October 2009- DS 5729

International Business Question Paper Solutions

Q1. Multinational Corporations contribute immensely for the development of economies in
the world Discuss with illustrations.
Ans. MNC contrbute ma|ory n the deveopment of economes n the word. In the past
quarter of a century the word has wtnessed the dramatc deveopment of the mutnatona
corporaton nto a ma|or phenomenon n nternatona economc reatons. MNCs are depcted
n some quarters as key nstruments for maxmzng word wefare are aso seen as dangerous
agents of mperasm n others. MNCs are ma|or force n word trade. In many countres, a few
MNCs are responsbe for a sgnfcant porton of exports of manufacturers. Moreover, ntra-
corporaton trade has aso grown n mportance.
As far as nda s concerned we a know that before 1990 our country was sufferng from the
probem of ow economy but after that when MNCs came to our country the economy of our
country ncreased.
MNCs provde empoyment to our country for those who are unempoyed. Through MNCs we
can buy product at ow cost whch we get at hgher prces because of mport duty. Many
goods whch were not avaabe n Inda and need to be bought from abroad but wth the
advent of MNCs now amost 90% goods are avaabe n Inda. Aong wth that they aso brng
advance technoogy and brng more competton.
Q2. Discuss various methods and modes of enterin and operatin in !" with merits and
demerits of each method.
Ans. Entry methods or strateges can be broady cassfed nto two categores:
1) Strategc aances
2) Standaone entres
In many cases, no company woud ke to share busnesses or profts that t vsuazes or
expects n any markets. Often, companes are forced to form strategc aances whe enterng
new markets, or for that matter to contnue servcng ts current markets. Ths s the resut of
|ust one cause - nadequacy, nadequacy reated to dfferent resources requred to
successfuy servce the markets and derve profts from t. Some of the mportant
nadequaces that force a company to consder or even wecome an aance are:
Capta / capabty to take rsk
Knowedge/experence about technoogy
Knowedge/experence about the market
Knowedge/experence about the envronment
The nature of the strategc aance usuay depends on what compmentary resources the
foregn company s ookng for n ts oca partner. Strategc aances can be broken down nto
the foowng types:
1) |ont Ventures
2) Contract Manufacturng
3) Lcensng
4) Franchsng
5) Exportng
Standaone entres are done by companes whch perceve themseves to have adequate
capabty n takng capta rsk and are ready to gan the knowedge assocated wth the new
markets over tme. Companes that enter new markets on ther own have to reaze and
accept the rsk n not dependng on others to gan experence about the new markets.
|ont Venture
The term |ont Venture appes to those strategc aances where there s equty partcpaton
from both the foregn entrant and the oca coaborator. The equty partcpaton can be of
dfferent ratos, rangng from a mnorty stake, equa stake to a controng stake or a more
predomnant ma|orty stake. From the perspectve of theforegn entrant, a |ont venture has
the foowng advantages:
Decrease the capta rsk nvoved.
Leverage the oca companys factes, n manufacturng, dstrbuton and retang.
Leverage the oca companys managera capabty n the oca envronment.
Leverage the oca companys contacts wth the government to get green sgnas
Some of dsadvantages of |ont venture are:
Dfference n cuture.
Dfference n managera styes.
Dfferences n the motvaton behnd the partcpaton. Communcaton probems.
Seecton of the rght partner.
Other than the above stated hurdes, there are aso rsks assocated wth enterng n |ont
venture. One of the rsks s the compcaton at the tme of ext, .e. when a foregn entrant
decdes to eave the market and hence, the |ont venture. A very mportant aspect of an entry
strategy s to have an ext strategy aso. The nature of ths entry method often resuts n a
very compcated ext strategy and ths s not even under the compete contro of the foregn
company. The second ma|or rsk s assocated wth the safety of a companys nteectua
property (IP). It s defntey more dffcut to contro the access to ones technoogy when one
s not the ony entty n charge. Furthermore, the theft of IP by the oca partner s aso an
ssue to dea wth, especay n countres rfe wth pracy, ke Chna. Ths probaby expans
why the ma|orty of companes whch enter markets where whoy owned subsdares are
aowed, prefer that route over |ont venture
Contract Manufacturng
Contract manufacturng has a mted roe as an entry strategy and s more often used as a
compment to other entry strateges. It s used n con|uncton wth strateges ke whoy
owned subsdares or franchsng. Contract Manufacturng s aso often used when a company
enters a new market and has an actvty that s requred but s not a core nor s propretary n
nature, ke the manufacturng of cothes, or smpe goods ke cothng rons and other
consumer goods. In most of the ndustres where contract manufacturng s resorted to, the
core actvtes of the company e more n marketng and research and deveopment rather
than n manufacturng. Beow are the sts of advantages and dsadvantages n resortng to
contract manufacturng as an entry method.
Advantages:
Less capta requred.
Low managera rsk.
Focus on core actvtes.
Less compcated ext probems.
Less compcated dvson of responsbty.
Dsadvantages:
Chance for a ack of contro on certan product parameters.
Dfferences n quaty standards.
Scaabty of probems.
Seecton of vendors
Lcensng
Lcensng s a common method of nternatona market entry for companes wth a dstnctve
and egay protected asset, whch s a key dfferentatng eement n ther marketng offer. It
nvoves a contractua arrangement whereby a company censes the rghts to certan
technoogca know-how, desgn, patents, trademarks and nteectua property to a foregn
company n return for royates or other knds of payment. For exampe, Dsney's mode of
entry n |apan had been censng. Because tte nvestment on the part of the censor s
requred, censng has the potenta to provde a very arge ROI. However, because the
censee produces and markets the product, potenta returns from manufacturng and
marketng actvtes may be ost.
Here are severa condtons where censng s favorabe over other entry methods:
Import and nvestment barrers.
Lega protecton possbe n target envronment.
Low saes potenta n target country.
Large cutura dstance.
Lcensee acks abty to become a compettor
The most mportant dsadvantage of censng s to run the rsk of creatng future oca
compettors. Ths s partcuary true n technoogy busnesses, n whch a desgn or process s
censed to a oca busness, thus reveang "secrets," n the shape of nteectua property that
woud otherwse not be avaabe to that oca busness. In the worst case scenaro, the oca
censee can end up breakng away from the nternatona censor and qute deberatey
steang or mtatng the technoogy. Even n a best case scenaro, the oca censee w
certany beneft from acceerated earnng reated to the technoogy or product category.
Partcpaton n nternatona markets va censng s therefore best suted to frms wth a
contnuous stream of technoogca nnovaton because those corporatons w be abe to
move on to new products or servces that retan a compettve advantage over "mtator" ex-
censees.
Franchsng
Franchsng s one of the entry modes that has been wdey used as a rapd method of
nternatona expanson, most notaby by fast food chans, consumer servce busnesses such
as hote or car renta, and busness servces. A franchse s an ongong busness reatonshp
where one party ('the franchsor') grants to another ('the franchsee') the rght to dstrbute
goods or servces usng the franchsors brand and system n exchange for a fee. Franchsng
enabes rapd market expanson usng the nteectua property of the franchsor, and the
capta and enthusasm of a network of owner operators.
Some of the common, but not essenta, features of franchsed busnesses are as foows:
Group purchasng arrangements.
An excusve terrtory for each franchsee.
Group advertsng programs.
Inta and ongong tranng and support from the franchsor.
Assstance from the franchsor wth equpment specfcaton, ste seecton and premses ft-
out and sgnage.
The man drawback of franchsng s the dffcuty of adaptng the franchsed asset or brand to
oca market tastes. A key ndcator that franchsng carres ths constrant s the fact that
marketng budgets at oca eves are usuay restrcted to short-term promotons rather than
market deveopment.
Exportng
It s one of the methods that organzatons can use to enter foregn markets. In ths entry
method, products produced n one country are marketed n another country through
marketng and dstrbuton channes. Thus, t requres a sgnfcant nvestment n marketng
strateges. In reaty, exportng s the most tradtona and we-estabshed form of operatng
n foregn markets. It can be further categorzed nto drect or ndrect export.
Whoy Owned Subsdares
Many organzatons prefer to estabsh ther presence n foregn markets wth 100% ownershp
through whoy owned subsdares. Under ths method, organzatons obtan greater contro
over operatons and hgher profts snce there s no ownershp spt agreement. However, such
entry method requres arge nvestments and faces hgher rsks, especay n the potca,
ega and economca arenas. There are two approaches for the whoy owned subsdares
entry method; one s through acquston and the other through greenfed nvestments.
Greenfed nvestment means usng funds to bud an entrey new facty. Even though such
approach entas fu contro and no rsk of cutura confcts, ts costs are extremey hgh, and
returns on nvestment are obtaned n the ong-run due to the extent of tme requred to bud
the facty, start operatons, and attan economes of scae and the experence-curve.
Acquston as an entry method s preferabe n the foowng stuatons:
When speed of entry s mportant for the busness success.
When barrers to entry (.e. hgh economes of scae of oca compettors) can be overcome
by acquston of a frm n the ndustry targeted.
When the enterng frm acks competences mportant n the new busness area.
Q #.$hort %ote on&
1) Baance of Payment:
Defnton:
"An economc fow that refects the creaton, transformaton, exchange, or extncton of
economc vaue and nvoves changes n ownershp of goods and/or fnanca assets, the
provson of servces, or the provson of abor and capta"
Baance of payment foows:
Standard doube entry accountng record
The tota debts match the tota credts .e. BoP s aways baance
Classification of Balance of Payment
2) Free Trade Agreement:
Sgned between 2 countres
Free trade agreements are a key eement of customs unons and free trade areas.
Economc Growth
Reduces Poverty
Removes restrctons from busnesses
An mportant feature of nternatona trade arrangements between countres over the ast two
decades has been a sgnfcant expanson of regional trade agreements (RTAs) across the
goba economy. Some of these agreements are smpy free-trade agreements whch nvove a
reducton n current tarff and non-tarff mport contros so as to berase trade n goods and
servces between countres. The most sophstcated RTAs go beyond tradtona trade pocy
mechansms, to ncude regona rues on fows of nvestment, co-ordnaton of competton
poces, agreements on envronmenta poces and the free movement of abour.
Exampes of regona trade agreements:
The European Unon (EU) - a customs unon, a snge market and now wth a snge
currency
The European Free Trade Area (EFTA)
The North Amercan Free Trade Agreement (NAFTA) - created n 1994
Mercosur - a customs unon between Braz, Argentna, Uruguay, Paraguay and
Venezuea
The Assocaton of Southeast Asan Natons (ASEAN) Free Trade Area (AFTA)
The Common Market of Eastern and Southern Afrca (COMESA)
The South Asan Free Trade Area (SAFTA) created n |anuary 2006 and contanng
countres such as Inda and Pakstan
3) Trade Barrers
Trade barrers are measures that governments or pubc authortes ntroduce that prevent or
restrct overseas trade and nvestment. These measures need not necessary take the form of
egsaton or a specfc decson. They may aso take the form of current practce. As a resut
of these measures, domestc companes receve a compettve advantage reatve to ther
foregn counterparts.
It s accepted that n many cases, products are abe to custom dutes when mported nto a
market and that mported products ought to be accompaned by the correct documentaton.
In some cases, however, customs dutes may be unreasonaby hgh or customs cearance may
take an unreasonaby ong tme.
Trade barrers may take the form of, for exampe:
Customs dutes
Customs procedures
Technca reguatons, standards, etc. - for exampe for the purpose of consumer
protecton, heath protecton, protecton of the envronment, etc
Restrctons on access to prmary products - for exampe n the form of export
eves that drve up prces artfcay or speca export prces that are hgher than
the prce of the same prmary products for use n natona processng ndustres
Insuffcent protecton of nteectua property rghts - both wth respect to the
scope of protecton and wth respect to the possbtes of ega protecton. Ths
ncudes, for nstance, protecton of patents, copyrghts, trademarks and
geographca ndcatons of orgn
Barrers to trade n servces - for exampe n the form of dscrmnatory
condtons
Restrctons on access to nvestment - for exampe through natona partcpaton
requrements or restrctons on access to repatraton of profts
Unfar appcaton of state ad and other forms of subsdes
Due to gobasaton, trade restrctons have become ncreasngy sgnfcant.
4) Internatona Logstcs
The fow of goods between the pont of orgn and the pont of destnaton n order
to meet the requrements of customers or corporatons s Logstcs
Goba ntegrated ogstcs actvtes dffer from domestc ntegrated ogstcs, n
terms of the foowng:
Transportaton
Warehousng Management
Packagng
Inventory Management
Matera Handng
Informaton Systems
Response tmes are normay onger nternatonay because of dstance, sower
movement by sea freght, and more documentaton.
Consgnees normay ad|ust ther needs to a sower response tme f the order s
compete and accurate.
Research studes have ndcated that ony 16% of nternatona shpments have
been found to be compete and accurate.
Loss, damage, and theft ncur addtona costs
Documentaton Requred:
A bill of lading s a contract between the exporter and the carrer ndcatng that the
carrer has accepted responsbty for the goods and w provde transportaton n
return for payment.
A commercial inoice s a b for the goods statng basc nformaton about the
transacton, ncudng a descrpton of the merchandse, tota cost of the goods sod,
addresses of the shpper and seer, and devery and payment terms.
! freig"t forwarder specazes n handng export documentaton.
Q '( )D! has become an effective resource mobili*ation avenue as compared to )orein
!nstitutional !nvestment+ ,ustify the statement.
Ans: Foregn drect nvestment (FDI) s drect nvestment nto producton n a country by a
company ocated n another country, ether by buyng a company n the target country or
by expandng operatons of an exstng busness n that country. Foregn drect nvestment
s done for many reasons ncudng to take advantage of cheaper wages n the country,
speca nvestment prveges such as tax exemptons offered by the country as an
ncentve to gan tarff-free access to the markets of the country or the regon. Foregn
drect nvestment s n contrast to portfoo nvestment whch s a passve nvestment n
the securtes of another country such as stocks and bonds.
FII s used most commony n Inda to refer to outsde companes nvestng n the fnanca
markets of Inda. Internatona nsttutona nvestors must regster wth the Securtes and
Exchange Board of Inda to partcpate n the market. One of the ma|or market reguatons
pertanng to FIIs nvoves pacng mts on FII ownershp n Indan companes.
Now FDI s becomng more popuar because t s more effectve resource mobzaton
avenue as compared to FII because of the foowng reasons:
1. Rasng the Leve of Investment
Foregn nvestment can f the gap between desred nvestment and ocay mobsed savngs.
Loca capta markets are often not we deveoped. Thus, they cannot meet the capta
requrements for arge nvestment pro|ects. Besdes, access to the hard currency needed to
purchase nvestment goods not avaabe ocay can be dffcut. FDI soves both these
probems at once as t s a drect source of externa capta. It can f the gap between desred
foregn exchange requrements and those derved from net export earnngs.
2. Up gradaton of Technoogy
Foregn nvestment brngs wth t technoogca knowedge whe transferrng machnery and
equpment to deveopng countres. Producton unts n deveopng countres use out-
dated equpment and technques that can reduce the productvty of workers and ead to the
producton of goods of a ower standard
3. Improvement n export compettveness
FDI can hep the host
country mprove ts export performance. By rasng the eve of effcency and the standards of
product quaty, FDI makes a postve mpact on the host countrys export compettveness.
Further, because of the nternatona nkages of MNCs, FDI provdes to the host country better
access to foregn markets. Enhanced export possbty contrbutes to the growth of the host
economes by reaxng demand sde constrants on growth. Ths s mportant for those
countres whch have a sma domestc market and must ncrease exports vgorousy to
mantan ther tempo of economc growth.
4. Empoyment Generaton
Foregn nvestment can create empoyment n the modern sectors of deveopng countres.
Recpents of FDI gan tranng of empoyees n the course of operatng newenterprses, whch
contrbutes to human capta formaton n the host country.
5. Benefts to Consumers
Consumers n deveopng countres stand to gan from FDI through new products, and
mproved quaty of goods at compettve prces.
6. Revenue to Government
Generated by FDI contrbute to corporate tax revenues n the host country
Q -. .$/.% 0eion is an attractive destination for !ndia for trade1 investment and
manufacturin especially in recent period+ Discuss
Ans.
Wth a combned popuaton of 1.8 bon and a GDP of $2.75 tron, the Asean-Inda FTA
s one of the argest n the word. It offers huge growth opportuntes to Asean and Inda.
Currenty, Indas share of Asean mports s 2.1 percent, aganst 13 percent for Chna.
Gven the Chna-Asean FTA, whch makes Chnese goods cheaper n the Asean market,
Inda needs ths agreement |ust to mantan ts trade share. But f the agreement manages
to extend not ony to goods but aso servces and nvestment, Inda stands to acheve even
greater gans.
Accordng to the Federaton of Indan Chambers of Commerce and Industry, the new trade
dea w provde greater market access to Indan professonas and servce provders.
The Asean regon s a net mporter of servces, buyng neary $180 bon worth of servces
n 2007. In vew of ths and Indas compettve advantages n terms of cost and expertse
n a range of areas, such ncreased access w be very benefca.
As to the second queston, n order to render the Indan market receptve to Asean
nvestment, Inda w need to contnue rong out nsttutona reforms and bod pocy
changes.
These reforms are essenta for the Indan government to boost the countrys economc
resence, ncrease export compettveness and mprove the Indan busness envronment.
As the nfrastructure and reta sectors are arge targets for Asean nvestors, these sectors
w requre partcuar focus. In addton, the trade dea may drve abor market reforms, as
Inda strves to compete as an exporter wth Chna. These much-needed reforms woud
ony boster the Indan domestc economy. And fnay, the Inda-Asean FTA may go some
way towards stemmng Chnas growng economc domnance n Asa, hepng to managng
Chnas rse n a peacefu and constructve way.
Negatve Impacts:
Many n Inda are concerned that the FTA w adversey affect Indas trade baance wth
some Asean countres. A few countres ke Chna w route ther products nto Inda
through Asean.
The Indan domestc ndustry must be prepared to face the chaenge of cheap mports
from Asean foodng the Indan market. Even wthout ths trade agreement, Inda faces
arge trade defcts wth Indonesa and other Asean countres. But overa, the Asean-Inda
FTA must be consdered a postve deveopment. Asean and Inda need each other. For
Asean, Indas workng-age popuaton s growng, whe the workng-age popuaton n
other Asan economes, such as Chna, Korea and |apan, s decnng. Inda s aso a word
eader n nformaton technoogy and an attractve destnaton for foregn nvestment. For
Inda, the trade w drve exstng economc reforms, assstng the naton n estabshng
tsef as a growng economc power n Asa.
Q 2( Competitive advantae of nations propounded by michael porter has complete
functional value1 manaement inputs and strateic relevance in todays 3lobal business+
Discuss
Ans.
In ths compettve busness word, proper management s vta for any organzaton's
success. Proft maxmzaton sub|ect to the budget constrant s the man ob|ectve of any
busness organzaton. For ths, any organzaton need good busness pan. Management s
the process of gettng thngs done, effectvey and effcenty, wth the hep of peope.
Bascay, pannng, organzng, eadng and controng are the man processes of busness
management. Busness pannng s a roadmap whch gudes any organzaton about what
to and how to do. Pannng ncudes defnng goas, estabshng strategy, and deveopng
pans to coordnate actvtes. It s concerned wth ends (what s to be done) as we as wth
means (how t s to be done). Due to the dynamc nature of the socety and busness word,
any organzaton must be sncere and attentve about happenngs around. So, to manage
changes n the envronment, pannng s necessary. For the ong term busness pannng,
strategc management process s necessary. Strategc management process ncudes a
nne-step process that nvoves strategc pannng, mpementaton, and evauaton.
Dfferent strategc modues/approaches are deveoped by dfferent schoars to defne
compettve advantage of a frm.
Theory of compettve advantage was proposed by Mchae Porter n 1990. It suggests that
any state and busness shoud pursue poces that create hgh-quaty goods to se at hgh
prces n the market. Ths theory states that any country shoud specaze n exportng
prmary goods and raw materas that trap countres n ow-wage economes due to terms
of trade. Accordng to Porter (2004), "An effectve compettve strategy takes offensve or
defendabe poston aganst the fve compettve forces". A compettve advantage s the
thng that dfferentates a busness from ts compettors. It s what separates you from
everyone ese. And, t's usuay the reason you are n busness. It answers the queston,
"why shoud I buy from you?" How are you better than my current supper" .Vaue-
creatng products and dfferent from compettors makes comparatve advantage
sustanabe. There are dfferent opnons about compettve advantage propounded by
dfferent schoars. However, t advocates many how a company s best at what and why?
Case Study- Pharma Offshoring Market: A Bright Future for India
1. Discuss the competitive advantaes of !ndia in pharma offshorin mar4ets
Ans:
The compettve advantage of Inda n Pharma Offshorng markets are:
1. A key drver of offshorng on outsourcng s the rsng cost of R&D whch s forcng
ma|ors n the US and Europe to ook for ow cost R&D destnatons such as Inda
2. Another ncentve s cost of basc producton n Inda, whch s up to 50% ower than
n the US FDA approved pants. It can be acheved at 30-50% ower costs than n the
estabshed markets n Europe
3. Contract manufacturng worth $680 mon was done n Inda n 2008 and may grow
at 15%
4. Tax ncentves have aso heped aong wth approvas of pharma SEZs a enabng
the growth of the pharma ndustry
2. %ame the ma5or potential players who can succeed in such an avenue
Ans:
Cpa, Torrent , Cada, Hmaayas, Dr. Reddys Lab and Arabndo Pharma
6. Discuss various strateies that can be adopted to win offshorin business
Ans:
#ong term Strategies$
Long term revenue modes of the companes are based on botech and targeted
treatment soutons. Pharma companes are exporng further avenues through forward
ntegratonwth heath care and medca equpment. The ntegrated mode w be a
prerequste for true mpementaton of targeted treatment soutons. Companes are
pannng to aunch heath care kosks offerng one-stop-shop servces as targeted
treatment soutons.
S"ort term strategies-Semi Bloc% Busters$
Short term strateges are many focused on fghtng aganst pre- and post-patent
competton. Ths mode w act as a substtute for the bock buster mode for the next
few years. It nvoves pre- and post-patent expraton strateges, NME- and NCE-based
sem bock busters, and hgh compresson marketng of branded generc drugs.
Process Optimisation - &et'or% (odel
Pharma companes are workng on the n-sourcng and outsourcng mode to ncrease
effcency, and reduce ead tme n drug dscovery. The varous n-house and
outsourced departments functon as horzontay and vertcay nked
networks.Companes are exporng the benefts of baanced budgetng n each
department, prmary based on ROI and proftabty from ndvdua cost centres. The
network mode s greaty supported by product fe cyce management.