International Business: Benefits, Challenges and the Concept of Comparative Advantage

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The continuous growth of economic connections across borders has contributed to the growing importance of the study of international business. We are living in a century characterized by rapid changes which do not only include social, political or technological trends.

They are especially concerning market trends which are strongly marked by the increasing linkages between nations. International business has greatly expanded during the last period of the twentieth century. The main reason for that was the liberalization of trade as well as the development of new technologies. Today, globalization is affecting nearly every company – regardless of its size or industry.

What exactly is International Business?

International business comprises all commercial transactions between two or more regions beyond their political borders. Or in simple terms: it describes the movement of goods,  technology or capital from one country to another. The study of international business requires an understanding of the effects these movements have on both domestic and foreign markets, countries, governments as well as on individuals. It furthermore involves awareness of the diversity of the world as a marketplace. As usual, the benefits go hand-in-hand with risks and challenges. Therefore the ability to cope with the downside of international business is crucial.

The Benefits of International Business and the Concept of Comparative Advantage

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Participating in international business includes making use of a country’s so-called comparative advantage. This is a concept evolved by the political economist David Ricardo in the early 1800s. Ricardo describes comparative advantage as an economy’s ability to produce goods and services at a lower opportunity cost than that of its trade partners. Opportunity costs represent the value of what one country has to give up in order to produce something else. A nation with a comparative advantage benefits from the ability of selling its goods at a lower price than its competitors and is therefore able to realize higher profit margins. Through the subsequent specialization of nations in certain industries, the variety of goods and services on the marketplace as well as the level of competition and therefore the global innovation is constantly increasing. 

Challenges of International Business

So far so good. But taking part in international business is coming along with various challenges and risks too. Since every state has its own government system, currency, taxes and laws etc., international business can get very complex. It requires precise and intense considerations of the diversity between nations in order to make it work. These considerations include aspects such as national wealth disparities, cultural and lingual diversity as well as country size and population diversity.

Furthermore, recent worldwide environmental issues are shaping the agenda of many global corporations nowadays. International legislations such as the UN’s Sustainable Development Goals have put environmental issues at the head of international business development. To expand a business across borders, it therefore is essential to be aware of the country-specific environmental regulations. Every impact of international business on different nations’ environments and societies need to be considered.

The key: adaptation and proper planning

So, keeping these factors in mind, in order to enter international business in the most efficient and successful way possible, a proper planning is vital. Companies need to make serious considerations of all peculiarities and conditions of the regions affected. As Charles Darwin once said: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.” Especially in times of globalization, the ability of adaptation and assimilation is the key to prosperous international business.