International Business in the 21st century

University Degree Business and Administrative studies

Executive Summary –

International Business has come a long way in the last couple of decade or so. In this paper we look back at the major changes that happened within the International Business arena and the way it has directly or indirectly affected International trade and investment. In this paper we also look into the major challenges and opportunities that International Business face in the 21st century. It is also interesting to note that a lot of factors in the past especially in the last decade have changed the very modus operandi of International Business. This has added many more challenges and opportunities to the world nations and also to the governing bodies across that control the international trade and investment. Here, we also argue on the fact that international business has evolved now into a manner that the very nature and elements moulding the international business environment are becoming more and more difficult to fathom.

Introduction –

We all live today in a globalised world since we are not only aware of what is happening across the globe but also understand its significance and to an extend respond directly or indirectly to those happenings. Human race is much more interdependent than ever before in human history. Globalisation has brought about radical changes in the thinking and the way in which people, policy makers and more importantly the methodology in which business (both trade and investment) is being done. Businesses these days are planned in much larger scale than before.

International trade involves transactions across borders and these transactions involve trade (import and export) and investment (capital, money, technology and labor).

In the bigger picture, globalisation refers to the growing economic interdependencies among countries and this is reflected in the growing amount of business in goods, services and capital flow across borders. This has provided companies across globe to function in different countries and environment and reap benefits from the opportunities and made consumers king by giving them choice and variety like never before.

But there has also been considerable amount of opposition to the growing concept of globalisation. Critics of globalisation have blamed globalisation as the brain child of the developed world and that it will have an adverse effect on the poor countries. Though there are proofs for this argument, counter claims do exist for the same.

In this paper we will look into the major events that shaped international business that we know of today and also the challenges and opportunities associated with the globalised world in the 21st century and how it will shape the world for tomorrow’s generation.

The research below reinforces the fact that no one lives and works in isolation in this world and that the international business of today is governed by multiple factors of complex nature; interlinked in a way that the international business environment has evolved into a challenging scenario for the modern world.

Major Changes in International Business between 1998 to 2008 –

In the current world scenario, International Business, which includes both trade and investment, is vital to the betterment and well being of any country and more so for the entire world community. Never before in human history has international trade and investment been so critical to a country’s economic development and stability. This phenomenon has been shaped by many factors that happened in the first half of the 1990’s and significant changes that followed due to the interaction of these factors with human community.

Before we go in detail into the major changes experienced by the international business environment between 1998 and 2008 we will try to go back in time to analyse the factors that shaped international trade and investment.

Historically, governments in most countries focussed their attention in developing and effectively implementing their domestic policies. This was directed solely to safeguard the national interest. Though, these policies were solely aimed at one’s own country it had direct or indirect effect on their foreign policy decisions on international trade and investment. For example a country may restrict import so as to protect its national interest. Hence, as seen in the past conflicts between countries arose which mostly resulted in both countries losing something or the other.

After conclusion of World War II; a need was felt by countries across the world to regulate the international monetary and financial system and trade. The efforts took shape at United Nations Monetary and Financial Conference commonly known as Bretton Woods conference in 1944. 730 nations came together and signed to set up International Bank for Reconstruction and Development (IBRD), International Monetary Fund (IMF) and General Agreement on Tariffs and Trade (GATT). General Agreement on Tariffs and Trade (GATT) came into effect 1947. GATT aimed at ensuring transparent and non-discriminatory procedures in trade and to resolve disputes and also to involve developing countries in international trade. This was followed by many other rounds of talk like Kennedy Round and Tokyo Round which further made headways in international trade by reducing international trade barriers and disputes. In the early 1995 the GATT was replaced by World Trade Organisation (WTO) which now controls and manages the international trade and investments. In 2001 Doha round decisions were made to further increase international trade and also to include regulations in agriculture, and anti dumping issues. But due to high pressure from the US and EU not much progress has been made in this direction.

2.0.1 Rise of Asia – One of the major changes in the last decade or so in International Business is the emergence of Asia led by China, India and the Four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) as global players in the Global business arena. Since 2001 Asia has had a steady GDP growth and has contributed for more than half of world’s growth and its contribution to the world’s GDP is more than USA. These details and the percentage contribution of nations to world GDP can be found at the International Monetary Fund (IMF) website at <http://www.imf.org/external/pubs/ft/weo/2008/01/c1/FIG1_10.pdf>.

One other important development with regard to Asia has been the decreasing dependence of Asia with the US (Asia Monitor, 2008).

The last two decades were a roller-coaster ride for Asia in particular. It started in mid 1990’s when the growth in East Asia caught the imagination of the world, which even the World Bank dubbed as the ‘East Asian Miracle’. This sudden and uninvited attention prompted the countries to go for excessive rapid financial and capital liberalisation. This led to speculations and rumours in the market and the frantic events that unfolded crippled the countries to an extent that it took a while for them to recover. It started with speculation of the Thai baht and selling of huge volumes of the currency by investors leading to devaluation of the currency. By which time the government actions to stop the process failed and the currency value nosedived. Along the same time the South Korean countries were being encouraged to borrow from foreign banks to expand their business. But rumours started growing in the Wall Street that these companies were not capable enough to repay the loan. Banks started acting on these rumours and refused to roll over the loans to the companies and thereby causing bankruptcies. These events eventually affected countries like Malaysia, Indonesia and Philippines causing unemployment to rise to uncontrollable levels.

The importance of these events is that even though it was difficult times for the East Asian regions what came about were the hard learned lessons from these events. It also forged many countries to work together and the structural reforms were paced faster to catch put for the lost time. The Asian economy has recovered since the 2000s and they are far more cautious in their approach to trade liberalisation. The results are already showing up with the International Monetary Fund (IMF) counting Korea, Taiwan, Hong Kong and Singapore among the advanced economies. Along with them, China and India ...

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Trading Blocs – Another development that happened after the Second World War is the emergence of many Regional Free Trade Agreements. This movement started with the developed nations and slowly swept across South Korea, Taiwan Hong Kong, Singapore and to other Southeast Asia and finally into major economies like China, India, Latin America Central and Eastern Europe including Russia and parts of Africa. Some of the major trading blocs are European (EU), North American Free Trade Agreement (NAFTA) and Asia–Pacific Economic Cooperation Conference (APEC).

The emergence of these trading blocs as explained by Grossman and Helpman (1991a, p. 517–26) has been due to the following advantages –

Increase in the opportunities for communication and thus facilitating the transmission of technology.
Increasing international competition can encourage entrepreneurs to engage in more R&D activities, while at the same time reducing duplication of research effort.
The size of the market is expanded with free trade, potentially increasing investment activity.

In their analysis Jon D. Haveman, Vivian Lei, and Janet S. Netz (2001) has found out that increased international integration does lead to faster growth. This has been very evident in the economic advancement of many smaller countries taking advantage by joining in one or the other regional agreements. European Union and the Asian region have advanced economically in a very fast pace with the help of regional trade agreements and corporation which they otherwise would not have achieved in the short span of time.

Technological Advancement and Transportation – One other silent revolution that changed the international business is the role played by transportation and technology. Though transportation cost has been declining for the last two decade or so much greater effect was the decline in cost communication technology due to the advancement in IT. Businesses and governments across the globe have adopted technology for faster communication and effective management overseas business. This has provided for faster resolution of international business issues and has increased the coordination of businesses to a higher level. New advancements in information technology have helped create a new category of firms called ‘Born Global’. The role of advancements in technology and their subsequent influence in businesses going global much faster is very much supported by Mika Gabrielssona (et al... 2008) in their paper. The heavy reduction in transportation cost in the last decade has enabled companies to move the resources to far areas at much lesser rate. In short technological and transportation changes in the last decade has brought not only counties closer than ever before but also has changed the very way in which international business is done by giving more opportunity for all.
Terrorism – One global factor that emerged more than ever, and that is the affecting each of our life directly or indirectly, is terrorism. Terrorism has emerged as a single most threat to global well being. Since terrorism has a profound negative effect on all the people, it directly or indirectly has had an impact on International Business across the globe. One of the worst ever terrorist attacks on US on September 11, 2001 brought out the profound effect terrorism has on global business and for the first time nations across the globe sensed a feeling of instability and insecurity. This attack was followed by October 12, 2002 attack in Bali, Indonesia. This affected Indonesia’s vital income via tourism. The terrorist attack on London on 7 July 2005 disrupted transport and communication and caused the FTSE to fall 200 points and the pound fell 0.89 cents against the US dollar which was the maximum in 19 months (Michael R. Czinkota et al. 2009). Some sections of the society blame Globalisation as the catalyst for terrorism. They argue that with globalisation access to technology and immigration becomes easier. How far these arguments are true is not yet clear. But what has come out of these developments is that nations across the global are more than ever united in their fight against the global nuisance called terrorism. However, free flow of trade and confidence of security of investments takes a hit during every occurrence of terrorist attack.
Emergence of Euro Currency and European Union –

In 1998, eleven European countries came together to form a unified zone of similar purchasing parity with a revolutionised concept - a single monetary authority and monetary system. The consolidated group was called European Union and the currency Euro. Currently there are 16 countries in the EU. There has been relatively better price stability with inflation average just over 2% due to the European Central Bank's (ECB) monetary policy. The details of which are given below and can be accessed from the ECB website at <http://www.ecb.int/ecb/educational/hicp/html/chart3.en.html>.

Also the nominal interest rates have come down to 5% on an average, details of which are shown in the graph above from the ECB website at <http://www.ecb.int/ecb/10ann/figures/shared/img/img4.png>.

This has in a way paved the way for more cross border trade and investment and this account for one-third of GDP. All these factors have contributed in a big way in the last ten years to create 16 million new jobs thereby reducing the unemployment rate significantly. The data can be seen from the ECB website at <http://www.ecb.int/stats/prices/indic/forecast/html/table_hist_unem.en.html>.

The European region has now emerged as a major International business zone and Euro has emerged as a strong contender to US dollar in world trade.

3.0 Challenges and Opportunity for International Business in 21st Century –

Even though the concept of globalisation has matured in the past few decades there are still quite a few challenges facing International Business in the 21st century. We will also look into some of the opportunities that are encouraging to the consumers and to the global society as a whole.

3.0.1 Major Challenges –

Some of the major challenges that international business face in the 21st century are discussed below.

3.0.1a Trading Blocs – The setting up of these regional trading blocs have created complex rules, which World Trade Organisation (WTO) believes will create additional issues and conflicts in the international trading scenario. It is estimated that by 2010 almost 400 such agreements could exist as per information in the WTO website at <http://www.wto.org/english/tratop_e/region_e/region_e.htm>. The WTO which controls the overall international trade will have to look into the complex regional agreement to foster international trade which is proving to be very tedious for the functioning of the WTO.

3.0.1b Dependence of Developing Counties on the Developed Countries – Although it is seen that the Asian economy has become less dependent to the US economy, the recent global credit crunch has shown that Asian economy is not fully decoupled from the US economy. But since Asia has developed to levels never seen before in the world arena they are far more prepared to face challenges. For example, the recent initiative to increase international trade and investment to and from countries other than US is one such move. But since international economics depends on a vast array of factors there is a long way to go in this regards for all countries.

3.0.1c Terrorism – The issue with technology transfer have been in the recent past for obvious reasons. Governments across the globe, mainly developed countries have been reluctant to transfer technology to other countries since they believe that such an act could increase the competitive advantage of the importing country. Investing firms are also of the same opinion. This thinking has also been catalysed by the terrorist attacks on many developed countries and they believe that technology transfer can increase the chances of such attacks in future. But for international business to flourish a more of open minded thinking will be required to reap the total benefits of international trade and investment. One outcome of terrorism that Michael R. Czinkota and Ilkka A. Ronkainen (2005) argues is that due to terrorist risk in a particular country international business houses are forced to move out to other location even though the cost is comparatively higher. This affects the overall cost and production and the very meaning of going global.

3.0.1d Environmental Changes – The issue that the NGOs have raised worldwide against globalisation is the environmental issues that international business brings along. Countries depend on energy for production and hence revenue for growth. Fossil fuel is widely used around the world for energy and accounts for 80 percent of worldwide energy production. Details of primary energy consumption by source from 1947 to 2007 can be found at the Energy Information Administration website at the link <http://www.eia.doe.gov/emeu/aer/txt/ptb0103.html>. But along with this come environmental pollution. The projected figures of pollution due to fossil fuels are alarming as shown in the figure below.

The Kyoto Protocol had tried many ways to curtail this effect by many measures. One of the steps taken is by asking US to cut carbon dioxide emission by 25 percent by 2012. But this comes at a price of between $100 billion to $400 billion per year for the US. The US has withdrawn from the agreement and many Annex B countries are pushing for relaxation of the target. Christoph Bohringer and Andreas Loschel (2002) argue that there can be significant reduction in the total costs of compliance with Kyoto by International trade in emissions. Though the developing nations have been exempt from emission cuts to an extent, they depend on US for much of the economic assistance. This may worsen international relations and international business which depends on intergovernmental policies for existence. Policy makers should make sure that such developments should not affect international business.

Though international business has thrown toward us a lot of challenges it has stayed on owing much to the opportunities it can offer to people across the globe. Globalisation has provided for greater economic freedom and widened the choices people have. To a great extend international trade and investment has also improved education, public health and thereby relieved poverty to a great level. A few of the opportunities in the 21st century are discussed below.

Major Opportunities –

Even though International Business faces many challenges, the future holds many opportunities for the international trade and investment. Some of opportunities for international business in the 21st century are discussed below.

3.0.2a Beyond Chindia – As discussed earlier the rise of Asia has brought about better income and urbanisation to the Asian middle class. Due to the continuous demand in consumer and industrial products and large population less exposed to quality good, Asia is better equipped to maintain the growth and the region will attract more investors. One other aspect that is beginning to happen is the slow rise of other nations like Vietnam, Bangladesh and Myanmar. A few of the lesser economies have better advantage over China and India like infrastructure, education and more open trade policies. Hence, if the resources are tapped systematically the Asian block has the potential to grow and catch up with the other Asian giants. Since the Asian region has various advantages compared to other countries, the region will continue to grow and become the biggest driver of the global economy.

3.0.2b Technology Transfer – Information Technology is a critical factor in International business. The technological capability of a company gives MNCs competitive advantage in the market. This is also applicable when MNCs try investing in foreign markets. The ability of a firm to transfer technology to foreign market is very critical to the success of the company to achieve more profit. Technology transfer is defined as the transmission of know-how to suit local conditions, with effective absorption and diffusion both within and across countries (Chung, 2001; Kaynak, 1985; Tihanyi& Roath, 2002). In recent developments it is seen that MNCs are very open to the idea of transferring technology in relation to FDI in transitional economies (Uhlenbruck & De Castro, 2000; Young & Lan, 1997). Thereby with the technology transfer not only does the foreign company benefit but more benefit is being achieved by the host country in terms of adopting the relevant technology domain. Hence developing countries that are open to international FDIs will gain much more via international business and leap forward in terms of economic progress.

3.0.2c More Regional Free Trade Agreements – As seen from the success story of the European Union it is quite evident that regional collaboration can lead to regional prosperity and a better stand in the world. It can lead to better trade and investment and thereby raise the economic condition of the member countries. Though Asia in the past had tried, and to an extent succeeded in establishing Free Trade Agreement not much success has come out the agreements. For example since 2000, China has been an active participant in FTA but only two exist in practise, one with Hong Kong and the other with Macao. This when compared with the regional collaboration in Europe one finds that though there is much to be gained very little has been done in this direction.

This is an opportunity for Asia to come up to level of the developed countries. There are political roadblocks, but the rise of many Asian countries in the last decade suggest that if countries rise above politics and come together to set up a unified zone with common governing body then much faster progress can be made for the economic development of the region and in effect raise the economic level of one third of the world population.

4.0 Domain of International Business Today –

The concept of International business has been in existence now for centuries. But it has gained momentum and far more significance in today’s world due to number of factors like, relaxation of trade barriers, common customer preference triggered by development in information technology and transportation. This has led to growing interdependence between countries across the globe for trade and eventually for economic development. In fact nations across the globe are far more interdependent than ever before in history. This has led to many changes in the way business is done in today’s world. International business now operates in a much more complex and demanding environment.

There has been significant amount of changes that happened across the globe that has led to such a scenario wherein it has now become difficulty in defining the overall domain of international business. One major change that is happening is the influence of international market events on the local economic policy formulation of a country. Nations across the world have come to a scenario wherein it has become very difficult to formulate a domestic policy without judging its impact on the global market. Hence domestic policy formulation has become more complex owing to the impact it will have on the international trade and investment of the country and its direct and indirect impact on the local economy. The scenario is such that nations are now in dilemma of whether to formulate a domestic policy that is in tune with the international market movement or to have a foreign policy that will appease the local policy sentiments. International Business sentiments invariably affect the domestic legislation now and then. For example, in 2001 when Japan put restrictions on Chinese products; the Chinese retaliated by imposing 100 percent tariff on Japanese vehicle and mobile phone imports. Thus it is becoming clear that the domain of international business is far beyond foreign policies of a nation, it is invariably playing an active role directly or indirectly on the local policy and vice versa.

One other development that is rendering the international business environment more complex is the weakening of international institutions like the WTO and IMF due to various factors. One major factor that is reducing the influence of WTO is the emergence of numerous regional trade agreements and different economic systems. This can be seen in the change in the main focus of the WTO, which has now shifted from reducing tariff barriers (for which as established) to regulating non-tariff barriers which are much more challenging. The non-tariff barriers in international business include factors like bureaucratic hurdles, special treatment of domestic products, intense domestic campaign, restricted import on certain product or service, varying product standards and complex regulatory environment. Since the laws governing each of these non-tariff barriers vary from country to country and since there is no clear boundary with regard to the factors any disputes in this regard are intensely debatable. Coupled with this scenario is the emergence of regional trade agreements. Every country is in one way or the other indulged in a regional trade agreement. Hence WTO has the additional burden of looking into the global trade scenario and at the same time respect the regional commitments of each member countries. Along similar lines is the complex scenario through which International Monetary Fund (IMF) is going through. The emergence of new economic conditions has demanded for different approaches. For example the new link between political and economic stability require different considerations, there by substantially changing the mission of IMF. The complexities evolving from these developments in the International business arena are such that it has put pressure even on the international organisations like WTO, IMF and the World Bank to reanalyse their strategy.

Overall in this paper we have seen that political, legal and economic factors are all inter linked in such a way that any change in any of the factor shows up considerable changes on other factors. Since these factors affect the domestic policies of the country and also on the foreign policy outlook of the country international business in the end is also directly or indirectly affected. Though some may argue that with globalisation a form of standardisation has happened with the help of world governing bodies and other compelling factors, overall we see in today’s world a complex picture emerging in the international business scenario and the more the world gets involved with international trade and investment the more factors it has to take into consideration to keep up the profitability and sustain economic development. In short it is seen that the boundary of international business keeps on increasing. Overall in future years there must be better regulation in the capital markets, trade and business across the globe and that barriers restricting international business must be addressed and overcome which will benefit not only developed nations but will also be more beneficial to emerging nations across the globe.

5.0 Conclusion –

Through this paper we have seen a brief history of International Business. Some of the changes it has gone through particularly between 1998 and 2008. The last decade or so has been very interesting considering the fact many path breaking decisions were taken which revolutionised cross border trade and investment. Few significant events that happened in the last decade were the formation of European Union, the rise of Asian countries and terrorism. The success of the EU can be attributed to mainly to nations rising above politics for the economic development of the region. The formation of a single monetary body and currency for the region were stands testimony to the shape of this to come in the international business arena. The success of the EU model has prompted many nations across globe to come together and replicate the same but a lot of challenges still face the world community and a lot of ground work need to be done. Another significant change in the last decade was the rise of Asian countries with China and India leading the way. Though the Asian countries still to an extent depend on the developed nations but a greater decoupling has happened in the last decade. The rise of Asian countries is significant in the sense that any development in the region directly affect one third of the world population. Though more Free Trade Agreements within Asian countries can boost the economic development of the region much effort has to be put in this regard.

Last decade also witnessed much technological advancement and also the transfer of these technologies to developing countries via international investment by multinational companies. This has provided the host nations to develop at a much faster rate than ever before in history. In the last decade international business was also affected by the global menace of terrorism. This was very much evident in the September 9/11 attacks in United States. Global business got hit across the globe directly or indirectly. Nations across the globe has since suffered from such inhuman acts. This rise of terrorism has also added to the complexity of doing international business, but at the same time the fight against terrorism has also brought many nations together. Environmental issues are still a cause of concern but companies across global have started addressing this issue in a much better way than before.

In the last decade had been a roller coaster ride for International Business environment and it is now faced with much more challenges and opportunities and at the same time is being influenced by many other factors which have come up in the last decade. Factors like terrorism and regional trading blocs, political and environmental issues has now rendered international business environment much more complex. Hence overall international business has come a long way and efforts are being made to stream lining its operations globally but the domain of international trade and investment has become very complex for nations and corporations to deal with, in this ever changing world.

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