MODULE 1

INTRODUCTION TO INTERNATIONAL BUSINESS

1.Explain the history of international business

Introduction
The origin of international business goes back to human civilization.3000 years ago the civilization
started trade with each other. Roman Empire had extensive trade route across the known world. During
15th and 16th century European travelers travel globe in search of new trade route. Colonial development
started in 1600.The concept of international business become very strong during 19 th century. The first
phase of globalization can be traced back to 1870 and ended with World War 1 driven by industrial
revolution in UK, USA and Germany. The import of raw material by colonial empires from their colonies
and exporting finished goods to the overseas possession was the main reason of increase in international
trade. Later various governments imposed a number of barriers to trade to protect their domestic
production. Advanced countries experienced several set back due to trade barriers .Then the world nation
felt the importance of international co operation for global trade. It resulted in the establishment of IMF
(international monetary fund) and IBRD (International bank for reconstruction and development
popularly called as World Bank. The prolonged recession before World War 2 made the countries to think
about new policies in international business after world war 2.Then 23 countries conducted negotiation
and formed GATT. Later GATT become WTO .The effort of IMF, GATT, WTO along with effort of
individual countries lead to globalization of business.
2. Define international business (june 2008)

DEFENITION OF IB
International business in simple term can be defined as any commercial transaction-taking place across
the boundary lines of a sovereign entity.
According to Francis Cherunilam in his book on International Business IB can be defined as business
activity or transaction that transcends the national border can be called as international
business(International Business) Page no:4
According to Terpstra and Sarathy international business is finding out what customers want around the
world and satisfying these wants better than other competitors both domestic and international
According to Keegan international business is the process of focusing the resources and objective of an
organization on the global market opportunities and threat.

4. What are the major driving forces of IB?/explain the drivers of cross boarder business(June
2008)/what are drivers of IB .Indian entrepreneurs are emerging as good entrepreneur in
international business.why?(July 2007 :5 marks)
DRIVERS OF IB
There are number of forces which induce and propel globalization. The important driving forces
of IB are
1. liberalisation and globalization

The important factor which helps in flourishing of international business is globalization and
liberalization. With a lot of liberalization and with the help of WTO/GATT the world has become one
single market. Moreover the changes made in many of the countries like china ,and other socialist
countries due to liberalization is an important driving force of IB.
2. MNCs
Multinational companies which use their resources with world market is an important force of IB. Taking
advantage of liberalization they are growing very fast. According to World Invest Report 2000,there were
about 44500 MNCs in the world.
3. Technology
Technology is an important force .Technology is a universal factor that crosses national and cultural
boundaries. There are no cultural boundaries limiting its applications. Once technology is introduced it
will be spread to everywhere in the world. Technology monopoly encourages internationalism because
firm can exploit the respective demands without any competition. for ex in medical and health sector a
hospital in USA perform required diagnostics an X-ray and scan. In the next 3 minutes the radiologist in
India receives and send the report
4. Transport and communication revolution
Transport and communication helps in reducing the disadvantage s of natural barriers and thereby help in
international business. IT revolution has made an enormous contribution to the emergence of global
village. Over past 30 years global communication has been revolutionized by developments in satellite,
optical fiber and wireless technology and now internet. All the modern facilities of transportation and
communication is a major driving force of internationalism.
5. Product development costs and efforts
The cost of new product development is huge in many of the industries like pharmaceutical industry. To
recopy such cost a global market is required. Further because of huge investment and diverse skill
requirements associated with new product development, cross border alliance in research and
development are becoming more and more popular.
6. Quality and cost
When a firm is in international business the quality will be better and some time the cost will be also less.
So in order to maintain quality and to reduce the cost firms are compelled to do international business and
thus these 2 are major drivers of IB
7. Rising aspirations and wants
Because of increasing level of education and exposure to media the aspiration of people around the world
is rising. They aspire for everything which makes their life comfortable. If domestic firms are not able to
meet their wants they will go internationally.
8. Competition
Heightened competition compels firms to explore new ways of increasing their efficiency, by shifting
internationally at the earliest. It also results in international production taking new forms with new
ownership and contractual agreement, and new activities in abroad.

9. World economic trends

There are some world economic trends which add momentum to globalization trend. One of the important
trends is the difference in growth rate of economies. The comparatively slow growth rate of developed
economic countries and the drastic growth of developing countries prompt the developed countries to find
their market somewhere else. Liberalization characterized by deregulation and privatization is also one of
the major change. Thirdly domestic economic growth and opportunities outside reduce the opposition to
globalization. A classic example is China. China has benefited tremendously from foreign investment. At
the same time it is using outside opportunities also.ie globalization should be mutual.
10. Regional integration
Several regional integration like NAFTA,EU, create a borderless world between the members of such
block, foster the globalistion some of the regional blocks also give a fill up to cross border investment and
financial flows.
11. Leverage
A major factor helps in IB is opportunity a global company posses to develop leverage. The more the
number of countries it operates in business sectors the more could be the scope for leverage. According to
Keegan leverage is simply some type of advantage that a company enjoys by virtue of the fact that it
conducts business in more that one country. Global company posses following 4 types of leverage

Q3. Differentiate between Domestic and international Business. (June 2013)

Domestic Business

International Business

1. Single language and nationality

1. Multilingual/multinational/multicultural factors

2. Relatively homogeneous market

2. Fragmented and diverse markets

3. Data available, usually accurate and

collection easy

3. Data collection a large task requiring significantly higher

budgets and personnel allocation

4. Political factors relatively unimportant

4. Political factors frequently vital

5. Relative freedom from government

interference

5. Involvement in national economic plans; government

influences business decisions

6. Individual corporation has little effect on 6. "Gravitational" distortion by large companies

environment

7. Transaction time is less

7. Transaction time is more .

8. Relatively stable business environment

8. Multiple environments, many of which are highly

unstable (but may be highly profitable)

9. Uniform financial climate

9. Variety of financial climates ranging from overconservative to wildly inflationary

10 Single currency

10. Currencies differing in stability and real value

11 Business "rules of the game" mature and 11. Rules diverse, changeable and unclear
understood

12 Management generally accustomed to

sharing responsibilities and using
financial controls

12. Management frequently un autonomous and unfamiliar

with budgets and controls

5. Q. Why companies go global? Discuss the motives of globalization of business (June 2011;8 marks)
The factors behind why companies go international can be divided into2.one is pull factor and the other is
push factor.
Pull factor proactive factors, companies are motivated because of attractiveness of foreign market. Ex.
profitability and growth prospects
Push factors-compulsion of domestic market ex. saturation of market.

Reasons for companies go global

1. Profit advantage
Profit is the first motive of any company. In order to increase profit companies want to go international.
Companies start their business in other countries, where cost of production is less .Many MNCS lured to
China due to cheap labour. For ex .Philips has got 23 factories in China. In some cases international trade
will increase profitability of domestic business
2. Growth opportunities
The most common reason for going global is the potential for growth. The safe course is always to start
locally and grow from the foundation a company established at home. Taking the opportunities around
world MNCs are interested in going global .now a days companies go to developing countries due to
increase in population and income in those countries. Ex; Indias per capita income was rs 16,688 in
2000 and it drastically increased to 74,920 in 2014.

3.Domestic market constrain

The demand for a good in some countries tends to decline some time. When supply exceeds demand in
the country there will be excess production in the country. So in order to find new market for the product
countries go international. For ex .1st quarter of 21st century, stock of certain consumer durables like tv car
etc exceed total number of house hold. Certain companies like Samsung, LG whose origin is in South
Korea etc increase their presence in India. Lower manufacturing cost and untapped market was the main
reason for them to enter in India.
4. Competition
Till liberalization in 1991 Indian market was protected from other market. Economic liberalization cause
increase competition from foreign firms. Strategy of counter competition is very common in which
companies penetrate the home market of foreign competitors. For example IBM entered the Japanese
market and become a great success. Then the 2 other computer industry Fugitsu and hitachi lost their
business. So in order to counter the competition they entered US market which is the home country of
IBM.But they couldnt be successful in the initial stage. Later they enter a joint venture in US and become
successful.
5.Government policy and regulation
There is negative and positive factors for government policy and regulations. Many government give
incentive and positive support to domestic companies ,import development and foreign investment.
Sometimes environmental law in developed countries compel countries to go international.
6. Monopoly power
In seeking of monopoly power countries spread internationally. But in long run competitors will follow.
7. High cost of transportation
Initially company enters through marketing operation. But the profit margin will be less for foreign
country. This is mainly because of high transportation cost. Then the company try to set up a new branch
in foreign country
8. Raw material availability
In search of raw material at low cost companies go global. The raw material which is expensive in foreign
country will be cheap in foreign country
9. Tarrif and import quotas
Due to imposition of import quotas and trade restriction of some countries foreign investors will start
their business in the country in order to get rid from all these type of trade barriers.

Q5.What do we mean by the Term Internationalisation?(JULY2012)

The term internationalisation envelops all activities that a company undertakes with regards to its
relations with foreign markets. Political and economic changes in the global terrain certainly
influenced the term to a point where it now involves more activities than merely exporting goods
to other countries. Thus, internationalisation can take many forms, such as investing in a foreign

country (foreign direct investment), forming partnerships with foreign companies, subcontracting
foreign experts, taking part in international networks, and many more.
Q6.What do you mean by trade flow?
Trade flows are the buying and selling of goods and services between countries.
Trade flows measure the balance of trade (exports imports). This is the amount of goods that
one country sells to other countries minus the amount of goods that a country buys from other
countries. This calculation includes all international goods transactions and represents a
country's trade balance.
Net exporters run a trade surplus. This is due to the fact that they sell more goods to the
international market than they purchase from the international market. Demand for that country's
currency then increases because international clients must buy the countrys currency in order to
buy these goods. This causes the value of the currency to rise.
Countries that are net importers import more from international producers than they export to
international clients.
Net importers run a trade deficit. This is due to the fact that they purchase more foreign goods
than they sell to the international market. In order to purchase these international goods,
importers must sell their domestic currency and buy a foreign currency. This causes the value of
the domestic currency to fall.
As an example, let us look at Japan, which is an export-driven economy which usually runs a
trade surplus. Japan exports more goods to international clients than they import from
international producers. Japans trade surplus is the major reason why the JPY(Japanese Yen) has
not depreciated sharply despite severe economic weakness.
.Q6 Explain Investment flow. What are the types, methods and importance of FDI?
Investment flows is also referred to as relative economic strength forecasting: The focus is on investment
flows, which follow strong economic growth trends that attract foreign investments, and thus, increase
demand for the local currency.
Capital flows represent investments by countries or companies in another country. The flow of money to a
particular destination tends to increase demand for the target destination's currency. This increase in
demand causes the currency to appreciate (increase in value).
Foreign direct investment (FDI) is a direct investment into production or business in a country by an
individual or company of another country, either by buying a company in the target country or by
expanding operations of an existing business in that country. Foreign direct investment is in contrast to

portfolio investment which is a passive investment in the securities of another country such as

stocks

and bonds.
Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting
profits earned from overseas operations and intra company loans". In a narrow sense, foreign direct
investment refers just to building new facilities. The numerical FDI figures based on varied definitions are
not easily comparable.
Types of FDI
1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value
chain stage in a host country through FDI.
2. Platform FDI Foreign direct investment from a source country into a destination country for the
purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different
value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion
in a host country.
Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the
two other types generally act as a stimulus for it. FDI is building new facilities.

Methods of FDI
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the
following methods:

by incorporating a wholly owned subsidiary or company anywhere

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise

Importance of FDI
1. The rapid growth of world population since 1950 has occurred mostly in developing
countries. This growth has been matched by more rapid increases in gross domestic
product, and thus income per capita has increased in most countries around the world
since 1950. Only war-torn and countries with other serious external problems, such as
Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita.
2. An increase in FDI may be associated with improved economic growth due to the influx
of capital and increased tax revenues for the host country. Host countries often try to
channel FDI investment into new infrastructure and other projects to boost development.

3. Greater competition from new companies can lead to productivity gains and greater
efficiency in the host country and it has been suggested that the application of a foreign
entitys policies to a domestic subsidiary may improve corporate governance standards.
4. Foreign investment can result in the transfer of soft skills through training and job
creation, the availability of more advanced technology for the domestic market and
access to research and development resources.
5. The local population may be able to benefit from the employment opportunities created
by new businesses.
China

FDI in China, also known as RFDI (renminbi foreign direct investment), has increased
considerably in the last decade, reaching $59.1 billion in the first six months of 2012, making
China the largest recipient of foreign direct investment and topping the United States which had
$57.4 billion of FDI.
During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010.
India

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA).
India disallowed overseas corporate bodies (OCB) to invest in India. Starting from a baseline of
less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most
important FDI destination (after China) for transnational corporations during 20102012. As per
the data, the sectors that attracted higher inflows were services, telecommunication, construction
activities and computer software and hardware. Mauritius, Singapore, US and UK were among
the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of
43% from the first half of the last year.
United States
Broadly speaking, the U.S. has a fundamentally ' open economy' and low barriers to foreign direct
investment. U.S. FDI totaled $194 billion in 2010. 84% of FDI in the U.S. in 2010 came from or through
eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the
Netherlands, and Canada.

6.Q.what are the different approaches to IB? Explain with relevant examples?/ What are the
different types of orientations in International business?
According to the analysis made by Douglas, Wings, and Pelmutter there are 4 approaches to IB.
They are
1.Ethnocentric
2.Poly centric
3.Regiocentric
4.Geocentric

The degree and nature of involvement in international business or the international orientation of
companies is of four types
1.Ethnocentrism (home country orientation)

It has home country orientation. In this approach the overseas operations are viewed as
secondary to domestic operations. It primarily goes international to dispose of the
surplus. The domestic market is superior. Plans are made in the home office and overseas
marketing is commonly administered by an export home country nationals. Domestic
product mix is implemented without many modifications. Foreign markets are extension
of domestic markets. They consider new extended company as a new region. An export
department will monitor all the transaction .it can be explained with a diagram
Managing director

Mng R&D
finance

Mng

Mng HR
Mng

Mng mrkting

production
Asst mng north india

Asst
mngr
mng
South india Asst
export

Merits
1. No cost and efforts of localization
2. An easy route when foreign markets have similar characteristics to domestic markets.
Demerits
1. Limits the exploitation of international business opportunities.
2Polycentrism (host country orientation)

In this stage the company establishes a foreign subsidiary company and decentralizes all
operation and gives the decision making authority to its executives. The company
appoints key person from country and others will be from home country. Subsidiaries
established in overseas market operate independently of others and establish their own
marketing strategies.
Managing director
CEO subsidiary

Mng R&D

Mng
Mng
Mng finance
mrkt production
Mng HR
Merits

1. Adaptation to the market characteristics which helps better exploitation of the market
potentials.
Demerits
1.High cost of adaptation.
2.Delays in adaptation.
3.Regiocentrism (regional orientation)

In this approach company view different region as different markets. A particular region
with certain important common marketing characteristics is regarded as a single market.
It has regional orientation. Markets are differentiated and delineated on the basis of
common regional characteristics. Try to trade off between localization and
standardization. It can be explained with a diagram
Managing director
CEO subsidiary south Africa

Mrkt namibia

Mrkt lesotho

Mrkt botswana

Mng R&D

Mng mrkt
Mng

Merits
Mng finance
1. Some production
advantages ofMng
localization
and standardization.
HR
Demerits
1. Neglect intraregional differences in the business environment.
4.Geocentrism (world orientation)
It has global orientation. The entire world is a single market and can be
effectively tapped by a standardized marketing strategy. The strategy appropriate would be

global standardization. A number of subsidies will be operating across the world. All of them
are independent and autonomous. It can be diagrammatically depicted as
Managing director(head quarters in India)

Subsi in UK

Subsid in India
Subs in Kenya
Subs in
Subsidiary in US
Merits
Africa
1. Economies of scale
2. Advantage of pace

south

Demerits
1. Standardization may not be successful in all the countries.

7. What are the stages of Internationalization? What are the stages of a company going
global?
STAGES OF INTERNATIONALISATION
The stages of internationalization have been changing at a fast rate after 1990various factors like
globalization, information technology revolution, high growth rate of transport technology,
increase globalisatin of culture, increase in educational opportunities and career orientation
among the people of developing country etc. The variation in the scenario is generally categorize
STAGE 1
DOMESTIC COMPANY
Domestic companies limit its operation, mission, and vision, to the national political boundaries.
These companies focus on domestic customers, domestic prices, domestic suppliers, domestic
financial companies etc. The companies analyses national environment of company, formulate
strategies to exploit opportunities offered by environment
Domestic company never thinks globally. If it grows beyond its present capacity the
company enter into new domestic market domestic company will never penetrate into
international market. For domestic company in India total super markets, MTR
STAGE 2
INTERNATIOANL COMPANY

Some of the domestic companies which grow beyond their production think of growing
company internationally. These companies remain domestic oriented. They believe the strategy
they adopt in their home country will be superior and they adopt same in foreign market. They
locate a branch in foreign countries and extend domestic operation in that branch. Most of the
companies start internationalism in this stage only. Most of the companies follow this strategy
due to lack of resources.
STAGE 3
MULTINATIONAL COMPANY
International companies sometime realize that internationalism will not work properly. For ex;
Toyota exports its car Toyopet in US market. But it was not accepted by the US market as they
think that it is overly priced and looks like a tank. So Toyota shipped back all the cars to Japan.
But later from their experience they make cars which are suitable for US market. International
companies turn into multinational companies when they adapt to the local environment and make
products according to needs of the foreign country.
A multinational company is the one which has branches in many place and its strategies will be
according to each country where it is operating. But the headquarters will be in home country
.ex. TATA CONSULTANCY SERVICE, RANBAXY
STAGE 4
GLOBAL COMPANY
A Global company is the one which has either global marketing strategy or a global strategy.
Global company either produces in home country or in a single country and focus on marketing
these products globally, or produce the product globally and focus on marketing these products
domestically.
Ex: Dr Reddys lab design and produce drugs in India and markets globally.
STAGE 5
TRANSNATIONAL COMPANY
Transnational company produces markets, invest and operate across world. It links global
resources with global market at profit. ex: coco cola, pepsi