Globalization is a process through which different economies of the world gradually lift up the restrictions, that hinders the free flow goods, services, resources etc. across various political boundaries.
This is done in particular through International Business (carries out mainly through International Trade and Investment), aided by sophisticated technologies and market integration.
International Business means carrying out businesses beyond national boundaries. The international business includes both International Trade as well as Foreign Direct Investment (FDI).
International Trade can broadly be divided into two parts viz. Export and Import.
- Export – The transaction of goods and services (via. sales, barter, gift or grant) from home country to the host country is called Export.
- Import – The transaction of goods and services (via. sales, barter, gift or grant) to home country from host country is called Import.
Foreign Direct Investment occurs when an investor based in one country (at home country) acquires an asset in another country (the host country) with intent to manage that asset. It is the management dimension that typically differentiates FDI from Portfolio Investment in foreign securities and financial instruments in foreign securities and financial instruments.
In most cases both the investor and the asset, it manages abroad are the business entity. In such a case investor is typically referred to as ‘parent firm’ and the asset it manages is called ‘affiliate’ or ‘subsidiary’.
Motive behind Foreign Direct Investment (FDI) includes:-
- Acquiring natural resources
- Recovery of large expenditure made on research and development
- Capturing a large International Market System
- Earning Large Profit
- Maintaining Balance of Payment
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Importance of International Business
The importance of International Business can be studied at two levels:
- No country (be it developed or developing) produces all the commodities to meet its requirement as such it needs to port those commodities that are either not produced or produced in insufficient quantity in domestically to meet its requirements.
- At the same time, all the country tries to export all the commodities that are in excess of its domestic consumption.
- Maintaining the favorable balance of payment.
Maximization of corporate wealthCorporate wealth is the value of productive asset plus the present value of wealth created by those assets.Alternatively, corporate wealth quals to the sum of the total of debt and equity of a firm.
Minimization of costAcquiring the resources which are relatively cheaper helps reduce the cost of production.
Minimization of risk through
(A) Diversification of business
(B) Expansion of business
Approaches to International Business
- Ethnocentric– In this form of approach, the policies of a firm operating in the foreign country are based upon that of the home country.
- Polycentric– In this form of approach, the policies of a firm operating in the foreign country are based upon that of the host country in which it is operating.
- Geocentric– Between above two approaches, geocentric approach follows a real life situation, where there exist no distinction (or boundaries) of framing the policies in terms of either home or host country. This approach aims to fit the “right policy at the right place”.