Importance of international business

From CEOpedia | Management online

In current global economy importance of international business is very high, because of:

  • industry interdependence on various natural resources
  • access to global financial markets
  • fast movement of people, goods and information
  • changing global tariffs and tax policies
  • possibility to expand to new markets
  • capturing cost advantage in different countries (e.g. lower labour costs)
  • improvement in logistics processes can increase efficiency
  • capturing demand of more customers in different countries and diverse cultures
  • gaining knowledge from other countries increase innovation

International business refers to the trade of services, goods, technology, capital and knowledge. It involves cross-border transactions of goods and services between two or more countries. International business is also known as globalization’’’. International business is also the study of the internationalization process of multinational enterprises’’’.

Multinational Enterprise

A multinational enterprise (MNE) is a company which has a worldwide approach to markets, operations and production in several countries’’’.

Well-known multinational enterprises include companies: McDonald's, Starbucks Coffee Company, Microsoft, etc.

To MNEs leaders include also:

  • vehicle manufacturers such as: Ford Motor Company, and General Motors.
  • Consumer-electronics producers such as: Samsung, LG and Sony
  • Energy companies such as: Exxon Mobil and British Petroleum.

To conduct business abroad, companies should be conscious of all the factors that may affect any business activities, including:

  • difference in legal systems,
  • political systems,
  • economic policy,
  • language,
  • accounting standards,
  • labor standards,
  • living standards,
  • local cultures,
  • foreign-exchange markets,
  • import and export regulations,
  • trade agreements,
  • climate,
  • education.

Each of these factors can require changes in how companies operate from one country to the next.

International Company

All company that want to go international have one aim in common: the desire to increase their respective economic values when engaging in international trade transactions.

To gain this goal, each company must develop its individual strategy and approach to maximize value, increase profits and lower costs.

A firm's value creation is the difference between the value of the product being sold (V) and the cost of production per each product sold (C)[1].

Value creation may be categorized as:

  • Primary activities (production, marketing, sales and customer service)
  • Support activities (logistics, Information systems and human resources).

All of these activities must be managed effectively and be consistent with the company strategy.

The success of internationally firms depends on the goods or services sold and on the firm's core competencies (Skills within the firm which competitors cannot easily match). For a firm to be successful, strategy must be consistent with the environment. Firm's organizational structure must to reflect changes in the setting in which they are operating and the strategy they are pursuing[2].

When a firm decides to enter a foreign market, it must decide on a mode of entry. There are six different modes to enter a foreign market[3]:

  • exporting,
  • turnkey projects,
  • licensing,
  • franchising,
  • establishing joint ventures with a host-country firm
  • setting up a new wholly owned subsidiary in the host country.

Means of Businesses[4]:

Examples of Importance of international business

  • Global Reach: International business allows organizations to expand their markets and reach more customers around the world. This increases the potential for greater profits and allows for a more diversified customer base.
  • Increased Profits: International business can open up new revenue streams and create a more diversified portfolio of products and services. This can help organizations increase their profits and reduce their reliance on a single market or customer.
  • Reduced Costs: Companies can often benefit from lower labor costs and other business-related expenses when they expand their operations into other countries. This can help organizations reduce their operating costs and enable them to offer more competitive prices on their products and services.
  • Access to New Resources: International business also provides organizations with access to new resources and materials. This can enable companies to create more innovative products and services and open up new opportunities for growth.
  • Greater Innovation: By engaging in international business, organizations can gain access to new ideas and technologies from around the world. This can help them develop more advanced products and services and expand their reach even further.

Advantages of Importance of international business

The importance of international business cannot be overstated in today's global economy. There are numerous advantages to engaging in international business, including:

  • Access to new markets: International business provides companies with the opportunity to access new markets, allowing them to increase their customer base and profits.
  • More efficient use of resources: Companies can take advantage of resources they lack domestically by importing them from another country. This can result in more efficient production and cost savings.
  • Greater competition: International business helps create a more competitive business environment. Companies must strive to innovate and create better products in order to remain competitive.
  • Increased cultural capital: International business can help increase cultural capital, as companies learn to work in diverse environments and deal with different cultures.
  • Higher profits: Companies that engage in international business are likely to enjoy higher profits, as they can take advantage of lower labor and production costs in other countries.
  • Improved access to technology: International business provides companies with access to the latest technologies, allowing them to stay competitive in the global marketplace.

Limitations of Importance of international business

International business is of great importance in the current global economy, however there are several limitations that need to be taken into consideration.

  • Political risk: Political risk is a major limitation for international business, as it can be difficult to predict the impact of changing political climates and policies on the business operations.
  • Cultural differences: Cultural differences can create challenges in international business, as different countries have different customs, values, and expectations. This can lead to miscommunication and misunderstandings which can have a negative impact on the business.
  • Language barriers: Language barriers can also be a limitation for international business, as it can be difficult to communicate effectively with customers and partners in different countries.
  • Differences in legal systems: Different countries have different legal systems, which can create confusion and difficulty in conducting international business.
  • Costs of transportation and communication: The costs of transportation and communication can be a significant limitation for international business, as it can be expensive to transport goods and services and to communicate with partners and customers in other countries.
  • Exchange rate fluctuations: Exchange rate fluctuations can also be a limitation for international business, as changes in exchange rates can have a significant impact on the profitability of the business.

Other approaches related to Importance of international business

International business is of utmost importance in today's global economy. There are several other approaches that contribute to the importance of international business, such as:

  • Globalisation: Globalisation has been a major driver of international business, as it has made it easier for companies to access markets, customers and products from around the world. This has allowed companies to expand their business operations and reach customers that would otherwise be unreachable.
  • Technological Advancement: Technology has been instrumental in facilitating international business, as it has enabled businesses to quickly and efficiently transfer data and products across borders. With the internet and other communication tools, companies can now communicate with customers and partners from around the world in real time.
  • International Trade: International trade has been a key factor in the growth of international business. By allowing companies to access resources and products that are not available in their own countries, it has enabled them to expand their businesses and reach new markets.
  • Investment: Investment has been a major source of finance for international business. By investing in foreign companies, it has allowed businesses to access new markets and resources, as well as benefit from the foreign exchange markets.

In conclusion, the importance of international business has been greatly enhanced by globalisation, technological advancement, international trade and investment. These factors have enabled companies to access new markets, resources, and customers, which has allowed them to expand their operations and take advantage of global opportunities.


Importance of international business — recommended articles
International competitiveness — International division of labor — Importance of international marketing — Domestic market — Global production networks — Trade liberalization — Economic factor — Competitive disadvantage — Internationalization

References

Footnotes

  1. ↑ W.L. Charles Hill (2005)
  2. ↑ W.L. Charles Hill (2005)
  3. ↑ W.L. Charles Hill (2005)
  4. ↑ F. Luthans, J.P. Doh (2015)

Author: Karolina Piotrowska

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