Foundations of International Business
The analytical framework of international business is build around the activities of MNEs enunciated by the process of internationalisation. The FDI, on the part of an MNE attempts to overcome the obstructions to trade in foreign countries. The strategies relating to the functional areas, such as production, marketing, finance and price policies, are adopted by the MNEs in such a manner that an amicable relationship between home and host nations is created.
Foreign direct investment can be distinguished from the other forms of international business, such as exporting, licensing, joint ventures and management contracts. Basically, it reacts to the restrictions in foreign trade, licensing, etc., and its growth at the global level has taken place. This is due to the imperfections in the world markets and protective trade policies pursued by different countries for the sake of protecting their economies. There are different ways in which the MNEs have provided challenges to the imperfections and restraints in the world markets from an important part of the conceptual methods underlying the expanding role of international business.
Before the emergence of the MNEs, foreign trade and international business were regarded as synonymous, and international trade doctrines based on labour cost differentials and free trade guided the international transactions among different trading partners. The multinationals undertook FDI abroad, and their innovative efforts in technological development and management techniques, in a way, refuted the traditional trade theories. Several FDI theories have been developed in support of international business for the improvement and welfare of world economies. The fast growth of international business has also been conducive to foster close international economic relations among different countries of the world.
Now, the world economy is not only interdependent but also inter-linked, and any kind of R & D taking place in any part of the world has its impact on the entire global economy. The multinationals are to keep a constant surveillance on the fluctuating foreign exchange rates and inflation as these have a direct bearing on the profitability of international operations. The socio-cultural, political and economic environments of host countries also affect the investment decisions of foreign investors.
International Trade Theories
International business began with international trade operations, facilitated by the laissez faire in the world economy. It improved the well-being of many nations, and the imposition of trade barriers reduced the gains from trade, giving rise to the search for alternate avenues to exporting. The latter resulted in the establishment of subsidiaries in foreign countries through FDI. In this context, it is pertinent to understand the determinants of and the effects of international trade and FDI on the trading partners, international operations of multinationals and the economies of the home and host countries. Several theories have been formulated, from time to time, which form the bases of international trade and FDI.
