International business involves transactions across national borders to satisfy needs of individuals and organizations. The primary types of transactions are export-import trade and foreign direct investment. A business engages in international business when it produces or sells in a foreign country and is associated with or controlled by an enterprise operating in other countries. Globalization refers to the rapid increase in economic activity across borders and includes how goods and services are produced, delivered, sold, and how capital moves. As companies progress from domestic to international to multinational to global, their orientation shifts from ethnocentric to polycentric to geocentric.

1. INTERNATIONAL BUSINESS
IB is the study of transactions taking place across national
borders for the purpose of satisfying the needs of individuals
and organizations. Primary type of transactions are exportimport trade and FDI.
It is the marketing operations of an enterprise that produces
and or sells in a foreign country when:
That organization is a part of or associated with an enterprise
with an enterprise which also operates in other country.
There is some degree of influence on or control of the
organization activities from outside the home country in
which it produces and or sells.

2. G LOBALISATION
• Globalization refers to rapid increase in the
share of economic activity taking place across
national borders.
• It goes beyond the international trade includes
the way in which goods/ services are produced
/created, delivered &sold & movement of
capital

3. STAGES OF GLOBALISATION
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Domestic company
International company
MNC
Global company
Transnational company
(ETHNOCENTRIC)
(POLYCENTRIC)
(REGIOCENTRIC)
( GEOCENTRIC)

4. DOMESTIC COMPANY
• Limits its operations, mission & vision to the national political
boundaries. These companies focus its view on the domestic
opportunities, domestic suppliers, domestic customers etc.
these companies analyze the national environment of the
country, formulate the strategies to exploit the opportunities
offered by the environment. The domestic company’s
unconscious motto is that “if its happening in the home country
its not happening any where”.
• Domestic companies never thinks of growing globally. If it grows,
beyond its present capacity the company selects diversification
strategy of entering into new domestic market, new products,
technology. It does not select the strategy of expansion or
penetrating international markets.

5. INTERNATIONAL COMPANY
• Companies who divide to develop the opportunities outside the
domestic country are stage two companies. They remain
ethnocentric or domestic country oriented. They believe that
practice adopted in domestic business, people and product of
domestic business are superior to other companies. Focus of
their companies in domestic but extends its wings to foreign
countries. They select the strategy of locating the branch in
foreign country, extend domestic operation to foreign markets,
and extend domestic price and product and promotion practice
to foreign markets.
• Company follows these strategies due to limited resources and to
learn from foreign market gradually before becoming a global
company without much risk.

6. MULTINATIONAL COMPANY
• Formulates different strategies for different
market so orientation shift from ethnocentric
to polycentric orientation. Under polycentric
orientation the office and the subsidiaries of
multinational companies work like domestic
company in each country where they operate
with individual policies and strategies suitable
to that country concerned.

7. GLOBAL COMPANY
• A company, which has either global marketing or
global strategy
1. Either produce in home country or a single country
and focus on marketing products globally
2. Produce the products globally and focus on
marketing the products domestically. Eg. Dr.Reddy’s
lab designs and produces drugs in India and markets
globally.

8. TRANSNATIONAL COMPANY
• Produces, markets, invest and operate across
the world. Its an integrated global enterprise
which links global resource with global
markets at profits. There is no pure
transnational corporation. Most of the
transnational companies satisfy many of the
characteristics of the global corporation. It’s
geocentric in approach.

9. ETHNOCENTRIC:
• They treat all foreign operations as if they were
extension of domestic operations. Each unit is
integrated into the planning and control system
of the parent country. Standard products and
services are produced that can be used anywhere
in the world. They follow the same procedure of
the parent country to the other countries also.
This is suitable only if the tastes and preferences
of different markets are same. Eg whirlpool when
entered Japan.

10. POLYCENTRIC
• They go to every market and study the market
and then produce goods that suits the market.
It is right opposite to ethnocentric. They have
a danger of global presence in the market.
They treat the MNE as a holding company
and to decentralize decision making to the
subsidiary level.

11. REGIOCENTRIC
• The managements operate in the foreign
market and change the policies and
procedures depending on the regions and
situations. They are better than ethnocentric
as they suit the purpose of profit
maximization by thoroughly understanding
the market and changing conditions

12. GEOCENTRIC
• ‘GLOCALISATION’- THINK GLOBAL ACT LOCAL
• they maintain brand image, standards of
quality but they style make the strategies
depending on the market. Operations,
manpower, resources are global. Company
needs a lot of experience to adapt this
operation.

13. Reasons For Globalization
Firm operate internationally for a number of
reasons:
• They may be seeking to secure better sources of raw materials
& energy.
• They may want to obtain access to low cost factors of
production such as labour.
• They may be attracted to certain countries because of subsidies
those countries provide.
• They may be seeking new markets for their products.
• Domestic markets may no longer be able to attract production
at minimum efficient scale.

14. Contd…
• They may be motivated by life style
factors.Domestic markets become saturated
As they older , firms look abroad for new
opportunities.
• They may be seeking opportunities for
economies of scope & for learning.

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ADVANTAGES OF GLOBALISATION
opportunistic development
following customers abroad
pursuing geographic diversification
market extension for incremental profit
develop PLC differences ( if a product is in decline stage
it can be introduced in the other country)
maximum capacity utilization
leverage key success factors abroad
quality products
improve standard of living
technological advantage
reduction in the price of the goods
employment generation
competition in the domestic market

16. DISADVANTAGES OF GLOBALISATION
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expensive ( spent on research)
differences in political and legal environment
cultural differences
unemployment in the local market
economic differences
difficulty in trade practices
dumping of products
HR policies of company ( issues in the work
culture)
• exploitation of resources

17. ROUTES OF GLOBALISATION
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EXPORTING
LICENSING
FRANCHISING
JOINT VENTURES
MERGERS AND ACQUISITION
COUNTERTRADE AGREEMENTS
MANUFACTURING ABROAD

18. EXPORTING
• Most of the firms start their operations in the
foreign country as exporters and then later
switch to other modes. In this the companies
manufacture in the home country and then
send it to the other national markets. Eg. most
of the leather industries .

19. LICENSING
• It is an agreement where a licensor grants the
rights to intangible property to another entity
(licensee) for a specified period of time and in
return, the licensorLICENSING a royalty fee from
receives
the licensee. Intangible property includes
patents, inventions, formulas, processes,
designs, copyrights and trademarks

20. ADVANTAGES OF LICENSING
• The firm does not have to bear the development costs and
risks associated with opening foreign market.
• It is used when a firm wishes to participate in a foreign market
but is prohibited from doing so due to barriers to investment.
• It can help a company to establish a market and to set
operating standards for new technologies and products.
• It is a method of earning short term fees with the promise of
longer term profits.
• Eg. Sun micro systems has licensed its micro processor
technology to Toshibs and other leading computer
manufacturers in Japan.
• Eg Coca-Cola has licensed its trademark to clothing
manufacturers.

21. DISADVANTAGES OF LICENSING
• Does not give the firm a tight control over manufacturing, marketing and
the strategy required for realizing experience curve
• Competing in the global market may require a firm to coordinate in other
countries by using the profits earned in one country to support
competitive attack in the other. Licensing does not allow the firm to do
this .
• A firm can lose control over its technology by licensing it.
• Competitors are given new technology, process or information without
having to spend any money on R&D.
• The licensor typically has no local presence but rather relies exclusively on
the licensee.
• There is no chance for complimentary opportunities of any kind such as
identifying local demand for goods that could be produced by spinning of
this technology.
• Competitive obsolescence is guaranteed as the licensee seeks methods of
improving the technology and striking out on its own.

22. FRANCHISING
• It is basically a specialized form of licensing in which
the franchisor not only sells the intellectual property
rights to the franchisee but also insists him to follow
strict rules as to how it does business.
• The franchisor will also often assist the franchisee to
run the business on an ongoing basis. As with licensing,
the franchisor typically receives a royalty payment that
amounts to some percentage of the franchisee’s
revenues. Whereas licensing is pursued primarily by
manufacturing firms, franchising is employed by
service firms. Eg KFC, Mc.Donalds.

23. Why Franchise?
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More rapid expansion at lower capital cost
Motivated owner/operators
Economies of scale and operating efficiencies
Revenue
Location
Flexibility

24. Barriers to Global Franchising
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Culture, Culture, Culture!
Location, Location, Location!
Intellectual Property Protection
Political/Legal Framework
Availability of Raw Materials
Availability of Skilled Managers
Education and Training
Quality Control
Marketing Strategy

25. JOINT VENTURES
• It is the establishment of a firm that is jointly
owned by two or more independent
firms.
It does not involve buying and selling of
shares. A and B come together to form a new
company C. And hence both the companies
still exist. The expertise of A and B may be
different and hence decides to leverage. They
exist for a particular period of time.

26. ADVANTAGES OF JOINT VENTURES
• To upgrade technology( eg. TVS tie up with Suzuki )
• More funds. ( may have attractive business but not the
capital and hence results in a joint venture.)
• Managerial expertise
• To block competition ( eg. Mahindra Ford )
• Exports ( eg Tata and Dalmier )
• Operational improvements
• Reduction of risk of failure by sharing the burden with the
partner
• Rapid market access and opportunity for quick profits
• An increase in the company and product acceptance
brought about by having a local firm serve as the direct
interface with the customer.

27. DISADVANTAGES OF JOINT VENTURES
• Overcharging ( if u want to learn the technology
the company charges u more)
• Interference of management
• Inability to work well with the foreign partner
results in either sellout or a cessation of the
arrangement.
• Domination of the local market by the partner
and hence not allowing the foreign company to
have direct contacts with the customer.

28. MERGERS AND ACQUISITION
• This involves buying and selling of shares
• In a merger two or more companies combine to form a
new company. They might exist in the market place with
their own brand name or dissolve and come out with
another brand name or combine both the brand names. Eg.
Smithline Beecham and Glaxo formed Glaxo Smithline. HP
and Compaq merged and now exists as HP.
• In a take over one company buys the other company.
Normally it has a negative impact. In this one gets the
market share over night. eg.HLL took over TOMCO (Tata Oil
Mill Ccmpany). If the brand image of the company is good
then they leverage with the brand image.

29. ADVANTAGES
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Economies of scale
Increase market power
Diversification
Technology acquisition
Market entry ( eg. Coke entered India by acquiring Thums up)
Possession of market infrastructure (eg. OBC merged with GTB to
have an advantage of the network strength of GTB.)
Product mix optimization
Optimum utilization of resources and facilities
Pre emptive strategy ( before a company could take advantage of
the market place u create entry barriers and attack them)
Acquisition of brands

30. DISADVANTAGES
• Might have a problem with integration
• May but technology that is outdated
• Dissolution of the brand name if changed

31. COUNTERTRADE AGREEMENTS
It is a form of international trade in which certain export and
import transactions are directly linked with each other and in
which import of goods are paid for export of goods, instead of
money payements.
forms of counter trade
• Barter
• Buy back
• countrpurchase

32. MANUFACTURING ABROAD
• The ultimate decision to sell abroad is the
decision to establish a manufacturing plant in
the host country. The government of the host
country may give the organization some form
of tax advantage because they wish to attract
inward investment to help create employment
for their economy

33. DRIVERS OF GLOBALIZATION
Declining trade and investment barriers:
a) After the world war II the lowering of trade
barriers led to the free flow of goods, services,
and capital between nations.
b) In addition to lowering of trade barriers, many
countries have also removed restrictions on
barriers to FDI.
c) These two changes made the laws less
restrictive thereby encouraging both inward and
outward investment by foreign firms.

34. DRIVERS OF GLOBALIZATION
The role of technological change
a) Advances in microprocessors and
telecommunication
b) Emergence of the internet and world wide
web
c) Innovations and developments in the
transportation technology

35. DRIVERS OF GLOBALIZATION
• Other Environment specific driver
a) Competition
b) Regional, economic and political integration
c) Economic growth
d) Converging consumer needs
e) Cost reduction
f) Increase sales and profits

36. 1-7
history of international business
• International trade is not a new aspect of business
• Globalization forces
– computers and communications
– reduction of barriers to trade
– merger of the global community
• International business as a business practice is
not new
• 1600 British East India Company
• Shipping routes to the east opened by Dutch companies in 1590
• American colonial traders of the 1700’s
• Singer Sewing Machine 1868 (Scotland)

37. DIFFERENCES BETWEEN IB AND DOMESTIC BUSINESS:
DIMENSION
DOMESTIC BUSINESS OPERATION
INTERNATIONAL BUSINESS
OPERATION
1.Environment
The economic, political, legal, socio-cultural,
competitive and technology environments are
known, hence one can take the necessary
precautions.
The environment is not fully known,
innumerable hidden factors which may emerge
at any time to pose problems
2. plan and strategy
Plans and strategies can be worked out for short
terms and carried forward to long term
Only long term planning and strategy will work.
Strategies inputs are required in multiples
3. competition
The maximum domestic competitive forces
operate and one can understand their movement
International competitive forces place a vital
role and is very difficult to understand their
motive and movement
4.currency
Local currency is used for transactions. Costing,
pricing, revenue and margins are computed in a
single currency.volatility may have a minimum
impact in business in short term.
Transactions are carried out in various
currencies. Fluctuations in cross currency
movement and associated risks are common.
Currency fluctuation influences pricing and
costing and investment decisions

38. 5. business risks
6. research
7. human resources
8. organizational vision and
objective
9. product development
10. legal aspects
Comparatively one can predict future
risks and shocks and they will not
have a major impact on the business
houses
It is reasonable and easy to conduct
business research, demand analysis
and customer survey. It is also reliable
for business ventures
Due to past laurels and established
systems, comorates can succeed even
if the HR have minimum skills and
knowledge
Narrowed down to work in a single
country with a steady growth
objective. Each one will understand
the vision and objective very quickly
Adapted to the local environment, as
per the requirements of the domestic
customers affordability, beliefs, values
and cultural elements
Only local regulations are fully
applicable to conduct business. There
is minimum adherence to
international regulations related to
IPR
Very difficult to predict and risks may
crop up at any time, due to the
political situation, the society itself or
other unknown factors
Very expensive and difficult to
conduct. Reliability criteria depends
on individual countries and there is no
uniformity in the output
Multilingual, multi-strategic and
multi-cultural HR are necessary and
they should be able to withstand large
risks
Broaden to cover many countries and
geograohic and cultural diversity may
influence the vision and objective
Varies from country to country subject
to the regulations of the host country.
This is especially true for consumers
and medicinal items
International regulations and host
country regulations are applicable.
Advanced countries impose strict
regulations compared to LDC’s

39. 11. investment
12.pricing
Depending on the size of the business
one can start with a minimum
investment. Involvement of regulatory
bodies is minimal.
All overseas operation except exports
call for huge investments to set up and
expand business in many countries.
Special regulatory bodies are involved
in the process since foreign currency
is transacted
A majority of companies use cost plus Companies use marginal cost pricing
margin pricing or competitive pricing or transfer pricing or competitive
pricing to succeed
13. distribution
The business house can use its
discrition to select any channel to
reach the customer
The distribution channel is governed
by the government or market
practice.cash and carry shopping malls
and mail order service are becoming
popular in international business.
14.promotion
Advertising, personal selling and other
promotional methods are not restricted
through strict legal framework if they
are not socially objectionable
Different countries have different
restrictions. Eg, advertisements for
liquor and cigarettes are banned in few
countries.
15. logistics
Domestic players are involved in all
the activities
International players with advanced
technology and systems are involved.

40. ENVIRONMENT OF IB
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Political – Legal Environment
Economic Environment
Cultural Environment
Technological Groups

41. POLITICAL ENVIRONMENT
• This refers to the influence of the system of
government and judiciary in a nation on
international business
• A political system is stable, honest, efficient and
dynamic which ensures political participation to
the people.
• The type and structure of government main in a
country decides, promotes, fosters, encourages,
shelters, directs and controls the business of that
country.
• It is primary factor for economic developed.

42. Political factors
Consider:
• The political stability of the nation. Is it a
democracy, communist, or autocratic
government?
• Monetary regulations. Will the seller be paid
in a currency that they value or will payments
only be accepted in the host nation currency?

43. DEMOCRACY
• Democracy may patent itself in any of two fundamental manners. If each
individual is given the right to rule and vote on every matter, the result is
pure democracy which is not, however workable in a complex society with
a large constituency.
• Public in a democratic manner, elect their representatives who do the
ruling.
• A representative democracy rest on the assumption that should the
elected representatives fail to perform adequately they will be voted
down at the next election.
• democracy maintain stable business environment primarily through laws
protecting individual property rights,
• In theory, business prospers when the private sector enjoys freedom to
decide, freedom to earn and freedom to spend. But in practice, free
markets, property rights and democracies do not guarantee economic
growth. Ex: Country like India
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44. TOTALITARIANISM
• It is also called as authoritarianism; individual freedom is
completely subordinated to the power of the authority of state and
concentrated in the hands of one person or in a small group which
is not constitutionally accountable to the people.
• Societies ruled by a pressure group – political, economic or military
or by a ruler, plus most kingdom belong to this category.
• During the first and second world wars, the controlling
governments began to appear in most mature economies. Even
after the second war, the totalitarianism system became most
common in newly independent nations.
• Nazi Germany (Under Adolf Hitler) and the former Soviet Union
(Under Joseph Stalin) are historic examples. Today:- Cambodia,
Myanmar, China, Cuba

45. THEOCRACY
• When a country is religious, leaders are also
its political leaders; the political system is
called Theocracy.
• Religious leaders frame and enforce laws and
regulations that are based on religious beliefs.
• A political system that is under the control of
religious leaders is theocratic totalitarianism.
Ex: Afghanistan

46. SECULAR
• A political system in which political leaders are
guided by military and bureaucratic power is
called secular totalitarianism. In such a
system, the military controls the government
and makes decisions which it deems to be in
the best interest of the country. Ex: Pakistan

47. TRIBAL
• A third form of totalitarianism is the tribal
totalitarianism. This exists principally in
African countries such as Zimbabwe, Tanzania,
Uganda and Kenya. Tribal totalitarianism
occurs when a political party that represents
the interest of a particular tribe monopolizes
power.

48. POLITICAL RISK
• Political risk is any governmental action or politically
motivated event that could adversely affect the long –
term profitability or value of the firm.
• It can pressure the market of an exporter, the
production facilities of a manufacturer or the ability of
a firm to repatriate its profits from a host country to its
home country.
• Political risk varies from nation to nation. It is very high
in countries Yugoslavia, Myanmar, Turkey and
Indonesia. It is non-existent in US, Canada, Australia
and western European countries.

49. Managing Political Risks
• Avoiding Investment:
The simplest way to manage political risks is to avoid
investing in a country ranked high in such risks. Investments
are transferred to some other country which is considered
to be relatively safe. This may be poor choice as the
opportunity to do business in a country will be lost.
• Adaptation:
Adaptation means incorporating risk into business
strategies. MNC’s incorporate risk by means of the
following three strategies:
• Local equity and debt
• Development assistance
• Insurance

50. • Low Equity and Debt
This involves financing subsidiaries with the
help of local firms, trade unions, financial
institutions and government localization entails
modifying operations, product mix or any such
activity to suit local tastes and culture. Ex: Mc
Donald started franchisee operations in India
ensured pack in did not contain any beef.

51. • Development Assistance
Offering development assistance allows an
international business to assist the most country
in improving its quality of life. Since the firm and
the nation become partners, both stand to gain.
In Myanmar, the US oil company and France’s
total have invested billions of dollars to develop
natural gas fields and also spent $ 6 million on
local education, medical care and other
improvements

52. • Insurance
This is the last means of adaptation.
Companies buy insurance against the potential
effects of political risk. Some policies protect
companies, when host governments restrict the
convertibility of their currency into parent
country currency. Others insure against losses
created by violent events, including war and
terrorism.

53. LEGAL ENVIRONMENT
• Legal environment refers to the legal system obtaining in a country. It
refers to rule and laws that regulate behavior of individuals and
organizations.
• Failure to fulfill with the laws means that penalties will be inflicted by the
courts depending on offense.
• The legal system of a country is very much important to international
business.
• A country’s law regulates business practice, define the manner in which
business transactions are to be carried and set down the rights and
obligations of those involved in business deals.
• Legal system in a country is influenced by its political system. The
government of a country firms conduct business and often the laws that
regulate business reflect the ruler’s political ideology. Totalitarian states
for example, tend to exact laws that restrict private enterprise while
democratically elected governments are pro-private enterprise .

54. SYSTEM OF LAW
• Islamic law, derived from the interpretation of the
Quran and practiced in countries where Muslims are in
majority
• Common law, derived from English law, is prevalent in
countries which were under British influence.
• Civil or code law, derived from Roman law practiced in
Germany, Japan, France, and non-Marxist and nonIslamic countries.
• Marxist legal system which has takers in communist
countries.

55. ISLAMIC LAW
• Derived from interpretation of Quran and teachings of Mohammed.
• Islam means submission or surrender.
• Muslim submits to will of god, who judges or decides what is proper and what
is improper.
• God’s commandments as revealed to Mohammed provide path for true
believers to follow. It provides ethical and moral percepts as well as rules of
public order.
• The idea of law in Islamic societies in quite different from western countries.
Most western nations perceive law as an expression of will of people acting
through their legislatures. Islamic law is product of godly revelation. It cannot
be changed as people believe in will of god.
• Islam law prohibits receipt and payment of interest. It also rule out alcohol,
gambling .
• It advocates risk sharing, property rights, individual rights and duties and
sacredness of controls.
• To conclude Islam law emphasizes on ethical, moral, social and religious
dimensions to enhance equality and fairness.

56. SOCIALIST LAW
• Evolves from Marxist socialist system and practiced in communist
countries like Russia, China, Vietnam, North Korea, and Cuba.
• Extensive codes are primary sources of socialist law. The legislature
is primary branch of government and judiciary comes next.
• Ideology plays a vital role in socialist law. Unlike civil law, which can
be used by government of widely differing political view points,
socialist legal codes a redesigned to achieve personal and societal
transformation.
• Communist ideology pass through socialist law. The legal
environment provides for state ownership of means of production
and distribution and also calls for state ownership of land and in
most cases collective use of land. It supports centralized planning.
• There is little tolerance of private property rights, freedom, taxation
and price control.

57. COMMON LAW
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develop from English law and skillful in US, Canada, England, Australia, India etc.
It is based on cumulative wisdom of judge’s decisions in individual cases.
Contracts, agency are controlled by collection of principles reason from specific
disputed resolved in an advisory process.
In common law similar disputes should achieve similar legal results. Therefore
parties to a dispute will look for similar earlier cases with favorable decisions.
This provides stability required for biz people to plan their future actions. But flip
side is it creates potential problems for not so well informed international biz
manager.
For example, manufacturers of defective products are more vulues to lawsuits in
US than in New Zealand as a result of evolutionary difference in law of negligence
in the two countries.
Legislation and its regulations are another source of law in common law countries
as it provides blanket rules.
Tradition is also a major source in common law countries.

58. CIVIL LAW
• Originated with Romans and is practiced in Germany,
France and Japan.
• Based on detailed set of laws that make up a code.
• In Common law system, judges serves as neutral reference,
defining points of law and ruling on various motions put
forth by opposition party’s lawyers. The lawyers are
responsible for developing their client’s case and choosing
which evidence to submit to court. Whereas in Civil law
judge takes on many of tasks of lawyer’s i.e. he collects
evidence to be presented to the court.
• Under Code law ownership is determined by registration.
Whereas in Common law ownership is established by use.

59. ECONOMIC ENVIRONMENT
• Classification of countries on the basis of
income
• Countries classified by economic system
• Region-wise classification of countries
• Economic trade policies
• Economic institutions

60. Economical Factors
Consider:
• Consumer wealth and expenditure within the
country.
• National interests and inflation rate.
• Are quotas imposed on your product.
• Are there import tariffs imposed.
• Does the government offer subsidies to
national players that make it difficult for you
to compete

61. INCOME-WISE CLASSIFICATION OF COUNTRIES
LIC (Low Income)
• Having PCcapital of $735 or less.
• Ex: Cambodia, Indonesia, Mongolia, Vietnam in East Asia and Pacific.
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Georgia, Tajikistan, Uzbekistan… in Europe and Central Asia
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Congo, Ethiopia, Nigeria, Zimbabwe…..in Sub-Saharan Africa.
• These are called developing countries.
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LMC (Low-Middle Income)
• Having incomes between $736 and $2995.
• Ex: China, Fiji, Philippines……..in East Asia and pacific.
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Bulgaria, Romania, Turkey……in Europe and Central Asia.
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Brazil, Cuba Paraguay, Peru…..in Latin America and Caribbean
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Algeria, Egypt, Iran, Iraq…..in Middle East and North Africa.
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Sri Lanka, Maldives in South Asia.
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Namibia, Swaziland, South Africa in Sub-Saharan Africa.
• These are called developing countries.

62. UMC (Upper-Middle Income)
• Having incomes between $2996 and $9265.
• Ex: Malaysia, American Samoa……..in East Asia and pacific.
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Hungary, Poland, Croatia……in Europe and Central Asia.
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Chile, Grenada, Panama…..in Latin America and Caribbean
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Libya, Saudi Arabia…..in Middle East and North Africa.
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Botswana, Gabon, Mauritius in Sub-Saharan Africa.
• These are called developing countries.
High-Income OECD
• Having incomes more than $9266.
• Australia, United States, United Kingdom, Japan, New Zealand, Germany, France….
• These are called developed countries.
• The other high income countries are Antigua, Bahamas, Greenland, Kuwait, Israel,
UAE……

63. DEVELOPING COUNTRIES
• Most developing countries share a set of
common goals.
• Ex: Reduction in poverty, unemployment,
provision for minimum levels of education,
health, food…..
• Substantial increasing dependence on foreign
technologies, institutions and value systems.

64. DEVELOPED COUNTRIES:
• These countries are highly industrialized, highly
efficient and people enjoy a high quality of life.
• People receive excellent healthcare and benefit
from the best educational systems in the world.
• These countries generate nearly 80% of the
world’s wealth.
• They are natural place to do business because of
high demand.
• They have relative political and economic
stability.

65. ECONOMIC ENVIRONMENT FACTORS
•
•
•
•
•
•
•
•
•
Economic system
Economic planning
Industry
Agriculture
Infrastructure
Financial and fiscal sector
Removal of regional imbalances
Price and distribution control
Economic Reforms

66. COUNTRIES ECONOMIC SYSTEMS:
• Market Economy
– It is also called capitalism.
– All productive functions are privately owned.
– Production is determined by the interaction of
supply and demand forces.
– Consumers are supreme, they decide what the
producers should produce and supply.

67. • Command Economy
•
•
•
•
•
•
It is also called Socialism.
Planning is a must in this.
Decisions relating to all economic activities are taken
Consistent with collective ideology
The main objective is to own and run business for the good
of society.
These are usually found in communist countries.
Since the failure of communism in the late 1980’s,
the number of commands economy nations has
fallen considerably.

68. • Mixed Economy
• This falls midway between market economy and command
economy.
• They admit existence of private sector along with
government ownership. The economic set up under this is
split into three parts:
– Sectors in which both production and distribution are entirely
managed and controlled by the state to the complete exclusion of
private enterprise.
– Sectors in which the state and private enterprise jointly
participate as well as in distribution
– Sectors in which the private enterprise has complete access
subject only to the general control and regulation of the state.

69. ECONOMIES IN TRANSITION
India
• From 1950 to 1991, India had a mixed economy.
• Now it is to say that the economy is on its way towards open market operations.
•
China
• It is attracting attention of all the nations
• No other country on earth has done more for its people economically in the last 20
years
• It has ¼th of world’s population and one of the world’s population and one of the
world’s largest economies despite its communist rule
• After 1970 China has made many changes in its economic and legal systems
• It has opened opportunities for collectively and privately owned enterprises.
• It increased its imports of technology, modernized its banking systems and other
service industries.
• During 1990’s it became one of the most attractive markets for FDI by MNC’s
around the world.
• Over 1/3rd of all investments has gone to China
• In 2000 alone 12000 foreign companies set up wholly owned subsidiaries in china.

70. Vietnam
• Located in Southern Asia
• Country with a population of 80 million
• It almost became a free economy when the communist party’s top decision
makers decided in 2002 to pursue policies necessary to boost the role of private
sector.
• Like China, Vietnam is one of the new investment dealings in Asia.
• Crime, corruption, poor infrastructure are impeding the flow of investment into
Vietnam.
Russia
• Russia’s marriage with communism dates back to 1917.
• For the next 75 years everything were controlled by the government.
• Russia is permanent very big political and economic reforms at the same time.
• Russia as an entity came into being following the dissolution of the USSR in 1991
and as of today it is CIS (Common wealth of Independent States)
• In winter of 1998-99, the Russian government requested food from Western
Europe and the US to help its people avoid hunger.

71. CULTURAL ENVIRONMENT
• Culture consists of the consideration and
behavioral patterns that members of society
learn through language and other forms of
symbolic interaction – their customs, habits,
beliefs and values, the common view points
that attach them together as a social entity.

72. Elements or Determinants of Culture
•
•
•
•
•
•
•
Language
Aesthetics
Religion
Education
Customs and Manners
Attitudes
Culture

73. LANGUAGE
•
•
•
•
•
Foundation of any culture – it is an abstract system of word meaning and symbols
for all aspects of culture.
Language includes speech, written characters, numerical, symbols and signal of
non-verbal communication.
Languages can be classified based on whether message conveyed in implicit or
explicit.
Languages in which people state things directly and explicitly are low context (Ex:
German) and indirectly and implicitly are high context (Ex: Asian language).
It helps determine success in following ways:
– It provides a clearer understanding of given situation. International manager can directly
conduct biz without need of an interpreter if he has ability to communicate in host language.
– It establishes effective and suitable bridges to local people.
– Speaking with host in their language gives speaker feel of emotions and significance with
which host communicates.
– It provides practical means of understanding another culture.
– Learning language, understanding all tone and line and socializing with a host are rewarding
experiences for an international manager. They help manager to be more effective.

74. RELIGION
Hinduism
• 500 million adherents, mainly found in India.
• Critics argue that by emphasizing moksha, dharma rejection.
Hinduism cancel out entrepreneurialism and acquisition of wealth.
But, India has produced hundreds of entrepreneurs who have made
it big as home and abroad.
• Theoretical classification of 4 stages:
–
–
–
–
Brahmacharya – Student life
Grihstha – Married and house holder
Vanaprastha – Hermit in forest
Sanyasi – Old man and have less traveler.
• Wealth is worshipped in form of Goddess Lakshmi unlike in West were richness
is merely respected.

75. Christianity
• Widely practiced religion in world – About 1
billion people
• Live in Europe and America
• Capitalism - most dominant economic
philosophy which advocates hard work and
wealth acquisition

76. Islam
• Second largest religion practiced in more than 35
countries from Africa to Middle East to China and
Malaysia in Far East.
• exclude receipt or payment of interest which affects
country’s banking and financial system.
• Approving of free enterprise and of earning lawful
profit through trade and commerce.
• advocate market based systems.
• There has been increase of fundamentalism in some
Islamic countries.

77. Buddhism
• 250 million followers in Central and South East
Asia, China, Korea and Japan.
• Stress spiritual achievement and wealth
creation is not encouraged.
• Cultural stress on entrepreneur behavior is
not seen.

78. Confucians
• 150 million people found in China, Korea and Japan.
• Teaches importance of attaining personal recovery
through right action.
• High moral and ethical conduct and loyalty to others
are central to Confucianism.
• Teaches to lower the costs of doing biz which has led to
economic success of Japan, South Korea, etc.
• Loyalty, mutual obligations and honesty are central to
Confucianism.

79. Education and Culture
• Education is lifelong process of learning through which members of
a society acquire knowledge and develop skills, ideas, values, norms
and attitudes which they share with other members of society
• Education has considerable economic implications
– Countries rich in educational facilities attract high wage industries
– Market potential of country defends on education. MNC’s doing biz in
these countries will find it easier to hire and train local managers.
– Level of education determines nature of advertising, packaging,
quality of market research

80. Aesthetics and Culture
• Relates to creative tastes of culture
• Aesthetic values of Indians are different from Canadians as
reflected by art literature, music etc.
• Behavior of people is one more quality of aesthetics
• International managers should understand aesthetic local
values if one has to appreciate another culture
• Color is also related to aesthetics. In Western countries black
is associated with mourning. In Asian countries white is color
of mourning. Green is favored in Islam but associated with
sickness across Asia.

81. CULTURAL
McArabia Kofta

82. Technological environment:
• Technology as a systematic application of scientific
or other organized knowledge to practical tasks.
• Features of technology:
– The first feature of technology is its change and then
more change.
– Technologies effects are wide spread.
– Technology is self-reinforcing.

83. Technological
Consider:
• The technological infrastructure of the market.
• Do all homes have access to energy
(electricity)
• Is there an Internet infrastructure. Does this
infrastructure support broadband or dial up?
• Will your systems easily integrate with your
host country’s?

84. TECHNOLOGICAL
• “World Wide Web” has exploded in last 10 years
• Computers can move money around world =
“finance capital”
• Silicon Valley is 9th largest economy in world!

85. INTERNATIONAL TRADE THEORIES
•
•
•
•
Trade theory is useful because it helps to explain what
might be produced in a given environment ,where
the company might go to produce a given product
efficiently /and whether governmental practices
might interface with the free flow of trade among
countries. Basically all theories look in to the
following factors :
How much to be traded ?
What products to be traded ?
With whom to be traded ?
Should the govt. intervene in trade ?

86. INTERNATIONAL TRADE THEORIES
•
•
•
•
•
Mercantilism
Absolute advantage
Comparative advantage
National Competitive Advantage
The new product life cycle theory

87. Mercantilism
• The first theory of international trade emerged in England in the mid 16th
century. its principle statement was that gold and silver were the
mainstays of national wealth and essential to dynamic commerce.
• At that time silver and gold were the currency of trade between countries
.the country can earn gold and silver by exporting goods.
• In ordinary means therefore to increases our wealth and treasure is by
foreign trade where in we must ever observe this rule ; to sell more to
stranger yearly than we consume of their values
• The main belief of mercantilism was that it was in a country’s best
interests to maintain a trade surplus, to expand.

88. • National wealth was measured by its treasure
(gold)
• Countries should strive to export more than they
import to earn gold
• Use subsidies to enhance exports
• Use tariffs to limit imports
• Use overseas colonies to export to at high prices
and buy from at low prices
• The effects of mercantilism practiced until the
mid-20th century continue to be felt to this day

89. • A nation’s wealth depends on accumulated
treasure
• Gold and silver are the currency
trade.
• Theory says you should have
trade surplus.
– Maximize exports through
– Minimize imports through tariffs
quotas.
4-6

90. Absolute Advantage
• Adam Smith, The Wealth of Nations (1776)
• Real wealth consisted of goods and services
available to citizens, not gold
• Different countries inherently can produce
some goods more efficiently than others and
should specialize in such goods.
• Specialization should be based on natural or
acquired advantages of a nation
• Global efficiency can thus be increased
through free trade

91. • Capability of one country to produce more of a product
with the same amount of input than another country.
• Produce only goods where you are most efficient, trade
for those where you are not efficient.
– Trade between countries is, therefore, beneficial.
• Assumes there is an absolute advantage
balance among nations.

92. ASSUMPTIONS OF THEORY
•
•
•
•
Trade is between two countries
Only two commodities are traded
Free trade exists between countries
The only element of cost of production is
labour

93. Trade Based on Absolute Advantage
An arithmetic example
A Case of Absolute Advantage
Output per Labor Hour
Country
iPad
Cloth
U.K.
U.S.
5 sets
15 sets
20 yards
10 yards
The U.S. has an absolute advantage in iPad production; its iPad workers'
productivity (output per worker hour) is higher than that of the U.K,
which leads to lower costs (less labor required to produce a set of iPad).
In like manner, the U.K has an absolute advantage in cloth production.

94. • A country has an absolute advantage over another in
producing a good, if it can produce that good using smaller
amount resources than another country.
• For example if one unit of labor in Australia can produce 80
units of wool or 20 units of wine; while in France one unit
of labor makes 50 units of wool or 75 units of wine, then
Australia has an absolute advantage in producing wool and
France has an absolute advantage in producing wine.
• Australia can get more wine with its labor by specializing in
wool and trading the wool for French wine, while France
can benefit by trading wine for wool.

95. Comparative Advantage Theory
• In 1817 principles of political economy .
• David Ricardo took Adam Smith’s theory one
step further by exploring what might happen
when one country has an absolute advantage
in production of all goods.

96. • Mutually beneficial trade can occur even when
one country is absolutely more efficient in the
production of all goods.
– The more efficient country should specialize in and
export that good in which it is relatively more
efficient (where its absolute advantage is bigger).
– The less efficient country should specialize in and
export the good in which it is relatively less inefficient
(where its absolute disadvantage is smaller).

97. • A country enjoys an absolute advantage
over another country in the production of
a product if it uses less resources to
produce that product than the other
country does.
• A country enjoys a comparative
advantage in the production of a good if
that good can be produced at a lower cost
in terms of other goods.

98. Qualifications and Assumptions
•
•
•
•
•
•
•
Only two countries and two goods.
Transportation cost is nil.
No difference in price of resources.
Resources can move freely with in the country.
Constant return on sales.
Fixed stock of resources.
Assume away the effect of trade and income
distribution within the country.

99. • Ricardo's comparative advantage theory extends
Smith's view to the case where one of the two
countries has an absolute advantage in both
commodities, and shows that even here trade is
good for both countries.
• As noted above , Ricardo's Comparative
Advantage Theory rests on the same very strong
assumptions that underlie Smith's Absolute
advantage theory .

100. • An Example of Comparative Advantage
A Case of Comparative Advantage
Output per labor hour
Country
iPads
Cloth
Relative cost
U.S.
5 sets
15 yards
1 iPad=3 yards of cloth
China
1 set
5 yards
1 iPad=5 yards of cloth
The
U.S. labor has a 5-to-1 absolute advantage in the
production of iPads. The U.S. labor also has a 3-to-1 absolute
advantage in the production of cloth. The U.S. has a greater
absolute advantage in producing iPads than in producing cloth.
China
has an absolute disadvantage in the production of iPads
and cloth. However, China’s absolute disadvantage is smaller in
producing cloth than in producing iPads.

101. • Gains from Specialization and Trade with Comparative
Advantage
The Change in the World Output Resulting from Specialization
Change in the production of
Country
iPads
Cloth
U.S.
5 sets
15 yards
China
3 sets
15 yards
Change in the World Output
+2 sets
0
As
the U.S. transfers 1 worker from cloth production to iPad production, its
output of iPads increases by 5 and cloth production falls by 15 yards.
As
China transfers 3 workers from iPad production to cloth production, its
cloth production increases by 15 yards and iPad production falls by 3.
The
gain from production and trade is the increase in the world output that
results from each country specializing in its production according to its
comparative advantage.