquisition is the purchase of a foreign organization as a way to enter a new market.
A Greenfield operation is the creation of a new organization and legal entity in the foreign
market. A number of organizations that want to limit their risk, while maximizing their
exposure to the foreign market will choose acquisition as their entry mode.

DIFFERENCE BETWEEN DOMESTIC BUSINESS AND INTERNATIONAL

BUSINESS

BASIS FOR INTERNATIONAL

DOMESTIC BUSINESS
COMPARISON BUSINESS

Meaning A business is said to be International business is

domestic, when its
economic transactions are
conducted within the
geographical boundaries
of the country.
one which is engaged in
economic transaction with
several countries in the
world.

Area of Within the country Whole world

operation

Quality Quite low Very high

standards

Deals in Single currency Multiple currencies

Capital Less Huge

investment

Restrictions Few Many

Nature of Homogeneous Heterogeneous

customers
 BASIS FOR INTERNATIONAL
DOMESTIC BUSINESS
COMPARISON BUSINESS

Business It can be conducted easily. It is difficult to conduct

research research.

Mobility of Free Restricted

factors of
production

PROBLEMS OF INTERNATIONAL BUSINESS

1. Different Trade Patterns:
International business has to deal with the business patterns among
the various countries of the world. It has to take into account these
business policies of various countries which govern their imports
and exports. These policies and practices impose certain constraints
and restrictions on international business.

International Business Problem # 2. Regulatory Measures:

Every country wants to export its surplus natural resources,
agricultural produce and manufactured goods to the extent, it can
and import only these goods and products which are not produced
or manufactured within the country. For this purpose regulatory
measures like tariff barriers (custom duties) non-tariff barriers,
quota restrictions, foreign exchange restrictions, technological and
administrative regulations, consulter formalities, state trading and
preferential arrangements, trade agreements and joint commissions
etc. Come in the way of free trade and unfettered flow of foreign
business.
International Business Problem # 3. Lop Sided Development of
Developing Countries:
Developed counters are equipped with sophisticated, technologies
capable of transforming raw materials into finished goods on a large
scale. While developing countries on the other-hand lack
technological knowledge and latest equipment. It leads to the lop
sided development in the international business.

International Business Problem # 4. Economic Unions:

There is an increasing tendency among nations to form small
groups of Economic Unions which help them to negotiate terms for
the business with other countries.

6. National Policy of Development:

The country desirous of
achieving self-sufficiency, follows a strategy of importing capital
goods equipped with latest and sophisticated technology and
restricting imports of less important consumer goods with a view to
lowering down its import bill.

International Business Problem # 6. Procedural Difficulties:

Different countries have evolved different procedures, practices and
documents in order to regulate the export trade. Some of these such
as foreign exchange control regulations and others have been
formulated after keeping in view the national objectives and have
posed certain procedural problems to exporters and importers.

International Business Problem # 7. Other Problems:

Apart from the problems written above there are many other
internal difficulties which restrict our export business and
consequently affect the foreign exchange earnings.