Module 1 - Ut 1

 

 

MODULE 1

INTRODUCTION TO INTERNATIONAL BUSINESS 1. Explain  Explain the history of international international business business

Introduction The origin of international business goes back to human civilization.3000 civilization.3000 years ago the civilization started trade with each other. Roman Empire had extensive trade route across the known world. uring !"th and !#th century European travelers travel globe in search of new trade route. $olonial development started in !#00.The concept of international business become very strong during !% th century. The first  phase of globalization globalization can be traced back to !& !&'0 '0 and ended with ( (orld orld (ar (ar ! driven by industrial industrial revolution in )*+ ),- and ermany. The import of raw material by colonial empires from fr om their colonies and exporting finished goods to the overseas possession was the main reason of increase in international trade. /ater various governments imposed a number of barriers to trade to protect their domestic  production. -dvanced countries countries experienced several several set back due to trade barri barriers ers .Then the world nat nation ion felt the importance of international co operation for global trade. t resulted in the establishment of 12 international monetary fund4 and 5R nternational bank for reconstruction and development  popularly called as (orld (orld 5ank. The prolong prolonged ed recession before ( (orld orld (ar (ar 6 made the countries countries to think about new policies in international business after world war 6.Then 63 countries conducted negotiation and formed -TT. /ater -TT become (T7 .The effort of 12+ -TT+ (T7 along with effort of individual countries lead to globalization of business. 2. Define international business (june 2008)

DEFENITION OF IB nternational business in simple term can be defined as 8any commercial transaction9taking transaction9taking place across the boundary lines of a sovereign entity:. -ccording to 2rancis $herunilam in his book on nternational 5usiness 5 can be defined as 8business activity or transaction that transcends the national border can be called as international  business:nternational  business:ntern ational 5usiness4 ;age no<= no<= -ccording to Terpstra Terpstrathese and ,arathy international business is 8finding out whatand customers want around the world and satisfying wants better than other competitors both domestic international: -ccording to *eegan 8international business is the process of focusing the resources and ob>ective of an organization on the global market opportunities and threat.:

4. What are the major drivin for!es of "#$%explain the drivers of !ross boarder business(&une 2008)%'hat are drivers of "# ."ndian entrepreneurs are emerin as ood entrepreneur in international business.'hy$(&uly 200 * mar+s) DRIVERS OF IB

There are number of forces which induce and propel globalization. The important driving forces of 5 are 1. liberaliation and !lobali"ation

 

  The important factor which helps in flourishing flourishing of internationa internationall business is globalizatio globalization n and liberalization. (ith a lot of liberalization and with the help of (T7?-TT the world has become one single market. 1oreover the changes made in many man y of the countries like china +and other socialist countries due to liberalization is an important driving force of 5. #. MNC$

1ultinational companies which use their resources with world market is an important force of 5. Taking Taking advantage of liberalization they are growing very fast. -ccording to (o (orld rld nvest Report 6000+there were about =="00 1@$As in the world. %. Tec&nolo!'

Te Technology chnology is an important force .Technology .Technology is a universal factor that crosses national and cultural  boundaries. There There are no cultural boundaries boundaries limiting its applications. applications. 7nce technology technology is introduced introduced it will be spread to everywhere in the world. Technology monopoly encourages internationalism internationalism because firm can exploit the respective demands without any competition. for ex in medical and health sector a hospital in ),- perform reBuired diagnostics Can D9ray and scan. n the next 3 minutes the radiologist radiologist in ndia receives and send the report =. Tran(ort and co))unication re*olution Transportt andbusiness. Transpor communication helps in disadvantage s of natural barriers and thereby help in international business . T revolution hasreducing made anthe enormous contribution to the emergence of global village. 7ver past 30 years global communication has been revolutionized by developments in satellite+ optical fiber and wireless technology and now internet. -ll the modern facilities of transportation and communication is a ma>or driving force of internationalism. internationalism. ". +roduct de*elo()ent cot and e,,ort The cost of new product development is huge in many of the industries like pharmaceutical industry. To recopy such cost a global market is reBuired. 2urther because of huge investment and diverse skill reBuirements associated with new product development+ cross border alliance in research and development are becoming more and more popular. -. ualit' and cot

(hen a firm is in international business the Buality will be better and some time the cost will be also less. ,o in order to maintain Buality and to reduce the cost firms are compelled to do international business and thus these 6 are ma>or drivers of 5 /. Riin! a(iration and 0ant

5ecause of increasing level of education and exposure to media the aspiration of people around the world is rising. They aspire for everything which makes their life comfortable. f domestic firms are not able to meet their wants they will go internationally. . Co)(etition

eightened competition compels firms to explore new ways of increasing their efficiency efficiency++ by shifting internationally at the earliest. t also results in international production taking new forms with new ownership and contractual agreement+ and new activities in abroad.

 

2. 3orld econo)ic trend

There are some world economic trends which add momentum to globalization trend. 7ne of the important trends is the difference in growth rate of economies. The comparatively slow growth rate of developed economic countries and the drastic growth of developing countries prompt the developed countries to find their market somewhere else. /iberalization characterized by deregulation and privatization is also one of the ma>or change. Thirdly domestic economic growth and opportunities outside reduce the opposition to globalization globalization. classic is $hina. $hina has benefited tremendously foreign investment. -t the same time. it is usingexample outside opportunities opportuniti es also.ie globalization should be from mutual. !4. Re!ional inte!ration ,everal regional integration like like @-2T@-2T-+E)+ +E)+ create a borderless world between the members of such  block+ foster the globalistion globalistion some of the regional regional blocks also give give a fill up to cross bo border rder investment and financial flows. 11. Le*era!e

- ma>or factor helps in 5 is opportunity a global company posses to develop leverage. The more the number of countries it operates in business sectors the more could be the scope for leverage. -ccording to *eegan 8leverage is simply some type of advantage that a company en>oys by virtue of the fact that it conducts business in more that one country. lobal company posses following = types of leverage

,-. Differentiate bet'een Domesti! and international #usiness. (&une 20-)

Do)etic Buine

International Buine

!. ,ing ,inglle llan angu guag agee aan nd nat natio ion nal alit ity y

!. 1u 1ult ltil iliingu ngual al?m ?mu ultin ltinaation tionaal?m l?multic lticu ultu tura rall fac facto tors rs

6. Relatively homogeneous mark arket

6. 2ragmented and diverse mar ark kets

3. ata availabl available+ e+ usually acc accurate urate and collection easy

3. ata collecti collection on a large large task reBuiring significantly significantly higher   budgets and personnel personnel allocation

=. ;oliti ;olitical cal factor factorss rrela elativ tively ely uni unimpo mporta rtant nt

=. ;oliti ;olitical cal factor factorss freB freBuen uently tly vital vital

". Relative Relative freedom freedom from governmen governmentt interference

". nvolvement in national national economic plansF government influences business decisions

#. ndividual corporation has little little effect on #. GravitationalG distortion by large large companies environment

 

'. Transaction time is less

'. Transaction time is more .

&. Relati Relativel vely y stabl stablee busine business ss envir environm onment ent

&. 1ultip 1ultiple le enviro environme nments nts++ many of of which which are are highly highly unstable but may be highly profitable4

%. )niform financial climate

%. Hariety of financial climates ranging from over9 conservative to wildly inflationary

!0 ,i , ingle currency

!0. $ $u urrencies differing in stability and real value

!! 5usiness Grules of the gameG mature mature and !!. Rules diverse+ changeable changeable and unclear  unclear  understood

!6 1anagement g generally enerally accustomed accustomed to sharing responsibilities and using financial controls

!6. 1anagement freBuently un un autonomous and unfamiliar unfamiliar with budgets and controls

5 . ,. Why !ompanies o lobal$ lobal$ Dis!uss the motives o off lobali/ation of b business usiness (&une 20 208 8 mar+s)

The factors behind why companies go international can be divided into6.one is pull factor and the other is  push factor. ;ull factor Cproactive factors+ companies are motivated because of attractiveness of foreign market. Ex.  profitability and growth prospects ;ush factors9compulsion of domestic market ex. saturation of market.

Reaon ,or co)(anie !o !lobal 1. +ro,it ad*anta!e ;rofit is the first motive of any company. n order to increase profit companies want to go international. $ompanies start their business in other countries+ where cost of production is less .1any 1@$A, lured to $hina due to cheap labour. 2or ex .;hilips has got 63 factories in $hina. n some cases international trade will increase profitability of domestic business #. 6ro0t& o((ortunitie

 The most common reason for going global is the potential for growth. The safe course is always to start locally and grow from the foundation a company established at home. Taking the opportunities around world 1@$As are interested in going global .now a days companies go to developing countries due to increase in population and income income in those countries. ExF ndiaAs per capita income was rs !#+#&& in 6000 and it drastically increased to '=+%60 in 60!=.

 

%.Do)etic )ar7et contrain

The demand for a good in some countries tends to decline some time. (hen supply exceeds demand in the country there will be excess production in the country. ,o in order to find new market for the product countries go international. 2or ex .! st Buarter of 6!st century+ stock of certain consumer durables like tv car  etc exceed total number of house hold. $ertain companies like ,amsung+ / whose origin is in ,outh *orea etc increase their presence in ndia. /ower manufacturing cost and untapped market was the main reason for them to enter in ndia. ndia. 8. Co)(etition Till liberalization liberalization in !%%! ndian market was protected from other market. Economic liberalization cause increase competition from foreign firms. ,trategy of counter competition is very common in which companies penetrate the home market of foreign competitors. 2or example 51 entered the Iapanese market and become a great success. Then the 6 other computer industry 2ugitsu 2ugitsu and hitachi lost their  business. ,o in order to counter counter the competition competition they entered ), market which which is the home country of of 51.5ut they couldnAt be successful in the initial stage. /ater they enter a >oint venture in ), and become successful. 5.6o*ern)ent (olic' and re!ulation

There is negative and positive factors for government policy and regulations. 1any government give incentive and positive support to domestic companies +import development and foreign investment. ,ometimes environmental law in developed countries compel countries to go international. -. Mono(ol' (o0er

n seeking of monopoly power countries spread internationally internationally.. 5ut in long run competitors will follow. /. 9i!& cot o, tran(ortation

nitially company enters through marketing operation. 5ut the profit margin will be less for foreign country.. This is mainly because of high transportation cost. Then the company try to set up a new branch country in foreign country . Ra0 )aterial a*ailabilit'

n search of raw material at low cost companies go global. The raw material which is expensive in foreign country will be cheap in foreign country 2. Tarri, Tarri, and i)(ort :uota

ue to imposition of import Buotas and trade restriction of some countries foreign investors will start their business in the country in order to get rid from all these type of trade barriers.

"nternationalisation;<=UL>#41#? ,*.What do 'e mean by the 1erm "nternationalisation ;<=UL>#41#? The term internationalisation envelops all activities that a company undertakes with regards to its relations with foreign markets. ;olitical and economic changes in the global terrain certainly influenced the term to a point where it now involves more activities than merely exporting  goods  goods to other countries. Thus+ internationalisation can take many forms+ such as investing in a foreign

 

country foreign direct investment4+ forming partnerships with foreign companies+ subcontracting foreign experts+ taking part in international networks+ and many man y more. ,.What do you mean by trade flo'$

Trade flows are the buying and selling of goods and an d services between countries. Trade flows measure the balance of trade exports C imports4. imports4. This is the amount of goods that one country sells to other countries minus the amount a mount of goods that a country b buys uys from other countries. This calculation includes all all international goods transacti transactions ons and represents a countryJs trade balance.  @et exporters run a trade surplus. This is due to the fact that they sell more goods to the international market than they purchase from the international m market. arket. emand for that countryJs currency then increases because international clients must buy the countryAs currency in order to  buy these goods. This causes the value of the currency to rise. $ountries that are net importers import more from international producers than they export to international clients.  @et importers run a trade deficit. This is due to the fact that they purchase more foreign goods than they sell to the the international market. n order to purchase these international goods+ importers must sell their domestic domestic currency and buy a foreign currency. This causes the value of the domestic currency to fall. -s an example+ let us look at Iapan+ which is an export9driven eeconomy conomy which usually runs a trade surplus. Iapan exports more goods to to international clients than tthey hey import from international producers. IapanAs trade surplus is the ma>or reason why the I;KIapanese Ken4 Ken4 has not depreciated sharply despite severe economic econo mic weakness. flo'. What are the types types33 methods and importan!e of D"$ D"$ .,   Explain "nvestment flo'.

nvestment flows is also referred to as relative economic strength forecasting< The focus is on investment flows+ which follow strong economic growth trends that attract foreign investments+ and thus+ increase demand for the local currency. $apital flows represent investments by countries or companies in another country. The The flow of money to a  particular destination tends to increase demand for the target destinationJs currency. This increase in demand causes the currency to appreciate increase in value4. Forei!n direct in*et)ent  FDI4 is a direct investment into production or business in a country by an individual or company of another country+ either by buying a company in the target country or by expanding operations of an existing business in that country. 2oreign direct investment is in contrast to

 

 portfolio investment which is a passive investment in the securities of another country such as

stocks

and bonds. 5roadly+ foreign direct investment includes Gmergers and acBuisitions+ building new facilities+ reinvesting 5roadly+  profits earned from overseas operations and intra company loansG. n a narrow sense+ foreign direct investment refers >ust to building new facilities. The numerical 2 figures based on varied definitions are not easily comparable.

 Types  Types of FDI !. 9ori"ontal FDI arises when a firm duplicates its home country9based activit activities ies at the same value chain stage in a host country through 2. 6. +lat,or) FDI 2oreign direct investment from a source country into a destination country for the  purpose of exporting to to a third country. country. 3. Vertical FDI takes place when a firm through 2 moves upstream or downstream in different value chains i.e.+ when firms perform value9adding activities stage by stage in a vertical fashion in a host country. orizontal 2 decreases international trade as the product of them is usually aimed at host countryF the two other types generally act as a stimulus for it. 2 is building new facilities.

Methods of FDI The foreign direct investor may acBuire voting power of an enterprise in an economy through any of the following methods< •

 by incorporating a wholly wholly owned subsid subsidiary iary or company anywhere

•

 by acBuiring shares in an an associated enterpris enterprisee

•

•

through a merger or an acBuisition of an unrelated enterprise  participating in an eBuity eBuity >oint venture venture with another investor investor or enterprise

Importance of FDI !. The rap rapid id growth growth of world world populat population ion since since !%"0 has occurre occurred d mostly mostly in developi developing ng countries. This growth has been matched by more rapid increases in gross domestic  product+ and thus income per capita has increased in most countries around the world since !%"0. 7nly war9torn and countries with other serious external problems+ such as aiti+ ,omalia+ and @iger have not registered substantial increases in ; per capita. 6. -n increase increase in 2 2 may be associat associated ed with improve improved d economic economic growth growth due due to the influx influx of capital and increased tax revenues for the host country. ost countries often try to channel 2 investment into new infrastructure and other pro>ects to boost development.

 

3. re reate aterr compet competiti ition on from new companie companiess can lead to produ producti ctivity vity ga gains ins and greater  greater  efficiency in the host country and it has been suggested that the application of a foreign entityAs policies policies to a domestic subsidiary may improve corporate governance standards. =. 2or 2oreig eign n invest investmen mentt can result result in the transfe transferr of soft skills skills through through traini training ng and >ob creation+ creati on+ the availabi availability lity of more advanced technology technology for the domestic market and access to research and development resources. ". The local local population population may may be able to benefit benefit from the the employment employment opportun opportunities ities created created  by new businesses.

China

2 in $hin 2 $hina+ a+ also also known known as R2 R2 r renm enmin inbi bi fo fore reig ign n dire direct ct inve invest stme ment nt4+ 4+ has has incr increas eased ed considerably in the last decade+ reaching L"%.! billion in the first six months of 60!6+ making $hina the largest recipient of foreign direct investment and topping the )nited ,tates which had L"'.= billion of 2. uring the global financial crisis 2 crisis 2 fell by over one9third in 600% but rebounded in 60!0. India

2oreign investment was introduced in !%%! under 2oreign Exchange 1anagement -ct 2E1-4 2E1-4.. ndia disallowed overseas corporate bodies 7$54 to invest in ndia. ,tarting from a baseline of  le less ss tha than n L! billi billion on in !%%0+ !%%0+ a 60!6 60!6 )@$T-  )@$T-  survey pro>ected ndia as the second most important 2 destination after $hina4 for transnational corporations during 60!0C60!6. -s per  the data+ the sectors that attracted higher inflows were services+ telecommunication+ construction activities activ ities and computer computer software software and hardware. hardware. 1auritius+ 1auritius+ ,ingapore+ ,ingapore+ ), and )* were among the leading sources of 2. 5ased on )@$T- data 2 flows were L!0.= billion+ a drop of  =3M from the first half of the last year. United States 5roadly speaking+ the ).,. has a fundamentally J open economyJ  and low barriers to foreign direct investment. ).,. 2 totaled L!%= billion in 60!0. &=M of 2 in the ).,. in 60!0 came from or through eight eig ht cou count ntrie ries< s< ,witze ,witzerla rland+ nd+ the )nite )nited d *ingdo *ingdom+ m+ Iapan+ Iapan+ 2rance 2rance++ erman ermany y+ /uxemb /uxembour ourg+ g+ the  @etherlands+ and $anada.

.,.'hat are the different approa!hes to "#$ Explain 'ith relevant examples$% What are the different types of orientations in "nternational business$ -ccording to the analysis made by ouglas+ (ings+ and ;elmutter there are = approaches to 5. They are !.Ethnocentric 6.;oly centric 3.Regiocentric

=.eocentric

 

The degree and nature of involvement in international business or the international orientation of  companies is of four types 1.Et&nocentri) C home country orientation4 C 

 t has home country orientation. n this approach the overseas operations are viewed as seconda sec ondary ry to domest domestic ic operati operations ons.. t primar primarily ily goe goess intern internati ationa onall to dispos disposee of the surplus. The domestic market is superior. ;lans are made in the home office and overseas marketing is commonly administered by an export home country nationals. omestic  product mix is implemented without many modifications. 2oreign markets are extension of domestic markets. They consider new extended company as a new region. -n export department will monitor all the transaction .it can be explained with a diagram 1anaging director 

1ng R  1ng RN finance

1ng

1ng

1ng mrkting

 production

-sst mng north india  

-sst mngr   -sst mng ,outh india export

Merit

!. @o cos costt and and ef effor forts ts of of local localiza izatio tion n 6. -n easy route route when when foreign foreign markets markets have similar similar characte characteristi ristics cs to domestic domestic markets markets.. De)erit

!. /imits /imits the exploit exploitation ation o off internation international al business business opportu opportuniti nities. es. #+ol'centri) @ <&ot countr' orientation4

n this stage the company establishes a foreign subsidiary company and decentralizes all operati oper ation on and gives gives the decisi decision on making making author authority ity to its executive executives. s. The company company appoints key person from country and others will be from home country. ,ubsidiaries established in overseas market operate independently of others and establish their own marketing strategies. 1anaging director  $E7 subsidiary

 

1ng RN

1ng 1ng 1ng finance mrkt  production 1ng R  Merit

!. -daptation -daptation to the market market character characteristic isticss which helps helps better better exploitatio exploitation n of the market  potentials. De)erit !.igh cost of adaptation. 6.elays in adaptation. %.Re!iocentri) @ <re!ional orientation? @

n this approach company view different region as different markets. - particular region with certain important common marketing characteristics is regarded as a single market. t has regional regional orientation. orientation. 1arkets 1arkets are differenti differentiated ated and delineated delineated on the basis of  co comm mmon on regi region onal al ch char arac acte teri rist stic ics. s. Try to trad tradee off off be betw twee een n loca locali liza zati tion on an and d standardization. t can be explained with a diagram 1anaging director  $E7 subsidiary south -frica

1rkt namibia

1rkt lesotho

1rkt botswana

1ng RN 1ng mrkt 1ng

1erits 1ng finance !. ,ome production advantages advantages of1ng locali localization zation and standar standardizati dization. on. R  emerits !. @eglect @eglect intraregi intraregional onal diffe differences rences iin n the business business environment environment..

8.6eocentri) <0orld orientation? t has global orientation. The entire world is a single market and can be

effectivel effe ctively y tapped by a standardize standardized d marketing marketing strategy. strategy. The strategy strategy appropriate appropriate would be

 

global standardization. - number of subsidies will be operating across the world. -ll of them are independent and autonomous. t can be diagrammatically depicted as 1anaging directorhead Buarters in ndia4

,ubsi in )* 

,ubsid in ndia ,ubs in *enya ,ubs in ,ubsidiary in ), Merit -frica 1. Economies of scale #. -dvantage of pace  

south

De)erit 1. ,tandardization may not be successful in all the countries.

. What are the staes of "nternationali/ation$ What are the staes of a !ompany oin  lobal O STA6ES OF INTERNATIONALISATION

The stages of internationalization have been changing at a fast rate after !%%0various factors like globalization+ information technology revolution+ high growth rate of transport technology+ increase globalisatin of culture+ increase in educational opportunities opp ortunities and career orientation among the people of developing country etc. The variation in the scenario is generally categorize STA6E 1 DOMESTIC COM+AN> COM+AN>

omestic companies limit its operation+ mission+ and vision+ to the national political boundaries. These companies focus on domestic customers+ domestic prices+ domestic suppliers+ domestic financial companies etc. The companies analyses national environment of company+ formulate strategies to exploit opportunities offered by environment   omestic company never thinks globally. f it grows beyond its present capacity the company enter into new domestic do mestic market domestic company will never penetrate into international market. 2or domestic company in ndia Ctotal super markets+ 1TR  STA6E # INTERNATIOANL COM+AN>

 

,ome of the domestic companies which grow grow beyond their production think of growing company internationally. These companies remain domestic oriented. They believe the strategy they adopt in their home country cou ntry will be superior and they adopt same in foreign market. They locate a branch in foreign countries and extend domestic operation in that branch. 1ost of the companies start internationalism in this stage only. 1ost of the companies follow this strategy due to lack of resources. STA6E % MULTINATIONAL MULTINAT IONAL COM+AN>

nternational companies sometime realize that internationalism will not work properly. 2or exF Toyota Toy ota exports its car Toyopet in ), market. 5ut it was not accepted by the ), market as they think that it is overly priced and looks like a tank. ,o Toyota shipped back all the cars to Iapan. 5ut later from their experience they make cars which are suitable for ), market. nternational companies turn into multinational companies when they adapt to the local environment and make  products according to needs of the foreign country. - multinational multinational company is the one which has branches in many place and its strategies will be according to each country coun try where it is operating. 5ut the headBuarters will be in home country .ex. T-T- $7@,)/T-@$K ,ERH$E+ R-@5-DK STA6E 8 6LOBAL COM+AN>

- lobal company is the one which has either global marketing strategy or a global strategy. lobal company either produces in home country or in a single country and focus on marketing these products globally+ or produce the product globally and focus on marketing these products domestically. Ex< r ReddyAs lab design and produce drugs in ndia and markets globally. STA6E 5 TRANSNATIONAL COM+AN>

Transnational company produces markets+ invest and operate across world. t links global resources with global market at profit. ex< coco cola+ pepsi