1. International business

International business includes all business transactions that involve two or more countries. Such business relationships may be private or governmental.

There are three primary motivations for firms to pursue international business: to expand sales, to acquire resources, and to diversify sources of sales and supplies.

The concept of international business includes the balance of trade – the relationship between exports and imports and balance of payments – the difference between inward and outward cash flows.

A company can engage in international business through various means, including exporting and/or importing of merchandise and services, direct and portfolio investments, and strategic alliances with other companies.

Merchandise exports are tangible goods sent out of a country; merchandise imports are tangible goods brought in.

Service exports and imports are international earnings other than those derived from goods sent to another country. They are also referred to as invisibles. International business comprises many different types of services: travel, tourism, transportation; performance of activities abroad; use of assets from abroad.

Foreign investment is the ownership of property abroad. Direct investment is a subset of foreign investment that takes place when control follows the investment. When two or more organizations share in the ownership of a direct investment, the operation is known as a joint venture.

The factor that distinguishes portfolio from direct investment is that control does not follow this kind of investment.

The major factors causing changes in world trade and investment patterns are economic conditions, technology, wars and political relationships.

2. International trade

International trade is essential for the maintenance and growth of prosperity in all countries.

One of the major reasons why international trade takes place is that it creates value. It increases the efficiency or resource allocation worldwide, reduces production costs, and lowers input costs and prices paid by consumers and increases product variety and availability.

Nations are usually better off if they specialize in certain products or commercial activities. By doing what they do best they are able to exchange products not needed domestically for foreign-made goods that are needed.

The concept of absolute advantage and comparative advantage play a critical role in international trade. A country has an absolute advantage in the marketing of a product if it has a monopolistic position or if it produces the item at the lowest cost.

A country has a comparative advantage in an item it can supply that item more efficiently and at a lower cost that it can supply other products. Nations usually produce and export those goods in which they have the greatest comparative advantage or the least comparative disadvantage.

Some countries refuse to specialize their productive efforts because they want to be self-sufficient. Other countries subscribe to the self-sufficiency viewpoint only for commodities that they regard as strategic to their long-run development.

In most cases countries who seek to be self-sufficient do so for reasons of military preparedness, fear of economic reprisal from other countries and nationalism.