International business includes all commercial activities that take place to promote the transfer of goods, services, resources, people, ideas and technology across national borders.
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International business takes place in many different formats:
- The movement of goods from one country to another (export, import, trade)
- Contractual agreements that allow foreign companies to use products, services and processes from other nations (licenses, franchises)
- The establishment and operation of sales, manufacturing, research and development and distribution facilities in foreign markets.
The study of international business involves understanding the impact that the above activities have on domestic and foreign markets, countries, governments, companies and individuals. Successful international companies recognize the diversity of the world's marketplace and can handle the uncertainties and risks of doing business in an ever-changing global marketplace.
An international business strategy, organization and/or functional decisions are classified as:
- A multinational company with independent subsidiaries operating as national companies; ANY
- Global activities with integrated subsidiaries; ANY
- A combination of both
However, the challenging aspect of international business is that many companies combine aspects of multinational and global operations:
Multidomestic –A strategic business model that involves promoting products and services in different markets around the world and adapting the product/service to the cultural norms, tastes and religious customs of different markets.
Multinational –A business strategy that involves selling products and services in different foreign markets without changing the characteristics of the product/service to accommodate the cultural norms or customs of different markets.
The advantages of international business and the concept of comparative advantage
Participation in international business allows countries to reap its benefitscomparative advantage.
The concept of comparative advantage means that a nation has an advantage over other nations in terms of access to affordable land, resources, labor and capital. In other words, a country will export those products or services that use factors of production in abundance. Additionally, companies with sufficient capital may look to another land- or labor-rich country, or companies may look to invest internationally when their home market is saturated.
Participation in international business allows countries to take advantage of specialized knowledge and abundant production factors to offer goods and services in the international market. This has the advantage of increasing the variety of goods and services available on the market.
International business also increases competition in domestic markets and opens up new opportunities in foreign markets. Global competition encourages companies to use resources more innovatively and efficiently.
For consumers, international businesses offer a variety of goods and services. For many, it improves the standard of living and increases exposure to new ideas, devices, products, services and technologies.
International business growth
The spread of international business increased significantly in the second half of the 20th century, thanks to trade and investment liberalization and technological developments. Some of the essential elements that have advanced international business are:
- The creation of the World Trade Organization (WTO) in 1995
- The beginning of electronic payments
- The introduction of the euro in the European Union
- Technological innovation that facilitates global communication and transportation
- The dissolution of several communist markets, opening many economies to private initiative.
Today, global competition affects almost all companies, regardless of their size. Many acquire suppliers from abroad and compete even more with products or services that come from abroad. International business remains a broad concept that ranges from the smallest companies that can only export or import to another country, to the largest global companies with integrated operations and strategic alliances around the world.
The challenges and considerations of international business
Because nation-states have systems of government, laws and regulations, taxes, customs, currencies, cultures, practices, etc. Unique, international companies are significantly more complex than companies that operate only in domestic markets.
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The main task of international business is to understand the overall size of the global market. There are currently over 200 national markets around the world, offering a seemingly endless supply of international business opportunities. However, diversity among nations brings with it unique considerations and a myriad of obstacles, such as:
- Disparities in national wealth:Wealth disparities between nations remain huge.
- Regional diversity by wealth and population:North America is home to just 5% of the world's population but controls nearly a third of the world's gross domestic product.
- Cultural/linguistic diversity:There are over 10,000 language/cultural groups in the world.
- Country size and population diversity:At the beginning of the 20th century, there were around 60 countries; By the year 2000, that number had risen to over 200.
Some of the challenges companies and professionals face in international business include:
The economic environment can vary greatly from country to country. Countries' economies can be industrialized (developed), emerging (newly industrialized) or less developed (Third World). Furthermore, within each of these economies are myriad variations that have a major impact on everything from education and infrastructure to technology and healthcare.
A nation's economic structure such as a free market, centrally planned market or mixed market also plays a crucial role in the ease with which international business ventures can be carried out. For example, free market economies allow international business to take place with little interference. At the other end of the spectrum, centrally planned economies are controlled by the government. Although most countries now function as free market economies, China, the world's most populous country, remains a centrally planned economy.
The political environment of international business relates to the relationship between government and business and a nation's political risk. Therefore, companies involved in international business must expect to deal with different types of governments, such as multi-party democracies, one-party states, dictatorships and constitutional monarchies.
Some governments may see foreign companies as positive, while other governments see them as exploitative. As international business depends on the goodwill of the government, international business must consider the political structure of the foreign government.
International companies should also consider the level of political risk in a foreign location; in other words, the likelihood of major changes in government. Some of the unstable government issues that international companies need to consider are riots, revolutions, wars and terrorism.
The cultural environment of a foreign nation remains a critical part of the international business environment, but it is one of the most difficult to understand. The cultural environment of a foreign nation includes shared beliefs and values shaped by factors such as language, religion, geography, government, history and education.
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It is common for many international companies to undertake a cultural analysis of a foreign nation to better understand these factors and how they affect international business endeavors.
The competitive environment is constantly changing according to economic, political and cultural conditions. Competition can come from many sources, and the nature of competition can vary from location to location. Cooperation can be encouraged or discouraged, and the relationship between buyers and sellers can be friendly or hostile. The level of technological innovation is also an important aspect of the competitive landscape, as companies compete for access to the latest technologies.
To succeed in a foreign market, international companies must understand the many factors that influence the competitive environment and assess their impact effectively.
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