Updated: Sep 25, 2020
This video discusses how international business differs from domestic business. It tells you what factors you need to consider when doing business in a foreign environment.
If you’re a business student, you might ask, “why would I need to take a class in international business? Isn’t doing business pretty much the same regardless of where it is conducted? Sure I may have to get someone to translate for me, or change my money at the bank, but a transaction is a transaction and people have been transacting across borders for centuries.
Moreover, you may have vacationed, done volunteer work, or even been an exchange
student in another country. You recognize that there are differences, but how does that really hinder me from doing business? After all, we are all human and, for the most part, we all must produce and consume to stay alive. Besides, how different can international business be from domestic business?
Well, it turns out that international business is often quite different from doing business in your home country. International business is technically defined as “all commercial transactions, including sales, investments, and transportation, that take place between two or more countries”. In other words, it is the act of doing business across national borders. The reality is that when you cross your national borders, many of the taken-for-granted assumptions about the way the business world works need to be reexamined.
Take opening up a restaurant in the United States, for example. When you do business in the U.S. there are many external factors that are fairly consistent across companies and even industries. You assume that you can pay your employees what you want, as long as you don’t go below the minimum wage and meet other basic work requirements, all of which are readily available. You can assume that these requirements will not change much over time. You can also assume that the government will not mind if you open up another restaurant. As long as you get a business permit and a food license, you are good to go. You also correctly assume that you will be able to either buy or rent a building for your restaurant and that you can choose the location. You can search through a realtor or on your own, and you will be able to negotiate the price. You are also fairly familiar with the local tastes and preferences, so you have an idea of what foods people will like. Essentially, they like what you like. You assume that the U.S. dollar will hold its value and that people will be able to pay with cash or credit cards. You assume that you will not be asked for bribes to open or continue with your business and that you will not need to pay protection money to the organized crime leaders in your area. Finally, you assume that you will be able to use social media and the internet to advertise and offer online reservations.
Most of these assumptions may sound pretty silly… Of course I will be able to choose the location of my restaurant. Of course the US dollar will be an acceptable form of currency. But when you do business internationally, all of these assumptions need to be questioned and modified to address the realities of a global environment. In an international setting, things that were just assumptions can no longer be taken for granted and become paramount to your success. Companies able to more effectively identify and respond to local nuances will be the global winners. Those who cannot adapt, will eventually die, whether it be at the hands of a local competitor or a foreign company that better understands the local market.
These differences across nations could be as stark as the differences one might find in doing business across planets. While you may have thought about international business before, very few have thought much about inter-planetary business. Yet, believe it or not, some people have. And they are not all Jedi or Trekkies. PayPal, for example, has a Galactic Initiative to figure out what future space travelers would use as cash. They admit that this would not be a reality anytime soon, but nonetheless, they want to be ready when space tourism and other out-of-this-world opportunities begin to take off.
While we still haven’t found intelligent life on other planets, you can imagine that if we did there would be plenty of people wanting to do business with them. These foreign planets would represent untapped markets for your products and services. For instance, let’s say you are a successful watch maker and that your watches are sold all over planet earth. If it were a possibility, there are three main reasons why you might want to start selling beyond Earth.
First, you have been doing well, but because there are no new areas to expand, your business is not growing. However, one day in your intergalactic travels you find a planet whose inhabitant life forms (or as you like to call them, aliens) tell time using pocket watches, but no one uses wristwatches. In fact, they have never even heard of wristwatches. Part of the reason could be that they don’t really have wrists that are smaller than their hands. The idea of putting something on their wrist only to fall off every time they put their arm down seems rather absurd.
However, you see a potential growth opportunity. While the exact watches you produce may not be suitable for this population, you realize that with some slight modifications using the incredibly advanced technology of spandex that you already use in some of your watches on Earth, the watches could stay attached to the aliens’ wrists. If you are successful in entering this planet’s market (as well as atmosphere), then you might be able to grow your sales. This would be much easier than trying to get the humans on earth to switch from their existing watch brand to yours. So increased sales is a major motive for expanding into interplanetary markets.
Second, while spandex is super cool and super advanced, you may find that the foreign planet in which you are trying to expand has technological advances that not only allow them to make spandex much more cheaply, but to do so in a way that creates environmental waste. This is good news to you for two reasons. One, you will now be less of a contributor to depleting your own planet’s ozone layer and subject to lower carbon taxes. Two, you will now be able to decrease the overall cost of producing watches both for the new planet and for planet Earth. In addition, you may find that by interacting and working with the aliens, you are able to glean some new insights on spandex bands for the Earth market. So the ability to acquire resources and knowledge from the foreign planet would act as a second major motive for expanding into interplanetary markets.
Third, you may feel that by selling your wristwatches in a foreign planet reduces risks that you are facing by limiting your sales to Earth. For example, it is no secret that the Klingons, aliens from the planet Klingon, have had their eyes on capturing and taking over planet Earth for quite some time. As far as you can tell from viewing the many episodes of Star Trek, the Klingons are not wristwatch people. They seem to care less about telling time and more about telling civilizations what to do. While people have made the effort to learn their language and understand their culture, relations are indeed strained. So, by setting up manufacturing operations and selling your product on a separate planet, if your sales decline on Earth, then you can always count on your sales on the other planet to help you pay your bills and absorb the Klingon attacks. Another way that expanding to other planet markets might reduce your risk is by preempting Earth-based competitors who were also contemplating moving to an intergalactic business model. Everyone (at least everyone in your galaxy) knows that if you hadn’t started selling to your selected foreign planet first, that it would be difficult for you to compete against Rolex at an intergalactic level. Like Switzerland, Rolex never seems to get involved in any of the intergalactic turmoil that goes around and they seem to be well respected by most planets.
Once you’ve decided that you want to sell your watches to this foreign planet, you need to consider how you will set up shop.
First, considers what you will need to do business across planets. You probably need a space ship to take your goods back and forth. If the planet you are doing business on is billions of light years away, do you use Federation-Ex or do you purchase the space ships yourself? Will the watches handle going through a worm-hole or do you have to risk going the slow way by traveling at the speed of light—risking that your customers will be dead by the time it reaches them? Do you have to be concerned about intergalactic pirates? Will you sell directly to retail shops on the alien planet, or will you have a local partner who has your best interest at heart and understands the alien market and culture? Better yet, will you set up your own operations there so you have a local presence and can control more of the production and sales process?
If you do set up your own operations, how do you go about doing this? Will you buy facilities from someone else or will you build your own? There are many factors to consider in making this decision. These factors relate to the alien planet’s economy. Do you think aliens are more likely to follow a socialistic system where government exerts more control over the major factors of production or do you think they would prefer a more capitalistic system where private owners decide on the terms of transaction? Will their laws be the same as the laws you see on earth? What if they are at war with another planet? Will their language, culture, and norms be same? Will you need to make modifications based on these socio-cultural factors? And finally, will they have similar technologies and processes to the ones you use? Is there something you can learn from their technological environment?
All of these factors influence the form your company takes and how you will manage your operations. Like interplanetary business, international business must similarly consider these factors. The differences require you to modify existing business principles and practices, making international business something quite different from domestic business. Those who recognize that these potential differences exist are more likely to ask the right questions, allowing them to find the answers and out compete their rivals. Those who ignore differences won’t even be aware they should be asking questions at all. Given the increasing degree of international trade and business, the question is are you going to engage in international business with your eyes open or with them closed; are you willing to understand and adapt or are you likely to be left wishing the world would adapt for you.