How Does International Business Different From Domestic Business

How Does International Business Different From Domestic Business

International business is not so different from domestic business because it follows the same rules of supply and demand. However, an international corporate transaction may be complicated by various external variables.

How Does International Business Different From Domestic Business

These factors include geopolitical considerations, cross-cultural communication barriers, tariffs and quotas, currency exchange fluctuations, economic power/purchasing parity in various countries, political risk potential, and local regulations at destinations.

Foreign business transactions may also carry additional costs such as localization of products, long-distance communication barriers between partners, cultural change needed to sustain company operations abroad, political risks for foreigners or locals, etc.

Some factors that make international business unique are different forms of exchange, different economic systems, and language barriers.

For example, there are five main types of business transactions, including arm’s length transactions (most similar to domestic transactions), international trade within multinational corporations (MNCs) or between MNCs, foreign direct investment (FDI), franchising, and outsourcing.

Domestic businesses do not usually use FDI but rely more heavily on arm’s length transactions. Arm’s length transactions might include licensing the rights to an intellectual property overseas or setting up a manufacturing facility abroad through an MNC subsidiary or affiliate. Franchising is typically done domestically, whereas international franchising is typically done under license by foreign parties who operate its brand in their own country, region, or continent.

Another difference between domestic business and international business is economic systems. A competitive market structure in most countries may be considered different from more hierarchical relationships.

Additionally, language may act as a barrier to good intercultural dialogue. It is important for parties engaged in foreign transactions to develop effective international communication strategies. Language barriers may exist between mass markets (e.g., English-speaking countries) and emerging markets (e.g., China). Mass markets usually have lower transaction costs associated with cultural differences; however, emerging markets offer new opportunities that might not be available in mass markets due to saturation of product/service demands at a lower rate of product/service growth.

Language barriers may also be a factor to consider between globalized and local markets, both in the same country. Globalization aims to capitalize on economies of scale by either selling products or services to a larger market or to produce in a place with lower costs (logistics, labor). However, local markets might not pay as much attention to globalization strategies because they do not usually share language, culture, laws (e.g., sales tax rates). Therefore, business transactions with these customers may be more difficult than expected.

Another key difference between domestic business and international business is that international business has new opportunities available for investment purposes. In contrast, some foreign markets may offer favorable conditions for direct investment, and other foreign markets may offer favorable conditions for outsourcing.

Some of the opportunities that exist in foreign markets include lower production costs due to reduced business taxation, low operating expenses, low labor cost advantages (e.g., manufacturing), less competition from local companies, political stability risk potentials, and increased proximity to major sources of demand (due to import/export demands). Many emerging markets such as China and India offer these opportunities; however, many countries require appropriate licenses or expertise before entering into certain international market transactions because they represent a higher level of risk than domestic business activities.

International business is often done with different cultures and language barriers, presenting unique challenges. Common considerations when performing international business include: using effective communication strategies to overcome language barriers, understanding customer price sensitivity in international markets when setting prices, and minimizing country risk when entering into transactions with foreign parties.

Internationalization is a process of increasing how businesses operate across national borders to gain competitive advantages. For example, Apple Inc. began its business operations as a domestic company; however, it has expanded worldwide.

International business is also known as “going global” because companies expand their activities beyond national borders to more than one country. There are advantages and disadvantages to internationalizing business operations (e.g., increased expenses associated with expanding into new markets). For example, Apple Inc. had the advantage of having access to more customers due to geographic expansion; however, since it entered into new markets with different languages and cultures, its expenses increased (e.g., product localization costs).

Companies achieve internationalization through two main approaches: exporting or direct investment for “branching out.” Businesses can use exporting to enter foreign markets because they will not have to make major changes or investments. To expand internationally through direct investment, companies must first establish the presence of their company in the foreign country by either creating a new subsidiary or acquiring an existing company.

The following are different methods for international business: exporting, licensing, franchising, forming joint ventures, or strategic alliances. Exporting is when companies sell goods and services to foreign businesses/individuals without altering the original form of the product while maintaining its branding. International licensing distributes intellectual properties (e.g., trademarks) to other parties in different countries for a fixed fee. In contrast, international franchising is when companies agree to establish their brand name in other countries by licensing their trademark to other parties. Joint ventures are relationships between companies that engage in business activities, whereas strategic alliances are agreements made between businesses for marketing purposes (e.g., distribution of goods or services). The section that follows examines the advantages and disadvantages of international business methods.

Exporting allows a company to expand its business operations with little or no investment because it can sell/distribute its products without changing the original form. However, exporting still has some disadvantages related to potential fluctuations in currency prices and customer preferences.

Franchising is a way for companies to maximize profits by expanding business operations internationally without investing as much as if the company was going directly to open a new subsidiary. Franchising can be used for international expansion because it does not require companies to have extensive knowledge about other countries’ local markets and cultures.

Forming strategic alliances is a way for businesses to leverage the strengths and resources of other companies within the same industry. Alliances can be formed for different reasons such as distribution, research and development, and marketing purposes. For example, Apple Inc. partnered with another tech company, Intel, to make mobile processors for its mobile devices (e.g., iPhones).

Apple Incorporated is an international business that engages in several different forms of global transactions: exporting, licensing intellectual properties (e.g., trademarks), and forming strategic alliances (e.g., marketing partnerships).

Apple exports over $70 billion worth of products every year, about 60% of which goes to Europe and China alone, according to Apple’s 2013 annual report. Licensing has been a successful method for gaining sales from customers in different countries due to the growth of mobile phone usage. Apple has licensed its iPhone’s trademark to mobile companies in multiple foreign countries like Japan, Hungary, and South Korea.

Apple entered into a strategic alliance with business partner Intel Corp. in July 2014 for making processors for its mobile devices (e.g., iPhones) due to hardware limitations caused by low energy efficiency.

One challenge of Apple is the localization of products since it will need to adopt changes or upgrades according to customers’ country preferences; this is often done by international subsidiaries stationed in other countries where the products will be sold/distributed. For example, Apple opened an Italian R&D office in Naples in early 2015 (Only one of many subsidiaries).