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Lecture Overview
What is International Business Relevance of the Study of International Business Evolution of International Business Nature of International Business Reasons for going international Stages of Internationalization International Business Approaches Advantages & Problems of International Business Major Decisions in International Business
Text
International
Francis Cherunilam
International
Dr.
place across national borders for the purpose of satisfying the objectives of individuals and organizations.
International transactions export-import trade, licensing, franchising, contract manufacturing, management contracts, turnkey projects, foreign direct investments, joint-ventures, Alliances. International Business also includes a growing service industry in areas such as Information technology, transportation, tourism, advertising, construction, retailing, wholesaling, and mass communication.
Post world war-II, the growth of international & multinational companies took place
International trade to International marketing International marketing to International Business TT to SWIFT settlement system Movement of Capital overtaken Trade
Copyright 1999 by Harcourt Brace & Company All rights reserved
Profit Advantage Growth opportunities Domestic market constraints Competition Government policies & regulations Political stability vs. Instability Availability of technology & Managerial Competence High cost of transportation Nearness to raw material Availability of Quality Human resource at low cost Liberalization & Globalization Increasing market share
Stages of Internationalization
Stage-1 Stage
: : : : :
Domestic Company International Company Multinational Company Global Company Transnational Company
Ethnocentric approach
Sales of domestic products in int. markets. Domestic orientation International Market secondary Firm seeks markets similar to domestic. Little adaptation of product or marketing mix. Usually produced domestically
Polycentric approach
Recognition of difference in overseas markets Decentralization of operations Country by country basis Local marketing input and control
Regiocentric approach
Different regions as different markets Strategies formulated for a region
Geocentric approach
Develop product and marketing strategies for world markets. Standardize as far as possible, adapt where necessary. Economies of scale transfer of knowledge and technology, global image, and better competitive position. The world is viewed as the market
Focus
Marketing strategy Management style Manufacturing stance Investment policy Performance evaluation
Domestic
Domestic Domestic Mainly domestic Domestic Domestic market share
Ethnocentric
Extension Centralized top down Mainly domestic Domestic used worldwide Against home country market share
Polycentric
Adaptation Decentralized bottom up Host country Mainly in each host country Each host country market share
Geocentric
Extension Integrated Lowest cost worldwide Cross subsidization Worldwide
Advantages
Higher living standards Increased socio-economic welfare Wider market Reduced effects of business cycles Reduced risks Large scale economies Potential untapped markets Provides opportunities for challenges to domestic market Division of labor and specialization Economic growth of the world Optimum and proper utilization of World resources Cultural transformations Knitting the world into a closely interactive traditional villages
Problems
Political factors Huge foreign indebtedness Exchange instability Entry requirements Tariff, quotas and trade barriers Corruption Bureaucratic practices of government Technological pirating High cost Cultural sensitivities
What volume of foreign sales is desired? How many countries to market in? What types of countries to enter?
Choose possible countries and rank based on market size, market growth, cost of doing business, competitive advantage, and risk level
Foreign direct investment Representative Office, Branch, Creating a Subsidiary, Merger & Acquisition Foreign Institutional Investments Yen now $ Carry Trade, Portfolio investments, ECBs, ADRs, GDRs, FCCB, FCEB etc
Selling largely the same products and using the same marketing approaches worldwide. Producer adjusts the marketing mix elements to each target market, bearing more costs but hoping for a larger market share and return.
Geographical organizations World product groups International subsidiaries Become a global organization
M erchandise 80.6%
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Electronics
11.38 Pharma & fine chemical 8.43 Plastics, Coal & Minerals 10.00
Copyright 1999 by Harcourt Brace & Company All rights reserved
Share (%) Petroleum products 31.20 Gold/Silver/Prec Stone 21.50 Machinery 19.70 Electronic Goods 8.08 Iron & Steel, Coal etc 7.00 Transport & Org. Chem 6.00
Copyright 1999 by Harcourt Brace & Company All rights reserved
Exports US UAE China Spore & UK Imports China Saudi Arabia UAE US Iran
Share (%) 13.02 9.66 6.78 8.50 11.3 8.1 5.62 5.51 4.58
Chapter 1
BUSINESS
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Learning Objectives
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nation-state.
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Concept of Globalization
The process of integration and convergence of economic, financial, cultural and political systems across the world.
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Globalization
Globalization
The liberalization of capital movements and deregulations, especially of financial services that led to a spurt in cross-border capital flows.
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Cultural Globalization
Convergence of cultures across the world.
Political Globalization
Convergence of political systems and processes around
the world.
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Globalization of production
Globalization of markets Globalization of competition Globalization of technology Globalization of corporations and industries
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Movers of Globalization
Multilateral institutions
International economic integrations Move towards free marketing systems Rising research & development costs Global expansion of business operations
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Regulatory controls
Nationalism
War and civil disturbances
Management myopia
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Maximization of Economic Efficiencies Enhancing Trade Increased Cross-border Capital Movement Improves Efficiency of Local Firms Increases Consumer Welfare
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Criticism of Globalization
Developed versus Developing Countries: Unequal Players in Globalization: Widening Gap between the Rich and the Poor Wipes out Domestic Industry Leads to Unemployment and Mass Lay-offs Brings in Balance of Payments Problems Increased Volatility of Markets Diminishing Power of Nation States Loss of Cultural Identity Shift of Power to Multinationals
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International Trade: Exports of goods and services by a firm to a foreign-based buyer (importer)
International Marketing: It focuses on the firm-level marketing practices across the border, including market identification and targeting, entry mode selection, and marketing mix and strategic decisions to compete in international markets.
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International
Investments:
Cross-border
transfer
of
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International Business: All those business activities which involves cross border transactions of goods, services, and
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Market-Seeking Motives
Marketing opportunities due to life cycles Uniqueness of product or service
Economic Motives
Profitability Achieving economies of scale Spreading R&D costs
Strategic Motives
Growth Risk spread
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Legal Environment
Political Environment Competition
Infrastructure
Technology
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Foreign Direct
Investment
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Learning Objectives
of
foreign
direct
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Significance of FDI
International trade and foreign direct investment (FDI) are the two most important international economic activities integrating the world economy. With the increase in mobility of factors of production across countries, FDI has become an integral part of firms strategy to expand international business.
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Concept of FDI
In simple terms, FDI means acquiring ownership in an overseas business entity. Foreign direct investment occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage it.
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Access to superior technology Increased competition Increase in domestic investment Bridging host countries foreign exchange gaps
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Market Monopoly Crowding-out and unemployment effects Technology dependence Profit outflow Corruption National security
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Cost of capital input Wage rate Taxation regime Cost of inputs Cost of logistics Market demand
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Types of FDI
On the Basis of Direction of Investment
Inward FDI: Foreign firms taking control over domestic
assets.
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On the Basis of Investment Objectives Resource-seeking FDI: Direct investment overseas so as to gain privileged access to resources vis--vis competitor Market-seeking FDI: Direct investment overseas with sizeable market and growth in order to protect existing markets, counteract competitors, and to preclude rivals from gaining new markets Efficiency-seeking FDI: Direct investment overseas so as to improve efficiency and or seek advantages of process specialization or product rationalization
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production.
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To access countries with market imperfections, such as government policies, including import restrictions and quotas, incentives on exports, tax regimes, and governments participation in trade etc, FDI is often employed as a strategic tool for international business expansion.
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Internalization Theory
When the know-how, technology, skills, or trade secrets available with a firm are crucial to the firms competitive advantage, it needs to protect such
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The Ownership (O) Factor Specific advantages possessed by a firm enabling it to reap profits from overseas investments.
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overseas.
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Screening, admission, and establishment Fiscal incentives Financial incentives Other incentives, such as subsidized service fees,
Performance requirements
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Policy Framework
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FDI Prohibited
Retail trading (Except single brand product retailing) Atomic energy Lottery business Gambling and betting sector Business of chit fund and nidhi company Plantation except tea Trading in Transferable Development Rights (TDR) Activity/ sector not opened to private sector investment
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FM broadcasting Up-linking a news and current affairs TV channels Defence production Insurance Publishing of news papers and periodicals
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ISP with gateways, radio-paging, and end-toend bandwidth Establishment and operation of satellites Private sector banking Telecommunications services Non-scheduled Air transport services, ground handling services
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Foreign
direct investment up to 100 per cent allowed with prior government approval subject to conditions: Trading: Courier services Tea sector, including tea plantation: ISP without gateway, infrastructure provider, electronic mail, and voice mail: Mining and mineral separation of titanium bearing minerals and ores, its value addition Cigars and cigarettes manufacture Airports- existing projects with prior government approval beyond 74 per cent Up-linking of a non-news and current affairs TV channels Investing companies in infrastructure/ services sector (except telecom sector) Publishing of scientific magazines, specialty journals and periodicals
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Foreign Direct Investment allowed up to 100 per cent under automatic route Agriculture sector Industrial sectors
Mining Manufacturing activities Petroleum sector Power Special Economic Zones and Free Trade Warehousing Zones Industrial Parks Construction development projects
Services
Civil aviation Non banking finance companies Trading
In sectors/ activities not listed above, FDI is permitted upto 100 per cent through automatic route
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Patterns of FDI
Flow of FDI: The amount of FDI undertaken over a given time period (for example, a year). If the investment is made by a foreign firm in a country, known as inflow of FDI whereas investment made overseas is termed as outflow of FDI. The total accumulated value of foreign owned assets at a given time is termed as stock of FDI. FDI comprises of equity capital and re-invested earnings as per IMF norms. Besides, capacity expansion financed by firms of foreign origin as well as short-term or long-term loans that form part of original packages are also treated as FDI.
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capital
Reinvested
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For carrying out cross-country comparison of FDI performance and FDI potential, the UNCTADs FDI performance and potential indices serve as useful
tools
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Inward FDI Performance Index: Measure of the extent to which a host economy receives inward FDI relative to its economy size. Outward FDI performance index: The ratio of a countrys share in global FDI outflows to its share in the world GDP.
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S e rvic e s S e c to r 22.0% o the rs 30.6% C o m pute r S o ftwa re & Ha rdwa re 11.5% C he m ic a ls 2.3%
P e tro le um & Na tura l Ga s 3.1% P o we r 4.1% Auto m o bile Indus try 4.0%
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others 24.6%
Mauritius 40.6%
UAE 1% .1
France 1 .4% Cyprus 1 .7% Germany 2.3% J apan 3.1 % Netherlands 4.0%
UK 6.5%
Singapore 7.1 %
USA 7.6%
*Figures for April 2000 to May 2008 Source: Fact sheet on FDI, Department of Industrial Policy and Promotion, Government of India, New Delhi, 2008
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To explain the significance of the political and legal environment in international business
LEARNING OBJECTIVES
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Political System
It comprise of various stakeholders, such as the government, political parties with different ideologies, labour unions, religious organizations, environmental activists, and various NGOs.
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Political Ideology
A set of ideas or beliefs that people hold about their
political regime and its institutions about their
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Parliamentary: The government consults its citizens from time to time and the parliament has power to formulate and execute laws. Commonwealth Countries: Countries representing constitutional monarchies which recognize Queen Elizabeth II as head of the sate over an independent government.
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Monarchies:
heads of
government.
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Trade Embargos: Prohibiting trade completely with a country so as to economically isolate it and apply political pressure on its government. Trade Sanctions: Imposing selective coercive
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Bureaucracy: Form of administration based on hierarchical structure governed by a set of written rules and established procedures. The term is often used to
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Common law originated from England and it is followed in most of the former British colonies, such as India, United Kingdom, the United States, Canada, Australia, and New Zealand.
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Civil Law: Law based on a comprehensive set of written statutes. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America.
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Theocratic Law: The legal system based on religious doctrine, precepts, and beliefs. For instance, the
Hebrew law and the Islamic law are derived from religious doctrines and their scholarly
interpretations.
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Doctrine of Comity Act of State Doctrine Treatment and Right of Aliens Forum for Hearing and Setting Disputes
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Commercial Risks: Risks such as non-acceptance of goods, nonpayment or insolvency of the importer.
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Economic Risks:
and
natural
resources,
scarcity
of
foreign
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Political Risks: Possibility of political decisions, events, or conditions in an overseas market or country that adversely affect the international
business
that
include
confiscation,
and
expropriation,
nationalisation,
domestication.
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BERI Index
It provides risk forecasts for about 50 countries throughout the world and a broad assessment of the countrys business climate on 15 economic, political, and financial factors on a scale from zero to four.
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GPRI is a comparative index to monitor political risks in 24 emerging markets, including India, China, Brazil, Russia, and South Africa. It serves as an early warning system to anticipate critical trends and provides a measure for the countrys capacity to withstand political, economic, security-related, and social shocks.
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deterioration.
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C7
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Learning Objectives
To understand the significance of culture in international business decisions To elucidate the concept of culture and its constituents To explain comparisons of cross-cultural behaviour
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Significance of Culture
A firm operating internationally comes across a wide range of diverse cultural environments, which significantly to appreciate influence the international among business cultural decisions. Managers operating internationally need differences behaviours of their business partners and consumers across various countries.
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Constituents of Culture
A variety of learned traits that influence human behaviour can
norms
aesthetics customs and traditions language religion
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Value System
Shared assumptions of a group about how things ought to be or abstract ideas about what a group
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Norms
Guidelines or social rules that prescribe
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Aesthetics
Ideas and perceptions that a cultural group upholds in terms of beauty and good taste. It includes areas related to music, dance, painting, drama,
architecture, etc.
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Language
A systematic means of communicating ideas or feelings by the use of conventionalized signs, gestures, marks, or especially articulate vocal sounds.
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Religion
Religious beliefs significantly influence business decision making. Religion encompasses three distinct elements:
Explanation: God seen as a first cause behind the creation of the universe A standard organization: Consisting of places of worships and rituals Moral rules of good behaviour
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Superiors and subordinates consider each other equal Organizations are relatively flatter Decision making is decentralized
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Countries with high individualism include, the US, Great Britain, France, South Africa etc
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Collectivisms:
Malaysia etc.
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Uncertainty avoidance
The extent to which people feel threatened by ambiguous situations. In high uncertainty avoidance societies there is lack of tolerance for ambiguity and the need for formal rules.
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Universalism: The belief that ideas and practices can be defined and applied everywhere without modification
Particularism: The belief that unique circumstances and relationships, rather than abstract rules are more important considerations that determine how ideas and practices should be applied e.g. Venezuela, the US, Indonesia, China etc.
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For instance
Mexico, and the UK . Communitarianism: people regarding themselves as part of a group. For instance, Singapore, Thailand, Japan, and Indonesia.
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Low Context Cultures: Cultures in which communication is more explicit with heavy reliance on words to convey the meanings. For instance, Germany, Switzerland, Scandinavia, North America and Britain.
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religion.
For instance, Japan, Korea and Scandinavian countries. Heterophilous Cultures: Countries that have a fair amount of differentiation in languages, beliefs, and religions followed. For instance, India and China.
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For instance, Britain, USA, Germany, Denmark, Australia, Canada, Finland etc.
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Finland etc.
Informal Cultures: Status differences are not valued and
Informal behaviour is not considered disrespectful. For instance, the USA, Canada, and Australia etc.
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EPRG Approach
Ethnocentric orientation
The belief which considers ones own culture as superior to others. The belief that the business strategy which has worked in the home country would also be suitable in alien cultures.
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Polycentric orientation
It is based on the belief that substantial differences exist among various countries. Therefore, a single business strategy cannot be effective across the world and customized business strategies need to be adapted in different countries.
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Regiocentric orientation
A firm treats the region as a uniform cultural
segment and adopts a similar business strategy within the region but not across the region.
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Geocentric orientation
The approach considers the whole world a single market and
attempts to formulate integrated business strategies. A
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The Emic school holds that attitudes, interests, and behaviour are unique to a culture and best understood in their own terms. It emphasizes studying the business research problem in each countrys specific context and identifying and understanding its unique facets. The Etic school emphasizes identifying and assessing universal attitudinal and behavioural concepts and developing pan-cultural measures. Thus, etic is basically concerned with measuring universal behavioural and attitudinal traits.
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Emphasis is often placed an identifying and developing constructs that are feasible across
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