What are the three forms of international business?

Cambridge dictionary defines international business as – “the activity of trading goods and services between countries.” However, international business is beyond this definition; it has a wide scope. International business also has its own advantages and disadvantages. In this article, let’s understand the different areas of international business.

International business is a cross-border transaction between individuals, businesses, or government entities. The transaction can be of anything that has value; examples include:

• Physical Goods
• Services such as banking, insurance, construction, etc.
• Technology such as software, arms and ammunition, satellite technology, etc.
• Capital and
• Knowledge

For ease of understanding, the word “goods” in this article will include all of the items mentioned above. For regular commodities, we will be using the word “physical goods.”

Types of International Businesses

All the major types of international business conducted in the world can come under seven main types. These can also be termed as modes of business. Let’s look at each in detail –

Imports and Exports

The simplest and most commonly used method, imports and exports, can be seen as the foundation of international business. Imports are an inflow of goods into the markets of the home country for consumption. In contrast, export means selling goods to foreign countries. In short, imports means inflow, whereas export means outflow of goods in any form.

Licensing

Licencing is one of the easiest ways to expand a business internationally. When a company has a standardized product with ownership rights, it can use licensing to distribute and sell the products in the international market. Licenses come in many forms, some of which are patent, copyright, trademark, etc. Products such as books and movies are usually distributed internationally through licensing agreements.

Franchising

A very effective method to expand a business nationally and internationally, franchising is similar to licensing. In this, a parent company gives the right to another company to conduct business using the parent company’s name/ brand and products. The parent company becomes the franchiser, and the receiving company becomes the franchisee. Many of the biggest restaurant chains in the world have used the franchisee model to expand internationally. Some examples include – McDonald’s, Pizza Hut, Starbucks, Domino’s Pizza, etc.

Outsourcing and Offshoring

Outsourcing means giving out contracts to international firms for certain business processes, for example, giving out accounting functions to an international firm. This is usually effective when the cost of conducting these processes is comparatively much cheaper in some other country than in the home country. For example, many developed countries such as the USA, Australia, the UK, etc., outsource their functions to companies in India, China, etc., because it is cheaper.

Offshoring is similar to outsourcing in the sense that a function is moved away from the home country. However, it is different in the sense that the facility is physically moved to another country, but the management stays with the company itself. For example, Apple Inc. is conducting its manufacturing function in China. However, it is entirely controlled by Apple Inc.

Joint Ventures and Strategic Partnerships

A joint venture is a contract between two parties. One is an international company, while another company is local to where the business has to be conducted. Both parties contribute to the equity and management of the company. As a result, both share the profit as well. These parties can mutually decide the percentage of equity and profit-sharing.

These types of ventures and partnerships come into existence when both parties have something to offer. For example, the local company may have the brand name and network within the country, while the international company may have advanced technology. A classic example of a joint venture is the Tata Jaguar collaboration in India. Sometimes there are government restrictions on international companies against holding 100% equity in certain areas such as defense. In such cases, international companies can take the benefit from the new market through a joint venture.

Multinational Companies

As the name suggests, multinational companies are companies that are conducting business in multiple countries. They actually set up the whole business in multiple countries. Some such examples are Amazon, Citigroup, Coca-Cola, etc.

These companies have independent operations in each country, and each country has its own set of offices, employees, etc. In fact, even the products and marketing campaigns are customized as per local needs. For example, Nestle introduced a Matcha flavor Kit Kat in Japan as the flavor is very popular in that country. However, they don’t offer the same flavor in India. This customization is one of the many benefits of being a multinational company.

Foreign Direct Investment

Foreign direct investment is an investment made by an individual or a company located in one country to the business interest located in another foreign country. In this, the investing company usually commits more than capital; they share management, technology, processes, etc., with the company they have invested in. Foreign direct investments can take many forms, such as a subsidiary company, associate company, joint venture, merger, etc.

These are the major types through which people, companies, and governments conduct international business. However, means of business is just one minor speck of the international business environment.

One must consider many issues and challenges when setting up any business internationally. These factors include –

Geographical Factors

Simple challenges that come with the change in geography have to be studied when considering international business. There are differences in storage requirements, supply chain requirements, connectivity issues, etc., from country to country. Colgate-Palmolive will face a thousand challenges even before its soaps and shampoos can reach rural areas of India where there is a lack of basic necessities such as water, electricity, transportation, etc.

Social Factors

Social factors are very important in international business. It is very difficult to set up shops in politically disturbed countries or are going through some tensions. For example, most companies don’t want to expand their business in Afghanistan, as there is so much disturbance.

Legal Policies

Every country has different laws and governing policies. A company should check all the legal requirements in the country where it wants to conduct business. The basic laws that need attention are organization laws, securities laws, consumer protection laws, employee protection laws, etc. The process can be lengthy, but it is necessary.

Behavioral Factors

Every country has different cultures and beliefs, and people can be very sensitive to these beliefs. An international company, if not careful, can land a lot of issues if they don’t take care of the country’s behavioral factors. For example, McDonald’s cannot sell its beef burgers in India; else, it will have to face the brunt of the Indian population that is majority Hindu.

Economic Forces

These factors include the county’s currency values, market size, cost, inflation, etc. These are important because it directly affects the profitability of operations. Every company should consider these factors before expanding internationally if they want to manage its bottom line.

All these factors mentioned above play an important role in how successful or unsuccessful an entity will be in its international business adventures. All these factors should be a consideration in the research and planning stage to get the maximum benefit out of it.

Also, read International Business Strategy.

The emergence of globalization and digital technology space has continued to lay a foundation for the world becoming a global village. This has led to the creation of conventional markets such as the African Union and the Economic Community of West African States. The factor of globalization has made it easier for most businesses to build international strategies that can tap the potentials available in other countries.

What Is International Business

It involves the trade between one country and another or trade amongst nations. It can be private or governmental in nature or take the form of bilateral and multilateral trade agreements.

In international business, items of trade consist of goods, services, labour and technology. There are no geographical boundaries to the flow of trade.

What Are The Types of International Business

When considering a venture in international markets, there are some significant tactical and strategic decisions to be effected. Exporting, joint ventures, direct investment, licensing, franchising, and other forms of an alliance is duly considered as market entry types. Each entry modules have different pros and cons, addressing issues like cost, control, speed to market, legal barriers, and cultural barriers with varying degrees of efficiency.

Licensing:

This agreement allows the licensor an affordable entry to a foreign market while the licensee gains access to the unique assets, especially goodwill of another firm. The structure is designed to allow firms to choose foreign individuals or companies to market or manufacture their products in another country. The foreign individual or firm in return pays royalty and a fee for the license granted.

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Franchising 

In a franchising arrangement, a company (the franchiser) grants an entrepreneur or local company (the franchisee) access to its brand, trademarks, and products.

In this arrangement, the entrepreneur or local company will take the majority of the risk in opening a new location. In return, the company (franchiser) will receive a certain percentage of the profits of the venture from the franchisee. The franchiser will usually often provide training and assistance with product or service.

Joint Ventures

Under this arrangement, the international business is structured that the foreign company partners by contributing on an equal basis in resources and capital for a new business in the partner’s country.

Here, the ownership is a joint venture between the foreign partners and indigenous partners who also share profit from the company. Some countries allow joint ventures as the only way to do international business within their countries. 

Foreign Direct Investments

It involves the commitment by a foreign investor of a substantial financial, capital and human resources in a country where it hopes to operate. It is a situation where a company buys or establishes a valuable asset or investment in another country.

Companies do FDI to benefit from cheap labour costs, tax exemptions, and other privileges in that host country.

Offshoring 

Offshoring is also known as outsourcing. Offshoring is the movement of a company’s business process from one country to another. This typically involves an operational process—for example, manufacturing or a support system process, such as accounting.

Even governments utilize offshoring, and more recently, it has been associated primarily with the validating of technical and administrative services.

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Conclusion

International business strategy involves the application of foreign branch office designs, the appointment of independent agents, licensing arrangements, the formation of strategic alliances and foreign direct investment by multinational companies.

They assist in aggregate opportunities and profits with diverse geographical boundaries in favour of the foreign company.

Lastly, never dismiss the impact changes in foreign exchange rates can have on your business.