International Business - Unit 4 BBM Notes

1. INTERNATIONAL BUSINESS
BBM – 6th Semester
University of Mysore
SYLLABUS – UNIT 4:
Multinational Corporations: Meaning, Mode of
Operations, Foreign Collaborations, Joint Ventures,
Franchising and Strategic Alliances. International
Channels of Distribution, - Overseas Production, Free
Trade Area.

2. International Business – Unit 4
MULTI NATIONAL CORPORATIONS (MNCs)
Meaning of Multi National Corporations (MNCs): A Multi
National Corporation (MNC) is a corporation that has its facilities
and other assets in at least one country, other than its home country,
Such Companies have offices in more than one country.
A Multi National Corporation or World Wide Enterprises is an
organization that owns and controls production of goods and
services in one or more countries, other than their home country. It
is also referred as ‘INTERNATIONAL CORPORATION, A
TRANSNATIONAL CORPORATION or a STATELESS
CORPORATION.

3. International Business – Unit 4
Multi National Corporations (MNCs)
One of the first Multi National Business Organizations, the
EAST INDIA COMPANY arose in 1600. After East India
Company, came the DUTCH EAST INDIA COMPANY founded
in Mar 20, 1602, which became the world’s largest company in
the world for nearly 200 years.

4. International Business – Unit 4
Multi National Corporations (MNCs)
Traditional Multi National Corporations and Trans
National Corporations
A Traditional Multi-National Corporation are National
Companies with Foreign Subsidiaries, while a Trans National
Corporation are corporations which spread out their operations
in several countries to sustain high levels of local
responsiveness. Example for Trans National Corporation is
NESTLE, who employ executives from several countries and
tries to make decisions from a Global perspective rather than
from ONE CENTRALIZED HEAD QUARTERS.

5. International Business – Unit 4
Multi National Corporations (MNCs)
Mode of Operations
Usually, the MNCs face the problem of Moral and Legal
Constraints, which is one of the major Global Socio-
Economic problems, to become ‘Stateless Actors’ in the
present century. The MNCs are supported by the “Economic
Liberalization’ and ‘Free Market System’ in the Globalized
International Society.

6. International Business – Unit 4
Multi National Corporations (MNCs)
A Multi National Corporations, are usually large corporations
will the following characteristics:
 Manufacture of Goods or Sells Goods (Trader) in various countries,
 Importing and Exporting of Goods and Services,
 Making significant investments in a foreign country,
 Buying and Selling licenses in Foreign Markets,
 Engaged in contract manufacturing – Permitting a local
manufacturer in a foreign country to produce their goods,
 Opening manufacturing facilities or assembling operations in a
foreign country,

7. International Business – Unit 4
Foreign Collaborations
Foreign Collaboration means an alliance (Union formed for a
mutual benefit of parties) incorporated to carry out the agreed
task collectively with the participation (role) of resident or
non-resident entities.

8. International Business – Unit 4
What is Foreign Collaborations?
 Foreign Collaborations is a mutual co-operation between one
or more resident or non-resident entities.,
 Foreign Collaborations is a strategic alliance, between one or
more resident or non-resident entities.,
 Foreign Collaborations is formed only when one or more non-
resident entities collaborate with one or more resident
entities.,
 Foreign Collaborations before initiatives will require an
approval of the Government of the domestic country.,

9. International Business – Unit 4
What is Foreign Collaborations?
 Foreign Collaborations, during a process of seeking permission the
collaborating entities prepare a preliminary agreement.,
 Foreign Collaborations, after seeking Government’s permission/
approval the resident and non-resident entities sign preliminary
agreement and a contract is executed to form a foreign
collaboration.,
 Foreign Collaborations, after establishing foreign collaboration,
resident and non-resident entity start business together in the
domestic country.,
 Foreign Collaborations is ‘Collaborating entities share their profits
as per the profit sharing ratio mentioned in their executes contract.,
 Foreign Collaborations are for specific period (Tenure) and is
mentioned in the contract.

10. International Business – Unit 4
Examples for Foreign Collaborations are as follows:
 ICICI Lombard General Insurance Company Limited is a financial
foreign collaboration between ICICI Bank Limited, India and
Fairfax Financial Holdings Limited, Canada.
 ING Vysya Bank Limited is a Financial Foreign Collaboration,
formed between ING Group, Netherlands and Vysya Bank, India.
 Tata Docomo is a Technical Foreign Collaboration between TATA
Teleservices, India and NTT Docomo, Inc, Japan.
 Sikkim Manipal University (SMU), India runs some academic
programs through an Educational Foreign Collaborations with
abroad Universities and Institutes, like Liverpool School of Tropical
Medicine, United Kingdom (UK), Loma Linda and Louisiana State
Universities, United States of America (USA), Kuopio University,
Finland and University of Adelaide, Australia.

11. International Business – Unit 4
Objectives of Foreign Collaborations:
 Improve financial growth of the collaborating entities,
 Occupy a major market share for the collaborating entities,
 Reduce the higher operating cost of the Non-Resident
Entities,
 Make an optimum and effective use of resources of the
resident entity’s country,
 Generate Employment in the resident entity’s country.

12. International Business – Unit 4
The Manufacturing Strategies WITHOUT Foreign Direct Investments
(FDI) include,
 Licensing,
 Franchising,
 Contract Manufacturing,
 Turnkey Operations,
 Management Contracts.
The Manufacturing Strategies WITH Foreign Direct Investments (FDI)
include,
 Joint Ventures,
 Strategic Alliances,
 Merger,
 Acquisitions,
 Wholly owned subsidiary,
 Assembly Operations.

13. International Business – Unit 4
Joint Ventures
• Joint Venture means when two parties get together to take on
one project. Its seen that in such an situation, both the parties
equally invest in the project in terms of money, time and effort
to build the original concept.
• A joint venture (JV) is a business agreement in which the
parties agree to develop, for a finite time, a new entity and new
assets by contributing equity. They exercise control over the
enterprise and consequently share revenue, expenses, and
assets.

14. International Business – Unit 4
Joint Ventures
Characteristics of Joint Ventures:
• Joint Ventures can also be JV limited by Guarantee,
• Joint Ventures limited by Guarantee by Partners
holding shares.
• Joint Ventures companies are the preferred form of
corporate investment.
• There is no separate law for JV,
• Joint Ventures Companies are treated like the
Domestic Companies

15. International Business – Unit 4
Joint Ventures
4 Basic Reasons for Joint Ventures:
 To gain faster entry into a foreign market,
 To acquire expertise.
 To increase production scale,
 To expand business development program, by access to distributors
network,
• Some of the popular Joint Ventures are Sony Ericsson, Penske
Truck Leasing, Dow Corning and Owens Corning.
• Parties getting together on temporary basis of partnerships are
also called Joint Ventures, here they are called as Co-Ventures.

16. International Business – Unit 4
Joint Ventures
Screening the Joint Ventures Partners:
 Screening the prospective partners,
 Short Listing with ranking based,
 Checking the credentials of the firm from other companies,
 Availability of appreciated or depreciated property contributed to the
Joint Venture,
 The most appropriate structure of structure and invitation/ bid,
 Foreign investors buying interest in a local company.

17. International Business – Unit 4
Joint Ventures
• Dissolution of a Joint Venture: A Joint Venture can be dissolved
on the following grounds:
• The objective of the venture is met,
• The objective of the venture is not met,
• Either or Both parties have developed a new goal,
• Either or Both parties no longer agree with the JV aims,
• Time for JV has been expired,
• JV Agreement is no longer appropriate in the present market
conditions,
• One party acquires the other.
• Examples of JV are Maruti-Suzuki, ITC-Imperial Tobacco, Hindustan
Unilever, Bharati Airtel and so on are laid and monitored by the SEBI.

18. International Business – Unit 4
Franchising
• Franchising is the means of marketing of goods and
services in which the franchiser grants the ‘Legal
Right to use the Branding, Trademarks and Products
and the Methods of Operation is transferred to Third
party – the Franchisee – in Return for a Franchisee
Fee. The franchiser provides Assistance, Training and
help with sourcing components and exercises
significant control over the Franchisee’s method of
operations.

19. International Business – Unit 4
Franchising
Advantages for franchising:
 Franchising is relatively less risky to start the business.,
 Franchising helps to get readymade information, without wasting time,
energy and resources to gather all information.,
 Franchising too helps to gather readymade information, without using
capital.,
 Franchising is advantageous to build greater market coverage.,
 Franchising successfully done helps the firm to obtain a steady,
predictable stream of income.

20. International Business – Unit 4
Franchising
Types of franchising: ‘Chan identifies two types of
franchise’:
• Product/ Trade Franchising: These are franchise which are
concerned with the Products or Trade like Car Dealership,
Petrol Service Stations, Soft drink bottlers and so on, where
product and trade is concerned.
• Business Format Franchising: This type of franchise is
concerned with Business Formats which is growing steadily
across the globe, like Hotels, Convenience Stores,
Restaurants and so on. This is concerned with the BUSINESS
also the APPEARANCE OF THE LOCATION.

21. International Business – Unit 4
Strategic Alliances
• There is no clear or specific definition for Strategic Alliance,
as there is no hard rule or one way to form a strategic alliance.
Strategic Alliance is possible in the field of Sales and
Marketing, Production of goods, Services, Research and
Development and so on.
• In simple terms, “Strategic Alliance can be said as a new
form of market entry (International or Multinational) and
competitive cooperation for both or single party”. The
strategic alliance can be the result of Mergers, Acquisitions,
(one party is benefitted) and Joint Ventures or Licensing
Agreements (Both parties are mutually benefitted)

22. International Business – Unit 4
Two types of Strategic Alliances:
• On the basis of directions of the alliances, (Vertical
Alliances – Improving business from top to bottom, and
Horizontal Alliances are those which take diversification in a
unrelated business)
• On the basis of extent and timescale of collaborations, This is
based on the agreement between the parties which include, a)
Extent of Cooperation Focused and Complex Alliances, b)
Time Scale of the Collaborations, and c) Consortiums
(Consortiums are time bound projects like civil constructions,
or highway contracts and so on)

23. International Business – Unit 4
Advantages and Disadvantages of Strategic Alliances:
• The Advantages include, i) Spread and Reduced Costs,
ii) Specialize in competence, iii) Avoid or Counter
Competition, iv). Secure Vertical and Horizontal Links, v)
Gain Location-Specific Assets, vi) Overcome
Government Constraints, vii) Minimize Minimum Risky
Environment.
• The Disadvantages of Strategic Alliances include, i)
Adverse Selection, ii) Moral Hazards, iii) Access to
information, iv). Distribution of earnings, v) Potential
Loss of Autonomy, vi) Changing Circumstances.

24. International Business – Unit 4
International Channels of Distribution
• International Business involves coordinating the firm’s
marketing activities from one nation to other, where
Distribution plays a vital role in International Business
competing with one another to reduce the cost and maximize
profits. The agents involved in this process are called as
Intermediaries. These agents, institutions stand between the
producers on one hand and the consumption on the other hand.

25. International Business – Unit 4
International Channels of Distribution
‘Channel Innovation’ depends upon the economic
level, demographic and geographical factors, social
reforms, Government action and Competition
pressure. A properly designed distribution channel
will help the company to achieve competitive
advantage, where this channel distribution depends on
the customer.

26. International Business – Unit 4
International Channels of Distribution
Factors affecting the channel of distribution are:
• Factors relating to the product characteristics, (Value,
Perishable, Delicate, Turnover)
• Factors relating to the company characteristics, (Financial
Strength, Policies, Size, Experience)
• Factors relating to Market and Consumer Characteristics,
(Habits, Preferences, Order size)
• Factors relating to the middlemen Considerations,
(Availability, Attitude, Cost, Services)
• Factors relating to the Environmental Considerations.
(Political, Climate, Competitors, Fiscal)

27. International Business – Unit 4
International Channels of Distribution
Channel Members in International or Global
Distribution:
There are two basic channels – Direct Intermediaries
and Indirect Intermediaries.
• Direct Intermediaries: This include when the firm
appoints appropriate agents to take care of their
operations, these include Foreign Distributor, Foreign
Retailer, State Controlled Trading Company, End
user.

28. International Business – Unit 4
International Channels of Distribution
Channel Members in International or Global
Distribution:
• Indirect Intermediaries: This include when the firm depends
on certain channel as stated below:
Domestic Agents: This include, Agents who look after the
interest of the manufacturers (Example: Export Broker, Sales
Representatives, Export Management Company, Cooperative
Exporters, Webb Pomerene,. Association (Webb Pomerene are
when 2 or more firms of the same industry, get together for
Market their goods overseas), Agents who look after the
interest of the buyers (Example: Resident Buyer, State
controlled buying agents, and Buying agents)

29. International Business – Unit 4
International Channels of Distribution
Channel Members in International or Global
Distribution:
There are two basic channels – Direct Intermediaries
and Indirect Intermediaries.
• Domestic Merchants: These include, i) Export
Merchant, ii) Export Drop Shipper (Drops the goods
at the overseas customers), iii) Export Distributors,
iv) Trading Companies.

30. International Business – Unit 4
International Channels of Distribution
Distribution pattern followed:
• General Pattern: (Middlemen services, Line
Breadth (carried by wholesalers and retailers),
Cost and Margin, Channel Length, Non-Extent
Channel, Power and Competition and so on)
• Retail Pattern: Retail Size Pattern, Direct
Marketing, and Resistance to change.

31. International Business – Unit 4
Overseas Production
• Overseas Production means the firm decides
and manufacturers their goods, other than their
home country. There are various factors for
Overseas Production.

32. International Business – Unit 4
The factors involved in overseas production are:
– Political Factors (The legal policies permit a foreign firm to produce a
product)
– Natural Resources (The availability of resources are abundant)
– Agreement (The agreement between the domestic firm and a foreign
firm or the government)
– Economical Factors (The government can invite firms, into their
nation, to improve economical growth, employment opportunities and
so on)
– Scale of production (This helps to increase the production to reduce
the cost of production)
– Cheaper labor,
– Outsourced production (BPO, KPO offices in India are working for
western countries)

33. International Business – Unit 4
Overseas Production:
• Outsourcing is one of the leading role taken by the
manufacturers across the globe due to several advantages,
these include:
– Lowering costs.
– Skilled Workforce,
– Security,
– Controlled Concerned,
• (All the above points can be used for both advantages and
disadvantages of overseas production, by outsourcing pattern)

34. International Business – Unit 4
Free Trade Area
Free Trade Area is the strategy played by the trade blocs across
the globe.
“A Free Trade Area is the region encompassing a trade bloc
which is the member countries have signed a FREE TRADE
AGREEMENT (FTA) such agreements involve cooperation
between at least two countries to reduce trade barriers –
Import Quotas and Tariffs – and to increase trade of goods
and services with each other”.

35. International Business – Unit 4
Free Trade Area
• “A free trade area can also be said that it is the area where a
group of countries have got together to have a few or no price
control in the form of tariffs or quota between each other”.
• “A geographical area formed by international boundary on
trade and tariffs, which are uniform to all or selected ones”.

36. International Business – Unit 4
Free Trade Area
• Some of the Free Trade Areas, have a common currency
applicable in the area, while certain are fixed to trade and
tariffs, All depends on the agreement between the nations.
• Free trade area benefits the consumers by getting a superior
product at a lower price, while for the firm it is profit, as due
to scale of production it has heavy sales. Producers struggle to
sell their products in the competitive environment.

37. International Business – Unit 4
Free Trade Area
• United States signed free trade agreement with Australia,
Bahrain, Chile, Colombia, Peru, Singapore, Morocco, Oman,
Israel, Jordan and Korea. The US participated in 14 trade areas
in 2014 with the participation of over 20 nations. In addition to
NAFTA, there is a Dominican Republic-Central American
Free Trade Area (DR-CAFTA - 2004). African Union Aims for
Continental Free Trade Area by 2017.

38. International Business – Unit 4
Free Trade Area - List of free trade areas:
– Middle East Free Trade Area (MEFTA)
– South Asian Free Trade Area (SAFTA - 2004)
– Economic and Monetary Union (EU and other countries)
– Economic Union (EU and other countries)
– Customs and Monetary Union ( CEMA/ XAF, UEMOA/
XOF)
– Common Markets,(European Economic Area EEA –
Switzerland – 1994)

39. International Business – Unit 4
Free Trade Area - List of free trade areas:
– Customs Union,
– Multilateral Free Trade Area (NAFTA, and other unions)
– Pan-Arab Free Trade Area (PAN ARAB)
– South African Development Community (SADC on trade -
2005)
– ASEAN Free Trade Area (1992)
– ASEAN India Free Trade Area (AIFTA - 2010)
– ASEAN China Free Trade Area (ACFTA - 2010)
– Asia Pacific Trade Agreement (APTA – 1975)

40. International Business – Unit 4
Free Trade Area
There are multiple proposal agreements for free trade area:
• China-Japan-South Korea Free Trade Agreement, CJSK –
FTA)
• The Tripartite Free Trade Agreement in Africa (T-FTA)
• Shanghai Cooperation Organization (SCO)
• Community of Sahel-Saharan States,
• Free Trade Area of the Americans (FTAA)

41. International Business Environment
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