BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

Why study international business? Any business - related to global business environment Obtaining employment overseas or with foreign-owned business Languages to communicate for business manager

As an informed citizen What is International Business International business is any business transaction that involves parties from more than one country. International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations . These transactions can take various forms and can involve different kinds of participants, e.g., individuals, non-profit organisations, companies, groups of companies, and government agencies IB is the process of focussing on the resources of the globe International business: all commercial transactions between parties in two or more countries Private firms are profit-oriented. Government organizations may or may not be profit-oriented. The international business environment is more complex and diverse than the domestic business environment.

Need for International Business More and more firms around the world are going global, including: o Manufacturing firms o Service companies (i.e. banks, insurance, consulting firms) o Art, film, and music companies

International business: o causes the flow of ideas, services, and capital across the world o offers consumers new choices o permits the acquisition of a wider variety of products o facilitates the mobility of labor, capital, and technology o provides challenging employment opportunities o reallocates resources, makes preferential choices, and shifts activities to a global level DEFINITION OF INTERNATIONAL BUSINESS The economic system of exchanging good and services, conducted between individuals and businesses in multiple countries Differences between domestic and international businesses. Currency (payments) Legal systems Culture Differences Language Differences Resource availability (Technical Differences) Distances Tariff Barriers
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B.Narayanan, Assistant Professor, Shivani School of Business Management

BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

Documentations

Transport and Insurance cost Why Go International To Achieve Higher rate of Profits Expanding the production capacities beyond the demand of the Domestic Country Severe Competition in the Home Country Limited Home Market Political Stability Vs Political Instability Availability of Technology and Managerial Competence High Cost of Transportation Nearness to Raw Materials Availability of Quality Human Resources at less cost Liberalisation and Globalisation To increase Market Share To avoid tariff and import Quotas

Stages of Internationalisation Domestic Company International Company Multinational Company Global Company Transnational Company Domestic Company These Companies view on the domestic market opportunities, domestic suppliers, domestic financial companies, domestic customers etc. Unconscious motto If it is not happening in the home country, it is not happening International Company The focus of these companies is domestic but extends the wings to the foreign countries These companies select the strategy of locating the branch in the foreign markets and extend the same domestic operations into foreign markets. Multinational Company MNC Multinational Corporation is a company, which produces goods or markets its services in more than one country. In a narrow sense it is a company that through foreign direct investment controls and manages subsidiaries in a number of countries outside its home base. It formulates different strategies for different markets Global Company Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces the products globally and focuses on marketing these products domestically. Manufacture globally and sell locally and vice versa
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B.Narayanan, Assistant Professor, Shivani School of Business Management

BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

Transnational Company Its sales, investments, production, R&D activities and other business related operations are carried out in many countries. It is an integrated global enterprise which links global resources with global markets at profit. Manufacture @ low cost and sell globally Think globally and act locally

Modes of Entry: International Entry Strategies Modes of entry into international business (Different Forms /Global Entry strategy) Export Contract Manufacturing Licensing Strategic alliance Franchising Joint venture Management contracts Merger Turnkey Projects Acquisition Foreign direct investment Exporting : Forms of exporting Firms can export using the following methods: Indirect involvement means that the firm participates in international business through an intermediary and does not deal with foreign customers or markets. Direct involvement means that the firm works with foreign customers or markets with the opportunity to develop a relationship. Intra corporate transfers are selling of products by a company to its affiliated company in host country (another country). Licensing Under a licensing agreement, one firm permits another to use its intellectual property for compensation designated as royalty. The property licensed may include: Patents Technology Trademarks Technical know-how Copyrights Specific business skills Benefits and Costs of Licensing Benefits It requires neither capital investment nor detailed involvement with foreign customers. It capitalizes on research and development already conducted. It helps avoid host country regulations applicable to equity ventures. Costs It is a very limited form of foreign market participation. It does not guarantee a basis for future expansion. The licensor may create its own competitor.

B.Narayanan, Assistant Professor, Shivani School of Business Management

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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

Franchising: A firm (the franchisor) allows another firm (the franchisee) to operate a business under the name of the first firm, in return for a fee (normally a fixed payment and royalty). The franchisor provides trademarks, operating systems, product reputation & support services (advertising, training, quality assurance). Franchising is the granting of the right by a parent company to another independent entity to do business in a prescribed manner. The major forms of franchising are: Manufacturer-retailer systems such as car dealerships, Manufacturer-wholesaler systems such as soft drink, companies Service-firm retailer systems such as fast-food outlets. To be successful, the firm must offer unique products or propositions, and a high degree of standardization. Key Reasons for Franchising: Financial Gain Market Potential Saturated DomesticMarkets Management Contract: One firm provides managerial assistance, technical advice or specialized services to another firm for an agreed time period in return for a fee (flat fee or percent of revenues). Turnkey Project: One firm (or firms) agrees to fully design, construct and equip a facility and then turn the key over to the purchaser when the plant is ready for operation. May be a fixed price or a cost plus contract. Often done with large construction projects in developing countries. Foreign Direct Investment Direct investment in productive assets by a company incorporated in a foreign company.Acquisition of foreign assets for the purpose of control. Methods for FDI: Greenfield entry (start froms cratch, with clean slate) Brownfield entry (acquisition of existing firm) Joint venture (go with a partner) Contract Manufacturing A company contracts with a foreign producer to manufacture products for sale in the foreign market.It is also called as outsourcing. Globalization: the ongoing social, economic, and political process that deepens and broadens the relationships and inter-dependencies amongst nationstheir people, their firms, their organizations, and their governments International business facilitates globalization process Four Dimension of Globalization Index are: Economic, Technological, Personal Contact, and Political

B.Narayanan, Assistant Professor, Shivani School of Business Management

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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

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1. 2. 3. 4. 5. 6. 7. 1. 2. 3.

The Forces Driving Globalization Increased in and expansion of technology Liberalization of cross-border trade and resource movements Development of services that support international business Growing consumer pressures Increased global competition Changing political situations Expanded cross-national cooperation Criticisms of Globalization Threats to national sovereignty Economic growth and environmental stress Growing income inequality and personal stress

BUSINESS ENVIRONMENT Environment- Sum total of all the forces surrounding & influencing the life and development of the firm.Business involves activities, which links an organization with outside world. Within an organization, a business is governed by the behaviour of its employees, management or decision makers. But externally a business is influenced by a score of factors, which range from customers to competitors and government. Therefore, a business cannot be independent of the influence of these external factors Demographic Environment: This refers to the size and behaviour of population in a country. Suppose a country has a huge size of population, then, the country would provide extensive business or marketing opportunities for all types of business organizations.
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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

On the other hand, a country with low size of population would force the business organizations to seek external market for their products or services. Similarly, if the population in a country is well - tuned to 'use and throw concept *like most of the Western countries+ then there would be limited scope for repair shops and employment scope in that segment would be almost nil. But alternatively this would give wide marketing opportunities for manufacturing organizations. Hence, the size and quality of population emerges as a vital factor influencing business environment. Economic environment: Economic environment refers to the overall economic factors like economic philosophy of the country, economic structure, planning, economic policies, controls and regulations, etc. All these have a serious impact on the functioning of business organizations in a country. For example, in a Capitalistic economic system, business organizations would be subjected to limited government regulations and controls. They would be more governed by market forces [demand and supply] rather than by other factors. On the other hand, in a Socialist system, the government would determine everything on behalf of the country. In a Communist set up, the government has absolute control over every aspect over production that private enterprises may not exist at all. In a Mixed economic system, government would be selective in allowing die presence of private enterprises in certain activities, reserving some spheres completely for governmental operations. Geographical and ecological environment: Geographical environment refers to climatic conditions and natural resources, which determines flu manufacturing scope and the nature of the products that could be marketed. For example, a country like Kenya has to manufacture more of products based on forest resources, while the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc., Countries in the tropical region would have organizations specializing in products from geographical resources available in abundant in that region. Hence, while identifying the business opportunities, business organizations have to be conscious of the limitations posed by the geographical and ecological considerations.

B.Narayanan, Assistant Professor, Shivani School of Business Management

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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

Legal environment: It is well known that every country has a number of legal regulations to ensure that the interests of business organizations do not run counter to national interests. Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of customer complaints, payment of tax to government, manufacturing practices, human resources development to pricing of products and services, a number of legal regulations have to be fulfilled. For example, in USA and several western countries, consumer protection is very active, that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services. In India and other countries, very rigorous legal provisions are in place to prevent hunting of rare species, that any organization, which manufactures products based on such species, have lo get legal sanctions. In case of failure compensations. to honor cheques issued, organizations are now a days made to pay hefty

Technological environment: This is a very significant external factor determining the destiny of business organizations. Supported by computerize operations, modern business organizations have succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time and place, etc. While communications use to take unduly long time in those days, business communications are instantaneous these days, to modern satellite technology. Modern organizations have recognized that research and development alone can ensure organizational growth and stability. They have become more and more pro-active and remain as change agents of the economy. Governments have also become more technology conscious that right from police controls to registration of title deeds, computerizations has been adopted. Customer servicing through call centers is the latest necessity of organizations. Manufacturing activities have become more and more technically sophisticated. Social environment: Social environment today has brought compulsions on business organizations to adhere to certain business ethics and morals. Social responsibility of business is an important force that modern business organizations cannot wriggle out of their duties and responsibilities towards the society. For example, every leather manufacturing or process unit is made to install pollution prevention system. Similarly, the expectations of various interests in the society have undergone a sea of change. The shareholders, promoters and owners expect a reasonable return on their investments. The workers expect security of service, terminal benefits, accident relief and various other compensations from the organizations.

B.Narayanan, Assistant Professor, Shivani School of Business Management

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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

Government expects the business units to pay tax regularly and participate in social improvement. The distributors and agents expect the organizations to ensure smooth delivery process and demand more commission and compensation. Suppliers expect the organizations to give them continuous business and prompt payment of bills. Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all these groups remains successful and grows. Educational and cultural environment: Educational environment in a country determines the quality of population. A country with very high illiterate population would always experience political and economic instability. Similarly, lack of education may also give scope for the existence of superstitious beliefs, fatalistic attitude, etc. People's choice of goods and services would be more governed, by their religious faiths and beliefs. economic development of a country completely depends on the literacy level which alone can pave the way for improvement in science and technology, modernization, industrialization, etc. In such a country, the business opportunities are plenty. Cultural environment refers to the values, norms, customs, ethics, goals and other accepted behaviour pattern of people in a country. In olden days, religion was the basis of all activities in a society. The religious leaders and institutions determined what business should do and what people must consume. In India, the existence of caste system has done more damage than any good. Caste based politics has become the order of the day. Under the pretext of working for backward and downtrodden people, several persons have amassed fortune. This is worsened by political support and policies. A modern organization does not have the liberty to recruit people on merit but it has to follow strictly die reservation policy of the government. Another serious aspect of the cultural environment is the attitude and behaviour of the people in urban and rural areas. The urban - rural divide has created enormous problems for administrators and specifically business organizations prefer urban educated person to persons from rural areas. Political environment: Political stability is one important factor winch determines the business growth or downfall. A country with relative political stability would witness inflow of foreign capital and collaboration. By political stability we mean that the policies of government remaining consistent. As the business decisions are based on government policies, frequent changes in these policies would force business organizations to change their policies too which, makes functioning very difficult. Sometimes, when the policies determined by a party in power are reversed by the succeeding party forming the government, there would be far reaching changes in business environment.

B.Narayanan, Assistant Professor, Shivani School of Business Management

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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

Unit - 1

In the absence of competition, the business organizations, made people to accept inferior quality goods and services. Once, the liberalization policy is adopted, the scene has completely changed. Today, no business can survive unless it provides quality goods or services on par with the multinational corporations. India had to accept various trade and monetary policies. This has brought about a complete change in business environment. Protectionism and Trade Liberalisation Protectionism- Means by which trade between countries is restricted in some way normally through measures to reduce the number of imports coming into a country Tariff: -A tax on a good coming into a country -Increases the price of the good and makes it less competitive -Export good which leave the country or -Transit pass through one country bound for another -Import imposed on goods to country or goods imported -Advalorem imposed on percentage on values of goods imported -Specific attributes like weight, quantity, value etc. -Compound- partly as a % on value and as a rate /unit or weight Non Tariff Barriers -Quotas refers to numerical limits on the quantity of goods during a specified period -Quantity must be stated in the licence - Has the penalty exceeds the limit Voluntary Export Restraints (VERs) quota on trade imposed by exporting country, at the request of importing country Subsidies - Government payment to domestic producer - Several forms cash grants, low-interest loans, tax breaks, government participation - Helps in foreign imports ar low-cost - Gain access to export markets Other Non-Tariff Barriers Embargo - refers to complete ban to trade in one or more products - Most restrictive trade barrier - Use less today were in the past

B.Narayanan, Assistant Professor, Shivani School of Business Management

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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

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Product & Testing standards - Meet the requirements of their specifications and they test the quality standards Currency Controls - Must pay in a common, internationally acceptable currency such as US Dollar etc. - Must obtain the currency from domestic banking system Administrative Delays - Requiring product inspection, custom office to cause unusual delays, requiring special licenses that take a long time Local Content Requirement - Legal stipulation of specified amount of goods and services supplied by the producers in domestic market - Government may state that input used partially at least in the production of goods. Examples include setting exacting standards on fuel emissions from cars, the documentation required to be able to sell drugs in different countries, the ingredients in products some of which may be banned in the destination country NTBs are difficult to prove when do you accuse a country of protectionism could be a legal or cultural issue? The main method involved in NTBs is not to prevent trade but to make the cost of doing so prohibitive to the potential exporter Trade Liberalisation Aims to free up world trade and break down the barriers to international trade Basic philosophy rests on the principle of comparative advantage Talks to achieve trade liberalisation have been ongoing for many years GATT General Agreement on Tariffs and Trade First signed in 1947 talks on-going since then! Uruguay Round 1994 set up the World Trade Organisation (WTO) as well as agreements covering a range of trade liberalisation measures WTO provides the forum through which trade issues can be negotiated and works to help implement and police trade agreements Potential benefits: Promotes international specialisation and increases world output Promotes efficient use and allocation of world resources Allows developing countries access to the heavily protected markets of the developed world thus helping promote development Facilitates the working of the international market system and the working of price signals to ensure efficient allocation of resources, international competition and the associated benefits to all Limitations: World agreements are very difficult to achieve. Witness the issues over the removal or reduction of agricultural subsidies, tariffs
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BA6221- INTERNATIONAL BUSINESS MANAGEMENT

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B.Narayanan, Assistant Professor, Shivani School of Business Management

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