Friedman (2005) argues, “The world is flat!” Friedman’s research highlighted the fact that the barriers, which limited trading across the world, had been demolished. He further argued that with the introduction of new technology and the advancement in transportation meant that trading internationally had become commonplace. As a result organisations now face competition from across the globe. The motivations behind an organisation’s expansion can now be realized on a larger, global scale.
Organisations consider international and global trade for a number of reasons. An organisation may have to respond to a sudden increase in foreign competition resulting in a “follow the competitor” strategy. Alternatively an organisation may choose to set up in the native country of a competitor in order to take business away from them. Longer-term strategic direction of an organisation’s international trade could be focused towards reducing costs by looking at foreign direct investment or vertical expansion whilst overcoming border tariffs. It has been suggested that even if a domestic firm maintained it’s native position whilst exporting goods to the international market they would find that this comes with a higher variable cost and therefore it would make sense for some kind of integration in to the international market to maximize it’s potential (Oberhofer and Pffafermayr, 2012).
The motivation to ‘trade’ in any environment is the same for both domestic firms as well as international firms. However there are inherent differences between the two in both their resources, structure and influence in being able to trade within an international context. In this essay we will attempt to identify the key terminology whilst looking at structure and differences between the two.
International trade has considerably changed and developed from the mercantilism theory of trade. The Mercantilism theory of trade proposed to maximize the use of domestic resources whilst limiting that of foreign ownership. However, the simplistic notion of a purely domestic firm, operating within its national boundary, and maintaining no interaction with other countries is unusual. With Friedman’s Shrinking Globe idea (Friedman, 2005) with increasing global ability, even domestic “firms may face international issues, such as those related to their foreign business partners, corporate cultures or employees of foreign origin” (Burkert, Ivens & Shan 2011 p544).
The domestic firm is an organisation, which focuses on its “home” country. Akin to sheltered industries (Grant & Jordan, 2012) such as railroads, hairdressers and milk production, which remain locally dependent, they rarely develop their business over national borders. Remaining very much in their home market they conduct their business under fairly simplistic restrictions in terms of government and regulatory restriction. A domestic firm will maintain a degree of competitive advantage in that they are able to easily understand and recognize their competitors. As discussed earlier, it could be suggested, that a truly domestic firm no longer exists. Even hairdressers who remain sheltered in terms of scope, structure, customer demand and local competition are affected by the developments internationally supplier products and international trends. Influence of international suppliers combined with a growing demand for products from abroad can influence the domestic firm to trade. Grant and Jordan (2012) support this by arguing that the sheltered industries are shrinking and are beginning to succumb to the forces of internationalization.
An international firm is defined as “business that takes place across national borders” (Worthington & Britton, 2009, p 398). Buckley and Caisson also agree with this through their Internalization Theory (1976)…