International Business as Business between Countries - Essay Example

?Should business activities of a US firm in another US be considered domestic but business activities of a UK firm in France be considered international? Discuss and fully support your argument. Business is one of the few things that have been recorded through the entire human history. In the prehistoric times, around 3,000 B.C.E, people used to do business. The only difference is that people at that time used to trade goods for goods. They used to exchange goods they had in plenty with goods they needed. That kind of business was local or domestic. People from one region within a country used to go to other regions to exchange goods. Different communities realized that there were other goods that they did not know and were available in long distances. This was realized when people from different regions travelled long distances in search for more resources. Word soon spread across the world and communities from different parts of the globe started to look for the different goods. There were goods that were more precious. Merchants went across the world just to get those goods. Such countries included China, India, America and Europe. International business started to blossom at that time leading to a number of civilizations. Domestic business or trade is a form of business, which is confined to the borders of a country. People within that country or territory buy goods and services within their borders. Domestic trade is usually good as it develops local infrastructure and also plays a role in enriching its own. This form of trade is probably the oldest form of trade. It was the main type of business in many parts of the world long before, merchants started to go to far lands. On the other hand, international business is business between countries. In this case, merchants from different countries exchange goods for money. Different countries are endowed differently. There are some that are good in industries while others have resources that can be used as raw materials for their industries. The country with industries, for example, would buy raw materials from the country with those resources. Money paid to the country with the resources would be used to buy industrial goods from the industrialized country. Ideally,what is sold to another country is export and what is received from another country is imports. The two countries benefit by getting what they did not have and foreign exchange (Curtin, 2002). One country can trade with many countries depending on its needs. Some countries have been found to import much more than they import while others export much more than they import. Countries importing more are known as net importer countries, for example, the United States while countries that export more are known as net exporter countries, for example, Japan. International business has assisted many countries to develop and share with others. The unique characteristic of international business is that it also boosts domestic business in some way. Use of the terms domestic business and international business has been very confusing to some people in some scenarios. For example, there are some people who may argue, since domestic business is in certain territories or countries, then in countries with state government systems, the individual states experience both domestic and international trade in some way. Such people will argue that a State like California and Texas trading is international business. Nevertheless, different counties within California do domestic trading. According to such people, interstate trade is the same as Britain and France trading (Curtin, 2002). This theory is true, to some extent, and wrong in another way. The different states in the United States represent some form of territorial jurisdiction. In fact, some states operate very differently from others. They have their own regulations for different things and differ from others. Each state has its own governing body that is responsible for drafting and passing policies. As such, the different countries of diverse regions with the state experience domestic business with each other. For example, one region in Texas could be known for growing corn while another region within the same state could be known for ranching. The corn growing region would need meat while the ranching region would need corn. The two regions would have done domestic business. On the other hand, one state doing business with another within United States still remains domestic business. This is because the different self-governing states are all part of the United States as a country. They are just units created to make governing the country easily by ensuring that every unique region is represented well. Therefore, if a rancher in Texas sells his cattle to a person in Louisiana, and a farmer in Oklahoma sell his merchandise to a buyer in Texas, all that would be termed as domestic business. Domestic business in United States can be considered even in scenarios where goods, services and money are exchanged between businesses and clients in East or Central United States and Alaska, which does not even seem to be part of the United States, because of where it is located (Curtin, 2002). Although domestic trade or business is within countries, there are some regulations in countries that have the State system of governance. Some states in the United States and Australia have specific requirements that have to be met when goods are exchanged with another state. At the same time, a business owner may be required to do an application to be allowed to do business in that state. Such regulations are not stringent for businesses within the respective countries compared to when international businesses are involved. They are usually for consumer protection just in case, there are issues or problems. Only certain types of businesses are required to do so in most cases. As stated above, International business can only occur when a company within the United States, in any state, sells merchandise to clients in another country. It can be said to have taken place in such a case. It can be between countries that border each other or countries that are far from each other. An example can be Britain and France or between Britain and China. The two countries are two independent jurisdictions with varying regulations on international business. Regulations on international business in the various countries are aimed at varying reasons. Some countries' regulation is for protecting the domestic companies. United States, for example, protects the domestic companies against competition from international companies. As such, if there are American companies providing products or services within United States, the government prefers to have the American company sell the products and services to Americans rather than having an international company provide the same products or services. Moving goods and services from country to country is not always easy. Governments in the selling and buying countries have to raise some money from the companies through various forms of taxes. As such, a company that would like to sell its merchandise in another country has to be prepared to pay some tariffs to get the goods or services in the other country. Tariffs make the goods and expensive more expensive. The manufacturer or provider of the goods and services passes the extra cost down to the clients (Choi and Hartigan, 2004). This would not be the case when goods and services are exchanged between states in countries like United States, Australia and other countries that have the state system of governance. After all, the government for all the states within the jurisdiction is one. The government policy on protecting of consumers from exploitation has been very keen to ensure that imported goods and services prices are reduced. Countries in the same regions came up with policies that would see the tariffs charged decreased, for imports and exports within the countries that region. Organizations such as European Union, European Free Trade Agreement EFTA, Central American common Market CACM, North American Free Trade Association, Andean Pact, COMESA, ECOWAS, and many others were formed with this objective. These institutions fall under four broad categories. One, Free Trade Area in which member countries agree to reduce charges, tariffs and quotas for goods imported and exported within member countries. Second, Custom Unions in which members agree to reduce tariffs for member countries. Third is the common market in which the member countries agree to remove all trade barriers for member countries and fourth is economic union in which member countries come up with universal trading policies and regulations to govern all member countries (Reuvid and Sherlock, 2011). Countries with large client base in other countries in different regions of the world felt left out. A proposal as made to have all the countries in the world support free trade. This is basically international business between countries across the world with fewer tariffs and quotas. This is regulated by World Trade Organization, which ensures that each country reduce the trade barriers and trades in harmony with other members of the organization. Countries choose the organizations to join. Jurisdictions that are not members of organizations cannot be restricted to do business by the organizations. Reduction in trade barriers has made it possible for even small companies in some countries to be able to export their goods and services to other countries. Bigger companies and institutions have been able to set up branches, industrial plants and companies in other countries. Some have taken advantage of the fact that, setting up industrial plant in some of those countries is cheaper. Such a scenario would be when a company sets up a plant in, for example, China to be closer to the source of raw materials used to produce their products. In addition, labor is cheap in some countries, for instance, in Asia and Africa compared to America and Europe. Companies spend less and can be able to reduce the cost of their goods and services to some extent. In addition, countries where the industrial plants or companies are set up gain by having improved infrastructure, employment of local people and economic growth. How can firms ‘manage’ the political and legal risk their business activities are exposed to? Discuss this question contrasting firms from a developed vs. an emerging country context and fully support your argument. Businesses, whether domestic or international face certain risks. The two major risks that faces businesses are concerned with are political risks and legal risks. Political risks are associated with the government of a country. When the government is stable, there are little or no political risks. On the other hand, if the government is unstable or there is no understanding between the different arms of government, then political risk can be said to be very high at that point. Legal risks, on the other hand, are related to law and regulations. Such risk may occur when a business is about to venture into a certain country or region and does not understand corporate and company law of that particular territory well. Businesses can come across political and legal risks in both developed countries, developing countries and undeveloped countries. There has always been a perception that there are no business risks in the developed countries. However, there are cases in which businesses have suffered in developed countries as a result of these two risks. Take, for example, the recent partial government shut down in the United States. Another scenario was the sudden and unexpected change of governments in France and Greece mid 2012. Businesses that were greatly affected were those that thought that these countries could not have political risks (Dransfield, 2001). Managing political risks in the developed countries is much easier compared to emerging markets. Management of risks is based on easy understanding of the relevant institutions, for instance, the government. Developed countries governments are mature, and though there may be misunderstanding in the relevant institutions, handling difference is much easier. The recent United States government shutdown was a result of deadlock between high-ranking policy makers. The issue was discussed over and over till the institutions involved came into an agreement. If it were an emerging country with the same issues, the process would have been relatively radical. As such, businesses would have been affected more. Obtaining necessary data in developed countries is relatively easy and straight forward. Governments in these countries are very transparent and straight forward. The correct data is provided during the initial contact or as per the request. Nevertheless, obtaining important data in some emerging countries is extremely hard. As that is not enough, the institutions concerned with such matters in emerging countries may provide inaccurate data. Inaccurate data from government institutions in emerging countries can really cost the business. Businesses rely upon such data to project profitability and investment. A business, especially a multinational may invest in a country only to realize later on that data that was provided initially was inaccurate (Pacek and Thorniley, 2010). Economic indicators which are part of political risk are easy to predict in the developed countries compared to emerging markets. Usually, various economic indictors are released every month in the developed nations. The data from the indicators shows general business climate in the country. Companies and businesses planning to set up in those countries know whether it is a good idea to go there at a certain time or not. On the other hand, getting economic data and the general political environment in emerging countries may be challenging. Businesses would not be able to determine the best time to do business or not. Another key distinction in political risk management in developed countries is availability of resources. Resources are readily available in developed countries. Insurance companies that ensure businesses can insure practically any scenario in developed countries. This can include unexpected changes, riots and demonstrations and other political risk related issues. Insurers in emerging markets are usually cautious and only insure the very basic scenarios only. There are some emerging markets where businesses cannot be compensated during political risks; they have to cater for their own losses. At the same time, there are some businesses that are very influential throughout the world. Such businesses have agreements with large insurance companies in the country they operate in against political risks. The insurance companies in their part have agreements with the government, to compensate the business in the case of political risks. A good example is OPIC, which has agreements in more than one hundred and forty countries across the world. The company has comprehensive Political Risk Insurance policy in all these countries. In the case of political risk arising, the governments of the respective countries would have to compensate OPIC the amount loss as a result of that particular risk. This special kind of insurance is known as expropriate underwriting. The host government usually negotiates with the business to set up base through the insurer until an agreement is reached (Moran, 2001). Government is willing to come to the rescue of businesses in the developed countries whereas it is impossible in emerging markets. A few years ago, when there were concerns that some businesses especially banks in Europe, were on the verge of collapsing, governments bailed the banks. These institutions were given billions of dollars to continue operating. In the case of emerging markets, businesses collapse and the government or relevant institutions do not even care. Corruption is another factor that shows a lot of disparities in political risk management in developed countries and emerging markets. Cavusgil, Ghauri and Ackal show this clearly well in their book doing business in emerging markets. They have provided an example of a business owner who was a friend to the president’s family in Egypt. His business flourished and was untouchable because it was protected by the government. When was the government of President Hosni was ousted, the business was ransacked and his business assets were frozen. The next regime then started to investigate him (Cavusgil, Ghauri and Ackal, 2012). The above is a classic example of cases where companies and businesses form alliances with governments for protection. This kind of corruption is not heard of in the developed countries. What matters in the developed countries is whether the businesses have all the required documents and conditions met. Even in the case of government change, the government would not be affected. The stringent follow of law and order makes the developed countries make the countries good places for businesses; both local and international. Legal risk management has a lot of disparities in developed and emerging markets. One, getting acknowledgement of intellectual property is an issue in the emerging markets. There are no clear definitions on the different sectors. As such, there would be a problem getting the right intellectual property in these countries. In developed nations, there are well defined sections on intellectual property and getting the right certification. At the same time, it does not take long to get the right certification in developed countries. Another legal issue associated with businesses is taxation. Information on taxation and the requirements for running business in developed countries are well outlined and the consequences of not following them. This information can be easily obtained from the relevant government agencies or organizations. Emerging markets government claims that all information is provided. However, there are some cases where businesses have learned lessons the hard way. They prepare everything required only to realize that there were some things that were not provided. Businesses may be required to provide extra requirements, which were not provided initially when the details were provided (Merna and Al-Thani, 2011). At the same time, provision of the necessary certificates and authorizations take totally different timelines to be provided. It takes relatively short time to get registration certificates in the developed countries. On the other hand, getting registration and certification may take a long time in some emerging market countries. It can take up to twenty-four months to complete the entire registration and certification process. Some countries in the emerging market category may not have some regulation specifications for certain types of businesses. For instance, the development of technology has led to a new bred of institutions, for example, online remittances. Regulations for such companies may not be provided by the regulatory department of the government. Multi national companies going to start businesses in such countries may have challenges operating there. Businesses are required to use the necessary management strategies to caution themselves from political, legal and other risks that may affect the business profitability. The first thing a business should consider doing understands a country very well. A risk manager should be hired to perform due diligence on countries where the business would like to establish. Some of the factors the risk manager should look at include the history of the country, the government operations in the last few years, the economic situation and concerns as well as general sentiment by other businesses in that country. Another thing the risk manager should look at keenly is the taxation and general regulatory issues in the country. It would not make business sense to start operating in a country yet it takes a long time to get the right certification and registration. Risk managers should prepare a well detailed report on their finding to be discussed by the board or the company management. The business management should rate the business opportunity according to the report and make a comprehensive decision on whether to invest in that country or not. If the business has to invest there, it should consider all what ifs before anything. If not well done, a business may end up losing at some point in future (Masson and Shariff, 2009). International business is one of the most common binding factors among countries in the world today. Business started between people of different regions within a certain locality. Business within a locality, territory or country is domestic business while business between a country, and another country is international business. With time, international business became fashionable. Many changes have been experienced in international business. More changes continue to be experienced as time continues to unwind. It has become fashionable for businesses in different countries to establish bases in other countries. Businesses should consider all the political and legal risks before investing in a particular country. This is the key determinant to success of a business in a foreign land. References Cavusgil, S., Ghauri, P and Ackal, A., 2012. Doing Business in Emerging Markets. New York: Sage. Choi, E. and Hartigan, J., 2004. A handbook of International Trade: the economic and legal analysis of trade policy and institutions. Oxford: Blackwell publishing. Curtin, P., 2002. Cross-cultural trade in world history. Cambridge: Cambridge University Press. Dransfield, R., 2001. Corporate Strategy. Toronto: Heinemann. Masson, A and Shariff, M., 2009. Legal Strategies: How Corporations Use Law to Improve Performance. New York: Springer. Merna, T and Al-Thani, F., 2011. Corporate Risk Management. New York: John Wiley and Sons. Moran, T., 2001. International Political Risk Management: Exploring New Frontiers. Washington D.C: World Bank publications. Pacek, N. and Thorniley, D., 2007. Emerging Markets: Lessons for business success and the outlook for different markets. London: Profile books. Reuvid, J. and Sherlock, J., 2011. International Trade: An essential guide to the principles and practices of export. London: Kogan Page Limited. Read More