International Business Management full notes

INTERNATIONAL BUSINESS
MANAGEMENT
UNIT I
Versatile Business School, Egmore, Chennai - 600 008

 Africa
 Antarctica
 Asia
 Europe
 North America
 South America

EVOLUTION OF INTERNATIONAL BUSINESS
 First phase of globalization in 1870
 Ended with World war I driven by Industrial Revolution
 ‘A vast game of beggar-my-neighbour’
 Felt need for International Cooperation
IMF IBRD

EVOLUTION OF INTERNATIONAL BUSINESS
 Prolonged recession before world war II
 GATT by 23 countries
 GATT WTO
 International trade International Marketing
 International Marketing International Business

CHARACTERISTICS/FEATURES OF INTERNATIONAL
BUSINESS
 Regional Integration
 Declining Trade Barriers
 Declining Investment Barriers
 Growth in FDI
 Strides in Technology
 Growth of MNCs

Stages Influence
• Domestic Social and Cultural
• International Technological
• Multinational Economic
• Global Political
• Transnational
Domestic
Business
International
Business
Approaches Influence
• Ethnocentric Export
• Polycentric Direct Investment
• Regiocentric Licensing
• Geocentric Franchising
Turnkey Projects
Joint Venture
Mergers and Acquisition
Goals
• Market Share
• High Profit
• Risk Avoidance
• Resource Acquisition
• Expand Business Capacities
Advantages
• Low Price
• Variety of Goods
• High Living Standards
• Economic Growth
• Competitive Advantages
Problems
• Political risk
• Foreign Debt
• Exchange Instability
• High Cost
INTERNATIONAL BUSINESS MODEL Versatile Business School, Egmore, Chennai - 600 008

INFLUENCES
 Accurate Information e.g. Bata
 Timely Information e.g. Coca Cola
 Size of the Business
 Market Segmentation
 Potentiality of Markets
 Inter-Country comparative study
 Host Country’s Monetary System
 National Security Policies e.g.: USA
 Cultural Factors e.g. : Fiji
 Language
 Nationalism and Business Policy e.g.: USA ‘s Be American, Buy
American Made

STAGES OF INTERNATIONALIZATION
 Domestic Company
 Limits operation, Vision, Mission to National political boundaries
 International Company
 Focus on domestic practices but extend wings to foreign countries (Mere
export-import)
 Multinational Company
 Different strategy for different market
 Global Company
 Either produce in one country and market globally or produce globally and
market domestically
 Transnational Company
 Produces, markets, invests and operates across the world

APPROACHES TO INTL. BUSINESS
Ethnocentric
Domestic companies
view foreign markets as
an extension to
domestic markets
Polycentric
Companies establish
foreign subsidiaries and
empowers its
executives
Regiocentric
Subsidiaries consider
regional environment
for policy/strategy
formulation
Geocentric
Companies view the
entire world as a single
unit

MODES OF ENTRY
Indirect
Exporting Joint VenturesDirect Exporting
Turn Key
ProjectsMergers and Acquisition
Direct
Investment
Licensing
arrangements
with foreign
companies
Franchising
arrangements
with foreign
companies
Management
Contracts
Contract
Manufacturing

GOALS OF INTERNATIONAL BUSINESS
 To achieve higher rates of profits
 Expanding production capacity
 Severe competition in home country
 Limited home market
 Political stability vs. instability
 Availability of technology and human resources
 High cost of transportation
 Nearness to raw material
 Liberalization and Globalization
 To increase market share
 Higher rate of economic growth
 Tariffs and import quotas

ADVANTAGES OF INTL BUSINESS
 High living standards
 Increased socio-economic welfare
 Wider market
 Reduced effects of business cycles
 Reduced risks
 Large-scale economies
 Potential Untapped markets

ADVANTAGES OF INTL BUSINESS
 Opportunity for challenge to domestic business
 Division of labour and specialization
 Economic growth of the world
 Optimum and proper utilization of world resources
 Cultural transformation
 Knitting the world into a traditional village

PROBLEMS OF INTL BUSINESS
 Political factors
 Huge foreign indebtedness
 Exchange instability
 Entry requirements
 Tariffs, quotas and trade barriers
 Corruption
 Bureaucratic practices of Govt
 Technological pirating
 Quality Maintenance

UNIT II

GLOBALIZATION
 IMF defines globalization as, “the growing economic
interdependence of countries worldwide 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 widespread diffusion of technology”

COMPONENTS OF GLOBALISATION
Globalization of
Markets
Globalization of
Technology
Globalization of
Production
Globalization of
Investment

GLOBALIZATION OF MARKETS
 Globalization of markets refers to the process of integrating and
merging of the distinct world markets into a single market
 EXAMPLE: Coca-Cola, Pepsi, McDonald’s burgers, Levis Jeans etc.,
FEATURES:
 Size of the company need not be too large
 Distinction of national markets still prevail
 Most of the foreign markets are markets for non-consumer goods

REASONS FOR GLOBALIZATION OF
MARKETS
 Large scale industrialization enabled mass production
 Risk reduction by diversification
 Increase profits and achieve goals
 Adverse business environment in home country
 Demand for their products in foreign markets
 Failure of domestic companies to cater the needs of customers

GLOBALIZATION OF PRODUCTION
 Globalization of production is locating the manufacturing facilities in a number of
locations around the globe. EXAMPLE: Jet airlines Boeing 777 and Swan opticals
REASONS:
 Impositions of imports by the foreign country
 Availability of high quality raw materials and components
 Availability of inputs at low cost
 Skilled human resource at low cost
 Liberal labour laws
 To reduce cost of transport
 To cater to varying tastes of customers

GLOBALIZATION OF PRODUCTION
 Globalization of investment refers to investment of capital by a global company
in any part of the world.
REASONS:
 Increase in volume of global trade
 Limitations of exporting and importing
 Liberalization
 Avoid restrictions

MODES OF GLOBALIZATION OF
PRODUCTION
 Acquisition
 Joint ventures
 Long term loans
 Issuing equity, shares, debentures, bonds’
 Global deposit receipt

GLOBALIZATION OF TECHNOLOGY
 Latest technology and distinctive competencies
 Technological collaboration
 Usage of technology by paying royalty

GLOBALIZATION
ADVANTAGES
 Free flow of capital, technology
 Industrialization
 Production facilities throughout the
world
 Increase in production and
consumption
 Lower prices and high quality
 Jobs and Incomes
 Higher standard of living
 Balanced Human development
 Welfare and prosperity
DISADVANTAGES
 Kills domestic business
 Exploits human resource
 Unemployment and
underemployment
 Widening gap between rich and poor
 Transfer of natural resources
 National sovereignty at stake
 Commercial and political
colonialism

INTERNATIONAL BUSINESS
ENVIRONMENT
INTERNAL EXTERNAL
Organisational
Structure
R&DHRMarketingProduction Finance
External Micro
Environment
External Macro
Environment
Shareholders Creditors Bankers &
Financial
Institutions
Competitors Suppliers
Customers
Social
&Cultural
Factors
Technological
Factors
Economic Political
International
Factors
Natural Factors
Organisational
Structure
R&DHRMarketingProduction Finance
External Micro
Environment
External Macro
Environment
Market &
Intermediary

SOCIAL AND CULTURAL
ENVIRONMENT
CULTURE
 Prescriptive
 Socially Shared
 Learned
 Subjective
 Cumulative
 Dynamic

SOCIAL AND CULTURAL
ENVIRONMENT
 Food habits and International business
 Dressing habits and International business
 Cross-Cultural communication process and Negotiations
 Low-context cultures
 High-context culture
 Monochromic
 Polychromic

SOCIAL AND CULTURAL
ENVIRONMENT
 Cultural Universals
 Communication
 Time and Culture
 Space and Culture
 Culture and agreement
 Culture of friendship
 Culture and negotiation
 Culture and superstition
 Culture and gifts

ECONOMIC SYSTEM
 Economic system: It is an organization of institution to satisfy
human needs/wants
 Economic systems are based on resource allocation
 There are three types of economic system
 Capitalism: under this system, customer allocates resources
 This economic system provides for economic democracy, thus giving the
customer, his choice for products
 Communism: In this, economic system, private property and property
rights to income are abolished
 Mixed: Under this system, major factor of production and distribution are
owned, managed and controlled by the state

 Countries classified by income
 Low income countries – US$ 755 or less
 India, Pakistan and Bangladesh
 Lower middle income countries – US$756 to US$2,995
 China, Indonesia and Sir Lanka
 Upper middle income countries – US$ 2996 to US$ 9265
 Brazil, Hungary, Malaysia, Mexico and Saudi Arabia
 Higher income countries – US$9266 or more
 USA, UK, Japan, Italy Australia
 World bank refers to low and lower middle income countries as
developing countries
 Higher – income countries are referred to developed countries

POLITICAL ENVIRONMENT
 Political ideology is the body of complex ideas, theories and
objectives
 Political ideology of the people in the same country vary widely due
to the variation in culture, ethnic group, tribal, community, religious
and economic groups
 Democracy : Pure democracy aims that all citizens should be equal
politically and legally and should enjoy freedom
 Totalitarianism is extreme to democracy

 Types of political systems
 Appraisal of political systems helps us in having and idea of political
systems and their impact on international business
 Government may be parliamentary or absolutist
 Parliamentary is open
 Absolutist is closed
 Government may be classified into
 Two party system
 Multi party system
 Single party system
 One party dominated system

GLOBALIZATION OF BUSINESS
 Globalization is the shift towards a more integrated and
interdependent world economy
 Globalization implies integration of the economy of the country with
the rest of the world economy and opening up of the economy for
foreign direct investment by liberalizing the rules and regulation and
by creating favorable socio-economic and political climate for global
business

FEATURES OF GLOBALIZATION
 Operating and planning to expand business throughout the world
 Erasing the difference between domestic and foreign markets
 Buying and selling goods and services from any country to any country in the world
 Establishing manufacturing and distribution facilities in any part of the world based
on the feasibility and viability rather than national consideration
 product planning and development are based on market consideration of the
entire world
 Sourcing the factors of production and inputs like raw materials, machinery,
finance, human resources , technology and managerial skills from entire world
 Global orientation in strategies, organizational structure, organizational culture and
managerial expertise
 Setting the mind and attitude to view the entire globe as a single market

PROCESS OF GLOBALIZATION
 Domestic company export to foreign countries through the dealers or
distributors of the home country
 The domestic company exports to foreign countries directly on its
own
 The domestic company becomes an international company by
establishing production and marketing operations in various key
foreign countires
 The company replicates a foreign company in the foregin country by
having all the facilities including r&d, full fledged human resource
 The company becomes a true foreign company by serving the needs
of foreign customer just like the home country company serves

Components of globalization
Globalization
of markets
Globalization of
production
Globalization of
investment
Globalization of
technology

GLOBALIZATION OF MARKETS
 Globalization of markets refers to the process of integrating and
merging of the distinct world markets into a single market
 This process involves the identification of some common norms,
values, taste, preference and convenience and slowly enables the
cultural shift towards the use of a common products or services
 A number of consumer products have global acceptance. Eg coca-
cola, pepsi, sony and kfc

FEATURES OF GLOBALIZATION
OF MARKETS
 The size of the company should be large to create a global market
 The difference require the companies to formulate different
strategies for each market
Eg coca cola, levis jeans employ separate strategies for each
country
 Most of the foreign markets are the marketers for non-consumer
goods like industrial products, machinery, computers, software,
financial products
 The global business firms compete with each other frequently in
different national markets including their home markets

REASONS FOR GLOBALIZATION
OF MARKETS
 Large scale industries enable mass production
 Companies in order to reduce the risk
 Companies globalize markets in order to increase their profits and
achieve company goals
 To cater the demand for their products in the foreign markets
 The failure of the domestic companies in catering the needs of their
customer pulled the foreign countries to market their product

GLOBALIZATION OF
PRODUCTION
 Factors influencing the location of manufacturing facilities vary from
one country to another
 They may be more favorable in foreign countries rather than in the
home country
 Eg cheap lab our in developing countries, availability of high quality and
cheap raw materials in other countries enable the companies to produce
the products of high quality and low cost in various foreign markets

OF PRODUCTION
 Availability of high quality raw materials and components in other
countries
 Availability of skilled human resources at low cost
 Availability of inputs at low cost in foreign countries
 Liberal lab our laws in the foreign countries
 To reduce the cost of transportation and easy logistics management
 To design and produce the product as per the varying tastes of
customers in foreign countries

GLOBALIZATION OF INVESTMENT
 Globalization of investment refers to investment of capital by a
global company in any part of the world
 Before 1930 many countries created barriers relating to export and
imports. After GATT the reduction in trade was implemented
 After WTO the eliminated the investment barriers
 India has allowed 51% foreign direct investment in Indian
companies

OF INVESTMENT
 Many countries provided more congenial environment for attracting
direct investment
 Significant amount of FDI is directed to the developing countries in
Asia and Eastern Europe
 Small and medium companies have started investing in foreign
countries
 Limitation of exporting and licensing force the domestic companies to
enter foreign countries
 Sourcing funds globally: The Indian government has allowed Indian
companies to procured investment from foreign companies
 Eg reliance, Dr. reddy lab and sat yam computers

GLOBALIZATION OF
TECHNOLOGY
 Technological changes is improved after 1950
 The revolution in telecommunication, IT and transportation have
made many company go into globalization
 Methods of globalization technology
 Companies with latest technology acquire distinctive competencies and gain the
advantages of producing high quality products at low cost
 Companies may have technological collaboration with foreign companies through
which technology spreads from country to country
 The foreign companies allow the companies of various other countries adopt their
technologies on royally payment basis

ADVANTAGES AND DISADVANTAGES OF
GLOBALIZATION
 Free flow of capital
 Free flow of technology
 Increase industrialization
 Balanced development of world
economics
 Increase in production and
consumption
 Commodities at lower prices with
high quality
 Increase in jobs and income
 Higher standards of living
 Balanced human development
 Increase in welfare and prosperity
 Globalization kills domestic
business
 Exploits human resources
 Leads to unemployment and
underemployment
 Decline in demand for domestic
products
 Decline in income
 Widening gap between rich and
poor
 Transfer of natural resources

MODE OF GLOBALIZATION
 Acquisition of foreign companies
 Joint ventures
 Long term loans
 Issuing equity shares, debentures and bonds
 Global deposits receipts

DRIVERS OF GLOBALIZATION
 Establishment of the world trade organization:
 Government of the member countries of general agreement on trade and
tariff(GATT) concluded the Uruguay round negotiation on the 15th
December 1994. according to uruguay meeting they came with a political
support “ strengthen the world economy and lead to more trade,
investment, employment and income growth throughout the world” WTO
was established on 1st Jan 1995. This is to facilitate the implementation,
administration and operation and further the objectives of this agreement
and on the multinational trade agreement

 Declining trade barriers:
 International trade occurs when the goods flow across the countries.
Government used to impose trade barriers like quotas and tariffs in order
to protect domestic business from the competition of international
business. Advanced countries after world war 2 agreed to reduce tariffs
in order to encourage free flow of goods. Thus reduction of tariffs and
other trade barriers contributed for the growth of global trade
 Declining investment barriers:
 Global business firm invest in order to establish manufacturing and other
facilities in foreign country. Foreign government impose barriers on
foreign investment in order to protect domestic industry.
 Various countries have been removing these barriers on foreign direct
investment

 Growth in foreign direct investment:
 There are number of reasons for the growth of FDI. Which is also a
drivers of globalization
 Strides in technology:
 Technological changes has dramatically diverged global company to
globalization
 Microprocessors and telecommunications
 The internet and world wide web
 On-line globalization
 Transportation technology
 Growth of multinational companies
 Growth of multinational and transactional company are spreading their
operation in manufacturing, finance and other functional areas. Which
are been the drivers of globalization

TRADE LIBERALIZATION
 Integration of the economy of a country with the rest of the world
economy is called globalization.
 Indian government globalised economy by announcing economic
liberalization in 1991.
 Integrated global economy were sown as early as 1940’s when steps
were taken to establish
 International Monetary Fund
 International Bank for Reconstruction and Development
 General Agreement on Tariffs and Trade

INTRODUCTION TO GATT
 There were many barrier for free trade were laid down to support the
government expenditure
 After II world war several international measures were undertaken to
liberalize trade and payment between nations
 International monetary funds and international bank for
reconstruction and development were set up
 International trade organization to deal with international trade was
sough to be set up
 GATT (general agreement for trade and tariff)was set to liberalize
the trade and reduce the tariff amount

GATT
 The General Agreement on Tariffs and Trade (GATT) was
originally created by the Bretton Woods Conference as
part of a larger plan for economic recovery after World
War II.
 The GATT’s main purpose was to reduce barriers to
international trade.
 This was achieved through the reduction of tariff
barriers, quantitative restrictions and subsidies on trade
through a series of different agreements.
 The GATT was an agreement, not an organization.
 Originally, the GATT was supposed to become a full
international organization like the World Bank or IMF
called the International Trade Organization
 The agreement was not ratified, so the GATT remained
simply an agreement.
 The functions of the GATT have been replaced by the
World Trade Organization.

 GATT trade rounds
 Geneva Round – 1947 The first round’s duration was 7 months. 23
countries took part in the round. The main focus was Tariffs Signing
of GATT, 45,000 tariff concessions affecting $10 billion of trade.
 Annecy Round – 1949 The second round took place in 1949 in
Annecy, France. 13 countries took part in the round. The main focus
of the talks was more tariff reductions.
 Torquay Round – 1951 The third round occurred in Torquay,
England in 1950. 38 countries took part in the round. 8,700 tariff
concessions were made totaling the remaining amount of tariffs to
¾ of the tariffs which were in effect in 1948.

 Geneva Round - 1955-1956 The fourth round returned to Geneva
in 1955 and lasted until May 1956. Twenty-six countries took part in
the round. $2.5 billion in tariffs were eliminated or reduced.
 Dillon Round - 1960-1962 The fifth round occurred once more in
Geneva and lasted from 1960-1962. The talks were named after
U.S. Treasury Secretary and former Under Secretary of State,
Douglas Dillion, who first proposed the talks. 26 countries took part
in the round. Along with reducing over $4.9 billion in tariffs, it also
yielded discussion relating to the creation of the European Economic
Community (EEC).

 Kennedy - 1964 The sixth round’s duration was 37 months. 62
countries took part in the round and the main focus was Tariffs,
Anti-dumping. Its achievement was Tariff concessions worth $40
billion of world trade
 Tokyo Round - 1973-1979 Reduced tariffs and established new
regulations aimed at controlling the proliferation of non-tariff
barriers and voluntary export restrictions. 102 countries took part in
the round. Concessions were made on $190 billion worth.

 Uruguay Round - 1986-1994 The Uruguay Round began in 1986.
It was the most ambitious round to date, hoping to expand the
competence of the GATT to important new areas such as service,
capital, intellectual property, textiles, and agriculture. 123 countries
took part in the round. The Uruguay Round was also the first set of
multilateral trade negotiations in which developing countries had
played an active role

OBJECTIVES OF GATT
 To raise standard of living
 To ensure full employment and a large and steadily growing volume
of real income and effective demand
 To develop the full use of the resource of the world
 To expand production and international trade

ACTIVITIES OF GATT
 Tariff bargaining
 Bargaining on non- tariff trade barriers
 Elimination of quantum restriction
 Settlement of disputes between contracting parties

WORLD TRADE ORGANIZATION
 WTO was established on January 1, 1995
 WTO is the embodiment of the Uruguay Round results and the
successor to GATT
 Government became member of the WTO on its first day
 As of December 2000 there are 142 members of the WTO and 34
countries have an observer status
 28 members are there in waiting list

Functions of WTO
 Administering and implementing the multilateral and plurilateral
trade agreements which together make up WTO
 Acting as a forum for multilateral trade negotiation
 Seeking to resolve trade disputes
 Overseeing national trade policies
 Cooperating with other international institution involved in global
policy making

Ministerial
conference
General council
Disputes
settlement body
council
Director
general
trade policy review
body committees
Council
For
Trade
In
goods
Council
For
Trade
In
services
Council
For trade
Related
Aspects of
Intellectua
l
rights
Secretaria
t
Of the
WTO
Committee
On trade
And
developme
nt
Committe
e
On
Balance
Of
Payment
restrcitio
n
Committe
e
On‘
Budget
Finance
And
admin
Structure of WTO

 Ministerial conference: ministerial conference is the highest
hierarchical level in the organizational structure.
 All the member countries of WTO are the representative of the ministerial
conference
 The ministerial conference has the authority to make decision on all
matters relating to multilateral trade agreements
 General council: General council is the executives body of the WTO
 General council reports its decision and activities to the ministerial
conference
 There are forms of general council
Dispute settlement body
Trade policy review body

 Council: The third level in the hierarchy is council
 Council for trade in goods: This council supervise the implementation and
functioning of all agreement relating to trade in goods
 Council for trade in service: This council overseas the implementation of all the
agreement relating to trade in services
 Council for trade related aspects of intellectual property rights: This council
overseas the implementation
 Committees: Various councils specified earlier, constitute committee
for administering the arrangement
 Committees on trade and development: This committee is concerned with the
issues concerning developing countries and particularly least developed countries
 Committee on balance of payments: some WTO members countries resort to trade
restrictive measures with a view to cope with their balance of payments problems
 Committee on budget, finance and admin: this committee deals with the issues
relating to the budget, finance and administration of WTO

 Management bodies: plurilateral agreement of the WTO have their
management bodies. These management bodies report to the
general council
WTO provides a more powerful mechanism to solve disputes over trade
among the members countries

Difference between GATT and WTO
 It is a set of rules and multilateral
agreement
 It was designed with an attempt to
establish International Trade
Organization
 It was applied on a provisional basis
 Its rules are applicable to trade in
merchandise goods
 GATT was originally a multilateral
instrument, but plurilateral agreement
were added at a later stage
 Its disputes settlement system was
not faster and automatic
 It is a permanent institution
 It is established to serve its own
purpose
 Its activities are full and permanent
 Its rules are applicable to trade in
merchandise and trade in services and
trade in related aspects of intellectual
property
 Its agreements are almost multilateral
 Its disputes settlement systems is fast
and automatic

Multinational corporation

Multinational corporation/company
 Multinational corporation/company is an organization doing business
in more than one country.
 It is integrated global enterprise which links global resources with
global markets at profit
 These companies have sales offices or manufacturing facilities in many
countries
 Mnc’s have worldwide involvement and a global perspective in its
management and decision making

Features of MNC’s
• MNC,s consider opportunities throughout the globe though they do the business
in the countries
• MNC,s invest considerable portion of their assets internationally
• MNC,s engage in international production and operate plants in a number of
countries
• MNC,s take managerial decisions based on a global perspective.
• The international operations are integrated into the cooperation’s overall business

WHY COMPANIES BECOME MNCS
 Protection
 Tap global
 Increase market share
 Reduce cost
 Overcome tariffs
 Technological advantages

Growth of MNC
 Expansion of market territory
 Market superiorities
 Financial superiorities
 Technological superiorities
 Product innovation

Classification of MNC
• Global corporation: global corporation produces in home country or in
a single country and focuses on marketing these products globally
• International corporation: international corporation conduct the
operations in one or more foreign countries, but with domestic
orientation
• Multinational corporation: MNC,s operates in more than one country,
but operates like domestic company of the product concerned
• Transnational corporation: Transnational corporation produces,
market, invest and operates across the world

Advantages and Disadvantages of MNC
 Creates the demand for the home country
products
 Boost up the industrial activity of the home
country
 Create unemployment for home country people
 Earns foreign exchange for the home country and
contributes for the balance of payment
 Get the benefits of foreign culture
 Produces the product required by the domestic
consumer in foreign countries with foreign
resources
 Saves the domestic country from environmental
pollution
 Get the customer for the country’s out dated
technology
 Transfer capital to other countries ad cause
unfavorable balance of payment
 May not create employment opportunities to domestic
people by following geocentric approaches or
outsourcing business operations in various counties
like USA software companies outsourcing business
operation in India
 May neglect the industrial development of the home
country as the transnational companies follow the
secular approaches
 May cause erosion of the domestic culture
 May exploit the natural resources resulting in excessive
exploitation of natural resources

Role of MNC in developing countries
 Industrializations is in a backward state in developing countries
 Resource available in developing countries are insufficient to develop the technology and
thereby industrialization
 Developing countries are rich in mineral and natural resource
 Local manpower, materials, capital etc cannot be optimally utilized by the developing
countries on their own
 Developing countries would be requires to import raw materials, capital equipment,
technology on their own, thus they need large foreign exchange resources
 Developing countries, though they produces goods and services on their own by importing
technology and materials, they fail in marketing the product due to severe competitions

Conflict mostly arises
• Host country’s companies
• Host country’s government
• Host country’s customer
• Host country’s society
• Home country’s companies
• Home country’s government
• Home country’s customer
• Home country’s society

Conflict in MNC
• Macro economic area
• Production area
• Marketing area
• Finance area
• Human resource area
• Social and ethical area
• Environmental issues
• Competing

UNIT IV
IBM

KINDS OF ECONOMIC INTEGRATION
 Free Trade Area: Group of countries agreeing to abolish all trade restrictions
 Customs Union: (i) Member countries abolish all restrictions (ii) They adopt a
uniform commercial policy of barriers and restrictions
 Common Market: (i) Member countries abolish all restrictions (ii) They adopt a
uniform commercial policy of barriers and restrictions (iii) They allow free
movement of human resource and capital
 Economic Union: i) Member countries abolish all restrictions (ii) They adopt a
uniform commercial policy of barriers and restrictions (iii) They allow free
movement of human resource and capital (iv)Achieve uniformity in monetary and
fiscal policy

EUROPEAN UNION
Evolutionary stages
 European coal and steel community
 European common market/European economic community
 European economic union

ACTIVITIES OF EU Elimination of customs duties, quantitative restrictions with regard to exports and
imports of goods among member countries.
 Establishment/formulation of a common custom tariff and common commercial policy
with regard to non-member countries
 Abolition of all obstacles for movement of persons, services and capital among member
countries.
 Common policy in agriculture and transport
 Programmes to coordinate the economic policies and disequilibrium in balance of
payments of member countries.
 Establishment of European Social fund
 Establishment of European Investment Bank.

ORGANISATION OF EU
 European council is the administrative body of the EU.
 Each member country is represented by a minister in this council
 Each member country holds presidency for 6 months on rotation basis.
 The committee of permanent representatives called ‘Corper’ acts as secretariat of
the council.

ORGANISATION OF EU
Court of Justice
(Adjudicates
Disputes)
•Agriculture
•Social Security
•Completion of
Policy
Court of
Auditors
•EEC Budget
•Monitoring
expenditure
European
Commission
(Commissioners
and Assistants)
European Parliament
•Consultants
•Approvals
Advisory Committees
•Economic and social
•Monetary
•Coal & Steel Industry

NORTH AMERICAN FREE TRADE
AGREEMENT-NAFTA
 NAFTA came into being on January 1,1994.
 USA, Canada and Mexico together formed NAFTA
 Initial agreement was between USA and Canada in 1989 which
was later extended to Mexico.

OBJECTIVES OF NAFTA
 To create new business opportunities particularly in Mexico
 Enhance competitive advantage of companies operating in USA, Canada and
Mexico.
 Reduce price of products and services
 Enhance industrial development
 To provide stable and predictable environment for investors
 To develop industries in Mexico, thereby reducing migration from Mexico to USA
 Improve and consolidate political relationship among member countries

MEASURES AS PER AGREEMENT OF
NAFTA
 Opening up of government procurement markets in member
countries
 Protection of IP rights of NAFTA members
 Simplification and harmonization of product standards in
member countries
 Free flow of employees and business people among member
countries
 Pollution control among USA-Mexico border

ASEAN-ASSOCIATION OF SOUTH EAST ASIAN
NATIONS A group of 6 members viz singapore, Brunei, Malaysia,
Philippines, Thailand and Indonesia in 1992 to establish a
Common Effective Preferential Tariffs(CEPT) plan which
resulted in creation of ASEAN.
 Organisation structure includes ASEAN economic ministers,
ASEAN foreign ministers, ASEAN secretariat, Fixed
committees and rotating committees.

INDIAAND ASEAN
 India became a sectoral dialogue partner of ASEAN in 1992. The
sectors were trade, investment, tourism and science and technology
 India became a full dialogue partner of ASEAN during fifth ASEAN
summit in Bangkok in 1995

AFTA-Asian Free Trade Area
 AFTA was formed in September 1994.
 AFTA was formed to develop ASEAN trade
OBJECTIVES
 To encourage inflow of foreign investment into this region
 To establish free trade area in the member countries
 To reduce tariff of the products produced in ASEAN countries

SAARC
 SAARC stands for South Asian Association for Regional Co-operation
 India, Bangladesh, Bhutan, Pakistan, the Maldives, Nepal and Sri
Lanka established SAARC on Dec 8, 1985.
 Afghanistan joined SAARC in April 2007.

OBJECTIVES OF SAARC
 To improve the quality of life and welfare of people
 To develop region economically, socially, culturally
 To provide opportunity for the people to live in dignity
 To enhance self-reliance of members
 To extend co-operation to other trade blocks
 To enhance co-operation with developing countries
 To have unity among member countries

ORGANIZATION STRUCTURE
 The council of SAARC is the highest policy making body
 The council is represented by the heads of the Government of the member
countries
 The Council meets once in two years
 This council is assisted by council of ministers
 The council of ministers is represented by foreign ministers of member
countries
 The council of ministers are assisted by standing committee which consists
of foreign secretaries of member countries

STANDING COMMITTEE
 Monitoring and co-ordinating the programmes
 Determining inter-sectoral priorities
 Mobilizing co-operation within and outside the region
 Standing committee is assisted by Programming
committee

PROGRAMMING COMMITTEE
 This includes the senior officials of the member countries. The
functions are
 Scrutinising budget of the secretariat
 Finalising annual schedule of the secretariat
 Carrying out the activities assigned by the standing committee
 Analysing reports of technical committees and SAARC
regional centres and submitting them to the standing committee.

TECHNICAL COMMITTEE
 This consists of representative of all member countries
FUNCTIONS
 Formulating projects and programmes in their respective
areas
 Monitoring and implementing projects
 Submitting the reports to the standing committee through
the program committee

TECHNICAL COMMITTEE
 The technical committees of SAARC includes
 Agriculture
 Environment
 Rural Development
 Tourism and transport
 Communications
 Health and population activity
 Science and technology

 The Secretarial work is done by SAARC secretariat
located in Nepal.
 The secretary-General is the chief of the secretariat
 Ahmed Salim of Maldives is the oresent Secretary
General of SAARC

ESCAP
 Economic and Social commission for Asia and The Pacific
 ESCAP has 48 members countries
 The original name of ESCAP was Economic commission for Asia and far east
 ESCAP’s geographical area is as follows:
East: Cook Island
West: Azerbaijan
North: Mangolia
South: Australia and New Zealand

APEC
 APEC stands for Asia Pacific Economic co-operation
 It looks for facilitating economic growth, co-operation, trade and investment in
Asia Pacific region.
 APEC has 21 members referred as ‘Member Economies’ which accounts for more
than a third of the world’s population(2.6 billion people), approximately 60% of
world’s GDP and about 47% of world trade.
 It is the most economically dynamic region in the world

PURPOSE AND GOALS
 To enhance the economic growth and prosperity of Asia-
pacific region
 To reduce tariff and trade barriers
 Creation of an environment for safe and efficient movement of
goods, services and people across borders

OPERATION OF APEC
 Every year one of the 21 APEC member economies play host
to APEC meetings and serves as the APEC Chair.
 The APEC host economy is responsible for chairing the Annul
meetings of APEC.
 APEC is not a donor organization. It’s activities are centrally
funded by small annual contributions from APEC members
economies.

MERCOSUR
 The treaty signed by Argentina, Brazil, Paraguay and Uruguay on March 26, 1991
created Mercosur.
 Mercosur is South America’s largest trade block.
OBJECTIVES
 Free transit of transportation goods, services and factors between the member states.
 Fixing of a common external tariff and adopting common trade policy
 Co-ordination of macro-economic and sectoral policies of member states in areas of
foreign trade, agriculture, transport and communications etc.,

INTERNATIONAL CAPITAL MARKET
 Network of people, firms, financial institutions, and
governments borrowing and investing internationally
Borrowers
 Expands money supply
 Reduces cost of money
Lenders
 Spread / reduce risk
 Offset gains / losses

INTERNATIONAL FINANCIAL MARKET
 Few of the International financial markets are as follows:
Foreign exchange market
Eurocurrency market
Eurocredit market
Eurobond market
International stock markets

FOREIGN EXCHANGE MARKET
 The foreign exchange market allows currencies to be exchanged in order to
facilitate international trade or financial transactions.
 The foreign exchange market assists international trade and investment by
enabling currency conversion. For example, it permits a business in the United
States to import goods from the European Union member states
 The system for establishing exchange rates has evolved over time.
 From 1876 to 1913, each currency was convertible into gold at a specified rate
 This was followed by a period of instability, as World War I began and the
Great Depression followed.
 The 1944 Bretton Woods Agreement called for fixed currency exchange rates.

FOREIGN EXCHANGE MARKET
 There is no specific building or location where traders
exchange currencies. Trading also occurs around the clock.
 The market for immediate exchange is known as the spot
market.
 The forward market enables an MNC to lock in the exchange
rate at which it will buy or sell a certain quantity of currency
on a specified future date.

EUROCURRENCY MARKET
 The Eurocurrency market consists of banks (called Eurobanks) that accept deposits
and make loans in foreign currencies
 A Eurocurrency is a freely convertible currency deposited in a bank located in a
country which is not the native country of the currency
 The deposit can be placed in a foreign bank or in the foreign branch of a domestic
bank
 In the 1960s and 70s, the Eurodollar market, or what is now referred to as the
Eurocurrency market, grew to accommodate increasing international business.

EUROCURRENCY MARKET
 The Eurocurrency market is made up of several large
banks called Eurobanks that accept deposits and
provide loans in various currencies.
 For example, the Eurocurrency market has
historically recycled the oil revenues (petrodollars)
from oil-exporting (OPEC) countries to other
countries.

EUROCURRENCY MARKET
 The Eurocurrency market in Asia is sometimes referred to separately as
the Asian dollar market.
 The primary function of banks in the Asian dollar market is to channel
funds from depositors to borrowers.
 Another function is interbank lending and borrowing.

EURO CREDIT MARKET
 Loans of one year or longer are extended by Eurobanks to MNCs or government
agencies in the Eurocredit market. These loans are known as Eurocredit loans.
 Floating rates are commonly used in Eurocredit Market

EUROBOND MARKET
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It
is a debt security, under which the issuer owes the holders a debt and, depending on
the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay
the principal at a later date, termed the maturity
There are two types of international bonds.
 Bonds denominated in the currency of the country where they are placed but issued
by borrowers foreign to the country are called foreign bonds or parallel bonds.
 Bonds that are sold in countries other than the country represented by the currency
denominating them are called Eurobonds.

INTERNATIONAL STOCK MARKETS
 In addition to issuing stock locally, MNCs can also obtain funds by issuing stock in
international markets.
 This will enhance the firm’s image and name recognition, and diversify the
shareholder base. The stocks may also be more easily digested.
 Note that market competition should increase the efficiency of new issues.

 A stock exchange is an entity that provides "trading" facilities for stock
brokers and traders, to trade stocks, bonds, and other securities.

NASDAC
 The NASDAQ Stock Market commonly known as
the NASDAQ, is an American stock exchange. "NASDAQ"
originally stood for National Association of Securities
Dealers Automated Quotations.
 It is the second-largest stock market comparing to official
stock exchanges by market capitalization in the world, after
the New York Stock Exchange.
 The exchange platform is owned by NASDAQ OMX Group,
which also owns the OMX stock market network.

HISTORY
 When the NASDAQ stock exchange began trading on February 8, 1971, it
was the world's first electronic stock market.
 NASDAQ was the successor to the over-the-counter (OTC) system of
trading
 NASDAQ was also the first stock market in the United States to start
trading online, highlighting NASDAQ-traded companies
 In 1992, it joined with the London Stock Exchange to form the first
intercontinental linkage of securities markets
 In 2006 NASDAQ changed from stock market to licensed national
exchange.

NASDAC
 The NASDAQ-100 is a stock market index of 100 of the largest non-financial
companies listed on the NASDAQ]
 The NASDAQ has over the years put in place a series of stringent standards
that companies must meet before being included in the index. Those standards
include the following:
 Being listed exclusively on NASDAQ in either the Global Select or Global Market
tiers.
 Being publicly offered on an established American market for three months.
 Having average daily volume of 200,000 shares.
 Being current in regards to quarterly and annual reports.
 Not being in bankruptcy proceedings.

NASDAC-OPERATIONS
 The Nasdaq, on the other hand, is located not on a
physical trading floor but on a telecommunications
network
 Instead, trading takes place directly between
investors and their buyers or sellers, through an
elaborate system of companies electronically
connected to one another.

NASDAQ 100
 21st Century Fox (FOXA)
 Amazon.com, Inc. (AMZN)
 Apple Inc. (AAPL)
 Cognizant Technology Solutions Corporation (CTSH)
 Dell Inc. (DELL)
 Google Inc. (GOOG)
 Vodafone Group, plc. (VOD)
 Yahoo! Inc. (YHOO)

EXIM BANK
 Export-Import Bank of India is the premier export finance
institution of the country, established in 1982 under the
Export-Import Bank of India Act 1981.
 Government of India launched the institution with a mandate,
not just to enhance exports from India, but to integrate the
country’s foreign trade and investment with the
overall economic growth.

EXIM BANK-ORGANIZATION
 Exim Bank is managed by a Board of Directors,
which has representatives from the
Government, Reserve Bank of India, Export Credit
Guarantee Corporation of India, a financial
institution, public sector banks, and the business
community.

EXIM-FUNCTIONS
The Bank's functions are segmented into several operating groups including:
 Corporate Banking Group which handles a variety of financing programmes
for Export Oriented Units (EOUs), Importers, and overseas investment by Indian
companies.
 Project Finance / Trade Finance Group handles the entire range of export credit
services such as supplier's credit, pre-shipment Agri Business Group, to spearhead the
initiative to promote and support Agri-exports. The Group handles projects and export
transactions in the agricultural sector for financing.
 Small and Medium Enterprise: The group handles credit proposals from SMEs under
various lending programmes of the Bank.

EXIM-FUNCTIONS
 Export Services Group offers variety of advisory and value-
added information services aimed at investment promotion.
 Export Marketing Services Bank offers assistance to Indian
companies, to enable them establish their products in overseas
markets.
 The idea behind this service is to promote Indian export.
Export Marketing Services covers wide range of export
oriented companies and organizations.

EXIM-FUNCTIONS
 Besides these, the Support Services groups, which include:
Research & Planning, Treasury and Accounts, Loan
Administration, Internal Audit, Management Information
Services, Information Technology, Legal, Human Resources
Management and Corporate Communications.

ECGC
 The Export Credit Guarantee Corporation of India
Limited (ECGC) is a company wholly owned by
the Government of India based in Mumbai, Maharashtra
 It is controlled by the Ministry of
Commerce. Government of India.
 It was transformed into Export Credit and
Guarantee Corporation Limited (ECGC) in 1964
and to Export Credit Guarantee Corporation of
India in 1983.

ECGC
 ECGC of India Ltd, was established in July, 1957 to strengthen
the export promotion by covering the risk of exporting on
credit
 It is managed by a Board of Directors comprising
representatives of the Government, Reserve Bank of India,
banking, insurance and exporting community.
 ECGC is the fifth largest credit insurer of the world in terms of
coverage of national exports.

NEED FOR EXPORT CREDIT INSURANCE
 An outbreak of war or civil war may block or delay payment for goods
exported.
 Economic difficulties or balance of payment problems may lead a
country to impose restrictions on either import of certain goods or on
transfer of payments for goods imported.
 The commercial risks of a foreign buyer going bankrupt or losing his
capacity to pay

FUNCTIONS OF ECGC
 Provides a range of credit risk insurance covers to exporters
against loss in export of goods and services.
 Offers guarantees to banks and financial institutions to enable
exporters to obtain better facilities from them.
 Provides Overseas Investment Insurance to Indian companies
investing in joint ventures abroad in the form of equity or loan.

FUNCTIONS OF ECGC
 Offers insurance protection to exporters against payment risks
 Provides guidance in export-related activities
 Makes available information on different countries with its own
credit ratings
 Makes it easy to obtain export finance from banks/financial
institutions
 Assists exporters in recovering bad debts
 Provides information on credit-worthiness of overseas buyers

IBM
UNIT V

EXPORT PROCEDURES
Preliminaries
Offer and
Receipt of
confirmed
orders
Production
and clearance
of the
products for
exports
Shipment
Negotiation
of Documents
and
realization of
export
proceeds
Obtaining
various
export
incentives

PRELIMINARIES
 Importer-Exporter Code Number (IEC Number): License to be obtained from
regional licensing authorities.
 Membership in certain bodies: Membership in bodies like Export promotion
councils, India trade promotion organization etc.,
 Registration: Register with Export promotion councils (EPC), Sales tax authorities
etc.,

INQUIRY,OFFER AND RECEIPT OF
CONFIRMED ORDERS
 Inquiry is the request made by a prospective importer regarding his wish to import
certain goods.
 Offer is a proposal submitted by a exporter expressing his intention to export
certain goods.
 Exporter makes an offer in the form of ‘Proforma Invoice’

PROFORMA INVOICE
Proforma Invoice includes the following:
 Name of the buyer: Complete details of buyer/importer
 Description of goods: Technical, chemical and physical features of
goods.
 Price: Unit wise and total price of the goods in internationally
accepted currencies or mutually agreed currencies.
 The forms used should be f.o.b., c and c.i.f ., f (Cost, Insurance and
Freight (CIF) vs. Free On Board (FOB)) or internationally accepted
form.

PROFORMA INVOICE
Conditions of Sale:
 Validity: The period for which the invoice is valid
 Escalation Clause: Prices may increase before delivery of the goods due to
increase in cost of inputs. Hence, seller may include escalation clause
 Delivery Schedule: Realistic delivery schedule should be indicated.
 Inspection: Authority who will conduct inspection should be indicated.

PROFORMA INVOICE
Payment Terms: Letter of credit, bill of exchange should be included.
Other obligations:
 Post sales service to be provided
 Providing spare parts
 Warranty/guarantee for equipment/technology
Confirmed Order: The buyer sends the confirmed order to the exporter by signing
the duplicate copy of the invoice which becomes the confirmed order

PROFORMA INVOICE
Export License: The exporter has to obtain the export license
from the authorities concerned if the items to be exported
requires license.
Procuring Finance: If the exporter does not have the required
finance then he should arrange it from various sources.

PRODUCTION/PROCUREMENT OF GOODS
 The exporting house after receiving the order should produce the goods as
specified in the order.
Packing and Marketing:
 The exporter should arrange for packing and marking of goods as per
International standards.
 Bureau of Indian Standards
 British Standard Packing Code
 Exporters Encyclopedia
 International Cargo-Handling Co-ordination Association.

PRODUCTION/PROCUREMENT OF GOODS
Quality control and pre-shipment inspection:
 Quality and pre-shipment inspection by Export Inspection Council
Excise Duty Rebates:
 Goods meant for export are exempted from imposition of excise
duty. Rebate on duty is provided on submission of the following
forms:
 AR-4 forms

SHIPMENT
 Exporter has to contact shipping companies for space after
getting the order confirmed.
 Shipping advise refers to mere information about availability
of space and there is no obligation to accept the cargo
 Shipping order issuance creates obligation to accept the cargo

CUSTOMS CLEARANCE
 The exporter has to get custom clearance of the goods before they are
loaded on the ship. The list of documents to be furnished includes the
following:
 Proforma Invoice
 GR-I Form (Duplicate)
 AR-4 Form (Duplicate)
 Export License
 Letter of credit covering export order, export contract or order in
original
 Certificate of Inspection

CUSTOMS CLEARANCE
Form of Declaration (in duplicate)
Shipping bill (Five copies)
Quality control Inspection certificate(If required)
Original contract wherever available
Packing list
Letter of registration certificate (If applicable)

CUSTOMS CLEARANCE
 GR-I Form:
 Exchange control document
 Proceeds of sale to be realized in 180 days from date of shipment.
 Not necessary in case of export to Bhutan and Nepal
 AR-4 Form:
 Every manufacturer for clearance of excisable goods files an
application AR-4 from his factory for export
 The clearances can be 'under claim for rebate of duty' or 'under bond.'
 The goods can be examined and sealed at the factory by a central
excise officer having jurisdiction over the factory. After shipment of
goods, the customs officer endorses AR-4 form

CUSTOMS CLEARANCE
 Export License: The exporter has to obtain the export license
from the authorities concerned if the items to be exported
requires license.
 Letter of Credit:A letter from a bank guaranteeing that a
buyer's payment to a seller will be received on time and for the
correct amount. In the event that the buyer is unable to make
payment on the purchase, the bank will be required to cover
the full or remaining amount of the purchase.

CUSTOMS CLEARANCE
 Certificate of Inspection: Certifying or non certifying about the
fulfillment of National export standards
 Form of Declaration:
Customs form completed and submitted by an exporter at the port
of export
(1) to provide information on amount, nature,
and value of exports to the
statistical office for compilation of foreign trade data,

CUSTOMS CLEARANCE
 Shipping bill: The bill contains the following
Name of the exporter
Description and Quantity of goods
Value of goods
Number of packages and markings on them
Amount of drawback claimed
Port of Destination
Names of the ship and its agentVersatile Business School, Egmore, Chennai - 600 008

CUSTOMS CLEARANCE
 Carting Order: Once the good for exports is ready and shipping order is
available, the superintendent of the concerned port trust gives permission
for physical movement of goods into port.
 Customs Examination of Cargo at Dock: Checking of products to be
exported at the dock by Customs Appraiser
 Let Ship:
 Let ship order authorizes shipping company to accept the cargo
 Issued by the preventive officer of the customs department before
loading takes place.

CUSTOMS CLEARANCE
 Mate’s Receipt: The captain of the ship certifies the
loading of the cargo by issuing document called ‘Mate’s
Receipt’ to the Port Superintendent.
 Port Trust Dues: Port trust authorities issues ‘Bill of
Lading’ to the exporter after receiving ‘Mate’s receipt’ from
the captain.
 Bill of Lading: Agent collects ‘Mate’s Receipt’ and gives to
port trust authorities and in turn collects ‘Bill of Lading’.

CUSTOMS CLEARANCE
 Exporter’s agent provides the following documents in the final
stage:
Copy of Invoice attested by customs
Copy of Shipping bill
Export promotion copy of shipping bill
Bill of lading
Original letter of credit
Customer's order or contract
Duplicate copy of AR-4 Form

NEGOTIATION OF DOCUMENTS AND REALIZATION
OF EXPORT PROCEEDS
 The exporter submits relevant documents to his banker for getting payment of goods exported.
 Submission of documents and process of getting payment through bank is called ‘Negotiating the
Documents’.
 These documents are called as ‘Negotiable set of documents’
 Documents include:
 Bill of lading
 Commercial Invoice with packing slip and bill of exchange
 Certificate of origin
 GR-I Form
 Marine Insurance Policy
 Letter of Credit

NEGOTIATION OF DOCUMENTS AND
REALIZATION OF EXPORT PROCEEDS
 Government of India appointed a committee to recommend on the documentation in
export. Standardized documents suggested are as follows and the system is called as
‘Aligned Documentation System’
Invoice
Exchange control Declaration (GR Form)
Shipping Bill
Bill of Lading

EXPORT DOCUMENTATION
Export incentives include,
 Duty Drawback: Eligible to get back excise duty paid on all raw materials, components
and consumables used in production of goods exported.
 Excise Duty Refund: Eligible for refund of paid at the beginning. Bonds can also be
executed without making payment.

SHIPPING BY OTHER MODES OF TRANSPORT
Shipping By Air
Mostly perishable
goods and goods
of very less weight
Shipping by Post
Goods of less
weight are
exported.
Shipping by Land
Similar to Export
by sea

International Business Management full notes

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