With the globalization of the world economy, there has been a rise in the number of companies that operate globally. International business is the all those business activities that include cross-border transactions of goods, services, and resources between two or more economies. Transactions of economic resources include capital, skills, people for the purpose of the international production of physical goods and services such as finance, banking, insurance, construction etc. International Business can also be defined as the globalization.
2. Why Firms engage in IB
Firms engage in international business for a variety of reasons, but the goal is generally firm’s growth or expansion. Whether a company hires international employees or searches for new markets abroad, an international strategy can help diversify and expand a firm’s business. Some of the reasons why firms engage in international business are given below:
2.1. To expand Sales
Firms are basically dependent on
Consumers’ interest in product and services and
The consumers’ willingness and ability to buy them
Over years the number of consumers is increasing with their standard of living also rising, which has led to increased purchasing power and demands in a particular country. When this is compared to the consumers and demand of the entire world it opens up an exciting world of opportunities. This means higher sales and higher profits due to economies of scale that can be achieved with high volumes.
2.2. To acquire Resources
Manufacturers and distributors look for foreign capital, technology and information that they can use at home to reduce costs. Sometimes companies operate abroad to acquire something which is not readily available at home country so as to improve the cost and product quality.
Also it is possible that setting up the industry in another country is cheaper than transporting the raw material from other country to home country.
2.3. Minimize Risk
Companies seek foreign markets to minimize swings in sales and profits arising of business cycle i.e. recession and expansions, which occur differently in different countries. For example there would be recession in one country where the sales are growing very slowly on other hand there would be a developing country where there is high demand for its products due to its expanding markets.
2.4. Lower Cost of Production
Companies go international to find alternative sources of labor. Labor in developing countries is much cheaper when compares to developed countries, labor cost has a direct impact on the cost of production which affects the bottom line of the companies. Some companies look to international countries for lower-cost manufacturing, technology assistance and other services in order to maintain a competitive advantage
2.5. Broaden Workforce
Companies go international to broaden their work force and obtain new ideas. A work force comprised of different backgrounds and cultural differences can bring fresh ideas and concepts to help a company grow. For example, IBM actively recruits individuals from diverse backgrounds because it believes it’s a competitive advantage that drives innovation and benefits customer.
3. Ways of engaging in International Business
There are many ways in engaging in international business. Some of the ways are given below with the definition and examples.
3.1. International Trade: It means companies enter into the international business through importing and exporting only.
3.2. Licensing: It is a permission given by the parent companies to others to use its technology, brand and other ingredients in exchange of fees. For example copyrights, patents ; trademarks.
3.3. Franchising: It is also a permission given by the parent companies to others to use its business strategy but the parent company holds the reasonable power to control it. For example parent company will send a production manager to manage the production of franchisee in a particular economy.
3.4. Joint Ventures: Joint ventures are those companies which are owned and operated by two or more firms jointly. For example, General Mills Inc and Nestle, Lanka Bangla finance, Dutch Bangla Bank Ltd. etc.
3.5. Acquisitions of existing operations: It means firms acquire other firms in foreign countries through purchase. Acquisition provides full control over foreign business and quick establishment in foreign market share. It needs huge amount of investment.
3.6. Establishing new foreign subsidiaries: It means new operation in foreign countries by the parent company to produce and sell products in the countries. It requires large investment but less than acquiring existing business.
4. History of IBM ; Its Business
IBM is an American multinational technology company headquartered in Armonk, New York, United States, with operations in over 170 countries. The company originated in 1911 as the Computing-Tabulating-Recording Company (CTR) and was renamed “International Business Machines” in 1924. Inventions by IBM include the automated teller machine (ATM), the PC, the floppy disk, the hard disk drive, the magnetic stripe card, the relational database, the SQL programming language, the UPC barcode, and dynamic random-access memory (DRAM).
IBM manufactures and markets computer hardware, middleware and software and hosting and consulting in areas ranging from mainframe computers to nanotechnology. IBM is also a major research organization.
5. List of international subsidiaries of IBM
In 1949, Thomas Watson created IBM World Trade Corporation, a subsidiary of IBM focused on foreign operations. Watson figured that by giving the foreign operation a measure of independence, the organization would be focused and aggressive. Watson launched an aggressive international expansion beyond the company’s existing operations in the US, Canada, Germany and Britain—first to France and then to Brazil, South Africa, Japan and China. Till 2016, IBM has more than 70 subsidiaries around the world. Some of the subsidiaries of IBM are given below.
1. IBM, India 2. IBM, Canada 3. IBM, Germany
4. IBM, Japan 5. IBM, France 6. IBM, South Africa
7. IBM, China 8. IBM, Austria 9. IBM, Belgium
10. IBM, Bulgaria 11. IBM, Czechoslovakia 12. IBM, The Netherlands
13. IBM, Italy 14. IBM, Norway 15. IBM, Poland
16. IBM, Romania 17. IBM, Russia / Soviet Union 18. IBM, Sweden
19. IBM, Switzerland 20. IBM, Vietnam 21. IBM, Yugoslavia
6. Subsidiary & its Characteristics
A subsidiary is a company with voting stock that is more than 50% controlled by another company. A subsidiary is partly or completely owned by the parent company, which holds a controlling interest in the subsidiary company. A subsidiary company can be owned partly that is more than 50% or can be owned completely that is 100%.The owning company is called a parent company or sometimes a holding company. A subsidiary’s parent company may be the sole owner or one of several owners. If a parent company or holding company owns 100% of another company, that company is called a “wholly owned subsidiary.”
There is a difference between a parent company and a holding company in terms of operations. A holding company has no operations of its own; it owns a controlling share of stock and ?holds assets of other companies. A parent company is simply a company that runs a business and that owns another business — the subsidiary. The parent company has operations of its own, and the subsidiary may carry on a related business.
6.1. Characteristics of Subsidiary: The key characteristics are given below
i) Ownership: Holding company or parent company owns the more than 50% or 100% of ownership of a subsidiary company
ii) Management: A holding company directs the management and operations of the subsidiaries it owns and maintains the authority to add or remove board members, directors and other key management and personnel.
iii) Financial Control: A subsidiary has no financial control over its operations. Even independently acting subsidiaries are ultimately financially controlled by their holding company. Financial control includes financial activities such as investment decisions, sales projections and budgeting.
iv) Legal Responsibility: A holding company may invest in subsidiaries in a variety of industries to diversify its investment, lower its risk potential and, take advantage of shared loss and tax consolidation. At the same way, the parent or holding company has take the legal responsibilities of that particular subsidiaries.
Finally it can be said that, when a company acquires majority shares in another company, it becomes a holding company and the company whose share it acquires becomes a subsidiary company. The relationship between the holding and subsidiary company is that of a parent and child.
7. Factors should be considered before entering into IB through Subsidiary
It is essential to review a number of factors before making any decisions on when, where and how you are going to make your move and establish yourself as a competitor. These include political stability, logistics infrastructure, availability of skilled workers in your sector, legal systems, fiscal and monetary policies, and rights on property. A strong customer base and good working relationships with local suppliers are the foundations of business and can take years to establish so getting in early is advised.
Before establishing a subsidiary in other economies a company must consider factors such as:
Cost and time to establish a foreign subsidiary
Corporate policy toward compensation and other HR issues
Compliance risk for payroll, taxation and immigration rules
Establishing secure office premises, employee residences and bank accounts
Evaluating the growth potential against the required investment
Permanent establishment issues resulting in taxable local revenue
Contingency plans in the event that the new foreign office needs to be closed
8. Why IBM started to set up its Subsidiaries
After fulfilling the local demand IBM started to engage in international business through establishing foreign subsidiaries. At present, IBM has more than 70 subsidiaries around the world in order to make its products ; services available to customers. The reasons of establishing subsidiaries are as follows:
Opening up Access to New Markets for Products and Services
Expanding Brand Recognition
More Cost-Effective Production and Manufacturing
Access to Technical Skills / Regional Knowledge
Customer Service Centers
Part of a Global Expansion Plan
Use of Free Trade
9. Advantages ; Disadvantages of Subsidiary
A subsidiary can be set up starting from nothing or through the acquisition of a local company. Depending on the location there is a benefit to both choices. There are various advantages of choosing a subsidiary as the business vehicle for your company set up or expansion internationally. The main aspect is the control and support of the parent company. The already established parent company will have the resources and employees to staff the subsidiary so the subsidiary receives a readymade network of people with experience in the business.
Many parent companies send executives to subsidiaries to get them started, ensuring they have a reliable person in authority to manage the subsidiary’s operations. The brand and reputation of the parent company also transfer to the subsidiary so all the intellectual property is protected from rival firms. Much of the day to day business aspects of the companies can be shared between the parent and subsidiary, with joint financial systems, shared marketing programmers, and cooperative administrative services available. This can save both money and resources as well time developing and putting them into place.
On the other hand, the main disadvantage of setting a subsidiary abroad is the cost. Acquiring a local company may be a quicker way to establish the company in its new surroundings but it will also be a more expensive option. It may be difficult for the parent company not to overpay for the local company’s assets and the price will be bumped up further if there is a bidding war.
The usual problems of working in a foreign country also apply. There could be language difficulties, cultural differences, and a lack of workers skilled in the areas you need. It is important to remember that the parent company holds all responsibility for the subsidiary and so any legal or financial action taken could lead to implications for the parent company.
10. The risks are faced by IBM in case of international business
At the time of engaging in international business IBM faced various risks. Some of the risks factors are mentioned below:
10.1) Economic risk or Country risk: Country risk is a collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, and transfer risk, which is the risk of capital being locked up or frozen by government action. Country risk varies from one country to the next. Some countries have high enough risk to discourage much foreign investment.
10.2) Political risk: Political risk is the risk which occurs as a result of political changes or instability in a country. Political risk is also known as “geopolitical risk”. Because of this risk investment’s return can be affected negatively and which will discourage to set up a subsidiary in that particular economy.
10.3) Foreign Exchange rate risk: Foreign exchange rate risk is the risk of changing value due to changes in the currency exchange rate. This risk has ability to affect the investment’s return ; can increase the cost of setting up a subsidiary in foreign economy.
Going for international business is not easy and profitable for the all firms or companies. Many of factors have to consider before entering into the international business like skilled personnel, risk factors, profitability as well as cost figure.
Establishing a foreign subsidiary can be your first step to business success abroad. Assessing all the options and carefully weighing up the benefits and risks will allow a company to determine whether it is a worth a go for the company.