International Business & Trade: Globalization Factors

Globalization. Globalization is the process of increasing interdependence and integration among the economies, markets, societies, and cultures of different countries worldwide. This is made possible by the:  reduction of barriers to international trade,  the liberalization of capital...

Globalization. Globalization is the process of increasing interdependence and integration among the economies, markets, societies, and cultures of different countries worldwide. This is made possible by the:  reduction of barriers to international trade,  the liberalization of capital movements,  the development of transportation, and  the advancement of information and communication Factors Contributing to Globalization: Information Technology. The move from telephonic communication to cable and satellite digital communication have resulted in increasing information flows. Economic Factors. The emergence of global sporting events such as The Olympics, Formula 1 and Football all bring people together across borders. Cultural Factors. The global economy is Post Industrial – as a result it is increasingly ‘weightless’ (Quah 1999) – products are much more likely to be information based/electronic, such as computer software, films and music or information services rather than actual tangible, physical goods such as food, clothing or cars. Political Changes. The collapse of Communism in the 1990s meant the end of the divided ‘cold war’ world, and now these ex-communist countries are themselves democracies and integrated into the global economy. International Business Domestic Business operates solely within the borders of one country. International Business represents the business activities being carried out far beyond the borders of any nation. Key Differences between Domestic and International Business 1. Scope of Operation Domestic Business: → Are confined to operating within one country. International Business: → Spread their operations through various countries. 2. Market Research and Customer Diversity Domestic Business: → Simpler and cheaper market research due to cultural and linguistic similarities among consumers. International Business: → Serious, complex, and expensive marketing research. → A deeper understanding of global consumer behavior, which is crucial for developing successful international marketing strategies. 3. Legal and Regulatory Environment Domestic Business: → Must comply with the laws of one country. → Legal framework is complex but consistent. International Business: → Must navigate the laws of multiple countries, each with its own regulations. → Faces increased complexity and legal risk. 4. Economic Factors and Currency Domestic Business: → Operates within one national economy. → Uses a single currency, simplifying financial planning and transactions. International Business: → Deals with multiple currencies and diverse economic conditions. → Faces foreign exchange risk and must monitor global economic trends to inform pricing and forecasting. 5. Capital and Resource Requirements Domestic Business: → Requires less capital due to limited geographic and operational scope. → Operates within a single economic environment. International Business: → Demands higher capital for expansion, infrastructure, and global operations. → Includes costs for setting up manufacturing units, customer service centers, and other facilities across multiple countries. 6. Quality Standards and Consumer Expectations Domestic Business: → Complies with one set of national quality and regulatory standards. → Quality expectations are generally uniform within the country. International Business: → Must adhere to international standards and diverse regulations across different countries. → Needs to adapt to varying consumer definitions of "quality" in global markets to maintain brand reputation. 7. Risk Exposure Domestic Business: → Faces local risks. → Operates within a single, consistent legal and political framework. International Business: → Exposed to global risks such as political unrest, currency fluctuations, and legal differences across borders. → Requires advanced risk management strategies to handle complex and unpredictable global challenges. Basis International Trade International Business Meaning The exchange of goods Those business between different activities that take countries of the world is place beyond the known as International geographical Trade. boundaries of a nation, but also include movement of capital, personnel, technology  and intellectual property, are called International Business. Goods and Services It includes only International business movements of goods. includes goods and services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising. Currency used International Currency International Currency is used in case of of more than one International Trade. country is used. Scope International trade has International business is a narrower scope. broader than international trade and includes international trade Effect on Foreign It has a direct impact on It also has a direct Reserve the foreign reserves of impact on the foreign a country. reserves of a country. Risk It involves It involves a high comparatively less degree of risk. degree of risk. Factors Affecting International Business Economic Environment. The economic conditions of a country or region play a crucial role in determining the feasibility and profitability of doing business there. Exchange Rate: The currency unit varies from nation to nation. Political and Legal Environment. Political stability is vital for smooth business operations and long-term investments. Countries with unstable governments or frequent policy changes present higher risks, as unexpected regulations or political shifts can disrupt operations. Cultural and Social Factors. Cultural differences significantly affect international business, influencing marketing strategies, product design, and customer interactions. Values, beliefs, and social norms vary widely across cultures, impacting consumer preferences and purchasing behaviour. Technological Environment. The changes in technology bring about the change in the working conditions and the quality of the product. It also helps to produce the goods on a large scale at a lower cost. Competitive Environment. The level of competition in a foreign market shapes a company’s strategy and potential for success. Natural Environment and Sustainability Factors. Geographic factors and environmental considerations are increasingly important in international business. Geographic conditions, such as climate, terrain, and distance from production sites, affect logistics and supply chains, impacting delivery times and costs. Geographical Position: Common borders, ease of transportation, coastal areas, climate, etc. affect international trade. Labour and Workforce Factors. The availability, quality, and cost of labor vary significantly across countries, affecting production and operational costs. Financial and Funding Constraints. Access to capital and the structure of a country’s financial markets influence a company’s ability to fund its international operations. Protectionism: A country’s government can have a major effect on its balance of trade due to its policies on subsidizing exporters, restrictions on imports, or lack of enforcement on piracy. Lengthy Legal Procedures: Import or export of goods involves a lengthy and complicated procedure. Inflation: Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. Balance of Payments Position: If a country is facing balance of payment crisis, it has to adopt measures intended to restrict the import and increase On the other hand in case of balance of payment surplus imports are supported. To correct a balance of payments deficit, a country can; 1. Devaluing the currency can make a country's exports cheaper and imports more expensive, thereby improving the balance of payments. 2. Increasing exports can also help to correct a balance of payments deficit. 3. Reducing imports can be another way to correct a balance of payments deficit. 4. Implementing fiscal austerity can also help to correct a balance of payments deficit. National Income: National income means the value of goods and services produced by a country during a financial year. Market forces: Demographics of each country have its own perceptions about different products and services. Level of Economic Development: The developed countries have a large share of international business. They trade in finished and high quality good. The developing countries trade in raw materials and agricultural goods. Benefits of International business To the Nation; Earning of Foreign Exchange. International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically. More Efficient Use of Resources. International business operates on a simple principle produce what your country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently. Improving Growth Prospects and Employment Potentials. Producing solely for the purposes of domestic consumption severely restricts a country’s prospects for growth and employment. Increased Standard of Living. In the absence of international trade of goods and services, it would not have been possible for the world community to consume goods and services produced in other countries that the people in these countries are able to consume and enjoy a higher standard of living. Greater Variety of Goods and Services Available for Consumption. International trade brings in different varieties of a particular product from different destinations. Consumption at Cheaper Cost. International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Reduces Trade Fluctuations. By making the size of the market large with large supplies and extensive demand, international trade reduces trade fluctuations. The prices of goods tend to remain more stable. To Firms; Prospects for Higher Profits. International business can be more profitable than the domestic business. When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high. Increased Capacity Utilization. Many firms setup production capacities for their products which are in excess of demand in the domestic market. Prospects for Growth. Business firms find it quite frustrating when demand for their products starts getting saturated in the domestic market. Way Out of Intense Competition in Domestic Market. When competition in the domestic market is very intense, internationalization seems to be the only way to achieve significant growth. Improved Business Vision. The growth of international business of many companies is essentially a part of their business policies or strategic management. The vision to become international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalization. To Leaders; Increased Revenues. International trade can be extremely advantageous for increasing the number of potential consumers – leading to business growth, larger market share from greater market access, and higher profits. Decreased Competition. Depending on the product or service, exporting overseas could open up new markets that are less crowded or saturated than domestic ones. Longer Product Lifespan. Over time, domestic consumers may stop buying goods – or start upgrading to different versions – while the same may not be true for international markets. Keeping an eye on emerging markets may result in further demand for products and increased sales. Easier Cash-Flow Management. For multinational businesses, receiving payment upfront for international transactions may be prudent. In home markets, creativity and caution can be required to maintain cash flow while waiting to receive payment. Better Risk Management. Diversification is critical to businesses wishing to remain relevant, competitive and resilient. Benefitting from Currency Exchange. Global trade and currency fluctuations can be advantageous for exporters. Disposal of Surplus Goods. When goods are no longer selling well in a domestic market, exporting to international markets can offer alternatives to help shift otherwise superfluous stock. Enhanced Reputation. Selling internationally can raise a company’s profile, increase trust and credibility and boost brand reputation. Success in one country can influence success in others. International trade. refers to the exchange of goods and services between countries. It involves imports (buying from other countries) and exports (selling to other countries). International trade allows nations to access resources, products, and services that they may not have or cannot produce efficiently on their own. Trade Barriers Trade barriers are the methods used by the government to control international trade. Generally, government design and implement policies or regulations to obstruct the excessive inflow of foreign goods to the country. Reasons for governments imposing trade barriers: Government imposes it to protect the domestic market from foreign competition. In other words, to restrict the entry of goods and services from other countries and promote domestic production.  The government imposes tariffs, makes revenue by charging taxes on imported goods, and discourages the entry of foreign goods into the domestic market. The trade deficit is another reason the government put trade restrictions. This is because the current account deficit increases as the goods imported are much more than those exported from the country. Hence government tries to reduce imports and promote export. Different types of trade barriers are as follows: Anti-Dumping Duties: When a domestic government applies a protectionist tariff on goods from outside that deems priced below fair market value, it is known as an anti-dumping duty. Regulatory Barriers: These barriers are imposed by the government for various reasons, such as to control pollution, ensure product standards, and maintain safety standards. These standards are decided by the governments of different countries depending on their rules and regulations that restrict unsuitable goods from entering the foreign market. Voluntary Export Restraints: Voluntary export restraints (VER) are agreements between exporting and importing nations where the exporting country agrees to restrict the number of particular exports below a predetermined level to avoid the imposition of mandatory restrictions by the importing country. Subsidies: Government subsidies lower the price of goods and services produced locally in the country compared to the price of goods and services from other nations. Therefore, subsidies are another way that acts as a trade barrier. Tariffs: Tariffs are the tax imposed on imports from other countries. The tax is imposed on the final products and is charged to the end consumers. Thus, it increases the price of the goods imported from other countries more than the actual price and discourages consumers from purchasing goods from other countries. Quotas: A quota is a trade restriction imposed on the number of goods that can enter the country. It is decided by the governments of both exporting and importing countries on the specific goods to reduce the import of specific goods and increase the domestic production. The disadvantages of the trade barrier are as follows:  Trade barriers increase the cost to the company since they have to depend on domestic products for raw materials due to restrictions on importing cheap foreign raw materials. The diversified variety of goods available in the foreign market is not available in the domestic market. Trade barriers can discourage the country from trading with other countries. Trade barriers limit the overall job opportunities in countries. International-Expansion Entry Modes Exporting. Is a typically the easiest way to enter an international market, and therefore most firms begin their international expansion using this model of entry. Advantages Fast entry, low risk Disadvantages Low control, low local knowledge, potential negative environmental impact of transportation. Licensing and Franchising. a company that wants to get into an international market quickly while taking only limited financial and legal risks might consider licensing agreements with foreign companies. Advantages Fast entry, low cost, low risk Disadvantages Less control, licensee may become a competitor, legal and regulatory environment (IP and contract law) must be sound Partnering and Strategic Alliance. Involves a contractual agreement between two or more enterprises stipulating that the involved parties will cooperate in a certain way for a certain time to achieve a common purpose. Advantages Shared costs reduce investment needed, reduced risk, seen as local entity Disadvantages Higher cost than exporting, licensing, or franchising; integration problems between two corporate cultures Acquisition. is a transaction in which a firm gains control of another firm by purchasing its stock, exchanging the stock for its own, or, in the case of a private firm, paying the owners a purchase price. Advantages Fast entry; known, established operations Disadvantages High cost, integration issues with home office Greenfield Venture. (Launch of a new, wholly owned subsidiary). Advantages Gain local market knowledge; can be seen as insider who employs locals; maximum control Disadvantages High cost, high risk due to unknowns, slow entry due to setup time Regardless of which entry strategy a company chooses, several factors are always important. Cultural and linguistic differences. These affect all relationships and interactions inside the company, with customers, and with the government. Understanding the local business culture is critical to success. Quality and training of local contacts and/or employees. Evaluating skill sets and then determining if the local staff is qualified is a key factor for success. Political and economic issues. Policy can change frequently, and companies need to determine what level of investment they’re willing to make, what’s required to make this investment, and how much of their earnings they can repatriate. Experience of the partner company. Assessing the experience of the partner company in the market—with the product and in dealing with foreign companies—is essential in selecting the right local partner. Top Risks for International Businesses When an organization decides to engage in international financing activities, it takes on additional risks along with opportunities. The main risks that are associated with businesses engaging in international finance include foreign exchange risk and political risk. These challenges may sometimes make it difficult for companies to maintain constant and reliable revenue. In this article, we'll review the strategies companies can employ to reduce the impact of the risks they face from doing business internationally. Types Of Risk in International Business & How to Reduce “Risk is a part of business, and no one can fully eliminate it. Businessmen can do one thing; they can reduce risk and its effects by keeping things well- managed.” These are major factors. Risks can create some barriers in your business operations.  International Transportation  Intellectual Property  Credit  Currency  Buyers-Sellers Trust Risk Types And How To Manage Them 1. Credit Risk. The most important part of a business is a consideration, whether it is international business or local. 2. Intellectual Property Risk. In some cases, the business details or information can be used illegally in other parts of the region. It can be anything, such as – strategic data, logo, business name, the resemblance of products, etc. 3. Foreign Exchange Risk. the case of international business, sellers will get payments in international currencies. 4. Ethical Risks. All companies have some ethical standards, rules & regulations. 5. Shipping Risk. Shipping is the biggest part of the online marketplace. It is the only thing that connects a buyer with the seller. 6. Country And Political Risks. Some risks and factors cannot be eliminated with management or anything else. Businesses need to deal with these things smartly and by preparing a perfect strategy.  Generally, these risks are related to some legal authorities that are authorizing the business operations in the market. Political risk happens when countries change policies that might negatively affect a business, such as trade barriers. Geopolitical risk, also known as political risk, transpires when a country's government unexpectedly changes its policies, which now negatively affects the foreign company. Key Takeaways The major international risks for businesses include foreign exchange and political risks. Foreign exchange risk typically affects businesses that export and/or import their products, services, and supplies. Note Political instability also includes wars, coups, and riots that can adversely impact businesses. Protection for International Businesses In general, organizations engaging in international finance activities can experience much greater uncertainty in their revenues. An unsteady and unpredictable stream of revenue can make it hard to operate a business effectively. There are also ways in which a company can overcome some of these risk exposures. Hedging For example, a business may attempt to hedge some of its foreign exchange risks by buying futures, currency forwards, or options on the currency market. The purpose of these hedges is to reduce the risk that price movements in the currency market will adversely affect the company's revenue and profits. Political Risk Insurance Companies also may decide to acquire political risk insurance in order to protect their equity investments and loans from specific government actions. Multinational corporations will often outline in their 10-K annual filings with the U.S. Securities and Exchange Commission (SEC) the actions they take to mitigate the political risk they face in foreign countries. What Are the Risks for International Businesses? Besides the risk of exchange rate fluctuations and potential political instability (which may also involve higher rates of crime and violence),international businesses face the possibility of institutional failures and the lack of financial resources to support their activities. Multinationals may also have to deal with cultural differences and compliance challenges, as well as compete with local companies. What Is the Main Reason Why International Businesses Fail? Lack of planning is often the main cause of international business failure. Multinationals may fail to research the markets properly, assess the differences in local versus global strategies, and evaluate the costs of doing business globally. What Is the Least Risky Type of International Business? Exporting is one of the least risky methods of doing international business, since there is little investment required (there's no need to invest in production facilities in the chosen country) and the company doesn't depend solely on sales within the local market. For the same reasons, it's also the most cost-effective type of international business. The Bottom Line What a company must decide is whether the pros outweigh the cons when deciding to venture into the international market. With increased globalization, many companies see the benefits of expanding their reach beyond their domestic borders. The chance for increased revenue and the opportunity to bring their products and services to a larger audience plays an important role in their decision to focus on international markets. Top 10 Business Risks In 2024 By Allianz Risk Barometer 1. Cyber incidents 2. Business interruption 3. Natural Catastrophes 4. Changes in legislation and regulation 5. Macroeconomic developments 6. Fire explosion 7. Climate change 8. Political Risks and violence 9. Market developments 10. Labor shortage