Reason for International Business

The fundamental reason

Countries cannot produce equally well or equally cheaply all that they need. This happens because of:

• the unequal distribution of natural resources among nations, and
• differences in productivity levels.

The availability of factors of production — labour, capital and raw materials — differs from nation to nation. So do labour productivity and production costs, owing to varied socio-economic, geographical and political reasons. Because of these differences, one country is often better placed to produce certain goods of better quality and/or at lower cost than others can.

Specialise and trade

Since some countries hold an advantage in producing select goods and services that others cannot make as efficiently, each country finds it worthwhile to:

1. produce at home the select goods and services it can make most efficiently, and
2. procure the rest through trade with other countries that can make those goods more cheaply.

This is precisely why countries trade with one another and engage in what we call international business.

Geographical specialisation

• International business as it exists today is largely the result of geographical specialisation.
• The same logic explains domestic trade between regions within a country. For example, within India, West Bengal specialises in jute products, while Mumbai and neighbouring Maharashtra are more involved with cotton textiles.
• The same territorial division of labour applies internationally. Many developing countries, being labour-abundant, specialise in producing and exporting garments; lacking capital and technology, they import textile machinery from developed nations that can make it more efficiently.

True for firms too …