International Business Management
Content
MB0053 - International Business Management
Roll no.
Q1. The world economy is globalizing at an accelerating pace. What do you mean by globalization? Discuss the merits and demerits of Globalization.
Answer: Globalization: Globalization is the process by which the economies of countries around the world become increasingly integrated over time. This integration occurs as technological advances expedite the trade of goods and services, the flow of capital, and the migration of people across international borders. The term has been used in this context since the 1980s, when computer technology first began making it easier and faster to conduct business internationally. Globalization can also refer to the efforts of businesses to expand their operations to new countries and markets. Merits: Globalization caters to employment and income generation to the people in the host country. Also, the migration of people, which has become easier has led to better jobs opportunities. The country can produce what it produces best and import the rest. With numerous educational institutions around the globe, one can move out from the home country for better opportunities elsewhere. There is a feeling of an international economy. A particular commodity may fetch hundreds of options with different prices. The product quality has been enhanced so as to retain the customers. This leads to Foreign Direct Investment, which helps in promoting economic growth in the host country. The local industries work hard to compete with international firms. Globalization makes one can conveniently deliver the products to a customer located at any part of the world. As the market has widened, the scope and demand for a product will increase. Thus, the final outcome in terms of financial gain enhances the GDP of the country. The standard of life becomes better.
Demerits: Local industries get dislodged. Globalization has given rise to more health risks and presents new threats and challenges for epidemics. Though globalization has opened new avenues like wider markets and employment, there still exists a disparity in the development of the economies.
There is political interference and conflicts arise. Globalization also serves to drive down wages as workers in each country are pitted against each other in the capitalist bid for the lowest costs. Eventually, this must create class tensions which threaten the very survival of capitalism. With large number of people moving into and out of a country people may adapt to the culture of the resident country this can give rise to cultural conflicts. The fast-paced economies that are the developed countries are vying to be the supreme power it has given rise to terrorism and other forms of violence. Globalization increases tensions between competing capitalist states as both fight over access to lucrative markets. Under developed countries are exploited.
Q2. The international trade theories explain the basics behind international trade. Compare the Absolute and comparative cost advantage theories with the help of example.
Answer: International Trade: International trade is the purchase, sale or exchange of goods and services across national borders. International trade produces many benefits to countries both exporting and importing products. The economy of countries affects the world output of international trade. Trade has consistently grown faster than output. International trade encompasses many aspects in relation to various countries. There are many theories regarding international trade some of those are mercantilism, absolute advantage, comparative advantage, factor proportions theory, international product life cycle, new trade theory and national competitive advantage. Absolute advantage theory: The absolute advantage theory was the ability of a nation to produce a product more efficiently than any other nation using the same amount or fewer resources. The difference in this theory is that trade should not be banned or restricted by tariffs but allowed to flow freely according to the demand of the market. This theory also states that the objective be that the people of the country have a higher living standard by being able to obtain goods more cheaply and in greater abundance. The theory measures a nation's wealth on the living standards of the people and not on the money the country has in its reserve. Comparative advantage theory: In the comparative advantage theory the country in question may not be able to produce the good more efficiently than any other country but can produce the good more efficiently than any other good within its own country. This type of trade is accomplished if, say, one country has the absolute advantage in two different types of exports but it costs more monetarily or in labor than another country. This second country then has the comparative advantage. It is able to produce and export this second good to the first country cheaper and more efficiently.
Comparison between Comparative advantage and Absolute advantage theories: A country can have a comparative advantage in producing a good even if it is absolutely less efficient at producing that good. For example a young doctor opens her own practice, working by herself, and within a few months has developed a substantial clientele. At first, she was performing all her clerical work filing, typing and answering the phone by herself. With an ever busier schedule, however, she realizes that she could spend more time seeing patients, and thus see a greater number of patients, if she hired an assistant. As it turns out, the young professional is not only a brilliant doctor, but is also lightning-fast at typing and filing. She is, in fact, better at doing both jobs than the clerical assistant she hires. In other words, she has an absolute advantage at both tasks: medical diagnosis and clerical work. The term absolute advantage emerges when considering multiple products. If A has an economic advantage against B at producing X, and A has an economic advantage against B at producing Y, then we say that A has an absolute advantage against B with respect to products X and Y. The concept of comparative advantage emerges when considering trade. At first glance, there is no reason to think that A, with absolute advantage against B in goods X and Y, would wish to trade either X or Y with B. Another worry is that if B trades in either X or Y with A, he might harm his interests. These initial impressions are completely exploded by considering the nature of trade, and Ricardo’s discovery of the law of comparative advantage.
Q3. Culture is more often a source of conflict than synergy. As an Indian manager, what management style and corporate culture you should be aware of while travelling to Japan and to USA?
Answer: Corporate culture: The success of any multinational company depends on the techniques and cultures. Corporate culture is an organizational culture, related to the management of businesses with respect to organizational structure, strategy, and control. It states all the elements around which a company describes and relates to its stakeholders. Corporate culture also includes the way it organizes its workers, lets them express themselves, and conveys its values. The corporate culture is said to be positive when the official relationships are reasonably considered, members have a stake in company profits, and demands for production are considered sensible. The corporate culture is said to be negative when the opposite conditions apply and relationship with the management is not productive. Japanese Corporate culture: Basis of approach to corporate culture -- Relationship must come before business.
Business structure -- Hierarchically structured, based on harmony and co-operation, with individuals aware of their position within a group. Management style -- Information flows from the bottom of the company to the top. Implementation of decisions has been actively involved in the modeling of policy. Individual personality is not seen as the requisite for effective leadership. Team work – Consensus building process is used to define an agreement before a formal meeting to avoid any conflict. People are expected be modest and self-promotion is not encouraged USA’s corporate culture: Basis of approach to corporate culture -- Every aspect of commercial life is studied and analyzed. Business structure -- The Company is an entity in its own right and survives independently from its workers. Senior management is more rooted in the personality at the top. Americans like to know where exactly they are, what are their responsibilities and to whom they report. Management style -- Management style is individualistic in approach; managers are responsible for the decisions made within their regions of responsibility. Important decisions are discussed in open environment and the responsibility for the concerns of the decision lies with the manager. Team work – Groups of individuals are brought together to complete a given task. During that period the group is together, everybody is committed to the common goals, and work with dedication to assure that the goals are accomplished. Teams are assumed to be temporary in nature.
Q4. Regional integration is the bonding between nations and states through political, cultural and economic cooperation. A whole range of regional integration exists today. Discuss these 6 types in brief.
Answer: Regional integration: Regional integration is a process in which states enter into a regional agreement in order to enhance regional cooperation through regional institutions and rules. The objectives of the agreement could range from economic to political to environmental, although it has typically taken the form of a political economy initiative where commercial interests have been the focus for achieving broader socio-political and security objectives, as defined by national governments. There are six types of regional integration those are, Preferential trading agreement: Preferential trading agreement is a trade pact between countries. It is the weakest type of economic integration and aims to reduce taxes on few products to the countries who sign the
pact. The tariffs are not abolished completely but are lower than the tariffs charged to countries not party to the agreement. India is in PTA with countries like Afghanistan, Chile and South Common Market (MERCOSUR). Free trade area: Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of economic integration. It comprises of all countries that are willing to or agree to reduce preferences, tariffs and quotas on services and goods traded between them. The importers must obtain product information from all suppliers within the supply chain in order to determine the eligibility for a Free Trade Agreement (FTA). The importers product is qualified individually by the FTA. The product should have a minimum percentage of local content for it to be qualified. Customs Union: A customs union goes further than a Free Trade Area and requires its members to implement a common external tariff on imports from outside the Union, whereby the aim is to facilitate goods to move freely throughout the union. An example of a customs union is the established customs union between the European Union and Turkey, which came into effect in 1996. A large part of the EU's trade and competition rules is also extended to the Turkish economy. Common Market: The creation of a common market is the next step, whereby the obstacles for the free movement of labor, capital, services and persons are eliminated. The instruments necessary to establish a common market are: a trade liberalization programme; common external tariff; the coordination of macroeconomic policy; and the adaptation of sectoral agreements. The main idea is to eliminate within the EC all special national rules, which discriminate against the citizens, companies or products of other member countries. The single market with the "four freedoms" the free movement of goods, services, persons and capital forms the core of the European Common Market. Economic union: Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a common market with a customs union. The countries that are part of an economic union have common policies on the freedom of movement of four factors of production, common product regulations and a common external trade policy. The purpose of an economic union is to promote closer cultural and political ties while increasing the economic efficiency between the member countries. These include the free movements of: Goods and services within the union along with a common taxing method for imports from non-member countries. Capital within the economic union. Persons within the economic union. Some forms of cooperation usually exist while framing fiscal and monetary policies.
Political Integration: The deeper forms of integration refer to the constitution of new political entities, which have a certain degree of independence in regard to the individual states. Thus, political integration involves the strengthening of a political system, in particular the scope and capacity of its decision-making process. Legal integration is closely related to political integration and involves the establishment of common legal rules and a common legal system for the citizens of the different states of a region. Treaties might well stipulate a certain degree of sovereignty transfer; however the actual practice might sometimes diverge considerably from the stipulations of the treaty.
Q5. The decision of a firm to compete internationally will be strategic. While formulating global marketing strategies, how should a firm deal with segmentation, market positioning and international product policy?
Answer: Segmentation: Firms that serve global markets can be segregated into several clusters based on their similarities. Each such cluster is termed as a segment. Segmentation helps the firms to serve the markets in an improved way. Markets can be segmented into nine categories, but the most common method of segmentation is on the basis of individual characteristics, which include the behavioral, psychographic and demographic segmentations. The basis of behavioral segmentation is the general behavioral aspects of the customers. Demographic segmentation considers the factors like age, culture, income, education and gender. Psychographic segmentation takes into account beliefs, values, attitudes, personalities, opinions, lifestyles and so on. Market positioning: The next step in the marketing process is, the firms should position their product in the global market. Product positioning is the process of creating a favorable image of the product against the competitor's products. In global markets, product positioning is categorized as high-tech or high-touch positioning. High-tech products and High-tough products each classified as special interest products, technical products, and demonstration products. One challenge that firms face is to make a tradeoff between adjusting their products to the specific demands of a country and gaining advantage of standardization, such as the maintenance of a consistent global brand image and cost savings. International product policy: Some theorists of the industry feel that there is a difference between conventional products and services, stressing on service characteristics, such as heterogeneity (variation in standards among providers and different locations of the same firm), inseparability from
consumption, intangibility and perish ability. Typically, products are composed of some service component like documentation, warranty and distribution. These service components are an integral part of the product and its positioning. We often think of a product in terms of fulfilling the need of our own culture. However, the functions served by that product may be very different in other cultures; Firms have a choice in marketing their products across markets. Many a time’s firms opt for a strategy which involves customization through which the firm introduces a unique product in each country. On the other hand, standardization proposes the marketing of one global product with the belief that the same product can be sold in different countries without significant changes. For example Intel microprocessors are the same irrespective of the country in which they are sold.
Q6. Global sourcing industry is on a growth run as there are sound business reasons to it. Discuss these reasons with examples.
Answer: Reasons for Global Sourcing Global sourcing is one of the most controversial subjects as the benefits of outsourcing are not properly understood by both companies and politicians. The global sourcing industry is on a growth run as there are sound business reasons in global sourcing. These reasons are explained as below: Lower salary and wages: The foremost reason for global sourcing has been the ‘financial incentive’ of outsourced operations to low cost labor destinations. Due to the different stages of economic development, labor cost of workers in any developed countries is far higher than their counterparts. The following table illustrates labor cost differentials among countries. Regulatory costs in business: An underappreciated incentive in global sourcing to developing countries including India has seen significant difference in the regulatory cost of business. Attorneys in India charge a fraction of the cost compared to those in the US, hence, law firms in the US get their law related work done in India. Moreover, cost of employment in US is far higher as companies have to offer legally complying pay packages which include social security, medical care, post retirement benefits, entertainment allowances, employee group insurance, unemployment insurance, etc. Such components may not exist in countries like India. Tax breaks and benefits: Developing countries like India offer tax breaks for new entrants thus offering cost savings for these companies. For example, Hyundai was offered a tax break (VAT) of 5 years by the Tamilnadu government for setting up a plant. Nokia shifted its plant from Germany to Romania as it had low labor cost coupled with tax breaks offered by government.
Improved performance: Developed countries usually outsource their business operations to developing countries like India which is at the bottom of their core operations, monotonous and require huge labor. Such work can be done by dedicated outsourced labor force in developing country at a fraction of the cost of developed countries. It is found that such bottom of the pyramid, monotonous and repetitive work has far better performance in developing countries due to specialization and dedicated expertise for the work. Faster turnaround time: Companies as well as government are outsourcing their non core operations to low cost countries as it helps not only to focus on core activities but to also get the required job done much faster with reduced time and accuracy. In business, ‘time is money’ as the saying goes, thus, firms outsource some of their business operations for faster and quicker turnaround time Uncertainty over political/business climate: Another advantage of global sourcing is that companies want to evade their political and business risks by locating their business operations at various parts of the world. If political or economic problems occur in any region, the company will be able to continue its operations without disruption by fulfilling their needs from other global sourcing location. Proximity to key markets: In an era of globalization, firms have outsourced their business operations close to their key markets. For example, it is cheaper to manufacture goods in Thailand or China and then ship them to Japan than to ship them from US or Europe. Multination organizations have resorted to global sourcing to countries like India to fulfill their markets demand not only for South Asia but also for East Asia, Middle-East and Eastern Africa.
Roll no.
Q1. The world economy is globalizing at an accelerating pace. What do you mean by globalization? Discuss the merits and demerits of Globalization.
Answer: Globalization: Globalization is the process by which the economies of countries around the world become increasingly integrated over time. This integration occurs as technological advances expedite the trade of goods and services, the flow of capital, and the migration of people across international borders. The term has been used in this context since the 1980s, when computer technology first began making it easier and faster to conduct business internationally. Globalization can also refer to the efforts of businesses to expand their operations to new countries and markets. Merits: Globalization caters to employment and income generation to the people in the host country. Also, the migration of people, which has become easier has led to better jobs opportunities. The country can produce what it produces best and import the rest. With numerous educational institutions around the globe, one can move out from the home country for better opportunities elsewhere. There is a feeling of an international economy. A particular commodity may fetch hundreds of options with different prices. The product quality has been enhanced so as to retain the customers. This leads to Foreign Direct Investment, which helps in promoting economic growth in the host country. The local industries work hard to compete with international firms. Globalization makes one can conveniently deliver the products to a customer located at any part of the world. As the market has widened, the scope and demand for a product will increase. Thus, the final outcome in terms of financial gain enhances the GDP of the country. The standard of life becomes better.
Demerits: Local industries get dislodged. Globalization has given rise to more health risks and presents new threats and challenges for epidemics. Though globalization has opened new avenues like wider markets and employment, there still exists a disparity in the development of the economies.
There is political interference and conflicts arise. Globalization also serves to drive down wages as workers in each country are pitted against each other in the capitalist bid for the lowest costs. Eventually, this must create class tensions which threaten the very survival of capitalism. With large number of people moving into and out of a country people may adapt to the culture of the resident country this can give rise to cultural conflicts. The fast-paced economies that are the developed countries are vying to be the supreme power it has given rise to terrorism and other forms of violence. Globalization increases tensions between competing capitalist states as both fight over access to lucrative markets. Under developed countries are exploited.
Q2. The international trade theories explain the basics behind international trade. Compare the Absolute and comparative cost advantage theories with the help of example.
Answer: International Trade: International trade is the purchase, sale or exchange of goods and services across national borders. International trade produces many benefits to countries both exporting and importing products. The economy of countries affects the world output of international trade. Trade has consistently grown faster than output. International trade encompasses many aspects in relation to various countries. There are many theories regarding international trade some of those are mercantilism, absolute advantage, comparative advantage, factor proportions theory, international product life cycle, new trade theory and national competitive advantage. Absolute advantage theory: The absolute advantage theory was the ability of a nation to produce a product more efficiently than any other nation using the same amount or fewer resources. The difference in this theory is that trade should not be banned or restricted by tariffs but allowed to flow freely according to the demand of the market. This theory also states that the objective be that the people of the country have a higher living standard by being able to obtain goods more cheaply and in greater abundance. The theory measures a nation's wealth on the living standards of the people and not on the money the country has in its reserve. Comparative advantage theory: In the comparative advantage theory the country in question may not be able to produce the good more efficiently than any other country but can produce the good more efficiently than any other good within its own country. This type of trade is accomplished if, say, one country has the absolute advantage in two different types of exports but it costs more monetarily or in labor than another country. This second country then has the comparative advantage. It is able to produce and export this second good to the first country cheaper and more efficiently.
Comparison between Comparative advantage and Absolute advantage theories: A country can have a comparative advantage in producing a good even if it is absolutely less efficient at producing that good. For example a young doctor opens her own practice, working by herself, and within a few months has developed a substantial clientele. At first, she was performing all her clerical work filing, typing and answering the phone by herself. With an ever busier schedule, however, she realizes that she could spend more time seeing patients, and thus see a greater number of patients, if she hired an assistant. As it turns out, the young professional is not only a brilliant doctor, but is also lightning-fast at typing and filing. She is, in fact, better at doing both jobs than the clerical assistant she hires. In other words, she has an absolute advantage at both tasks: medical diagnosis and clerical work. The term absolute advantage emerges when considering multiple products. If A has an economic advantage against B at producing X, and A has an economic advantage against B at producing Y, then we say that A has an absolute advantage against B with respect to products X and Y. The concept of comparative advantage emerges when considering trade. At first glance, there is no reason to think that A, with absolute advantage against B in goods X and Y, would wish to trade either X or Y with B. Another worry is that if B trades in either X or Y with A, he might harm his interests. These initial impressions are completely exploded by considering the nature of trade, and Ricardo’s discovery of the law of comparative advantage.
Q3. Culture is more often a source of conflict than synergy. As an Indian manager, what management style and corporate culture you should be aware of while travelling to Japan and to USA?
Answer: Corporate culture: The success of any multinational company depends on the techniques and cultures. Corporate culture is an organizational culture, related to the management of businesses with respect to organizational structure, strategy, and control. It states all the elements around which a company describes and relates to its stakeholders. Corporate culture also includes the way it organizes its workers, lets them express themselves, and conveys its values. The corporate culture is said to be positive when the official relationships are reasonably considered, members have a stake in company profits, and demands for production are considered sensible. The corporate culture is said to be negative when the opposite conditions apply and relationship with the management is not productive. Japanese Corporate culture: Basis of approach to corporate culture -- Relationship must come before business.
Business structure -- Hierarchically structured, based on harmony and co-operation, with individuals aware of their position within a group. Management style -- Information flows from the bottom of the company to the top. Implementation of decisions has been actively involved in the modeling of policy. Individual personality is not seen as the requisite for effective leadership. Team work – Consensus building process is used to define an agreement before a formal meeting to avoid any conflict. People are expected be modest and self-promotion is not encouraged USA’s corporate culture: Basis of approach to corporate culture -- Every aspect of commercial life is studied and analyzed. Business structure -- The Company is an entity in its own right and survives independently from its workers. Senior management is more rooted in the personality at the top. Americans like to know where exactly they are, what are their responsibilities and to whom they report. Management style -- Management style is individualistic in approach; managers are responsible for the decisions made within their regions of responsibility. Important decisions are discussed in open environment and the responsibility for the concerns of the decision lies with the manager. Team work – Groups of individuals are brought together to complete a given task. During that period the group is together, everybody is committed to the common goals, and work with dedication to assure that the goals are accomplished. Teams are assumed to be temporary in nature.
Q4. Regional integration is the bonding between nations and states through political, cultural and economic cooperation. A whole range of regional integration exists today. Discuss these 6 types in brief.
Answer: Regional integration: Regional integration is a process in which states enter into a regional agreement in order to enhance regional cooperation through regional institutions and rules. The objectives of the agreement could range from economic to political to environmental, although it has typically taken the form of a political economy initiative where commercial interests have been the focus for achieving broader socio-political and security objectives, as defined by national governments. There are six types of regional integration those are, Preferential trading agreement: Preferential trading agreement is a trade pact between countries. It is the weakest type of economic integration and aims to reduce taxes on few products to the countries who sign the
pact. The tariffs are not abolished completely but are lower than the tariffs charged to countries not party to the agreement. India is in PTA with countries like Afghanistan, Chile and South Common Market (MERCOSUR). Free trade area: Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of economic integration. It comprises of all countries that are willing to or agree to reduce preferences, tariffs and quotas on services and goods traded between them. The importers must obtain product information from all suppliers within the supply chain in order to determine the eligibility for a Free Trade Agreement (FTA). The importers product is qualified individually by the FTA. The product should have a minimum percentage of local content for it to be qualified. Customs Union: A customs union goes further than a Free Trade Area and requires its members to implement a common external tariff on imports from outside the Union, whereby the aim is to facilitate goods to move freely throughout the union. An example of a customs union is the established customs union between the European Union and Turkey, which came into effect in 1996. A large part of the EU's trade and competition rules is also extended to the Turkish economy. Common Market: The creation of a common market is the next step, whereby the obstacles for the free movement of labor, capital, services and persons are eliminated. The instruments necessary to establish a common market are: a trade liberalization programme; common external tariff; the coordination of macroeconomic policy; and the adaptation of sectoral agreements. The main idea is to eliminate within the EC all special national rules, which discriminate against the citizens, companies or products of other member countries. The single market with the "four freedoms" the free movement of goods, services, persons and capital forms the core of the European Common Market. Economic union: Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a common market with a customs union. The countries that are part of an economic union have common policies on the freedom of movement of four factors of production, common product regulations and a common external trade policy. The purpose of an economic union is to promote closer cultural and political ties while increasing the economic efficiency between the member countries. These include the free movements of: Goods and services within the union along with a common taxing method for imports from non-member countries. Capital within the economic union. Persons within the economic union. Some forms of cooperation usually exist while framing fiscal and monetary policies.
Political Integration: The deeper forms of integration refer to the constitution of new political entities, which have a certain degree of independence in regard to the individual states. Thus, political integration involves the strengthening of a political system, in particular the scope and capacity of its decision-making process. Legal integration is closely related to political integration and involves the establishment of common legal rules and a common legal system for the citizens of the different states of a region. Treaties might well stipulate a certain degree of sovereignty transfer; however the actual practice might sometimes diverge considerably from the stipulations of the treaty.
Q5. The decision of a firm to compete internationally will be strategic. While formulating global marketing strategies, how should a firm deal with segmentation, market positioning and international product policy?
Answer: Segmentation: Firms that serve global markets can be segregated into several clusters based on their similarities. Each such cluster is termed as a segment. Segmentation helps the firms to serve the markets in an improved way. Markets can be segmented into nine categories, but the most common method of segmentation is on the basis of individual characteristics, which include the behavioral, psychographic and demographic segmentations. The basis of behavioral segmentation is the general behavioral aspects of the customers. Demographic segmentation considers the factors like age, culture, income, education and gender. Psychographic segmentation takes into account beliefs, values, attitudes, personalities, opinions, lifestyles and so on. Market positioning: The next step in the marketing process is, the firms should position their product in the global market. Product positioning is the process of creating a favorable image of the product against the competitor's products. In global markets, product positioning is categorized as high-tech or high-touch positioning. High-tech products and High-tough products each classified as special interest products, technical products, and demonstration products. One challenge that firms face is to make a tradeoff between adjusting their products to the specific demands of a country and gaining advantage of standardization, such as the maintenance of a consistent global brand image and cost savings. International product policy: Some theorists of the industry feel that there is a difference between conventional products and services, stressing on service characteristics, such as heterogeneity (variation in standards among providers and different locations of the same firm), inseparability from
consumption, intangibility and perish ability. Typically, products are composed of some service component like documentation, warranty and distribution. These service components are an integral part of the product and its positioning. We often think of a product in terms of fulfilling the need of our own culture. However, the functions served by that product may be very different in other cultures; Firms have a choice in marketing their products across markets. Many a time’s firms opt for a strategy which involves customization through which the firm introduces a unique product in each country. On the other hand, standardization proposes the marketing of one global product with the belief that the same product can be sold in different countries without significant changes. For example Intel microprocessors are the same irrespective of the country in which they are sold.
Q6. Global sourcing industry is on a growth run as there are sound business reasons to it. Discuss these reasons with examples.
Answer: Reasons for Global Sourcing Global sourcing is one of the most controversial subjects as the benefits of outsourcing are not properly understood by both companies and politicians. The global sourcing industry is on a growth run as there are sound business reasons in global sourcing. These reasons are explained as below: Lower salary and wages: The foremost reason for global sourcing has been the ‘financial incentive’ of outsourced operations to low cost labor destinations. Due to the different stages of economic development, labor cost of workers in any developed countries is far higher than their counterparts. The following table illustrates labor cost differentials among countries. Regulatory costs in business: An underappreciated incentive in global sourcing to developing countries including India has seen significant difference in the regulatory cost of business. Attorneys in India charge a fraction of the cost compared to those in the US, hence, law firms in the US get their law related work done in India. Moreover, cost of employment in US is far higher as companies have to offer legally complying pay packages which include social security, medical care, post retirement benefits, entertainment allowances, employee group insurance, unemployment insurance, etc. Such components may not exist in countries like India. Tax breaks and benefits: Developing countries like India offer tax breaks for new entrants thus offering cost savings for these companies. For example, Hyundai was offered a tax break (VAT) of 5 years by the Tamilnadu government for setting up a plant. Nokia shifted its plant from Germany to Romania as it had low labor cost coupled with tax breaks offered by government.
Improved performance: Developed countries usually outsource their business operations to developing countries like India which is at the bottom of their core operations, monotonous and require huge labor. Such work can be done by dedicated outsourced labor force in developing country at a fraction of the cost of developed countries. It is found that such bottom of the pyramid, monotonous and repetitive work has far better performance in developing countries due to specialization and dedicated expertise for the work. Faster turnaround time: Companies as well as government are outsourcing their non core operations to low cost countries as it helps not only to focus on core activities but to also get the required job done much faster with reduced time and accuracy. In business, ‘time is money’ as the saying goes, thus, firms outsource some of their business operations for faster and quicker turnaround time Uncertainty over political/business climate: Another advantage of global sourcing is that companies want to evade their political and business risks by locating their business operations at various parts of the world. If political or economic problems occur in any region, the company will be able to continue its operations without disruption by fulfilling their needs from other global sourcing location. Proximity to key markets: In an era of globalization, firms have outsourced their business operations close to their key markets. For example, it is cheaper to manufacture goods in Thailand or China and then ship them to Japan than to ship them from US or Europe. Multination organizations have resorted to global sourcing to countries like India to fulfill their markets demand not only for South Asia but also for East Asia, Middle-East and Eastern Africa.
