Definition of International Business
International business is the performance of business activities across national boundaries that’s internationally. Every nation in the world participates in international business to some extent. Large companies as well as smaller firms sell their products throughout the world. Involvement in international business has increased steadily since World War 2.
Why Firms Conduct International Business:
A country with a surplus of some product may decide to sell this surplus to other nations. Such sales will enable the country to purchase other products that it may not have the ability to produce. Thus scarcity of resources is perhaps the major reason why nation trade or business with each other. No nation has all raw materials. No nation can produce everything it needs. Most nations specialize in producing a particular goods and services.
A nation has an absolute advantage if it can produce a product more efficiently than any other nation. South Africa has an absolute advantage in the production of diamonds. Absolute advantages are rare because usually at least two countries can efficiently supply a specific product.
A nation has a comparative advantage if it can produce one product more efficiently than other products, in comparison to other nations. China and South American countries have a comparative advantage in producing labor intensive products such as shoes and clothing. Many nations become involved in international business because they have a comparative advantage.
Basic Concept of International Business:
1.Exporting and Importing
2. Balance of Trade
3. Balance of Payments
4. Exchange Rates
Exporting and Importing:
Exporting is selling domestic made goods in another country. Importing is purchasing goods made in another country. No doubt you realize that the U.S. imports variety of products: oil, clothing, automobiles, steel, and paper. But U.S. exports are on the raise. U.S. firms export such products as machine tools to Germany, shoes to Italy.
Balance of Trade:
Balance of trade is the result of importing and exporting. A country’s balance of trade is the difference (monetary term) between the amount it exports and the amount it imports. A nation that exports more than it imports maintains a favorable balance of trade. A nation that imports more than it exports has an unfavorable balance of trade or trade deficit.
Balance of Payments:
A country’s balance of payments is the total flow of money into and out of the country. The balance of payments is determined by a country’s balance of trade, foreign aid, foreign investments, military spending, and money spent by tourists in other countries. A country has a favorable balance of payments if more money is flowing in than is flowing out; an unfavorable balance of payments exists when more money is flowing out of the country than in.
The rate at which one country’s currency can be exchanged for that of another country is called the exchange rate. For example, 1 U.S. dollar exchanged for 1.15 Canadian dollars. Governments and market conditions determine exchange rates. Devaluation by its government reduces the value of a nation’s currency in relation to currencies of other nations.
Barriers to International Business:
To enter international business faces several obstacles. Most common barriers to effective international business: cultural, social, political, and tariff & trade restrictions.
Cultural and Social Barriers:
Culture consists of a country’s general concepts and values and tangible items such as food, clothing, and buildings. Social forces include family, education, and religion. Selling products from one country to another is sometimes difficult when the cultures of the two countries differ significantly. Some countries also have different values about spending than do Americans. The Japanese have long been a nation that believes in paying cash for the products they buy, although the use of credit cards has soared in Japan.
Social forces can create obstacles to international trade. In some countries, purchasing items as basic as food and clothing can be influenced by religion. Some societies simply do not value material possessions to the same degree that Americans do.
Most firms know the importance of understanding the cultural and social differences between selling and buying countries.
The political climate of a country can have a major impact on international business. Nations experiencing intense political unrest may change their attitude toward foreign firms at any time; this instability creates an unfavorable atmosphere for international trade. The greatest risk for international firms is in politically unstable areas of the world such as Middle East, Africa. U.S. and Japan are more attractive because their political stability.
Tariffs and Trade Restrictions:
A nation can restrict trade through import tariffs, quotas and embargoes, and exchange controls.
Import tariffs is tax, levied against goods brought into a country is an import tariff. Tariffs can be used for, to discourage foreign competitors from entering a domestic market. Some Americans have called for high tariffs on Japanese products such as cars and stereos.
Quotas and embargoes is a quota is a limit on the amount of a product that can leave or enter a country. Some quotas are established on a voluntary basis. Generally, voluntary quota fosters goodwill and protects a country from foreign competition.
An embargo is the total ban on certain imports and exports. Many embargoes are politically motivated, such as the United Nations embargo of goods to Iraq after that nation invaded Kuwait in 1990.
Exchange Controls: Restrictions on the amount of a certain currency that can be bought or sold are called exchange control. A government can use exchange controls to limit the amount of products that importers can purchase with a particular currency.
Regulation of International Business:
We look at major legislation and organizations that have been developed to regulate international business.
Legislation is law, that is
- Wabb-Pomerene Export Trade Act (1918)
- Foreign Corrupt Practice Act (1978)
- Export Trading Companies Act (1982)
International organizations exist to facilitate world trade. That mentioned below:
GATT: An international organization formed to reduce or eliminate tariffs and other barriers to international trade. GATT signed in 1947, formed an international organization of 23 nations, including the United States. Now nearly 100 countries agree to the guidelines established by GATT.
Below Organizations That Facilitate International Business:
- GATT (General Agreement on Tariffs and Trade)
- EC (European Community)
- LAFTA (Latin American Free Trade Association)
- EFTA (European Free Trade Association)
- OPEC (Organization of Petroleum Exporting Countries)
- IMF (International Monetary Fund)
- WB (World Bank)
This organization formed to facilitate the movement of products among member nations through the creation of common economic policies, is called an economic community. The European Community (EC) is the largest, formed in 1957. EC is to reduce trade barriers among the 12 member nations: Belgium, France, Denmark, Germany, Greece, Italy, Ireland, Luxembourg, Netherland, Portugal, Spain, and UK.
IMF and World Bank:
The International Monetary Fund (IMF) was founded in 1944. IMF is to promote cooperation among member nations by eliminating trade barriers. IMF lends money to countries that need short term loans to conduct international trade.
The World Bank was formed in 1946. WB is to lend money to underdeveloped and developing countries for various projects. The WB makes loans to member nations to fund the development of roads, factories, and medical facilities.
Approaches to International Business:
When a firm decides to enter international business or trade must select an approach. Approaches to international business include:
- Joint Ventures
- Trading Companies
- Direct Ownership
- Multinational Corporations