International business involves trading goods and services across countries. It’s a cross-border activity between businesses, individuals, or governments. Their transactions can be anything that has value, like knowledge, physical goods, technology such as software, arms, and ammunition, or services such as insurance, banking, and construction.
Apart from cost, there are other factors influencing international business, including:
- Legal abilities such as discrimination, age, and wage rates, among others
- Political factors such as political stability, policy changes, and foreign trade regulations
- Economic factors such as inflation rates, interest rates, fiscal policies, employment level, and many more
- Social factors, including status, awareness, and education
- Environmental factors such as temperature, weather, or climate change
The cost of doing business involves all expenses an entity incurs while buying goods and services. This could be an indirect cost like building security or a direct cost such as raw materials. Regardless of the business, managers and business owners carefully consider these costs since they determine the business’s profitability.
Therefore, doing business abroad means considering different cost factors than domestic ventures. Besides the obvious cost factors like shipping, your business should also consider cost factors related to its finance, marketing, and economic divisions. These factors include:
Also read: 15 Best International Money Transfer Apps
1. Exchange Rate Conversion
International business involves exchanging your country’s currency for foreign currency as a legal tender. Exchange rates are determined by the trading relationship between the two countries. They are also comparative and show currency differences between the two countries.
However, currency exchange can be risky and costly because the exchange rates can fluctuate within seconds. Business owners and managers can counter the fluctuation of the currency by drawing up a forward contract. The contract locks the initial exchange rate to allow both parties to know what price to expect. Businesses that don’t draft this contract are subject to currency value changes and can lose a lot of money.
Apart from the exchange rate, it’s also essential to consider the fees on international money transfers. Thanks to technology, it’s easier to move money across the world. Bulk transactions that used to be costly and would take days are now taking a fraction of your time and effort. There is also pressure from bodies like the United Nations (UN) to make these fees more manageable and less costly.
2. Research And Development
What excels in one country might be a mess in another country. Before doing business abroad, managers and business owners should conduct research on the population, infrastructure, and local culture to be successful. Moreover, the company should conduct surveys and run tests to design, develop, and promote its products, technologies, and services within the new country. Furthermore, products related to technology should match the country’s infrastructure and should illustrate the correct language.
Some products may need modification in their design. For instance, in Europe and Japan, the size and color of products differ significantly from the U.S. The United States customers prefer larger vehicles, while European and Japanese customers prefer compact vehicles to match their narrow roads.
Taxation is defined as imposing compulsory levies on entities or individuals by the government. Taxes are inflicted in almost all countries and their goal is to raise revenue for government expenditure. Conducting business abroad means you’re subject to taxation in that country. However, some countries set low tax rates to encourage investors to do business within their borders.
Therefore, international businesses should invest in a country that offers friendly tax rates to promote their operations.
4. Marketing And Advertising
Many marketing and advertising strategies don’t work overseas. International businesses selling products in foreign markets invest heavily in marketing and advertising methods that blend in with the local audience. For instance, a company selling cleaning products in Mexico can advertise through product placement in the telenovela, while in Sweden, it can be done through humorous television programs.
Therefore, international companies incur extra costs of hiring local advertising companies that understand the local culture to avoid offending the local audience. For instance, the “OK” hand sign logo that was made in America offended some countries. The hand gesture was supposed to represent the inflammatory concept, but it’s a sign to perform offensive acts in Greece. The bottom line is to research marketing strategies that can work in the country you’re investing in to get the most out of your efforts.
The Bottom Line
Understanding the cost factors for conducting international business is crucial to running a successful business. The cost depends on the factors listed above, the cost of goods and services, interest rates of taxes, and compliance with regulations. In general, the lower the overall cost the less investment that needs to be made, thus increasing the company’s profit in the long run.