What is International business?

International business is the business that takes place outside the nation’s geographical boundaries or across the national frontiers. It involves not only the international movements of goods and services but also capital, personnel, technology, and intellectual property like patents, trademarks, know-how, and copyrights.

Structures of International business

Every company has to pass through the following stages in international business:

• Domestic company
• International company
• Multinational company
• Global company
• Transnational company

1. Domestic company

Companies that operate their business solely in one country or within the boundary of one country are called domestic companies. Every company is a domestic company before becoming a multinational company. Domestic companies follow the political system of one country. Domestic companies follow rules, laws, and regulations subject to a single country and deal in the currency of the domestic country.

Advantages

Business of domestic companies is easier as compared to the business of transnational, multinational, and other international companies. Operating in domestic territory requires less compliance with rules, and regulations along with a lower transportation cost. Customers easily trust the product of domestic companies over other multinational or foreign companies.

Disadvantages

Procurement of materials for production is one of the problems faced by domestic companies. Domestic companies have an outsourcing option for procuring resources such as materials, labor, etc. which increases their cost and reduce their profits.

2. International company

These are the company whose trading and business activities are outside the boundaries of domestic countries. These companies may or may not have branches in different countries. Various other stakeholders such as suppliers, employees, middlemen, shareholders, and partners are from different nations. The degree of mobility of factors of production like labor and capital across nations is relatively less. Business systems in international business and practices vary considerably across countries.

Advantages

International companies enjoy the advantages of a wide reach of customers. They enjoy the benefit of currency exchange and have the leverage of export financing. The international company develops goodwill and reputation which help them to earn more profit and revenue.

Disadvantages

The main disadvantage faced by the international company is the availability and mobility of factors of production because the mobility of factors of production like labor and capital across nations is relatively less. International markets also lack similarity in products due to differences in language, preferences, customs, rules, regulations, etc., across markets.

3. Multinational company

Multinational companies are those companies that have their business operation in more than one country and they expand their network of business in various other countries and across the globe. Some examples of MNCs are Apple, Microsoft, Alphabet, Amazon, Facebook, etc.

Advantages

Multinational companies enjoy the first-mover advantages by bringing new and innovative products to the market with the help of new technologies. MNCs have wide networking across the globe and a wide reach of customer support. They maintain an assured quality standard for products and services and utilize the available resources to the optimum level.

Disadvantages

Multinational company increases the competition for domestic companies, and it hampers the growth of domestic companies. MNCs produces the goods in large quantity and sometimes also damages the environment when they produce products in large quantity and lower the standard of goods to reduce the cost.

4. Global company

Global companies are the companies that operate all around the world or the globe. To become a global company one needs to introduce not only their products but also the company to people who live in other countries. Today, all global companies once had been startups. Coca-Cola was one of them, google has also started as a research project undertaken by Larry Page and Sergey Brin.

Advantages

Being a global company always has a strong and large customer base. Their operating cost is less because they operate in a different country and utilize their resources to the optimum level. Global company experience goodwill and reputation across the world.

Disadvantages

The global company faces the problems of expansion to another country due to the government restriction in the domestic country. The government put such restrictions to protect the interest of domestic companies. Handling and logistic is also a problem because of social-cultural and language barriers.

5. Transnational company

Transnational companies are a combination of domestic and global companies. They use the central control structure to manage their operating unit as a global company. For example, the operating unit in America is handling the manufacturing of products and the one in China is responsible for global marketing and the one in India is responsible for research and development. Nestle company is one example.

Advantages

They work with high flexibility with a multidimensional approach based on the requirement of the business. One of the major advantages of transnational companies is that they respond quickly to the local market where they maintain their facilities.

Disadvantages

Transnational companies choose their manufacturing units in selecting countries with low wages and minimal restrictions for saving cost purposes. So, they exploit the resources of less powerful companies.

Scope of international business

Most people think of international business as international trade. But this is not true. Undoubtedly, international trade, comprising exports and imports of goods, has historically been an important component of international business. But of late, the scope of international business has substantially expanded. International trade in services such as international travel and tourism, transportation, communication, banking, warehousing, distribution, and advertising has considerably grown. The following business activities fall under the scope of international business:

Export and import of merchandise

This means tangible goods which can be touched and seen are both exported and imported through international business. This includes only trading in goods and excluding trading in services.

Exporting and Importing services

Exporting and importing of services include trading in intangibles and trade in services is known as invisible trade. Services are traded internationally that include tourism, medical facilities, boarding, professional services like training, and educational and financial services.

Licensing and Franchising

This is the process of permitting another party in a foreign country to produce and sell goods under the tradename, patent, and Copywrite of your company and in return, some fees are charged by the company who’s offering their tradename. Franchising is also similar to licensing, but this is a term that is used in connection with the provision of services.

Foreign investment

This is another way of entering into the international business. Foreign Direct Investment takes place when a company directly invest in property such as land, building, and plant with the overview of producing and manufacturing the goods and selling them into that country's market.

Context and Applications

This concept is important in various academic curriculums at graduate and postgraduate levels. It is an important part of various professional management courses and professional management training programs such as:

• Master of Business Administration (International Business)
• Bachelor of Business Administration (General)

An individual or group intending to start an international business should have a proper understanding of the different structures of international business. They can select the suitable route to enter international markets after weighing the advantages and disadvantages of each type of international business set up.

Practice Problems

 1. Which of the following is/are modes of entering into international business?

1. Joint venture
2. Licensing and Franchising
3. Exporting and Importing
4. All of the above

Answer: Option d

Explanation: Joint Venture, Licensing, Franchising, Importing, and Exporting are all examples of modes of entering the international market.

2. McDonald’s uses which of the following modes of international business?

1. Wholly owned physical stores
2. Exporting and Importing
3. Licensing and Franchising
4. None of the above

Answer: Option c

Explanation: McDonald’s has been successful in expanding its fast-food business in the international markets by way of licensing its patent on recipes and awarding franchises to various business enterprises across the world.

3. Which of the following is a clear benefit to the International business?

1. Entry restrictions by domestic governments
2. Tariff and Trade barriers in favor of domestic companies
3. Generating employment opportunities and boosting economic growth
4. None of the above

Answer: Option c

Explanation: International businesses help generate decent employment opportunities, which boosts the economic growth of an economy.

4. Transactional company is a combination of which of the following two companies?

1. Global company
2. Domestic company
3. Both A and B
4. Multinational and International companies

Answer: Option c
Explanation: Transnational companies are a combination of domestic and global companies.

5. Which of the following is not a stage of international business?

1. Multi-national company
2. Domestic company
3. Government company
4. Trans-national company

Answer: Option b
Explanation: Government companies are companies that are entirely or partly owned by the state or federal government. Such companies do not venture into international business.