International Business

Conceptual Overview

International business has been conducted since national boundaries were formed, from the days of the Phoenician Empire to the present. Czinkota, Ronkainen, and Moffett point out how, throughout history, IB has been used as a tool of governmental policy; either as an enabler, or as a form of coercion and control. Though IB has a long history, its economic, social, and political importance has increased with phenomena such as industrialization, transportation, globalization, and the growth of multinational enterprises (MNEs). As Buckley outlines, contemporary theory of IB embraces elements of applied economics, finance, business policy and corporate strategy, organization theory, and of applied management fields such as marketing.

Early theories of IB assumed imbalanced power relationships between nations in relation to financial and physical resources. Mercantilists believed that the prosperity of a nation was dependent on its reserves of precious metals, which in turn would be increased through generating high exports and reducing imports. In the mercantile system, the state fulfilled an active protectionist role, through the application of selective tariffs to promote exports and minimize imports. Between the 16th and 18th centuries, protectionism was one of the key factors underpinning European imperialism and many European wars.

The 18th-century economist Adam Smith opposed the mercantilists' restrictive and regulated system and, in his book The Wealth of Nations, he argued that free trade, competition, and choice spur economic development, reduce poverty, and stimulate social and moral improvement. Using examples from across the world, Smith provided a new understanding of the wealth-creating process and paved the way for an era of free trade and economic expansion in the 19th century. Adam Smith's arguments were based on the concept of absolute advantage, whereby each nation should export goods that it can produce more efficiently than any other, and should import those for which another country holds absolute advantage.

It is possible for two countries to engage in exchange even where one holds absolute advantage over the other in relation to the production of all goods. This is explained by the theory of comparative advantage, which places emphasis on the relative efficiency of the utilization of resources both within and between countries. Robert Torrens first described the concept in 1815, but it became widely known following David Ricardo's explanation in his 1817 book, The Principles of Political Economy and Taxation.

Early theories of IB were concerned with the competitiveness of countries rather than companies, and with trade in products rather than services, seeking to explain how countries could achieve and maintain a positive balance of trade, and why particular countries offered suitable targets for exports within the global supply chain. In addition to a shift in the focus of exchange from products to services, the second half of the 20th century saw the growth of MNEs: those companies owning separate operations in more than one country, accompanied by a move away from country-based theories to development of firm-based theories and consideration of industries and products.

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