International Business Management
Content
International Business Management
What is globalization? “The shift towards a more integrated and interdependent world economy” Globalization "is the closer integration of the countries and peoples of the world ...brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders." Globalization is the system of interaction among the countries of the world in order to develop the global economy. Globalization refers to the integration of economics and societies all over the world. Globalization involves technological, economic, political, and cultural exchanges made possible largely by advances in communication, transportation, and infrastructure. Globalization (or Globalisation) refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import quotas. Effects of Globalization According to economists, there are a lot of global events connected with globalization and integration. It is easy to identify the changes brought by globalization. 1. Improvement of International Trade. Because of globalization, the number of countries where products can be sold or purchased has increased dramatically. 2. Technological Progress. Because of the need to compete and be competitive globally, governments have upgraded their level of technology. 3. Increasing Influence of Multinational Companies. A company that has subsidiaries in various countries is called a multinational. Often, the head office is found in the country where the company was established. An example is a car company whose head office is based in Japan. This company has branches in different countries. While the head office controls the subsidiaries, the subsidiaries decide on production. The subsidiaries are tasked to increase the production and profits. They are able to do it because they have already penetrated the local markets. The rise of multinational corporations began after World War II. Large companies refer to the countries where their subsidiaries reside as host countries. Globalization has a lot to do with the rise of multinational corporations.
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4. Power of the WTO, IMF, and WB. According to experts, another effect of globalization is the strengthening power and influence of international institutions such as the World Trade Organization (WTO), International Monetary Fund (IMF), and World Bank (WB). 5. Greater Mobility of Human Resources across Countries. Globalization allows countries to source their manpower in countries with cheap labor. For instance, the manpower shortages in Taiwan, South Korea, and Malaysia provide opportunities for labor exporting countries such as the Philippines to bring their human resources to those countries for employment. 6. Greater Outsourcing of Business Processes to Other Countries. China, India, and the Philippines are tremendously benefiting from this trend of global business outsourcing. Global companies in the US and Europe take advantage of the cheaper labor and highly-skilled workers that countries like India and the Philippines can offer 7. Civil Society. An important trend in globalization is the increasing influence and broadening scope of the global civil society. Civil society often refers to NGOs (nongovernment organizations). There are institutions in a country that are established and run by citizens. The family, being an institution, is part of the society. In globalization, global civil society refers to organizations that advocate certain issue or cause. There are NGOs that support women's rights and there are those that promote environment preservation. These organizations don't work to counter government policies, but rather to establish policies that are beneficial to all. Both the government and NGOs have the same goal of serving the people. The spread of globalization led to greater influence of NGOs especially in areas of great concern like human rights, the environment, children, and workers. Together with the growing influence of NGOs is the increasing power of multinational corporations. If the trend continues, globalization will pave the way for the realization of the full potential of these two important global players.
Introduction to international business:
We are witnessing a fundamental shift in world economy. We are moving away from a world in which national economies were relatively self-contained. Now, no economy is isolated from each other by barriers to cross border trade and investment. We are moving toward a world in which all the perpetual barriers are declining; perceived distance is shrinking due to advanced transport and telecommunications. The process by which this is occurring is commonly referred to as Globalization. An example here would make things quite clear. An American might drive to work in a car designed in Germany that was assembled in Mexico by Daimler Chrysler from components made in the U.S. and Japan, which were fabricated 2
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from Korean steel and Malaysian rubber. The driver might pull into a drive through a coffee stall run by a Korean immigrant and order a single tall-non-fat latte and chocolate covered biscuits. The coffee beans come from Brazil and the chocolate from Peru. This is the world we live in. it is a world where the volume of goods, services and investments crossing the national borders has expanded faster than the world output consistently. It is a world where more than 12 billion dollars in foreign exchange transactions are made every day, where 8.88 trillion dollars of goods and 2.2 trillion services were sold across the nations’ borders in 2004. At the same time, globalization has created a new threat for businesses adjusted to the dominating their domestic markets. They have entered many formerly protected industries in developing nations, thereby increasing competitions and driving down prices. Advances in the technology, lower transportation costs and the rise of skilled workers in the developing countries imply that many services no longer needed to be performed where they are delivered. Components of world economy: There are 2 types: 1) Globalization of Markets & 2) Globalization of Production 1) Globalization of Markets The Globalization of Markets refers to the merging of historically distinct and separate national markets into one huge market place. Ex: Citigroup credit cards, Coca Cola soft drinks, Sony Play station and video games, McDonald’s hamburgers and Starbucks etc The major differences Globalization of markets seeks to nullify are: a) b) c) d) e) Consumer taste and preferences Distribution channels Culturally embedded value systems Business systems Legal regulations
Other important factors include: 1. Reduce of trade barriers helps globalization of markets. 2. The above mentioned companies are beneficiaries as well as facilitators of globalization of markets 3. Small businesses too have played a vital role in creating global market 4. Despite global markets, national markets have their own identity, through consumer taste and preferences etc. 5. Competitors follow their rivals around the world to prevent monopoly of markets. 3
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Globalization of Production It refers to sourcing of goods and services from the locations around the globe to take advantage of national differences in the cost and quality of factors of production such as labour, energy, land and capital. Globalization of production helps companies hope to lower their overall cost structure and improve the quality of their product offering. This allows them to compete more effectively. Ex: Boeing 777 1) 2) 3) 4) 5) 6) 7) 8) Its fuselage, doors and wings ordered from Japan Nose landing doors from Singapore Wing flaps from Italy 30% of Boeing 777 is built by foreign companies. The suppliers are the best at their particular activities. It results in better financial products It gives Boeing an edge over its rival- Airbus Boeing outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country.
Emerging global economy:
International institutions are required to help in managing, regulating and controlling the global marketplace. They are also needed to promote the establishment of multinational treaties to govern global business system. Some of the important global institutions that have been created to help perform these functions include: I. II. III. IV. V. Key facts: General Agreement on Tariffs and Trade (GATT) The General Agreement on Tariffs and Trade (typically abbreviated GATT) was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1947 and lasted until 1993, when it was replaced by the World Trade Organization in 1995. The original GATT text General Agreement on Tariffs and Trade (GATT) The World Trade Organization (WTO) The International Monetary Fund( IMF) The World Bank The United Nations(UN)
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(GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994. The World Trade Organization (WTO) Responsible for policing the world trade system Responsible for facilitating the establishment of additional multinational agreements between WTO member states Promoted cross border trade and investment As of May 2005, 148 nations are WTO members The International Monetary Fund (IMF) Established in 1944 Task is to maintain order in international monetary system Lender of last resort to nation-states whose economies are in turmoil Has helped countries such as Argentina, Indonesia, Mexico, Russia, South Korea, Thailand and Turkey The World Bank The World Bank is an international financial institution that provides loans to developing countries for capital programs. The World Bank's official goal is the reduction of poverty. According to the World Bank's Articles of Agreement (As amended effective 16 February 1989) all of its decisions must be guided by a commitment to promote foreign investment, international trade and facilitate capital investment. The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter incorporates these two in addition to three more: International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID) Poverty reduction strategies For the poorest developing countries in the world, the bank's assistance plans are based on poverty reduction strategies; by combining a cross-section of local groups with an extensive analysis of the country's financial and economic situation the World Bank develops a strategy pertaining uniquely to the country in question. The government then identifies the country's priorities and targets for the reduction of poverty, and the World Bank aligns its aid efforts correspondingly.
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Forty-five countries pledged US$25.1 billion in "aid for the world's poorest countries", aid that goes to the World Bank International Development Association (IDA) which distributes the loans to eighty poorer countries. While wealthier nations sometimes fund their own aid projects, including those for diseases, and although IDA is the recipient of criticism, Robert B. Zoellick, the president of the World Bank, said when the loans were announced on 15 December 2007, that IDA money "is the core funding that the poorest developing countries rely on". The United Nations (UN) Established on October 24, 1945 Committed to preserving peace through international cooperation and collective security Members now totals up to 191 countries Follows UN charter, an international treaty, which establishes basic principles of international relations. Four purposes of the UN: 1. To maintain international peace and security 2. To develop friendly relations between nations 3. To be a centre for harmonizing the actions of states 4. To cooperate in solving international problems and in promoting respect for human rights
Drivers of Globalization
The following are the two factors which constitute drivers of globalization: 1) Decline in barriers to the free flow of goods, services and capital 2) Technological change particularly the developments in recent years in the field of communication and information. Declining trade and investment barriers: Points to ponder over: International trade occurs when a firm exports goods and services to consumers in another country Foreign Direct Investment occurs when a firm invests resources in business activities outside its home country
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Earlier, international trade was restricted due to high tariffs on imports of manufactured goods. The intention was to protect the domestic industries from competition Things started to changed after World War II, with the establishment of WTO, World Bank, IMF and GATT 94% of the changes have been made between 1991 and 2003 in the laws governing foreign direct investment created a more favourable environment for FDI. Advantages of lowering of barriers include the chance for firms to view the world, rather than a single country as their market. It also allows them to base production at the optimal location for that locality. Globalization of markets and production and the resulting growth of world trade, FDI and imports imply that firms are finding their home markets under attack from foreign competitors. Helps in increasing the intensity of competition in a range of manufacturing and service industries In some countries, the removal of barriers has backfired. There is a demand for protection from foreign competitors around the world. The role of technological change The lowering of trade barriers made globalization of markets and production possible. Telecommunications is now creating global audience. Transportation is creating a global village. Microprocessors and telecommunications: Helped in the explosive growth of high power, low cost computing, vastly increasing the amount of information that can be processed by individuals and firms. Revolutionary developments in satellite, optical fibre and wireless technologies, the internet and World Wide Web. The cost of global communication has come down due to this The internet and World Wide Web promise to develop into the information backbone of the global economy. The greatest current potential of the Web is to be in the business-tobusiness arena. It is emerging as an equalizer by rolling back some of the constraints of location, scale and time zones. The web has made it easier for buyers and sellers to find each other, wherever they may be located. The web allows businesses (both small and large) to expand their global presence at a lower cost than ever before.
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Transportation technology is another vital aspect. The development of commercial jet aircraft and super-freighters and the introduction of containers. Jets have reduced travel time, thus shrinking the globe. Containers have revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances.
Modes of International Business
Since 1980, firms have made increasing use of joint ventures, and network based arrangements and other forms of intermediate transacting modes for both domestic and overseas projects. However, many of these cooperative initiatives have performed poorly; estimates of the failure rate sustained by multinational joint ventures for example range from 37-70% of all those formed. The six major modes of international business are imports and exports, tourism and transportation, licensing and franchising, turnkey operations, management contracts, and direct and portfolio investment. Imports and exports are the most common mode of international business, particularly in smaller companies even though they are less likely to export. Large companies are more likely to engage in other modes of international business in conjunction with importing and exporting. Companies may import and export merchandise, defined as tangible goods brought into or out of (respectively) a country. While exports and imports apply mainly to goods, they can also apply to services, or non-products. Most service imports and exports revolve around tourism and transportation. The revenue gained from international tourism and transportation is best seen in hotels, airlines, travel agencies, and shipping companies. For many countries, especially in the Caribbean and Southeast Asia, their income on foreign tourism is more important than their income from exports. The same holds true in countries such as Norway and Greece, who earn a considerable amount from foreign shipping. Many companies enter into international licensing agreements, allowing other countries around the world to use their assets (i.e.: trademarks, patents, copyrights, or expertise) under contract, receiving royalty payments in return. Similarly, many companies engage in franchising, a mode of business where the franchisor allows the franchisee to use a trademark that is an essential part of the franchisee's business. For example, Gloria Vanderbilt has franchised her name out to several clothing companies, forming the Gloria Vanderbilt line. The franchisor also assists on a continuing basis in the operation of the business-for example, by providing components, management services, and technology. Companies also pay fees that may be incurred on an international level for engineering services handled through turnkey operations and management contracts. A turnkey operation involves construction of facilities, performed under contract, which is then transferred to the owner when the company is ready to begin operating. Management contracts are initiated when one company supplies personnel to perform general or specialized management
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functions for another company. This is most evident in Disney's theme parks in France, Japan, and China. Finally, international business occurs within direct and portfolio investments. By investing in a foreign company, the investor takes ownership in a foreign property for a financial return. A foreign direct investment (the more common of the two) gives the investor a controlling interest in the foreign company. When two or more companies share in an FDI, it is known as a joint venture. When a government joins a company in an FDI, it becomes a mixed venture. Conversely, a portfolio investment is a non-controlling interest in a company that usually involves either taking stock in a company or making loans to a company in the form of bonds, bills, or notes that the investor purchases. Portfolio investments are particularly popular with multinational enterprises as they offer a safe means towards short-term financial gain.
The Globalization Debate- Arguments for and Against:
The Globalisation Debate
Globalisation is a fervidly contested and often misunderstood concept. It has occupied and divided economists, sociologists and anti-capitalists alike. Antiglobalisation protestors have regularly and successfully picketed World Trade Organisation summits as part of their stand against the might of globalisation. Yet, many economists tout the benefits of increased trade, sophisticated telecommunications networks and cross-border investment to developing countries, pointing to the gains workers and unions throughout the world stand to make from closer integration. Most people seem to know whether they are for or against globalisation, without pausing to consider what exactly it is and where its effects can be seen. Globalisation might be a term too slippery to be closely defined, but it is a vibrant debate worth engaging in. Globalisation researchers have focused on two new phenomena that have become significant in the last few decades: one, qualitative and quantitative changes in economic structures through processes such as the globalisation of capital and production; and two, transformations in the technological base and subsequent global scope of the mass media. For these reasons, it is increasingly important to analyse the world economy and society globally as well as nationally. The standard resolution of the difficulties this conclusion raises for concrete empirical research is an often rather vague injunction to "think globally, act locally," which appears to be as popular with the major transnational corporations (as we shall see) as it is with sociologists, anthropologists, geographers, environmentalists and the rest. I suspect that most theory and research on transnational communities proceeds in a similar fashion. Global system theory has its own version of "think globally, act locally," where it is an expression of how the global capitalist system operates to maximise profits. For: 9
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Globalisation means ending as soon as possible all barriers to economic, technological, trade, capital flow among all countries so that all real and financial markets get more integrated. Integrated markets will mean more intense completion and removal of all inefficient producers thereby enhancing the product quality and reducing costs, faster spread of technological progress and the resultant benefits across the globe, unlimited access for the poor people of the Word to the cheapest source of desired goods and services, access for the unemployed to international capital and employers, end to nepotism and corruption by State monopolies and exploitation of the citizens by local businessmen in the name of nationalism, faster economic growth in all countries including the poor countries, lower prices of foods, drugs, clothes, shelter, greater opportunities of employment both locally and abroad for the skilled and the merited, better understanding among the peoples of different countries, increased mutual dependence leading to end of adversarial relations, competition among national govts. to provide the internationally best standard of government services to the people. The proponents of globalization see globalization in a beneficial extension of freedom and capitalism. Those who support free trade claim that the increase in both economic prosperity and opportunities, especially in developing countries, increased civil liberties and lead to a more efficient allocation of resources. Economic theories of comparative advantage suggest that the free market that produces effective allocation of resources, a greater benefit of all countries that are involved. In general, this leads to lower prices, more jobs, increase production and living standards especially for those living in developing countries. There is also the so-called "global" or "global", proposing a "democratic globalization". They believe that the first phase of globalization, market orientation, or economic issues, should be followed independent homeentertainment distribution company by a stage of creation of President of and Chairman of global political institutions representing the views and aspirations of the "global citizen" His difference with other "global" is that they do not define in advance an ideology to orient this will, leaving it to the will of the citizens through a democratic process.
Positive impacts of globalization:
1. International trade keeps prices low and quality high. Anytime a country in the past has tried to be self sufficient and not partake in the global markets, they find that their businesses become inefficient due to a lack of competition, prices rise, their products lack innovation, and they end up with hyperinflation. 2. Globalization can bring wealth to some of the world's poor. For example, much of southeast Asia was terribly poor a few decades ago; thanks to globalization and international trade many of these countries have experienced annual growth in the double digits and many of those people are now much better off than their parents were a generation ago. 10
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3. Globalization can help bring world peace. As every country on the planet becomes more interconnected with every other country, there is a serious incentive for all of the involved to keep the peace. Thomas Friedman, in his book "The Lexus and the Olive Tree", goes so far as to discuss the "Golden Arches" theory of world peace--he says that no countries that have McDonald's have ever or will ever attack each other. 4. Globalization could help protect the environment. Some people have pointed out that in the past a nation like China could have produced as much pollution as they would have like to, but today if China wants to engage in the global marketplace the rest of their trading partners could potentially put pressure on them to clean up their act. Against: It is clear that globalisation has failed to rid the world of poverty. Rather than being an unstoppable force for development, globalisation now seems more like an economic temptress, promising riches to everyone but only delivering to the few. Although global average per capita income rose strongly throughout the 20th century, the income gap between rich and poor countries has been widening for many decades. Globalisation has not worked. The reason globalisation has not worked is because there has not been enough of it. If countries, including the rich industrialised ones, got rid of all their protectionist measures, everyone would benefit from the resulting increase in international trade: it's simple economics. If unnecessary government regulation can be eliminated, and investors and corporations can act freely, the result will be an overall increase in prosperity as the "invisible hand" of the market does its work. Many developing countries have done exactly what free market evangelists such as the International Monetary Fund told them to and have failed to see the benefits. The truth is that no industrialised society developed through such policies. American businesses were protected from foreign competition in the 19th century, as were companies in more recent "success stories" such as South Korea. Faith in the free market contradicts history and statistical evidence. The power of corporations and the global financial markets adversely affect the sovereignty of countries by limiting governments' ability to determine tax and exchange rate policies as well as their ability to impose regulations on companies' behaviour. Countries are now involved in a "race to the bottom" to attract and retain investment; multinational corporations are taking advantage of this to employ sweatshop labour and then skim off huge profits while paying very little tax. It is only through organisations such as IMF etc. that the less developed countries have a chance to improve their situations. The IMF is there to bail out countries that get into financial difficulties. Governments go to the IMF because 11
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the alternative is much worse. If the IMF and its sister organisation, the World Bank, were shut down, the flow of resources to developing countries would diminish, leaving the developing world even worse off. The WTO is a different kind of organisation and is run on a one-country-one-vote basis with no regard for the economic power of each nation; every single member has a veto. In addition, no country can be compelled to obey a WTO rule that it opposed in the first place.
Trends in International Trade:
International business is a complex topic, because the environment it operates in is constantly changing. First, businesses are constantly pushing the frontiers of economic growth, technology, culture, and politics, which also changes the surrounding global society and global economic context. Secondly, factors external to international business (e.g. developments in science and information technology) are constantly forcing international businesses to change how they operate. Growth in Information and Communication Technology
Information and communication technologies, also known as ICT, are changing the landscape in which businesses operate. ICT includes phones, the Internet, computers and other hardwares and digital services that facilitate that exchange of information across wide geographic areas. Aside from instigating an entire new generation of businesses (e.g. the "Tech" boom of the late 1990s, the growth of Google, Amazon, Yahoo, etc.), ICT has also reshaped how businesses operate by providing them with fast, organized, and (mostly) quality information from a number of sources (e.g. think about how iPhones, Microsoft Office, and email impact daily business operations). In the words of journalist Thomas Friedman, "the world is flat," because of the impact of ICTs on globalization. (References 1)
Growth in Emerging Markets
The growth of emerging markets (e.g. India, China, Brazil, and other parts of Asia and South America especially) has impacted international business in every way. The emerging markets have simultaneously increased the potential size and worth of current major international businesses (e.g. General Electric, Wal-Mart, and Microsoft), while also facilitating the emergence of a whole new generation of innovative companies. According to "A special report on innovation in emerging markets" by The Economist magazine, "The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation." (References 2)
Increasing Influence of States on International Business
International business is increasingly influenced by politics and government. For example, the global recession from 2008 to 2010 led to the U.S. nationalizing (even if temporarily) major U.S. companies like 12
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General Motors, and major states like China and the United Kingdom passed economic stimulus packages that were each valued at least 5 percent of their respective GDPs (Gross Domestic Product). Ian Bremmer, the President the leading political risk firm The Eurasia Group, argues that the recent era has heralded in a new era of "State Capitalism," which will drastically change how businesses conceive of the global economy and the ability for businesses to remain truly independent. The changing world output and world trade picture The United States was by far the most dominant industrial power of the world in the early 1960s. But the trend has been changing dramatically over the years. The same occurred to Germany, France and the UK. The decline in the U.S. position was not an absolute one. The U.S. Economy grew at a robust average annual rate of more than 3% from 1963 to 2004. It reflects the faster economic growth of several other countries The world is seeing emerging economies such as Brazil, Poland etc A rapid rise in the share of world output accounted for by developing countries such as China, India, Indonesia, Thailand, South Korea, Mexico, Brazil etc By 2020, the Chinese economy could be larger than that of the United States if current trend continues. It suggests that a shift in the economic geography of the world in now visible although the magnitude may not be much. Many of tomorrow’s economic opportunities may be found in the developing nations of the world. Many of tomorrow’s most capable competitors will emerge from the developing world. The Changing Foreign Direct Investment Scenario The U.S. firms accounted for 66.3% of worldwide FDI flows in the 1060s. British firms were second accounting for 10.55 As the barriers to the free flow of goods, services and capital fell, nonU.S. firms increasingly began to invest across national borders. The need for this was to build a direct presence in major foreign markets and to disperse production activities to optimal locations Toyota, the Japanese auto major, rapidly increased its investments in auto production facilities across the U.S. and Europe The 1990-2000 decade showed two important trends: the sustained growth of FDI and the emerging importance of developing nations as the destinations of foreign direct investment. It resulted in internationalization of business cooperation
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Domestic Trade Domestic trade is the exchange of goods, services, or both within the confines of a national territory. They are always aimed at a single market. International Trade Trade that includes exchange of capital, goods, and services across nations is called International Trade.
Conducting and managing international business operations is more complex than undertaking domestic business. Differences in the nationality of parties involved, relatively less mobility of factors of production, customer heterogeneity across markets, variations in business practices and political systems, varied business regulations and policies, use of different currencies are the key aspects that differentiate international businesses from domestic business. These, moreover, are the factors that make international business much more complex and a difficult activity.
Differences between International Trade and Domestic Trade
Scope: Scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments. Domestic business pertains to a limited territory. Though the firm has many business establishments in different locations all the trading activities are inside a single boundary. Benefits: International business benefits both the nations and firms. Domestic businesses have lesser benefits when compared to the former.
To the nations: Through international business nations gain by way of earning foreign exchange, more efficient use of domestic resources, greater prospects of growth and creation of employment opportunities. Domestic business as it is conducted locally there would be no much involvement of foreign currency. It can create employment opportunities too and the most important part is business since carried locally and always dealt with local resources the perfection in utilisation of the same resources would obviously reap the benefits. To the firms: The advantages to the firms carrying business globally include prospects for higher profits, greater utilization of production capacities, way out to intense competition in domestic market and improved business vision. Profits in domestic trade are always lesser when compared to the profits of the firms dealing transactions globally.
Market Fluctuations: Firms conducting trade internationally can withstand these situations and huge losses as their operations are wide spread. Though they face losses in one area they may get profits in other areas, this provides for stabilizing during seasonal market fluctuations. Firms carrying business locally have to face this situation which results in low profits and in some cases losses too. Modes of entry: A firm desirous of entering into international business has several options available to it. These range from exporting/importing to contract manufacturing abroad, licensing and franchising, joint ventures and 14
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setting up wholly owned subsidiaries abroad. Each entry mode has its own advantages and disadvantages which the firm needs to take into account while deciding as to which mode of entry it should prefer. Firms going for domestic trade does have the options but not too many as the former one. To establish business internationally firms initially have to complete many formalities which obviously is a tedious task. But to start a business locally the process is always an easy task. It doesn't require to process any difficult formalities. Purvey: Providing goods and services as a business within a territory is much easier than doing the same globally. Restrictions such as custom procedures do not bother domestic entities but whereas globally operating firms need to follow complicated customs procedures and trade barriers like tariff etc. Sharing of Technology: International business provides for sharing of the latest technology that is innovated in various firms across the globe which in consequence will improve the mode and quality of their production. Political relations: International business obviously improve the political relations among the nations which gives rise to Cross-national cooperation and agreements. Nations co-operate more on transactional issues Global business is an extension of domestic business. There are important differences as well as similarities. Managing an international business is different from managing a domestic business for the following reasons: ◊ Countries are different ◊ The range of problems confronted by a manager in an international business is wider and the problems themselves are more complex than those confronted by a manager in a domestic business ◊ Managers in an international business must find ways to work within the limits imposed by governments’ involvement in international trade and investment ◊ International transactions involve converting money into different currencies.
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What is globalization? “The shift towards a more integrated and interdependent world economy” Globalization "is the closer integration of the countries and peoples of the world ...brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders." Globalization is the system of interaction among the countries of the world in order to develop the global economy. Globalization refers to the integration of economics and societies all over the world. Globalization involves technological, economic, political, and cultural exchanges made possible largely by advances in communication, transportation, and infrastructure. Globalization (or Globalisation) refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import quotas. Effects of Globalization According to economists, there are a lot of global events connected with globalization and integration. It is easy to identify the changes brought by globalization. 1. Improvement of International Trade. Because of globalization, the number of countries where products can be sold or purchased has increased dramatically. 2. Technological Progress. Because of the need to compete and be competitive globally, governments have upgraded their level of technology. 3. Increasing Influence of Multinational Companies. A company that has subsidiaries in various countries is called a multinational. Often, the head office is found in the country where the company was established. An example is a car company whose head office is based in Japan. This company has branches in different countries. While the head office controls the subsidiaries, the subsidiaries decide on production. The subsidiaries are tasked to increase the production and profits. They are able to do it because they have already penetrated the local markets. The rise of multinational corporations began after World War II. Large companies refer to the countries where their subsidiaries reside as host countries. Globalization has a lot to do with the rise of multinational corporations.
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4. Power of the WTO, IMF, and WB. According to experts, another effect of globalization is the strengthening power and influence of international institutions such as the World Trade Organization (WTO), International Monetary Fund (IMF), and World Bank (WB). 5. Greater Mobility of Human Resources across Countries. Globalization allows countries to source their manpower in countries with cheap labor. For instance, the manpower shortages in Taiwan, South Korea, and Malaysia provide opportunities for labor exporting countries such as the Philippines to bring their human resources to those countries for employment. 6. Greater Outsourcing of Business Processes to Other Countries. China, India, and the Philippines are tremendously benefiting from this trend of global business outsourcing. Global companies in the US and Europe take advantage of the cheaper labor and highly-skilled workers that countries like India and the Philippines can offer 7. Civil Society. An important trend in globalization is the increasing influence and broadening scope of the global civil society. Civil society often refers to NGOs (nongovernment organizations). There are institutions in a country that are established and run by citizens. The family, being an institution, is part of the society. In globalization, global civil society refers to organizations that advocate certain issue or cause. There are NGOs that support women's rights and there are those that promote environment preservation. These organizations don't work to counter government policies, but rather to establish policies that are beneficial to all. Both the government and NGOs have the same goal of serving the people. The spread of globalization led to greater influence of NGOs especially in areas of great concern like human rights, the environment, children, and workers. Together with the growing influence of NGOs is the increasing power of multinational corporations. If the trend continues, globalization will pave the way for the realization of the full potential of these two important global players.
Introduction to international business:
We are witnessing a fundamental shift in world economy. We are moving away from a world in which national economies were relatively self-contained. Now, no economy is isolated from each other by barriers to cross border trade and investment. We are moving toward a world in which all the perpetual barriers are declining; perceived distance is shrinking due to advanced transport and telecommunications. The process by which this is occurring is commonly referred to as Globalization. An example here would make things quite clear. An American might drive to work in a car designed in Germany that was assembled in Mexico by Daimler Chrysler from components made in the U.S. and Japan, which were fabricated 2
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from Korean steel and Malaysian rubber. The driver might pull into a drive through a coffee stall run by a Korean immigrant and order a single tall-non-fat latte and chocolate covered biscuits. The coffee beans come from Brazil and the chocolate from Peru. This is the world we live in. it is a world where the volume of goods, services and investments crossing the national borders has expanded faster than the world output consistently. It is a world where more than 12 billion dollars in foreign exchange transactions are made every day, where 8.88 trillion dollars of goods and 2.2 trillion services were sold across the nations’ borders in 2004. At the same time, globalization has created a new threat for businesses adjusted to the dominating their domestic markets. They have entered many formerly protected industries in developing nations, thereby increasing competitions and driving down prices. Advances in the technology, lower transportation costs and the rise of skilled workers in the developing countries imply that many services no longer needed to be performed where they are delivered. Components of world economy: There are 2 types: 1) Globalization of Markets & 2) Globalization of Production 1) Globalization of Markets The Globalization of Markets refers to the merging of historically distinct and separate national markets into one huge market place. Ex: Citigroup credit cards, Coca Cola soft drinks, Sony Play station and video games, McDonald’s hamburgers and Starbucks etc The major differences Globalization of markets seeks to nullify are: a) b) c) d) e) Consumer taste and preferences Distribution channels Culturally embedded value systems Business systems Legal regulations
Other important factors include: 1. Reduce of trade barriers helps globalization of markets. 2. The above mentioned companies are beneficiaries as well as facilitators of globalization of markets 3. Small businesses too have played a vital role in creating global market 4. Despite global markets, national markets have their own identity, through consumer taste and preferences etc. 5. Competitors follow their rivals around the world to prevent monopoly of markets. 3
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Globalization of Production It refers to sourcing of goods and services from the locations around the globe to take advantage of national differences in the cost and quality of factors of production such as labour, energy, land and capital. Globalization of production helps companies hope to lower their overall cost structure and improve the quality of their product offering. This allows them to compete more effectively. Ex: Boeing 777 1) 2) 3) 4) 5) 6) 7) 8) Its fuselage, doors and wings ordered from Japan Nose landing doors from Singapore Wing flaps from Italy 30% of Boeing 777 is built by foreign companies. The suppliers are the best at their particular activities. It results in better financial products It gives Boeing an edge over its rival- Airbus Boeing outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country.
Emerging global economy:
International institutions are required to help in managing, regulating and controlling the global marketplace. They are also needed to promote the establishment of multinational treaties to govern global business system. Some of the important global institutions that have been created to help perform these functions include: I. II. III. IV. V. Key facts: General Agreement on Tariffs and Trade (GATT) The General Agreement on Tariffs and Trade (typically abbreviated GATT) was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1947 and lasted until 1993, when it was replaced by the World Trade Organization in 1995. The original GATT text General Agreement on Tariffs and Trade (GATT) The World Trade Organization (WTO) The International Monetary Fund( IMF) The World Bank The United Nations(UN)
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(GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994. The World Trade Organization (WTO) Responsible for policing the world trade system Responsible for facilitating the establishment of additional multinational agreements between WTO member states Promoted cross border trade and investment As of May 2005, 148 nations are WTO members The International Monetary Fund (IMF) Established in 1944 Task is to maintain order in international monetary system Lender of last resort to nation-states whose economies are in turmoil Has helped countries such as Argentina, Indonesia, Mexico, Russia, South Korea, Thailand and Turkey The World Bank The World Bank is an international financial institution that provides loans to developing countries for capital programs. The World Bank's official goal is the reduction of poverty. According to the World Bank's Articles of Agreement (As amended effective 16 February 1989) all of its decisions must be guided by a commitment to promote foreign investment, international trade and facilitate capital investment. The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter incorporates these two in addition to three more: International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID) Poverty reduction strategies For the poorest developing countries in the world, the bank's assistance plans are based on poverty reduction strategies; by combining a cross-section of local groups with an extensive analysis of the country's financial and economic situation the World Bank develops a strategy pertaining uniquely to the country in question. The government then identifies the country's priorities and targets for the reduction of poverty, and the World Bank aligns its aid efforts correspondingly.
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Forty-five countries pledged US$25.1 billion in "aid for the world's poorest countries", aid that goes to the World Bank International Development Association (IDA) which distributes the loans to eighty poorer countries. While wealthier nations sometimes fund their own aid projects, including those for diseases, and although IDA is the recipient of criticism, Robert B. Zoellick, the president of the World Bank, said when the loans were announced on 15 December 2007, that IDA money "is the core funding that the poorest developing countries rely on". The United Nations (UN) Established on October 24, 1945 Committed to preserving peace through international cooperation and collective security Members now totals up to 191 countries Follows UN charter, an international treaty, which establishes basic principles of international relations. Four purposes of the UN: 1. To maintain international peace and security 2. To develop friendly relations between nations 3. To be a centre for harmonizing the actions of states 4. To cooperate in solving international problems and in promoting respect for human rights
Drivers of Globalization
The following are the two factors which constitute drivers of globalization: 1) Decline in barriers to the free flow of goods, services and capital 2) Technological change particularly the developments in recent years in the field of communication and information. Declining trade and investment barriers: Points to ponder over: International trade occurs when a firm exports goods and services to consumers in another country Foreign Direct Investment occurs when a firm invests resources in business activities outside its home country
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Earlier, international trade was restricted due to high tariffs on imports of manufactured goods. The intention was to protect the domestic industries from competition Things started to changed after World War II, with the establishment of WTO, World Bank, IMF and GATT 94% of the changes have been made between 1991 and 2003 in the laws governing foreign direct investment created a more favourable environment for FDI. Advantages of lowering of barriers include the chance for firms to view the world, rather than a single country as their market. It also allows them to base production at the optimal location for that locality. Globalization of markets and production and the resulting growth of world trade, FDI and imports imply that firms are finding their home markets under attack from foreign competitors. Helps in increasing the intensity of competition in a range of manufacturing and service industries In some countries, the removal of barriers has backfired. There is a demand for protection from foreign competitors around the world. The role of technological change The lowering of trade barriers made globalization of markets and production possible. Telecommunications is now creating global audience. Transportation is creating a global village. Microprocessors and telecommunications: Helped in the explosive growth of high power, low cost computing, vastly increasing the amount of information that can be processed by individuals and firms. Revolutionary developments in satellite, optical fibre and wireless technologies, the internet and World Wide Web. The cost of global communication has come down due to this The internet and World Wide Web promise to develop into the information backbone of the global economy. The greatest current potential of the Web is to be in the business-tobusiness arena. It is emerging as an equalizer by rolling back some of the constraints of location, scale and time zones. The web has made it easier for buyers and sellers to find each other, wherever they may be located. The web allows businesses (both small and large) to expand their global presence at a lower cost than ever before.
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Transportation technology is another vital aspect. The development of commercial jet aircraft and super-freighters and the introduction of containers. Jets have reduced travel time, thus shrinking the globe. Containers have revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances.
Modes of International Business
Since 1980, firms have made increasing use of joint ventures, and network based arrangements and other forms of intermediate transacting modes for both domestic and overseas projects. However, many of these cooperative initiatives have performed poorly; estimates of the failure rate sustained by multinational joint ventures for example range from 37-70% of all those formed. The six major modes of international business are imports and exports, tourism and transportation, licensing and franchising, turnkey operations, management contracts, and direct and portfolio investment. Imports and exports are the most common mode of international business, particularly in smaller companies even though they are less likely to export. Large companies are more likely to engage in other modes of international business in conjunction with importing and exporting. Companies may import and export merchandise, defined as tangible goods brought into or out of (respectively) a country. While exports and imports apply mainly to goods, they can also apply to services, or non-products. Most service imports and exports revolve around tourism and transportation. The revenue gained from international tourism and transportation is best seen in hotels, airlines, travel agencies, and shipping companies. For many countries, especially in the Caribbean and Southeast Asia, their income on foreign tourism is more important than their income from exports. The same holds true in countries such as Norway and Greece, who earn a considerable amount from foreign shipping. Many companies enter into international licensing agreements, allowing other countries around the world to use their assets (i.e.: trademarks, patents, copyrights, or expertise) under contract, receiving royalty payments in return. Similarly, many companies engage in franchising, a mode of business where the franchisor allows the franchisee to use a trademark that is an essential part of the franchisee's business. For example, Gloria Vanderbilt has franchised her name out to several clothing companies, forming the Gloria Vanderbilt line. The franchisor also assists on a continuing basis in the operation of the business-for example, by providing components, management services, and technology. Companies also pay fees that may be incurred on an international level for engineering services handled through turnkey operations and management contracts. A turnkey operation involves construction of facilities, performed under contract, which is then transferred to the owner when the company is ready to begin operating. Management contracts are initiated when one company supplies personnel to perform general or specialized management
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functions for another company. This is most evident in Disney's theme parks in France, Japan, and China. Finally, international business occurs within direct and portfolio investments. By investing in a foreign company, the investor takes ownership in a foreign property for a financial return. A foreign direct investment (the more common of the two) gives the investor a controlling interest in the foreign company. When two or more companies share in an FDI, it is known as a joint venture. When a government joins a company in an FDI, it becomes a mixed venture. Conversely, a portfolio investment is a non-controlling interest in a company that usually involves either taking stock in a company or making loans to a company in the form of bonds, bills, or notes that the investor purchases. Portfolio investments are particularly popular with multinational enterprises as they offer a safe means towards short-term financial gain.
The Globalization Debate- Arguments for and Against:
The Globalisation Debate
Globalisation is a fervidly contested and often misunderstood concept. It has occupied and divided economists, sociologists and anti-capitalists alike. Antiglobalisation protestors have regularly and successfully picketed World Trade Organisation summits as part of their stand against the might of globalisation. Yet, many economists tout the benefits of increased trade, sophisticated telecommunications networks and cross-border investment to developing countries, pointing to the gains workers and unions throughout the world stand to make from closer integration. Most people seem to know whether they are for or against globalisation, without pausing to consider what exactly it is and where its effects can be seen. Globalisation might be a term too slippery to be closely defined, but it is a vibrant debate worth engaging in. Globalisation researchers have focused on two new phenomena that have become significant in the last few decades: one, qualitative and quantitative changes in economic structures through processes such as the globalisation of capital and production; and two, transformations in the technological base and subsequent global scope of the mass media. For these reasons, it is increasingly important to analyse the world economy and society globally as well as nationally. The standard resolution of the difficulties this conclusion raises for concrete empirical research is an often rather vague injunction to "think globally, act locally," which appears to be as popular with the major transnational corporations (as we shall see) as it is with sociologists, anthropologists, geographers, environmentalists and the rest. I suspect that most theory and research on transnational communities proceeds in a similar fashion. Global system theory has its own version of "think globally, act locally," where it is an expression of how the global capitalist system operates to maximise profits. For: 9
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Globalisation means ending as soon as possible all barriers to economic, technological, trade, capital flow among all countries so that all real and financial markets get more integrated. Integrated markets will mean more intense completion and removal of all inefficient producers thereby enhancing the product quality and reducing costs, faster spread of technological progress and the resultant benefits across the globe, unlimited access for the poor people of the Word to the cheapest source of desired goods and services, access for the unemployed to international capital and employers, end to nepotism and corruption by State monopolies and exploitation of the citizens by local businessmen in the name of nationalism, faster economic growth in all countries including the poor countries, lower prices of foods, drugs, clothes, shelter, greater opportunities of employment both locally and abroad for the skilled and the merited, better understanding among the peoples of different countries, increased mutual dependence leading to end of adversarial relations, competition among national govts. to provide the internationally best standard of government services to the people. The proponents of globalization see globalization in a beneficial extension of freedom and capitalism. Those who support free trade claim that the increase in both economic prosperity and opportunities, especially in developing countries, increased civil liberties and lead to a more efficient allocation of resources. Economic theories of comparative advantage suggest that the free market that produces effective allocation of resources, a greater benefit of all countries that are involved. In general, this leads to lower prices, more jobs, increase production and living standards especially for those living in developing countries. There is also the so-called "global" or "global", proposing a "democratic globalization". They believe that the first phase of globalization, market orientation, or economic issues, should be followed independent homeentertainment distribution company by a stage of creation of President of and Chairman of global political institutions representing the views and aspirations of the "global citizen" His difference with other "global" is that they do not define in advance an ideology to orient this will, leaving it to the will of the citizens through a democratic process.
Positive impacts of globalization:
1. International trade keeps prices low and quality high. Anytime a country in the past has tried to be self sufficient and not partake in the global markets, they find that their businesses become inefficient due to a lack of competition, prices rise, their products lack innovation, and they end up with hyperinflation. 2. Globalization can bring wealth to some of the world's poor. For example, much of southeast Asia was terribly poor a few decades ago; thanks to globalization and international trade many of these countries have experienced annual growth in the double digits and many of those people are now much better off than their parents were a generation ago. 10
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3. Globalization can help bring world peace. As every country on the planet becomes more interconnected with every other country, there is a serious incentive for all of the involved to keep the peace. Thomas Friedman, in his book "The Lexus and the Olive Tree", goes so far as to discuss the "Golden Arches" theory of world peace--he says that no countries that have McDonald's have ever or will ever attack each other. 4. Globalization could help protect the environment. Some people have pointed out that in the past a nation like China could have produced as much pollution as they would have like to, but today if China wants to engage in the global marketplace the rest of their trading partners could potentially put pressure on them to clean up their act. Against: It is clear that globalisation has failed to rid the world of poverty. Rather than being an unstoppable force for development, globalisation now seems more like an economic temptress, promising riches to everyone but only delivering to the few. Although global average per capita income rose strongly throughout the 20th century, the income gap between rich and poor countries has been widening for many decades. Globalisation has not worked. The reason globalisation has not worked is because there has not been enough of it. If countries, including the rich industrialised ones, got rid of all their protectionist measures, everyone would benefit from the resulting increase in international trade: it's simple economics. If unnecessary government regulation can be eliminated, and investors and corporations can act freely, the result will be an overall increase in prosperity as the "invisible hand" of the market does its work. Many developing countries have done exactly what free market evangelists such as the International Monetary Fund told them to and have failed to see the benefits. The truth is that no industrialised society developed through such policies. American businesses were protected from foreign competition in the 19th century, as were companies in more recent "success stories" such as South Korea. Faith in the free market contradicts history and statistical evidence. The power of corporations and the global financial markets adversely affect the sovereignty of countries by limiting governments' ability to determine tax and exchange rate policies as well as their ability to impose regulations on companies' behaviour. Countries are now involved in a "race to the bottom" to attract and retain investment; multinational corporations are taking advantage of this to employ sweatshop labour and then skim off huge profits while paying very little tax. It is only through organisations such as IMF etc. that the less developed countries have a chance to improve their situations. The IMF is there to bail out countries that get into financial difficulties. Governments go to the IMF because 11
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the alternative is much worse. If the IMF and its sister organisation, the World Bank, were shut down, the flow of resources to developing countries would diminish, leaving the developing world even worse off. The WTO is a different kind of organisation and is run on a one-country-one-vote basis with no regard for the economic power of each nation; every single member has a veto. In addition, no country can be compelled to obey a WTO rule that it opposed in the first place.
Trends in International Trade:
International business is a complex topic, because the environment it operates in is constantly changing. First, businesses are constantly pushing the frontiers of economic growth, technology, culture, and politics, which also changes the surrounding global society and global economic context. Secondly, factors external to international business (e.g. developments in science and information technology) are constantly forcing international businesses to change how they operate. Growth in Information and Communication Technology
Information and communication technologies, also known as ICT, are changing the landscape in which businesses operate. ICT includes phones, the Internet, computers and other hardwares and digital services that facilitate that exchange of information across wide geographic areas. Aside from instigating an entire new generation of businesses (e.g. the "Tech" boom of the late 1990s, the growth of Google, Amazon, Yahoo, etc.), ICT has also reshaped how businesses operate by providing them with fast, organized, and (mostly) quality information from a number of sources (e.g. think about how iPhones, Microsoft Office, and email impact daily business operations). In the words of journalist Thomas Friedman, "the world is flat," because of the impact of ICTs on globalization. (References 1)
Growth in Emerging Markets
The growth of emerging markets (e.g. India, China, Brazil, and other parts of Asia and South America especially) has impacted international business in every way. The emerging markets have simultaneously increased the potential size and worth of current major international businesses (e.g. General Electric, Wal-Mart, and Microsoft), while also facilitating the emergence of a whole new generation of innovative companies. According to "A special report on innovation in emerging markets" by The Economist magazine, "The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation." (References 2)
Increasing Influence of States on International Business
International business is increasingly influenced by politics and government. For example, the global recession from 2008 to 2010 led to the U.S. nationalizing (even if temporarily) major U.S. companies like 12
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General Motors, and major states like China and the United Kingdom passed economic stimulus packages that were each valued at least 5 percent of their respective GDPs (Gross Domestic Product). Ian Bremmer, the President the leading political risk firm The Eurasia Group, argues that the recent era has heralded in a new era of "State Capitalism," which will drastically change how businesses conceive of the global economy and the ability for businesses to remain truly independent. The changing world output and world trade picture The United States was by far the most dominant industrial power of the world in the early 1960s. But the trend has been changing dramatically over the years. The same occurred to Germany, France and the UK. The decline in the U.S. position was not an absolute one. The U.S. Economy grew at a robust average annual rate of more than 3% from 1963 to 2004. It reflects the faster economic growth of several other countries The world is seeing emerging economies such as Brazil, Poland etc A rapid rise in the share of world output accounted for by developing countries such as China, India, Indonesia, Thailand, South Korea, Mexico, Brazil etc By 2020, the Chinese economy could be larger than that of the United States if current trend continues. It suggests that a shift in the economic geography of the world in now visible although the magnitude may not be much. Many of tomorrow’s economic opportunities may be found in the developing nations of the world. Many of tomorrow’s most capable competitors will emerge from the developing world. The Changing Foreign Direct Investment Scenario The U.S. firms accounted for 66.3% of worldwide FDI flows in the 1060s. British firms were second accounting for 10.55 As the barriers to the free flow of goods, services and capital fell, nonU.S. firms increasingly began to invest across national borders. The need for this was to build a direct presence in major foreign markets and to disperse production activities to optimal locations Toyota, the Japanese auto major, rapidly increased its investments in auto production facilities across the U.S. and Europe The 1990-2000 decade showed two important trends: the sustained growth of FDI and the emerging importance of developing nations as the destinations of foreign direct investment. It resulted in internationalization of business cooperation
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Domestic Trade Domestic trade is the exchange of goods, services, or both within the confines of a national territory. They are always aimed at a single market. International Trade Trade that includes exchange of capital, goods, and services across nations is called International Trade.
Conducting and managing international business operations is more complex than undertaking domestic business. Differences in the nationality of parties involved, relatively less mobility of factors of production, customer heterogeneity across markets, variations in business practices and political systems, varied business regulations and policies, use of different currencies are the key aspects that differentiate international businesses from domestic business. These, moreover, are the factors that make international business much more complex and a difficult activity.
Differences between International Trade and Domestic Trade
Scope: Scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments. Domestic business pertains to a limited territory. Though the firm has many business establishments in different locations all the trading activities are inside a single boundary. Benefits: International business benefits both the nations and firms. Domestic businesses have lesser benefits when compared to the former.
To the nations: Through international business nations gain by way of earning foreign exchange, more efficient use of domestic resources, greater prospects of growth and creation of employment opportunities. Domestic business as it is conducted locally there would be no much involvement of foreign currency. It can create employment opportunities too and the most important part is business since carried locally and always dealt with local resources the perfection in utilisation of the same resources would obviously reap the benefits. To the firms: The advantages to the firms carrying business globally include prospects for higher profits, greater utilization of production capacities, way out to intense competition in domestic market and improved business vision. Profits in domestic trade are always lesser when compared to the profits of the firms dealing transactions globally.
Market Fluctuations: Firms conducting trade internationally can withstand these situations and huge losses as their operations are wide spread. Though they face losses in one area they may get profits in other areas, this provides for stabilizing during seasonal market fluctuations. Firms carrying business locally have to face this situation which results in low profits and in some cases losses too. Modes of entry: A firm desirous of entering into international business has several options available to it. These range from exporting/importing to contract manufacturing abroad, licensing and franchising, joint ventures and 14
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setting up wholly owned subsidiaries abroad. Each entry mode has its own advantages and disadvantages which the firm needs to take into account while deciding as to which mode of entry it should prefer. Firms going for domestic trade does have the options but not too many as the former one. To establish business internationally firms initially have to complete many formalities which obviously is a tedious task. But to start a business locally the process is always an easy task. It doesn't require to process any difficult formalities. Purvey: Providing goods and services as a business within a territory is much easier than doing the same globally. Restrictions such as custom procedures do not bother domestic entities but whereas globally operating firms need to follow complicated customs procedures and trade barriers like tariff etc. Sharing of Technology: International business provides for sharing of the latest technology that is innovated in various firms across the globe which in consequence will improve the mode and quality of their production. Political relations: International business obviously improve the political relations among the nations which gives rise to Cross-national cooperation and agreements. Nations co-operate more on transactional issues Global business is an extension of domestic business. There are important differences as well as similarities. Managing an international business is different from managing a domestic business for the following reasons: ◊ Countries are different ◊ The range of problems confronted by a manager in an international business is wider and the problems themselves are more complex than those confronted by a manager in a domestic business ◊ Managers in an international business must find ways to work within the limits imposed by governments’ involvement in international trade and investment ◊ International transactions involve converting money into different currencies.
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