Unit-1 Types of International Business: Exporting

Unit-1
Types of International Business

1. Exporting:
Exporting is often the first choice when manufacturers decide to expand abroad. Simply
stating, exporting means selling abroad, either directly to target customers or indirectly by
retaining foreign sales agents or/and distributors. Either case, going abroad through exporting
has minimal impact on the firm’s human resource management because only a few, if at all,
of its employees are expected to be posted abroad.
2. Licensing:
Licensing is another way to expand one’s operations internationally. In case of international

licensing, there is an agreement whereby a firm, called licensor, grants a foreign firm the
right to use intangible (intellectual) property for a specific period of time, usually in return for
a royalty. Licensing of intellectual property such as patents, copyrights, manufacturing
processes, or trade names abound across the nations. The Indian basmati (rice) is one such
example.
3. Franchising:
Closely related to licensing is franchising. Franchising is an option in which a parent

company grants another company/firm the right to do business in a prescribed manner.
Franchising differs from licensing in the sense that it usually requires the franchisee to follow
much stricter guidelines in running the business than does licensing. Further, licensing tends
to be confined to manufacturers, whereas franchising is more popular with service firms such
as restaurants, hotels, and rental services.
One does not have to look very far to see how important franchising business is to companies
here and abroad. At present, the prominent examples of the franchise agreements in India are
Pepsi Food Ltd., Coca-Cola, Wimpy’s Damino, McDonald, and Nirula. In USA, one in 12
business establishments is a franchise.
However, exporting, licensing and franchising make companies get them only so far in
international business. Companies aspiring to take full advantage of opportunities offered by
foreign markets decide to make a substantial direct investment of their own funds in another
country. This is popularly known as Foreign Direct Investment (FDI). Here, by international
business means foreign direct investment mainly. Let us discuss some more about foreign
direct investment.
4. Foreign Direct Investment (FDI):
Foreign direct investment refers to operations in one country that ire controlled by entities in
a foreign country. In a sense, this FDI means building new facilities in other country. In
India, a foreign direct investment means acquiring control by more than 74% of the
operation. This limit was 50% till the financial year 2001-2002.
There are two forms of direct foreign investment: joint ventures and wholly-owned
subsidiaries. A joint venture is defined as “the participation of two or more companies jointly
in an enterprise in which each party contributes assets, owns the entity to some degree, and
shares risk”. In contrast, a wholly-owned subsidiary is owned 100% by the foreign firm.
An international business is any firm that engages in international trade or investment.

International trade refers to export or import of goods or services to customers/consumers in
another country. On the other hand, international investment refers to the investment of
resources in business activities outside a firm’s home country.
International Organizational Design &

Structures
International Organizational Structures: Type # 1
Expo-documents against acceptancert Department:
Exports are often looked after by a company’s marketing or sales department in the initial
stages when the volume of exports sales is low. However, with increase in exports turnover,
an independent exports department is often setup and separated from domestic marketing, as
shown in Fig. 17.2.
Exports activities are controlled by a company’s home-based office through a designated

head of export department, i.e. Vice President, Director, or Manager (Exports). The role of
the HR department is primarily confined to planning and recruiting staff for exports, training
and development, and compensation.
Sometimes, some HR activities, such as recruiting foreign sales or agency personnel are
carried out by the exports or marketing department with or without consultation with the HR
department.
International division structure:
As the foreign operations of a company grow, businesses often realize the overseas growth
opportunities and an independent international division is created which handles all of a
company’s international operations (Fig. 17.3). The head of international division, who
directly reports to the chief executive officer, coordinates and monitors all foreign activities.
The in-charge of subsidiaries reports to the head of the international division. Some parallel
but less formal reporting also takes place directly to various functional heads at the corporate
headquarters.
The corporate human resource department coordinates and implements staffing, expatriate
management, and training and development at the corporate level for international
assignments. Further, it also interacts with the HR divisions of individual subsidiaries.
The international structure ensures the attention of the top management towards developing a
holistic and unified approach to international operations. Such a structure facilitates cross-
product and cross-geographic co-ordination, and reduces resource duplication.
Although an international structure provides much greater autonomy in decision-making, it is

often used during the early stages of internationalization with relatively low ratio of foreign
to domestic sales, and limited foreign product and geographic diversity.
Global Organizational Structures:
Rise in a company’s overseas operations necessitates integration of its activities across the
world and building up a worldwide organizational structure.
While conceptualizing organizational structure, the internationalizing firm often has to

resolve the following conflicting issues:
1. Extent or type of control exerted by the parent company headquarters over subsidiaries
2. Extent of autonomy in making key decisions to be provided by the parent company
headquarters to subsidiaries (centralization vs. decentralization)
It leads to re-organization and amalgamation of hitherto fragmented organizational interests

into a globally integrated organizational structure which may either be based on functional,
geographic, or product divisions. Depending upon the firm strategy and demands of the
external business environment, it may further be graduated to a global matrix or trans-
national network structure.
Global functional division structure:
It aims to focus the attention of key functions of a firm, as shown in Fig. 17.4, wherein each
functional department or division is responsible for its activities around the world. For
instance, the operations department controls and monitors all production and operational
activities; similarly, marketing, finance, and human resource divisions co-ordinate and
control their respective activities across the world.
Such an organizational structure takes advantage of the expertise of each functional division
and facilitates centralized control. MNEs with narrow and integrated product lines, such as
Caterpillar, usually adopt the functional organizational structure.
Such organizational structures were also adopted by automobile MNEs but have now been
replaced by geographic and product structures during recent years due to their global
expansion.
The major advantages of global functional division structure include:
1. Greater emphasis on functional expertise

2. Relatively lean managerial staff
iii. High level of centralized control

1. Higher international orientation of all functional managers
The disadvantages of such divisional structure include:
1. Difficulty in cross-functional coordination

2. Challenge in managing multiple product lines due to separation of operations and marketing
in different departments
iii. Since only the chief executive officer is responsible for profits, such a structure is
favoured only when centralized coordination and control of various activities is required.
Global product structure:
Under global product structure, the corporate product division, as depicted in Fig. 17.5, is
given worldwide responsibility for the product growth.
The heads of product divisions do receive internal functional support associated with the
product from all other divisions, such as operations, finance, marketing, and human
resources. They also enjoy considerable autonomy with authority to take important decisions
and operate as profit centres.
The global product structure is effective in managing diversified product lines.
Such a structure is extremely effective in carrying out product modifications so as to meet

rapidly changing customer needs in diverse markets. It enables close coordination between
the technological and marketing aspects of various markets in view of the differences in
product life cycles in these markets, for instance, in case of consumer electronics, such as
TV, music players, etc.
However, creating exclusive product divisions tends to replicate various functional activities
and multiplicity of staff. Besides, little attention is paid to worldwide market demand and
strategy. Lack of cooperation among various product lines may also result into sales loss.
Product managers often pursue currently attractive markets neglecting those with better long-
term potential.
Global geographic structure:
Under the global geographic structure, a firm’s global operations are organized on the basis
of geographic regions, as depicted in Fig. 17.6. It is generally used by companies with mature
businesses and narrow product lines. It allows the independent heads of various geographical
subsidiaries to focus on the local market requirements, monitor environmental changes, and
respond quickly and effectively.
The corporate headquarter is responsible for transferring excess resources from one country
to another, as and when required. The corporate human resource division also coordinates
and provides synergy to achieve company’s overall strategic goals between various
subsidiaries based in different countries.
Such structure is effective when the product lines are not too diverse and resources can be
shared. Under such organizational structure, subsidiaries in each country are deeply
embedded with nationalistic biases that prohibit them from cooperating among each other.
Global matrix structure:
It is an integrated organizational structure, which super-imposes on each other more than one
dimension. The global matrix structure might consist of product divisions intersecting with
various geographical areas or functional divisions (Fig. 17.7). Unlike functional,
geographical, or product division structures, the matrix structure shares joint control over
firm’s various functional activities.
Such an integrated organizational structure facilitates greater interaction and flow of
information throughout the organization. Since the matrix structure has an in-built concept of
interaction between intersecting perspectives, it tends to balance the MNE’s prospective,
taking cross-functional aspects into consideration.
It facilitates ease of technology transfer to foreign operations and of new products to different
markets leading to higher economies of scale and better foreign sales performance. Matrix
structure is used successfully by a large number of MNEs, such as Royal Dutch/Shell, Dow
Chemical, etc.
In an effort to bring together divergent perspectives within the organization, the matrix
structure may also lead to conflicting situations. It inhibits a firm’s ability to respond quickly
to environmental changes in case an effective conflict resolution mechanism is not in place.
Since the structure requires most managers to report to two or multiple bosses, Fayol’s basic
principle of unity of command is violated and conflicting directives from multiple authorities
may compel employees to compromise with sub-optimal alternatives so as to avoid conflict
which may not be the most appropriate strategy for an organization as a whole.
Transnational network structure:
Such a globally integrated structure represents the ultimate form of an earth-spanning

organization, which eliminates the meaning of two or three matrix dimensions. It
encompasses elements of function, product, and geographic designs while relying upon a
network arrangement to link worldwide subsidiaries (Fig. 17.8).
This form of organization is not defined by its formal structure but by how its processes are
linked with each other, which may be characterized by an overall integrated system of
various inter-related sub-systems.
The trans-national network structure is designed around ‘nodes’, which are the units
responsible for coordinating with product, functional and geographic aspects of an MNE.
Thus, trans-national network structures build-up multidimensional organizations which are
fully networked.
The conceptual framework of a trans-national network structure primarily consists of

three components:
Disperse sub-units:
These are subsidiaries located anywhere in the world where they can benefit the organization
either to take advantage of low-factor costs or provide information on new technologies or
market trends
Specialized operations:
These are the activities carried out by sub-units focusing upon particular product lines,
research areas, and marketing areas design to tap specialized expertise or other resources in
the company’s worldwide subsidiaries.
Inter-dependent relationships:
It is used to share information and resources throughout the dispersed and specialized
subsidiaries.
Organizational structure of N.V. Philips which operates in more than 50 countries with
diverse range of product lines provides a good illustration of a trans-national network
structure.
Evolution of Global Organizational Structures:
Organizational structures often exhibit evolutionary patterns, as shown in Fig. 17.9,

depending upon their strategic globalization. The historical evolution of organizational
patterns indicates that in the early phase of internationalization, most firms separate their
exports departments from domestic marketing or have separate international divisions.
Companies with emphasis on global business strategies move towards global product
structures whereas those with emphasis on location base strategies move towards global
geographic structures.
Subsequently, a large number of companies graduate to a matrix or trans-national network

structure due to dual demands of local adaptations pressures and globalization. In practice,
most companies hardly adopt either pure matrix or trans-national structures; rather they opt
for hybrid structures incorporating both.
Risk in International Business

Risk happens on account of uncertainty about happening of an event like loss, damage,
variations in foreign exchange rates, interest rate variations, etc. Every business manager is
always risk averters, i.e., managers usually do not want to take risk. Hence, he likes to work
out higher probability for creating wealth and profit. He likes to work as hedger.
The risk taker would like to take risk. He normally works as speculator. Any change in the
business environment, would bring the same type of risk. Generally, the areas of business
prone to risks are shortage of inventory, shortage of business orders, shortage of manpower,
shortage of utilities like power and fuel, changes in government policies, etc.
The international business faces the risk due to the following reasons:
1. Operations across and with different political, legal, taxation and culture systems.
2. Operations across and with a wider range of product and factor markets, each with different
levels of competition and efficiency.
3. Trades in wider range of currencies and frequent resort to foreign exchange markets.
4. Unregulated international capital markets.
In other words, risk is the main measurement of the probability of incurring a loss or damage.
The chance and possibility that the actual outcome from an activity will differ from the
expected outcome normally gives rise to risk. This means that, higher the variability the
possible outcomes that can occur (i.e. broader the range of possible outcomes), results in to
greater risk.
Types of Risks:
The value of firm’s assets, liabilities, operating incomes, operating expenses, and other
abnormal incomes, expenses differ from expected one clue to changes in many economic and
financial variables like exchange rates, interest rates, inflation rates etc.
The appreciation of a local currency results in decreasing the local currency value with
respect to exports receivable denominated in foreign currency. Such appreciation or
depreciation of local currency makes effect on the cash flow of domestic currency due to the
transactions’ exposure of merchandise and non-merchandise exports and imports.
Exposure is a measure of the sensitivity of the value of a financial item (cash flow, assets,
liability etc.) to changes in variables like exchange rates, etc., while risk is a measure of the
variability of the value of the financial item.
A firm always encounters a number of risks during the course of business, i.e. political
instability, technical obsolescence, availability of skilled labour, extent of trade unionism,
infrastructural bottlenecks and financial risks.
Generally risks which a firm has been categorized as:
1. Foreign exchange rate risk

2. Interest rate risk
3. Credit risk
4. Legal risk
5. Liquidity risk
6. Settlement risk
7. Political risk
Let us now discuss about all these risks in detail.
1. Foreign Exchange Rate Risk:

The variance or changes of the real domestic currency value of assets, liabilities or operating
income on account of unanticipated changes in exchange rates referred as Foreign Exchange
Risk. This risk relates to the uncertainty attached to the exchange rates between the two
currencies.
If an Indian businessman borrows some amount viz. dollars and has to repay the loan in
dollars only over a period of time, then he is said to be exposed to the foreign exchange rate
risk during the currency of loan.
Thus, if the dollar becomes stronger (costly) vis-a-vis rupees (cheap) or depreciated during
the period then the businessman has to repay the loan in terms of more rupees than the rupees
he obtained by way of loan. The extra rupees which he pays are not due to an increase of
interest rates, but because of the unfavourable foreign exchange rate.
On the contrary, he gains if the dollar weakens vis-a-vis rupee because of favourable
exchange rate. Anyway, the businessman would like to protect his business from
unfavourable exchange rate by adopting a number of hedging techniques and would like to
optimise his gains in case of favourable exchange rate situation. This mechanism, in short, is
known as Foreign Exchange Risk Management.
Indian business was not very much exposed to this risk as the exchange rate in India operated
in RBI controlled regime. However, with the advent of the budget for 1993-94, a new era was
ushered in by opening up Indian economy to the International market.
The various steps taken for encouraging globalization have made the Indian business
vulnerable to foreign exchange rate risk. Hence, exchange rate risk exposure is considered to
be an important factor while conducting business in India.
The types of foreign exchange risks and exposure are:
1. Transaction exposure
2. Translation exposure
3. Economic exposure, and
4. Operating exposure
2. Interest Rate Risk:
The fluctuations in interest rates over a period of time change the cash flow need of a firm,
for interest payment. The rate of interest is decided and agreed among parties (i.e. lender and
borrower) at the time of sanctioning of debt.
The interest rate may be constant or may be related to some other variable or benchmark. If it
is constant, it is known as, ‘Fixed Interest Rate Debt Instrument’ (FXR). If the rate is linked
to any other variable or benchmark say LIBOR (London Inter-Bank Offer Rate) then known
as Floating Interest Rate Debt Instrument (FIR).
Interest Rate Exposure and Risk:

Interest rate uncertainty exposes a firm to the following types of risks. Borrowings on
floating rate bring uncertainty relating to future interest payments, for the firm. The floating
rate makes borrowing cost of capital unknown.
The problem is that there is a rise of variation in interest rate risk for the firm due to the
fluctuating or floating rate clause in loan agreement. Hence, firm management not sure about
the interest payment they have to make whenever interest amount is payable to financial
institutions or lenders of the funds. Borrowings on fixed rate basis results in risk if future
periods interest rates may come down, and the firm has to continue with a heavy burden on
debt servicing.
In the Indian environment, the management of interest rate risks has been a comparatively
new concern. The behaviour of interest rates during the period of 2003-2008 has upset the
cost and return calculations of many industries.
The exchange rate fluctuation in the South East Asian Countries or the nosedive (sudden
plunge or changes) of rupee in terms of dollars shows the extreme sensitivity of exchange
rates, and in turn the extent to which the firm’s exposures affected.
Interest rates in India were regulated and controlled by the dictates of the Reserve Bank of
India. This ensured a stability of interest rate mechanism and the Indian business was not
very much bothered about them. However, with changes being brought out by the
Government and Reserve Bank of India, it is quite clear that interest rates will henceforth be
market driven.
3. Credit Risk:
A credit risk is the risk, in a transaction, of counter party of the transaction failing to meet its
obligation towards the transaction. This risk is present in all trade and commerce transactions,
thus it also includes the transactions relating to foreign trade and foreign exchange.
4. Legal Risk:
The risk arising due to legal enforceability of a contract or a transaction is known as legal
risk. The contract is normally unenforceable due to pending, or newly created, political and
legal issues between the two trading countries. The various legal taxes, controls, regulations,
exchange and trade controls, controls on financial transactions, controls on tariff, and quotas
system, are risks factors or elements in foreign trade and finance flows.
5. Liquidity Risk:
If the markets turn illiquid or the positions in market are such that cannot be liquidated,
except huge price concession, the resultant risk is known as liquidity risk. It can also be
termed that the risks which, though directly or indirectly, affect the liquidity and in turn long
term solvency of the parties in the market, is known as liquidity risk.
The international financial system failed to support the increasing demands of expanding
trade and finance due to lack of enough resources, efficient and quick actions of surveillance
on capital flows and inadequate liquidity to meet emerging crisis situations.
6. Settlement Risk:
This is the risk of counterparty failing during settlement, because of time difference in the
markets in which cash flows the two currencies have to be paid and received viz. settled.
Settlement risk depends on the various risks like risk of the borrowing company’s ability to
meet its debt service obligation in time, represented by the risk of its business, financial risk,
market risk, labour problems, restrictions on dividend distribution, fluctuations in profits and
a host of other company related problems. Unanticipated depreciation of a country’s currency
might hurt a company which is net importer but it may benefit exporter.
7. Political Risk:
Political Risk is the risk that results from political changes or instability in a country. Such
variability or changes always result into some kind of changes in the monetary, fiscal, legal,
and other policies of the country facing the changes.
It has adverse impact on the working of the financial and commercial operation carried out by
the country with the globe, and also of foreign enterprise located in host country. When a
factor of instability is found with a country, such kind of risk crop up, and affect the foreign
trade and exchange of the country adversely. The political risk results in to uncertainty over
property rights and protection of wealth.
Types of Political Risk:
Political Risk makes the impact on direct and indirect investments in the host country as well
as the inter-trading transactions. The government measure also tends to limit the working and
operations of foreign firm in the country.
Political Risk can broadly classify into the following four categories:
1. Country Risks
2. Sector Risks
3. Project Risks
4. Currency Risks
1. Country Risks:
Country risks emanate from political, social and economic instability of a country, and bring
hostility towards foreign investments. The hostility develops during the periods of crisis and
forces the few governments to nationalize core industrial sectors based on strategic
importance of the same.
The political risk takes several forms, such as nationalization or expropriation without
indemnity (Compensation). The major episodes in this context are nationalization in Iran
(1978), Libya (1969), Algeria (1962); nationalization with indemnity, such as in Chile
(1971). Above all latent Nationalisation in terms of compulsory local or governmental
participation constitutes another variant of political risk.
The concerns may veer (opinion or moving around some perception related questions)
round the following questions:
1. How stable is that government?

2. Are government policies reasonably consistent over time?
3. Is political power concentrated or diffused? Is it administered by a strong central
government or by a more federal allocation of power?
4. How insulated is the government from changes in public opinion, particularly with respect to
foreign investment and trade issues?
5. Is the government relatively strong or weak?
6. What is the country’s record of compliance with international agreements, including
sovereign debt obligations?
7. How strong is the rule of law? Are laws and contracts generally enforced by an accessible,
fair, and impartial judiciary?
8. Are there social and economic factors of special concern (for example, environmental
protection, human rights, labour standards, or inequitable allocation of wealth or income)?
2. Sector Risks:
Generally, sectors like Petroleum, Mining, and Banking and so on are the sectors which are
prone to greater element of political risk in a country in comparison to other sectors, because
such sectors directly affect the climate for foreign investment.
For instances, petroleum sector has been nationalized in various countries such as Mexico
(1938), Libya (1968), Iraq (1972), Venezuela and Kuwait (1975), Iran (1978) and Nigeria
(1979). Likewise, nationalization of copper mines took place in Zaire, Zambia, and Chile and
of Iron mines in Venezuela. Banking sector was nationalized in Guinea (1962), Vietnam
(1975) and Iran and Nicaragua (1978).
3. Project Risks:
Generally, not only country and sector but also the specific project is subject to risk.
Multinationals establishes big projects in foreign countries, like electricity generation plants,
dams, exploration of petroleum fields, etc. such project requires a huge investment in the
beginning and as gestation period is long enough the risk enhances.
In the event of the project turning to be successful (for example finding an exploitable
petroleum field), some governments are very demanding, and in certain situations, in
particular, with the change of government the latter may even refuse to respect the
engagement of the predecessor. In the year 1995, a new Government of the Maharashtra State
in India refused to fulfill the agreement of the previous government for a large electricity
project, named Enron project.
The need happens to focus on analytical framework before taking up an activity, to ensure
that effective risk management can be achieved in practical context. The risk management
activity to be undertaken with respect to particular industry, sector and/or project and also the
nature of parties involved in it, hence, the integration of all parameters is needed.
The assessment and determination of risk is a highly subjective and theoretical. In such
circumstances, the decisions taken by the managers are more often influenced by
management’s view of the future of the sector, and their desire to achieve the excellence
performance, in addition to their knowledge based on past experience.
4. Currency Risks:
A currency risk arises due to imbalance in the balance-of-payments of a country. In last

decade, changes in the macro-economic situation and resulting national controls on capital
flows and foreign investment and borrowings resulted into Asian crisis. It is needed to
monitor various macro-economic situations and national control as they result into currency
risk and it affects the private sector infrastructure projects.
In short, risk can be evidenced when the exact relationship between the causes of risk and its
impact on the economy cannot be established. For this purpose by application of the
statistical techniques, probabilities can be worked out for each possible event. It is always
solely subjective assessment.
Risk Analysis:
Risk analysis, being a component of risk management process, deals with the various kinds of
events and causes and effects of these events which may resultantly cause harm to the
functioning of the firm. Risk analysis supports the business managers to work out the proper
decisions in business working.
Risk analysis is done on the basis of the possibility of an event taking place. Thus, the risk of
an event can be measured through the possibility (probability) of the event taking place with
regards to the frequency and severity.
An event can have wide variety of characteristics or possibility with respect to varying
degrees of seriousness, depending upon its nature and the extent of damage it can create, and
the perception of the event’s occurrence taken by the management. Each project or activity
can have many associated risks, and these risks can vary depending upon technology,
funding, organisations involved etc.
However, in broad terms, the key sources of project or process risks are like:
1. Commercial risk
2. Financial risk
3. Legal risks
4. Political risks
5. Social risks
6. Environmental risks
7. Communications risks
8. Geographical risks
9. Geotechnical risks
10. Construction risks
11. Technological risks
12. Operational risks
13. Demand or product risks, and
14. Management risks etc.
These sources of risk directly influence the project-specific and non-project-specific
performance. The analyst is supposed to define the boundaries of each risk driver and its
detailed risk elements. Then, he/she has to move to estimate the impact of the same.
The decision with respect to division of risks into specific element; and later on evaluates.
The parameters of evaluations are generally affected by personal subjectivity and belief of the
financial analyst. The risk analysis explores the avenues for business managers to take
informed decision
Motives for International Business

1. INCREASE SALES AND PROFITS
If your business is succeeding in your domestic market, expanding globally will likely

improve overall revenue. Economic growth rates in Europe, USA and Japan are very low
compared to the large and new emerging markets. In Europe live around 300 million people
as well as in the USA. Only in China and India, we can approach more than 2.4 billion
potential consumers. 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. Sales in
foreign markets can also be at a higher price (an margin) than in the domestic market. Many
imported products are paid as premium products and brands. Therefore, more sales in foreign
markets, generally brings more profits.
2. SHORT AND LONG TERM SECURITY
Your business will be less vulnerable to periodic fluctuations and downturns in the Spanish or
European economy and marketplace. Generally speaking, the Eurozone is a large, mature
market with intense competition from domestic and foreign competitors. During these years
of deep economic recession, exports were the solution for many Spanish companies. Thanks
to these sales to foreign markets many companies could keep and also improve their
production capacity, employment and financial structure.
3. INCREASE INNOVATION AND MANAGEMENT LEARNING
Extending your customer base internationally can help you finance new product
development, learning from competitive markets and competitors, and get use to work with
very demanding and sophisticated customers. A company can benefit so much from
participating in a tough and competitive 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 or global brand, even if profits in that market were low. Lead markets include:
United States for software and IT, Japan for consumer electronics, Italy and France 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.
4. 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
5. 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 a 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.
SUMMARY
Above are some of the good reasons to go global, among other many that a company can
have: following local customers, extended product life cycle, searching for raw materials or
other inputs, delocalization in order to reduce production costs, saturation of the local market,
etc.
A strategic decision once the company decides to internationalize will be the approach to
entering the international market. Different circumstances will be prevalent in different
markets and for different companies. In all cases it is strongly advised to undertake serious
thought and much preparation. Research foreign property and understand the customer
culture of your overseas operations. This analysis and research will provide the company with
the adequate information to make sound entry decisions and to implement a sound marketing
mix strategy in the new international scenario.
Barriers to International Business

Firms desiring to enter international business face several obstacles; some are much more
severe than others. The most common barriers to effective business are cultural, social, and
political barriers, and tariffs and trade restrictions.
The first one to effective business is the cultural and social barriers. A nation’s culture and
social forces can restrict international business activities. Culture consists of a country’s
general concepts and values and tangible items such as food, clothing, and building. Social
forces include family, education, religion and customs. Selling products from one country to
another is sometimes difficult when the cultures of the two countries differ significantly. For
example, when McDonald’s opened its first restaurant in Rome, it was met with protest. The
people of Rome objected to the smell of hamburgers frying. McDonald’s overcame this
objection by changing the exhaust system of the restaurant.
The second barrier is the social forces that can create obstacles to international trade. In
some countries, purchasing items as basic as food and clothing can be influenced by religion.
In many nations, individuals do not have the same choices in food, clothing, and health care.
The third one is political barriers. The political climate of a country can have a major impact
on international business. Nations experiencing intense political unrest may change their
attitude toward foreign firms at any time; this instability creates an unfavorable atmosphere
for international trade.
The last one is the tariffs and trade restrictions. Tariffs and trade restrictions are also barriers
to international business. A nation can restrict trade through import tariffs, quotas and
embargoes, and exchanges controls.
Foreign Exchange Market: Nature,

Structure, Types of Transactions
The Foreign Exchange Market is a market where the buyers and sellers are involved in the
sale and purchase of foreign currencies. In other words, a market where the currencies of
different countries are bought and sold is called a foreign exchange market.
The structure of the foreign exchange market constitutes central banks, commercial banks,
brokers, exporters and importers, immigrants, investors, tourists. These are the main players
of the foreign market, their position and place are shown in the figure below.
At the bottom of a pyramid are the actual buyers and sellers of the foreign currencies-
exporters, importers, tourist, investors, and immigrants. They are actual users of the
currencies and approach commercial banks to buy it.
The commercial banks are the second most important organ of the foreign exchange market.
The banks dealing in foreign exchange play a role of “market makers”, in the sense that
they quote on a daily basis the foreign exchange rates for buying and selling of the foreign
currencies. Also, they function as clearing houses, thereby helping in wiping out the
difference between the demand for and the supply of currencies. These banks buy the
currencies from the brokers and sell it to the buyers.
The third layer of a pyramid constitutes the foreign exchange brokers. These brokers

function as a link between the central bank and the commercial banks and also between the
actual buyers and commercial banks. They are the major source of market information. These
are the persons who do not themselves buy the foreign currency, but rather strike a deal
between the buyer and the seller on a commission basis.
The central bank of any country is the apex body in the organization of the exchange market.
They work as the lender of the last resort and the custodian of foreign exchange of the
country. The central bank has the power to regulate and control the foreign exchange market
so as to assure that it works in the orderly fashion. One of the major functions of the central
bank is to prevent the aggressive fluctuations in the foreign exchange market, if necessary, by
direct intervention. Intervention in the form of selling the currency when it is overvalued and
buying it when it tends to be undervalued.
Functions of Foreign Exchange Market

Foreign Exchange Market is the market where the buyers and sellers are involved in the
buying and selling of foreign currencies. Simply, the market in which the currencies of
different countries are bought and sold is called as a foreign exchange market.
The foreign exchange market is commonly known as FOREX, a worldwide network, that
enables the exchanges around the globe. The following are the main functions of foreign
exchange market,which are actually the outcome of its working:
1. Transfer Function: The basic and the most visible function of foreign exchange market is the
transfer of funds (foreign currency) from one country to another for the settlement of payments. It
basically includes the conversion of one currency to another,wherein the role of FOREX is to
transfer the purchasing power from one country to another.
For example, If the exporter of India import goods from the USA and the payment is to be
made in dollars, then the conversion of the rupee to the dollar will be facilitated by FOREX.
The transfer function is performed through a use of credit instruments, such as bank drafts,
bills of foreign exchange, and telephone transfers.
2. Credit Function: FOREX provides a short-term credit to the importers so as to facilitate the

smooth flow of goods and services from country to country. An importer can use credit to finance
the foreign purchases. Such as an Indian company wants to purchase the machinery from the USA,
can pay for the purchase by issuing a bill of exchange in the foreign exchange market, essentially
with a three-month maturity.
3. Hedging Function: The third function of a foreign exchange market is to hedge foreign
exchange risks. The parties to the foreign exchange are often afraid of the fluctuations in the
exchange rates, i.e., the price of one currency in terms of another. The change in the exchange rate
may result in a gain or loss to the party concerned.
Thus, due to this reason the FOREX provides the services for hedging the anticipated or
actual claims/liabilities in exchange for the forward contracts. A forward contract is usually
a three month contract to buy or sell the foreign exchange for another currency at a fixed date
in the future at a price agreed upon today. Thus, no money is exchanged at the time of the
contract.
There are several dealers in the foreign exchange markets, the most important amongst them
are the banks. The banks have their branches in different countries through which the foreign
exchange is facilitated, such service of a bank are called as Exchange Banks.
Types of Foreign Exchange Transactions
The Foreign Exchange Transactions refers to the sale and purchase of foreign currencies.

Simply, the foreign exchange transaction is an agreement of exchange of currencies of one
country for another at an agreed exchange rate on a definite date.
1. Spot Transaction: The spot transaction is when the buyer and seller of different currencies
settle their payments within the two days of the deal. It is the fastest way to exchange the
currencies. Here, the currencies are exchanged over a two-day period, which means no contractis
signed between the countries. The exchange rate at which the currencies are exchanged is called
the Spot Exchange Rate. This rate is often the prevailing exchange rate. The market in which the
spot sale and purchase of currencies is facilitated is called as a Spot Market.
2. Forward Transaction: A forward transaction is a future transaction where the buyer and
seller enter into an agreement of sale and purchase of currency after 90 days of the dealat a fixed
exchange rate on a definite date in the future. The rate at which the currency is exchanged is called
a Forward Exchange Rate. The market in which the deals for the sale and purchase of currency at
some future date is made is called a Forward Market.
3. Future Transaction: The future transactions are also the forward transactionsand deals with
the contracts in the same manner as that of normal forward transactions. But however, the
transactions made in a future contract differs from the transaction made in the forward contract on
the following grounds:
 The forward contracts can be customizedon the client’s request, while the future contracts
are standardized such as the features, date, and the size of the contracts is standardized.
 The future contracts can only be traded on the organized exchanges,while the forward
contracts can be traded anywhere depending on the client’s convenience.
 No marginis required in case of the forward contracts, while the margins are required of all
the participants and an initial margin is kept as collateral so as to establish the future position.
4. Swap Transactions: The Swap Transactions involve a simultaneous borrowing and

lending of two different currencies between two investors. Here one investor borrows the currency
and lends another currency to the second investor. The obligation to repay the currencies is used as
collateral, and the amount is repaid at a forward rate. The swap contracts allow the investors to
utilize the funds in the currency held by him/her to pay off the obligations denominated in a
different currency without suffering a foreign exchange risk.
5. Option Transactions: The foreign exchange option gives an investor theright, but not the
obligation to exchange the currency in one denomination to another at an agreed exchange rate on
a pre-defined date. An option to buy the currency is called as a Call Option, while the option to sell
the currency is called as a Put Option.
Thus, the Foreign exchange transaction involves the conversion of a currency of one country
into the currency of another country for the settlement of payments.
Unit-2
Foreign Market entry strategies, LPG
model
There are many ways in which a Company can find a route to an overseas market. There is no
single market entry that works for all International markets. For many businesses direct
exporting may be the best strategy while in another it may be suitable to set up a joint venture
and in another it may be effective to license the manufacturing. Many factors will determine
the choice of strategy, including, but not limited to, tariff rates, the degree to which you need
to adapt your product, marketing and transportation costs. These factors may well increase
cost to market but it would be expected that the increase in sales will offset these costs.
The following Market entry strategies can be regarded as the main options for companies:
Direct Exporting
The most common form of exporting, it’s selling directly into the chosen market using your
own resources initially. Many companies once they have established a sales programme turn
to agents and/or distributors to represent them in that market. Distributors and Agents work
closely with the company in representing the company’s interests and it’s critical that much
time is spent in deciding the choice of agent / distributor. A good distributor / agent could
transform chances of success in a chosen market and vice versa.
Acquisition of an Overseas Company
For some companies operating who want to enter a market the purchase of an existing
business may be the most appropriate strategy. This may be because the company has large
market share, may be a direct competitor or due to government regulation this is the only
option for the company to enter the market. It will be certainly costly to acquire a business
and determining the value of a company in a foreign market will require competent financial
due diligence. The up-side is this market entry strategy will instantly provide the company
with the standing of being a local company and will receive all the benefits of local
knowledge, an established customer base and be treated by the local government as a local
business.
Licensing
Licensing is quite a sophisticated arrangement where a firm transfers the rights to the use of a
product or service to another company. It’s a particularly beneficial if the purchaser of the
license has a large share in the market that the company wants to enter. Licensing can be both
for marketing or production.
Franchising
Very common in North America it’s a process for rapid market expansion but it can be seen
to be expanding globally. Franchising works particularly well for companies that have a good
brand that has repeatable business. For example, food outlets which can be easily relocated
into other markets. Two points of importance are required when considering using the
franchise strategy. First, is that your business model should be unique or have a strong brand
that can be leveraged internationally. The second is that you may run the risk of creating your
future competition in your franchisee.
Joint Ventures
Joint Ventures are a particular form of partnership that involves creating a third
independently managed company. Two companies agree to work together in a particular
market, either geographic or product and create a third company to action this. Risks and
profits are normally shared equally. Some good examples of a successful joint ventures are
Sony/Ericsson the mobile phone company, Jaguar Land Rover sealed a joint venture with
Chinese company Chery Automobile marking £1.1bn of investment into China.
Partnering
Partnering can be almost a necessity when companies enter certain foreign markets, for
example Asia. Partnering can be a simple co-marketing arrangement or a sophisticated
strategic alliance for manufacturing. Partnering can work well in those markets where the
culture, both business and social is vastly different that the company’s home market. The
local partners will bring local market knowledge, contacts and even potential customers.
Turnkey Projects
Turnkey projects are normally associated to companies that provide services such as
environmental consulting, architecture, construction and engineering. A turnkey project is
where the facility is built from scratch and turned over to the customer and ready to go – turn
the key and the factory is operational. This can be a good way to enter foreign markets as the
customer is normally a government and often the project is being financed by an international
financial agency such as the World Bank so the risk of not being paid is dramatically
reduced.
Piggybacking
Piggybacking is a fairly unique method of entering the international marketplace. If a

company has a particularly interesting and unique product or service that they sell to large
domestic companies who operate on foreign markets, it may be worth approaching them to
see if a product or service can be included in their sales portfolio for international markets.
This reduces the risk and costs because you are essentially selling domestically and the larger
company is marketing your product or service for the company internationally.
Greenfield Investments
Greenfield investments require the greatest involvement in international business. A

greenfield investment is where a company purchases the land, builds the facility and operates
the business on an ongoing basis in a foreign market. It’s certainly the most costly option and
holds the greatest risk but some markets may require companies to undertake the cost and
risk due to government regulations, transportation costs and the ability to access technology
or skilled labour.
Liberalization, Privatization, Globalization (LPG Model)
Liberalization
The basic aim of liberalization was to put an end to those restrictions which became
hindrances in the development and growth of the nation. The loosening of government
control in a country and when private sector companies’ start working without or with fewer
restrictions and government allow private players to expand for the growth of the country
depicts liberalization in a country.
Objectives of Liberalization Policy
 To increase competition amongst domestic industries.

 To encourage foreign trade with other countries with regulated imports and exports.
 Enhancement of foreign capital and technology.
 To expand global market frontiers of the country.
 To diminish the debt burden of the country.
Privatization
This is the second of the three policies of LPG. It is the increment of the dominating role of
private sector companies and the reduced role of public sector companies. In other words, it
is the reduction of ownership of the management of a government-owned enterprise.
Government companies can be converted into private companies in two ways:
 By Disinvestment
 By Withdrawal of governmental ownership and management of public sector companies.
Forms of Privatization
 Denationalization or Strategic Sale: When 100% government ownership of productive

assets is transferred to the private sector players, the act is called denationalization.
 Partial Privatization or Partial Sale: When private sector owns more than 50% but less than
100% ownership in a previously construed public sector company by transfer of shares, it is called
partial privatization. Here the private sector owns the majority of shares. Consequently, the private
sector possesses substantial control in the functioning and autonomy of the company.
 Deficit Privatization or Token Privatization:When the government disinvests its share
capital to an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization.
Objectives of Privatization
 Improve the financial situation of the government.

 Reduce the workload of public sector companies.
 Raise funds from disinvestment.
 Increase the efficiency of government organizations.
 Provide better and improved goods and services to the consumer.
 Create healthy competition in the society.
 Encouraging foreign direct investments (FDI) in India.
Globalization
It means to integrate the economy of one country with the global economy. During
Globalization the main focus is on foreign trade & private and institutional foreign
investment. It is the last policy of LPG to be implemented.
Globalization as a term has a very complex phenomenon. The main aim is to transform the
world towards independence and integration of the world as a whole by setting various
strategic policies. Globalization is attempting to create a borderless world, wherein the need
of one country can be driven from across the globe and turning into one large economy.
Outsourcing as an Outcome of Globalization
The most important outcome of the globalization process is Outsourcing. During the
outsourcing model, a company of a country hires a professional from some other country to
get their work done, which was earlier conducted by their internal resource of their own
country.
The best part of outsourcing is that the work can be done at a lower rate and from the superior
source available anywhere in the world. Services like legal advice, marketing, technical
support, etc. As the Information Technology has grown in the past few years, the outsourcing
of contractual work from one country to another has grown tremendously. As a mode of
communication has widened their reach, all economic activities have expanded globally.
Various Business Process Outsourcing companies or call centres, which have their model of a
voice-based business process have developed in India. Activities like accounting and book-
keeping services, clinical advice, banking services or even education are been outsourced
from developed countries to India.
The most important advantage of outsourcing is that big multi-national corporate or even
small enterprises can avail good services at a cheaper rate as compared to their country’s
standards. The skill set in India is considered most dynamic and effective across the world.
Indian professionals are best at their work. The low wage rate and specialized personnel with
high skills have made India the most favourable destination for global outsourcing in the later
stage of reformation.
LPG Model in India
After Independence in 1947 Indian government faced a significant problem to develop the
economy and to solve the issues. Considering the difficulties pertaining at that time
government decided to follow LPG Model. The Growth Economics conditions of India at that
time were not very good. This was because it did not have proper resources for the
development, not regarding natural resources but financial and industrial development. At
that time India needed the path of economic planning and for that used ‘Five Year Plan’
concept of which was taken from Russia and feet that it will provide a fast development like
that of Russia, under the view of the socialistic pattern society. India had practiced some
restrictions ever since the introduction of the first industrial policy resolution in 1948.
Liberalization is defined as making economics free to enter the market and establish their
venture in the country. Privatization is defined as when the control of economic is sifted
from public to a private hand. Globalization is described as the process by which regional
economies, societies, and cultures have become integrated through a global network of
communication, transportation, and trade
Factors of Country Evaluation and

Selection
Country Evaluation and Selection: Tool #1
Trade Analysis and Analogy Methods:
Trade analysis and country analogy methods are widely used for country evaluation by
estimating their market size. In simple terms, the market size of a country may be determined
by subtracting the exports of a product from the sum-total of its production and imports.
Market size = Production + Imports – Exports

One can arrive at market size by using data based on ITC(HS) code classifications up to eight
digits for specific product categories. Published data on exports and imports can be obtained
through international sources, such as the WTO, International Trade Centre, and the
UNCTAD.
National governments comply trade statistics through customs and central banks, for
instance, in India, through DGCI&S and Reserve Bank of India (RBI).
Production statistics are generally available through government organizations for broad
product categories, such as agricultural commodities, textiles, steel, cement, minerals, etc.
More product-specific statistics are compiled by commodity organizations and trade
associations.
For new product categories, with little consumption and production in the past, various types
of analogy methods are employed. In the analogy method, a country at similar stage of
economic development and comparable consumer behaviour is selected whose market size is
known.
Besides, a surrogate measure is also identified, which has similar demand to the product for
the international market. Alternatively, the analogy method for different time periods, which
may be compared with similar demand patterns in two different countries, may also be used.
Opportunity-Risk Analysis:
Carrying out a cross-country analysis of opportunities and risks provides a useful tool to
compare and evaluate various investment locations based on a company’s objectives and
business environment. The internationalizing firm may choose variables both for
opportunities (such as market size, growth, future potential, tax regime, costs, etc.) and risks
(political, economic, legal, operational, etc.).
Values and weights may be assigned to each of these variables depending upon their
perceived significance by the firm. Thus, it provides an opportunity to a company to evaluate
each country on the weighted indicators.
On the basis of business opportunities and risks, ranking of various countries may be made
for investment. Countries with low-risks and high-returns are often preferred investment
destinations. In addition, such grids may also be used for future projections.
Although, such grids (Exhibit 10.2) serve as useful tools for cross-country comparison of
opportunity versus risk, it hardly provides any insight into relationships among the
investment destinations.
Countries for investment can also be plotted in form of a matrix, as shown in Fig. 10.23, to
indicate opportunities and risks. Besides, the countries can be placed for a pre-defined future
time, both for opportunities and risks. In addition to inter-country evaluation, the country
placements and its benchmarking with the global average opportunities and risks may also be
carried out.
Products-Country Matrix Strategy:

With an objective to examine market diversification and commodity diversification, the
product-country matrix strategy is employed. Under this approach, previous trade statistics
are analysed to identify the major markets and major products, based on which a suitable
marketing strategy is developed.
The matrix based on a predominantly supply side analysis reveals comparative advantages. In
1995, the Government of India carried out the analysis of trade data of the mid-nineties to
prepare such a matrix. The analysis revealed the restricted commodity/country basket for
India’s exports.
It was observed that 15 countries and 15 commodities accounted for around 75-80 per cent of
India’s exports. An attempt was made to involve trade and industry to set up trade facilitators
for achieving increased exports in the 15 products and 15 markets.
However, the exercise of the trade facilitation did not get enough support and response from
various stakeholders. The focus on the 15 x 15 matrix, based on past performance data was a
useful exercise as it helped to focus on the importance of a few commodities and a few
destinations in India’s export performance.
There has been a market diversification for the top products though there has also been a
product consolidation for the top markets. The analysis also reveals that the 15 X 15 matrix is
dynamic and mature as it has undergone changes over the years and it requires modification
of marketing strategy on a continuous basis.
Market Focus Strategies:

In view of market potential of a region, market focus strategies can be formulated. Under this
technique, the market potential, generally on a regional basis is determined and major product
groups that need to be focused are identified. Subsequently, strategies for increasing exports
to the identified markets can be formulated.
India’s major markets have been identified on the basis of pre-defined criteria, such as
country’s share in imports and its growth rate, GDP and its growth rate, and trade deficits
which facilitate segmentation and targeting of markets. India has formulated such market
focus strategies for Latin America, Africa, and CIS countries.
Considering the potential of the Latin American region, an integrated programme ‘Focus
LAC was launched in November 1997 with an objective to focus at the Latin American
region, with added emphasis on the nine major trading partners of the region.
The strategy emphasized identification of areas of bilateral trade and investments so as to

promote commercial interaction. This region, comprising 43 countries, accounted for about 5
per cent of the world trade. But India is not a significant trading partner of this region. Under
the programme, nine major product groups for enhancing India’s exports to the Latin
American region were identified.
These included:
1. Textiles including ready-made garments, carpets, and handicrafts

2. Engineering products and computer software
3. Chemical products including drugs/pharmaceuticals.
On similar lines, Focus Africa was launched on 1 April 2002, which initially covered seven
countries in the first phase of the programme to include Nigeria, South Africa, Mauritius,
Kenya, Tanzania, and Ghana.
Subsequently, it was extended to 11 other countries of the region, i.e., Angola, Botswana,
Ivory Coast, Madagascar, Mozambique, Senegal, Seychelles, Uganda, Zambia, Namibia, and
Zimbabwe along with the six countries of North Africa—Egypt, Libya, Tunisia Sudan,
Morocco, and Algeria.
Focus CIS was launched on 1 April 2003, which include focused export promotion to 12 CIS
(commonwealth of independent states) countries, i.e., Russian Federation, Ukraine, Moldova,
Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, Uzbekistan, Kyrgyzstan, Turkmenistan,
and Tajikistan—the Baltic states of Latvia, Lithuania, and Estonia.
The programme was based on an integrated strategy to focus on major product groups,
technology and services sectors for enhancing India’s exports and bilateral trade and co-
operation with countries of the CIS region.
The strategy envisaged at making integrated efforts to promote exports by the Government of
India and various related agencies, such as India Trade Promotion Organisation (ITPO),
Export Promotion Councils (EPCs), Apex Chambers of Commerce and Industry, Indian
missions abroad, and institutions such as Export Import Bank and Export Credit and
Guarantee Corporation (ECGC).
Such integrated and focused approaches are conceptually sound but their success depends
upon effectiveness of implementation of the programmes. On 1 April 2006, the Focus Market
Scheme was launched in order to enhance the competitiveness in the select markets. The
scheme notifies 83 countries form Latin America, Africa, and CIS.
Growth-Share Matrix:
The technique offers a useful tool to evaluate countries for different product categories based
on their market share and growth rate. Products are classified under four categories on the
lines of BCG matrix based on a model developed by Boston Consulting Group for
classification of strategic business units (SB Us) of an organization, as shown in Fig. 10.24.
Such a matrix can be prepared either for country’s exports or firm’s exports so as to
facilitate segmentation of the products under the broad categories:
High-growth high-share [stars] products:
Such products offer high-growth potential but require lot of resources to maintain the share in
high-growth markets.
Low-growth high-share [cash cows) products:
Products under this category bring higher profits, although have a slow market growth rate.
High-growth low-share [question marks) products:
These are the products under high risk category with an uncertain future, sometimes called
problem children. A highly competitive strategic business decision is required to invest
resources to bring it to the category of stars by achieving a higher market share.
Low-growth Low-share (dogs) products:
These products have low growth and low market share, therefore generally do not call for
investing much resources.
For each of the product groups under the growth share matrix, differentiated strategies need
to be formulated and adopted. Similar matrix can also be prepared country-wise for
formulating country-specific business strategies.
Country Attractiveness-Company Strength Matrix:

An analysis may be carried out for country evaluation and strategy development based on
business attractiveness of countries and the competitive strength of the company.
Various factors, such as market size, market growth, customers’ buying power, average trade
margins, seasonality and fluctuations in the market, marketing barriers, competitive
structures, government regulations, economic and political stability, infrastructure, and
psychic distance may be taken into account to assess the country attractiveness.
The competitive strength of a firm is often determined by its market share, familiarity and
knowledge about the country, price, product-fit to the market, demands, image, contribution
margin, technology position, product quality, financial resources, access to distribution
channels, and their quality.
An analysis can be carried out in the form of a matrix, assigning weight to each of these
factors. Based on this analysis, a matrix may be drawn as in Fig. 10.25.
The countries depicted in the matrix may be segmented as
Primary Markets:
These countries offer the highest marketing opportunities and call for a high level of business
commitments. The firms often strive to establish permanent presence in these countries.
Secondary Markets:
In these countries, the perceived political and economic risks are too high to make long-term
irrevocable business commitments. A firm has to explore and identify the perceived risk
factors or the firm’s limitations in these countries and adopt individualized strategies, such as
joint ventures so as to take care of the limitations of operating business.
Tertiary Markets:
These are countries with high perceived risks; therefore, allocation of firm’s resources is
minimal. Generally a firm does not have any long-term commitment in such countries and
opportunistic business strategies such as licensing are often followed.
Based on the above analysis, a firm should focus its country selection and expansion
strategies in countries at the top left of the matrix where the country attractiveness and the
competitive strengths of the company are very high. On the other hand, the firm should focus
on harvesting/divesting its resources from countries where the country attractiveness and
company strength both are very low.
However, a firm may use licensing as a mode of business operation with little resource
commitment but continue to receive royalties. Countries at the extreme right top of the matrix
signify higher country attractiveness but lower company strength.
A firm should identify its competitive weaknesses in these countries and strive to gain the
competitive strength. It may also enter into joint venture with other firms, which most of the
time are local and have complementarities to gain competitive strength.
In countries where a firm has medium competitive strength and country attractiveness needs
to carefully study the market condition and adopt appropriate strategy. Ford tractors used the
country attractiveness-company strength matrix and placed India under the extreme right top
of the matrix wherein the country attractiveness was very high but the competitive strength of
the company was low.
Decisions to expand business across national boundaries require much higher level of
commitment of a company’s resources as any business failure may have serious
repercussions. By way of effective evaluation and selection of countries, the
internationalizing firm avoids wastage of time and resources and it can focus its efforts on a
few fruitful locations.
Decision Concerning Foreign Direct and

Portfolio
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the two
important forms of foreign capital. The real difference between the two is that while FDI
aims to take control of the company in which investment is made, FPI aims to reap profits by
investing in shares and bonds of the invested entity without controlling the company.
Both FDI and FPI are the most well sought type of foreign capital by the developing world.
Usually, both these are measured in terms of the percentage of the shares they own in a
company (ie., 10%, 20% etc.,).
According to the existing regulation by the SEBI, FPI is investment in shares of a company
not exceeding 10% of the total paid up capital of the company. Any investment above 10% is
FDI as with that size of shareholding, the foreign investor can exert control in the
management of the company.
A marvellous advantage of both FDI and FPI is that the receiving country need not repay the
debt like in the case of External Commercial Borrowings (foreign loans). Both are thus
described as non –debt creating, and hence involve no payment obligations. Their own
servicing depends on future growth of the economy. This is why most developing countries
prefer FDI and FPI compared to other forms of foreign capital like ECBs.
The similarity between the two ends here. A one-to one comparison will reveal that FDI is
superior to FDI from the angle of a developing country like India.
Foreign Direct Investment (FDI)
FDI is investment by non-resident entities like MNCs to carryout business operations in India
with management of investment, production of goods or services, employing people and
marketing their products. In FDI, both the ownership and control of the firm is with the
investor. The foreign investor usually takes a considerable stake or shareholding in the
company and exerts management influences completely or partially, depending on his
shareholding.
Foreign Portfolio Investment (FPI)
FPI on the other hand is investment in shares, bonds, debentures, etc. According to the IMF,
portfolio investment is defined as cross-border transactions and positions involving debt or
equity securities, other than those included in direct investment or reserve assets.
FDI vs. FPI: Of the two, FDI is more desirable
FDI means real investment; whereas FPI is monetary or financial investment –Here, FDI
means the investor makes investment in buildings and machineries directly in the company in
which he has made the investment. FPI doesn’t create such productive asset creation directly.
It is just financial investment. FDI is certain, predictable, takes production risks, have
stabilizing impact on production. It directly augments employment, output, export etc. The
major merit of FDI is that it is non debt creating as well as non-volatile (less fluctuating).
FPI on the other hand is investment aimed at getting profits from shares, interests from
deposits etc. It is otherwise known as hot money. The portfolio investors stays his money in
the capital market only for a short period of time. Its destination period is so small and is
empirically considered as fluctuating (often short term) capital. It is highly volatile, a fair
weather friend, speculative, involves exchange risks and may lead to capital flight and
currency crisis affecting real economic variables. It is destabilizing in the foreign exchange
market. Fluctuations in the mobility of FPI affects foreign exchange rate, domestic money
supply, value of rupee, call money rates, security market etc. FII (Foreign Institutional
Inflows) inflows depend on two factors: first, return potential of the destination market (host
country) and second availability of risk capital at source geographies (home market; countries
like the US). A change in environment in any of these will result in quick reversal of the
flows.
If FDI is certain, long term and less fluctuating, FPI is speculative, highly volatile and un-
predictive. Hence, FDI is superior to FPI.
Control Methods in International
Business
Control mechanisms play an important role in any business organization, without which the
roles of managers get constrained. Control is required for achieving the goals in a predefined
manner because it provides the instruments which influence the performance and decision-
making process of an organization. Control is in fact concerned with the regulations applied
to the activities within an organization to attain expected results in establishing policies,
plans, and practices.
Control mechanisms can be set according to functions, product attributes, geographical

attributes, and the overall strategic and financial objectives.
Objectives of Control
There are three major objectives for having a control mechanism in an international firm.
They are:
 To get data and clues for the top management for monitoring, evaluating, and adjusting
their decisions and operational objectives.
 To get clues based on which common objectives can be set to get optimum coordination
among units.
 To evaluate the performance metrics of managers at each level.
In 1916, Henri Fayol defined management control as follows −
“Control of an undertaking consists of seeing that everything is being carried out in

accordance with the plan which has been adopted, the orders which have been given, and the
principles which have been laid down. Its object is to point out mistakes in order that they
may be rectified and prevented from recurring”
Types of Control Mechanisms
There are various modes of control. The most influential ones are the following −
Personal Controls
Personal controls are achieved via personal contact with the subordinates. It is the most
widely used type of control mechanism in small firms for providing direct supervision of
operational and employee management. Personal control is used to construct relationship
processes between managers at different levels of employees in multinational companies.
CEOs of international firms may use a set of personal control policies to influence the
behavior of the subordinates.
Bureaucratic Controls
These are associated with the inherent bureaucracy in an international firm. This control
mechanism is composed of some system of rules and procedure to direct and influence the
actions of sub-units.
The most common example of bureaucratic control is found in case of capital spending
rules that require top management’s approval when it exceeds a certain limit.
Output Controls
Output Controls are used to set goals for the subsidiaries to achieve the targeted outputs in
various departments. Output control is an important part of international business
management because a company’s efficiency is relative to bureaucratic control.
The major criteria for judging output controls include productivity, profitability, growth,
market share, and quality of products.
Cultural Controls
Corporate culture is a key for deriving maximum output and profitability and hence cultural
control is a very important attribute to measure the overall efficiency of a firm. It takes form
when employees of the firm try to adopt the norms and values preached by the firm.
Employees usually tend to control their own behavior following the cultural control norms of
the firm. Hence, it reduces the dependence on direct supervision when applied well. In a firm
with a strong culture, self-control flourishes automatically, which in turn reduces the need for
other types of control mechanisms.
Approaches to Control Mechanisms
There are seven major approaches for controlling a business organization. These are
discussed below:
Market Approach
The market approach says that the external market forces shape the control mechanism and
the behavior of the management within the organizational units of an MNC. Market approach
is applied in any organization having a decentralized culture. In such organizations, transfer
prices are negotiated openly and freely. The decision-making process in this approach is
largely directed and governed by the market forces.
Rules Approach
The rules approach applies to a rules-oriented organization where a greater part of decision-
making is applied to strongly impose the organizational rules and procedures. It requires
highly developed plan and budget systems with extensive formal reporting. Rules approach
of control utilizes both the input and output controls in an organized and exclusively
formalized manner.
Corporate Culture Approach

In organizations that follow the corporate culture approach, the employees internalize the
goals by building a strong set of values. This value-syndication influences the operational
mechanism of the organization. It has been observed that even when some organizations have
strong norms of behavioural controls, they are informal and less explicit. Corporate culture
approach requires more time to bring the aimed changes or adjustments in an organization.
Reporting Culture
Reporting culture is a powerful control mechanism. It is used while allocating resources or
while the top management wants to monitor the performance of the firm and the employees.
Rewarding the personnel is a common practice in such approaches of control. However, to
get the maximum out of reporting approach, the reports must be frequent, correct, and useful.
Visits to Subsidiaries
Visiting the subsidiaries is a common control approach. The disadvantage is that all the
information cannot be exchanged via visits. Corporate staff usually and frequently visit
subsidiaries to confer and socialize with the local management. Visits can enable the visitors
to collect information about the firm which allows them to offer advice and directives.
Management Performance Evaluation

Management performance Evaluation is used to evaluate the subsidiary managers for the
subsidiary’s performance. However, as decision-making authority is different from the
operational managers, some aspects of control cannot be managed via this approach. Slow
growth rates of firms and risky economical and political environment requires this kind of
approach.
Cost and Accounting Comparisons

Cost and Accounting Comparisons is a financial approach. It arises due to the difference in
expenditure among various units of the subsidiaries. A meaningful comparison of the
operating performances of the units is necessary to get the full output from this approach.
Cost accounting comparisons use a set of rules that are applicable to the home country
principles to meet local reporting requirements.
Constraints of Control Approaches

Control mechanisms can never be uniform in every country. International firms have to face
severe constraints based on which they modify their control mechanisms in every country.
Here is a list of major constraints that affect an organization in setting its managerial control
mechanism −
 Distance: Geographical distances and various forms of cultural disparities is a big constraint

of control systems. Nowadays, email and fax transmissions have replaced the human
communication, changing the meaning of distance among units and employees of an organization.
 Diversity: It is hard to apply a common control system to everyone due to diversity. It
requires the managers to be locally responsive to address the needs of the country in which the firm
operates. Diverse attributes may exist in the form of labor, cost, currency, economic factors,
business standards, etc.
 Degree of Uncertainty: Data relating to the reporting mechanism may be inaccurate and
incomplete, raising serious challenges to control mechanisms. Due to uncertainties, control
mechanisms must focus on setting goals and developing plans to meet the goals.
Unit-3
Basic Foreign Manufacturing and
Sourcing Decisions
Foreign manufacturers are much cheaper than domestic sources; your costs of labor could
be reduced by as much as 80 percent. This can allow you to funnel more money towards
marketing and development for your products.
Some countries have also implemented incentives to attract companies, such as minimal taxes
and fewer regulations or red tape. This allows you to start your operation quickly and scale
the business as needed.
There is also a vast amount of workers available who are willing to do the labor for much
lower wages; this keeps delays to a minimum since there are always employees ready.
However, foreign manufacturers have some issues too. Many still view foreign sources as
inferior in terms of quality and other countries have fewer intellectual property protections,
putting your business at risk. Shipping time can be weeks or even months instead of days, due
to a lengthy customs and import process.
Ultimately, the decision lies in your manufacturing needs. There is no one right answer for all
companies or all products. What makes the most business sense is dependent on your unique
needs and your company goals. Do you sell a product which isn’t time-sensitive, or do you
sell a highly-specialized product which has to be produced on a reliable timetable? There are
a number of factors to consider in making the best choice for your business. Don’t go with
the cheapest option; choose the one which will deliver the most value in the long-term.
Total Landed Cost
Most people focus mainly on the lowest unit cost. However, unit cost is just one piece of the
total cost equation. One must consider other factors like the transportation, customs and
duties, brokerage services, financing and insurance, etc. Other additional, unexpected costs
are also to be considered. If customs decides to examine the freight, you should add in
charges for the examination and local coordination charges. Also delays in the supply chain
could result in expedited freight charges in order to meet the target delivery date.
Product quality
Quality is an important part of any souring business. The quality of the product will definitely
cause consequence over and above the unit cost. Hence, quality needs to be defined as issues
in the quality of the product causes difficulty in addressing with a vendor through cultures,
time zones and geographies. Poor quality affects everything downstream and can cause
customer dissatisfaction. Defective product may need to be sold at a discount or written off as
a loss thus effecting profit. Some souring agents like Classik International is a Global
Sourcing Agent that stand out as offering a consistently superior product thus nurturing long
term relations.
Logistics Capability
All the great products and quality will mean nothing if you are unable to get the goods to
market. Therefore there must be a reliable transportation infrastructure in the country from
the sourcing/manufacturing origin point to the port. Seasonal fluctuations and weather should
be taken into consideration. It is important to have the flexibility with Global Sourcing Agent
or sourcing consultant to implement alternate plans quickly in case the primary plan or
transportation lane becomes unavailable.
Location
Location proximity of a country may make it a more attractive to source goods. Proximity
leads to benefits such as doing business in the same, or close, time zones. In addition,
common cultural differences and similarities, including language, are known.
Trade Regulations
Governmental regulations can enhance or detract from the ease of doing business with a
given origin. So, prior to making any sourcing decisions, it is necessary that all trade
incentives or restrictions are evaluated carefully. Many government-sponsored publications,
brokers or consulting organizations like Classik International are available to help educate an
importer in the legal requirements of international trade.
Responsiveness of Supplier/ Global Sourcing Agent
Another important factor in sourcing decisions is the time to market goods. If your
competitor has product available more quickly than yours, there are high chances for your
lost market share and lost revenue. Therefore choose a receptive supplier who is able to
accommodate changes.
Communication/IT Capabilities
In order to know what has been shipped choose a real time supplier who is also internet-
savvy and information-sharing. Open dialogue and communication is imperative between the
supplier and buyer. Late, missing or inaccurate documents can cause delays of customs
clearance and, ultimately, delivery to destination.
These are some of the key factors to consider when making global sourcing decisions.
Whether you are new to importing, or just considering sourcing from new origin region,
choosing a proper Global Sourcing Agent with resources will help you make a well-thought-
out choice. Once an informed decision is made, there is a huge opportunity to enjoy
conducting profitable business in the global market.
Product and Branding decisions for

Foreign Market
The international marketing mix consists of 4 Ps viz.
 Product
 Price
 Place
 Promotion
Product & Branding Decision
A product is something both tangible and intangible. The tangible products can be described
in terms of physical attributes like shape, dimension, components, form, color etc.
The intangible products include various services like merchant banking, mutual funds,
insurance, consultancy, air travel etc. However, sometimes both tangible and intangible are
combined to give a total product.
The global markets must see the total product which includes tangible and intangible.
The study of product in the international market includes:
1. Product Development
2. Product Life-cycle
3. Branding Decisions
4. Packaging Decisions
Market Segmentation: The main purpose of the market segmentation is to satisfy the

customer needs more precisely. Market segmentation helps to enter the foreign markets in a
phased manner
Product Positioning: Product positioning attempts to occupy an appealing space in a

consumer’s mind in relation to the space occupied by other competitive products.
Product Adoption: Product to be adopted in a foreign market must demonstrate Five factors.
They are:
(1) Relative advantage over existing alternatives.

(2) Products cleanliness and sanitation are accepted in rich countries.
(3) Compatible with local customs and habits:
(4) Observism: If the product is used publicly the others can observe the product.
(5) Complexity: If the product’s qualities are difficult to understand then other product has
slow market acceptance.
INTERNATIONAL PRODUCT LIFE CYCLE
International product life cycle model is based on empirical actual pattern of trade. This
model explains the relationship among the product life cycle trade and investment.
International product life cycle model explains:
(1) High-income, mass-consumption countries initially export, and later import the product as
they lose their export markets.
(2) Later, the other advanced countries shift from an importing country to an exporting
country.
(3) After some time, even the less developed countries shift from the status of importing
country.
(1) New products are initially introduced in high-income countries/markets as the latter offer
high potential demand
(2) Initially products are produced where they are sold.
(3) Mostly product inventions take place in high-income countries.
(4) Entrepreneurs in middle-income countries take the advantage of low cost of labor and
other factors of production in the production of the new products.
(5) Market stabilizes when the product reaches maturity, the design, technology and markets
stabilize.
(6) Production from low income countries displaces the production of the high income
countries due to the cost advantage.
(7) Companies of high-income countries shift to low-income countries to take the advantage

of low cost factors of production.
(8) These companies gain the ownership and control over the production of low-income
countries.
(9) The producers of low-income countries produce and sell higher volumes due to the low
cost of production and price. Further, these producers also export in higher volumes due to
heavy demand, consequent upon low cost of factors.
(10) Low-income countries export to high-income countries and compete with the industries
of high income countries who enjoyed monopoly at the initial stage of the cycle.
(11) With this stage, cycle completes its turn. Textiles is an example of this cycle. This
product has gone through the complete cycle for the investing country (UK), other developed
countries and finally the developing countries. Similarly, electronics industry passed through
all the stages. This product shifted from USA to Japan to Korea to India.
Stages of International Product Life Cycle
(1) Stage Zero: Local Innovation: The product in this stage is a familiar product in the local
market. Product innovations take place mostly due to the changing wants of the local people.
(2) Stage 1: Overseas Innovation: After a product is successful in the domestic market, the
producer desires exporting it to the foreign markets due to excess production compared to its
demand in the domestic country.
(3) Stage 2: Maturity: The development of the product reaches the peak stage even in
foreign markets. The producer modifies it and develops it based on taste and preference of the
customers in foreign markets. The producer exports the products even to less developed
countries in this stage.
(4) Stage 3: Worldwide Imitation: The local manufacturers in various foreign countries

start to imitate the popular foreign products. They modify those products slightly based on
the local needs and produce the same at less cost and sell them at cheaper prices.
(5) Stage 4: Reversal: Competitive advantage of innovative or original manufacturer

disappears at this1stage as producers in many foreign countries imitate the product, develop it
further and produce it at less cost. This stage also results in product standardization and
competitive disadvantage. The product at this stage does not have to be either capital
intensive or technology intensive, but it becomes labour intensive – a strong competitive
advantage possessed by developing countries.
International Branding Decision
A trademark in USA according to the Lauham Trademark Act, 1947, “includes
any word, name, symbol or device or any combination thereof adopted and used by
manufacturer or merchant to identify his goods, and distinguish them from those
manufactured or sold by others.”
BRANDING DECISION
Generic or No Brand: The first decision regarding branding is whether to brand or not. The
trend towards non-branding products is increasing world-wide. In fact, the scales of non-
branded products is increasing particularly in retail stores. The increase in demand for non-
brand products is due to the availability of these products at less price. In addition, non-brand
products are available – In a number of sizes and models.
Branded Products: Most of the global companies go for branding. The customers of

different countries find it easy to identify the branded products and they are aware of the
ingredients and utility of the branded products. For example” the customers throughout the
world are aware of the products of Colgate-Palmolive, Pepsi or Coke etc. The global
company can get better price and profits through branded products.
Private Brand: Most of the exporting companies go for dealer’s brand or private brand. The
advantages of private branding include: easy in giving dealer’s acceptance, possibility of
getting larger market share, less promotional expenses etc. Private branding is more
appropriate for the small companies who export to various foreign countries.
Manufacturer’s Brand: The manufacturer sells the products in his own brand. The
advantages of manufacturer’s brand include: better control of products and features, better
price due to more price in electricity, retention of brand loyalty and better bargaining power.
Single Brand: The global company go for a single brand for all its exports to the same
country (or Single Brand): The advantages of single brand in single market include: better
impact on marketing, permitting more focused marketing, brand receives full attention,
reduction in cost of promotion etc.
Multiple Brands: The marketing conditions and the features of the customers vary widely
from one region to the other, in the same country. Therefore, the exporter uses multiple
branding decisions in such cases. Multiple branding enables the exporter to meet the needs of
all segments. The other advantages of multiple branding include: creation of excitement
among employees, gaining of more shelf space, avoidance of negative connotation of existing
brand etc.
Local Brands: Global companies have started widely using the local brands in order to give
the impression of cultural compatibility of the local market. The advantages of local branding
include: elimination of difficulty in pronunciation, elimination of negative connotations,
avoidance of taxation on international brand etc.
World Wide Brand/Global Brand: Exporters normally go for global brand. The advantages
of global brand include: reduction of advertising costs, elimination of brand confusion, better
marketing impact and focus, status for prestigious brands and for well-known designs etc.
Strategies for Branding Decisions
(1) If the product has production consistency and salient attributes which can be
differentiated, then it would be better for the manufacturer to go for branding otherwise better
to sell the product without any brand.
(2) If the manufacturer is least dependent person, it would be feasible to go for the
manufacturer’s own brand otherwise, it would be feasible to go for a private brand.
(3) If there are intermarket differences like demographic and psychological, it would be
feasible for having a local brand. Otherwise, it would be better to go for global brand.
(4) If there are intermarket differences like demographic and psychological, it would be
feasible for multiband. Otherwise it would be feasible to go for single brand.
Pricing for International Markets, Factors

affecting International Price
Determination
Pricing decisions are complex in international marketing. A firm may have to follow different
pricing strategies in different markets. Whatever might be the strategy followed, pricing has
to reflect the proper value in the eyes of the consumer wherever they are situated.
Choice of a pricing strategy is dependent on:
 Corporate goals and objectives.

 Customer characteristics.
 The intensity of inter-firm rivalry.
 The phase of the product life cycle.
Two phenomena may occur when products are sold in disparate markets. When a product is
exported, price escalation, whereby the product dramatically increases in price in the export
market, is likely to take place. This usually occurs because a longer distribution chain is
necessary and because smaller quantities sold through this route will usually not allow for
economies of scale.
“Gray” markets occur when products are diverted from one market in which they are cheaper
to another one where prices are higher – e.g., Luis Vuitton bags were significantly more
expensive in Japan than in France, since the profit maximizing price in Japan was higher and
thus bags would be bought in France and shipped to Japan for resale. The manufacturer
therefore imposed quantity limits on buyers.
Since these quantity limits were circumvented by enterprising exchange students who were
recruited to buy their quota on a daily basis, prices eventually had to be lowered in Japan to
make the practice of diversion unattractive.
Where a local government imposes price controls, a firm may find the market profitable to
enter nevertheless since revenues from the new market only have to cover marginal costs.
However, products may then be attractive to divert to countries without such controls.
SOME PRICING STRATEGIES TO USE WHEN SELLING INTERNATIONALLY

DIFFERENTIAL PRICING
This strategy involves a firm differentiating its price across different market segments. The
assumption in this strategy is that different market segments do not communicate or have
different search costs and value perceptions of the product. Diversity in the market motivates
a firm to adopt this strategy.
A strong and effective pricing strategy takes advantage of a company’s position and product
offerings to maximise profit. A differential pricing strategy allows the company to adjust
pricing based on various situations or circumstances. The price variations come in different
forms, from discounts for a particular group of people to coupons or rebates for a purchase.
Offering discounts allows your company to expand abroad to customers who might not
otherwise buy your product. The lower price makes your business more attractive to those
groups you target.
The company’s overall sales increase due to this expanded customer base. In cases when
strategies like coupons, sales or rebates are used, the initial discount gives the new customers
a chance to try the product. If they like what they experience, they may continue buying the
product at full price when the discount is no longer available.
However, your profits on the discounted sales drop since you won’t receive the full amount
you normally charge. If the prices eventually go back up after a sale or the end of a coupon
offer, you may lose those new clients who cannot afford to pay full price.
GEOGRAPHIC PRICING
This strategy seeks to exploit economies of scale by pricing the product below the
competitor’s in one market and adopting a penetration strategy in the other. The former is
termed as second market discounting.
This second market discounting is a part of the differential pricing strategy where the firm
either dumps or sells below its cost in the market to utilize its existing surplus capacity. So, in
geographic pricing strategy, a firm may charge a premium in one market, penetration price in
another market and a discounted price in the third.
TRANSFER PRICING
Transfer pricing involves what one subsidiary will charge another for products or components
supplied for use in another country. Firms will often try to charge high prices to subsidiaries
in countries with high taxes so that the income earned there will be minimised.
Transactions may include the trade of supplies or labour between departments. Transfer
prices are used when individual entities of a larger multi-entity firm are treated and measured
as separately run entities.
Therefore, when divisions are required to transact with each other, a transfer price is used to
determine costs. Transfer prices tend not to differ much from the price in the market because
one of the entities in such a transaction will lose out: they will either be buying for more than
the prevailing market price or selling below the market price, and this will affect their
performance.
Foreign Channel and Logistics Decision

International companies either sell directly or indirectly.
Indirect selling takes place through domestic agent/domestic merchants. This is a long
channel involving a number of marketing intermediaries.
International Market Intermediaries
Place/Distribution channels could be studies under:
1. Direct Selling: Foreign Company develops its own overseas marketing department or foreign
marketing intermediaries and sells the product in the foreign market.
2. Indirect Selling: Indirect selling is through market intermediaries.
Types of Market Intermediaries
(1) Foreign Distributor: It is a foreign company having exclusive rights to distribute the
company’s product in a foreign country.
(2) Foreign Retailer: It is a retailing company firm in a foreign country engaged by the
distributor of the foreign country concerned to deal in and sell the products.
(3) State-Controlled Trading Company: It is a government company authorized to deal in

and sell the products/services of foreign companies. For example, State Trading Corporation
in India.
(3) Export Broker: It is a domestic company engaged in arranging for export of goods of
domestic companies by charging a fee.
(4) Manufacturer’s Export Agent /Sales Representatives: It is a firm exclusively engaged

to take up all export activities of a domestic manufacturer. This agent works for a
commission.
(5) Export Management Company: This Company manages the entire export activities of a
domestic company on contract.
(6) Co-operative Exporter: Manufacturers of a particular product in the domestic country

form into a co-operative union to manage their export activities. This co-operative union
manages the export activities of its members. Examples include GE, Singer and Borg-
Warner.
(7) Web-Pomerence Association: It is an association jointly formed by two or more
domestic manufacturers to export their products. It is basically an export cartel.
(8) Purchasing Buying Agent: It is an agency firm of a foreign buyer/importer. Foreign

buying/ importing company appoints agents to arrange for buying products from other
countries.
(9) Country-controlled Buying Agent: It is a foreign government’s agency or a quasi-

governmental firm engaged in buying/importing products from other countries. This firm
buys products on behalf of the government of the importing country.
(10) Resident Buyer: It is an agency engaged in buying the products on behalf of the
importer. This agent locates his firm near the manufacturers in the exporting country.
(11) Export Merchant: It is a firm engaged in buying the products in the domestic country
in order to export to foreign countries on its own.
(12) Export Drop Shipper: Export drop shipper is also known as a desk jobber or cable
merchant. He arranges a link between the exporter and importer. He informs the requirements
of the customers in a foreign country to the exporter. Exporter, in his turn sends the products
directly to the importer.
(13) Export Distributor: Export distributor is granted exclusive right to represent the

manufacturer in selling the product in foreign countries. He operates either in his own name
or manufacturer’s name.
(14) Trading Company: Trading companies act as a link between exporting companies and
importing companies.
Unit-4
Accounting Differences Across Countries
Companies that solely operate in the United States generally prepare financial statements that
are in accordance with U.S. Generally Accepted Accounting Principles (GAAP). However,
most of the rest of the world is subject to International Financial Reporting Standards (IFRS).
While there is significant overlap between the two systems, there are marked differences.
Understanding the differences between U.S. GAAP and IFRS can help you make sure that
your company’s books are in order as you branch out overseas.
Principles vs. Rules
The major difference between U.S. GAAP and IFRS is their differing philosophy with regard
to how regulations should be constructed. IFRS accounting regulations reflect a principles-
based approach where there are less bright-line rules and more qualitative guidance.
Supporters of this approach argue that companies should be looking at the nature of a
transaction, not arbitrary cutoffs. U.S. GAAP often takes a rules-based approach where
companies classify transactions based upon numerical cutoffs. Lease accounting is a good
example of the difference in philosophy. Under U.S. GAAP, a company is required to
capitalize any lease when the lease contract is for greater than 75 percent of the economic life
of the asset. However, under IFRS the guidance requires capitalization when the lease is for a
“major part” of the economic life of the asset.
Inventory
Last-in, first-out (LIFO) inventory is commonly used by U.S. companies to lower tax
liabilities. By expensing inventory that is purchased most recently first, as prices rise
companies reduce net income. However, as companies expand overseas, they may run into
trouble. LIFO inventory is not allowed under IFRS. Companies that wish to do business in
other countries should first check to see if an audit under that country’s accounting
regulations is required by statute. If so, companies that have adopted LIFO inventory should
consider the costs of complying with this regulation before moving into the foreign market.
For smaller businesses, the costs of compliance may outweigh the benefits of expansion.
Extraordinary Items
Extraordinary items are defined by U.S. GAAP as gains and losses that are both unusual and
infrequent in nature. Small business owners should recognize that this is a pretty onerous
criteria. For example, losses related to Hurricane Katrina were not considered to meet the
criteria, as hurricanes are common, particularly in the Southeast. However, when the criteria
are met, U.S. GAAP and IFRS have differing presentation requirements. U.S. GAAP allows
for extraordinary items to be broken out and displayed as net income. This allows investors to
easily remove the effect of these items from the company’s income figure. However, IFRS
financial statements do not allow this treatment and include extraordinary items above the net
income figure in the statement of income.
Development Costs
An important difference between U.S. GAAP and IFRS exists for small business owners
involved in research and development. Under U.S. GAAP, research and development costs
are generally expensed as incurred. However, under IFRS certain development costs may be
capitalized. Small business owners should take note that like other parts of IFRS,
capitalization guidance is principles-based. As such, small business owners with significant
development costs should anticipate spending a fair amount of time working with their
accountant as to the whether or not their company’s specific activities constitute costs that
should be expensed or capitalized.
Magnitude of Accounting Diversity:

Although it is generally assumed that accounting diversity results in significant differences in
the measurement of income and equity across countries, until the 1990s there was very little
systematic empirical documentation of the effect that these differences have on published
financial statements.
In 1993, the SEC published a survey that examined the U.S. GAAP reconciliations made by
444 foreign entities from 36 countries. The results of that survey indicate that approximately
two-thirds of the foreign companies showed material differences between net income and
owners’ equity reported on the basis of home GAAP and U.S. GAAP.
United States Securities and Exchange Commission, Survey of Financial Statement

Reconciliations by Foreign Registrants.
Of those with material differences, net income would have been lower under U.S. GAAP for
about two-thirds of the companies (higher using US. GAAP for about one-third). Similar
results were found with regard to owners’ equity. At the extremes, income was 29 times
higher under U.S. GAAP for one foreign entity, and 178 times higher using British GAAP for
another entity. In addition, the study found that significant differences are spread relatively
evenly across countries.
In other words, material differences are as likely to exist for a British or Canadian
company as for a company in South America, Asia, or Continental Europe:
Focusing on the U.S. GAAP reconciliations of British companies, a separate study found that
all 39 companies examined reported material differences in income or equity. More than 90
percent reported lower income under U.S. GAAP and approximately 60 percent reported
higher equity.
The average difference in income, even after including those with higher U.S. GAAP income,
was a 42 percent reduction in income when reconciling to U.S. GAAP. It is clear that
differences in accounting principles can have a material impact on amounts reported in
financial statements.
A General Model of the Reasons for International Differences in

Financial Reporting:
In 1998, Nobes developed a simplified model of the reasons for international accounting
diversity that has only two explanatory factors:
(1) National culture, including institutional structures, and
(2) The nature of a country’s financing system.
Nobes argued that differences in the purpose for financial reporting across countries is the
major reason for international differences in financial reporting and that the most relevant
factor in determining the purpose of financial reporting is the nature of a country’s financing
system. Specifically, whether or not a country has a strong equity financing system with large
numbers of outside shareholders determines the type of financial reporting system a country
uses.
Nobes divided financial reporting systems into two classes, A and B. Countries with a strong
equity-outsider financing system use a Class A accounting system and countries with a weak
equity-outsider financing system have a Class B system. Class A accounting is less con-
servative, provides more disclosure, and does not follow tax rules. Class B accounting is
more conservative and disclosure is not as extensive and more closely follows tax rules.
Nobes stated that a country’s culture determines the nature of its financing system. He
assumed (without explaining how) that some cultures lead to strong equity-outsider financing
systems and other cultures lead to weak equity-outsider financing systems.
His model of reasons for international accounting differences is summarized as follows:
Many countries in the developing world are culturally dominated by another country, often as
a result of European colonialism. Nobes argued that culturally dominated countries use the
accounting system of their dominating country regardless of the nature of the equity
financing system. This explains, for example, why the African nation of Malawi, a former
British colony, uses a Class A accounting system even though it has a weak equity-outsider
financing system.
Nobes’s classification is consistent with the findings of a study in which data on 100 account-
ing practices in 50 countries were analyzed using the statistical procedure of hierarchical
cluster analysis.” The results of this procedure (see Exhibit 11.6) produced two large clusters
of countries composed of several smaller clusters. The two clusters in what is referred to as
the micro class of accounting system consist primarily of countries that at some point in their
history were part of the British Empire.
In contrast, no English-speaking countries are in the macro class clusters. The two classes of
accounting reflected in Exhibit 11.6 differed significantly on 66 of the 100 financial reporting
practices examined. The micro class countries generally indicated requiring more disclosures
than the macro class countries, and a much larger percentage of macro countries indicated
that accounting practice adhered to tax requirements.
As the financing system in a country evolves from weak equity to strong equity, Nobes sug-
gests that the accounting system also evolves in the direction of Class A accounting. He cites
China as an example of a country in which this is already taking place. Nobes also argues that
individual companies with strong equity-outsider financing attempt to use Class A accounting
even if they are located in a Class B accounting system country; some evidence suggests that
this also has occurred.
To enhance companies’ ability to compete in attracting international equity investment,

several European countries (with weak equity-outsider financing and Class B accounting
systems) developed a two-tiered financial reporting system in the late 1990s.
Austria, France, Germany, Italy, and Switzerland gave stock exchange-listed companies the
option to use International Financial Reporting Standards (IFRSs) (a Class A accounting sys-
tem) in preparing their consolidated financial statements. Large numbers of German and
Swiss multinational companies (including Deutsche Bank, Bayer, and Nestle), in particular,
took advantage of this option. Other companies continued to use local GAAP.
The desire for companies to be competitive in the international capital market led the
European Union in 2005 to require all publicly traded companies to use IFRSs in preparing
their consolidated financial statements. As time passes, it will be interesting to see whether
adoption of a Class A accounting system results in a stronger equity-outsider financing sys-
tem within the countries composing the European Union.
International Harmonization of Financial Reporting:

Because of the problems associated with worldwide accounting diversity, attempts to reduce
accounting differences across countries known as harmonization have been ongoing for more
than three decades. The ultimate goal of harmonization is to have all companies around the
world follow one set of international accounting standards.
Arguments for Harmonization:
Proponents of accounting harmonization argue that worldwide comparability of financial

statements is necessary for the globalization of capital markets. Financial statement
comparability would make it easier for investors to evaluate potential investments in foreign
securities and thereby take advantage of the risk reduction possible through international
diversification. It also would simplify multinational companies’ evaluation of possible
foreign takeover targets.
From the securities issuer side, harmonization could allow companies to gain access to all
worldwide capital markets with one set of financial statements. This would allow companies
to lower their cost of capital and would make it easier for foreign investors to acquire the
company’s stock.
One set of universally accepted accounting standards would reduce the cost of preparing
worldwide consolidated financial statements and would simplify the auditing of these state-
ments. Multinational companies would find it easier to transfer accounting staff to other
countries. This would be true for the international auditing firms as well.
Arguments against Harmonization:
One obstacle to harmonization is the magnitude of the differences between countries and the
fact that the political cost of eliminating those differences could be quite high. As Dennis
Beresford, former chairman of the FASB, stated, “High on almost everybody’s list of
obstacles is nationalism.
Whether out of deep-seated tradition, indifference born of economic power, or resistance to

intrusion of foreign influence, some say that national entities will not bow to any
international body.” Arriving at principles that satisfy all parties involved throughout the
world seems an almost Herculean task.
Harmonization is difficult to achieve, and the need for such standards is not universally
accepted. As Richard Karl Goeltz stated, “Full harmonization of international accounting
standards is probably neither practical nor truly valuable. It is not clear whether significant
benefits would be derived in fact.
A well-developed global capital market exists already. It has evolved without uniform
accounting standards.” Opponents of harmonization argue that it is unnecessary to force all
companies worldwide to follow a common set of rules. The international capital market will
force companies that benefit from accessing the market to provide the required accounting
information without harmonization.
Another argument against harmonization is that because of different environmental influ-

ences, differences in accounting across countries might be appropriate and necessary. For
example, countries at different stages of economic development or that rely on different
sources of financing perhaps should have differently oriented accounting systems.
Regardless of the arguments against harmonization, substantial effort to reduce differences in

accounting practice and to develop a set of international accounting standards has been
ongoing for several decades.
Major Harmonization Efforts:
While numerous organizations have been involved in the international harmonization of

financial reporting the two most important players in this effort have been the European
Union on a regional basis and the International Accounting Standards Board on a global
basis.
European Union:
The major objective embodied in the Treaty of Rome that created the European Economic
Community in 1957 (now called the European Union) was the establishment of free
movement of persons, goods and services, and capital across member countries. To achieve a
common capital market, the European Union (EU) has attempted to harmonize financial
reporting practices within the community. To do this, the EU issues directives that must be
incorporated into the laws of member nations.
Two directives have helped harmonize accounting. The Fourth Directive, issued in 1978,
deals with valuation rules, disclosure requirements, and the format of financial statements.
The Seventh Directive, issued in 1983, relates to the preparation of consolidated financial
statements.
The Seventh Directive requires companies to prepare consolidated financial statements and
outlines the procedures for their preparation. This directive has significantly impacted
European accounting because consolidations were previously uncommon on the Continent.
The Fourth Directive provides considerable flexibility with dozens of provisions beginning
with the expression “member states may require or permit companies to”; these allow coun-
tries to choose from among acceptable alternatives. One manifestation of this flexibility is
that Dutch and British law allow companies to write up assets to higher market values, but in
Germany this is strictly forbidden. Notwithstanding this flexibility, implementation of the
directives into local law caused extensive change in accounting practice in several countries.
The Fourth and Seventh Directives did not create complete harmonization within the
European Union. As an illustration of the effects of differing principles within the EU, the
profits of one case study company were measured in European currency units (ECUs) using
the accounting principles of various member states.
International Accounting Standards Committee:

In hopes of eliminating the diversity of principles used throughout the world, the
International Accounting Standards Committee (IASC) was formed in June 1973 by
accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands,
the United Kingdom and Ireland, and the United States. The IASC operated until April 1,
2001, when it was succeeded by the International Accounting Standards Board (IASB).
Based in London, the IASC’s primary objective was to develop international accounting
standards (IASs). The IASC had no power to require the use of its standards, but member
accountancy bodies pledged to work toward adoption of IASs in their countries. IASs were
approved by a board consisting of representatives from 14 countries. The part-time board
members normally met only three times a year for three or four days. The publication of a
final IAS required approval of at least 11 of the 14 board members.
Early IASs tended to follow a lowest common denominator approach and often allowed at
least two methods for dealing with a particular accounting issue. For example, IAS 2, origi-
nally issued in 1975, allowed the use of specific identification, FIFO, LIFO, average cost, and
the base stock method for valuing inventories, effectively sanctioning most of the alternative
methods in worldwide use.
For the same reason, the IASC initially allowed both the traditional U.S. treatment of
expensing goodwill over a period of up to 40 years and the U.K. approach of writing off
goodwill directly to stockholders’ equity. Although perhaps necessary from a political
perspective, such compromise brought the IASC under heavy criticism.
The IOSCO Agreement:
In 1987, the International Organization of Securities Commissions (IOSCO) became a mem-

ber of the IASC’s Consultative Group. IOSCO is composed of the stock exchange regulators
in more than 100 countries, including the U.S. SEC. As one of its objectives, IOSCO works
to facilitate cross-border securities offerings and listings by multinational issuers.
To this end, IOSCO has supported the IASC’s efforts at developing IASs that foreign issuers
could use in lieu of local accounting standards when entering capital markets outside of their
home country. “This could mean, for example, that if a French company has a simultaneous
stock offering in the United States, Canada, and Japan, financial statements prepared in
accordance with international standards could be used in all three nations.”
IOSCO supported the IASC’s Comparability Project (begun in 1987), “to eliminate most of
the choices of accounting treatment currently permitted under International Accounting Stan-
dards.” As a result of the Comparability Project, 10 revised IASs were approved in 1993 to
become effective in 1995. In 1993, IOSCO and the IASC agreed upon a list of “core” stan-
dards to use in financial statements of companies involved in cross-border securities offerings
and listings. Upon their completion, IOSCO agreed to evaluate the core standards for possible
endorsement for cross-border listing purposes.
The IASC accelerated its pace of standards development, issuing or revising 16 standards in
the period 1997-1998. With the publication of IAS 39 in December 1998, the IASC com-
pleted its work program to develop the core set of standards. In 2000, IOSCO’s Technical
Committee recommended that securities regulators permit foreign issuers to use IASC stan-
dards to gain access to a country’s capital market as an alternative to using local standards.
A Principles-Based Approach to Standard Setting:
The IASB has taken a principles-based approach to establishing accounting standards rather
than the so-called rules-based approach followed by the FASB in the United States.
Principles- based standards focus on providing general principles for the recognition and
measurement of a specific item with a limited amount of guidance; they avoid the use of
“bright-line” tests. Application of principles-based standards requires a greater degree of
professional judgment than does application of rules-based standards.
Classification of leases is an accounting issue that demonstrates the difference in the

standard-setting approach taken by the IASB and the FASB. The FASB’s SFAS 13,
“Accounting for Leases,” requires leases to be classified as either capital or operating. Capital
leases are reported on the balance sheet as both an asset and a liability whereas operating
leases are not. Criteria for classifying leases are set out in paragraph 7 of the standard, which
clearly states “if at its inception, a lease meets one or more of the following four criteria, the
lease shall be classified as a capital lease by the lessee. Otherwise it shall be classified as an
operating lease.”
The four criteria follow:
1. The lease transfers property ownership to the lessee by the end of the lease term.
2. The lease contains a bargain purchase option.
3. The lease term equals 75 percent or more of the economic life of the leased property.
4. The present value of minimum lease payments is 90 percent or more of the lease property’s
fair value.
SFAS 13 is very prescriptive. A lease shall be classified as a capital lease if at least one of
four criteria is met, and two of the criteria are based on bright-line thresholds—75 percent or
more of the economic life and 90 percent or more of the fair value.
The bright-line tests established in this standard have come under considerable criticism
because they give companies the opportunity to engineer lease agreements so as to avoid
meeting the tests and thereby to keep leases off the balance sheet. In a Financial Reporting
Issues Conference sponsored by the FASB in 1996, SFAS 13 was deemed to be the worst
standard in U.S. GAAP.
IAS 17, “Accounting for Leases,” is similar to SFAS 13 in many respects. It also distin-
guishes between capital (finance) leases and operating leases, but its guidance for classifying
leases is much less prescriptive than the U.S. standard.
Clearly, IAS 17’s general principle for classifying leases does not provide sufficient guidance
to ensure consistent application across companies. Paragraphs 10 and 11 provide additional
guidance that is suggestive rather than prescriptive. These paragraphs describe examples of
situations that individually or in combination would normally lead to or could lead to the
classifications of a lease as a finance lease. Note that the standard does not indicate that in
these situations a lease must be capitalized.
Four of the examples provided in paragraph 10 are similar to the four criteria for lease
classification in SFAS 13. However, the IASB standard is careful not to establish bright-line
tests. Rather than the 75 percent of economic life rule in US. GAAP, IAS 17 indicates that if
the lease term is for the major part of the asset’s economic life, it normally would be
classified as a capital lease. In the example relating the present value of minimum lease
payments to the fair value of the lease property, a less specific test of at least substantially all
is used instead of the FASB’s bright line of 90 percent or more.
Presumably, writing a lease contract whose lease term is only 74 percent of the asset’s
economic life and the present value of lease payments is only 89 percent of the asset’s fair
value would not in and of itself preclude the lease from being classified as a finance lease
under IAS 17, whereas it clearly would not meet the test for capitalization under U.S. GAAP.
IAS 17 reiterates in paragraph 10 that “whether a lease is a finance lease or an operating lease
depends on the substance of the transaction rather than the form of the contract.”
Concerned that the rules-based standards in U.S. GAAP could have contributed to the spate
of accounting scandals at U.S. companies, the Sarbanes-Oxley Act of 2002 required the SEC
to study the adoption of a principles-based accounting system in the United States. In
conducting its study, the SEC evaluated IFRSs but concluded that they did not represent a
cohesive set of principles-based standards that could act as a model for the United States.
The SEC report to Congress issued in 2003 stated that “a careful examination of the IFRS
shows that many of those standards are more properly described as rules based. Other IFRS
could fairly be characterized as principles only because they are overly general.” Principles-
only standards do not contain sufficient guidance to ensure relatively consistent application
across companies.
Some observers have expressed concern that the FASB-IASB convergence project might
result in IASB standards becoming more rules based. In 2003, the IASB issued exposure draft
ED 4, “Disposal of Non-current Assets and Presentation of Discount Operations,” intended to
converge IFRSs with SFAS 144, the equivalent U.S. standard. Consistent with SFAS 144, the
IASB’s exposure draft included a list of criteria for determining when assets are being “held
for sale” and therefore must be classified as such on the balance sheet.
In a letter commenting on ED4, representatives from the National Association of German

Banks (Bundesverband deutscher Banken) took issue with the fact that the proposed standard
included a list of criteria for identifying assets held for sale. According to the authors, such a
“list of criteria is at odds with the IAS objective of producing standards based on principles.”
Moreover, they argue that “in our view, setting out detailed sets of individual circumstances
will result in more, not less, discretionary leeway.”
Obstacles to Worldwide Comparability of Financial Statements:

IFRS and U.S. GAAP are the dominant accounting standards worldwide. In January 2007, a
study conducted by the Financial Times determined that U.S. GAAP was used by companies
comprising 35 percent of global market capitalization; companies making up 55 percent of
global market capitalization were using or planning to use IFRS; and only 10 percent were
using some other set of rules for financial reporting purposes.
If the FASB-IASB convergence project progresses to the elimination of substantive

differences between the two sets of standards, someday all major companies could use very
similar accounting rules. When that day arrives, will the objective of accounting
harmonization have been achieved?
Will financial statements truly be comparable across countries? The use of a common set of
accounting standards is a necessary but perhaps not a sufficient condition for ensuring
worldwide comparability. Several obstacles stand in the way of a common set of standards
being interpreted and applied in a consistent manner across all countries.
Translation of IFRS into other Languages:
IFRS are written in English and therefore must be translated into other languages for use by
non- English-speaking accountants. The IASB created an official translation process in 1997,
and by the end of 2006, IFRS had been translated into more than 30 other languages. Most
translations are into European languages because of the European Union’s required usage of
IFRS.
However, IFRS also have been translated into Chinese, Japanese, and Arabic. Despite the
care the IASB took in the translation process, several research studies suggest that certain
English-language expressions used in IFRS are difficult to translate without some distortion
of meaning.
In one study, Canadian researchers examined English-speaking and French-speaking

students’ interpretations of probability expressions such as probable, not likely, and
reasonable assurance used to establish recognition and disclosure thresholds in IASs. English-
speaking students’ interpretations of these expressions differed significantly from the
interpretations made by French-speaking students of the French-language translation.
In another study, German accountants fluent in English assigned values to both the English
original and the German translation of probability expressions used in IFRS. For several
expressions, the original and translation were interpreted differently, suggesting that the
German translation distorted the original meaning.
As an example, IFRS (and U.S. GAAP) use the term remote that appears particularly difficult
to translate in a consistent fashion. IAS 37, “Provisions, Contingent Liabilities and Con-
tingent Assets,” indicates that a contingent liability is disclosed “unless the possibility of an
outflow of resources embodying economic benefits is remote”, and IAS 31, “Interests in Joint
Ventures,” requires separate disclosure of specific types of contingent liabilities “unless the
probability of loss is remote”. It would appear that remote is intended to establish a similar
threshold for disclosure in both standards.
French translations of remote in both IAS 31 and IAS 3 7 use the word faible (weak).
However, the adjective tres (very) is added to form the expression tres faible in IAS 31. Thus,
remote is literally translated as “weak” (faible) in IAS 37 and “very weak” (tres faible) in IAS
31. Preparers of financial statements using the French translation of IFRSs might interpret
IAS 31 as establishing a stronger test than IAS 37 for avoiding disclosure.
Translating remote into German presents even greater difficulty. IAS 31 uses the German
word unwahrscheinlich (improbable), and IAS 37 uses the phrase äuβerst gering (extremely
remote). The German translation of IAS 31 appears to establish a more stringent threshold for
nondisclosure of contingent liabilities than does the German translation of IAS 37, and it is
questionable whether either threshold is the same as the original in English.
The SEC implicitly acknowledged the potential problem in translating IFRS to other
languages in its proposed rule to eliminate the U.S. GAAP reconciliation requirement for
foreign registrants. That rule applies only to those foreign companies that prepare financial
statements in accordance with the English language version of IFRS.
The Impact of Culture on Financial Reporting:
Even if translating IFRS into languages other than English was not difficult, differences in
national culture values could lead to differences in the interpretation and application of IFRS.
Gray proposed a model that hypothesizes a relationship between cultural values, accounting
values, and the financial reporting rules developed in a country. More recently, Gray’s model
was extended to hypothesize that accounting values not only affect a country’s accounting
rules but also the manner in which those rules are applied.
This hypothesis has important implications for a world in which countries with different
national cultures use the same accounting standards. It implies that for accounting issues in
which accountants must use their judgment in applying an accounting principle, culturally
based biases could cause accountants in one country to apply the standard differently from
accountants in another country.
Several research studies support this hypothesis. For example, one study found that, given the
same set of facts, accountants in France and Germany estimated higher amounts of warranty
expense than did accountants in the United Kingdom. This result was consistent with dif-
ferences in the level of the accounting value of conservatism across these countries resulting
from differences in their cultural values.
Financial statement users need to be aware that the use of a common set of accounting
standards will not lead to complete financial statement comparability across countries.
However, a greater degree of comparability will exist than if each country were to continue to
use a different set of standards.
Cross Cultural Challenges in International

Business
Culture is the “acquired knowledge that people use to anticipate events and interpret
experiences for generating acceptable social & professional behaviors. This knowledge forms
values, creates attitudes and influences behaviors”. Culture is learned through experiences
and shared by a large number of people in the society. Further, culture is transferred from one
generation to another.
Core Components of “Culture”
 Power distribution: Whether the members of the society follow the hierarchical approach or
the egalitarian ideology?
 Social relationships: Are people more individualistic or they believe in collectivism?
 Environmental relationships: Do people exploit the environment for their socioeconomic
purposes or do they strive to live in harmony with the surroundings?
 Work patterns: Do people perform one task at a time or they take up multiple tasks at a
time?
 Uncertainty & social control: Whether the members of the society like to avoid uncertainty
and be rule-bound or whether the members of the society are more relationship-based and like to
deal with the uncertainties as & when they arise?
Critical issues that generally surface in cross-cultural teams
 Inadequate trust: For example, on one hand a Chinese manager wonders why his Indian
teammates speak in Hindi in the office and on the other hand, his teammates argue that when the
manager is not around, why they can’t speak in English?
 Perception: For instance, people from advanced countries consider people from less-
developed countries inferior or vice-versa.
 Inaccurate biases: For example, “Japanese people make decisions in the group” or “Indians
do not deliver on time”, are too generalized versions of cultural prejudices.
 False communication: For example, during discussions, Japanese people nod their heads
more as a sign of politeness and not necessarily as an agreement to what is being talked about.
Communication styles that are influenced by the culture of the nation
 ‘Direct’ or ‘Indirect’: The messages are explicit and straight in the ‘Direct’ style. However, in
the ‘Indirect’ style, the messages are more implicit & contextual.
 ‘Elaborate’ or ‘Exact’ or ‘Succinct’: In the ‘Elaborate’ style, the speaker talks a lot & repeats
many times. In the ‘Exact’ style, the speaker is precise with minimum repetitions and in the ‘Succinct’
style; the speaker uses fewer words with moderate repetitions & uses nonverbal cues.
 ‘Contextual’ or ‘Personal’: In the ‘Contextual’ style, the focus is on the speaker’s title or
designation & hierarchical relationships. However, in the ‘Personal’ style, the focus is on the
speaker’s individual achievements & there is minimum reference to the hierarchical relationships
 ‘Affective’ or ‘Instrumental’: In the ‘Affective’ style, the communication is more relationship-
oriented and listeners need to understand meanings based on nonverbal clues. Whereas in the
‘Instrumental’ style, the speaker is more goal-oriented and uses direct language with minimum
nonverbal cues.
Important nonverbal cues related to the communication among cross-cultural

teams
 Body contact – This refers to the hand gestures (intended / unintended), embracing,
hugging, kissing, thumping on the shoulder, firmness of handshakes, etc.
 Interpersonal distance – This is about the physical distance between two or more
individuals. 18″ is considered an intimate distance, 18″ to 4′ is treated as personal distance, 4′ to 8′ is
the acceptable social distance, and 8′ is considered as the public distance.
 Artifacts – This refers to the use of tie pins, jewelry, and so on.
 Para-language – This is about the speech rate, pitch, and loudness.
 Cosmetics – This is about the use powder, fragrance, deodorants, etc.
 Time symbolism – This is about the appropriateness of time. For example, when is the
proper time to call, when to start, when to finish, etc. because different countries are in different
time zones.
Epilogue
“Cross-cultural challenges in international business management”, has become a keenly

followed topic in last two decades. There are enough examples of business failures or
stagnation or failure of joint ventures, on account of the management’s inability to recognize
cross-cultural challenges and tackle them appropriately. There are also examples of
companies having compulsory training on culture management or acculturation programs for
employees being sent abroad as or hired from other countries, to ensure that cross-challenges
are tackled effectively.
The world is becoming smaller day-by-day and therefore, managers involved in the
international businesses will have to become more sensitive to the challenges emanating from
the cultural and ethnic landscape of the countries they work in.
Ignoring cultural challenges while managing internal businesses is a risky proposition

because the stakes are high. It is cognate to the “Hygiene” factor of the “Dual-factor
Motivation” theory developed by psychologist Frederick Herzberg in the mid 1960s. In
management of the international business, embracing the cultural diversity of the country
may or may not bring success, but not doing so will surely increase the chances of
stagnation or failure.
International Staffing
Staffing (or finding, choosing and placing) good employees is difficult even at home.
However, it becomes more difficult in other countries. For example, until recently in Russia,
very few Russians had resumes available to give to prospective employers with vacant
positions. Consequently, recruiting is often done only by word of mouth. Only recently have
more sophisticated methods—such as structured interviews, testing or work samples—been
used on a limited basis. More systematic selection is becoming necessary in Russia and many
of the former Soviet-bloc countries as younger, more highly educated candidates are being
needed by international firms.
Deciding on the mix of local employees, employees from the home country, and even people
from third countries that will best meet organizational goals is a challenge. In staffing an
overseas operation, cost is a major factor to be considered. The cost of establishing a manager
or professional in another country can run as high as $1 million for a three-year job
assignment. The actual costs for placing a key manager outside the United States often are
twice the manager’s annual salary.
For instance, if the manager is going to Japan, the costs may be even higher when housing
costs, schooling subsidies, and tax equalization payment are calculated. Further, if a manager
or professional executive quits an international assignment prematurely or insists on a
transfer home, associated costs can equal or exceed the annual salary. “Failure” rates for
managers sent to other countries run as high as 45%.
Factors that are most likely to be causes of concern for an employee sent overseas are shown
in Figure. The figure shows that only roughly two-thirds to three-fourths of employees sent to
another country are satisfied with the way the top five support needs are being met.
To meet these needs, organizations are outsourcing various functions, citing gains in cost
effectiveness, expertise, and efficiency. Several respondents to a survey on the subject
suggested that outsourcing certain HR functions to international experts may be a long-term
trend.
Types of International Employees

International employees can be placed in three different classifications.
 An expatriate is an employee working in a unit or plant who is not a citizen of the country in
which the unit or plant is located but is a citizen of the country in which the organization is
headquartered.
 A host-country national is an employee working in a unit or plant who is a citizen of the

country in which the unit or plant is located, but where the unit or plant is operated by an
organization headquartered in another country.
 A third-country national is a citizen of one country, working in a second country, and

employed by an organization headquartered in a third country. Each of these individuals presents
some unique HR management challenges. Because in a given situation each is a citizen of a different
country, different tax laws and other factors apply. HR professionals have to be knowledgeable
about the laws and customs of each country. They must establish appropriate payroll and record-
keeping procedures, among other activities, to ensure compliance with varying regulations and
requirements.
EXPATRIATES
(An expatriate (in abbreviated form, expat) is a person temporarily or permanently residing
in a country and culture other than that of the person’s upbringing.) (A person who leave
one’s native country to live elsewhere)
Many MNEs use expatriates to ensure that foreign operations are linked effectively with the
parent corporations. Generally, expatriates also are used to develop international capabilities
within an organization. Experienced expatriates can provide a pool of talent that can be
tapped as the organization expands its operations more broadly into even more countries.
Japanese-owned firms with operations in the United States have rotated Japanese managers
through U.S. operations in order to expand the knowledge of U.S. business practices in the
Japanese firms.
Several types of expatriates may be differentiated by job assignment, because not all
individuals who decide to work as expatriates are similar in the assignments undertaken.
 Volunteer expatriates: These are persons who want to work abroad for a period of time
because of career or self-development interests. Often, these expatriates volunteer for shorter-term
assignments of less than a year so that they can experience other cultures and travel to desired parts
of the world.
 Traditional expatriates: These are professionals and managers assigned to work in foreign

operations for one to three years. They then rotate back to the parent corporation in the home
country.
 Career development expatriates: These individuals are placed in foreign jobs to develop the
international management capabilities of the firm. They may serve one to three “tours” in different
countries, so that they can develop a broader understanding of international operations.
 Global expatriates: The broadcast category comprises those individuals who move from one
country to another. Often, they prefer to work internationally rather than in the home country.
HOST-COUNTRY NATIONALS
Using host-country nationals is important for several reasons. It is important if the
organization wants to establish clearly that it is making a commitment to the host country and
not just setting up a foreign operation. Host-country nationals often know the culture, politics,
laws, and business customs better than an outsider would. Also, tapping into the informal
“power” network may be important. In one Southeast Asian country, foreign companies have
learned that a firm’s problems are resolved more quickly if a family member of that country’s
president is a consultant to the firm or a member of its management. But U.S. firms must take
care that the individuals used actually perform work for the company; the “salary” must not
be a disguised bribe paid in order to obtain contracts. Otherwise, the firms could be in
violation of the FCPA addressing foreign corrupt practices. Another reason to use host-
country nationals is to provide employment in the country. In many lesser-developed
countries, compensation levels are significantly lower than in the United States, so U.S. firms
can gain cost advantages by using host-country nationals to staff many jobs.
Recruiting the first group of local employees can be a challenge. The initial group helps
create a culture for that organization—for better or worse. Yet, the opportunity for serious
errors is great. For example, many countries have very different employment laws, which
may make it difficult to dismiss an employee. In countries where there is a shortage of
qualified candidates, good potential employees may be lost if not approached correctly. To
accomplish successful hiring of host-country nationals, many firms form partnerships with
local companies
to help with hiring.
THIRD-COUNTRY NATIONALS
Using third-country nationals emphasizes that a truly global approach is being taken. Often,
these individuals are used to handle responsibilities throughout a continent or region. For
instance, a major U.S.- based electronics company has its European headquarters in Brussels,
Belgium.
While most employees on the clerical staff are Belgians, only about 20% of the professionals
and managers are from Belgium. Most of the rest, except for five U.S. expatriates, are from
other Western European countries.
It is unusual to find third-country nationals in a new multinational enterprise (MNE). These

are usually staffed with qualified nationals and expatriates. Thirdcountry nationals are often
first hired when a company has several foreign operations and decides to open another. The
choice is often between transferring another expatriate from headquarters or transferring an
employee from another overseas operation. Third-country nationals are more common in
MNEs with headquarters in North America than in other regions.
TRANSNATIONAL PROJECT TEAMS

There has been a dramatic increase in the number and variety of multicultural or
“transnational” teams. These teams may be temporary or somewhat permanent and are
formed to solve a specific problem or to handle ongoing activities. They often include
headquarters representatives, host-country nationals, and third-country nationals. They are
useful not only as potentially valuable business units but also as development vehicles for
leaders. Eastman Kodak formed a transnational team based in London to launch its photo CD
at the same time in several European countries. The team dealt with complex strategic issues
across geographic and cultural barriers.
International Compensation Decisions

Recently, the dilemma between sector and cultural predictors of compensation policies has
become a public concern, and is extremely important in the background of
internationalization. Even some well-known cultural traditions at working styles of many
countries, examples like the Industry Wide Bargaining of Germany, the Lifetime
Employment of Japan and the Wide-range Social Safety Net of France, now are facing the
threats of being damaged owing to the big pressures from economic globalization. As a
result, multinational employers are facing unprecedented challenges when choosing a job due
to the pressures of economic globalization and market economy.
The growth of global economy plays a major role in general business, especially in the areas
of human resource management. It has been at the agenda of company leaders to chase the
qualification of global mind-sets by which they used to meet the challenges brought by the
trend of globalization of economy and create more opportunities.
Compensation in international human resource management is one of the aspects for them to
come up with to form the global mind-sets, which is more than complex. When it comes to
use some incentives and rewards to motivate employers from different countries, so-called
multinational employers, the multinational cultures are extremely important to be taken into
consideration. In all, the global mind-set talked earlier can be attained by the proper adoption
of compensation and reward systems. Otherwise, the systems will come to hinder the
development of global mind-set if improper.
Factors Affecting International Compensation Strategy
The understanding of the economic, political and social conditions of the business where they
are is vital to make sound compensation strategy in the competing markets.
Though compensation and reward system is used to motivate employees, but it isn’t just used
to attract and hold talents. It serves as a comparative advantage for companies if used
properly. Thus, the establishment of international compensation and reward system has been
at the top agenda of multinational giants. It becomes a new boom that many multinational
giants try to establish compensation and reward system in a perspective of global mind-sets
rather than local. Global knowledge and information are collected to overcome the limits of
local experience and the result is that the integration of global mind-sets in the system
contributes to the competitive advantage of those brilliant companies.
The main factors affecting international compensation strategy are; (1) social contract (2)
culture (3) trade union (4) ownership and capital markets, and (5) managers’ autonomy.
1. Social Contract
Considered as part of the social contract, the employment relationship is not just an
interaction between an employee and an employer, and it also includes the government, all
managers and all employees. The relationships and expectations of these groups form the
social contract. When thinking about how people get salaries around the world, it is apparent
that different people have different ideas, so they think variously of government, employers
and employees. The understanding of employee compensation management requires
understanding of the social contract in that country. How to change employee compensation
systems–for example, to make them serve better to customers, encourage innovative and
quality service, or control costs–requires changing the expectations of groups to the social
contract.
2. Culture
Culture is an abstract but collective concept, which is not defined as a certain object but
covers more than one object. It is a collection of Material wealth and Spiritual wealth
including religious, customs, education, regulations, laws, economy and even science.
Culture also plays its part in the international compensation system.
People with different cultural backgrounds will view compensation system differently under
the influence of culture. So does the management of the system. Culture is a thing deeply
rooted in the blood of people. People in the same nation tends hold the same or similar mental
programming way to process ideas and information. In other countries, the way may differ.
So is the case of compensation system, the certain culture will inclines to match one culture
of a nation if global mind-sets are not brought in and lead people to manage systems in a
certain way. A simple and direct way to confirm it is to see the different meanings
compensation in different countries.
Culture which forms a system of knowledge, information and beliefs will affect attitudes and
behaviors associated with the work. Culture affects the variables of the established
compensation system. Though equity customs are shared among the employees from many
countries, America and Japan for example, the force of the customs really works differently
in different countries. In all, having the awareness of focusing the influence of culture values
on employees is extremely important for corporate leaders. When dealing with compensation
system, the controlling for context of culture should be paid attention.
3. Trade Unions
Europe keeps highly solidaric and Asia is less heavily unionized. In some countries, team
agreement sets how much the workers can earn even though the workers may not be union
members. In France for example a majority of workers are paid by collective agreements, but
only a few are union members. Social legislation differs among European countries; UK has
the fewest requirements, because it has no minimum salaries, no maximum working hours,
and no common methods for employee participation. Social insurance in Germany and
France are the most generous.
4. Ownership and Capital Markets
Ownership and financing of companies are dramatically different around the world. These
differences are vital to the understanding and managing of international payment. These
patterns of ownership make certain kinds of pay systems have no significance. Employees in
these corporations have various values and expectations. One research indicated that people
who work for local or public corporations like salaries according to one’s performance more;
however, those who work in federal-owned corporations are on the opposite side. So it is
obvious that ownership differences have great effects on types of payment. It is very
misleading to consider that every place is just like home.
5. Managers Autonomy
Managerial autonomy reflects managers set his employees to make decisions by themselves.
There is a relationship between it and the degree of centralization. Government, trade unions
and corporate police are responsible to restrict managerial autonomy. Compensation
decisions made in the domestic corporate offices and exported to subsidies all over the world
may relate to the corporate strategy but discount local economics and social conditions.
To sum up, international compensation is affected by economic, institutional, organizational,

and individual conditions, globalization really represents that these conditions are varying–
thus international pay system are altering too.
Other Factors
Besides the factors affecting compensation strategy talked about above, there exist some
other important factors worth consideration. Global national policy is an example. Global
national policy concerns many parts of the society, like tax. Taxation burden for the citizens
vary across different countries. And so does welfare policy like retirement plan. The two are
only two small parts of the national policy. National policy relates to the relationships among
employers, employees, government and companies, which can exert influence on the
compensation and reward systems as well. National policy of different countries will vary, so
it will influence the international compensation and reward system. Some examples can be
listed to support it. In German and Japan and in America and England, taxation and some
regulation policies will show differently in the use of stock options. And the taxation will in
turn decide the variable payment of a person. Different tax rates will decide different variable
pay schemes. Besides, bonuses and allowances win popularity among employees in Korea or
Japan. The increase of bonuses and allowances are not directly decided by the performance at
work. However, this is not the case in other places. As we all know, only the base pay rather
than bonuses and allowances can be the base point to be calculated in some welfare schemes
like national health insurance rates. And in America, the income tax doesn’t mean too much
to benefit schemes. In this way, the taxation can function more effective to create
employment.
Besides, the complying with national policies is also a problem. When the government takes
some initiatives, the corporate leaders is not easy to deal with even they are given discretion.
They can’t just follow what others do. In many cases, companies can still have the clear mind
to make decision about whether to follow the pervasiveness or to persist in the traditions.
This just depends on the real condition of the company. For example, America once put
forward some creative and innovative compensation schemes like phantom, ESOPs. The fact
is that some companies adopted the initiatives and benefited a lot. And some didn’t, they just
picked out what was proper for their companies. So whether to observe the national policies
is a big choice worth consideration.
Finally, there are social contracts in terms of the national policies. Social contracts are related
to fairness and justice. The other concept is psychological contract. It means the company can
benefit from benefiting employees. That is to say, though the psychological contract is
invisible, the company can use to motivate. It concerns the employee participation and the
emotions of employees. Companies can benefit development by satisfying the inner needs of
employees to increase employee participation. The national policies put forward by
government can show the social contract customs. Some public policies are issued to put
limits to the employment relationship like minimum wage and family leave statutes.
However, those national policies will influence the psychological contract by influencing the
expectations related to the psychological contract.
Basic Techniques of Risk Management in

International Business
Comprehensive business risk management is a multi-stage process that will vary
depending on the needs and requirements of each individual enterprise.
The first stage is to determine exactly what the risks facing your business are, in order to
assess the likely and potential impact of each incident occurring.
Once this process has been completed, you can get down to evaluating the technique which
will best suit your business and maximize your risk management moving forward.
Here are the four key potential risk treatments to consider.
Avoidance
Obviously one of the easiest ways to mitigate risk is to put a stop to any activities that might
put your business in jeopardy.
However it’s important to remember that with nothing ventured comes nothing gained, and
therefore this is often not a realistic option for many businesses.
Reduction
The second risk management technique is reduction – essentially, taking the steps required to
minimize the potential that an incident will occur.
Risk reduction strategies need to be weighed up in terms of their potential return on

investment. If the cost of risk reduction outweighs the potential cost of an incident occurring,
you will need to decide whether it is really worthwhile.
Transfer
One of the best methods of risk management is transferring that risk to another party. An
example of this would be purchasing comprehensive business insurance.
Risk transfer is a realistic approach to risk management as it accepts that sometimes incidents
do occur, yet ensures that your business will be prepared to cope with the impact of that
eventuality.
Acceptance
finally, risk acceptance involves ‘taking it on the chin’, so to speak, and weathering the
impact of an event. This option is often chosen by those who consider the cost of risk transfer
or reduction to be excessive or unnecessary.
Risk acceptance is a dangerous strategy as your business runs the risk of underestimating
potential losses, and therefore will be particularly vulnerable in the event that an incident
occurs.
Which one is right for my business?
It is important to take an objective and even-handed approach to business risk management,

and not to underestimate the vulnerability of your enterprise.

Unit-1 Types of International Business: Exporting

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Unit-1

Types of International Business

Licensing is another way to expand one’s operations internationally. In case of international

Closely related to licensing is franchising. Franchising is an option in which a parent

4. Foreign Direct Investment (FDI):

An international business is any firm that engages in international trade or investment.

International Organizational Design &

Exports activities are controlled by a company’s home-based office through a designated

International Organizational Structures: Type # 2

International division structure:

Although an international structure provides much greater autonomy in decision-making, it is

International Organizational Structures: Type # 3

Global Organizational Structures:

While conceptualizing organizational structure, the internationalizing firm often has to

It leads to re-organization and amalgamation of hitherto fragmented organizational interests

Global functional division structure:

The major advantages of global functional division structure include:

1. Greater emphasis on functional expertise

iii. High level of centralized control

The disadvantages of such divisional structure include:

1. Difficulty in cross-functional coordination

Global product structure:

The global product structure is effective in managing diversified product lines.

Such a structure is extremely effective in carrying out product modifications so as to meet

Global geographic structure:

Global matrix structure:

Transnational network structure:

Such a globally integrated structure represents the ultimate form of an earth-spanning

The conceptual framework of a trans-national network structure primarily consists of

International Organizational Structures: Type # 4

Evolution of Global Organizational Structures:

Organizational structures often exhibit evolutionary patterns, as shown in Fig. 17.9,

Subsequently, a large number of companies graduate to a matrix or trans-national network

Risk in International Business

Generally risks which a firm has been categorized as:

1. Foreign exchange rate risk

Let us now discuss about all these risks in detail.

1. Foreign Exchange Rate Risk:

The types of foreign exchange risks and exposure are:

2. Interest Rate Risk:

Interest Rate Exposure and Risk:

Types of Political Risk:

1. How stable is that government?

A currency risk arises due to imbalance in the balance-of-payments of a country. In last

Motives for International Business

If your business is succeeding in your domestic market, expanding globally will likely

2. SHORT AND LONG TERM SECURITY

3. INCREASE INNOVATION AND MANAGEMENT LEARNING

Barriers to International Business

Foreign Exchange Market: Nature,

The third layer of a pyramid constitutes the foreign exchange brokers. These brokers

Functions of Foreign Exchange Market

2. Credit Function: FOREX provides a short-term credit to the importers so as to facilitate the

Types of Foreign Exchange Transactions

The Foreign Exchange Transactions refers to the sale and purchase of foreign currencies.

4. Swap Transactions: The Swap Transactions involve a simultaneous borrowing and

Acquisition of an Overseas Company

Piggybacking is a fairly unique method of entering the international marketplace. If a

Greenfield investments require the greatest involvement in international business. A

Liberalization, Privatization, Globalization (LPG Model)

Objectives of Liberalization Policy

 To increase competition amongst domestic industries.

 Denationalization or Strategic Sale: When 100% government ownership of productive