International Business

1. International BusinessInternational Business
By KMIBy KMI

2. International business is business whoseInternational business is business whose
activities are carried out across nationalactivities are carried out across national
bordersborders
Foreign BusinessForeign Business
Multi-domestic CompanyMulti-domestic Company
Global CompanyGlobal Company
International CompanyInternational Company
By KMI

3. Core Capabilities of Global BusinessCore Capabilities of Global Business
► In-depth knowledgeIn-depth knowledge of the organisation’sof the organisation’s
products/services, their strengths and special customerproducts/services, their strengths and special customer
service skills.service skills.
► Highly developedHighly developed marketing skillsmarketing skills by way of insight ofby way of insight of
consumer behavior, market segments, share of theconsumer behavior, market segments, share of the
market and distributions channels.market and distributions channels.
► Capacity for continuous innovation and researchCapacity for continuous innovation and research which iswhich is
a prerequisite for maintaining and consolidating of theira prerequisite for maintaining and consolidating of their
global leadership status in a highly competitive businessglobal leadership status in a highly competitive business
environment.environment.
► Creation and retention of a pool of talented andCreation and retention of a pool of talented and
motivated management teammotivated management team and work force alignedand work force aligned
with the strategic objectives of the organisation.with the strategic objectives of the organisation.
► Financial resourcefulnessFinancial resourcefulness with the capability to utilize thewith the capability to utilize the
funds effectively with sound planning and controlfunds effectively with sound planning and control
structures.structures. By KMI

4. Developing the Global BusinessDeveloping the Global Business
 ExportingExporting using foreign intermediaries. It is low riskusing foreign intermediaries. It is low risk
and ethnocentric.and ethnocentric.
 Overseas branchesOverseas branches is still ethnocentric.is still ethnocentric.
 Overseas productionOverseas production is still ethnocentricis still ethnocentric
 InsiderisationInsiderisation is a shift to polycentrism Theis a shift to polycentrism The
company is a multinational.company is a multinational.
 The global companyThe global company takes a world view whiletakes a world view while
recognizing total differences: it has a geocentricrecognizing total differences: it has a geocentric
orientation. It integrates learning, skills andorientation. It integrates learning, skills and
competences to achieve global efficiencies whilecompetences to achieve global efficiencies while
retaining local responsiveness.retaining local responsiveness.
By KMI

5. Management OrientationsManagement Orientations
►EthnocentricEthnocentric oriented companies followoriented companies follow
policies that are primarily home-grown andpolicies that are primarily home-grown and
the management assumes that thethe management assumes that the
practices which work in the headquarters orpractices which work in the headquarters or
in the home country are most suitable andin the home country are most suitable and
should be adopted and pursued in all theirshould be adopted and pursued in all their
international operations.international operations.
By KMI

6. Management OrientationsManagement Orientations
► PolycentricPolycentric oriented companies follow theoriented companies follow the
philosophy that the organization located in thephilosophy that the organization located in the
host country should be staffed by localhost country should be staffed by local
individuals to the maximum extent as they areindividuals to the maximum extent as they are
expected to understand more closely theirexpected to understand more closely their
culture, work ethics and markets.culture, work ethics and markets.
Consequently, subsidiaries in various countriesConsequently, subsidiaries in various countries
operate under the directions of locals and areoperate under the directions of locals and are
controlled by the parent company through well-controlled by the parent company through well-
conceived financial reporting systems.conceived financial reporting systems.
By KMI

7. Management OrientationsManagement Orientations
► Geocentric orientationGeocentric orientation is an approach inis an approach in
which the management considers that awhich the management considers that a
worldwide focus, both at the headquarters andworldwide focus, both at the headquarters and
also in the host countries, offers optimalalso in the host countries, offers optimal
advantages. The best people, regardless ofadvantages. The best people, regardless of
their home or host country origin, should betheir home or host country origin, should be
used to solve company problems. Major issuesused to solve company problems. Major issues
of headquarters and subsidiaries, such asof headquarters and subsidiaries, such as
raising of funds, building of plants, researchraising of funds, building of plants, research
and development are viewed in the entireand development are viewed in the entire
global perspective.global perspective.
By KMI

8. Reasons for rapid globalizationReasons for rapid globalization
► Adoption of free market economic policiesAdoption of free market economic policies byby
increasing number of countries has createdincreasing number of countries has created
opportunities for capital investment and significantopportunities for capital investment and significant
economic growth.economic growth.
► Rapid improvement in communicationsRapid improvement in communications havehave
reduced costs of transportation and facilitated quickreduced costs of transportation and facilitated quick
movement of goods, services and financialmovement of goods, services and financial
resources.resources.
► Technological advancesTechnological advances have made it possible tohave made it possible to
manage and control business operations in differentmanage and control business operations in different
countries through electronic mail, internet andcountries through electronic mail, internet and
frequent travel by key management and otherfrequent travel by key management and other
professional staff.professional staff.
By KMI

9. Reasons for rapid globalizationReasons for rapid globalization
►The development of the emerging marketsThe development of the emerging markets
has expanded thehas expanded the demand for products anddemand for products and
services worldwide.services worldwide.
►Global companies seek competitiveGlobal companies seek competitive
advantagesadvantages by locating production facilitiesby locating production facilities
of components and parts in those countriesof components and parts in those countries
where the costs are the lowest.where the costs are the lowest.
By KMI

10. Expansion of Global MarketsExpansion of Global Markets
►Specialization of productsSpecialization of products
►Reduction in tariff barriers andReduction in tariff barriers and
relaxation of direct foreignrelaxation of direct foreign
investment regulationsinvestment regulations
►Economies of ScaleEconomies of Scale
►High R&D expenditures on ProductsHigh R&D expenditures on Products
►Reduction in Communication andReduction in Communication and
Transportation CostsTransportation Costs
By KMI

11. ExportingExporting
Goods are made at home but sold abroad. ItGoods are made at home but sold abroad. It
is the easiest, cheapest and mostis the easiest, cheapest and most
commonly used route into a new foreigncommonly used route into a new foreign
market.market.
By KMI

12. AdvantagesAdvantages
► Exporters can concentrate production in aExporters can concentrate production in a
single location, giving economies of scale andsingle location, giving economies of scale and
consistency of product quality.consistency of product quality.
► Firms lacking experience can try internationalFirms lacking experience can try international
marketing on a small scale.marketing on a small scale.
► Firms can test their international marketingFirms can test their international marketing
plans and strategies before risking investmentplans and strategies before risking investment
in overseas operations.in overseas operations.
► Exporting minimizes operating costs,Exporting minimizes operating costs,
administrative overheads and personneladministrative overheads and personnel
requirements.requirements.
By KMI

13. Indirect ExportsIndirect Exports
► Indirect exports is where a firm’s goods areIndirect exports is where a firm’s goods are
sold abroad by other organizations who cansold abroad by other organizations who can
offer greater market knowledge.offer greater market knowledge.
► Export houses are firms which facilitateExport houses are firms which facilitate
exporting on behalf of the producer. Usually theexporting on behalf of the producer. Usually the
producer has little control over the market andproducer has little control over the market and
the marketing effort.the marketing effort.
► Specialist export management firms performSpecialist export management firms perform
the same functions as an in-house exportthe same functions as an in-house export
department but are normally remunerated bydepartment but are normally remunerated by
way of commission.way of commission.
By KMI

14. Direct ExportsDirect Exports
► Direct exporting occurs where the producingDirect exporting occurs where the producing
organization itself performs the export tasks ratherorganization itself performs the export tasks rather
than using an intermediary. Sales are made directlythan using an intermediary. Sales are made directly
to customers overseas who may be the wholesalers,to customers overseas who may be the wholesalers,
retailers or final users.retailers or final users.
► Sales to final user. Typical customers includeSales to final user. Typical customers include
industrial users, governments or mail orderindustrial users, governments or mail order
customers.customers.
► Company branch offices abroad. A firm canCompany branch offices abroad. A firm can
establish its own office in a foreign market for theestablish its own office in a foreign market for the
purpose of marketing and distribution as this givepurpose of marketing and distribution as this give
greater control.greater control.
By KMI

15. LicensingLicensing
LicensingLicensing is a technique of entering ais a technique of entering a
specific market in which the licensor entersspecific market in which the licensor enters
into an agreement with a licensee, byinto an agreement with a licensee, by
offering the licensee the right to use theoffering the licensee the right to use the
manufacturing process, trade mark, patent,manufacturing process, trade mark, patent,
trade secret or any other item of value for atrade secret or any other item of value for a
fee or royalty.fee or royalty.
By KMI

16. AdvantagesAdvantages
► Direct Exporting may be unattractive because ofDirect Exporting may be unattractive because of
tariffs, quotas or other import restrictions in overseastariffs, quotas or other import restrictions in overseas
markets.markets.
► Licensing may allow fairly rapid penetration ofLicensing may allow fairly rapid penetration of
overseas markets.overseas markets.
► Licensing does not require substantial financialLicensing does not require substantial financial
resources.resources.
► Political risks are reduced since the licensee is likelyPolitical risks are reduced since the licensee is likely
to be a local company.to be a local company.
► Local production may be the only feasible option inLocal production may be the only feasible option in
the case of bulky products such as cement and flatthe case of bulky products such as cement and flat
glass.glass.
By KMI

17. Advantages of Overseas ManufacturingAdvantages of Overseas Manufacturing
► The company would not have to share itsThe company would not have to share its
profits with any other entity.profits with any other entity.
► The company would not have to share itsThe company would not have to share its
technology and know-how with any foreigntechnology and know-how with any foreign
entity.entity.
► The company would not have communicationThe company would not have communication
problems which are frequently experienced inproblems which are frequently experienced in
joint venture operations.joint venture operations.
► The overseas manufacturing operations of theThe overseas manufacturing operations of the
Korean company would be fully integrated andKorean company would be fully integrated and
aligned with its overall international operations.aligned with its overall international operations.
By KMI

18. DisadvantagesDisadvantages
► The substantial amount of investment may preventThe substantial amount of investment may prevent
or discourage the company from undertaking wholly-or discourage the company from undertaking wholly-
owned overseas manufacturing operations.owned overseas manufacturing operations.
► The risks of nationalization and losses are muchThe risks of nationalization and losses are much
greater in the event the host government introducesgreater in the event the host government introduces
major changes in its policies towards foreignmajor changes in its policies towards foreign
investments.investments.
► It may be difficult to recruit suitable high-levelIt may be difficult to recruit suitable high-level
technical and management personnel in the hosttechnical and management personnel in the host
country in the absence of benefits of equitycountry in the absence of benefits of equity
ownership.ownership.
► The wholly-owned subsidiary may not be able toThe wholly-owned subsidiary may not be able to
avail the benefits of the overseas partner’s valuableavail the benefits of the overseas partner’s valuable
knowledge and expertise of the domestic conditions,knowledge and expertise of the domestic conditions,
local markets and distribution channels etc.local markets and distribution channels etc.By KMI

19. Branch OperationsBranch Operations
► If the foreign business is not expected to be profitable inIf the foreign business is not expected to be profitable in
the initial years and therefore the losses of the subsidiarythe initial years and therefore the losses of the subsidiary
company can have a negative effect on the image of thecompany can have a negative effect on the image of the
MNC.MNC.
► If the legal and accounting formalities of the branchIf the legal and accounting formalities of the branch
operations are more simple vis-à-vis those involved in aoperations are more simple vis-à-vis those involved in a
subsidiary company.subsidiary company.
► If the MNC does not intend to have a long term presenceIf the MNC does not intend to have a long term presence
in the foreign country, it would prefer to establish branchin the foreign country, it would prefer to establish branch
operations.operations.
► If the amount of investment involved in the foreignIf the amount of investment involved in the foreign
country is of a nominal amount and it may be advisablecountry is of a nominal amount and it may be advisable
to set up branch operations instead of a subsidiaryto set up branch operations instead of a subsidiary
company.company.
► If it is advisable to have a low operating profile toIf it is advisable to have a low operating profile to
achieve the business objectives.achieve the business objectives.By KMI

20. International Trade ExpansionInternational Trade Expansion
► Reduction in tariffs, quotas, exchange controls andReduction in tariffs, quotas, exchange controls and
liberalization of trade and investments have resulted inliberalization of trade and investments have resulted in
making the imported products competitive in localmaking the imported products competitive in local
markets.markets.
► Phenomenal improvement in communication andPhenomenal improvement in communication and
transportation technologies have resulted in rapidtransportation technologies have resulted in rapid
movement of goods and consequent reduction inmovement of goods and consequent reduction in
transportation costs.transportation costs.
► Development of free-trade zones such as EuropeanDevelopment of free-trade zones such as European
Union and North American Free Trade Agreement haveUnion and North American Free Trade Agreement have
resulted in increase in international trade owing toresulted in increase in international trade owing to
preferential movement of goods and dismantling of highpreferential movement of goods and dismantling of high
tariff regimes.tariff regimes.
By KMI

21. International Trade ExpansionInternational Trade Expansion
► Global standardization and worldwide brand building with localGlobal standardization and worldwide brand building with local
adaption have created significant market opportunities inadaption have created significant market opportunities in
different countries.different countries.
► Substantial expenditures have been incurred on R&D andSubstantial expenditures have been incurred on R&D and
standardization of manufacturing and marketing techniques bystandardization of manufacturing and marketing techniques by
global companies in industries such as manufacturing ofglobal companies in industries such as manufacturing of
pharmaceutical products, energy development,pharmaceutical products, energy development,
telecommunications, fast food, etc and such companies seektelecommunications, fast food, etc and such companies seek
opportunities to apportion these costs to markets in differentopportunities to apportion these costs to markets in different
countries.countries.
► Important raw material exporting countries now have a growingImportant raw material exporting countries now have a growing
class of affluent citizens and foreign residents which haveclass of affluent citizens and foreign residents which have
resulted in the creation of substantial markets for import ofresulted in the creation of substantial markets for import of
vehicles, construction materials, equipment, edible products andvehicles, construction materials, equipment, edible products and
luxury goods.luxury goods.
By KMI

22. Characteristics of MNCsCharacteristics of MNCs
►Large sizeLarge size
►Multi country operationMulti country operation
►Various objectivesVarious objectives
►Various environmentsVarious environments
►Centralized ownership and controlCentralized ownership and control
►High efficiencyHigh efficiency
By KMI

23. Success Factors for MNCsSuccess Factors for MNCs
►Strategic managementStrategic management
►Global leadership and knowledge of opsGlobal leadership and knowledge of ops
►Adapt products to global marketsAdapt products to global markets
►Trademarks and brands recognized globallyTrademarks and brands recognized globally
►Effective distribution systemsEffective distribution systems
►Financial soundFinancial sound
By KMI

24. MNCs ObjectivesMNCs Objectives
►(i) Economies of scale(i) Economies of scale
►(ii) To recover R & D costs(ii) To recover R & D costs
►(iii) To gain access to wide global markets(iii) To gain access to wide global markets
►(iv) To seize the advantages offered by(iv) To seize the advantages offered by
growing economies growing economies
►(v) To enter into widely diversified markets (v) To enter into widely diversified markets
►(vi) To derive maximum advantages of(vi) To derive maximum advantages of
access to cheap sources of labour, rawaccess to cheap sources of labour, raw
materials and energy.materials and energy.
By KMI

25. Centralized Cash ManagementCentralized Cash Management
►Security and ConvenienceSecurity and Convenience
►Availability of InformationAvailability of Information
►Holding of Minimum Surplus FundsHolding of Minimum Surplus Funds
for Precautionary Purposesfor Precautionary Purposes
►Reduction in Interest CostsReduction in Interest Costs
►Acquisition of Services of CompetentAcquisition of Services of Competent
PersonnelPersonnel
By KMI

26. MNC FinancingMNC Financing
► to obtain financing at overall lower costs,to obtain financing at overall lower costs,
comprising of interest costs and impact of anycomprising of interest costs and impact of any
adverse fluctuations in exchange rates.adverse fluctuations in exchange rates.
► because of liberalization of foreign exchangebecause of liberalization of foreign exchange
regulations which allow easy and freeregulations which allow easy and free
movement of capital in the important financialmovement of capital in the important financial
centers.centers.
► because financing can be obtainedbecause financing can be obtained
conveniently in different countries in whichconveniently in different countries in which
MNCs conduct significant business operations.MNCs conduct significant business operations.
By KMI

27. MNC FinancingMNC Financing
►fund raising in certain countries is easierfund raising in certain countries is easier
because the debt and equity markets therebecause the debt and equity markets there
are broad-based and have greater marketare broad-based and have greater market
depth.depth.
►to seize strategic advantages of theirto seize strategic advantages of their
presence and relationships in importantpresence and relationships in important
financial centers in many countries.financial centers in many countries.
By KMI

28. MNC Control Policies forMNC Control Policies for
SubsidiariesSubsidiaries
►Large size of the subsidiary companies andLarge size of the subsidiary companies and
Substantial Capital InvestmentSubstantial Capital Investment
►Access to technology and manufacturingAccess to technology and manufacturing
processprocess
►Operations of the subsidiary companies areOperations of the subsidiary companies are
closely integrated and inter-dependentclosely integrated and inter-dependent
►StringentStringent
By KMI

29. Difficulties of CentralizedDifficulties of Centralized
Financial PolicyFinancial Policy
►centralized financial policies are:centralized financial policies are:
►The staff at the parent company would notThe staff at the parent company would not
be fully conversant with the local rules andbe fully conversant with the local rules and
regulations in the host country.regulations in the host country.
►The operations of the subsidiary may sufferThe operations of the subsidiary may suffer
due to delays in the decisions by the parentdue to delays in the decisions by the parent
company resulting in higher costs andcompany resulting in higher costs and
inefficiencies.inefficiencies.
By KMI

30. Difficulties of CentralizedDifficulties of Centralized
Financial PolicyFinancial Policy
► The executives at the parent company wouldThe executives at the parent company would
be overburdened as they would have to takebe overburdened as they would have to take
numerous decisions pertaining to thenumerous decisions pertaining to the
subsidiary.subsidiary.
► The morale and initiative of the local staff mayThe morale and initiative of the local staff may
be affected as they would have to obtainbe affected as they would have to obtain
approvals for decisions which can be takenapprovals for decisions which can be taken
here readily by responsible officers.here readily by responsible officers.
► The overall costs would increase considerablyThe overall costs would increase considerably
due to duplication of work and additionaldue to duplication of work and additional
traveling and incidental costs.traveling and incidental costs.
By KMI

31. MNC Financial DecisionsMNC Financial Decisions
► Should the parent company invest in the subsidiaryShould the parent company invest in the subsidiary
as a wholly owned company or should the parentas a wholly owned company or should the parent
company retain only a majority interest in thecompany retain only a majority interest in the
subsidiary?subsidiary?
► If the parent company decides to retain only aIf the parent company decides to retain only a
majority interest, then should the subsidiary raisemajority interest, then should the subsidiary raise
equity through a resourceful local investor in theequity through a resourceful local investor in the
host country or should it make a public offering of itshost country or should it make a public offering of its
shares?shares?
► Should the subsidiary be financed substantiallyShould the subsidiary be financed substantially
through equity investment or should it raise debtthrough equity investment or should it raise debt
financing to meet a large proportion of its capitalfinancing to meet a large proportion of its capital
costs?costs?
By KMI

32. MNC Financial DecisionsMNC Financial Decisions
► Should the subsidiary make the borrowings in theShould the subsidiary make the borrowings in the
local currency of the host country or in any otherlocal currency of the host country or in any other
currency to avail benefits of exchange fluctuations?currency to avail benefits of exchange fluctuations?
► Should the subsidiary distribute a large portion of itsShould the subsidiary distribute a large portion of its
profits as high dividends or should it retain aprofits as high dividends or should it retain a
substantial portion of its earnings to meet the cost ofsubstantial portion of its earnings to meet the cost of
its expansion strategy?its expansion strategy?
► Should the subsidiary raise the bulk of its workingShould the subsidiary raise the bulk of its working
capital requirements through borrowings from bankscapital requirements through borrowings from banks
or should it place heavy reliance on trade credit?or should it place heavy reliance on trade credit?
By KMI

33. Difficulties faced by Parent CoDifficulties faced by Parent Co
►Physical and Cultural DistancesPhysical and Cultural Distances
The geographical and cultural distancesThe geographical and cultural distances
separating the parent company increasesseparating the parent company increases
the duration, expenses and barriers inthe duration, expenses and barriers in
communications between the headquarterscommunications between the headquarters
and their foreign subsidiary companies andand their foreign subsidiary companies and
creates difficulties in the planning andcreates difficulties in the planning and
control process.control process.
By KMI

34. Difficulties faced by Parent CoDifficulties faced by Parent Co
Diverse Economic ConditionsDiverse Economic Conditions
The parent company has to adjustThe parent company has to adjust
operations to the situations prevailing in theoperations to the situations prevailing in the
countries in which the subsidiary companiescountries in which the subsidiary companies
are located. Differences in size of theare located. Differences in size of the
market, nature of competition, type of themarket, nature of competition, type of the
products, labor costs and currencyproducts, labor costs and currency
implications render the tasks of settingimplications render the tasks of setting
standards and evaluating performance ofstandards and evaluating performance of
foreign subsidiaries extremely complicated.foreign subsidiaries extremely complicated.By KMI

35. ►Uncontrollable FactorsUncontrollable Factors
Planning and control is effective only inPlanning and control is effective only in
situations when timely corrective actionssituations when timely corrective actions
can be taken in the event of deviations incan be taken in the event of deviations in
performances. Corrective action may notperformances. Corrective action may not
produce positive results because manyproduce positive results because many
foreign subsidiaries operate in conditionsforeign subsidiaries operate in conditions
which are very different from those of thewhich are very different from those of the
parent company.parent company.
By KMI

36. Entry Barriers for NewEntry Barriers for New
EntrantsEntrants
►(i) It may be difficult to achieve economies(i) It may be difficult to achieve economies
of scale quickly due to technical/operatingof scale quickly due to technical/operating
constraints with the result that the newconstraints with the result that the new
entrants may sustain substantial losses forentrants may sustain substantial losses for
a considerable period.a considerable period.
►(ii) The technology and specialised know-(ii) The technology and specialised know-
how for manufacture of the products may behow for manufacture of the products may be
held closely by a few suppliers and it mayheld closely by a few suppliers and it may
be difficult or too expensive for new entrantsbe difficult or too expensive for new entrants
to gain access to such technology.to gain access to such technology.By KMI

37. Entry Barriers for NewEntry Barriers for New
EntrantsEntrants
►(iii) The existing suppliers may have deeply-(iii) The existing suppliers may have deeply-
entrenched brands and enjoy strongentrenched brands and enjoy strong
customer loyalty which may make it difficultcustomer loyalty which may make it difficult
for the new entrants to compete with them.for the new entrants to compete with them.
►(iv) The existing suppliers may be financially(iv) The existing suppliers may be financially
resourceful and enter into price wars toresourceful and enter into price wars to
deter new entrants.deter new entrants.
By KMI

38. Entry Barriers for NewEntry Barriers for New
EntrantsEntrants
► (v) The initial capital requirements may be too large(v) The initial capital requirements may be too large
and beyond the capacity of potential new entrants.and beyond the capacity of potential new entrants.
► (vi) It may be difficult for new entrants to have(vi) It may be difficult for new entrants to have
access to sources of raw materials as the existingaccess to sources of raw materials as the existing
manufacturers may have highly favourablemanufacturers may have highly favourable
ownership/lease rights of these sources.ownership/lease rights of these sources.
► (vii) The existing suppliers may have well-(vii) The existing suppliers may have well-
established relations with knowledgeable andestablished relations with knowledgeable and
resourceful distribution channels and the newresourceful distribution channels and the new
entrants may find it difficult to develop newentrants may find it difficult to develop new
marketing channels for distribution of their products.marketing channels for distribution of their products.
► (viii) The government regulatory policies may(viii) The government regulatory policies may
prohibit new entrants from establishing new units toprohibit new entrants from establishing new units to
provide protection to state-owned industries.provide protection to state-owned industries.By KMI

39. Exit BarriersExit Barriers
►i. Substantial Investment in Highlyi. Substantial Investment in Highly
Specialized Fixed Assets:Specialized Fixed Assets:
►ii. High Redundancy Costs:ii. High Redundancy Costs:
►iii. Ancillary Costs of Closure ofiii. Ancillary Costs of Closure of
Business:Business:
►iv. High Fixed Operating Costs :iv. High Fixed Operating Costs :
By KMI

40. FDIFDI
► (i) Expansion of global markets and competition to(i) Expansion of global markets and competition to
secure business globally require firms to operatesecure business globally require firms to operate
simultaneously in several countries by making directsimultaneously in several countries by making direct
foreign investments in the host countries.foreign investments in the host countries.
► (ii) Foreign direct investments allow the firms to gain(ii) Foreign direct investments allow the firms to gain
first-hand advantages of the prevailing and emergingfirst-hand advantages of the prevailing and emerging
business opportunities in the host countries.business opportunities in the host countries.
► (iii) Foreign direct investments enable firms to(iii) Foreign direct investments enable firms to
overcome barriers to trade and operate abroad asovercome barriers to trade and operate abroad as
domestic entities without the unfavourable impact ofdomestic entities without the unfavourable impact of
customs duties, tariffs and other import restrictions.customs duties, tariffs and other import restrictions.
By KMI

41. ►(iv) Foreign direct investments are(iv) Foreign direct investments are
channeled in business opportunities to seizechanneled in business opportunities to seize
advantages of low costs of labour, rawadvantages of low costs of labour, raw
materials and energy in the host countriesmaterials and energy in the host countries
and ensure their uninterrupted supplies.and ensure their uninterrupted supplies.
►(v) Foreign direct investments in(v) Foreign direct investments in
manufacturing facilities in host countriesmanufacturing facilities in host countries
create a perception of locally manufacturedcreate a perception of locally manufactured
products among the buyers.products among the buyers.
By KMI

42. ►(vi) Various countries offer attractive(vi) Various countries offer attractive
incentives such as tax holidays and facilitiesincentives such as tax holidays and facilities
of special export/industrial zones toof special export/industrial zones to
companies to attract them to make foreigncompanies to attract them to make foreign
direct investments.direct investments.
By KMI

43. FDI ProblemsFDI Problems
► Poor infrastructure facilities of roads andPoor infrastructure facilities of roads and
communications.communications.
► Currency depreciation of the underdeveloped country.Currency depreciation of the underdeveloped country.
► High costs of energy inputs and their unreliableHigh costs of energy inputs and their unreliable
availability.availability.
► Absence of laws relating to patents, copyrights andAbsence of laws relating to patents, copyrights and
intellectual properties.intellectual properties.
► High Risk of political instability in the country.High Risk of political instability in the country.
► Widespread corruption in the government and otherWidespread corruption in the government and other
social sectors.social sectors.
► Lack of education and non-availability of a skilled andLack of education and non-availability of a skilled and
competent work force.competent work force.
► Absence of generally accepted accounting principles.Absence of generally accepted accounting principles.
► Uncertain long-term economic and financial policies.Uncertain long-term economic and financial policies.By KMI

44. Transfer PricingTransfer Pricing
International transfer pricing is the price atInternational transfer pricing is the price at
which products or services are transactedwhich products or services are transacted
between units of the same company whichbetween units of the same company which
are located in different countries.are located in different countries.
By KMI

45. AdvantagesAdvantages
► The individual units would achieve high level ofThe individual units would achieve high level of
efficiency as they can negotiate mostefficiency as they can negotiate most
favourable market-based prices as if they werefavourable market-based prices as if they were
independent units.independent units.
► The selling unit would make efforts to improveThe selling unit would make efforts to improve
the quality of the products in accordance withthe quality of the products in accordance with
the requirements of the purchasing unit.the requirements of the purchasing unit.
► The performance of the individual units can beThe performance of the individual units can be
evaluated more objectively.evaluated more objectively.
By KMI

46. DisadvantagesDisadvantages
►Market price may be temporaryMarket price may be temporary
►May act as a disincentive to utilize overMay act as a disincentive to utilize over
capacitycapacity
►Many products do not have equivalentMany products do not have equivalent
market pricesmarket prices
By KMI

47. ProtectionismProtectionism
►The Governments in developing countriesThe Governments in developing countries
may take the following policy decisions tomay take the following policy decisions to
protect their interests in the face of threatsprotect their interests in the face of threats
from global companies:from global companies:
►(i) Impose quotas which would prescribe(i) Impose quotas which would prescribe
limits on the quantities and values of rawlimits on the quantities and values of raw
materials that the global company maymaterials that the global company may
import from its affiliated/parent companies.import from its affiliated/parent companies.
By KMI

48. ► (ii) An import tariff structure may be imposed(ii) An import tariff structure may be imposed
which may make the imported goodswhich may make the imported goods
expensive and enable the domesticexpensive and enable the domestic
manufacturers to compete in the local market.manufacturers to compete in the local market.
► (iii) The government may place restrictions on(iii) The government may place restrictions on
the ability of global companies to acquirethe ability of global companies to acquire
domestic companies, especially those whichdomestic companies, especially those which
are engaged in business of a sensitive natureare engaged in business of a sensitive nature
such as defense, utilities, etc.such as defense, utilities, etc.
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49. ►(iv) The government may impose(iv) The government may impose
restrictions on the maximum per cent ofrestrictions on the maximum per cent of
shares that a global company can hold in ashares that a global company can hold in a
domestic business entity.domestic business entity.
►(v) Legal standards of safety and quality of(v) Legal standards of safety and quality of
imported goods may be imposed to preventimported goods may be imposed to prevent
global companies from importing goodsglobal companies from importing goods
which are considered to be of awhich are considered to be of a
substandard or inferior quality.substandard or inferior quality.
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50. ►(vi) Impose stringent conditions of deletion(vi) Impose stringent conditions of deletion
programs.programs.
►(vii) Stipulate that a certain proportion of the(vii) Stipulate that a certain proportion of the
local personnel should be hired by thelocal personnel should be hired by the
global company.global company.
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51. Political RiskPolitical Risk
Domestic InstabilityDomestic Instability
Foreign ConflictForeign Conflict
Political ClimatePolitical Climate
Economic CultureEconomic Culture
Level of CorruptionLevel of Corruption
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52. Political Risk EvaluationPolitical Risk Evaluation
►(i) The assets may be nationalized or(i) The assets may be nationalized or
expropriated by the government of the hostexpropriated by the government of the host
country.country.
►(ii) The country may impose stringent(ii) The country may impose stringent
exchange control restrictions which wouldexchange control restrictions which would
make it difficult to repatriate the profits andmake it difficult to repatriate the profits and
investments.investments.
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53. Political Risk EvaluationPolitical Risk Evaluation
►(iii) The country may face domestic(iii) The country may face domestic
instability such as revolution, social andinstability such as revolution, social and
political unrest and terrorist activities whichpolitical unrest and terrorist activities which
would be detrimental to the interests of thewould be detrimental to the interests of the
company.company.
►(iv) The country may be involved in conflict,(iv) The country may be involved in conflict,
disputes and war with other countries whichdisputes and war with other countries which
would cause disruptions in business.would cause disruptions in business.
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54. Political Risk EvaluationPolitical Risk Evaluation
► (v) Deterioration of relationships between the(v) Deterioration of relationships between the
investor country and the country in which theinvestor country and the country in which the
investment is proposed would pose difficultiesinvestment is proposed would pose difficulties
in the business operations of the company.in the business operations of the company.
► (vi) Frequent changes in the government with(vi) Frequent changes in the government with
far reaching shifts in its policies.far reaching shifts in its policies.
► (vii) Risk of sovereign default by the host(vii) Risk of sovereign default by the host
country.country.
► (viii) Maintenance of the tolerance standards,(viii) Maintenance of the tolerance standards,
relaxation in any way could impact therelaxation in any way could impact the
demand.demand.
By KMI