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Module 1

Unit 1
International Business

(International Business - Nature, importance and scope/types of international business; reasons for
companies going international; major decisions in international business; factors influencing
international business decisions; indicators of growth of international business - trade/GDP ratio;
FDI/GDP ratio, FDI/capital formation ratio, growth of international production, growth of global supply
chains and global sourcing.)

• International Business conducts business transactions all over the world. These transactions include the
transfer of goods, services, technology, managerial knowledge, and capital to other countries.
International business involves exports and imports

• International business is a business that involves transactions between parties in different global locations.
It can involve exchange of goods and services as well as technologies and people.

• IB is the exchange of “Goods & Services, resources, knowledge, & skills” among individuals &
businesses in two or more countries. It includes all transaction that are carried out across national borders
to satisfy the objectives of individuals and organizations. It implies the conduct of business activities
beyond the national boundaries.

• Though a number of definitions in the business literature can be found but no simple or universally
accepted definition exists for the term international business.

• International business is defined as organization that buys and/or sells goods and services across two or
more national boundaries, even if management is located in a single country.

• Even when you purchase an item in international website (such as Amazon, AliBaba or EBay) you are
taking part in an international business transaction. Your purchase sets in motion a financial transaction
(your payment for the goods), a logistic transaction (the good are being sent to you from China) and a
consumer transaction (you are purchasing goods).

NATURE OF IB

i. Long term - International business is complex and requires investment of time and money.

ii. Cultural difference -It means that you and your international partner/ customer to business, may have a
completely different perception regarding basic things.

iii. Different countries- - different laws. When working internationally, it is important to understand what is
the applicable law that governs your transaction

iv. Logistics - You may have the best prices, and you have found the perfect customer, but if you fail to
create an effective and efficient transportation facility, IB wouldn’t work.

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v. Language-- it is important to make sure that you & your customer or partners are on the same page and
that you have invested resources to, either translate/localize your documents/web/etc., or that you have
someone that has control of the language of your business partner. So - MAKE SURE THAT YOU ARE
COMMUNICATING CORRECTLY AND AGREE ON THE LANGUAGE YOU USE.

vi. Global Partners-When you work globally, you will need local partners that will do different
tasks for you - representation, communication, logistics, sales, distribution, etc.

vii. Time Consuming- when working globally, the time difference must be taken into account so
that you will not bother your business partners during their weekends, or set conference calls in
the middle of the night.

viii. Distance- - since you are doing business in a different country, you need to take into account the
distance - it affects delivery time, logistics, taking into account expiration dates and most
importantly - what happens when something goes wrong and you will need to resolve it
remotely. You cannot just get a refund or ask them to send you something so it will be delivered
to you within a day or so - they are far away!

ix. Risk- Risk must be taken into account when you are pricing, when you are planning the
business, deliveries, international payments, etc.

IMPORTANCE OF IB

1. Increases the foreign exchange

2. Optimum utilisation of resources of the country
3. To spread business risks (i.e to reduce it)
4. Improve organization's efficiency with the wide exposure and challenges
5. Expansion and diversification of business
6. Receives benefits from Government as IB caters FDI
7. Increase competitive capacity of the business

CHARACTERISTICS/FEATURES OF INTERNATIONAL BUSINESS

• Regional Integration
• Declining Trade Barriers
• Declining Investment Barriers
• Growth in FDI
• IB helps to take Stride in Technology
• Growth of MNCs

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SCOPE OF IB

• International marketing
• Foreign Exchange
• Caters trade of services ( Invisible trades – recruiting, lodging, training, travel, educational &
financial services)
• Licensing and franchising
• Catalyst to exports and imports

TYPES OF IB

• Exporting
• Turnkey Projects
• Licensing
• Franchising
• Joint Ventures
• Wholly Owned Subsidiaries

EXPORTING

Exporting is the process of selling of goods and services produced in one country to other countries.
There are two types of exporting: direct and indirect.

Direct Exports
Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in
production concentrated in the home country and affording better control over distribution. Direct export
works the best if the volumes are small. Large volumes of export may trigger protectionism.

Indirect Exports:
An indirect export is the process of exporting through domestically based export intermediaries. The
exporter has no control over its products in the foreign market.

TURNKEY PROJECTS

 A turnkey project refers to a project in which clients pay contractors to design and construct new facilities
and train personnel. A turnkey project is way for a foreign company to export its process and technology to
other countries by building a plant in that country. Industrial companies that specialize in complex
production technologies normally use turnkey projects as an entry strategy.

 One of the major advantages of turnkey projects is the possibility for a company to establish a plant and earn
profits in a foreign country especially in which foreign direct investment opportunities are limited and lack of
expertise in a specific area exists.

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 Potential disadvantages of a turnkey project for a company include risk of revealing companies secrets to
rivals, and takeover of their plant by the host country. By entering a market with a turnkey project proves that
a company has no long-term interest in the country which can become a disadvantage if the country proves to
be the main market for the output of the exported process.

LICENSING

• A Licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to
another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee.

• An international licensing agreement allows foreign firms, either exclusively or non-exclusively to

manufacture a proprietor’s product for a fixed term in a specific market.

• Summarizing, in this foreign market entry mode, a licensor in the home country makes limited rights or
resources available to the licensee in the host country. The rights or resources may include patents,
trademarks, managerial skills, technology, and others that can make it possible for the licensee to
manufacture and sell in the host country a similar product to the one the licensor has already been
producing and selling in the home country without requiring the licensor to open a new operation
overseas. The licensor earnings usually take forms of one time payments, technical fees and royalty
payments usually calculated as a percentage of sales.

• As in this mode of entry the transference of knowledge between the parental company and the licensee is
strongly present, the decision of making an international license agreement depend on the respect the host
government show for intellectual property and on the ability of the licensor to choose the right partners
and avoid them to compete in each other market. Licensing is a relatively flexible work agreement that
can be customized to fit the needs and interests of both, licensor and licensee.

FRANCHISING

• Franchising is similar to licensing, although franchising tends to involve longer-term commitments than
licensing. ¨ The Franchiser will also often assist the franchisee to run the business on an ongoing basis. ¨ It
also receives a royalty payment, which amounts to some percentage of the franchisee’s revenues.

• The Franchising system can be defined as: “A system in which semi-independent business owners
(franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become
identified with its trademark, to sell its products or services, and often to use its business format and system.”

• Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package
of rights and resources which usually includes: equipments’, managerial systems, operation manual, initial
trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is
done by the franchisor. In addition to that, while a licensing agreement involves things such as intellectual

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property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of
the business.

JOINT VENTURES

A Joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms.

There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing
and joint product development, and conforming to government regulations. Other benefits include political
connections and distribution channel access that may depend on relationships. Such alliances often are
favorable when:

*The partners’ strategic goals converge while their competitive goals diverge
*The partners’ size, market power, and resources are small compared to the Industry leaders
*Partners are able to learn from one another while limiting access to their own proprietary skills

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology
transfer, local firm capabilities and resources, and government intentions.

WHOLLY OWNED SUBSIDIARIES

In a wholly owned subsidiary, the firm owns 100 percent of the stock. ¨ WOS in a foreign market can be done two
ways. The firm either can set up a new operation in that country, often referred to as a Greenfield venture, or it
can acquire an established firm in that host nation

A wholly owned subsidiary includes two types of strategies: Greenfield investment and Acquisitions. Greenfield
investment and Acquisition include both advantages and disadvantages. To decide which entry modes to use is
depending on situations.

Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and potentially
costly, but it is able to full control to the firm and has the most potential to provide above average return. “Wholly
owned subsidiaries and expatriate staff are preferred in service industries where close contact with end customers
and high levels of professional skills, specialized know how, and customizations are required.”

Greenfield investment is more likely preferred where physical capital intensive plants are planned. This strategy is
attractive if there are no competitors to buy or the transfer competitive advantages that consists of embedded
competencies, skills, routines, and culture.

Acquisition has become a popular mode of entering foreign markets mainly due to its quick access.
Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the alternative.

Acquisition has been increasing because it is a way to achieve greater market power. The market share usually is
affected by market power. Therefore, many multinational corporations apply acquisitions to achieve their greater

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market power require buying a competitor, a supplier, a distributor, or a business in highly related industry to
allow exercise of a core competency and capture competitive advantage in the market.

REASONS TO ENTER THE INTERNATIONAL MARKETPLACE AND HOW TO ENJOY NEW

EXPORT OPPORTUNITIES

1. Increase sales.

2. Improve profits.

3. Short-term security..

4. Long-term security. 5. Increase innovation.

6. Exclusivity.

7. Economies of scale.

8. Education.

9. Competitive Strike.

10. Government Incentives

1. Increase sales. If your business is succeeding in the U.S., expanding globally will likely improve overall
revenue. Approximately 96% of the world’s population lives outside of the U.S. and 90% of the world’s
population does not speak English – this suggests customers are global and that if your company looks beyond the
shores of the domestic market, you have some real upside potential. If your company has a unique product or
technological advantage not available to international competitors then this advantage should result in major
business success abroad. For example, if you run a software company and add a French and German language
version, you are extending your total market by nearly 200 million.

2. Improve profits. Many export markets are not as competitive as the U.S. and therefore price pressures are far
less – ever wonder why a Jaguar car made in Coventry, England costs more in Coventry than California? It is
common practice for U.S. products to be sold at a higher price (and margin) in many export markets – software
translated into German is much appreciated by users in Germany and they will become loyal customers and pay a
premium. A U.S. company will often enjoy a far less competitive landscape if it goes to the trouble of localizing.

3. Short-term security. Your business will be less vulnerable to periodic fluctuations and downturns in the U.S.
economy and marketplace.

4. Long-term security. The U.S. is a large, mature market with intense competition from domestic and foreign
competitors. Additionally, the U.S. currently has excess capacity so international business trade may become a
necessity if you want to keep up in an increasingly global marketplace and enjoy the potential for cost savings.

5. Increase innovation. Extending your customer base internationally can help you finance new product
development.

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6. Exclusivity. Your company’s management may have exclusive market information about foreign
customers/prospects, marketplaces or market situations that are not known to others.

7. Economies of scale. Exporting is an excellent way to expand your business with products that are more widely
accepted around the world. In many manufacturing industries, for example, internationalization can help
companies achieve greater scales of economy, especially for companies from smaller domestic markets. In
other cases, a company may seek to exploit a unique and differentiating advantage (intellectual property), such as
a brand, service model, or patented product. The emphasis should be on “more of the same,” with relatively little
adjustment to local markets, which would undermine scale economies.

8. Education. Under certain circumstances, a company might undertake an international market entry not solely
for financial reasons, but to learn. For example, the consumer products division of Koc, the Turkish conglomerate,
entered Germany, regarded as the world’s leading market for dishwashers, refrigerators, freezers, and washing
machines in terms of consumer sophistication and product specification. In doing so, it recognized that its
unknown brand would struggle to gain much market share in this fiercely competitive market. However, Koc took
the view that, as an aspiring global company, it would undoubtedly benefit from participating in the world’s
toughest market and that its own product design and marketing would improve and enable it to perform better
around the world. In most sectors, participation in the “lead market” would be a prerequisite for qualifying as a
global leader, even if profits in that market were low. Lead markets include: United States for software, Japan for
consumer electronics, Italy for fashion, Germany for automobiles and so on. It should be noted that if a company
is to maximize learning from a lead market, it should probably participate with its own subsidiary. Learning
indirectly, via a local distributor or partner, is obviously less effective and will contribute less to the company’s
development as a global player.

9. Competitive Strike. Market entry can prompt not by the positive characteristics of the country identified in a
market assessment project, but as a reaction to competitors’ moves. A common scenario is market entry as a
follower move, where a company enters the market because a major competitor has done so. This is obviously
driven by the belief that the competitor would gain a significant advantage if it were allowed to operate alone in
that market. Another frequent scenario is “offense as defense,” in which a company enters the home market of a
competitor—usually in retaliation for an earlier entry into its own domestic market. In this case, the objective is
also to force the competitor to allocate increased resources to an intensified level of competition.

10. Government Incentives (i.e., cash). It is common for governments to “incentivize” their country’s
companies to export. This often results in many companies entering markets they would otherwise not have
tackled.

Approaches in IB

1. Ethnocentric approach
2. Polycentric approach
3. Regio-centric approach
4. Geocentric approach

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1. Ethnocentric approach

Under ethnocentric approach, the domestic companies view foreign markets as an extension to
domestic markets

The domestic companies normally formulate their strategies, their product design and their operations towards
the national markets, customers and competitors. But, the excessive production more than the demand for the
product, either due to competition or due to changes in customer preferences push the company to export the
excessive production to foreign countries. The domestic company continues the exports to the foreign
countries and views the foreign markets as an extension to the domestic markets just like a new region.
The executives at the head office of the company make the decisions relating to exports and, the marketing
personnel of the domestic company monitor the export operations with the help of an export department.
The company exports the same product designed for domestic markets to foreign countries under this approach.
Thus, maintenance of domestic approach towards international business is called ethnocentric approach.

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2. Polycentric approach

Under polycentric approach, companies establish foreign subsidiary and empowers its executives.
The companies customises the marketing mix to meet the taste, performance and needs of the
customers of each international market.

The domestic companies which are exporting to foreign countries using the ethnocentric approach find at
the later stage that the foreign markets need an altogether different approach. Then, the company establishes
a foreign subsidiary company and decentralizes all the operations and delegates’ decision-making and
policy-making authority to its executives. In fact, the company appoints executives and personnel including
a chief executive who reports directly to the Managing Director of the company. Company appoints the key
personnel from the home country and all other vacancies are filled by the people of the host country.
This approach chooses policies and procedures based on their host country. The local markets needs and
requirements are met by a team of local employees and various foreign subsidiaries are established to work
independently to achieve the objectives & plans of the organisation.

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3. Regio-centric approach

In this approach the company operating successfully in a foreign country thinks of exporting
other neighbouring countries of the host country. Under this approach, subsidiaries consider
regional environment for policy/ strategy formulation.

The company after operating successfully in a foreign country, thinks of exporting to the neighbouring
countries of the host country. At this stage, the foreign subsidiary considers the regional environment (for
example, Asian environment like laws, culture, policies, etc.), for formulating policies and strategies.
However, it markets more or less the same product designed.

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4. Geocentric approach

Under this approach, the entire world is just like a single country for the company and the company
analyses the tastes, preference and needs of the customers in all foreign markets and then adopts a
standardized marketing mix for all the foreign markets.

Under this approach, the entire world is just like a single country for the company. They select the
employees from the entire globe and operate with a number of subsidiaries. The headquarters coordinate
the activities of the subsidiaries. Each subsidiary functions like an independent and autonomous company
in formulating policies, strategies, product design, human resource policies, operations, etc.

Under this approach, the company analyses the tastes, preference and needs of the customers in all
foreign markets and then adopts a standardized marketing mix for all the foreign markets.

Coca-cola adopted this strategy by selling its popular soft drink with the same content, packaging,
branding & advertisement themes worldwide

Whirlpool designs a world-washer – small, stripped-down automatic washing machine for Mexico, Brazil &
India. However, it modified its product for Indian market to wash the delicate “sarees”.

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INTERNATIONAL ORGANISATIONS

• General agreement on Tariff and trade (GATT) – an international organization formed to reduce or
eliminate tariff and other barrier to international trade
• International Monetary Fund (IMF) – an international financial organization that lend money to
countries in conducting international trade
• World Bank – an international financial organization that lend money to underdeveloped and developing
countries for development
• Economic Communities – the creation of common economic policies – World Trade Organization
(WTO) – European Community (EC) – North American Free Trade Agreement (NAFTA) – Asian Free
Trade Agreement (AFTA)

PROBLEMS IN IB

1. Political stability of host country

2. Tariffs and trade barriers
3. Exchange rate instability
4. Entry requirements in each countries
5. Corruption and bureaucratic practices in host countries
6. Difference in culture and language barriers
7. War and terrorism
8. Quality Management

REASONS FOR COMPANIES GOING INTERNATIONAL

1. Pull Factors – Proactive factors that tend to pull organisations towards international business.
2. Push Factors – It is reactive in nature, the pressures pertaining to domestic market forces the company to
explore foreign markets

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Pull Factors

1. It increases sales.
2. Improves profitability.
3. Helps to minimise the risk.
4. Increases innovation.
5. Economies of scale- increase in production leading to “low cost per unit”.
6. Access to imported inputs.
7. WTO policies.
8. Government Incentives.
9. Promotes unity among countries and economies.

Push Factors

1. Chances of Exclusivity/ Uniqueness of product in the international market

2. Introducing products in the varied markets to tackle the trade cycle effects
3. R & D costs can be controlled
4. Resource utilisation
5. Improved quality
6. Government policies of countries that focuses on imports and overseas investment

MAJOR DECISIONS IN INTERNATIONAL BUSINESS

1. Analysing the international Markets

2. Deciding whether to go abroad
3. Deciding which market to enter
4. Deciding how to enter the market

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5. Deciding on business strategy

6. Deciding on organisation

Elucidate the factors which influence international business decisions. (Oct, 2017)

FACTORS AFFECTING IB DECISIONS

1. Social Conditions
2. Cultural Difference
3. Political Uncertainties
4. Legal Factors
5. Technological Differences
6. Technological Advances
7. Economics Conditions
8. Difference in Exchange rates
9. Restrictions on Imports and Exports
10. Government Policies
11. Internal Factors: Land, Labour, Capital, Business Location, Product Quality, Product Price, Owners
Equity.

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Mention two indicators of growth of IB. (Oct, 2017)

INDICATORS OF GROWTH OF IB

i. Trade/GDP Ratio
ii. FDI/GDP Ratio
iii. FDI/ Capital Formation Ratio

iv. Trade/GDP Ratio

Trade GDP Ratio is generally regarded as an indicator of globalisation and openness of an economy , this ratio is
obtained by dividing international trade over a period by GDP of the same period It is also called trade openness
ratio, as it helps to measure the openness of a particular economy to trade.
Global Trade GDP Ratio was around 20% in 1995 and has increased to over 44% in 2015. India’s trade-GDP
ratio has increased substantially in last few decades mainly due to increased service exports from India. India’s
ratio has been rising sharply, particularly over the decade to 2012, when it doubled to 53 per cent; the recovery
from the global financial crisis in 2008 was also swift. As a result, India’s ratio now surpasses China and United
States, which is remarkable.

v. FDI/GDP Ratio
Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or
company of another country, either by buying a company in the target country or by expanding operations of an
existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a
passive investment in the securities of another country such as stocks and bonds.

vi. FDI/ Capital Formation Ratio

FDI refers to the physical investments made by foreign investors in a country by an individual or company of
another country. The physical investments refer to the direct investments into building, machinery and equipment.
As FDI helps overall capital formation, this ratio is considered as a determinant of economic growth. This ratio
is the measure of FDI in an year divided by total fixed investments in the country

Challenges of IB

i. Initial cost is high

ii. Alterations in product as per each legislatives

iii. Affects payments as international payments can get delayed in exports

iv. Cultural Differences

v. Competitive foreign markets

vi. Barriers to trade

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INTERNATIONAL PRODUCTION

Meaning

• International production deals with production of goods and services in international locations and
markets.

• The international production encompasses vertical production chains extended across the countries in the
region as well as distribution networks throughout the world.

• IP provides an unparalleled opportunity for companies to grow into new markets.

• It involves management process which has to take into consideration local production market (labour and
capital) and international customer necessities.

• The major actors are corporate firms belonging to the machinery industries, including general machinery,
electrical machinery, transport equipment, and precision machinery though some firms in other industries,
such as textiles and garment, also develop the network.

• It involves management process which has to take into consideration local production market (labour and
capital) and international customer necessities.

• The major actors are corporate firms belonging to the machinery industries, including general machinery,
electrical machinery, transport equipment, and precision machinery though some firms in other industries,
such as textiles and garment, also develop the network.

NATURE OF INTERNATIONAL PRODUCTION

i. Different procedures and principles in each countries

ii. Diversified markets

iii. Country’s Policy Challenges

iv. Optimum utilisation of resources

v. Accelerates economic growth

GROWTH OF INTERNATIONAL PRODUCTION

i. Huge factor cost differences in each countries (low of cost of labour or raw materials in some countries)

ii. High growth in emerging markets

iii. Lower transaction/transportation costs by setting up global production houses

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INTERNATIONAL SUPPLY CHAIN

• International Supply Chain is the flow involving goods or services that begins from the acquisition of raw
materials to providing the final product to the end consumer.

• In the case of International Supply Chain Management, this flow assumes the involvement of at least one
company from abroad, with the purpose of creating a network composed out of trans-national companies.
It involves planning how the entire supply chain will function as an integrated whole, with the aim of
generating an optimum level of customer service while being as cost efficient as possible.

• Other aims include increasing the speed by which your product reaches your customers, as well as
flexibility in dealing with customer transactions. It incorporates management processes that integrate the
network of suppliers, manufacturers, warehouses and retail outlets so that the right type of goods are
sourced, supplied, produced and shipped in the right quantities, to the right locations, at the right time
and are received in sound condition. To achieve successful integration, flows of information (such as
purchase orders, shipping notices, waybills and invoices), materials (including raw and finished products)
and finances (payments and refunds) through the supply chain must be co-ordinated effectively.

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GROWTH OF GLOBAL SUPPLY CHAIN

i. Global market forces- the pressure created by global competitors and customers.

ii. Technological Forces- Technological advancements in other countries, that are useful for our product. Eg:
Microsoft’s research labs in Europe

iii. Global Cost Forces : US companies taking help of indian programming skills

iv. Political and economic forces- tariff and quota policies of host country that helps foreign countries

GLOBAL SOURCING

• It is a process of sourcing from global market for goods, services,etc across geo- political boundaries.

• Global sourcing is a procurement strategy that aims to take advantage of global efficiencies for the
delivery of goods and services. For MNCs, it has become a strategic sourcing in today’s competitive
setting.

• Some popular examples of globally sourced goods and services are: labor-intensive goods produced
in China at low production cost, BPOs staffed with low cost English proficient people in India, and
IT (software and hardware) tasks performed by Indian and Eastern European low cost programmers.
These examples particularly relate to low cost country specific sourcing but the scope and definition of
global sourcing is not limited to low cost nations.

• In reality, global sourcing is a centralized procurement strategy of a multinational company, wherein a

central procurement department seeks the economies of scale through corporate wide standardization and
benchmarking. In short, global sourcing is a ‘strategic business philosophy’ that coordinates the world’s
most cost effective production and operation inputs such as men, materials, machines, technology,
suppliers, engineering and other required facilities.

GROWTH OF GLOBAL SOURCING AND PROCUREMENT

i. Pool of highly skilled labourers

ii. State of art technologies

iii. Advances in technologies

iv. Matured delievery models inspite of varied time zones

v. Improvements in collaborative tools and platforms

vi. Benefits of Global Sourcing

THE GLOBAL SOURCING PHILOSOPHY HAS FOLLOWING ADVANTAGES:

(i) Low cost manufacturing

(ii) Tapping skills and resources those are not available in the home nation

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iii) Seeking the benefit of alternate suppliers

(iv) Learning global business skills.

(vi) Meeting competition efficiently.

Disadvantages of Global Sourcing:

(i) No exposure of international culture, traditions and beliefs

(ii) Hidden costs related to different time zones and languages

(iii) Financial and political risks associated with emerging economies

(iv) Risk of losing intellectual properties, patents and copyrights

(v) Long lead times

Problems Related to Global Sourcing:

(i) Language barrier

(ii) Cultural difference

(iii) Climate/time difference

(iv) Distance issue

PREVIOUS YEARS QUESTION PAPER

1. Mention two indicators of growth of IB. (Oct, 2017)

2. Elucidate the factors which influence international business decisions. (Oct, 2017)

International Business SNIT ADOOR 2018-2020 Prepared By : Chippy Mohan