Why Do International Businesses have a More Significant Impact on the Domestic Market of the Country?
Introduction
International business has a significant impact on the economic development of host countries. The activities undertaken under internal business recognize the diversity of the global marketplace as such; companies and multi-conglomerates can cope with the uncertainties and risks of doing businesses in the volatile and unpredictable business world(Demirhan and Masca 2008). The capability of honing the diversity of the marketplace explains why such endeavors under international business remain profitable despite the growing uncertainties(Kurtishi-Kastrati 2013). Intriguingly, the global company creates more impact on host countries compared to the existing domestic-based business. The comparative advantage of international business transcends from technological, socio-economic, financial, political, and economic positivity for the host countries(Nosheen 2013). The focus of the following paper is to succinctly discuss why international business has a more significant impact on the domestic market of the host country. The objective of the paper, therefore, is to highlight the growing interest in academic research regarding the impact that international business places on domestic states.
Foreign Direct Investment
The main reason that international business significantly impacts domestic economies is the factor of foreign direct investment. Foreign direct investment is the highest form of investments capitalized on by global companies alongside trade (Keller and Yeaple 2009). Hosting countries have a plethora of policies and regulations set-up to attract foreign investors with the hope of improving the financial and economic growth outlook (Keller and Yeaple 2009). The objective of the host countries is to guarantee an increase in productivity. The aim is to benefit local firms and businesses. In the United States of America, the state spent $230 million to attract the development of a new Mercedes manufacturing plant in Alabama (Keller and Yeaple 2009).
Similarly, China has adopted the same strategies, which have resulted in the development of numerous manufacturing plants and subsidies, making the country a renowned industrialized nation (Lu et al. 2014). The outcome of the foreign direct investment is technology spill-over through imports, as Kurtishi-Kastrati (2013) reiterates. With increased FDI host countries are bound to witness an increase in the importation of technology which benefits local businesses.
International businesses are keen on research and development, ideally with the focus on technology. When a host country permits global companies to set-up in their country, they also allow the importation of technology into their premise(Nosheen 2013). Along with this, Bilir, Chor, and Manova (2019) concurs that international businesses are known to increase investment in research and development in the technology, import more of the technology, and exploit the technology within the host countries. Spillovers are bound to happen in these scenarios(Demirhan and Masca 2008). The significant benefactors are the local businesses that can also exploit the technology and use it to improve productivity.
Additional factors such as increased foreign direct investment in setting up manufacturing companies and subsidiaries generate more revenues for the governments and improve the livelihood of host country citizens(Forte and Moura 2013). International businesses have a particular unit labor differential compared to the host country businesses (Edwards, Colling, and Ferner 2007). Often, working for international business is regarded as lucrative, meaning; workers gain more benefits compared to those in the local companies. The capability of global companies to achieve this is through lower labor unit costs incurred due to the locational advantages of the host countries(Bilir et al. 2019; Demirhan and Masca 2008). The host countries, according to Nosheen (2013), offer incentives to the international business, which allows the firms to profit despite high costs incurred during research and development. Therefore, foreign direct investment by international companies creates positive gains for the host countries with increased capital investment by global businesses, which facilitate improved technological and improved working conditions for the host country citizens.
Improved Worker Payments
International business improves the working conditions of the workers within the host countries. As a result of the increased Foreign Direct Investment by global companies, host countries encourage setting up businesses in their territories (Bilir et al. 2019). Due to this, international companies have a vertical-system of integrating standardized operating conditions. These include working conditions. The Indonesian study conducted by (Forte and Moura 2013) reports that international businesses often offer higher wages compared to local companies. Global companies are known to have more influence on how workers are paid in a host country, given that they are decision-makers on wage and salary payment(Edwards et al. 2007). In Venezuela, for instance, as stated by (Forte and Moura 2013), local establishments enjoy increased wages in the presence of foreign direct investment. Similarly, higher wages set-up by international businesses has a direct impact on the wages set-up by local companies. The` compounding reason, Lu et al. (2014) states they are those foreign businesses often dominate the local market in countries especially, developing countries.
Regarding the wage gap, workers in local establishments often feel that they are not paid fairly. The reason is that those working in foreign establishments have increased wage levels compared to those working for domestic establishments (Nosheen 2013). International businesses can facilitate such payments due to foreign direct investment and spillover channels from subsidiaries around the world(Kurtishi-Kastrati 2013). As a result, the pressures from those working for local establishments may increase, resulting in negotiation for higher wages. Concurrently, local businesses have to conform to the bargaining and negotiation tactics by the domestic workers to motivate them and retain them to avoid high turnovers. The merit to this is that local workers receive wages about the market-based salary, which would not be possible if the international businesses were lacking(Lu et al. 2014). In reference to (Forte and Moura 2013), Forte and Moura’s (2013) study on the impact of international business on local economies is the improved living standards given that those working for local companies receive higher wages. The consequence of this, nevertheless, is that location-based pressures, including cities and urbanized areas, receive a high influx of unemployed workers seeking for job opportunities(Forte and Moura 2013). It may explain why developing countries, and recently, developed nation, report of increased unemployment rates in urbanized regions within their territories.
The impact of living conditions is differential. According to Forte and Moura (2013), the industry and sector that hosts the international business often benefits from a foreign direct investment compared to other industries. One fact remains, the living standards of workers in the host country improves. However, the level of wage gaps differs significantly. Companies belonging to industries with high technological investments linked to international businesses have a higher wage provision compared to industries with minimal investment in technology indirectly related to global companies (Keller and Yeaple 2009). The reason is that the high invested technology industries have spillover in FDI, while the small investment industries have limited FDI(Keller and Yeaple 2009). Nevertheless, the impact of international businesses on the living standards of the citizens in the host countries improves due to the working rate standard set-up by the dominating global companies.
Technology Investments Transfer
International businesses have knowledge and expertise on how to thrive in the unpredictable and volatile global market(Kurtishi-Kastrati 2013). The success is based on the technologically advanced products and services provided by the businesses. The channels of distribution set-up by international companies in host countries promote technology transfer to the nations. The merit of this technology transfer is the motivation given to the local industries(Kurtishi-Kastrati 2013). The motivation lies in the learning need by the local entrepreneurs and business owners to manufacture or produce similar products or services at lower costs. Price is a dynamic factor when it comes to deriving technological knowledge from international businesses (Bilir et al. 2019). The motivation, however, is for the local companies to improve their outcome through enhanced learning of the technology.
The most considerable significance that international businesses have is the investment capital spillover into host countries. The capital is known to also overflow to the local distribution channels recruited by foreign companies (Demirhan and Masca 2008). The opportunities that global companies bring to the local businesses are access to the specialized products and input as well as the production process. The innovation through research and development that arises, as a result, forces the local businesses to use localized resources to improve on production and improve on the quality of products as well as services(Lu et al. 2014). Additionally, local businesses have access to knowledge on the know-how of how international companies conduct their supply-chain management, including downstream manufacturing.
There are several ways that international businesses impact knowledge-driven in local companies. On one end, there is the importation of products(Nosheen 2013). The trade that includes the sale of international products through international businesses facilitates the need for the local enterprises and companies to know the unique characteristics of the imported products(Nosheen 2013). Therefore, research and development from the local businesses are encouraged, primarily through the exploitation of the local resources of the host country. The other is the increased machinery importation by international companies (Kurtishi-Kastrati 2013). To provide the required input, global businesses have to import the necessary equipment and machinery into the host country. The increased desire to improve on the competition by the local companies drives them to improve on their knowledge of the technology used by international businesses.
In retrospect, the technological transfer promoted by international businesses improves the competitiveness of the local industries. The need for the local companies to know more about the type of machinery, equipment, and products produced and used by international businesses, encourages research and development(Kurtishi-Kastrati 2013). Consequently, the exploitation of local resources increases with a linear increase in industry performances in the host countries. The industrial analysis study report by Keller indicates that with increased FDI in host countries, increased competition marked by increased industrial growth contributed by local companies achieved in the host country(Kurtishi-Kastrati 2013). Therefore, the impact that international businesses have on host countries is the improved technological transfer to local companies for improved competitiveness driving economic growth.
Transfer of Human Resource Practices
A key feature of international businesses is the transfer of human resource practices in host countries. The impact and extent of influence of HR transfers are phenomenal with increased performance on the local industries (Edwards et al. 2007). The transfer of human resource practices is necessary for local businesses as they conceptualize how international companies have different ideologies on human resource practices. According to Edwards et al. (2007), local businesses benefit through the idea of increased competition in investing in their employees.
The philosophical transfer of human resource practices by international businesses is to fortify the best practices according to international standards. The models that are incorporated by international companies have undergone years of modifications and perfection to suit business internal and external environments(Edwards et al. 2007). Concepts on Maslow’s hierarchy of needs and rationalization on organizational cultures are implemented in the modifications on the human resource practices(Lu et al. 2014). Therefore, the success that international businesses have experienced serves as good examples for the local companies in host countries.
The impact that international businesses have on local markets of host countries is the increased competitive pressures for the local businesses. Interestingly, local companies compare themselves to global companies within the same industries. With such comparison, local companies are forced to idolize the human resource practices adopted by foreign businesses(Nosheen 2013). The decision to upstage competition drives the local companies to seek more knowledge of employment practices geared explicitly for small businesses(Edwards et al. 2007). Hence, the application of the cross-national comparative approach on culturalism, employment practices, how to adopt heterogeneous working environments, and cultural heterogeneity of workers are given the needed attention. Forte and Moura (2013) describe that local businesses often have no interest in the rights and working conditions as well as employment practices for their employees.
With the increased influence of international businesses into the local market, workers pressurize their employers to seek better working conditions and practices with the threat of leaving the local businesses for the international ones. The result is the shift in the local cultures in working practices set-up by the employers(Keller and Yeaple 2009). As a result, the impact of international businesses on the local markets is the improvement of human resource practices adopted by foreign companies. Concurrently, the performance management of the domestic workers improves, leading to improved competition among local businesses(Forte and Moura 2013). Competitive factors have consequential effects on the economic growth of the host country.
Balance of Payments
The most significant impact that international businesses have on local economies is the balance of payment. The balance of payments can be categorized into three factors. The first factor is through the capital investments that foreign businesses do in establishing a subsidiary in the host country. The capital flow is known as an initial capital inflow in the country, which is determined as a one time effect (Bilir et al. 2019). The second factor is the importation of goods and services into the local economy. The benefit of the introduction into the host country is the boost in the current account of the host country through increased products and or services rendered (Bilir et al. 2019). For instance, the Japanese investment companies in America provide Japanese cars to America and the United Kingdom. The FDI by Japanese automobile companies is seen as the direct investment into the American federal account using the importation of the vehicles(Bilir et al. 2019). The third factor is the benefits that arise from the exportation of goods and services to other countries.
The foreign revenue earned by the governments through this exportation is a balance of payments effects of FDI (Bilir et al. 2019). However, the impact is different for developing and developed nations. According to Bilir et al. (2019), developed countries have more prudent and stricter measures when it comes to the factors mentioned above, allowing the sustenance of government revenue. As for developing countries, the opposite is true. Foreign businesses have more domination factors on the economies that the government has little authority on the policies provided regarding the collection of revenues (Bilir et al. 2019).
Consequently, the impact of the balance of payments is the international trade that local countries enjoy as a result of the establishment of international businesses in the country. Host countries can seek association with international trade facilitated by international companies. It could include efficiency-seeking, market-seeking, resource-seeking, and strategic-seeking(Bilir et al. 2019). Local firms are set to benefit if the type of products and services are at par with international standards. Then, the local businesses can export the products using local resources for value-added purposes. The overall effect is the increased trade for local businesses on the international markets(Demirhan and Masca 2008). The compounding benefit that international companies present to regional countries are increased competition. Competition can be measured by the increased economic development, which spurs domestic competition, thus, increasing productivity, reduced product and service prices, and improved efficiency in resource allocation.
Transfer of Management Systems
International businesses are reputable for transferring management systems from one subsidiary to the other. The idea is to reduce the time and capital needed to adopt new managerial competencies to realize a good working environment for their employees(Forte and Moura 2013). However, the businesses have to incorporate local cultures and demographics as well as employment policies in their management systems(Forte and Moura 2013). All in all, international businesses often enjoy management efficiencies in operations and improved worker performance through training and improved skill management.
The effect of the transfer of management systems is the need by the local businesses to emulate the models. The reason is that international businesses have overall success in different economies(Bilir et al. 2019). Such success can be motivational for the local businesses, especially in the same industry segment. Local companies would want to emulate the management styles, including employee training, skill training emphasis, and adoption of the different types of management systems. According to Bilir et al. (2019), the transfer of management competencies by international businesses presents extensive and untapped opportunities for local companies. They include management efficiencies in operations due to emphasis placed on training employees and setting higher standards of services (Lu et al. 2014). For the entrepreneurs, seeking new opportunities increase, and employee training received improves with specialized skill-training such as accounting, management, and technical.
The overall effect of international businesses in local markets is that employees gain new skills through in-house and external training. The training is beneficial to both the workers employed in international companies and those working for the local companies(Lu et al. 2014). For instance, training in foreign firms have an added advantage of producing high standard workers who may, in turn, seek opportunities in training others. Therefore, when the worker enters or re-enters the market, they have higher working standards compared to those who do not have such training(Bilir et al. 2019). In summary, the benefits that the country gains from the training of the workers have improved the organization and management of the local businesses(Bilir et al. 2019). In turn, it coordinates with factors of improved worker conditions, living conditions, and improved competition among the local businesses.
Conclusion
The paper has several factors that are impacted when international businesses operate in a host country. Primarily, the factors include technological transfer, foreign direct investments, management, the balance of payments, and the transfer of human resources systems. Each element is unique and presents advantages that international businesses have on their host countries. The research has also determined that countries benefit socio-economically, financially, economically, and sociologically. Employers gain new skills, improve their working and living conditions, have enhanced pay, and increase competition within themselves due to the factors that international businesses import into the host country. The paper has also discussed the improved competition that local businesses experience as a result of the improvements made in management and entrepreneurial training in research and development along with knowledge-acquisition promoted by international companies. Therefore, the paper concludes that international businesses present a positive impact on the host countries, improving on revenue allocation for the government and citizens also benefit through enhanced opportunities in international trade and improvement of business operations.
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