Management of International Business

Modes of Entry
Exporting -An item produced in a domestic market can be
sold abroad. Storing and processing is mainly done in
the supplying firm’s home country. Export can increase
the sales volume. When a firm receives canvassed items
and exports them, it is called Passive Export. Alternately,
if a strategic decision is taken to establish proper
processes for organizing the export functions and for
obtaining foreign sales, it is known as Active Export.
Advantages: Low investment; Less risks
Disadvantages: Unknown market; No control over foreign
market; Lack of information about external
environment
Licensing
In this mode of entry, the manufacturer of the home country leases
the right of intellectual properties, i.e., technology, copyrights, brand
name, etc., to a manufacturer of a foreign country for a
predetermined fee. The manufacturer that leases is known as the
licensor and the manufacturer of the country that gets the license
id known as the licensee.
Advantages: Low investment of licensor; Low financial risk of licensor;
Licensor can investigate the foreign market; Licensee’s investment
in R&D is low; Licensee does not bear the risk of product failure;
Any international location can be chosen to enjoy the advantages;
No obligations of ownership, managerial decisions, investment etc
Disadvantages: Limited opportunities for both parties involved; Both
parties have to manage product quality and promotion; One party’s
dishonesty can affect the other; Chances of misunderstanding;
Chances of trade secrets leakage of the licensor.
Franchising
In this mode, an independent firm called the
franchisee does the business using the
name of another company called the
franchisor. In franchising, the franchisee
has to pay a fee or a fraction of profit to
the franchisor. The franchisor provides the
trademarks, operating process, product
reputation and marketing, HR and
operational support to the franchisee
 Advantages: Low investment; Low risk; Franchisor
understands market culture, customs and
environment of the host country; Franchisor
learns more from the experience of the
franchisees; Franchisee gets the R&D and brand
name with low cost; Franchisee has no risk of
product failure.
 Disadvantages: Franchising can be complicated at
times; Difficult to control; Reduced market
opportunities for both franchisee and franchisor;
Responsibilities of managing product quality and
product promotion for both; Leakage of trade
secrets
Turnkey Project
It is a special mode of carrying out
international business. It is a contract
under which a firm agrees – for a
remuneration – to fully carry out the
design, create, and equip the production
facility and shift the project over to the
purchaser when the facility is operational.
Mergers & Acquisition
In Mergers & Acquisitions, a home company may merge itself
with a foreign company to enter an international business.
Alternatively, the home company may buy a foreign company
and acquire the foreign company’s ownership and control.
M&A offers quick access to international manufacturing
facilities and marketing networks.
Advantages: Immediate ownership and control over the
acquired firm’s assets; Probability of earning more revenues;
The host country may benefit by escaping optimum capacity
level or overcapacity level.
Disadvantages: Complex process and requires experts from
both countries; No addition of capacity to the industry;
Government restrictions on acquisition of local companies
may disrupt business; Transfer of problems of the host
country’s to the acquired company.
Joint Venture
When two or more firms join together to
create a new business entity, it is called a
joint venture. The uniqueness in a joint
venture is its shared ownership.
Environmental factors like social,
technological, economic and political
environments may encourage joint
ventures.
Advantages: Joint ventures provide significant
funds for major projects; Sharing of risks
between or among partners; Provides skills,
technology, expertise, marketing to both
parties.
Disadvantages: Conflicts may develop; Delay in
decision-making of one affects the other
party and it may be costly; The venture may
collapse due to the entry of competitors
and the changes in the partner’s strength;
Slow decision-making due to the
involvement of two or more decision-
makers.
Wholly Owned Subsidiary
Wholly Owned Subsidiary is a company
whose common stock is fully owned by
another company, known as the parent
company. A wholly owned subsidiary may
arise through acquisition or by a spin-off
from the parent company.
Reasons for going International
 To achieve higher rate of profits
 Expending production capacity beyond the demand of
the Domestic Market
 Growth Opportunities
 Government policies and regulations
 Monopoly Power
 Sever Competition in home Country
 Limited Home Market
 Political stability V/S Political instability
 High Cost of Transportation
 Nearness to Raw Materials
 Availability of Quality Human Recourses at low cost
Entry Barriers
1. Tariff Barriers-
 Customs duties enforced on imported
Products
 Different tariff rates for different
countries and different products
 May be adjusted by Political Influence
from trade associations
2. Non tariff barriers-
 State subsidies, procurement, trading, state
ownership
 National regulations on health, safety,
employment
 Product classification
 Quota shares
 Foreign exchange controls and multiplicity
 Over elaborate or inadequate infrastructure
 "Buy national" policy.
 Intellectual property laws, patents, copyrights
 Bribery and corruption
 Unfair customs procedures
 Restrictive licenses
 Import bans

Natural Entry Barriers

 Intense competition among several differentiated

brands

 Strong brand names charging a premium price

over generic competition
Artificial Entry Barriers

 Limited distribution access

 Bureaucratic inertia

 Government regulations

 Limited access to technology

 Local monopolies


India and Global Competitiveness
The question why some nations enjoy
competitive advantages over the rest
could be answered based on Porter’s
Diamond of Determinants of Competitive
Advantages. A diagram of the diamond is
provided in figure 1.1. Each point in the
diamond and the diamond as a system act
as basic ingredients for achieving mastery
in global market.
 Firm
Strategy,
Structure
and Rivalry

Factor Domestic
Conditions Demand
Conditions

Related and
Supporting
Industries
The four determinants of competitive advantages are:
Factor Conditions
 Factor conditions include the nation’s position in matters like
skilled labour, infrastructure etc. that are necessary base of
competing.
Demand Conditions
 The demand of domestic market helps firms to create
requisite avenues and resources to compete at the global
level.
 Related and Supporting Industries
Presence of supplier and related industries provide and growth
impetus to compete.
 Firm Strategy, Structure and Rivalry
The conditions in which companies are created, governed and
companies learn the basic lessons of competing is crucial to
decide the functioning of the firms and nation.
Definition of Competitiveness
World Economic Forum defines
competitiveness as “the set of institutions,
policies, and factors that determine the level of
productivity of a country.” Productivity
determines the ability to sustain the level of
income of a nation as well as it decides the
return on investment . Return on investment
in turn decides the economic growth potential
of a nation.
Pillars of Competitiveness
World Economic Forum has identified 12
pillars of global competitiveness. These
are:
1. Institutions
2. Infrastructure
3. Macroeconomic Stability
4. Health and Primary Education
5. Higher Education and Training
6. Goods and service market efficiency
7. Labor Market efficiency
8. Financial market Sophistication
9. Technological readiness
10. Market Size
11. Business Sophistication
12. Innovation
 GLOBAL MARKETING MANAGEMENT

The customer does not always respond to a “one size fits all” approach.

What are the benefits of Global Marketing? The number of companies

that can have a truly global marketing strategy is limited, however if
carried out successfully, global marketing offers the following benefits:
 When a large market segment can be identified across major regions,
better economies of scale can be achieved and can create a competitive
advantage for a multinational company

 The transfer of knowledge and experience across countries results in

improved communication and coordination of marketing activities.

 Pleasing customers in product and services categories that are normally

hard to reach means winning business that the competition cannot.

 Diversifying your markets means more financial stability. Spreading out

your company’s portfolio means that if financial, legal or economic
conditions suffer in one area, they can be balanced out by others.
 How do I plan for a Global Market?
There are 3 types of planning related to
international business: corporate, strategic or
tactical.
 Corporate planning is long-term, and includes
generalized goals for the whole firm
 Strategic planning is conducted at highest
management levels and deals with products,
capital, research and the long and short-term
golas of the company
 Tactical planning, or market planning, are specific
actions and the allocation of resources used to
carry out strategic goals in given markets.
How do I organize internally?
organizations must reflect upon a number of
company-specific factors, such as:
 Size
 level of policy decisions
 the length of chain of command
 staff support
 sources of natural and personnel resources
 degree of organizational control
 cultural differences in decision-making styles
 centralization
 type or level of marketing involvement
Cross-Cultural Management
CCM is a fairly new field that is based on
theories and research from:
 Cross Cultural Psychology
 International Business
 Organizational Behaviour
 Human Resources
 Anthropology
Priorities of Cultural Values
United States Japan Arab Countries
1. Freedom 1. Belonging 1. Family security
2. Group 2. Family harmony
2. Independence
harmony 3. Parental guidance
3. Self-reliance 3. Collectiveness 4. Age
4. Equality 4. Age/seniority 5. Authority
5. Individualism 5. Group 6. Compromise
6. Competition consensus 7. Devotion
6. Cooperation 8. Patience
7. Efficiency
7. Quality 9. Indirectness
8. Time 8. Patience 10. Hospitality
9. Directness 9. Indirectness
10. Openness 10. Go-between
 Management Approaches Affected by
Cultural Diversity
Centralized Cultural
vs. High vs. low
Decentralized Diversity organizational
decision loyalty
making
High vs. low
Safety vs. organizational
risk loyalty

Cooperation
Individual
vs.
vs.
competition
group
rewards Sort-term vs.
long-term Stability vs.
horizons innovation
Values in Culture
 Values are basic convictions that people
have regarding what is right and wrong,
good and bad, important and unimportant.
These values are learned from the culture
in which the individual is living.
Hofstede’s Cultural
Dimensions
• We know that we are living in a global age.

• Technology has brought everyone much closer

together. This means that people of different
cultures find themselves working together and
communicating more and more.

• This is exciting, but it can also be frustrating and

fraught with uncertainty. How do you relate to
someone of another culture? What do you say, or
not say, to start a conversation right? Are there
cultural taboos that you need to be aware of?
• Fortunately, psychologist Dr Geert Hofstede
asked himself this question in the 1970s. What
emerged after a decade of research and
thousands of interviews is a model of cultural
dimensions that has become an internationally
recognized standard.

• With access to people working for the same

organization in over 40 countries of the world,
Hofstede collected cultural data and analyzed his
findings. He initially identified four distinct
cultural dimensions that served to distinguish
one culture from another. Later he added a fifth
dimension, and that is how the model stands
today.
 Power Distance

Hofstede’s Individualism

Five
Masculinity
Cultural
Dimensions Uncertainty Avoidance

Long-Term Orientation
 1. Power/Distance (PD)
 This refers to the degree of inequality that exists – and is
accepted – among people with and without power. A high
PD score indicates that society accepts an unequal
distribution of power, and that people understand "their
place" in the system. Low PD means that power is shared
and well dispersed. It also means that society members
view themselves as equals.
 Application: According to Hofstede's model, in a high
PD country such as Malaysia (104), you would probably
send reports only to top management and have closed-
door meetings where only select powerful leaders were
in attendance.
 PD Characteristics Tips

•Centralized
•Acknowledge a
companies.
leader's power.
•Strong hierarchies.
High PD •Be aware that you
•Large gaps in
may need to go to the
compensation,
top for answers
authority, and respect.

•Flatter organizations.
•Use teamwork.
•Supervisors and
•Involve as many
Low PD employees are
people as possible in
considered almost as
decision making.
equals.
2. Individualism (IDV)
 This refers to the strength of the ties people have to others
within the community. A high IDV score indicates loose
connections. In countries with a high IDV score there is a lack
of interpersonal connection, and little sharing of responsibility
beyond family and perhaps a few close friends. A society with a
low IDV score would have strong group cohesion, and there
would be a large amount of loyalty and respect for members of
the group. The group itself is also larger and people take more
responsibility for each other's well being.
 Application: Hofstede's analysis suggests that in the Central
American countries of Panama and Guatemala where the IDV
scores are very low (11 and 6, respectively), a marketing
campaign that emphasized benefits to the community or that
tied into a popular political movement would likely be
understood and well received.
 IDV Characteristics Tips

•High valuation on
people's time and their •Acknowledge
need for freedom. accomplishments.
•An enjoyment of •Don't ask for too much
High IDV
challenges, and an personal information.
expectation of rewards for •Encourage debate and
hard work. expression of own ideas.
•Respect for privacy.

•Emphasis on building •Show respect for age and

skills and becoming wisdom.
masters of something. •Suppress feelings and
Low IDV •Work for intrinsic emotions to work in
rewards. harmony.
•Harmony more important •Respect traditions and
than honesty. introduce change slowly.
3. Masculinity (MAS)
 This refers to how much a society sticks with, and values,
traditional male and female roles. High MAS scores are found
in countries where men are expected to be "tough," to be
the provider, and to be assertive. If women work outside the
home, they tend to have separate professions from men. Low
MAS scores do not reverse the gender roles. In a low MAS
society, the roles are simply blurred. You see women and men
working together equally across many professions. Men are
allowed to be sensitive, and women can work hard for
professional success.
 Application: Japan is highly masculine with a score of 95,
whereas Sweden has the lowest measured value (5).
According to Hofstede's analysis, if you were to open an
office in Japan, you might have greater success if you
appointed a male employee to lead the team and had a
strong male contingent on the team. In Sweden, on the other
hand, you would aim for a team that was balanced in terms
of skill rather than gender.
 MAS Characteristics Tips

•Be aware that people

may expect male and
•Men are masculine and
female roles to be
women are feminine.
distinct.
•There is a well defined
High MAS •Advise men to avoid
distinction between
discussing emotions or
men's work and
making emotionally
women's work.
based decisions or
arguments.

•Avoid an "old boys'

club" mentality.
•A woman can do
•Ensure job design and
anything a man can do.
practices are not
Low MAS •Powerful and
discriminatory to either
successful women are
gender.
admired and respected.
•Treat men and women
equally.
4. Uncertainty/Avoidance Index (UAI)
 This relates to the degree of anxiety that society members
feel when in uncertain or unknown situations. High UAI-
scoring nations try to avoid ambiguous situations whenever
possible. They are governed by rules and order and they seek
a collective "truth." Low UAI scores indicate that the society
enjoys novel events and values differences. There are very
few rules, and people are encouraged to discover their own
truth.
 Application: Hofstede's Cultural Dimensions imply that
when discussing a project with people in Belgium, whose
country scored a 94 on the UAI scale, you should investigate
the various options and then present a limited number of
choices, but have very detailed information available on your
contingency and risk plans. (Note that there will be cultural
differences between French and Dutch speakers in Belgium.)
 UAI Characteristics Tips

•Be clear and concise about

•Very formal business conduct
with lots of rules and policies.
•Need and expect structure.
High UAI •Sense of nervousness spurns
high levels of emotion and
expression.
•Differences are avoided.
your expectations and
parameters.
•Plan and prepare,
communicate often and early,
provide detailed plans, and
focus on the tactical aspects of
a job or project.
•Express your emotions through
hand gestures and raised
voices.

•Do not impose rules or

structure unnecessarily.
•Informal business attitude.
•Minimize your emotional
•More concern with long term
response by being calm and
Low UAI strategy than what is happening
contemplating situations before
on a daily basis.
speaking.
•Accepting of change and risk.
•Express curiosity when you
discover differences.
5. Long Term Orientation (LTO)
 This refers to how much society values long-standing – as
opposed to short-term – traditions and values. This is the fifth
dimension that Hofstede added in the 1990s, after finding that
Asian countries with a strong link to Confucian philosophy
acted differently from Western cultures. In countries with a
high LTO score, delivering on social obligations and avoiding
"loss of face" are considered very important.
 Application: According to Hofstede's analysis, people in the
United States and United Kingdom have low LTO scores. This
suggests that you can pretty much expect anything in this
culture in terms of creative expression and novel ideas. The
model implies that people in the U.S. and U.K. don't value
tradition as much as many others, and are therefore likely to
be willing to help you execute the most innovative plans as
long as they get to participate fully. (This may be surprising to
people in the U.K., with its associations of tradition.)
 LTO Characteristics Tips

•Show respect for traditions.

•Family is the basis of
•Do not display
society.
extravagance or act
•Parents and men have
frivolously.
more authority than young
High LTO •Reward perseverance,
people and women.
loyalty, and commitment.
•Strong work ethic.
•Avoid doing anything that
•High value placed on
would cause another to
education and training.
"lose face."

•Promotion of equality. •Expect to live by the same

•High creativity,
individualism.
Low LTO
•Treat others as you would
like to be treated.
•Self-actualization is sought.
standards and rules you
create.
•Be respectful of others.
•Do not hesitate to introduce
necessary changes.
 Examples of Cultural Dimensions
Examples of Cultural Dimensions
Power Uncertainty Long-term
Country Individualism* Masculinity**
Distance Avoidance Orientation***

China High Low Moderate Moderate High

France High High Moderate High Low

Germany Low High High Moderate Moderate

Hong Kong High Low High Low High

Indonesia High Low Moderate Low Low

Japan Moderate Moderate High Moderate Moderate

Netherlands Low High Low Moderate Moderate

Russia High Moderate Low High Low

United States Low High High Low Low

West Africa High Low Moderate Moderate Low

* A low score is synonymous with collectivism
** A low score is synonymous with masculinity
*** A low score is synonymous with a short-term orientation
Edward T Hall Study
Context-
 Low Context and High Context

1- Low Context
- More verbal communication
- More straight forwards
- Less misunderstanding
2- High Context
- More non-verbal communication.
- Implying the message in a more
indirect method.
- More confusing.
Low Context VS High Context
 Time
Monochronic time
 Polychronic time
 Monochronic time
• It means doing one thing at a time.
• Assumes careful planning and scheduling.
• A familiar Western approach that appears in
 disciplines such as 'time management'.
• Monochronic people tend also to be low context.

 Polychronic time
• Human interaction is valued over time and material
things
• Leads to a lesser concern for 'getting things done'
• They do get done, but more in their own time.
• Polychronic people tend also to be high context.
Contrasting the two

 Western cultures vary in their focus on

monochronic or polychronic time.
 Americans are strongly monochronic whilst the
French have a much greater polychronic
tendency

 For example, a French person may turn up to a

meeting late and think nothing of it (much to the
annoyance of a German or American co-worker).

 Note the similarity with Trompenaars' time as

sequence (monochronic) and time as
synchronization (polychronic).
 Factor Monochronic Polychronic
Action Action
Actions do one thing at a time do many things at
once
Focus Concentrate on the Are easily distracted
job at hand
Attention to time Think about when Think about what will
things must be be achieved
achieved

Priority Put the job first Put relationship first

Respect for property Seldom borrow or Borrow and lend
lend things things often and
easily

Timeless Emphasize Base promptness

promptness relationship factors
The need for space
High territoriality
Low territoriality
The need for space

Some people need more space in all areas so whoever who

encroach into that space are seen as a threat.

 Personal space is an example of a mobile form of territory

and people need less or greater distances between them and
others.

 Some people need bigger homes, bigger cars, bigger offices

and so on. This may be driven by cultural factors

 For example, the space in America needs to greater use of

space, whilst Japanese need less space (partly as a result of
limited useful space in Japan).

 A Japanese person who needs less space thus will stand

closer to an American, inadvertently making the American
uncomfortable.
High territorial

Some people are more territorial than others with greater

concern for ownership. They seek to mark out the areas
which are theirs

 Territoriality also extends to anything that is 'mine' and

ownership concerns extend to material things.

 Security thus becomes a subject of great concern for

people with a high need for ownership.

 People with high territoriality tend also to be low context

Low territorial

 People with lower territoriality have less ownership of

space and boundaries are less important to them.

 They will share territory and ownership with little

thought.

 They also have less concern for material ownership and

their sense of 'stealing' is less developed (this is more
important for highly territorial people).

 People with low territoriality tend also to be high

context.
Sensitivity training

 The most commonly used Organizational

Development intervention is sensitivity
training.
 It is called laboratory training as it is
conducted by creating an experimental
laboratory situation in which employees are
brought together, in groups, to interact in an
unstructured environment.
 The members are encouraged to interact
with new members and new individual
behaviours.
The objectives of laboratory training are:

1. To help people understand themselves better.

2. To create better understanding of others.
3. To gain insight into the group process
4. To develop specific behavioural skills

 Some people never understand why they feel and act

as they do and how the others feel about them.
 Some people are insensitive to the effects of their
behaviour upon others and their orders upon
subordinates
 Laboratory training helps such people to understand
the impact of their behaviour on others.
 Most of the people concentrate on what
they are going to say rather than what the
others are saying.
 This training develops the communication
skills of the employers and develops them
as good listeners.

 It also helps the participants to form into

informal groups and teams and work
more effectively
Modus Operandi of Sensitivity Training

 Sensitivity training provides face to face

interaction.
 This training is carried out by largely
unstructured groups without an agenda,
leader and predetermined goals.
 The group is given complete freedom in
developing their own devices, interactions
and on-going process for interaction..
Main Functions of Global Human Resource
Management?

 Globalization, the process of integrating a

business's operations and strategies across a wide
array of cultures, products and ideas, is having an
impact on the role of human resource managers.
Once concerned with the impact of local issues
on employees, human resources must now
consider the effects of workforce diversity, legal
restrictions and the interdependence between
training and professional development on the
organization. As such, the five main functions of
global human resource management are vital
concepts to the strategic operation of a business.

Human Resource Management
It refers to the activities an organization
carries out to use its human resources
effectively.
These activities include:
i. Determine firm’s HR strategy
ii. Staffing
iii. Performance Evaluation
iv. Management Development
v. Compensation
vi. Labour relations
Importance of HRM
i. Related to the strategy of the firm.
ii. Influence on the character, development,
quality and productivity of firm’s HR
iii. Helps firms to achieve strategic goal of
reducing cost of value creation
iv. Helps firms add value by serving
customer needs better.
Key Issues
i. How to staff key management posts in
the Co.?
ii. How to develop managers, who can do
business in different countries?
iii. How to compensate people in different
nations?
iv. How to evaluate the performance of
managers in different countries?
v. Expatriate managers
Strategic role of Global HRM

STRUCTURE INCENTIVES & CTRL

People

PROCESSES CULTURE
Strategic Role of Global HRM
Strategy is implemented through
organizational architecture.
Right people at right postings.
Effective training to acquire right skill set
to help perform jobs effectively.
 Behaviour, congruent with the desired
organizational culture.
Compensation must create incentives for
actions inline with the strategy.
Performance appraisal to measure the
behaviour, firm wants to encourage.
How different is Global HRM?
Several key factors make Global HRM
different from domestic management:
i. Different labour markets
ii. Mobility problems: legal, economic,
cultural barriers
iii. Different management styles
iv. Varied compensation practices
v. Labour laws.
Recruitment

 Attracting, hiring and retaining a skilled

workforce is perhaps the most basic of
the human resources functions. There are
several elements to this task including
developing a job description, interviewing
candidates, making offers and negotiating
salaries and benefits. Companies that
recognize the value of their people place
a significant amount of stock in the
recruitment function of HR.
Training

 Even when an organization hires skilled

employees, there is normally some level
of on-the-job training that the human
resources department is responsible for
providing. This is because every
organization performs tasks in a slightly
different way. One company might use
computer software differently from
another, or it may have a different
timekeeping method.
Professional Development

 Professional development is about providing

employees with opportunities for growth
and education on an individual basis. Many
human resource departments offer
professional development opportunities to
their employees by sponsoring them to visit
conferences, external skills training days or
trade shows. The result is a win-win: it helps
the employee feel like she is a vital and
cared-for part of the team and the
organization benefits from the employee's
added skill set and motivation.
Benefits and Compensation

 Non-traditional benefits such as flexible

working hours, paternity leave, extended
vacation time and telecommuting are
ways to motivate existing employees and
to attract and retain new skilled
employees. Balancing compensation and
benefits for the organization's workforce
is an important HR function because it
requires a sensitivity to the wants and
needs of a diverse group of people.
Ensuring Legal Compliance

 Ensuring legal compliance with labor and

tax law is a vital part of ensuring the
organization's continued existence. The
federal government as well as the state
and local government where the business
operates impose mandates on companies
regarding the working hours of
employees, tax allowances, required break
times and working hours, minimum wage
amounts and policies on discrimination.
1)Staffing Policy
Staffing policy is concerned with the
selection of employees for particular
jobs.

i. Selecting individuals who have the skill

to do a particular job.
ii. Tool for developing and promoting the
desired corporate culture (norms &
value system) of the firm.
Types of staffing policies
There are three types of staffing policies in
IB:
i. Ethnocentric approach
ii. Polycentric approach
iii. Geocentric approach
2) Training and Management
Development
 After selection, the next step is training the
manager to do the specific job.
 MDP is a broader concept, it is intended to
develop a manager’s skills over her career in the
firm, e.g., sending managers on various foreign
postings over years to build her cross cultural
sensitivity and experience.
 To enhance management and leadership skills of
executives.
 MDP have a strategic purpose, and helps
reinforce desired culture of the firm by creating
an informal network.
Types of training
i. Cultural training – understanding the
culture of host country, enhance
effectiveness, familiarization trip before
formal transfer.
ii. Language training – manager’s ability to
interact, help build rapport and improve
manager’s effectiveness.
iii. Practical training – adjust to day to day life
in host country, establish a routine,
successful adaptation, support network of
friends
3) Performance Appraisal
 These are the systems used to evaluate the
performance of managers against some criteria, that
the firm judges to be important for the
implementation of strategy and attainment of
competitive advantage.
 Important elements of control system.
 2 groups evaluate the performance of Expatriates, -
Host country managers and home country managers.
 Biasness by cultural frame of reference and
expectations
 Unfair evaluation
 Due to proximity, onsite manager should evaluate soft
variables of expatriate’s performance.
 Consultation of home country manager to balance
out.
4) Compensation
 National differences in compensation
 Payments according to global standards
or country specific standards.
 Issues in compensation practices:
i. How compensation should be adjusted
to reflect national differences in
economic circumstances and practices?
ii. How should the expatriate managers be
paid?
International Financial
Management
Introduction
 The main objective of international
financial management is to maximise
shareholder wealth.
 Adam Smith wrote in his famous title,
“Wealth of Nations” that if a foreign
country can supply us with a commodity
Cheaper than we ourselves can make it,
better buy it of them with some part of
the produce of our own in which we have
some advantage.
Basic Functions
 Acquisition of funds (financing decision)
◦ This function involves generating funds from internal
as well as external sources.
◦ The effort is to get funds at the lowest cost possible.
 Investment decision
◦ It is concerned with deployment of the acquired
funds in a manner so as to maximize shareholder
wealth.
◦ Other decisions relate to dividend payment, working
capital and capital structure etc.
◦ In addition, risk management involves both financing
and investment decision.
Nature & Scope
 Finance function of a multinational firm has two functions
namely, treasury and control.
◦ The treasurer is responsible for
 financial planning analysis
 fund acquisition
 investment financing
 cash management
 investment decision and
 risk management
◦ Controller deals with the functions related to
 external reporting
 tax planning and management
 management information system
 financial and management accounting
 budget planning and control, and
 accounts receivables etc.
Environment at International
Level
 International financial management
practitioners are required the knowledge in
the following fields.
 the knowledge of latest changes in forex
rates
 instability in capital market
 interest rate fluctuations
 macro level charges
 micro level economic indicators
 savings rate
 consumption pattern
• investment behaviour of investors
• export and import trends
• Competition
• banking sector performance
• inflationary trends
• demand and supply conditions etc.
International financial manager will
involve the study of
 exchange rate and currency markets
 theory and practice of estimating future
exchange rate
 various risks such as political/country risk,
exchange rate risk and interest rate risk
 various risk management techniques
 cost of capital and capital budgeting in
international context
 working capital management
 balance of payment, and
 international financial institutions etc.
Features of International
Finance
 Foreign exchange risk
 Political risk
 Expanded opportunity sets
 Market imperfections
Foreign exchange risk
 In a domestic economy this risk is generally ignored because
a single national currency serves as the main medium of
exchange within a country.
 When different national currencies are exchanged for each
other, there is a definite risk of volatility in foreign exchange
rates.
 The present International Monetary System set up is
characterised by a mix of floating and managed exchange
rate policies adopted by each nation keeping in view its
interests.
 In fact, this variability of exchange rates is widely regarded as
the most serious international financial problem facing
corporate managers and policy makers.
Political risk
 Political risk ranges from the risk of loss (or gain) from
unforeseen government actions or other events of a political
character such as acts of terrorism to outright expropriation
of assets held by foreigners.
 For example, in 1992, Enron Development Corporation, a
subsidiary of a Houston based Energy Company, signed a
contract to build India’s longest power plant. Unfortunately,
the project got cancelled in 1995 by the politicians in
Maharashtra who argued that India did not require the
power plant. The company had spent nearly $ 300 million on
the project.
Expanded Opportunity Sets
 When firms go global, they also tend to
benefit from expanded opportunities
which are available now.
 They can raise funds in capital markets
where cost of capital is the lowest.
 The firms can also gain from greater
economies of scale when they operate on
a global basis.
Market Imperfections
 domestic finance is that world markets
today are highly imperfect
 differences among nations’ laws, tax
systems, business practices and general
cultural environments
International Trade Theories
 Theory of Mercantilism
 Theory of Absolute Cost Advantage
 Theory of Comparative Cost Advantage
Theory of Mercantilism
• This theory is during the sixteenth to the three-
fourths of the eighteenth centuries.
• It beliefs in nationalism and the welfare of the
nation alone, planning and regulation of economic
activities for achieving the national goals, restriction
imports and promoting exports.
• It believed that the power of a nation lied in its
wealth, which grew by acquiring gold from abroad.
 Theory of Absolute Cost Advantage
• This theory was propounded by Adam Smith (1776),
arguing that the countries gain from trading, if they
specialise according to their production advantages.
 The pre-trade exchange ratio in Country I would be
2A=1B and in Country II IA=2B.
Theory of Absolute Cost
Advantage
• If it is nearer to Country I domestic exchange
ratio then trade would be more beneficial to
Country II and vice versa.
• Assuming the international exchange ratio is
established IA=IB.
• The terms of trade between the trading
partners would depend upon their economic
strength and the bargaining power.
Theory of Comparative Cost
Advantage
• Ricardo (1817), though adhering to the absolute
cost advantage principle of Adam Smith, pointed out
that cost advantage to both the trade partners was
not a necessary condition for trade to occur.
 According to Ricardo, so long as the other country
is not equally less productive in all lines of
production, measurable in terms of opportunity
cost of each commodity in the two countries, it will
still be mutually gainful for them if they enter into
trade.
◦ In the example given, the opportunity cost of
one unit of A in country I is 0.89 (80/90) unit
of good B and in country II it is 1.2 (120/100)
unit of good B.
◦ On the other hand, the opportunity cost of
one unit of good B in country I is 1.125
(90/80)units of good A and 0.83 (100/120)
unit of good A, in country II.
• The opportunity cost of the two goods are different in
both the countries and as long as this is the case, they
will have comparative advantage in the production of
either, good A or good B, and will gain from trade
regardless of the fact that one of the trade partners may
be possessing absolute cost advantage in both lines of
production.
 Thus, country I has comparative advantage in good A as
the opportunity cost of its production is lower in this
country as compared to its opportunity cost in country
II which has comparative advantage in the production of
good B on the same reasoning.