Today’s business environment is more global than ever before with international trade being omnipresent.
As with many major economic developments, international trade creates both potential opportunities and limitations to businesses.
The growing importance of international trade
The dramatic growth of world trade has been possible because of a few factors:
- Trade liberalization. This includes allowing companies from different countries to trade with one another without protectionist restrictions such as tariffs, quotas, embargoes or bans stimulated imports and exports.
- Role of The World Trade Organization (WTO). The World Trade Organization (WTO) is made up of countries committed to freeing world trade from restrictions. Its existence and presence has been a sign of increased globalization. Its main works include establishment of free-trade agreements between countries as well as regional free trade areas that allows no trade barriers between member countries.
- Establishing trading blocs. Trade restrictions have been eliminated thanks to the establishment of free trading blocs such as EU, ASEAN, NAFTA that allow free flow of goods, services, workforce, capital and trade.
- Development of technology. Especially E-Commerce, S-Commerce and M-Commerce which allowed companies to trade online without borders with the use of modern technology. International marketing is possible today with the invention of technologies such as air shipping, the Internet, telephones, smartphones, FAX machines, etc.
- Growth of Asian economies. Total world trade expansion in the last 20 years has been led mainly by the economies of China and India. Most importantly, China has joined The World Trade Organization (WTO) that helped to reduce world trade barriers fueling rapid growth of international trade.
- English as business language. Although English is the official language of businesses in many parts of the world, business managers should not ignore local cultures and languages. Local knowledge can have detrimental effects on the long-term success of a firm in foreign markets.
Advantages of international trade for a business
Potential benefits and strategic opportunities of trading internationally include:
- New foreign markets. International trade opens up new markets giving domestic companies greater opportunity for selling goods and providing services in other countries. These new markets which are not yet saturated with products as the domestic market may have done, give businesses the chance of achieving higher sales and benefiting from economies of scale to improve profitability.
- Improved competitiveness. Companies that operate globally are more competitive (better) than companies that operate only locally. It is because in order to compete internationally with others, the firm must be efficient in manufacturing and selling products and services that are better in terms of quality, cheaper than those offered by other businesses and offered in wider selection.
- Wider choice of locations. This will give the business an opportunity to seek new locations in other countries. Expanded distribution network will not only increase the firm’s direct exposure into new markets, but also possibly lower costs in cheaper places. Also, being present in each country will lead to better market information.
- Opportunities for external business growth. With greater freedom to operate and trade globally, the firm can pursue international Joint Ventures (JV), Strategic Alliances (SA), mergers and takeovers. This will additionally reduce restrictions on foreign trade.
Disadvantages of international trade for a business
Potential limitations and threats of trading internationally include:
- Increased competition. After making international trade freer, businesses from many countries now have easier access to each other’s domestic markets. With increased competition in one large global market, businesses that are not internationally competitive will be put out of business. Offering better products in wider selection at lower prices can ensure global competitiveness.
- Failure to consider national differences. International trading requires business managers to ‘think globally, but act locally’. Those businesses that are not able to localize failing to consider the cultural and social differences between consumers of different nations will most likely fail to achieve commercial success.
- Distribution problems. When producing and selling products on many locations, this can lead to significant distribution issues such as problems with transportation, communication issues, etc. There are always risks associated with managing people far away from the head office that can lead to serious problems with product being available on time where needed by customers.
- Risk of being taken over. While mergers and takeovers are often used by multinational companies as a method of entering overseas markets, local businesses are now at a higher risk of being taken over by a stronger firm.
- Scrutiny from pressure groups. With globalization, ethical principles have extended across cultures and nationalities. There has been a growing activity from anti-globalization groups on one hand, and from old-school pressure groups on the other concerned with exploitation of local workforce and harm to natural environment as the impact of globalization. If an multinational company is to be found guilty of unethical business practices, it will result in bad publicity. Also governments will have much less influence on business decisions.
The growth of multinational companies which are businesses that operate in more than one country has been a result of freeing international trade between countries in recent decades.
Multinationals are companies that own or control production or service facilities outside of its country of origin. They have the influence on countries when it comes to Balance of Payment, transfer of technology and expertise, social responsibility and governmental control in regards to transfer pricing of goods and services between companies.
