Factors Leading To Growth In International Business Commerce Essay

International business is defined as the transactions that are carried out across national borders to fulfill the objectives of individuals, companies and organizations. The different modes by which international business is being done are import-export trade, foreign direct investment, licensing, franchising and management contracts. Over the last five decades international trade and investment have grown faster than the domestic economies. International business facilitates flow of idea, services and capital across the globe. The result is higher levels of innovation, faster dissemination of goods and information worldwide, more efficient use of human capital and improved access to financing (Czinkota, Ronkainen and Moffett, 2009).

1.1 Brief History of International Business

International business is not a new phenomenon but has been practiced around the world for thousands of years. Through the routes established in the Mediterranean, the Phoenicians, Mesopotamians, and Greeks did trading. As sophisticated business techniques emerged, facilitating the flow of goods, resources and funds between countries flourished. This growth was further stimulated by colonization activities. The Industrial Revolution stimulated the growth of international business by providing methods of production for mass markets and efficient methods for utilizing raw materials. The inventions and technological developments from Industrial revolution further accelerated the smooth flow of goods, services and capital between the countries. The production grew at unprecedented levels by 1880’s as the industrial revolution was in full swing in Europe and in the United States. Growth continued in an upward spiral as mass production was realized and the manufactures were pushed to seek foreign markets for their products. This marked the emergence of multinational corporations. (Ajami,Cool, Goddard and Khambata, 2006)

2.0 Factors leading to Growth in International Business

2.1 Development and expansion of technology

The introduction of telegraph in 1837, the telephone in 1876, the wireless in 1895, the aero plane in 1903, the television in 1926, the liquid fuelled rocket in 1927, the coaxial cable in 1930’s and digital computer in 1946 were all the key events that triggered the growth of international business. Next to air transport, electronic communication, digital information processing has been the other principal area of technological innovation. All these technological advancements provided the platform for companies to set off increased number of international business activities. (Marios Katsioloudes, Spyros Hadjidakis, 2007)

2.2 Liberalization of cross border activities

The governmental barriers for international business have been lowered after the Second World War. The European Union, NAFTA, ASEAN and other regional economic blocs throughout the world provide fewer restrictions on cross border movements. The European Union was awarded the Nobel prize for peace 2012 in recognition for its constructive handling of peace, improving relations between nations through trade, reconciliation and human rights in Europe over the past six decades. (Europa.eu, 2012) The European commission president Jose Manuel Barrosa at the outset of receiving prize said that, “we honor this prize and will preserve what had been achieved. This achievement will propel the quest for shaping a better organized world with the values of freedom, democracy and human rights.”(Guardian.co.uk, 2012)

2.3 Development of supporting services

Governments and companies have developed services that facilitate further international business. For instance Mail, which is a government monopoly, could be transferred by an airline other than that of the country of origin, could go through many different countries before reaching the final destination with the stamp of the country of origin. Also banking institutions have developed effective and efficient means for companies to receive payment for their foreign sales. The banks can assist in the payment of any currency through various international transactions upon the receipt of goods /services. (Katsioloudes and Hadjidakis, 2007)

3.0 Distinctive elements of international business

The four distinctive elements of international business are:

Globalization

International Business Environment

Unique Culture

International Business Management

3.1 Globalization

People around the globe are more connected than ever before. Goods and services produced in one part of the world is increasingly available in other parts of the world. This phenomenon is termed as “globalization.” Globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has two components which are globalization of production and globalization of markets. (Aswathappa, 2009)

Globalization of markets refers to the merging of separate and distinct market place into a single market. (Subba Rao, 2009). The global acceptance of consumer products such as Sony Walkman, Coca-Cola, Levi’s Jeans, Citicorp Credit Cards, MCDonald Hamburgers are all considered as prototypical examples of this trend. By offering a standardized product worldwide they are helping to create a global market. ( Katsioloudes and Hadjidakis, 2007)

Globalization of production refers to the tendency among firms to source goods and services from locations around the world to take global advantage of national differences in the cost and quality of factors of production. (Labor, land, energy and capital) Companies hope to lower overall cost structure by doing so. For example, Boeing company’s jet airliner 777 has 132,500 component parts which are produced around the world by 545 suppliers. (Katsioloudes and Hadjidakis, 2007)

3.2 International Business Environment

The international business environment is highly characterized and influenced by

International Politics

International Culture

International Trade

International financial markets and Institutions

3.2.1 International Politics

International politics is a primary concern for Multi National Enterprises. (MNE’s) The past two decades have witnessed dramatic change in their political systems. Most of the countries in the Eastern Europe, in the Americas’ are building market economies in varying degrees. MNE’s feel more confident in starting up their operations in market driven economy as they are endowed with more freedom to fix prices and more liberty in carrying out their business operations. Until MNE’s feel that the government is willing to take the steps necessary to ensure that promises are kept and they are able to repatriate their funds, they are going to proceed very cautiously with their investment plans. (Rugman and Collinson, 2006)

3.2.2 International Culture

Despite the various patterns and processes of globalization, Cultural awareness is a very important aspect for MNE’s when it operates in international arena. As an example, the culture, beliefs and etiquettes which are followed in the India is entirely different from that of the western world and the companies and persons who are involved in businesses in India should comprehend the Indian culture to its full extent. ‘When going to a business meeting in India, bring family photos. Indians enjoy talking about each other’s families, which is seen as building trust and rapport before doing business. ‘(Czinkota,Ronkainen and Moffet, 2009)

Real Business Case – Saudi Arabia: Many organizations from foreign countries entered into the Saudi Arabian market following the crisis it faced in 1970’s. But not all were successful as they failed to understand the Saudi Arabian culture. A major U.S security company won a large contract to install security system for a client in Saudi Arabia. The troubles started when the shipments from the U.S. which landed in Saudi Arabia were not released by the custom officials. The reason behind the detainment of the shipments was that the security devices were wrapped in newspapers which contained fashion photographs of scantly claded women. This offended the cultural sensitivities of the officials of a nation in which majority of the women wear a long garment called ‘Abayah’. (Misra and Yadav, 2009)

3.2.3 International Trade

International trade is a broad term, which includes all commercial transactions that take place between nations. Multinational companies are major players in international trade and account for the major proportion of International trade. Some classic examples for international trade are, Ford which makes gear box in its factory in Bordeaux and exports it to assembly plants in different EU countries. Spain depends upon Nigeria, Algeria and Libya for 99% of its natural gas requirements. (Misra and Yadav, 2009)

3.2.4 International Financial Markets and Institutions

Irrespective of whether a company or bank engages in international trade, it is important that its managers understand some key aspects of international financial markets. The euro currency market, international monetary system, the foreign exchange market all influence the functioning of markets for goods and services. The euro currency market may offer a low cost borrowing opportunity; the international monetary system may set a framework that may affect many firms and the foreign exchange market determines the cost and availability of foreign currencies used in business by many firms. (Misra and Yadav, 2009)

3.3 Unique Culture

International business and its by product globalization will ensure and enforce a unique culture around the globe. For example, Pizza which has had its origin in Italy is now widely accepted and consumed all around the world thus integrating the culture and bringing about a unique food culture. Similarly Indian costumes are in high demand these days in the U.S and Europe. So international business is bringing forth a common culture which brushes out all national and cultural barriers. (Ashwathappa, 2009)

3.4 International Business Management

International business management is all about developing business operations on an international scale. (Coade,1997). The key features of international business management are:

The elements of market analysis which are required to start business operations overseas.

Guidance on how to influence the international strategy on business

Construct a dynamic market entry strategy

Easy ways to search for a competitive advantage

4.0 Why do companies go international?

The desire to expand sales and revenue to acquire inputs at least cost and to minimize business and financial risk through geographic diversification has led to the growth of MNC’s. The factors that led the companies accelerate their business activities worldwide are:

Minimize competitive risk

Expand sales

Acquire resources

Cost

4.1 Minimize Competitive Risk

Companies seek to have global presence for defensive reasons. The intense competition between companies in the domestic market incites companies to have global operations.

Real Business Case – Tata Motors: Since early 1990’s India have been witnessing strong waves of liberalization, privatization, and globalization. The automobile giant in India, Tata motors realized that if it wants to grow then it cannot afford to have business solely to the fortunes of one country as automotive business is highly competitive and the competitiveness depends on the quality, economies of scale and efficiency can be improved if the organization enters foreign market. The senior management of Tata Motors where left with the question “whether they should remain as an exporter of vehicles which they were doing since 1961 or to enter into the international market which can compete with the best in the business.” The answer they have zeroed in was to widen its business operations than just exports (Misra and Yadav, 2009).

4.2 Acquire Resources

Another important motive of companies to set for international business is to acquire resources such as raw materials, capital, products, technology, products or services. The reasons for it would be:

Non-Availability of resources in the home country.

High prices of resources in the home country.

To seek resources of better quality/standard.

Real Business Case – Philips: Cheap labor in China brought Philips to China. In 2002 Philips had 23 factories in china which were either wholly owned or joint ventures. Two third of the company’s export products were from these plants. According to Gerard Kleiterlee, the president and CEO of Philips Electronics, ” China is the second largest market for Philips Surpassing Germany in the last quarter of 2009. We are one of the largest multinationals in the country operating in 600 Chinese cities and employ 15000 people.” (Philips.com, 2009)

4.3 Minimize Risk

Organizations always want to minimize the risk by minimizing the swings in sales and profit. Companies try to mitigate the vulnerability to a single economy by having a broader base in multiple geographies.

Real Business Case – Nestle: In 2001, Nestle witnessed slower growth in Western Europe and in the U.S. but this was offset by higher growth in Eastern Europe, Latin America and Asia. According to Peter Brabeck , Vice chairman and CEO of Nestle, ‘ Nestle has delivered a good performance by any measure in the first half of 2002 demonstrating its capacity for growth and performance improvement even in a difficult global environment” (Nestle, 2002).

4.4 Cost

Cost aspect is a significant motivation for organizations to have inclination towards global business. Many organizations go in for international business to become more competitive internationally by reducing their costs.

Real Business Case – Toshiba: The manufacturing of Toshiba laptop is dispersed geographically where the mix of factor costs and skills are most favorable. The manufacturing of laptop components such as memory chips and display screens take place in Japan, microprocessors and hard drives made in the U.S. and finally assembly takes place in Singapore from where it is shipped to the U.S, Western Europe and Japan. (Toshiba.com, 2009)

5.0 Global Trends shaping International Business

5.1 Emerging markets increase their global power

Emerging markets are viewed as the worlds’ economic growth engine. The emerging markets where once seen as home for natural resources, cheap labor and low manufacturing cost. But now these emerging markets are seen as promising markets as they are having rapid population growth, sustained economic development and growing middle class. It is expected that BRIC nations (Brazil,Russia,India and China) would account for 50% of global GDP growth by 2020. (Ernst and Young, 2012)

5.2 Cleantech become a competitive advantage

Most of the governments and organizations around the world are very well aware about the carbon emissions and its repercussions. The cleantech enabled transformation to a low carbon, resource efficient economy will be the source for next industrial revolution. China, India, Brazil and Germany are gaining advantage in solar, wind, biofuels for its energy requirements. (Ernst and Young, 2012)

5.3 Global Banking sees recovery through transformation

The financial institutions all around the world are forced to have regulatory changes following the global economic slowdown. (Ernst and Young, 2012)

The final shape of global regulatory framework is still not clear but the international banking will change tremendously in following fundamental ways:

Heightened corporate governance

More restrictions on priority trading, investments in hedge funds and private equity funds.

Executive pay will be limited.

More focus on consumer protection.

5.4 Demographic shifts will transform global workforce

Even though the global population is on a rise, the availability of skilled workforce is shrinking. The data suggests that the demographic divide will arise between countries with younger skilled population and aging shrinking workforce. The war for talent will be intense in areas which require higher skill levels and education. (Ernst and Young, 2012)

5.5 Rapid technology innovation creates a smart, mobile world

Last twenty five years have been marked by digital revolution and it has changed the way we work and communicate. Yet the consumers want more powerful devices and applications, meanwhile businesses are looking for cost-effective technology. Still there is room for greater innovation in the areas of business intelligence, smart devices and cloud computing which would revolutionize the whole process by which international business is being carried out. (Ernst and Young, 2012)

6.0 Conclusion

From daily bread to fuel, cosmetics to cars, entertainment to essentials, it is hard to see a product without having the label of a foreign brand. In fact international business has transformed our lifestyle, culture and tastes. It has to be noted that the positives of international business is overarching than the negatives. International business has served as a bridge for the developing nations to attain the status of developed nation, for underdeveloped nations, it is a ray of hope and for the developed world it is a means to further extend their business operations and supremacy. The good, international business has done to the human kind can never be estimated and the history has proved that the international business activities were blossomed when peace existed between nations. Thus international business can be viewed as symbol of prevailing peace, prosperity and general well being of mankind.