Reading: Lesson 2 - Forms of International Business

5.2.A - Forms of International Business

1. FORMS OF INTERNATIONAL BUSINESS

1. International business happens in many structures. More often than not, when a firm chooses to go into international business, it begins by exporting, which includes pitching its items or services to purchasers in another nation. For instance, Boeing makes planes in the United States and sells some of them to Qantas, an Australian airline. Importing alludes to purchasing products or services made in an outside nation. At the point when Americans purchase Darjeeling tea, they are purchasing products imported from India. Exporting and importing are generally the easiest types of global business. Both should be possible with restricted assets and are moderately risk free.
   
2. International business additionally happens through licensing. International licensing happens when one organization enables an organization in another nation to make and offer items as per certain specifications. Accordingly, when an American pharmaceutical organization enables a German firm to make and sell in Germany a medicine the American organization has invented, this is licensing. The American organization gets a royalty from the German organization for any medicines the last sells. Licensing and its related concept, franchising, are moderately more costly and risky techniques for growing abroad, contrasted with exporting.
   
3. Firms may set up businesses in outside nations by framing joint ventures with different organizations. In a joint venture, at least two firms share the expenses of working together and share the profits. At the point when the firm sets up a business abroad all alone with no partners, it is known as a wholly owned subsidiary. These are more costly to set up and also more risky should the business fail.
   
4. As of late, numerous competitors have gone into strategic alliances with each other. Under strategic alliances, firms consent to coordinate on specific parts of business while remaining competitors on different aspects. In this manner, due to the high cost of growing new drugs for curing disease, two pharmaceutical organizations may consent to share research information and expenses while competing with each other in selling different medicines.
   
5. The development of international business has enabled the creation of multinational firms. A multinational firm is a firm that possesses or controls production or service facilities in more than one country. The country in which the business has its headquarters is alluded to as the home country. The foreign location where it has offices is alluded to as the host country. Organization headquarters is known as the parent firm; and the foreign branches, if registered as independent legal entities, are alluded to as subsidiaries. The majority of the world's biggest organizations are multinational firms. Be that as it may, numerous small firms are multinational businesses.
   
6. Trade and investment in the international environment have some unique complications. Businesses must consider government policies toward foreign firms and products, the value of foreign currencies, and the contrast of cultures when doing business abroad.

2. GOVERNING POLICIES

1. Since international business happens between at least two nations, the policies, tenets, and laws of more than one national government influence exchange and investment. Governments have a few alternatives accessible to them as an approach to keep up control when conducting international business.
   
2. In spite of the fact that financial experts trust that free trade is attractive for economic growth, once in a while governments impose trade barriers. Governments utilize various arguments for imposing trade barriers; protection of domestic employment, customers, infant industries, and national security and as a form of retaliation. Taxes are imposed on foreign products to secure domestic industries and to earn revenue. For example, assume that the U.S. government trusts that pants made in Colombia, South America, have leverage as a result of low-cost labor. The U.S. government can set a tariff of 10 percent to ensure domestic employment in U.S. firms that produce pants. On the off chance that the pants are priced at $30, the American customs department will collect an tax of $3 ($30 × 0.10), and the cost per pair will rise to $33.
   
3. Governments additionally impose tariffs when a foreign supplier is guilty of “dumping” its products. Dumping alludes to the act of selling goods in a foreign market at a value that is below cost or below what it charges in its home country. At the point when an organization dumps, it is trying to win more clients by driving domestic producers out of the market. A government could participate in countering against dumping by setting tariffs that increase the cost of merchandise being dumped. For instance, if Brazilian firms attempt to dump steel in the United States, a tariff may be imposed to adequately raise the cost of that steel to allow domestic producers to contend successfully.
   
4. Another way by which governments restrict the availability of foreign goods is to create quotas. A quota limits the quantity or value of units permitted to enter a country. For instance, the U.S. government may allow only 10,000 tons of salmon to enter the country annually from Chile, although much more salmon could be sold. Alternatively, the government could allow salmon worth up to $100 million into the United States from Chile annually. In either case, quotas limit the number or dollar value of foreign goods that can be sold in a country. Quotas are designed to protect the market share of domestic producers. This could help a new salmon farm or other infant industry in the United States. However, both tariffs and quotas increase the price of foreign goods to consumers.
   
5. In addition to tariffs and quotas, it may be difficult to sell goods and services abroad because of non-tariff barriers, which are non-tax methods of discouraging trade. In many cases, such barriers do not target specific foreign companies or products, but they have the practical effect of keeping them out. In other cases, barriers are deliberately created to protect domestic producers.
   
6. Almost all countries have non-tariff barriers of one sort or another. For example, in the United States, steering wheels are on the left side of motor vehicles, whereas in Ireland, the steering wheel is on the right side. Thus, before an American company can sell cars in Ireland, it would have to make changes to the vehicle. Another example of non-tariff barriers would be a public campaign to “Buy American.” This is clearly designed to discourage the buying of foreign goods and services. Non-tariff barriers are difficult to remove because they are often part of a country’s culture and tradition.
   
7. Governments may place restrictions on what goods and services can be exported or imported. The goals are again to protect domestic businesses, citizens, or cultures and to ensure national security. American firms need government licenses to sell high-technology or military products abroad. For political reasons, a government may bar companies from doing business with particular countries. Such a restriction is known as an embargo. For instance, the U.S. government has established an embargo that bars U.S. companies from conducting business with North Korea.
   
8. A sanction is a milder form of an embargo that bans specific business ties with a foreign country. For instance, it is illegal for an American company to sell nuclear technology to Pakistan, which tested atomic bombs in 1998. Governments place restrictions on what domestic companies foreigners are allowed to invest in or buy. In the United States, foreign firms are not allowed to have a majority control of airlines or television stations. The government fears that allowing that to happen might endanger national security. In extreme cases, a government may seize foreign firms with or without compensating the foreign company, if such businesses are thought to be harmful to national interests.
   
9. Prior to the World Trade Organization (WTO), individual countries would develop specialized relationships with partner countries or blocs of countries. Often, one country would have a dispute with another country when it felt its businesses were treated unfairly. This would lead to trade disputes and retaliatory actions. Countries or blocs of countries would engage in trade wars, damaging worldwide economic growth.
   
10. A number of agreements between countries were negotiated at the end of World War II. These included the creation of the United Nations and the General Agreement on Tariffs and Trade (GATT). As its name implies, GATT was designed to establish agreed upon frameworks for international tariffs and trade, including how to resolve disputes. The original GATT was signed by 23 nations in 1947. The WTO, the modern evolution of GATT, started in 1995 with 123 countries. The WTO acts as a forum for countries to negotiate trade agreements and to settle trade disputes. Member countries engage in a series of negotiations, or rounds, to revise WTO rules. The WTO’s Uruguay Round took over seven years to negotiate. The current Doha Round negotiations, which include 161 member countries, started in 2001 and are still ongoing.
    
11. International trade can be very complicated. WTO member countries have agreed to abide by the international trade rules and to bring their disputes to the WTO for dispute resolution instead of acting unilaterally. Once the WTO Appellate Body has announced a verdict, countries focus on complying with the WTO rules. They can renegotiate in future rounds. Since 1995, over 400 disputes have been brought to the WTO, including the February 2011 dispute between China and the United States. China requested consultations with the United States related to U.S. anti-dumping measures on frozen warm water shrimp from China. In September of 2011, the United States requested consultations with China concerning China’s measures to impose anti-dumping and countervailing duties on chicken broiler products from the United States. The WTO helps to keep trade disputes from spiraling into retaliatory acts and more serious political conflicts.
    
12. International business involves dealing with the money, or currency, of foreign countries. Currencies have different names, such as the dollar in the United States, peso in Mexico, and yen in Japan, but more important, they differ in value. This is a key difference between doing business domestically and doing business internationally. The exchange rate is the value of one country’s currency expressed in the currency of another country. For example, one U.S. dollar might be worth fifteen Mexican pesos right now. If you were traveling to Mexico and wanted some Mexican money, you would receive fifteen pesos for every dollar you turned in to the bank at this exchange rate. The value of each currency in terms of another can change every minute, depending on many factors, such as the demand for a particular currency, interest rates, inflation rates, and government policies. Several websites and mobile device apps post exchange rates for most currencies. In addition, there are online calculators that convert one currency to another.
    
13. Managers must closely watch exchange rates, as they affect profits and investment decisions in a big way. For example, assume the value of one American dollar is equal to 120 Japanese yen. A camera made in Japan for 12,000 yen would sell in the United States for $100 (12,000/120). If the exchange rate changes to 110 yen to the dollar, that same camera will now cost just over $109 (12,000/110). Thus, the Japanese camera becomes more expensive in the United States entirely because of exchange rate changes. To protect firms against adverse changes in the exchange rates, international business managers may use various finance-based strategies, such as contracts that require payments in a specific currency.
    
14. International business also requires understanding and coping with cultural values and traits in foreign countries that are different from those of the home country. Culture refers to the customs, beliefs, values, and patterns of behavior of the people of a country or group. It also includes language; religion; attitudes toward work, authority, and family; practices regarding courtship, etiquette, gestures, and joking; and manners and traditions. In many countries, especially large ones like India, Russia, and South Africa, numerous cultural differences exist within their own populations. Likewise, in the United States, there are cultural differences, such as among various racial and ethnic groups.
    
15. Some cultures may be more familiar to Americans, such as those of Canada and Great Britain. Others seem very unfamiliar to Americans, such as those of India and Thailand. Managers who work in foreign countries need to be aware of cultural differences in order to be successful in their assignments. The greater the cultural gap, the more the businessperson will have to adjust. Culture affects how people communicate in a country. In a low-context culture such as the United States, people communicate directly and explicitly. A person is expected to make his or her point directly and not beat around the bush. An American manager might say, “Do this task immediately.” The receiver of this message is not expected to read between the lines. In contrast, in a high-context culture such as Japan, communication tends to occur through nonverbal signs and indirect suggestions. Ambiguity and indirect suggestions are expected and highly valued. A person is not supposed to come right out and say it. A Japanese manager might say, “This task is very important, and your attention to it will be greatly appreciated.” The difference between high-and low-context cultures can cause communication misunderstandings.
    
16. English has become the language of international business. In general, business English is taught the same way in most business programs and within businesses. However, communication problems can arise outside of the office where relationships are built between individuals. Word usage and terminology vary across the world. This is even true for English-speaking countries. For example, individuals from the United Kingdom have a tendency to be more formal and keep a “stiff upper lip,” or be more reserved and restrained. Individuals from Australia can be the direct opposite. They are very informal and self-deprecating.