INTERNATIONAL BUSINESS AND STRATEGIC ALLIANCES

Question 1. Factors influencing for cultural environment in international business.

Answer 1. There are number of cultural variables/elements that influence the

International Business environment. The main variables of ct1lture are represented
in the figure below,
Technology and Material Culture. Material
culture is an outcome of technology and it is
concerned with the manner in which society
organizes its economic activity. The
development and organization of material
culture is dependent on the availability and
adequacy of the basic economic, social,
financial and marketing infrastructures.

Technological advancements bring variations

in the existing cultural values. Material culture
affects the type and quality of products
demanded, level of demand, functional features
of products and the various means of production and distribution of the goods.

1. Social Institutions, such as business, politics, family or clans related aspects

play a vital role in influencing the behaviour of individuals as well as the ways in
which the people relate to each other.

Example. There are few countries that consider 'Family' as an important social
group even, sometimes family relationship has an impact over the working conditions
and the employment practices.

In Latin America and Arab world, an obligation is fulfilled only when special good
treatment towards a relative/ family member is considered as an obligation of a
manager.

3 . Aesthetics, implies attitudes towards beauty, good taste in the art, music and
drama of a culture. Aesthetics related to specific culture is significant to explain the
symbolic meanings of different artistic expressions. However, it tends to vary from
one culture to other. For example, sex in advertising is preferred by most of the
consumers.

Companies must examine the aesthetic factors like product and package design,
colour, brand name and symbols. This would be helpful in influencing the customers.
Also, it is necessary for international businessmen to understand non-verbal cultural
differences, so that wrong communication can be avoided.

4 . Religious Beliefs. Most important religions that are shared by most of the
nations include,

(i) Islam is mainly practiced by most of the countries worldwide like Africa,
Arab world, around the Mediterranean and Indonesia, Pakistan and rising
 steadily in India, American countries like U.S, Canada and other countries like
Iran, Algeria and so on.

(ii) Christianity is broadly practiced all around the world

especially in countries like Europe and America.

(iii) Hinduism is mostly practiced in India.

(iv) Buddhism is practiced in central and South East Asia, China, Korea
and Japan.

(v) Confucianism a mostly followed in countries like China, Korea and

Japan

Religion holds a direct impact on the marketing strategy in different ways,

(a) Than is an impact over consumption patterns based on religious

requirements. In one of the traditional example, Catholics prefers to eat fish
on Friday only Hindus have been prohibited from consuming beef as they
considers Cow as their holy animal, whereas, the Muslims avoid pork and
there exist prohibitions on the entry of pork in many countries lie Israel and all
the Islamic countries (Saudi Arabia, Iraq, Iran, Indonesia Malaysia Kuwait).

(b) Role of women in the economy differs from one culture to another. For
example, role of women in Middle East countries is bounded in their capacity
as consumers, workers or respondents.

(c) Religious holidays differ widely among countries worldwide. Example,

Sundays are considered as religious holiday inns where Christianity is a major
religion and in of Muslim countries where majority is Muslims Friday is
considered as a religious holiday such as Saudi Arabia, Kuwait, UAE so on.

5 . Language, one of the means by which one can communicate with others and
can share ideas or feelings through conventionalized sig., gesture, marks etc.
Sanskrit and Latin are the most ancient languages of the world from which many
other languages emerged. It 6 the language which distinguishes human beings from
animals. It is one of the most important constituent of culture. There are 6912 living
languages in the world as per ethnologic lists.

Language is considered as important cultural tool that effectively carryout

international business. Therefore, is used in all types of marketing communications
such as public relations advertisement and general communication.

The marketing people must speak the same language that is used by their
customers. In any international business, the marketers are required to learn the
languages of other nation as to become flexible in communication with than This
would ultimately leads to the achievement of target.

6 . Values and Attitudes. With the help of own set of values and attitudes, an
individual is able to differentiate between the right or wrong habits or between the
advisable and no advisable behaviour.
 There are certain values and attitudes which have been originated and derived
from certain culture that possess central beliefs/views like religion wherein, global
marketing manager needs to successfully move in the market. In industrialized or
developed economies, attitude towards changes viewed as positive behaviour
whereas in tradition restricted on or countries, change is resisted by the individuals
of a country particularly if it is transmitted from the foreign °aunty.

7. Respecting Employees. International companies develop many policies and

practices that respect the beliefs and religions of their employees. In order to
encourage employees of work, companies adopt policies that support the workers in
expressing their religious conviction

Example. Mattel-Inc, the largest toy manufacturing company - promotes and

encourages do religious and ethical feelings of employees. Mattel has provided
Mosque far Muslim, a Hindu shrine and a Buddhist shrine.

Thus, the culture has a significant role in international marketing. Any

international or national business cannot reach its goal until it considers the culture
of nations.

Question 2. Theory of Mercantilism and Theory of Absolute Advantage.

Answer 2. The Theory of Mercantilism acts as the basis for the economic thought
and is the oldest theory of international trade. It states that the exports of the country
should be 1nore than their imports and the value of trade profits should be received
in the form of gold from the countries 11aving trade deficits. The Govt for avoiding
trade deficits imposes restrictions on imports and pro1notes the exports. British
utilised colonial powers for carrying ot1t trade with the colonies like India, Sri Lanka
etc by importing the raw materials from and exporting the finished products to
colonies. The colonies must export less valuable products and must import more
valuable goods. Tl1e colo11ical powers were benefitted from this theory but it
caused dissatisfaction in the colonies.

Limitations. The following are the limitations of the theory of mercantilism,

1. This theory reco1nmends that a favot1rable balance of trade can be maintained if

the gold is imported for the export of goods and services. But the validity of this
theory was decreased due to decline of gold standard.

2. This theory was criticised on the basis that a nation's wealth depends on the
existing goods ai1d services instead of gold.

Theory of Absolute Cost Advantage. In order to overcome the shortcomings of

mercantilism theory, Adam Smith, a Scottish economist developed the Absolute Cost
Advantage theory. This theory is based on the principle of division of labour, which
states that the countries should produce those goods in which they have a cost
advantage over other nations. Adam Smith stated that, all the nations must produce
only those products which can be manufactured at less cost when compared to other
nations and can be exchanged by die products that are produced by other nations at
less costs. Trade is performed between two nations when a nation manufactures the
product at less costs and other nation possess absolute cost advantage over the first
country in die production of other products.

Skilled Labour and Specialisation Advantages

The nation can attain absolute cost advantage because of the following reasons,

1. The labour specialisation in manufacturing specific products helps in

increasing the productivity and reducing the boost of labour per unit of output.

2. The suitability of the country’s labour skill in manufacturing specific products

3. Decrease in the labour cost per-unit of output due to economies of scale.

Natural Advantage. The countries can attain natural advantage in manufacturing

specific products because of the climatic conditions, access to natural resources etc
For instance, the climate of India is suitable for the production of mangoes, while the
climate of USA is suitable for the production of wheat.

Acquired Advantage. The countries can obtain the benefits by developing the skills
and technology. For instance, by importing iron and coal, Japan has obtained
benefits in the production of steel. Japan attained these benefits by acquiring the
labour saving and material saving technology.

The various assumptions of the theory of absolute cost advantage are as follows,

1. Trade is carried out between two countries

2. Trade is performed only by two commodities traded.

3. Free-trade is carried out between the countries.

4. Labour is the only element of production cost.

The various implications of the theory are as follows,

1. The trade helps the two countries to produce more quantities of both the
products.

2. The trade helps in enhancing the standard of living of the people of both the
countries.

3. Trading assists in enhancing the global effectiveness and efficiency.

4. The productivity of labour and other resources can be increased globally

through trading.

The following are the limitations of theory of absolute cost advantage,

1. This theory states that one country must be able to manufacture at least one
product with low cost. But in actual practise though the developing countries
participate in the international trade, most of them do not attain the absolute
advantage in manufacturing products at low cost.
 2. This theory focuses only on labour and the other resources such as
technology, natural resources etc., are not at all considered.

3. The large scale economies decrease the production cost and is regarded as
the part of absolute advantage. But, this aspect is completely ignored in this
theory

4. The transportation costs play a key role in international trade but it is not
taken into account

Question 3. Functions of WTO.

Answer 3. The following are the functions of WTO,

1. Assists, Promotes and Changes the Economies. In WTO, almost three

quarters of membership belongs to the third world countries. WTO plays an
important role in these third world countries, as majority of them are in the transition
period and are moving from the planned economic system to market based
economic system. Several programmes were arranged by WTO's Secretariat's
Training and Technical Cooperation Institute for training the public officials and the
negotiators, Apart from Geneva, many other global organizations have arranged
these programmes integratedly. WTO makes a provision to supply information on
tariff and trade to the third world countries to assist them in their export.

2. Special Assistance for Export. In the year 1964, international trade centre
was developed by WTO mainly to assist the third world countries in export The
operations arid functions of the international trade centre are managed and
controlled by both WTO and United Nations It helps in letting out the information and
suggestion on various export markets and marketing methods. It helps on in starting
the export promotion and marketing services and provides training to the human
resources who are required for these services.

3. WTO's Roles in Global Economic Policy Making. In order to increase the

cohesiveness in the global economic policy making, WTO cooperates with the
international monetary fund, the World Bank and other multilateral institutions. In
April 1994,a separate ministerial declaration was approved at Marrakesh Ministerial
Meeting to emphasize upon than objective.

4. Gathering information. WTO gathers the general information with respect to

policies and tariffs from its member countries on a regular basis In accordance to
several treaties, the government needs to notify WTO regarding the changed trade
measures such as safety standards, technical standards, antidumping and
countervailing duties and so on. Therefore, WTO in this manner would not only be
up-to-date about the development but would also be able to provide information to its
member countries in order to increase their exports.
5. Providing information to Public. The information about the development of
WTO is also being provided largely with the help of its publications and websites to
the public.

6. Motivating Development and Economic Reform. Greater assistance and

trade discounts are being provided by GATE tar third world countries. WTO
agreements assign/allot particular transition periods to the third world countries to
adjust to the new and complex situations. The ministerial decision followed/practiced
at the end of the round states that the developed countries must greatly follow the
market access commitments on exported goods by the third world countries.

Question 4. Porter Diamond Model or Porter's National Competitive Advantage

Theory.

Answer 4. According to a recent study it was found that there are four factors which
help in attaining competitive superiority. those factors are,

1. Demand conditions
2. Factor endowment
3. Related and supporting industries
4. A Company's strategy structure and rivalry.

The figure given here depicts the various

determinants of global competitive
advantage.

The determinants of global

competitive advantage are also known to
“Porter Diamond”. The total impact of
these tartars on the development and
existence of competitive advantages must
be clearly understood But the impact of
these tartan may not be always be beneficial
for a firm for gaining superiority globally. If a firm is attaining global competitive
advantage, then the combined impact of these factors need to be favourable.

The four elements of Porter's diamond are explained below,

1. Factor Conditions. It consists of various factors of production. Porter

focusses on the factors such as educational level of labour and quality of
infrastructure of the country. The factor resources of the country such as research,
innovation and training help it to compete globally.

2. Demand Conditions. The companies enhance their products and also

develop new products based on the requirements and demands of the sophisticated
warmness. Severe competition exists between the domestic companies with regard
to the development of existing and new products. There are also some firms which
perform much better than the foreign firms and export their products to other nations

7. Related and Supported Industries. The growth and development of industries

increases the scope for development of market intermediaries, suppliers of raw
materials, consulting agencies, financial firms and so on. The increased competition
among these supporting service agencies results in producing good quality of inputs
at reasonable prices which in-turns improves the competitive advantage of the firm at
the international level.

8. Firm's Strategy, Structure and Rivalry. The companies usually make

investments in research and development. This enhances the designs of product,
invest in technology, personnel development etc., so as to compete domestically. All
these modifications and developments help in producing good quality products at
reasonable prices in domestic country which can be easily transferred to the foreign
markets.

Thus, the Porter's theory integrates the traditional country based theories and
firm bared theories. But hl actual practice, all the theories are important and must be
taken into account for understanding and explaining the trade direction, structure and
its flows among various nations.

Question 5. Types of Strategic Alliances.

Answer 5. Strategic Alliances are of three types. They axe,

1. Equity Strategic Alliance

2. Non-equity Strategic Alliance and
3. Joint Venture.

1. Equity Strategic Alliance. Equity strategic alliance refer to an alliance where

in two or more companies hold different amount of share in the company which is
established by than by contributing their resources and abilities to develop a
competitive advantage. Most of the Foreign Direct Investment (FDI) made by
Japanese and US companies loaned in China are completed by forming equity
strategic alliance. For instance, Citigroup hen and Nikko Carial Corporation entered
into a comprehensive strategic alliance in order to start Japan's one of the leading
financial services groups and to make combined franchise possible. Combined
franchise is essential to grab new growth opportunities giving importance to
Japanese culture and business practices. Compared to Nikko Cordial Corporation
Citigroup Inc. had high percentage ownership in this comprehensive strategic
alliance.

2. Non-equity Strategic Alliance. In case of non-equity strategic alliance, two

or more companies enter into a contractual relationship with an intention to stare
their distinctive resources and capabilities to develop a competitive advantage. No
separate independent company a formed in non-equity strategic alliance so
companies entering into non-equity strategic alliance do not hold any equity share.
Non-equity strategic alliances are informal alliances and relive limited partner
dedication than compared to equity strategic alliance and Joint Ventures. The
features of non-equity strategic alliances are making it inapplicable to complicated
projects which need sharing of knowledge between alliance partners to achieve
success.

3. Licensing agreements, supply contracts and distribution agreements are

various type of non-equity strategic alliances, Hewlett-Packard (HP) licenses few of
its intellectual property by entering into strategic alliances. Particularly, outsourcing
commitments are made through non-equity strategic alliance. For example, Dell and
many other computer companies do outsourcing of their products and usually enter
into non-equity strategic alliances in order to specify what kind of relationship they
have with the fines to whom outsourcing is done.

4. Joint Venture is one of the types of strategic alliances where in two or more
companies combined to establish a legally independent company in order to share
some of their resource and abilities to create a competitive advantage. Joint ventures
are usually formed with an intention to improve company’s capabilities to compete ire
the unpredictable competitive environment. Forming joint venture is an effective
method to build long lasting relationship and to share tacit knowledge. Tacit
knowledge can be acquired through experience i.e., tacit knowledge can be gained
by partner fins by working together in a joint venture. Most of the firms gain
competitive advantage through tacit knowledge.

The firms forming a joint venture hold equal percentage of share and share
equally to the working of joint venture. For example, Polo Ralph Lauren Corporation,
Geneva-based watch & jewellery company Companie Financiere Richmont AG
where in each firm hold 20% of share in the new company. The intention behind
forming a joint venture is to produce and distribute products across the world though
Ralph Lauren boutique stores. The joint venture formed is the Polo's first entry it a
fine jewellery and luxury watches business and it is the Richemont's first joint venture
formed with fashion designer.

Joint ventures might be the effective kind of cooperative arrangement where

firms are required to being together some of their unique resources and capabilities
to develop a competitive advantage and where partner aim at entering into highly
uncertain markets.