International Business - Professor Natasha Bhamani

CHAPTER 1. OVERVIEW OF INTERNATIONAL BUSINESS

INTRODUCTION:
Change is occurring at an accelerating rate. Today is not like yesterday, and
tomorrow will be different from today. Continuing today’s strategy is risky, so is
turning to a new strategy.
Business activities beyond the political boundaries of the country are termed as
international Business. Global trade, inter-regional trade, world trade, & export
marketing are some terms which are to some extent identical with the term
international Business.

DEFINITION:
1. International Business is the multinational process of planning & executing the
conception, pricing, promotion & distribution of ideas, goods & services to create
exchanges between nations to satisfy individual & organizational objectives.

2. Business activities beyond the political boundaries of the country is termed as

international marketing.

DIFFERENCE BETWEEN INTERNATIONAL BUSINESS & DOMESTIC BUSINESS:

International Business Domestic Business
1. Meaning It refers to planning It refers to planning,
organizing, directing and organizing directing and
controlling activities controlling activities
relating to export relating to domestic
business. marketing

2. Exchange of Goods Exchange of goods is Free exchange of goods is

allowed subject to certain allowed within the country.
restrictions
3. Languages/Culture Since it involves many It involves only one nation
nations, there are diverse and mostly one language
languages and cultures. and one culture.

4. Currencies It involves multiple There is a-use of single

currencies. currency.

5. Seale of Operation It’s scale of operations are It’s scale of operations are
diversified throughout the confined to a limited area
globe
6. Government Influence To a great extent, export There is less government
business is affected by interference.
government decisions
7. Risks There are high risks and Domestic marketing is
uncertainties, both subject to minimum risks
political and commercial and uncertainties.

8. Mobility of Factors of There is lower mobility of Normally, there is free

Page 1 of 1
International Business - Professor Natasha Bhamani

Production factors of production. mobility of factors of

production.
9. Monetary System It is subject to different There is one monetary and
monetary and economic economic system.
systems.
10. Procedures It involves complicated It involves simple
procedures and a lot of procedures less
documentation work. documents.
11. Taxes and Levies It is subject to tariff and It is subject to simple
non-tariff barriers. taxes

ADVANTAGES OF INTERNATIONAL BUSINESS

1. High Living Standard- Customers in various countries can buy more products
with the same amount of money in the International Markets. In turn, it can
also enhance the living standard of the people through enhanced purchasing
power and by consuming high quality products.
2. Increased Socio-Economic Welfare- International business enhances the
consumption level, and economic welfare of the trading countries.
3. Wider Markets - International business widens the market and increases the
market size. Therefore, the companies need not depend on the demand for
the product in one single country or customer’s taste and preferences.
4. Reduced effects of Business Cycle - The stages of business cycle vary from
country to country. Therefore, MNC’s shift from the country experiencing a
recession to the country experiencing the boom conditions. Thus,
international business firms can escape from the recessionary conditions.
5. Reduced Risks - Both commercial and political risks are reduced for the
companies engaged in international business due to spread in different
countries.
6. Large Scale Economics - MNC due to the wider and larger markets produce
larger quantities, which provide the benefit of large-scale economies like
reduced cost of production, availability of expertise, etc.
7. Potential Untapped Markets - International business provides the chance of
exploring and exploiting the potential markets which are untapped so far.
These markets provides the opportunity of selling the product at ahigher price
than in domestic markets.
8. Provides the opportunities for and challenge to domestic business -
International Business firms provides the opportunities to the domestic
companies. These opportunities include technology, management expertise,
market intelligence, etc,.
9. Division of Labour and Specialisation - International business leads to division
of labour and specialization. Brazil specializes in coffee, Kenya in tea, Japan
in automobiles.
10. Economic Growth of the world - Specialisation, division of labour,
enhancement of productivity, posing challenges, development to meet them,
innovations and creations to meet the competition lead to ovrall economic
growth of the world nations.

Page 2 of 2
International Business - Professor Natasha Bhamani

11. Optimum and proper utilization of world resources - International business

provides for the flow of raw materials, natural resources and human
resources from the countries where they are in excess supply to those
countries which are in short supply or need most.
12. Cultural Transformation - International business benefits are not purely
economical or commercial, they are even social and cultural. There is a close
cultural transformation and integration.

CHALLENGES OF INTERNATIONAL BUSINESS

1. Political Factors - Political instability is the major factor that discourages the
spread of international business.
2. Huge Foreign Indebtedness - The developing countries with less purchasing
power are lured into a debt trap due to the operations of MNCs in these
countries.
3. Exchange Instability - Currencies of countries are depreciated due to
imbalances in the balance of payments, political instability and foreign
indebtedness. This, in turn, leads to instability in the exchange rates of
domestic currencies in terms of foreign currencies.
4. Entry Requirements - Domestic governments impose entry requirements to
multinational.
5. Tariff Quotas and Trade Barriers - Governments of various countries impose
tariffs, import and export barriers in order to protect the domestic business.
Further these barriers are imposed based on the political and diplomatic
relations between or among various governments.
6. Corruption - Corruption has become an international phenomenon. The higher
rate bribes and kickbacks discourage the foreign investors to expand their
operations.
7. Bureaucratic Practices of Government - Bureaucratic attitudes and practices
of government delay sanctions, grants permission and licenses to foreign
companies.
8. Technological Pirating - Copying the original technology, producing imitative
products, imitating other areas of business operations were common in
Japan . this practices invariably alarms the foreign companies against
expansion.

INTERNATIONAL BUSINESS APPROACHES: (EPRG FRAMEWORK):

International business approaches are similar to the stages of internationalization or
globalization. Douglas Wind and Pelmutter advocated four approaches of
international business. They are:
1. Ethnocentric Approach
2. Polycentric Approach
3. Regiocentric Approach
4. Geocentric Approach.

1. Ethnocentric Approach:
The domestic companies normally formulate their strategies, their product design

Page 3 of 3
International Business - Professor Natasha Bhamani

and their
operations towards the national markets, customers and competitors. But, the
excessive production more than the demand for the product, either due to
competition or due to changes in customer preferences push the company to export
the excessive production to foreign countries. The domestic company continues the
exports to the foreign countries and views the foreign markets as an extension to
the domestic markets just like a new region. The executives at the head office of the
company make the decisions relating to exports and, the marketing personnel of the
domestic company monitor the export operations with the help of an export
department.
The company exports the same product designed for domestic markets to foreign
countries
under this approach. Thus, maintenance of domestic approach towards international
business is called ethnocentric approach.
This approach is suitable to the companies during the early days of
internationalization and
also to the smaller companies.

2. Polycentric Approach
The domestic companies which are exporting to foreign countries using the
ethnocentric
approach find at the later stage that the foreign markets need an altogether different
approach.
Then, the company establishes a foreign subsidiary company and decentralizes all
the
operations and delegates decision-making and policy making authority to its
executives. In fact, the company appoints executives and personnel including a chief
executive who reports directly to the Managing Director of the company. Company
appoints the key personnel from the home country and all other vacancies are filled
by the people of the host country. The executives of the subsidiary formulate the
policies and strategies, design the product based on the host country's environment
(culture, customs, laws, government policies etc.) and the preferences of the local
customers. Thus, the polycentric approach mostly focuses on the conditions of the
host country in policy formulation, strategy implementation and operations.

Page 4 of 4
International Business - Professor Natasha Bhamani

3. Regiocentric Approach
The company after operating successfully in a foreign country thinks of exporting to
the neighboring countries of the host country. At this stage, the foreign subsidiary
considers the regional environment (for example, Asian environment like laws,
culture, policies etc.) for formulating policies and strategies. However, it markets
more or less the same product designed under polycentric approach in other
countries of the region, but with different market strategies

4. Geocentric Approach
Under this approach, the entire world is just like a single country for the company.
They select the employees from the entire globe and operate with a number of
subsidiaries. The headquarters coordinate the activities of the subsidiaries. Each
subsidiary functions like an independent and autonomous company in formulating
policies, strategies, product design, human resource policies, operations etc.

EXTERNAL FACTORS OF INTERNATIONAL BUSINESS ENVIRONMENT:

Everyday our market is changing the way it is. Many new things are developed and in
a matter of about some seconds, the whole scenario stands different in front of us.
Among them, there are many things that we can control and then there are other
things that fall beyond our control and those are called systematic factors.
Systematic things happen in the environment we live in, the environment that

Page 5 of 5
International Business - Professor Natasha Bhamani

surrounds us and many times they greatly influence us.

Businesses are also influenced by the environment that they’re in and all the
situational factors that determine circumstances from day to day. It is because of
this, that businesses need to keep a check and constantly analyze the environment
within which they run their trade and within which the market lays.

External Factors affecting International Business Environment are as follows:

1. Political Environment:
The political environment can be one of the less predictable elements in a business.
Any business needs to monitor the changing political environment because political
change can profoundly affect an organization. Any political environment of a country
can be either blessing for some business or curse for other business. In other sense,
it provides opportunity to some business and threats to others. A businessman has
to adjust his business to the prevailing political environment as he is left with no
choice.
Political factors take into account the political situation of a country and the world in
relation to the country. For example, what sort of government leadership is affecting
what decisions of a country? All the policies, all the taxes laws and every tariff that a
government levies over a trade falls under this category of factors

2. The Economic & Commercial Environment:

The economic environment refers to all those economic factors, which have bearing
on the functioning of a business unit. Business depends on the economic
environment to buy its input as well as to sell it.
Important economic & commercial factors are as follows:
1. Gross National Product
2. Per Capita Income
3. Balance of trade position
4. Industry life cycle and current phase through which industry is passing. (Boom,
Recession and depression)
5. The inflation rate
6. Rate of Interest charged by commercial banks.
7. The monetary or fiscal policies
8. The foreign exchange rates that affect imports and exports
All these determine the direction in which an economy might move, therefore
businesses analyze this factor based on their environment so as to build strategies
that fall in line with all the changes that are about to occur

3. The Social and Cultural Environment:

Culture represents religion, language, upbringing and education of any human being.
Social Class comprises of Income, Occupation, location of residence etc.
In such an environment, it is crucial for businesses to fully understand the cultural
values of a society, especially where an organization is seeking to do business in a
country where social and cultural values keep changing in all areas and they are
given top priorities Every country is different and every country has a unique mindset.
These mindsets cast an impact on the businesses and the sales of their products
and services. The cultural implications, the gender and connected demographics, the

Page 6 of 6
International Business - Professor Natasha Bhamani

social lifestyles, the domestic structures; all of these are studied by companies to
understand the market and the consumer better.

4. Technological Environment:
The pace of technological change is becoming increasingly rapid and businessman
need to understand how technological developments will affect their businesses.
Technology changes every minute and therefore companies need to stay connected
along the way and integrate as and when needed. Also, these factors are analyzed to
understand how the consumers react to technological trends and how they utilize
them for their benefit.

5. Demographic Environment:
Demography is the study of populations in terms of age and gender composition.
Among the topics of interest to demographers are the age structures of a country,
the geographic distribution of its population, the balance between male and females,
and the likely future size of the population and its characteristics. Changes in the
size and age structure of the population are critical to many organizations. For any
business in any country, it is very important to understand the demographic
environment.

6. Legal Environment:
Legal Environment is the result of government intervention in the economic and
business spheres. A business has to operate within the framework of regulations
and legal provisions created by legal environment. Legislative changes occur from
time to time and many of them affect the business environment. For example, if a
regulatory body would set up a regulation for the industries, then that law would
impact all the industries and business that strife in that economy, therefore
businesses also analyze the legal developments happening in their environment.

Page 7 of 7