International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. History of International Business International business has been a major force in shaping borders and changing world history. The Roman Empire is credited with being the first major international trade. The Romans used the Pax Romana, or Roman peace, as a major stimulus.
This ensured that merchants were able to travel safely and rapidly on roads built, maintained and protected by Roman legions and their affiliated troops. A common means of exchange (coinage) simplified business transactions and made them comparable throughout the empire. In addition, Rome developed a systematic law, central market locations through the founding of cities, and an effective communication system; all of which contributed to the functioning of the marketplace and a reduction of business uncertainty.
As the empire prospered City-nations and tribes that were not part of the empire decided to join as allies, and paid tributes and taxes to gain from trade with the Romans. The decline of the Roman Empire coincided with the infighting that resulted in insecurity and decline of infrastructure. This reduced the general acceptability of the common coinage, effectively killing off trade. Later, the British Empire used effective international business policy, which provided for efficient transport intensive trade, and an insistence on open markets to develop international trade.
More recently, the United States developed a world leadership position largely due to its championing of market-based business transactions in the Western world; broader flow of ideas, goods and services along national borders; and an encouragement of international communication and transportation. Factors Stimulating Growth of International Business Stable Currency Relative currency stability is imperative for International trade to take place as it inspires general confidence on the sides of both buyer and seller. Inflation has the following effects on businesses: i) Inflation would cause a hike in interest rates.
For example, if a lender normally wants 5% to let someone else use the money for a while, and inflation is also 5%, then the lender will want 10%. This puts up business costs and makes borrowing less and therefore investment less; less investment means less growth and ultimately less business activity. ii) During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence. ii) When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be fewer sales for that country’s goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international market. The Zimbabwe situation though extreme is a good example of how inflation of how inflation can bring a countries participation in trade, both local and international, to a halt.
Below is an inflation curve showing the exponential rate of growth and the resultant reduction of GDP for the country. Inflation rate and GDP Graphs of Zimbabwe showing the interrelationship between the two Governments strive to control the rate of inflation to ensure that goods produced within its borders are competitively priced and that they do not price themselves out of the international market. Thus a stable currency is a stimulus for growth of international business. Technology and Innovation
In the 21st century the technological developments became more rapid compared to the previous centuries particularly in the information technology. This to some extent has an impact on changes in business practices and business models and enabled companies to embark business on a global scale. This also enabled the companies the ability to co-ordinate activities and to share information on real time and plan international operations. This also enabled the emergence of international capital flows.
This gave rise to the emergence of multinational corporations and transnational corporations operating in many countries. Competition became dynamic than static in nature. For example e-commerce, business networks, alliances, joint ventures and changes in decision about inbound logistics, outbound logistics, when where to produce at what scale, marketing and sales, distribution channel strategies to gain cost leadership, differentiation and focus became vital for sustainable profitability in the long-term by corporate entities of small, medium and large enterprises.
Technology also improves efficiency and effectiveness of an organization. The level of efficiency and productivity is increased dramatically with mechanization. The organizations that embrace mechanization also reap the benefits of economies of scale which makes their products competitively priced in the international market and thus stimulating international trade. Mechanization also gives the final products consistency which is important since the international market requires standardized goods with standard quality specifications
Government Policy i) Taxation The taxation policy of the government will either attract or discourage individuals from conducting international trade. Taxation affects the general price of goods and services thus too high a tax rate would make an organizations goods and services uncompetitive. Governments would impose taxes and duties on goods to protect their fledgling domestic industries from competition from imports of goods that are less expensive from countries that are more established producers of that particular commodity. i) Political Influence Due to political reasons, Governments may choose to impose Trade Embargoes with other countries, which essentially is a ban on trade between the two countries. This may retard the amount of Trade between the two countries. The lifting of such bans has a stimulating effect on the levels of international trade as seen in the Case of South Africa after the end of the Apartheid era. In the Table below, there was a marked shift in the revenues and general international trade.
The end of the Apartheid brought about a real GDP growth of 2. 6% and a general reduction in the Unemployment rate from a whopping 50% to 19%. The increase in International Trade was attributed to the lifting of trade embargoes by the UK and other European countries opposed to Apartheid. The liberalization of trade and the dismantling of trade barriers has increased trade between countries. In addition, the emergence of Trading blocs and economic communities has played its part in stimulating regional and international trade.
The East African Community for example, has the potential of giving its individual member states a larger consumer base for its products and services with minimal restrictions. It also gives the countries collective bargaining power in matters of pricing when trading with non- member countries. The political stability of a country may also influence its ability to trade internationally. Countries that have a history of political instability usually suffer in the international market since investors and the business people in general are averse to the risk and unpredictability of trading with such countries. 1989 (Pre- Apartheid) |1994 (Post Apartheid) | |GDP: real growth rate 1. 1% |GDP: real growth rate: 2. 6% | |Inflation rate (consumer prices): 12. 3% |Inflation rate (consumer prices): 13. 7% | |Unemployment rate: 50% |Unemployment rate: 19% | |Budget: revenues $18. billion; expenditures $23. 3 billion, including |Budget: revenues: $28. 3 billion | |capital expenditures of $3. 8 billion |expenditures: $34 billion, including capital expenditures of $2. 5 | |Exports: $18. 5 billion (f. o. b. ); @m5commodities–gold 40%, minerals and |billion | |metals 23%, food 6%, chemicals 3%; @m5partners–US, FRG, Japan, other |Exports: $29. billion commodities: gold 27%, other minerals and metals | |EC, Hong Kong |20-25%, food 5%, chemicals 3% | |Imports: $15. 3 billion (c. i. f. ); @m5commodities–machinery 27%, chemicals|partners: Italy, Japan, US, Germany, Hong Kong | |11%, vehicles and aircraft 11%, textiles, scientific instruments, base |Imports: $23. billion commodities: machinery 32%, transport equipment | |metals; @m5partners–US, Japan, France, Italy, Switzerland |15%, chemicals 11%, oil, textiles, scientific instruments | |External debt: $1. 1 billion (March 1988) |partners: Germany, US, Japan, , Italy , UK, France, | | |External debt: $17 billion |
South Africa’s Economic Performance Summaries for 1989 and 1994 (Extracted from the South African Reserve Bank Website) iii) Legal Environment In an attempt to become a globalized company or to operate in a fully globalized world, companies must plan and formulate strategies and form business organization forms that are the most suitable when entering a new country or region.
Some of the organization forms employed by companies seeking to penetrate into the international business arena include • An international company is a business that engages directly or indirectly in any form of international business activity such as exporting, importing, or production. • A multinational company (MNC) is a business that has direct investments (in the form of marketing/sales or more usually, manufacturing subsidiaries abroad in one or several nations, called host countries. A joint venture is a separate company or entity that is created and jointly owned by two or more independent entities (joint venture partners) in order to achieve a common business objective. Joint ventures are popular because they reduce risk, involve opportunities to penetrate markets that would not be possible without significant local ownership or access often in emerging markets and help gain access to another company’s distribution or marketing network.
For example, in Sudan penetration can only be achieved through joint venture activities, partnering with local firms and individuals. • A strategic alliance occurs where two or more entities cooperate but do not form a separate company to mutually achieve the strategic goals of each. The building of the European Air Bus was accomplished through a multinational governmental alliance. It is an alliance between the Governments of Germany, China, the United Kingdom and Netherlands.
Every country has some laws that govern external investment and trade and the strategy utilized by investors is dependent on what is accepted in the country they wish to invest in. The Sudan example is an example of a country in which one cannot penetrate without having local partnership. This may have a double edged sword effect in that it discourages investors from coming into the market due to the risks involved in partnering up with relatively unknown people in a new business environment.
On the other hand, the citizens of the country benefit since they are able to partner up with external investors and be part of the business and this reduces the extent of capital flight, that is, the amount of money that is repatriated back to the investors’ home country Other legal requirements that the investor may need to adhere to include: • Product Safety and Product Liability: Many international companies are required to customize or modify products to comply with local standards and specifications.
Product liability law is well developed in the United States, the European Union, and in many wealthy nations throughout the world. In contrast, product liability laws are nominally existent, non-existent, or arbitrary throughout much of the less-developed world. While product liability law provides for an award of punitive damages as a measure of damages in product defect cases, this practice is far less common in most countries throughout the world.
This requirement would obviously be a deterrent as the cost of modifying products to be in compliance with the local laws may be costly enough to discourage foreign importers from making inroads into that economy • Marketplace Behavior: National legal systems determine the legality of such practices as pricing, distribution, advertising, and promotion of products and services. Antitrust or antimonopoly law is an important aspect of international business law.
For example the prices of some items may be controlled by the government for strategic purposes. In countries where this is normal practice, this discourages importers as they are unable to get their targeted profit margins due to the strict price controls by the government. Licensing In order to maintain competitiveness among the various companies operating within its borders, government limits the number of businesses operating in the same line. This is controlled by licensing.
The licenses also help enforce discipline in respective industries by ensuring that the different companies follow the local countries follow the law failure to which their licenses can be revoked. Also the process of investing into a country would attract or repel investors. Generally countries who subject potential investors to many stages before licensing them to operate are shied away from. Governments, through their investment promotions arm, are trying to reduce the formalities of registering a business by foreign investors.
REFERENCES Ml Czinkota et al, International Business, 7th Ed. Thomson Corporation, South Western. 2005. C. W. Hill, International Business, 7th Ed, McGraw Hill Irwin (2009) Balance of payments – South Africa – export, power http://www. nationsencyclopedia. com/Africa/South-Africa-BALANCE-OF-PAYMENTS. html#ixzz16l9E8ctv http://www. resbank. co. za/Economics http://bizcovering. com/business-and-society/the-factors-affecting-competitiveness-of-companies/#ixzz170uodi00