International Business

What is International Business?

Cambridge dictionary defines international business as – “the activity of trading goods and services between countries.” However, international business is beyond this definition; it has a wide scope. International business also has its own advantages and disadvantages. In this article, let’s understand the different areas of international business.

International business is a cross-border transaction between individuals, businesses, or government entities. The transaction can be of anything that has value; examples include:

  • Physical Goods
  • Services such as banking, insurance, construction, etc.
  • Technology such as software, arms and ammunition, satellite technology, etc.
  • Capital and
  • Knowledge

For ease of understanding, the word “goods” in this article will include all of the items mentioned above. For regular commodities, we will be using the word “physical goods.”

Types of International Businesses

All the major types of international business conducted in the world can come under seven main types. These can also be termed as modes of business. Let’s look at each in detail –

Imports and Exports

The simplest and most commonly used method, imports and exports, can be seen as the foundation of international business. Imports are an inflow of goods into the markets of the home country for consumption. In contrast, export means selling goods to foreign countries. In short, imports means inflow, whereas export means outflow of goods in any form.

Licensing

Licencing is one of the easiest ways to expand a business internationally. When a company has a standardized product with ownership rights, it can use licensing to distribute and sell the products in the international market. Licenses come in many forms, some of which are patent, copyright, trademark, etc. Products such as books and movies are usually distributed internationally through licensing agreements.

Franchising

A very effective method to expand a business nationally and internationally, franchising is similar to licensing. In this, a parent company gives the right to another company to conduct business using the parent company’s name/ brand and products. The parent company becomes the franchiser, and the receiving company becomes the franchisee. Many of the biggest restaurant chains in the world have used the franchisee model to expand internationally. Some examples include – McDonald’s, Pizza Hut, Starbucks, Domino’s Pizza, etc.

International Business

Outsourcing and Offshoring

Outsourcing means giving out contracts to international firms for certain business processes, for example, giving out accounting functions to an international firm. This is usually effective when the cost of conducting these processes is comparatively much cheaper in some other country than in the home country. For example, many developed countries such as the USA, Australia, the UK, etc., outsource their functions to companies in India, China, etc., because it is cheaper.

Offshoring is similar to outsourcing in the sense that a function is moved away from the home country. However, it is different in the sense that the facility is physically moved to another country, but the management stays with the company itself. For example, Apple Inc. is conducting its manufacturing function in China. However, it is entirely controlled by Apple Inc.

Joint Ventures and Strategic Partnerships

A joint venture is a contract between two parties. One is an international company, while another company is local to where the business has to be conducted. Both parties contribute to the equity and management of the company. As a result, both share the profit as well. These parties can mutually decide the percentage of equity and profit-sharing.

These types of ventures and partnerships come into existence when both parties have something to offer. For example, the local company may have the brand name and network within the country, while the international company may have advanced technology. A classic example of a joint venture is the Tata Jaguar collaboration in India. Sometimes there are government restrictions on international companies against holding 100% equity in certain areas such as defense. In such cases, international companies can take the benefit from the new market through a joint venture.

Multinational Companies

As the name suggests, multinational companies are companies that are conducting business in multiple countries. They actually set up the whole business in multiple countries. Some such examples are Amazon, Citigroup, Coca-Cola, etc.

These companies have independent operations in each country, and each country has its own set of offices, employees, etc. In fact, even the products and marketing campaigns are customized as per local needs. For example, Nestle introduced a Matcha flavor Kit Kat in Japan as the flavor is very popular in that country. However, they don’t offer the same flavor in India. This customization is one of the many benefits of being a multinational company.

Foreign Direct Investment

Foreign direct investment is an investment made by an individual or a company located in one country to the business interest located in another foreign country. In this, the investing company usually commits more than capital; they share management, technology, processes, etc., with the company they have invested in. Foreign direct investments can take many forms, such as a subsidiary company, associate company, joint venture, merger, etc.

These are the major types through which people, companies, and governments conduct international business. However, means of business is just one minor speck of the international business environment.

One must consider many issues and challenges when setting up any business internationally. These factors include –

Factors to Consider before Starting International Business Operations

Geographical Factors

Simple challenges that come with the change in geography have to be studied when considering international business. There are differences in storage requirements, supply chain requirements, connectivity issues, etc., from country to country. Colgate-Palmolive will face a thousand challenges even before its soaps and shampoos can reach rural areas of India where there is a lack of basic necessities such as water, electricity, transportation, etc.

Social Factors

Social factors are very important in international business. It is very difficult to set up shops in politically disturbed countries or are going through some tensions. For example, most companies don’t want to expand their business in Afghanistan, as there is so much disturbance.

Every country has different laws and governing policies. A company should check all the legal requirements in the country where it wants to conduct business. The basic laws that need attention are organization laws, securities laws, consumer protection laws, employee protection laws, etc. The process can be lengthy, but it is necessary.

Behavioral Factors

Every country has different cultures and beliefs, and people can be very sensitive to these beliefs. An international company, if not careful, can land a lot of issues if they don’t take care of the country’s behavioral factors. For example, McDonald’s cannot sell its beef burgers in India; else, it will have to face the brunt of the Indian population that is majority Hindu.

Economic Forces

These factors include the county’s currency values, market size, cost, inflation, etc. These are important because it directly affects the profitability of operations. Every company should consider these factors before expanding internationally if they want to manage its bottom line.

All these factors mentioned above play an important role in how successful or unsuccessful an entity will be in its international business adventures. All these factors should be a consideration in the research and planning stage to get the maximum benefit out of it.

Also, read International Business Strategy.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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