Balance General

One may ask, what are the reasons for international business? The answer to the question cannot be far-fetched. Four factors are responsible for interest in international business: explosive growth of participants in international business, explosive increase in income, closer central control through improved communication network, and host community reactions. These are discussed below.

Explosive Growth

One striking, difference is the explosive growth in both size and quantity of multinational concerns and indigenous enterprises involved in international business in the last few decades.

Ball and McCulloch (1996) reveal that an estimate of the total accumulated foreign investment by the industrially developed countries range from 350 to 400 trillion US dollars. According to recent survey by the European Community, there are now over 10,000 multinational enterprises in existence worldwide.

123 Explosive Increase in Income

The size of the Income generated by enterprises in international business is much higher than those generated in the domestic market. The most interesting fact here is that, while the income generation rate of enterprises in international business is galloping growing at a geometric progression, those of the domestic enterprises is trotting at an arithmetic progression. The implication of this is that international business has become increasingly important in the industrial and economic life of many nations. Further, the increasing importance of the international business in the local economy of developing countries has caused a number of their governments to view this change as a threat to their autonomy. Critics of large multinational enterprises cite statistics to ―prove‖ that host governments, especially, those of the industrially less developed countries are powerless before the multinationals ( Jaja, 1995). For instance, some multinationals are known to have total sales, which are greater than the Gross National Products of many host nations. It is reported that the total sales of largest multinationals surpass the sum, of the Gross National Products of 43 African countries put together (World Bank Report 1991).

Closer Central Control

A third important factor, which has attracted the attention of researchers and practitioners in international business, has been the much closer control now exercised by headquarters of the multinational enterprises. Though the subsidiaries may be scattered over the globe, management in the home office coordinates and integrate their activities.

The ability to exercise central control has come about because of fast air travel and the ability to transmit, and analyse rapidly large amounts of information by means of improved technology in communication network. This improved information technology is in the areas of the telephone,

124

telex, computers, fax and e-mail. This is in contrast to the days when overseas travel was by sea and primarily letter-handled communications. Once the information arrived in the home office, several days were required for processing before top management could act on it. Small International Business Management wonders that the local subsidiaries were given considerable independence, and there was little success in coordination of foreign operations. In addition, poor transportation facilities between countries, and the presence of tariff and non-tariff trade barriers made it difficult for a firm in one country to market its products in another. This meant that there was less need for close integration and thus each subsidiary tended to operate in its own domestic market. Thanks to the global orientation, which has made both the host and home country governments to apply caution in their behavior in international business.

Host Community Reaction

Host nation governments as early as I950s began to realize that the establishment of an increasing number of businesses controlled by management outside their jurisdiction was resulting in proliferation of subsidiaries that could pursue objectives in conflict with their own.

This they believed would weaken national sovereignty. For instance, if government executives believed it is necessary to implant a tight monetary policy, and therefore restrict the amount of capital available for industrial expansion; they may fear that foreign-owned subsidiaries might upset their plans by bringing in capital from abroad. If they attempted to raise taxes to reduce purchasing power, absentee owners might shift production elsewhere and sources of employment would be lost.

Similarly, as governments strove to provide more infrastructures such as highways, educational facilities, housing, and all the myriad elements of a higher standard of living, they required more

125

foreign exchange. Anything, which reduced its availability‘ such as fees, paid to outsiders for management services, and technological assistance or rules by home offices prohibiting subsidiaries from exporting or buying lower-priced raw materials in the open markets rather than from the parent company, would weaken these efforts.

It must be emphasized that, enterprises in international business satisfy different groups in the course of their operations. These groups include employees, customers, competitors, stockholders, and the government of the home and host countries. Because the objectives of these different groups are necessarily not compatible with those of the business, and sometimes with each other, conflicts in international business are bound to arise. This is because, the satisfaction of these groups is a cost on business, and entrepreneurs involved in international, business will always want to minimize cost, and maximize profit. The pursuit of profit maximization leads the enterprise in international business to:

1. Choose the mode of operation that best suits its own objectives.

2. Improve efficiency by allocating its resources within the corporate family, and 3. Keep as much of its profit as possible as retained earnings.

Economically, speaking there are few conflicts between the goals of an enterprise in international business and the objectives of home countries. Conflicts do arise, however, if an enterprise closes its factory at home and invests money abroad, leading to higher unemployment at home.

The conflicts between the enterprises in international business and its home country can also arise from non-economic goals that are set by the government in the home country. Conflicts may arise over exports and over the licensing and production of certain products in host countries. Conflicts may also arise over environmental issues.

126

The major factors that determine the intensity of reactions of a host country to international business operations are the perceived degree of foreign domination and control. The other is the extent to which the activities of enterprises in international business are subsidized by the government of the host country. Further suspicions concerning the presence of some foreigners have led some countries to go so far as to confiscate foreign enterprises in their country. For example, after the downfall of the Shah of Iran, the new Islamic Republic Government of that country confiscated All-American business organizations . Some other countries however, have been Indecisive about the presence of enterprises in international business and have gone from one extreme to another. Some countries have developed different policy measures that have the intention of lessening the effect of ‗foreign direct investment‘ (FDI) on their economic systems without banning FDI altogether. It is hoped that such policies would provide them with the benefits of FDI - technology, managerial know-how, labour training, the needed capital, and access to foreign markets — without forcing them to yield completely to foreign ownership and control.

Some major policies employed by host countries in dealing with firms in international business require joint venture arrangements. Another set demands controlling entries and takeovers, excluding foreigners from specific business activities. Others involve controlling the domestic capital market, debt-equity requirements, dis-investment, controlling remittances, rates and fees, and taking the foreign investment apart, which means buying the needed technology, management, and capital separately, rather than acquiring them in one package in the ―form of international business investment (Michael 1996; Hall 1997). This must have influenced Jonas 1997) to contend that policies used by host countries in securing some of the benefits in international business, i.e investments require that entrepreneurs should engage in labour

127

training. It seems this will ensure that persons occupying certain key positions in host countries would not suffer from the prohibition of foreign enterprises engaging in technologically stagnant industries. This can be achieved through the engagement in manpower research and development in the host countries.

One thing is clear, many host countries believe that there are gains to be made from the operations of firm‘s international business within their borders and they continue to receive these enterprises with open arms. This is especially true for countries with market economies. For example, Brazil offers a number of incentives to attract foreign investments. These include tax rebates for firms that invest corporate earnings, convertibility of earnings into dollar, fiscal incentives, and free repatriation of corporate earnings up to 12 percent of the invested capital (Asheghian & Ebrahimi 1990).