International Business Issues

International Business Issues

Introduction

International business refers to the commercial transactions between two or more nations usually done for profit, political reasons or other international requirements. Just as there are different types of businesses, there are different forms of international business such as franchises, joint ventures, partnerships among others. Companies, individuals or governments that try to penetrate the market of other nations through creating a capital base, license agreements, joint ventures, counter trade among others. They are faced with risks and uncertainties and require heavy financing for their products to meet international standards. This essay shall analyze such issues.

Basic Strategies to Compete In International Markets

There are four basic strategies for competing effectively in the international market which are; global strategy, transnational strategy, international strategy and multidomestic strategy. Global strategy is usually effective where there are strong pressures to reduce costs accompanied by a low demand for local responses. International strategy is highly effective when a firm faces weak pressures to reduce costs and weak local responses. Transnational strategy works in conditions where a firm is aiming at cost reduction and a high level of pressure for local responses. Multidomestic strategy works well when a firm has a high cost structure and maximum local response.

An organization using this strategy aims at bringing a balance between pressures for global integration and pressure for local responses. Companies form alliances with their customers, suppliers and other business partners. These long term partnerships bring to the firm special competences, stable and reliable market outlets for further marketing of its products and services while enjoying stable and flexible supply. Several independent firms may collaborate to bring products and services to the market to save costs. This strategy helps develop valuable

International Business Issues

skills in the firm’s world wide operations. Transfer of knowledge occurs from a foreign subsidiary to the home country sector and to other foreign subsidiaries.

A firm that wants to use transnational strategy must have a strong structure to ensure its stability. The combination of mechanisms needed is contradictory. A firm needs to be centralized yet decentralized at the same time, formalized and unformalised and integrated and non integrated at the same time. These contradicting demands on the organization limit its effectiveness.

Licensing Agreements

This is an agreement that permits a firm to produce or market the product or service of another company. This agreement grants a license at a fee usually called a royalty payment. Items licensed include patents, trademarks, designs, expertise among others. A licensing agreement allows a firm to penetrate the international markets by providing a middle way between direct exports and investment internationally. The licensee takes the risks involved and enjoys the goodwill created by the licensing firm and this makes investment easier as costs for penetrating an overseas market declines

Licensing agreements are very risky deals which call for caution. The firm is likely to lose control over manufacture and marketing of its products or services in other countries. Being a mode of international expansion, it may be less profitable as profit as to be shared between the two parties. The risk of selecting a foreign partner, language barriers, and social cultural issues while the foreign company may sell a competitive product once the license expires making it hard to remain in business.

Joint Venture

International Business Issues

It is a strategic deal between two or more parties mainly firms with the aim of forming a partnership to share markets, property, knowledge and profits made with no transfer of ownership. The outsider joint venture is the most common form of joint venture. Law firms are mainly joint ventures with lawyers, advocates and other experts.

A joint venture firm gets access to overseas markets without paying tariffs and has close contacts with customers. They incorporate high levels of skills and knowledge getting a competitive edge over competitors relying on the element of trustworthiness as key for their success which can easily be compromised. Firms take a long time to implement and gain acceptance in the international market causing losses in the initial stages. Lack of experience and knowledge of the international market may lead to losses.

Counter Trade

This is mechanism where goods, services or technology are paid for through reciprocated purchasing obligations in addition to or in the place of financial settlement. Barter is the simplest form of counter trade. It is used to settle debt or where money is not accepted as a form of exchange. Firms are reluctant to engage in counter trade due to the increases in costs, risks and uncertainties, time consumed in negotiations, added legal and brokerage costs. Difficulties in reselling products with concerns of price arise with customers becoming competitors. Firms avoid this form of trade because of these issues.

The main attraction to counter trade is its ability to increase exports and open new markets especially for developing countries. Firms in developing countries are most likely to engage in counter trade because of lack of enough foreign currency, limited access to trade finance facilities, international standards and requirements, depressed prices and increasing debts.

International Business Issues

Capital Budgeting

A firm seeking entry in the international market needs to make sound investment, financial and money decisions. Feasibility studies have to be done to determine the viability of a market opportunity. Decisions made affect the performance of the firm in its home country. Care has to be taken in determining the best method of penetrating the overseas market to avoid losses or closure of business.

Capital budgeting is the evaluation and analysis of capital in vestment decisions. As far as the international market is concerned it is usually referred to as international capital budgeting. The return on investment and internal rate of return are used to ascertain the profitability of projects undertaken and to estimate the time value of money. Capital decisions for international markets are usually characterized by unexpected costs, sequential investment, trade offs and the foreign environment usually hinder capital budegeting.Inflation,risks and uncertainties of the markets and the foreign exchange rates complicate the process of international capital budgeting. (Zaring, 1996)

Risks

International trade though beneficial is faced with risks ranging from strategic, technological, political, and economic, among other risks. Political risks are the political actions, and instabilities that may hinder a firm to operate due to negative public image potrayed and the influence of individuals in top government positions on the firm. (Okolo, 2008) A company seeking to penetrate foreign markets has to consider the political risks as a hostile government may expropriate foreign assets, restrict the operations of foreign firms and the subsidiaries in other countries and home country would be affected. The political history of the country needs to be analyzed.

Economic risk is the inability of a country to meet its financial obligations, the changing of the domestic fiscal and monetary policies, and the effects of interest and exchange rates that make

International Business Issues

it difficult to do business. This affects all the decisions that the foreign company is expected to make. There is need to assess these as these changes affect the firm to ensure that there is protection from the sate to avoid huge losses.

Foreign Exchange Rate Systems

A floating exchange rate regime is where the currency is allowed to fluctuate according to the foreign exchange market. Since most developing countries cannot maintain a stable exchange rate they adopt a system where the rate is allowed to fluctuate or an equilibrium rate is set. This exchange rate does not hinder foreign trade. As the rate fluctuates, the country is able to adjust to shocks and foreign business cycles and avoid a balance of payment crisis. (Calvo and R einhart, 2002)

A dirty float system is a system of the floating system where the central government intervenes in some instances to change the direction of the value of the country’s currency. A free floating system raises foreign exchange volatility as there is no government interference in the system.

Conclusion

The international market has many benefits. However the issues surrounding it such as the modes of entry, risks involved and the complex capital budgeting has to be done for a firm to remain internationally competitive.

References

International Business Issues

Bortlett, C and Ghoshal, S. (1998). Managing across borders, & transnational solution. Boston:

Harvard business school press

Calvo, G and Reinhart, C. (2002). Fear of floating:= journal of economics. 117, 379-408

Dunning, J. (2009). Journal for international Business studies, 41(9)

Hofstede, G. (2000). Culture’s consequences: + -values, behaviors, institutions and

organizations across nations. (4 Th Edition) New York: Sage publications

Okolo, S. (2008). Risks in International Business. Retrieved September 17, 2009, from http://ez inearticles.com/?Risks-in-International-Business&id=1331702

Pitts, R and Lei, D. (2000).Strategic management & sustaining a competitive advantage. (2nd ed.), Cincinnati: South Western College publishing house

Zaring, O. (1996).Capital budgeting for the unexpected, Sweden: Elsevier science ltd