International Business Environment

1. Introduction

What is international business?

Business takes place the world over, in a huge diversity of societies and between widely varying organizations. Business can be referred to the vast array of economic activities, in which goods and services are supplied in exchange for payment, usually money (Morrison, 2006). Businesses not only look for market within the country they are situated in but, start looking for business opportunities outside their home country and this leads to international business. Morrison (2006) refers to International business as business activities that straddle two or more countries. Where by business look beyond their home country for more opportunities. A company may begin by selling its products or purchasing raw materials abroad, and go on to producing its products abroad. We can therefore say a company that does business in more than one country is a multinational company.

Internationalization of firms is a process in which the firm gradually increases their international involvement (Johansom & Vahlne, 1977). The process on internationalization can therefore mean the process of a business doing international business; it could range from simple exportation to a foreign market, to setting up a production plant in the foreign market.

Multinational enterprises (MNEs) or companies are those which engage in foreign direct investment (FDI) and own or run value-adding activities in more than one country (Dunning, 1993).

There are many different factors that affect the need of companies doing international business. This includes; increased completion, growth and governance. Over the years there are many researchers and academic writers have come up with theories as to why and how business move towards doing business internationally. This include; the classical trade theory, factor proportion theory, product life cycle theory, market imperfection theory and many more/

One of the most notable of all theories explain need of companies doing international business is John Dunning Eclectic theory, also known as OLI Paradigm (Morrision, 2006, Pg. 162). John Dunning built the theory form his personal theory of international production and internationalization theory developed by his colleagues, Peter Buckley and Mark Casson, and also other theories (Rugman, 2010., Cleeve, 2009., Dunning, 2001)

2. What is OLI and how it came about

The OLI eclectic theory was as a result of John Dunning's dissatisfaction of his then existing theory of international production, the product-cycle theory by Hymer kindlebery and internalization theory. These three theories were considered to only partially explain international production. John Dunning hence projected the Eclectic model that tried to integrate the existing theories (Dunning, 2001., Calvet, 1981 )

In the OLI Eclectic theory, John Dunning talks about the three main factors that affect a firms decision to internationalize, which include; advantage of Ownership (O), Location (L) and Internationalization (I). (Morrison, 2006., Madhok & Phene, 2001., Fu et al., 2010).

Morrison, (2006) in her book describes these three factors as follows:

* Ownership specific advantage: these include property rights over assets, broadly defined and including both tangible and intangible resources: capital, technology, labour, natural resources, know-how, organizational and entrepreneurial skills.

* Location specific advantage: these include the cultural, political and social environment of the country: low labour costs, government incentives and the size and structure of market.

* Internalization advantage: derived from the theory of the firm developed by economists, these look to the reduction of transaction costs through hierarchical organisation as an alternative to reliance on market forces. A firm may thus acquire control of the supply of raw materials or components, achieving vertical integration which reduces costs.

2.1. Ownership specific advantage

The ownership advantages are specific to a company and mostly linked to its size and position it has in a certain market. These advantages can readily be transferred between the different countries it operates in. The ownership advantages are usually competitive or monopolistic advantages a company has over other companies. These advantages are key qualities for a company, which allow it, acquire a better market position opposed to other companies. Companies usually develop on and protect these advantages to stay ahead of competitors. We can break down these advantages into three different parts,

The first are the standard advantages a company has over other companies. These advantages are primarily associated with the size and market position a company has. These advantages are also often associated with the product and services provided by a company, use of technology, patents, and many more. These advantages mostly allow a company enjoys market position and profitability. An important aspect is brand names, trademarks and quality. Secondly being in a group of companies, a company will benefit from shared costs of purchasing raw material, production and promotion. And also the benefit from management, marketing and administrative style of the parent company. More so a large company will possess more financial resource, which is key to its success in a foreign market. And finally a company may already be a multinational, this therefore gives it an advantage when setting up abroad, it possesses the experience of managing production, sales and marketing in foreign countries. They can therefore use their know-how to exploit foreign and gain a market share (Dunning, 2001., Dunning, 2000., Madhok & Phene, 2001).

A good example of ownership specific advantage is Coco-Cola Enterprises Inc; they are one of the leading companies in the beverage industry, they possess a large market share in most parts of the world, they have a diverse range of products, which are patent and trade marked. As a corporation, the management, marketing and administrative style in standardized, and being since already being a multinational, they are easily able to adapt to foreign markets easily (Times 100, 2013)

2.2. Location specific advantage

The location advantages countries provide is a major factor considered by multinational companies when choosing a host country. These advantages can be broken down into three main categories; economic, social and political. Economic advantages mostly comprise the quantity and quality the effect production, the market size and scale, cost of transport of goods and service, communication factors