The natural endowment varies from country to country. Some countries have some natural resources that make them rich and they can afford to do business with the excess of these natural resources
However, some countries only have resources that could only be consumed by their citizens; while some depend entirely on the rich countries with excess resources. The issue of excess is not limited to goods only-it, could also extend to and technical know-how.
International Business could not be discussed without reference to Mult-inational Companies (MNCs).
Multi-National Companies (MNCs)
During the past thirty-five years, there has been an impressive growth in both number and size of multi-national Companies (MNCs). This is destined to continue and these companies will do an increasingly large destined to continue and these companies will do an increasingly large part of he world’s business.
According to Ducker (1969), these companies are the only institutions that create an economic community transcending national lines and yet and respectful of national sovereignties and local cultures.
They have numerous opportunities for goods in the world but they are faced with serous conflicts and challenges as they go about their work. However, the growth of Multi-national companies have brought about the change of international trade which concerned itself mostly with countries exporting goods to and importing from others to a world of multi-national business. Based on this development “international business” and “multinational business” will be used interchangly.
Why Business Is Necessary
Specializations a necessity in a complex and dynamic economy. It is from specialization both workers and owners of productive capital benefit or gain form each other. Thus an equivalent exchange exists in which an individual sells personal skills on the market and in turn is able to acquire goods and services with the money earned. In this way, people are able to live much better than if they had to provide all their own needs such as clothing, food or shelter.
Specialization
Countries work the same way. Just as workers combine their talents and training with available natural and capital resources to specialize, so countries specialize on the basis of their labour, energy supplies, climate and management. They use the earnings from this effort to pay the goods provided more efficiently by other countries. In this way each country benefits from the fruits of its specialization.
Principles of Comparative Advantage
The classical economists asked what would be traded between two countries because they thought the answer for business between countries was different from that for business within a country. Within a country a region produces the goods it can make cheaper than other regions.
For example, the Northern part of Nigeria will produce groundnuts, East will produce coal and West will produce Cocoa. The value of a commodity within a country-is determined by its labour content. If the product of a certain industry can be sold more than the value of the labour it contains, additional labour will transfer into that industry from other occupations to earn the abnormal profit available there. Supply will expand until price is brought down to the value of labour it contains.
Similarly, if a commodity sells for less than the worth of its labour, labour will move away into other lines until the gap is closed. The tendency of wages toward equality within a country results in prices of goods equal to their labour such as to equalise the return to labour in all occupations or regions.
If wages are higher in Lagos than in Calabar, labour will migrate to Lagos. This will lower the wages in Lagos and raise them in Calabar, and the movement will continue until the return to labour is equated in the two cities.
However, after labour has spread itself among several cities to equalize wages, these cities will produce and sell to catch other what each city can make the cheapest Its advantage in such commodities over other cities will be absolute. Therefore, the theory of business applicable to cities of a country is the theory of absolute advantage.
Classical economists therefore thought that the labour theory of value valid in business within a country cannot be applied between nations, since factors of production are immobile interationally. For example, if wages are higher in South Africa than in Nigeria, they stay higher, for migration cannot take place on a scale sufficient to eliminate discrepancies.
Although, some attempts might be made but the immigration law of the country involved will curtail these attempts. Under these circumstances the classical economists asked, what will South Africa sell to Nigeria, and Nigeria to South Africa?
Let us assume two countries and two commodities, South Africa and Nigeria, each produces gold and cocoa. South Africa produces both products at less cost than Nigeria. For South Africa, the relative saving in production cost for gold is greater than cocoa. In this situation, South Africa enjoys an absolute advantage over Nigeria in the case of both products: and in the case of cocoa, when the relative saving in production costs is greater.
South Africa enjoys a comparative advantage over Nigeria despite the fact that South Africa can produce both gold and cocoa cheaper than. Nigeria, it might concentrate its resources on gold for which it enjoys the larger saving and import cocoa from Nigeria.
Otherwise, Nigeria might not have enough money to buy gold from South Africa. In other words products must be exchanged between countries if each is to benefit from the other’s specialization and comparative advantage.
Definition of International Business
International business is a business undertaking between two or more countries. As earlier stressed in this chapter, the activities of MNCs should not be under-estimated while defining international business as they (MNCs) are the real subjects that constitute what is known as International Business today. At this juncture, multinational company will be defined.
Multi-National Company Defined
Multi-National Company (MNC) is a company or firm that does business in two or more countries in such a volume that the investment is of some importance to the company or firm and to the host country. The headquarters of such a company or firm would like to make decisions on the basis of global alternatives, Glos defined the MNC as one that operates under a worldwide strategy.
More specifically Glos went further to define MNC as one in which the managers think globally – co-ordinating and interchanging technology, production, sales and distribution among subsidiaries and with parent company.
Theoretically, the management of MNC would like to manufacture in those countries where it finds the greatest comparative advantage; it would like to buy and sell anywhere in the world to take advantage throughout the world of changes in labour costs, productivity, trade agreement, and currency fluctuations; and it would like to expand or contrast on the basis of world wide comparative advantages.
Objectives of Multi-National Company
Some of the objectives of a Multi-National Company are as listed below:
1. To obtain a high and return on invested capital.
2. To achieve a rising growth in sales.
3. To keep financial risks within reasonable limits in relation to profits.
4. To maintain its technological and other proprietary strengths.
The MNCs would like to achieve the highest possible level of economic rationality in their decision-making while assuming reasonable share of social responsibilities.
Why Do Businesses Go Abroad?
The question as to why businesses go abroad now arises. There are many reasons why businesses seek to do business abroad. According to’Steiner (1975), a sample of businessmen from seventy-six companies were asked why they make foreign investments and the response is shown below in order of importance:
1. To maintain or increase market share locally,
2. Unable to reach market from United States because of tariffs, transportation costs or nationalistic purchasing policy.
3. To meet competition.
4 To meet local content requirements and host government pressure
5. Faster sales growth than in the United States.
6. To obtain or use local raw materials or components.
7. Low wage costs.
8. Greater profit prospects abroad.
9. To follow major customers.
10. Inducements connected with host government investment programs.
Glos, stressed, if one were to inquire into the motives for international investment by Multinational Companies, the following might be typical:
1. A need to get behind tariff walls to safeguard the company’s export markets.
2. Greater efficiency and responsiveness by producing in the local markets as compared with exporting to it.
3. The fear that competitors going abroad may capture a lucrative foreign market or may, by acquiring cheaper sources of supply, threatens the domestic position the company
4. The possibility of lower production costs which make it cheaper to produce components abroad.
5. A need to diversify product lines to avoid fluctuations in earnings.
6. A desire to assist licensees abroad who may need capital to expand their operations.
7. A desire to avoid home country regulations such as anti-trust laws in the United States.
From the reasons given by both Steiner (1975) and Glos et. al., (1976), the fundamental forces compelling MNCs to invest abroad are the quest for profit and the fear that their present or prospective market position will be lost to foreign or domestic competitors. In other words, the market factors seem to be the most dominant motivations for the reasons for going abroad.
Sources of Conflict For a Multi-National Company
MNCs are viewed from two extreme positions. On one hand, are those who see in the MNC the most productive development in the twentieth century for raising world economic well-being and for bringing nations together for peaceful.purposes to their mutual advantage (Jacoby 1973; Eells, 1972 and Donner, 1967).
At the other extreme Zambia says the MNC is an instrument of neo-colonialism; it maintains invisible control (over the less-developed countries) and has sharpened contradictions as never before” (Steven, 1971:49). Although, there are many reasons for such opposite view and much depends upon who is commenting or looking
Overreaching specific complaints about MNCs are fundamental conflicts between the objectives of the MNC and national government of countries in which they do business (Steiner, 1975).
Some of the major goals of most countries around the world conflict with the Mks objectives (as enumerated in this chapter) and the decision-making processes. However, the following goals are sought by most countries:
(a) Economic growth.
(b) Full employment of people and resources.
(c) Raising skills of workers.
(d) Price stability.
(e) A favourable balance of payments.
(f) More equitable distribution of income.
(g) Improving technology in and productivity of business firms,
(h) National hegemony over economic system.
(i) National security.
(j) Social stability.
(k) Advancing certain elements of the quality of life. (Kapoor and Grubby, 1972).
MNCs have been and can be of enormous help to governments of the world in their efforts to achieve most of these goals, especially the economic ones. At the same time, however, it is clear that conflicts between the two sets of goals and decision-making processes are inevitable.
Host Countries Issues
Steiner (1975) stressed, there is no international law to which business can looking its foreign dealings, because there is no supernational authority to enforce it. At the same time, if a host country feels a MNC is doing something it should not be doing, there is world”authority” to whom it can look for adjudication.
The conditions under which a company operates in a foreign country are subject to the laws of that country. National sovereignty covers the actions of business corporations. Treaties have been negotiated to reduce and eliminate frictions, but treaties can be skirted by ingenious officials without actually violating the letter of the agreement.
A host country can control a MNC, but if the MNC feels the yoke is too tight it can leave. Differences in the exercise of power between the two are tolerable up to a point, but the point varies from country to country and issue to issue.