IBM UNIT 1 - INTRODUCTION

Topics - International Business –Definition – Internationalizing business-Advantages –

factors causing globalization of business- international business environment – country
attractiveness –Political, economic and cultural environment – Protection Vs liberalization of
global business environment.

1.1 International Business

 Comprises all commercial transactions (private and governmental, sales, investments,

logistics, and transportation) that take place between two or more regions, countries
and nations beyond their political boundaries.
 Students majoring in International Business at Saunders College of Business, learn
how to serve customers in international markets.
 They also learn how to take a local business global.
 Immersion in another nation's culture, values, and business practices is the key to
international business success.
 Students gain an understanding of how people in other countries live and develop
business strategies that meet the needs and wants of customers. Specific courses may
include topics in strategic planning, marketing, government relations, and policy
analysis.

 A successful product in one country does not guarantee success in another.

 At Saunders College, we teach our students what it really means to have a global
business.
 We stress the values of diversity and understanding – students graduate with the
ability to take a problem and solve it while also factoring in variables such as
language, customs and government policy.

1.2 Definition:

 International Business is the process of focusing on the resources of the globe and
objectives of the organisations on global business opportunities and threats.
 International business defined as global trade of goods/services or investment.
 More comprehensive view does not focus on the “firm” but on the exchange process
Free Trade occurs when a government does not attempt to influence, through quotas
or duties, what its citizens can buy from another country or what they can produce
and sell to another country.


1
  The Benefits of Trade allow a country to specialize in the manufacture and export of
products that can be produced most efficiently in that country.
 The Pattern of International Trade displays patterns that are are easy to understand
(Saudi Arabia/oil or Mexico/labor intensive goods).
 Others are not so easy to understand (Japan and cars).

1.2.1 Nature of International Business

1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

1.2.2 Scope of International Business

1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange

1.2.3 Need for International Business

1. To achieve higher rate of profits
2. Expanding the production capacity beyond the demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions
6. Availability of technology and managerial competence
7. Cost of manpower, transportation
8. Nearness to raw material
 9. Liberalization, Privatization and Globalization (LPG)
10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO), decreasing
costs in telecommunications and transportation; and freer capital markets

1.2.4 Reasons for Recent International Business Growth

1. Expansion of technology
2. Business is becoming more global because
 Transportation is quicker
 Communications enable control from afar
 Transportation and communications costs are more conducive for
international operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources
enable Companies to take better advantage of international opportunities

1.2.5 Problems in International Business

1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy

1.2.6 Methods of International Business

1. Joint Ventures
2. Contract Manufacturing
3. Licensing
4. Franchising
5. Exporting

1. Joint Venture
 The term ‘Joint Venture’ applies to those strategic alliances where there is equity
participation from both the foreign entrant and the local collaborator.
 The equity participation can be of different ratios, ranging from a minority stake,
equal stake to a controlling stake or a more predominant majority stake.
 From the perspective of the foreign entrant, a joint venture has the following
advantages:
o Decrease the capital risk involved.
 o Leverage the local company’s facilities, in manufacturing, distribution and
retailing.
o Leverage the local company’s managerial capability in the local environment.
o Leverage the local company’s contacts with the government to get green
signals.
 Many companies avoid having joint venture due to the complexity involved in
coordinating policies, decisions and execution with a different company.
 There are instances when companies which have the ability to take the risk involved
in entering a new market still enter into joint venture.
 This is often a result of the policies laid out by governments in many emerging
markets.
 For example, China has a policy wherein foreign companies have to enter joint
collaboration with state owned companies to even set up shop there.
 As in India, the government has policies which prevent foreign companies from
having full ownership in certain industries. In such cases, foreign companies end up
having to enter into joint venture to take advantage of the low cost of manufacturing
and the large size of the markets.
 Still, the disadvantages or hurdles stay which a foreign company has to deal with to
make its venture successful. Some of disadvantages of joint venture are:
o Difference in culture.
o Difference in managerial styles.
o Differences in the motivation behind the participation. • Communication
problems.
o Selection of the right partner.

2. Contract Manufacturing
 Contract manufacturing has a limited role as an entry strategy and is more often used
as a compliment to other entry strategies.
 It is used in conjunction with strategies like wholly owned subsidiaries or
franchising.
 Contract Manufacturing is also often used when a company enters a new market and
has an activity that is required but is not a core nor is proprietary in nature, like the
manufacturing of clothes, or simple goods like clothing irons and other consumer
goods.
 In most of the industries where contract manufacturing is resorted to, the core
activities of the company lie more in marketing and research and development rather
than in manufacturing.
 Below are the lists of advantages and disadvantages in resorting to contract
manufacturing as an entry method.

Advantages:

o Less capital required.

o Low managerial risk.
 o Focus on core activities.
o Less complicated exit problems.
o Less complicated division of responsibility.

Disadvantages:

o Chance for a lack of control on certain product

parameters. o Differences in quality standards.
o Scalability of problems.
o Selection of vendors.

3. Licensing
 Licensing is a common method of international market entry for companies with a
distinctive and legally protected asset, which is a key differentiating element in their
marketing offer.
 It involves a contractual arrangement whereby a company licenses the rights to
certain technological know-how, design, patents, trademarks and intellectual property
to a foreign company in return for royalties or other kinds of payment.
 For example, Disney's mode of entry in Japan had been licensing.
 Because little investment on the part of the licensor is required, licensing has the
potential to provide a very large ROI.
 However, because the licensee produces and markets the product, potential returns
from manufacturing and marketing activities may be lost.
 Here are several conditions where licensing is favorable over other entry methods:
o Import and investment barriers.
o Legal protection possible in target environment.
o Low sales potential in target country.
o Large cultural distance.
o Licensee lacks ability to become a competitor.
 Licensing offers businesses many advantages, such as rapid entry into foreign
markets and virtually no capital requirements to establish manufacturing operations
abroad.
 Returns are usually realized more quickly than for manufacturing ventures.
 The other major advantage of licensing is that, despite the low level of local
involvement required of the international licensor, the business is essentially local
and is in the shape of the local business that holds the license.
 As a result, import barriers such as regulation or tariffs do not apply.

4. Exporting
 Exporting is one of the methods that organizations can use to enter foreign markets.
 In this entry method, products produced in one country are marketed in another
country through marketing and distribution channels.
 Thus, it requires a significant investment in marketing strategies.
  In reality, exporting is the most traditional and well-established form of operating in
foreign markets.
 It can be further categorized into direct or indirect export.

Direct Export:

 The organization uses an agent, distributor, or overseas subsidiary, or acts via a

Government agency.
 Usually, companies export through local agents or distributors mainly because they
have local knowledge that is important in conducting the business; they speak the
language, understand the local business, and know who the customers are and how to
reach them.

Indirect Export:

 Products are exported through trading companies (common for commodities like
cotton and cocoa), export management companies, piggybacking and counter-trade.
 The main advantage of indirect exporting is that the manufacturer/exporter does not
need too much expertise and can count on trading companies and/or export
management companies’ knowledge.
 In the counter-trade method there are two separate contracts involved, one for the
delivery and payment for the goods supplied and the other for the purchase and
payment for the goods imported.
 The seller, in fact, accepts products and services from the importing country in partial
or total payment for his exports. This method is suited for situations where
competition is low and currency exchange is difficult.

5. Wholly Owned Subsidiaries

 Many organizations prefer to establish their presence in foreign markets with 100%
ownership through wholly owned subsidiaries.
 Under this method, organizations obtain greater control over operations and higher
profits since there is no ownership split agreement.
 However, such entry method requires large investments and faces higher risks,
especially in the political, legal and economical arenas.
 There are two approaches for the wholly owned subsidiaries entry method; one is
through acquisition and the other through green field investments.
 Greenfield investment means using funds to build an entirely new facility.
 Even though such approach entails full control and no risk of cultural conflicts, its
costs are extremely high, and returns on investment are obtained in the long-run due
to the extent of time required to build the facility, start operations, and attain
economies of scale and the experience-curve.

1.3 Globalization
  Globalization implies the opening of local and nationalistic perspectives to a broader
outlook of an interconnected and interdependent world with free transfer of capital,
goods, and services across national frontiers.

1.3.1 Benefits of Globalization

1. Free Trade
 Free trade is a way for countries to exchange goods and resources.
 This means countries can specialize in producing goods where they have a
comparative advantage (this means they can produce goods at a lower opportunity
cost).
 When countries specialize there will be several gains from trade
o Lower prices for consumers
o Greater choice of goods
o Bigger export markets for domestic manufacturers
o Economies of scale through being able to specialise in certain goods

2. Free Movement of Labor

 Increased labor migration gives advantages to both workers and recipient countries.
 If a country experiences high unemployment, there are increased opportunities to
look for work elsewhere.
 This process of labor migration also helps reduce geographical inequality.
 This has been quite effective in the EU, with many Eastern European workers
migrating west.
 Also, it helps countries with labor shortages fill important posts.
 For example, the UK needed to recruit nurses from the far east to fill shortages.
 3. Increased Economies of Scale.
 Production is increasingly specialized.
 Globalization enables goods to be produced in different parts of the world.
 This greater specialization enables lower average costs and lower prices for
consumers.

4. Greater Competition
 Domestic monopolies used to be protected by lack of competition.
 However, globalization means that firms face greater competition from foreign firms.

5. Increased Investment
 Globalization has also enabled increased levels of investment.
 It has made it easier for countries to attract short term and long term investment.
 Investment by multinational companies can play a big role in improving the
economies of developing countries.

1.3.2 Factors Causing Globalization of Business

1. Technological Advancement
 Technological advancement at almost every level, from widespread Internet access to
standardization of transport containers and rapid global transportation, serves as a
key driver of globalization.
 Standardization of manufacturing processes allows businesses to harness the
economies of scale that make it feasible to serve a global-sized market, and reliable,
worldwide transportation provides the necessary element to build a supply chain to
serve that market.
 The 24/7 nature of the Internet gives consumers easy access to products from across
the world and, in turn, drives a need for globalization in marketing.

2. Global Communication
 Global communication, aided in large part by online communication channels, such
as social media, aid in the transmission not only of ideas, but of social norms and
wants.
 In essence, global communication leads to more homogenized tastes in everything
from tablet computers to music.
 This trend toward global-level interest in products, regardless of origin point, calls
for marketing that deals with brands from a global perspective, rather than a local or
even national level.
 Marketers must craft imagery and messages that transcend cultural particulars and
reflect universally appealing core ideas.

3. Capital Mobility
.
 Capital now moves across national borders with comparative ease, which makes it
easier for companies to secure financing from a variety of sources.
 This ability to secure funding from abroad, should domestic sources prove unwilling,
can facilitate domestic growth and foreign expansion.
 In order to secure foreign funding, a business’s marketing team must prove capable
of demonstrating that, for example, a foreign market exists for the business’s
products, and that it knows how to address both domestic and foreign markets to
capture share in both.

4. Considerations
 Globalization presents a conundrum for small business owners.
 On the one hand, small businesses often find themselves competing with and
marketing in competition with better funded global brands.
 On the other hand, these same businesses have access to a worldwide consumer base
that can prove a substantial source of income.
 Choosing between offering service to a worldwide consumer base or focusing on
capturing local and regional business means weighing a number of factors, including
logistics, expense, and the difficulty inherent in developing global-friendly marketing
materials.
 Although some businesses lend themselves to serving the global
market, selling information products for example, many small businesses
opt out of globalization.

5. The Reduction and Removal of Trade Barriers

 Since the end of World War II, the General Agreement on Tariffs and Trade (GATT)
and its successor, the WTO, have reduced tariffs and various non-tariff barriers to
trade, enabling more countries to exploit their comparative advantage.
 Developing countries continue to drive the global recovery, but their output growth is
also expected to moderate to 6.0 per cent during 2011-2012, down from 7.0 per cent
in 2010, because of the slowdown in the advanced countries and phasing out of
stimulus measures.
 Developing Asia, led by China and India, continues to show the strongest growth
performance, but some moderation (to around 7 per cent) is expected in 2011 and
2012.

6. High unemployment is the Achilles heel for the recovery

 The Uruguay Round of trade negotiations (1986-94) was the real watershed for
global trade.
 Here, a large package of measures was agreed, which freed up trade in both goods
and in services.
 As a result, the volume of world trade rose by 50% just in the 6 years following the
conclusion of the Uruguay Round.
 Equally important is the number of countries taking part in free trade negotiations.
 N

 In 1948, when the GATT treaty became effective, there were only 23 Contracting
Parties to the agreement.
 Just over 60 years later, there are now 153 member states of the WTO who all enjoy
the benefits of free trade based on the principle of comparative advantage.
 Accordingly, between 1948 and 2008, trade rose from only 5% to a massive >25% of
world GDP.
 This means countries are becoming more and more reliant upon each other for their
export earnings, income and employment.
 This exposes them to the international trade multiplier, where domestic business
cycles become vulnerable to changes in the level of economic activity in the rest of
the world.

7. Transport Costs
 Improvements in containerization have drastically lowered freight charges.
 For example, over the last 25 years, sea transport unit costs have fallen by over 70%,
while air-freight costs have fallen by 3-4% year-on-year.
 The result has been a boost in trade flows, as transport costs are now less likely to
cancel out the gains from comparative advantage.
 However the rise in sea and air transport has also caused great concern over the
negative externalities of global trade.
 Indeed recent estimates that CO2 emissions will rise by >70% by 2020 have led to
calls for green taxes on shipping transport.
 If these go ahead, they will partially offset the falls in transport costs, hence the
process of globalization will be dampened to some extent.

8. Growth of the Internet

 The growth of the internet has increased e-commerce, enabling firms of all sizes to
compete more easily in global markets.
 Essentially, the internet acts as a 24-hour shop front allowing consumers all over the
world to buy products online and around the clock, from whoever happens to be
offering the best deal.
 For the firm, it therefore provides cheap marketing with global reach, such that even
small local businesses can afford to serve customers abroad.
 Accordingly, the internet gives all firms - both domestic and MNCs alike - easier
access to foreign markets.
 We now find that international trade is no longer the sole preserve of the larger firm.
 It can now even be undertaken by, say, a local antiques shop, which can either set up
its own website or sell through an online auction like eBay.
 The end result is of course that more countries become interdependent and reliant
upon each other for the sale and provision of goods and services.

1.4 International Business Environment

  The international business environment can be defined as the environment in
different sovereign countries, with factors exogenous to the home environment of the
organization that influences decision-making on resource use and capabilities.
 This includes the social, political, economic, regulatory, tax, cultural, legal, and
technological environments.

1.4.1 Country Attractiveness

 Country attractiveness is a multidisciplinary concept at the crossroads

of development economics, financial economics, comparative law and political
science: it aims at tracking and contrasting the relative appeal of different territories
and jurisdictions competing for “scarce” investment inflows, by scoring
them quantitatively and qualitatively across ad hocseries of variables such as GDP
growth, tax rates, capital repatriation … etc.
 There are multiple factors determining host country attractiveness in the eyes of large
foreign direct institutional investors, notably pension funds and sovereign wealth
funds. Research conducted by the World Pensions Council (WPC) suggests that
perceived legal/political stability over time and medium-term economic growth
dynamics constitute the two main determinants.
 Some development economists believe that a sizeable part of Western Europe has
now fallen behind the most dynamic amongst Asia’s emerging nations, notably
because the latter adopted policies more propitious to long-term investments:
“Successful countries such as Singapore, Indonesia and South Korea still remember
the harsh adjustment mechanisms imposed abruptly upon them by the IMF and
World Bank during the 1997-1998 ‘Asian Crisis’ What they have achieved in the past
10 years is all the more remarkable: they have quietly abandoned the
“Washington consensus” [the dominant Neoclassical perspective] by investing
massively in infrastructure projects this pragmatic approach proved to be very
successful.
1.4.2 Country Attractiveness – Company Strength Matrix
(1) Geographically,
 The country is located in the centre of key trading partner countries.
 Timber Wolf would be able to expect demand from Paraguayans for its hiking boots
because of the country's rough terrain.
 Despite severe climate in particular seasons for parts of the region, Paraguay's large
subtropical climate provides a favourable condition to operate a manufacturing plant.
 The country also offers electricity and hide, major resources for Timber Wolf's shoe
manufacturing operation, at lower costs due to the abundance of hydropower and
beef products.
 Taking these factors into consideration, the Physical Geography section receives a
score of 5.

(2) Politically,
 Paraguay offers many incentives to attract foreign direct investment and has laws
to protect the rights of foreign investors.
 In addition, the country's MERCOSUR membership would provide Timber Wolf
with many advantages over trade with other member countries.
 However, the political risks of the country outweigh these opportunities.
 In fact, Paraguay's transition to democracy has not been completed.
 The leading political party is split into two oppositional factions, creating an
unstable government.
 Also, the corrupted judicial system impedes the enforcement of property rights,
and that makes expropriation a possibility.
  As a result, the Political Environment section receives a score of 3.

(3) The economic

 Ideology of Paraguay suggests that the government still plays a major role in the
economy, and the situation does not seem to change in the near future.
 The country's privatization efforts are still in their infancy.
 There has been declining annual growth, increased foreign debt, continuous
currency devaluation, and a negative balance of trade.
 In addition, Paraguay's infrastructure is weak.
 Taking these factors into consideration, the Economic Environment section
receives a score of 2.

(4) For the social-cultural environment,

 Most people in Paraguay have a basic education, making the marketing effort
easier.
 A large population in Asuncion would provide a sufficient labour pool of
potential employees, and they would also be a target market for Timber Wolf's
shoes.
 Labour unions exist, but it would not be difficult to prevent the unionization.
Taking these factors into consideration, Paraguay's Social-Cultural environment
receives a score of 6.
 Thus, Paraguay's overall score on country attractiveness is 4.

1.4.3 Political Environment

 A political system is basically the system of politics and government in a country.
 It governs a complete set of rules, regulations, institutions, and attitudes.
 A main differentiator of political systems is each system’s philosophy on the rights of
the individual and the group as well as the role of government.
 Each political system’s philosophy impacts the policies that govern the local
economy and business environment.
 There are more than thirteen major types of government, each of which consists of
multiple variations.
 Let’s focus on the overarching modern political philosophies.
 At one end of the extremes of political philosophies, or ideologies, is anarchism,
which contends that individuals should control political activities and public
government is both unnecessary and unwanted.
 At the other extreme is totalitarianism, which contends that every aspect of an
individual’s life should be controlled and dictated by a strong central government.
 In reality, neither extreme exists in its purest form. Instead, most countries have a
combination of both, the balance of which is often a reflection of the country’s
history, culture, and religion.
 This combination is called pluralism, which asserts that both public and private
groups are important in a well-functioning political system.
 Although most countries are pluralistic politically, they may lean more to one
extreme than the other.
 In some countries, the government controls more aspects of daily life than in others.
 While the common usage treats totalitarian and authoritarian as synonyms, there is a
distinct difference.
 For the purpose of this discussion, the main relevant difference is in ideology.
 Authoritarian governments centralize all control in the hands of one strong leader or
a small group of leaders, who have full authority.
 These leaders are not democratically elected and are not politically, economically, or
socially accountable to the people in the country.
 Totalitarianism, a more extreme form of authoritarianism, occurs when an
authoritarian leadership is motivated by a distinct ideology, such as communism.
 In totalitarianism, the ideology influences or controls the people, not just a person or
party.
 Authoritarian leaders tend not to have a guiding philosophy and use more fear and
corruption to maintain control.
 Democracy is the most common form of government around the world today.
 Democratic governments derive their power from the people of the country, either by
direct referendum (called a direct democracy) or by means of elected representatives
of the people (a representative democracy).
 Democracy has a number of variations, both in theory and practice, some of which
provide better representation and more freedoms for their citizens than others.
 What businesses must focus on is how a country’s political system impacts the
economy as well as the particular firm and industry.
 Firms need to assess the balance to determine how local policies, rules, and
regulations will affect their business. Depending on how long a company expects to
 operate in a country and how easy it is for it to enter and exit, a firm may also assess
the country’s political risk and stability.
 A company may ask several questions regarding a prospective country’s government
to assess possible risks:
o How stable is the government?
o Is it a democracy or a dictatorship?
o If a new party comes into power, will the rules of business change
dramatically?
o Is power concentrated in the hands of a few, or is it clearly outlined in a
constitution or similar national legal document?
o How involved is the government in the private sector?
o Is there a well-established legal environment both to enforce policies and
rules as well as to challenge them?
o How transparent is the government’s political, legal, and economic decision-
making process?
 While any country can, in theory, pose a risk in all of these factors, some countries
offer a more stable business environment than others.
 In fact, political stability is a key part of government efforts to attract foreign
investment to their country.
 Businesses need to assess if a country believes in free markets, government control,
or heavy intervention (often to the benefit of a few) in industry.
 The country’s view on capitalism is also a factor for business consideration.
 In the broadest sense, capitalism is an economic system in which the means of
production are owned and controlled privately.
 In contrast, a planned economy is one in which the government or state directs and
controls the economy, including the means and decision making for production.
 Historically, democratic governments have supported capitalism and authoritarian
regimes have tended to utilize a state-controlled approach to managing the economy.
 As you might expect, established democracies, such as those found in the United
States, Canada, Western Europe, Japan, and Australia, offer a high level of political
stability.
 While many countries in Asia and Latin America also are functioning democracies,
their stage of development impacts the stability of their economic and trade policy,
which can fluctuate with government changes.
 Within reason, in democracies, businesses understand that most rules survive changes
in government.
 Any changes are usually a reflection of a changing economic environment, like the
world economic crisis of 2008, and not a change in the government players.
 This contrasts with more authoritarian governments, where democracy is either not in
effect or simply a token process.
 China is one of the more visible examples, with its strong government and limited
individual rights.
 However, in the past two decades, China has pursued a new balance of how much the
state plans and manages the national economy.
 While the government still remains the dominant force by controlling more than a
third of the economy, more private businesses have emerged.
 China has successfully combined state intervention with private investment to
develop a robust, market-driven economy—all within a communist form of
government. This system is commonly referred to as “a socialist market economy
with Chinese characteristics.”
 The Chinese are eager to portray their version of combining an authoritarian form of
government with a market-oriented economy as a better alternative model for
fledging economies, such as those in Africa.
 This new combination has also posed more questions for businesses that are
encountering new issues—such as privacy, individual rights, and intellectual rights
protections—as they try to do business with China, now the second-largest economy
in the world behind the United States.
 The Chinese model of an authoritarian government and a market-oriented economy
has, at times, tilted favour toward companies, usually Chinese, who understand how
to navigate the nuances of this new system.
 Chinese government control on the Internet, for example, has helped propel home
grown, Baidu, a Chinese search engine, which earns more than 73 percent of the
 IBM UNIT 1 - INTRODUCTION

Chinese search-engine revenues. Baidu self-censors and, as a result, has seen its
revenues soar after Google limited its operations in the country.

Factors that influence international business

a) Economic System

 The type of economic system a country builds is a political choice. Foreign countries
often will have different economic systems from your domestic market and
adjustments often need to be made to take these differences into account.
 A country may operate in a market economy where private individuals own most of
the property and operate most of the businesses. A market economy is usually the
best economic environment for a foreign business because of the protection of private
property and contract rights.
 Some countries lean more towards a socialist economy where many industries and
businesses are owned by the state. Operating businesses in this environment will be
more difficult, but products can still be produced and sold as people still pick their
jobs and earn money.
 A few countries operate under a communistic economic system where the state
pretty much controls all aspects of the economy. Conducting business in this
environment ranges for difficult to impossible.
 The reality is that all economies are mixed economies that take parts from two or
more of the 'pure' economic systems. For example, you can conduct business in
communist China in Hong Kong and other special areas where a market economy is
allowed to operate.

b) Government System
 Businesses must often contend with different governmental systems.
 Examples include democracies, authoritarian governments, and monarchies.
 Some governments are easier to work with than others.
 Democracies, for example, are answerable to their citizens and the rule of law.
Authoritarian regimes are usually answerable to no one, including the law. It is less
risky to conduct business in democracies and constitutional monarchies (a monarch
with a constitution that protects the public and subjects the monarch to the rule of
law) than in countries with authoritarian regimes.
c) Trade Agreements
 Countries often enter into trade agreements to help facilitate trade between them.
 If your country has entered into a trade agreement with another country, conducting
business in that country will usually be easier and less risky because the trade
agreement will provide some predictability and protection.
  One great advantage, for example, is that your products will be subjected to fewer
trade barriers that serve as obstacles to exporting your products into the country.
d) Formal Trade Barriers
 A trade barrier is simply anything that makes it harder for a company to export
products to a foreign country.
 Formal trade barriers are enacted by governments for the purpose of restricting
imports to protect a country's domestic industries.
 Formal trade barriers include tariffs, which are taxes on imports that helps make
domestic products more competitive, and product quotas that limits the number of
products imported into the country.
e) Informal Trade Barriers
 Governments may impose regulations that aren't primarily promulgated as barriers to
trade but have the same effect.
 Examples can include specific product standards and health and safety standards that
businesses will be required to meet before the products can be sold.

1.4.4 Economic Environment

 International management is the management of business operations conducted in
more than one country.
 The fundamental tasks of business management including the financing production
and distribution of products and services, do not change in any substantive way when
a firm is transacting business across international borders.
 The basic management functions of planning, organizing, leading and controlling are
the same whether a company operates domestically or internationally.
 However, managers will experience greater difficulties and risks when performing
these management functions on an international scale. For example,
1. When US chicken entrepreneur Frank Purdue translated successful advertising
slogan into Spanish it takes a tough man to make a tender chicken came out as It
takes a virile man to make a chicken affectionate.
2. It took McDonald’s more than a year to figure out that Hindus in India do not
eat beef. The company’s sales took off only after McDonald’s started making
burgers sold in India out of lamb.
3. In Africa the labels on bottles show pictures of what is inside so illiterate
shoppers can know what they’re buying. When a baby food company showed a
picture of an infant on its label, the product didn’t sell very well.
4. United Airlines discovered that even colors can doom a product. The airline
handed out white carnations when its started flying from Hong Kong only to
discover that to many Asians such flowers represent death and bad luck.
 The economic environment represents the economic conditions in the country where
the international organization operates.
  This part of the environment includes such factors as economic development,
infrastructure, resource and product markets; and exchange rates, each of which is
discussed in the following sections.
 In addition factors such as inflation, interest rates, and economic growth are also part
of the international economic environment

Economic Development:

 Economic development differs widely among the countries and regions of the world.
Countries can be categorized as either developing or developed.
 Developing countries are referred to as less developed countries (LDCs).
 The criterion traditionally used to classify countries as developing is per capita
income, which is the income generated by the nation’s production of goods and
services divided by total population.
 The developing countries have low per capita incomes.
 LDCs generally are located in Asia, Africa, and South America. Developed countries
are generally located in North America , Europe and Japan.
 Most international business firms are headquartered in the wealthier, economically
advanced countries,
 However, smart companies are investing heavily in Asia, Eastern Europe and Latin
America.
 For example the number of Internet users and the rate of e-commerce in Latin
America is rapidly growing. Computer companies have launched on line stores for
Latin American customers to buy computers over the Internet.
 American Online sees Latin America as crucial to expanding its global presence,
even though Universe Online International (UOL) based in Brazil got a tremendous
head start over AOL.
 These companies face risks and challenges today, but they stand to reap huge benefits
in the future.

Infrastructure:

 A country’s physical facilities that support economic activities make up its

infrastructure which includes transportation facilities such as airports highways, and
railroads, energy producing facilities such as utilities and power plants and
communication facilities such as telephone lines and radio stations.
 Companies operating in LDCs must contend with lower levels of technology and
perplexing logistical distribution and communication problems.
 Undeveloped infrastructures represent opportunities for some firms, such as United
Technologies Corporation based in Hartford, Connecticut whose business include jet
engines air conditioning and heating systems and elevators.

Trade
  Trade barriers are government-induced restrictions on international trade. Man-made
trade barriers come in several forms, including:
o Tariffs
o Non-tariff barriers to trade
o Import licenses
o Export licenses
o Import quotas
o Subsidies
o Voluntary Export Restraints
o Local content requirements
o Embargo
o Currency devaluation

Trade restriction

 Most trade barriers work on the same principle–the imposition of some sort of cost
on trade that raises the price of the traded products.
 If two or more nations repeatedly use trade barriers against each other, then a trade
war results.
 Economists generally agree that trade barriers are detrimental and decrease overall
economic efficiency.
 This can be explained by the theory of comparative advantage.
 In theory, free trade involves the removal of all such barriers, except perhaps those
considered necessary for health or national security.
 In practice, however, even those countries promoting free trade heavily subsidize
certain industries, such as agriculture and steel.
 Trade barriers are often criticized for the effect they have on the developing world.
 Because rich-country players set trade policies, goods, such as agricultural products
that developing countries are best at producing, face high barriers.
 Trade barriers, such as taxes on food imports or subsidies for farmers in developed
economies, lead to overproduction and dumping on world markets, thus lowering
prices and hurting poor-country farmers.
 Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates
for labor-intensive processed goods.
 The Commitment to Development Index measures the effect that rich country trade
policies actually have on the developing world.
 Another negative aspect of trade barriers is that it would cause a limited choice of
products and, therefore, would force customers to pay higher prices and accept
inferior quality.
 In general, for a given level of protection, quota-like restrictions carry a greater
potential for reducing welfare than do tariffs.
 Tariffs, quotas, and non-tariff barriers lead too few of the economy's resources being
used to produce tradeable goods.

 An export subsidy can also be used to give an advantage to a domestic producer over
a foreign producer.
 Export subsidies tend to have a particularly strong negative effect because in addition
to distorting resource allocation, they reduce the economy's terms of trade.
  In contrast to tariffs, export subsidies lead to an over allocation of the economy's
resources to the production of tradeable goods.

1.4.5 Cultural Environment

 Businesses do not exist in a vacuum, and even the most successful business must be
aware of changes in the cultures and societies in which it does business.
 As society and culture change, businesses must adapt to stay ahead of their
competitors and stay relevant in the minds of their consumers.

Changing Preferences

 A major socio-cultural factor influencing businesses and business decisions is

changing consumer preferences.
 What was popular and fashionable 20 years ago may not be popular today or 10 years
down the road.
 Different styles and priorities can undermine long successful products and services.
For example, a clothing company must constantly be aware of changing preferences
when creating new products or it will quickly become outdated.

Demographics

 Changes in demographics are also a significant factor in the business world.

 As populations age, for example, markets for popular music and fashions may shrink
while markets for luxury goods and health products may increase.
 Additionally, changes in the proportion of genders and different racial, religious and
ethnic groups within a society may also have a significant impact on the way a
company does business.

Advertising Techniques

 Advertising is perhaps the area of business most closely in touch with socio-cultural
changes.
 Advertising often seeks to be hip and trendsetting, and to do this, advertising
agencies and departments cannot lose track of the pulse of the societies in which they
engage in business.
 Changes in morals, values and fashions must all be considered when creating
outward facing advertising.

Internal Environment

 In addition to a company's interactions with the market and its customers, socio-
cultural factors also impact a company's internal decision-making process.
  For example, changing gender roles and increasing emphasis on family life have led
to increased respect for maternity and even paternity leave with organizations.
 Additionally, attitudes towards racial discrimination and sexual harassment have
changed drastically over the years as a result of socio-cultural change.

Religion and Custom

 Religion and custom are two of the most important factors impacting a business.
 Every organization has to adapt itself to the prevalent customs and traditions in a
region.
 A uniform business policy cannot be implemented throughout the world, as
allowances need to be made for the religious sensibilities of the local population.
 Let us understand the concept in detail with the help of an example.
o McDonald's, one of the largest restaurant chains in the world, started its India
operations in 1996.
o Although McDonald's had been in business for roughly 40 years, during
which it had expanded to different parts of the world, its foray into the Indian
sector was met with skepticism.
o The prime reason why many people didn't give McDonald's a chance in India
was because most of the McDonald's restaurants around the world served beef
in their burgers.
o India, with its Hindu majority population, considers cow as sacred, and
vegetarianism is taken so seriously that many vegetarians avoid sitting with
someone having a non-vegetarian meal.
o The marketing heads at McDonald's were also aware of the vast diversity in
Indian food habits, and they had to come up with a menu that would appeal to
such a large number of people.
o To succeed in a country where frugality was an inherent characteristic,
McDonald's also had to work towards keeping the price of its products under
check, without compromising on the hygiene and quality factors.
o To succeed in such a behemoth and diverse market, McDonald's had to pay
attention to all these socio-cultural factors.

Change in Preferences

 One of the most important socio-cultural trends which has an impact on a business is
the constantly changing preferences of customers.
 A business may build a brand name for itself and model its core strategies in a certain
manner, but if it fails to recognize and adapt to the changing preferences of the
customers, it is doomed to fail.
 The example given below will analyze this in detail.
o Nokia was one of the biggest mobile handset manufacturers until recently.
 o In 2007, Apple launched the iPhone, which completely changed the rules in
the smartphone market.
o iPhone was a bold statement by Apple on what a phone could achieve.
o The launch of iPhone, and its subsequent critical and commercial acclaim,
was a clear indicator to all handset manufacturers that customers expected
quality experience while browsing the internet, listening to songs, watching
videos, etc. iPhone's unprecedented sales, despite the fact that it came with a
higher contract cost, was a testimony to the fact that the customers were
appreciative of innovation and technology, and didn't mind paying extra to get
the best thing in the market.

Change in Demographics

 Demographics is another socio-cultural factor that has an impact on the fortunes of a

business.
 The number of people living in a region, their ethnicity, age, gender, race, sex, etc.
are important factors to consider for any business organization.
 An understanding of the demographics of the customer base can provide a business
with invaluable pointers towards launching new products, pricing, marketing
strategies, etc.
 The following example will illustrate how demographics lead to a change in strategy.
o Harley Davidson, the iconic US-based motorcycle manufacturer, has
established itself as one of the premier bike makers in the world.
o Most of the customer base of Harley Davidson comprises Baby Boomers,
over the age of 35. After the World War II ended, America emerged as one of
the most powerful nations of the world.
o The period after the war was filled with optimism and exhilaration.
o The Baby Boomer generation grew up in a period marked with added
emphasis on individuality and adventure.
o Motorcycling had emerged as an alternate lifestyle, with most motorcyclists
preferring the heavy, cruiser bikes of Harley Davidson.

Marketing

 Socio-cultural factors play a major role in the marketing strategy of a business.

 In fact, the whole idea of marketing is to connect with the existing customers, and to
reach out to potential customers.
 The way a society is composed, and the manner in which it views itself culturally,
plays an important role in the development of a robust marketing strategy.
 The marketing strategies vary from one country to another, and the factors that
influence the strategy are literacy levels of the population, its core beliefs, its
sensitivities, willingness to change, etc.
 In the following example, we will take a look at how Nestlé had to change its
marketing policy to prevent itself from being in the center of a controversy.
o Nestlé, one of the largest food-processing brands in the world, was involved
in a controversy in the 1970s, when it was accused of causing deaths and
malnutrition in infants in sub-Saharan Africa.
o The center of the controversy was Nestlé's breastfeeding substitute - a baby
milk powder.
o The substitute was marketed aggressively all around the world, but in several
African countries, where literacy levels were low, people failed to realize that
the product was aimed to act as a substitute for those children, whose
mothers were unable to breastfeed them.
 IBM – UNIT 2
INTERNATIONAL TRADE AND INVESTMENT

.1 Promotion of Global Business

2.1.1 Promotional tools

 Numerous tools can be used to influence consumer purchases:
 Advertising—in or on newspapers, radio, television, billboards, busses, taxis, or the
Internet
 Price promotions—products are being made available temporarily as at a lower price,
or some premium (e.g., toothbrush with a package of toothpaste) is being offered for
free.
 Sponsorships
 Point-of-purchase—the manufacturer pays for extra display space in the store or puts a
coupon right by the product

2.1.2 Promotional objectives

 Promotional objectives involve the question of what the firm hopes to achieve with a
campaign—“increasing profits” is too vague an objective, since this has to be
achieved through some intermediate outcome (such as increasing market share, which
in turn is achieved by some change in consumers which cause them to buy more).
 Some common objectives that firms may hold:

6. Awareness.
← Many French consumers do not know that the Gap even exists, so they cannot
decide to go shopping there.
← This objective is often achieved through advertising, but could also be
achieved through favourable point-of-purchase displays.
← Note that since advertising and promotional stimuli are often afforded very
little attention by consumers, potential buyers may have to be exposed to the
promotional stimulus numerous times before it “registers.”
 5. Trial.
← Even when consumers know that a product exists and could possibly satisfy
some of their desires, it may take a while before they get around to trying the
product—especially when there are so many other products that compete for
their attention and wallets.
← Thus, the next step is often to try get consumer to try the product at least once,
with the hope that they will make repeat purchases.
← Coupons are often an effective way of achieving trial, but these are illegal in
some countries and in some others, the infrastructure to readily accept
coupons (e.g., clearing houses) does not exist.
← Continued advertising and point-of-purchase displays may be effective.
← Although Coca Cola is widely known in China, a large part of the population
has not yet tried the product.

9. Attitude toward the product.

← A high percentage of people in the U.S. and Europe have tried Coca Cola, so a
more reasonable objective is to get people to believe positive things about the
product.

12. Ex - That it has a superior taste and is better than generics or store brands.
This is often achieved through advertising.
10. Temporary sales increases.
← For mature products and categories, attitudes may be fairly well established
and not subject to cost-effective change.
← Thus, it may be more useful to work on getting temporary increases in sales
(which are likely to go away the incentives are removed).
← In the U.S. and Japan, for example, fast food restaurants may run temporary
price promotions to get people to eat out more or switch from competitors, but
when these promotions end, sales are likely to move back down again (in
developing countries, in contrast, trial may be a more appropriate objective in
this category).

.
 6. Language barriers:
 The advertising will have to be translated, not just into the generic language category
(e.g., Portuguese) but also into the specific version spoken in the region (e.g.,
Brazilian Portuguese).
 (Occasionally, foreign language ads are deliberately run to add mystique to a product,
but this is the exception rather than the rule).

p Cultural barriers.
 Subtle cultural differences may make an ad that tested well in one country unsuitable
in another.

 Local attitudes toward advertising.

p People in some countries are more receptive to advertising than others.
q While advertising is accepted as a fact of life in the U.S., some Europeans find it too
crass and commercial.

4. Media infrastructure
p Cable TV is not well developed in some countries and regions, and not all media in
all countries accept advertising.
q Consumer media habits also differ dramatically; newspapers appear to have a higher
reach than television and radio in parts of Latin America.

2 Advertising regulations.
3. Countries often have arbitrary rules on what can be advertised and what can be
claimed.
4. Comparative advertising is banned almost everywhere outside the U.S.
5. Holland requires that a toothbrush be displayed in advertisements for sweets, and
some countries require that advertising to be shown there be produced in the country.

Some cultural dimensions:

 Directness vs. indirectness:

← U.S. advertising tends to emphasize directly why someone would benefit from
buying the product.
← This, however, is considered too pushy for Japanese consumers, where it is
felt to be arrogant of the seller to presume to know what the consumer would
like.

 Comparison:
 ← Comparative advertising is banned in most countries and would probably be
very counterproductive, as an insulting instance of confrontation and bragging,
in Asia even if it were allowed.
← In the U.S., comparison advertising has proven somewhat effective (although
its implementation is tricky) as a way to persuade consumers what to buy.

p Humor.
← Although humor is a relatively universal phenomenon, what is considered
funny between countries differs greatly, so pre-testing is essential.

q Gender roles.
← A study found that women in U.S. advertising tended to be shown in more
traditional roles in the U.S. than in Europe or Australia.
← On the other hand, some countries are even more traditional
← Ex - A Japanese ad that claimed a camera to be “so simple that even a woman
can use it” was not found to be unusually insulting.

r Explicitness.
← Europeans tend to allow for considerably more explicit advertisements, often
with sexual overtones, than Americans.

s Sophistication.
← Europeans, particularly the French, demand considerably more sophistication
than Americans who may react more favourably to emotional appeals
← Ex - An ad showing a mentally retarded young man succeeding in a job at
McDonald’s was very favourably received in the U.S. but was booed at the
Cannes film festival in France.

t Popular vs. traditional culture.

← U.S. ads tend to employ contemporary, popular culture, often including
current music while those in more traditional cultures tend to refer more to
classical culture.

u Information content vs. fluff.

← American ads contain a great deal of “puffery,” which was found to be very
ineffective in Eastern European countries because it resembled communist
propaganda too much.
← The Eastern European consumers instead wanted hard, cold facts.

2.1.4 Legal issues.

 p Countries differ in their regulations of advertising, and some products are banned
from advertising on certain media (large supermarket chains are not allowed to
advertise on TV in France, for example).
q Other forms of promotion may also be banned or regulated.
r In some European countries, for example, it is illegal to price discriminate between
consumers, and thus coupons are banned and in some, it is illegal to offer products on
sale outside a very narrow seasonal and percentage range.

2.2 The Role of GATT / WTO

p A treaty created following the conclusion of World War II. The General Agreement on
Tariffs and Trade (GATT) was implemented to further regulate world trade to aide in
the economic recovery following the war.
q GATT's main objective was to reduce the barriers of international trade through the
reduction of tariffs, quotas and subsidies.
r Formed in 1947 and signed into international law on January 1, 1948, GATT
remained one of the focal features of international trade agreements until it was
replaced by the creation of the World Trade Organization on January 1, 1995.
s The foundation for GATT was laid by the proposal of the International Trade
Organization in 1945.
t The Governments of the COMMONWEALTH OF AUSTRALIA, the KINGDOM OF
BELGIUM, the UNITED STATES OF BRAZIL, BURMA, CANADA, CEYLON,
the REPUBLIC OF CHILE, the REPUBLIC OF CHINA, the REPUBLIC OF CUBA,
the CZECHOSLOVAK REPUBLIC, the FRENCH REPUBLIC, INDIA, LEBANON,
the GRAND-DUCHY OF LUXEMBURG, the KINGDOM OF THE
NETHERLANDS, NEW ZEALAND, the KINGDOM OF NORWAY,
PAKISTAN,SOUTHERN RHODESIA, SYRIA, the UNION OF SOUTH AFRICA,
the UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, and
the UNITED STATES OF AMERICA.
u The role of GATT in integrating developing countries into an open multilateral trading
system is also of major consequence.
 p The increasing participation of developing countries in the GATT trading system and
the pragmatic support provided to them through the flexible application of certain
rules helped developing countries to both expand and diversify their trade.
q It could now be said that a great number of these countries have already become full
partners in the system as can be witnessed by their active participation in the Uruguay
Round.
r The task of helping to integrate further the least-developed countries is one of the
challenges that lies ahead in the WTO.
s Similarly, the full integration of countries with economies in transition into the trading
system must be achieved in order to strengthen economic interdependence as a basis
for greater prosperity and world peace.
t These negotiations were critical to ensure the future health of the world economy and
the trading system.
u The globalization of the world economy over the past decade has created a greater
reliance than ever on an open multilateral trading system.
v Free trade has become the backbone of economic prosperity and development
throughout the world.
w Partly as a result of this, there has been a shift in trade policy mechanisms from
border measures to internal policy measures, substantially affecting the management
of trade relations.
x The Uruguay Round sought to establish a new balance in rights and obligations
among trading nations as a result of this phenomenon.
y We are gradually moving towards a global marketplace, and for that, we need a global
system of rules for trade relations among partners in that market place.
2.2.1 The fundamental princ iples of trading.

4. A trading system should be free of discrimination in the sense that one country cannot
privilege a particular trading partner above others within the system, nor can it
discriminate against fo reign products and services.
5. A trading system sh ould tend toward more freedom, that is, toward fewer trade
barriers (tariffs and non-tariff barriers).
6. A trading system sho uld be predictable, with foreign companie s and governments
reassured that trade ba rriers will not be raised arbitrarily and that markets will remain
open.
 A trading system should tend toward greater competition.
 A trading system shou ld be more accommodating for less develope d countries,
giving them more time to adj ust, greater flexibility, and more privileges.
2.2.2 Subjects of WTO
p Agriculture
q Services
r Non-agriculture
s Intellectual Property R ights
t Trade investment, com petition, policy, government procurement an d trade facilities
u Trade rules
v Dispute settlements
w Trade and environmen t
x Trade, finance and deb t
y Trade and technology transfer
z Electronic commerce.

2.2.3 Structure:
 The WTO has nearly 153 members accounting for over 97% of world trade.
 Around 30 others are negotiating membership.
 Decisions are made by the entire membership.
 This is typically by consensus.
 A majority vote is also possible but it has never been used in the WTO and was
extremely rare under the WTO’s predecessor, GATT.
 The WTO’s agreements have been ratified in all members’ parliaments.
 The WTO’s top level decision-making body is the Ministerial Conferences which
meets at least once in every two years.
 Below this is the General Council (normally ambassadors and heads of delegation in
Geneva, but sometimes officials sent from members’ capitals) which meets several
times a year in the Geneva headquarters.
 The General Council also meets as the Trade Policy Review Body and the Disputes
Settlement Body.
 At the next level, the Goods Council, Services Council and Intellectual Property
(TRIPs) Council report to the General Council.
 Numerous specialized committees, working groups and working parties deal with the
individual agreements and other areas such as, the environment, development,
membership applications and regional trade agreements.
2.2.4 Secretariat
 The WTO secretariat, based in Geneva, has around 600 staff and is headed by a
Director-General.
 Its annual budget is roughly 160 million Swiss Francs.
 It does not have branch offices outside Geneva.
 Since decisions are taken by the members themselves, the secretariat does not have
the decision making the role that other international bureaucracies are given.
 The secretariat s main duties to supply technical support for the various councils and
committees and the ministerial conferences, to provide technical assistance for
developing countries, to analyze world trade and to explain WTO affairs to the public
and media.
 The secretariat also provides some forms of legal assistance in the dispute settlement
process and advises governments wishing to become members of the WTO.

2.2.5 The important objectives of WTO are:

 To improve the standard of living of people in the member countries.
 To ensure full employment and broad increase in effective demand.
 To enlarge production and trade of goods.
 To increase the trade of services.
 To ensure optimum utilization of world resources.
 To protect the environment.

 To accept the concept of sustainable development.

2.2.6 The main functions of WTO are discussed below:

 To implement rules and provisions related to trade policy review mechanism.
 To provide a platform to member countries to decide future strategies related to trade
and tariff.
 To provide facilities for implementation, administration and operation of multilateral
and bilateral agreements of the world trade.
 To administer the rules and processes related to dispute settlement.
 To ensure the optimum use of world resources.
 To assist international organizations such as, IMF and IBRD for establishing
coherence in Universal Economic Policy determination.

2.2.7 WTO Agreements:

← The WTO’s rule and the agreements are the result of negotiations between the
members.
← The current sets were the outcome to the 1986-93 Uruguay Round negotiations which
included a major revision of the original General Agreement on Tariffs and Trade
(GATI).
← GATT is now the WTO’s principal rule-book for trade in goods.
← The Uruguay Round also created new rules for dealing with trade in services, relevant
aspects of intellectual property, dispute settlement and trade policy reviews.
← The complete set runs to some 30,000 pages consisting of about 30 agreements and
separate commitments (called schedules) made by individual members in specific
areas such as, lower customs duty rates and services market-opening.
← Through these agreements, WTO members operate a non-discriminatory trading
system that spells out their rights and their obligations.
 ← Each country receives guarantees that its exports will be treated fairly and
consistently in other countries’ markets.
← Each country promises to do the same for imports into its own market.
← The system also gives developing countries some flexibility in implementing their
commitments.

 Goods:

← It all began with trade in goods. From 1947 to 1994, GATT was the forum for
negotiating lower customs duty rates and other trade barriers; the text of the General
Agreement spelt out important, rules, particularly non-discriminations since 1995, the
updated GATT has become the WTO s umbrella agreement for trade in goods.
← It has annexes dealing with specific sectors such as, agriculture and textiles and with
specific issues such as, state trading, product standards, subsidies and action taken
against dumping.

 Services:

← Banks, insurance firms, telecommunication companies, tour operators, hotel chains

and transport companies looking to do business abroad can now enjoy the same
principles of free and fair that originally only applied to trade in goods.
← These principles appear in the new General Agreement on Trade in Services (GATS).
WTO members have also made individual commitments under GATS stating which of
their services sectors, they are willing to open for foreign competition and how open
those markets are.

 Intellectual Property:

← The WTO’s intellectual property agreement amounts to rules for trade and investment
in ideas and creativity.
← The rules state how copyrights, patents, trademarks, geographical names used to
identify products, industrial designs, integrated circuit layout designs and undisclosed
information such as trade secrets “intellectual property” should be protected when
trade is involved.

 Dispute Settlement:

← The WTO’s procedure for resolving trade quarrels under the Dispute Settlement
Understanding is vital for enforcing the rules and therefore, for ensuring that trade
flows smoothly.
← Countries bring disputes to the WTO if they think their rights under the agreements
are being infringed. Judgments by specially appointed independent experts are based
on interpretations of the agreements and individual countries’ commitments.
← The system encourages countries to settle their differences through consultation.
Failing that, they can follow a carefully mapped out, stage-by-stage procedure that
includes the possibility of the ruling by a panel of experts and the chance to appeal the
ruling on legal grounds.
← Confidence in the system is bourne out by the number of cases brought to the WTO,
around 300 cases in eight years compared to the 300 disputes dealt with during the
entire life of GATT (1947-94).

 Policy Review:

← The Trade Policy Review Mechanism’s purpose is to improve transparency, to create

a greater understanding of the policies that countries are adopting and to assess their
impact.
← Many members also see the reviews as constructive feedback on their policies.
← All WTO members must undergo periodic scrutiny, each review containing reports by
the country concerned and the WTO Secretariat.
2.2.7 The Basic Principles of the GATT:
 Most-Favored-Nation (MFN) Treatment:

← This is the fundamental principle of the GATT and it is not a coincidence that it
appears in Article 1 of the GATT 1947.
← It states that each contracting party to the GATT is required to provide to all other
contracting parties the same conditions of trade as the most favourable terms it
extends to any one of them, i.e., each contracting party is required to treat all
contracting parties in the same way that it treats its “most-favoured nation”.

 Reciprocity:

← GATT advocates the principles of “rights” and “obligations”.

← Each contracting party has a right, e.g. access to markets of other trading partners on a
MFN basis but also an obligation to reciprocate with trade concessions on a MFN
basis. In a way, this is closely associated with the MFN principle.

MFN – Most Favored Nation

3. Transparency:

p Fundamental to a transparent system of trade is the need to harmonize the system of

import protection, so that barriers on trade can be reduced through the process of
negotiations.
q The GATT therefore, limited the use of quotas, except in some specific sector such, as
agriculture and advocated import regimes that are based on “tariff-only”.
r In addition, the GATT and now the WTO, required many notifications from
contracting parties on their agricultural and trade policies so that these can be
examined by other parties to ensure that they are GATT/WTO compatible.

2 Tariff Binding and Reduction:

o When GATT was established, tariffs were the main form of trade protection and
negotiations in the early years focused primarily upon tariff binding and reduction.
p The text of the 1947, GATT lays out the obligations on the contracting parties in this
regard.

2.3 Multilateral Trade Negotiation and Agreements

3. A multilateral trade agreement involves three or more countries who wish to regulate
trade between the nations without discrimination.
4. They are usually intended to lower trade barriers between participating countries and,
as a consequence, increase the degree of economic integration between the
participants.
.
  Multilateral trade agreements are considered the most effective way of liberalizing
trade in an interdependent global economy.

2.3.1 WTO Agreements

 The WTO agreements cover goods, services and intellectual property.

 They spell out the principles of liberalization, and the permitted exceptions. They
include individual countries’ commitments to lower customs tariffs and other trade
barriers, and to open and keep open services markets.

 They set procedures for settling disputes. They prescribe special treatment for
developing countries.

 They require governments to make their trade policies transparent by notifying the
WTO about laws in force and measures adopted, and through regular reports by the
secretariat on countries’ trade policies.
 These agreements are often called the WTO’s trade rules, and the WTO is often
described as “rules-based”, a system based on rules. But it’s important to remember
that the rules are actually agreements that governments negotiated.

2.3.2 Benefits of WTO

 The system helps promote peace

← Peace is partly an outcome of two of the most fundamental principles of the trading
system, helping trade to flow smoothly, and providing countries with a constructive
and fair outlet for dealing with disputes over trade issues.
← It is also an outcome of the international confidence and cooperation that the system
creates and reinforces.

 Disputes are handled constructively

← There could be a down side to trade liberalization and expansion.

← More trade means more possibilities for disputes to arise.
← Left to themselves, those disputes could lead to serious conflict.
← But in reality, a lot of international trade tension is reduced because countries can turn
to organizations, in particular the WTO, to settle their trade disputes.

 Rules make life easier for all

← Decisions in the WTO are made by consensus.

← The WTO agreements were negotiated by all members, were approved by consensus
and were ratified in all members’ parliaments.
← The agreements apply to everyone.
 ← Rich and poor countries alike have an equal right to challenge each other in the
WTO’s dispute settlement procedures.

 Freer trade cuts the costs of living

← Protectionism is expensive: it raises prices.

← The WTO’s global system lowers trade barriers through negotiation and applies the
principle of non-discrimination.
← The result is reduced costs of production (because imports used in production are
cheaper) and reduced prices of finished goods and services, and ultimately a lower
cost of living.

 It provides more choice of products and qualities

← Think also of the things people in other countries can have because they buy exports
from us and elsewhere.
← Look around and consider all the things that would disappear if all our imports were
taken away from us.
← Imports allow us more choice — both more goods and services to choose from, and a
wider range of qualities.
← Even the quality of locally-produced goods can improve because of the competition
from imports.

 Trade raises incomes

← The WTO’s own estimates for the impact of the 1994 Uruguay Round trade deal were
between $109 billion and $510 billion added to world income (depending on the
assumptions of the calculations and allowing for margins of error).

 Trade stimulates economic growth

← This is a difficult subject to tackle in simple terms.

← There is strong evidence that trade boosts economic growth, and that economic
growth means more jobs.
← It is also true that some jobs are lost even when trade is expanding.
← But a reliable analysis of this poses at least two problems.

 The basic principles make life more efficient

← Trade allows a division of labour between countries.

← It allows resources to be used more appropriately and effectively for production.
← But the WTO’s trading system offers more than that.
 ← It helps to increase efficiency and to cut costs even more because of important
principles enshrined in the system.

 Governments are shielded from lobbying

← One of the lessons of the protectionism that dominated the early decades of the 20th
Century was the damage that can be caused if narrow sector-al interests gain an
unbalanced share of political influence.
← The result was increasingly restrictive policy which turned into a trade war that no
one won and everyone lost.

 The system encourages good government

← The rules include commitments not to backslide into unwise policies.

← Protectionism in general is unwise because of the damage it causes domestically and
internationally, as we have already seen.

2.4 VIII & IX Round Discussion and Arguments

Introduction of Uruguay Round (Round VIII)

 The Uruguay Round was the 8th round of multilateral trade negotiations (MTN)
conducted within the framework of the General Agreement on Tariffs and Trade
(GATT), spanning from 1986 to 1994 and embracing 123 countries as "contracting
parties".
 The Round led to the creation of the World Trade Organization, with GATT remaining
as an integral part of the WTO agreements.
 The broad mandate of the Round had been to extend GATT trade rules to areas
previously exempted as too difficult to liberalize (agriculture, textiles) and
increasingly important new areas previously not included (trade in services,
intellectual property, investment policy trade distortions).
 The Round came into effect in 1995 with deadlines ending in 2000 (2004 in the case
of developing country contracting parties) under the administrative direction of the
newly created World Trade Organization (WTO)

2.4.1 Important Salient Features of the Uruguay Round (Round VIII)

 Agreement on Agriculture:
 The tariffs resulting from transformation of non-tariff barriers, as well as other tariffs
on agricultural products are to be reduced on an average by 36 per cent in the case of
developed countries over 6 years and 24 per cent in the case of developing countries
over 10 years period.
 The least developed countries need not make any commitment for reduction.

 Agreement on Trade in Textiles and Clothing:

  This provide for phasing out the import quotas on textiles and clothing in force under
the Multi-Fibre Arrangements since 1974, over a span of 10 years, i.e., by the end of
the transition period on January 1, 2005.

 Agreement on Market Access:

 The member nations will cut tariff on industrial and farm goods by an average of
about 37 per cent.

(3) Agreement on TRIMs:

(5) The agreement on Trade Related Investment Measures (TRIMs) calls for introducing
national treatment of foreign investments and removal of quantitative restrictions.
(6) It identifies 5 investment measures which are inconsistent with the GATT provisions
on according national treatment and on general elimination of qualitative restrictions.
(7) These are measures which are imposed on the foreign investors such as the obligation
to use local inputs, to produce for exports as a condition, to obtain imported goods as
inputs, to balance foreign exchange outgo on importing inputs with foreign exchange
earnings through export, and not to export more than a specified proportion of the
local production.

 Agreements on TRIPs:
 Trade Related Intellectual Property Rights (TRIPs) pertain to patents and copyrights.
 Whereas earlier on-process patents were granted to food, medicines, drugs and
chemical products, the TRIPs agreement now provides for granting product patents
also in all these areas.
 Protection will be available for 20 years for patents and 50 years for copyrights.

f) Agreement on Services:
 For the first time, trade in services like banking, insurance, travel, maritime
transportation, mobility of labor etc., has been brought within the ambit of GATT.
 The GATS (General Agreement on Trade in Services) provides a multilateral
framework on principles and services which should govern trade in services under
conditions of transparency and progressive liberalization.
 It spells out certain obligations like grant of MFN status to the other member nations
with regard to trade in services, maintenance of transparency and also a commitment
for liberalization in general terms.

p Disputes Settlement Body:

p Settlement of disputes under GATT was a never ending process.
q There was ample scope for procedural delays, objections could be raised at each stage
of the dispute settlement process, and penal reports could be rejected by the offending
party.

 The Disputes Settlement Body (DSB) set up under WTO seeks to plug these
loopholes and thus provides security and predictability to the multilateral trading
system. It has now been made mandatory to settle a dispute within 18 months.
 The findings of the DSB will be final and binding.

2.4.2 Doha Round (IX Round)

 The Doha Round continues that tradition.
 It’s the ninth round since the Second World War and the first since the WTO inherited
the multilateral trading system in 1995.
 It aims to produce the first major overhaul of the system in the 21st Century.
 All WTO member governments — currently 157 — participate. The talks are
complex, with a broad array of subjects, and widely differing interests, even within
countries.
 Binding the complexity together are two key principles: decisions are by consensus,
which means everyone has to be persuaded before any deal can be struck, and
“nothing is agreed until everything is agreed”, sometimes called the “single
undertaking”.

1. Agriculture
 The 2001 Doha mandate on agriculture calls for reforms across three "pillars"
substantial improvements in market access, substantial reductions in domestic support
and the phasing out with a view to total elimination of all export subsidies.
 The Cairns Group coalition of 17 agricultural fair traders, chaired by Australia, played
a key role in framing this mandate and has continued to work since to set the ongoing
negotiating agenda and to press the WTO membership to step up and meet the
ambition of the Doha mandate.
 The agriculture negotiating framework (Annex A) secures an historic commitment to
eliminate export subsidies, the worst form of agricultural subsidy.
 Important new disciplines have also been agreed to remove unfair, subsidized
competition through government-supported export credit programs and to set up new
arrangements to manage food aid in ways which does not damage commercial trade.
 Big cuts in the other domestic support provided to farmers by many wealthy countries
have also been foreshadowed.
 The text provides for both an overall cut and for reductions in Amber box, de minimis
and blue box support.
 The EU and the US have agreed, in the framework, to a down payment reduction of
20% in trade distorting farm support in the first year after the negotiations are
completed.
 The market access part of the framework agreement provides for substantial tariff
reductions leading to substantial access improvements for all products.
 This will be negotiated through a tiered formula which ensures that higher tariffs are
subject to deeper cuts.

 There is provision for designating some sensitive products which will not be subject
to the full effect of the tariff reductions.
 These will be designated using tariff lines and will still be subject to the requirement
of substantial improvement in market access, through a combination of tariff rate
quota expansion and tariff reductions.
 The agreement is not as ambitious as Australia had argued for on market access, but it
sets out an approach to tariff cuts and market opening which is much stronger than the
proposal we were faced with last year in Cancún .

2. Non-Agricultural Market Access (Industrial Products)

 The Doha mandate on industrial products provides for negotiations on non-
agricultural market access (NAMA) on reduction or elimination of tariffs, including
 by addressing tariff peaks, high tariffs and tariff escalation, as well as non-tariff
barriers.
 All products are to be covered with no exclusions.
 Australia is a major exporter of industrial products with our ability to increase such
exports dependent upon our ability to penetrate new and existing markets.
 This is why we have worked hard in Geneva to preserve the possibility of an outcome
to the Round that meets the Doha level of ambition.
 The non-agricultural products negotiating framework (Annex B) essentially replicates
the text that was presented at the Cancún Ministerial Meeting last year (known as the
Derbez text).
 It includes a non-linear (or harmonising) formula approach to reducing tariffs across-
the-board to a similar level, thereby reducing tariff peaks and tariff escalation as
required under the Doha mandate.
 There is also the option of supplementing the formula with sector-al initiatives.
However, other provisions lessen the impact of the formula on tariff reductions,
particularly through extensive flexibility provided to developing countries.
 As a number of WTO members had difficulties with the adoption of the Derbez text
unchanged it was agreed that Annex B would be presented as containing the
"elements" for future work on modalities by the Negotiating Group on Market Access,
while acknowledging that additional negotiations would be required to reach
agreement on the specifics of these elements.

3. Services
 Under the timetable agreed by WTO Trade Ministers at Doha, members were
expected to lodge initial requests for specific commitments by 30 June 2002, while
initial offers were due by 31 March 2003.
 Negotiations have been progressing steadily. By April 2004, 42 offers had been made,
covering 57 WTO members (the EC offer also covers the 15 EU members).
 However the pace of the services negotiations slowed after Cancún. Annex C of the
framework package reiterates calls on members who have not done so to submit

offers as soon as possible and the General Council Decision calls for all members to
submit improved offers by May 2005.
 Australia has a wide breadth of services interests - which range from professional,
financial and education services through to mining, environmental and private
hospital services - reflecting our status as a vibrant and rapidly growing services
exporter, with geographically diverse trading interests.
 For this reason, and because of the growing importance of global services trade,
Australia joined others in successfully pressing for the services negotiations to be
highlighted in the General Council Decision by giving it a stand-alone paragraph,
placing services on the same footing as the negotiations on agriculture and non-
agricultural market access.

4. Development Issues
 At Doha WTO Ministers agreed to place the needs and interests of developing
country members at the heart of the WTO work programme.
 This is addressed in the framework by its extensive recognition and integration of
special and differential treatment, technical assistance and capacity building.
 Appropriate S&D provisions allow developing countries to engage in commitments
and further integrate themselves into the multilateral trading system, while also
providing the flexibility to adjust to the transition this involves.
 The General Council Decision reaffirms WTO members" commitment to the
provision of such flexibility and to taking developing country concerns into
consideration in the future negotiations on modalities for agricultural and non-
agricultural market access.
 The framework package also recognizes the particular difficulties of least developed
countries (LDCs) - they have effectively been exempted from making any new
commitments under the Doha Round for agriculture or industrials.
 However Australia considers that the framework agreement most directly addresses
the needs of developing countries by encouraging economic reform, by creating the
conditions for global improvements in market access - particularly in agriculture,
industrial products and services - and through removing agricultural subsidies in
developed countries which negatively impact on the competitiveness of developing
country products.

5. Trade Facilitation
 The General Council Decision, by explicit consensus, launches negotiations on trade
facilitation.
 Annex D provides the modalities for negotiations that will be aimed at improving the
efficiency of the global movement of goods, for example through improved and
streamlined customs and border control procedures.
 Annex D also recognizes the particular difficulties faced by developing countries in
having the financial and technical capacity to undertake such improvements and
 includes commitment by developed country members to provide technical assistance
and support for capacity building.

2.5 Challenges for Global Business

 The world has grown smaller and businesses are taking advantage of this. But with
the emergence of more global business, comes new hurdles that require immediate
solutions.
 One important aspect of international business is business localization.
 This is more than merely penetrating local markets. It's actually a socio-cultural step
towards business success.
 Three major hurdles must be overcome by any global business wanting success.
 The first concern is providing real-time communication.
 The speed at which people communicate is one important problem that is
continuously limiting business growth.
 To compound on this concern, people are becoming mobile and instant
communication is important.
 Every second counts in business, and it becomes doubly difficult when people speak
different languages.
 Business localization technology offers immediate response to this by incorporating a
way for people to communicate faster with little or no language issues.
 Another concern that global companies have to contend with is the fact that they have
to cater to people from different parts of the world at the same time.
 Just the differences in language can slow down communication and business.
 Now multiplying this several times can cripple any company without the ability to
address this concern.
 Being able to handle this problem warrants an almost impossible task of simultaneous
language needs. Business localization services and technology offers the solution to
this very pressing concern.
 On top of all these problems, companies have to contend with the pressure of both
mobility and immediate communication needs at the same time.
 Juggling one and the other at a time can be a challenge enough.
 But putting them in just one basket for a company to carry around every day, can be
more difficult (and discouraging for many smaller businesses).
 Solutions are important in this highly competitive world.
 Solutions to these business predicaments are answered by business localization
services.
 Business success comes to those you are able to crack this language puzzles given to
all global companies.

.
2.5.1 Challenges faced by the Global Business
← Too often business owners jump when they see opportunities abroad without first
taking the time to conduct research and train their employees for the challenges they
may face.
← Here are some of the top challenges and risks that small businesses face.

 Inexperienced management team.

← The management team of small businesses may not have experience with
international businesses.
← Having experience with conducting business globally is critical for businesses to
move into the international market with the lowest amount of surprises, mistakes, and
expenses.
← The management team should be provided with appropriate training beforehand.
Another option is to hire internal or external experts to guide decision making.

 No local marketing contacts or partners.

← Having connections in the foreign country is a valuable asset to pushing the product
out faster and obtaining a quicker ROI.
← If the business does not have any contacts or partners, it should start working on
networking and possibly hiring a local marketing firm.

 Foreign country's laws and regulations.

← Each country has its own set of laws and regulations when it comes to importing
goods, taxes, and even selling online.
← Obtain legal advice from someone experienced in business law for that country and
conduct your own research to see which laws and regulations will affect your
business.
← However, finding information online does not replace legal advice from a qualified
lawyer.

 Inadequate infrastructure within the foreign country.

← Some countries do not have adequate infrastructure for transporting goods.
← Find out which obstacles exist and what should be done to overcome them or what
adjustments should be made.

 Cultural and language barriers.

← Researching the local culture and speaking the same language is not enough to
communicate efficiently.
← When two people are speaking the same sentence, the underlying meaning may not be
the same.
← Find out how the locals conduct business and how their culture affects their decision
making and communication.
 Corruption amongst foreign officials.
← Corruption is more prevalent than what most small business owners are prepared for.
← Conduct research into the foreign country and find out how business is truly
conducted.
← If possible, avoid countries where corruption is prevalent to save on future headaches
and possible losses.

 Company is not flexible.

← After entering into the foreign market the business may have to adapt further to the
local market.
← Small businesses that are not flexible or refuse to make alternations will lose out on
customers and potential revenue.
← The business should be prepared to make changes after entrance and have the
structure in place for quick decision making and implementations.

 Tariffs and quotas.

← Countries add taxes or restrictions to particular products coming into their country in
order to give their own businesses a higher advantage.
← Unsuspecting small business owners unaware of these tariffs and quotas can end up at
a loss instead of profiting.

 Pricing is not optimized for the country.

← Small business owners that price its products the same in foreign country as in the
United States is either overcharging or undercharging customers.
← For instance, in countries with a lower GDP, consumers have less money to spend on
purchases so lower price points should be set to attract more buyers.

 Does not provide after sales services.

← Customer support should be available in the language of each country and be
conveniently accessible.
← Customers should not have to pay long distance charges in order to receive assistance.
← Small business owners should ensure that they are providing adequate customer
service to all their customers.
← They can outsource this to a customer call center within the country.

2.6 Global Trade and Investment

 Foreign Direct Investment

← Foreign direct investment (FDI) has emerged as a principal source of financing for
development and can create employment and spread technologies and ideas.
  Growing FDI flows in Asia and the Pacific have helped boost regional integration and
growth. ESCAP assists countries in attracting and facilitating FDI for sustainable and
inclusive growth.

 Business Development
← Business has played a central role in driving economic growth and innovation, while
creating employment and generating income through skills development and
productivity improvement.
← ESCAP provides technical assistance to help governments formulate policies for a
conducive business environment and facilitate public and private sector dialogue
including through the ESCAP Business Advisory Council (EBAC).

 Sustainable Business Practices

← ESCAP is working together with governments, companies and entrepreneurs to
support the adoption of sustainable business practices.

 Trade Agreements
← Trade agreements lower barriers to trade and can boost trade among the partners.
Recent years have seen a rapid increase in the number of preferential trade
agreements.
← ESCAP helps countries negotiate agreements that promote inclusive growth and
development. ESCAP is also the secretariat to the Asia-Pacific Trade Agreement
(APTA).

 Trade and Investment Research

← ESCAP research on trade and investment helps policymakers make important
decisions. Our regular annual reports, as well as frequent working papers, provide
crucial insights into emerging issues and the latest trends.
← ESCAP also helps develop the research capacity in Member States themselves on
which effective decision-making depends, including through the Asia Pacific
Research and Training Network on Trade (ARTNeT).
 Trade Facilitation
← Cumbersome trade procedures discourage economic activity and make it difficult for
firms and countries to participate in regional and global production networks.
← ESCAP assists countries, particularly least developed and landlocked developing
countries (LDCs and LLDCs), with trade facilitation measures that help simplify
processes and regulations.
← The United Nations Network of Experts for Paperless Trade in Asia and the Pacific
(UNNExT) is the main platform through which ESCAP delivers its activities.

 Trade Policy
← Decision makers need to determine many crucial elements of trade policy including:
improving market access; negotiating trade agreements with positive developmental
impacts; and coordinating measures complementary to trade policy.
← ESCAP advice, technical assistance and capacity building supports effective and
inclusive policy-making.

2.7 Theories of International Trade and Theories of International Investment

2.7.1 Theories of International Trade

 International trade theories are simply different theories to explain international trade.
 Trade is the concept of exchanging goods and services between two people or entities.

 International trade is then the concept of this exchange between people or entities in
two different countries.
 People or entities trade because they believe that they benefit from the exchange.
They may need or want the goods or services.
 While at the surface, this many sound very simple, there is a great deal of theory,
policy, and business strategy that constitutes international trade.

2.7.2 Classical or Country-Based Trade Theories

1. Mercantilism
 Developed in the sixteenth century, mercantilism was one of the earliest efforts to
develop an economic theory.
 This theory stated that a country’s wealth was determined by the amount of its gold
and silver holdings.
 In its simplest sense, mercantilists believed that a country should increase its holdings
of gold and silver by promoting exports and discouraging imports.
 In other words, if people in other countries buy more from you (exports) than they sell
to you (imports), then they have to pay you the difference in gold and silver.
 The objective of each country was to have a trade surplus, or a situation where the
value of exports are greater than the value of imports, and to avoid a trade deficit, or a
situation where the value of imports is greater than the value of exports.
 A closer look at world history from the 1500s to the late 1800s helps explain why
mercantilism flourished.
 The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen
their nations by building larger armies and national institutions.
p By increasing exports and trade, these rulers were able to amass more gold and wealth
for their countries.
q One way that many of these new nations promoted exports was to impose restrictions
on imports. This strategy is called protectionism and is still used today.
r Nations expanded their wealth by using their colonies around the world in an effort to
control more trade and amass more riches.
s The British colonial empire was one of the more successful examples; it sought to
increase its wealth by using raw materials from places ranging from what are now the
Americas and India. France, the Netherlands, Portugal, and Spain were also
successful in building large colonial empires that generated extensive wealth for their
governing nations.
t Although mercantilism is one of the oldest trade theories, it remains part of modern
thinking.
u Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor
exports and discourage imports through a form of neo-mercantilism in which the
countries promote a combination of protectionist policies and restrictions and
domestic-industry subsidies.
v Nearly every country, at one point or another, has implemented some form of
protectionist policy to guard key industries in its economy.
w While export-oriented companies usually support protectionist policies that favor their
industries or firms, other companies and consumers are hurt by protectionism.
x Taxpayers pay for government subsidies of select exports in the form of higher taxes.
Import restrictions lead to higher prices for consumers, who pay more for foreign-
made goods or services.
y Free-trade advocates highlight how free trade benefits all members of the global
community, while mercantilism’s protectionist policies only benefit select industries,
at the expense of both consumers and other companies, within and outside of the
industry.

2. Absolute Advantage
 Recent versions have been edited by scholars and economists.
 Smith offered a new trade theory called absolute advantage, which focused on the
ability of a country to produce a good more efficiently than another nation.
 Smith reasoned that trade between countries shouldn’t be regulated or restricted by
government policy or intervention.
 He stated that trade should flow naturally according to market forces.
 In a hypothetical two-country world, if Country A could produce a good cheaper or
faster (or both) than Country B, then Country A had the advantage and could focus on
specializing on producing that good.
 Similarly, if Country B was better at producing another good, it could focus on
specialization as well.

p By specialization, countries would generate efficiencies, because their labor force

would become more skilled by doing the same tasks.
q Production would also become more efficient, because there would be an incentive to
create faster and better production methods to increase the specialization.
r Smith’s theory reasoned that with increased efficiencies, people in both countries
would benefit and trade should be encouraged.
s His theory stated that a nation’s wealth shouldn’t be judged by how much gold and
silver it had but rather by the living standards of its people.

3. Comparative Advantage
p The challenge to the absolute advantage theory was that some countries may be better
at producing both goods and, therefore, have an advantage in many areas.
q In contrast, another country may not have any useful absolute advantages.
r To answer this challenge, David Ricardo, an English economist, introduced the theory
of comparative advantage in 1817.
s Ricardo reasoned that even if Country had the absolute advantage in the production of
both products, specialization and trade could still occur between two countries.
t Comparative advantage occurs when a country cannot produce a product more
efficiently than the other country; however, it can produce that product better and
more efficiently than it does other goods.
u The difference between these two theories is subtle.
v Comparative advantage focuses on the relative productivity differences, whereas
absolute advantage looks at the absolute productivity.

4. Heckscher-Ohlin Theory (Factor Proportions Theory)

p The theories of Smith and Ricardo didn’t help countries determine which products
would give a country an advantage.
q Both theories assumed that free and open markets would lead countries and producers
to determine which goods they could produce more efficiently.
r In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused
their attention on how a country could gain comparative advantage by producing
products that utilized factors that were in abundance in the country.
s Their theory is based on a country’s production factors—land, labor, and capital,
which provide the funds for investment in plants and equipment.
t They determined that the cost of any factor or resource was a function of supply and
demand.
u Factors that were in great supply relative to demand would be cheaper; factors in
great demand relative to supply would be more expensive.
v Their theory, also called the factor proportions theory, stated that countries would
produce and export goods that required resources or factors that were in great supply
and therefore, cheaper production factors. In contrast, countries would import goods
that required resources that were in short supply, but higher demand.
p For example, China and India are home to cheap, large pools of labor. Hence these
countries have become the optimal locations for labor-intensive industries like textiles
and garments.

5. Leontief Paradox
p In the early 1950s, Russian-born American economist Wassily W. Leontief studied the
US economy closely and noted that the United States was abundant in capital and,
therefore, should export more capital-intensive goods.
q However, his research using actual data showed the opposite: the United States was
importing more capital-intensive goods.
r According to the factor proportions theory, the United States should have been
importing labor-intensive goods, but instead it was actually exporting them.
s His analysis became known as the Leontief Paradox because it was the reverse of
what was expected by the factor proportions theory.
t In subsequent years, economists have noted historically at that point in time, labor in
the United States was both available in steady supply and more productive than in
many other countries; hence it made sense to export labor-intensive goods.
u Over the decades, many economists have used theories and data to explain and
minimize the impact of the paradox.
v However, what remains clear is that international trade is complex and is impacted by
numerous and often-changing factors.
w Trade cannot be explained neatly by one single theory, and more importantly, our
understanding of international trade theories continues to evolve.

6. Modern or Firm-Based Trade Theories

p In contrast to classical, country-based trade theories, the category of modern, firm-
based theories emerged after World War II and was developed in large part by
business school professors, not economists.
q The firm-based theories evolved with the growth of the multinational company
(MNC).
r The country-based theories couldn’t adequately address the expansion of either MNCs
or intra industry trade, which refers to trade between two countries of goods produced
in the same industry.
s For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz
automobiles from Germany.
t Unlike the country-based theories, firm-based theories incorporate other product and
service factors, including brand and customer loyalty, technology, and quality, into the
understanding of trade flows.
7. Country Similarity Theory
 Swedish economist Steffan Linder developed the country similarity theory in 1961, as
he tried to explain the concept of intra industry trade.
 Linder’s theory proposed that consumers in countries that are in the same or similar
stage of development would have similar preferences.
 In this firm-based theory, Linder suggested that companies first produce for domestic
consumption.
 When they explore exporting, the companies often find that markets that look similar
to their domestic one, in terms of customer preferences, offer the most potential for
success.
 Linder’s country similarity theory then states that most trade in manufactured goods
will be between countries with similar per capita incomes, and intra industry trade
will be common.
 This theory is often most useful in understanding trade in goods where brand names
and product reputations are important factors in the buyers’ decision-making and
purchasing processes.

8. Product Life Cycle Theory

p Raymond Vernon, a Harvard Business School professor, developed the product life
cycle theory in the 1960s.
q The theory, originating in the field of marketing, stated that a product life cycle has
three distinct stages: (1) new product, (2) maturing product, and (3) standardized
product.
r The theory assumed that production of the new product will occur completely in the
home country of its innovation.
s In the 1960s this was a useful theory to explain the manufacturing success of the
United States.
t US manufacturing was the globally dominant producer in many industries after World
War II.
u It has also been used to describe how the personal computer (PC) went through its
product cycle.
v The PC was a new product in the 1970s and developed into a mature product during
the 1980s and 1990s.
w Today, the PC is in the standardized product stage, and the majority of manufacturing
and production process is done in low-cost countries in Asia and Mexico.
x The product life cycle theory has been less able to explain current trade patterns
where innovation and manufacturing occur around the world.
y For example, global companies even conduct research and development in developing
markets where highly skilled labor and facilities are usually cheaper.
z Even though research and development is typically associated with the first or new
product stage and therefore completed in the home country, these developing or
 emerging-market countries, such as India and China, offer both highly skilled labor
and new research facilities at a substantial cost advantage for global firms.

9. Global Strategic Rivalry Theory

p Global strategic rivalry theory emerged in the 1980s and was based on the work of
economists Paul Krugman and Kelvin Lancaster.
q Their theory focused on MNCs and their efforts to gain a competitive advantage
against other global firms in their industry.
r Firms will encounter global competition in their industries and in order to prosper,
they must develop competitive advantages.
s The critical ways that firms can obtain a sustainable competitive advantage are called
the barriers to entry for that industry.
t The barriers to entry refer to the obstacles a new firm may face when trying to enter
into an industry or new market.
u The barriers to entry that corporations may seek to optimize include:
← research and development, the ownership of intellectual property rights,
economies of scale, unique business processes or methods as well as extensive
experience in the industry, and the control of resources or favorable access to
raw materials.

p Porter’s National Competitive Advantage Theory

 In the continuing evolution of international trade theories, Michael Porter of Harvard
Business School developed a new model to explain national competitive advantage in
1990.
 Porter’s theory stated that a nation’s competitiveness in an industry depends on the
capacity of the industry to innovate and upgrade.
 His theory focused on explaining why some nations are more competitive in certain
industries. To explain his theory, Porter identified four determinants that he linked
together.
 The four determinants are (1) local market resources and capabilities, (2) local market
demand conditions, (3) local suppliers and complementary industries, and (4) local
firm characteristics.

← Local market resources and capabilities (factor conditions).

← Porter recognized the value of the factor proportions theory, which considers a
nation’s resources (e.g., natural resources and available labor) as key factors in
determining what products a country will import or export.
← Porter added to these basic factors a new list of advanced factors, which he
defined as skilled labor, investments in education, technology, and
infrastructure.
← He perceived these advanced factors as providing a country with a sustainable
competitive advantage.
  Local market demand conditions.
← Porter believed that a sophisticated home market is critical to ensuring ongoing
innovation, thereby creating a sustainable competitive advantage.
← Companies whose domestic markets are sophisticated, trendsetting, and
demanding forces continuous innovation and the development of new products
and technologies.
← Many sources credit the demanding US consumer with forcing US software
companies to continuously innovate, thus creating a sustainable competitive
advantage in software products and services.

 Local suppliers and complementary industries.

← To remain competitive, large global firms benefit from having strong, efficient
supporting and related industries to provide the inputs required by the industry.
Certain industries cluster geographically, which provides efficiencies and
productivity.

 Local firm characteristics.

← Local firm characteristics include firm strategy, industry structure, and industry
rivalry. Local strategy affects a firm’s competitiveness.
← A healthy level of rivalry between local firms will spur innovation and
competitiveness.

2.7.3 Theories of International Investment

1. Monopolistic Advantage Theory
p Stefan Hymer saw the role of firm-specific advantages as a way of marrying the study
of direct foreign investment with classic models of imperfect competition in product
markets.
q He argued that a direct foreign investor possesses some kind of proprietary or
monopolistic advantage not available to local firms.
r These advantages must be economies of scale, superior technology, or superior
knowledge in marketing, management, or finance.
s Foreign direct investment took place because of the product and factor market
imperfections.
t The direct investor is a monopolist or, more often, an oligopolistic in product markets.

u Humer implied that governments should be ready to impose controls on it.

2. Product and Factor Market Imperfection

p Caves (1971) expanded Hymer's theory and hypothesized that the ability of firms to
differentiate their products - particularly high income consumer goods and services -
may be key ownership advantages of firms leading to foreign production.
p The consumers would prefer to similar locally made goods and thus would give the
firm some control over the selling price and an advantage over indigenous firms.
q To support these contentions, Caves noted that companies investing overseas were in
industries that typically engaged in heavy product research and marketing effort.

3. International Product Life cycle

 I have already examined this theory, but there is a close relationship between
international trade and international investment.
 The international product life cycle theory explains that foreign direct investment is a
natural stage in the life of a product.

4. Other Theories
 The Knickerbocker's follow-the-leader theory argued that, as risk minimizers
oligopolistic, wishing to avoid destructive competition, would normally follow each
other into (e.g., foreign) markets, to safeguard their own commercial interests.
 This theory is considered defensive because competitors are investing to avoid losing
the markets served by exports when their initial investor begins local production.
They may also fear that the initiator will achieve some advantage of risk
diversification that they will have unless they also enter the market.

5. Cross Investment Theory

 Graham noted a tendency for cross investment by European and American firms in
certain oligopolistic industries; that is, European firms tended to invest in the United
States when American companies had gone to Europe.
 He postulated that such investments would permit the American subsidiaries of
European firms to retaliate in the home market of U.S. companies if the European
subsidiaries of these companies initiated some aggressive tactic, such as price cutting,
in the European market.

6. The Internalization Theory

 Is an extension of the market imperfection theory. By investing in a foreign subsidiary
rather than licensing, the company is able to sent the knowledge across borders while
maintaining it within the firm, where it presumably yields a better return on the
investment made to produce it.
 Other theories relate to financial factors. Robert Aliber believes the imperfections in
the foreign exchange markets may be responsible for foreign investment.
 He explained this in terms of the ability of firms from countries with strong currencies
to borrow or raise capital in domestic or foreign markets with weak currencies, which,
in turn, enabled them to capitalize their expected income streams at different rates of
interest.
 Structural imperfections in the foreign exchange market allow firms to make foreign
exchange gains through the purchase or sales of assets in an undervalued or
overvalued currency.
 One other financially based theory (portfolio theory) was put by Rugman, Agmon and
Lessard.
 These researchers argued that international operations allow for a diversification of
risk and therefore tend to maximize the expected return on investment.
 Rugman and Lessard have further argued that the location of the foreign direct
investment would be a function of both the firm's perception of the uncertainties
involved and the geographical distribution of its existing assets.

7. The Eclectic Paradigm

 The eclectic paradigm is developed by John Dunning seeks to offer a general
framework for determining the extent and pattern of both foreign-owned production
undertaken by a country's own enterprises and also that of domestic production owned
by foreign enterprises.

8. Industrial Organization Theory

 Mainly explains the nature of the ownership (O) advantages that arise:
(1) From the possession of particular intangible assets - assets advantages (Oa);
(2) From the ability of the firm to coordinate multiple and geographically dispersed
value-added activities and to capture the gains of risk diversification- transaction cost
minimizing advantages (Ot).
 The theory of property rights and the internalization paradigm explain why firms
engage in foreign activity to exploit or acquire these advantages.
 Theories of location and tradeexplain the factors determining the siting of production.
 Theories of oligopoly and business strategy explain the likely reaction of firms to
particular OLI configurations.
 The eclectic paradigm suggests that all forms of foreign production by all countries
can be explained by reference to the above conditions.
 Dunning further argued that the eclectic paradigm offers the basis for a general
explanation of international production.
 The propensity of enterprises of a particular nationality to engage in foreign direct
investment will vary according to the economic et al. specific characteristics of their
home country and the country(ies) in which they propose to invest, the range and
types of products they intend to produce, and their underlying management and
organizational strategies.
2.8 Need for Global Competitiveness
 The need for global competitiveness is much important for any industry to sustain in
this competitive world and this helps the company to retain its old customers as well
to obtain new customers, maintaining the profit level and also to be a leader in the
market.
 Aspiring to be a market leader or to be globally competitive helps a company to
grow.It also helps the company in introducing new products to the world.
 Ex - Apple came up with the iPad and they were first to target the people with the new
product and thus were able to get advantage.
 Similarly Google acquired Motorola mobility holdings to become strong in the cell
phone segment too.
 When firm competes with each other it does not benefit them alone but a wide range
of customers too.

2.9 Regional Trade Blocks

 In general terms, regional trade blocks are associations of nations at a governmental
level to promote trade within the block and defend its members against global
competition.
 Defense against global competition is obtained through established tariffs on goods
produced by member states, import quotas, government subsidies, onerous
bureaucratic import processes, and technical and other non-tariff barriers.
 Since trade is not an isolated activity, member states within regional blocks also
cooperate in economic, political, security, climatic, and other issues affecting the
region.
 In terms of their size and trade value, there are four major trade blocks and a larger
number of blocks of regional importance.

2.10 Types of Regional Trade Blocs

 There are five different types of economic integration as given below

1. Free Trade Area

2. Custom Union

3. Common Market

4. Complete Economic Union

5. Complete Political Integration.

1. Free Trade Area

 In this form of economic integration, member nations remove all trade impediments
among themselves but retain their own policies with the outside world.
  That to say, the member countries do not charge any import tariff on imports from
each other but they do have their respective policies as regards levy of import tariffs
on imports from the countries outside the group.

2. Custom union

 This arrangement of economic integration is a similar to free trade area. Besides,

member nations have common external commercial relations.

 For example, they adopt common external tariff on imports from the non member
nations.

 Thus, custom union marks the second stage of economic integration amongst the
nations.

3. Common Market

 In this type of economic integration, the member nations have custom union
agreement with one another and they also agree for factor mobility across the national
borders of member countries.

 Thus, the common market arrangement permits free movement of labor and capital
amongst the member nations.

4. Complete Economic Union

 This is the final stage of economic integration to provide the basis for complete
political integration.

 In this type of economic integration, member countries are part of common market
and agree to have complete unification of monetary and fiscal policies.

 This arrangement is akin to economic and monetary union amongst the member
nations.

 In a recent development, eleven out of fifteen countries of the European Union have
agreed to move forward to forge economic and monetary union amongst themselves
with effect from 1.1.1999 when they decided to have a common currency unit called
Euro.

 There eleven countries are Belgium, France, Germany, Italy, Luxembourg,

Netherlands, Austria, Ireland, Portugal, Spain and Finland.
 5. Complete Political Integration

 This is the ultimate stage of integration amongst the nations when the member nations
literally merge their individual identities into one nation.

 In this form, the nation members have a central parliament with the sovereignty of a
national government.

2.11 Brief History of Regional Trade Blocks

1. ASEAN (Association of Southeast Asian Nations)
 Established on August 8, 1967, in Bangkok/Thailand.
 Member States: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand, and Vietnam.
 Goals: (1) Accelerate economic growth, social progress and cultural
development in the region and
 (2)Promote regional peace and stability and adhere to United Nations Charter.
Important Indicators for 2012: Population 616.6 million; GDP US$3.751
trillion; and Total Trade US$2.474 trillion.

Establishment
 The Association of Southeast Asian Nations, or ASEAN, was established on 8 August
1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok
Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia,
Philippines, Singapore and Thailand.

 Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao
PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up
what is today the ten Member States of ASEAN.

AIMS AND PURPOSES

As set out in the ASEAN Declaration, the aims and purposes of ASEAN are:

1. To accelerate the economic growth, social progress and cultural development in the region
through joint endeavors in the spirit of equality and partnership in order to strengthen the
foundation for a prosperous and peaceful community of Southeast Asian Nations;

2. To promote regional peace and stability through abiding respect for justice and the rule of law
in the relationship among countries of the region and adherence to the principles of the
United Nations Charter;

3. To promote active collaboration and mutual assistance on matters of common interest in the
economic, social, cultural, technical, scientific and administrative fields;

4. To provide assistance to each other in the form of training and research facilities in the
educational, professional, technical and administrative spheres;

5. To collaborate more effectively for the greater utilisation of their agriculture and industries,
the expansion of their trade, including the study of the problems of international commodity
trade, the improvement of their transportation and communications facilities and the raising
of the living standards of their peoples;
6. To promote Southeast Asian studies; and

7. To maintain close and beneficial cooperation with existing international and regional
organizations with similar aims and purposes, and explore all avenues for even closer
cooperation among themselves.

FUNDAMENTAL PRINCIPLES

 In their relations with one another, the ASEAN Member States have adopted the
following fundamental principles, as contained in the Treaty of Amity and
Cooperation in Southeast Asia (TAC) of 1976:
1) Mutual respect for the independence, sovereignty, equality, territorial integrity, and
national identity of all nations
2) The right of every State to lead its national existence free from external interference,
subversion or coercion
3) Non-interference in the internal affairs of one another
4) Settlement of differences or disputes by peaceful manner
5) Renunciation of the threat or use of force and
6) Effective cooperation among themselves.

2. EU (European Union)
 Founded in 1951 by six neighboring states as the European Coal and Steel Community
(ECSC).
 Over time evolved into the European Economic Community, then the European
Community and,in 1992, was finally transformed into the European Union.
 Regional block with the largest number of members states (28). These include
Austria, Belgium, Bulgaria, Croatia (2013), Cyprus, Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,
Lithuania, Luxembourg, Malta, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden, The Netherlands, and the United Kingdom.
 Population estimated at 505.7 million (January 2013 est., Eurostat).
GDP (PPP) estimated at US$15.54 trillion (2012 est., CIA World Factbook 7 January
History of EU

a) 1945 - 1959

A peaceful Europe – the beginnings of cooperation

 The European Union is set up with the aim of ending the frequent and bloody wars
between neighbours, which culminated in the Second World War.
 As of 1950, the European Coal and Steel Community begins to unite European
countries economically and politically in order to secure lasting peace.
 The six founders are Belgium, France, Germany, Italy, Luxembourg and the
Netherlands.
 The 1950s are dominated by a cold war between east and west.
 Protests in Hungary against the Communist regime are put down by Soviet tanks in
1956; while the following year, 1957, the Soviet Union takes the lead in the space
race, when it launches the first man-made space satellite, Sputnik 1. Also in 1957, the
Treaty of Rome creates the European Economic Community (EEC), or ‘Common
Market’.

b) 1960 - 1969

The ‘Swinging Sixties’ – a period of economic growth

 The 1960s sees the emergence of 'youth culture’, with groups such as The Beatles
attracting huge crowds of teenage fans wherever they appear, helping to stimulate a
cultural revolution and widening the generation gap.
 It is a good period for the economy, helped by the fact that EU countries stop charging
custom duties when they trade with each other.
 They also agree joint control over food production, so that everybody now has enough
to eat - and soon there is even surplus agricultural produce.
 May 1968 becomes famous for student riots in Paris, and many changes in society and
behaviour become associated with the so-called ‘68 generation’.

c) 1970 - 1979

A growing Community – the first Enlargement

 Denmark, Ireland and the United Kingdom join the European Union on 1 January
1973, raising the number of member states to nine.
 The short, yet brutal, Arab-Israeli war of October 1973 result in an energy crisis and
economic problems in Europe.
 The last right-wing dictatorships in Europe come to an end with the overthrow of the
Salazar regime in Portugal in 1974 and the death of General Franco of Spain in 1975.
 The EU regional policy starts to transfer huge sums to create jobs and infrastructure in
poorer areas.
  The European Parliament increases its influence in EU affairs and in 1979 all citizens
can, for the first time, elect their members directly.

d) 1980 - 1989

The changing face of Europe - the fall of the Berlin Wall

 The Polish trade union, Solidarność, and its leader Lech Walesa, become household
names across Europe and the world following the Gdansk shipyard strikes in the
summer of 1980.
 In 1981, Greece becomes the 10th member of the EU and Spain and Portugal follow
five years later.
 In 1986 the Single European Act is signed.
 This is a treaty which provides the basis for a vast six-year programme aimed at
sorting out the problems with the free-flow of trade across EU borders and thus
creates the ‘Single Market’.
 There is major political upheaval when, on 9 November 1989, the Berlin Wall is
pulled down and the border between East and West Germany is opened for the first
time in 28 years, this leads to the reunification of Germany when both East and West
Germany are united in October 1990.

e) 1990 - 1999

A Europe without frontiers

 With the collapse of communism across central and eastern Europe, Europeans
become closer neighbours.
 In 1993 the Single Market is completed with the 'four freedoms' of: movement of
goods, services, people and money.
 The 1990s is also the decade of two treaties, the ‘Maastricht’ Treaty on European
Union in 1993 and the Treaty of Amsterdam in 1999.
 People are concerned about how to protect the environment and also how Europeans
can act together when it comes to security and defence matters.
 In 1995 the EU gains three more new members, Austria, Finland and Sweden.
 A small village in Luxembourg gives its name to the ‘Schengen’ agreements that
gradually allow people to travel without having their passports checked at the borders.
 Millions of young people study in other countries with EU support. Communication is
made easier as more and more people start using mobile phones and the internet.

f) 2000 – 2009

Further expansion

 The euro is the new currency for many Europeans. 11 September 2001 becomes
synonymous with the 'War on Terror' after hijacked airliners are flown into buildings
in New York and Washington.
 EU countries begin to work much more closely together to fight crime.
  The political divisions between east and west Europe are finally declared healed when
no fewer than 10 new countries join the EU in 2004, followed by two more in 2007.
 A financial crisis hits the global economy in September 2008, leading to closer
economic cooperation between EU countries.
 The Treaty of Lisbon is ratified by all EU countries before entering into force on 1
December 2009.
 It provides the EU with modern institutions and more efficient working methods.

g) 2010 – Today

A decade of opportunities and challenges

 The new decade starts with a severe economic crisis, but also with the hope that
investments in new green and climate-friendly technologies and closer European
cooperation will bring lasting growth and welfare.

3. MERCOSUR (Mercado Comun del Cono Sul - Southern Cone Common Market)

 Established on 26 March 1991 with the Treaty of Assunción.

 Full members include Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Boliivia
is undergoing process of becoming a full member. Associate members include Chile,
Colombia, Ecuador, Guyana, Peru, and Suriname.
 Associate members have access to preferential trade but not to tariff benefits of full
members. Mexico, interested in becoming a member of the
region, has an observer status.
 Goals: Integration of member states for acceleration of sustained economic
development based on socialjustice, environmental protection, and combating
poverty.
 Population: More than 282 million people (July 2013 est., CIA World Factbook) GDP
(PPP) of more than US$3.471 trillion (2011 est., World Economic Outlook Database,
IMF, April 2012).

4. NAFTA (North American Free Trade Agreement)

 Members: Canada, Mexico, and the United States of America.
 Goals: Eliminate trade barriers among member states, promote conditions for free
trade, increase investment opportunities, and protect intellectual property rights.
 Population of over 469.8 million (July 2013 est., The CIA Factbook, 14 January
2014). GDP (PPP) US$17.8 trillion (July 2012 est., The CIA Factbook, 5 February
2013).

.
Free Trade Commission


Made up of ministerial representatives from the NAFTA partners.

Supervises the implementation and further elaboration of the Agreement and helps
resolve disputes arising from its interpretation.
 Oversees the work of the NAFTA committees, working groups, and other subsidiary
bodies.
NAFTA Coordinators

 Senior trade department officials designated by each country.

 Responsible for the day-to-day management of NAFTA implementation.
NAFTA Working Groups and Committees

 Over 30 working groups and committees have been established to facilitate trade and
investment and to ensure the effective implementation and administration of NAFTA.
 Key areas of work include trade in goods, rules of origin, customs, agricultural trade and
subsidies, standards, government procurement, investment and services, cross-border
movement of business people, and alternative dispute resolution.
NAFTA Secretariat

 Made up of a “national section” from each member country.

 Responsible for administering the dispute settlement provisions of the Agreement and
for administering dispute resolution processes under Chapter 14, Chapter 19 and
Chapter 20. Also has certain responsibilities related to the Chapter 11 dispute settlement
provisions concerning investment.
 Maintains a court-like registry relating to panel, committee, and tribunal proceedings.
 Maintains a tri-national website containing up-to-date information on past and current
disputes.
Commission for Labor Cooperation

 Created to promote cooperation on labor matters among NAFTA members and the
effective enforcement of domestic labor law.
 Consists of a Council of Ministers (comprising the labor ministers from each country)
and a Secretariat, which provides administrative, technical, and operational support to
the Council and implements an annual work program. Departments responsible for labor
in each of the three countries serve as domestic implementation
points. Commission for Environmental Cooperation

 Established to further cooperation among NAFTA partners in implementing the

environmental side accord to NAFTA and to address environmental issues of continental
concern, with particular attention to the environmental challenges and opportunities
presented by continent-wide free trade.
  Consists of a Council (comprising the environment ministers from each country), a Joint
Public Advisory Committee (a 15-member, independent volunteer body that provides
advice and public input to Council on any matter within the scope of the environmental
accord), and a Secretariat (which provides administrative, technical, and operational
support).

5. Asia Pacific Economic Cooperation

 The idea of APEC was firstly publicly broached by former Prime Minister of
Australia Bob Hawke during a speech in Seoul, Korea on 31 January 1989.
 Ten months later, 12 Asia-Pacific economies met in Canberra, Australia to establish
APEC. The founding members were: Australia, Brunei Darussalam, Canada,
Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore,
Thailand and the United States.
 China, Hong Kong, China and Chinese Taipei joined in 1991. Mexico and Papua New
Guinea followed in 1993. Chile acceded in 1994. And in 1998, Peru, Russia and Viet
Nam joined, taking the full membership to 21.
 Between 1989 and 1992, APEC met as an informal senior official and Ministerial
level dialogue. In 1993, former United States President Bill Clinton, established the
practice of an annual APEC Economic Leaders' Meeting to provide greater strategic
vision and direction to cooperation in the region.

Mission Statement

 APEC is the premier Asia-Pacific economic forum. Our primary goal is to support
sustainable economic growth and prosperity in the Asia-Pacific region.

 We are united in our drive to build a dynamic and harmonious Asia-Pacific

community by championing free and open trade and investment, promoting and
accelerating regional economic integration, encouraging economic and technical
cooperation, enhancing human security, and facilitating a favorable and sustainable
business environment. Our initiatives turn policy goals into concrete results and
agreements into tangible benefits.

APEC Members Date of Joining

Australia 6-7 Nov 1989

Brunei Darussalam 6-7 Nov 1989

Canada 6-7 Nov 1989

Chile 11-12 Nov 1994

People's Republic of China 12-14 Nov 1991

Hong Kong, China 12-14 Nov 1991

Indonesia 6-7 Nov 1989

Japan 6-7 Nov 1989

Republic of Korea 6-7 Nov 1989

Malaysia 6-7 Nov 1989

Mexico 17-19 Nov 1993

New Zealand 6-7 Nov 1989

Papua New Guinea 17-19 Nov 1993

Peru 14-15 Nov 1998

The Philippines 6-7 Nov 1989

Russia 14-15 Nov 1998

Singapore 6-7 Nov 1989

Chinese Taipei 12-14 Nov 1991

Thailand 6-7 Nov 1989

The United States 6-7 Nov 1989

Viet Nam 14-15 Nov 1998

6. Gulf Cooperation Council

Foundation and Objectives

 On 21st Rajab 1401 AH corresponding to 25th May 1981, Their Majesties and
Highnesses, the leaders of the United Arab Emirates, State of Bahrain, Kingdom of
Saudi Arabia, Sultanate of Oman, State of Qatar and State of Kuwait met in Abu
Dhabi, United Arab Emirates, where they reached a cooperative framework joining
the six states to effect coordination, integration and inter-connection among the
Member States in all fields in order to achieve unity, according to article 4 of the GCC
Charter.
 Article 4 also emphasized the deepening and strengthening of relations, links and
areas of cooperation among their citizens. The underpinnings which are clearly
provided for in the preamble of the GCC Charter, confirm the special relations,
common qualities and similar systems founded on the creed of Islam, faith in a
 common destiny and sharing one goal, and that the cooperation among these states
would serve the sublime objectives of the Arab nation.
 The decision was not a product of the moment but an institutional embodiment of a
historical, social and cultural reality.
 Deep religious and cultural ties link the six states, and strong kin relations prevail
among their citizens.
 All these factors, enhanced by one geographical entity extending from sea to desert,
have facilitated contacts and interaction among them, and created homogeneous
values and characteristics.
 Therefore, while, on one hand, the GCC is a continuation, evolution and
institutionalization of old prevailing realities, it is, on the other, a practical answer to
the challenges of security and economic development in the area. It is also a
fulfillment of the aspirations of its citizens towards some sort of Arab regional unity.

Objectives

The GCC Charter states that the basic objectives are :

 To effect co-ordination, integration and inter-connection between member states in all

fields in order to achieve unity between them.
 To deepen and strengthen relations, links and areas of cooperation now prevailing
between their peoples in various fields.
 To formulate similar regulations in various fields including the following:
A. Economic and financial affairs.
B. Commerce, customs and communications.
C. Education and culture.
D. Social and health affairs.
E. Information and tourism.
F. Legislative and administrative affairs.
 To stimulate scientific and technological progress in the fields of industry, mining,
agriculture, water and animal resources: to establish scientific research : to establish
joint ventures and encourage cooperation by the private sector for the good of their
peoples.

Member States – UAE, The Kingdom of Bahrain, The Kingdom of Saudi Arabia, The
Sultanate of Owen, Qatar, Kuwait.
8. ESCAP

 The United Nations Economic and Social Commission for Asia and the Pacific
(ESCAP) is the regional development arm of the United Nations for the Asia-Pacific
region.
 Made up of 53 Member States and 9 Associate Members, with a geographical scope
that stretches from Turkey in the west to the Pacific island nation of Kiribati in the
east, and from the Russian Federation in the north to New Zealand in the south, the
region is home to 4.1 billion people, or two thirds of the world’s population.
 This makes ESCAP the most comprehensive of the United Nations five regional
commissions, and the largest United Nations body serving the Asia-Pacific region
with over 600 staff.
 Established in 1947 with its headquarters in Bangkok, Thailand, ESCAP works to
overcome some of the region’s greatest challenges by providing results oriented
projects, technical assistance and capacity building to member States in the following
areas:

 Sustainable Development
 Macroeconomic Policy and Development
 Trade and Investment
 Transport
 Social Development
 Environment and Development
 Information and Communications Technology
 Disaster Risk Reduction
 Statistics
 Sub-regional activities for development

 ESCAP promotes rigorous analysis and peer learning in our 7 core areas of work;
translates these findings into policy dialogues and recommendations; and provides
good development practices, knowledge sharing and technical assistance to member
States in the implementation of these recommendations.
 ESCAP uses its convening power to bring countries together to address issues through
regional cooperation, including:

 Issues that all or a group of countries in the region face, for which it is
necessary to learn from each other;
 Issues that benefit from regional or multi-country involvement;
 Issues that are transboundary in nature, or that would benefit from
collaborative inter-country approaches;
 Issues that are of a sensitive or emerging nature and require further advocacy
and negotiation.

 ESCAP provides a forum for its member States that promotes regional cooperation
and collective action, assisting countries in building and sustaining shared economic
growth and social equity.
 In addition, ESCAP gives stronger participation to the smaller and often left out
voices of the region, the least developed countries, the small island States and
landlocked States.

Vision

 ESCAP is committed to a resilient Asia and the Pacific founded on shared prosperity,
social equity and sustainability.
 Our vision is to be the most comprehensive multilateral platform for promoting
cooperation among member States to achieve inclusive and sustainable economic and
social development in Asia and the Pacific.

History

 Established in 1947 in Shanghai, China, as the Economic Commission for Asia and
the Far East (ECAFE) to assist in post-war economic reconstruction, the United
Nations Economic and Social Commission for Asia and the Pacific (ESCAP) moved
its headquarters to Bangkok in January 1949.
 The name was changed in 1974 to reflect both the economic and social aspects of
development and the geographic location of its member countries.

.
  ESCAP's mandate was broadened in 1977 by the General Assembly. The regional
commissions have since then been the main UN economic and social development
centres within the five different regions.
 Strengthened by 50 years of experience as a regional think-tank, ESCAP's activities
are more and more concentrated on spreading the growth momentum from its more
dynamic member countries to the rest of the region.
 The ultimate challenge lies in bringing the region's 680 million poor into the
economic mainstream, enabling everybody to achieve a better standard of life as
envisaged in the Charter of the United Nations.

9. Organization of Petroleum Exporting Countries (OPEC)

Mission

 In accordance with its Statute, the mission of the Organization of the Petroleum
Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its
Member Countries and ensure the stabilization of oil markets in order to secure an
efficient, economic and regular supply of petroleum to consumers, a steady income to
producers and a fair return on capital for those investing in the petroleum industry.

History

 The Organization of the Petroleum Exporting Countries (OPEC) was founded in

Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries
namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They
were to become the Founder Members of the Organization
 These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962),
the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973),
Gabon (1975) and Angola (2007)
 From December 1992 until October 2007, Ecuador suspended its membership. Gabon
terminated its membership in 1995. Indonesia suspended its membership effective
January 2009.

10. SAARC

History

 The idea of co-operation in South Asia was discussed in at least three conferences: the
Asian Relations Conference held in New Delhi on April 1947; the Baguio Conference
in the Philippines on May 1950; and the Colombo Powers Conference held in Sri
Lanka in April 1954.
  In the ending years of the 1970s, the seven inner South Asian nations that included
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka agreed upon the
creation of a trade bloc and to provide a platform for the people of South Asia to work
together in a spirit of friendship, trust and understanding.
 President Ziaur Rahman later addressed official letters to the leaders of the countries
of the South Asia, presenting his vision for the future of the region and the compelling
arguments for region.
 During his visit to India in December 1977,President Ziaur Rahman discussed the
issue of regional cooperation with the Indian Prime Minister, Morarji Desai.
 In the inaugural speech to the Colombo Plan Consultative Committee which met in
Kathmandu also in 1977, King Birendra of Nepal gave a call for close regional
cooperation among South Asian countries in sharing river waters.
 After the USSR's intervention in Afghanistan, the efforts to established the union was
accelerated in 1979 and the resulting rapid deterioration of South Asian security
situation.
 Responding to the President Zia Rehman and King Birendra's convention, the
officials of the foreign ministries of the seven countries met for the first time in
Colombo in April 1981.
 The Bangladesh's proposal was promptly endorsed by Nepal, Sri Lanka, Bhutan and
the Maldives but India and Pakistan were sceptical initially.
 The Indian concern was the proposal’s reference to the security matters in South Asia
and feared that President Zia Rehman's proposal for a regional organisation might
provide an opportunity for new smaller neighbours to renationalised all bilateral
issues and to join with each other to gang up against India.
 Pakistan assumed that it might be an Indian strategy to organise the other South Asian
countries against Pakistan and ensure a regional market for Indian products, thereby
consolidating and further strengthening India’s economic dominance in the region.
 In 1983, the international conference held by Indian Minister of External Affairs P.V.
Narasimha Rao in New Delhi, the foreign ministers of the inner seven countries
adopted the Declaration on South Asian Association Regional Cooperation (SAARC)
and formally launched the Integrated Programme of Action (IPA) initially in five
agreed areas of cooperation namely, Agriculture; Rural Development;
Telecommunications; Meteorology; and Health and Population Activities.

Members –

The member states are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan,
and Sri Lanka.
 IBM UNIT 3 - INTERNATIONAL STRATEGIC MANAGEMENT

Topics - Strategic Compulsions –Standardization VS Differentiation – Strategic Options –

Global Portfolio Management –global Entry Strategy-Different form of international
business-advantages and organizational issues in International business – Organizational
structures and controlling of international business - Global business performance evaluation
system.

3.1 International Business Strategy

 Business is acknowledged to be international and there is a general expectation that
this will continue for the foreseeable future.
 International business may be defined simply as business transactions that take place
across national borders.
 This broad definition includes the very small firm that exports (or imports) a small
quantity to only one country, as well as the very large global firm with integrated
operations and strategic alliances around the world.
 Within this broad array, distinctions are often made among different types of
international firms, and these distinctions are helpful in understanding a firm's
strategy, organization, and functional decisions (for example, its financial,
administrative, marketing, human resource, or operations decisions).

.
  One distinction that can be helpful is the distinction between multi-domestic
operations, with independent subsidiaries which act essentially as domestic firms, and
global operations, with integrated subsidiaries which are closely related and
interconnected.
 These may be thought of as the two ends of a continuum, with many possibilities in
between. Firms are unlikely to be at one end of the continuum, though, as they often
combining aspects of multi-domestic operations with aspects of global
operations.
 International business grew over the last half of the twentieth century partly because
of liberalization of both trade and investment, and partly because doing business
internationally had become easier. In terms of liberalization, the General Agreement
on Tariffs and Trade (GATT) negotiation rounds resulted in trade liberalization, and
this was continued with the formation of the World Trade Organization (WTO) in
1995.
 At the same time, worldwide capital movements were liberalized by most
governments, particularly with the advent of electronic funds transfers.
 In addition, the introduction of a new European monetary unit, the euro, into
circulation in January 2002 has impacted international business economically.
 The euro is the currency of the European Union, membership in March 2005 of 25
countries, and the euro replaced each country's previous currency.
 As of early 2005, the United States dollar continues to struggle against the euro and
the impacts are being felt across industries worldwide.

 In terms of ease of doing business internationally, two major forces are important:
 Technological developments which make global communication and transportation
relatively quick and convenient; and
 The disappearance of a substantial part of the communist world, opening many of the
world's economies to private business.

3.2 Standardization of International Business

7. An international strategy means that internationally scattered subsidiaries act
independently and operate as if they were local companies, with minimum
coordination from the parent company.
8. Global strategy leads to a wide variety of business strategies, and a high level of
adaptation to the local business environment.
9. The challenge here is to develop one single strategy that can be applied throughout
the world while at the same time maintaining the flexibility to adapt that strategy to
the local business environment when necessary.
 ← A global strategy involves a carefully crafted single strategy for the entire network of
subsidiaries and partners, encompassing many countries simultaneously and
leveraging synergies across many countries.
← What differences are there between the global strategy and international strategy?
There are three key differences.

6. The first relates to the degree of involvement and coordination from the centre.
Coordination of strategic activities is the extent to which a firm’s strategic activities in
different country locations are planned and executed interdependently on a global scale to
exploit the synergies that exist across different countries. An international strategy does
not require strong coordination from the centre. A global strategy, on the other hand,
requires significant coordination between the activities of the centre and those of
subsidiaries.

7. The second difference relates to the degree of product standardization and responsiveness
to local business environment. Product standardization is the degree to which a product,
service, or process is standardized across countries. An international strategy assumes that
the subsidiary should respond to local business needs unless there is a good reason for not
doing so. In contrast, the global strategy assumes that the centre should standardize its
operations and products in all the different countries, unless there is a compelling reason
for not doing so.

8. The third difference has to do with strategy integration and competitive moves.
‘Integration’ and ‘competitive move’ refer to the extent to which a firm’s competitive
moves in major markets are interdependent. For example, a multinational firm subsidizes
operations or subsidiaries in countries where the market is growing with resources gained
from other subsidiaries where the market is declining, or responds to competitive moves
by rivals in one market by counter-attacking in others. The international strategy gives
subsidiaries the independence to plan and execute competitive moves independently—
that is, competitive moves are based solely on the analysis of local rivals. In contrast, the
global strategy plans and executes competitive battles on a global scale. Firms adopting a
global strategy, however, compete as a collection of globally integrated single firms. An
international strategy treats competition in each country on a ‘stand-alone basis’, while a
global strategy takes ‘an integrated approach’ across different countries.
3.2.1 Differentiation – Competitive Advantage
11. Competitive advantage is defined as the strategic advantage one business entity has
over its rival entities within its competitive industry.
12. Achieving competitive advantage strengthens and positions a business better within
the business environment.
13. Competitive advantage seeks to address some of the criticisms of comparative
advantage.
.
 13. A country is said to have a comparative advantage in the production of a good (say
cloth) if it can produce cloth at a lower opportunity cost than another country.
14. The opportunity cost of cloth production is defined as the amount of wine that must
be given up in order to produce one more unit of cloth.
15. Thus, England would have the comparative advantage in cloth production relative to
Portugal if it must give up less wine to produce another unit of cloth than the amount
of wine that Portugal would have to give up to produce another unit of cloth.

Micheal Porter’s Generic Strategies

1. Cost Leadership
5. Cost leadership means having the lowest per-unit (i.e., average) cost in the industry –
that is, lowest cost relative to your rivals.
6. This could mean having the lowest per-unit cost among rivals in highly competitive
industries, in which case returns or profits will be low but nonetheless higher than
competitors
7. Or, this could mean having lowest cost among a few rivals where each firm enjoys
pricing power and high profits.
8. Notice that cost leadership is defined independently of market structure.

Cost leadership is a defendable strategy because:

8. It defends the firm against powerful buyers. Buyers can drive price down only to
the level of the next most efficient producer.
 7. It defends against powerful suppliers. Cost leadership provides flexibility to
absorb an increase in input costs, whereas competitors may not have this
flexibility.
8. The factors that lead to cost leadership also provide entry barriers in many
instances. Economies of scale require potential rivals to enter the industry with
substantial capacity to produce, and this means the cost of entry may be
prohibitive to many potential competitors.

Achieving a low cost position usually requires the following resources and skills:

 Large up-front capital investment in new technology, which hopefully leads to

large market share in the long-run, but may lead to losses in the short-run.
 Continued capital investment to maintain cost advantage through economies of
scale and market share.
 Process innovation – developing cheaper ways to produce existing products.
 Intensive monitoring of labor, where workers frequently have an incentive-based
pay structure (i.e., a contract which includes some combination of a fixed-wage
plus piece-rate pay).
 Tight control of overhead.

2. Differentiation
q Differentiating the product offering of a firm means creating something that is
perceived industry wide as being unique.
r It is a means of creating your own market to some extent.
s There are several approaches to differentiation:
o Different design
o Brand image
o Number of features
o New technology
 A differentiation strategy may mean differentiating along 2 or more of these
dimensions.

Differentiation is a defendable strategy for earning above average returns because:

 It insulates a firm from competitive rivalry by creating brand loyalty; it lowers the
price elasticity of demand by making customers less sensitive to price changes in your
products.
 Uniqueness, almost by definition, creates barriers and reduces substitutes. This leads
to higher margins, which reduces the need for a low-cost advantage.
 Higher margins give the firm room to deal with powerful suppliers.
 Differentiation also mitigates buyer power since buyers now have fewer alternatives.

Achieving a successful strategy of differentiation usually requires the following:

r Exclusivity, which unfortunately also precludes market share and low cost advantage.
 r Strong marketing skills.
s Product innovation as opposed to process innovation.
t Applied R&D.
u Customer support.
v Less emphasis on incentive based pay structure.

3 Focus or Niche Strategy

6. Here we focus on a particular buyer group, product segment, or geographical market.
7. Whereas low cost and differentiation are aimed at achieving their objectives industry
wide, the focus or niche strategy is built on serving a particular target (customer,
product, or location) very well.
8. Note, however, that a focus strategy means achieving either a low cost advantage or
differentiation in a narrow part of the market. For reasons discussed above, this
creates a defendable position within that part of the market.

Stuck in the Middle:

 Failure to develop a strategy in one of these 3 directions is a firm that is “stuck in the
middle.”
 This means you lack the market share, capital, and overhead control to be a cost
leader, and lack the industry wide differentiation necessary to create margins which
obviate the need for a low-cost position.
 Being “stuck” implies low profits as a rule: profits are bid away to compete with low
cost producers; or, the firm loses high margin business to firms who achieve better
differentiation.
 Classic examples of this problem are large, international airline companies, many of
which are now bankrupt.
 Depending on a firm’s capabilities and resources, a “stuck” firm must gravitate
toward either low cost (usually by buying market share) or focus or differentiation
(which may mean decreasing market share).

Risks of each Strategy:

← Each generic strategy is based on erecting different kinds of defences against the
competitive forces, and hence they involve different risks.

v Cost Leadership:

← Maintaining cost leadership can be risky because:

s Innovations nullify past inventions and learning, and hence cost leadership
requires continual capital investment to maintain cost advantage.
v Exclusive attention to cost can blind firms to changes in product requirements.
z Cost increases narrow price differentials and reduce ability to compete with
competitors’ brand loyalty.
2 Differentiation:

o Risks are:
7. Cost differentiation between low cost firms and differentiating firms becomes
too large to hold customer loyalty. Buyers trade-off features, service, or image
for price.
 Buyers need for differentiation falls.
aa Imitation decreases perceived differentiation.

3.3 Global Entry Strategies

 The traditional international-expansion entry modes. Beyond importing, international
expansion is achieved through exporting, licensing arrangements, partnering and
strategic alliances, acquisitions, and establishing new, wholly owned subsidiaries, also
known as green field ventures.
 Each mode of market entry has advantages and disadvantages. Firms need to evaluate
their options to choose the entry mode that best suits their strategy and goals.

1. Exporting
 Exporting is a typically the easiest way to enter an international market, and therefore
most firms begin their international expansion using this model of entry.
 Exporting is the sale of products and services in foreign countries that are sourced
from the home country.
 The advantage of this mode of entry is that firms avoid the expense of establishing
operations in the new country.
 Firms must, however, have a way to distribute and market their products in the new
country, which they typically do through contractual agreements with a local
company or distributor.
 When exporting, the firm must give thought to labeling, packaging, and pricing the
offering appropriately for the market.
 In terms of marketing and promotion, the firm will need to let potential buyers know
of its offerings, be it through advertising, trade shows, or a local sales force..

2. Licensing
 Licensing is a common method of international market entry for companies with a
distinctive and legally protected asset, which is a key differentiating element in their
marketing offer.
 It involves a contractual arrangement whereby a company licenses the rights to
certain technological know-how, design, patents, trademarks and intellectual property
to a foreign company in return for royalties or other kinds of payment.
 For example, Disney's mode of entry in Japan had been licensing.
 Because little investment on the part of the licensor is required, licensing has the
potential to provide a very large ROI.
 However, because the licensee produces and markets the product, potential returns
from manufacturing and marketing activities may be lost.
 Here are several conditions where licensing is favorable over other entry methods:
 Import and investment barriers.
← Legal protection possible in target environment. o
Low sales potential in target country.
o Large cultural distance.
o Licensee lacks ability to become a competitor.
 Licensing offers businesses many advantages, such as rapid entry into foreign markets
and virtually no capital requirements to establish manufacturing operations abroad.
 Returns are usually realized more quickly than for manufacturing ventures.
 The other major advantage of licensing is that, despite the low level of local
involvement required of the international licensor, the business is essentially local and
is in the shape of the local business that holds the license.
 As a result, import barriers such as regulation or tariffs do not apply.

3. Partnerships and Strategic Alliances

 Another way to enter a new market is through a strategic alliance with a local partner.
 A strategic alliance involves a contractual agreement between two or more enterprises
stipulating that the involved parties will cooperate in a certain way for a certain time
to achieve a common purpose.
 To determine if the alliance approach is suitable for the firm, the firm must decide
what value the partner could bring to the venture in terms of both tangible and
intangible aspects.
 The advantages of partnering with a local firm are that the local firm likely
understands the local culture, market, and ways of doing business better than an
outside firm.
 Partners are especially valuable if they have a recognized, reputable brand name in the
country or have existing relationships with customers that the firm might want to
access.
 For example, Cisco formed a strategic alliance with Fujitsu to develop routers for
Japan. In the alliance, Cisco decided to co-brand with the Fujitsu name so that it could
leverage Fujitsu’s reputation in Japan for IT equipment and solutions while still
retaining the Cisco name to benefit from Cisco’s global reputation for switches and
routers.

4. Acquisitions
 An acquisition is a transaction in which a firm gains control of another firm by
purchasing its stock, exchanging the stock for its own, or, in the case of a private firm,
paying the owners a purchase price.
 In our increasingly flat world, cross-border acquisitions have risen dramatically.

3 In recent years, cross-border acquisitions have made up over 60 percent of all

acquisitions completed worldwide. Acquisitions are appealing because they give the
company quick, established access to a new market.
4 However, they are expensive, which in the past had put them out of reach as a strategy
for companies in the undeveloped world to pursue.
5 What has changed over the years is the strength of different currencies.
 6 The higher interest rates in developing nations has strengthened their currencies
relative to the dollar or euro.
7 If the acquiring firm is in a country with a strong currency, the acquisition is
comparatively cheaper to make.

5. Wholly Owned Subsidiary

5. The process of establishing of a new, wholly owned subsidiary (also called a green
field venture) is often complex and potentially costly, but it affords the firm maximum
control and has the most potential to provide above-average returns.
6. The costs and risks are high given the costs of establishing a new business operation
in a new country.
7. The firm may have to acquire the knowledge and expertise of the existing market by
hiring either host-country nationals—possibly from competitive firms—or costly
consultants.

3.4 Different Forms of International Business

 There are number of ways for internationalization / globalization of business.
 These are referred as foreign market entry strategies.
 Each of these ways has certain advantages and disadvantages.
 One strategy for a particular business may not be very suitable for another business
with different environment.
 Therefore it is quite common that a company employs different strategies for different
markets.
 The different strategies are :
 Imports: Imports is defined as goods and services produced by host country and
purchased by parent country. it is reverse process of Exports.
 Exports: Exports is defined as goods and services produced in one country then get
marketed to other country.
 Foreign Direct Investment (FDI) : Here funds are invested in equity from parent
country to a host country. Rich countries invest funds in growth industries and
geographic areas of economic development.
 Licensing : Licensing which involve minimal commitment of resources and effort on
the part of the international marketer, are easy ways of entering the foreign markets.
Under international licensing, a firm in one country (the licensor) permits a firm in
one country permits the firm in another country to use the intellectual property (such
as patents, trademarks, copyrights, technology, technical know – how, marketing skill
 or some other specific skill). The monetary benefits to the licensor is the royalty fees,
which the licensee pays.
 Franchising: Franchising is giving right at a parent company (Franchiser) to another
company (Franchisee) using his name selling his products, do business in a prescribed
manner and get advantage of brands of parent company.
 Joint Venture: It is a mutual agreement of two or more partners across globe to
collectively own the company to produce goods and services. This will be pooling the
resources to mutual advantages.
 Manufacturing in Foreign Country: When a company finds better economy in
manufacturing in host country due to lower costs of materials labour or duties the
manufacturing is undertaken in host country. The local conditions in host country
should support manufacturing and marketing activities.
 Management Contracts: The foreign country needs management expertise in
managing existing or a sick company this method is used. Under management
contract the service provided gets fees or shares in the company. The contracts is for a
specific period.
 Consultancy Services
 Strategic Partnerships: The positive aspect of two companies in different countries are
joined together. The resources are pooled together to produce new marketable
products. This will put both companies in win-win situations .
 Mergers: A Corporate Merger is a combining of corporations in which one of two or
more corporations survives and works for common objectives. These are several types
of mergers with a variety of filing requirements based on number of corporations
merging and the type of merger.
 Counter Trades: Counter trade is a form of international trade in which certain exports
and import transactions are directly linked with each other and in which imports of
goods are paid for by exports of goods, instead of money payments.

3.5 Advantage and Organizational Issues in International Business

3.5.1 Advantage of International Business

 Earning valuable foreign currency: A country is able to earn valuable foreign
currency by exporting its goods to other countries.
 Division of labor: International business leads to specialization in the production of
goods. Thus, quality goods for which it has maximum advantage.
 Optimum utilization of available resources: International business reduces waste of
national resources. It helps each country to make optimum use of its natural resources.
Every country produces those goods for which it has maximum advantage.
 Increase in the standard of living of people: Sale of surplus production of one
country to another country leads to increase in the incomes and savings of the people

of the former country. This raises the standard of living of the people of the exporting
country.
  Benefits to consumers: Consumers are also benefited from international business. A
variety of goods of better quality is available to them at reasonable prices. Hence,
consumers of importing countries are benefited as they have a good scope of choice
of products.
 Encouragement to industrialization: Exchange of technological know-how enables
underdeveloped and developing countries to establish new industries with the
assistance of foreign aid. Thus, international business helps in the development of
industry.
 International peace and harmony: International business removes rivalry between
different countries and promotes international peace and harmony. It creates
dependence on each other, improves mutual confidence and good faith.
 Cultural development: International business fosters exchange of culture and ideas
between countries having greater diversities. A better way of life, dress, food, etc. can
be adopted form other countries.
 Economies of large-scale production: International business leads to production on
a large scale because of extensive demand. All the countries of the world can obtain
the advantages of large-scale production.
 Stability in prices of products: International business irons out wide fluctuations in
the prices of products. It leads to stabilization of prices of products throughout the
world.
 Widening the market for products: International business widens the market for
products all over the world. With the increase in the scale of operation, the profit of
the business increases.
 Advantageous in emergencies: International business enables us to face
emergencies. In case of natural calamity, goods can be imported to meet necessaries.
 Creating employment opportunities: International business boosts employment
opportunities in an export-oriented market. It raises the standard of living of the
countries dealing international business.
 Increase in Government revenue: The Government imposes import and export
duties for this trade. Thus, Government is able to earn a great deal of revenue from
international business.
 Other advantages: Effective business education, Improvement in production
systems, Elimination of monopolies, etc

3.5.2 Disadvantage of International Business

 Adverse effects on economy: One country affects the economy of another country
through international business. Moreover, large-scale exports discourage the industrial
development of importing country. Consequently, the economy of the importing
country suffers.

 Competition with developed countries: Developing countries are unable to compete

with developed countries. It hampers the growth and development of developing
countries, unless international business is controlled.
 Rivalry among nations: Intense competition and eagerness to export more
commodities may lead rivalry among nations. As a consequence, international peace
may be hampered.
 Colonization: Sometimes, the importing country is reduced to a colony due to
economic and political dependence and industrial backwardness.
  Exploitation: International business leads to exploitation of developing countries the
developed countries. The prosperous and dominant countries regulate the economy
poor nations.
 Legal problems: Varied laws regulations and customs formalities followed different
countries, have a direct b earring on their export and import trade.
 Publicity of undesirable fashions: Cultural values and heritages are not identical in
all the countries. There are many aspects, which may not be suitable for our
atmosphere, culture, tradition, etc. This, indecency is often found to be created in the
name of cultural exchange.
 Language problems: Different languages in different countries create barriers to
establish trade relations between various countries.
 Dumping policy: Developed countries often sell their products to developing
countries below the cost of production. As a result, industries in developing countries
of the close down.
 Complicated technical procedure: International business in highly technical and it
has complicated procedure. It involves various uses of important documents. It
required expert services to cope with complicate procedures at different stages.
 Shortage of goods in the exporting country: Sometimes, traders prefer to sell their
goods to other countries instate of in their own country in order to earn more profits.
This results in the shortage of goods within the home country.
 Adverse effects on home industry: International business poses a threat to the
survival of infant and nascent industries. Due to foreign competition and unrestricted
imports upcoming industries in the home country may collapse.

3.5.3 Issues and Challenges faced by International

Business Issues faced by International Business

 First Main Problem in International Business is Culture: The culture of the nation and
the companies should have international vision. The long term perspective of
companies should be to move wherever market opportunities are good. The inward
looking culture makes companies to remain local.
 International Business is Market Competition in Host Country: If best global
companies enter the markets, the competition goes intense and accordingly inefficient
companies have to close their shops.
 International Business is Costs: The competition calls for marketing quality products
at competitive prices. If prices are high the market rejects the products.
 International Business is National Controls: The nation build barriers for outside
country manufacturers by increasing trade barriers. Trade barriers will be direct by
way of high customs duties. Indirect barriers will be licensing procedures, quota
system, inspection, certification and tedious paper work.
 International Business is Nationalization: Due to Ideological differences some nations
do not trade with nations of their dislike.
 International Business is War and Terrorism : The political uncertainties and war like
situation are blockages to growth of trade.
 International Business is Short sightedness of Management: Some management
ignores vast business opportunities across national borders. The companies do not
wish to go beyond national borders. If a company does not adapt to local conditions it
does not survive.
  International Business is Organization History : The companies who are contended
and like to remain within a nation.
 International Business is Domestic Forces : The government or social restrictions
imposed on commerce and industry become hurdle in a company going global.
 International Business is Conflict within companies and within international
organization : Difference of opinion in strategies to be adopted between different
management levels in international business. If support is inadequate the international
business proposal fails.

Challenges faced by International Business

 Globalisation in the International Business Environment

← Definitions of globalisation refer to it as “growing economic interdependence
among countries as reflected in increasing cross-border flows of three types of
commodities: goods and services, capital, and knowhow”
← Globalisation is usually divided into globalisation of markets and globalisation
of production (Hill 2005).
← According to Levitt (1983), market globalisation implies a standardisation of
products across the world as national barriers become less and less relevant.
Nevertheless, this type of globalisation appears less of a reality as national
markets still present significant differences, marketing strategies continue to
have country-specific traits and customer needs differ across countries
(Douglas & Wind 1987).
← Instead, production globalisation appears more of a reality.
← Globalisation of production refers to the sourcing of goods and services to take
advantage of a difference in the factors of production (land, labour, capital).
← Globalisation of production continues to suffer from trade barriers, costs of
transportation, economic, social and political risks and others (Hill 2005).
 Strategic Choices for International Business

← The optimal strategy for tackling global markets has been a matter of dispute.
← Often scholars propose an evolutionary view of strategy, which goes from a
simple international strategy to sophisticated transnational solutions (Hill
2005).
← Under the international strategy framework, international business is not a
core interest of the firm.
← The company simply decides to “go international” and often sets up an
international division that deals with the non-domestic business of the
company.
← As the international business develops, the company may decide to source
some components from overseas, and to standardise some of its products.
← As Briscoe and Schuler (2004) point out, when a certain critical mass
develops, the company must choose other, more complex strategies of tackling
the international market.
  Culture and the Costs of Doing Business
← Culture is an elusive term that has received hundreds of definitions.
← Hofstede’s (1984, p. 21) influential definition is that culture is “the collective
programming of the mind which distinguishes the members of one human
group from another”
← Hofstede (1984) identified the main dimensions of culture that affect work
practices in different countries: Power distance, uncertainty avoidance,
individualism vs. collectivism, masculinity vs. femininity, long vs. short-term
orientation.
 The Impact of Political Risk
← Political risk was defined by Wells (1998) as the challenges faced by investors
that result from some sort of government action, and sometimes inaction.
← Political risk implies negative business consequences due to the behaviour of
governments and public sector organisations (Suder 2004).
← The most important political risk has been the threat of nationalisation (Brooks
et al 2004).
← The extreme threat of nationalisation sometimes takes milder forms as when,
in times of crisis, some governments resort to exchange rate controls.
← Another source of political risk are wars or civil strife. However, Jones (2001)
observes that dramatic events such as wars, assassinations and sequestrations
are rare in the international business arena.
 International Trade Theory
← International Trade Theory dates back to Adam Smith’s famous Wealth of
Nations and David Ricardo’s comparative advantage model.
← In the early 20th century, trade theory has achieved its classical form through
the Heckscher-Ohlin (H-O) theory (Leamer 1995).
← According to the H-O model, relative factor endowments determine a
country’s comparative advantage.

← Leontief (1956) found that empirically the H-O theory did not work in the case
of the US, which imported capital-intensive products, even though it was a
capital-rich country.
← This generated a long line of controversy as further researchers found
arguments for and against the Leontief paradox.
 National and International Accounting
← Business accounting has historically developed on a national basis (Walton &
al 2003).
← As Walton et al point out, the national differences are a reflection of the
culture of the country where businesses operated.
← Moreover, the national accounting principles seek to capture the respective
economic circumstances of the country.
← The ‘contingent’ model of accounting evolution considers that accounting
principles or laws are built in response to a major national crisis, or pressure
(i.e. Anderson & lanen 1997).

3.6 Organizational Structure and Controlling the International Business

3.6.1 Organizational Structure

  Thetypically hierarchical arrangement of lines of authority, communications, rights an
d duties of an organization
 Organizational structure determineshowthe roles, power and responsibilities are assig
ned, controlled, and coordinated, and how information flows between the different
levels of management.
 A structure depends on the organization's objectives and strategy.
 In a centralized structure, the top layer of management has most of the decision
making power and has tight control over departments and divisions.
 In a decentralized structure, the decision making power is distributed and the
departments and divisions may have different degrees of independence.
 A company such as Proctor & Gamble that sells multiple products may organize their
structure so that groups are divided according to each product and depending on
geographical area as well.

3.6.2 Vertical Differentiation – Centralization and Decentralization

 Centralization is said to be a process where the concentration of decision making is in
a few hands. All the important decision and actions at the lower level, all subjects and
actions at the lower level are subject to the approval of top management
 The implication of centralization can be

1. Reservation of decision making power at top level.

(4) Reservation of operating authority with the middle level managers.

(5) Reservation of operation at lower level at the directions of the top level

(8) Under centralization, the important and key decisions are taken by the top
management and the other levels are into implementations as per the directions of top
level.
(9) For example, in a business concern, the father & son being the owners decide about
the important matters and all the rest of functions like product, finance, marketing,
personnel, are carried out by the department heads and they have to act as per
instruction and orders of the two people. Therefore in this case, decision making
power remain in the hands of father & son.
 (10) On the other hand, Decentralization is a systematic delegation of authority at
all levels of management and in all of the organization. In a decentralization concern,
authority in retained by the top management for taking major decisions and framing
policies concerning the whole concern. Rest of the authority may be delegated to the
middle level and lower level of management.
(11) The degree of centralization and decentralization will depend upon the amount
of authority delegated to the lowest level. According to Allen, “Decentralization refers
to the systematic effort to delegate to the lowest level of authority except that which
can be controlled and exercised at central points.
(12) Decentralization is not the same as delegation. In fact, decentralization is all
extension of delegation. Decentralization pattern is wider is scope and the authorities
are diffused to the lowest most level of management. Delegation of authority is a
complete process and takes place from one person to another. While decentralization
is complete only when fullest possible delegation has taken place. For example, the
general manager of a company is responsible for receiving the leave application for
the whole of the concern. The general manager delegates this work to the personnel
manager who is now responsible for receiving the leave applicants. In this situation
delegation of authority has taken place. On the other hand, on the request of the
personnel manager, if the general manager delegates this power to all the
departmental heads at all level, in this situation decentralization has taken place.
There is a saying that “Everything that increasing the role of subordinates is
decentralization and that decreases the role is centralization”. Decentralization is
wider in scope and the subordinate’s responsibility increase in this case. On the other
hand, in delegation the managers remain answerable even for the acts of subordinates
to their superiors.

Implications of Decentralization
 There are fewer burdens on the Chief Executive as in the case of centralization.
 In decentralization, the subordinates get a chance to decide and act independently
which develops skills and capabilities. This way the organization is able to process
reserve of talents in it.
 In decentralization, diversification and horizontal can be easily implanted.
 In decentralization, concern diversification of activities can place effectively since there
is more scope for creating new departments. Therefore, diversification growth is of a
degree.
 In decentralization structure, operations can be coordinated at divisional level which is
not possible in the centralization set up.
 In the case of decentralization structure, there is greater motivation and morale of the
employees since they get more independence to act and decide.
 In a decentralization structure, co-ordination to some extent is difficult to maintain as
there are lot many department divisions and authority is delegated to maximum possible
extent, i.e., to the bottom most level delegation reaches. Centralization and
decentralization are the categories by which the pattern of authority relationships became
clear. The degree of centralization and de-centralization can be affected by many factors
like nature of operation, volume of profits, number of departments, size of a concern, etc.
The larger the size of a concern, a decentralization set up is suitable in it.
UNIT-IV Production marketing and human Resource of global business

Topics - Global Production-Location-Scale of operations – cost of production make or buy

decisions-Global supply chain issues-Quality-Global marketing-challenges in marketing
products, pricing ,production and channel management-Investment decisions-economic political
risk-sources of fund –exchange rate risk-Expatriate selection orientation-training and
development ,compensation.

4.1 International operation Management

4.1 Outsourcing

 In business, outsourcing is the contracting out of a business process to a third-party. The

term "outsourcing" became popular in the United States near the turn of the 21st century.
Outsourcing sometimes involves transferring employees and assets from one firm to
another, but not always Outsourcing is also used to describe the practice of handing over
control of public services to for-profit corporations.
 Outsourcing includes both foreign and domestic contracting, and sometimes includes off
shoring or relocating a business function to another country financial savings from lower
international labor rates is a big motivation for outsourcing/off shoring.
 The opposite of outsourcing is called in sourcing, which entails bringing processes
handled by third-party firms in-house, and is sometimes accomplished via vertical
integration. However, a business can provide a contract service to another business
without necessarily in sourcing that business process.
 Two organizations may enter into a contractual agreement involving an exchange of
services and payments. Outsourcing is said to help firms to perform well in their core
competencies and mitigate shortage of skill or expertise in the areas where they want to
outsource.
 In the early 21st century, businesses increasingly outsourced to suppliers outside their
own country, sometimes referred to as off shoring or offshore outsourcing. Several related
terms have emerged to refer to various aspects of the complex relationship between
economic organizations or networks, such as near shoring, crowd sourcing, multi-
sourcing and strategic outsourcing
  .
 Outsourcing can offer greater budget flexibility and control. Outsourcing lets
organizations pay for only the services they need, when they need them. It also reduces
the need to hire and train specialized staff, brings in fresh engineering expertise, and
reduces capital and operating expenses.
 One of the biggest changes in the early 21st century came from the growth of groups of
people using online technologies to use outsourcing as a way to build a viable service
delivery business that can be run from virtually anywhere in the world. The preferential
contract rates that can be obtained by temporarily employing experts in specific areas to
deliver elements of a project purely online means that there is a growing number of small
businesses that operate entirely online using offshore contractors to deliver the work
before repackaging it to deliver to the end user. One common area where this business
model thrives is in providing website creation, analysis and marketing services. All
elements can be done remotely and delivered digitally, and service providers can leverage
the scale and economy of outsourcing to deliver high-value services at reduced end-
customer prices.

4.1.1 Reasons for outsourcing

 Companies outsource to avoid certain types of costs. They outsource the non core
activities. Among the reasons companies elect to outsource include the avoidance of
regulations, high taxes, high energy costs, and costs associated with defined benefits in
labor-union contracts and taxes for government-mandated benefits. Perceived or actual
gross margin in the short run incentivizes a company to outsource. With reduced short-
run costs, executive management sees the opportunity for short-run profits, while the
income growth of the consumer base is strained. This motivates companies to outsource
for lower labor costs. However, the company may or may not incur unexpected costs to
[
train these overseas workers. Lower regulatory costs are an addition to companies saving
money when outsourcing. On comparative costs, a U.S. employer typically incurs higher
defined benefit costs associated with taxes to account for social security, Medicare, safety
protection (OSHA regulations) and FICA taxes etc. than in other countries. Companies
 may seek internal savings to focus money and resources towards core business. A
company may outsource its landscaping functions irrelevant to the core business
Companies and public entities may outsource certain specialized functions, such as
payroll, to ADP or Ceridian. Companies may find the same level of consumer
satisfaction.
10. Import marketers may make short-run profits from cheaper overseas labor and currency
mainly in wealth-consuming sectors at the long-run expense of an economy's wealth-
producing sectors, thus straining the home country's tax base, income growth, and
increasing the debt burden. When companies offshore products and services, those jobs
may leave the home country for foreign countries, at the expense of the wealth-producing
sectors. Outsourcing may increase the risk of leakage and reduce confidentiality, as well
as introduce additional privacy and security concerns.

4.2 Implications

4.2.1 Management processes

9. Greater physical distance between higher management and the production-floor

employees often requires a change in management methodologies, as inspection and
feedback may not be as direct and frequent as in internal processes.
10. This often requires the assimilation of new communication methods such as Voice over
ip, Instant messaging, and Issue Tracking Systems, new Time management methods such
as Time Tracking Software, and new cost- and schedule-assessment tools such as Cost
Estimation Software.

4.2.2 Quality of service (Quos)

14. Quality of service is best measured through customer satisfaction questionnaires which
are designed to capture an unbiased view.

4.2.3 Language skills

16. In the area of call centers end-user-experience is deemed to be of lower quality when a
service is outsourced. This is exacerbated when outsourcing is combined with off shoring
to regions where the first language and culture are different.
17. Foreign call center agents may speak with different linguistic features such as accents,
word use and phraseology, which may impede comprehension. The visual cues that are
missing in a telephone call may lead to misunderstandings and difficulties.
4.2.4 Security

9. Before outsourcing, an organization is responsible for the actions of their entire staff,
sometimes a substantial liability.
10. When these same people are transferred to an outsourcer, they may not even change
desks.
11. But their legal status changes.
12. They are no longer directly employed by (and responsible to) the organization.
13. This creates legal, security and compliance issues that are often addressed through the
contract between the client and the suppliers.
14. This is one of the most complex areas of outsourcing and sometimes involves a specialist
third-party adviser.
15. Fraud is a specific security issue as well as criminal activity, whether it is by employees
or the supplier staff.
16. However, it can be disputed that fraud is more likely when outsourcers are involved, for
example credit-card theft when there is the opportunity for fraud by credit-card cloning.
17. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank
customers occurred when call-center workers acquired the passwords to customer
accounts and transferred the money to their own accounts opened under fictitious names.
Citibank did not find out about the problem until the American customers noticed
discrepancies with their accounts and notified the bank.

4.2.5 Qualifications of outsourcers

9. In the engineering discipline, there has been a debate about the number of engineers
being produced by the major economies of the United States, India and China.
10. The argument centers around the definition of an engineering graduate and also the
disputed numbers.
11. The closest comparable numbers of annual graduates of four-year degrees are United
States (137,437) India (112,000) and China (351,537)

4.2.6 Diversification

9. The early trend in outsourcing was seen in financial constructs where a function's
associated capital and personnel were sold to a vendor and then rented back over a series
of years.
10. Early benefits were a boost in expertise and efficiency as outsource vendors had more
focus and capability in their specialization.
  As time progressed, the year 0 benefit was off the books, customer needs evolved and
contracts generally aged poorly.
 Rigid contracts hampered the ability of customers to respond to emerging business
drivers, and simultaneously tied the hands of the vendor's team who was focused on
increased efficiencies for static problems.
 The result tended to be additional "project" contracts for incremental changes in a
monopoly environment.
 Many deals became contentious, and many customers have become very uncomfortable
surrendering so much power to a single vendor.
 As the contract aged, it became increasingly difficult to even negotiate with vendors with
confidence, because the customer began to lack any real knowledge of the cost structure
of the function, or the competitive situation of the vendor.
 Industry leaders turned to each other, trade journals and management consultants to try to
regain control of the situation, and the next answer that grabbed hold of the industry was
labor cost arbitration; leveraging cheap, offshore resources to replace or pressure
increasingly expensive legacy outsource vendors.
 Pressure led incumbent vendors to move resources offshore, or to be replaced wholesale.
 As this renegotiation was under way, many customers seized the opportunity to
restructure to gain more control, transparency and negotiating power.
 The end result has been fragmentation of outsource contracts and a decline in mega-deals.
Many companies are now relying on several vendors who each offer specialization and /
or lowest cost.

4.2.7 In-sourcing

t Outsourcing has gone through many iterations and reinventions.

u Some outsourcing deals have been partially or fully reversed, citing an inability to
execute strategy, lost transparency & control, onerous contractual models, a lack of
competition, recurring costs, hidden costs, and so on.
v Many companies are now moving to more tailored models where along with outsource
vendor diversification, key parts of what was previously outsourced has been in sourced.
w In sourcing has been identified as a means to ensure control, compliance and to gain
competitive differentiation through vertical integration or the development of shared
services commonly called a 'center of excellence'.
x In sourcing at some level also tends to be leveraged to enable organizations to undergo
significant transformational change
y Further, the label outsourcing has been found to be used for too many different kinds of
exchange in confusing ways.
z For example, global software development, which often involves people working in
different countries, cannot simply be called outsourcing.
  The outsourcing-based market model fails to explain why these development projects are
jointly developed, and not simply bought and sold in the marketplace.
 Recently, a study has identified an additional system of governance, termed algocracy,
that appears to govern global software projects alongside bureaucratic and market-based
[]
mechanisms. The study distinguishes code-based governance system from bureaucracy
and the market, and underscores the prominent features of each organizational form in
terms of its ruling mechanism: bureaucracy (legal-rational), the market (price), and
algocracy (programming or algorithm).
 So, global software development projects, though not insourced, are not outsourced
either. They are in-between, in a process that is sometimes termed Remote In-Sourcing.
Projects are developed together where a common software platform allows different
teams around the world to work on the same project together.

4.2.8. Standpoint of labor

o From the standpoint of labor, outsourcing may represent a new threat, contributing to
worker insecurity, and is reflective of the general process of globalization and economic
polarization (economics).
p On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States
to increase its manufacturing base employment to 20% of the workforce, commenting
that the U.S. has outsourced too much and can no longer rely on consumer spending to
drive demand.

 2.9 Standpoint of government

o Western governments may attempt to compensate workers affected by outsourcing

through various forms of legislation. In Europe, the Acquired Rights Directive attempts to
address the issue. The Directive is implemented differently in different nations. In the
United States, the Trade Adjustment Assistance Act is meant to provide compensation for
workers directly affected by international trade agreements. Whether or not these policies
provide the security and fair compensation they promise is debatable.

4.2.10 Policy-Making Strategy

s A main feature of outsourcing influencing policy-making is the unpredictability it

generates regarding the future of any particular sector or skill-group.
t The uncertainty of future conditions influences governance approaches to different
aspects of long-term policies.

4.2.11 Competitiveness Strategy

 w Economic growth requires change, therefore a governance disposed to helping social and
economic structures adapt to the changing environment will facilitate growth and a stable
transition to new economic structures the economic structures become detrimental to the
social, political and cultural structures.
x In less economically developed countries, policies which embrace the global
phenomenon of outsourcing are a logical response to the ongoing movement towards
"open markets" and "trade liberalization."
y Outsourcing, when interpreted as a trade phenomenon, complements trade liberalization
strategies not only by promoting technological spillovers and capital inflows but also by
offsetting the increasing levels of unemployment which result from opening up domestic
markets..

4.2.12 Education Strategy

4 Jobs become outsourced not based on the skill-level group it represents, but rather based
on a variety of other factors including transportation cost of ideas, wage and labour
productivity edge Because of the overall uncertainty regarding the future dynamics of
outsourcing it is not possible to predict the nature of labour demand in different regions.
5 To better prepare the domestic workforce to future industry demands, therefore, national
education programs ought to focus on flexibility and diversity of skills rather than on any
specific task-oriented skills.
6 Emphasis should go on preparing students both to succeed in non-habitual tasks and to
adapt to changes in labour demands in the market.
7 A specific goal that ought to be adopted is teaching students how to learn rather than
teach them particular skills.
8 This strategy would help students adapt to changing skill requirements in the future thus
reducing friction from structural unemployment.

4.2.13 Welfare State Strategy

9. The uncertainty regarding the domestic productivity edge renders caution a key element
of governance to ensure a sustainable regional development.
10. Together with helping the unemployed re-enter the work force and smoothly transition
into high-demand labour opportunities – potentially through re-training programs –, the
government should also address the socioeconomic struggle and other welfare concerns
of displaced employees Negative welfare effects of outsourcing have gathered substantial
public attention.
  The possibility of outsourcing has internationalized labour markets which used to be
local, opening up jobs which were traditionally non-traded to international competition of
economic gains for a government to maintain its voters’ favors.
 Because of overall unpredictability, governments will likely need to reassure civilians
that the burden of employment jobs resulting from outsourcing will be shared among
taxpayers.
 The fluctuations in employment levels are determined by the types of jobs which can be
profitably outsourced or off shored.
 Domestic jobs become off shored or outsourced when lower productivity in other regions
is compensated by lower wages, making outsourcing profitable even despite the added
costs of transportation.
 The overall cost-effectiveness of the spatial unbundling of the industrial process thus
depends on the cost of transporting specific services or ideas given the available
technology.
 Because of this reason technological advancements such as the telecommunications
revolution, air shipping or the Internet have deeply accelerated outsourcing and may
continue to boost this process.
 The future results of technological ingenuity and innovation are unknown, as are its
potential impacts employment levels on any given task or job across regions the Global
South, policies attracting multinational corporations can help increase employment levels
and promote growth. Governments which pursue such strategies facilitate welfare
protection given the context of increased unemployment in industries which cannot
compete with the international market due to trade liberalization policies.

Industrial Policy

w Outsourcing results from an internationalization of labour markets as more tasks become

tradable.
x According to leading economist Greg Mankiw, the labor market functions under the same
forces as the market of goods, with the underlying implication that the greater the number of
tasks available to being moved, the better for efficiency under the gains from trade.
y With technological progress, more tasks can be off shored at different stages of the
overall corporate process

Environmental Policy

t There are widespread claims that outsourcing has pushed environmental standards down
in developing regions as countries compete to attract foreign projects and investment.
u Similar to lower wages, lower health and environmental regulations contribute to giving
a country a comparative advantage over another due to lower production costs.
 w The controversy this raises, however, is that unlike wages, lower health or environmental
standards does benefit the new employees joining the workforce.
x Import competition has caused a de facto ‘race-to-the-bottom’ where countries lower
environmental regulations to secure a competitive edge for their industries relative to
other countries.
y As Mexico competes with China over Canadian and American markets, its national
Commission for Environmental Cooperation has not been active in enacting or enforcing
regulations to prevent environmental damage from increasingly industrialized Export
Processing Zones

4.3 Globalization and Socio-Economic Implications

4.3.1 Global Inequality and Development

Industrialization

aa Outsourcing has contributed to further levelling of global inequalities as it has led to

general trends of industrialization in the Global South and deindustrialization in the
Global North.
bb Even though outsourcing has promoted a movement of industrial sites from the Global
North to Global South regions, it has not been the only reason for the concurrent
deindustrialization and industrialization of the North and South respectively.
cc Deindustrialization in more economically and technologically developed regions has also
been affected by increased industrial productivity.
dd The rise in industrial efficiency which characterized development in developed countries
has occurred as a result of labour-saving technological improvements.
ee Although these improvements do not directly reduce employment levels but rather
increase output per unit of work, they can indirectly diminish the amount of labour
required for fixed levels of output. a trending shift in demand towards non-tradable
services such as those in the health-care or government sectors has further accelerated
deindustrialization in the Global North.
ff Since these tasks cannot be outsourced, the demand for them needs to be met
domestically abiding by the local market price.
gg Consequently, a shift in the labour force towards fulfilling these profitable services has
mostly taken place at the expense of industry since the agricultural sector in the early
industrializing Global North had already been maximizing its labor capacity Despite the
variety of domestic and international factors affecting deindustrialization in the Global
North, those concerning the external influence of the global market have been the most
influential ones since 1994
 3 The recent industrialization process outsourcing has encouraged in the Global South has
taken place at a much faster pace than it did during its beginnings in the North, given that
the well-developed technology was already developed, and merely spread to further
regions.

4.3.1 Growth and Income

8. The almost simultaneous industrialization of the developing Global South and

deindustrialization of the more developed Global North resulted in an international
convergence of incomes.
9. Outsourcing has been characterized by rapid rates of growth and industrialization in the
Global South.
10. Conversely, the Global North has experienced a moderate slowdown in growth. Patterns
of global industrialization and deindustrialization are explained by a combination of
models in economic geography and economic growth.
11. Models in economic geography illustrate that decreasing communication costs reduce the
spatial clustering of industrial development.
12. The lower cost to the spread of ideas improved coordination and communication within
corporations across greater geographic distances.
13. This process originated roughly after the international chaos of the World Wars, as a
consequence of advancements in information technology during the 1960s.
14. Further adaptations to technological progress, particularly the spread of the internet and
liberalization of the telecommunications industry, permitted an acceleration of the
movement of ideas and consequently of outsourcing since about the 1980s.

4.2 Urbanization

 The pace of urbanization in the Global North decreased considerably relative to its high
levels following the Industrial Revolution. Rates of urban growth have been higher in the
Global South.

Trade

bb Outsourcing emerged with a new wave of globalization marked by high volumes of trade
and capital flows.
cc The increased movement of capital and goods contrasted starkly with the barriers and
protectionism prevalent throughout the World Wars and the Great Depression during the
Interwar Years.

Migration
  The level of migration has remained relatively low, particularly compared to the mass
migratory trends which characterized the Industrial Revolution roughly between 1850
and 1914, only allow people with citizenship cards live and work free in their territories,
even getting a citizenship card is difficult for someone not born in their territory.
 Free labor markets, discrimination based with a person skills would help reduce
outsourcing problems, letting people freely follow their jobs in other countries.

Domestic Inequality

 Outsourcing in the Global North led to a rising divergence in domestic employment

levels in different tasks within a given industry, making tackling unemployment more
difficult for governments as job losses ceased to be primarily sectored

4.3 Co-sourcing

 Co-sourcing is a business practice where a service is performed by staff from inside an

organization and also by an external service provider. It can be a service performed in
concert with a client's existing internal audit department. The scope of work may focus
on one or more aspects of the internal audit function. Co-sourcing can serve to minimize
sourcing risks, increase transparency, clarity and lend toward better control over the
processes outsourced
 Examples of co-sourcing services are supplementing the in-house internal audit staff with
specialized skills such as information risk management or integrity services, providing
routine assistance to in-house auditing for operations and control evaluations in peak
period activity and conducting special projects such as fraud investigation or plant
investment appraisals. Another example of co-sourcing is outsourcing part of software
development or software maintenance activities to an external organization, while
keeping part of the development in-house. Other internal business activities such as HR
and administrative tasks can also be co-sourced by employee leasing companies.

4.4 Identity management co-sourcing

 It is an approach to enterprise identity management in which the identity service interacts

directly or through some technical footprint with an organization’s Information
Technology (IT) identity backend infrastructure (directories, databases, and other identity
repositories).
 The organization and the external service provider typically have a shared responsibility
for building, hosting and operating the identity service.
 The balance of this responsibility can vary depending on the service levels required, and
span from an all on-premise deployment, where the identity service is built, hosted and
 operated within the organization’s IT infrastructure and managed on-premise by the
external service provider.
 This contrasts with an "all in-the-cloud" service scenario, where the identity service is
built, hosted and operated by the service provider in an externally hosted, cloud
computing infrastructure.

4.5 Quality

 If a product fulfils the customer’s expectations, the customer will be pleased and consider
that the product is of acceptable or even high quality.
 If his or her expectations are not fulfilled, the customer will consider that the product is
of low quality.
 This means that the quality of a product may be defined as “its ability to fulfill the
customer’s needs and expectations”.
 Quality needs to be defined firstly in terms of parameters or characteristics, which vary
from product to product.
 For example, for a mechanical or electronic product these are performance, reliability,
safety and appearance.
 For pharmaceutical products, parameters such as physical and chemical characteristics,
medicinal effect, toxicity, taste and shelf life may be important.
 For a food product they will include taste, nutritional properties, texture, shelf life and so
on.

4.5.1 Fixing product specifications

 A specification is the minimum requirement according to which a producer or service

provider makes and delivers the product and service to the customer. In setting
specification limits, the following should be considered:
 The user’s and/or customer’s needs
 Requirements relating to product safety and health hazards provided for in the statutory
and regulatory requirements
 Requirements provided for in national and/or international standards
 The competitor’s product specifications, in order to gain marketing advantages
 In designing the product, the capacity of processes and machines should be kept in mind.
It is also necessary to maintain a balance between cost and value realization.
 The clearer the specification, the better the possibility of creating and delivering quality
products.
4.5.2 Preparing product design

 The specifications and drawings produced by the designer should show the quality
standard demanded by the customer or marketplace in clear and precise terms. Every
dimension should have realistic tolerances and other performance requirements

4.5.3 Product Quality

8 To achieve the above, those responsible for design, production and quality should be
consulted from the sales negotiation stage onwards.
9 The overall design of any products made up of many individual characteristics.
10 For example these may be:
8. Dimensions, such as length, diameter, thickness or area; o
Physical properties, such as weight, volume or strength; o
Electrical properties, such as resistance, voltage or current; o
Appearance, such as finish, color or texture;
o Functional qualities, such as output or kilometer per liter;
o Effects

4.6 Manufacture or Buy

 Once the design and planning for manufacture have been completed, the manufacturing
can begin.
 If the planning has been well done, there should not be too many problems. During
manufacture the following are the most common factors that can affect quality:
o (a) Set-up. Some processes, such as punching, cutting, printing and labelling, are
so consistent that, if the initial set-up is correct, the whole lot will conform to the
specifications. However, the initial set-up has to be checked by carrying out first-
piece inspection;
o (b) Machines and tools. From time to time changes can occur in machine or tool
settings, which can then lead to defects. Processes of this type include machining,
resistance welding and filling. Here it is necessary to carry out periodic checks by
patrol inspection;
 (c) Operator. There are some processes where the result depends on the skill and
attention of the operator, such as welding, hand soldering and painting processes.
 For such processes it is necessary at the manufacture planning stage for the
operator’s working methods to be decided upon;
 (d) Materials and components. It is important to ensure the quality of raw
materials and components by undertaking regular checks on the suppliers’
processes and also Where necessary by carrying out incoming inspection.

4.7 Correction of quality deficiencies

In spite of all the efforts made, the required quality will sometimes not be attained and one may
be faced with a pile of scrap and rework. This means that something has gone wrong during the
quality planning and maybe also during the manufacturing process. The reason for the trouble
must be located and permanently corrected so that it cannot happen again. The following are
obvious possibilities:

 The shop-floor operators had no clear idea what standard of quality

was required;
 The method was such that it was very difficult to get the job right, but
very easy to get it wrong;
 The machine and equipment were incapable of achieving the
tolerances required;
 The incoming materials and components were unsatisfactory; o
The operators were untrained and not up to the job;

4.8 Why inspection?

By “inspection” it is usually meant that, at certain stages in the course of production, a

comparison is made between what has actually been produced and what should have been
produced. The standard of reference may be a specification, drawing or a visual quality standard.
The check made must be appropriate to the job and must be made with suitable measuring
instruments. Inspectors should not waste time checking things that do not matter or fail to do a
check that is important. Things that are unlikely to go wrong need little checking and those
which are difficult to hold within limits will need a considerable amount of attention. It is a
misconception that the inspector alone is responsible for quality. Quality results from a
combination of quality of the original designs, the methods, equipment and materials used and
the skill and care of the operator. In spite of these, if the job is still wrong, no amount of
inspection will put it right.

4.8.1. Different forms of inspection

According to production flow, the inspection may be divided into:

 Incoming inspection
 In-process inspection
  Final inspection

4.8.2.Incoming inspection

Incoming inspection concerns goods upon delivery from vendors and/or suppliers. It
consists of inspection of raw materials, components, sub-assemblies and so on. The aim of
incoming inspection is to prevent goods that do not fulfil the quality requirements from
entering the production process. Incoming inspection is one of the following steps in the control
of the quality of supplies:

 A buying specification is prepared, setting out exactly what quality of material hasto be
obtained;
 Possible suppliers are checked for their ability and willingness to provide this quality.
This is called “vendor appraisal” or “supplier evaluation”;
 If the results of the ven

4.8.3 Seven quality control tools

The seven quality control tools were developed by Kaoru Ishikawa,1 known as the “father of
quality control circles”. It has been the Japanese experience that 95 per cent of problems in the
workshop can be solved by using the following seven simple quality control tools and by the
effective working of quality circles:

 Process flow charts

 Check sheets
 Graphs
 Pareto analysis
 Cause and effect diagrams
 Scatter diagrams
 Control charts

4.9. Process flow charts

Process flow charts record a series of events and activities, stages and decisions in a form
that can be easily understood and communicated to all. Figure I gives an example of aglow chart.

Flow charts can also be used as a problem-solving tool. For this, first a flowchart is drawn up by
a team of persons in order to reflect the way the process actually works. Then the members of the
group are asked to draw up a flow chart on how the process should work ideally. The difference
between the two represents the problems to be solved. It thus helps first to understand the
process and then to make improvements.
4.9.1 Check sheets

Check sheets, or tally charts, are a simple device on which data is collected by putting a
mark against predetermined items of measurement. The purpose for which the data is collected
should always be clear. For example, check sheets can be used to track events by factors such as
timeliness (in time, one day late, two days late, etc.),reasons for failure during inspection (defects
like blow holes, cracks, etc.) or number of customer complaints per day. An example check sheet
for the final inspection of bracket casting in a foundry shop is shown in figure

Other good practices

While the above seven quality control tools can help operators and supervisors to monitor
their processes and find the causes of variations, there are other simple practices that have been
very successfully practiced in Japanese industry. They are:

 Japanese 5S
 Quality circle
 Kaizen

Japanese 5S

Japanese factories are reputed for their cleanliness and orderliness. They follow the well-
known “5S” practice, which refers to the following five Japanese words:

 Seiri (Structurize: organize well)

 Seiton (Systemize: neatness in all areas)
 Seiso (Sanitize: cleanliness)
 Seiketsu (Standardize)
 Shitsuke (Self-discipline: do 5S daily
4.10.SCOPE OF PRODUCTION AND OPERATIONS MANAGEMENT

Production and operations management concern with the conversion of inputs into
outputs, using physical resources, so as to provide the desired utilities to the customer while
meeting the other organizational objectives of effectiveness, efficiency and adoptability. It
distinguishes itself from other functions such as personnel, marketing, finance, etc., by its
primary concern for conversion by using physical resources.’ Following are the activities which
are listed under production and operations management functions:

 Location of facilities

 Plant layouts and material handling

.
 Product design

 Process design

 Production and planning control

 Quality control

 Materials management

 Maintenance management.

4.10.1. LOCATION OF FACILITIES

Location of facilities for operations is a long-term capacity decision which involves a

long term commitment about the geographically static factors that affect a business organization.
It is important strategic level decision-making for an organization. It deals with the questions
such as ‘where our main operations should be based?’The selection of location is a key-decision
as large investment is made in building plant and machinery. An improper location of plant may
lead to waste of all the investments made in plant and machinery equipments. Hen

4.10.2. PRODUCT DESIGN

Product design deals with conversion of ideas into reality. Every business organization
have to design, develop and introduce new products as a survival and growth strategy.
Developing the new products and launching them in the market is the biggest challenge faced by
the organizations. The entire process of need identification to physical manufactures of product
involves three functions: marketing, product development, manufacturing. Product development
translates the needs of customers given by marketing into technical specifications and designing
the various features into the product to these specifications. Manufacturing has the responsibility
of selecting the processes by which the product can be manufactured. Product design and
development provides link between marketing, customer needs and expectations and the
activities required to manufacture the product.

4.10.3PROCESS DESIGN

Process design is a macroscopic decision-making of an overall process route for

converting the raw material into finished goods. These decisions encompass the selection of a
process, choice of technology, process flow analysis and layout of the facilities. Hence, the
important decisions in process design are to analyze the workflow for converting raw material
into finished product and to select the workstation for each included in the workflow.
4.10.4.PRODUCTION PLANNING AND CONTROL

Production planning and control can be defined as the process of planning the production
in advance, setting the exact route of each item, fixing the starting and finishing dates for each
item, to give production orders to shops and to follow up the progress of products according to
orders

4.10.5. QUALITY CONTROL

Quality Control (QC) may be defined as ‘a system that is used to maintain a desired level
of quality in a product or service’. It is a systematic control of various factors that affect the
quality of the product. Quality control aims at prevention of defects at the source, relies on
effective feed back system and corrective action procedure. Quality control can also be defined
as ‘that industrial management technique by means of which product of uniform acceptable
quality is manufactured’. It is the entire collection of activities which ensures that the operation
will produce the optimum quality products at minimum cost.

The main objectives of quality control are:

(6) To improve the companies income by making the production more acceptable to the
customers i.e., by providing long life, greater usefulness, maintainability, etc.
(7) To reduce companies cost through reduction of losses due to defects.
(8) To achieve interchangeability of manufacture in large scale production.
(9) To produce optimal quality at reduced price.
(10) To ensure satisfaction of customers with productions or services or high quality
level, to build customer goodwill, confidence and reputation of manufacturer.
(11) To make inspection prompt to ensure quality control.
(12)To check the variation during manufacturing.

4.11. MATERIALS MANAGEMENT

Materials management is that aspect of management function which is primarily

concerned with the acquisition, control and use of materials needed and flow of goods and
services connected with the production process having some predetermined objectives in view.

The main objectives of materials management are:

(13) To minimize material cost.

(14) To purchase, receive, transport and store materials efficiently and to reduce the related
cost.

 To cut down costs through simplification, standardization, value analysis, import

substitution, etc.
  To trace new sources of supply and to develop cordial relations with them in order to
ensure continuous supply at reasonable rates. To reduce investment tied in the
inventories for use in other productive purposes and to develop high inventory turnover
ratios.

4.12. MAINTENANCE MANAGEMENT

In modern industry, equipment and machinery are a very important part of the total
productive effort. Therefore, their idleness or downtime ereof can lead to a clunky, slow, and ill-
equipped force with too much or too little supply.

4.13. Business logistics

A forklift stacking a logistics provider's warehouse of goods on pallets.

One definition of business logistics speaks of "having the right item in the right quantity at the
right time at the right place for the right price in the right condition to the right
customer".Business logistics incorporates all industry sectors and aims to manage the fruition of
project life cycles, supply chains, and resultant efficiencies.
[8]
The term business logistics has evolved since the 1960s due to the increasing complexity of
supplying businesses with materials and shipping out products in an increasingly globalized
supply chain, leading to a call for professionals called "supply chain logisticians".

In business, logistics may have either an internal focus (inbound logistics) or an external focus
(outbound logistics), covering the flow and storage of materials from point of origin to point of
consumption (see supply-chain management). The main functions of a qualified logistician
include inventory management, purchasing, transportation, warehousing, consultation, and the
organizing and planning of these activities. Logisticians combine a professional knowledge of
each of these functions to coordinate resources in an organization.

There are two fundamentally different forms of logistics: one optimizes a steady flow of material
through a network of transport links and storage nodes, while the other coordinates a sequence of
resources to carry out some project.

Nodes of a distribution network

The nodes of a distribution network include:

 Factories where products are manufactured or assembled

  A depot or deposit is a standard type of warehouse thought for storing merchandise (high
level of inventory).
 Distribution centers are thought for order processing and order fulfillment (lower level of
inventory) and also for receiving returning items from clients.
 Transit points are built for cross docking activities, which consist in reassembling cargo
units based on deliveries scheduled (only moving merchandise).
 Traditional retail stores of the Mom and Pop variety, modern supermarkets,
hypermarkets, discount stores or also voluntary chains, consumer cooperative, groups of
consumer with collective buying power. Note that subsidiaries will be mostly owned by
another company and franchisers, although using other company brands, actually own the
point of sale.

There maybe some intermediaries operating for representative matters between nodes such as
sales agents or brokers.

4.13.1.Logistic families and metrics

A logistic family is a set of products which share a common characteristic: weight and
volumetric characteristics, physical storing needs (temperature, radiation,...), handling needs,
order frequency, package size, etc. The following metrics maybe used by the company to
[9]
organize its products in different families:

q Physical metrics used to evaluate inventory systems include stocking capacity, selectivity,
superficial utilization, volumetric utilization, transport capacity, transport capacity
utilization.
r Monetary metrics used include space holding costs (building, shelving and services) and
handling costs (people, handling machinery, energy and maintenance).

Other metrics may present themselves in both physical or monetary form, such as the standard
Inventory turnover.

4.13.2.Handling and Order Processing

Unit loads for transportation of luggage at the airport, in this case the unit load has protective
function.

Unit loads are combinations of individual items which are moved by handling systems, usually
[10]
employing a pallet of normed dimensions.

Handling systems include: trans-pallet handlers, counterweight handler, retractable mast handler,
bilateral handlers, trilateral handlers, AGV and stacker handlers. Storage systems include: pile
[11]
stocking, cell racks (either static or movable), cantilever racks and gravity racks.

Order processing is a sequential process involving: processing withdrawal list, picking (selective
removal of items from loading units), sorting (assembling items based on destination), package
formation (weighting, labeling and packing), order consolidation (gathering packages into
[12]
loading units for transportation, control and bill of lading).

Picking can be both manual or automated. Manual picking can be both man to goods, i.e.
operator using a cart or conveyor belt, or goods to man, i.e. the operator benefiting from the
presence of a mini-load ASRS, vertical or horizontal carousel or from an Automatic Vertical
Storage System (AVSS). Automatic picking is done either with dispensers or depalleting robots.

Sorting can be done manually trough carts or conveyor belts, or automatically trough sorters.

4.13.3.Transportation

Cargo, i.e. merchandise being transported, can be moved trough a variety of

transportation means and is organized in different shipment categories. Unit loads are usually
assembled into higher standardized units such as: ISO containers, swap bodies or semi-trailers.
Especially for very long distances, product transportation will likely benefit from using different
transportation means: multimodal transport, intermodal transport (no handling) and combined
transport (minimal road transport).

Operators involved in transportation include: all train, road vehicles, boats, airplanes companies,
couriers, freight forwarders and multi-modal transport operators.

Merchandise being transported internationally is usually subject to the Incoterms standards

issued by the International Chamber of Commerce.

Push-Back rack for motorcycles, a LIFO rack system for storage.

Similarly to production systems, logistic systems need to properly configured and managed.
Actually a number of methodologies have been directly borrowed from operations management
such as using Economic Order Quantity models for managing inventory in the nodes of the
network. Distribution resource planning (DRP) is similar to MRP, except that it doesn't concern
activities inside the nodes of the network but planning distribution when moving goods trough
the links of the network.

Traditionally in logistics configuration may be at the level of the warehouse (node) or at level of
the distribution system (network).

Regarding a single warehouse, besides the issue of designing and building the warehouse,
configuration means solving a number of interrelated technical-economic problems:
dimensioning rack cells, choosing a palletizing method (manual or trough robots), rack
dimensioning and design, number of racks, number and typology of retrieval systems (e.g.
stacker cranes). Some important constraints have to satisfied: fork and load beams resistance to
bending and proper placement of sprinklers. Although picking is more of a tactical planning
decision than a configuration problem, it is important to take it into account when deciding the
racks layout inside the warehouse and buying tools such as handlers and motorized carts since
once those decisions are taken they will work as constraints when managing the warehouse,
same reasoning for sorting when designing the conveyor system and/or installing automatic
dispensers.

Configuration at the level of the distribution system concerns primarily the problem of location
of the nodes in a geographic space and distribution of capacity among the nodes. The first may
be referred to as facility location (with the special case of site selection) while the latter to as
capacity allocation. The problem of outsourcing typically arises at this level: the nodes of a
supply chain are very rarely owned by a single enterprise. Distribution networks can be
characterized by numbers of levels, namely the number of intermediary nodes between supplier
and consumer:

r Direct store delivery, i.e. zero levels

s One level network: central warehouse
t Two level network: central and peripheral warehouses

This distinction is more useful for modeling purposes, but it relates also to a tactical decision
regarding safety stocks: considering a two level network, if safety inventory is kept only in
peripheral warehouses then it is called a dependent system (from suppliers), if safety inventory is
distributed among central and peripheral warehouses it is called an independent system (from
suppliers). Transportation from producer to the second level is called primary transportation,
from the second level to consumer is called secondary transportation.

Although configuring a distribution network from zero is possible, logisticians more usually
have to deal with restructuring existing networks due to presence of an array of factors: changing
demand, product or process innovation, opportunities for outsourcing, change of government
policy toward trade barriers, innovation in transportation means (both vehicles or thoroughfares),
introduction of regulations (notably those regarding pollution) and availability of ICT supporting
systems (e.g ERP or e-commerce).

Once a logistic system is configured, management, meaning tactical decisions, takes place, once
again, at the level of the warehouse and of the distribution network. Decisions have to be made
under a set of constraints: internal, such as using the available infrastructure, or external, such as
complying with given product shelf lifes and expiration dates.

At level of the warehouse, the logistician must decide how to distribute merchandise over the
racks. Three basic situations are traditionally considered: shared storage, dedicated storage (rack
space reserved for specific merchandise) and class based storage (class meaning merchandise
organized in different areas according to their access index).
 Global marketing

It is “marketing on a worldwi de scale reconciling or taking commercial adv antage of global

operational differences, similarities and opportunities in order to meet global obj ectives".

4.14. Worldwide competition

One of the product categories in which global competition has been easy to track in
U.S.is automotive sales The incr easing intensity of competition in global mark ets is a challenge
facing companies at all stages of involvement in international markets. As mar kets open up, and
become more integrated, the pace of change accelerates, technology shrinks distances between
markets and reduces the scale advantages of large firms, new sources of compet ition emerge,
and competitive pressures mount at all levels of the organization. Also, the threa t of competition
from companies in countries su ch as India, China, Malaysia, and Brazil is on the rise, as their
own domestic markets are opening up to foreign competition, stimulating grea ter awareness of
international market opportuniti es and of the need to be internationally competitive. Companies
which previously focused on p rotected domestic markets are entering into markets in other
countries, creating new sourc es of competition, often targeted to price-sensitive market
segments. Not only is competition intensifying for all firms regardless of their degree of global
market involvement, but the ba sis for competition is changing. Competition continues to be
market-based and ultimately relies on delivering superior value to consumers. However, success
in global markets depends on kn owledge accumulation and deployment.

Evolution to global marketing

Global marketing is not a revolu tionary shift, it is an evolutionary process. Wh ile the following
does not apply to all companies , it does apply to most companies that begin as domestic-only
companies.

4.14.1. Domestic marketing

A marketing restricted to the political boundaries of a country, is c alled "Domestic

Marketing". A company marketing only within its national boundaries only has to consider
domestic competition. Even if th at competition includes companies from foreign markets, it still
only has to focus on the competition that exists in its home market. Products and services are
developed for customers in the home market without thought of how the product or service could
be used in other markets. All marketing decisions are made at headquarters.

The biggest obstacle these marketers face is being blindsided by emerging global marketers.
Because domestic marketers do not generally focus on the changes in the global marketplace,
they may not be aware of a potential competitor who is a market leader on three continents until
they simultaneously open 20 stores in the Northeastern U.S. These marketers can be considered
ethnocentric as they are most concerned with how they are perceived in their home country.

Domestic market is a large market that every nation needs. These markets are all restricted to be
under control of certain boundaries in that company or country. This type of marketing is the
type of marketing that takes place in the headquarters. In domestic markets it helps reduce the
cost of competition. By reducing competition the company has a better shot of being more
successful in the long run. Also if the company’s competition is not a big factor that will affect
their business, they have a good shot at making prices higher and people will still purchase that
product.

A domestic market also gets the opportunity to operate in different areas and this gives the
company an opportunity to have bigger markets to advertise to. Even in Domestic markets
businesses are still trying to trade with each other to promote their business to other businesses in
the area. A good thing that helps out Domestic market is that they might be able to receive tax
benefits, because they offer jobs to the nation and give people opportunities for work. Domestic
market helps country’s out by offering more jobs bring in good business to the market and also
helps with the trading around the market.

4.14.2. International marketing

International marketing is the export, franchising, joint venture or full direct entry of a
marketing organization into another country. This can be achieved by exporting a company's
product into another location, entry through a joint venture with another firm in the target
country, or foreign direct investment into the target country. The development of the marketing
mix for that country is then required - international marketing. It can be as straightforward as
using existing marketing strategies, mix and tools for export on the one side, to a highly complex
relationship strategy including localization, local product offerings, pricing, production and
distribution with customized promotions, offers, website, social media and leadership.
Internationalization and international marketing meets the needs of selected foreign countries
where a company's value can be exported and there is inter-firm and firm learning, optimization
and efficiency in economies of scale and scope. the firm does not need to export or enter all
world markets to be considered an international marketer.

4.14.3 Global Marketing

Global marketing is a firm's ability to market to almost all countries on the planet. With
extensive reach, the need for a firm's product or services is established. The global firm retains
the capability, reach, knowledge, staff, skills, insights, and expertise to deliver value to
customers worldwide. The firm understands the requirement to service customers locally with
global standard solutions or products, and localizes that product as required to maintain an
optimal balance of cost, efficiency, customization and localization in a control-customization
continuum to best meet local, national and global requirements to position itself against or with
competitors, partners, alliances, substitutes and defend against new global and local market
entrants per country, region or city. The firm will price its products appropriately worldwide,
nationally and locally, and promote, deliver access and information to its customers im the most
cost-effective way. The firm also needs to understand, research, measure and develop loyalty for
its brand and global brand equity (stay on brand) for the long term.

At this level, global marketing and global branding are integrated. Branding involves a structure
process of analyzing "soft" assets and "hard" assets of a firm's resources. The strategic analysis
and development of a brand includes customer analysis (trends, motivation, unmet needs,
segmentation), competitive analysis (brand image/identity, strengths, strategies, vulnerabilities),
and self-analysis (existing brand image, brand heritage, strengths/capabilities, organizational
values)

Further, Global brand identity development is the process establishing brands of products, the
firm, and services locally and worldwide with consideration for scope, product attributes,
quality/value, uses, users and country of origin; organizational attributes (local vs. global);
personality attributes (genuine, energetic, rugged, elegant) and brand customer relationships
(friend, adviser, influencer, trusted source); and importantly symbols, trademarks metaphors,
imagery, mood, photography and the company's brand heritage. In establishing a global brand,
the brand proposition (functional benefits, emotional benefits and self-expressive benefits are
identified, localized and streamlined to be consistent with a local, national, international and
global point of view. The brand developed needs to be credible.

A global marketing and branding implementation system distributes marketing assets (website,
social media, Google PPC, PDFs, sales collateral, press junkets, kits, product samples, news
releases, local mini-sites, flyers, posters, alliance and partner materials, affiliate programs and
materials, internal communications, newsletters, investor materials, event promotions and trade
shows to deliver an integrated, comprehensive and focused communication, access and value to
the customers, that can be tracked to build loyalty, case studies and further establish the
company's global marketing and brand footprint.

4.15. Global marketing specialization

Global marketing is a field of study in general business management to provide valuable

products, solutions and services to customers locally, nationally, internationally and worldwide

Elements of the global marketing

Not only do standard marketing approaches, strategies, tactics and processes apply, global
marketing requires an understanding of global finance, global operations and distribution,
government relations, global human capital management and resource allocation, distributed
technology development and management, global business logic, interfirm and global
competitiveness, exporting, joint ventures, foreign direct investments and global risk
management.

The standard “Four P’s” of marketing: product, price, placement, and promotion are all affected
as a company moves through the five evolutionary phases to become a global company.
Ultimately, at the global marketing level, a company trying to speak with one voice is faced with
many challenges when creating a worldwide marketing plan. Unless a company holds the same
position against its competition in all markets (market leader, low cost, etc.) it is impossible to
launch identical marketing plans worldwide. Nisant Chakram(Marketing Management)

4.15.1Product

A global company is one that can create a single product and only have to tweak elements
for different markets. For example, Coca-Cola uses two formulas (one with sugar, one with corn
syrup) for all markets. The product packaging in every country incorporates the contour bottle
design and the dynamic ribbon in some way, shapes, or form. However, the bottle can also
include the country’s native language and is the same size as other beverage bottles or cans in
that same country.

4.15.2 Price

Price will always vary from market to market. Price is affected by many variables: cost of
product development (produced locally or imported), cost of ingredients, cost of delivery
(transportation, tariffs, etc.), and much more. Additionally, the product’s position in relation to
the competition influences the ultimate profit margin. Whether this product is considered the
high-end, expensive choice, the economical, low-cost choice, or something in-between helps
determine the price point.

Placement

How the product is distributed is also a country-by-country decision influenced by how

the competition is being offered to the target market. Using Coca-Cola as an example again, not
all cultures use vending machines. In the United States, beverages are sold by the pallet via
warehouse stores. In India, this is not an option. Placement decisions must also consider the
product’s position in the market place. For example, a high-end product would not want to be
distributed via a “dollar store” in the United States. Conversely, a product promoted as the low-
cost option in France would find limited success in a pricey boutique.

Promotion

After product research, development and creation, promotion (specifically advertising) is

generally the largest line item in a global company’s marketing budget. At this stage of a
company’s development, integrated marketing is the goal. The global corporation seeks to reduce
costs, minimize redundancies in personnel and work, maximize speed of implementation, and to
speak with one voice. If the goal of a global company is to send the same message worldwide,
then delivering that message in a relevant, engaging, and cost-effective way is the challenge.

Effective global advertising techniques do exist. The key is testing advertising ideas using a
marketing research system proven to provide results that can be compared across countries. The
ability to identify which elements or moments of an ad are contributing to that success is how
economies of scale are maximized. Market research measures such as Flow of Attention, Flow of
Emotion and branding moments provide insights into what is working in an ad in any country
because the measures are based on visual, not verbal, elements of the ad

Reach Benefits of e Marketing over traditional marketing

The nature of the internet means businesses now have a truly global reach. While
traditional media costs limit this kind of reach to huge multinationals, e Marketing opens up new
avenues for smaller businesses, on a much smaller budget, to access potential consumers from all

Scopeoverthe world.
Internet marketing allows the marketer to reach consumers in a wide range of ways and
enables them to offer a wide range of products and services. E Marketing includes, among other
things, information management, public relations, customer service and sales. With the range of

Interactivitynewhnologies becoming available all the time, this scope can only grow.
 

Whereas traditional marketing is largely about getting a brand’s message out there, e
Marketing facilitates conversations between companies and consumers. With a two way
communication channel, companies can feed off of the responses of their consumers, making

Immediacythemmoredynamic and adaptive.

Internet marketing is able to, in ways never before imagined, provide an immediate impact.
Imagine you’re reading your favorite magazine. You see a double-page advert for some new
product or service, maybe BMW’s latest luxury sedan or Apple’s latest iPod offering. With this
kind of traditional media, it’s not that easy for you, the consumer, to take the step from
hearing about a product to actual acquisition. With e Marketing, it’s easy to make that step as
simple as possible, meaning that within a few short clicks you could have booked a test drive or
ordered the iPod. And all of this can happen regardless of normal office hours. Effectively,
Internet marketing makes business hours 24 hours per day, 7 days per week for every week of the
year. By closing the gap between providing information and eliciting a consumer reaction,
the consumer’s

Demographics buyingandtargetingcycleis speeded up.

Generally speaking, the demographics of the Internet are a marketer’s dream. Internet
users, considered as a group, have greater buying power and could perhaps be considered as a
population group skewed towards the middle-classes. Buying power is not all though. The nature
of the Internet is such that its users will tend to organize themselves into far more focused
groupings. Savvy marketers who know where to look can quite easily find access to the niche
markets they wish to target. Marketing messages are most effective when they are presented
directly to the audience most likely to be interested. The Internet creates the perfect environment
Adaptivelyfornichemarketingandclosedtotargetedloopmarketingoups.
 Closed Loop Marketing requires the constant measurement and analysis of the results of
marketing initiatives. By continuously tracking the response and effectiveness of a campaign, the
marketer can be far more dynamic in adapting to consumers’ wants and needs. With e
Marketing, responses can be analyzed in real-time and campaigns can be tweaked continuously.
Combined with the immediacy of the Internet as a medium, this means that there’s minimal
advertising spend wasted on less than effective campaigns. Maximum marketing efficiency from
e Marketing creates new opportunities to seize strategic competitive advantages. The
combination of all these factors results in an improved ROI and ultimately, more customers,
happier customers and an improved bottom line.

Disadvantages

 Differences in consumer needs, wants, and usage patterns for products

 Differences in consumer response to marketing mix elements
 Differences in brand and product development and the competitive environment
 Differences in the legal environment, some of which may conflict with those of the home
market
 Differences in the institutions available, some of which may call for the creation of
entirely new ones (e.g. infrastructure)
 Differences in administrative procedures
 Differences in product placement.
 Differences in the administrative procedures and product placement can occur
4.16. INTERNATIONAL INVESTMENT DECISION MAKING

Now that you understand the basic economic reasons why companies choose to invest in
foreign markets, and what forms that investment may take, it is important to understand the other
factors that influence where and why companies decide to invest overseas. These other factors
relate not only to the overall economic outlook for a country, but also to economic policy
decisions taken by foreign governments—aspects that can be very political and controversial.

The policy frameworks relating to FDI and FPI are relatively similar, although there are a few
differences.

Direct investors tend to look at a number of factors relating to how they will be able to operate in
a foreign country:

 the rules and regulations pertaining to the entry and operations of foreign investors
 standards of treatment of foreign affiliates, compared to “nationals” of the host country
 the functioning and efficiency of local markets
 trade policy and privatization policy
 business facilitation measures, such as investment promotion, incentives, improvements
in amenities and other measures to reduce the cost of doing business. For example, some
countries set up special export processing zones, which may be free of customs or duties,
or offer special tax breaks for new investors
 restrictions, if any, on bringing home (“repatriating”) earnings or profits in the form of
dividends, royalties, interest or other payments

The determinants of FPI are somewhat more complex, however. Because portfolio investment
earnings are more likely to be tied to the broader macroeconomic indicators of a country, such as
overall market capitalization of an economy, they can be more sensitive to factors such as:

 high national economic growth rates

 exchange rate stability
 general macroeconomic stability
 levels of foreign exchange reserves held by the central bank
 general health of the foreign banking system
 liquidity of the stock and bond market
 interest rates

In addition to these general economic indicators, portfolio investors also look at the economic
policy environment as well, and especially at factors such as:

 the ease of repatriating dividends and capital

 taxes on capital gains
 regulation of the stock and bond markets

.
  the quality of domestic accounting and disclosure systems
 the speed and reliability of dispute settlement systems
 the degree of protection of investor’s rights

4.17.Foreign Exchange Risk

Foreign exchange risk (also known as exchange rate risk or currency risk) is a
financial risk posed by an exposure to unanticipated changes in the exchange rate between two
[1][2]
currencies. Investors and multinational businesses exporting or importing goods and services
or making foreign investments throughout the global economy are faced with an exchange rate
risk which can have severe financial consequences if not managed appropriately.

Types of Exposure
4.17.1. Transaction Exposure

A firm has transaction exposure whenever it has contractual cash flows (receivables and
payables) whose values are subject to unanticipated changes in exchange rates due to a contract
being denominated in a foreign currency. To realize the domestic value of its foreign-
denominated cash flows, the firm must exchange foreign currency for domestic currency. As
firms negotiate contracts with set prices and delivery dates in the face of a volatile foreign
exchange market with exchange rates constantly fluctuating, the firms face a risk of changes in
the exchange rate between the foreign and domestic currency

4.17.2 Economic Exposure

A firm has economic exposure (also known as operating exposure) to the degree that its
market value is influenced by unexpected exchange rate fluctuations. Such exchange rate
adjustments can severely affect the firm's market share| position with regards to its competitors,
the firm's future cash flows, and ultimately the firm's value. Economic exposure can affect the
present value of future cash flows. Any transaction that exposes the firm to foreign exchange risk
also exposes the firm economically, but economic exposure can be caused by other business
activities and investments which may not be mere international transactions, such as future cash
flows from fixed assets. A shift in exchange rates that influences the demand for a good in some
country would also be an economic exposure for a firm that sells that good.

4.17.3Translation Exposure

A firm's translation exposure is the extent to which its financial reporting is affected by
exchange rate movements. As all firms generally must prepare consolidated financial statements
for reporting purposes, the consolidation process for multinationals entails translating foreign
asset]s and liabilities or the financial statements of foreign subsidiary subsidiaries from foreign
to domestic currency. While translation exposure may not affect a firm's cash flows, it could have
a significant impact on a firm's reported earnings and therefore its stock price. Translation

exposure is distinguished from transaction risk as a result of income and losses from various
types of risk having different accounting treatments.
4.17.4Contingent exposure

 A firm has contingent exposure when bidding for foreign projects or negotiating other
contracts or foreign direct investments. Such an exposure arises from the potential for a
firm to suddenly face a transactional or economic foreign exchange risk, contingent on
the outcome of some contract or negotiation. For example, a firm could be waiting for a
project bid to be accepted by a foreign business or government that if accepted would
result in an immediate receivable. While waiting, the firm faces a contingent exposure
from the uncertainty as to whether or not that receivable will happen. If the bid is
accepted and a receivable is paid the firm then faces a transaction exposure, so a firm
may prefer to manage contingent exposures.

Measurement

 If foreign exchange markets are efficient such that purchasing power parity, interest rate
parity, and the international Fisher effect hold true, a firm or investor needn't protect
against foreign exchange risk due to an indifference toward international investment
decisions. A deviation from one or more of the three international parity conditions
generally needs to occur for an exposure to foreign exchange risk. Financial risk is most
commonly measured in terms of the variance or standard deviation of a variable such as
percentage returns or rates of change. In foreign exchange, a relevant factor would be the
rate of change of the spot exchange rate between currencies. Variance represents
exchange rate risk by the spread of exchange rates, whereas standard deviation represents
exchange rate risk by the amount exchange rates deviate, on average, from the mean
exchange rate in a probability distribution. A higher standard deviation would signal a
greater currency risk. Economists have criticized the accuracy of standard deviation as a
risk indicator for its uniform treatment of deviations, be they positive or negative, and for
automatically squaring deviation values. Alternatives such as average absolute deviation
and semi variance have been advanced for measuring financial risk.

Value at Risk

 Practitioners have advanced and regulators have accepted a financial risk management
technique called value at risk (VAR), which examines the tail end of a distribution of
returns for changes in exchange rates to highlight the outcomes with the worst returns.
Banks in Europe have been authorized by the Bank for International Settlements to
employ VAR models of their own design in establishing capital requirements for given
levels of market risk. Using the VAR model helps risk managers determine the amount
that could be lost on an investment portfolio over a certain period of time with a given
probability of changes in exchange rates.
Management

Foreign exchange hedge

 Managers of multinational firms employ a number of foreign exchange hedging strategies

in order to protect against exchange rate risk. Transaction exposure is often managed
either with the use of the money markets, foreign exchange derivatives such as forward
contracts, futures contracts, options, and swaps, or with operational techniques such as
currency invoicing, leading and lagging of receipts and payments, and exposure
nettingFirms may exercise alternative strategies to financial hedging for managing their
economic or operating exposure, by carefully selecting production sites with a mind for
lowering costs, using a policy of flexible sourcing in its supply chain management,
diversifying its export market across a greater number of countries, or by implementing
strong research and development activities and differentiating its products in pursuit of
greater inelasticity and less foreign exchange risk exposure.
 Translation exposure is largely dependent on the accounting standards of the home
country and the translation methods required by those standards. For example, the United
States Federal Accounting Standards Board specifies when and where to use certain
methods such as the temporal method and current rate method. Firms can manage
translation exposure by performing a balance sheet hedge. Since translation exposure
arises from discrepancies between net assets and net liabilities on a balance sheet solely
from exchange rate differences. Following this logic, a firm could acquire an appropriate
amount of exposed assets or liabilities to balance any outstanding discrepancy. Foreign
exchange derivatives may also be used to hedge against translation exposure.

Presenting the Problem in Expatriates

 Once the company has made the decision to go global, a way of running those companies
could be through sending expatriates into the foreign country, whereas there are some
processes to consider. According to Evans et al. (2002) to make an international
assignment successful both for the expatriate, his/her spouse and family, the firm needs to
pay attention to many factors from the time of selection until repatriation.
 Based on Gooderham & Nordhaug (2003), from a HRM perspective, such a process can
be broken down into a set of four phases, namely:
  Selection – By focusing on selection criterions and characteristics of the
expatriates.
 Training – Prepare the expatriate for the international assignment.
 Arrival and Support – Period where the expatriate learn to adjust to new
behaviors, norms, values and assumptions.
← Repatriation – How to prepare the expatriate and his/her spouse and family to re-
turn to the home country.
 This thesis concerns the first two phases of the Expatriation Process, described by
Gooderham and Nordhaug (2003). The interest of focusing on the first two phases comes
from expatriate failure. According to Shay and Tracey (1997) selecting the expatriates as
well as training them before the international assignment are correlated to expatriate
failure.
 Having problem to adapt to the host country culture is one of the reasons why an expatri-
ate fails in an international assignment. Another reason could also be because the spouse
and family do not adjust to the new environment which put pressures on the expatriate
(Harzing & Ruysseveldt, 2004).

Target Group

 Besides the companies interviewed, this thesis will hopefully provide other Swedish
multi-national companies that are interested to send away expatriates, an insight of how
the processes of selecting and training employees would be before sending them to
China.

4.18 Expatriation

 A fundamental challenge faced by multinational companies today is how to ensure that

managers develop not only an overview of the organization in its entirety, but also a feel
for international business (Gooderham & Nordhaug, 2003).
 Due to globalization, in order to stay resistant in the increasing competing global market,
it is important to train the em-ployee to become international minded.
 As Briscoe and Schuler (2004) say, the health of today’s multinational companies is the
function of International Human Resource Man-agement’s ability to match the firms’
workforce forecast with the supply of global talent.
 “People that are living and working in a non-native country"
 The first definition put emphasize of not being born in the specific country whereas in the
second definition the expatriate does not need to be born in the country he/she considers
to be his/her home country.
 The last definition describes an expatriate that works in a country which he/she is not a
citizen. Since we believe that these three definitions differ from each other, we have
 chosen to define our own definition of expatriate, of what we be-lieve is suitable for the
purpose of our thesis. Since we are interested in gaining an under-standing of how a few
Swedish multinational companies select and train their employees to work in China, we
have defined an expatriate according to the definition:
 “An expatriate is an employee that is temporarily working and living in a country or
region that is not his or her home country”.

4.18.1 The Three Faces of Expatriation

 Dowling and Welch (2004) define PCNs as employees, in the parent company, that are
transferred to a host country subsidiary. PCN’s role today is changing. Evans et al. (2002)
state that traditional expatriates was sent abroad only to fix a problem or control the
foreign organization.
 Today, more and more companies recognize that cross-border mobility is a potential
learning toll, thus it increases the number of assignments in which the primary drive is to
support individual or organizational learning.
 Except for PCNs, there are two more kinds of employees that are considered to be
expatriates, namely:
o Host - Country Nationals (HCN) and
o Third - Country Nationals (TCN)
 HCN are employees sent from the host subsidiary to the parent company. TCN are
employees sent from one foreign subsidiary to another foreign subsidiary that are both
owned by the same parent company (Dowling & Welch, 2004).
 For example, the Swedish multinational company employs Chinese citizens in its
Swedish operations (HCNs), or a Swedish company sends some of its Japanese
employees on assignment to China (TCNs). Below in Figure 2-1 is an illustration by
Dowling and Welch (2004) on the different kind of expatriates created by international
assignments.
 As stated in the purpose, our research will only be focused upon gaining an
understanding of how three Swedish multinational companies select and train their
Parent-Country Na- (PCN) expatriates before the international assignment in China.
Therefore, when we refer to the word expatriate in the rest of this thesis will
automatically refer to PCN expatriate.
 The reason why we chose to look upon PCN expatriate is because, today it is still the
most common way to send an employee to work in a foreign environment. A PCN

expatriate does not only help the head quarter to bring in new knowledge, but also
transfer new ways of doing things to the subsidiaries (Evans et al., 2002).

4.18.2 Motives and Roles of Expatriation

  After having decided that PCN expatriates are the most suitable employees for us to look
at we will now describe the different roles that an expatriate can take and the motives be-
hind it. Dowling and Welch (2004) have identified several reasons for using expatriates.
1. Agent of Socialization:
 The person that performs the task knows and is familiar with the “values and beliefs” of
the parent firm. Dowling and Welch (2004) call the transfer of values and beliefs
socialization. An example is that the parent firm has values and beliefs, visions and
strategies that they want to communicate through the whole organization. The best way to
transfer these factors is through someone that has a clear understanding of the parent
company.

2. Network Builder:
 International assignments are viewed as a way of conducting interpersonal linkages that
can be used for informal control and communication purposes. An expatriate that works
as a network builder will possess knowledge that is of value for the company. Knowing
people from different key positions and what they need as well as these people know
what the expatriate is credible for, when performing a task, there is a mutual dependence
between both parts (Dowling & Welch, 2004).

3. Agent of Direct Control:

z The parent company wants to have an overview and con-trol over the host company
(Ström, Bergren, Carle & Polgren, 1995).
aa The use of expatriate in this context can be regarded as a bureaucratic control mechanism
since the primary role is to ensure compliance through direct supervision (Dowling &
Welch, 2004).

← Boundary Spanners:
t Boundary Spanning refers to the activities that an expatriate conduct, such as gathering
information that bridge internal and external organizational contexts.
u Visiting the foreign country, the expatriate has the function to promote its own firm to a
high level but also at the same time able to collect host country information.
v The expatriate will also have the opportunity to gather mar-kets intelligence for the firm
(Dowling & Welch, 2004).

4.18.3 Expatriate Failure

w Expatriate failure is a term that is defined as the premature return of an expatriate which
means that the expatriate is returning home before completing the assignment.
x If the expatriate remains during the whole assignment and have done what was intended,
the assignment will then count as a success.
y Today, expatriate failure rate is between 25 and 40 percent of when an expatriate is as-
signed a task in a developed country compared with 70 percent in still developing coun-
tries (Shay & Tracey, 1997).
4.19 Culture

w Every country has at least some differences compared with other countries, e.g., its
history, government and laws (Briscoe & Shuler, 2004).
x There are distinguishable differences between cultures such as in how a person dress and
behaves but also discrete differences such as values and beliefs (Harzing & Ruysseveldt,
2004).
y Today, it is generally recognized that culturally insensitive attitudes and behaviors
stemming from ignorance or from misguided beliefs not only are inappropriate, but often
cause international business failure (Dowling & Welch, 2004).
z Managers, as well as the people they work with, are part of national societies. If the
managers want to understand the behavior of people in a different culture, they have to
understand their society (Hofstede & Hofstede, 2005).
aa Multinational companies need to learn to cope internationally with issues like selecting
and preparing people for working and managing in other countries, how to negotiate and
con-duct businesses in a foreign country, to be able to capitalize and absorb the learning
throughout the international operations. In order to succeed in these activities, one has to
understand the effects of culture on day-to-day business operations (Briscoe & Shuler,
2004).
bb The cultural aspects of this thesis will only be dealt in a general level with the aim to
make the reader aware of the contrast between Sweden and China.

4.20 Selection

q Today, research within how to select an expatriate is heavily oriented.

 x According to Evans et al. (2002) this has led to lists of competences and characteristics
that an expatriate should have. Selection is thus about how to make a fair and relevant
choice among the applicants by accessing their strengths and weaknesses (Boxall &
Purcell, 2003).

4.20.1 Selection Criterions

u A lot of research has focused on understanding selection criterions (Evans et al., 2002).
v According to Briscoe and Schuler (2004) errors in the selection process can have a
negative impact on the success of an organization’s overseas operations and therefore it is
crucial to select the right person for the assignment.
w Dowling and Welch (2004) have identified six criterions that a manager evaluates when
selecting an employee for an international assignment, they are:

Technical Ability –

 The candidate needs to know how to perform the required technical and managerial tasks
while abroad (Dowling & Welch, 2004).
 According to a study by McEnery and DesHarnais (1990) most managers and other
professionals involved in inter-national work, regard functional expertise to be the most
important criteria when selecting and training an expatriate.
 Companies emphasize on the technical and managerial skills since these can be evaluated
by looking at past performance of the candidate (Dowling & Welch, 2004).
 However, past performance has little or no bearing on how the candidate will perform in
a different culture (Dowling & Welch, 2004).

Cross-Cultural Suitability –

aa Allows the candidate to operate in a new culture. Some of the abilities that should be
included are; cultural empathy, adaptability, diplomacy, language Situation Individual i
emotional stability, and maturity.
bb Even though cross-cultural abilities are said to be important, very few senior managers
will actually test the candidate for these, since they are difficult to determine.
cc Even if a candidate possess a number of cross-cultural abilities the candidate’s
personality might still make him/her unsuitable for international assignments, for
instance; attitude towards foreigners, and the inability to relate to people from another
cultural group (Dowling & Welch, 2004).

Family Requirements –

v Since the candidate might have a family which he/she needs to take into consideration,
such as; the spouse/partner especially in dual-career families, the adolescent children
especially considering schooling, health issues, dependent parents, and psychological
difficulties like for instance phobia of flying (Briscoe & Schuler, 2004).
 w Gooderham and Nordhaug (2003) refers to Tung (1982) who in a study on expatriate
failure of American, Japanese, and European expatriates shows that not only is the
inability of the spouse to adjust the number one reason among the Americans, it is also
the only consistent reason among the European expatriate.
x The spouse/partner might not work during the international assignment however, their
workload is quite extensive, starting with settling the family into the new home, and
perhaps even employing servants, caring for the wellbeing as well as arranging with the
schooling for the children, and all of this comes at a time when the spouse/partner has left
their career behind them as well as their friends and relatives (Dowling & Welch, 2004).

Country/Cultural Requirements –

p It may sometimes be difficult for the companies to get work permits for their expatriate,
not to mention their spouse, which may in a dual career relationship add hardship on the
expatriate and hence, increasing the risk of expatriate failure.
q Also it seems that some companies prefer not to send women to certain conservative
countries or regions, such as parts of the Middle East and South East Asian (Dowling &
Welch, 2004).
r Although this is common among companies, research has shown that even in traditionally
male dominated countries, such as Japan and Korea, female expatriates do as good as the
male ones. In fact, the locals sees a female expatriate as a representative for the company
first, a foreigner second and as a women third (Stroh et al., 2004).
s Lastly, it is also important that the company keeps up-to-date on the legislation in the
countries that they operate in (Dowling & Welch, 2004).

The Multinational Enterprise (MNE) Requirements –

q A company might try to keep a certain proportion of expatriates compared to their local
staff, hence choosing to hire Host Country Nationals (HCN) instead.

Language –

 The ability to speak a local language is considered to be more important in some

countries than others. For instance in certain countries using an interpreter may be a
much better choice since learning that language would take to long. Since there is a risk

that a candidate might be removed from the pool of possible expatriates because of lack
of speaking the language, the company might oversee a person whom would have been
per-fect for the job, and hence increase the risk of failure for the company (Dowling &
Welch, 2004).
 Dowling and Welch (2004) believes that technical ability, cross-cultural suitability, and
fam-ily requirements are all based upon the individual meanwhile country/cultural
require-ments, language and multinational company requirements are different depend on
the host country and culture. Companies usually choose to hire their expatriates from
within the or-ganization since it is generally easier for the company to observe an
individual’s ability and efforts that is already employed, compared with a candidate from
an external job market (Baron & Kreps, 1999).
4.20.2 Competences of an Expatriate
 v Another way for firms to avoid the phenomenon of expatriate failure is to select
expatriate, with their families, that will be most able to adapt overseas and also at the
same time pos-sess the necessary skills to have the job done in the foreign environment
(Briscoe & Shuler, 2004).
w According to Schneider and Barsoux (1997) there are nine competences that are sig-
nificant for an expatriate in order to cope with differences abroad, they are:

Interpersonal Skills –

q An expatriate needs to be able to form relationships so that they can integrate into the
social fabric of the host country.
r Thus, satisfying both the personal need for friendship and intimacy, as well as smoothing
the progress of transferring knowledge, and improving coordination and control between
the parental company and the host subsidiary.

Linguistic Ability –

r Is a competence that helps the expatriate in establishing contact with the locals. Having
total command of the language is not necessary, however efforts to speak the language,
even if only parts of local phrases, shows that the expatriate is making a symbolic effort
to communicate and to connect with the host nationals. The opposite, a resolute
unwillingness to speak the language may be seen as a sign of contempt to the host
nationals.

Motivation to Work and Live Abroad

 This has shown to be important in order for the expatriate and his/her family to
successfully adapt to the new culture. Selecting expatriates and their families should be
based on a genuine interest in new experiences and other cultures.
Ability to Tolerate and Cope with Uncertainty –

 Since circumstances might unexpectedly change, or that the behaviors and reactions of
the local employees may be unpredictable, the expatriate needs to be able to show the
capability of quick adaptation to the new situation. It is good if the expatriate knows, in
advance, that uncertainty and ambiguity exists, that people might have different
perspectives, and that not everything is as straight-forward as it might appear (Schneider
& Barsoux, 1997).
Flexibility –

 When something unexpected occurs, the expatriate might need to let go of the control, in
order to let the company adapt to the event and use it as an opportunity to grow. This may
be especially difficult, since managers are generally rewarded for staying on top of
things.

Patience and Respect –

 The expatriate needs to remember that different cultures have other ways of doing things,
which is why patience is so important when dealing with a new culture.
 An expatriate needs to be careful so that he/she does not always use their own culture as a
benchmark for the new culture, but instead try to make sense of the reasoning be-hind the
way the locals think and act. Patience and respect is the golden rule of international
business, but it seems that this rule is the one to be most often broken.
Cultural Empathy –

 An expatriate should be able to respect the ideas, values, and behav-iors of others.
Listening with a non-judgmental approach helps the expatriate understand the thoughts,
feelings, and experiences of the locals. However, this ability is deeply rooted in a
person’s characteristics and may not be acquired easily.
Strong Sense of Self (ego strength) –

 Having a strong sense of self enables a person to in-teract with other cultures without
losing one’s own identity, as well as allowing the expatri-ate to be self-critical and open
to feedback. It also makes the expatriate treat failures as a learning experience and not as
an injury to their self-image, which would undermine their self-confidence. When the
expatriate has a strong ego, the ability to handle stress becomes better.

A Sense of Humor –

 Is needed for two reasons. Firstly, it is a way to deal with frustration, uncertainty, and
confusion that the expatriate might encounter. It also helps him/her distancing from the
situation, in order to regain some perspective. Secondly, if used correctly humor can work
as an ice breaker, a way of establishing a relationship with others. Or, it can be used to
put people at ease, to break the tension, and allow a more open and constructive
discussion.
 Having gained an understanding of the different criterions that firms use and the different
competences that an expatriate can possess, the next step is to use different selection
tools, and based on the selection criterions; find the appropriate expatriate for the
international assignment.
4.20.3 The Different Selection Processes

 Today, organizations rely on different procedures in their selection of individuals for

inter-national assignments. There are, according to Briscoe and Schuler (2004), a number
of procedures to choose from when selecting an expatriate.

Interviews –

 According to Briscoe and Schuler (2004) interviews with the candidate and possibly
his/her spouse should be conducted in order to find out if they have the ability to adjust to
the foreign culture. The interview in itself should be focused on the candidate’s past
behaviors that might provide evidence of the presence or absence of the characteristics
the interviewer favor (Stroh et al., 2004). Interviews can be most useful when assessing a
candidate’s communication and interpersonal skills, and also, sometimes, general
intelligence.

Formal Assessment Tests –

 Evaluates the candidate’s personal traits found to be important in adjusting to the new
culture; these include adaptability, flexibility, a liking for new experiences, and good
interpersonal skills (Briscoe & Schuler, 2004).
 Testing to see if the candidate has competences related to managing diversity is as
important if not more important than the candidate’s technical competences.
Career Planning –

 Is another reason for multinational companies to send an individual for an international

assignment. Managers see that international assignment may be a step for an employee in
his/her career development (Briscoe & Schuler, 2004).

Self-Selection –

6. Many multinational companies use one or more of the above processes. However, at the
end it is usually up to the candidate to decide if he/she is ready or have the necessary
skills, experiences, or attitudes to go on an international assignment (Briscoe & Schuler
2004).
7. It is as important for the expatriate as it is for the company that he/she fits the assignment
in question since the expatriate would suffer from a bad fit. The general idea is that the
longer a worker is happily employed, the greater will the worker’s commit-ment and
loyalty to the firm be (Baron & Kreps, 1999).
2.21 Training of the Expatriate

2. Once an employee has been selected for an expatriate position, pre-departure training is
considered to be the next critical step in attempting to ensure that the expatriate’s
effectiveness and success abroad, especially where the destination country is considered
to be culturally tough (Dowling & Welch, 2004).
3. It is said that good preparation can go a long way to reduce the time it takes to adjust to
the new environment (Evans et al., 2002).
4. Strong evidence shows that pre-departure cross-cultural training reduces expatriate
failure rates and increases expatriate job performances (Cullen & Parboteeah, 2004).
5. Evans et al. (2002) describe three main issues that concern training and development of
the expatriates. The first one concerns the different training methods, second the timing
of training and the third issue concerns preparing the spouse and family when
accompanying the expatriate during the international assignment.

2.21.1 Training Methods

5. According to Dowling and Welch (2004), studies indicate that the essential components
of pre-departure training programs that contribute to a smooth transition to a foreign
location include Cross-Cultural Training (CCT), preliminary visits, language training and
assistance with practical day-to-day matters.

2.21.2 Cross-Cultural Training

6. It is generally accepted that, to be effective, the expatriate employee must adapt to and
not feel isolated from the host country. Without an understanding of the host country’s
culture, the expatriate is likely to face some difficulties during the international
assignment. There-fore, cultural awareness training remains the most common form of
pre-departure training (Dowling & Welch, 2004).

 Become aware that behaviors differ across cultures and the importance of
observing these cultural differences carefully.
 Build cognitive cultural maps so that expatriates understand why the local people
value certain behaviors, how these appear to be and how these can be appropriately
reproduced.
 Practice the behaviors they will need to reproduce in order to be efficient in their
international assignments.
 2. The processes mentioned above reflect back upon the importance for expatriates to be
able to deal with cultural differences that he/she may confront. It builds the foundation of
de-signing cross-cultural training for the managers (Stroh et al., 2004).
3. According to Stroh et al. (2004), Evans et al. (2002) as well as Dowling and Welch
(2004), the success factor of a training program is the level of rigor of the training.
4. Stroh et al. (2004) state that rigor is the degree of mental involvement and effort that the
trainer and the trainee need to get use of in order for the trainee to learn the required
concepts.

Rigor Training (information giving approach) –

 Training that last for a short period of time and includes activities such as area briefings
and cultural briefings (lectures), watching videos, reading books and language training at
a survival level.

Moderate Rigor Training (affective approach) –

4. The training last about 4 weeks and con-tain activities such as culture assimilator
training, role playing, cases, stress reduction train-ings and moderate language training.

High Rigor Training (immersion approach) –

8. Are often planned to endure more than a month and it contains more experimental
training such as assessment centers, field experiments (the employee is sent to work
abroad for a short period of time), simulations, sensitivity training as well as extensive
language training.
UNIT-V-CONFLICT MANAGEMENT AND ETHICS IN BUSINESS MANAGEMENT

Topics - Disadvantages of international business – Conflict in international business- Sources

and types of conflict – Conflict resolutions – Negotiation – the role of international agencies –
Ethical issues in international business – Ethical decision-making

UNIT-V-CONFLICT MANAGEMENT AND ETHICS IN BUSINESS MANAGEMENT

CONFLICT

Conflict is actual or perceived opposition of needs, values and interests. A conflict can be
internal (within oneself) e individuals). Conflict as a concept can help explain many aspects of
social life such as social disagreement, conflicts of interests, and fights between individuals,
groups, or organizations. In political terms, "conflict" can refer to wars, revolutions or other
struggles, which may involve the use of force as in the term armed conflict.

CONFLICT MANAGEMENT

Conflict management refers to the long-term management of intractable conflicts. It is the label
for the variety of ways by which people handle grievances—standing up for what they consider
to be right and against what they consider to be wrong. Those ways include such diverse
phenomena as gossip, ridicule, lynching, terrorism, warfare, feuding, genocide, law, mediation,
and avoidance. Which forms of conflict management will be used in any given situation can be
somewhat predicted and explained by the social structure—or social geometry—of the case.

3.TYPES OF CONFLICT

3.1. Community conflict

3.2. Diplomatic conflict

3.3. Environmental resources conflict

3.4. External conflict

3.5. Interpersonal conflict

3.6. Organizational conflict

3.7. Intra-societal conflict

3.8. Military conflict

3.9. Religious-based conflict

3.10. Workplace conflict

3.11. Relationship conflict

Conflict also defines as natural disagreement resulting from individuals or groups that differ in
beliefs, attitudes, values or needs. It can also originate from past rivalries and personality
differences. Other causes of conflict include trying to negotiate before the timing is right or
before needed information is available.

4.CAUSES OF CONFLICT:

4.1. Communication failure

4.2 .Personality conflict

4.3. Value differences

4.4 .Goal differences

4.5. Methodological differences

4.6. Substandard performance

4.7. Lack of cooperation

4.8. Differences regarding authority

4.9. Differences regarding responsibility

4.10 .Competition over resource

4.11. Non-compliance with rules

5.WAYS OF ADDRESSING CONFLICT

 Accommodating: Individuals who enjoy solving the other party‘s problems and preserving
personal relationships. Accommodators are sensitive to the emotional states, body language, and
verbal signals of the other parties. They can, however, feel taken advantage of in situations when
the other party places little emphasis on the relationship.
 Avoiding: Individuals who do not like to negotiate and don‘t do it unless warranted. When
negotiating, avoiders tend to defer and dodge the confrontational aspects of negotiating;
however, they may be perceived as tactful and diplomatic.

3 .Collaborating: Individuals who enjoy negotiations that involve solving tough problems in
creative ways. Collaborators are good at using negotiations to understand the concerns and
interests of the other parties. They can, however, create problems by transforming simple
situations into more complex ones.

 Competing: Individuals who enjoy negotiations because they present an opportunity to win
something. Competitive negotiators have strong instincts for all aspects of negotiating and are
often strategic. Because their style can dominate the bargaining process, competitive negotiators
often neglect the importance of relationships.

5.Compromising: Individuals who are eager to close the deal by doing what is fair and equal for
all parties involved in the negotiation. Compromisers can be useful when there is limited time to
complete the deal; however, compromisers often unnecessarily rush the negotiation process and
make concessions too quickly.

6.COUNSELING

When personal conflict leads to frustration and loss of efficiency, counseling may prove to be a
helpful antidote. Although few organizations can afford the luxury of having professional
counselors on the staff, given some training, managers may be able to perform this function.
Nondirective counseling, or "listening with understanding", is little more than being a good
listener—something every manager should be.

7.CONFLICT RESOLUTION

Conflict resolution is a range of methods for alleviating or eliminating sources of conflict. The
term "conflict resolution" is sometimes used interchangeably with the term dispute resolution or
alternative dispute resolution. Processes of conflict resolution generally include negotiation,
mediation, and diplomacy. The processes of arbitration, litigation, and formal complaint
processes such as ombudsman processes, are usually described with the term dispute resolution,
although some refer to them as "conflict resolution." Processes of mediation and arbitration are
often referred to as alternative dispute resolution.

8.METHODS OF DISPUTE RESOLUTION INCLUDE:

1.lawsuits (litigation)

2.arbitration
3.collaborative law

4.mediation

5.conciliation

6.many types of negotiation

7.facilitation

One could theoretically include violence or even war as part of this spectrum, but dispute
resolution practitioners do not usually do so; violence rarely ends disputes effectively, and
indeed, often only escalates them. Some individuals, notably Joseph Stalin, have stated that
all problems emanate from man, and absent man, no problems ensue. Hence, violence could
theoretically end disputes, but alongside it, life.

Dispute resolution processes fall into two major types:

1.Adjudicative processes, such as litigation or arbitration, in which a judge, jury or arbitrator

determines the outcome.

2.Consensual processes, such as collaborative law, mediation, conciliation, or negotiation, in

which the parties attempt to reach agreement.

A LAWSUIT is a civil action brought before a court of law in which a plaintiff, a party who
claims to have received damages from a defendant's actions, seeks a legal or equitable remedy.
The defendant is required to respond to the plaintiff's complaint. If the plaintiff is successful,
judgment will be given in the plaintiff's favor, and a range of court orders may be issued to
enforce a right, award damages, or impose an injunction to prevent an act or compel an act.

8.1ARBITRATION, a form of alternative dispute resolution (ADR), is a legal technique for

the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or
more persons (the "arbitrators", "arbiters" or "arbitral tribunal"), by whose decision (the "award")
they agree to be bound. It is a settlement technique in which a third party reviews the case and
imposes a decision that is legally binding for both sides. Other forms of ADR include mediation
(a form of settlement negotiation facilitated by a neutral third party) and non-binding resolution
by experts.

8.2.COLLABORATIVE LAW (also called Collaborative Practice, Collaborative Divorce,

and Collaborative Family Law) was originally a family law procedure in which the two parties
agreed that they would not go to court, or threaten to do so.

8.3.MEDIATION, a form of alternative dispute resolution (ADR) or "appropriate dispute

resolution", aims to assist two (or more) disputants in reaching an agreement. The parties
themselves determine the conditions of any settlements reached— rather than accepting
something imposed by a third party. The disputes may involve (as parties) states, organizations,
communities, individuals or other representatives with a vested interest in the outcome.

8.4.CONCILIATION is an alternative dispute resolution (ADR) process whereby the parties

to a dispute (including future interest disputes) agree to utilize the services of a conciliator, who
then meets with the parties separately in an attempt to resolve their differences. He does this by
lowering tensions, improving communications, interpreting issues, providing technical
assistance, exploring potential solutions and bringing about a negotiated settlement.

8.5.NEGOTIATION

Negotiation is a dialogue intended to resolve disputes, to produce an agreement upon courses

of action, to bargain for individual or collective advantage, or to craft outcomes to satisfy
various interests. It is the primary method of alternative dispute resolution.

Negotiation occurs in business, non-profit organizations, government branches, legal

proceedings, among nations and in personal situations such as marriage, divorce, parenting, and
everyday life.

9.ETYMOLOGY

The word "negotiation" is from the Latin expression, "negotiatus", past participle of negotiare
which means "to carry on business".

Another view of negotiation comprises 4 elements:

Strategy, process and tools, and tactics. Strategy comprises the top level goals - typically
including relationship and the final outcome. Processes and tools include the steps that will be
followed and the roles taken in both preparing for and negotiating with the other parties. Tactics
include more detailed statements and actions and responses to others' statements and actions.

10.APPROACHES TO NEGOTIATION

The advocate's approach

In the advocacy approach, a skilled negotiator usually serves as advocate for one party to the
negotiation and attempts to obtain the most favorable outcomes possible for that party. In this
process the negotiator attempts to determine the minimum outcome(s) the other party is (or
parties are) willing to accept, then adjusts their demands accordingly. A "successful" negotiation
in the advocacy approach is when the negotiator is able to obtain all or most of the outcomes
their party desires, but without driving the
other party to permanently break off negotiations, unless the best alternative to a negotiated
agreement (BATNA) is acceptable.

Indeed, the ten new rules for global negotiations advocated by Hernandez and Graham.

1.Accept only creative outcomes

2.Understand cultures, especially your own.

3.Don‘t just adjust to cultural differences, exploit them.

4.Gather intelligence and reconnoiter the terrain.

5.Design the information flow and process of meetings.

6.Invest in personal relationships.

7.Persuade with questions. Seek information and understanding.

8.Make no concessions until the end.

9.Use techniques of creativity

stages in the negotiation process. Although various negative emotions affect negotiation
outcomes, by far the most researched is anger. Angry negotiators plan to use more competitive
strategies and to cooperate less, even before the negotiation starts. These competitive strategies
are related to reduce joint outcomes. During negotiations, anger disrupts the process by reducing
the level of trust, clouding parties' judgment, narrowing parties' focus of attention and changing
their central goal from reaching agreement to retaliating against the other side. Angry negotiators
pay less attention to opponent‘s interests and are less accurate in judging their interests, thus
achieve lower joint gains. Moreover, because anger makes negotiators more self-centered in their
preferences, it increases the likelihood that they will reject profitable offers. Anger doesn‘t help
in achieving negotiation goals either: it reduces joint gains and does not help to boost personal
gains, as angry negotiators don‘t succeed in claiming more for themselves. Moreover, negative
emotions leads to acceptance of settlements that are not in the positive utility function but rather
have a negative utility. However, expression of negative emotions during negotiation can
sometimes be beneficial: legitimately expressed anger can be an effective way to show one's
commitment, sincerity, and needs. Moreover, although NA reduces gains in integrative tasks, it is
a better strategy than PA in distributive tasks (such as zero-sum). In his work on negative affect
arousal and white noise, Seidner found support for the existence of a negative affect arousal
mechanism through observations regarding the devaluation of speakers from other ethnic
origins." Negotiation may be negatively affected, in turn, by submerged hostility toward an
ethnic or gender group.
Conditions for emotion effect in 10.Continue creativity after negotiations

11.OTHER NEGOTIATION STYLES

Shell identified five styles/responses to negotiation. Individuals can often have strong
dispositions towards numerous styles; the style used during a negotiation depends on the context
and the interests of the other party, among other factors. In addition, styles can change over time.

1.Accommodating: Individuals who enjoy solving the other party‘s problems and preserving
personal relationships. Accommodators are sensitive to the emotional states, body language, and
verbal signals of the other parties. They can, however, feel taken advantage of in situations when
the other party places little emphasis on the relationship.

2.Avoiding: Individuals who do not like to negotiate and don‘t do it unless warranted. When
negotiating, avoiders tend to defer and dodge the confrontational aspects of negotiating;
however, they may be perceived as tactful and diplomatic.

3.Collaborating: Individuals who enjoy negotiations that involve solving tough problems in
creative ways. Collaborators are good at using negotiations to understand the concerns and
interests of the other parties. They can, however, create problems by transforming simple
situations into more complex ones.

4.Competing: Individuals who enjoy negotiations because they present an opportunity to win
something. Competitive negotiators have strong instincts for all aspects of negotiating and are
often strategic. Because their style can dominate the bargaining process, competitive negotiators
often neglect the importance of relationships.

5.Compromising: Individuals who are eager to close the deal by doing what is fair and equal for
all parties involved in the negotiation. Compromisers can be useful when there is limited time to
complete the deal; however, compromisers often unnecessarily rush the negotiation process and
make concessions too quickly.

12.EMOTION IN NEGOTIATION

Emotions play an important part in the negotiation process, although it is only in recent years
that their effect is being studied. Emotions have the potential to play either a positive or negative
role in negotiation. During negotiations, the decision as to whether or not to settle rests in part on
emotional factors. Negative emotions can cause intense and even irrational behavior, and can
cause conflicts to escalate and negotiations to break down, while positive emotions facilitate
reaching an agreement and help to maximize joint gains.

.
12.1.Positive effect in negotiation

Even before the negotiation process starts, people in a positive mood have more confidence, and
higher tendencies to plan to use a cooperative strategy. During the negotiation, negotiators who
are in a positive mood tend to enjoy the interaction more, show less contentious behavior, use
less aggressive tactics and more cooperative strategies. This in turn increases the likelihood that
parties will reach their instrumental goals, and enhance the ability to find integrative gains.
Indeed, compared with negotiators with negative or natural affectivity, negotiators with positive
affectivity reached more agreements and tended to honor those agreements more. Those
favorable outcomes are due to better Decision Making processes, such as flexible thinking,
creative Problem Solving, respect for others' perspectives, willingness to take risks and

higher confidence. Post negotiation positive affect has beneficial consequences as well. It
increases satisfaction with achieved outcome and influences one‘s desire for future interactions.
The PA aroused by reaching an agreement facilitates the dyadic relationship, which result in
affective commitment that sets the stage for subsequent interactions. PA also has its drawbacks: it
distorts perception of self performance, such that performance is judged to be relatively better
than it actually is. Thus, studies involving self reports on achieved outcomes might be biased.

12.2.Negative effect in negotiation

Negative effect has detrimental effects on various negotiation

Research indicates that negotiator‘s emotions do not necessarily affect the negotiation process.
Albarracın et al. (2003) suggested that there are two conditions for emotional effect, both related
to the ability (presence of environmental or cognitive disturbances) and the motivation:

1.Identification of the affect: requires high motivation, high ability or both.

2.Determination that the affect is relevant and important for the judgment: requires that either the
motivation, the ability or both are low.

According to this model, emotions are expected to affect negotiations only when one is high and
the other is low. When both ability and motivation are low the affect will not be identified, and
when both are high the affect will be identify but discounted as irrelevant for judgment. A
possible implication of this model is, for example, that the positive effects PA has on negotiations
(as described above) will be seen only when either motivation or ability are low.

Cultural differences cause four kinds of problems in international business negotiations, at the
levels of:

1.Language

2.Nonverbal behaviors
3.Values

4.Thinking and decision-making processes

The order is important; the problems lower on the list are more serious because they are more
subtle. For example, two negotiators would notice immediately if one were speaking Japanese
and the other German. The solution to the problem may be as simple as hiring an interpreter or
talking in a common third language, or it may be as difficult as learning a language. Regardless
of the solution, the problem is obvious.

13.NONVERBAL BEHAVIORS

Anthropologist Ray L. Birdwhistell demonstrated that less than 35% of the message in
conversations is conveyed by the spoken word while the other 65% is communicated
nonverbally. Albert Mehrabian, a UCLA psychologist, also parsed where meaning comes from in
face-to-face interactions. He reports:

1.7% of the meaning is derived from the words spoken

2.38% from paralinguistic channels, that is, tone of voice, loudness, and other aspects of how
things are said

3.55% from facial expressions

Of course, some might quibble with the exact percentages (and many have), but our work also
supports the notion that nonverbal behaviors are crucial – how things are said is often more
important than what is said.

Exhibit 2 provides analyses of some linguistic aspects and nonverbal behaviors for the 15
videotaped groups, that is, how things are said. Although these efforts merely scratch the surface
of these kinds of behavioral analyses, they still provide indications of substantial cultural
differences.

Differences in managerial values as pertinent to negotiations

Four managerial values—objectivity, competitiveness, equality, and punctuality—that are held

strongly and deeply by most Americans seem to frequently cause misunderstandings and bad
feelings in international business negotiations.
14.Objectivity

―Americans make decisions based upon the bottom line and on cold, hard facts.ǁ ―Americans
don‘t play favorites.ǁ ―Economics and performance count, not people.ǁ ―Business is business.ǁ
Such statements well reflect American notions of the importance of objectivity.

The single most successful book on the topic of negotiation, Getting to Yes,[33] is highly
recommended for both American and foreign readers. The latter will learn not only about
negotiations but, perhaps more important, about how Americans think about negotiations. The
authors are quite emphatic about ―separating the people from the

15.Competitiveness and Equality

Simulated negotiations can be viewed as a kind of experimental economics wherein the values of
each participating cultural group are roughly reflected in the economic outcomes. The simple
simulation used in this part of our work represents the essence of commercial negotiations—it
has both competitive and cooperative aspects. At least 40 businesspeople from each culture
played the same buyer-seller game, negotiating over the prices of three products. Depending on
the agreement reached, the ―negotiation pieǁ could be made larger through cooperation (as high
as $10,400 in joint profits) before it was divided between the buyer and seller.

16.Time

―Just make them wait.ǁ Everyone else in the world knows that no negotiation tactic is more
useful with Americans, because no one places more value on time, no one has less patience when
things slow down, and no one looks at their wristwatches more than Americans do. Edward T.
Hall in his seminal writing is best at explaining how the passage of time is viewed differently
across cultures and how these differences most often hurt Americans.

Differences in thinking and decision-making processes

When faced with a complex negotiation task, most Westerners (notice the generalization here)
divide the large task up into a series of smaller tasks. Issues such as prices, delivery, warranty,
and service contracts may be settled one issue at a time, with the final agreement being the sum
of the sequence of smaller agreements. In Asia, however, a different approach is more often
taken wherein all the issues are discussed at once, in no apparent order, and concessions are
made on all issues at the end of the discussion. The Western sequential approach and the Eastern
holistic approach do not mix well.

.
17.NEGOTIATION THEORY

Common Assumptions of Most Theories

Negotiation is a specialized and formal version of conflict resolution most frequently employed
when important issues must be agreed upon. Negotiation is necessary when one party requires
the other party's agreement to achieve its aim. The aim of negotiating is to build a shared
environment leading to longterm trust and often involves a third, neutral party to extract the
issues from the emotions and keep the individuals concerned focused. It is a powerful method for
resolving conflict and requires skill and experience. Zartman defines negotiation as "a process of
combining conflicting positions into a common position under a decision rule of unanimity, a
phenomenon in which the outcome is determined by the process."

However, most theories of negotiations share the notion of negotiations as a process. Yet, they
differ in their description of the process. Structural Analysis considers this process to be a power
game. Strategic analysis thinks of it as a repetition of games (Game Theory). Integrative Analysis
prefers the more intuitive notion of process, in which negotiations undergo successive stages, e.g.
pre-negotiation, stalemate, settlement. Especially structural, strategic and procedural analysis
build on rational actors, who are able to prioritize clear goals, are able to make trade-offs
between conflicting values, are consistent in their behavioral pattern, and are able to take
uncertainty into account.

Negotiations differ from mere coercion, in that negotiating parties have the theoretic possibility
to withdraw from negotiations. It is easier to study bi-lateral negotiations, as opposed to
multilateral negotiations.

Structural Analysis

Structural Analysis is based on a distribution of empowering elements among two negotiating

parties. Structural theory moves away from traditional Realist notions of power in that it does not
only consider power to be a possession, manifested for example in economic or military
resources, but also thinks of power as a relation.

Based on the distribution of elements, in structural analysis we find either power- symmetry
between equally strong parties or power-asymmetry between a stronger and a weaker party. All
elements from which the respective parties can draw power constitute.

18.Business Ethics & Social Responsibility

A. Definitions
The term “ethics” is derived from the Greek word “ethos” which means “character and from the
Latin word “mores” which means “customs”; the following definitions should also be helpful in
understanding the concept:

Ethics can be defined as the reflective process by which individuals, social groups and social
institutions evaluate their actions from the perspective of moral principles and values; or

The branch of philosophy that defines what is good for individuals and society and establishes
the nature of obligations that members of society owe to themselves and other members of
society.

Business Ethics: The reflective process whereby businesses evaluate their actions, policies and
decision-making processes.

Managers regularly face two types of ethical issues:

Micromanagement issues including conflicts of interest, accepting or giving gifts and the fairness
of performance appraisals.
Macromanagement issues including layoffs and down-sizings, employee screening tests and
employee privacy rights. .

18.1.Categories of Ethical Dilemmas

11. Taking things that don't belong to you

12. Saying things you know are not true

13. Giving or allowing false impressions

14. Buying influence or engaging in conflict of interest

15. Hiding or divulging information

16. Taking unfair advantage

17. Committing personal decadence

18. Perpetrating interpersonal abuse

19. Permitting organizational abuse

11. Violating rules

12. Condoning unethical actions

13. Balancing ethical dilemmas

18.2.The Language of Ethical Dilemmas

1."Everybody else does it."

2."If we don't do it, someone else."

3."That's the way it has always been done."

4."We'll wait until the lawyers tell us it's wrong."

5."It doesn't really hurt anyone."

6."The system is unfair."

7."I was just following orders."

18.3.Approaches to Ethical Decision Making

While a wide variety of approaches exist to provide guidance on how to make ethical decisions,
those approaches can be placed in the following categories:

Philosophy based approaches to ethical decision making.

Teleological Theories: These approaches emphasize the consequences of actions and policies;

Often associated with philosophers Jeremy Bentham (1748-1832) and John Stuart Mill

(1806-1873) and utilitarianism.

Utilitarianism posits that a decision is ethical to the degree that it promotes the greatest good for
the greatest number of stakeholders; "good" includes material goods as well as various forms of
pleasure.

Each stakeholder counts once and only This approach allows for degrees of right and wrong.

The shortcomings of utilitarianism include:

It is difficult and quite subjective to quantify pleasures in a cost/ benefit analysis.

 It is not always clear beforehand what the outcome of a decision will be, nor who will be
affected by it.
The calculation required to determine what is right is both complicated and time consuming;
many occasions will not permit the time and many individuals may not even be capable of the
calculations.
The greater good may be achieved under conditions that are harmful to some individuals as long
as that harm is balanced by a greater good.
The theory's tendency to condone inequitable distributions and even abuse of minorities has led
it to be labeled as elitist.

15. Deontological Theories: These theories are often associated with philosopher
Immanuel Kant (1724-1804) who attempted to discover the "categorical
imperatives" against which all other ethical decisions would be evaluated.

← The categorical imperatives applied the following two concepts:

←Universalizable: Always act in such a way that you can also will
that the maxim of your action should become universal law.

2)-Respect for persons: Always act so that you treat humanity, both
in your own person and in that of another, always as an end and
never merely as a means (similar to the golden rule).

b)This approach identifies certain interests or rights that must be

respected;

These rights include many of the freedoms recognized in the U.S.

Constitution.

Simplified this approach says an action or policy is morally right only

if those persons affected by the action or policy are not used as instruments

for advancing some goal, but are fully informed and have their fundamental human rights
honored and protected.

Shortcomings of Kant’s approach include:

It creates moral dilemmas when duties come into conflict but provides no mechanism for
resolving such conflicts.
It yields only absolutes and thus recognizes no gray areas; rigid lines often result (i.e. lying is
unethical so that even a "polite lie" is wrong).

In deontology it’s how you play the game and not whether you win or lose (i.e. the

Decision making process is more important than the outcome of the process); while in

Utilitarianism winning is everything (i.e. outcomes are more important than processes).

Virtue ethics theory: This theory is normally associated with the Greek philosophers Aristotle and
Plato. This theory suggests a way of being rather than a rule for doing.

Virtue ethics theory posits that what one needs to do to make ethical decisions is to cultivate
virtuous character traits since virtuous people are more inclined to both be ethical and to make
ethical decisions.

This theory defines virtues as fixed traits or habits to do what is morally commendable.

Aristotle’s list of virtues included courage, self-discipline and honesty.

Criticism’s of the virtue ethics approach include:

It is not practical in a society like ours in which wealth and success are so highly valued.

is not useful for evaluating the desirability of actions (i.e. are they right or wrong).

The fact that a virtuous person chooses a certain course of action does not guarantee that the
action is ethical since even saints are fallible.

Religious based approaches such as the Golden Rule which posits an action or policy is ethical
to the it treats the other stakeholders the way the decision makers would want to be treated (i.e.
do unto others as you would have them do unto you.

Business based approaches such as Warren Buffet’s “Front-Page-of-the-Newspaper Test” in

which he suggests:
When contemplating any business act, an employee should ask him/herself whether he/she
would willing to see it immediately described by an informed and critical reporter on the front
page of his/her local newspaper, there to be read by his/her spouse, children and friends.

Ethical relativism is the theory that holds that morality is relative to the norms of one's culture.
That is, whether an action is right or wrong depends on the moral norms of the society in which
it is practiced. The same action may be morally right in one society but be morally wrong in
another.

For the ethical relativist, there are no universal moral standards.

Most ethicists reject the theory of ethical relativism.

Perhaps the strongest argument against ethical relativism comes from those who assert that
universal moral standards can exist even if some moral practices and beliefs vary among
cultures. In other words, we can acknowledge cultural differences in moral practices and beliefs
and still hold that some of these practices and beliefs are morally wrong.

E. Key reasons why managers act ethically (per HBS survey results)

1.Personal moral values prevent doing it;

2.The action would hurt the organization or someone in it;

3.Not doing it enhances personal satisfactions;

4.The organization is fair, so why take advantage of it;

5.The punishment if caught is severe;

6.There is a high risk of getting caught.

F. Key reasons why managers act unethically ( per HBS survey results)

← Belief that the act would not hurt the organization or its members;
← Belief that act would advance personal economic well-being;
← Absence of moral constraints not to do it;

← Top management acts this way or condones such acts;

← Other workers do it, accept it, or put pressure on others to do it;

←There is little risk of getting caught or punished.

G. Teaching ethics: How morality develops in humans

Lawrence Kohlberg, in his book “Moral Stages and Moralization”, proposes that moral standards
of behavior
are developed over time, as children mature into adults.

There are six stages, grouped into three major levels termed "preconventional," "conventional,"
and
"postconventional."

18. This is the level of most children under 9 years old, some adolescents up to age 20, and
Level
1-Preconventional many adolescent and adult criminal offenders. individuals at this level do not
understand or accept societal rules.

Stage I-Individual benefits. Avoid breaking rules backed . by punishments. Think only in terms
of your own interests. Do not recograze the interests of others. Morality, in short, is doing what's
right for you.

-Interpersonal exchanges. Avoid breaking rules backed by rewards. Still focus on your
own interests, but recognize that others have interests too. Morality is an exchange, a
deal, an agreement on what's right for both.

.Level 2 This is the level of most adolescents and adults within our society and within other

societies as well. Individuals at this stage accept societal rules just because they are society's
rules,
 conventions, expectations.

Stage 3-Interpersonal expectations. Live up to what is expected of you in a small family group;
follow the roles as a son or daughter that make the family function. Morality is behaving as
expected by others close to you.

Stage 4-Social expectations. Live up to what is expected of you in larger social groups to keep
those institutions going. Obey the law as a set of written social rules. Morality is behaving as
expected by others similar to you.

Level 3-Postconventional: This is the level that is reached by only a minority of adults.
Individuals at this stage accept societal rules, but acceptance is based upon recognizing the
general ethical principles that underlie those rules.

Stage 5-Social contract. Follow the law which is a reciprocal agreement to protect the rights and
welfare of all citizens. Recognize that others have different morals and values, but that you have
all agreed to honor such basic goals as the right to life, liberty, and property.

Stage 6-Social principles. Follow self-chosen ethical principles. Obey the law only when it does
not violate those principles. Believe in the validity of rational ethical principles on such issues as
justice, equality, and respect for the worth of individual human beings.

H. Actions to Promote Ethical Behavior in a Business Organization

Develop and distribute a written code of ethics.
The primary function of a code of ethics is to provide guidance to provide
guidance to epoyees faced with ethical dilemmas, especially ambiguous ones.

Some professional associations have developed highly detailed and

enforceable Codes of Ethic for their membership.

For example, the Model Rules of Conduct of the American Bar Association (ABA) contains
eight sections, construed according to 138 ethical considerations and implemented by
a. comparable number of parallel disciplinary rules.

a). Other professions with Codes of Ethics include medicine, dentistry, engineering,

accounting, psychology, journalism, advertising, architecture, banking and real estate.

12.Since some of these professions are not licensed, it is more difficult to obtain recourse for

a claim of unethical conduct.

The Computer Ethics Institute in Washington, D.C. has developed a code-like

“Ten Commandments of Computer Ethics” which includes:

1-Thou shall not use a computer to harm other people.

2-Thou shall not interfere with other people’s computer work.

3-Thou shall not snoop around in other people’s computer files.

4-Thou shall not use a computer to steal.

5-Thou shall not use a computer to bear false witness.

 6-Thou shall not copy or use proprietary software for which you have not paid.

7-Thou shall not use other people’s computer resources without authorization
or proper compensation

8-Thou shall not appropriate other people’s intellectual output.

9-Thou shall think about the social consequences of the program you are
writing or the system you are designing.

10-Thou shall always use a computer in ways that insure consideration and
respect for your fellow humans.

← Support and reinforce the code through the actions of top management.
← Hire an ethics advisor to serve a role similar to a legal advisor.
← Establish an ethics audit committee.
← Institute an open door policy to encourage employees to seek advice on ethical
issues.
I. The Caux Rundtable Principles: An International Code of Ethic

.The Caux Round Table was created in 1994. The principles form an international code of
ethical conduct

for global firms and were created through collaboration with business leaders in Europe,
Japan, and the

United State

These principles are rooted in two basic ideals: kyosei and human dignity.

The Japanese concept of kyosei means living and working together for the common good-
enabling cooperation and mutual prosperity to coexist with healthy and fair competition.
Human dignity refers to the sacredness or value of each person as an end, not simply as a
means to the fulfillment of others' purposes.
The Doctrine of Social Responsibility of Business

Singular Purpose Viewpoint - corporations benefit society by maximizing profits and

should not respond to the social environment. Arguments bolstering this viewpoint
include:
For-profit corporations are chartered under state law to operate a business to benefit the
shareholders (Milton Friedman, noted economist, believes the sole responsibility of
business isto increase profits and any actions undertaken for other purposes are
subversive)
Corporate social actions may undermine what is the proper role of government, giving
business too great a role in our society.
Corporate social actions are inefficient and may result in resource misallocation

Corporate social actions make corporations less competitive compared to foreign

competition.
Plural Purpose Viewpoint - Corporations should maximize profits and also respond to the
external social environment. Arguments bolstering this viewpoint incSocially responsive acts
are proper corporate activities when they benefit the firm, even though in an indirect or
general way.. Business benefits when it contributes toward a stable, market-oriented
environment.
Business is more efficient in administering for the social good than government. By
undertaking social action, business can correct social problems before government regulates
their business operations.
Social responsiveness can generate indirect long-term profits which are difficult to
quantity.Business is a major institution in our society, so it has an obligation to provide public
service

The Social Responsibility Triangle developed by Professor Archie Carroll of the University
of Maryland suggests that the doctrine of social responsibility is a multifaceted and complex
doctrine
His theory suggests that being socially responsible involves satisfying foutypes of
responsibilities: economic; legal; ethical; and philanthropic.

Economic responsibilities enjoy the highest priority and are the

foundation upon which all other responsibilities rest.

Legal responsibilities enjoy the second highest priority; the law is

society’s codification of what is right and what is wrong (i.e. ethical or
unethical).

Ethical responsibilities have the third highest priority and include

the obligation to be fair and avoid harming others.

Lastly, philanthropic responsibilities require good citizenship especially in

terms of reinvesting in one’s community to improve the quality of life for all citizens.