International business refers to the trade of goods and service goods, services, technology, capital and/or knowledge across national borders and at a global or transnational scale. It includes all commercial activities that promote the transfer of goods, services and values globally. It may also refer to a commercial entity that operates in different countries.
International business involves cross-border transactions of goods and services between two or more countries. These transactions include economic resources such as capital, skills, and labor, all of which contribute to the international production of physical goods and services like finance, banking, insurance, and construction. International business is also known as globalization.
To conduct business overseas, multinational companies must bridge separate national markets into a single global marketplace. Two macro-scale factors drive the trend towards greater globalization. The first is the elimination of barriers, which makes cross-border trade easier (e.g. enabling the free flow of goods, services, and capital—commonly referred to as "free trade"). The second is technological advancement, particularly in communication, information processing, and transportation technologies.
Overview The discourse surrounding international business has a transition in terminology over the years, reflecting shifts in understanding and the expanding scope of cross-border commerce. Initially, phrases such as "foreign trade" and "foreign exchange" were prevalent, embodying a static view of cross-border interactions. However, the term "foreign" often evoked notions of remoteness or strangeness, failing to capture the dynamic essence of international engagements.
As commerce evolved with the advent of firms engaging in substantial direct investments across borders, newer terms to encapsulate the changing landscape. The mid-19th century marked the rise of companies owning and controlling production facilities in various countries, a departure from the earlier norm where firms held minor or passive ("portfolio") investments abroad. This paradigm shift necessitated a fresh nomenclature, leading to the introduction of the term "multinational enterprise" (MNE), referring to entities with substantial operations in multiple nations.
"International business" is also defined as the study of the internationalization process of multinational enterprises. A multinational enterprise (MNE) is a company that has a worldwide approach to markets, production and/or operations in several countries. Well-known MNEs include fast-food companies such as: McDonald's, Yum! Brands, Starbucks, etc. Other industrial MNEs leaders include vehicle manufacturers such as: Ford Motor Company, and General Motors (GMC). Some consumer electronics producers such as Samsung, LG and Sony, and energy companies such as ExxonMobil and BP are also multinational enterprises.
Multinational enterprises range from any kind of business activity or market, from consumer goods to machinery manufacture; a company can become an international business. Therefore, to conduct business overseas, companies should be aware of all the factors that might affect any business activities, including, but not limited to: difference in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local cultures, corporate cultures, foreign-exchange markets, tariffs, import and export regulations, trade agreements, climate, and education. Each of these factors may require changes in how companies operate from one country to another. Each factor makes a difference and a connection.
One of the first scholars to engage in developing a theory of multinational companies was Canadian economist Stephen Hymer. Throughout his academic life, he developed theories that sought to explain foreign direct investment (FDI) and why firms become multinational.
There were three phases of internationalization according to Hymer's work. In this thesis, the author departs from neoclassical theory and opens up a new area of international production. At first, Hymer started analyzing neoclassical theory and financial investment, where the main reason for capital movement is the difference in interest rates. After this analysis, Hymer analyzed the characteristics of foreign investment by large companies for production and direct business purposes, calling this Foreign Direct Investment (FDI). By analyzing the two types of investments, Hymer distinguished financial investment from direct investment. The main distinguishing feature was control. Portfolio investment is a more passive approach, and the main purpose is financial gain, whereas in foreign direct investment a firm has control over the operations abroad. So, the traditional theory of investment based on differential interest rates does not explain the motivations for FDI.
According to Hymer, there are two main determinants of FDI; where an imperfect market structure is the key element. The first is the firm-specific advantages which are developed at the specific companies home country and, profitably, used in the foreign country. The second determinant is the removal of control where Hymer wrote: "When firms are interconnected, they compete in selling in the same market or one of the firms may sell to the other," and because of this "it may be profitable to substitute centralized decision-making for decentralized decision-making".
Hymer's second phase is his neoclassical article in 1968 that includes a theory of internationalization and explains the direction of growth of the international expansion of firms. In a later stage, Hymer went to a more Marxist approach where he explains that MNC as agents of an international capitalist system causing conflict and contradictions, causing among other things inequality and poverty in the world. Hymer is the "father of the theory of MNEs", and explains the motivations for companies doing direct business abroad.
Among modern economic theories of multinationals and foreign direct investment are internalization theory and John Dunning's OLI paradigm (standing for ownership, location and internationalization). Dunning was widely known for his research in economics of international direct investment and the multinational enterprise. His OLI paradigm, in particular, remains as the predominant theoretical contribution to study international business topics. Hymer and Dunning are considered founders of international business as a specialist field of study.
Physical and social factors of competitive business and social environment The conduct of international operations depends on a company's objectives and the means with which they carry them out. The operations affect and are affected by the physical and societal factors and the competitive environment.
Operations All firms that want to go international have one goal in common; the desire to increase their respective economic values when engaging in international trade transactions. To accomplish this goal, each firm must develop its individual strategy and approach to maximize value, lower costs, and increase profits. A firm's value creation is the difference between (the value of the product being sold) and (the cost of production per each product sold).
Value creation can be categorized as: primary activities (research and development, production, marketing and sales, customer service) and as support activities (information systems, logistics, human resources). All of these activities must be managed effectively and be consistent with the firm strategy. However, the success of firms that extend internationally depends on the goods or services sold and on the firm's core competencies (Skills within the firm that competitors cannot easily match or imitate). For a firm to be successful, the firm's strategy must be consistent with the environment in which the firm operates. Therefore, the firm needs to change its organizational structure to reflect changes in the setting in which they are operating and the strategy they are pursuing.
Once a firm decides to enter a foreign market, it must decide on a mode of entry. There are six different modes to enter a foreign market, and each mode has pros and cons that are associated with it. The firm must decide which mode is most appropriately aligned with the company's goals and objectives. The six different modes of entry are exporting, turnkey projects, licensing, franchising, establishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary in the host country.
The first entry mode is exporting. Exporting is the sale of a product in a different national market than a centralized hub of manufacturing. In this way, a firm may realize a substantial scale of economies from its global sales revenue. As an example, many Japanese automakers made inroads into the U.S. market through exporting. There are two primary advantages to exporting: avoiding high costs of establishing manufacturing in a host country (when these are higher) and gaining an experience curve. Some possible disadvantages to exporting are high transport costs and high tariff barriers.
The second entry mode is a turnkey project. In a turnkey project, an independent contractor is hired by the company to oversee all of the preparation for entering a foreign market. Once the preparation is complete and the end of the contract is reached, the plant is turned over to the company fully ready for operation.
Licensing and franchising are two additional entry modes that are similar in operation. Licensing allows a licensor to grant the rights to an intangible property to the licensee for a specified period of time for a royalty fee. Franchising, on the other hand, is a specialized form of licensing in which the "franchisor" sells the intangible property to the franchisee, and also requires the franchisee operate as dictated by the franchisor.
Lastly, a joint venture and wholly owned subsidiary are two more entry modes in international business. A joint venture is when a firm created is jointly owned by two or more companies (Most joint venture are 50-50 partnerships). This is in contrast with a wholly owned subsidiary, when a firm owns 100 percent of the stock of a company in a foreign country because it has either set up a new operation or acquires an established firm in that country.
Types of operations Exports and import Merchandise exports: goods exportednot including services. Merchandise imports: The physical good or product that is imported into the respective country. Countries import products or goods that their country lacks in. An example of this is that Colombia must import cars since there is no Colombian car company. Service exports: , the fastest growing export sector. The majority of the companies create a product that requires installation, repairs, and troubleshooting, Service exports is simply a resident of one country providing a service to another country. A cloud software platform used by people or companies outside the home country. "Tourism and transportation, service performance, asset use". Exports and Imports of products, goods or services are usually a country's most important international economic transactions.
Top imports and exports in the world Data is from the CIA World Factbook, compiled in 2017: Partner name Export (US$ thousand)Import (US$ thousand)Import partner share (%)Export partner share (%)World14,639,041,733.8814,748,663,389.75100.00100.00United States 1,456,000,0001,292,436,125.648.7613.29Japan634,900,000661,678,484.034.493.20Germany1,322,000,0001,145,973,941.197.776.26France507,000,000488,825,071.863.313.68United Kingdom407,300,000359,480,074.292.444.17
Choice of entry mode in international business