International business Globalization

1. Sukanya
Ram
1
INTERNATIONALBUSINESS

2. Sukanya Ram
2
Unit 1
Introduction to
International Business

3. Sukanya Ram 3
• Introduction
• Nature
• Stages of Internationalization
• Difference between domestic and foreign companies
• Approaches of International Business
• Theories of International Business
• Competitive advantages and problems of International Business
• Modes of entering International Business
• Major Trends and legal issues in International Business
Chapter outline

4. Sukanya Ram
4
 The exchange of Goods & Services, Resources, Knowledge, & Skills, among individuals &
businesses in two or more countries.
 Transaction that are carried out across national borders to satisfy the objectives of individuals and
organization
 All Commercial transactions that take place between two or more countries.
 Private & Government
 Sales
 Investments
 Logistics
 Transportation
Introduction

5. Sukanya Ram 5
1) Accurate information
2) Timely information
3) Size of the market
4) Market segmentation
5) Potentiality of markets
6) Wider scope
7) Inter country comparative study
Nature of International business

6. Reasons for International Business
1) To achieve higher rate of profits
2) Expanding the production capacities
beyond the demand of the domestic
capacity
3) Severe competition in the home country
4) Limited home market
5) Political stability vs Political instability
6) Availability of technology and
managerial competence
7) High cost of transportation
8) Nearness to raw material
9) Availability of quality HR at less
cost
10) Liberalization and globalization
11) Increase market share
12) Tariff and import quotas
Sukanya Ram 6

7. Sukanya Ram 7
Stages of Internationalization

8. Sukanya Ram 8
• Limits its operations, Mission and vision to the national political boundaries.
• Focuses its view on the domestic market opportunities , domestic suppliers, domestic
financial companies, domestic customers etc..
• Analyze the national environment of the country, formulate the strategies to exploit
opportunities offered by the environment.
• “if it is not happening in the home country, it is not happening”
• Never thinks of growing globally. If it grows beyond its capacity – it will venture into
new domestic markets, new technology, new products etc..
• Does not select strategy for expansion / penetrating into the international markets.
Stage – 1 Domestic Company

9. Sukanya Ram 9
• Domestic companies when grew beyond their capacity think of internationalizing their
operations. They decide to exploit the opportunities outside the domestic country. They remain
ethnocentric or domestic country oriented.
• These companies focuses domestically but extends the wings to the foreign market.
• Select the strategy of locating a branch in the foreign market and extend the same domestic
operations in the foreign market – domestic product, price promotion and other business
practices.
• International company holds marketing mix constantly and extends the operations to new
countries.
• Extends the domestic country marketing mix and business model and practices to foreign
countries.
Stage – 2 International Company

10. Sukanya Ram 10
• International company’s learn to extension strategy will not work.
• International company turn into a multinational company as they start responding to the
specific needs of the different country markets regarding product, price and promotion.
• The stage of Multinational company also refereed as multidomestic company.
• As it formulates different strategies for different markets; – thus the orientation shifts from
ethnocentric to polycentric
• MNCs work like a domestic company in each country where they operate with distinct
police's and strategies suitable to the country.
Stage – 3 Multinational Company

11. Sukanya Ram 11
• A global company is the one which has either global marketing strategy or a global
strategy.
• Global company either produces in home country or in a single country and focuses on
marketing these products globally or produces the products globally and focuses on
marketing these products domestically.
Stage – 4 Global Company

12. Sukanya Ram 12
• A company that produces, markets, invests and operates across the world.
• It is an integrated global enterprise that links global resources with global markets
at profit.
• Most of the transnational companies satisfy many of the characteristics of a global
corporation.
• Ex: coca cola, pepsi – cola etc.
Stage – 5 Transnational Company

13. Sukanya Ram 13
• Characteristics – Transnational company
– Geocentric orientation
– Scanning or information acquisition
– Vision and aspiration
– Geographic scope
– Operating style
– Adaption
– Extension
– Creation through extension
– Human resource management policy
– Purchasing

14. Sukanya Ram 14
Difference Between Domestic Business &
International Business
Domestic business International business
Approach Ethnocentric approach
Regiocentric approach, polycentric approach
and geocentric approach
Geographic scope Within national boundaries Minimum 2 maximum globe
Operating style Domestic country Entire globe
Environment
Analyze and scan the domestic
environment
Analyze and scan the international
environment

15. Sukanya Ram 15
Domestic business International business
Quotas / tariffs / foreign
exchange rates
Import and export /tariffs /forex - of
various countries does not influence the
domestic business
Import and export /tariffs /forex - of
various countries directly influence the
domestic business
Culture Domestic culture Various countries culture
Export - import
procedures
Not influenced Influenced
Human resources People from same country People from different country
Markets and customer Domestic market and customers
International market and customers from
various countries

16. Sukanya Ram 16
Approaches to International Business

17. Sukanya Ram 17
• Formulates their strategies, product design and operations toward the national markets,
customers and competitors.
• Excessive production – either due to competition, change in the customer preference.
• Exports the product to foreign countries and views the foreign market as an extension
of the domestic market – like a new region.
• Export the same products designed for domestic market to foreign countries.
• This approach is suitable for companies in the early days of internationalization and
also to smaller companies.
Ethnocentric Approach

18. Sukanya Ram 18
Organisation Structure of Ethnocentric Company
Managing Director
R&D
Manager
Finance
Manager
Marketing
Manager
HR
Manager
Production
Resources
Manager
Assistant
manager for
North India
Assistant
manager for
South India
Assistant
manager for
Exports

19. Sukanya Ram 19
• Company establishes a foreign subsidiary company and decentralizes all the operations and
delegates decision – making and policy making authority to its executives.
• The company appoints executives and personnel including a chief executive who reports directly
to the MD of the company.
• Company appoints key personnel from the home country and other vacancies are filled by the
people of the host country.
• Executives of the subsidiary formulate the policies and strategies, design of the product based on
the host country environment / Customer preferences.
• Focuses on conditions of the host country in policy formulation, strategy implementation and
operations.
Polycentric Approach

20. Sukanya Ram 20
Managing
Director
R & D
Manager
Finance
manager
Production
Manager
HR
Manager
Marketing
Manger
CEO Foreign
Subsidiary
Organisation Structure of Polycentric Company

21. Sukanya Ram 21
• Company operates successfully in a foreign country.
• Plans of exporting to neighboring countries of the host country
• At this stage, foreign subsidiary considers the regional environment for formulating
the policies and strategies.
• Markets more or less the same product designed under polycentric approach in
other countries of the region, but with different market strategies.
Regiocentric Approach

22. Sukanya Ram
22
Organisation Structure of Regiocentric Company
Managing Director
R & D
Manager
Finance
manager
Production
Manager
HR
Manager
Marketing
Manger
CEO Foreign Subsidiary
(South Africa)
Marketing
Marketing Marketing

23. Sukanya Ram 23
• The entire world is like a single country for the company. They select employees
from the entire world and operate with a number of subsidiaries.
• Headquarters coordinate activities of subsidiaries.
• Each subsidiary functions – an independent company in formulating the polices,
strategies, product, design HR policies, operations etc..
Geocentric Approach

24. Sukanya Ram 24
Organisation Structure of Geocentric Company
Managing Director
R & D
Manager
Finance
manager
Production
Manager
HR
Manager
Marketing
Manger

25. Sukanya Ram
25
Approaches to International Business
Ethnocentric Approach
Under this approach, target market is own country,
Excessive production will export due to change in
customer taste, preferences
Polycentric Approach
Under this approach, the companies customizes
the marketing mix to meet the taste, performance
and needs of the customers of each international
market.

26. Sukanya Ram 26
Regio centric Approach
Under this approach, the company operating successfully in a
foreign country thinks of exporting other neighboring countries
of the host country.
At this stage, the concerned subsidiary considers the regional
environment ( such as laws, culture, policies etc.) for formulating
the policies & strategies.
Geocentric Approach
Under this approach, the company analyses the
tastes, preference and needs of the customers in
all foreign markets and then adopts a
standardized marketing mix for all the foreign
markets.

27. Sukanya Ram
27
1. Mercantilism
2. Theory of Absolute cost advantage
3. Comparative cost advantage theory
4. Comparative advantage theory with money
5. Relative Factor Endowments (or) Heckscher – Ohlin Theory
6. Product Life Cycle Theory
Theories to International Business

28. Sukanya Ram 28
• Oldest international trade theory formed during 1500 to 1800
• According to this theory the holdings of a country treasure is primarily in the form of
gold.
• Theory specifies that countries should export more than they import and receive the
value of trade surplus in the form of gold from other countries.
• Suggests that for maintaining a favourable balance of trade in the form of import of gold
for export of goods and services.
• But decay of gold standard reduced the validity of this theory and was modified in the
NEO – MERCANTILISM.
Mercantilism Theory

29. Sukanya Ram 29
• NEO – MERCANTILISM –
– Proposes that countries attempt to produce more than the demand in domestic
country in order to achieve social objectives like employment or political like
assessing the friendly countries.
• This theory was attracted on the basis of that wealth of a nation is based on its
available goods and services rather than gold.
• This theory paved way for Absolute cost advantage theory.

30. Sukanya Ram 30
• Proposed by Adam smith in 1776 - Based on the principle of division of labour
• Every country should specialize in producing those products which can be produced at less cost
and exchange these products with other products produced cheaply by other countries.
• Trade takes place b/w 2 countries when one produces one product at less cost compared to
another country.
• The country has an absolute cost advantage over the 1st country in producing in any other
product.
Absolute Cost Advantage Theory

31. Sukanya Ram 31
• Assumptions
– Trade is between two countries
– Only two countries are traded
– Free trade exists between the countries
– The only element of cost of production is labour
• Implications
– 2 countries can have more quantities of both the product
– Increases the standard of living of the people in both counties
– Inefficiency in producing certain products can be avoided
– Increases global efficiency and effectiveness
– Maximizes the global labour and resource productivity.
Absolute Cost Advantage Theory

32. Sukanya Ram 32
Criticism
1. No absolute advantage
2. Country size
3. Variety of resources
4. Transport cost
5. Scale economies
6. Absolute advantage for many products
Absolute Cost Advantage Theory

33. Sukanya Ram 34
• By Davis Ricardo – expansion of absolute cost advantage theory
• Based on relative productivity differences and incorporates the concept of opportunity cost
• States that the countries should produce and export those products which is relatively more productive than
other countries and import those products that are more relative to other countries.
• Assumptions
– There exist full employment
– No trade barriers
– Trade is fee from cost of producing
– Trade takes place between 2 countries
– Only 2 products are trades
– No cost of transportation
– Only element of production is labour
Comparative Cost Theory

34. Sukanya Ram 35
Implications
– Efficient allocation of global resources
– Maximization of the global production at the least possible cost
– Product prices becomes more or less equal among world markets and maximize the demand for
resources and products globally
– Countries specialize in products having a relative advantage, counties can buy other products
from other countries having relatively better advantage at producing them.
– It is argued that lower labour cost need not be a source of comparative advantage.
– This theory fails to consider the money value of cost of production
– It is better for the countries in specialising those products which they relatively do best and
export them
– It is better for the countries to buy other goods from countries who are relatively better at
producing them

35. Sukanya Ram 36
• Modern economy is money economy and almost all the transactions take place in the form of
money
• F W Taussig –
– comparative differences in labour cost of commodities can be translated into absolute
differences in prices without affecting the real exchange relations between products.
• It is beneficial to both the countries to use pens and Japanese audio tape recorders
Comparative Advantage With Money
Cost of Goods in Japan Cost of Goods in India
Japan (Yen) India (Yen) Japan (Rs) India (Rs)
Pens 6 4 3 2
Audio Tape
Recorders 60 100 30 50

36. Sukanya Ram 37
• Criticism of the theory
– Two countries (in reality more countries participate)
– Transportation cost (non – existence of transportation cost)
– Two products (many products are involved)
– Full employment ( unemployment )
– Economic efficiency (poor nations trade only with friendly nations)
– Division of gains ( gains shared between trading nations)
– Mobility (mobility of resources is not considered)
– Services ( comparative advantage is only with products and not services)
Comparative Advantage With Money

37. Sukanya Ram 38
• According to this theory
– If labour in abundance in relation to land and capital in a country, the price of labour
would be low and the price of land and capital would be high in that country.
– The vice versa is true in those countries where land and capital are available in
abundance in relation to labour.
– These relative labour cost would lead countries to produce the products at low cost
– Countries participate in international trade by exporting those products which they can
produce at low cost upon abundance of factors and import the other products which
they can produce comparatively at high cost.
Relative Factor Endowments (Or) Heckscher – Ohlin Theory

38. Sukanya Ram 39
• International product life cycle traces the roles of innovation, market
expansion, comparative advantage and strategic response to global rivals in
manufacturing, trade and investment decisions.
• International product life cycle consists of 4 stages
1. New product Introduction
2. Growth
3. Maturing Product
4. Decline
Product Life Cycle Theory

39. Sukanya Ram 40
Stages of Product life Cycle
– Stage 1 - New product
– Location of innovation
– Significance of innovation
– Labour as a major input
– Feedback and development
– Stage 2 - Growth
– Stage 3 – Maturity
– Stage 4 – Decline
– Suitability of the theory

40. Sukanya Ram 41
• Firms innovate new products based on needs and problems in domestic country.
• Location of Innovation
– Though produced anywhere in the world – the firm mostly locates the
manufacturing facilities in the domestic country
– To have immediate feedback, modify and develop the product accordingly to save
time and transportation cost.
• Significance of Innovation
– Innovation can be in the form of a product, manufacturing process and marketing
the product.
– LMIC have the utility of innovations by importing either technology or products
from the R&D intensive countries.
Stage 1: New Product

41. Sukanya Ram 42
• Labour as a major input
– Production process at this stage is labour intensive
– Product in this stage is improved based on customer feedback.
– Standard equipment and machinery to produce the product cannot be developed
due to frequent changes in the product design.
– Even computer manufacturing are labour intensive
• Feedback and development
– Firms manufacturing executives have to continuously get the feedback from the
customers and the production employees develop the problem continuously.

42. Sukanya Ram 43
• Increase in the sale of new product attracts the competitors
• Increased awareness of the new product in various countries particularly in advanced
countries increases the demand for the product
• Competitors at this stage concentrate mostly on the process technology rather than on
product technology.
• Technology at this stage would ne mode of labour intensive type.
• Competitors start producing the product in various foreign markets at this stage
• Original producing country would increase its exports to various countries through the
competition has emerged in certain important foreign markets where local production has
taken place.
Stage 2: Growth

43. Sukanya Ram 44
• Worldwide production increases along with demand
• Resting in decline in exports
• Increased completion – result in product standardization an cost reduction
• Lower cost of production per unit – result in exports to developing countries.
• Technology becomes standard
• producers start locating their plants in UMI counties in order to take the advantage of
lower labour cost.
• Reduces the cost of production per unit – increases the competition based cost
Stage 3: Maturity

44. Sukanya Ram 45
• Markets concentrate in less developed countries as the customers in advanced countries
shift their demand to further new product
• Production plants locate in LMI Countries
• Exports decline considerably
• Original country become net importer
• Suitability of the theory
– Consistent for certain consumer durables, synthetic materials and electronics
– Studies have found that the production movements – did not take place as predicted
in the PLC model.
Stage 4: Decline

45. Sukanya Ram 46
• Production facilities do not move to foreign countries to achieve cost reduction due to
short PLC – upon very rapid innovations
• Cost reduction had a little concern to the consumer in case of luxury products
• Exports may not be in significant volume where cost of transportation is very high
• Non cost strategies like advertising nullify the opportunity to move to foreign
countries for cost minimization
Limitations of PLC theory

46. Sukanya Ram 47
1. High living standards – countries have advantage of raw materials, human resources, natural
resources and climatic conditions in producing a particular goods – a low cost and high quality.
2. Increased socio-economic welfare – IB enhances the consumption level and economic welfare of
the people of the trading countries.
3. Wider market – IB widens the market and increases the market size. Companies need not depend
on the demand for the product in a single country or country’s taste and preferences of a single
country.
4. Reduced effects of business cycle – business cycle vary from one country to another. MNCs shift
from country – experiencing a recession to the country experiencing “boom” conditions. IB can
escape from the recessionary conditions.
Competitive Advantages of International Business

47. Sukanya Ram 48
5. Reduced Risk – commercial and political risk are reduced due to spread in different countries.
6. Large scale economics – provide the benefit of large scale economies – reduced cost of
production, availability of expertise, quality etc.
7. Potential untapped markets – provides chance of exploring and exploiting the potential markets
are untapped so far. Provides the opportunity of selling the product at a higher price than in
domestic market.
8. Provides the opportunity for and challenge to domestic business – provides opportunities –
technology, management expertise, market intelligence, product development.

48. Sukanya Ram 49
9. Division of labour and specialization – IB leads to division of labor and specialization.
10. Economic growth utilization of world resources – specialization, division of labor,
enhancement of productivity, posing challenges, development to meet them, innovations
and creations to meet the competition – lead to overall economic growth of the world
11. Optimum and proper utilization of world resources - provides flow of raw materials,
natural resources and human resources from the countries – when they are in excess supply
to those countries which are in short supply or need most.
12. Cultural transformation – west is slowy tending toward the east
13. Knitting the world into a closely interactive traditional village

49. Sukanya Ram 50
1. Huge foreign indebtedness – countries with less purchasing power are lured into a debt
trap due to the operations of MNCs in these countries
2. Exchange instability – currencies are depreciated due to imbalances in the BOP, political
instability and foreign indebtedness
3. Entry requirements – domestic govt impose entry requirements to MNCs
4. Tariffs, Quotas and trade barriers – govt of various countries impose tariffs, import and
export quotas and trade barriers to protect domestic business
Problems of International Business

50. Sukanya Ram 51
5. Corruption – higher rate of bribes and kickbacks discourage the foreign investors to
expand their operations
6. Bureaucratic practices of government – bureaucratic activities and practices of govt
delay sanctions, granting permission and licences to foreign companies.
7. Technological pirating – copying original technology, producing imitative products, and
other areas of business operations
8. High cost – internationalising – domestic market involves market survey, product
improvement, quality upgradation, managerial efficiency

51. Sukanya Ram 52
Mode of Entering International
Business

52. Mode of Entering International Business
A. Exporting
1. Indirect export
2. Direct export
3. Intracorporate export
B. Licensing
4. International licensing
C. Franchising
5) International franchising
D. Special modes
6. Contract manufacturing
7. Management contracts
8. Business process outsourcing
9. Turnkey projects
E. FDI without alliances
10. Green field strategy
F. FDI with alliances
11. M&A
12. Joint ventures
Sukanya Ram 53

53. Sukanya Ram 54
– Simplest and widely used mode for entering foreign markets
– Merits: Need for limited finance, Less risk, Motivation for employees
– Demerits: Extra cost, financial risk , product adaptation , lack of market information
– Forms
– Indirect export
– Direct export
– Intracorporate export
– Government policies – export policies, import policies, export financing, foreign exchange etc.
– Marketing factors – image, distribution networks, customer – awareness, responsiveness and
preferences
– Logistical consideration – physical distribution cost, warehousing coasts, packaging,
transporting, inventory carrying cost
– Distribution issues – own distribution networks, networks of host country’s companies
Exporting

54. Sukanya Ram 55
• Export Intermediaries
– Perform variety if functions and enable the small companies to export theor goods to foreign
countries.
– Includes handling transportation, documentation, taking ownership of foreign bound goods,
assuming total responsibility for exporting and financing
• Types
– Export management companies
– Co operative society
– International trading company
– Manufacturers agents
– Manufacturers export agents
– Export and import brokers
– Freight forwarders

55. Sukanya Ram
56
• International licensing
– The manufacturer leases the right to use its intellectual property – technology, work
methods, patents, copy rights, brand names, trade marks
– To a manufacturer in a foreign country for a fee.
– The manufacturer in the domestic country is called “licensor” and the manufacturer in the
foreign country is called as “licensee”
• Basic issues in international licensing
– Boundaries of the agreements
– Determination of royalty .
– Determining the rights, privileges and constraints
– Dispute settlement mechanism
– Agreement duration
Licensing

56. Sukanya Ram 57
• Merits
– Low investment on the part of licensor
– Low financial risk to the licensor
– Licensor can investigate the foreign market without many efforts on his part.
– Licensee gets the benefits with less investment on R&D.
– Licensee escapes himself from the risk of product failure.
• Demerits
– Reduces the market opportunities for both
– Chance for misunderstanding between the parties
– Chance for leakage of trade secrets of the licensor
– Licensee may develop his reputation
– Licensee may sell product outside the agreed territory & after the expiry of the contract

57. Sukanya Ram 58
• A form of licensing – franchisor can exercise control over the franchisee compared to that in
licensing.
• International franchising is growing at a faster rate
• Here an independent organisation called the franchisee operates the business under the
name of another company called the franchisor.
• Franchising services
– Trade marks
– Operating systems
– Product reputations
Franchising

58. Sukanya Ram 59
• Merits
– Low investment and low risk
– Franchisor gets information regarding the market culture, customs and environment in the host
country
– Franchisor learns from the experiences of the franchises
– Franchisee gets the benefits with less investment on R&D
– Franchisee escapes himself from the risk of product failure.
• Demerits
– More complicating than domestic franchising
– Difficult to control the international franchisee
– Reduces the market opportunities for both
– Issue of leakage of trade secrets
– Both parties have responsibilities to maintain product quality and product promotion

59. Sukanya Ram 60
• An agreement between investors or owners of a project and a management company
hired for coordinating and overseeing a contract.
• Certain period of time for fees
• Agreement between two companies
• Whereby one country provides package of skills like managerial assistance, technical
expertise & specialized services – company lacking these skills.
Special modes -
Management Contracts

60. Sukanya Ram 61
• A contract in which a firm agrees to fully design, construct and equip a manufacturing
business/services facility
• Turn the project over to the purchase when it is ready for operation.
• For remuneration like a fixed price, payment on cost plus basis.
• Eg: nuclear power plants, airports, oil refinery, national highways, railway line etc
• Multi year project
Turnkey Projects

61. Sukanya Ram 62
• Merits
– A great way to earn economic returns from the asset
– Provide ability to leverage the skills of technological processes in countries where
R&D
– Independent agent gives a fixed price to complete a project.
– Project might be easier than originally thought
– Large profit is made
• Demerits
– Company is a contractor will not have a long-term business in the foreign currency
– Can create a competitor
– Technology
– Lot of time, materials, money is lost

62. Sukanya Ram 63
• Merger - A general term used to refer to the consolidation of companies. A combination
of two companies to form a new company
• Acquisition - While an acquisition is the purchase of one company by another in which
no company is formed.
• A domestic company merges with a foreign company in order to enter IB.
• Alternatively domestic company may purchase the foreign company and acquires its
ownership and control.
• Provides immediate access to international manufacturing facilitates and marketing
network
Mergers and Acquisitions

63. Sukanya Ram 64
• Merits
– Company immediately gets the ownership and control over the acquired firms,
employees, technology, brand names and distribution networks
– Company can formulate international strategy and generate more revenues
– If the company had reached optimal stage in the host country. This strategy helps the
host country.
• Demerits
– This strategy adds no capacity to the industry
– Labour issues of the host country company is transferred to the acquisition company
– Involves complex task involving bankers, lawyers, regulation, merger and acquisition
specialist from the two countries
– Sometimes host countries imposed restrictions on acquisition of local companies by the
foreign companies.

64. Sukanya Ram 65
• Two or more firms join together to create a new business entity that is legally separate
ands distinct from its parent company.
• Various environmental factors like social, technological economic and political
encourage the formation of joint venture.
• Provides strength in terms of required capital
• Improves the local image in the host country and also satisfies the governmental JV
• Latest technology – requires human talent and enable companies to share the risk in
the foreign market
Joint Venture

65. Sukanya Ram 66
• Basic elements of an international JV
– Contractual agreement – involving two or more individuals or organisation – entered for a
specific business purpose
– Specific limited purpose and duration – limited life span or a long term
– Joint property interest – JV contributes property, cash or other assets and organisational
capital for the pursuit of a common and specific business purpose
– Common financial and intangible goals and objectives - goals and objectives of an
international JV tend to be narrowly focused, recognising that the assets deployed by each
participant only a portion of the overall resource base
– Shared profits, losses, management and control -

66. Sukanya Ram 67
1. Risk sharing
2. Economies of scale
3. Market access
4. Geographical constraints
5. Funding constraints
6. Acquisition Barriers; Prelude to acquisition
Reasons for forming a Joint Venture

67. Sukanya Ram 68
1. Political factors
2. Huge foreign indebtedness
3. Exchange instability
4. Entry restrictions
5. Tariffs, quotas and trade barriers
6. Corruption
7. Bureaucratic practices of government
8. Technological pirating
9. High cost
Problems of International Business

68. Sukanya Ram 69