The economic cooperation amongst countries and individuals by means of which or that which facilitates the exchange of commodities and services between the respective countries or individuals is called International Business. International business is defined as any business that may cross one or more than one national borders at any point during the transaction. International business relates to a business which cannot be local by any means and has to be capable of handling the cross cultural differences that borders resemble. It's all about learning to adapt business processes, techniques and ethics in different cultures. There are a few parameters to gauge whether the business in question is really an international business:
How real and functional are the client relationships in the varied markets? The point of contention is whether the organization is able to strike a rapport with its international clients.
The term International business should not be limited to the business alone. The company should also be concerned about its international clients and the corresponding ergonomics.
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The measures the organization undertakes to make sure that the business runs well in international markets, the success in adapting to their regulations and success techniques is very important for a business looking to make it international.
Three skills are of utmost importance and relevance when an organization thinks of entering a new market via their business: the ability to manage risk in unknown environments, the ability to be creative and flexible according to the new needs of the environment and the required sense of adaptability to provide the new requirements. In addition to all the aforementioned qualities, an organization has to have people that are good with people, and can connect with the local people without the cross cultural differences creeping up in interactions, and the marketing acumen to be able to compete and survive in a new market. (king, 2010)
Problem of research:
The present day scenario requires a holistic approach towards business in native as well as foreign nations. Thus the problem of our research is the factors influencing the flourishing of international business, the risks faced by the phenomena
Objective and Importance:
The key motivations for firms to engage in international business
The first and one of the most prominent is the want to have opportunities to grow into a bigger international firm through diversification and every company hopes to be among the top shots of the world one day and seeing itself as a Fortune 500 company.
Money is always one of the most crucial factors .There is motivation for earning greater and greater profits as there are newer markets to be explored which have been earlier untapped.
Curiosity is one of the factors propelling human growth .There is and always has been a desire to learn new ideas and methods about the different kinds of business methods and practices being followed in different geographies of the world.
Another factor motivating factor for companies is to service the customers that have relocated to foreign shores. When local companies want to expand and move out to foreign countries they take along various other companies like the banking and the services sectors along with them which helps in spreading business as a whole.
One reason compelling companies to go for IB is to be nearer to the originating supply sources and benefit from the integrated global supply chain and gain advantage from the sourcing and also gains an upper hand by having leniency in product sourcing.
It helps the companies involved in the world trade to have a better access to the ever improving and affordable factors of production. No doubt that the developed countries are the The major R & D hubs of the world with the productions facilities spread throughout the low cost nations but the developing companies are the ones who are leading in low cost innovative solutions as the resources are limited but the demand is pretty much the same. The innovative techniques found out in the developing countries can pretty much cater to the developed markets are well which otherwise would have had to comply with the more expensive options .
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It brings the companies to a state where they can be mammoths in the R&D, marketing and production related activities.
It enables the companies to limit the expanse of foreign companies in their home market as well go head to head with international competition on a more effective level.
By engaging in IB, companies have a potentially everlasting n stable relation with their partners which has a very good effect for the future of the enterprise.
Types of risk in International Business
Commercial Risk: The first kind of risk involved is commercial risk in which there is possibility of a company incurring huge losses or failing to exist because of various reasons that include badly executed strategies .These also include timing of the company into a particular market, the competitive intensity existing prevailing in the market, poor strategy execution and the weakness of the partner and also the various kinds of operational problems.
Country risk: Country risk is also a very major risk factor in international business .It has the capacity to have very negative effects on the operations of an organization and also the profit because of the various kinds of changes in the economic, judicial and administrative scenario in a foreign nation. You take a very big risk in entering in a foreign company because you are yet to understand the fundamental forces that run the country and it takes time to adjust to the local practices and there is big chance that by the times things fall correctly into place it may be the time for your exit from the country .So entering a new country is a very risky proportion but nevertheless it has to be done to expand and be ahead in the race of globalization.
Currency risk: Financial risk is another name for currency risk. It is related to the effects of undeterminable up downs in daily exchange rates of different currencies pegged against each other .It includes the valuation of the assets and the foreign taxation policies of different countries .Currency hedging is one of the riskiest things to do after entering a foreign markets as the currency markets are the most volatile in the world and very unpredictable.
Cross-cultural risk: The last kind of risk while doing International Business is the cross cultural risk. It is sometimes also referred to as cultural shock. It is a scenario where a slight situation related to miscommunication regarding cultures may put the human values at a significant risk. It is related to different decision related styles and ethical practices. Even if the financial verticals are aligned within a company it is very difficult in the start to align the cultural mismatches and people take time to adjust working with the new kind of people in the workplace and it is one of the biggest reasons of failure of the working of this model.
Difference between International Business and Domestic business:
International Business management is much more complex than handling domestic operations .The difference in the national identity of the companies involved, the stability of the production factors, the different types of customers across the market, the changes in business ethics and the political environment as you switch across geographies and currency fluctuations are the key elements that make international business different from domestic market.
1: Scope: The scale of IB is quite vast. It contains merchandise exports as well as services, franchising and licensing and also contains the reign of foreign investments. The domestic Business is limited to a very less territory and all the activities are confined to a boundary. Various sectors like the fisheries which require a huge physical presence as well as government jobs cant be brought under international business and have to comply with the limits of geography.
2: Market Fluctuations: Firms have to face market fluctuations which lead in very loss gains and in a very few cases losses also. International business stabilizes the changing fluctuations of market which helps them to face the very large losses because their reach is so wide that companies operating locally can't even dream of. (dilipchandra12)
The 5 drivers of globalization:
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1: There has been a tremendous worldwide reduction in barriers related to trade and investment even in the most far flung areas of the globe at an earlier time which one could have never imagined a decade back .With the forming of GATT and now WTO and the various treaties barriers have been formalized like the NAFTA and SAFTA which have broken physical walls in terms of trade and increased the level of trade between countries.
2: Within the last decade and with the rapid strides in globalization there has been rapid breaking of walls .There has been a rapid transition to free market based approach and the adoption of liberal trade policies in countries that had earlier bound by communist shackles like china, ex USSR and other countries.
3: The world financial system has become so integrated that it is difficult to tell where one ends and the other starts .The world market has been integrated into 1 giant web and it follows the so called butterfly effect which states that a flutter of butterflies' wings in one part of the world can cause a tornado in some other part of the world.
4: The advances in technology has championed the cause of globalization which has the brought the world to our homes. The modern technology has flattened the world and has brought us all down to a level playing field where everybody can compete with anyone even when they cant see each other physically.
5: The cause of globalization has been spread by the rapid industrialization, modernization and the economic development and will certainly increase as the world becomes an even smaller place to live in.
Role of the WTO
The WTO as we know it is organization which is internationally spread throughout the world which was started to free international trade of all the barriers .It started working on January 1, 1995 which replaced GATT.
The WTO has been made for dealing in regulating trade between the member countries and it provides a regulatory framework for agreeing to trade treaties, and it follows to resolve disputes and it enforces to adhere to the standard agreements of WTO signed by international governments. Most of the present issues are derived from past trade disputes.
The current endeavors are pertaining to Doha Development Agenda started in 2001 whose aim was to increase the involvement of the poorest countries of the world which form the major chunk of the world's population. But the talks have been stalled for years due to non agreement between the countries whose major workforce are farmers and the bulk agriculture exporters over the special measures of safeguard to protect the farmers in their respective countries from the surge in the imports which threatens to put millions in poverty and make them unemployed.
An intermediary is a facilitator that's offers in between services between two parties who are trading .It acts as a guarantee for the products in contention. It also creates a place for itself by creating a value for itself for adding and offering some value added services to the trade which might have been accessible by the two way trade between the two parties .The main application is in the space of insurance ,financial services business industry .The online intermediaries offer all the traditional services offered by the intermediaries but without the inconvenience of having to set up a shop somewhere in a main financial hub and letting the computers do that all that for you without the hassles caused by public relations management. The most famous examples that have set the trend include the likes of Alibaba which is a portal for B2B exchanges in China, Amazon, Dell and the likes on eBay in US. With technology reaching every nook and cranny you can imagine the traditional likes of WalMart and Carrefour have also set up their online shops which are going head to head with the online intermediaries. Setting all positives aside there is also a negative side which leads to cheats preying on innocent consumers with bad products which are fakes of original stuff.
A focal firm is a firm that sows the seeds for international business .It takes care of all the transactions involved in the international business that includes all the Multinational Enterprises and the entire Short and medium term enterprises. Now as the world is expanding, and the internet is reaching out to each and every individual even in the developing world, it is utmost important than we showcase ourself as a cross-cultural firm which is available to its customers whenever they need it. Just log in and you will find us waiting for you. This may help us strike a chord with our customers and make them feel a personal touch with us. The trend of trade is changing as it is shifting more to online than offline. Change is the key and utilizing it to full extent is what will take us ahead of our competitors. This is the approach which would be useful in the times to come.
Factor proportions theory:
Soln: Factor proportions theory is very important aspects of IB industry. It states that each and every country of the world no matter rich or poor should manufacture and also export products that are products of an intense supply chain of processes and that one should import only those which have a little addition to the raw materials, i.e, they use very less resources.
The most abundant factor in China: Low cost labor
The most abundant factor in Japan: Technical expertise
The most abundant factor in Saudi Arabia: Oil
The most abundant factor in USA: Pharmaceutical
There are 2 kinds of approaches that can be followed by a manager:
Deal orientation-In this kind of approach the main focus of the manager is to take care of the task which has been assigned to him on that particular time. They can't let emotions get in the way of their work. They are in the habit of typically using contracts. They don't waste their time on non sense and believe the strictly business approach.An example of countries where this approach is followed is Australia and countries of North America.
Relationship Manager: In this kind of approach the manager show a more humane side. They associate with people in a friendly manner; they try to build relations while doing business .Relationships are valued much more than the deals. Trust is given the highest priority that can given be given to any property. Examples of countries where this approach is followed are the like of Asian countries like India, China and the countries of Latin America.
Specific sources of national competitive advantage:
The specific sources that offer a nation competitive advantage are classified into 2 categories:
Comparative advantage refers to a country's specific set of resources that include the brilliant features that a country has to offer that provides it special benefits in the global competitive environment which have either been obtained from specific and strong national polices or the national wealth.
Egs include exodus of IT workers in India, the abundance of the lowest cost labor force in developing countries or the Uranium sources of Australia etc.
Competitive advantage refers to the set of sources that include unique assets or the competitiveness of a company that derives its value from the cost, and the innovations that a company has the capacity to make which are difficult for others to follow.
Examples include the technical mastery and expertise of dell in its global supply linkage, the marketing mantras of P&G, Apple's lead in the area of personal and portable music players and mobile phones.
One of the most successful product and services in the UAE has been the prowess of its financial industry which was initially caused by oil dollars but has now taken its own stance.
Practical Case Study:
A case study was done taking a group of developing countries like India, china, the UAE as a center of study in which it was seen that after catering to the need of the local markets there was a time when they had to go to neighboring countries in order to overcome the local saturation in the market and to explore the expansion and growth potentials available across borders. This may be through joint ventures with various other companies already established in the respective countries and bagging important projects and when he company had attained the knowledge about the working environment and the business practices of the aforementioned neighbor county, it would eventually take the solo path. A case study also shows that the locals are often hostile to foreign companies' setting up shop and giving their own nationals job in the new country. Recently there has been a major change in this trend, with companies realizing that the jobs should be handed to people with better local knows how and government relations which will whelp them immensely in securing contracts.
Analysis and result:
Developing Countries: A booming market
In today's world, developing countries have become a big market for international firms as their markets are new, young and unexplored. There is a lot of chance of expanding the companies there and gathering huge profits. Markets like Asia and Africa have opened a lot of business opportunities for the international firms who are bent upon utilizing these resources to the fullest. The advances in technology has championed the cause of globalization which has the brought the world to our homes. The modern technology has flattened the world. This has led to the exposure of international products in the domestic market. Like a coin, it has two sides. On one hand, this has made a lot of new products, some vital like medicines etc. available to the natives. It has brought with it jobs and lucrative opportunities. Above all it is harnessing the hidden resources which were unused and thus going waste. On the other it has its adverse effects also. Domestic markets suffer. The exclusivity of the native traders is lost and folk practices in trade start becoming vestigial. The competition given by well established international firms is very difficult for a start-up native business to cope with. But in my opinion, the pros of international trade are far for better and greater than its cons. If we allow the international trade to flourish in a controlled manner without affecting the local businesses, it can prove to a boon for our developing economy. Along with trade, it also brings culture and business practices which are very useful and ought to be learnt. Culture plays a very important role in the global scenario of International Business and one of the most sensitive issues you have to handle while doing International Business .Culture plays a very integral role in the development of new products .Understanding the culture of each other during IB helps you to communicate and talk with your business partners in a much more effective way and gives you an edge while negotiating international treaties and laying ground rules for structuring the business decisions. Also it brings flexibility in working with people from different cultures which would help us in our exports. Opening our economy to international firms would not only bring a lot of investment and development but also would see a rise in exports of the country. This is beneficial for a developing economy like ours. Also it would help us brand ourselves on the world globe. Also it would help us connect with a broader audience and thus will widen our perspective. (Developing Nations in International Trade)
Cross Cultural Matters in International Business
Culture plays a very important role in the global scenario of International Business and one of the most sensitive issues you have to handle while doing International Business .Culture plays a very integral role in the development of new products .Understanding the culture of each other during IB helps you to communicate and talk with your business partners in a much more effective way and gives you an edge while negotiating international treaties and laying ground rules for structuring the business decisions. It helps you to be a better interactor by helping you to talk to your present and future clients effectively. It helps you to prepare yourself to create a much better marketing and promotional stuff for the brand positioning.
Cross-cultural differences can cause a lot of troubles for managers because of the kind of bindings you have to deal with while handling cultural differences like they have to face the problem in case when the locals and the foreigners don't gel well. Workers in some countries are expected to remain loyal to the firms throughout their working lives , which becomes difficult for firms to handle .The organizational structure in the new workplace also creates a lot of challenges as there are numerous considerations like information sharing is not allowed to move freely because of the various constraints. Fitting into cultures becomes very difficult in case when people are not comfortable with following their own thought process and rather lead a follower's life.
Conclusion and Recommendation:
International business is inevitable for growth and the mad rush for globalization. It is of utmost necessity to break the horizons of geography and enter foreign shores. Although there are risk involved, regulatory hurdles, difficulty in pricing mechanisms, pressures from the local people and their governments, cross cultural hardships, currency fluctuations and trade market imbalances, international business can still thrive if carried out responsibly and with an eye on the welfare of the overall community which will include the employers, the clients, the local people and the organization in a whole.