INTERNATIONAL BUSINESS MANAGEMENT

LESSON 2: WHY GO INTERNATIONAL?
Canada The Canadian economy’s growth rate is like ly to pick up in 1996. An index of business confidence shows higher real spending on machinery and equipment in the first half of 1996, reflecting a high level of producer confidence. On the consumption side, however, the picture is less promising. Low consumer demand has been strengthened by a high unemployment rate of 9.8 per cent, high household debt levels, and consumer worries over job security. Even so, retail sales are expected to pick up soon. So, the forecast for personal expenditure growth, rather than being downgraded, remains unchanged. But the low spending level has helped in restraining inflation. Consumer prices rose by only 13 per cent in the first half of’ 1996 well within the central bank’s target range of between 1 and 3 per cent allowing the fifth round of interest rate cuts in 1996 independent of US economic conditions. As the data available so far suggest that an upturn on the industrial front is Linder way. Also, the trade surplus is favourable as strong net external demand enhanced by the low Canadian dollar, low domestic demand, and a stronger US growth rate led to a Canadian $4.10 billion trade surplus in May 1996. Japan In recent months, the prospects of a sustained recovery in Japan have improved although the Economic Planning Agency has warned that the recovery ‘is still fragile, and that expansionary trends have yet to be confirmed. Recently, there have been increasing signs of an upturn in private consumption, led by Improving job opportunities and rising wages. Retail sales rebounded in June 1996, rising by 2 per cent over June 1995, after posting declines in two previous months. Consensus Inc.’s forecasts for private consumption growth in both 1996 and 1997 have been upgraded to 3.5 and 2.6 per cent respectively. On the supply side, however, the picture is less optimistic, with another fall industrial output growth indicating that inventories are still being worked off. Meanwhile, utility costs rose by 1.3 per cent while food prices jumped by 6.8 per cent in July 1996. However, Consensus Inc. forecasts negligible inflation pressure in 1996 although more significant price rises are expected in 1997, Although the trade surplus narrowed to Y3 trillion in the first, half of 1996, the pace of contraction is slowing due to Japan’s higher competitiveness following the depreciation of the yen last year Australia Despite stronger thanexpected economic growth in the first quarter of 1996, the “Reserve Bank of Australia (RBOA) lowered the cash rate by 0.5 per cent to 7 per cent in endJuly 1996. The governor of the RBOA said that the lower, and declining, rate of growth o f wages suggested that economic growth had fallen below its potential levels. Moreover, recent indicators of consumer spending point to a softer private

We have discussed the nature of international business and the precautions that the multinational companies should take while operating in foreign countries. The basic question of “why do the Business firms of a country go to other countywide?” might have been in your minds. Therefore, we answer this question, before proceeding further. To achieve Higher Rate of Profits: As we have discussed in various courses/subjects like Principles and Practice of Management, Managerial Economics and Financial Management that the basic objective of the business firms is to earn profits. When the domestic markets do not promise a higher rate of profits, business firms search for foreign markets, which promise for higher rate of profits. For example, Hewlett Packard earned 85.4% of its profits from the foreign markets compared to that of domestic markets in 1994. Apple earned US $ 390 million as net profit from the foreign markets and only US $ 310 millions as net profit from its domestic market in 1994. Expanding the Production Capacities beyond the Demand of the Domestic Country: Some of the domestic companies expanded their production capacities more than the demand for the product in the domestic countries. These companies, in such cases, are forced to sell their excess production in foreign developed countries. Toyota of Japan is an example. (See Box 1. 3 for Economies of Developed Countries). Article 2.1

The Economies of Developed Countries
United States In the US, the rate of growth of Gross Domestic Product (GDP) rose by 2.6 per cent in the second quarter of 1996 over the corresponding period of 1995 much higher than the first quarter growth rate of 1.7 per cent. The rate of growth of personal consumption rose strongly throughout the first half of 1996 overshadowing the economy’s performance on the business investment front, which slowed between April and June 1996. Buoyant consumer demand has prompted further speculation about the future course of the inflation curve and shortterm interest rates. Recent data present a contradictory picture. While some surveys point to a stronger rate of growth of industrial production in the third quarter of 1996, the growth rate of durable goods orders fell by 0.8 per cent between May and June 1996. Besides, statements by Alan Greenspan, the Chairman of the Federal Reserve, confirm a weaker growth prognosis. With growth showing signs of easing, there is a likelihood that interest rates will be on hold. But Consensus Inc. predicts that 10-year treasury bond rates will increase from the 1995 level of 5.6 per cent to 6.7 per cent by November 1996,

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consumption growth rate in the second quarter of 1996 while excess capacity and high inventories suggest that industrial Production growth is likely to remain depressed over the next few months. After a peak of 5.1 per cent in the last quarter of 1995, inflation declined to 3.4 per cent in the first half of 1996. This trend has also been reinforced by the weakening growth of weekly earnings, which averaged 3.7 per cent in the first six months of 1996. However, an upward pressure on wages is building, which will determine the course of both inflation and monetary policy in the short run. In fact, Consensus Inc, expects that the 90day ‘bank bill rate will fall to 6.8 per cent over the next three months. Severe Competition in the Home Country: The countries oriented towards market economies since 1960s had severe competition from other business firms in the home countries. The weak companies, which could not meet the competition of the strong companies in the domestic country, started entering the markets of the developing countries. Limited Home Market: When the size of the home market is limited either due to the smaller size of the population or due to lower purchasing power of the people or both, the companies internationalise their operations. For example, most of the Japanese automobile and electronic firms entered US, Europe and even African markets due to the smaller size of the home market. ITC entered the European market due to the lower purchasing power of the Indians with regard to high quality cigarettes. Similarly, the mere six million population of Switzerland is the reason for Ciba Geigy to internationalise its operations. In fact, this company was forced to concentrate on global market and establish manufacturing facilities in foreign countries. Political Stability vs Political Instability: Political stability does not simply mean that continuation of the same party in power, but it does mean the continuation of the same policies of the Government for a quite longer period. It is viewed that USA is a politically stable country. Similarly, UK, France, Germany, Italy and Japan are also politically stable countries. Most of the African countries and some of the Asian countries like Malaysia, Indonesia, Pakistan and India are politically instable countries. Business firms prefer to enter the politically stable countries and are restrained from locating their business operations in politically instable countries. In fact, business firms shift their operations from politically instable countries into politically stable countries.

Article 2.2
Ibm Gives Fastest Computer to the World International Business Machines Corporation unveiled the fastest computer in the world, which the US government will use to simulate nuclear weapons tests. The supercomputer, able to process more in a second than one person with a calculator could do in 10 million years, was made for the US department of energy’s Accelerated Strategic Computing Initiative (ASCI.). The system could ease congressional opposition to the United States signing the Comprehensive Test Ban Treaty, banning all actual nuclear weapons testing worldwide. “Without underground testing, we need simulations to make sure the stockpile is safe, reliable and operational,” said David Cooper, a member of the President’s Council on Computing and chief information officer of Lawrence Livermore Lab in California, where the system will be run. Called ASCI, White super computer will churn the factors involved in a nuclear detonation, including the weapon’s age and design. This could eventually allow the government to manage its entire stockpile of nuclear weapons without any real nuclear tests, Cooper said. The US Senate last year filed to ratify the test ban treaty, insisting on the nation’s right to continue testing nuclear weapons underground. “If you polled the weapons designers right now, they would say that testing is still more effective,” Cooper said. The new supercomputer is a major step toward full simulation but is not yet capable of testing the nuclear weapons stockpile to standards set by experts. A system that could replace actual nuclear tests must have a computing capability of 100 teraflops, or trillions of operations per second, versus the ASCI White computing capacity as tested by IMB of 12.3 teraflops, Cooper said “We’re still on timescale to do by 2004,” he added. The system contains 8,192 copper microprocessors and is 1,000 times more powerful than its chess playing predecessor ‘Deep Blue,’ which defeated World Champion Gary Kasparov in 1997. IBM Is selling the system, which will take up the floor space equivalent to two basketball courts and weighs as much as 17 fullsized elephants to the DOE for $110 million. But designing the most powerful computer in the world has other pay-offs of IBM, including bragging rights that could allow it to take a greater share in the supercomputer market, as well as the use of the advanced technology in its lower-level computer products. “We’re seeing more and more that deep computing will become a critical element In how real business is run every day, and that It’s not just in the territory of the propeller heads,” said Nicholas Donofrio, IBM senior vicepresident technology and manufacturing. High Cost of Transportation: Initially companies enter foreign countries through their marketing operations. At this stage, the companies realise the challenge from the domestic companies. Added to this, the home companies enjoy higher profit margins whereas the foreign firms suffer from lower profit margins. The major

INTERNATIONAL BUSINESS MANAGEMENT

Availability of Technology and Managerial Competence:
Availability of advanced technology and managerial competence in some countries act as pulling factors for business firms from the home country. The developed countries due to these reasons attract companies from the developing world. In fact, American companies, in recent years, depend on Japanese companies for technology and management expertise.’ (Box 1.4 presents information regarding latest technology in computers).

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factor for this situation is the cost of transportation of the products. Under such conditions, the foreign companies are inclined to increase their profit margin by locating -their manufacturing facilities in foreign countries where there is enough demand either in one country or in a group of neighboring countries. For example, Mobil, which was supplying the petroleum products to Ethiopia, Kenya, Eritrea, Sudan etc. from its refineries in Saudi Arabia, established its refinery facilities in Eritrea in order to reduce the cost of transportation. Similarly, Caterpillar located its manufacturing facilities at different centers in order to reduce the cost of transportation. This company produces highvalue added parts in limited locations and less valued and noncritical components and assembles the final products in a number of foreign countries. Nearness to Raw Materials: The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting the companies from various foreign countries. Most of the US based and European based companies located their manufacturing facilities in Saudi Arabia, Bahrain, Qatar, Oman, Iran and other Middle East countries due to the availability of petroleum. Theses companies, thus, reduced the cost of transportation. Availability of Quality Human Resources at Less Cost : This is a major factor, in recent times, for software, high technology and telecommunication companies to locate their operations in India. India is a major source for high quality and low cost human resources unlike USA, developed European countries and Japan. Importing human resources from India by these firms is costly rather than locating their operations in India. Hence these companies started their operations in India and other similar countries. To Avoid Tariffs and Import Quotas: It was quite common before globalization that governments imposed tariffs or duty on imports to protect the domestic company. Sometimes Government also fixes import quotas in order to reduce the competition to the domestic companies from the competent foreign companies. These practices are prevalent not only in developing countries but also in advanced countries. For example, Japanese companies are competent competitors to the US companies. USA imposed tariffs and quotas regarding import of automobiles and electronics from Japan. Harley Davidson of USA sought and got five years of tariffs protection from Japanese imports. Similarly, Japan places high tariffs on imports of rice and other agricultural goods from USA. o avoid high tariffs and quotas, companies prefer direct investment to go globally. For example, companies like Sony, Honda and Toyota preferred direct investment if] various countries by establishing subsidiaries or through joint ventures in various foreign countries including USA and India, Similarly, General Electrical, and Whirlpool also have foreign subsidiaries. Xerox, Canon, Phillips, Unilever, Lucky Gold Star, South Korean Electronics Company, Pepsi, Coca Cola. Shell, Mobil etc. established manufacturing facilities in various foreign countries in order to avoid tariffs, import duties and quotas.

Having discussed the need for international business, we shall discus the basis for international business.

INTERNATIONAL BUSINESS MANAGEMENT

Stages of Internationalisation
The internationalization process generally includes fives stages. Viz domestic company, international company, multinational company, global company and transnational company. Now, we will study stage of internationalization in detail. Stage 1: Domestic Company Domestic company limits its operations, mission and vision to the national political boundaries. These companies focus its view on the domestic market opportunities, domestic suppliers, domestic financial companies, domestic customers etc. These companies analyze the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment. The domestic companies’ unconscious motto is that, “if its not happening in the home country, it is not happening” The domestic company never thinks of growing globally. If it grows, beyond its present capacity, the company selects the diversification strategy of entering into new domestic markets, new products, technology etc. The domestic company does not select the strategy of expansion/penetrating into the international markets. Stage 2: International Company Some of the domestic companies, which grow beyond their production and/or domestic marketing capacities, think of internationalizing their operations. Those companies who decide to exploit the opportunities outside the domestic country are the stage two companies. These companies remain ethnocentric or domestic country oriented. These companies believe that the practices adopted in domestic business, the people and products of domestic business are superior to those of other countries. The focus of these companies is domestic but extends the wings to the foreign countries. Markets and extend the same domestic operations into foreign markets. In other words, these companies extend the domestic product, domestic price, promotion and other business practices to the foreign markets. Normally internationalization process of most of the global companies starts with this stage two process. Most of the companies following this strategy due to limited resources and also to learn from the foreign markets gradually before becoming a global company without much risk. The international company holds the marketing mix constant and extends the operations to new countries. Thus the international company extends the domestic country marketing mix and business model and practices to foreign countries. Stage: 3 Multinational Company Sooner or later, the international companies learn that the extension strategy (i.e., extending the domestic product, price and promotion to foreign markets) will not work. The best example is that Toyota exported Toyopet cars produced for Japan in Japan to USA in 1957. Toyopet was not successful in USA. Toyota could not sell these cars in USA as they were over priced, underpowered and built like tanks. Thus these cars were not suitable for the US markets. The unsold cars were shipped back to Japan.
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Toyota took this failure as a rich learning experience and as a source of invaluable intelligence but not as failure. Toyota, based on this experience designed new models of cars suitable for the US market. The international companies turn into multinational companies when they start responding to the specific needs of the different country markets regarding product, price and promotion. This statue of multinational company is also referred to as multidomestic. Multidomestic company formulates different strategies for different markets; thus, the orientation shifts from ethnocentric to polycentric. Under polycentric orientation the offices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. Thus they operate like a domestic company of the country concerned in each of their markets. Philips of Netherlands was a multidomestic company of this stage during 1960s. It used to have autonomous national organizations and formulate the strategies separately for each country. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based oil global strategy. Global strategy was based on focusing the company resources to serve tile world market. Philips strategy was to work like a domestic company, and produce a number of models of the product consequently it increased the cost of production and price of the product. But the Matsushita’s strategy was to give the value, quality, design and low price to the customer. Philips lost its market share as Matsushita offered more value to the customer Consequently Philips changed its strategy and created “industry main groups” in Netherlands which are responsible for formulating a global strategy for producing, marketing and R & D. Stage 4: Global Company A global company is the one, which has either global marketing strategy or a global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces the products globally and focuses on marketing these products domestically. Harley designs and produces super heavy weight motorcycles in USA and markets in the global market. Similarly, Dr. Reddy’s Lab designs and produces drugs in India and markets globally. Thus Harley and Dr. Reddy’s Lab are examples of global marketing focus. Gap procures products in the global countries and markets the products in its retail organization in USA. Thus gap is an example for global sourcing company. Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in Germany. The Gap understands the US consumer and got competitive advantage. Stage 5:’Fransnational Company Transnational company produces, markets, invests and operates across the world. It is an integrated global enterprise which links global resources with global markets at profit. There is no pure transnational corporation. However, most of the transnational

companies satisfy many of the characteristics of a global corporation. Characteristics of a Transnational Company The characteristics of a transnational company include: geocentric orientation, scanning or information acquisition, longrun visions etc. We discuss these characteristics in detail. (i)Geocentric Orientation: A transnational company is geocentric in its orientation. This company thinks globally and acts locally. This company adopts global strategy but allows value addition to the customer of a domestic country. This company allows adaptation to add value to its global offer. Table 1.1 presents stages of internationalization. The assets of a transnational company are distributed throughout the world, independent and specialized. The R & D facilities of a transnational company are spread in many countries, but specialized in each Country based on the local needs and integrated in world R & D project. Similarly, the production facilities are spread but specialized and integrated. In case of Caterpillar, manufacturing and assembly facilities are located in many countries. Components are shipped for assembly and the assembled product is shipped to the place o f the customer. Units of the transnational corporation in different countries create and develop the knowledge in all functions and share among them. Thus knowledge and experience is shared jointly. Transnational gains power and competitive advantage by developing and sharing knowledge and experience. of the knowledge among all, Colgate operating companies across globe is an example here. (ii) Scanning or information Acquisition: Transnational companies collect the data and information worldwide. These companies scan the environmental information regarding economic environment, political environment, social and cultural environment and technological environment. These companies collect and scan the information regardless geographical and national boundaries. (iii) Vision and Aspirations: The vision and aspiration of transnational companies are global, global markets, global customers and grow ahead of other global/transnational companies (iv) Geographic Scope: The transnational companies scan the global data and information. by doing so, they analyze the global opportunities regarding the availability of resources, customers, markets, technology, research and development etc. Similarly, they also analyze the global challenge and threats like competition from the other global companies, local companies of host countries, political uncertainties and the like. They formulate global strategy. Thus the geographic scope of a transnational company is not limited to certain countries in analyzing opportunities, threats and formulating strategies. (v) Operating Style: Key operations of a transnational are globalize. The transnational companies globalize the functions like R & D, product development, placing key human resources, Procurement of high valued material etc. For example, the R &D activity of Proctor & Gamble, and key human resource

INTERNATIONAL BUSINESS MANAGEMENT

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activity of Colgate are the joint and shared activity of the units of these companies in various countries. . vi) Adaptation: Global and transnational companies adapt their products, marketing strategic and other functional strategies to the environmental factors of the market concerned, For example, Mercedes Benz is a super luxury car in North America, luxury automobile in Germany, standard taxi in Europe. (vii) Extensions: Some products do not require any change when they are marketed in other countries. Their market is just extension. For example, Casio calculators of Japan, Hero pens of China, and BIC’s line of pens, butane lighters and razors. (viii) Creation through Extension: Transnational companies create the global brand through extending the product to the new market. Rothmans Cigarette extended its product to many European countries and African countries and created it as global and national basis (ix) Human Resource Management Policy: The transnational company’s human resource policy is not restricted by national political or legal constraints. It selects the best human resources and develops them regardless of nationality, ethnic group etc. But the international company reserves the top and key positions for nationals (x) Purchasing: Transnational company procures world-class material from the best source across the globe.

Unfortunate you cannot find good foreigners who are willing to live in the United States, were out headquarters is located. American executives are more mobile. In addition, American have the drive and initiate we like. In fact, the European nationals would prefer to report to an American rather than to so other European”. Company C: “We are a multinational firm. Our product division executives have world w profit responsibility. As our organizational chart shows, the United States is just one region o par with Europe, Latin America, Africa, etc. in each division”. The executives from company C go on to explain, “the worldwide product division cone is rather difficult to implement. The senior executives in charge of these divisions have Ii overseas experience. They have been promoted from domestic posts and tend to view fore consumer needs as really basically the same as ours. Also, product division executives tend focus on the domestic market because the domestic market is larger and generates more revenue than the fragmented foreign markets. The rewards are for global performance, but strategy is focus on domestic. Most of our senior executives simply do not understand what happens overseas and really do not trust foreign executives, even those in key positions”. Company D (nonAmerican) : ‘We are a multinational firm. We have at least 18 nationalities represented at our headquarters. Most senor executives speak at least two languages. About 30 percent of our staff at headquarters is foreigners. He continues by explaining “since the voting shareholders must by law come from the home country, the home country’s interest must be given careful consideration. But we are proud of our nationality; we should not be ashamed of it. Infact, many times we have been reluctant to use homecountry ideas overseas, to our detriment, especially in our U.S. Subsidiary. Our country produces good executives’ who tend to stay with us a long time. It is harder to keep executives from the United States.

INTERNATIONAL BUSINESS MANAGEMENT

Tutorial
Questions for Discussion Q:1 what are the various reasons which motivates the domestic firms to go for international business? Q:2 what are the stages of internationalization?

Tutorial
Case Discussion
Which Company is Truly Multinational?

Four senior executives of the world’s largest firms with extensive holdings outside the host country speak. Company A: “We are a multinational firm. We distribute our products in about 100 countries We manufacture in over 17 countries and do research and development in three countries. We look at all new investment projects both domestic and overseas using exactly the same criteria”. The execution from company A continues, “of course most of the key posts in our subsidiaries are held by homecountry nationals. Whenever replacements for these men are sought, it is practice, if not the policy, to look next to you at the head office and pick someone (usually a ho country national) you know and trust”. Company B. “We are a multinational firm. Only 1 percent of the personnel in our affiliate companies are nonnational. Most of these are US executives in temporary assignments. In major markets, the affiliates managing director is of the local nationality”. He continues, “Of course there are very few nonAmericans in the key posts at headquarter. The few we have are so Americanized that we usually do not notice their nationality.

Questions for Discussion
1. Which company is truly multinational? 2. What are the attributes of a truly multinational company? 3. Why quibble about how multinational a company is?

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