Domestic vs. International business and Advantages of international business
Domestic vs. International business
The fundamental objective of any business is to generate good prons from its operations While this remains true in both domestic and international business, we can observe several differences in areas like legal framework government regulations financial management account systems, culture, and market forces. Some of these issues are explained below.
Legal and regulatory framework
This framework refers to companies having to comply with the law of the land they operate in. Companies involved in international business may have to comply with laws of more than one country. This certainly poses a challenge as each country has its own set of laws. These companies have to ascertain that their scope of business is within the regulatory framework set by the authorities of that country
In a domestic scenario, all the payments of a business involve the local currency. In an international scenario, for example, a company may pay in Chinese Yuan for sourcing its materials from China, pay wages in Malaysian Ringgits at its production base in Malaysia, and receive payments in Euros from its customer in Germany. Hence, a company has to deal with multiple currencies, exchange rate mechanisms, hedging of currencies, banking systems, fluctuating interest rates and so on.
Trade barriers and tariffs
In a domestic scenario, a company can move its goods and services almost freely within the country. But in international trade, companies face issues like licensing, anti-dumping laws, quota restrictions, and tariffs for their business operations in a foreign country or region.
Accounting and taxation
Domestic businesses need to comply with the accounting and taxation standards prevailing in that country. A company with international operations has to comply with the accounting standards and tax laws of the foreign country as well
In a domestic market, a business deals with a homogenous culture whereas a company with international business has to deal with heterogeneous cultures in multiple countries. The company’s management has to study different cultures and get accustomed to different languages culture, sentiments, and traditions of the foreign country in order to conduct business productivity
Market forces –
Demographics of each country have its own perceptions about different products and services. The local political, economic, and technological environments differ from country to country. While these differences are at a macro level, at the micro level we have to consider several other factors.
They may be in terms of customer preferences product placement, pricing, advertising, distribution channels and so on An international company has to face the challenges of multiple regional customers, each with unique requirements.
Advantages of international business
Let us discuss the need for companies to expand into foreign markets, and the benefits companies get from international business. Some of the advantages are as follows:
Low cost production
A company can take advantage of low cost production outside its domestic operations by identifying a nation where the labour is cost effective and in abundant supply. For example countries like China, Philippines, and Mexico offer such low cost production opportunities
A company utilises many valuable resources available in a foreign country either by importing from that country or by setting up a subsidiary, manufacturing, or production plant in that country, These resources can be human or natural resources like minerals.
For example, India has an abundance of skilled engineers, and many global companies take advantage of this resource by either setting up a subsidiary in India or through their partners. Similarly, Australia boasts of rich mineral deposits and so it houses the world’s largest mining companies.
Large customer base
Expanding into markets of foreign countries leads to exposure to more customers, better revenues, increased profits, and lateral growth. This scenario is ideal when the company has already established products in its domestic market. For example, Sweden based IKEA is the world’s largest furniture retailer, and operates in 37 countries after a modest beginning in Sweden.
A company with unique competencies and capabilities gain benefits in the international market. For example, Intel’s (USA) competencies and capabilities in semiconductors and chips have propelled it to global market leadership in microprocessors.
Any company can dilute its business risk by spreading its operations to a number of different and diverse countries rather than depending on any one market or region. For example, during the 1997 Asian financial crisis, companies with exposure in European and American countries were able to sustain far better than their counterparts in Asia.