International Business: Meaning, Reason, Scope, and Benefits
International business refers to those business activities that take place beyond the geographical boundaries of a country. It involves not only the international movements of goods and services but also capital, technology, IP like patents, trademarks, copyright, etc.
For example, India selling agricultural products to foreign countries is an international business. Advancements in technology and better communication facilities have increased international business with great success in various countries. International business provides a wide market range to organizations and gives them an opportunity to satisfy the needs of customers all over the world.
Reason for International Business
- Uneven Distribution of Natural Resources: Due to unequal distribution of natural resources, all countries cannot produce goods at a low cost. As a consequence, it has an impact on their productivity levels. Therefore, the countries with less quantity of a natural resource either purchase the resource or the actual product itself from the countries with an abundance of these. For example, crude oil is exported from the USA as it is found in abundance there.
- Availability of Productivity Factors: The numerous production variables, like labor, capital, and raw materials, that are required to produce and distribute diverse commodities and services are found in different quantities in different countries. It gives rise to buying and selling of productivity factors among the countries. For example, due to unemployment in India, foreign countries can employ labor at chap rates from India.
- Specialization: Some countries specialize in producing goods and services for which they have advantages such as education, favorable climatic circumstances, and so on. It results in the business between different countries for the purchase and sale of specialized products. For example, the Indian market specializes in handcraft products which increases its exports to other countries.
- Cost Advantages: Production costs vary according to geographical, political, and socioeconomic situations in different countries. Some countries are in a better position to manufacture certain commodities at a lower cost than others. Firms participate in international trade to purchase products that are cheaper in other countries and to sell things that they can supply at a lower cost. For example, China sells various goods at a low price to different countries all over the world because of the cost advantage.
Scope of International Business
The scope of international business is wider than domestic business as it includes the following:
- Imports and Exports of Merchandise: Merchandise refers to physical products, such as those that can be seen and felt. Therefore, imports and exports of merchandise mean the transfer or exchange of tangible goods from and to different countries of the world. It is also called trade in goods as it excludes buying and selling of services.
- Imports and Exports of Services: Imports and exports of services involve intangible goods that cannot be seen, felt, or touched. It is also known as invisible trade. Services such as tourism and travel, transportation, communication, etc. are imported and exported.
- Licensing and Franchising: Licensing is a contractual agreement between two firms, where the licensor (one firm) grants the licensee (another firm), access to trademarks, copyrights, patents, etc. in a foreign country in exchange for a fee. The fee charged by the licensor is known as royalty. For example, Microsoft grants a license to different companies in exchange for royalty.
Franchising is also similar to licensing. However, it provides services rather than access to patents, etc. For example, Subway has various franchises all over the world where it provides the same services to the customers.
- Foreign Investment: It means investing money into a foreign country in exchange for a profit. Foreign investment can be of two types Direct and Portfolio Investment.
Direct investment occurs when a firm invests directly in the machinery and plant in another country to produce and market goods and services in that country.
A portfolio investment is a foreign investment where a company buys shares of another company in a different country or lends money to another company. The return of portfolio investment is received in the form of dividends or interest respectively.
Benefits of International Business
Benefits to countries
- Foreign Exchange: It assists a country in earning foreign exchange, which may then be utilized to buy capital goods, technology, and other products from foreign countries.
- More Efficient Resource Utilization: It is based on the comparative cost advantage theory. It entails producing what your country can produce more efficiently and trading the surplus production with other countries to purchase what they can produce more efficiently. In this way, countries can make better use of their resources.
- Growth Possibilities and Job Opportunities: Countries can enhance their manufacturing capacity to supply commodities to other countries through external trade. If external trade holds, the production will rise, increasing the GDP level of the country, resulting in economic growth. With more production, the demand for more labor also rises. Therefore, the international business also creates job opportunities.
- Improved Standard of Living: International business allows individuals to consume goods and services from other countries. Consumption of a variety of goods and services improves the standard of living of the people.
Benefits to firms
- Profit Opportunities: When compared to local business, international business is more profitable. When domestic prices are lower, businesses can make more money by selling their products in other countries.
- Increased Resource Utilization: Many enterprises anticipate international growth and get orders from foreign clients to set up production capabilities for their products that are more in demand in the local market. It enables them to better utilize their excess resources.
- Growth Prospects: When demand falls or the domestic market reaches saturation point, business enterprises become irritated. By expanding internationally, such businesses can increase their growth potential significantly.
- Decrease Competition: When domestic competition is fierce, internationalization appears to be the only option to achieve success and required growth. Many businesses are motivated to expand into overseas markets because of the fierce competition in the domestic markets.
- Improved Business Vision: Many firms’ existence and goodwill depend on their ability to expand their worldwide business. The desire to expand and diversify, as well as to take advantage of the strategic advantages of internationalization, is expressed in the desire to become more international.