Category :
11th Class
International Trade - I
Facts that Matter
- Self-reliance was the goal of economies in the beginning of 20th century. But since the formation of WTO, countries are now getting involved in trade with each other at a very large scale.
- The biggest reason behind it is the development of technology in the form of fast modes of transportation, communication, information and technology etc.
- The number of firms which are engaged in international business is increasing day by day. The extent is such that we are calling the world to be "Global Village".
- India is not an exception to the phenomenon. India also embarks on the path of globalisation.
Meaning of International Business
- International business means carrying on business activities beyond national boundaries. These activities normally include the transaction of economic resources such as goods, capital, services (comprising technology, skilled labour, and transportation, etc.), and international production. It refers to that business activity that takes place beyond the geographical limits of a country.
- Production may either involve production of physical goods or provision of services like banking, finance, insurance, construction, trading, and so on.
- Thus, international business includes not only international trade of goods and services but also foreign investment, especially foreign direct investment.
Features of International Business
- It involves two countries.
- It makes use of foreign exchange.
- It requires legal documentation.
- It has a high degree of risk.
- It requires heavy documentation.
- It is time consuming.
- There is lack of personal contact.
Differences between Domestic Business and International Business
- Nationality of buyers and sellers: In case of domestic business, both the buyers and sellers are from the same country. But in international business, buyers and sellers are from different nationality.
- Nationality of other stakeholders: Employees, suppliers, customers, shareholders, partners, middlemen etc belong to different nationality in international business. Employees, suppliers, customers, shareholders, partners, middlemen etc belong to the same nationality in domestic business. Exceptions are possible.
- Risk: Degree of risk is higher in international business as compared to domestic business.
- Political System: International business is subject to political system of many nations. Domestic business is subject to political system of one country.
- Mobility of factors of production: Mobility of factors of production is less across countries. Mobility of factors of production is more within countries
- Currency: International business involves usage of foreign currency. Domestic business makes use of domestic currency.
- Consumers taste and preferences: International markets are heterogeneous in terms of taste and preferences of the customer. Domestic markets are more homogeneous in terms of taste and preference of the consumers.
- Business regulations and policy: International business is subject to rules, laws, policies, and taxation system etc of multiple countries. Domestic business is subject to rules, laws, policies, and taxation system etc of single country.
- Differences in business systems and practices: Business systems and policies are heterogeneous in two countries. Business system and policies are more homogeneous within a country.
Benefits of International Business to Nations
- Earning of Foreign Exchange: Trading countries get an opportunity to earn foreign exchange.
- More efficient use of resources: It allows them to produce those goods in which they have specialization. It leads to more efficient use of resources.
- Improving growth prospects and employment potentials: It improves growth perspectives and employment potentials for both the nations,
- Increased standard of living: It leads to improvement in standard of living.
Benefits of International Business to Business Firms
- Prospects for higher profits: It creates better prospects for higher profits.
- Increased capacity utilization: It leads to better utilization of capacity.
- Prospects for growth: It creates better prospects for growth.
- Way out to intense competition in domestic market: International business acts as an alternate when there is intense competition in domestic market.
- Improved business vision: When a business firm acts globally, it gives it an improved business vision.
Problems of International Business
International business faces the following problems:
- Different currencies: It requires different currencies. It gives birth to the problem of foreign exchange reserve maintenance.
- Legal formalities: There are so many legal formalities involved in international business.
- Distance barriers: In international business, distance is too much between trading partners. It makes procedure of shipment and collecting payments go through many procedures.
- Language barrier: In international business, trading partners have different languages. It also makes it difficult.
- Difference in laws: Both parties are subject to different laws. It increases the problems of international business further.
- Information gap: Since both the parties involved in international business are away from each other, an information gap emerges.
- Transport problem: Due to long distance, transport also becomes a problem.
Advantages of Exporting and Importing
- It is easy mode of entry.
- It is less involving.
- It requires less investment.
Words that Matter
- International Business: International business refers to that business activity that takes place beyond the geographical limits of a country.
- Export Trade: Export trade refers to selling of goods and services by a firm of home country to a firm of foreign country.
- Import Trade: Import trade refers to buying of goods and services by a firm of home country from a firm of foreign country.
