INTRODUCTION TO INTERNATIONAL BUSINESS

 

Objectives

  i.               To outline the main activities involved in international business

ii.               To indicate the significance of international business for individuals, firms and countries

iii.               To identify the advantages and disadvantages of the main international market entry strategies

iv.               To discuss the reasons why firms go international

v.               To identify international trade barriers.

 

Introduction

It is hard to imagine a world without international business.  Everything that is consumed, everything that is produced and every financial activity engaged in is affected by international business.  Virtually, every nation, from the smallest to the largest, has business firms engaged in various types of international business activity.  It is through these activities that nationals enjoy the benefits of international business by trading in a great variety of goods and services produced around the world and made available locally.

International business is claimed to be as old as the history of mankind itself.  Even at the most tribal level, communities found it in their interest to trade, albeit in a very primitive manner and involving the exchange of simple objects mostly for immediate consumption, citing from the writings of the ancient Greek historian, Herodotus, Taoka, and Beeman gave the interesting example of ‘silent trade’ in which ‘deliverers would leave objects in a clearing and then hide.  Others would come along and leave articles in exchange for what they took.  Historically, trade was in the form of barter involving the exchange of articles in kind and undertaken as much for social as for economic reasons.

Even though modern trade is conducted in far more advanced forms and for more complex reasons than ever before, the basic human need for trade remains the same.  However, unlike ancient times during which trade was devised and undertaken by communities for the benefit of the communities themselves, over 90% of modern trade is undertaken by private firms in pursuit of their own aims and objectives.

The growth of modern trade coincided to a large extent, with the emergence of the modern nation state and with the consequent formation of national borders.  The clear recognition and appreciation of the benefits of free trade (trade without barriers and based on the principle of comparative advantage) provided sufficient incentives for nation states to seek greater opportunities in each other’s domestic markets and thus to increase the volume of trade among themselves.  Such mutual benefits have largely responsible for the growth of alliances and regional integration around the world, as evidenced by the establishment of a considerable number of trading areas, such as the European Union (EO), Common Market for Eastern and Southern Africa (COMESA), and North American Free Trade Agreement (NAFTA).  Over the years, nations have helped to promote trade and international business activities by attempting to create suitable business and investment environments within their borders, not only out of political and strategic necessity but also out of a desire to attract business and foreign investment, often in competition with other nations.  For example, the recent spate of liberalization, deregulation and privatization programmes by governments around the world, have given special impetus to the growth of foreign direct investment (FDI).

As a consequence of the endeavours of nation states and international agreements such as GATT and its successor organisation, the World Trade Organisation (WTO), there has been a steady and impressive growth in both trade and FDI.  FDI is a form of investment which entitles the investing firm to equity or ownership rights and concomitant control over its investment in a country other than its own.

The growth of modern trade has also been reinforced immensely by the growth and rapid spread of technology.  What started as a simple improvement in land (trains) and sea transport (steamships) has illuminated in a bewildering variety of developments in telecommunications, fast and safe means of transport by land, sea and air and products and services ranging from modern aircraft to exotic holidays in all parts of the world.  Modern trade increasingly involves intermediate products, components used in production processes around the world (cars, computers and the like) and an array of complex high-technology goods and services.  Many of the services which until recently were only available locally, such as financial services can now be accessed through modern telecommunication systems, even in remotest parts of the world.  Indeed, one is now witnessing the birth of trade through the internet using the so-called cyber currency.

Definition of International Business

International business is any business activity organised and carried across national borders by business firms in pursuit of their stated aims and objectives.  International activities fall into two broad categories, that is international trade and international investment.  International trade takes place when a firm engages in export and or import of goods and services. International investment takes place when a firm transfers resources to undertake business activities outside its country of origin.  The firm’s investment activities are carried out in various forms, ranging from investment by its wholly owned subsidiary or in partnership with a local business firm in the form of a joint venture, to licensed or franchised operation or a turnkey project management contacts.

Within the context of these two broad categories of business activity, it is useful to consider international business to other countries.  Even the largest multinational enterprises (MNEs) can trace their beginnings to domestic business venture, which over time outgrew their domestic market and required their managers to seek business opportunities in other countries.

In international business an executive is subject to a new set of macro environmental factors, to different constraints and to quite frequent conflicts resulting from different laws, cultures and societies.  The basic principles of business still apply but their application, complexity and intensity may vary substantially. 

International business executives they have to consider international issues and make decisions related to questions such as these:

¨      How will my idea, product or service fit into the international market?

¨      What adjustments are or will be necessary?

¨      What threats from global competition should I expect?

¨      How can those threats be counteracted?

¨      What are my strategic global alternatives?

Finally this will result to:  growth, profit and need satisfaction not available to firms that limit their activities to the domestic market place.

Importance of International Business

International business is important and necessary because economic isolationism (isolation) has become impossible.  Failure to become a part of the global market assures a nation a declining economic influence and deteriorating standard of living for its citizens.  And successful participation in international business, however, holds the promise of improved even leading some believe to a more peaceful world.

International business offers companies new markets.

It presents more opportunities for expansion, growth and income that does domestic business alone. International business causes the flow of ideas, goods, culture, services, capital and provides challenging employment opportunities across the world as a result.

Innovations can be developed and disseminated more rapidly. Human capital can be used better and financing can take place more quickly.

¨      International business also offers consumers new choices by permitting the acquisition of a wide varied of products both in terms of quantity and quality and at a reduced price through international competition.

¨      Therefore, both as an opportunity and a challenge, international business is important to countries, companies, and individuals.

In recent years, however, international business has acquired additional importance for host countries in particular and world economies in general as a result of developments in the following areas:

1.      Technology

The technological developments are transmitted to every corner of the earth through the practice of international business.  This transmission is not only in the form of products and services used every day, but also in the form of modern management, production, marketing and logistics systems employed by domestic as well as international firms.

And thanks to the dramatic developments in communication and information technology, the benefits of such transmission are shared worldwide.  These technological spin-offs are often shared with local partners, suppliers and educational and training institutions, saving the host country the research and development costs.

2.      Competition

Except in the case of acquisition entry, the arrival of an international business firms in the host country, either in partnership with a local firm or on its own, may stimulate domestic entrepreneurial challenges especially in developing countries.  International firms with superior worldwide experience, knowledge, technology and other relevant resources have the ability to offer goods and services often at a lower prices and higher quality.  In the short run, domestic firms which cannot compete effectively may be forced to leave the industry.  In the long run, however, economies of scale, growth in investment and research and development will result in more efficient techniques in production, management and marketing.

3.      Standardization

One of the major difficulties facing firms, especially in the developing countries is the lack of universal standards in their basic business functions such as marketing and more importantly, in the design and specification of their products.  Standardisation refers to the adoption of norms and practices generally acceptable in world markets.  In some cases, the result is one standard product sold throughout the world using similar selling techniques which enables easier and more effective comparisons to be made by consumers and other interested parties (health and safety authorities for example).

National and regional differences in consumer tastes, preferences and interests and in patterns of market demand have diminished as a consequence of advances in technology, telecommunication, transport and advertising.  This has made product standardisation an easier option.  A further stimulus for greater standardization is provided by the increasing attempts of nation states to integrate their economies and promote the joint prosperity of their citizens.  The creation of COMESA, European Union, East African Community/Co-operation etc, which offers limitless opportunities and challenges to international firms within and outside the member states to market their products with similar characteristics and specifications.

4.      The business environment

A business firm operates within its internal and external environment.  The internal environment is one over which the firm has considerable control; the firm determines its own internal environmental factors by specifying its:

-          Corporate mission

-          Organisational structure

-          Recruitment policy and its

-          Relationship with suppliers.

The external environment is one over which the firm has little or no control; what little control the firm may have is usually the consequence of its market power or collective action by a representative body such as Kenya Manufacturers Association etc.  The firm must, therefore, confirm to its external environmental factors, whether they are national, international and global, or suffer the consequences of its failure to do so.  For example, changes:

-          Health and safety regulations,

-          Trade policies and

-          The legal environments are unavoidable.

With the increasing internationalization of business activities, the methods of dealing with internal and external environments factors tend to become more standardised.  The main reason for this development is that domestic firms aspiring to expand internationally often emulate existing international firms in adapting to environmental changes.  In other words, international business acts as a conduit for successful business firms to adopt as a preparation for going international.  For example, many US and European firms have adopted Japanese management techniques such as quality circles, the just-in-time system (JIT), and total quality management (TQM) in order to remain competitive in their own as well as in international markets.

5.      The Political impact of international business

Governments play an important role in the development and promotion of international business activities.  They provide a great variety of financial and non-financial incentives to attract FDI into their countries, often in competition with their neighbours.  The increasing scale of liberalization of trade and environment,

-          Deregulation of domestic industries.

-          Privatization of state-owned enterprises has the attraction of foreign business as one of its primary objectives.  These programmes have created immense international business opportunities.

-          The major impact of international business in this area has been the impetus on governments to open up their borders to international trade and investment, standardize their systems and procedures, adopt internationally acceptable values and attitudes, particularly with respect to human rights and child labour, and encourage the development and democratic institutions.  For example, in order to qualify for membership of the World Trade Organisation (WTO), the Chinese government is having to soften its attitude towards capitalism, undertake a review of and improvements in its human rights record, liberalize its trade and investment policies, and privatize its state enterprises (albeit at a very slow rate).

6.      Economic integration and globalization

One of the most fundamental impacts of the process of internalization since the end of World War II has been the progressive ending of the isolation of national economies.  Gradually, more and more of the barriers to international trade and investment are being replaced with measures designed to enhance co-operation and co-ordination among nation states.  The need to co-operate and co-ordinate over wider geographical areas has led to the formation of regional groupings in the form of free trade areas for example.  Attempts to create regional economic integration in which individual economies are merged into a larger economic region have increased significantly over the years in response, among other things, to a rapid increase in the growth of international business activities.

International business activities have not only grown but have become much more diverse and complex, putting them far beyond the ability of individual governments to influence or control.  One direct result has been the emergence of a new world economic order in which national economies are merging into one global economy, either on an individual basis or as has recently been the case in regional groupings. The rapid emergence of the global economy has also given rise to the need to re-examine the role and effectiveness of the agencies involved in global governance in monitoring global activities and resolving conflicts of interest which may rise; these agencies include the international monetary fund (IMF) and United Nations (UN).

Major International Business Activities

Multinational enterprises (MNEs) are major forces in international business.  They concentrate their activities in three main areas; international trade, foreign direct investment (FDI) and a cluster of activities including joining ventures, licensing, franchising etc.

The Nature of International Business

International Business

International trade

Foreign Direct Investment

Other Activities

 

* Read more about the above activities of international business

The Difference between International and Domestic Business

The same basic business principles concerning tasks, functions and processes apply to international business as to domestic business.  However, the environment in which domestic and international business firms operate varies considerably and therefore requires an international business firm to alter and modify its business practices country by country. 

Unlike a domestic business manager and international manager faces greater difficulties, greater uncertainties, and more importantly much greater risks.  The tasks of an international business executive are clearly much challenging.

These difficulties, uncertainties, and risks emanate from differences in the political, economic and legal environment, in the cultural environment, and in different foreign exchange markets and exchange rate systems.  In most cases, these problems manifest themselves as constraints which lender the process of decision-making and decision – implementation more difficult (and in some cases, more hazardous) than under domestic circumstances.  More importantly, culturally insensitive decisions often result in conflicts which are more difficult (and costly) to resolve without seriously affecting the performance of the firm, its future operations and the effectiveness of its management.  The dynamic nature of constant changes in business, economic, political and legal environments in the host country adds still more difficulties with which the international business executive must deal on an almost daily basis.  More specifically, an international business differs from a domestic business in the following ways:

1.      Each country in which the firm operates is culturally different.  To be successful, the firm must operate in a culturally sensitive manner and within the constraints of the culturally determined manners, customs, values and norms of the host country.  An international business manager must respect and empathize with cultural differences in all aspects of business and social life, seek to confirm and co-operate rather than confront or behave as if operating in her/his own culture.

2.      Conducting business across national borders involves the use of different currencies and observing different government rules and regulations limiting the firm’s freedom of action, for example, restrictions on the amount of profit to be transferred.  Governments practice difference exchange rate policies and systems, ranging from daily decrees about the value of the local currency in terms of the world’s major currencies to fixed and floating exchange rate systems.  These practices add greater risk and uncertainty to the already highly risky and uncertain nature of international financial transactions.  To be successful, the firm must develop an appropriate strategy to deal with these differences and the associated problems.

3.      The legal environment differs from country to country, requiring firms to show particular sensitivity to laws, rules and regulations and performance.  Disregarding or disobeying the laws of the host country can be very damaging to the finances and the image of the firm.  Laws pertaining to joint ownership of assets, for example, are often very complicated, bureaucratic, frustrating, and time-consuming.  Legal difficulties are often the source of serious disputes between the host government and the firm, requiring protracted negotiations which may end in failure to invest or to continue with the existing business.

4.      The differences in consumer tastes and preferences and demand patterns stemming from cultural differences require the firm to adopt appropriate production, procurement and marketing strategies to minimise costs and maintain the firm’s value.  Even in the case of standard global products, certain modifications may be necessary to render the product more acceptable to the consumer in the host culture.  For example, the name of the product in the host country’s language may be offensive or the packaging may be inappropriate.

5.      Different countries possess different factor endowments with different qualities, requiring the firm to formulate and implement suitable product development and logistics strategies consistent with the availability and quality of resources in the host country.  Unavailable or available in limited quantities and qualities.  If unavailable, the firm must either import them or develop local sources of supply.

Barriers to International Trade

Policy makers find themselves with increasing responsibilities, yet with fewer and less effective tools to carry them out.  More segments of the domestic economy are vulnerable to global shifts at the same time that they are becoming less controllable.  To regain some power to influence policies, some governments have sought to restrict the influence of world trade by erecting barriers, charging tariffs, and implementing import regulations.  However, these measures too have been restrained by the existence of global agreements forged through institutions such as the GATT or bilateral negotiations.  World trade has therefore, changed many previously held notions about the sovereignty of nation-states and extraterritoriality.  The same independence that made us all more affluent has left has more vulnerable.  Due to this vulnerability has resulted barriers to trade namely:

a)      Tariff barriers

b)      Non-tariff barriers.

a)      Tariff Barriers

A tariff is a tax on imports.  Duty is charged on all products based on the product and the country of origin, some products are permitted duty-free entry into the Kenyan market.

¨      Protective tariffs are assessed to protect domestic products from foreign competition.

¨      Revenue tariffs are imposed to generate tax revenue.

¨      Punitive tariffs are intended to punish trading partners.

¨      Antidumping duties are assessed to merchandise that is sold in Kenya at less than fair-market value.

¨      Countervailing duties are applied to counter the effects of subsidies provided by foreign governments to merchandise that are exported to Kenyan market. 

NB:  Tariffs may be classified as to the way the duty or tariff is levied.

¨      Ad Valorem tariff is expressed as a fixed percentage of the customs value of the imported product, for example, 8% tariff on the shipment valued Ksh780,000.

¨      Specific tariff is expressed as an amount of money per unit of product for example Ksh100 per ton.

¨      Compound tariff is a combination of the ad valorem and specific tariffs.

b)     Non-tariff Barriers

Nontariff barriers include a variety of measures that have the common objective of restricting imports.

¨      Quotas limit the amount of product that may be imported during a certain period of time.  Quotas are established by legislation, by directives, and by proclamations issued under the authority contained in specific legislation.

¨      Absolute quota means that no more of a product than the permitted entry during a quota period.  There are two types of absolute quotas namely:

(i)                 Global quota is a limitation on the quantity that applies to all foreign countries as a group.

(ii)               Country quota is an allocation of a portion of the quota to specified foreign countries.

¨      Tariff-rate quota provides for the entry of a specified quantity of the product at a reduced rate during the quota period.  Quantities entered in excess of the quota are subject to higher duty rates.

¨      Local content regulation is a requirement that some specified portion of a product be produced locally.

¨      Voluntary export restraints are quotas and exports set by the exporting country to forestall more severe restrictions by the importing country.

¨      Subsidies are payments made by governments to industries or companies that essentially offset their high costs and permit them to be artificially competitive in an export market, thereby compromising the intent of free trade.

¨      Administrative barriers are complex of laws, regulations, administrative rulings, health and safety standards testing certification etc.  that when applied make it difficult, costly or virtually impossible to export goods to a foreign country.  Even when capable of being complied with, these measures tend to raise the price of exported goods.

NB:  There are literally hundreds of ways to build a barrier.  The following list provides just a few of the trade barriers that exporters face:

¨      Restrictive licensing.

¨      Special import authorization.

¨      Licenses for selected purchases.

¨      Country quotas

¨      Global quotas

¨      Seasonal prohibitions

¨      Voluntary export restraints

¨      Temporary prohibitions

¨      Advance import deposits

¨      Health and sanitary prohibitions

¨      Foreign exchange licensing

¨      Taxes on foreign exchange deals

¨      Licenses subject to barter and counter-trade

¨      Preferential licensing applications

¨      Customs surcharges

¨      Stamp duties

¨      Excise duties

¨      Licensing fees

¨      Consular invoice fees

¨      Taxes on transport

¨      Statistical taxes

¨      Value-added taxes

¨      Sales taxes

¨      Turnover taxes

¨      Discretionary licensing

¨      Internal taxes etc.

Determinants for export controls are for:  National security, foreign policy, short supply and nuclear non-proliferation.

Reasons for Government’s Protection of Business Activities

1.      To prevent national wealth from being transferred in exchange with another nation for goods.  (Keep-money-or-home)

2.      To encourage home industry to perpetuate.

3.      To make local goods compete fairly against imports, which otherwise may be cheaper because of technological advantage or other similar reasons.

4.      To protect home industry from imports from low-wage countries.

5.      To safeguard against potential trade concessions that may have to be made in response to multinational trade agreements.

6.      To protect level of home employment.

7.      To prevent dumping of foreign products.

8.      To seek reduction of tariffs by other countries or to retaliate against another country.

9.      To be on one’s own for national security reasons such as was for national calamities.

10.  To encourage new industries in the country

11.  To compensate the country for loss in revenue when price elasticity of import demand is greater than zero.

Major Problems and Difficulties firms face when they want to go international

1.        Huge foreign indebtedness

Many countries of the World that would otherwise be attractive markets have, accumulated such high foreign indebtedness that they cannot even pay the interest on their foreign debt.

2.        Unstable governments

High indebtedness, high inflation and high unemployment in countries have resulted in highly instable governments that expose foreign firms to the risks of expropriation, nationalisation and limits to profit repatriation and so on.

3.        Exchange instability

High indebtedness and political instability, force a country’s currency to depreciate, or at least add a lot of volatility to the currency’s value.  The result is that foreign investors hesitate to hold much of the foreign currency and this limits business.

4.        Foreign government entry requirements

Governments sometimes put in place more regulations on firms, such as requiring, joint ownership with majority share going to the domestic partner, a high level of nationals hired for management, technological transfer of trade secrets, and limits on profit repatriation.

5.        Tariffs and other trade barriers

Governments often impose unreasonably high tariffs against imports in order to “subsidise” or protect their own industries.

6.        Corruption

Officials in several countries require bribes in order to co-operate.  They often award business to the highest briber, rather than the best bidder. Kickbacks are received by governments and officials in most developing countries

7.        Technological pirating

A company locating its plan to abroad worries about foreign managers learning how to make its product and breaking way to compete openly.

8.        High cost of product and communication adaptation

A company going abroad must study each foreign market carefully, become sensitive to economics, politics and culture and make some adaptations in its products and communications to suit foreign tastes, otherwise it might make some serious blunders.

Benefits to International Businessmen

There are many benefits which accrue to an international businessman.  They are summarized as follows:-

1.        A much bigger area of market, so that the exporter may be less dependent upon the tastes and preferences of one particular country.

2.        With global market, the exporter is much less likely to be affected by the business cycles and political instability of a particular country.

If one country has a recession and sales are difficult, the exporter may export to other markets which are relatively prosperous.

3.        A good network of market implies that if a competition captures one market, only a portion of high sales is likely to be affected.

4.        Due to bulk selling because of bulk orders, economical manufacturing is possible for the manufacturer/exporter.

5.        If international business is properly handled, the payment is guaranteed and quick.

6.        Exports help in developing domestic trade – Domestic consumers are inclined to have more faith in products which they know are selling abroad.  International business creates “good will” in the eyes of the consumers.

NB:

The potential international businessman must learn how to make a start and how to find customers abroad.  He must also understand the terms used in international business, the procedure for collecting payment from customers abroad, and have some knowledge of shipping marine,  insurance and packing.

International business brings large orders and they must therefore assure themselves that their production capacity is sufficient to cope with those orders.

The differences between domestic business and international business:

 

      Domestic  Business                                            International Business  

1.   One nation, same language                       1.   Many nations, many languages

      and culture                                                                  and cultures.

2.   One currency                                             2.   Different currencies in different

                                                                         Countries.

3.   Political environment and                         3.   Different political environment and

      factors are the same                                        factors in different countries are vital.

4.   Market is relatively                                   4.   Markets are diverse and highly

      homogeneous                                                  heterogeneous

5.   No problem of exchange                           5.   There are problems of exchange controls

      control and tariffs.                                           And tariffs and they act as obstacles.

6.   Relative freedom from                              6.   Government influences business

      government interference                                 decisions.

7.   Relatively stable business                         7.   Multiple environments many of which

      environment                                                    are highly unstable.

8.   Uniform financial climate                         8.   Variety of financial climates ranging                                                                                      from over conservative to wildly

                                                                              inflationary.

9.   Business “rules of the game”                    9.   Rules diverse, changeable and

      mature and understood.                                  unclear.

10.  The same natural resources                      10.  Different kinds of natural resources.