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1. INTRODUCTION
Global economy is at crossroads. There is no single or simple answer to current economic
problems. Transparency in the conduct of monetary and fiscal policies is needed to provide an
anchor for expectations. Developments that seem unusual, even unbalanced, need to necessarily
be judged unsustainable. For example, the potential gains offered by new technology,
particularly in the production of goods and financial services, may provide a sound rationale for
a number of trends that currently seem hard to explain. Yet, a starting point characterized by
significant macroeconomic imbalances and major financial restructuring does not present a
comforting environment for policymakers; given very low interest rates and virtual price stability
in many countries, the scope for lowering real policy rates is now limited. This chapter implies a
continuing need to focus on measures to strengthen the global financial system which looks to be
the most vulnerable part of marketbased economies.
1.1 Business
A business is an economic activity. It refers to buying and selling of goods. Todays business
carries a complex area of commerce and industries which includes the activities of both
production and distribution. To the enterprises business is related with the decision. What to
produce? When to produce? Whom to produce? Where to produce? How much to produce? In
simplest word we can say that the modern times business is very much complex. As the
environment is dynamic and changes frequently so the above questions always make the
business enterprises to rethink about their business strategies.
1.2 International Business
International business means the buying and selling of the goods and services across the border.
These business activities may be of government or private enterprises. Here the national border
are crossed by the enterprises to expand their business activities like manufacturing, mining,
construction, agriculture, banking, insurance, health, education, transportation, communication
and so on.
A business enterprise who goes for international business has to take a very wide and long view
before making any decision, it has to refer to social, political, historical, cultural, geographical,
physical, ecological and economic aspects of the another country where it had to business.
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International Business conducts business transactions all over the world. These transactions
include the transfer of goods, services, technology, managerial knowledge, and capital to other
countries. International business involves exports and imports.
International Business is also known, called or referred as a Global Business or an International
Marketing.
An international business has many options for doing business, it includes,
1. Exporting goods and services.
2. Giving license to produce goods in the host country.
3. Starting a joint venture with a company.
4. Opening a branch for producing & distributing goods in the host country.
5. Providing managerial services to companies in the host country.
1.2.1 Features of International Business
The nature and characteristics or features of international business are:-
1. Large scale operations : In international business, all the operations are conducted on a
very huge scale. Production and marketing activities are conducted on a large scale. It
first sells its goods in the local market. Then the surplus goods are exported.
2. Intergration of economies : International business integrates (combines) the economies
of many countries. This is because it uses finance from one country, labour from another
country, and infrastructure from another country. It designs the product in one country,
produces its parts in many different countries and assembles the product in another
country. It sells the product in many countries, i.e. in the international market.
3. Dominated by developed countries and MNCs : International business is dominated by
developed countries and their multinational corporations (MNCs). At present, MNCs
from USA, Europe and Japan dominate (fully control) foreign trade. This is because they
have large financial and other resources. They also have the best technology and research
and development (R & D). They have highly skilled employees and managers because
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they give very high salaries and other benefits. Therefore, they produce good quality
goods and services at low prices. This helps them to capture and dominate the world
market.
4. Benefits to participating countries : International business gives benefits to all
participating countries. However, the developed (rich) countries get the maximum
benefits. The developing (poor) countries also get benefits. They get foreign capital and
technology. They get rapid industrial development. They get more employment
opportunities. All this results in economic development of the developing countries.
Therefore, developing countries open up their economies through liberal economic
policies.
5. Keen competition : International business has to face keen (too much) competition in the
world market. The competition is between unequal partners i.e. developed and
developing countries. In this keen competition, developed countries and their MNCs are
in a favourable position because they produce superior quality goods and services at very
low prices. Developed countries also have many contacts in the world market. So,
developing countries find it very difficult to face competition from developed countries.
6. Special role of science and technology : International business gives a lot of importance
to science and technology. Science and Technology (S & T) help the business to have
large-scale production. Developed countries use high technologies. Therefore, they
dominate global business. International business helps them to transfer such top high-end
technologies to the developing countries.
7. International restrictions : International business faces many restrictions on the inflow
and outflow of capital, technology and goods. Many governments do not allow
international businesses to enter their countries. They have many trade blocks, tariff
barriers, foreign exchange restrictions, etc. All this is harmful to international business.
8. Sensitive nature : The international business is very sensitive in nature. Any changes in
the economic policies, technology, political environment, etc. has a huge impact on it.
Therefore, international business must conduct marketing research to find out and study
these changes. They must adjust their business activities and adapt accordingly to survive
changes.

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2. EMPIRICAL STUDY IN INTERNATIONAL BUSINESS
Today, business is acknowledged to be international and there is a general expectation that this
will continue for the foreseeable future. International business may be defined simply as business
transactions that take place across national borders. This broad definition includes the very small
firm that exports (or imports) a small quantity to only one country, as well as the very large
global firm with integrated operations and strategic alliances around the world. Within this broad
array, distinctions are often made among different types of international firms, and these
distinctions are helpful in understanding a firm's strategy, organization, and functional decisions
(for example, its financial, administrative, marketing, human resource, or operations decisions).
One distinction that can be helpful is the distinction between multi-domestic operations, with
independent subsidiaries which act essentially as domestic firms, and global operations, with
integrated subsidiaries which are closely related and interconnected. These may be thought of as
the two ends of a continuum, with many possibilities in between. Firms are unlikely to be at one
end of the continuum, though, as they often combine aspects of multi-domestic operations with
aspects of global operations.
International business grew over the last half of the twentieth century partly because of
liberalization of both trade and investment, and partly because doing business internationally had
become easier. In terms of liberalization, the General Agreement on Tariffs and Trade
(GATT) negotiation rounds resulted in trade liberalization, and this was continued with the
formation of the World Trade Organization (WTO) in 1995. At the same time, worldwide capital
movements were liberalized by most governments, particularly with the advent of electronic
funds transfers. In addition, the introduction of a new European monetary unit, the euro, into
circulation in January 2002 has impacted international business economically. The euro is the
currency of the European Union, membership in March 2005 of 25 countries, and the euro
replaced each country's previous currency. As of early 2005, the United States dollar continues
to struggle against the euro and the impacts are being felt across industries worldwide.
In terms of ease of doing business internationally, two major forces are important:
1. technological developments which make global communication and transportation
relatively quick and convenient; and
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2. the disappearance of a substantial part of the communist world, opening many of the
world's economies to private business.
2.1 DOMESTIC VS. INTERNATIONAL BUSINESS
Domestic and international enterprises, in both the public and private sectors, share the business
objectives of functioning successfully to continue operations. Private enterprises seek to function
profitably as well. Why, then, is international business different from domestic? The answer lies
in the differences across borders. Nation-states generally have unique government systems, laws
and regulations, currencies, taxes and duties, and so on, as well as different cultures and
practices. An individual traveling from his home country to a foreign country needs to have the
proper documents, to carry foreign currency, to be able to communicate in the foreign country, to
be dressed appropriately, and so on. Doing business in a foreign country involves similar issues
and is thus more complex than doing business at home. The following sections will explore some
of these issues. Specifically, comparative advantage is introduced, the international business
environment is explored, and forms of international entry are outlined.
2.2 THEORIES OF INTERNATIONAL TRADE AND INVESTMENT
In order to understand international business, it is necessary to have a broad conceptual
understanding of why trade and investment across national borders take place. Trade and
investment can be examined in terms of the comparative advantage of nations.
Comparative advantage suggests that each nation is relatively good at producing certain products
or services. This comparative advantage is based on the nation's abundant factors of
productionland, labor, and capitaland a country will export those products/services that use
its abundant factors of production intensively. Simply, consider only two factors of production,
labor and capital, and two countries, X and Y. If country X has a relative abundance of labor and
country Y a relative abundance of capital, country X should export products/services that use
labor intensively, country Y should export products/services that use capital intensively.
This is a very simplistic explanation, of course. There are many more factors of production, of
varying qualities, and there are many additional influences on trade such as government
regulations. Nevertheless, it is a starting point for understanding what nations are likely to export
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or import. The concept of comparative advantage can also help explain investment flows.
Generally, capital is the most mobile of the factors of production and can move relatively easily
from one country to another. Other factors of production, such as land and labor, either do not
move or are less mobile. The result is that where capital is available in one country it may be
used to invest in other countries to take advantage of their abundant land or labor. Firms may
develop expertise and firm specific advantages based initially on abundant resources at home,
but as resource needs change, the stage of the product life cycle matures, and home markets
become saturated, these firms find it advantageous to invest internationally.
2.3 THE INTERNATIONAL BUSINESS ENVIRONMENT
International business is different from domestic business because the environment changes
when a firm crosses international borders. Typically, a firm understands its domestic
environment quite well, but is less familiar with the environment in other countries and must
invest more time and resources into understanding the new environment. The following
considers some of the important aspects of the environment that change internationally.
The economic environment can be very different from one nation to another. Countries are often
divided into three main categories: the more developed or industrialized, the less developed or
third world, and the newly industrializing or emerging economies. Within each category there
are major variations, but overall the more developed countries are the rich countries, the less
developed the poor ones, and the newly industrializing (those moving from poorer to richer).
These distinctions are usually made on the basis of gross domestic product per
capita (GDP/capita). Better education, infrastructure, technology, health care, and so on are also
often associated with higher levels of economic development.
In addition to level of economic development, countries can be classified as free-market,
centrally planned, or mixed. Free-market economies are those where government intervenes
minimally in business activities, and market forces of supply and demand are allowed to
determine production and prices. Centrally planned economies are those where the government
determines production and prices based on forecasts of demand and desired levels of supply.
Mixed economies are those where some activities are left to market forces and some, for national
and individual welfare reasons, are government controlled. In the late twentieth century there has
been a substantial move to free-market economies, but the People's Republic of China, the
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world's most populous country, along with a few others, remained largely centrally planned
economies, and most countries maintain some government control of business activities.
Clearly the level of economic activity combined with education, infrastructure, and so on, as well
as the degree of government control of the economy, affect virtually all facets of doing business,
and a firm needs to understand this environment if it is to operate successfully internationally.
The political environment refers to the type of government, the government relationship with
business, and the political risk in a country. Doing business internationally thus implies dealing
with different types of governments, relationships, and levels of risk.
There are many different types of political systems, for example, multi-party democracies, one-
party states, constitutional monarchies, dictatorships (military and nonmilitary). Also,
governments change in different ways, for example, by regular elections, occasional elections,
death, coups, war. Government-business relationships also differ from country to country.
Business may be viewed positively as the engine of growth, it may be viewed negatively as
the exploiter of the workers, or somewhere in between as providing both benefits and drawbacks.
Specific government-business relationships can also vary from positive to negative depending on
the type of business operations involved and the relationship between the people of the host
country and the people of the home country. To be effective in a foreign location an international
firm relies on the goodwill of the foreign government and needs to have a good understanding of
all of these aspects of the political environment.
A particular concern of international firms is the degree of political risk in a foreign location.
Political risk refers to the likelihood of government activity that has unwanted consequences for
the firm. These consequences can be dramatic as in forced divestment, where a government
requires the firm give up its assets, or more moderate, as in unwelcome regulations or
interference in operations. In any case the risk occurs because of uncertainty about the likelihood
of government activity occurring. Generally, risk is associated with instability and a country is
thus seen as more risky if the government is likely to change unexpectedly, if there is social
unrest, if there are riots, revolutions, war, terrorism, and so on. Firms naturally prefer countries
that are stable and that present little political risk, but the returns need to be weighed against the
risks, and firms often do business in countries where the risk is relatively high. In these
situations, firms seek to manage the perceived risk through insurance, ownership and
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management choices, supply and market control, financing arrangements, and so on. In addition,
the degree of political risk is not solely a function of the country, but depends on the company
and its activities as wella risky country for one company may be relatively safe for another.
The cultural environment is one of the critical components of the international business
environment and one of the most difficult to understand. This is because the cultural
environment is essentially unseen; it has been described as a shared, commonly held body of
general beliefs and values that determine what is right for one group, according to Kluckhohn
and Strodtbeck. National culture is described as the body of general beliefs and values that are
shared by a nation. Beliefs and values are generally seen as formed by factors such as history,
language, religion, geographic location, government, and education; thus firms begin a cultural
analysis by seeking to understand these factors.
Firms want to understand what beliefs and values they may find in countries where they do
business, and a number of models of cultural values have been proposed by scholars. The most
well-known is that developed by Hofstede in1980. This model proposes four dimensions of
cultural values including individualism, uncertainty avoidance, power distance and masculinity.
Individualism is the degree to which a nation values and encourages individual action and
decision making. Uncertainty avoidance is the degree to which a nation is willing to accept and
deal with uncertainty. Power distance is the degree to which a national accepts and sanctions
differences in power. And masculinity is the degree to which a nation accepts traditional male
values or traditional female values. This model of cultural values has been used extensively
because it provides data for a wide array of countries. Many academics and managers found this
model helpful in exploring management approaches that would be appropriate in different
cultures. For example, in a nation that is high on individualism one expects individual goals,
individual tasks, and individual reward systems to be effective, whereas the reverse would be the
case in a nation that is low on individualism. While this model is popular, there have been many
attempts to develop more complex and inclusive models of culture.
The competitive environment can also change from country to country. This is partly because of
the economic, political, and cultural environments; these environmental factors help determine
the type and degree of competition that exists in a given country. Competition can come from a
variety of sources. It can be public or private sector, come from large or small organizations, be
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domestic or global, and stem from traditional or new competitors. For the domestic firm the most
likely sources of competition may be well understood. The same is not the case when one moves
to compete in a new environment. For example, in the 1990s in the United States most business
was privately owned and competition was among private sector companies, while in the People's
Republic of China (PRC) businesses were owned by the state. Thus, a U.S. company in the PRC
could find itself competing with organizations owned by state entities such as the PRC army.
This could change the nature of competition dramatically.
The nature of competition can also change from place to place as the following illustrate:
competition may be encouraged and accepted or discouraged in favor of cooperation; relations
between buyers and sellers may be friendly or hostile; barriers to entry and exit may be low or
high; regulations may permit or prohibit certain activities. To be effective internationally, firms
need to understand these competitive issues and assess their impact.
An important aspect of the competitive environment is the level, and acceptance, of
technological innovation in different countries. The last decades of the twentieth century saw
major advances in technology, and this is continuing in the twenty-first century. Technology
often is seen as giving firms a competitive advantage; hence, firms compete for access to the
newest in technology, and international firms transfer technology to be globally competitive. It is
easier than ever for even small businesses to have a global presence thanks to the internet, which
greatly expands their exposure, their market, and their potential customer base. For economic,
political, and cultural reasons, some countries are more accepting of technological innovations,
others less accepting.
2.4 INTERNATIONAL ENTRY CHOICES
International firms may choose to do business in a variety of ways. Some of the most common
include exports, licenses, contracts and turnkey operations, franchises, joint ventures, wholly
owned subsidiaries, and strategic alliances.
Exporting is often the first international choice for firms, and many firms rely substantially on
exports throughout their history. Exports are seen as relatively simple because the firm is relying
on domestic production, can use a variety of intermediaries to assist in the process, and expects
its foreign customers to deal with the marketing and sales issues. Many firms begin by exporting
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reactively; then become proactive when they realize the potential benefits of addressing a market
that is much larger than the domestic one. Effective exporting requires attention to detail if the
process is to be successful; for example, the exporter needs to decide if and when to use different
intermediaries, select an appropriate transportation method, preparing export documentation,
prepare the product, arrange acceptable payment terms, and so on. Most importantly, the
exporter usually leaves marketing and sales to the foreign customers, and these may not receive
the same attention as if the firm itself under-took these activities. Larger exporters often
undertake their own marketing and establish sales subsidiaries in important foreign markets.
Licenses are granted from a licensor to a licensee for the rights to some intangible property (e.g.
patents, processes, copyrights, trademarks) for agreed on compensation (a royalty payment).
Many companies feel that production in a foreign country is desirable but they do not want to
undertake this production themselves. In this situation the firm can grant a license to a foreign
firm to undertake the production. The licensing agreement gives access to foreign markets
through foreign production without the necessity of investing in the foreign location. This is
particularly attractive for a company that does not have the financial or managerial capacity to
invest and undertake foreign production. The major disadvantage to a licensing agreement is the
dependence on the foreign producer for quality, efficiency, and promotion of the productif the
licensee is not effective this reflects on the licensor. In addition, the licensor risks losing some of
its technology and creating a potential competitor. This means the licensor should choose a
licensee carefully to be sure the licensee will perform at an acceptable level and is trustworthy.
The agreement is important to both parties and should ensure that both parties benefit equitably.
Contracts are used frequently by firms that provide specialized services, such as management,
technical knowledge, engineering, information technology, education, and so on, in a foreign
location for a specified time period and fee. Contracts are attractive for firms that have talents
not being fully utilized at home and in demand in foreign locations. They are relatively short-
term, allowing for flexibility, and the fee is usually fixed so that revenues are known in advance.
The major drawback is their short-term nature, which means that the contracting firm needs to
develop new business constantly and negotiate new contracts. This negotiation is time
consuming, costly, and requires skill at cross-cultural negotiations. Revenues are likely to be
uneven and the firm must be able to weather periods when no new contracts materialize.
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Turnkey contracts are a specific kind of contract where a firm constructs a facility, starts
operations, trains local personnel, then transfers the facility (turns over the keys) to the foreign
owner. These contracts are usually for very large infrastructure projects, such as dams, railways,
and airports, and involve substantial financing; thus they are often financed by international
financial institutions such as the World Bank. Companies that specialize in these projects can be
very profitable, but they require specialized expertise. Further, the investment in obtaining these
projects is very high, so only a relatively small number of large firms are involved in these
projects, and often they involve a syndicate or collaboration of firms.
Similar to licensing agreements, franchises involve the sale of the right to operate a complete
business operation. Well-known examples include independently owned fast-food
restaurants like McDonald's and Pizza Hut. A successful franchise requires control over
something that others are willing to pay for, such as a name, set of products, or a way of doing
things, and the availability of willing and able franchisees. Finding franchisees and maintaining
control over franchisable assets in foreign countries can be difficult; to be successful at
international franchising firms need to ensure they can accomplish both of these.
Joint ventures involve shared ownership in a subsidiary company. A joint venture allows a firm
to take an investment position in a foreign location without taking on the complete responsibility
for the foreign investment. Joint ventures can take many forms. For example, there can be two
partners or more, partners can share equally or have varying stakes, partners can come from the
private sector or the public, partners can be silent or active, partners can be local or international.
The decisions on what to share, how much to share, with whom to share, and how long to share
are all important to the success of a joint venture. Joint ventures have been likened to marriages,
with the suggestion that the choice of partner is critically important. Many joint ventures fail
because partners have not agreed on their objectives and find it difficult to work out conflicts.
Joint ventures provide an effective international entry when partners are complementary, but
firms need to be thorough in their preparation for a joint venture.
Wholly-owned subsidiaries involve the establishment of businesses in foreign locations which
are owned entirely by the investing firm. This entry choice puts the investor parent in full control
of operations but also requires the ability to provide the needed capital and management, and to
take on all of the risk. Where control is important and the firm is capable of the investment, it is
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often the preferred choice. Other firms feel the need for local input from local partners, or
specialized input from international partners, and opt for joint ventures or strategic alliances,
even where they are financially capable of 100 percent ownership.
Strategic alliances are arrangements among companies to cooperate for strategic purposes.
Licenses and joint ventures are forms of strategic alliances, but are often differentiated from
them. Strategic alliances can involve no joint ownership or specific license agreement, but rather
two companies working together to develop a synergy. Joint advertising programs are a form of
strategic alliance, as are joint research and development programs. Strategic alliances seem to
make some firms vulnerable to loss of competitive advantage, especially where small firms ally
with larger firms. In spite of this, many smaller firms find strategic alliances allow them to enter
the international arena when they could not do so alone.
International business grew substantially in the second half of the twentieth century, and this
growth is likely to continue. The international environment is complex and it is very important
for firms to understand this environment and make effective choices in this complex
environment. The previous discussion introduced the concept of comparative advantage,
explored some of the important aspects of the international business environment, and outlined
the major international entry choices available to firms. The topic of international business is
itself complex, and this short discussion serves only to introduce a few ideas on international
business issues.


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3. TYPES OF INTERNATIONAL BUSINESS
There are number of ways for internationalization / globalization of business. these are referred
as foreign market entry strategies. Each of these ways has certain advantages and disadvantages.
One strategy for a particular business may not be very suitable for another business with
different environment. Therefore it is quite common that a company employs different strategies
for different markets.
INTERNATIONAL BUSINESS IS DIVIDED INTO FOLLOWING :
(a) Trading : Import and exports of goods and services have been very fast. In countries like
Japan, there are international trading houses, which transact enormous volume of business. The
export house, trading house, stare trading houses and superstar trading houses are merchant
exporters they buy and resell goods. They are comparatively small in size from giant trading
house of Japan.
(b) Manufacturing and Marketing : The manufacturing exports are those who export goods
manufactured by them. Many MNCs and other firms both small and large do manufacturing and
marketing
(c) Sourcing and Marketing : There are many MNCs and firms which outsource their products
which they market at home and abroad.
(d) Global Sourcing for Production : There are many firms that outsource globally their raw
material, intermediates etc required for their manufacturing.
(e) Services : Services is an enormous and fast growing sector of international
businesses. There is a large variety of services rendered Sinternationally. The broad segment
includes tourism and transportations, IT, banking, insurance, consultancies etc.
(f) Investments : International portfolio investment has been growing fast, as a result of
globalization.
FDI are associates with establishment of manufacturing or marketing facilities abroad.
So, in short we can say that every business in todays world is growing internationally and world
is coming closer and with this there are greater chances of revenue generation.
TYPES
Licensing
Licensing gives a licensee certain rights or resources to manufacture and/or market a
certain product in a host country.
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Licensing is a business agreement involving two companies: one gives the other special
permissions, such as using patents or copyrights, in exchange for payment.
An international business licensing agreement involves two firms from different
countries, with the licensee receiving the rights or resources to manufacture in the foreign
country.
Rights or resources may include patents, copyrights, technology, managerial skills, or
other factors necessary to manufacture the good.
Advantages of expanding internationally using international licensing include: the ability
to reach new markets that may be closed by trade restrictions and the ability to expand
without too much risk or capital investment.
Disadvantages include the risk of an incompetent foreign partner firm and lower income
compared to other modes of international expansion.
Licensing
A business arrangement in which one company gives another company permission to
manufacture its product for a specified payment.
Licensing is a business arrangement in which one company gives another company permission to
manufacture its product for a specified payment.
Licensing generally involves allowing another company to use patents, trademarks, copyrights,
designs, and other intellectual in exchange for a percentage of revenue or a fee. It's a fast way to
generate income and grow a business, as there is no manufacturing or sales involved. Instead,
licensing usually means taking advantage of an existing company's pipeline and infrastructure in
exchange for a small percentage of revenue.
An international licensing agreement allows foreign firms, either exclusively or non-exclusively,
to manufacture a proprietors product for a fixed term in a specific market.
To summarize, in this foreign market entry mode, a licensor in the home country makes limited
rights or resources available to the licensee in the host country. The rights or resources may
include patents, trademarks, managerial skills, technology, and others that can make it possible
for the licensee to manufacture and sell in the host country a similar product to the one the
licensor has already been producing and selling in the home country without requiring the
licensor to open a new operation overseas. The licensor's earnings usually take the form of one-
time payments, technical fees, and royalty payments, usually calculated as a percentage of sales.
Figure 1
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As in this mode of entry the transference of knowledge between the parental company and the
licensee is strongly present, the decision of making an international license agreement depend on
the respect the host government shows for intellectual property and on the ability of the licensor
to choose the right partners and avoid having them compete in each other's market. Licensing is a
relatively flexible work agreement that can be customized to fit the needs and interests of both
licensor and licensee. The following are the main advantages and reasons to use an international
licensing for expanding internationally:
Obtain extra income for technical know-how and services.
Reach new markets not accessible by export from existing facilities.
Quickly expand without much risk and large capital investment.
Pave the way for future investments in the market.
Retain established markets closed by trade restrictions.
Political risk is minimized as the licensee is usually 100% locally owned.
This is highly attractive for companies that are new in international business. On the other hand,
international licensing is a foreign market entry mode that presents some disadvantages and
reasons why companies should not use it, because there is:
Lower income than in other entry modes
Loss of control of the licensee manufacture and marketing operations and practices
leading to loss of quality
Risk of having the trademark and reputation ruined by a incompetent partner
The foreign partner also can become a competitor by selling its production in places
where the parental company has a presence
Franchising
Franchising is the practice of licensing another firm's business model as an operator.
Essentially, and in terms of distribution, the franchiser is a supplier who allows an
operator, or a franchisee, to use the supplier's trademark and distribute the supplier's
goods. In return, the operator pays the supplier a fee.
Thirty three countries, including the United States, China, and Australia, have laws that
explicitly regulate franchising, with the majority of all other countries having laws which
have a direct or indirect impact on franchising.
Franchise agreements carry no guarantees or warranties, and the franchisee has little or
no recourse to legal intervention in the event of a dispute.
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franchise
The authorization granted by a company to sell or distribute its goods or services in a
certain area.
franchisee
A holder of a franchise; a person who is granted a franchise.
franchiser
A franchisor, a company which or person who grants franchises.
Franchising is the practice of using another firm's successful business model. For the franchiser,
the franchise is an alternative to building "chain stores" to distribute goods that avoids the
investments and liability of a chain. The franchiser's success depends on the success of the
franchisees. The franchisee is said to have a greater incentive than a direct employee because he
or she has a direct stake in the business. Essentially, and in terms of distribution, the franchiser is
a supplier who allows an operator, or a franchisee, to use the supplier's trademark and distribute
the supplier's goods. In return, the operator pays the supplier a fee. Figure 1
In short, in terms of distribution, the franchiser is a supplier who allows an operator, or a
franchisee, to use the supplier's trademark and distribute the supplier's goods. In return, the
operator pays the supplier a fee.
Each party to a franchise has several interests to protect. The franchiser is involved in securing
protection for the trademark, controlling the business concept, and securing know how. The
franchisee is obligated to carry out the services for which the trademark has been made
prominent or famous. There is a great deal of standardization required. The place of service has
to bear the franchiser's signs, logos, and trademark in a prominent place. The uniforms worn by
the staff of the franchisee have to be of a particular design and color. The service has to be in
accordance with the pattern followed by the franchiser in the successful franchise operations.
Thus, franchisees are not in full control of the business, as they would be in retailing.
A service can be successful if equipment and supplies are purchased at a fair price from the
franchiser or sources recommended by the franchiser. A coffee brew, for example, can be readily
identified by the trademark if its raw materials come from a particular supplier. If the franchiser
requires purchase from his stores, it may come under anti-trust legislation or equivalent laws of
other countries. So too the purchase of uniforms of personnel, signs, etc., as well as the franchise
sites, if they are owned or controlled by the franchiser.
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Franchise agreements carry no guarantees or warranties, and the franchisee has little or no
recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral
contracts in favor of the franchiser, who is generally protected from lawsuits from their
franchisees because of the non-negotiable contracts that require franchisees to acknowledge, in
effect, that they are buying the franchise knowing that there is risk, and that they have not been
promised success or profits by the franchiser. Contracts are renewable at the sole option of the
franchiser. Most franchisers require franchisees to sign agreements that mandate where and
under what law any dispute would be litigated.

Exporting
Exporting is the practice of shipping goods from the domestic country to a foreign country.
This term export is derived from the conceptual meaning as to ship the goods and
services out of the port of a country.
In national accounts "exports" consist of transactions in goods and services (sales, barter,
gifts or grants) from residents to non-residents.
Statistics on international trade do not record smuggled goods or flows of illegal services.
A small fraction of the smuggled goods and illegal services may nevertheless be included
in official trade statistics through dummy shipments that serve to conceal the illegal
nature of the activities.
export
to sell (goods) to a foreign country
import
To bring (something) in from a foreign country, especially for sale or trade.
Examples
When individuals from Country A purchase goods from Country B, this process is known
as exporting for Country B (since their goods are being sold) and importing for Country
A (since they are buying the goods).

Licensing is a business arrangement in which one company gives another company permission to
manufacture its product for a specified payment.
Licensing generally involves allowing another company to use patents, trademarks, copyrights,
designs, and other intellectual in exchange for a percentage of revenue or a fee. It's a fast way to
18
generate income and grow a business, as there is no manufacturing or sales involved. Instead,
licensing usually means taking advantage of an existing company's pipeline and infrastructure in
exchange for a small percentage of revenue.
An international licensing agreement allows foreign firms, either exclusively or non-exclusively,
to manufacture a proprietors product for a fixed term in a specific market.
To summarize, in this foreign market entry mode, a licensor in the home country makes limited
rights or resources available to the licensee in the host country. The rights or resources may
include patents, trademarks, managerial skills, technology, and others that can make it possible
for the licensee to manufacture and sell in the host country a similar product to the one the
licensor has already been producing and selling in the home country without requiring the
licensor to open a new operation overseas. The licensor's earnings usually take the form of one-
time payments, technical fees, and royalty payments, usually calculated as a percentage of sales.
Figure 1
As in this mode of entry the transference of knowledge between the parental company and the
licensee is strongly present, the decision of making an international license agreement depend on
the respect the host government shows for intellectual property and on the ability of the licensor
to choose the right partners and avoid having them compete in each other's market. Licensing is a
relatively flexible work agreement that can be customized to fit the needs and interests of both
licensor and licensee. The following are the main advantages and reasons to use an international
licensing for expanding internationally:
Obtain extra income for technical know-how and services.
Reach new markets not accessible by export from existing facilities.
Quickly expand without much risk and large capital investment.
Pave the way for future investments in the market.
Retain established markets closed by trade restrictions.
Political risk is minimized as the licensee is usually 100% locally owned.
This is highly attractive for companies that are new in international business. On the other hand,
international licensing is a foreign market entry mode that presents some disadvantages and
reasons why companies should not use it, because there is:
Lower income than in other entry modes
Loss of control of the licensee manufacture and marketing operations and practices
leading to loss of quality
19
Risk of having the trademark and reputation ruined by a incompetent partner
The foreign partner also can become a competitor by selling its production in places
where the parental company has a presence
I mporting
Imports are the inflow of goods and services into a country's market for consumption.
A country specializes in the export of goods for which it has a comparative advantage
and imports those for which it has a comparative disadvantage. By doing so, the country
can increase its welfare.
Comparative advantage describes the ability of a country to produce one specific good
more efficiently than other goods.
A country enhances its welfare by importing a broader range of higher-quality goods and
services at lower cost than it could produce domestically.
import
To bring (something) in from a foreign country, especially for sale or trade.
comparative advantage
The concept that a certain good can be produced more efficiently than others due to a
number of factors, including productive skills, climate, natural resource availability, and
so forth.
Examples
A country in certain tropical areas of the world has a comparative advantage at growing
crops like sugar or coffee beans, but it would be much less efficient at growing wheat
(due to the climate). Therefore, they should export their sugar/coffee beans and import
wheat at a lower cost than trying to grow wheat themselves.

The term "import" is derived from the concept of goods and services arriving into the port of a
country (Figure 1). The buyer of such goods and services is referred to an "importer" and is
based in the country of import whereas the overseas-based seller is referred to as an "exporter".
Thus, an import is any good (e.g. a commodity) or service brought in from one country to
another country in a legitimate fashion, typically for use in trade. It is a good that is brought in
from another country for sale.
Imported goods or services are provided to domestic consumers by foreign producers. An import
in the receiving country is an export to the sending country. Imports, along with exports, form
20
the basics of international trade. Import of goods normally requires the involvement of customs
authorities in both the country of import and the country of export; those goods are often subject
to import quotas, tariffs, and trade agreements. While imports are the set of goods and services
imported, "imports" also means the economic value of all goods and services that are imported.
Imports are the inflow of goods and services into a country's market for consumption. A country
enhances its welfare by importing a broader range of higher-quality goods and services at lower
cost than it could produce domestically. Comparative advantage is a concept often applied to
importing and exporting. Comparative advantage is the concept that a country should specialize
in the production and export of those goods and services that it can produce more efficiently than
other goods and services, and that it should import those goods and services in which it has a
comparative disadvantage.

Contract Manufacturing
In contract manufacturing, a hiring firm makes an agreement with the contract
manufacturer to produce and ship the hiring firm's goods.
A hiring firm may enter a contract with a contract manufacturer (CM) to produce
components or final products on behalf of the hiring firm for some agreed-upon price.
There are many benefits to contract manufacturing, and companies are finding many
reasons why they should be outsourcing their production to other companies.
Production outside of the company does come with many risks attached. Companies must
first identify their core competencies before deciding about contract manufacture.
Contract manufacturing
Business model in which a firm hires a contract manufacturer to produce components or
final products based on the hiring firm's design.
A contract manufacturer ("CM") is a manufacturer that enters into a contract with a firm to
produce components or products for that firm (Figure 1). It is a form of outsourcing. In a contract
manufacturing business model, the hiring firm approaches the contract manufacturer with a
design or formula. The contract manufacturer will quote the parts based on processes, labor,
tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After
the bidding process is complete, the hiring firm will select a source, and then, for the agreed-
upon price, the CM acts as the hiring firm's factory, producing and shipping units of the design
on behalf of the hiring firm.
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Benefits
Contract manufacturing offers a number of benefits:
Cost Savings: Companies save on their capital costs because they do not have to pay for a
facility and the equipment needed for production. They can also save on labor costs such
as wages, training, and benefits. Some companies may look to contract manufacture in
low-cost countries, such as China, to benefit from the low cost of labor.
Mutual Benefit to Contract Site: A contract between the manufacturer and the company it
is producing for may last several years. The manufacturer will know that it will have a
steady flow of business at least until that contract expires.
Advanced Skills: Companies can take advantage of skills that they may not possess, but
the contract manufacturer does. The contract manufacturer is likely to have relationships
formed with raw material suppliers or methods of efficiency within their production.
Quality: Contract Manufacturers are likely to have their own methods of quality control
in place that help them to detect counterfeit or damaged materials early.
Focus: Companies can focus on their core competencies better if they can hand off base
production to an outside company.
Economies of Scale: Contract Manufacturers have multiple customers that they produce
for. Because they are servicing multiple customers, they can offer reduced costs in
acquiring raw materials by benefiting from economies of scale. The more units there are
in one shipment, the less expensive the price per unit will be.
Risks
Balanced against the above benefits of contract manufacturing are a number of risks:
Lack of Control: When a company signs the contract allowing another company to
produce their product, they lose a significant amount of control over that product. They
can only suggest strategies to the contract manufacturer; they cannot force them to
implement those strategies.
Relationships: It is imperative that the company forms a good relationship with its
contract manufacturer. The company must keep in mind that the manufacturer has other
customers. They cannot force them to produce their product before a competitors. Most
companies mitigate this risk by working cohesively with the manufacturer and awarding
good performance with additional business.
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Quality: When entering into a contract, companies must make sure that the
manufacturers standards are congruent with their own. They should evaluate the
methods in which they test products to make sure they are of good quality. The company
has to ensure the contract manufacturer has suppliers that also meet these standards.
Intellectual Property Loss: When entering into a contract, a company is divulging their
formulas or technologies. This is why it is important that a company not give out any of
its core competencies to contract manufacturers. It is very easy for an employee to
download such information from a computer and steal it. The recent increase in
intellectual property loss has corporate and government officials struggling to improve
security. Usually, it comes down to the integrity of the employees.
Outsourcing Risks: Although outsourcing to low-cost countries has become very popular,
it does bring along risks such as language barriers, cultural differences, and long lead
times. This could make the management of contract manufacturers more difficult,
expensive, and time-consuming.
Capacity Constraints: If a company does not make up a large portion of the contract
manufacturers business, they may find that they are de-prioritized over other companies
during high production periods. Thus, they may not obtain the product they need when
they need it.
Loss of Flexibility and Responsiveness: Without direct control over the manufacturing
facility, the company will lose some of its ability to respond to disruptions in the supply
chain. It may also hurt their ability to respond to demand fluctuations, risking their
customer service levels.
J oint Ventures
In a joint venture business model, two or more parties agree to invest time, equity, and
effort for the development of a new shared project.
Joint business ventures involve two parties contributing their own equity and resources to
develop a new project. The enterprise, revenues, expenses and assets are shared by the
involved parties.
Since money is involved in a joint venture, it is necessary to have a strategic plan in
place.
As the cost of starting new projects is generally high, a joint venture allows both parties
to share the burden of the project as well as the resulting profits.
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joint venture
A cooperative partnership between two individuals or businesses in which profits and
risks are shared.
Examples
Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson
and Japanese electronics manufacturer Sony to develop cellular devices.

A joint venture Figure 1 is a business agreement in which parties agree to develop a new entity
and new assets by contributing equity. They exercise control over the enterprise and
consequently share revenues, expenses and assets.
When two or more persons come together to form a partnership for the purpose of carrying out a
project, this is called a joint venture. In this scenario, both parties are equally invested in the
project in terms of money, time and effort to build on the original concept. While joint ventures
are generally small projects, major corporations use this method to diversify. A joint venture can
ensure the success of smaller projects for those that are just starting in the business world or for
established corporations. Since the cost of starting new projects is generally high, a joint venture
allows both parties to share the burden of the project as well as the resulting profits.
Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In
short, both parties must be committed to focusing on the future of the partnership rather than just
the immediate returns. Ultimately, short term and long term successes are both important.To
achieve this success, honesty, integrity and communication within the joint venture are
necessary.
A consortium JV (also known as a cooperative agreement) is formed when one party seeks
technological expertise, franchise and brand-use agreements, management contracts, and rental
agreements for one-time contracts. The JV is dissolved when that goal is reached. Some major
joint ventures include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing,
Norampac, and Owens-Corning.

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Outsourcing
Outsourcing business functions to developing foreign countries has become a popular way
for companies to reduce cost.
Outsourcing is the contracting of business processes to external firms, usually in
developing countries where labor costs are cheaper.
This practice has increased in prevalence due to better technology and improvements in
the educational standards of the countries to which jobs are outsourced.
The opposite of outsourcing is called insourcing, and it is sometimes accomplished via
vertical integration. However, a business can provide a contract service to another
business without necessarily insourcing that business process.
outsourcing
The transfer of a business function to an external service provider.
offshoring
The location of a business in another country for tax purposes.
insourcing
The obtaining of goods or services using domestic resources or employees as opposed to
foreign.
Examples
Corporations may outsource their helpdesk or customer service functions to 3rd party call
centers in foreign countries because these skilled laborers can do these jobs at a lesser
cost than their equivalents in the domestic country.

Outsourcing is the contracting out of a business process, which an organization may have
previously performed internally or has a new need for, to an independent organization from
which the process is purchased back as a service. Though the practice of purchasing a business
functioninstead of providing it internallyis a common feature of any modern economy, the
term outsourcing became popular in America near the turn of the 21
st
century. An outsourcing
deal may also involve transfer of the employees and assets involved to the outsourcing business
partner. The definition of outsourcing includes both foreign or domestic contracting (Figure 1),
which may include offshoring, described as a company taking a function out of their business
and relocating it to another country.
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The opposite of outsourcing is called insourcing, and it is sometimes accomplished via vertical
integration. However, a business can provide a contract service to another business without
necessarily insourcing that business process.
Reasons for Outsourcing
Companies outsource to avoid certain types of costs. Among the reasons companies elect to
outsource include avoidance of burdensome regulations, high taxes, high energy costs, and
unreasonable costs that may be associated with defined benefits in labor union contracts and
taxes for government mandated benefits. Perceived or actual gross margin in the short run
incentivizes a company to outsource. With reduced short run costs, executive management sees
the opportunity for short run profits while the income growth of the consumers base is strained.
This motivates companies to outsource for lower labor costs. However, the company may or may
not incur unexpected costs to train these overseas workers. Lower regulatory costs are an
addition to companies saving money when outsourcing.
Import marketers may make short run profits from cheaper overseas labor and currency mainly
in wealth consuming sectors at the long run expense of an economy's wealth producing sectors
straining the home county's tax base, income growth, and increasing the debt burden. When
companies offshore products and services, those jobs may leave the home country for foreign
countries at the expense of the wealth producing sectors. Outsourcing may increase the risk of
leakage and reduce confidentiality, as well as introduce additional privacy and security concerns.

Offshoring
Offshoring entails a company moving a business process from one country to another.
Offshoring is the relocation of certain business processes from one country to the other,
resulting in large tax breaks and lower labor costs.
Offshoring can cause controversy in a company's domestic country since it is perceived
to impact the domestic employment situation negatively.
Offshoring of a company's services that were previously produced domestically can be
advantageous in lowering operation costs, but has incited some controversy over the
economic implications.
outsourcing
The transfer of a business function to an external service provider.
offshoring
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The location of a business in another country for tax purposes.
captive
held prisoner; not free; confined
"Offshoring" (Figure 1) is a company's
relocation of a business process from one
country to another. This typically involves
an operational process, such as
manufacturing, or a supporting process,
such as accounting. Even state governments
employ offshoring. More recently,
offshoring has been associated primarily
with the sourcing of technical and
administrative services that support both
domestic and global operations conducted
outside a given home country by means of
internal (captive) or external (outsourcing)
delivery models.The subject of offshoring, also known as "outsourcing," has produced
considerable controversy in the United States. Offshoring for U.S. companies can result in large
tax breaks and low-cost labor.
Offshoring can be seen in the context of either production offshoring or services offshoring.
After its accession to the World Trade Organization (WTO) in 2001, the People's Republic of
China emerged as a prominent destination for production offshoring. Another focus area includes
the software industry as part of Global Software Development and the development of Global
Information Systems. After technical progress in telecommunications improved the possibilities
of trade in services, India became a leader in this domain; however, many other countries are
now emerging as offshore destinations.
The economic logic is to reduce costs. People who can use some of their skills more cheaply than
others have a comparative advantage. Countries often strive to trade freely items that are of the
least cost to produce.
Related terms include "nearshoring," "inshoring" and "bestshoring," otherwise know as
"rightshoring." Nearshoring is the relocation of business processes to (typically) lower cost
foreign locations that are still within close geographical proximity (for example, shifting United
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States-based business processes to Canada/Latin America). Inshoring entails choosing services
within a country, while bestshoring entails choosing the "best shore" based on various criteria.
Business process outsourcing (BPO) refers to outsourcing arrangements when entire business
functions (such as Finance & Accounting and Customer Service) are outsourced. More specific
terms can be found in the field of software development; for example, Global Information
System as a class of systems being developed for/by globally distributed teams.

Multinational Firms
With the advent of improved communication and technology, corporations have been able
to expand into multiple countries.
Multinational corporations operate in multiple countries.
MNCs have considerable bargaining power and may negotiate business or trade policies
with success.
A corporation may choose to locate in a special economic zone, a geographical region
that has economic and other laws that are more free-market-oriented than a country's
typical or national laws.
Multinational corporation
A corporation or enterprise that operates in multiple countries.
Examples
McDonalds operates in over 119 different countries, making it a fairly large MNC by any
standard

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation
registered in more than one country or has operations in more than one country. It is a large
corporation which both produces and sells goods or services in various countries (Figure 1). It
can also be referred to as an international corporation. The first multinational corporation was the
Dutch East India Company, founded March 20, 1602.
Corporations may make a foreign direct investment. Foreign direct investment is direct
investment into one country by a company located in another country. Investors buy a company
in the country or expand operations of an existing business in the country.
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A corporation may choose to locate in a special economic zone, a geographical region with
economic and other laws that are more free-market-oriented than a country's typical or national
laws.
Multinational corporations are important factors in the processes of globalization. National and
local governments often compete against one another to attract MNC facilities, with the
expectation of increased tax revenue, employment and economic activity. To compete, political
powers push toward greater autonomy for corporations. MNCs play an important role in
developing economies of developing countries.
Many economists argue that in countries with comparatively low labor costs and weak
environmental and social protection, multinationals actually bring about a "race to the top."
While multinationals will see a low tax burden or low labor costs as an element of comparative
advantage, MNC profits are tied to operational efficiency, which includes a high degree of
standardization. Thus, MNCs are likely to adapt production processes in many of their operations
to conform to the standards of the most rigorous jurisdiction in which they operate.
As for labor costs, while MNCs pay workers in developing countries far below levels in
countries where labor productivity is high (and accordingly, will adopt more labor-intensive
production processes), they also tend to pay a premium over local labor rates of 10% to 100%.
Finally, depending on the nature of the MNC, investment in any country reflects a desire for a
medium- to long-term return, as establishing a plant, training workers and so on can be costly.
Therefore, once established in a jurisdiction, MNCs are potentially vulnerable to arbitrary
government intervention like expropriation, sudden contract renegotiation and the arbitrary
withdrawal or compulsory purchase of licenses. Thus both the negotiating power of MNCs and
the "race to the bottom" critique may be overstated while understating the benefits (besides tax
revenue) of MNCs becoming established in a jurisdiction.

Direct I nvestment
FDI is practiced by companies in order to benefit from cheaper labor costs, tax exemptions,
and other privileges in that foreign country.
FDI is the flow of investments from one company to production in a foreign nation, with
the purpose of lowering labor costs and gaining tax incentives.
FDI can help the economic situations of developing countries, as well as facilitate
progressive internal policy reforms.
29
A major contributing factor to increasing FDI flow was internal policy reform relating to
trade openness and participation in international trade agreements and institutions.
Foreign direct investment
investment directly into production in a country by a company located in another country,
either by buying a company in the target country or by expanding operations of an
existing business in that country.
Examples
Intel is headquartered in the United States, but it has made foreign direct investments in a
number of Southeast Asian countries where they produce components of their products in
Intel-owned factories.

Foreign direct investment (FDI) is investment into production in a country by a company located
in another country, either by buying a company in the target country or by expanding operations
of an existing business in that country.
FDI is done for many reasons including to take advantage of cheaper wages in the country,
special investment privileges, such as tax exemptions, offered by the country as an incentive to
gain tariff-free access to the markets of the country or the region. FDI is in contrast to portfolio
investment which is a passive investment in the securities of another country, such as stocks and
bonds.
One theory for how to best help developing countries, is to increase their inward flow of FDI.
However, identifying the conditions that best attract such investment flow is difficult, since
foreign investment varies greatly across countries and over time. Knowing what has influenced
these decisions and the resulting trends in outcomes can be helpful for governments, non-
governmental organizations, businesses, and private donors looking to invest in developing
countries.
A study from scholars at Duke University and Princeton University published in the American
Journal of Political Science, The Politics of Foreign Direct Investment into Developing
Countries: Increasing FDI through International Trade Agreements," examines trends in FDI
from 1970 to 2000 in 122 developing countries to assess what the best conditions are for
attracting investment. The study found the major contributing factor to increasing FDI flow was
internal policy reform relating to trade openness and participation in international trade
agreements and institutions. The researchers conclude that, while democracy can be conducive
30
to international cooperation, the strongest indicator for higher inward flow of FDI for
developing countries was the number of trade agreements and institutions to which they were
party.

Countertrade
Countertrade is a system of exchange in which goods and services are used as payment
rather than money.
Countertrade is the exchange of goods or services for other goods or services. This
system can be typified as simple bartering, switch trading, counter purchase, buyback, or
offset.
Switch trading: Party A and B are countertrading salt for sugar. Party A may switch its
obligation to pay Party B to a third party, known as the switch trader. The switch trader
gets the sugar from Party B at a discount and sells it for money. The money is used as
Party A's payment to Party B.
Counter purchase: Party A sells salt to Party B. Party A promises to make a future
purchase of sugar from Party B.
Buyback: Party A builds a salt processing plant in Country B, providing capital to this
developing nation. In return, Country B pays Party A with salt from the plant.
Offset agreement: Party A and Country B enter a contract where Party A agrees to buy
sugar from Country B to manufacture candy. Country B then buys that candy.
barter
The exchange of goods or services without involving money.
Switch trading
Practice in which one company sells to another its obligation to make a purchase in a
given country.
counter purchase
Sale of goods and services to one company in another country by a company that
promises to make a future purchase of a specific product from the same company in that
country.
Examples
Bartering: One party gives salt in exchange for sugar from another party.

31
Countertrade means exchanging goods or services which are paid for, in whole or part, with
other goods or services, rather than with money. A monetary valuation can, however, be used in
counter trade for accounting purposes. Any transaction involving exchange of goods or service
for something of equal value.
There are five main variants of countertrade:
1. Barter: Exchange of goods or services directly for other goods or services without the use
of money as means of purchase or payment.
2. Switch trading: Practice in which one company sells to another its obligation to make a
purchase in a given country.
3. Counter purchase: Sale of goods and services to one company in aother country by a
company that promises to make a future purchase of a specific product from the same
company in that country.
4. Buyback: This occurs when a firm builds a plant in a country, or supplies technology,
equipment, training, or other services to the country, and agrees to take a certain
percentage of the plant's output as partial payment for the contract.
5. Offset: Agreement that a company will offset a hard currency purchase of an unspecified
product from that nation in the future. Agreement by one nation to buy a product from
another, subject to the purchase of some or all of the components and raw materials from
the buyer of the finished product, or the assembly of such product in the buyer nation.
(Figure 1)
Countertrade also occurs when countries lack sufficient hard currency or when other types of
market trade are impossible. In 2000, India and Iraq agreed on an "oil for wheat and rice" barter
deal, subject to UN approval under Article 50 of the UN Persian Gulf War sanctions, that would
facilitate 300,000 barrels of oil delivered daily to India at a price of $6.85 a barrel, while Iraq oil
sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million
tonnes of Iraqi crude under the oil-for-food program.

32
4. CHALLENGES AND THREATS FOR INTERNATIONAL BUSINESS
International business has been a much discussing topic. Threat to international business is the
major fences the growing of the same trade in all over the world. Economics expert have
disagree on the reality of international business for a country benefits. When a country increased
their exports in to foreign market its economically situation are growing and its high beneficial
for its economy. But if we see for other hand the country and its imports are increase can be
create threat for importer country economy. The policy maker of the country economy have been
worry and making strike rules to keep the balance between the agreement of two country,
International business can be develop the country economy, at the main time many local players
can be outdid by financially stronger multinational by forced close down their business or get
merge to multinational companies. In many cases multinational companies become so powerful
compare to the locals companies particularly in small countries, for their own benefit they can
dictate the political terms to the government of the country.
INTRODUCTION
During the colonial period, the risks for foreign investment were virtually non-existent, as an
investor with money colonies hold Imperial State had almost absolute Protection. Even if the
investment in countries was made, which was not less Colonial rule, the protection is often
repaired by diplomatic means the collective perception of pressure from countries of origin of the
investors involved. But the end of colonialism, the subsequent appearance of economic
nationalism and the lack of protection through the exercise of military power have greatly
increased the risks for foreign investment in the modern world (Maathai, W, 1995).
A company to engage in the trade across international borders will probably determine that the
risks are higher than the normal business risks on the domestic market. Risks of international
trade as a result of the need for, a different corporate culture, or even a different language saw to
cope themselves with different laws in another country. Economic risks include the risk of non-
payment by the buyer and credit movements in the rate of interest or exchange rates risk. When
delivered the goods abroad, risk of damage to or loss of the goods, contract disputes or denial of
the goods by the purchaser can arise. The political risks of international trade include the
33
possibility of expropriation of property by a foreign Government or import changes in public
policy on tariffs or quotas (Ghemawat & Reiche, 2011).

RISK IN INTERNATIONAL BUSINESS CAN BE DEFINE IN SEVERAL STEPS
1- Economics Risk:
Economics risk can be defined as: is the accidental that macroeconomic circumstances like
conversation rates, political constancy or administration regulation will be affect an investment,
frequently one in a foreign country (Gianni De, Honohan & Ize, 2003).
The opportunity an economic slowdown adversely has effect on investments, for example, start
produced directly for luxury or during a recession has many economic risks. Economic risk is
closely linked to the political risk, as the Government decisions, the impact on the economy can
affect an investment. For example, a Central Bank can raise interest rates or the legislature can
raise taxes and thus economic conditions that can effect on investments. Risks for foreign
investments such as economic factors development and currency affect exchange rates the level
of risk associated with the foreign investment, with stable economic growth; countries have less
risk compared to those countries whose economic growth fluctuates quickly varies over the
course of time (Love & Lattimore, 2009).
Economic risks can be dividing in following risks
-Risk of non-acceptance
-Risk of Exchange rate in currency worldwide
-Risk of insolvency of the buyer
-Risk of conceding in economic control
-Risk of long-drawn-out nonpayment i.e. the failure of the buyer to pay off the unpaid
Amount after quarter or six months of the due date

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2-Political Risk:
Political risk can be defined as Political risk is a nature of risk confronted by investors,
corporations, and governments. It is the type of risk that can be unstated and achieved with
coherent forethought and investment (Glenn, 1994).
The type of risk that an investment's earnings could hurt as a result of political vicissitudes or
unpredictability in a country, Instability affecting investment returns could stem from a change in
government, legislative bodies, other foreign policy makers, or military control. Political risk can
also be called as "geopolitical risk," and becomes more of a factor as the time prospect of an
investment becomes longer (Atchison, David W & David J, 2003).
Political risk can be divided in the following steps
-Political uncertainty of a country
-War and terrier
-Surrounding of political region
-Risk in the non-renewal exports and imports license
3- Country buyer and seller risk:
For international executive needs to avoid the main drawbacks of country risk assessment by
looking for information in a variety of places, leading relevant analysis, and changing opinions if
necessary. A company must set acceptable risk objectives based on its reward goals and risk
tolerance. The key to reducing risk is a thorough assessment of the country and customers.
Maintaining a systematic approach for each customer and country in this analysis will assure that
each evaluation is consistent, relevant, and objective (Rittenberg & Martens, 2012).
For buyer and seller that they are involved in international trade that they may be facing the
following risks
Government policies
Trade and international business restrictions
The shortage of foreign currency in the investment country
The exchange regulation policies
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Seller performance risk
Interest rate risk
Buyer acceptance risk
Buyer credit risk/liquidation

4-Commercial risks:
Commercial risks can be defined as as a firm/organization have to transaction with foreigner
buyer working in a changed lawful and political environment in international trade, the risk to
smooth behavior of the commercial transaction upsurge various, and financial risk accepted by a
seller when spreading credit without any collected or resources. In simple words all other risk
except the political risk (Najam, 2001).
Commercial risks are to the deprivation loss or in demand to another party or markets.
International business enhance to upsurge in different ways risk to equate to local risk. This is
the mostly due to lengthier distance partner between you and your counterparty, strange culture,
economic and political environment as well as local and nonlocal rules.
The custom of transections term such as payment and collection documentary credit and normal
transfer delivery terms like the incoterms decrease or remove various risks regarding to your
business including to cancellation of orders, delayed payment or late delivery (Mary C, Bart, Ay,
Sahin & Robert G, 2012).
Example of commercial risks
Nature of business and nature transection with buyer
Buyer financial position
You have different type understanding/clarification of which you are decided upon
Your business partner is not bequeathing accomplish the agreement
Your business partner are not capable for delivery the payment on time and potential loss of
shipments are acceptable
1 - A sellers incapable to deliver the required quantity or quality of goods
2 - Probability of shipment being refused
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3 - Value of the shipments
5-Others risks to International Trade:
In other risks culture difference, lake of knowledge, overseas markets, language barriers
corruption in business and natural risks these are risks which create the problems for the
foreigner investors (Games, 2011).
In details the other risks are includes
Lake of knowledge for overseas markets entrance
Natural risks due to numerous type of natural disasters which cannot be in human control
Language differences is the main problem in all over the world i.e. Chains and Japanese have
big problem to understood Arabic and English, and majors business opportunities for china
,Korea and Japanese companies are gulf countries
Autonomous risk the capability of the administration of a country to pay off its amount overdue
(Debts)
Inclination to corrupt business associates like many country have corrupt business organization
i.e. in Zimbabwe, Pakistan
Culture differences for example cultures believe the payment of an inducement to help business
is unconditionally lawful

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5. CASE STUDY
5.1 DOING BUSINESS IN INDIA: NEW ZEALAND CASE STUDIES
We have put together two different examples, illustrating New Zealand businesses offering
expertise to India in security management, and baggage and cargo airport systems. The case
studies focus on the logistics and processes of establishing a New Zealand company's presence in
the Indian market.
Glidepath
Glidepath, a New Zealand baggage, cargo and parcel automation company, is a world leader in
manufacturing airport baggage systems with 500 completed projects in 61 countries under its
belt. The company employs 220 staff and turns over NZ$80m annually.

India, Chennai airport - installation of Glidepath arrival carousels
First and foremost, Glidepaths interest in India stemmed from enormous revenue potential
offered by the countrys growing travel market and the desire by the Indian government to
upgrade air and cargo facilities to world standards.
Focusing on India, this case study demonstrates the business opportunities available to New
Zealand exporters as the country upgrades and modernises its air cargo and passenger
infrastructure and demonstrates the huge potential offered by Indias travel market as the wealth
of Indias citizens increases.
India has already proven a great success for Glidepath at what looks to be a very early
development stage in Indias mass tourism and aviation markets. It now has the benefit of
experience and a local office presence close to customers at a time when Indian spending on
aviation infrastructure is accelerating rapidly. India also offers the company the option of
establishing a fully fledged manufacturing hub in the region should future volumes justify
investment.
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Gallagher: partnerships in India
Solid local partnerships have been pivotal in Gallagher Security Management Systems success
in markets like India, and this approach was cited as a major factor in the companys win at the
New Zealand International Business Awards in October 2010.
Gallagher SMS, part of the multi-faceted, Hamilton-based Gallagher Group, won the category
Best Business $10m to $50m total annual revenue, with judges highlighting its partnership
approach in 130 markets.
In India, Gallagher owns 37 percent of a joint venture with Bangalore-based Ibex, originally an
agricultural fencing company. Thats a Gallagher PowerFence surround Lok Sahba, the Indian
Parliament in New Delhi. One of the countrys largest conglomerates, Reliance, uses Gallaghers
Cardax security system to control the movements of 15,000 staff (and 1,000 doors) at one of its
sites.
Elsewhere, a 9.5km detection fence protects the site where Indias much-hyped peoples car,
the Nano, is being made, and Gallagher barriers keep animals inside Indias game parks and
poachers out.
All of the joint ventures intellectual property and technical know-how comes from New
Zealand, says Curtis Edgecombe, general manager of Gallagher SMS. The Indian arm, which
employs 100 Indians, is primarily a marketing and distribution business.
Ibex Gallagher has flourished on the back of population growth, massive infrastructure
development and, post 9/11, more stringent security requirements around facilities such as
airports. Its a really exciting market for us and its attractive because its an English-speaking
market, says Edgecombe.

Reliance Infocomm - end user of Gallagher's security access system in India
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What about protecting IP? We are careful about the raw information we provide to any market
and that might be software code, or PC board designs, he says. But in terms of sending
product, we dont worry about things; the IP we have developed is embedded in the firmware.
Edgecombe says there are three critical steps for getting into Indian markets: You need to have
a strong business plan; find a reliable local partner who mirrors the company values and fits in
with the business strategy; and invest in enabling and supporting these partners.
Building and then nurturing a mutually supportive partnership is essential. We rely on our
Indian partners to bring marketing and local knowledge we cant do it from here, he says.
And we commit from our end to provide resources and expertise.
Gallagher Group founder Bill Gallagher started investigating India in the in the late 1980s. Every
time he went to Europe, he says, he stopped off in India to check out business prospects.
However, getting established was a slow process in those days: we had no established market
contacts, onerous import licenses were needed, and the initial products sent to India attracted
100% duty.
As India started reducing red tape, and with New Zealand Trade and Enterprise support,
Gallagher started making inroads. He came across Ibex, then an agricultural fencing company
suffering reliability problems with its finished products. Ibex decided its own future rested with
Gallagher products and hasnt looked back; the joint venture dates from 1995.
Edgecombe says New Zealand companies looking to sell in India need to make a long-term
commitment and investment. And its not necessarily about money youve got to be there
regularly, supporting the local people, making sure they are comfortable with your products and
up with the latest developments. Over time, that develops into a very solid relationship.

5.2 IMPORTANCE OF CULTURE IN INTERNATIONAL BUSINESS
The influence of the different cultures in the global business world is essential for building
successful International Relations. This issue is based on the new global business perspectives
and what is important to consider in developing an International Business plan. Companies have
the challenge of presenting and expanding into new horizons, and it is really important to fully
understand those new markets that the company is planning to expand in.
Nowadays, a companys business dealings are increasingly more international, and the need for
effective cross-cultural communication has become essential: knowing a foreign culture is a
40
long-term process of assimilation, comprehension and integration and is undoubtedly the key to
successful business expansion globally.
Taking time to know the culture of the country in which you are going to be doing business with
is really important as it shows a sign of respect and it will be strongly appreciated; in fact, not
doing so will cause uncomfortable situations between companies (that could result in the failure
of the business.) So it is important to say that those who effectively respond to the culture and
lifestyle of the country where they plan to expand have more possibilities of developing
successful businesses than those who dont.
One graphic example that supports this statement is explained in the book Management Across
Cultures: Challenges and Strategies. The author uses a grasshopper to explain how it is seen in
different cultures: In United States it is considered a plague and a useless insect, in China it is
considered as a pet, and in Thailand its a great snack to be used in sandwiches. He finishes this
example by stating that if a grasshopper is capable of creating so many points of view, imagine
all the other aspects among diverse cultures.
So, if you are going to start any business or negotiation with a different culture, be sure to
investigate and learn how one does business in that country, and, even more important, what one
should never do. What for your culture might be something of good taste, might be considered an
offense by other cultures.

Here are some more examples of business protocol in different countries:
In South America it is common to do business face to face.
In Russia, decisions have to be approved by several committees, which can make business
agreements take much longer.
In Japan, they have learnt the art of silence in negotiations and many times Americans are not
used to it and desperately think that something has gone wrong and feel pressure to close the
negotiation when it is not needed.
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Each culture has a different social structure; some are more defined and closed than others, thus
being more difficult to establish business.
Another important aspect to be considered when expanding to a different country is the
language, the local expressions and the way they express themselves, Literal translations are not
always effective and can lead to misunderstandings, for example, when promoting or naming the
products that the company wants to launch in a different market.
This is why companies that want to expand need a specific localization, which is the
modification of a business, product, content, that can satisfy both the language and cultural
differences of the targeted market.



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CONCLUSION
International Business is the most preferable & essential phenomena in the modern world.
Majority of the people know that International Business is necessary for the prosperity of the
world. No one can prosper without performing the business.
In the period of modern world International Business is a buzzword as like as Globalization.
Every moment of our life is related to business in orally or morally. Bangladesh is a small
country having large population.
While the advantages of international trade surpass the risks, firms should take a risk valuation of
both country and to also include intellectual property, bureaucratic procedure and corruption,
human resource restrictions, and ownership restrictions in the analysis, in order to consider all
risks involved before venturing into any of the countries.
However, although this obligation precious treasures that have been in the domestic space is
operated are confronted with a steep profit curve. Specific risks (e.g., buyer / supplier risk) are
familiar. In terms of general principles, but very different in practice other risks such as money,
and also be familiar especially challenging in many developing countries, where the local
currency is not freely tradable, companies should assess the risk begin discriminated against
domestic companies. Also red-tape practices among the lower operational levels of the
government. Companies also should focus on local and federal system of a country.

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