The 6 key elements of international business

In a world that is constantly developing, and with a very marked globalization, businesses have had the need to expand or stagnate. Supported by globalizing currents, it has made this expansion take place outside national borders.

Companies have understood that outside the borders of their countries there are very great growth opportunities, but they have also learned that to take advantage of these opportunities, a deep learning is necessary, since doing business outside their borders is not the same, because differences that will be seen in this course.

In the practice of international business, a large number of fundamental factors and details intervene that make it possible to function properly. However, all these factors are included in certain key elements, making it easier to understand and study them. There are 6 major key elements that make up the practice and environment of ALL business transactions on the international stage. Knowing those 6 key elements, it is much easier to understand understanding the total functioning of international business and its environment.

The 6 key elements found in each and every international business operation are:

Globalization in international business. Differences between countries. World trade and international investments. Financial environment in international business. Strategy and structure of international business. International business operations.

We will now explain each of these elements.

1. Globalization in international business.

In recent years, we have witnessed the globalization of markets and production. The globalization of markets implies that national markets merge into one huge single market. The globalization of production means that companies establish their productive activities in the best places in the world to carry them out.

The trend towards globalization is based on two factors: the reduction of trade barriers and changes in communication, information and transport technologies.

As a consequence of the globalization of markets and production, in recent years, world trade grew faster than production; foreign direct investment increased, exports penetrated more nations and the pressures of competition intensified in all branches of the economy.

One of the elements showing the advance of globalization in the economies is the increase in multinational companies. Multinational companies were born as a consequence of the process of market expansion. A multinational company is a company with productive activities in two or more countries.

As markets tend towards globalization and more and more business activities cross national borders, it is necessary to have institutions that manage, regulate and monitor the world market and promote the establishment of multinational treaties that govern the world business system.

The most important international institutions that have emerged for this purpose are:

International Monetary Fund. World Bank. United Nations Organization.

The most important administrative decisions to be made by managers of international companies are:

They must decide where in the world to set up their activities to minimize costs and maximize added value. They must decide whether it is ethical to obey the less stringent work and ecological standards of many developing countries. They must decide what the best way to coordinate and control production activities scattered around the world. They must decide which foreign markets they enter and which they avoid. They must choose the most appropriate entry modalities. They must deal with government restrictions on trade and investment. They must find the means to work within the limits imposed on them by the various government institutions. They must establish rules to deal with currency movements. International transactions require that money, in the currency of the country of origin,become the foreign currency and vice versa.

2. Differences between countries.

The political system of a country shapes its economic and social systems. So we must understand the nature of political systems before analyzing economic and legal systems.

By political system, we understand the system of government of a nation. Political systems are analyzed in two aspects.

Collectivism or individualism. Democracy or totalitarianism.

An economic system is a mechanism (social institution) that organizes production, distribution and consumption for the benefit of a particular society.

The economic systems, like the political systems, and linked to these, dictate the guidelines of how they are going to be carried out, or if they are going to carry out business in a certain region.

In economics, three general economic systems can be identified:

Market economy Planned economy Mixed economy

A country's legal system comprises the rules or laws that dictate behavior, along with the mechanisms by which these laws are applied and complaints are aired. The legal system of a country is of vital importance for international companies. The laws of a country regulate commercial practices, define the way to carry out commercial transactions, and establish the rights and obligations of the participants.

The legal system must consider:

Contract law. Property rights. Protection of intellectual property. Product safety and responsibility.

Economic development is the ability of countries or regions to create wealth in order to promote or maintain the prosperity or economic and social well-being of its inhabitants. The political, economic and legal systems have a profound effect on the level of economic development, which can be an attraction for companies as a possible market.

The countries, as a result of their economic policies, present different levels of economic development. There are great differences in economic development between countries.

To classify the degree of economic development, three categories are established:

Least developed countries Developing or intermediate developing countries Developed countries

Culture is the set of all forms, models or patterns, explicit or implicit, through which a society regulates the behavior of the people that comprise it. It is a value system shared by a group, thus outlining their behavior.

If international companies do not take into account the cultural difference between countries, it can be a major obstacle to entry and operation.

The elements that make up the culture are:

Values and norms. Social structure. Religious and ethical systems. Language. Education. Work culture.

In the context of international business, the most common ethical problems have to do with:

Employment practices Human rights Environmental standards Corruption Moral obligations

There are five approaches that international companies and their managers can take to consider ethical issues in business decisions.

Recruitment and promotions. Organizational culture and leadership. Decision-making processes. Ethics officials. Civil value.

3. World trade and international investments.

International trade is the systematic and widespread exchange of products and services between one country and another or between one country and several countries ”. Currently international trade is an important activity because its development contributes to economic growth and the well-being of citizens.

Theories of International Trade are a scientific synthesis that tries to explain the operation of international trade under certain established models. International Trade Theories are important for companies, especially because it helps them decide where to establish their various productive activities.

There are 6 theories of international trade:

The absolute advantage The comparative advantage The Heckscher Ohlin theory The national competitive advantage: Michel Porter's diamond The product life cycle theory The new theory of international trade

The countries' trade policy is the set of actions that governments undertake to promote and improve their foreign trade. Trade policy is divided into two: tariff policy and non-tariff policy.

The way the world economy is structured directly influences international business operations. The structure of the world economy can be divided into two main parts:

Economic systems. Levels of economic integration.

Economic integration is a term used to describe the different aspects by which the countries' economies become more homogeneous, that is, they tend to have a common economic policy.

The levels of economic integration that exists in the current economy are:

Preferential trade zone. Free trade zone. Customs union. Common market. Economic and monetary union.

Within the framework of international trade, there are large international institutions dedicated to promoting fair, equal and free trade between countries. The most important bodies in this field are the World Trade Organization (WTO; WTO for its acronym in English), the International Chamber of Commerce (ICC; ICC for its acronym in English), the World Customs Organization, and indirectly, the International Monetary Fund and the World Bank, although these are rather international financial institutions.

Foreign direct investment occurs when a company invests directly in facilities to produce or sell a good in a country. When a company makes an investment in a country other than its own, it becomes an international company.

Factors such as economic growth, deregulation, privatization programs open to foreign investors and the removal of many restrictions have made investment in other countries more attractive for companies. Furthermore, global economic globalization has also had a positive effect on the volume of foreign direct investment.

International companies make direct foreign investments to access national markets or to establish cheap manufacturing centers from which to supply regional or world markets. Foreign direct investment can be divided for its better understanding into two strands or classifications:

Horizontal direct foreign investment.Horizontal direct foreign investment.

4. Financial environment in international business.

In international negotiations, various currencies intervene. Each country has its own local currency of legal tender, with which goods and services are paid. The exchange rate is the number of units that must be delivered from one currency to obtain another.

In finance, there are two exchange rates: the exchange rate for purchase and the exchange rate for sale. The purchase exchange rate is used when we have foreign currency, and we want to exchange it for local currency. The exchange rate for sale is used when we have local currency, and we want to exchange it for some foreign currency.

Depending on time, the exchange rate is divided into two:

Spot exchange rate (Spot). Future exchange rate (Forward).

Depending on the ease of change, the exchange rate is divided into:

Direct exchange rate. Indirect exchange rate.

The exchange rate directly influences the international economy, mainly in two areas:

International Trade. International Investments.

The international financial system is the set of institutions, public and private, that regulate the correct functioning of financial resources in the international environment, and that provide the means of financing to the international economy for the development of its activities.

The institutions of the international financial system can be divided, by their constitution, into public and private, and by their scope, national and international.

By its constitution:

Public Institutions: Central Banks, Supranational Organizations, Ministries of Economy, etc. Private Institutions: Banks and Savings Banks, Supermarkets, Insurance Companies, Large Construction Companies.

Due to its scope:

National: Central banks, first-tier (commercial) banks, second-tier (development) banks, Ministries of economy, International: IMF, World Bank, as the most important institutions worldwide. These institutions work together with the central banks and the ministries of economy of the countries.

Purchasing power parity (PPP) is an economic indicator to realistically compare the standard of living between different countries, that is, their ability to purchase products, taking into account the gross domestic product per capita in terms of the cost of living in each country.

The theory of purchasing power parity can be divided into two parts:

PPA principle in its absolute form Interest parity principle.

The principle of purchasing power parity in its absolute form is applied to compare the purchasing power of goods and services. The principle of interest parity is applied in purely financial investments, that is, money, capital, yields, interests are the key words of this principle.

Financial markets are regulated institutions where bidders and claimants meet to carry out financial transactions of various goods.

The most important and most influential financial markets in international finance are:

Capital market Derivatives market Commodities market Foreign exchange market

5. Strategy and structure of international business.

The strategy of a company is defined as the set of actions aimed at achieving the objectives of a company. For most companies, the primary objective is to maximize the value of the business to its owners. Administrators must adopt strategies that increase the profitability of the company, as well as the growth rate of long-term profit.

With international expansion, managers stimulate the profitability of the company and increase the growth rate of long-term profit.

There are three approaches that have to do with international expansion:

Value creation.Strategic positioning.Operations as a company's value chain.

In the selection and implementation of the appropriate strategy, which we will talk about later, three fundamental variables intervene.

Localization economies Scale economies.

Companies usually have four standard strategies to compete in the international environment:

Global standardization strategy. Localization strategy. Transnational strategy. International strategy.

When we talk about organizational structure we refer to three aspects:

Location of decision-making responsibilities within that structure (vertical differentiation): It can be centralized or decentralized. Formal division of the organization into subunits (horizontal differentiation): The parts or departments into which a company is divided. Establishment of mechanisms integration to coordinate the activities of the subunits.

When companies decide to enter a foreign market, there are three basic decisions that must be taken into account:

The market to enter The indicated time to enter Until the scale to enter that market

Once a company decides to enter a foreign market, what follows is determining the best way to do it. Companies use six basic forms of entry to international markets:

Export. Turnkey projects. Licensing. Franchising. Subsidiary Partnership.

6. International business operations.

We can define production as the activities related to the creation of a product. The term production is used to denote both service and manufacturing activities.

Logistics encompasses the activities necessary to deliver materials to manufacturing facilities throughout the production process and distribution systems to the end user.

Subcontracting involves a company commissioning a second company to do some value creation process or activity in exchange for a payment through a contract. Often, international businesses are faced with the decision about whether to carry out some value creation activity themselves or to outsource those activities to a second entity.

In order for logistics to fulfill its main mission, it carries out a series of activities that are grouped into the following:

Processing of orders. Material handling. Packing. Product transport. Storage. Inventory control. Customer services.

When a company decides to internationalize, that is, offer its products or services in a foreign market, it must think how it will make it known, how it should adapt its offer, and how it will make its offer available to final consumers in that foreign market.

Marketing consists of a set of activities that aim to provide solutions to meet the needs of consumers. The most important marketing activities are:

Market research. Market segmentation. Product adaptation. Promotion. Consumer price setting. Distribution. Post-sale service.

For a company to achieve high profitability, a strong coupling between human resources and strategy is required. It requires not only the right strategy, but also that the strategy is based on the right organizational structure, and people are the cornerstone of a company's organizational structure.

The function of human resources, through hiring, training, remuneration and evaluation activities, has a critical effect on the organizational structure of companies.

Good accounting is essential for the proper functioning of a company. International businesses have to face a series of accounting problems that national businesses do not have to face.

Although many factors influence the development of a country's accounting system, there are five main variables.

The relationship between companies and capital providers. Political and economic ties with other countries. The level of inflation. The level of economic development of a country. The predominant culture in the country.

Financial administration is the proper management and optimization of the company's financial resources to achieve the objectives of creating value for international companies. Broadly speaking, international financial administration is focused on three main aspects.