INTERNATIONAL BUSINESS

1. Meaning of International Business

2. Nature of International Business
3. Stages of Internationalization
4. Approaches of International Business
5. Advantages & disadvantages of International
Business
1. Meaning of International Business
International Business (IB) means carrying out business
transactions beyond the national boundaries or across political
frontiers of the country. Therefore, IB involves only ‘International
business transactions’ (IBTs) which are basically of two types:-

• International trade in goods & services ( Receipts & payments

arising from export & import of goods & services)
• International investments (Primarily in the form of FDIs leading to
international production & also indirectly funding businesses through
portfolio investments.)
Hence, the scope of ‘International business’ is wider than
‘International trade’ as it also includes those IBTs which arise from
‘international production’ by foreign firms.
 Foreign Direct Investment
• Investment in a foreign country by private foreign investor by setting
up a branch/ a subsidiary/ acquiring a joint venture in the recipient
country.( Unlike this, portfolio investment refers to investment in
which the investors of one country purchase stocks floated by
industries in other countries)

• Investors are governed by long term considerations as these

investments cannot be liquidated easily. ( Portfolio investors are
influenced by short term gains- They invest in stocks to get returns,
don’t have much control over the use of capital portfolio investments
& these investments can be liquidated fairly easily)

• Investors have direct responsibility associated with promotion &

management of the enterprise.( Portfolio investors don't have such
involvement with the promotion of the foreign company)

• Such investments comprises of- Investments as approved by SIA,

FIPB, RBI & investments by NRI’s. (Portfolio investments comprise
of GDRs, FCCBs & investments by FIIs)
 2. Nature of International Business
International business unlike domestic business involves
complexities as it involves a wide range of international business
transactions such as-
• Receipts & payments arising from export & import of physical
goods.

• Receipts & payments arising from export & import of services.

• Capital receipts & capital payments arising from investment of

capital in production of goods & services across national
boundaries.

• Business transactions relating to managing projects, running

processes, imparting training, maintenance & constructions etc.
• Dealings relating to intellectual capital like, patents, trade marks,
process techniques etc.
 Complex nature of international business
can be outlined as follows:-
• Firms engaged in international business need accurate &
timely information for effective decision making & gain
significantly from international trade & investments.

• Transactions in international business are carried in unfamiliar

conditions prevailing in the host countries.

• Transactions in international business are mostly intra- firm in

case of flow of intermediate goods & raw materials.

• International business is prone to risks mainly, political risks &

exchange rate risks finally leading to financial risk.

• Management strategies in international business regarding

finance & accounting, marketing, production are completely
different from domestic business.
 3. Stages of Internationalization
Kenichi Ohmae, the Japanese management expert & world famous
corporate & business strategist had identified 5 different stages of
development of a firm into a global corporation.
In the process of internationalization the firm gets transformed from a
domestic company to an international company & than to a MNC, a
global company & finally to a TNC. The stages are:-

• Stage 1 (Domestic company)- The domestic company starts to

sell outside its domestic market by linking up with the distribution
system & agents of the host countries.

• Stage 2 ( International company)- The company exports to

foreign markets by setting its own distribution centers & extends the
same domestic operations. (Extention strategy)
 Stages contd.
• Stages 3 (Multinational corporation) The company
formulates different strategies for different markets & starts
responding to specific needs of customers of different countries

• Stage 4 ( Global company) The company adopts global

marketing strategies & focuses on marketing the products globally.

• Stage 5 ( Transnational company) The finally moves

towards a genuinely global mode of operation by truly serving the
interests of the customers by being responsive to their needs.
According to Dr. Ohmae, being a TNC means ‘ insiderisation’ ,
believing in the motto “ Think globally but act locally”, being able
to understand & respond to the local customers’ needs by tailoring
the business system in each country to meet its customers’ needs.
 4. Approaches of International Business
As a company passes through the stages its approaches/ orientation
towards international business changes.
Douglas, Wind & Perlmutter advocated 4 approaches of international
business, under EPRG Model-
• Ethnocentric Approach (Home country orientation)
View- The product that succeed in home country would succeed
anywhere.
• Polycentric Approach (Host country orientation)
View- Each country is unique so each subsidiary to develop its unique
business & marketing strategies.
• Regiocentric Approach (Regional orientation)
View- Regions are unique & hence need integrated regional strategy.
• Geocentric Approach (World orientation)
View- The entire world as a potential market & strives to develop
integrated world strategies.
5. Advantages & Disadvantages of International
Business
ADVANTAGES of INTERNATIONAL BUSINESS-
• Profit advantage
• Growth opportunities
• Flow of ideas, goods, services & capital
• Increase in welfare of consumers by offering more choices
• Facilitates international mobility of factors of production.
• Flow of FDIs & technology transfers lead to increase in productivity
& efficiency
DISADVANTAGES/ PROBLEMS OF INTERNATIONAL BUSINESS-
• Political instability
• Exchange rate instability
• Trade barriers like tariffs & quotas
• Entry requirements by domestic governments.
• Bureaucratic malpractices & corruption in the host country.
• High cost of market surveys, quality upgradation etc. in case of IB.