Reason for International Business
The basic reason behind international business is that the countries cannot produce equally well or inexpensively all that they require. This is due to the unequal distribution of natural resources amid them or differences in their level of productivity. Availability of several factors of production such as labour, capital and raw materials required for producing various goods and services differ among nations. In addition, labour productivity and production costs differ among nations because of various socio-economic, geographical and political reasons.
- International business involves commercial activities that cross national frontiers.
- International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of the individuals, companies and organisations. These transactions take on various forms which are often interrelated.
- International business is all business transactions - private and governmental - that involve two or more countries. Private companies undertake such transactions for profits; governments may or may not do the same in their transactions.
- Owing to these differences, it is not unusual to identify one particular country being in a better position to produce better quality products at lower costs than what other countries can do. In other words, we can predict that some countries are in an advantageous position in producing selective goods and services which other countries are incapable of producing effectively and efficiently, and viceversa. Accordingly, each country finds it advantageous to produce those selective goods and services which can be produced more effectively and efficiently at home, and procuring the remaining through trade with other countries which the other nations can produce at lower costs. This is precisely the reason why countries trade with other countries and engage themselves in international business. The international business as it flourishes today is to a great extent the result of geographical specialisation as mentioned above. Basically, it is for this reason that domestic trade between two states or regions within a country exists. The majority of states or regions within a country tend to specialise in production of goods and services for which they are well suited. In India, for instance, while West Bengal specialises in jute products; Mumbai and other neighbouring states in Maharashtra are more specialized in production of cotton textiles. This very same principle of territorial division of labour is appropriate at the international level too. Majority of developing countries which are labour abundant, for example, specialise in producing and exporting garments. As they lack resources and technology, they import textile machinery from the developed nations which the latter are in a situation to produce more efficiently. What is applicable for the nation is relatively applicable for firms. Business organizations also engage in international business to import available products and goods at lower prices in other countries, and also export products and goods to other countries where they can obtain better prices for their products. In addition to price considerations, there are many other benefits which countries and business organisations derive from international business. In a way, the other benefits too provide an impetus to countries and firms to engage in international business. Now, we shall take a look at some of these benefits accruing to countries and business organization by engaging in international business.