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International Business concepts for International Business MCOM sem 2 Delhi University

International Business concepts for International Business MCOM sem 2 Delhi University

International Business concepts for International Business MCOM sem 2 Delhi University – International business comprises all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundaries. Usually, private companies undertake transactions for profit; governments undertake them for profit and forpolitical reasons.

International Business concepts for International Business MCOM sem 2 Delhi University

The term “international business” refers to all those business activities which involve cross-border transactions of goods, services, and resources between two or more nations. Transactions of economic resources include capital, skills, people etc. for the purpose of the international production of physical goods and services such as finance, banking, insurance, construction etc.

International Business concepts for International Business MCOM sem 2 Delhi University

International Business concepts for International Business MCOM sem 2 Delhi University

A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or with operations in several countries. Well-known MNEs include fast-food companies such as McDonald’s and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer-electronics producers likeSamsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. As shown, multinational enterprises can make business in different types of market.

Areas of study within this topic include differences in legal systems, political systems, economic policy, language,accounting standards, labor standards, living standards, environmental standards, local culture, corporate culture,foreign-exchange market, tariffs, import and export regulations, trade agreements, climate, education and many more topics. Each of these factors may require changes in how individual business units operate from 1 country to the next.

International Business concepts for International Business MCOM sem 2 Delhi University

International business can be defined as the study of multinational companies.

One of the first scholars to engage in developing a theory of multinational companies was Stephen Hymer. Throughout his academic life he developed theories that sought to explain foreign direct investment and why firms become multinational.

There were three phases in Hymer’s work. The first phase was his dissertation in 1960 called the International Operations of National Firms. In this thesis, Hymer departs from neoclassical theory and opens up a new area of international production. At first Hymer started analyzing neoclassical theory and the financial investment wherein the main reason for capital movement is difference in interest rates. Then he started analyzing the characteristics of foreign investment by large companies for production and direct business purposes, calling this Foreign Direct Investment. By analyzing the two types of investments Hymer distinguished financial investment from direct investment. The main distinguishing feature was control. Where in portfolio investment is a more passive approach, and the main purpose is financial gain, with foreign direct investment a firm has control over the operations abroad. So the traditional theory of investment based on differential interest rates does not explain the motivations for FDI.

According to Hymer there are two main determinants of FDI wherein an imperfect market structure is the key element. The first is the firm specific advantages which are developed at the specific companies home country and, profitably, used in the foreign country. The second determinant is the removal of control wherein Hymer wrote: ‘’When firms are interconnected, they compete in selling in the same market or one of the firms may sell to the other,’’ and because of this ‘‘it may be profitable to substitute centralised decision making for decentralised decision making’’

The second phase is his neoclassical article in 1968. This paper includes theory of internationalization and explains the direction of growth of the international expansion of firms. In a later stage Hymer went to a more Marxist approach where he explains that MNC as agents of an international capitalist system causing conflict and contradictions, causing among other inequality and poverty in the world. Hymer is the father of the theory of MNE”, and explains the motivations for companies doing direct business abroad.

Among modern economic theories of multinationals and foreign direct investment are internalization theory and John Dunning’s OLI paradigm. Hymer and Dunning are considered founding fathers of international business as a specialist field of study.

International Business concepts for International Business MCOM sem 2 Delhi University | Risks

  • Strategic

A firm must be prepared, aware of the competition and ready to face it in the international market. Several companies (competitors) could substitute for products or services of an unpopular firm. A brilliant and innovative strategy will help a firm succeed.

  • Operational risk

A company has to be conscious about the production costs in order to not waste time and money. If the expenditures and costs are controlled, it will create an efficient production and help the internationalization.

  • Political risk

How a government governs a country can affect the operations of a firm. The government might be corrupt, hostile, totalitarian, etc., and has a negative image around the globe. A firm’s reputation can change if it operates in a country controlled by that type of government. Also, an unstable political situation can be a risk for multinational firms. Elections or any political event that is unexpected can change a country’s situation and put a firm in an awkward position.

  • Technological risk

Technological progress brings many benefits, but some disadvantages, including “lack of security in electronic transactions, the cost of developing new technology … the fact that this new technology may fail, and, when all of these are coupled with the outdated existing technology, [the fact that] the result may create a dangerous effect in doing business in the international arena.”

  • Environmental Risk

Companies that establish a subsidiary or factory abroad need to be conscious about the externalities they will produce. Negative externalities can be noise, pollution, etc. The population might want to fight against the company to keep a natural and healthy environment/country. This situation can change the customer’s perception of the firm and create a negative image of it.

  • Economic risk

These are the economic risks explained by Professor Okolo: “This comes from the inability of a country to meet its financial obligations. The changing of foreign-investment or/and domestic fiscal or monetary policies. The effect of exchange-rate and interest rate make it difficult to conduct international business.” Moreover, it can be a risk for a company to operate in a country and they may experience an unexpected economic crisis after establishing the subsidiary.

  • Financial risk

According to Professor Okolo: “This area is affected by the currency exchange rate, government flexibility in allowing the firms to repatriate profits or funds outside the country. The devaluation and inflation will also impact the firm’s ability to operate at an efficient capacity and still be stable.” Furthermore, the taxes that a company has to pay might be advantageous or not. It might be higher or lower in the host countries. Then “the risk that a government will discriminatorily change the laws, regulations, or contracts governing an investment—or will fail to enforce them—in a way that reduces an investor’s financial returns is what we call ‘policy risk.'”

  • Terrorism

A terrorist attack against a company or country is meant to hurt or damage it by violence. It is hate that pushes people to do it and it is usually based on religion, culture, political ideas, etc. The World Trade Center attack on 9/11 is an example of a terrorist attack that affected the United States and also companies that were established in these buildings. Therefore, it can be hard to operate where the environment is tense and scary and in countries that are likely to be attacked.

  • Planning risk
  • Price risk
  • Customer satisfaction risk
  • Mismanagement risks
  • Competitive risks
  • Location risks

A company has to choose the right location for the subsidiary abroad. It needs to make the right choice before outsourcing or offshoring its activities. There are many criteria to take into account: If there is enough of a labor force to work for the firm, what the regulations are, what the laws and policies of the host country are, if the area is safe, etc. It is important to know the data of the host country, such as the crime rate. Also, are the host country citizens willing to have this foreign company on their territory or not?

  • Bribery

Bribery is a worldwide phenomenon. Multinational enterprises must be conscious and concerned about it. Companies operating on the international market have a role in combating bribery, as do governments, trade unions, etc. The countries participating in international trade need to prevent bribery, not support it, offer it, give it, promise it, etc.

International Business concepts for International Business MCOM sem 2 Delhi University

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