- Why do companies engage in international business and what are the related modes of operating internationally?
Companies want to engage in international business first and for most to generate more revenue. New markets can not only increase the revenue but also the bottom line. Depending on the market, the cost may be lower and therefore profits can be higher. Developing countries are markets were the middle class is increasing and they want to buy products and services that are produced domestic and international.
When a company expands into additional markets they may also receive benefits from resources. Some multinational companies also search for products, services, and technology which is produced in foreign countries to assistant them in their organization. These resources can differentiate them from other competitors in the market and also enable larger profits from lower costs. Some countries may have for example, minerals, metals and land for agricultural production. Africa and parts of South Asia are two countries where these resources are attractive for the profits that these multinationals can make. Many countries do not have the equipment, manpower or experience to tap into these valuable resources. Therefore, new multinational companies can be a welcomed resource for the host country. Tapping into these resources can create jobs and revenue to grow the economy. The new and engage company in turn can receive tax breaks as well as a new revenue stream of their own.
Companies also expand internationally to offset risk. Some of the risks of selling or producing local is higher competition and also local economy risks, by keeping diversified when one market segment is seeing declining sales another segment may compensate and possibly recoup some if not all the loss.
Since companies exist to generate profits and increase their bottom lines, it is only natural that company would try and enter countries with better economic growth rates than their home country. Diversification into additional countries also helps with managing political, economic, and social risks. These types of risks vary from country to country so it is a smart business move to minimize risk by diversifying ones portfolio rather than being at the mercy of their local economy.
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Companies who expand internationally will engage in different modes ofbusiness, such as product or service import or exporting that differ from those it is not familiar with domestically. One of the most common modes of global business is foreign trade. A company will import its vital products from the least expensive source, while it’s exporting its products to different countries in order to maximum amount of foreign exchange.
Licensing is another mode of international business. When a company lacks the knowledge and capital of a foreign country it may lease out its technology and proprietary advantages to be used for a fee to a local technology company. As compared to exporting this can take less resources and time for multinational company on foreign soil. This can also be a way for a company to penetrate a market that may have government restrictions and barriers of entry.
Contracting services can be another mode of international business. A company will sell management skills to another company in a foreign country for a fee. Usually a contract is drawn up for these skilled workers to work in the host country for a certain time frame, months or years depending on the magnitude of the project.
Sometimes two companies may see competitive advantages to do what called a joint venture. This is another mode of international business. This partnership is an agreement in which the venture is owned jointly by the international company and a local company. This partnership allows both organizations to exploit their comparative advantages in the venture. For example, China is known for strong manufacturing and Japan is known for developing the technology to increase manufacturing efficiency. If these two countries were to partner up on a joint venture they would benefit each other in two different ways, technology and manufacturing.
To have an instant impact in a foreign country a multinational company may purchase a corporation in the host country. By acquiring an existing corporation the multinational company lowers the investment and the risk. Another approach and possibly less risky mode would be one of purchasing a majority of shares in an existing company in the foreign country. The foreign corporation would than fall under the umbrella of the multinational company becoming a subsidiary. This mode can be less risky because generally the size of the investment is less than an acquisition.
- What is culture? How does this affect international business?
Culture, can be defined as the “patterned ways of thinking, feeling, and reacting, acquired and transmitted mainly by symbols, constituting the distinctive achievements of human groups, including their embodiments in artifacts; the essential core of culture consists of traditional (i.e., historically derived and selected) ideas and especially their attached values” (1952). Culture understanding in international business is vital to the health and success of the organization. Developing a profitable relationship maybe not very hard if the stakeholders involved can see the value in the relationship but this can be tall task when dealing with different cultures. Understanding cultural differences is an initial task for all business who wish to have dealings internationally. Many organizations will usually have some type of cross-cultural training before engaging the new country. Advancing cultural understanding is vital to the further success of an international corporation in a global market place. On a broad scale these differences can be of religious, economic, ethnic, political, and linguistic dimensions. On a more local level, foreign countries governments can form sovereign boundaries to distinguish different nations with political and legal regulatory systems. As international business continues to increase so too will cultural differences and the need for cultural competency. To take part in the cultural competency begins the ground work to develop an effect plan towards effective international business relationships.
- Imagine a company is considering starting a new project that would have it conducting business in a foreign country in which it currently does not operate. Describe some of the political and economic issues it should investigate and consider to help determine whether or not to proceed with the new project.
As a company looks to enter a new market to expand their business and increase profits, selling to a foreign country becomes an apparent way to expand market share. This venture of selling products or services in a new country comes with its own distinctive set of challenges and risks, which are not always apparent. A company needs to be aware of the cultural differences which maybe of political and economic decent.
Depending on the country of choice the political dealings and volatility may make it complicated for a company to function efficiently based non supportive top government representatives. An organization cannot effectively do business at full capacity in such hostile political environment. A new and unfriendly government may replace the responsive one, and seize foreign assets. The cultural belief of one regime to another can impact a company significantly. For instance an organization like a hotel that sells alcohol may have a serious problem in a country that is ran by a Muslim leadership. This maybe against their religious beliefs and therefore hinder the company from selling some services or products. Understanding the political environment in a foreign country of new business is critical. As new markets continue to open up this presents new levels of uncertainty for international business.
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When a company decides to enter a foreign market there is always economic risks. Some country can restrict the exchange, which will limit the movement of capital into and out of the country, which makes it hard to remove profits from or make investments in the foreign country. The foreign country can also restrict certain products in a way to controls imports. The controls can not only hinder the imported products but also can be the cause of higher unemployment and even closure of plants. All countries have tax policies which enable them to collect and generate needed revenue for the host country. There is definitely risk in tax policy. Depending on the country and the tax policy this can severally hurt the multinational organization. In the long run profits may be negatively impacted. The economics can also be affected by political pressure from the host countries government. The government may force the control of imported prices on products or services. Countries like these can suffer from inflations, devaluations, or sharply rising costs. In an economic climate of this type companies maybe force to shut.
References
Kroeber, A.L., and Clyde Kluckhohn. Culture; A Critical Review of Concepts and Definitions. Cambridge, MA: The Museum, 1952.
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