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Lecture 03  ib approches

Lecture 03 ib approches






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    Lecture 03  ib approches Lecture 03 ib approches Document Transcript

    • INTERNATIONAL BUSINESS MANAGEMENT LESSON 3: INTERNATIONAL BUSINESS APPROACHESInternational business approaches are similar to the stages of 2. Polycentric Approachinternationalization or globalization. Douglas Wind and The domestic companies, which are exporting to foreignPelmutter advocated four approaches of international business. countries using the ethnocentric approach, find at the latter stageThey are: that the foreign markets need an altogether different approach. .1. Echnocentric Approach Then, the company establishes a foreign subsidiary companyThe domestic companies normally formulate their strategies. and decentralists all the operations and delegatesTheir product design and their operations towards the national decisionmaking and policy-making authority to its executives.markets, customers and competitors. But, the excessive In fact, the company appoints executives and personnelproduction more than the demand for the product, either due including a chief executive who reports directly to the Managingto competition or due to changes in customer preferences push Director of the company. Company appoints the key personnelthe company to export the excessive production to foreign from the home country and the people of the host country fillcountries. The domestic company continues the exports to the all other vacancies.foreign countries and views the foreign markets as an extensionto the domestic markets just like a new region. The executives atthe head office of the company make the decisions relating toexports and, the marketing personnel of the domestic companymonitor the export operations with the help of an exportdepartment.The company exports the same product designed for domesticmarkets to foreign countries under this approach. Thus,maintenance of domestic approach towards internationalbusiness is called ethnocentric approach. Managing Director Manager Manager Manager Manager Manager R&D Finance Production Human Marketing Resources Assistant Manger Assistant Manager Assistant Manager North India South India ExportsOrganization structure of Ethnocentric companyThis approach is suitable to the companies during the early daysof internationalization and also to the smaller companies. © Copy Right: Rai University11.625.1 9
    • INTERNATIONAL BUSINESS MANAGEMENT Managing Director CEO Foreign Subsidiary (Uganda) Manager Manager Manager Manager Manager R&D Finance Production Human Resource Marketing Organization Structure Of Polycentric Company 4. Geocentric approach 3. Regiocentric Approach Under this approach, the entire world is just like a single country The company after operating successfully in a foreign country, for the company. They select the employees from the entire thinks of exporting to the neighboring countries of the host globe and operate with a number of subsidiaries. The head- country. At this stage, the foreign subsidiary considers the quarter coordinates the activities of the subsidiaries. Each regions environment (for example, Asian environment like laws, subsidiary functions like an independent and autonomous culture, policies etc.) for formulating policies and strategies. company in formulating policies, strategies, product design, However, it markets more or less the same product designed human resource policies, operations etc. Managing Director CEO Foreign Subsidiary (Uganda) Manager Manager Manager Manager Manager R&D Finance Production Human Resource Marketing under polycentric approach in other countries of the region, but with different market strategies. © Copy Right: Rai University 10 11.625.1
    • Fig 1.4 helps to understand the concept of geocentric approach Business between two countries is profitable when a country INTERNATIONAL BUSINESS MANAGEMENTclearly. produces one good at a lower cost than other country and that Managing Director CEO Foreign Subsidiary (Uganda) Manager Manager Manager Manager Manager R&D Finance Production Human Resource MarketingFig 1.4 Organization Structure of Geocentric Company other produces another good at a lower cost than the former country.Theories Of International Business Business between two countries is also profitable when oneThe fundamental question that arises for most of us at this country produces more than one product efficiently, but, whenjuncture, is why should the business firms of one country it produces one of these products comparatively at greatershould go to the another country, when the industries of that efficiency than the other product.country also produce goods and market them. What is the basisfor international business? A number of theories have been Both the nations can engage in international business when onedeveloped to explain the basis for international business country specializes in the production in which it has greater efficiency in production.Comparative Cost TheoryIt is quite common that some countries have the advantage of Assumptions of the Theory : The assumptions of theproducing some goods at a lower cost compared to other comparative cost theory include:countries. This is due to the availability of cheap labour, skilled • The only element of cost of production is, labour.labour, cheap and qualitative raw materials, advanced technol- • Production is subject to the law of constant returns.ogy, competent management practices etc. Availability of these • There are no trade barriers.factors enhances productivity and thereby reduces the cost ofproduction per unit. Similarly, other countries have this • Trade is free from cost of transportation.advantage in producing other goods. For example, Japan has the Derivates of the Theory: The advantages desired from thisadvantage in producing electronics at low cost whereas India has theory are:similar advantage in producing textiles. • Efficient allocation of global resources.According to comparative cost theory the countries in the long • Maximization of global production at the least possible cost.run will tend to specialize in the business (production and • Product price, become more or less equal among worldmarketing) of those goods in whose business they enjoy markets.comparative low cost advantage and import other goods inwhich the countries have comparative cost disadvantage, if free • Demand for resources and products among world nationstrade is allowed. This specialization helps for the mutual will be optimizedadvantage of the countries participating, in the international Thus, we learn from this theory that, the basis for internationalbusiness. business is the comparative advantage of the nations toDavid Ricardo illustrated the Comparative Cost Theory in 1817. produce certain products at lower cost than other countries.He used a two country, two commodity model. The conclu- The Opportunity Cost Theorysions of his model are: Another example is that, India produces textile garments by utilizing its human resources worth of Rs I billion and exports to the US in 1999. The opportunity cost of this project is, had © Copy Right: Rai University11.625.1 11
    • India developed software packages by utilizing the same human in two countries in terms of differences in factorINTERNATIONAL BUSINESS MANAGEMENT resources and exported the same to USA in 1999, the worth of endowments. the exports would have been Rs 10 billion. • The theory specifies that international business is an Opportunity cost approach specifies the cost in terms of the extension to domestic or interregional trade. value of the alternatives, which have to be foregone in order to Hence, this theory is viewed as the modern theory of fulfill a specific act. international business. This theory is also called General Thus, this theory provides the basis for international business Equilibrium Theory of international business as it deals in terms of exporting a particular product rather than other with the equilibrium between demand for and supply of the products. The previous example suggests that it would be I products. India to develop and export software packages rather than • This theory indicates the impact of international business on textile garments to USA. product and factor prices. We slightly modify the previous example. For example, assume Derivatives: that India earned Rs 15 billion by exporting the same software packages to UK in 1999 rather than to USA. This theory The ultimate conclusions we draw from this theory are: suggests that the opportunity cost of India’s software exports • Price of the internationally traded products tend to be to USA in 1999 is Rs 15 billion. equalized in all the countries of the globe and in all the Thus, this theory also provides the basis for international regions of each country. However, existence of the cost of business of exporting a product to a particular country rather to transportation and nonexistence of perfect competition are another country. the limitations to this conclusion. • Prices of factors of production also tend to equalize across The Modern Theory of Factor the globe. However, existence of the cost of transportation Endowments (Heckscher Ohlin Thesis) and the nonexistence of the perfect competition are the Bertil Ohlin and Eli Heckscher explained the basis of interna- limitations to this conclusion also. tional business in terms of factor endowment. This theory Ultimately we can learn from this theory that the tendency of explains the reasons for comparative cost differences. They are: equilibrium of product/service prices and the prices of factors Different prevailing endowments of the factors of production of production is the basis for international business. and Different factors of production are to be used in different Adam Smith’s Theory of Absolute Differences in Cost degrees of intensity for producing different goods. According to Adam Smith, every country should specialize in According to this theory a country will specialize in the produc- producing those products, which it can produce at less, cost tion and export of those goods whose ratio between capital than that of other countries and exchange these products with and other factors of production is higher than those in other other products. These other products are produced absolutely at countries. less cost by other countries. According to Smith, “whether the Assumptions: HeckscherOhlin theory is built on the following advantage which one country has over another be natural or assumptions: acquired, is in this respect of no consequence.” Perfect competition is in existence for both product and Criticism: According to this theory every country should be able factors in both the countries. to produce certain products at low cost compared to other Factors of production are fixed in each country. countries and should produce certain other products at Factors of production are of equal quality in both the comparatively high price than other countries. International countries. trade takes place only under such condition. But, in reality most of the developing countries do not have absolute advantage of Factors of production have full employment in both the producing at lowest cost any commodity, yet they participate in countries international business. Factors endowments vary from one country to another country. The Productivity Theory It is criticised that the comparative cost theories are not Business between two countries is free from all barriers. applicable to developing countries. Hence, H.Myint proposed There is no cost of transportation, productivity theory and the vent for surplus theory. Production in both the countries is subject to law of The productivity theory points toward indirect and direct returns benefits. This theory emphasises that the process of Factor intensity varies between goods. specialisation involves adapting and reshaping the production Merits : Despite the assumptions, this theory enjoys the structure of a trading country to meet the export demands. following merits: Countries increase productivity in order to utilise the gains of exports. This theory encourages the developing countries to go This theory provides more valid basis for the existence of for cash crops, increase productivity by enhancing the efficiency international business compared to the other theories. of human resources, adapting latest technology etc. • This theory is superior to the comparative cost theory as it provides the reasons for the difference in cost of production © Copy Right: Rai University 12 11.625.1
    • Limitations: However, this theory has also certain limitations. INTERNATIONAL BUSINESS MANAGEMENT• Labour productivity did not increase after certain level• Increase in working hours• Increase in proportion of gainfully employed labour in proportion to disguised unemployed Labour.The Vent for Surplus TheoryInternational trade absorbs the output of unemployed factors.If the countries produce more than the domestic requirements,they have to export the surplus to other countries. Otherwise, apart of the productive labour of the country must cease and thevalue of its annual Produce diminishes.Thus, in the absence of foreign trade, they would be surplusproductive capacity in the country. This surplus productivecapacity is taken by another country and in turn gives the benefitunder international trade.Appropriateness of this Theory for Developing Countries:According to this theory, the factors of production of develop-ing countries are fully utilised. The unemployed labour of thedeveloping countries is profitably employed when the vent forsurplus is exported.International trade permits for more efficient use of capital andlabour. Hence I.S. Mill described this theory as, “surving relic ofthe Mercantile Theory.”Mill’s Theory of Reciprocal DemandComparative cost advantage theories. do not explain the ratiosat which commodities are exchanged for one another. J.S. Millintroduced the concept of ‘reciprocal demand’ to explain thedeterminations of the equilibrium terms of trade. Reciprocaldemand indicates a country’s demand for one commodity interms of the other commodity; it is prepared to give up inexchange. Reciprocal demand determines the terms of trade andrelative share of each country.Equilibrium = Quality of a product exported by country AQuality of another product exported by country BAssumptions: Assumptions of this theory are: Existence oftwo countries, trade in only two goods, both the goods areproduced under the law of constant returns, absence oftransportation Costs. Existence of perfect competition andexistence of full employment.TutorialQuestions for DiscussionQ1) What are the various approaches to International Business.Q2) Distinguish between Absolute advantage theory and Comparative Advantage Theory of International TradeQ3) What do you understand by Heckscher Ohlin Theory of International Trade. What are its assumptions/Notes: © Copy Right: Rai University11.625.1 13