Question

What benefits do firms derive by entering into international business?

Answer 1

The following are some of the benefits that firms enjoy by entering into international business.

(a) Higher profits: International business allows firms to earn higher profits by taking advantage of the price differences prevailing between countries. For instance, if the price of a commodity in the domestic market is lower than that prevailing in international markets, a firm can benefit by selling the commodity in international markets.

(b) Growth prospects: Often, firms face a saturated domestic demand. In such cases, international trade provides a platform for them to increase their consumer base by opening up the route to overseas markets. This increases their growth prospects.

(c) Higher capacity utilisation: Sometimes, the production capacity of a firm may exceed the demand for its product in the domestic market. Therefore, in such cases, trading in international markets helps in utilising its capacity fully (by serving a larger consumer base). This in turn helps the firm to improve the profitability of its operations and benefit from the economies of scale by lowering production costs and increasing the per-unit profit margin.

(d) Method to escape high domestic competition: International trading allows firms to escape stiff competition in domestic markets. If domestic traders face high competition in domestic markets, they can turn towards international markets to sell their products and earn higher profits.

(e) Enhanced business perceptions: Every business firm strives to achieve long-term growth and expansion. This objective is aligned with the objective of stepping into international markets. Hence, companies aim at diversifying their products to enter into foreign markets to reap the benefits of overseas trading, and also to achieve growth.