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3 INTERNATIONAL BUSINESS
MODULE 1
International Trade Theory
1.1 GLOBALIZATION
1.1.1 Meaning of Globalization:
Globalization encourages the following:
1. Foreign Direct Investment (FDI) The Foreign Direct Investment not only
augments the domestic investible resources but also stimulates exports.
2. Foreign Institutional Investors (FII) Foreign Institutional Investors means an
institution established or incorporated outside India which proposes to make
investment in India in securities.
The following global bodies are considered as the agents to the globalization process:
1. IMF
2. WTO
3. World Bank
4. United Nations (UN)
The following are considered as the catalyst for increasing globalization activities
1. Free Trade Agreements
• G.A.T.T
• N.A.F.T.A
1.1.2 Definition:
Stephen Gill: defines globalisation as the reduction of transaction cost of transborder
movements of capital and goods thus of factors of production and goods.
Guy Brainbant: says that the process of globalisation not only includes opening up of
world trade, development of advanced means of communication, internationalisation of
financial markets, growing importance of MNC's, population migrations and more
generally increased mobility of persons, goods, capital, data and ideas but also infections,
diseases and pollution
1.1.3 Advantages of Globalization:
1. Increase of competitiveness: The competitiveness has increased the development of
technology, training methods, employee participation etc., to meet the global
market with the help of global brands
2. TQM: trends towards the Total quality Management (TQM) is insisted in the
international market at competitive prices by reducing at least possible cost at
abetter quality
3. Skill development: It has also increases the importance of project management,
strategic management and other managerial abilities.
4. Global strategic partnership has been formed with one or more foreign companies
to tap the business opportunities.
5. Sharing of Facilities: It has also increased the joint venture with other countries to
share cost of production and research facilities in the foreign countries
6. Development of Information Technology: The rapid development and increasing
use of technology have enhanced the business value of information. Electronic
Mail, Internet, Mobile Phone, Computer for business works, Consumer information
through Direct To Home (DTH) services, Shopping through Television etc., have
been providing valuable business information. The globe has become almost like a
village due to the best means of communication.
7. Global Scope: Scope of this kind of marketing is so large that it becomes a unique
experience.
8. Brand image Consistency: Global marketing allows you to have a consistent image
in every region that you choose to market.
9. Quick and Efficient Use of Ideas: A global entity is able to use a marketing idea
and mould it into a strategy to implement on a global scale.
10. Lower Marketing Costs: If you are to consider lumpsome cost then, yes, it is high,
but the same cost even goes even higher if the company has to market a product
differently in every country that it is selling.
11. Uniformity in Marketing Practices: A global entity can keep some degree of
uniformity in marketing through out the world. It has also increased the use of
right to market the branded goods or use of patented processes or copyrighted
materials by means of Licensing Agreement
12. GDP Increase: If the statistics are any indication, GDP of the developing countries
have increased twice as much as before.
13. Per capita Income Increase: The wealth has had a trickling effect on the poor. The
average income has increased to thrice as much.
14. Unemployment is Reduced: This fact is quite evident when you look at countries
like India and China.
15. Education has Increased: Globalization has been a catalyst to the jobs that require
higher skill set. This demand allowed people to gain higher education.
16. Competition on Even Platform: The companies all around the world are competing
on a single global platform. This allows better options to consumers.
1.1.4 Disadvantages of Globalization:
1. Inconsistency in Consumer Needs: American consumer will be different from the
South African. Global marketing should be able to address that.
2. Consumer Response Inconsistency: Consumer in one country may react differently
than a consumer in another country.
3. Country Specific Brand and Product: A Japanese might like a product to have a
traditional touch, where as an American might like to add a retro modern look to
it. In this case, a global strategy is difficult to device.
4. Dumping Issues: The Multinational Companies bring second hand technologies
that are outdated in their country
5. Devaluation of Currencies: In order to encourage exports very often currencies may
be devalued
6. The Laws of the Land Have to be Considered: Original company policies may be
according to the laws of home countries. The overseas laws may be conflicting in
these policies.
7. Infrastructural Differences: Infrastructure may be hampering the process in one
country and accelerating in another. Global strategy cannot be consistent in such a
scenario.
8. Uneven Distribution of Wealth: Wealth is still concentrated in the hands of a few
individuals and a common man in a developing country is yet to see any major
benefits of globalization.
9. Income Gap Between Developed and Developing Countries: Wealth of developed
countries continues to grow twice as much as the developing world.
10. Different Wage Standards for Developing Countries: A technology worker may get
more value for his work in a developed country than a worker in a developing
country.
11. Reversal of Globalization: In future, factors such as war may demand the reversal
of the globalization (as evident in inter world war years), current process of
globalization may just be impossible to reverse.
1.1.5 The impact of Globalization on India:
The foreign exchange crunch in the early nineties dragged Indian economy close to
defaulting on loans. This issue was addressed through the domestic and external sector
policy measures which was partly prompted by the immediate needs and partly by the
demand of the multilateral organisations. The major measures initiated as a part of the
liberalisation and globalisation strategy in the early nineties included the following:
1. Scrapping of the industrial licensing regime,
2. Reduction in the number of areas reserved for the public sector
3. Amendment of the monopolies and the restrictive trade practices act,
4. Start of the privatisation programme,
5. Reduction in tariff rates and change over to market determined exchange rates.
6. Steady liberalisation of the current account transactions, more and more sectors
opened up for foreign direct investments and portfolio investments facilitating
entry of foreign investors in Telecom, roads, ports, airports, insurance and other
major sectors.
7. The Indian tariff rates reduced sharply over the decade from a weighted average of
72.5% in 199192 to 24.6 in 199697.
8. The liberalisation of the domestic economy and the increasing integration of India
with the global economy have helped step up GDP growth rates, which picked up
from 5.6% in 199091 to a peak level of 77.8% in 199697.
1.1.6 The consequence of India's global integration :
The implications of globalisation for a national economy are many. Globalisation has
intensified interdependence and competition between economies in the world market.
This is reflected in Interdependence in regard to trading in goods and services and in
movement of capital. As a result domestic economic developments are not determined
entirely by domestic policies and market conditions. Rather, they are influenced by both
domestic and international policies and economic conditions. It is thus clear that a
globalisation economy, while formulating and evaluating its domestic policy cannot afford
to ignore the possible actions and reactions of policies and developments in the rest of the
world. This constrained the policy option available to the government which implies loss
of policy autonomy to some extent, in decisionmaking at the national level.
1.2 MULTINATIONAL COMPANY (MNC)
1.2.1 Meaning
A Multinational company is one whose ownership is accommodated in more than one
country. Products are manufactures in many countries and sold in many countries.
Examples: Toyota of Japan, General Motors of U.S.A, and Indian Oil Corporation
of India are multinational companies.
1.2.2 MNC as a company is expected to meet the following criteria:
1. It operates in many countries at different levels of economic development
2. Multinationals manage its local subsidiaries
3. It maintains complete industrial organizations, including Research and
Development and manufacturing facilities in several countries
4. It has multinational central management
5. It has Multinational stock ownership
Three broad groups of MNC
• Horizontally integrated MNC
• Vertically integrated MNC
• Diversified integrated MNC
Characteristics of MNC
• MNC is centralized ownership
• MNC draw on a common pool of resources including money, credit,
patents, trademark, information & HR
• Use of global, integrated strategy
• A large part of capital asset of the parent company is owned by the
citizens of the companies home country
• MNC are predominantly large sized & exercise a great degree of
economic dominance .
1.2.3 Advantages of MNC's
1. They increase the investment level and increase the income and emoployment in the
host country.
2. They increase the managerial skills by employing sophisticated management
techniques
3. They support the domestic enterprise operations and assist the domestic suppliers
4. They help in increasing the competition and remove domestic monopolies
5. They try to equalize the cost of factors of production around the world
6. They conduct efficient research and development and contribute the invention and
innovation
7. They enable the host country to increase their exports and decrease their import
requirements
8. They provide an efficient means of integrating national economies
1.2.4 Disadvantages of MNC
1. They may retard growth of employment in the home country
2. They may destroy competition and acquire monopoly powers
3. MNC's technology is designed for worldwide profit maximisation and is not for the
development of needs of poor countries
4. MNC's avoid taxes by manipulating the transfer price
5. MNC's through their power and flexibility may under control and mine the
national economies autonomy that is detrimental to the national interest of the
countries
6. Drain of resources for profit maximization
7. Influence of culture
8. Evasion of taxes
9. Strain of scare Foreign Exchange Reserve
10. Minimum transfer of technology.
11. Economic threat
12. Unfavorable effect on BOP of the host country
Foreign direct investment (FDI) or foreign investment refers to long term participation by
country A into country B. It usually involves participation in management, jointventure,
transfer of technology and expertise. There are two types of FDI: inward foreign direct
investment and outward foreign direct investment, resulting in a net FDI inflow (positive
or negative) and "stock of foreign direct investment", which is the cumulative number for
a given period. Direct investment excludes investment through purchase of shares.
(FDI) is a measure of foreign ownership of productive assets, such as factories, mines and
land. Increasing foreign investment can be used as one measure of growing economic
globalization. Figure below shows net inflows of foreign direct investment. The largest
flows of foreign investment occur between the industrialized countries (North America,
Western Europe and Japan). But flows to nonindustrialized countries are increasing
sharply.
Types
A foreign direct investor may be classified in any sector of the economy and could be any
one of the following:
• an individual;
• a group of related individuals;
• an incorporated or unincorporated entity;
• a public company or private company;
• a group of related enterprises;
• a government body;
• an estate (law), trust or other societal organization; or
• any combination of the above.
Methods
The foreign direct investor may acquire voting power of an enterprise in an economy
through any of the following methods:
• by incorporating a wholly owned subsidiary or company
• by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives may take the following forms:
• low corporate tax and income tax rates
• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• EPZ Export Processing Zones
• Bonded Warehouses
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation subsidies
• job training & employment subsidies
• infrastructure subsidies
• R&D support
• derogation from regulations (usually for very large projects)
Factors Affecting FDI
• Financial incentives (Funds from local Government)
• Fiscal incentives (Exemption from import duties)
• Indirect incentives (Provides land and
• Political stability
• Market potential & accessibility
• Large economy
• Market size
Why India is preferred for FDI?
• Liberal, largest democracy, Political Stability
• Second largest emerging market (US$ 2.4 trillion)
• Skilled and competitive labors force
• highest rates of return on investment
• one hundred of the Fortune 500 have R & D facilities in India
• Second largest group of software developers after the U.S.
• lists 6,500 companies on the Bombay Stock Exchange (only the NYSE
has more)
• World's fourth largest economy & second largest pharmaceutical
industry
• growth over the past few years averaging 8%
• has a middle class estimated at 300 million out of a total population of
1 billion
• Destination for business process outsourcing, Knowledge processing
etc.
• Second largest Englishspeaking, scientific, technical and executive
manpower
• Low costs & Tax exemptions in SEZ
• Tax incentives for IT , business process outsourcing and KPO
companies
Government policies
Automatic Route
Prior Permission (FIPB)
Foreign direct investment in India
A recent UNCTAD survey projected India as the second most important FDI destination
(after China) for transnational corporations during 20102012. As per the data, the
sectors which attracted higher inflows were services, telecommunication, construction
activities and computer software and hardware. Mauritius, Singapore, the US and the
UK were among the leading sources of FDI. FDI for 200910 at USD 25.88 billion was
lower by five per cent from USD 27.33 billion in the previous fiscal. Foreign direct
investment in August dipped by about 60 per cent to USD 1.33 billion, the lowest in 2010
fiscal, industry department data released showed.
Investing in India – Entry Routes
FDI Investment Sectors
Prohibited activities
• Atomic energy
• Arms and ammunition
• Lottery business
• Betting and Gambling
• Aircraft and warships
• Coal lignite
FOREIGN INSTITUTIONAL INVESTORS
An institution established outside India, which invests in securities traded on the
markets in India e.g.
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance companies
• Endowment Funds
• University Funds
• Foundations or Charitable Trusts
• Asset Management Companies
• Power of Attorney Holders
• Bank
FII Vs FDI
FII is Foreign Institutional Investment: It is investment made by foreign Mutual Funds
in the Indian Market. FDI is Foreign Direct Investment: It is the investment made by
Foreign Multinational comapnies in India.
Foreign Institutional Investors (FII)
• Foreign investment banks are not permitted to directly invest in shares on
the Indian stock exchange
• Makes investments on behalf of foreign investors, referred to as “sub
accounts”
• Foreign Institutional Investors (FII)
FIIs may invest in:
• securities in the primary and secondary markets (shares, debentures,
warrants of listed and unlisted companies)
• units issued by domestic mutual funds
• dated Government securities
• derivatives traded on a recognized stock exchange
• commercial paper
• debt instruments – provided a 70/30 equity/debt ratio is maintained
• Limits on the type and amount of investments apply to FIIs
• no more than 10% of the equity in any one company
• no more than 10% in the equity in any one company on behalf of a fund sub
account
• no more than 5% in the equity in any one company on behalf of a
corporate/individual subaccount
no more than 24% in the aggregate of the total issued capital of a company
•
to be held by FIIs
FOREIGN INATITUTIONAL INVESTORS
Introduction to Foreign Institutional Investors (FII’s)
Since 199091, the Government of India embarked on liberalization and economic reforms
with a view of bringing about rapid and substantial economic growth and move towards
globalization of the economy. As a part of the reforms process, the Government under its
New Industrial Policy revamped its foreign investment policy recognizing the growing
importance of foreign direct investment as an instrument of technology transfer,
augmentation of foreign exchange reserves and globalization of the Indian economy.
Simultaneously, the Government, for the first time, permitted portfolio investments from
abroad by foreign institutional investors in the Indian capital market. The entry of FIIs
seems to be a follow up of the recommendation of the Narsimhan Committee Report on
Financial System. While recommending their entry, the Committee, however did not
elaborate on the objectives of the suggested policy. The committee only suggested that the
capital market should be gradually opened up to foreign portfolio investments.
From September 14, 1992 with suitable restrictions, Foreign Institutional Investors were
permitted to invest in all the securities traded on the primary and secondary markets,
including shares, debentures and warrants issued by companies which were listed or
were to be listed on the Stock Exchanges in India. While presenting the Budget for 1992
93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow
reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market.
Market design in India for foreign institutional investors
Foreign Institutional Investors means an institution established or incorporated outside
India which proposes to make investment in India in securities. A Working Group for
Streamlining of the Procedures relating to Foriegn Institutional Investors, constituted in
April, 2003, inter alia, recommended streamlining of SEBI registration procedure, and
suggested that dual approval process of SEBI and RBI be changed to a single approval
process of SEBI. This recommendation was implemented in December 2003.
Currently, entities eligible to invest under the FII route are as follows:
• As FII: Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies,
a trustee or power of attorney holder incorporated or established outside India
proposing to make proprietary investments or with no single investor holding more
than 10 per cent of the shares or units of the fund.
• As Subaccounts: The sub account is generally the underlying fund on whose behalf
the FII invests. The following entities are eligible to be registered as subaccounts,
viz. partnership firms, private company, public company, pension fund, investment
trust, and individuals.
FIIs registered with SEBI fall under the following categories:
• Regular FIIs those who are required to invest not less than 70 % of their
investment in equityrelated instruments and 30 % in nonequity instruments.
• 100 % debtfund FIIs those who are permitted to invest only in debt instruments.
The Government guidelines for FII of 1992 allowed, interalia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio
managers or their power of attorney holders (providing discretionary and non
discretionary portfolio management services) to be registered as Foreign Institutional
Investors. While the guidelines did not have a specific provision regarding clients, in the
application form the details of clients on whose behalf investments were being made were
sought.
While granting registration to the FII, permission was also granted for making
investments in the names of such clients. Asset management companies/portfolio
managers are basically in the business of managing funds and investing them on behalf
of their funds/clients. Hence, the intention of the guidelines was to allow these categories
of investors to invest funds in India on behalf of their ‘clients’. These ‘clients’ later came to
be known as subaccounts. The broad strategy consisted of having a wide variety of
clients, including individuals, intermediated through institutional investors, who would
be registered as FIIs in India. FIIs are eligible to purchase shares and convertible
debentures issued by Indian companies under the Portfolio Investment Scheme.
Prohibitions on Investments:
Foreign Institutional Investors are not permitted to invest in equity issued by an Asset
Reconstruction Company. They are also not allowed to invest in any company which is
engaged or proposes to engage in the following activities:
• Business of chit fund
• Nidhi Company
• Agricultural or plantation activities
• Real estate business or construction of farm houses (real estate business does not
include development of townships, construction of residential/commercial premises,
roads or bridges).
• Trading in Transferable Development Rights (TDRs).
Trends of Foreign Institutional Investments in India.
Portfolio investments in India include investments in American Depository Receipts
(ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and
investments in offshore funds. Before 1992, only NonResident Indians (NRIs) and
Overseas Corporate Bodies were allowed to undertake portfolio investments in India.
Thereafter, the Indian stock markets were opened up for direct participation by FIIs.
They were allowed to invest in all the securities traded on the primary and the secondary
market including the equity and other securities/instruments of companies listed/to be
listed on stock exchanges in India.
Advantages
• Enhanced flows of equity capital
• FIIs have a greater appetite for equity than debt in their asset structure. The
opening up the economy to FIIs has been in line with the accepted preference for
nondebt creating foreign inflows over foreign debt. Enhanced flow of equity capital
helps improve capital structures and contributes towards building the investment
gap.
• Managing uncertainty and controlling risks.
• FII inflows help in financial innovation and development of hedging instruments.
Also, it not only enhances competition in financial markets, but also improves the
alignment of asset prices to fundamentals.
• Improving capital markets.
• FIIs as professional bodies of asset managers and financial analysts enhance
competition and efficiency of financial markets.
• Equity market development aids economic development.
• By increasing the availability of riskier long term capital for projects, and
increasing firms’ incentives to provide more information about their operations,
FIIs can help in the process of economic development.
• Improved corporate governance.
• FIIs constitute professional bodies of asset managers and financial analysts, who,
by contributing to better understanding of firms’ operations, improve corporate
governance. Bad corporate governance makes equity finance a costly option. Also,
institutionalization increases dividend payouts, and enhances productivity growth.
Disadvantages
• Problems of Inflation: Huge amounts of FII fund inflow into the country creates a
lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as
a result of demand created.
• Problems for small investor: The FIIs profit from investing in emerging financial
stock markets. If the cap on FII is high then they can bring in huge amounts of
funds in the country’s stock markets and thus have great influence on the way the
stock markets behaves, going up or down. The FII buying pushes the stocks up and
their selling shows the stock market the downward path. This creates problems for
the small retail investor, whose fortunes get driven by the actions of the large FIIs.
• Adverse impact on Exports: FII flows leading to appreciation of the currency may
lead to the exports industry becoming uncompetitive due to the appreciation of the
rupee.
• Hot Money: “Hot money” refers to funds that are controlled by investors who
actively seek shortterm returns. These investors scan the market for shortterm,
high interest rate investment opportunities. “Hot money” can have economic and
financial repercussions on countries and banks. When money is injected into a
country, the exchange rate for the country gaining the money strengthens, while
the exchange rate for the country losing the money weakens. If money is withdrawn
on short notice, the banking institution will experience a shortage of funds.
1.3 WORLD TRADE ORGANISATION
1.3.1 Meaning:
The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO agreements,
negotiated and signed by the bulk of the world’s trading nations and ratified in their
parliaments. The goal is to help producers of goods and services, exporters, and importers
conduct their business
1.3.3 Functions of WTO
1. The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government
IMPACT OF WTO ON INDIA
World Trade Organisation: India is one of the (out of 104) founder members of the WTO.
The GATT was not an organization but it was only a legal agreement. On the other hand
WTO is designed to play the role of watchdog in the spheres of trade in goods, trade in
services, foreign investment, intellectual property rights etc. There was much heated
discussion and arguments for and against regarding India becoming a member of the
WTO. India was one of the 76 Governments that became members of the WTO on the
first day of the formation of WTO. Thus, India was one of the founder members of the
WTO
BENEFITS TO INDIA
The reduction in agricultural subsidies and barriers to export of agricultural products,
agricultural exports from India will increase. The multilateral rules and disciplines
relating to antidumping, subsidies and countervailing measures, safeguards and
disputes settlement machinery will ensure greater security and predictability of
international trade. This would be favorable environment for India's international
business. India along with other developing countries has the market access to a number
of advanced countries due to the imposition of the clauses concerning to trade without
discrimination.
DISADVANTAGE TO INDIA
Despite the benefits of WTO to India, many economists and sociologists argue that, India
would be in a disadvantageous position by becoming a member of WTO. Their argument
include:
Trade Related Intellectual Property Rights (TRIPs) : Protection of intellectual property
rights (patents, copyrights, trademarks etc.) has been made stringent. It is argued that
the TRIPs agreement goes against the Indian Patents Act, 1970. Only process patents can
be granted in food, chemicals and medicines under the Indian Patents Act. TRIPs
agreement provides for granting product patents also. Under TRIPs patents can be
granted to methods of agriculture and horticulture, biotechnological process including
living organism like plants and animals. The duration of patents under TRIPs is 20 years
Introduction of product patents in India will lead to hike in drug prices by the MNCs who
have the product patent. This will hit the poor people who will not have the generic option
open .
The extension of intellectual property right to agriculture has negative effects on India.
Presently, plant breeding and seed production are largely, in the public domain. Indian
scientists have undertaken plant breeding and multiplication is in the hands of National
and State Seed Corporations. Government, through this machinery, provides seed to
Indian farmers at very low prices. Indian scientists, in future will find it extremely
difficult to breed new varieties and Indian research institutions will be unable to compete
financially with MNCs and will be denied access to patented genetic material. MNCs will
get the control over our genetic resources and as such the control over food production
would be jeopardised
Patenting has also been extended to a large area of microorganisms
Application of TRIMs agreement undermines any plan or strategy of selfreliant growth
based on local technology and resources
Services : Service sector like insurance, banking, telecommunications, transportation is
backward in India compared to that of developed countries. Therefore, inclusion of trade
in services is detrimental to the interest of India. Liberalisation of service sector would be
under tremendous pressure.
1.4 THE EVOLUTION OF GLOBAL BUSINESS
1.4.1 Local Business
A local business are aimed toward a single market. A local business is also referred to as
local trading. In local trading, a firm faces only one set of competitive, economic, and
market issues and essentially must deal with only one set of customers, although the
company may have several segments in a market. In a local business the market size and
growth are limited. This single market is the firm’s local market. The firm faces only one
set of competitive, economic and market issues.
1.4.2 National Business
National Business covers activities that are involved when a firm sells its products
outside its regional business base of operation and when products are physically moved
from one region to another with in the same country. A nation's internal market
representing the mechanisms for issuing and trading securities of entities domiciled
within that nation. The long term investment goals might not exist in the domestic
business
1.4.3 International Business
International Business covers activities that are involved when a firm sells its products
outside its National business base of operation that is when it crosses the boundaries of
that country and when products are physically moved from one country to another.
International Business calls for direct involvement in the local marketing environment
within a given country. Understanding different cultural, economic and political
environments becomes necessary for success in international business
1.4.4 Multinational Business
The focus on multinational marketing came as a result of the development of the
multinational corporation (MNC). These companies, characterized by extensive
investments in assets abroad, operate in a number of foreign countries as though they
were local companies. Multinationals traditionally pursue a multi domestic strategy,
wherein the multinational firm competes by applying many different strategies, each one
tailored to a particular local market. Often, multinational corporations attempt to appear
“local” wherever they compete. The major challenge confronting the multinational
businessmen is to find the best possible adaptation of a complete marketing strategy to
each individual country. This approach leads to a maximum amount of localization and
to a large variety of marketing strategies.
1.4.5 Global Business
A global business strategy involves the creation of a single strategy for a product, service,
or company for the entire global market. Rather than tailoring a strategy perfectly to any
individual market, a firm that pursues global marketing settles on a basic strategy that
can be applied throughout the world market, all while maintaining some flexibility to
adapt to local market requirements where necessary. Such strategies are inspired by the
fact that many markets appear increasingly similar in environment and customer
requirements. Firms that pursue global strategies must still be adept at international
marketing because designing one global strategy requires a sound understanding of the
cultural, economic, and political environments of many countries.
Motives of Internationalization of Firms
The factors which motivate or provoke firms to go international may be broadly divided
into two groups :
(1) Pull factors
(2) Push factors
(1) Pull Factors:
Those factors or forces which attract the foreign firms to do business in Foreign market
are come under this categories. Such attraction include, broadly, the relative profitability
& growth prospects. These are also called Proactive reasons.
The followings are important Pull Factors :
(a) Profit Advantage : IB could be more profitable than the domestic. But if not profitable
than Total Profit would be increase & thus it become again profitable.
(b) Growth opportunities:
∙ To increase sales
∙ To increase market share of the firms
(2) Push Factors:
It refers to the compulsion of the domestic market such as saturation of the market, which
prompt companies to internationalize. These reasons are also called Reactive reasons.
The followings are important push factors:
(a) Competition: Increase competition in domestic market is one of the main cause &
consequences of globalization.
(b) Domestic market constraints:
∙ Surplus production in home market
∙ Decline the demand of the domestic product in the home market
∙ Small domestic market in size or limited home market
∙ To take the benefit of economies of scale by producing mass production
(c) Political Stability Vs. Political Instability
The global financial system (GFS)
1.5 MANAGEMENT ORIENTATION OF INTERNATIONAL BUSINESS
The form and substance of a company's response to global market opportunities depends
greatly on management assumptions ad beliefs (both conscious and unconscious) about
the nature of the world. The world view of the company's personnel can be described as
1. Ethnocentric
2. Polycentric
3. Regiocentic
4. Geocentric
1.5.1 Ethnocentric Orientation
• Guided by domestic market extension concept:
• Domestic strategies, techniques, and personnel are perceived as superior
• International customers are considered as secondary
• International markets are regarded primarily as outlets for surplus domestic
production
• International business plans are developed inhouse by the international division
1.5.2 Polycentric Orientation
• Guided by the multidomestic market concept:
• Focuses on the importance and uniqueness of each international market
• Likely to establish businesses in each target country
• Fully decentralized, minimal coordination with headquarters
• Marketing strategies are specific to each country
• Result: No economies of scale, duplicated functions, higher final product costs
1.5.3 Regiocentric Orientation
• Guided by the global marketing concept:
• World regions that share economic, political, and/or cultural traits are perceived as
distinct markets
• Divisions are organized based on location
• Regional offices coordinate marketing activities
1.5.4 Geocentric Orientation
• Guided by the global marketing concept:
• The world is perceived as a total market with identifiable, homogenous segments
• Targeted marketing strategies aimed at market segments, rather than geographic
locations
• Achieve position as lowcost manufacturer and marketer of product line
• Provides standardized product or service throughout the world
1.6 REASONS FOR INTERNATIONALIZATION OF BUSINESS
1. Faster growth: Firms that have operate internationally tend to develop at a much
quicker pace than those operating locally
2. Access to cheaper inputs: Operating internationally may enable the firm to
source raw materials or labor at lower prices
3. Increased quality and efficiency: Exposure to foreign competition will
encourage increased efficiency. Doing business in the international market allows
firms to improve the quality of their product in order to gain a competitive
advantage.
4. New market opportunities: International business presents firms with new
market opportunities. These new markets provide more opportunities for
expansion, growth, and income. A bigger market means more customers, increased
revenue, a larger profit margin, and allows the business to realize economies of
scale.
5. Diversification: As the firm diversifies its market, it becomes less vulnerable to
changes in local demand. This reduces wild swings in a company's sales and
profits.
1.7 KEY FACTORS INFLUENCING INTERNATIONAL BUSINESS
• Political
• Economic
• Social
• Technological
1.7.1 Political
1. Political Change – regime change through coup, violence, etc. Change in
government through democratic election can influence future business strategy.
e.g. the opportunities that are now available in Russia and Eastern
Europe following the collapse of communism
2. Political Uncertainty – in countries like Zimbabwe, Sudan, Venezuela. Political
uncertainty can lead to a fall in investment by businesses and influence decisions
on expansion and business ventures
3. War/Terrorism – create uncertainty
4. Political Doctrine – can affect the ease with which business is conducted
1.7.2 Economic
All these factors need to be considered in any global business venture:
1. Tax Systems
2. Investment Considerations and Allowances
3. Sophistication of Financial Markets – ease with which capital can be moved and
raised
4. Commodity Prices – oil, energy, metals
5. Monetary and Fiscal Policies – interest rates, tax regimes, government aid
6. Internal Regulation and Bureaucracy – can be stifling!
7. Exchange Rates
1.7.3 Social
1. Religious Considerations – appropriateness of some business ventures – e.g. selling
condoms in staunchly Catholic countries
2. Impact on local communities of business development – availability of jobs,
training, environmental impact for these communities
3. Impact on the environment – can impact on the businesses image
4. Ethical considerations
5. Cultural issues
1.7.4 Technological
Availability and developments in technology can have a powerful influence on global
business strategy:
e.g.
1. Access to bandwidth
2. PC ownership
3. Technology and sales – processing payments and sales
4. Compatibility of technologies in Business Management – accounting
systems, language differences, etc.
1.8 FACTORS RESTRICTING INTERNATIONAL BUSINESS
1. Increased costs: There are increased operating expenses including the
establishment of facilities abroad, the hiring of additional staff, traveling of
personnel, specialized transport networks, information and communication
technology.
2. Foreign regulations and standards: The firm may need to conform to new
standards. This may require changes such as in the production process, inputs and
packaging, incurring additional costs.
3. Delays in payments: International trade may cause delays in payments,
adversely affecting the firm's cash flow.
4. Complex organizational structure: International business usually requires
changes to the firms operating structure. Training/retraining of management may
be necessary to facilitate restructuring.
5. Increased free trade between nations Increased liquidity of capital allowing
investors in developed nations to invest in developing nations