International business entails any businesses or financial transactions between individuals located in more than one country. It involves several activities some of which include; the selling and buying of inputs, finished products or raw materials across the borders of the countries of operation. Furthermore, it could also involve having plants operating in different countries in order to take advantage of the low operational costs of the country and locally sourced raw materials that are cheaper than imported raw materials. The companies could also take advantage of favorable finance options in one country in order to support the business in another country (Ajami & Goddard 2006).
The difference between the international business and local business is that international business occurs across the national borders, while domestic businesses operate within the confines of the country. In international business, one of the parties involved in the transactions will have to adapt and make necessary changes in order to transact in the foreign country. For instance, they will have to adapt to a new legal system, cultural system, as well as a new economic system. Additionally, they will be required to convert their currency to that of the other party with whom they have business and also change the way in which their products are produced in order to comply with the regulations of the new country (Buckley & Casson 2002).
The business activities that a firm could take part in include; franchising, international investments, management contracts, licensing, exporting and importing. The process of exporting entails selling the products obtained from one country either for resale or use in the other foreign country. Importing on the hand involves buying externally produced goods in order for them to be used or resold in one’s own country.
International investments refer to such activities as; portfolio investments and foreign direct investment. A portfolio investment activity involves purchasing foreign financial assets, which include; certificates, bonds and stocks for any other use apart from control. However, foreign direct investments are acquired for the sole purpose of regulating and controlling companies or assets situated in a foreign host nation. Licensing agreements give permission to a firm in a country to be able to utilize some or all intellectual property of an affiliated firm in the second country. This is done in exchange for payment of some royalty to the holder firm (Charles Hill & Jones 2009). A franchise agreement gives a firm the authority in a given country to use the names, logos, brands and techniques of operation of the second firm in the foreign nation. This is also done on condition that the interested firm pays a royalty to the host firm. A management contract involves the formulation of an agreement between the firms to run and manage the operations of the foreign firm by the host firm at an agreed fee to be paid to the managing firm.
International business has grown with the development of technology and globalization. Globalization has enhanced how business transactions are conducted all over the world. This growth in international business has made industries global. This paper will explore the reasons why some industries become global, while others remain local or regional. The paper will consider the various factors of growth in international businesses and how they influence industrial expansion. Furthermore, the paper will discuss how industries can overcome the trade barriers and break into the international market, thus, becoming global (Contractor and Lorange 2002).
There are several factors that have led to the observed growth in international business. These factors include; acquisition of resources, expansion of markets, change in technology, competitive forces and change in the social set up. The expansion of markets has instigated international trade in the sense that industries have saturated their domestic markets. Consequently, they tend to seek potential market opportunities in foreign countries. However, industries may also be forced to expand into a foreign market in order to acquire the resources it needs to facilitate its processes (Aswathappa 2005).
Inadequate resources, such as scarcity of raw materials, may force the industry to explore new markets in countries where its resources are readily available. The increased competition among firms in an industry has also propelled the growth in international business. When a competitor firm expands into other markets in foreign countries, the other firms in the industry will also seek to expand in order to keep up with the competition. Advances in technology have made the business internationalization process much easier and more effective than before (Dlabay, Scott & Scott 2010).
Changes in technology in areas, such as information processing, communications and transportation, have made international business transactions possible. Social change has made it much easier for the industries to penetrate the market. The consumers have become more aware of the services and products in several markets all over the world, in comparison to their local market. Therefore, they have the ability to choose from foreign markets apart from the domestic market. The loosening of government investment and trade policies has made it possible for industries to capitalize on the global market place growth opportunities. From the factors considered, it is now possible for firms to exploit markets all over the world efficiently (Folsom, Gordon, Spanogle, Fitzgerald & Van Alstine 2012). Therefore, industries are able to break the local and regional trade barriers to become global much faster. However, some industries have not optimally exploited these factors to become global and have remained local or regional.
There are several key factors that play a crucial role in determining whether an industry becomes global, regional or remains local. A global industry is one in which the firms involved in it compete in every world market, in which the product exists in order to survive. The competitive advantage of a global firm is dependent on the economies of scope and economies of scale. A regional firm is a firm which has operations within a region of influence, such as two or three countries. On the other hand, a local firm is one which exploits the domestic market only (Gerybadze, Hommel, Reiners & Thomaschewski 2010).
One of the factors for the global status of an industry is the cost drivers. There are several cost drivers that make an industry global. These factors are; physical location of the industry’s vital resources, the variation in costs between countries, the potential for economies of scope and economies of scale and the transportation costs. The strategic resources for firms that are global are located in diverse localities. The firms are forced to internationalize in order to be able to consolidate these resources. The potential for the economies of scope and the economies of scale also play a pivotal role. Globalization is inhibited by a flat experience curve. Industries with a large research and development expense, such as the aircraft industry, tend to have larger economies of scale than industries whose greatest expenses are labor and rent, for instance, the dry cleaning industry (Aykin 2009).
Furthermore, if an industry’s costs are reduced by at least 20% with a doubling in the volume, it has a high potential of becoming global (Leung, Bhagat, Buchan, Erez & Gibson 2005).
Transportation costs also determine the industry’s potential of becoming global. For instance, due to the ease of transportation of semiconductors and diamonds, the diamond industry is more prone to becoming global than ice (Oviatt & McDougall 2004).
A good example of an industry considered as global is the aircraft industry. The main reason why the aircraft industry is given this status is because it incurs enormous costs in the production of an aircraft in combination with the size of the market. The aircraft industry is compelled to become global, since the products, (aircrafts), must be sold to a wide enough market that will be able to justify the enormous costs of production. Consequently, the company must be able to source for clients all over the globe.
Competitive drivers also determine whether an industry will become global or not. There are two main competitive drivers. They are; existence of global competitors and competitor’s actions. For the global competitors, when they are in abundance, it indicates that the industry is ready for globalization. Global competitors usually have a considerable advantage over the local competitors. The actions of competitors in the global market include such actions as cross-subsidization in order to leverage their global positions, indicate that the industry is ready for globalization (Paul 2011).
Customer drivers also affect the globalization of an industry. The needs of the customer significantly favor globalization of an industry. An industry with homogenous consumer’s needs has a higher potential of becoming global in comparison to that whose consumer’s needs are varied. A comparison between the facsimile industry and the furniture industry shows that the facsimile customers have homogenous needs that are more perfect than those of the furniture customers. Furniture industry customer’s needs are determined by several factors, such as culture and personal tastes. An industry which has many global customers easily becomes globalized. The industry’s globalization will be in order to reach the global customers satisfactorily. Additionally, international customers require products that meet global standards.
There are three government drivers that play a strategic role in the globalization of an industry. These are; trade policies, government regulations and the technical standards of the host country. The furniture industry provides an example of an industry that was not global in the 1960’s. The failure of the furniture industry to globalize was because furniture is extremely bulky, fragile and easily gets damaged. Furthermore, the cost of furniture was high. In addition to these challenges, there were several trade barriers imposed by governments (Stock & Watson 2005).
IKEA, a Swedish furniture company, was the first to venture into globalization of the furniture industry. In order to reduce transportation costs, IKEA transported the furniture prior to assembling it. The company also included the buyer within the value chain as an extra policy of cost reduction. The customer was allowed to take the furniture home and fully assemble it. IKEA adopted a culture that was frugal which added upon its cost advantages. After IKEA’s success, the company expanded into Europe. This was due to the increase in the number of global customers who were willing to purchase such designs. The company became successful in many countries in Europe. However, IKEA was not able to penetrate the U.S market fully. This is because of the varying tastes of individuals in furniture design. The U.S market required designs that were designed according to the individual consumer tastes. IKEA could not profitably maintain this. Furthermore, IKEA could not effectively convey its culture of frugality to the U.S. Additionally the value of the Swedish Krona rose. This led to the cost of furniture made in Sweden and sold in the United States. Finally, the company faced more stiff competition in the U.S than was expected in comparison to the other countries in Europe. This provides a clear example of an industry that fails to become global due to challenges that it faces when it attempts to globalize (Stonehouse & Houston 2012).
In order for an industry to achieve global status, it needs to adopt a global strategy. A global strategy involves having the same product in all the countries of operation, centralizing the control of the industry operations, while leaving little authority, making decisions at the local level and having exceptionally minimal differences between the countries of operations. The advantages of applying this strategy are that the industry will incur less operational costs, efficiently coordinated activities, as well as rapid development of the industry’s product (Stonehouse, Campbell, Hamill & Purdie 2004).
A local industry has each of its functions from distribution to research and development done within the locality of each country. Moreover, a global industry sources its activities from each of the different countries of operation. An example of a firm that employed the global strategy is Matsushita. From the application of the global strategy, the company benefited immensely. The company acquired a strong network for distribution all over the globe, the company gained a stronger control of their finances, and also it got the ability to reach the market faster and also determine the market standards (Terpstra 2011).
In conclusion, industries have the potential to grow and become global or remain local, based on how they apply their strategies and how well they use various avenues of breaking through into the international market. Through efficient adoption of a global strategy, an industry can effectively take advantage of various world markets. Consequently, firms in the industry can be able to develop and gain on the advantages of becoming global.