INTERNATIONAL BUSINESS

MANAGEMENT
 International Business Management -
Overview

 What is International Business?

 International business is all commercial transactions
(private/Governmental) between two countries.
 Why should one study IB as a subject ?
 Now a days in general, International business is a
large portion of the total business. And the portion
is rapidly growing due to ‘Globalization’.
 Requirement of some specific knowledge is
essential to conduct IB.
 International Business Management -
Overview
 Why companies opt for IB?
 To increase sales and profit
 Economy of scale

 Full capacity utilization may be difficult without

foreign markets.
 Possibility of identifying niche foreign market

(hence a scope of premium pricing)

 Possibility of extending product life.

 To acquire resources such as technologies, capital,

manpower (skill/ talent) and information
 International Business Management -
Overview
 To increase prestige of the product and the
organisation.
 To expand the base of sales and supplies to
minimize the effect of trade-cycle or that of
recession or inflation in the domestic market
 Product development costs can be shared in a
larger market.
 To increase the competitive edge in the domestic
market. (global players are likely to edge out others
in the domestic market due to better quality and
cost effectiveness).
 International Business Management -
Overview
 What is ‘Economic Globalization’ ?
 There is a growing economic interdependence
among the countries.
 This is reflected in increasing cross border flows of
1. Goods and services. 2. Capital 3. Know how
 There is Globalisation in the field of marketing as
in the field of production/ operation.
 Globalisation is growing International trade in GDP
is now 30% of world GDP. It was only 10% 30
years ago. FDI has grown from 5% of GDP to
12% in 20 years. Cross border acquisition and
merger is increasing.
 International Business Management - Overview

 What are the major drivers of globalization?

 Expansion of technology . Technology is truly
‘stateless’. It crosses national or cultural
boundaries.
 Transportation and communication improvements –
in speed , reliability, cost factors etc.
 World economic trend:- Liberalization of cross
border movement, Deregulation, reduction in tariffs.
Trend towards privatization and market allocation
economy. - WTO initiatives.
 Common market needs promotes globalization.
 Leverages / advantages possessed by global
companies such as economy of scale, experience
transfer, improved resource utilization etc.
 International Business Management -
Overview
 What are the restraining forces of globalization?
 Management shortsightedness, ethnocentric style
and fear of the unknown in many organisation.
 Government policies, controls and barriers.

- Government tends to support the local players and

frames rules to protect them.
 What are the different types of international
business?
 Exports and imports of goods – ‘merchandise’.
 Exports and imports of services - Tourism and
transportation, Banking, insurance; use of assets
such as trademark, patent, copyright etc.
 Investment – direct and indirect.
 International Business Management -
Overview
 What are the different types management
orientation that companies adopt towards
International business?

1. Ethnocentric:
Its characteristics are -
Extension strategy is adopted for international
marketing.
Plans are made in home country and by its
personnel and generally operate through
agents.
Export is viewed as a means of disposing the
surplus in the domestic market.
 International Business Management -
Overview
Believes home country practices to be superior
and so can be successful everywhere.
Only sees the similarities in the markets.
Does not conduct any systematic International
market research
The approach does not allow a company to be a
major player in International Business.
Many call these types of companies ‘ International
companies’
2. Polycentric
Its characteristics are
 Opposite of Ethnocentrism – assumes each
country is unique. Only sees dissimilarities.
 International Business Management -
Overview
Each subsidiary develops its own unique
business and marketing strategies (– that is
decentralized)
Focus is on local conditions, laws, culture etc.
Adaptation strategy is followed in marketing.
These are called ‘ Multinational companies/ Multi-
domestic companies / Locally responsive
companies.
3. Regioncentric and Geocentric
Its characteristics are:
Pursues both extension and adaptation
International Business Management - Overview

Lies between the extremes of polycentrism and

ethnocentrism – it is a hybrid approach.
Views the entire world/global market to be a
single market but sees both similarities and
dissimilarities within it.
Adopts a policy of blending of cultures.
Integration strategy adopted at region/global
level
However it does not adapt just for the sake of
adapting – only does when it adds value.
“Thinks globally, acts locally”.
These are called Transnational Companies ( TNC) or
 Economic Environment
 How important is the study of economic environment
and what are to be studied?
 It is perhaps the most important among the environmental
factors to be studied before deciding on whether to do
business with a country or not – because the purchasing
power of the consumers of the target (or host) country is the
foremost requisite of profitable business.
 For marketing the products in a host country, the demand
conditions ( quantity and quality ) in the country with respect
to the products and related industry, need to be studied.
 For production of goods in a foreign country, its factor
conditions (such availability of raw material, human capital/
knowledge, land, infrastructure etc,) need to be studied.
 Other major economic aspects that need examination are:
 Economic size and economic data of the country
 Economic system prevailing in the country.
 Key macroeconomic indicators such as GNP, growth rate,
inflation, surpluses/ deficits etc of the target country.
 Economic Environment
 The relevant data regarding the target country that needs to
be studied, are:
 National accounts data such as GNP, GDP, Consumption,
Investment, Government expenditures, Price levels etc.
 Demographic data such as number of people, population
growth, educational levels etc.
 Other statistical data and information– sector wise
production, consumption, internal and external trade,
level of infrastructure, use of E-commerce etc.
 Economic Environment
 What are the different economic systems?
 There are three types of economic systems
 Capitalist (Market allocation of resources) system
 Socialist ( Command allocation of resources) system
 Mixed system
 Market allocation
 Consumer allocates the resources. Consumer with his
monetary strength decides the goods/services that he
wants.
 Command allocation
 Product , technology is decided by the state.
 Generally demand exceeds supply so market mix is
relevant
 Countries relying on this system are generally shifting
towards market allocation system
 Mixed system : In reality all market allocation systems are
mixed because Government spending is a command
allocation.
 Economic Environment
 How are the countries classified by income and how is
the classification related to stages of market
development?
 GNP per capita is a rational parameter for grouping
countries to determine the stages of market development .
The classification has been done as follows:
 Low income countries ( GNP less than $ 786/capita).
These cover 37% of world population but contribute only
3% to world GNP. These are characterized by
 Limited industrialization
 High birth rate.
 Low literacy rates.
 Low-middle income countries ( GNP per capita – $ 786 to
3125). These cover 39% of world population but
contribute 10% to world GNP. These are characterized
by:
 Generally early stages of industrialisation
 Producers of standardized labour intensive products.
 Economic Environment
 Upper- middle income countries ( GNP per capita - 3126 to
9655). These cover 7% of world population and contribute
7% to world GNP. These are characterized by:
 Rapid industrialisation, high degree of urbanization
 Rising wages, High degree of literacy.
 Rapid export driven economic growth.
 High income group countries. ( GNP per capita – above $
9655). These cover 16% of world population but contribute
80% to world GNP. These are characterized by:
 Post industrialized countries
 orientation towards service sectors, information
processing and exchange.
 Focuses on new products and innovations.

 Basket cases:
 Have economic social and political problems
 Abject poverty, Reducing income level
 Avoided by global marketers.
 Economic Environment
 What is GDP of a country?
 The GDP or Gross domestic product of a country is

the value of production ( of tangible goods and

intangible services) that accrues within the
geographical boundaries of a country in a year.
 It does not matter whether the production has

been done by a domestic or a foreign company.

 What is GNI of a country?
 Gross national income (GNI) also called GNP is the
market value of the production done by
domestically owned companies or individuals of
the country.
 Economic Environment
 What is purchasing power parity (PPP)?
 Conversion of dollar rates are misleading to assess
the purchasing power. Exchange rates is for trading
purpose and often bears no relationship with the
price of products sold in the domestic market. So
the World Bank has come up with GNI per capita in
international dollars converted at PPP rates.
 “PPP is the number of units of a country’s currency
required to buy the same amounts of goods and
services in the domestic market that 1$ would buy
in United states”.
 Economic Environment
 What is inflation? How is it measured? Why is it a
serious concern for a global player?
 The term ‘Inflation’ implies that prices are increasing. Hence
a unit of money is able to buy less
 ‘Consumer price index’ is used to measure inflation. The
change in the price of a rationally determined mix (or
basket) of goods over a period is determined. Rise in the
index results in inflation.
 Inflation rate’ is the percentage increase in the change in
prices from one period to the next ( usually a year)
 High inflation rate affects interest rates, exchange rates,
cost of living and general confidence on a country’s political
and economic system.
 Interest rates are set higher than inflation rates to attract
savings. The lending rates go up when inflation are high.
This causes economic slowdown
 During the times of high and erratic inflationary trends price
comparisons become difficult . Pricing becomes difficult.
 Economic Environment
 What is balance of payment? What are external debts
and internal debts?
 Balance of payment is a record of economic transaction
between residents of a country and the rest of the world. It
has two components :
Current accounts which records transaction related to
merchandise, service trade and income from assets
abroad.
Capital accounts which records long term direct
investment, portfolio investment and other capital flows.
 Balance of payment of a country indicates the stability of the
country’s currency.
 Merchandise trade balance is the difference between exports
and imports of merchandise.
 External debt is the money borrowed from foreign banks.
 Internal debt is the amount spent by the Government over
the tax receipts.
 Political Environment
 Why must MNEs study political environment of
a target country?
 It is important foe MNEs to study political
environment in order to be successful in a foreign
land – it must see whether it’s corporate policy suits
the political and legal environment of the country or
not. Moreover the political and the legal
environment varies from country to country – the
risk assessment is crucial.
Political and legal factors are a part of the external
environment that influences managerial decisions.
 Political Environment
 How are political policies developed and implemented?
( in other words, how is the political environment
created?)
 It is basically through a political system. The main

purpose of a political system is to integrate the

diverse groups of the society to function as a
composite unit. Polices evolve as shown below:-
 Political Environment
 What are the two political systems that lie on the two
extremes of the political spectrum?
 1. Democratic system 2. Totalitarian system
 Political Environment
 Totalitarianism also manifests itself in other forms
like Fascism, Authoritarianism and Communism.
Under fascist rule the state becomes all powerful
and dictates all aspects of lives of the people. It
tries to convert all the people to its own philosophy.
Authoritarianism tries to totally rule the people.
Communist governments totally control the
economic systems politically. They are however
secular.
 Political Environment
 What are the issues a foreign company should study
carefully in a target country’s political environment?
 Following issues arising from the political
environment needs to be studied by foreign
companies:-
1. Government’s attitude towards sovereignty –
sovereignty is the independence of a state to
conduct it’s affairs without the interference of any
other country or outside forces.
The process of integration in the global market in
a way is eroding national economic sovereignty.
Eg:- EU countries are giving up individual rights to
set their own product standard to gain access to
the common market.
 Political Environment
2. Political risks involved –
- Risk of government policies getting
changed is a serious issue to be considered by a
foreign company.
- Lower risks attract investments
- It has also been seen that generally the lower
the stage of development the higher is the
political risk.
- Causes of political risks could be due to 1. Party
in power being changed or change in opinions of
leaders. 2. Political/ civil unrest 3. Animosity or
war between the investor country and the host
country.
 Political Environment
3. Risk of Expropriation –
- Companies should evaluate the risk of
confiscation/ expropriation / creeping
expropriation in a target country.
- Confiscation means - host government
taking ownership of the property without giving
any compensation.
- Expropriation is in the form compelling a foreign
company to sell its operation
- After confiscation/ expropriation it can be either
nationalised or domesticated. Nationalisation
involves Government taking over the company.
Domestication means foreign company
relinquishing the control to private nationals.
 Political Environment
- Creeping expropriation is when severe restrictions
are imposed by the host country on economic
activities such as repatriation of profits , dividends
and royalties. It also can be in the form of weak
patent laws, laws related to recruitment of
nationals, price controls etc.
- For these companies can approach the World Bank
Investment Dispute Settlement Centre. Or it can
get itself covered by ‘Expropriation Insurance’.
3. Taxes and Taxation policies –
- Foreign companies are taxed by host countries as
per their laws.
- Till now common or universal tax laws do not
exist. Though there are bilateral tax treaties
between certain countries.
 Political Environment
4. Dilution of Equity –
- Governments of host countries attempt to control
ownership of foreign companies by regulations. Eg:- FERA
act in India.
- Some companies have joint ventures to reduce the threat
to equity dilution – but this might cause problems related
to patents, trade mark. technology transfer etc.
What are the types of strategy a foreign company
follows in dealing with the factors in the political
environment?
- To formulate a political strategy is often avery difficult
operation for a company. The company at first, should
identify the specific issues affecting the firm ( example: Is
it labour issues? Is it a regulatory issue? Is it a social
issue?) It should also know the govt’s view or stand point
related to the issue.
 Political Environment
- Companies often engage lobbyists to influence
democratic governments, to look at things from
their point of view. Companies can also take the
support of the consumers to influence the
government policies regarding the contentious
issues.
- At times it is easier to deal with totalitarian
government than democratic form of government,
but at the same time it is risky due to chances of
the toppling of the government.
 Legal Environment
 What are the different types of legal systems
existent?
 Basically there are three types of laws:
 Common laws : these are based on culture of the

nation, precedents, traditions etc.

 Civil laws : These are typically codified legal

system. They tend to be precise unlike the

common laws which are more open to
interpretations.
 Theocratic (or religious) laws : These are

religious laws . Eg:- Islamic laws.

 Legal Environment
 What are the types of business issues that can create
conflicts in International business?
 The global legal environment is very dynamic and complex
in nature. So it is imperative to obtain legal help to resolve
conflicts. However it is wise to prevent conflicts from arising
at the first place.
 The issues that can give rise to conflicts are –
1. Establishment of trade :
- Trade can be established only when conditions are
suitable for its growth, in a target country. It can
survive and grow if there is an assurance that
foreigners will be treated fairly. In order to ensure this
treaties are signed between countries regarding
commerce and navigation.
Companies are guided both by the laws of the host
country and the home country. ( Eg: Bribery laws of the
US is applicable to all the US MNCs operating in other
countries)
 Legal Environment
2. Jurisdiction:
- The company should clearly understand the extent to
which it is subject to the jurisdiction of host country
courts. Normally, all the economic activity within a nation
in governed by the nation’s laws. But which nation’s laws
apply when a transaction crosses boundaries/ The parties
involved must clarify such points at the point of making
the deal. The contract must specify these points, to take
care of any conflict of laws arising later.
3. Intellectual property rights :
Various types of disputes can arise over issues related to
trade marks and patents like –
- Counterfeiting is unauthorised copying and production
of a product.
- Associative counterfeit is an imitation with slight
variation in the product name (a well known brand name)
to dupe the customer.
- Piracy is unauthorised publication of a copy right
(particularly software and entertainment industries)
 Legal Environment
4. Antitrust :
Antitrust laws are intended to promote free
competition. But at times the laws in the host country
may go contrary to the basic principle of ‘Antitrust’, with
an objective to provide protection to local manufactures.
5. Licensing and Trade secrets:
Licensing is a contract that allows a licensee to use
patents, trademarks, trade secrets, technology against
royalty payments. In certain countries the permissible
amount of royalties is governed by the government.
Disputes arise if the license agreement not clearly
specify the scope ( to make/ use/ sell) of the license,
the method of pricing the assets, the rights to
sublicense etc. Disputes also arise due to
misinterpretation of the agreement.
 Social and cultural Environment
 What is culture?
 Culture is a way of living. In context of consumer
behaviour “culture is the sum total of learned beliefs,
values and customs that serve to regulate the consumer
behaviour of members of a particular society”
 Belief and value components of the definitions refer to

the accumulated feelings and priorities that individuals

have regarding ‘things and possessions’.
 “Beliefs contain a very large number of mental and

verbal statements”.
 “Values are those beliefs which are enduring and

widely accepted by members and society”.

 “Customs are behaviours that are culturally approved

or acceptable ways of behaving in specific situations”.

 Social and cultural Environment
 Why is cultural awareness important for companies to
be successful in International Business?
 People of one culture may not like what people of another
culture like.
 Same product may be consumed differently by people of
different cultures.
 Eg:- Shrimps are consumed differently in Spain, USA and Japan.
 Difference in language (and expressions) poses problems. At
times translations can be ludicrous .
 Eg:- Names of brands can have different meanings - ‘Nova’ (a
Chevrolet car) in Spanish means ‘does not go
 Colours have different significance in different countries.
 Eg:- White in China is associated with death and sorrow while it is
bridal attire (associated with happiness) in many countries in the
west.
 Social stigmas are attached with many products (Eg:- beef)
 Working styles are different (like in ‘High context culture’
and ‘Low context culture’).
 Subcultures exist within in many countries, which also are of
significance in International Business.
 Social and cultural Environment
 What are ‘High Context culture’ and ‘Low context
culture’?
 In high context culture getting to know the person and
building a relationship over a time is of utmost importance.
A person’s words are his ‘bonds’. Negotiations in countries of
this culture, take a long time because parties spend a lot of
time to know each other, in order to find out whether the
other can be trusted or not. People of this culture fear social
ostracism Litigations are not many. Competitive bidding is
infrequent.
 In Japan, China, Middle east etc High context culture
exists.
 In low Context culture messages / communications are
mostly explicit ( verbal / Written). In low context culture
fear of law generally makes a person abide by the
negotiated terms. People in the low context culture resent
intrusion into their private space. Negotiations proceed
relatively quickly. But many cases of litigations are found.
 In USA, Northern Europe this type of culture exists.
 Social and cultural Environment
 Why countries are useful but not perfect cultural
references?
 Countries are useful cultural references because people in a
country tend to be similar because - (1) of common national
identity (2) because they abide by same laws/ rules.
 But in spite of above reasons for similarity people within the
same country differ because - (1) people of different origin
(or nationality) stay in a country (2) because there are
subcultures within a country.
 Do cultures undergo changes?
 There is a set of basic value systems ( usually transmitted
by parents), which get formed by the age of ten. These do
not change easily
 Individual/ societal values get formed gradually. These
change over time – either by choice or by force. ( Change
by force/imposition is called cultural imperialism.)
 What are the two strong cultural stabilisers?
 Social and cultural Environment
 Which are the different behavioural practices / socio
economic factors that influence business practices?
 Social and cultural Environment
 What are the strategies that a company can adopt to
bring about cultural changes to transfer new products
from one country to another?
 It is very difficult to change the basic value system. So it is
wiser to avoid interfering with them.
 Certain adjustments required for adaptations are costly
while some are not. Cost benefit analysis for making the
adjustments should be considered by the company.
 Large number of changes introduced increases the
resistance to change. It should be avoided.
 Employees should be involved in decision making process.
 Opinion leaders should be spotted to influence others.
 Timing the change correctly is vital.
 Social and cultural Environment
 What are cultural universals / commonalities?
 Athletics ,sports, dancing, family feasting, cooking, music
are examples of activities carried out universally – only they
are done differently. – “what is seemingly different is
nothing but different ways of doing the same thing”. One
has to recognise the difference.
 A global player searches for such cultural universals. This
helps him to standardise elements of marketing mix.
 Recent cross-cultural convergence due to increased
increased travel and improved communication is aiding the
cause of global player.
 International Trade Theories
 How does the study of trade theories help?
 The theories help the Govt of the country and the
companies to determine:
 What and how much should be produced within the

country and exported to which country?

 What and how much should be imported and from

where?
 The theories also guide the government to decide where
and how much it should interfere with the free flows
keeping the national objectives in mind.
 International Trade Theories
 Which are the major theories? How do they explain
natural trade between nations and what do they
prescribe for trade relations?
1. Mercantilisms theory
 The foundation of the theory dates back to nearly 500 years
ago
 The theory focused on increasing trade surplus – which
meant increasing treasure (normally in form of gold)
During colonial rule the theory was used to benefit colonial
power. Colonies were forced to import costly finished
/manufactured goods from the ruling country and export the
raw material at cheap price.
 Now instead of treasure (gold ) the country with the trade
surplus holds the currency of the country with the trade
deficit (- or investments in the currency). In other words it
grants credit to the country with deficit trade – this of
advantage only if it can effectively buy sufficient
goods/services with the credit.
 International Trade Theories
 Neo-mercantilism seeks to achieve social and
political objectives by trade surplus.
2. Absolute advantagism
 Adam Smith proposed that consumer in a country will
benefit by buying foreign products if they are cheaper than
domestic ones.
 What the theory implies is – every country will specialise in
producing those items that give it competitive advantage.
 The specialisation will make the labour more efficient in
producing those items. Economy of scale will also help them
in producing those items at lower cost.
 The competitive advantage is either – natural or acquired.
 International Trade Theories
3. Natural advantagism theory
 Natural advantage can be due to
- natural resources available. Eg:- availability of petroleum
in middle eastern countries.
- climate. Eg:- climate helps in the production of tea in north
east india.
- land fertility and suitability. Eg:- jute in Bangladesh.
 Companies can gain by processing the raw agricultural
product and convert it to a form that is more efficiently and
economically transported – thus save transportation cost.
4. Acquired advantage theory
 Certain countries have acquired the skill and technology to
produce certain items better than others . Eg:- Japanese in
producing steel and electronic goods.
 International Trade Theories
5. Comparative advantage theory:
 A country must choose to produce the items it produces
best and import the rest even if it has absolute advantage in
all the products – this is justifiable due to allocation of
limited resources.
 Limitations of the theory lies in its assumption of full
utilisation of its resources. Eg:- Full employment may not be
a valid assumption
- Another reason why the strategy advocated by this theory
may not be totally satisfactory – for the risk associated with
over specialisation in certain items and overdependence on
imports of certain items.
- The other limitations of the theories of specialisation are:
sharing of gains between the countries may be a point of
dispute.
- Transort cost may offset the benefits of specialisation.
- Resources are not as mobile as the assumes.
 International Trade Theories
6. Theory of country size
 Larger countries ( in terms of land) are likely to have more
variety of resources than smaller ones. So they are more self
sufficient hence trade less.
 The transportation cost of procuring items from
neighbouring countries is higher than processing it from a
domestic source within the country.
 Domestic demand is often large enough for an economic
scale of production.
7. Factor Proportion theory
 According to this theory the factors ( of production) which
are more in existence are cheaper while the scarcer factors
are costlier.
- The production factors are – labour land and capital.
 Countries produce items requiring the factors available with
them (- how ever technology also decides the amount of the
factors required for a given output).
 International Trade Theories
8. Product life cycle theory of trade
 Phases of ‘Product life cycle’ are 1. Introduction 2. Growth
3. Maturity 4. Decline.
 The production starts in the country where the product was
first researched and developed. These countries are always
industrialised and advanced.
 Then the product shifts to other countries ( developing
countries) as the product reaches the stage of maturity in
the country where it originated.
 Some exception to the PLC theory of trade are –
(a) When products have very short cycles because of rapid
innovation.
(b) Products where the cost is of little concern to the
customer
(c) Products requiring specially skilled labour – which takes
time to develop.
 International Trade Theories
9. Country Similarity theory
 Trade takes place among dissimilar countries by the other
theories.
 But this theory points out why trade today is mostly
between countries similar in – climate, factor endowment
and innovative capability.
 Trade is influenced by :
- Economic power of the consumers in industrialised
countries
- Distance between countries (– transportation costs being
less).
- Similarity in culture
- relationship between the countries.