This document provides an overview of international business. It defines international business as transactions that cross national boundaries and includes product presence in different markets, global production bases, diverse human resources, international investments and intellectual property transactions. It discusses why international business is important to study and how understanding global business helps managers operate effectively. It also outlines factors that have encouraged the growth of international business like regional trade blocs and declining trade barriers.

1. Unit I
Dr. Neeta. Rao
Professor
M.Com. Dept, KLS Gogte College of Commerce

3.  Meaning:
 International Business may be understood as those business
transactions that involve the crossing of national boundaries.
 They include;
 1) Product presence in different markets of the world.
 2) Production bases across the globe
 3) Human resource to contain high diversity
 4) Investment in international service like banking, insurance,
advertising, tourism etc
 5)Transactions involving intellectual properties like
copyrights, patents etc

4.  1) Increasingly companies are sourcing their human
resource requirement globally. Fresh candidates can get
jobs easily in an MNC. Hence it is advisable that the
students are taught International Business- its
complexities, opportunities and challenges.
 2) Most of the products we use are supplied to us by
global businesses. Its better to understand global
companies, brands and products. Hence IB.

5.  3) To operate effectively, international managers must
know and understand the various facts of Global
Business.
 4) To know about Government’s role in improving and
encouraging global business.

6.  1) Establishment of WTO in 1995 by GATT countries.
 2) Regional integration by forming trade blocks by
neighboring countries like NAFTA, ASEAN etc
 Some of the trade blocks are;
 SAARC - South Asian Association for Regional
Co-operation
 NAFTA - North American Free Trade Agreement
 EU – European Union
 ASEAN-The Association of South East Asian Nationas

7.  EFTA- European Free Trade Association
 APEC- Asia Pacific Economic Co-operation
 3) Declining Trade Barriers
 4) Declining investment barriers
 5) Growth of Foreign Direct Investment (FDI)
 6) Technological advancement
 7) Growth of Multinational Companies

8.  Stage 1: DOMESTIC COMPANY
 Domestic Company limits its operations, mission and
vision to the national political boundaries.
 The company focuses its view on the domestic market
opportunities, domestic suppliers, domestic financial
companies, domestic customers etc.
 These companies analyse the national environment of
the country and formulate the strategies to explore the
opportunities offered by the national environment.

9.  The domestic companies usually never think of
growing globally.
 If they grow beyond the present capacity, they may
select to diversify their business by entering into new
domestic markets, new products, new technology etc.
 But they do not select the strategy of
expansion/penetrating into the international markets.
 Ex: A small private bank or a sugar factory in the
country.

10.  Stage 2: INTERNATIONAL COMPANY
 Those companies who decide to exploit the
opportunities outside the domestic country are the stage
2 companies.
 These companies remain domestic oriented. Hence the
focus of these companies is domestic but they extend
their wings to the foreign markets.
 They believe that the practices adopted in domestic
business, the people and products of their domestic
business are superior to those of foreign countries.

11.  These companies select the strategy of locating a
branch in the foreign market and extend the same
domestic operations into foreign markets.
 In other words, these companies extend the domestic
product, price, promotion, and other business practices
to the foreign markets.
 Normally internationalisation of most of the global
companies starts with this 2nd stage process.
 Ex: An export oriented garments factory having its
outlets in a forein market.

12.  Stage 3: MULTINATIONAL COMPANY
 Sooner or later, the international companies learn that
the extension strategy will not work. Hence they
transform into multinational companies when they start
responding to the specific needs of the different country
markets regarding product, price and promotion.
 This stage of multinational company is also refered to
as multidomestic. Because it formulates different
strategies for different markets.

13.  The offices/branches/subsidiaries of a multinational
company work like domestic company in each country,
where they operate with distinct policies and strategies
suitable to the country concerned.
 Thus they operate like a domestic company of the
country concerned in each of their markets.
 Ex: Automobile companies which produce cars with
different specifications, models in different countries
to suit the needs of countries concerned.

14.  Stage 4: GLOBAL COMPANY
 A global company is one which has either global
marketing strategy or a global manufacturing strategy.
 Global company either produces in home country or in
a single country and focuses on marketing these
products globally, or produces globally and focuses on
marketing these products domestically.
 Ex: Harley designs and produces super heavy weight
bykes in the USA and markets in the global markets.
Similarly, Dr Reddy’s Lab designs and produces drugs
in India and markets globally.

15.  GAP produces procures products in the global markets
and markets the products in the US through retail
stores.
 Thus Harley and Dr. Reddy’s are examples of global
marketing focus
 GAP is an example for global sourcing company.

16.  Stage 5: TRANSNATIONAL COMPANY
 Transnational company produces, markets, invests and
operates across the world.
 It is an integrated global enterprise that links global
resources with global markets at profit.
 There is no pure Transnational company. However
most of the global companies satisfy many of the
characteristics of the transnational corporation.
 Ex: Coca Cola, Pepsi Cola etc.

17.  International business approaches are similar to the
stages of Internationalisation or globalisation.
 Douglas Wind and Pelmutter advocated for approaches
of International Business. They are;
 1) Ethnocentric Approach
 2) Polycentric Approach
 3) Regiocentric Approach
 4) Geocentric Approach

18.  The domestic companies normally formulate their
strategies, their product design and their operations
towards the national markets, customers and
competitors. But the excessive production pushes the
companies to export the excessive production to
foreign countries.
 The domestic company views the foreign markets as an
extension to the domestic market just like a new region.
 The executives at the head office of the company make
the decisions relating to exports.

19.  The marketing personnel of the domestic company
monitor the export operations with the help of an
export department.
 The company exports the same product designed for
the domestic markets to foreign contries under this
approach.

20. Marketing
Manager
Asst Manager,
North India
Asst Manager,
South India
Asst Manager,
Exports

21.  The domestic Companies exporting to foreign countries
using the ethnocentric approach find at the later stage
that the foreign markets need an altogether different
approach.
 Then the company establishes a foreign subsidiary
company and decentralises all the operations and
delegates decision-making and policy making authority
to its executives.
 The company appoints all the key personnel from the
home country and all other vacancies are filled by the
people of the host country.

22.  The executives of the subsidiary formulate the policies
and strategies, design the product based on the host
country’s environment (culture, customs, laws,
government policies etc) and the preferences of the
local customers.
 Thus the polycentric approach mostly focusses on the
conditions of the host country in policy formulation,
strategy implementation and operations.

23. Managing Director
Manager, R & D Manager, Finance
Manager,
Production
Manager, HR
Manager,
Marketing
CEO
Foreign subsidiary
(South Africa)

24.  The company after operating successfully in a foreign
country, thinks of exporting to the neighbouring
countries of the host country.
 At this stage, the foreign subsidiary considers the
regional environment for formulating policies and
strategies.
 However, it markets more or less the same product
designed under polycentric approach in other countries
of the region, but with different market strategies.

25. Managing
Director
Manager, R & D Manager, Finance
Manager,
Production
Manager, H.R.
Manager,
Marketing
CEO, Subsidiary,
South Africa
Marketing
(Lesotho)
Marketing
(Botswana)
Marketing
(Namibia)

26.  Under this approach, the entire world is just like a
single country for the company.
 They select the employees from the entire globe and
operate with a number of subsidiaries.
 The Head Quarters coordinate the activities of the
subsidiaries.
 Each subsidiary functions like an independent and
autonomous company in formulating policies, product
design, human resource policies, operations etc.

27. Managing Director,
HQ India
Subsidiary,
India
Subsidiary,
Namibia
Subsidiary,
Kenya
Subsidiary,
Lesotho

28.  International Business is not all that lovely and easy as we
think. It has its own problems too.
 The important among them are as below.
 1) Political factors:
 Political instability and unrest are a major factor that
discourages the spread of international business.
 Ex: Civil wars in countries like Syria, Mynmar, Indonesia
etc make it difficult for MNCs to enter and transact
business in these countries.
 Indo-China political relations, Indo-Pak relations will be
always in tension.

29.  2) Exchange Instability:
 Currencies of the countries are depreciated due to
imbalances in the Balance of Payments, political
instability and foreign indebtedness. This in turn leads
to instability in the exchange rates of the domestic
currencies in terms of foreign currencies.
 Ex: The exchange rate of Rupee against the US Dollar
has depreciated many times in the past.
 From Rs. 61.72 in 2015 it has come down to Rs. 71.53
at present, which indicates the depreciation of Rupee
by almost Rs. 10 (16%)

30.  3) Entry Requirements:
 Many countries impose restrictions to MNCs at entry
point itself by making stringent rules and regulations,
licensing requirements etc which makes entry difficult.
 Ex: In India foreign companies can invest only upto
49% of capital, which means the remaining 51% should
be contributed by an Indian company.
 FDI policy of India allows a restricted investment in
many sectors by foreign entities.

31.  4) Tariffs, quotas and trade barriers:
 Governments of various countries impose tarrifs,
import-export quotas and trade barriers in order to
protect domestic business. Further these barriers are
imposed based on the political and diplomatic relations
between the countries.
 Ex: Now the political relation of India with Israel is
very good, hence two countries have signed various
MoUs to have extensive economic, military and
strategic relationship.

32.  5) Corruption:
 Corruption has become a global evil. Higher level
bribes and kickbacks prevent the international
businesses from entering the foreign markets.
 Ex: The high profile defense deals of almost all the
countries
 6) Bureaucratic practices of governmants:
 Bureaucratic attitude of Govt officials, delay in
sanctioning licenses and permission, granting facilities,
etc will discourage foreign companies.

33.  7) Quality maintenance:
 International business houses have to maintain high
quality standards in order to conform to the quality
standards of the countries concerned, otherwise they
will have to face severe legal consequences from those
counties.
 Quality standards differ from country to country and
MNCs have to abide by the standards of each country
they operate.

34.  8) High cost:
 Internationalising the domestic business involves
market survey, product improvement, quality up
gradation, managerial efficiency and the like. These
activities need higher investment and also involve
higher cost and risk for the firms. Hence most of the
successful domestic companies refrain from going
international.

35.  The economic environment of various countries mostly
and directly influence the business.
 Global economy has undergone a sea change during the
last 50 years, but it is more evident during the last 30
years, i.e. after 1990.
 The results of these changes are the emergence of
global markets, establishment of WTO, emergence of
global business houses and global competitors

36.  The major changes include;
 1) Capital flow rather than trade or product flowaccross
the globe.
 2) Establishment of production facilities in various
countries.
 3) Technological revolution has resulted in delinking of
volume of production and level of employment.
 4) The macroeconomic factors of individual nations
independently do not significantly control the global
economic outcomes.
 5) The contest between capitalism and communism is
over. Capitalism succeeded over communism/socialism
as a model for the organisation of economic activity.

37.  There are 3 types of economic systems, viz, Capitalism,
communism and Mixed.
 Economic systems are based on resource allocation in
the system.
 In fact there is no example of pure capitalistic or
communistic economy. All actual systems are mixed
economic systems of varied degrees of market
allocation and Government allocation.

38.  Under this system customers’ choice for products/services
decides what will be produced by whom.
 This economic system provides freedom of choice and
economic democracy.
 It emphasises the philosophy of individualism believing in
private ownership of production and distribution facilities.
 The limitations of this system urged the governments to
introduce welfare state concept like workmen’s
compensation laws, provision of social security etc
 USA, Japan and UK are the examples of Capitalistic
economies.

39.  Under this economic system, major factors of
production and distribution are owned, managed and
controlled by the state.
 The purpose is to provide the benefits to the public
more or less on equity basis.
 The factors of mixed economic system are
development of strong public sector, agrarian reforms,
control over private wealth, regulation of private
investment and national self-reliance.
 This system advocates for egalitarian principle.

40.  It believes in full employment and suitable rewards for
the workers’ efforts.
 As mentioned earlier, there is no pure capitalistic
system, or pure communist system. All capitalistic
systems have a command sector and all communist
systems have a market sector.
 The trend that is taking place in the globe now is the
move towards privatisation i.e. move towards market
allocation.

41.  In this economic system, private property and property
rights are abolished.
 The state owns all the factors of production and
distribution.
 Communism is also known as Marxism. Lenin set up a
communist state in Russia in 1917, and later it spread to
other countries like Czechoslovakia, China, Rumania,
Yugoslavia, Poland, etc.
 In a communist country, resource allocation decisions are
made by the government planners. The number of
automobiles, shoes, shirts,-their size, quality, color- are all
decided by the Govt planners.

42.  It reduces the individual freedom of choice due to
restrictions on items to be produced.
 It imposes too many restrictions on MNCs and FDI
 It fails to get total commitment of people to work.
 It failed to achieve significant economic growth.
 It could not achieve equality-the main plank of
Marxism.
 It has been obsessed with rights of workers.

43.  Communism collapsed in the former USSR and in most
of the African countries.
 The degree of command has been declining in Chine.
 Cuba is still a predominantly communist country.

44.  The World Bank categorises economies into one of the
following groups according to the per capita Gross
National Income.
 As of July 1, 2019, the new thresholds for classification

Threshold Per capita GNI ($)
Low income
Lower middle income 1026 – 3995
Upper middle income 3996 – 12,375
High income 12,375

45.  The World Bank refers to the low and middle income
countries as developing countries and high income
countries as developed or industrialised countries.
 However it does not mean that the developed countries
have reached a stage of final development.

46.  Also known as Third world countries, these countries
exhibit the following characteristics.
 1) Limited industrialisation and excessive dependence
of population on agriculture.
 2) High birth rates
 3) Low literacy rates.
 4) Heavy reliance on foreign aid.
 5) Political instability and unrest
 6) Concentrated in Africa and South of the Sahara

47.  7) Excessive unemployment and underemployment
 8) Technological backwardness
 9) Underutilisation of natural resources
 10) Excessive dependency on imports
 11) Industrial development is characterised by
consumer goods industries
 12) The vicious circle of poverty

48.  These countries are also known as less developed
countries. Features of these countries are;
 1) Early stage of industrialisation
 2) Expansion of consumer markets
 3) Availability of cheap and motivated human resources
 4) Domestic markets are dominated with the products
like clothing, building materials etc
 5) Location for production of standardised products
like clothing for export.
 6) Have competitive advantage in labour intensive
products

49.  Known as industrializing countries, these countries are
characterised by the following;
 1) Less dependence on agriculture
 2) Occupational mobility of the people from agriculture to
industry
 3) Migration of people from rural to urban areas resulting in
increased urbanisation
 4) Increase in literacy, formal education and increased
wages
 5) Low wage cost compared with advanced countries
 6) Formidable competitors due to lower wage costs, but
with capabilities of advance countries
 7) High exports and rapid economic growth

50.  These countries are termed as advanced countries also.
They have the following characteristics;
 1) Service sector contributes more than 50% to the
GDP.
 2) Development of information sector
 3) Development of intellectual technology over
machine technology
 4) Domination of scientists and professionals over
engineers and semi-skilled workers.
 5) Emphasis on future plans

51.  6) High income countries mostly aim at building the
information society
 7) These countries face the problems like pollution,
excessive urbanisation, economic depression, increase
in aged population etc
 8) Deindustrialisation is in the process in these
countries. These countries are shifting to information
society.
 9) Product innovations are more prevalent in post
industrial society compared that of industrial society.

52.  Japan’s work culture (mainly co-operation and
harmonious interaction) suits to the basic requirements
of post industrial society.
 The UK work culture (mainly distrust and absence of
sound relations) is in contrast with the needs of rapid
industrialisation.

53.  In case of global companies, understanding of trade
policies is very essential.
 International trade policies deal with the policies of the
national governments relating to exports and imports of
various goods and services to various countries either
on equal terms and conditions or on discriminatory
terms and conditions.
 Trade policies also aim at protecting the domestic
industries from the competitions of advanced countries
through imposing quotas or by giving subsidies to the
domestic companies.

54.  Thus the countries announce their trade policies from
time to time.
 An understanding of these policies enables the MNCs
to formulate their strategies regarding entry and
conduct of business in various countries.
 Governments announce their trade policies regarding
 Tariffs
 Subsidies
 Import quotas
 Voluntary export restraints
 Local content requirement
 Administrative policies

55.  Tariffs refer to the tax imposed on imports.
 Tariffs are of two types.
 1) Specific tariffs
 2) Ad valorem tariffs
 Specific tariffs are levied as a fixed charge for each unit
of the product imported. For ex, a tariff of Rs. 2,000 on
each computer imported, a tariff of Rs. 50,000 on each
car imported etc
 The tariff levied as a proportion of the value of the
imported goods is called Ad valorem tariff. For ex,
imposition of 40% tax on the value of the computers
imported.

56.  The purpose of tariffs is to protect the domestic
industry by increasing the cost of imported goods.
 The following parties gain from the tariffs;
 1) Government of the importing country
 2) Industry of the importing country
 3) People of the domestic country, as their jobs are
saved.
 4) Business of the ancillary industry, services, market
intermediaries etc

57.  However the following parties are adversely affected
by the tariff;
 Customers of the domestic country as they have to pay
a higher price. Thus the customers pay for the
inefficiency of the domestic industry.
 The industry of the exporting country loses the demand
for its product, sale and profit.

58.  In order to encourage domestic production or to protect
the domestic producer from foreign competitors, the
government pays to a domestic producer. Such
payments are called subsidies.
 Subsidies will help the domestic producer by reducing
his cost of production.
 Subsidies are in different forms.
 They are cash grants, loans and advances at a lower
rate of interest, tax holidays, government procurement
of output at a higher rate, equity participation and
supply of inputs at lower rates.

59.  Subsidies help the domestic producers in the following
ways;
 Low cost of production which enables the domestic
producer to earn high margin profits or fix the price at a
lower rate.
 Compete with a foreign producer in the domestic
market.
 Enter the foreign markets.

60.  Import quota is a direct restriction on the quantity of
goods which are imported into a country. These
restrictions are imposed by issuing import licences to
certain firms and individuals to import a certain
quantity of the goods.
 Import quotas provide protection to the domestic firms
from the foreign competitors.

61.  A voluntary export restraint is the opposite form of
import quotas.
 It is a quota on exports of the domestic firms imposed
by the exporting country, mostly at the request of the
importing country.
 Import quotas and voluntary export restraints help the
domestic firms by providing protection from foreign
competitors.

62.  Local content requirement is a condition that requires
some specific fraction of a product imported be
produced domestically.
 The requirement may be in physical terms (50% of the
components should be from the domestic country) or in
value terms (50% of the value of the product should be
produced domestically).
 Most of the developing countries insist on the local
content requirements in order to shift atleast certain
part of manufacturing base in their country.

63.  This helps the country to enhance the employment
opportunities, utilisation of local resources and
economic activities.
 This factor protects domestic producer as in case of
quotas.

64.  Governments, in addition to quotas and restrictions, use
formal and informal policies to restrict imports and
boost exports.
 Administrative policies are bureaucratic rules and
procedures which are formulated to make it difficult for
imports to enter the country.
 For ex, formal trade barriers like tariffs and quotas are
the lowest in Japan, but it mostly uses the
administrative policies to achieve the same.