Motives of International Business

Expansion in size of market

Domestic market may be small Volkswagen (Germany), Toyota & Sony (Japan), Nokia (Finland)

Acquiring Resources
Some resources may be scarce in home country These resources may be abundant in host nation Cheap and skilled labour in India

 Minimizing Risk
Operations of a firm in one nation is risky Recession, law and order, natural calamities, political instability etc Fall in demand in one nation, expansion in other nation

Economies of scale
Large scale procurement & production Use of modern machines, division of labour Specialisation, better utilisation of resources

 Domestic market constraint

Domestic market may be small in size High growth rate can be achieved through internationalization

Better use of natural resources

Natural resources may be more than domestic requirement Crude oil in Arab countries

 Better growth potential in emerging economies

Developing economies have high growth potential Large population India, China

Advantage of monopoly
Modern technology Patents

Incentives by govt.
Concessional loans Tax incentives subsidies

 Image in domestic country

International business improves image of organisation in domestic country

Healthy competition
Competition improves efficiency Costs go down Inefficient domestic manufacturers cant exploit the consumers

Comparative advantage
Each country focuses on those goods for which it has comparative advantage Benefits of specialisation

Disadvantages of International Business

Uneven development
Poor remains poor

Limited possibility of gain

Demand of primary products is less in developed economies Use of synthetic goods as compared to natural goods

Dumping

 Bad effect on savings

Propensity to consume People spend money on wasteful consumption Adverse effect on capital formation

Decline in domestic employment Scarcity of goods

Exports lead to scarcity Onion 1996-1997 (from Rs 5 to Rs 80/ Kg)

 Problem of balance of payment

Subsidiary company repatriate profits, royalty, interest, technical fee to home country Developed countries have favourable balance of payment situation as compared to developing nations

Setback to domestic industries

Competition Huge resources, better technology

 Dependence on foreign companies

Raw material, machines, technical know how, foreign technicians

Uncertainty
At the time of crisis when money is needed most foreign firms withdraw their money to invest it somewhere else

Hindrance in the development domestic technology Corruption