Difference between Domestic and International Business

Table of Contents:-

  1. Difference between Domestic and International Business
  2. Differentiate between domestic and international business
  3. Key Differences between International and Domestic Business

Understanding the difference between domestic and international business in commerce is essential, As these two business forms involve concerns and factors that require a thorough understanding.

The difference between Domestic and International Business is explained as follows:

Domestic Business

Domestic business involves those economic transactions that take place inside the geographical borders of a country. In this form of business both the buyer and seller belong to the same country. Domestic business is called ‘Home Trade’ or ‘Internal Business’. It is relatively easier to conduct business research in domestic business when compared to firms from abroad, and the degree of risk is also much lower. The selling process, currency, taxation laws, type of customers, and other regulations are more or less uniform, which can significantly benefit any organisation.

International Business

International business involves those economic transactions that take place outside the geographical borders of a country. The buyer and seller do not belong to the same country in this business. Companies involved in international trade are known as ‘Transnational’ or ‘Multinational companies‘. It is much more challenging to conduct business research on international business firms when compared to domestic companies, and the degree of risk is also higher. The selling process, type of customers, currency, taxation laws and other regulations are different for the buyer and seller, which can be a hindrance for any organisation to conduct business.

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Difference between Domestic and International Business

Domestic/Local and international enterprises, in both the public and private sectors, share the business objectives of functioning successfully to continue operations. Private companies seek to function profitably as well. Why, then, is international business different from domestic business? The answer to this lies in the differences across borders. Nation-states generally have unique government systems, currencies, laws and regulations, taxes and duties, and so on, as well as different cultures and practices. A person travelling from his home country to a foreign country needs to have the proper documents, to carry foreign currency, to be able to communicate in the foreign country, to be dressed properly and so on.

Doing business in a foreign country involves similar issues and is thus more complicated than doing business at home. The following table describes the clear difference between international and domestic/local business.

The major differences between Domestic and International Business are given as follows:

Basis of Difference International Business Domestic Business
1) Scope The scope of international business is quite wide. It includes merchandise exports, trade in services, franchising and licensing as well as foreign investment. Domestic business pertains to a limited territory. Though the company has many business establishments in various locations all the trading activities are inside a single boundary.
2) Benefits International business benefits both countries and companies. Domestic businesses have lower benefits when compared to the former.
3) Buyer and Seller The buyer and seller belong to foreign countries in international business. Both the buyer and seller belong to the same nation in domestic business.
4) Currency International businesses deal with various currencies since the buyer and seller are not from the same country. Domestic businesses deal with the same currency as both the buyer and seller are from the same country.
5) Political Relations International business improves the political relations among countries which gives rise to Cross-national cooperation and agreements. Does not improve political relations globally, and subsequently does not give rise to cross-national cooperation and agreements.
6) Purvey (Deals in) Globally operating firms need to follow complicated customs procedures and trade barriers like tariffs etc. Providing goods and services as a business within a country is much easier than doing the same globally. Restrictions such as customs procedures do not bother domestic entities.
7) Sharing of Technology International business provides for sharing of the latest technology that is innovated in various firms across the globe Does not provide for sharing of technology, only adopts the technology.
8) Trade Restrictions Will have to face restrictions in trade practices, licenses and government rules. Long distances and hence more transaction time. In a few cases, restrictions exist due to area development, forest, land, etc.
9) Distance Long distances and hence more transaction time. Short distances. Quick business is possible.
10) Modes of Entry into International Business A firm desirous of entering into international business has many options available to it. These range from exporting/importing to contract to manufacture abroad, licensing and franchising, joint ventures and setting up wholly owned subsidiaries abroad. Firms going for domestic trade do have the options but not too many as the former one.
11) Location MNCs take advantage of location economies wherever cheaper resources are available. No such advantage, once the plant is built, it cannot be easily shifted.
12) Cost Advantage High volumes cost advantage. Cost advantage, once a plant is built, it cannot be easily shifted.
13) MNCS MNCs have perfected principles, procedures and practices at the international level. MNCs take advantage of location economies wherever cheaper resources are available. No such experience or exposure. Once the plant is built, it cannot be easily shifted.
14) Capital Investment Capital investment is higher for businesses that are involved in international business. Capital investment is lower for businesses that are involved in domestic business.
15) Market Fluctuations Firms conducting trade internationally can withstand these situations and huge losses as their operations are widespread. Though they face losses in one area, they may get profits in other areas, this provides for stabilising during seasonal market fluctuations. Companies carrying business locally have to face this situation which results in low profits and and, in some cases, losses.

Difference between Domestic and International Business

Differentiate between domestic and international business

The fundamental principles governing international business’s tasks, functions, and processes mirror domestic business. However, the operational environment for domestic and international firms significantly differs, necessitating a global firm to adjust its business practices country-by-country. In contrast to a domestic business manager, an international manager encounters heightened challenges, increased uncertainties, and, notably, much more significant risks. The responsibilities of a global business executive are undeniably more demanding.

These challenges, uncertainties, and risks arise from variations in the political, economic, legal, and cultural landscape and disparities in foreign exchange markets and exchange rate systems. Often, these issues present themselves as constraints, making the decision-making and implementation processes in international business more intricate and, in some cases, more precarious than in domestic business. Importantly, decisions needing cultural sensitivity frequently lead to more complex conflicts (and more expensive) to resolve without significantly impacting the firm’s performance, future operations, and management effectiveness.

The dynamic nature of constant changes in the business, economic, political, and legal environments in the host country further compounds the difficulties that the international business executive must navigate almost daily.

The differentiation between domestic and international business can broadly occur based on the following parameters:

  1. Culture
  2. Fiscal and Government Policies
  3. Legal Environment
  4. Consumer Tastes and Preferences
  5. Availability of Factors of Production

Culture

In each country where the firm operates, cultural differences prevail. For success, the firm must navigate in a culturally sensitive manner, adhering to the host country’s culturally determined manners, customs, values, and norms. An international business manager must respect and empathize with cultural distinctions across all business and social life, aiming to conform and cooperate rather than confront or operate as if in their own culture.

Nike, the global sports shoe manufacturer, learned this lesson the hard way when introducing the Nike Air brand of shoes. The company initially artistically used cursive fonts, inadvertently creating an issue in Saudi Arabia where it resembled the word ‘Allah’ in Persian. Likewise, marketing campaigns, particularly advertising, may need adaptation according to local culture. Several years ago, a campaign for ‘Tuff’ shoes featuring male and female models wearing only shoes and no clothes faced scrutiny and was banned in India as it was considered obscene. However, a similar campaign in another country, such as France, might not have sparked public outcry and could have been viewed as usual, like any other campaign.

Fiscal and Government Policies

Conducting business across national borders involves using different currencies and observing different government rules and regulations limiting the firm’s freedom of action, for example, restrictions on the amount of profit to be transferred. Various governments practice other exchange rate policies and systems, ranging from daily decrees about the value of the local currency in terms of the world’s major currencies to fixed and floating exchange rate systems. These practices add greater risk and uncertainty to international financial transactions’ already hazardous and uncertain nature. To be successful, the firm must develop an appropriate strategy to deal with these differences and the associated problems.

Legal Environment

The legal environment differs from country to country, requiring companies to show particular sensitivity to laws, rules, and regulations which may affect operations and performance. Disregarding or disobeying the host country’s laws can be very damaging to the finances and the firm’s image. For example, rules about joint ownership of assets are often very complicated, bureaucratic, frustrating, and time-consuming. Legal difficulties are often the source of severe disputes between the host government and the firm, requiring protracted negotiations that may fail to invest or continue the existing business.

Consumer Tastes and Preferences

Differences in consumer tastes, preferences, and demand patterns stemming from cultural variations require the firm to adopt appropriate production, procurement, and marketing strategies to minimize costs and uphold the firm’s value. For instance, McDonald’s refrains from offering beef and pork items in India and exclusively sells vegetarian food dishes in the predominantly vegetarian state of Gujarat. Even for standard global products, certain modifications may be necessary to make the product more acceptable to consumers in the host culture. For example, the product’s name in the host country’s language may be offensive, or the packaging may be inappropriate.

Availability of Factors of Production

Different countries possess varying factor endowments with distinct qualities, necessitating the firm to formulate and implement suitable product development and logistics strategies in line with the availability and quality of resources in the host country. Specific skills or supplies may be unavailable or exist in limited quantities and qualities. If unavailable, the firm must either import them or develop local sources of supply.

Following its entry into the Soviet market in 1990, McDonald’s, one of the first Western fast-food firms, encountered significant challenges in securing high-quality local food supplies consistent with its food technology standards. To maintain its high benchmarks in quality, delivery, and production methods, McDonald’s had to transfer agricultural technology, equipment, and consultants from other countries with superior technology to collaborate with Soviet farmers. One remarkable outcome was a 100% increase in potato output alone. The company even established dairy farms, cattle farms, food-processing plants, and distribution systems.

Key Differences between International and Domestic Business

1. International business operates in many nations and cultures, whereas domestic business operates in one nation and one culture.

2. In international business, patriotism hinders trade, whereas in domestic business, patriotism helps trade.

3. Markets are diverse and fragmented in international business, whereas domestic business is more homogeneous.

4. In international business, multiple currencies are used for trade, which may differ in stability and exchange value, whereas in domestic business, a single currency is used.

5. International business has a varied economic (monetary and fiscal) climate, whereas domestic business has a uniform financial (monetary and fiscal) climate.

6. Political factors may play a significant role in international business, whereas political factors are of minor importance in domestic business.

7. In international business, the government influences business decisions, whereas in domestic business, there is minimal government interference in business decisions.

8. In international business, transport costs influence marketing decisions greatly, whereas transport costs form/influence only to a small extent in domestic business.

9. International business involves considerable financial and non-financial risks, necessitating credit and general insurance, whereas there is minimal payment and credit risk in domestic business.

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