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International business
International business comprises all commercial transactions
(private and governmental, sales, investments, logistics, and transportation) that take place between
two or more regions, countries and nations beyond their political boundaries. Usually, private
companies undertake transactions for profit; governments undertake them for profit and
for political reasons. The term "international business" refers to all those business activities which
[1]

involve cross-border transactions of goods, services, and resources between two or more nations.
Transactions of economic resources include capital, skills, people etc. for the purpose of the
international production of physical goods and services such as finance, banking, insurance,
construction etc. [2]

A multinational enterprise (MNE) is a company that has a worldwide approach to markets and
production or with operations in several countries. Well-known MNEs include fast-food companies
such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor
Company and Toyota, consumer-electronics producers like Samsung, LG and Sony, and energy
companies such as ExxonMobil, Shell and BP. As shown, multinational enterprises can make
business in different types of market.
Areas of study within this topic include differences in legal systems, political systems, economic
policy, language, accounting standards, labor standards, living standards, environmental
standards, local culture, corporate culture, foreign-exchange
market, tariffs, import and export regulations, trade agreements, climate, education and many more
topics. Each of these factors may require changes in how individual business units operate from 1
country to the next.
Contents
[hide]

1Background

2Physical and social factors of competitive business and social environment

o 2.1Operations

2.1.1Types of operations

o 2.2Choice of entry mode in international business

o 2.3Means of businesses

o 2.4Physical and social factors

o 2.5Risks

3Factors that influenced the growth in globalization of international business

4Importance of International Business Education

o 4.1Importance of language/cultural studies in International Business

o 4.2Importance of studying International Business

5References

6External links

Background[edit]
International business can be defined as the study of multinational companies. One of the first [citation needed ]

scholars to engage in developing a theory of multinational companies was Stephen Hymer.

Throughout his academic life he developed theories that sought to explain foreign direct investment
and why firms become multinational.
There were three phases in Hymer's work. The first phase was his dissertation in 1960 called the
International Operations of National Firms. In this thesis, Hymer departs from neoclassical theory
and opens up a new area of international production. At first Hymer started analyzing neoclassical
theory and the financial investment wherein the main reason for capital movement is difference in
interest rates. Then he started analyzing the characteristics of foreign investment by large
companies for production and direct business purposes, calling this Foreign Direct Investment. By
analyzing the two types of investments Hymer distinguished financial investment from direct
investment. The main distinguishing feature was control. Where in portfolio investment is a more
passive approach, and the main purpose is financial gain, with foreign direct investment a firm has
control over the operations abroad. So the traditional theory of investment based on differential
interest rates does not explain the motivations for FDI.
According to Hymer there are two main determinants of FDI wherein an imperfect market structure is
the key element. The first is the firm specific advantages which are developed at the specific
companies home country and, profitably, used in the foreign country. The second determinant is the
removal of control wherein Hymer wrote: When firms are interconnected, they compete in selling in
the same market or one of the firms may sell to the other, and because of this it may be profitable
to substitute centralised decision making for decentralised decision making
The second phase is his neoclassical article in 1968. This paper includes theory of
internationalization and explains the direction of growth of the international expansion of firms. In a
later stage Hymer went to a more Marxist approach where he explains that MNC as agents of an
international capitalist system causing conflict and contradictions, causing among other inequality
and poverty in the world. Hymer is the father of the theory of MNE", and explains the motivations for
companies doing direct business abroad.
Among modern economic theories of multinationals and foreign direct investment are internalization
theory and John Dunning's OLI paradigm. Hymer and Dunning are considered founding fathers of
international business as a specialist field of study.

Physical and social factors of competitive business and social

environment[edit]
The conduct of international operations depends on a company's objectives and the means with
which they carry them out. The operations affect and are affected by the physical and societal
factors and the competitive environment.
Operations[edit]

Objectives: sales expansion, resource acquisition, risk minimization, diversification of

their revenue stream
[edit]
Types of operations

Exports and imports of merchandise:

Service exports and imports

Merchandise exports: goods exported, not including services. [3]

Merchandise imports: The import goods are the ones brought into a country.
Service exports and imports are not product purchasing. It is only about services. Services
exports and imports can be divided into three most important categories
"Tourism and transportation, service performance, asset use". [1]

Exports and Imports of products, goods or services are usually a countrys most important
international economic transactions. [1]

Choice of entry mode in international business[edit]

Strategic variables impact the choice of entry mode for multinational corporation expansion beyond
their domestic markets. These variables are global concentration, global synergies, and global
strategic motivations of MNC.

Global concentration: many MNC share and overlap markets with a limited number of other
corporations in the same industry.
Global synergies: the reuse or sharing of resources by a corporation and may include marketing
departments or other inputs that can be used in multiple markets.
Global strategic motivations: other factors beyond entry mode that are the basic reasons for
corporate expansion into an additional market. These are strategic reasons that may include
establishing a foreign outpost for expansion, developing sourcing sites among other strategic
reasons. [4]

Means of businesses[edit]

Entry modes: Export/import, wholly owned subsidiary, merger or acquisition, alliances and joint
ventures, licensing (listed in order of least to most risky)[5]

Modes: importing and exporting, tourism and transportation, licensing and franchising, turnkey o
perations, management contracts, direct investment and portfolio investments.
Functions: marketing, global manufacturing and supply chain
management, accounting, finance, human resources
Overlaying alternatives: choice of countries, organization and control mechanisms
Physical and social factors[edit]

Geographical influences: There are many different geographical factors that affect international
business. In fact, the geographical size, the climatic challenges happening lately, the natural
resources available on a specific territory, the population distribution in a country, etc. are some
of the influences that have an effect on the international trade. [6]

Social factors: Political policies: political disputes, particularly, that result in the military
confrontation can disrupt trade and investment.
Legal policies: domestic and international laws play a big role in determining how a company
can operate overseas.
Behavioural factors: in a foreign environment, the related disciplines such as anthropology,
psychology, and sociology are helpful for managers to get a better understanding of values,
attitudes and beliefs.
Economic forces: economics explains country differences in costs, currency values,and market
size.[1]

Risks[edit]

Strategic
A firm must be prepared, aware of the competition and ready to face it in the international market.
Several companies (competitors) could substitute for products or services of an unpopular firm. A
brilliant and innovative strategy will help a firm succeed.
[7]

Operational risk
A company has to be conscious about the production costs in order to not waste time and money. If
the expenditures and costs are controlled, it will create an efficient production and help the
internationalization.[7]

Political risk
How a government governs a country can affect the operations of a firm. The government might be
corrupt, hostile, totalitarian, etc., and has a negative image around the globe. A firms reputation can
change if it operates in a country controlled by that type of government. Also, an unstable political
[7]

situation can be a risk for multinational firms. Elections or any political event that is unexpected can
change a country's situation and put a firm in an awkward position. [8]

Technological risk
Technological progress brings many benefits, but some disadvantages, including "lack of security in
electronic transactions, the cost of developing new technology ... the fact that this new technology
may fail, and, when all of these are coupled with the outdated existing technology, [the fact that] the
result may create a dangerous effect in doing business in the international arena." [7]

Environmental Risk
Companies that establish a subsidiary or factory abroad need to be conscious about the externalities
they will produce. Negative externalities can be noise, pollution, etc. The population might want to
fight against the company to keep a natural and healthy environment/country. This situation can
change the customers perception of the firm and create a negative image of it. [7]

Economic risk
These are the economic risks explained by Professor Okolo: "This comes from the inability of a
country to meet its financial obligations. The changing of foreign-investment or/and domestic fiscal or
monetary policies. The effect of exchange-rate and interest rate make it difficult to conduct
international business." Moreover, it can be a risk for a company to operate in a country and they
[7]

may experience an unexpected economic crisis after establishing the subsidiary. [8]

Financial risk
According to Professor Okolo: "This area is affected by the currency exchange rate, government
flexibility in allowing the firms to repatriate profits or funds outside the country. The devaluation and
inflation will also impact the firm's ability to operate at an efficient capacity and still be
stable." Furthermore, the taxes that a company has to pay might be advantageous or not. It might
[7]

be higher or lower in the host countries. Then "the risk that a government will discriminatorily change
the laws, regulations, or contracts governing an investmentor will fail to enforce themin a way
that reduces an investors financial returns is what we call 'policy risk.'"[8]

Terrorism
A terrorist attack against a company or country is meant to hurt or damage it by violence. It is hate
that pushes people to do it and it is usually based on religion, culture, political ideas, etc. The World
Trade Center attack on 9/11 is an example of a terrorist attack that affected the United States and
also companies that we established in these buildings. Therefore, it can be hard to operate where
[9]

the environment is tense and scary and in countries that are likely to be attacked. [7]

Planning risk
Price risk
Customer satisfaction risk
Mismanagement risks
Competitive risks
Location risks
A company has to choose the right location for the subsidiary abroad. It needs to make the right
choice before outsourcing or offshoring its activities. There are many criteria to take into account: If
there is enough of a labor force to work for the firm, what the regulations are, what the laws and
policies of the host country are, if the area is safe, etc. It is important to know the data of the host
country, such as the crime rate. Also, are the host country citizens willing to have this foreign
company on their territory or not? [10]

Bribery
Bribery is a worldwide phenomenon. Multinational enterprises must be conscious and concerned
about it. Companies operating on the international market have a role in combating bribery, as do
governments, trade unions, etc. The countries participating in international trade need to prevent
bribery, not support it, offer it, give it, promise it, etc. Societal risk
[citation needed ]

Factors that influenced the growth in globalization of

international business[edit]
There has been growth in globalization in recent decades due to (at least) the following eight factors:

Technology is expanding, especially in transportation and communications.

Governments are removing international business restrictions.
Institutions provide services to ease the conduct of international business.
Consumers want to know about foreign goods and services.
Competition has become more global.
Political relationships have improved among some major economic powers.
Countries cooperate more on transnational issues.
Cross-national cooperation and agreements.

Importance of International Business Education[edit]

Most companies are either international or compete with international companies.
Modes of operation may differ from those used domestically.
The best way of conducting business may differ by country.
An understanding helps you to make better career decisions.
An understanding helps you decide what governmental policies to support.
Managers in international business must understand social science disciplines and how they affect
all functional business fields.
Importance of language/cultural studies in International Business[edit]
A considerable advantage in International Business is gained through the knowledge and use of
language. Advantages of being an International Businessperson who is fluent in the local language
include the following:

Having the ability to directly communicate with employees and customers

Understanding the manner of speaking within business in the local area to improve overall
productivity
Gaining respect of customers and employees from speaking with them in their native tongue
In many cases it is truly impossible to gain an understanding of a culture's buying habits without first
taking the time to understand the culture. Examples of the benefit of understanding local culture
include the following:
 Being able to provide marketing techniques that are specifically tailored to the local market
Knowing how other businesses operate and what might or might not be social taboos
Understanding the time structure of an area. Some societies are more focused on "being on
time" while others focus on doing business at "the right time"
Associate with other people whom do not know several languages.
Importance of studying International Business[edit]
The International Business standards focuses on the following:

raising awareness of the interrelatedness of one country's political policies and economic
practices on another;
learning to improve international business relations through appropriate communication
strategies;
understanding the global business environmentthat is, the interconnectedness of cultural,
political, legal, economic, and ethical systems;
exploring basic concepts underlying international finance, management, marketing, and trade
relations; and
identifying forms of business ownership and international business opportunities.
By focusing on these, students will gain a better understanding of Political economy. These are tools
that would help future business people bridge the economical and political gap between countries.
There is an increasing amount of demand for business people with an education in International
Business. A survey conducted by Thomas Patrick from University of Notre Dame concluded
that Bachelor's degree holders and Master's degree holders felt that the training received through
education were very practical in the working environment. Business people with an education in
International Business also had a significantly higher chance of being sent abroad to work under the
international operations of a firm.

meaning
1. The exchange of goods and services among individuals and businesses in multiple
countries.
2. A specific entity, such as a multinational corporation or international business company
that engages in business among multiple countries.
International Business Management

Meaning
There are two ways of looking at the term international business. One is the action and the
other is theactor. As an action, international business refers to the types, process, scale,
governance and other aspects of carrying out international business. As referring to actor, the
term international business refers to the entity carrying out the international business.

The management of business operations for an organization that conducts business in more than
one country. International management requires knowledge and skills above and beyond normal
business expertise, such as familiarity with the business regulations of the nations in which the
organization operates, understanding of local customs and laws, and the capability to
conduct transactions that may involve multiple currencies.
International Business conducts business transactions all over the world. These transactions
include the transfer of goods, services, technology, managerial knowledge, and capital to other
countries. International business involves exports and imports.

International Business is also known, called or referred as a Global Business or an International

Marketing.

Definition
According to International Business Journal, International business is a commercial enterprise
that performs economical activity beyond the bounds of its location, has branches in two or more
foreign countries and makes use of economic, cultural, political, legal and other differences
between countries.

Features of International Business

1.Large scale operations
In international business, all the operations are conducted on a very huge scale. Production and
marketing activities are conducted on a large scale. It first sells its goods in the local market.
Then the surplus goods are exported.

2. Integration of economies
International business integrates (combines) the economies of many countries. This is because it
uses finance from one country, labour from another country, and infrastructure from another
country. It designs the product in one country, produces its parts in many different countries and
assembles the product in another country. It sells the product in many countries, i.e. in the
international market.

3. Dominated by developed countries and MNCs

International business is dominated by developed countries and their multinational corporations
(MNCs). At present, MNCs from USA, Europe and Japan dominate (fully control) foreign trade.
This is because they have large financial and other resources. They also have the best technology
and research and development (R & D). They have highly skilled employees and managers
because they give very high salaries and other benefits. Therefore, they produce good quality
goods and services at low prices. This helps them to capture and dominate the world market.

4. Benefits to participating countries

International business gives benefits to all participating countries. However, the developed (rich)
countries get the maximum benefits. The developing (poor) countries also get benefits. They get
foreign capital and technology. They get rapid industrial development. They get more
employment opportunities. All this results in economic development of the developing countries.
Therefore, developing countries open up their economies through liberal economic policies.

5. Keen competition
International business has to face keen (too much) competition in the world market. The
competition is between unequal partners i.e. developed and developing countries. In this keen
competition, developed countries and their MNCs are in a favourable position because they
produce superior quality goods and services at very low prices. Developed countries also have
many contacts in the world market. So, developing countries find it very difficult to face
competition from developed countries.

6. Special role of science and technology

International business gives a lot of importance to science and technology. Science and
Technology (S & T) help the business to have large-scale production. Developed countries use
high technologies. Therefore, they dominate global business. International business helps them to
transfer such top high-end technologies to the developing countries.

7. International restrictions
International business faces many restrictions on the inflow and outflow of capital, technology
and goods. Many governments do not allow international businesses to enter their countries.
They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is
harmful to international business.

8. Sensitive nature
The international business is very sensitive in nature. Any changes in the economic policies,
technology, political environment, etc. has a huge impact on it. Therefore, international business
must conduct marketing research to find out and study these changes. They must adjust their
business activities and adapt accordingly to survive changes.

Trade barriers

Free trade refers to the elimination of barriers to international trade. The most common barriers
to trade are tariffs, quotas, and nontariff barriers.
A tariff is a tax on imports, which is collected by the federal government and which raises the
price of the good to the consumer. Also known as duties or import duties, tariffs usually aim first
to limit imports and second to raise revenue.
A quota is a limit on the amount of a certain type of good that may be imported into the country.
A quota can be either voluntary or legally enforced.
EconoTalk

A tariff is a tax on imported goods, while a quota is a limit on the amount of goods that may be
imported. Both tariffs and quotas raise the price of and lower the demand for the goods to which they
apply. Nontariff barriers, such as regulations calling for a certain percentage of locally produced
content in the product, also have the same effect, but not as directly.
EconoTip

You may wonder why a nation would ever choose to use a quota when a tariff has the added advantage of
raising revenue. The major reason is that quotas allow the nation that uses them to decide the quantity to
be imported and let the price go where it will. A tariff adjusts the price, but leaves the post-tariff quantity
to market forces. Therefore, it is less predictable and precise than a quota.
The effect of tariffs and quotas is the same: to limit imports and protect domestic producers from
foreign competition. A tariff raises the price of the foreign good beyond the market equilibrium
price, which decreases the demand for and, eventually, the supply of the foreign good. A quota
limits the supply to a certain quantity, which raises the price beyond the market equilibrium level
and thus decreases demand.
Tariffs come in different forms, mostly depending on the motivation, or rather the stated
motivation. (The actual motivation is always to limit imports.) For instance, a tariff may be
levied in order to bring the price of the imported good up to the level of the domestically
produced good. This so-called scientific tariffwhich to an economist is anything buthas the
stated goal of equalizing the price and, therefore, leveling the playing field, between foreign
and domestic producers. In this game, the consumer loses.
A peril-point tariff is levied in order to save a domestic industry that has deteriorated to the point
where its very existence is in peril. An economist would argue that the industry should be
allowed to expire. That way, factors of production used by that inefficient industry could move
into a new one where they would be better employed.
A retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In the
eyes of an economist, retaliatory tariffs make no sense because they just start tariff wars in which
no oneleast of all the consumerwins.
Nontariff barriers include quotas, regulations regarding product content or quality, and other
conditions that hinder imports. One of the most commonly used nontariff barriers are product
standards, which may aim to serve as barriers to trade. For instance, when the United States
prohibits the importation of unpasteurized cheese from France, is it protecting the health of the
American consumer or protecting the revenue of the American cheese producer?
Other nontariff barriers include packing and shipping regulations, harbor and airport permits, and
onerous customs procedures, all of which can have either legitimate or purely anti-import
agendas, or both.

Economic Groupings

Economic integration
From Wikipedia, the free encyclopedia

Part of a series on

World trade
 Policy[show]

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Issues[show]

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By country[show]

Theory[show]

Economic integration is the unification of economic policies between different states through the
partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to
their integration. This is meant in turn to lead to lower prices for distributors and consumers with the
goal of increasing the level of welfare, while leading to an increase of economic productivity of the
states.
The trade stimulation effects intended by means of economic integration are part of the
contemporary economic Theory of the Second Best: where, in theory, the best option is free trade,
 with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic option,
and although realized within certain developed states, economic integration has been thought of as
the "second best" option for global trade where barriers to full free trade exist.
Contents
[hide]

1Etymology

2Objective

3Stages

4Economic theory

5Success factors

6Global economic integration

7See also

8Notes

9Bibliography

Etymology[edit]
In economics the word integration was first employed in industrial organisation to refer to
combinations of business firms through economic agreements, cartels, concerns, trusts, and
mergershorizontal integration referring to combinations of competitors, vertical integration to
combinations of suppliers with customers. In the current sense of combining separate economies
into larger economic regions, the use of the word integration can be traced to the 1930s and
1940s. Fritz Machlup credits Eli Heckscher, Herbert Gaedicke and Gert von Eyern as the first users
[1]

of the term economic integration in its current sense. According to Machlup, such usage first
appears in the 1935 English translation of Hecksher's 1931 book Merkantilismen (Mercantilism in
English), and independently in Gaedicke's and von Eyern's 1933 two-volume study Die
produktionswirtschaftliche Integration Europas: Eine Untersuchung ber die
Aussenhandelsverflechtung der europischen Lnder. [2]

Objective[edit]
There are economic as well as political reasons why nations pursue economic integration. The
economic rationale for the increase of trade between member states of economic unions that it is
meant to lead to higher productivity. This is one of the reasons for the global scale development of
economic integration, a phenomenon now realized in continental economic blocs such
as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic Community; and
proposed for intercontinental economic blocks, such as the Comprehensive Economic Partnership
for East Asia and the Transatlantic Free Trade Area.
Comparative advantage refers to the ability of a person or a country to produce a particular good or
service at a lower marginal and opportunity cost over another. Comparative advantage was first
described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy
and Taxation in an example involving England and Portugal. In Portugal it is possible to produce
[3]

both wine and clothwith less labour than it would take to produce the same quantities in England.
However the relative costs of producing those two goods are different in the two countries. In
England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal
both are easy to produce. Therefore, while it is cheaper to produce cloth in Portugal than England, it
is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely
England benefits from this trade because its cost for producing cloth has not changed but it can now
get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can
gain by specializing in the good where it has comparative advantage, and trading that good for the
other.
Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There
are factors that cause a producers average cost per unit to fall as the scale of output is increased.
Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility
and the usage levels of other inputs increase. Economies of scale is also a justification for economic [4]

integration, since some economies of scale may require a larger market than is possible within a
particular country for example, it would not be efficient for Liechtenstein to have its own car
maker, if they would only sell to their local market. A lone car maker may be profitable, however, if
they export cars to global markets in addition to selling to the local market.
Besides these economic reasons, the primary reasons why economic integration has been pursued
in practise are largely political. The Zollverein or German Customs Union of 1867 paved the way
for partial German unification under Prussian leadership in 1871. "Imperial free trade" was
(unsuccessfully) proposed in the late 19th century to strengthen the loosening ties within British
Empire. The European Economic Community was created to integrate France and Germany's
economies to the point that they would find it impossible to go to war with each other.

Stages[edit]

Stages of economic integration around the World (each country colored according to the most integrated form that it participates with):

Economic and monetary union (CSME/EC$, EU/, SwitzerlandLiechtenstein/CHF)

Economic union (CSME, EU, EAEU, MERCOSUR, GCC, SICA)

Customs and monetary union (CEMAC/XAF, UEMOA/XOF)

Common market (EEASwitzerland, ASEAN)

Customs union (CAN, EAC, EUCU, SACU)

Multilateral Free Trade Area (CEFTA, CISFTA, COMESA, EFTA, GAFTA, NAFTA, SAFTA, AANZFTA, PAFTA, SADCFTA)

Free trade around the World:

 Multilateral free trade agreements or more advanced agreements

Bilateral free trade agreements advanced agreements

No free trade agreements, but World Trade Organization members

A world map of World Trade Organization participation:

Members

Members, dually represented with the European Union

Observer

Non-member

The degree of economic integration can be categorized into seven stages: [5]

1. Preferential trading area

2. Free trade area
3. Customs union
4. Common market
5. Economic union
6. Economic and monetary union
7. Complete economic integration
These differ in the degree of unification of economic policies, with the highest one being the
completed economic integration of the states, which would most likely involve political integration as
well.
A "free trade area" (FTA) is formed when at least two states partially or fully abolish custom tariffs on
their inner border. To exclude regional exploitation of zero tariffs within the FTA there is a rule
of certificate of origin for the goods originating from the territory of a member state of an FTA.
A "customs union" introduces unified tariffs on the exterior borders of the union (CET, common
external tariffs). A "monetary union" introduces a shared currency. A "common market" add to a FTA
the free movement of services, capital and labor.
An "economic union" combines customs union with a common market. A "fiscal union" introduces a
shared fiscal and budgetary policy. In order to be successful the more advanced integration steps
are typically accompanied by unification of economic policies (tax, social welfare benefits, etc.),
reductions in the rest of the trade barriers, introduction of supranational bodies, and gradual moves
towards the final stage, a "political union".

Stages of Economic integration

 activities inside the trade bloc common barriers in external relations

Trade pact type eliminating barriers for exchange of Shared policies goods

services capital labour

goods(tariffs) goods (non-tariff) services capital labour monetary fiscal Tariff Non-tariff

Preferential trade agreement TIFA BIT, TIFA

Free trade agreement

Economic partnership

Common market

Monetary union

Fiscal union

Customs union

Customs and monetary union

Economic union

Economic and monetary union

Complete economic integration

[partial] [substantial] [none or not applicable]

Economic theory[edit]
The framework of the theory of economic integration was laid out by Jacob Viner (1950) who defined
the trade creation and trade diversion effects, the terms introduced for the change of interregional
flow of goods caused by changes in customs tariffs due to the creation of an economic union. He
considered trade flows between two states prior and after their unification, and compared them with
the rest of the world. His findings became and still are the foundation of the theory of economic
integration. The next attempts to enlarge the static analysis towards three states+world (Lipsey, et
al.) were not as successful.
The basics of the theory were summarized by the Hungarian economist Bla Balassa in the 1960s.
As economic integration increases, the barriers of trade between markets diminish. Balassa believed
that supranational common markets, with their free movement of economic factors across national
borders, naturally generate demand for further integration, not only economically (via monetary
unions) but also politicallyand, thus, that economic communities naturally evolve into political
unions over time.
The dynamic part of international economic integration theory, such as the dynamics of trade
creation and trade diversion effects, the Pareto efficiency of factors (labor, capital) and value added,
mathematically was introduced by Ravshanbek Dalimov. This provided an interdisciplinary approach
to the previously static theory of international economic integration, showing what effects take place
due to economic integration, as well as enabling the results of the non-linear sciences to be applied
to the dynamics of international economic integration.
Equations describing:

1. enforced oscillations of a pendulum with friction;

2. predator-prey oscillations;
3. heat and/or gas spatial dynamics (the heat equation and Navier-Stokes equations)
were successfully applied towards:

1. the dynamics of GDP;

2. price-output dynamics and the dynamic matrix of the outputs of an economy;
3. regional and inter-regional migration of labor income and value added, and to trade creation
and trade diversion effects (inter-regional output flows).
The straightforward conclusion from the findings is that one may use the accumulated knowledge of
the exact and natural sciences (physics, biodynamics, and chemical kinetics) and apply them
towards the analysis and forecasting of economic dynamics.
Dynamic analysis has started with a new definition of gross domestic product (GDP), as a difference
between aggregate revenues of sectors and investment (a modification of the value added definition
of the GDP). It was possible to analytically prove that all the states gain from economic unification,
with larger states receiving less growth of GDP and productivity, and vice versa concerning the
benefit to lesser states. Although this fact has been empirically known for decades, now it was also
shown as being mathematically correct.
A qualitative finding of the dynamic method is the similarity of a coherence policy of economic
integration and a mixture of previously separate liquids in a retort: they finally get one colour and
become one liquid. Economic space (tax, insurance and financial policies, customs tariffs, etc.) all
finally become the same along with the stages of economic integration.
Another important finding is a direct link between the dynamics of macro- and micro-economic
parameters such as the evolution of industrial clusters and the GDP's temporal and spatial
dynamics. Specifically, the dynamic approach analytically described the main features of the theory
of competition summarized by Michael Porter, stating that industrial clusters evolve from initial
entities gradually expanding within their geographic proximity. It was analytically found that the
geographic expansion of industrial clusters goes along with raising their productivity and
technological innovation.
Domestic savings rates of the member states were observed to strive to one magnitude, and the
dynamic method of forecasting this phenomenon has also been developed. Overall dynamic picture
of economic integration has been found to look quite similar to unification of previously separate
basins after opening intraboundary sluices, where instead of water the value added (revenues) of
entities of member states interact.
Success factors[edit]
Among the requirements for successful development of economic integration are "permanency" in its
evolution (a gradual expansion and over time a higher degree of economic/political unification); "a
formula for sharing joint revenues" (customs duties, licensing etc.) between member states (e.g., per
capita); "a process for adopting decisions" both economically and politically; and "a will to make
concessions" between developed and developing states of the union.
A "coherence" policy is a must for the permanent development of economic unions, being also a
property of the economic integration process. Historically the success of the European Coal and
Steel Community opened a way for the formation of the European Economic Community (EEC)
which involved much more than just the two sectors in the ECSC. So a coherence policy was
implemented to use a different speed of economic unification (coherence) applied both to economic
sectors and economic policies. Implementation of the coherence principle in adjusting economic
policies in the member states of economic block causes economic integration effects.

Global economic integration[edit]

With economics crisis started in 2008 the global economy has started to realize quite a few initiatives
on regional level. It is unification between the EU and US, expansion of Eurasian Economic
Community (now Eurasia Economic Union) by Armenia and Kyrgyzstan. It is also the creation of
BRICS with the bank of its members, and notably high motivation of creating competitive economic
structures within Shanghai Organization, also creating the bank with many multi-currency
instruments applied. Engine for such fast and dramatic changes was insufficiency of global capital,
while one has to mention obvious large political discrepancies witnessed in 2014-2015. Global
economy has to overcome this by easing the moves of capital and labor, while this is impossible
unless the states will find common point of views in resolving cultural and politic differences which
pushed it so far as of now.

What are the Different Types of Economic Integration?

NIRAV S
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Economic cooperation or integration may take any one or a combination of any of the following forms:

(i) Economic Union, (ii) Customs Union, (iii) Free Trade Area, (iv) Sectoral or Partial Integration, (v) Preferential Trading, (vi) Long-term Trade Agreements.

These different forms of integration visualise different degrees of economic cooperation in the descending order.

An Economic Union is a case of absolute integration. It implies complete economic integration of a group of countries. There is, thus, free mobility of factor resources and commodities in such a union. The
economic activities and policies (fiscal, monetary and general) of the member nations are perfectly harmonised, coordinated and collectively operated. Benelux (Belgium, the Netherlands and Luxembourg) and
the European Common Market (ECM) are such economic unions.

An economic union is, therefore, commonly referred to as a common market.

A Customs Union involves a common external tariff against non-member countries, while within the union itself there is unrestricted free trade. From the customs union gradually, complete economic union is
evolved. For instance in the case of ECM, the Rome Treaty (1958) laid the basis of a customs union of the six member countries, leading finally to an economic union by 1970.

A Free Trade Area involves the abolition of all trade restrictions within the group, but each individual country in the group is free to maintain any sort of relation with the non-member countries. Countries in a free
trade area have, thus, no common external tariffs to maintain.

The European Free Trade Association (EFTA), 1959, and the Latin American Free Trade Association (LAFTA) serve as examples of such free trade areas.

A Sectoral of Partial Integration refers to the establishment of a common market in a given product or products. The European Coal and Steel Community (ECSC), 1952, is such a sectoral integration by which
members of the "Inner Six" have created a common market in coal and steel products within their territories.

Preferential Trading is a sort of trading technique involving various measures for promoting trade among the members of the group.

Generally, agreements may be entered into to ensure to each contracting party a favoured treatment as compared to others. Such an agreement is usually referred to as the most-favoured nation agreement. It may
relate to commerce, industry and navigation, or it may relate either to commodities or merely to customs duties. Ordinarily, the most-favoured nation clause is bilateral in operation.

The trade liberalisation programme of the OEEC can be regarded as an example of preferential trading. In 1950, the Code of Liberalisation was adopted by the members of the OEEC in order to increase intra-
European trade.

The Long-term Trade Contract is a type of bilateral arrangement, either in a single product or many products of trade between any two nations. Its minimum duration may be an year or more. For instance, India
had once entered into a trade agreement with Japan for the supply of iron ore for a period of five years. Such an agreement tends to stabilise the export of a given product or products of the country concerned.
 Aims & Objectives of Economic Integration
Cargo being moved at shipping port. (Image: Jupiterimages/Stockbyte/Getty Images)
Economic integration refers to the coordination of national economic policies as a means of boosting international trade, market activity and general cooperation among economies. Formal
international economic unions are a recent phenomenon, but former International Monetary Fund economic counselor Michael Mussa traces the roots of global economic integration to the
medieval era. Despite the fact that the general aim of making trade flourish remains the same, particular objectives of economic integration agreements have changed to correspond to modern
political and economic circumstances.

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Increase of Trade
When foreign products are subject to tariffs, exporters either have to accept the extra cost of trade or make do with a lesser volume of exported products. A basic element of economic integration
policies is the abolition of part of the extra fees or even the full amount of them, making trade cheaper and giving exporters a bigger incentive to do business with integrated economies.

Allowing Consumers to Spend More

Economic integration reduces or eliminates customs duties, which in turn results in cheaper imported products for consumers. This way, the purchasing power of consumers grows, and with it,
activity in the market. The public can start buying more imported products or spend former duty expenses on other products or services. In addition, goods that are not produced in sufficient
quantities in one country can be imported and distributed in the market with low cost.

Advantages Of
Economic Integration
Trade Creation: Member
countries have (a) wider
selection of goods and
services not previously
available; (b) acquire
goods and services at a
lower cost after trade
barriers due to lowered
tariffs or removal of tariffs
(c) encourage more trade
between member
countries the balance of
money spend from
cheaper goods and
services, can be used to
buy more products and
services
Greater Consensus: Unlike
WTO with hugh
membership (147
countries), easier to gain
consensus amongst small
memberships in regional
integration
Political Cooperation: A
group of nation can have
significantly greater
political influence than
each nation would have
individually. This
integration is an essential
 strategy to address the
effects of conflicts and
political instability that may
affect the region. Useful
tool to handle the social
and economic challenges
associated with
globalization
Employment
Opportunities: As
economic integration
encourage trade liberation
and lead to market
expansion, more
investment into the
country and greater
diffusion of technology, it
create more employment
opportunities for people to
move from one country to
another to find jobs or to
earn higher pay. For
example, industries
requiring mostly unskilled
labor tends to shift
production to low wage
countries within a regional
cooperation

Disadvantages Of
Economic Integration

Creation Of Trading Blocs: It

can also increase trade
barriers against non-
member countries.

Trade Diversion: Because of

trade barriers, trade is
diverted from a non-
member country to a
member country despite
the inefficiency in cost. For
example, a country has to
stop trading with a low
cost manufacture in a non-
member country and trade
with a manufacturer in a
member country which
has a higher cost.

National Sovereignty:
Requires member
 countries to give up some
degree of control over key
policies like trade,
monetary and fiscal
policies. The higher the
level of integration, the
greater the degree of
controls that needs to be
given up particularly in the
case of a political union
economic integration
which requires nations to
give up a high degree of
sovereignty.
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4 Major International Economic Institutions

Article Shared by Nitisha

Almost every country exports and imports products to benefit from the growing international trade.

The growth of international trade can be increased, if the countries follow a common set of rules, regulations, and standards related to import

and export.

These common rules and regulations are set by various international economic institutions. These institutions aim to provide a level playing

field for all the countries and develop economic cooperation.

These institutions also help in solving the currency issues among countries related to stabilizing the exchange rates. There are three major

international economic institutions, namely, WTO, IMF, and UNCTAD.

World Trade Organization:

WTO was formed in 1995 to replace the General Agreement on Tariffs and Trade (GATT), which was started in 1948. GATT was replaced by

WTO because GATT was biased in favor of developed countries. WTO was formed as a global international organization dealing with the

rules of international trade among countries.

The main objective of WTO is to help the global organizations to conduct their businesses. WTO, headquartered at Geneva, Switzerland,

consists of 153 members and represents more than 97% of worlds trade.

The main objectives of WTO are as follows:

a. Raising the standard of living of people, promoting full employment, expanding production and trade, and utilizing the worlds resources

optimally

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b. Ensuring that developing and less developed countries have better share of growth in the world trade

c. Introducing sustainable development in which balanced growth of trade and environment goes together

The main functions of WTO are as follows:

a. Setting the framework for trade policies

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b. Reviewing the trade policies of different countries

c. Providing technical cooperation to less developed and developing countries

d. Setting a forum for addressing trade-related disputes among different countries

e. Reducing the barriers to international trade

f. Facilitating the implementation, administration, and operation of agreements

g. Setting a negotiation forum for multilateral trade agreements

h. Cooperating with the international institutions, such as IMF and World Bank for making global economic policies

i. Ensuring the transparency of trade policies

j. Conducting economic research and analysis

WTO has the following advantages:

(a) Promoting peace within nations:

Leads to less trade disputes. WTO helps in creating international cooperation, peace, and prosperity among nations.

(b) Handling the disputes constructively:

Helps in lesser trade conflicts. When the international trade expands, the chances of disputes also increase. WTO helps in reducing these

trade disputes and tensions among nations.

(c) Helping consumers by providing choices:

Implies that by promoting international trade, WTO helps consumers in gaining access to a large number of products.

(d) Encouraging good governance:

Accelerates the growth of a country. The rules formulated by WTO encourage good governance and discourage the unwise policies that lead

to corruption in a country.

(e) Stimulating economic growth:

Leads to more jobs and increase in income. The policies of WTO focus on reducing trade barriers among nations to increase the quantum of

import and export.

International Monetary Fund:

IMF, established in 1945, consists of 187 member countries. It works to secure financial stability, develop global monetary cooperation,

facilitate international trade, and reduce poverty and maintain sustainable economic growth around the world. Its headquarters are in

Washington, D.C., United States.

The objectives of IMF are as follows:

a. Helping in increasing employment and real income of people

b. Solving the international monetary problems that distort the economic development of different nations

c. Maintaining stability in the international exchange rates

d. Strengthening the economic integrity of the nations

e. Providing funds to the member nations as and when required

f. Monitoring the financial and economic policies of member nations

g. Assisting low developed countries in effectively managing their economies

WTO and IMF have total 150 common members. Thus, they both work together where the central focus of WTO is on the international trade

and of IMF is on the international monetary and financial system. These organizations together ensure a sound system of global trade and

financial stability in the world.

United Nations Conference on Trade and Development:

UNCTAD, established in 1964, is the principal organ of United Nations General Assembly. It provides a forum where the developing

countries can discuss the problems related to economic development. UNCTAD is headquartered in Geneva, Switzerland and has 193

member countries.

The conference of these member countries is held after every four years. UNCTAD was created because the existing institutions, such as

GATT, IMF, and World Bank were not concerned with the problem of developing countries. UNCTADs main objective is to formulate the

policies related to areas of development, such as trade, finance, transport, and technology.

The main objectives of UNCTAD are as follows:

a. Eliminating trade barriers that act as constraints for developing countries

b. Promoting international trade for speeding up the economic development

c. Formulating principles and policies related to international trade

d. Negotiating the multinational trade agreements

e. Providing technical assistance to developing countries specially low developed countries

It is important to note that UNCTAD is a strategic partner of WTO. Both the organizations ensure that international trade helps the low

developed and developing countries in accelerating their pace of growth. On 16th April, 2003, WTO and UNCTAD also signed a Memorandum

of Understanding (MoU), which identifies the fields for cooperation to facilitate the joint activities between them.

Regional Economic Integration:

Economic institutions, such as WTO, IMF, and UNCTAD aim at promoting economic cooperation worldwide. A similar effort is made

regionally through regional economic integration that is an agreement between the countries to

expand trade with mutual benefits. Regional economic integration involves removing trade barriers and coordinating the trade policies of the

countries.

It occurs because of various reasons, which are mentioned as follows:

(a) Shared culture:

Involves similarity in language, religion, norms, and traditions of the countries that prompt them to trade with each other. This commonality

facilitates the smooth flow of communication among countries. Same language of the countries helps the organizations to understand the

complexities of the targeted markets.

(b) History of political and economic dominance:

Affects the integration among the countries. For instance, the rule of Britishers has introduced the English language in India that later

became a widely used language. Thus, former colonial power facilitates the shared culture and language. It is easy for organizations to target

the markets, if culture and language is similar.

(c) Regional closeness:

Helps in maintaining strong economic relationships among the countries. The countries with same border have access to effective and direct

transportation that increases the probability of trade between them.

Regional economic integration is done through various agreements.

These agreements are called as trade blocs, which are shown in Figure-5:

The discussion of these agreements is given as follows:

(a) Customs Union:

Allows the trade of goods and services among the member countries without any custom duties and tariffs. In customs union, a group of

countries forms common trade policies that decide the common tariff for trading goods and services from rest of the world and ensures no

tariff for participating countries.

In customs union, the import duties and regulations are same for all the member countries. It can be said that customs union is a free trade

zone with a common tariff for rest of the world.

(b) Common Market:

Refers to an agreement where countries join together to eliminate the trade barriers. The unique feature of common markets is that they

allow free movement of goods, labor, and capital among the countries. Common markets are formed to eliminate the physical and fiscal

barriers, where physical barriers include borders and fiscal barriers include taxes. These barriers hamper the freedom of movement of the

labor and capital within the nations.

The formation of common markets helps in increasing employment opportunities and gross domestic product of the participating nations. In

a common market, the organizations benefit from economies of scale, lower costs, and high profitability; whereas, consumers benefit from

increased choice of products and low prices.

The aims and objectives of the common market are as follows:

i. Attaining sustainable development of the participating nations

ii. Promoting mutual development in all fields of economic activities

iii. Adopting policies and programs for raising the standard of living of the residents and fostering closer relations among participating

nations

iv. Facilitating cooperation among participating nations to maintain peace, security, and stability

v. Strengthening the relations between the countries and the rest of the world.

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Legal & Ethical Issues in International Business Expansion

by Bert Markgraf
 Related Articles

1What Issues Arise When Doing Business Globally?

2Social or Ethical Issues Companies Face in a Foreign Market

3List of Ethical Issues in Business

4What Are the Major Ethical Issues Business People Face?

When markets in foreign countries offer a higher profit potential than your home market, it makes sense to expand internationally. As you prepare your expansion and research target markets in other countries,

you will often find that the legal structures and ethical frameworks differ substantially from those in the United States. You have to address the legal and ethical issues of your entering these markets to make your

expansion a success.
Employment

Wages and the working environment in overseas locations are often inferior to those in the United States, even when you fulfill all local legal requirements. If you hire workers there, you face the issue of what

pay levels and working conditions are acceptable. Applying U.S. standards is usually not realistic and often simply disrupts the established market. An effective approach is to develop company standards which

protect workers while fitting into the local economy. Your standards have to guarantee a living wage, protect the safety of your workers and establish a reasonable number of hours for the work week.
Corruption

Companies making payments to secure business that they would not otherwise obtain are guilty of illegal actions under the U.S. Foreign Corrupt Practices Act. The payments, even if they seem to be customary,

are usually illegal under local laws as well. When your company makes such payments, it is encouraging a local system of corruption through unethical behavior. Smaller gifts, of a size that would not normally

influence a major decision, are considered ethical in some societies and may be legal under local and U.S. laws. If you find that large sums are routinely required to do any business in a country, you may want to

reevaluate your decision to enter that market.

Human Rights

The country into which you are expanding may not respect basic human rights. The ethical issue facing your company is whether your presence supports the current abusive regime or whether your presence can

serve as a catalyst for human rights improvements. If you find that you are supporting a regime that oppresses its citizens, engages in discrimination and does not recognize basic freedoms, the ethical action is to

withdraw from the market. If you find that the regime allows you to observe human rights within your organization and that your presence moderates human rights abuses, you may actively work to improve local

conditions.
Pollution

Not all foreign countries have environmental legislation that makes it illegal to pollute. Companies may discharge harmful materials into the environment and avoid costly anti-pollution measures. An ethical

approach to your expansion into such markets is to limit your environmental footprint beyond what is required by local laws. An ethically operating company ensures its operations don't have harmful effects on

the surrounding population. Since your company has the knowledge and expertise to operate within U,S. environmental regulations, it is ethical to apply similar standards in your new locations.\

International Management Strategy Formulation And

Implementation Revision
The following is a plain text extract of the PDF sample above, taken from our International Management Notes. This text version has had its formatting removed so pay attention to its contents alone rather than
its presentation. The version you download will have its original formatting intact and so will be much prettier to look at.
Strategy Formulation and Implementation
TERMS

Strategic Management - The process of determining a organisations basic mission and long term objectives, then implementing a plan of action for attaining these goals.

Economic Imperative - A worldwide strategy based on cost leadership, differentiation and segmentation.

Political Imperative - Strategic formulation and implementation utilising strategies that are country responsive and designed to protect local market niches.

Quality Imperative - Strategic formulation and implementation utilising strategies of total quality management to meet or exceed customers' expectations and continuously improve products or services.

Administrative Coordination - Strategic formulation and implementation in which the MNC makes strategic decisions based on the merits of the individual situation rather than using a predetermined
economically or politically driven strategy.

Global Integration - The production and distribution of products and services of a homogenous type and quality on a worldwide basis.

National Responsiveness - The need to understand the different consumer tastes in segmented regional markets and respond to different national standards and regulations imposed by autonomous governments
and agencies.

Global Strategy - Integrated based primarily on price competition.

Multi Domestic Strategy - Differentiated strategy emphasising local adaptation.

International Strategy - Mixed strategy combining low demand for integration and responsiveness.

Transnational Strategy - Integrated strategy emphasising both global integration and local responsiveness.

Environmental Scanning - The process of providing management with accurate forecasts of trends related to external changes in geographic areas where the firm currently is doing business or is considering
setting up operations.

Strategy Implementation - The process of providing goods and services in accord with a plan of action.

Base of Pyramid Strategy - Strategy targeting low income customers in developing countries.

International Entrepreneurship - A combination of innovative, proactive and risk seeking behaviour that crosses national boundaries and is intended to create value in organisations.

Born Global Firms - Firms that engage in significant international activities a short time after being established.
STRATEGIC MANAGEMENT

For most companies, regardless of how decentralised. The top management team is responsible for setting the strategy.

Middle management has sometimes been viewed as primarily responsible for the strategic implementation process but now companies are realising how imperative all levels of management are to the entire
process.

As companies go international, strategic process take on an added dimension.

The Growing Need For Strategic Management

One of the primary reasons that MNC's need strategic performance is to keep track of their increasingly diversified operations in a constantly changing international environment.

This need is particularly obvious when one considers the amount of foreign direct investment that has occurred in recent years.

These developments are resulting in a need to coordinate and integrate diverse operations with a unified and agreed on focus.
Benefits of Strategic Planning

Many MNC's are convinced that strategic planning is critical to their success and their efforts are being conducted both at home and in the subsidiaries.

There is no definitive evidence that strategic planning in the international arena always results in higher profitability, especially when MNC's try to use home strategies across different cultures.

The planning intensity is an important variable in determining performance.

Although strategic planning usually seems to pay off, as with most aspects of international management, the specifics of the situation will dictate the success of the process.
Approaches to Formulating and Implementing Strategy

Four common approaches to formulating and implementing strategy exist: o

Economic Imperative


Many of these companies typically sell products for which a large portion of value is added in the upstream activities of the industry's value chain.

By the time the product is ready to be sold, much of its value has already been created through research and development, manufacturing and distribution.

Because the product is basically homogenous and requires no alteration to fit the needs of the specific country, management uses a worldwide strategy that is consistent on a country to country basis.

The strategy is also used when the product is regarded as a generic good and therefore does not have to be sold based on a name brand or support services.

o
Middle managers are the key to stimulating profit growth within a company so expanding these efforts on an international level is a necessary tool to learn for today's new managers.
Another economic imperative concept that has gained prominence in recent years is global sourcing, which is proving very useful in formulating and implementing strategy.
Political Imperative

The success of the product or service generally depends heavily on marketing, sales and service.

o
The products sold by MNC's often have a large portion of their value added in downstream activities of the value chain.
Typically these industries use a country centred or multi domestic strategy.
Quality Imperative

A quality imperative takes two independent paths. Firstly a change in attitudes and a raising of expectation for service quality. Secondly the implementation of management practices that are designed to make
quality improvement an on-going process.

Total quality management, the approach takes a wide number of forms, including cross training personnel to do the jobs of al members
in their work group, process re-engineering designed to help identify and eliminate redundant tasks and wasteful effort and reward systems designed to reinforce quality performance.

TQM covers a lot, from strategy formulation to implementation and can be summarised as follows:

Quality is operationalized by meeting or exceeding customer expectations. Customers include not only the buyer or external user of the product or service, but also the support personnel both insider and outside
the organisation who are associated with the good or service.

The quality strategy is formulated at top management level and is diffused throughout the organisation. From top executives to hourly employees, everyone operates under a TQM strategy of delivering quality
products or services to internal and external customers.

Middle managers will better understand and implement these strategies as they are a part of the process.

o
Many MNC's make quality a part of their overall strategy as they have learned that this is the way to increase market share and profitability. A growing number of MNC's are finding that they have to continually
revise their strategies and make renewed commitment to the quality imperative because they are being bested by emerging markets.
Administrative Coordination

Many large MNC's work to combine the economic, political, quality and administrative approaches to strategic planning

Of the four approaches, however, the first three approaches are much more common because of the firms desire to coordinate its strategy both regionally and globally.
Global and Regional Strategies

The fundamental tension in international strategic management is the question of when to pursue global or regional strategies.

This is commonly referred to as the globalisation vs. national responsiveness conflict.

To a growing extent, the customers of MNC's have homogenised tastes and this has helped to spread international consumerism.

The 7 Benefits of Strategic Planning

If you dont know where you are going, then any road will take you there.

For some, Strategy and Strategic Planning is something that is done once a year which results in a report. Others think it is market position, operational effectiveness or an idea or business model.

Strategy is choosing to perform different activities that can be preserved and that will provide a sustainable competitive advantage. It is a mental exercise. It is a way of thinking about the world and approaching
business. Strategic planningis a process to produce innovative and creative ideas which serve as the core framework for the company and designing its future.

Strategic planning can have an immediate influence on your company and organization.
 1. Make your future happen dont let it happen to you
It is the difference between being proactive or reactive. Be on the defensive or the offensive. Be a victim of circumstances or be victorious in the fight. Not every situation can be foreseen but you
can make decisions and react to changing market conditions with the end in mind.

2. Establish direction
Clearly defines the purpose of the organization and establishes realistic goals and objectives consistent with the mission which can be clearly communicated to constituents. Provides a base from
which progress can be measured, employees compensated and boundaries established for effective decision making.

3. Make wise business decisions

How do you distinguish between a good idea and a great idea? Without a clear vision of what you want to achieve, and mission or purpose for doing it, everything seems like a good idea. What
project do you invest in? How should you and your staff invest your time? Having clarity about what you want to do, who you need and how to get there will focus limited financial and people
resources.

4. Create longevity of the business

The world market and industries are changing faster than ever and those companies who do not have a solid foundation and have relied on luck or opportunity most likely will not be around for the
future. Data reflects that one out of every three companies at the top of their industry will not make be there in five years. Focus is powerful. Scientists focus light so intently that it becomes a
laser which is used for surgery or able to cut through glass and metal.

5. Increased profitability and market share

Focused planning and strategic thinking will uncover the customer segments, market conditions, and product and service offerings that are in the best interest of your firm. An intentful and
targeted approach to markets and opportunities which guide your sales and marketing efforts, distribution and other business decisions which ultimately mean more profit to the bottom line and a
stronger market position.

6. Unique differentiation: avoid competitive convergence

Companies have gotten so used to looking at their competitors and their best practices and then trying to duplicate them that it becomes harder to tell the companies apart. They all start to look
the same with less distinction in unique value. Strategy means having a unique differentiation that sets you apart from your competitors.

7. Increased job satisfaction meaningful and full of purpose

Consistently one of the top reason for leaving a firm is the lack of job satisfaction. People need to have a motivation to come to work and feel like part of the team. It has been proven that
employees are the greatest source for innovative ideas. If your employees were in essence bricklayers, would they say that they are building a wall with each brick they lay each day or building a
cathedral? The purpose and meaning of work gives a new focus and reason to show up each day.

Benefits of Strategic Management

There are many benefits of strategic management and they include identification, prioritization, and exploration of opportunities. For instance, newer products, newer markets, and
newer forays into business lines are only possible if firms indulge in strategic planning. Next, strategic management allows firms to take an objective view of the activities being done by it and
do a cost benefit analysis as to whether the firm is profitable.

Just to differentiate, by this, we do not mean the financial benefits alone (which would be discussed below) but also the assessment of profitability that has to do with evaluating whether the
business is strategically aligned to its goals and priorities.

The key point to be noted here is that strategic management allows a firm to orient itself to its market and consumers and ensure that it is actualizing the right strategy.

Financial Benefits
It has been shown in many studies that firms that engage in strategic management are more profitable and successful than those that do not have the benefit of strategic planning and strategic
management.

When firms engage in forward looking planning and careful evaluation of their priorities, they have control over the future, which is necessary in the fast changing business landscape of the
21st century.

It has been estimated that more than 100,000 businesses fail in the US every year and most of these failures are to do with a lack of strategic focus and strategic direction. Further, high
performing firms tend to make more informed decisions because they have considered both the short term and long-term consequences and hence, have oriented their strategies accordingly.
In contrast, firms that do not engage themselves in meaningful strategic planning are often bogged down by internal problems and lack of focus that leads to failure.

Non-Financial Benefits
The section above discussed some of the tangible benefits of strategic management. Apart from these benefits, firms that engage in strategic management are more aware of the external
threats, an improved understanding of competitor strengths and weaknesses and increased employee productivity. They also have lesser resistance to change and a clear understanding of the
link between performance and rewards.

The key aspect of strategic management is that the problem solving and problem preventing capabilities of the firms are enhanced through strategic management. Strategic management is
essential as it helps firms to rationalize change and actualize change and communicate the need to change better to its employees. Finally, strategic management helps in bringing order and
discipline to the activities of the firm in its both internal processes and external activities.

Closing Thoughts
In recent years, virtually all firms have realized the importance of strategic management. However, the key difference between those who succeed and those who fail is that the way in which
strategic management is done and strategic planning is carried out makes the difference between success and failure. Of course, there are still firms that do not engage in strategic planning or
where the planners do not receive the support from management. These firms ought to realize the benefits of strategic management and ensure their longer-term viability and success in the
marketplace.