Manufacturing and trading beyond the boundaries of one’s own country are known as international business. International business is also called international trade. But this is partially true. No doubt, international trade comprises exports and imports of goods. However, the scope of international business has expanded significantly. International trade in services such as international travel and tourism, transportation, telecommunications, banking, warehousing, distribution, and advertising has increased significantly.
Other equally important developments are the increase in foreign investment and the production of goods and services abroad. The World Trade Organisation, established by the governments of various countries, is one of the major contributors to the expansion of intercountry ties and business relations. New methods of communication and the development of faster and more efficient transportation needs have enabled most countries to do their international business efficiently. The international business contributes to the development of both importing and exporting countries, which is why it holds great importance.
International Business
Concepts of International Business
Some of the important concepts of international business are discussed below:
Merchandise Exports and Imports: Merchandise refers to tangible goods, i.e., the goods that can be seen or touched. Now, if we talk about merchandise exports, it means sending tangible goods abroad. On the other hand, merchandise imports mean buying tangible goods from abroad.
Service Exports and Imports: Also known as invisible trade, involves the export and import of services. Services included are tourism, transport, communication, marketing etc.
Licensing and Franchising: Licensing is permitting another party in a foreign country to produce and sell goods under the home country's trademark, copyright or patent in lieu of some fees. For example, Pepsi and cola. Franchising is similar to licensing only but is associated with services, e.g., Mcdonald's.
Foreign Investment: Foreign investment refers to the investment of funds in foreign countries in exchange for financial return.
Importance of International Business
Through international trade, it becomes possible for people to consume goods and services of other countries and improve their standard of living.
International companies export goods and services around the world. This allows in earning valuable foreign exchange.
When firms get involved in external trade, it increases the firm’s production capacity. Due to the advantage of economies of scale, the cost of production decreases.
International business improves business vision and makes firms more competitive and diversified.
Types of External/International Trade
Export - It refers to selling goods and services to foreign countries.
Import - It refers to buying of goods and services from foreign countries.
Entrepot (Re-Export) - It refers to the import of goods not for consumption in the home country but for exporting them to another country.
Types of Trade
Benefits of International Business
The Importance of international business to nations and firms is discussed below:
1. Benefits to Nations
Earning of Foreign Exchange: It helps a country to earn foreign exchange and can be used to import capital goods, technology etc.
More Efficient Use of Resources: Every country has some resources, e.g., labour resources, technological capabilities, water resources, etc. So, countries can choose the goods they produce efficiently with their own resources and import the rest of the goods.
Improving Growth Prospects and Employment Potential: Through external trade, countries can increase their production capacity to supply goods to foreign countries.
Increase in the Standard of Living: Through international trade, it becomes possible for people to consume goods and services of other countries and improve their standard of living.
2. Benefits to Firms
Prospect for Higher Profit: If prices in the domestic market are low, then firms can sell their products in other countries (International market) where prices are high and can earn higher profit.
Increased Capacity Utilisation: When firms get involved in external trade, it increases the firm’s production capacity. Due to the advantage of economies of scale, the cost of production decreases.
Prospects for Growth: Firms can enhance or expand their business by approaching the international market.
Decrease Competition: If there is high competition in the domestic market, then companies can sell their products in the international market or in any other country where there is less competition.
Improved Business Vision: It improves business vision and makes firms more competitive and diversified.
Case Study
Sumit operated a small fireworks production unit. He exported about 70% of his products to the United States. He was associated with relevant government agencies that obtained export licences without following procedures. He was able to avoid paying the necessary excise duty. He hired immature and illiterate people, even children, from nearby huts. He provided poor workers with drugs, rations, and interest-free loans. He hired a teacher to teach the children in the evenings. As the economy grew, demand for the company's products increased by almost 20%. Due to increased profits, he decided to expand his business further. How has international business proved beneficial for companies like Sumit's? Explain.
Ans: International business has the following advantages for companies:
Higher Profit Prospects – Low domestic prices allow companies to make higher profits by shipping their products to high-priced countries.
Increased Production Capacity – Companies can plan to expand overseas and take orders from foreign companies to take advantage of excess manufacturing capacity and improve operating revenues. Large-scale production creates economies of scale, resulting in lower production costs and higher profit margins per unit.
Growth Prospects – As domestic demand saturates, companies can look to foreign markets where demand is strong and recovering rapidly, especially in developing countries. Businesses can greatly enhance their growth prospects by expanding into foreign markets.
Summary
The introduction to the international business started with companies increasingly making investments in foreign countries and undertaking the production of goods and services in foreign countries to come closer to foreign customers and serve them more effectively at lower costs. In conclusion, international business is a much broader concept that includes cross-border trade and goods and services production.
