International business refers to the business activities and operations outside the national boundaries. In international business, private organisations and governmental organisations engage in commercial and financial transactions. The objective of international business may or may not be profit making.
Some of the terms most frequently used in context of international business are as follows:
- International trade: International trade is different from international business. It refers to the exportor import of goods and services by a firm to or from foreign-based buyers or sellers.
- International marketing: It involves marketing of products and services of an organisation across borders. International marketing includes market identification, targeting, selecting preferred entry mode, deciding marketing mix and taking strategic decisions to compete in the international markets.
- Global business: A business that operates or does its activities in multiple countries in a highly coordinated manner and using a single strategy across the world is called global business.
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Participants in International Business
There are four types of participants in international business are:
- Focal firm: A focal firm is an initiator of international business transactions. For example, Multinational Enterprises (MNEs) and Small and Medium Sized Enterprises (SMEs) are focal firms which initiate and implement international business activities in manufacturing and service industries.
- Distribution channel intermediary: A distribution channel intermediary is a specialised organisation which provides distribution, logistics, and marketing services to focal firms involved in the international value chain on a contractual basis. These organisations are a part of international supply chain in the home country of focal firm as well as foreign countries. Distribution channel intermediaries include independent distributors and sales representatives who are placed in foreign markets.
- Facilitator: Facilitator organisations usually provide specialised services related to banking, law, customs clearance, market research, etc. The focal firms utilise the services of these facilitators to carry out their international business transactions. These facilitators are located in every country of the world. Examples of facilitator organisations include logistics service providers, freight forwarders, banks, etc.
- Governments: In international business, governments act as suppliers, buyers, and regulators. Most importantly, governments play an active role in regulating the international business by fixing tariffs and deciding the foreign trade policies.
Why Companies Engage in International Business
Different organisations have different reasons to engage in international business. However, the basic motives behind international expansion of businesses is categorised into three types are:
Market-seeking motives
Organisations usually seek markets in foreign countries due to two major reasons. Firstly, there may be presence of marketing opportunities due to life cycles. Secondly, organisations may seek foreign markets due to uniqueness of products and services. Businesses carry out marketing in foreign markets because of differences in the stages of life cycle for different products.
A product that is in the growth stage in one country can be in the decline stage in another country. At times, an organisation gauges that domestic market for a product or service has been saturated and in such cases, organisations can market their products or services in foreign countries by exporting or shifting its operations to other countries.
There are various products which are unique and indigenous to particular countries and organisations can market these products to foreign countries where they command very high prices. For instance, many organisations outsource their business processes to India.
Similarly, there are certain Indian items such as Hemp textile, Worn clothing, Organic products, Electronic Equipment, Ayurvedic products, Accessories, Handicrafts, Gaiters, Beverages, spirits, etc. which are in high demand in the USA and exported there.
Economic motives
There are three motives that can be categorised under economic motives for international business as follows:
- Profitability: The most frequent reason for international expansion of businesses is to earn higher profits. The higher profits are derived due to difference in prices of same products or services in different countries. At times, the home country government also motivates organistaions to increase exports by offering incentives.
Apart from incentives offered by the home country, the host country government also offers incentives for making foreign investments. At times, domestic organisations have technology to produce certain products but in order to utilise low cost and abundant supply of resources necessary for production, they set up production facilities in foreign countries.
Another reason for better profits in foreign markets is low level of competition in foreign markets. Governments of different countries knowingly impose high import tariffs to discourage imports and promote FDI in their countries. - Achieving economies of scale: Domestic organisations set up large production facilities in foreign countries (which might not be possible in their home country) having enormous capacities which help them in achieving economies of scale.
- Distributing R&D costs: Certain manufacturing organisations that produce products such as software, microprocessors and pharmaceutical products usually invest whopping amounts of money in their research and development. In order to recover such costs quickly and to take advantage of increased market size and to make profits, organisations expand internationally.
Strategic motives
There are two motives that can be categorised under strategic motives for international business as follows:
- Growth: There are various countries which have very small domestic markets and these markets get saturated quickly. Therefore, organisations from such countries need to expand internationally in order to access markets and earn profits. On the contrary, there are various countries that have large markets owing to their size or population such as US, China, and India and the organisations of such countries get a lot of opportunities to sell in their domestic markets.
- Spreading risk: At times, international expansion is used by organisations as a risk management tool. Expansion usually reduces the dependence of the organisation on single market and also offsets the risks of domestic markets.
EPRG Framework
The acronym EPRG stands for Ethnocentric, Polycentric, Regiocentric, and Geocentric. In 1969, Howard V. Perlmuter, Wind and Douglas proposed this framework. This framework is used by organisations in process of internationalisation. It also helps companies in viewing different international management orientations.
This framework focuses on the international marketing operations of an organisation. This framework is used by organisations to describe organisations’ attitudes with respect to international markets and related marketing practices.
In addition, it also gives an idea of the kind of relationship that exists between an organisation’s headquarters and its subsidiaries.
There are four management approaches under the EPRG Framework. An organisation can use any of these approaches to set the tone for its international business substantially. In other words, the EPRG Framework helps an organisation in deciding which approach will have them in achieving success in foreign countries.
There are four international orientations in the EPRG framework and an organisation can operate in international markets using any of the four orientations.
Ethnocentrism
The ethnocentrism approach is used by domestic organisations that want to engage in international business but do not want to put much effort in research in the foreign country’s market. As per this orientation, the management of an organisation perceived that the marketing practices followed in the domestic market will also prove successful in foreign markets.
The organisation seeks to find such a foreign market which has similar characteristics as that of domestic market which ensures that the organisation does not require to adapt its marketing strategy for the foreign country. This orientation looks upon foreign markets as extended domestic market.
Such organisations conduct all their planning and strategising for their foreign market operations from their headquarters in the home country. The organisation usually offers same products and services or products with low level of differentiation. Also, it uses similar pricing and promotional strategies.
Ethnocentrism is useful as there is a good coordination between the home country and the host country. All the marketing decisions are taken centrally for the domestic and international markets. This orientation helps the organisation in saving costs as it does not require to hire specific top-level managers for foreign markets. The most important aspect of this orientation is that the domestic country can maintain effective control over the operations of the foreign subsidiaries.
Polycentrism
Polycentrism orientation states that all markets of the world are different from one another and have their own needs. Under this approach, the domestic organisation gives its foreign subsidiaries freedom and autonomy to develop their own marketing and operational plans. Organisations hire top managers from host countries who engage in decision making.
Polycentric organisations have a local headquarter in home country and separate local headquarters in host countries. The local headquarters managelocal operations. The local headquarters develop market specific strategies for fulfilling the local needs. In short, it can be stated that polycentric organisations implement different marketing strategies for different markets.
Polycentric approach helps an organisation in making market specific strategic decisions based on the existing cultural and political differences. Due to decentralised decision making, it is easier for such organisations to adapt to changes.
Although this orientation has various advantages, it also has some disadvantages. The home country headquarter has very less control over the operations of foreign subsidiaries. Also, the cost of marketing is high for polycentric organisations as they have to develop market-specific marketing strategies.
Regiocentric
In regiocentric organisations, the management views different regions as being different markets. In this orientation, different regions having similar marketing characteristics are considered as single market irrespective of the national boundaries.
The domestic organisation can use their home country marketing strategies in all such regions. The organisations determine the economic, social and political similarities between domestic and foreign regions. Also, they can satisfy similar needs and demands of the customers.
Geocentric
In geocentric organisations, the management views the entire world as a single market. Such organisations take a world-oriented view and believe that they can use one type of strategy for all countries irrespective of their differences in culture. Regiocentric organisations develop products and services that suit both the national and international customers.
In case of the ethnocentric approach, the organisation sells their product or service in foreign markets as much they do in domestic markets. However, contrary to this, the organisations using geocentric approach proactively adapt their products and services to meet global needs.
This approach minimises operational costs as products and services are modified minimally. This helps organisations in achieving economies of scale. Such organisations use a combination of ethnocentric and geocentric approaches. It is the most agile orientation and it creates a win-win approach for the organisation and the international markets both.
Entering International Markets
Most organisations aspire to internationalise their operations. However, before they enter foreign markets, they must determine the mode of entering the foreign market. It is essential for them to evaluate all the pros and cons or the advantages and limitations of each mode of entry before entering a foreign market.
Exporting
Exporting supports an organisation to increase its business in the international market by selling its goods and services there. Exporting is of two types, namely direct and indirect exporting. In direct exporting, sellers and buyers from different countries comes in direct contact with each other.
On the other hand, in indirect exporting, a distributer from the home country becomes a mediator for sellers and customers from other countries. Exporting has two benefits. Firstly, the cost of establishing operations in a foreign country is not involved. Secondly, the economies of scale can easily be determined by organisations as products are manufactured at the centralised location and then sold globally.
However, exporting has some limitations, which are as follows:
- Involves high transportation costs Rigid quality requirements Involves only limited control over the marketing and distribution of products globally
- Involves difficulties in exporting a product whose substitute is already available in the foreign market
- Involves difficulties in modifying products
Licensing
When one organisation permits another organisation to use its particular form of intellectual property, under clearly defined conditions, it is called licensing. An organisation whose intellectual property is protected by a patent, trademark or copyright, can license it to a third party. Licensing is a very effective way of profit earning for intellectual property-rich organisations.
For example, Siebel Systems granted permission to other organisations for using its software that tracks customer’s behaviour. Siebel has earned nearly 40% of its revenue by licensing the software.
A licensing agreement is made between the licensee and the licensor that contains all terms and conditions of a license. The organisation that receives the permission to use intellectual property is called a licensee, whereas a licensor is the one that grants permission.
One of the effective ways of earning income for the organisation is licensing as the licensee pays a certain initial amount to get authorisation and constant royalty to use the intellectual property. Licensing is a cost effective option for the licensor to expand its geographical dimensions. Apart from this, another added advantage of licensing is that the risk associated with the intellectual property is shared by both the licensee and the licensor.
However, there are some limitations of licensing, which are:
- The licensor does not have any control over the product manufacturing.
- The licensee manufactures products, which means very less benefit of the economies of scale.
- Profit is shared between the licensor and licensee which means very less returns.
- High risk of imitation of technology by the licensee.
Franchising
Franchising is an approach that is generally employed by service organisations. The franchisee gets the right from the franchiser to sell his/her products and services. The costs and risks involved are borne by the franchisee for setting up the operations in the foreign market. The benefits of franchising and licensing are similar.
The major drawback of franchising is a lack of quality control. This is because the large number of franchisees and their geographic distance from the franchisor make it difficult to maintain quality. McDonald’s and KFC are the examples of franchising.
Mergers and Acquisitions
The strategies adopted to expand the scope of business for an organisation come under mergers and acquisitions. A merger takes place when two or more organisations combine by dissolving their assets and liabilities to form a new business entity. It is also referred to as an agreement in which one organisation attains the assets and liabilities of the other in exchange for shares or cash. Thus, in merger, an organisation’s resources are pooled together to create a competitive advantage.
On the other hand, gaining partial or full control of one organisation by another is considered as acquisition. Mostly, acquisitions are not friendly in nature as one organisation tries to take over another organisation by adopting unfriendly measures, which may not be in the interest of the acquired organisation. Mainly, mergers and acquisitions are done to increase market power and gain synergy of organisations.
There are various types of mergers that help in expanding the size of organisations.
- Horizontal mergers: These mergers take place when two or more organisations of the same trade merge to form a bigger entity. Since the merged organisationis created by merging two entities, the scale of operations of the merged entity is quite large. Resources and skills of organisations are shared by merging horizontally.
For example, two organisations manufacturing computer hardware may be merged together to create a large entity with enhanced scale of operations. An example is the integration of Facebook, Whatsapp, Instagram and Messenger. - Vertical mergers: These mergers take place between two or more organisations having different phases of business in the same industry.
For instance, organisation A, which is a manufacturing concern, merges with organisation B, which serves as the sales representative body for organisation A. The advantages of vertical mergers include reduced communication cost, synchronised production, better inventory planning, and so on. An example is Walt Disney and Pixar. - Concentric mergers: These are mixtures of two or more related organisations with similar production or distribution technologies. For example, a merger between a motorcycle manufacturer and a car manufacturer.
An example is Citicorp and Travelers Group merger. - Conglomerate mergers: These mergers denote a situation where two or more discrete organisations merge horizontally or vertically. For example, the merger of a fast-food outlet with a cloth manufacturing organisation is a conglomerate merger. An example is L&T and Voltas merger.
Mergers and acquisitions happen to achieve the following results:
- Increase the value of the organisation’s stock
- Accelerate the growth rate by making strategic investments
- Increase the number of product lines
- Reduce competition
- Gain advantage from tax discounts and benefits
- Ensure optimum utilisation of organisational capabilities
- Explore new markets for increasing market share
Joint ventures
Joint ventures refer to the formation of an entity by combining two or more organisations that want to achieve similar objectives for a specific time period. In other words, two organisations enter into a cooperative business agreement to fulfil their mutual needs. The joint venture strategy allows organisations to share their technical skills and explicit knowledge and represents a potential source for the growth of organisations. In addition, it is very useful for organisations going global.
An organisation can enter into a joint venture in the following situations:
- When performing an activity is uneconomical for an individual organisation
- When the risks of business are collective and reduced for participating organisations
- When the unique skills of organisations can be brought together
- When setting an independent organisation requires overcoming difficulties, such as tariffs and import quota
A rich organisation may enter into an agreement with an organisation having technical know-how but lacking in funds. According to Friedman, 50% of joint ventures take place for the purpose of knowledge acquisition. It is because every organisation would like to apply the knowledge gained from one project in other projects. Thus, it can be said that attaining knowledge is one of the reasons to enter into joint ventures.
The other reasons for the growth of joint ventures are as follow:
- Sharing technical and management skills
- Expanding the business by investments sharing
- Spreading the risk involved in the project
- Gaining access to distribution channels or raw materials supply
- Simplifying tax-related matters
- Gaining access to foreign technology
Although joint ventures have many benefits,there are various reasons due to which they may not be able to realise the desired goals.
The reasons for the failure of joint ventures are as follows:
- Failure of organisations on control sharing or compromising on difficult issues
- Inadequate planning for joint ventures
- Managers possessing expertise in one organisation refuses to share knowledge with their counterparts in other organisation of the joint venture
- Failure to achieve consensus to meet the basic objectives of joint ventures
- Lack of obligation and time in implementing joint ventures
Joint ventures can be a risky but gratifying strategy, if the concerned organisations match their thought process to achieve common objectives. Organisations entering into joint ventures should work together for a successful partnership for both the organisations.
Strategic Alliance
Strategic alliance allows organisations to share risks and resources. It is a partnership between the home country organisation and the international organisation. Every partner possesses knowledge and resources and tries to learn new skills. Strategic coalition develops core proficiencies that contribute to the goals of an organisation.
Generally, organisations form strategic coalition to gain technical skills and knowledge. However, all coalitions cannot be successful and the foremost reason for their failure is the conflict among partners and difficulty to manage the coalitions. The difficultly may also arise if the cultures of organisations entering into a coalition do not match with each other.
In order to gain a competitive advantage, organisations enter into a strategic alliance with their suppliers or competitors. These alliances facilitate organisations to enter new markets, block competitors, and generate higher profits.
The benefits of strategic alliances are as follows:
- Helping organisations to enter new markets by establishing partnerships with other organisations
- Reducing manufacturing costs by pooling resources and efficiently utilising them
- Developing technological proficiency by sharing technological knowledge
There are four types of strategic alliance, which are discussed as follows:
- Procompetitive coalition: This involves a relationship within the industry coalition, such as manufacturers, suppliers or merchants. These coalitions offer the benefits of vertical incorporation.
- Non-competitive coalition: This involves intra-industry partnerships between non-competitive organisations. In non-competitive coalition, the areas of activities of organisations do not overlap each other. Thus, there is no competition among them.
- Competitive coalition: This involves a partnership between two or more competing organisations. There can be an intra-industry or inter-industry competitive coalition. Many foreign organisations enter into strategic coalition with local competitive organisations.
- Precompetitive coalition: This implies partnerships between two or more organisations from discrete industries. This alliance is formed to work on different activities, such as new technology development, new product, or new idea. Combined research and development activities are examples of pre-competitive coalition.
According to Hamel and Prahalad, organisations form strategic alliances because of the following purposes:
- Risk and cost sharing is associated with the development of new products or processes. For example, the coalition between Boeing and a number of Japanese organisations to build 767 aircraft was the Boeing’s attempt to share the manufacturing cost of aircrafts.
- Skills that cannot be developed self-sufficiently are united. For example, in 1990, AT&T collated with NEC Corporation of Japan to trade technological skills. AT&T gave NEC a computer-aided design technology, while in return NEC gave AT&T access to advanced computer chips.
- To gain an easy entry into foreign markets. For example, entering the Japanese cellular phone market was difficult for Motorola because of high trade barriers. Thus, it formed a coalition with Toshiba of Japan to build microprocessors.
The demerit of the strategic coalition is that it gives competitors a cost-effective route to enter new technology and markets.
Turnkey Projects
Turnkey projects are the projects undertaken by foreign organisations based on the principle of build, control and transfer. It is an alliance in which one organisation is completely responsible on behalf of a client organisation to set up a new organisation, starting from the infrastructureture planning till the training of employees. After the completion of a project, the newly set up organisation is handed over to the client organisation for starting actual operations.
For example, a contractor hands over a hospital installed with high technology medical equipment to the owner after completion.
Contract Manufacturing
Contract manufacturing implies a coalition in which the production of goods is subcontracted to some other organisation. One organisation chooses the design and specifications but another organisation produces. For example, Nike follows the strategy of contract manufacturing where it decides the designs, but the manufacturing of the product is outsourced to another organisation.
Wholly Owned Subsidiary
Wholly owned subsidiary refers to the most expensive mode of global entry. Under this, a parent company acquires a company which becomes its subsidiary. It is also called Greenfield venture. The main advantage of establishing a wholly owned subsidiary in a foreign country is that it gives restricted control to the organisation in handling operations.
However, this mode of entry involves high costs as an organisation may have to attain particular skills, awareness, and proficiency to set up operations aboard. It is suggested that strategic alliances should be preferred in a country if the risk of establishing a subsidiary is high. LG and Samsung are examples of organisations that set wholly owned subsidiaries in India.
When a company purchases or leases any existing production facilities in another country to start its operations; it is called brownfield entry.