Pros and Cons of International Business: Analytical Essay

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Pros and Cons of International Business: Analytical Essay

Traditionally, international business is defined as a business that engages in international economic activities. It can also refer to the action of doing business abroad (Peng). Many businesses are either international or are domestic businesses competing against international businesses. Having a good understanding of what international business is can help business owners make better decisions, because international business is a rapidly changing environment. For example, according to market analyst Bert Markgraf, “Environmental factors are a major influence in the West and will become more so worldwide. Businesses must take into account the environmental impact of their normal operations. They can try to market environmentally friendly technologies internationally. The advantage of this market is that it is expected to grow more rapidly than the overall economy.” Therefore, in order to adapt to the rapidly changing environment of international business, it’s better to understand the way international business works and be able to take advantage of new emerging markets.

The political/legal/economic systems are very important aspects in international business. A political system refers to the rules of the game on how a country is governed politically. At the broadest level, there are two primary political systems: (1) democracy and (2) totalitarianism (Peng). A legal system refers to the formal rules of the game on how a country’s laws are enacted and enforced. By specifying the do’s and don’ts, a legal system reduces transaction costs by minimizing uncertainty and combating opportunism (Peng). International business needs to follow a certain set of political laws and rules made by governments both in domestic (Home) and foreign (Host) countries. This can be what is called “International Law”. Home governments can apply political decrees not to deal with disapproved political parties. These measures may take the refusal to grant an export license, or withdrawal of export guarantee cover. The host government may take measures like taxation, ownership controls, operating restrictions or expropriation (Fao). International businesses must follow the political and legal system of any country, or they face risk of losing good opportunities. For example, investing in a totalitarian state, like North Korea, can be an extremely tricky and risky. In a totalitarian government, the state exercises its power by developing a political structure that it can use to exert its power in such a way that it controls all aspects of the public and private life of its citizens (Armstrong, 2002). Being able to turn the disadvantage that comes with such a regime takes time and patience. One of the ways that one can gain some form of advantage is by gaining favor with the existing regime and forming good relations with the respective leaders (IP).

Depending on the political and legal aspects of a country the economic system plays a large role in whether an international business gains profit or not. An economic system refers to the rules of the game on how a country is governed economically (Peng). Financial stability, language, economic system, and local cultural factors can influence which markets a business should invest into. Countries are endowed with different assets and natural resources (land, labor, capital, and technology). Certain countries may produce the same good more efficiently and sell it at a lower price rate than other countries. If a country cannot produce a certain item, it can obtain the item by trading with another country that can efficiently produce it. This is the highlight in international trade. For example, if you can walk into a supermarket and find South American bananas, Brazilian coffee and a bottle of South African wine, you’re experiencing the effects of international trade (INPedia).

Foreign direct investment (FDI) means directly investing in, controlling, and managing value-added activities in other countries (Peng). Such investments can take place for many reasons, including to take advantage of cheaper wages, special investment privileges offered by the country (Mehra). There are certain pros and cons when directly investing in a foreign country.

Pros:

Increased employment rate, and increase in production
Trade and transfer of new technologies, management skills, and intellectual property
Increased rate of exports

Cons:

Risk of losing ownership to foreign company
Small enterprises fear risk of not being able to compete with large companies
Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company

Offshoring is the relocation of a business process to another country. The offshoring operation can be performed by a subsidiary of the same company, or by an offshore services provider (FS). Offshoring can greatly affect an organization’s ability to be competitive.

Pros:

Lower labor costs – It is more affordable for companies in the United States to pay foreign employees who have lower salaries compared to employees within the country (FS).
24/7 operations – Companies can cover time zones not handled by their operations through offshore subsidiaries or by hiring offshore service providers that offer 24/7 operations (FS).
Availability of skilled labor – Offshoring from certain countries with variety of skilled laborers from which U.S. companies can recruit employees for their offshoring operations. These countries have a rich pool of talent in terms of English language proficiency, college degree earners, and the skills of their workforce (FS).

Cons:

Cultural and social issues – Offshore countries have cultural and social customs that are very different from the countries of the originating companies. For example, an American executive may talk in a candid, outspoken manner while his Filipino employees are more reserved and not used to the frank approach of communicating. Both parties may miscommunicate what they intend to say to each other and this could lead to misunderstanding (FS).
Quality control problems – For manufacturing offshoring, ensuring that a product is strictly built according to the parent company’s standards may be a challenge under the offshore location’s manufacturing set-up. Even if the parent company provides quality guidelines, the differences in working culture, language, logistics and supply chains of the country where the factory is located may affect the quality of the finished product (FS).

Geert Hofstede, a Dutch professor. He defines culture as “the collective programming of the mind which distinguishes the members of one group or category of people from another.” (Peng). Hofstede developed a model that identifies four primary dimensions to differentiate cultures. He later added a fifth dimension.” The first four dimensions of culture dealt with areas that different societies handled differently, such as individualism and collectivism, power distance, masculinity and femininity, and uncertainty avoidance. Later, a fifth dimension that highlighted differences between long-term and short-term orientation was added. “These five dimensions, taken together, can give important insights for someone wishing to enter a new culture for business, study, travel or other purposes,” Tuleja says.

Individualism and collectivism is one of the first four clusters. It looks at the relationship the individual has with others.
The outcome of individualism and collectivism “focuses on the degree a society reinforces individual or collective achievement and interpersonal relationships,” Tuleja says.
The second cluster, power distance, focuses on the extent to which the less powerful members of institutions, such as the family, expect and accept that power is distributed unequally.
Tuleja said it represents inequality but defined from below, not above. “It suggests inequality is endorsed by the leaders and followers,” Tuleja says. “Power and inequality are fundamental factors of any society and anybody with some international experience will realize all societies are unequal, but some societies are more unequal than others,” says Hofstede.
The third cluster is masculinity and femininity.
Hofstede defines masculinity as “a society in which social gender roles are clearly distinct: Men are supposed to be assertive, tough and focused on material success; women are supposed to be more modest, tender and concerned with the quality of life.
“Femininity stands for a society in which social gender roles overlap: Both men and women are supposed to be modest, tender and concerned with the quality of life,” he said.
The fourth cluster is referred to as uncertainty avoidance, which denotes the need to avoid uncertainty about the future and in work relationships.
The uncertainty avoidance index focuses on the level of tolerance for uncertainty and ambiguity within the society. A high uncertainty avoidance ranking indicates the country has a low tolerance for uncertainty and ambiguity. It fosters a rules-oriented society.
The more recently added cluster spotlights long-term and short-term orientation. “Is society focused on the past, present or future?” is the question here, Tuleja says.
“Long-term orientation focuses on the degree the society embraces or does not embrace long-term devotion to traditional, forward thinking values,” she added.
Short-term orientation means that, comparatively, the national culture likes to get things done and relies on a quick turnaround time. In a short-term oriented work environment, employees tend to change jobs more often.

Reference Sources:

Peng: Peng, Mike W.. Global Business. Cengage Learning. Kindle Edition.
What is International Business? (n.d.). https://www.internationalrelationsedu.org/what-is-international-business/
Mehra: Mehra, V., & Gupta, T. (n.d.). Foreign Direct Investment. https://www.academia.edu/21296780/GLOBAL_BUSINESS_FOREIGN_DIRECT_INVESTMENT_Foreign_Direct_Investment
FS: Pros And Cons Of Offshoring. (2019, December 6). https://fullscale.io/pros-and-cons-of-offshoring/
Markgraf, B. (2019, March 5). Major Trends in International Business. Retrieved from https://smallbusiness.chron.com/major-trends-international-business-60529.html
Fao: Chapter 4: The Legal, Political/Trade Environment. (n.d.). Retrieved from http://www.fao.org/3/w5973e/w5973e08.htm
IP: Heron, C. (n.d.). Business Ethics in Totalitarian Countries. Retrieved from https://ivypanda.com/essays/business-ethics-in-totalitarian-countries/
Economy & Trade. (n.d.). Retrieved from https://ustr.gov/issue-areas/economy-trade
(INPedia): Heakal, R. (2020, January 29). What Is International Trade? Retrieved from https://www.investopedia.com/insights/what-is-international-trade/
Notre: Understanding the 5 Dimensions of Culture with Dr. Elizabeth Tuleja. (2019, October 8). Retrieved from https://www.notredameonline.com/resources/intercultural-management/exploring-the-five-dimensions-of-culture/

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