flowchart TB
IB[International<br/>Business] --> T[Trade<br/>visible + invisible]
IB --> I[Investment<br/>FDI + FPI]
IB --> C[Contractual<br/>licensing, franchising,<br/>management contracts]
T --> M[Merchandise<br/>Exports / Imports]
T --> S[Services<br/>Exports / Imports]
I --> FDI[FDI<br/>with control]
I --> FPI[FPI<br/>no control]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
3 Scope and importance of international business; Globalization and its drivers; Modes of entry into international business
3.1 Concept of International Business
International business is all commercial transactions — private and governmental — that take place between two or more countries. The transactions cover the cross-border movement of goods, services, capital, technology, personnel and intellectual property. What distinguishes it from domestic business is that it crosses a national boundary, involves more than one currency and is governed by more than one legal and political system.
3.1.1 Influential Definitions
TipAuthoritative Definitions of International Business
| Source | Definition | Foregrounds |
|---|---|---|
| Daniels, Radebaugh & Sullivan | “All commercial transactions — private and governmental — between two or more countries” | Transactions and parties |
| Charles W.L. Hill | “Any firm that engages in international trade or investment” | Firm-level activity |
| Francis Cherunilam | “Performance of trade and investment activities by firms across national borders” | Trade and investment |
| Alan Rugman | “Cross-border value-creating activities” | Value creation |
| John Dunning | “International economic activity involving production by firms outside their home countries” | International production |
3.2 Nature of International Business
International business inherits the features of domestic business but adds layers of complexity:
TipSeven Defining Features
- Wider scope — goes beyond merchandise trade to services, capital, technology and people.
- Multiple currencies — receipts and payments move through several currencies; exchange-rate volatility is a permanent companion.
- Heterogeneous markets — each country brings its own culture, language, consumer taste, infrastructure and legal regime.
- Greater risk — political, commercial, financial and cultural risks compound the usual business risks.
- Larger transaction size — cross-border deals are typically bigger to justify their fixed cost.
- Stronger government role — tariffs, quotas, exchange controls, FDI rules and trade agreements influence every transaction.
- Sensitive to geopolitics — wars, sanctions, bilateral disputes can suspend transactions overnight.
3.3 Scope of International Business
The “scope” question asks: what activities count as international business? The standard textbook answer covers six categories:
TipSix Components in the Scope of International Business
| Component | Description | Indian illustration |
|---|---|---|
| Merchandise exports and imports | Trade in tangible, visible goods | Tea, textiles, refined petroleum, gems, engineering goods |
| Service exports and imports | Trade in intangible, invisible services | Software services, BPO, tourism, transport, education |
| Foreign Direct Investment (FDI) | Long-term equity investment with managerial control | Walmart in Flipkart; Suzuki in Maruti |
| Foreign Portfolio Investment (FPI) | Short-term financial investment without control | FII purchases of Indian equity and debt |
| Licensing, franchising, leasing | Contractual transfer of intangible rights | KFC, McDonald’s, Domino’s franchises in India |
| Management contracts and turnkey projects | Operating expertise sold across borders | Indian PSUs building turnkey plants in Africa |
3.4 International Business vs Domestic Business
The differences are not merely of degree; international business changes the kind of decisions a manager must take.
TipInternational Business vs Domestic Business
| Dimension | Domestic business | International business |
|---|---|---|
| Geographical area | Within national borders | Across national borders |
| Currency | Single currency | Multiple currencies; exchange-rate exposure |
| Mobility of factors | Free movement of labour, capital | Restricted movement of labour and capital |
| Customer profile | Relatively homogeneous | Heterogeneous in taste, culture, language |
| Business system | Same legal, political and economic system | Multiple, often conflicting systems |
| Documentation | Simple invoice and dispatch | Letter of credit, bill of lading, certificate of origin |
| Risk | Commercial and financial | Adds political, exchange-rate, cultural, country risk |
| Regulation | One regulator | Multiple regulators and trade authorities |
| Capital requirement | Comparatively lower | Comparatively higher |
3.5 Importance of International Business
3.5.1 Why Firms Go International — Cherunilam’s Nine Drivers
TipReasons for Going International
- Profit advantage — foreign markets may offer better margins than a saturated domestic market.
- Growth opportunities — a larger total addressable market accelerates growth.
- Domestic market saturation — when the home market plateaus, exports become the next frontier.
- Government policy and incentives — export-promotion schemes, duty drawbacks, SEZ benefits.
- Monopoly power and product life-cycle extension — a product in decline at home may be in growth phase abroad (Vernon’s IPLC).
- Strategic vision — some firms internationalise for prestige and long-term presence.
- Spreading R&D costs — a wider market amortises a fixed research budget.
- Risk diversification — a downturn in one market is offset by growth in another.
- Resource access — securing raw material, talent or technology unavailable at home.
3.5.2 Benefits — to the Firm
TipFirm-Level Benefits
| Benefit | Mechanism |
|---|---|
| Higher revenue and growth | Access to a larger total market |
| Economies of scale | Larger output spreads fixed costs |
| Capacity utilisation | Excess domestic capacity finds an outlet |
| Risk diversification | Geographic spread cushions shocks |
| Competitive positioning | Forces innovation; benchmark against best-in-world |
| Brand internationalisation | Home brand acquires global recognition |
| Access to scarce resources | Cheaper inputs, skilled labour, advanced technology |
| Tax planning | Use of treaty networks and incentive regimes |
3.5.3 Benefits — to the Nation
TipNational-Level Benefits
| Benefit | Mechanism |
|---|---|
| Earning of foreign exchange | Exports build reserves; finance essential imports |
| Efficient resource use | Specialisation along comparative advantage |
| Wider market for producers | Domestic firms grow beyond domestic limits |
| Access to better goods | Imports raise consumer welfare and choice |
| Industrial development | Imports of capital goods and technology |
| Employment generation | Export sectors create jobs |
| International cooperation | Trade builds peaceful interdependence |
| Inflow of capital and technology | FDI accelerates growth and productivity |
3.6 Globalization and its Drivers
3.6.1 Meaning of Globalization
Globalization is the process of increasing interconnection and interdependence of national economies, markets, firms and societies through cross-border flows of goods, services, capital, people, information and ideas. Theodore Levitt’s The Globalisation of Markets (1983, HBR) is the seminal article: he argued that converging tastes turn the world into a single global market.
TipFour Dimensions of Globalization
| Dimension | Working content |
|---|---|
| Globalization of markets | Tastes, preferences, brand consciousness converging worldwide |
| Globalization of production | Sourcing inputs and locating production where it is cheapest / best |
| Globalization of investment | FDI, FPI and cross-border M&A linking capital markets |
| Globalization of technology and ideas | Internet, social media, scientific collaboration |
3.6.2 Drivers of Globalization
Charles Hill identifies two macro drivers — declining barriers to trade and investment, and technological change — each unpacking into several specific forces.
TipDrivers of Globalization
| Family | Driver | Working content |
|---|---|---|
| Falling barriers | GATT / WTO rounds | Eight GATT rounds (1947–94) + WTO since 1995 — average tariff fell from > 40 % to < 5 % |
| Regional trade agreements (RTAs) | > 350 RTAs notified to WTO | |
| Capital-account liberalisation | Removal of exchange controls in most countries | |
| Technology | Containerisation | Since 1956 (Malcom McLean) — slashed shipping costs |
| Jet travel | Cheap air freight; global supply chains | |
| Internet and digital networks | Real-time coordination; e-commerce | |
| Real-time payments / SWIFT | Cross-border money in minutes | |
| Demand-side | Converging consumer tastes | Global media, brands, lifestyles |
| Rise of emerging-market consumers | China, India, ASEAN | |
| Firm-side | Multinational corporations (MNCs) | Coordinate global value chains |
| Strategic alliances | Joint ventures, technology partnerships |
3.6.3 Indian Globalization — A Snapshot
India’s globalization began with the 1991 LPG reforms. Indicators of integration:
- Trade-to-GDP ratio rose from ~ 15 % (1991) to ~ 45 % (current).
- FDI inflows up from < USD 100 million (1991) to > USD 70 billion (recent peaks).
- Service exports — particularly software and BPO — among the world’s largest.
- Indian MNCs — Tata, Reliance, Infosys, Wipro, Bharti — acquired global presence.
- Indian diaspora remittances among the largest globally (> USD 100 billion annually).
3.7 Drawbacks and Concerns of Globalization
TipCosts and Concerns
- Job displacement in import-competing sectors.
- Income inequality widening within countries.
- Cultural homogenisation — loss of local diversity.
- Environmental cost of long supply chains.
- Pandemic and supply-shock vulnerability — exposed by COVID-19 and Ukraine war.
- Race to the bottom — fear of weakening labour and environmental standards.
- Loss of policy autonomy — capital flight risk constrains domestic policy.
3.8 Modes of Entry into International Business
A firm choosing to internationalise picks an entry mode — a vehicle that decides commitment, control and risk. Six modes recur in the textbooks, arranged here from low to high commitment.
TipSix Modes of Entry — Ranked by Commitment
| Mode | Commitment | Control | Risk | Typical user |
|---|---|---|---|---|
| Exporting (direct or indirect) | Low | Low | Low | First-time entrant |
| Licensing | Low | Low | Low | Owner of patents, brands |
| Franchising | Low–Medium | Medium | Low | Service-format firms (food, retail) |
| Contract manufacturing / management | Medium | Medium | Medium | Brand owners outsourcing production |
| Joint venture | High | Shared | Medium | Partners pooling local + global strengths |
| Wholly-owned subsidiary (Greenfield or Acquisition) | Highest | Full | Highest | Mature multinationals |
flowchart LR
E[Export] --> L[Licensing]
L --> F[Franchising]
F --> CM[Contract<br/>Manufacturing]
CM --> JV[Joint<br/>Venture]
JV --> WOS[Wholly-Owned<br/>Subsidiary]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
The arrow runs in the order of increasing commitment, control and risk.
3.8.1 Mode 1 — Exporting
Exporting is the simplest mode — the firm sells its product to foreign buyers without setting up operations abroad. Direct exporting — firm itself contacts and sells to foreign buyers / agents. Indirect exporting — through Export Houses, Trading Houses, EMCs (Export Management Companies).
3.8.2 Mode 2 — Licensing
A licensing agreement grants a foreign firm (licensee) the right to use the licensor’s intellectual property (patents, brand, technology) in return for a royalty / fee. Low commitment but the licensor gives up control over how the IP is used.
3.8.3 Mode 3 — Franchising
A franchise is licensing extended to the entire business model — brand, products, processes, training, supply. McDonald’s, KFC, Subway and Domino’s are textbook examples. The franchisor retains tighter control than in pure licensing.
3.8.4 Mode 4 — Contract Manufacturing and Management Contracts
In contract manufacturing, a foreign firm hires a local producer to make goods to its specification — Apple’s iPhones in China, Nike’s shoes in Vietnam. In management contracts, expertise is sold without equity — Indian PSUs running power plants in Africa.
3.8.5 Mode 5 — Joint Venture
A joint venture is shared ownership between a foreign and a local firm. It combines the foreigner’s technology and capital with the local partner’s market knowledge and contacts. Indian examples: Maruti-Suzuki (begun 1981), Hero-Honda (demerged 2010), Bharti-Walmart (demerged 2013).
3.8.6 Mode 6 — Wholly-Owned Subsidiary
A wholly-owned subsidiary is 100 % foreign equity. Two routes: Greenfield investment — building a new facility from scratch (Hyundai Sriperumbudur). Brownfield / Acquisition — buying an existing local firm (Walmart-Flipkart, Tata Steel-Corus).
3.9 Stages of Internationalisation
A firm rarely jumps from domestic operations to a global multinational in one step. Two foundational models describe the progression.
3.9.1 Uppsala Model — Johanson and Vahlne (1977)
The Uppsala internationalisation model is experiential and incremental — firms internationalise gradually as they accumulate knowledge of foreign markets, starting with psychically close (culturally / geographically similar) markets and moving to psychically distant ones.
TipUppsala’s Four-Stage Establishment Chain
| Stage | Commitment |
|---|---|
| 1 | No regular export activity |
| 2 | Export via independent agents |
| 3 | Sales subsidiary abroad |
| 4 | Production subsidiary abroad |
3.9.2 Perlmutter’s EPRG Framework (1969)
Howard Perlmutter classified the managerial mindset of an internationalising firm into four orientations:
TipPerlmutter’s EPRG Framework
| Orientation | Attitude | Strategy | Decision-making |
|---|---|---|---|
| Ethnocentric | Home-country superior | Export from home; foreign units replicate home | Centralised at HQ |
| Polycentric | Each host country unique | Localise everything; subsidiaries autonomous | Decentralised to subsidiary |
| Regiocentric | Manage by regions | Regional strategy (EU, ASEAN) | Regional HQs |
| Geocentric | World as one market | Global integration with local responsiveness | Networked, world-wide |
Mnemonic: EPRG = Ethno → Poly → Regio → Geo, in order of increasing global orientation.
3.10 Challenges of International Business
TipKey Challenges
- Political risk — expropriation, war, sanctions, change of regime.
- Currency risk — depreciation of the receiving currency.
- Cultural distance — language, etiquette, religious sensitivity.
- Regulatory complexity — multiple tax codes, labour laws, product standards.
- Logistics and infrastructure — long supply chains, port congestion, customs delays.
- Documentation — letter of credit, bill of lading, certificate of origin, insurance.
- Information gap — reliable data on foreign markets is costlier and harder to obtain.
- Trade barriers — tariffs, quotas, technical and sanitary standards.
- Country risk — sovereign default, currency convertibility restrictions.
3.11 Practice Questions
Q 01
Concept
Easy
Which of the following is not a defining feature distinguishing international business from domestic business?
View solution
Correct Option: C
Labour and capital are less mobile across borders than within them; this is a defining limitation, not a feature.
Q 02
Scope
Easy
Which of the following falls under invisible exports of a country?
View solution
Correct Option: C
Services are invisible trade (Balance of Payments terminology); tangible goods are visible trade.
Q 03
Globalization
Easy
"The world is becoming a single market with converging tastes." This globalization-of-markets thesis is most associated with:
View solution
Correct Option: B
Theodore Levitt's The Globalisation of Markets (HBR, 1983) launched the modern usage of the term.
Q 04
Globalization
Medium
Which of the following is not one of the four dimensions of globalization?
View solution
Correct Option: C
The four dimensions are markets, production, investment, technology / ideas. "Warfare" is not a recognised dimension.
Q 05
Globalization Drivers
Medium
The shipping innovation most credited with slashing intercontinental trade costs from the late 1950s is:
View solution
Correct Option: B
Containerisation — pioneered by Malcom McLean in 1956 with the SS Ideal X — enabled seamless inter-modal transfer of standardised boxes between ship, rail and truck, slashing shipping costs by ~ 90 %.
Q 06
Indian Globalization
Easy
India's globalization began with the:
View solution
Correct Option: C
LPG — Liberalisation, Privatisation, Globalisation — 1991 reforms triggered by BoP crisis, under FM Manmohan Singh and PM P.V. Narasimha Rao.
Q 07
Entry Modes
Easy
Which of the following entry modes carries the lowest commitment of resources?
View solution
Correct Option: A
Exporting requires no foreign establishment — lowest commitment, lowest control, lowest risk. WOS is the opposite extreme.
Q 08
Entry Modes
Medium
Arrange the following entry modes in increasing order of commitment, control and risk:
(i) Joint venture
(ii) Exporting
(iii) Wholly-owned subsidiary
(iv) Licensing
View solution
Correct Option: A
Export → License → Joint Venture → Wholly-Owned Subsidiary is the textbook order of rising commitment.
Q 09
Entry Modes
Medium
"An Indian engineering firm operates a power plant in Tanzania for five years under a fixed fee, then hands it over to the Tanzanian government." This arrangement best illustrates:
View solution
Correct Option: C
A management contract sells operating expertise without equity transfer; the asset reverts to the host party at the end of the term.
Q 10
Entry Modes
Medium
Which of the following is the key distinction between licensing and franchising?
View solution
Correct Option: B
Franchising extends licensing to the entire business model with tighter control; the franchisor dictates operations more than a licensor does.
Q 11
EPRG
Medium
Perlmutter's EPRG framework consists of:
View solution
Correct Option: A
Howard Perlmutter (1969): Ethnocentric (home-centred) → Polycentric (host-centred) → Regiocentric (region-centred) → Geocentric (world-centred). Egocentric is a common distractor.
Q 12
EPRG
Hard
A multinational corporation that treats each foreign market as unique, gives subsidiaries wide local autonomy and adapts products fully to local taste has a:
View solution
Correct Option: B
Polycentric orientation treats each host country as unique and localises everything. Ethnocentric is home-centred; geocentric integrates globally.
Q 13
Uppsala
Hard
The Uppsala internationalisation model emphasises:
View solution
Correct Option: B
Johanson and Vahlne (1977): firms internationalise gradually, starting with psychically (culturally / geographically) close markets and accumulating knowledge — four-stage establishment chain.
Q 14
Drawbacks
Medium
Which of the following is not commonly cited as a drawback of globalization?
View solution
Correct Option: D
Globalization typically increases, not reduces, the variety of consumer goods available — the other three are real concerns.
Q 15
JV
Medium
Which of the following is the most accurate description of a joint venture as an entry mode?
View solution
Correct Option: C
A joint venture involves shared equity, shared control and shared risk between two or more parties — typically a foreign firm and a local partner.
Q 16
Greenfield vs Brownfield
Hard
"Walmart acquires Flipkart in 2018 for USD 16 billion." This is an example of:
View solution
Correct Option: B
Brownfield investment is the acquisition of an existing local firm — as opposed to Greenfield, building a new facility from scratch.
Q 17
Importance
Easy
A firm-level benefit of going international does not include:
View solution
Correct Option: C
Earning foreign exchange is a national-level benefit; the others are firm-level.
Q 18
Scope
Medium
Match each component of international business with its example:
| Component | Example | ||
| (i) | FDI | (a) | FII buying Reliance shares on NSE |
| (ii) | FPI | (b) | Walmart in Flipkart |
| (iii) | Service export | (c) | Indian software firm serving US client |
| (iv) | Management contract | (d) | Indian PSU running power plant in Africa |
View solution
Correct Option: A
FDI brings management control (Walmart-Flipkart); FPI is portfolio investment (FII buying shares); services are invisibles (IT export); turnkey running-and-handover = management contract.
Q 19
Definitions
Medium
"All commercial transactions — private and governmental — between two or more countries." This working definition is given by:
View solution
Correct Option: A
Daniels, Radebaugh & Sullivan, International Business: Environments and Operations — the most widely-used US textbook.
Q 20
India FDI
Hard
"Maruti Suzuki India Ltd" — the once iconic Indian-Japanese collaboration — began life as a:
View solution
Correct Option: B
Maruti began in 1981 as a joint venture between the Government of India (majority initially) and Suzuki Motor Corporation. SMC's stake rose over the decades to majority and then to controlling, with full management control by the Suzuki side.
3.12 Quick Recall
ImportantQuick recall
- International business = trade and investment that crosses national borders.
- Three defining differences from domestic business: multiple currencies, multiple legal systems, restricted factor mobility.
- Six components in scope: merchandise, services, FDI, FPI, licensing/franchising, management/turnkey contracts.
- Visible trade = goods; Invisible trade = services.
- Globalization (Theodore Levitt 1983) — four dimensions: markets, production, investment, technology.
- Drivers: falling barriers (GATT/WTO, RTAs, capital-account liberalisation), technology (containerisation 1956, jet travel, internet, SWIFT), converging tastes, emerging-market consumers, MNCs, alliances.
- India globalised through LPG 1991 — trade/GDP rose from 15 % → 45 %; FDI from < USD 100 m → > USD 70 bn.
- Six entry modes (low → high commitment): Export → Licensing → Franchising → Contract manufacturing → Joint venture → Wholly-Owned Subsidiary.
- WOS: Greenfield (new build, Hyundai Sriperumbudur) vs Brownfield/Acquisition (Walmart-Flipkart, Tata-Corus).
- Uppsala model (Johanson-Vahlne 1977) — gradual, experiential, psychic distance.
- Perlmutter’s EPRG (1969): Ethnocentric (home) → Polycentric (host) → Regiocentric (region) → Geocentric (world).
- Reasons to go international: profit, growth, saturation, government incentives, product-cycle extension, prestige, R&D amortisation, risk diversification, resource access.
- Globalization drawbacks: job displacement, inequality, cultural homogenisation, environmental cost, pandemic vulnerability, race to the bottom, loss of policy autonomy.