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Q.1 What is globalization? What are its benefits? How does globalization help in international business? Give some instances. Solution: Globalization: Globlization is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalization defined as, “the worldwide trend of businesses expanding beyond their domestic boundaries’. It is advantageous for the economy of the countries because it promotes prosperity in the countries that embrace globalization. International Vs. Global Business: Most of us assume that international and global business are the same and that any company that deals with another country for its business is an international or global company. In fact there is a considerable difference between the two terms. International Companies: Companies that deal with foreign companies for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country. Global Companies: Companies, which invest in other countries for business and also operates from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets. The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in a few selected foreign countries and a company that operates and market its products across several countries and continents with manufacturing capabilities in several of these countries. Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy. a. Multinational Strategy: Companies adopt this strategy when each countries market needs to be treated as self contained. It can be for the following reasons: Customers from different countries have different preferences and expectations about a product or service. Competition in each national market is essentially independent of competition in other national markets and the set of competitors also differ from country to country.
A company’s reputation, customer base, and competitive position in one nation have little or no bearing on its ability to successfully compete in another market.
Some of the industry example for multinational competition includes beer, life insurance and food products.
b. Global Competitive Strategy: Companies adopt this strategy when prices and competitive conditions across the different countries are strongly linked together and have common synergies. In a globally competitive industry, a company’s business gets affected by the changing environment in different countries. The same set of competitors may compete against each other in several countries. In a global scenario, a company’s overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide. A good example to illustrate is Sony Ericssson, which has its headquarters in Sweden, Research and Development setup in USA and India, manufacturing and Assembly plants in low wage countries like China and sales and marketing worldwide. This is made possible because of the ease in transferring technology and expertise from country to country. Industries that have a global competition are automobiles, consumer electronics, watches and commercial aircraft and so on. Benefits of Globalization: The merits and demerits of globalization are highly debatable. While globalization creates employment opportunities in the host countries, it also exploits labour at a very low cost compared to home country. Some of the benefits of globalization are as follows: Promotes foreign trade and liberalization of economies. Increases the living standards of people in several developing countries through the capital investments in developing countries by developed countries.
Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low with increased productivity.
Promotes better education and jobs.
Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices and culture.
Provides better quality of products, customer services and standardised delivery model across countries.
Give better access to finance for corporate and sovereign borrowers.
Increase business travel, which in turn leads to flourishing travel and hospitality industry across the world.
Incease sales as the availability of cutting edge technologies and production techniques decrease the cost of production.
Provide several platforms for international dispute resolutions in business, which facilitates international trade.
Q.2 What is culture and in the context of international business environment how does it impact international business decisions? Solution:
Culture is defined as the art and other signs or demonstrations of human customs, civilisation, and the way of life of a specific society or group. Culture determines every aspect that is from birth to death and everything in between it. It is the duty of people to respect other cultures, other than their culture. Research shows that national cultures generally characterise the dominant groups values and practices in society, and not of the marginalised groups, even though the marginalised groups represent a majority or a minority in the society. Culture is very important to understand international business. Culture is the part of environment, which human has created, it is the total sum of knowledge, arts, beliefs, laws, morals, customs, and other abilities and habits gained by people as part of society. The following are the four factors that question assumptions regarding the impact of global business in culture: National cultures are not homogeneous and the impact of globalisation on heterogeneous cultures is not easily predicted. Culture is not similar to cultural practice. Globalisation does not characterise a rupture with the past but is a continuation of prior trends. Globalisation is only one of many processes involved in cultural change.
Culture in an International Business Organisation Cross cultural management:Cross cultural management is defined as the development and application of knowledge about cultures in the practice of international management, when people involved have diverse cultural identities. International managers in senior positions do not have direct interaction that is face-to-face with other culture workforce, but several home based managers handle immigrant groups adjusted into a workforce that offers domestic markets. The factors to be considered in cross cultural management are: Cross cultural management skills. Handling cultural diversity. Factors controlling group creativity.
Cross cultural management skills The ability to demonstrate a series of behaviour is called skill. It is functionally linked to achieving a performance goal. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The managers must adapt to other culture and have the ability to lead its members. The managers cannot expect to force members of other culture to fit into their cultural customs, which is the main assumption of cross cultural skills learning. Any organisation that tries to enforce its behavioural customs on unwilling workers from another culture faces conflict. The manager has to possess the skills linked with the following: Providing inspiration and appraisal systems. Establishing and applying formal structures. Identifying the importance of informal structures. Formulating and applying plans for modification. Identifying and solving disagreements. Handling cultural diversity
Cultural diversity in a work group offers opportunities and difficulties. Economy is benefited when the work groups are managed successfully. The organisations capability to draw, save, and inspire people from diverse cultures can give the organisation spirited advantages in structures of cost, creativity, problem solving, and adjusting to change. Cultural diversity offers key chances for joint work and co-operative action. Group work is a joint venture where, the production of two or more individuals or groups working in cooperation is larger than the combined production of their individual work. Factors controlling group creativity On complicated problem solving jobs diverse groups do better than identical groups. Diverse groups require time to solve issues of working together. In diverse groups, over time, the work experience helps to overcome gender, racial, and organisational and functional discriminations. But the impact cannot be evaluated and there is always risk in creating a diverse group. A successful group is profitable with respect to quick results and the creation of concern for the future. Negative stereotypes are emphasised if it fails.
Factors related with the industry and company culture are also important. Diverse groups do well when the members: Assist to make group decisions. Value the exchange of different points of view. Respect each others skills and share their own. Value the chance for cross-cultural learning.
Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of diverse cultures work together. A diverse group is known to be more creative, where the members are tolerant of differences. The top management level provides its moral and administrative support, and gives time for the group to overcome the usual process difficulties. They also provide diversity training, and the group members are rewarded for their commitment. Ignore diversity It may be difficult to manage diversity. It is better to ignore, which is an alternative. The management must: Ignore cultural diversity within the employees. Down-play the importance of cultural diversity. This rejection to identify diversity happens when management: Fails to have sufficient awareness and skills to identify diversity. Identifies diversity but does not have the skill to manage the diversity. Recognises the negative consequences of identifying diversity probably cause greater issues than ignoring it. Thinks the likely benefits of identifying and managing diversity do not validate the expected expenses. Identifies that the job provides no chances for drawing advantages from diversity.
Strategies to ignore diversity may be possible when culture groups are given various jobs, and sharing required resources are independent in the workplace. Groups and group members are equally incorporated and work together. In such cases, confusion occurs when the diverse value systems are not identified that are held by different staff groups.
Q.3 Cosmos Limited wants to enter international markets. Will country risk analysis help Cosmos Limited to take correct decisions? Substantiate your answer. Solution: Overview of Country Risk Analysis Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border investment. CRA represents the potentially adverse impact of a country's environment on the multinational corporation's cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. All business dealings involve risks. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. Since the 1980s, the financial markets are being refined with the introduction of new products. When business transactions occur across international borders, they bring additional risks compared to those in domestic transactions. These additional risks are called country risks which include risks arising from national differences in socio-political institutions, economic structures, policies, currencies, and geography. The CRA monitors the potential for these risks to decrease the expected return of a cross-border investment. For example, a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. The MNE must consider the risks from a broader spectrum of country characteristics. Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time. Analysts have categorised country risk into following groups: Economic risk: This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. Risk arises from the negative changes in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or creation). Transfer risk: Transfer risk arises from a decision by a foreign government to restrict capital movements. It is analysed as a function of a country's ability to earn foreign currency. Therefore, it implies that effort in earning foreign currency increases the possibility of capital controls. Exchange risk: This risk occurs due to an unfavourable movement in the exchange rate. Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Location risk: This type of risk is also referred to as neighborhood risk. It includes effects caused by problems in a region or in countries with similar characteristics. Location risk includes effects caused
by troubles in a region, in trading partner of a country, or in countries with similar perceived characteristics. Sovereign risk: This risk is based on a governments inability to meet its loan obligations. Sovereign risk is closely linked to transfer risk in which a government may run out of foreign exchange due to adverse developments in its balance of payments. It also relates to political risk in which a government may decide not to honor its commitments for political reasons. Political risk: This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. For example, tax laws, expropriation of assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to the element of political risk. Risk assessment requires analysis of many factors, including the decision-making process in the government, relationships of various groups in a country and the history of the country. Country risk is due to unpredicted events in a foreign country affecting the value of international assets, investment projects and their cash flows. The analysis of country risks distinguishes between the ability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds a country can borrow. Country risk is determined by the costs and benefits of a countrys repayment and default strategies. The ways of evaluating country risks by different firms and financial institutions differ from each other. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks. History Earlier, the cross-border business risk was an issue that affected those who had transactions or assets to receive from foreign customers. In the 1970s, the financial institutions were not well equipped to deal with country risk. However, to improve the business; they enhanced their exposure in foreign markets which required capital. In many cases, the loans were contracted without regular notice to credit dealings of both the borrower and the country. Since the 1980s, problems concerning the payback of those credits started affecting countries such as Mexico, Poland, and Brazil, whose defaults caused heavy losses for the international banks. As a result, this caused huge loss for investors and shareholders. So, the financial institutions started adopting new analytical ways, maximum risk policies and strong credit procedures, all those supported by reliable data. Rating agencies The rating agencies use country credit risk ratings and provide a periodical and organised skill of data. It deals with a cross-border analysis. There are several agencies like Standard and Poors, Moodys, Economist Intelligence Unit, Euro money, Institutional Investor, Political Risk Services, Business Control Risks Information Services, Environmental Risk Intelligence, international banks in
general and others institutions. The rating agencies provide information and analysis of economic sectors, companies, and operations assigning its related ratings. The credit rating agencies issue credit ratings based in the European Union and are used by investors, borrowers, issuers, and public administrations to help them make investment and financial decisions. These ratings are used as a reference for calculating their capital requirements for calculating risks in their investment activity. The Standard and Poors, and Moodys rating approach divide countries in categories and the four first levels of each one are considered as investment grades (better quality of the asset in risk terms). Based on their assessment of a bond issue, the agencies give their view in the form of letter grades, which are published for use by investors. For the typical investor, risk is judged not by an instinctively formulated probability distribution of possible returns but by the credit rating assigned to the bond by investment agencies. In their ratings, the agencies rank issues according to the probability of default. Both agencies have a Credit Watch list that makes aware the investors when the agency considers a change in rating for a particular borrower. Investing agencies credit rating Let us now study credit rating by various investing agencies. Moodys The table represents Moodys credit rating. Table: Moodys Credit Rating
Upper medium grade
Acquire speculative elements
Normally lack characteristics of a desirable investment
Poor standing: may be in default
Speculative in a high degree; often in a default
Lowest grade; extremely poor prospects
Standard and Poors The given table represents Standard and Poors credit rating. Table: Standard and Poors Credit Rating
Highest rating - extreme capacity to pay interest or principal
Very strong capacity to pay
Strong capacity to pay
Adequate capacity to pay
Uncertainties that lead to inadequate capacity to pay
Greater vulnerability to default, but currently has capacity to pay
Vulnerable to default
For debt subordinated to that with CCC rating
For debt subordinated to that with CCC - rating or bankruptcy petition has been filed
In payment default
Purpose of Country Risk Analysis
Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information. Country risk is composed of all the uncertainty that defines the risk of country exposure. The assessment of country risk is used to incorporate country risk in capital budgeting and modify the discount rate. CRA regulates the estimated cash flows and explores the main techniques used to measure a countrys overall riskiness. It is mainly used by MNCs, in order to avoid countries with excessive risk. It can be used to monitor countries where the MNC is engaged in international business. Analysing the country risk helps in evaluating the risk for a planned project considered for a foreign country and assesses gain and loss possibility outcomes of cross-border investment or export strategy.
Q.4 How can managers in international companies adjust to the ethical factors influencing countries? Is it possible to establish international ethical codes? Briefly explain. Solution: Ethics can be defined as the evaluation of moral values, principles, and standards of human conduct and its application in daily life to determine acceptable human behaviour. Business ethics pertains to the application of ethics to business, and is a matter of concern in the corporate world. Business ethics is almost similar to the generally accepted norms and principles. Behaviour that is considered unethical and immoral in society, for example dishonesty, applies to business as well. International Business and Ethics Most countries have similar ethical values, but are practiced differently. This section deals with the way individuals in different countries approach ethical issues, and their ethically acceptable behaviour. With the rise in global firms, issues related to ethical values and traditions become more common. These ethical issues create complications to Multi-National Companies (MNCs) while dealing with other countries for business. Hence, many companies have formulated well-designed codes of conduct to help their employees. Two of the most prominent issues that managers in MNCs operating in foreign countries face are bribery and corruption and worker compensation. Bribery and corruption: Bribery can be defined as the act of offering, accepting, or soliciting something of value for the purpose of influencing the action of officials in the discharge of their duties. Corruption is the abuse of public office for personal gain. The issue arises when there are differences in perception in different countries. For example, in the Middle East, it is perfectly acceptable to offer an official a gift. In Britain it is considered as an attempt to bribe the official, and hence, considered unlawful. Worker compensation: Businesses invest in production facilities abroad because of the availability of low-cost labour, which enables them to offer goods and services at a lower price than their competitors. The issue arises when workers are exploited and are underpaid compared to the
workers in the parent country who are paid more for the same job. The disparity arises due to the differences in the regulatory standards in the two countries. Managing ethics Earlier, we believed that ethics is a prerogative of individuals, but now this perception has immensely changed. Many companies use management techniques to encourage ethical behaviour at an organisational level. Various techniques of managing ethics like practicing ethics at the top level management, special training on ethics, forming committees to oversee ethical issues, and defining and implementing code of ethics are illustrated in figure.
Figure: Techniques of Managing Ethics Let us discuss each technique in detail. Top management:The senior management of a company must be committed to ensure that ethical standards are met. The chief executive of the company must not engage in business practices harmful to employees, or the society. The top management must focus on ethical practices while informing employees of their intention. Code of ethics: One of the best practices for ethics is creating a corporate ethical statement and communicating it within the company. Such practices enhance the companys public image. Almost all Fortune 500 companies have such codes. Ethics committee: There are ethics committees in many firms to help them deal with and advise on work related ethical issues. The Chief Executive Officer can head the committee that includes the Board of Directors. Such a committee answers employee queries, helps the company to establish policies in uncertain areas, advises the Board on ethical issues, and oversees the enforcement of the code of ethics.
Ethics hotline: A companys ethical hotline helps its employees report any ethical issues they face at work. The ethics committee then investigates these issues. Such hotline calls are treated confidential, where the callers identity is protected to encourage employees to report on ethical issues. The act of reporting illegal, immoral, or illegitimate practices by former or current employees involving its employees is known as Whistle-blowing. Whistle-blowing is favourable to a company because employees can alert the management on possibly deviant behaviour rather than reporting it to the media, which adversely affects the company. A case of whistle-blowing in Xerox corporation (a pioneer in copier machines), led its Chief Financial Officer to be fined $ 5.5 million and banned from practicing accountancy after reports of falsified financial statements emerged. Ethics training programs: Most firms take ethics seriously and provide training for its managers and employees. Such training programs help the employees become familiar with the official policy on ethical issues. These programs demonstrate the use of these ethic policies in everyday decisionmaking. Ethics training is most effective when conducted by managers and when focused on work environment. Ethics and law: Both law and ethics focus on defining the perfect human behaviour, but they are not the same. Law is the governments attempt to formalise rightful behaviour, but it is rarely possible to enforce written laws. It depends on individual or business ethics to reduce unlawful incidents. Ethical concepts are more complex than written rules since it deals with human dilemmas that go beyond the formal language of law. Legal rules seek to promote ethical behaviour in companies. The following are some of the Acts which seek to ensure fair business practices in India: Foreign Exchange Management Act (FEMA) of 1999 - FEMA regulates the cross border movement of foreign and local currencies. Companies Act of 1956 - Companies Act provides the complete legal framework for the formation, running, and winding up of a company. Consumer Protection Act of 1986 (CPA) - CPA provides and regulates the are essential framework for the protection of consumer rights. Essential Commodities Act of 1955 - This act defines the goods and services that for the people at all times and provides a legal framework for the uninterrupted supply of the same. National Differences in Ethics In the previous section we examined how ethics is significant in international ethics. In this section, let us consider the differences in understanding ethics across countries. The differences in national cultures have an impact on the social and ethical practices of multinational firms. Cultural norms and
values that usually influence business practices are attitudes towards women, minorities, bribery, and law. Religion and law are the key social factors that influence the type of ethical issues. In MNCs, managers play a key role in managing ethics. While working in a foreign country, you cannot expect a manager to have a comprehensive knowledge of that countrys culture and social factors that affect business. Therefore, the international manager needs to acquire adequate knowledge of a countrys cultural, legal, and social scenarios to ascertain the important ethical issues and to manage these issues. The approaches to understand national differences in ethics are ethical relativism, ethical universalism, and ethical convergence. Let us discuss each of them in detail. Ethical relativism and ethical universalism Ethical relativism means that each countrys outlook on ethics must be considered valid and ethical. This implies that if bribery is not unethical in a foreign country, then it is acceptable for an MNC to encourage bribery even if it is illegal in its home country. Ethical relativism means that when a company deals with a host country for business, the international managers must follow the ethical norms of the host country. Another example is the attitude towards women employees in certain Arab countries. The attitude differs to a large extent compared to western countries. In Saudi Arabia, women employees are segregated from their male counterparts at the work place. All companies, MNCs or local, must comply with these rules. The principle of ethical universalism states that there are basic moral principles that are valid across all cultural and political boundaries. For example, all countries forbid unethical accounting practices and tax evasion. Both these principles have drawbacks when in international business. Ethical relativism is a convenient way to indulge in unethical practices with cultural differences as an excuse. The universal approach can be perceived as cultural imperialism, since business managers may regard business practices in some countries as inferior or immoral. Ethical convergence Ethical convergence is defined as the practice of a uniform system of ethical codes in different countries that are culturally and socially different. There is a growing pressure on international business to follow a uniform set of guidelines in managing ethical behaviour and social responsibility across the countries in which they operate. The following are some of the advantages of ethical convergence: The growth of international trading blocks, such as North American Free Trade Agreement (NAFTA) and the European Union promotes common ethical practices across national cultures and borders to reduce institutional differences. Predictable interaction and behaviour among trading partners from different countries makes trade more efficient.
People from different cultural backgrounds increase their interactions and exposure to varying ethical traditions. They adopt, adjust to, and imitate new behaviour and attitudes which leads to acceptance of best practices. International businesses have employees from different cultural backgrounds. The companies rely on their corporate culture to provide consistent norms and values that govern ethical issues to set common standards for employees from different cultural backgrounds.
Q.5 Discuss the international marketing strategies. How is it different from domestic marketing strategies? Solution: Overview of International Marketing Selling usually centres on the needs of the seller whereas marketing focuses on the needs of the customer (buyer). The aim of business is to attract and retain a customer, which can be done through price competition and product differentiation. International marketing can be defined as marketing of goods and services outside the firms home country. International marketing has the following two forms of marketing: Multinational marketing. Global marketing.
Multinational marketing is very complex as a firm engages in marketing operations in many countries. In multinational marketing, a firm visualises different countries as one market and build their brand or service according to the business environment of the foreign countries. A regiocentric approach is taken to plan a product and consolidate the manufacturing processes. Therefore, international marketing is beneficial in preparing a firm to deal globally as it establishes a business stronghold on various foreign markets. Global marketing indicates the integrated and coordinated marketing activities across many different markets. Domestic vs. International marketing Domestic marketing refers to the practice of marketing within a firms home country. Whereas International or foreign marketing is the practice of marketing in a foreign country; the marketing is for the domestic operations of the firm in that country. Domestic marketing finds the "how" and "why" a product succeeds or fails within the firms home country and how the marketing activity affects the outcome. Whereas, foreign marketing deals with
these questions and tries to find answers according to the foreign market conditions and it provides a micro view of the market at the firms level. In domestic marketing a firm has insight of the marketing practices, culture, customer preferences, climate and so on of its home country, while it is not totally aware of the policies and the market conditions of the foreign country. The stages that have led to achieve global marketing are: Domestic marketing - Firms manufacture and sell products within the country. Hence, there is no international phenomenon. Export marketing - Firms start exporting products to other countries. This is a very basic stage of global marketing. Here, the products are developed based on the companys domestic market although the goods are exported to foreign countries. International marketing - Now, Firms start to sell products to various countries and the approach is polycentric, that is, making different products for different countries. Multinational marketing - In this stage, the number of countries in which the firm is doing business gets bigger than that in the earlier stage. And hence, the company identifies the regions to which the company can deliver same product instead of producing different goods for different countries. For example, a firm may decide to sell same products in India, Sri lanka and Pakistan, assuming that the people living in this region have similar choice and at the same time offering different product for American countries. This approach is termed regiocentric approach. Global marketing - Company operating in various countries opts for a common single product in order to achieve cost efficiencies. This is achieved by analysing the requirements and the choice of the customers in those countries. This approach is called Geocentric approach. The practice of marketing at the international stage does not designate any country as domestic or foreign. The firm is not considered as the corporate citizen of the world as it has a home base. The firm must not have a 'single marketing plan', because there are differences between the target markets (that is domestic or international markets). There should never be a rigid marketing campaign. A firm that is successful internationally first obtains success locally. Few approaches that you can consider for an international marketing are: Advertise as a foreign product - By doing so, the product will be considered as genuine and original in some countries. Joint partnership with a local firm - finding a firm that has already established credibility will benefit a lot. The product will be considered as a local product by following this marketing approach.
Licensing - You can sell the rights of your product to a foreign firm. Here the problem is that the firm may not maintain the quality standard and therefore may hurt the image of the brand. Culture is a major factor which influences marketing decisions and practices in a foreign country. For example, in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to womens apparel, as showcasing some aspects of women clothing is considered immodest and immoral. Nature of international marketing Operating in a foreign market depends on the level of control the firm has on the operations in the foreign country and it also depends on the capital expenditure. Once the decision to invest in the foreign market has been made, the mode of operation has to be established. Listed below are the important modes of operation: Exporting (direct or indirect). Joint ventures. Direct investment.
Exporting Exporting is the process of selling goods in a foreign country keeping in mind the customer base of the foreign country. The goods are manufactured in the home country of the firm. There are two types of exporting methodologies, namely direct exporting and indirect exporting. Direct exporting is the activity of directly shipping goods to a foreign country or market. For example, a car manufacturer may manufacture cars in home country and directly ship the cars to a foreign country like Ferrari. Indirect exporting is the process of utilising an intermediary firm, who in turn would distribute the product in the foreign market on the instructions of the firm. For example, a car manufacturer may employ a local distributor or a partner while selling cars in a foreign country. From a firm's perspective, exporting involves the least risk. This is so because no capital expenditure or additional finance has been allocated for the product. Thus, the chance of the existence of sunk costs or general barriers is limited. On the contrary, a firm may have less control when exporting into a foreign market, due to limited control on the supply of the goods within the foreign market. Joint ventures A joint venture is an understanding to work together between two or more firms with the aim of gaining a benefit from a given economic activity. The directives of some countries often state that all foreign investment in it should be through joint ventures. The level of risk is comparatively more when compared with exporting as the control of the firm which gets into a joint venture is limited.
Direct investment Here, a firm invests capital in a foreign country to construct a manufacturing facility or fixed or noncurrent asset. The aim of the firm is to manufacture a product within that country. With direct investment, comes more control of the firm, attached with more risk. The return on investment has to be determined and calculated as with any capital expenditure in addition to recovering any related sunk costs. Global Marketing Strategies After getting an overview of international marketing, we shall now discuss the strategies followed in global marketing. Taking into account the various conditions on which markets vary and depend, appropriate marketing strategies should be devised and adopted. Like, some countries prevent foreign firms from entering into its market space through protective legislation. Protectionism on the long run results in inefficiency of local firms as it is inept towards competition from foreign firms and other technological advancements. It also increases the living costs and protects inefficient domestic firms. To counter this scenario firms must learn how to enter foreign markets and increase their global competitiveness. Firms that plan to do business in foreign land find the marketplace different from the domestic one. Market sizes, customer preferences, and marketing practices all vary; therefore the firms planning to venture abroad must analyse all segments of the market in which they expect to compete. The decision of a firm to compete internationally is strategic; it will have an effect on the firm, including its management and operations locally. The decision of a firm to compete in foreign markets has many reasons. Some firms go abroad as the result of potential opportunities to exploit the market and to grow globally. And for some it is a policy driven decision to globalise and to take advantage by pressurising competitors. But, the decision to compete abroad is always a strategic down to business decision rather than simply a reaction. Strategic reasons for global expansion are: Diversifying markets that provide opportunistic global market development. Following customers abroad (customer satisfaction). Exploiting different economic growth rates. Pursuing a global logic or imperative to harvest new markets and profits. Pursuing geographic diversification. Globalising for defensive reasons.
Exploiting product life cycle differences (technology). Pursuing potential abroad.
Likewise, there can be other reasons like competition at home, tax structures, comparative advantage, economic trends, demographic conditions, and the stage in the product life cycle. In order to succeed, a firm should carefully look at their geographic expansion and global marketing strategy. To a certain extent, a firm makes a decision about its extent of globalisation by taking a stance that may span from entirely domestic to a global reach where the company devotes its entire marketing strategy to global competition. In the process of developing an international marketing strategy, the firm may decide to do business in its home-country (domestic operations) only or host-country (foreign country) only.
Q.6 Explain briefly the international financial management components with examples and applicability. Solution: Components of International Financial Management The components like foreign exchange market, foreign currency derivatives, international monetary markets and international financial markets are essential to the international financial management, which is discussed in this section. Foreign exchange market The Foreign exchange or the forex markets facilitates the participants to obtain, trade, exchange and speculate foreign currency. The foreign exchange market consists of banks, central banks, commercial companies, hedge funds, investment management firms and retail foreign exchange brokers and investors. It is considered to be the leading financial market in the world. It is vital to realise that the foreign exchange is not a single exchange, but is created from a global network of computers that connects the participants from all over the world. The foreign exchange market is immense in size and survives to serve a number of functions ranging from the funding of cross-border investment, loans, trade in goods, trade in services and currency speculation. The participant in a foreign exchange market will normally ask for a price. The trading in the foreign exchange market may take place in the following forms: Outright cash or ready foreign exchange currency deals that take place on the date of the deal. Next day - foreign exchange currency deals that take place on the next working day. Swap Simultaneous sale and purchase of identical amounts of currency for different maturities.
Spot and Forward contracts - A Spot contract is a binding obligation to buy or sell a definite amount of foreign currency at the existing or spot market rate. A forward contract is a binding obligation to buy or sell a definite amount of foreign currency at the pre-agreed rate of exchange, on or before a certain date. The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency requirements. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of the rate until the deal is carried out. The spot rate that is intended to receive will be set by current market conditions, the demand and supply of currency being traded and the amount to be dealt. In general, a better spot rate can be received if the amount of dealing is high. The spot deal will come to an end in two working days after the deal is struck. A forward market needs a more complex calculation. A forward rate is based on the existing spot rate plus a premium or discounts which are determined by the interest rate connecting the two currencies that are involved. For example, the interest rates of UK are higher than that of US and therefore a modification is made to the spot rate to reflect the financial effect of this differential over the period of the forward contract. The duration will be up to two years for a forward contract. A variation in foreign exchange markets can be affected to any company whether or not they are directly involved in the international trade or not. This is often referred to as Economic foreign exchange and most difficult to protect a business. The three ways of managing risks are as follows: Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises. This will result in a high risk and speculative strategy since one will not know the rate at which a transaction is dealt until the day and time it occurs. Managing the business becomes difficult if it depends on the selling or buying the currency in the spot market. The decision must be made to book a foreign exchange contract with the bank whenever the foreign exchange risk is likely to occur. This will help to fix the exchange rate immediately and will give a clear idea of knowing the exact cost of foreign currency and the amount to be received at the time of settlement whenever this due occurs. A currency option will prevent unfavourable exchange rate movements in the similar way as a forward contract does. It will permit gains if the markets move as per the expectations. For this base, a currency option is often demonstrated as a forward contract that can be left if it is not followed. Often banks provide currency options which will ensure protection and flexibility, but the likely problem to arise is the involvement of premium of particular kind. The premium involved might be a cash amount or it could also influence into the charge of the transaction. Foreign currency derivatives
Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. The currency derivative trades in markets correspond to the spot (cash) market. Hence, the spot market exposures can be enclosed with the currency derivatives. The main advantage from derivative hedging is the basket of currency available. The derivatives can be hedged with other derivatives. In the foreign exchange market, currency derivatives like the currency features, currency options and currency swaps are usually traded. The standard agreement made in order to buy or sell foreign currencies in future is termed as currency futures. These are usually traded through organised exchanges. The authority to buy or sell the foreign currencies in future at a specified rate is provided by currency option. These will help the businessmen to enhance their foreign exchange dealings. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency in future is provided by currency swaps. These will help to increase the funds of foreign currency from the cheapest sources. Some of the risks associated with currency derivatives are: Credit risk takes place, arising from the parties involved in a contract. Market risk occurs due to adverse moves in the overall market. Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade. Settlement risks similar to the credit risks occur when the parties involved in the contract fail to provide the currency at the agreed time. Operational risks are one of the biggest risks that occur in trading derivatives due to human error. Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is taking place. International monetary systems The international monetary systems represent the set of rules that are agreed internationally along with its conventions. It also consists of set of rules that govern international scenario, supporting institutions which will facilitate the worldwide trade, the investment across cross-borders and the reallocation of capital between the states. International monetary systems provide the mode of payment acceptable between buyers and sellers of different nationality, with addition to deferred payment. The global balance can be corrected by providing sufficient liquidity for the variations occurring in trade. Thereby it can be operated successfully.
The gold and gold bullion standards The gold standard was the first modern international system. It was operating during the late 19th and early 20th centuries, the standard provided for the free circulation between nations of gold coins of standard specification. The gold happened to be the only standard of value under the system. The advantages of this system depend in its stabilising influence. Any nation which exports more than its import would receive gold in payment of the balance. This in turn has resulted in the lowered value of domestic currency. The higher prices lead to the decreased demands for exports. The sudden increase in the supply of gold may be due to the discovery of rich deposit, which in turn will result in the increase of price abruptly. This standard was substituted by the gold bullion standard during the 1920s; thereby the nations no longer minted gold coins. Instead, reversed their currencies with gold bullion and determined to buy and sell the bullion at a fixed cost. This system was also discarded in the 1930s. The gold-exchange system Trading was conducted internationally with respect to the gold-exchange standard following World War II. In this system, the value of the currency is fixed by the nations with respect to some foreign currency but not with respect to gold. Most of the nations fixed their currency to the US dollar funds in the United States. With a view to maintain a stable exchange rate at the global level, the International Monetary Fund (IMF) was created at the Bretton Woods international Conference held in 1944. The drain on the US gold reserves continued up to the 1970s. Later in 1971, the gold convertibility was abandoned by the United States leaving the world without a single international monetary system. Floating exchange rates and recent development After the abundance of the gold convertibility by the US, the IMF in 1976 decided to be in agreement on the float exchange rates. The gold standard was suspended and the values of different currencies were determined in the market. The Japanese yen and the German Deutschmark strengthened and turned out to be increasingly important in international financial market, at the same time the US dollar diminished its significance. The Euro was set up in financial market in 1999 as a replacement for the currencies. Hence, it became the second most commonly used currency after the dollar in the international market. Many large companies opt to use euro rather than the dollar in bond trading with a goal to receive better exchange rates. Very recently the some of the members of Organisation of Petroleum Exporting Countries (OPEC) such as Saudi Arabia, Iraq have opted to trade petroleum in Euro than in Dollar. International financial markets International foreign markets provide links connecting the financial markets of each country and independent markets external to the authority of any one country. The heart of the international financial market is being governed by the market of currency where the foreign currency is
denominated by the international trade and investment. Hence the purchase of goods and services is preceded by the purchase of currency. The purpose of the foreign currency markets, international money markets, international capital markets and international securities markets are as follows: The foreign currency markets - The foreign currency market is an international market that is familiar in structure. This means that there exists no central place where the trading can take place. The market is actually the telecommunications like among financial institutions around the globe and opens for business at any time. The greater part of the worlds that deal in foreign currencies is still taking position in the cities where international financial activity is centred. International money markets - A money market can be conventionally defined as a market for accounts, deposits or deposits that include maturities of one year or less. This is also termed as the Euro currency markets which constitute an enormous financial market that is beyond the influence and supervision of world financial and government authorities. The Euro currency market is a money market for depositing and borrowing money located outside the country where that money is officially permitted tender. Also, Euro currencies are bank deposits and loans existing outside any particular country. International capital markets - The international capital provides links among the capital markets of individual countries. It also comprises a separate market of their own, the capital market that flows in to the Euro markets. The firms enjoy the freedom to raise capital, debit, fixed or floating interest rates and maturities varying from one month to thirty years in an international capital markets. International security markets - The banks have experienced the greatest growth in the past decade because of the continuity in providing large portion of the international financial needs of the government and business. The private placements, bonds and equities are included in the international security market. The following are the reasons given for the enormous growth in the trading of foreign currency: Deregulation of international capital flows - Without the major government restrictions, it is extremely simple to move the currencies and capital around the globe. The majority of the deregulation that has differentiated government policy over the past 10 to 15 years. Gain in technology and transaction cost efficiency - The advancements in technology is not only taking place in the distribution of information, in addition to the performance of exchange or trading. This has resulted greatly to the capacity of individuals on these markets to accomplish instantaneous arbitrage.
Market upwings - The financial markets have become increasingly unstable over recent years. There are faster swings in the stock values and interest rates, adding to the enthusiasm for moving further capital at faster rates.