1. Globalization and International Business

Chapter 1: Globalisation
and International
Business
MBA 3
IB
Module 1
1

IB and Globalisation
What is Globalisation?:
Globalisation is a process of interaction and
integration among the people, companies, and
governments of different nations, a process driven
by international trade and investment and aided
by information technology. This process has effects
on the environment, on culture, on political systems,
on economic development and prosperity, and
on human physical well-being in societies around
the world.
2

What is IB?:
International business occurs in many different
formats:
1. The movement of goods from country to another
(exporting, importing, trade)
2. Contractual agreements that allow foreign firms
to use products, services, and processes from
other nations (licensing, franchising)
3. The formation and operations of sales,
manufacturing, research and development, and
distribution facilities in foreign markets
3

Forces Driving Globalisation/
Drivers of Globalisation
1) Technological drivers:
Inventions in the area of microprocessors
and telecommunications enabled highly
effective computing and communication at
a low-cost level. Finally the rapid growth of
the Internet[1] is the latest technological
driver that created global e-business and e-
commerce.
4

2) Political drivers
Liberalized trading rules and deregulated markets
lead to lowered tariffs and allowed foreign direct
investments in almost all over the world. The
institution of GATT (General Agreement on Tariffs
and Trade) 1947 and the WTO (World Trade
Organization) 1995 as well as the ongoing opening
and privatization in Eastern Europe are only some
examples of latest developments.
5

3) Market drivers
As domestic markets become more and more
saturated, the opportunities for growth are limited
and global expanding is a way most organizations
choose to overcome this situation. Common
customer needs and the opportunity to use global
marketing channels and transfer marketing to
some extent are also incentives to choose
internationalization.
6

4) Cost drivers
Sourcing efficiency and costs vary from
country to country and global firms can take
advantage of this fact. Other cost drivers to
globalization are the opportunity to build
global scale economies and the high
product development costs nowadays
7

5) Competitive drivers
With the global market, global inter-firm
competition increases and organizations
are forced to “play” international. Strong
interdependences among countries and
high two-way trades and FDI actions also
support this driver.
8

 One of the most comprehensive is the A.T. Kearney / Foreign
Policy Globalization Index.
 This Index Ranks 62 countries across 4 dimensions :
1. Economic : International trade and investment.
2. Technological : Internet connectivity.
3. Personal contact : International travel and
tourism.
4. Political : Participation in international
government.
9

Factors in Increased globalization
• Increase in and expansion of technology.
• Liberalization of cross border trade and
resource movements.
• Development of service that support
international business.
• Growing consumer pressures.
• Increased global competition.
• Changing political situations.
• Expanded cross-national cooperation.
10

1.INCREASE IN AND EXPANSION
OF TECHNOLOGY
• One of the reason is the population growth and
the other is economic growth.
• Today, total population are more involved in
developing product rather than producing them.
• The advancement in communication and
transportation is also a major factor in
increase in and expansion in technology.
11

2.LIBERALIZATION OF CROSS
BORDER TRADE AND
RESOURCE MOVEMENTS
• To protect it’s own industries there is restriction across
borders for goods and services.
• Citizens need greater variety if Goods and services
are at lower rates.
• Competition spurs domestic producers to become
more efficient.
• They hope to induce other countries to lower their barriers
in turn.
12

3.DEVELOPMENT OF SERVICE
THAT SUPPORT
INTERNATIONAL BUSINESS.
• Countries have now developed a variety of
services that facilitate conduct of
international business. Some are :
• Bank credit agreements.
• Insurance that covers risks such as
damages
13

4.GROWING CONSUMER
PRESSURES
• Consumer now a days are more aware
about the products and services that are
available within and outside their domestic
territory .
• Today consumers want new and better
products that are finely differentiated.
14

5.INCREASED GLOBAL
COMPETITION
• The pressures both present and potential of
increased foreign competition can persuade
companies to buy or sell abroad.
• Firms have to become more global to compete in
today’s business environment and failure of this
can be very harmful. For Instance-Procter &
Gamble took over 100 years to go global.
15

6. CHANGING POLITICAL
SITUATIONS
• Now a days Government is supporting
programs favourable to international
trade.
• They are now providing an array of
services to help domestic companies sell
abroad and vice versa.
16

7.EXPANDED CROSS NATIONAL
COOPERATION
Increasingly governments have come to
realize that their own interests can be
addressed through international
cooperation by means of treaties,
agreements and consultation. The adoption
of any such policies are largely used to
meet certain needs.
17

Why Companies Engage in IB ?
1. Expanding Sales
2. Acquiring resources
3. Minimizing risk
18

1.Expanding Sales
 Company sales depend on 2 factor
Consumer interest and consumer
willingness.
 For example :- Companies like IBM
(US), Ericsson ( Sweden), Nestle
(Switzerland ), Sony(Japan) derive
more than half of their sales outside
their home countries.
19

2.ACQUIRING RESOURCES
• Producers seek out product ,m
services, resources, and
components from foreign countries .
• Firm gains competitive advantage by
improving product quality or by
differentiating products from competitors .
20

3.MINIMIZING RISK
• International operation may reduce
operating risk by :-
1. Smoothing sales and profit
2.Preventing competitors from
gaining advantages.
21

EPRG Framework
EPRG stand for Ethnocentric, Polycentric,
Regiocentric, and Geocentric. It is a framework
created by Howard V Perlmuter and Wind and
Douglas in 1969. It is designed to be used in an
internationalization process of businesses and
mainly addresses how companies view
international management orientations. According
to the EPRG Framework (or the EPRG Model),
there are four management approaches that an
organization can take to get more involved in
international business
22

The EPRG Framework suggests that
companies must decide which approach is
most suitable for achieving successful
results in countries abroad. For this reason,
the EPRG Framework can be a useful tool
to utilize if a company does not know yet
how to manage business activities between
companies in the local country and a host
country.
23

1. Ethnocentric Approach
 In this approach of the EPRG Framework, the company
in a local country that wants to do business overseas
does not put in much effort to do research abroad about
the host country’s market. Instead, most of the market
research is executed in the headquarters in the local
country. With this approach, the company seeks for
markets abroad that share the same characteristics as
the local market so that the marketing strategy does not
have to be adapted. More specifically, the ethnocentric
approach uses the same marketing strategies that are
created by local personnel and further utilized multiple
countries.
25

It is many times possible that companies that
utilize this approach believe that local products
should not be adapted to the local need of
countries abroad because the products are already
of high quality. Another reason could be that a
specific product is sold in large volume in the local
market, and for this reason, it is believed it will do
the same in other markets abroad.
The ethnocentric approach of the EPRG
Framework has benefits but also downsides. At
first, the company saves a lot of operational costs
that can be invested elsewhere. But the downside
is that the company does not build up new
knowledge about the market abroad.
26

E.G. Nissan sold its cars in US
without changing anything which they
sold in Japan. Nissan Headquarters in
Japan.
27

2. Polycentric Approach
Businesses that utilize the polycentric approach of
the EPRG Framework strongly believe that every
market has its differences. For this reason, these
types of companies implement different marketing
strategies for each market.
In the polycentric approach of the EPRG
Framework is the opposite of the ethnocentric
approach.
28

In the polycentric approach, it is therefore easier to
make strategic decisions based on current cultural
differences and political differences. Companies
that use this approach can also more easily adapt
to changes in the market because of their
decentralized decision-making authorities.
The downside is that the local headquarter has
less control over its operations abroad.
29

E.G Mc Donald’s, as they do not sell
beef Burgers in India.
30

3. Regiocentric Approach
In a regiocentric approach of the EPRG
Framework, businesses create and implement
internationalization strategies for specific regions.
Companies that utilize this type of approach use
this for the area in which the local business is
operated.
They treat different regions as different markets.
E.G. Punjab (Paneer products more), In Gujarat
(Sugar products are more)
31

4. Geocentric Approach
A geocentric approach of the EPRG Framework
means that a business strongly believes that it is
possible to utilize one type of strategy for all
countries, regardless of the cultural differences.
However, companies that use this approach attempt
to create products or offer services in a way that best
suit national and international customers. This means
that instead of believing that their product or service
is excellent and that it will sell in other markets, like in
the ethnocentric approach, these organization
proactively adapt their products and services that
best meet the global needs.
32

E.G. Microsoft and Nokia (Standardized
products world wide)
33

Modes of Entry/ Operations into
International Business
34

1. Direct/ Indirect Exporting
 Direct exporting involves you directly exporting your
goods and products to another overseas market. For
some businesses, it is the fastest mode of entry into the
international business.
 Direct exporting, in this case, could also be understood
as Direct Sales. This means you as a product owner in
India go out, to say, the middle east with your own
sales force to reach out to the customers.
 In case you foresee a potential demand for your goods
and products in an overseas market, you can opt to
supply your goods to an importer instead of
establishing your own retail presence in the overseas
market. (Indirect Exporting)
35

 Advantages Exporting
1. You can utilize the direct exporting strategy to test your
products in international markets before making a bigger
investment in the overseas market.
2. This strategy helps you to protect your patents, goodwill,
trademarks and other intangible assets.
 Disadvantages Exporting
1. In the case of offline products, there is a good amount of
lead time that goes into the market research, scoping and
hiring of the representatives in that country.
2. For offline products, this strategy will turn out to be a really
high cost strategy. Everything has to be setup by your
company
36

2. Licensing and Franchising
In Licensing agreement and franchise, an
overseas-based business will pay you a royalty or
commission to use your brand name,
manufacturing process, products, trademarks and
other intellectual properties.
While the licensee or the franchisee assumes the
risks and bears all losses, it shares a proportion
of their revenues and profits you.
Companies which want to establish a retail
presence in an overseas market with minimal risk,
the licensing and franchising strategy allows
another person or business assume the risk on
behalf of the company.
37

 Advantages of Licensing and Franchising
1. Low cost of entry into an international market
2. Licensing or Franchising partner has knowledge about the
local market
3. Offers you a passive source of income
4. Allows expansion in multiple regions with minimal
investment
 Disadvantages of Licensing and Franchising
1. In some cases, you might not be able to exercise complete
control on its licensing and franchising partners in the
overseas market
2. Your business risks tarnishing its brand image and
reputation in the overseas and other markets due to the
incompetence of their licensing and franchising partners
38

3. Joint Ventures
Companies wishing to expand into overseas
markets can form joint ventures with local
businesses in the overseas location, wherein both
joint venture partners share the rewards and risks
associated with the business.
Both business entities share the investment,
costs, profits and losses at the predetermined
proportion.
This mode of entry into international business is
suitable in countries wherein the governments
do not allow one hundred per cent foreign
ownership in certain industries.
39

For instance, foreign companies cannot have a
100 hundred per cent stake in broadcast content
services, print media, multi-brand retailing,
insurance, power exchange sectors and require to
opt for a joint-venture route to enter the Indian
market.
40

 Advantages of Joint Venture
1. Both partners can leverage their respective expertise to
grow and expand within a chosen market
2. The political risks involved in joint-venture is lower due to
the presence of the local partner, having knowledge of the
local market and its business environment
 Disadvantages of Joint Venture
1. Joint ventures can face the possibility of cultural clashes
within the organisation due to the difference in organisation
culture in both partnering firms
2. In the event of a dispute, dissolution of a joint venture is
subject to lengthy and complicated legal process
41

4. Strategic Acquisitions
Strategic acquisition implies that your
company acquires a controlling interest
in an existing company in the overseas
market.
This acquired company can be directly or
indirectly involved in offering similar
products or services in the overseas
market.
42

 Advantages of Strategic Acquisitions
1. Your business does not need to start from scratch as you
can use the existing infrastructure, manufacturing facilities,
distribution channels and an existing market share and a
consumer base
2. It is one of the fastest modes of entry into an international
business on a large scale
 Disadvantages of Strategic Acquisitions
1. Just like Joint Ventures, in Acquisitions as well, there is a
possibility of cultural clashes within the organisation due to
the difference in organisation culture
2. Technological process differences is one of the most
common issues in strategic acquisitions.
43

5. Foreign Direct Investment
Some of the reasons because of which
companies opt for foreign direct
investment strategy as the mode of entry into
international business can include:
I. Restriction or import limits on certain goods and
products.
II. Manufacturing locally can avoid import duties.
III. Companies can take advantage of low-cost
labour, cheaper material.
44

 Advantages of Foreign Direct Investment
1. You can retain your control over the operations and other
aspects of your business
2. Leverage low-cost labour, cheaper material etc. to reduce
manufacturing cost towards obtaining a competitive
advantage over competitors
 Disadvantages of Foreign Direct Investment
1. The business is exposed to high levels of political risk,
especially in case the government decides to adopt
protectionist policies to protect and support local business
against foreign companies
2. This strategy involves substantial investment to be made
for entering an international market
45

Why International Business differs
from Domestic Business?
• Factors that differentiate international
business from domestic business:-
 Physical factors – country’s geography
 Social factors – law, culture and economy
 Competitive factors – the number and
strength of the companies suppliers,
customers and rival firms.
46

1. Physical Factors
I. Geographic factors:
 the uneven distribution of resources in the
world.
 Geographic barriers – mountains, deserts ,
jungles – affect the communication and
distribution channels.
 Natural disasters and adverse
climatic conditions make investment
riskier.
47

2. Social Factors
I. Political policies:
 Political policies influence the way in
which international business takes place
within the borders.
 Political disputes- that result in
military confrontation can disrupt
trade and investment.
48

II. Legal policies:
 Domestic and international laws play a big
role.
 domestic laws includes both – homes and
host country regulations on matters such
as taxation, employment and foreign
exchange transaction.
 International law – in the form of legal
agreements between two countries –
determine how earnings are taxed.
49

III. Behavioural factors:
 Principles of psychology , sociology,
anthropology help managers understand
the attitudes and values and beliefs in a
foreign environment.
 Understanding helps managers to make
operational decisions in different
countries.
50

IV. Economic forces:
Economics helps explain why one country
can produce goods and services less
expensive than another.
51

3. Competitive Factors
I. Competitive strategy for products:
 Developing a favorable brand image
 Developing unique characteristics through
R&D efforts
 E.G. Fiat and Ferrari
52

II. Company resources and experience:
 Company’s national market share and
brand recognition have a bearing on how
it can operate in a country.
 Company’s long term standing dominant
market position uses operating tactics
quite different from those employed
by a new comer. (E.G. Cocacola)
53

III. Competitors faced in each market:
Success in a market depends on your
competition. Whether its local or
international
Boeing and Airbus facing same competition
while Walmart faces different competition in
different country
54

1. Globalization and International Business

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to 1. Globalization and International Business

Similar to 1. Globalization and International Business (20)

Recently uploaded

Recently uploaded (20)

1. Globalization and International Business