INTERNATIONAL BUSINESS

MODULE 1

1
 Introduction to IB
Significance or relevance of IB
Competition

Internationalization of
Business

Liberalization Globalization of OM

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 Globalization
Globalization is defined by IMF as:
The Growing economic interdependence of
countries world wide through increasing
volume and variety of cross-border
transactions in goods and services and of
international capital flows and also through
the more rapid and wide spread diffusion of
technology

3
Why should a company go global?

A company that fails to go global is in the

danger of losing its domestic business to
competitors with lower costs, greater
experience, better products and in nutshell,
more value for the customer.
- Keegan

4
 What is international business?
In simple terms, IB can be defined as any
commercial activity which takes place beyond
national frontiers, ie.across countries.
In detailed terms, IB involves
Cross country movement of goods, capital, services,
employees and technology
Exporting and importing
Cross-border transactions in intellectual property
(patents, trademarks, know-how, copyright) through
licensing or franchising)
contd---

5
 Contd---
Investment in physical and financial assets in
foreign countries.
Contract manufacturing and assembly of goods
abroad for local sale and for export to other
countries
Buying and selling in foreign countries
Establishment of foreign warehousing and
distribution system.

6
 Nature and dimensions of IB
Doing business globally
Expanding business globally
Developing global out look.
Locating the production and other physical
facilities globally
Product development and production planning
based on global consideration.
Global sourcing of factors of production.
Global orientation of organizational structure and
management culture.

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 Renovision on the Art of global
Dominance by Aravind Mills
Source raw materials where ever they are
cheapest.
Manufacture where ever in the world is most
cost-effective.
Sell in those global markets where prices are
highest.
Raise finances globally.
Forge international strategic alliances
To manage all these, take on the best talent from
all over the world.

8
 Types of IB based on activity
Trading
Manufacturing and trading
Outsourcing and marketing
Global sourcing for production
Services
Investments

9
International Business, International trade and
international marketing
International
Business
International trade

International
marketing

10
 International Business and national business

Factor International National business

Business horizon Global National
Competition Global Local/Regional/National
Regional formation/access Trade blocs/agreements Free access
Currency Foreign currency (unstable) Local (relatively stable)
Risk and uncertainty Unpredictable More predictable
Role of agent Primary (can be a catalyst) Secondary

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 Modes of IB based on market entry
and operating forms
Foreign Market entry and operating
strategies
Production/assembly
facility in foreign markets
* Contract manufacturing
Exporting Licensing/Franchising
*Assembly operations
(from home country) /strategic alliance
*Wholly owned
manufacturing facility
*Joint ventures

12
 Importance of IB- indicators
Foreign trade GDP Ratio
International investments, both direct and
portfolio have been growing rapidly
Growing international production
Rising export intensity

13
 Importance of IB to firms
Pull factors forces which pull the business to
the foreign markets. Eg. Relative profitability
and growth prospects
Push factors- compulsions of the domestic
markets to internationalize-Eg. Saturation in
the domestic market.

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 Reasons for going international
1. Profit advantage and earning foreign exchange
2. Growth opportunities
3. Domestic market constraints
4. Competition
5. Govt. policies and regulations
6. Monopoly power on strategic assets
7. Strategic vision
8. Economies of scale
9. Economies of scope
10. Spin-off benefits
1. White skin advantage
2. Better products to domestic markets
3. Import of capital goods and technology
4. Economic incentives offered by govt.

15
 Factors influencing international
business
Social Factors
Culture of the country
Language of the country
Environment and climate of the country
Marketing infrastructure
Financial system
Economic factors
Currency restrictions of the country
Government policy
Taxation
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 Factors influencing----
Opposition
Opposing organizations in the importing country
Opposing organizations in the competing countries
Opposing organizations in own country
Logistics
costs of planning and controlling the movement of goods
Transport required
Risks
Political and commercial risks
Risk of enemies and wars
Risk of piracy

17
How international business is different
from domestic business
Independent political entities
Customs duties
Quantitative restrictions
Exchange controls
Local taxes
Different legal system- common English Law, Civil Law
etc.
Different financial system inconsistency in exchange
rate etc.
Different market characteristics different demand
pattern, promotion methods, distribution modes

18
 Different procedures and documentation
systems
- Different export import rules etc.
Cultural differences
Low context culture- prefers written
communication rather than interpersonal
and business relationships
High-context culture prefers interpersonal
relationships and even an oral word is
enough for commitment. Eg. India most of
the business in India takes place orally.

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 International business is not a bed of
roses!
The distinct legal and political system of different
countries is one of the major problem in IB.
Each country will have different legal system in terms
of civil law, common law and religious law
Cross-cultural environment of countries is a problem.
Financial system can differ from country to country.
Currency units also vary from country to country which
poses problems in exchange rates.
Language can create problem for international player.

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 Market infrastructure of countries can differ
from each other. The advertisement
mediums used in one country may not be
available in another country.
Import restrictions imposed by different
countries.
The cost of transport can be very high in
carrying out international business
transactions because of large distance
between the countries.
Custom duties and taxes may also cause
some problems in IB.
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An Overview of Business Environment

Internal Business External Environment

Environment decisions

22
 SWOT ANALAYSIS
STRENGHTS WEAKNESS

Internal internal

OPPORTUNITIES THREATS

External External

23
 Environment of
international business

24
 Political and economic environment
Important economic policies are often political decision.
They include the following:
- Industrial policy
- Policy towards foreign capital and technology
- Fiscal policy
- Export import policy
Many political decisions have serious economic and
business implications.
Eg. Whether to allow foreign investment in an industry or
the limit of foreign equity are often political decisions.
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 Economic roles of government
Regulatory role
Promotional role
Entrepreneurial role
Planning role

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 Economic system
1. Free market economies or capitalist
economies
2. Centrally planned economies of communist
countries
3. Mixed economic system

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 Free market economy
The freedom of private enterprise is the greatest in the
free market economy which is characterized by the
following assumptions:
1. The factors of production (labour, land ,capital) are
privately owned, and production occurs at the initiative
of the private enterprise.
2. Income is received in monetary form by the sale of
services of the factors of production and from the profits
of the private enterprise.
3. Members of the free market economy have freedom of
choice in so far as consumption, occupation, savings and
investments are concerned.
4. The free market economy is not planned, controlled or
regulated by the government. The government satisfies
the community or collective wants, but does not
compete with private firms; nor does it tell the people
where to work or what to produce.
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Centrally planned economic system

Communist countries follow this system.

The state owns all the means of production,
determines the goals of production and controls
economy according to central master plan.
There is hardly any consumer sovereignty in centrally
planned economy, unlike in the free market economy.
The consumption pattern in a centrally planned
economy is dictated by the state.
China, East Germany, Soviet Union, Czechoslovakia,
Hungary, Poland etc had centrally planned economies.
But several countries have discarded communist
system and have move to market economy.

29
 Mixed economy
Falls in between capitalist system and centrally
planned system
Both public and private sectors co-exist, as in
India.
The extent of state participation varies widely
between the mixed economies.
In many mixed economies, the strategic and
other nationally very important industries are
fully owned or dominated by the state.
Conclusion
The economic system, thus, is a very important
determinant of the scope of private business.
The economic system and policy are, therefore, a
very important external constraint on business.
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 International legal environment
There are wide variations between countries in the policies
and regulations regarding the conduct of the business.
For example, certain trade practices or promotional
methods followed in some countries may be regarded as
unfair by the laws of some other countries.
In some countries, radio and TV are under strict state
control.
In most countries, apart from those laws that control
investment and related matters, there are a no. of laws that
regulate the conduct of the business.
These laws cover such matters as standards of product,
packaging, promotion, ethics, ecological factors etc.

31
 In many countries, with a view to
protecting consumer interests,
regulations have come stronger.
Environmental laws are very strong in
many countries to protect the purity of
the environment and preserve ecological
balance.
Some government specify certain
standards for the products (including
packaging) to be marketed in the country.
commercial advertisements.
32
 Some even prohibit the marketing of certain
products.
In most of the nations, promotional activities
are subject to various types of controls. For
eg, some European countries restrain the use
of children in advertisement.

33
 In India, the advertisement of alcoholic liquor is
prohibited.
Advertisement of cigarettes must carry the statutory
warning that cigarette smoking is injurious to
health.
Similarly baby foods must not be promoted as
substitute for breast feeding.
In countries like Germany, product comparison
advertisements and the use of superlatives like best
or excellent in advertisement is prohibited.
There are many statutory controls on business in
India.
Many countries have laws to regulate competition in
the public interest. Elimination of unfair competition
and dilution of monopoly power are the important
objectives of these regulations.

34
 Kinds of legal systems
Classified into three:
1. Common law
2. Civil law or code law
3. Theocratic law
Common law
The basis for common law is tradition, past practices and
legal precedents set by the court through interpretations
of statutes, legal legislation and past rulings.
Common law seeks interpretation through the past
decisions of higher courts which interpret the same
statutes or apply established and customary principles of
law to a similar set of facts.

35
 Civil Law or code law
Is based on an all-inclusive system of written rules (codes)
of law.
Under code laws the legal system is generally divided into
three separate codes: commercial, civil and criminal.
Rules for conducting business transactions are a part of the
code.
The common law, derived from English law, is found in
England, the US, Canada and many other countries which
were under colonial rule once.
The civil or code law, derived from Roman law, is found in
Germany, Japan, France and in many other countries.

36
 Theocratic law
The theocratic law system is based on
religious precepts.
The best example is Islamic Law based on The
Holy Koran,
The Sunnah, or decisions and sayings of the
Prophet Muhammad;
The writings of Islamic scholars and
Consensus of Muslim Countries legal
communities.
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 Categories of laws
There are broadly, three sets of laws and
regulations relevant to International business:
1. International Laws, treaties, conventions etc.
2. Laws of foreign countries.
3. Laws of home country (ie, India), related to
foreign trade.

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 International regulations
The International Institute for the Unification of
Private Law drafted two uniform laws on
International sales and these were adopted by a
conference at the Hague in 1964.
These are:
1. The Uniform Law on International Sale of Goods
(Uniform Law on the sale)
2. The Uniform Law on the Formation of Contract
for the International Sale of Goods (Uniform
Law on Formation)
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They are complementary in nature.
However, these Laws are yet to be given effect
to by a number of countries.

40
 incoterms
International Commercial Terms
Brought out by International Chamber of Commerce.
These are common sale or trade terms used in
international business to express the sale price and the
corresponding rights and responsibilities of the seller
and the buyer.
The purpose of the Incoterms is to provide a set of
international rules for interpretation of the most
commonly used trade terms in foreign trade.
Eg. CIF, FOB etc.

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 Settlement of disputes
Disputes of certain nature are settled by the WTO or in
accordance with WTO principles.
In other cases, there are broadly two avenues for the
settlement of disputes viz,
1. Judicial dispute settlement : the dispute is settled by
litigation i.e, by judicial. Litigation often takes very
long time, is very expensive and strains relationship
between the parties involved.
2. Extra judicial dispute settlement: a conciliation clause
or an arbitration clause is incorporated in the sales
contract.

42
 Laws of foreign countries
Product regulations:
1. Product standards
2. Disclosures
3. Environmental laws
4. Product liability
Packing and labelling regulations
Regulations of price
Regulation of promotion
Regulation of trade practices
Consumer protection laws.

43
 Indian laws
Foreign Trade (Development and Regulation) Act, 1992
Objectives: to provide for the development and
regulation of foreign trade by facilitating imports into,
and augmenting imports from India and matters
connected therewith or incidental thereto.
The Act empowers the Government to:
(i) Make provisions for the development and regulation
of foreign trade by facilitating imports and increasing
exports and
(ii) Make provisions for prohibiting, restricting or
otherwise regulating the imports and exports of
goods.

44
 Problems in legal environment
Business firms may encounter major problems
when a country respects more than one legal
system and generates conflicting values.
If a business contract contains a clause specifying
the jurisdiction, stipulating which countrys legal
system should be followed, to settle disputes, the
matter can be settled accordingly.
However, in the absence of any such provision,
disputes cannot be settled choosing a legal
system of any country in particular.
Eg. Bhopal tragedy by Union Carbide, US
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 Global Financial Environment
Global Financial environment is a result of
globalization and liberalization.
The importance of international finance depends
upon the importance of international trade and
various other aspects of the world economy.
The six different aspects of the global economy having
their influence on international finance are as follows:
(i) Specialization of countries and trade
(ii) Opening of economies across the world
(iii) globalization of business enterprises
(iv) Emergence of new forms of business organizations
(v) Increase in global trade
(vi) Need of the development process of nation
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 Specialization of countries and trade
Different nations specialize in the production of
different goods and services according to the
resources available to them and their requirements.
For eg, most of the oleoresins are manufactured from
India because of the cultivation of spices like pepper.
When a country specializes in a product or service, it
has an advantage over other countries which either
do not produce or produce very little of that product
or service.
In such a situation, the country specializing in the
product or service exports them to other countries
leading to international trade.
For this, international finance and payment system is
necessary.
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 Opening of economies across the
world
Many countries having closed economies later realized
the importance of open economies and started
international trade including both export and import.
The nations with the state-of the art technologies
and specialized goods and services were one which
opened international trade.
They expanded their market out side their home
country.
The developing nations also open up their economies
and globalize themselves as they face intense pressure
from the developed nations.

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 They export their goods and services to raise
funds.
They also import the state-of-the-art
technologies and goods and services they do
not specialize in from other nations.
This process of opening of economies across
the world has led to the integration of the
world and turned it into a global village.

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Theories of international
trade

50
 Globalization of business enterprises
There are various reasons for a business
enterprise to globalize itself.
They do so to:
Get raw materials
Technology
Knowledge
To have a competitive edge over its domestic
counterparts
Apart from these reasons, there are various
theories which provide a reason to the business
enterprise to globalize.
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 The theory of competitive advantage
A business enterprise can attain a competitive advantage
over other enterprises because of several factors such as :
(i) R & D,
(ii) Use of innovative technologies in production
(iii) Specialization in management style,
(iv) Technological up gradation,
(v) Location of the firm, and
(vi) Favourable govt. policies.
When a business enterprise attains competitive
advantage, it needs to maintain it because it enables the
enterprise to produce goods cheaper than the competing
firms in the same industry.

52
 The theory of imperfect markets
Not all the countries have all the resources in sufficient
quantities that are required to run their economies.
The availability of resources needed for the production
of goods and services differ from one country to
another.
Countries attain competitive advantage over others,
when they specialize in some goods and services for
which raw materials and technology are available.
the country can ride upon this advantage only if the
markets are imperfect.
Imperfect markets restrict the mobility of factors of
production.

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 On the other hand, if the markets are perfect, the
competitive advantage cannot be harnessed because the
resources can be freely transferred to the places where
they are needed.
Such unrestricted movement of resources can make the
process of international trade and investment ineffective.
However, in imperfect markets, because of the restrictions
on the ,mobility of resources, firms take advantage of the
resources available with them and lure the other firms to
make foreign investment which is one of the ways the firms
use to globalize themselves.

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 The Product Life Cycle Theory
According to this theory, a business enterprise
establish itself firmly as it gains a distinctive advantage
over its domestic competitors.
The business enterprise can easily compete with its
domestic competitors as the information is readily
available in the domestic market.
It can also fulfill the international demands for the
product it produces by exporting it.
As the demand increases even more, the business
enterprise may decide to establish itself internationally
so as to reduce the cost of production and
transportation.

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 This will lead to even more competition, this time from
the international companies in the same business.
To maintain its position in the tough competition, the
business enterprise can develop and adopt specialized
strategies.
In short, as the business enterprise grows, it starts
looking for opportunities outside its home country.
The use of the opportunities to expand itself depends
on how successful it is in maintaining an advantage
over its competitors.

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 Emergence of new forms of business
organization
For globalizing themselves the firms have to
adopt one or more forms like:
International trade
Licensing
Franchising
Joint ventures
Acquisitions of existing operations
Establishing of new foreign subsidiaries.
These forms help a business enterprise to have
access to foreign markets and take advantage of
imperfect market situations.
57
 Increase in global trade
There is a substantial increase in the global trade either
because of the increased and improved production
capacities or due to the necessity of nations.
The developed nations produce goods in large
quantities and export it to other nations and
Import goods and services in order to provide better
choices and higher standards of living to their
population.
International trade is beneficial for the developing
countries also as it provides them foreign exchange
necessary for importing goods, services and
technologies.

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 A nations need for development
The process of development can be either internal or
external.
In the internal development process, the nation and its
economy completely depends on its internal resources and
internal R &D.
It gives emphasis on the development of indigenous
technologies and producing substitute for the imported
products.
But both these require a lot of time and huge amount of
money.
In the external process of development the country
depends on the external source of finance and technology
to improve its production process.

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