INTERNATIONAL BUSINESS

What is Greenfield operation?

A green-field (also "greenfield") investment is a type of foreign direct investment (FDI) in which
a parent company creates a subsidiary in a different country, building its operations from the
ground up. In addition to the construction of new production facilities, these projects can also
include the building of new distribution hubs, offices, and living quarters.

What is porter’s Diamond?

The diamond model, also known as the Porter Diamond or the Porter Diamond Theory of
National Advantage, describes a nation's competitive advantage in the international market. In
this model, four attributes are taken into consideration: factor conditions, demand conditions,
related and supporting industries, and firm strategy, structure, and rivalry. According to Michael
Porter, the model's creator, "These determinants create the national environment in which
companies are born and learn how to compete.

What is Extra-Territoriality?
A) Term normally used to describe the exercise by a sovereign state of jurisdiction over
foreigners in respect of acts done outside the borders of that state. 
B) Extraterritoriality is the state of being exempted from the jurisdiction of local law, usually
as the result of diplomatic negotiations.

Define core competency.

What is meant by a core competitive advantage?
A core competency is a concept in management theory introduced by C. K. Prahalad and Gary
Hamel. It can be defined as "a harmonized combination of multiple resources and skills that
distinguish a firm in the marketplace" and therefore are the foundation of companies'
competitiveness.
Core competencies fulfill three criteria:

1. Provides potential access to a wide variety of markets.

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 2. Should make a significant contribution to the perceived customer benefits of the end
product.
3. Difficult to imitate by competitors.
For example, a company's core competencies may include precision mechanics, fine optics, and
micro-electronics. These help it build cameras, but may also be useful in making other products
that require these competencies.

Give the meaning of Piggy Back companies.

According to Business Directory, piggyback marketing is defined as:
“A low cost market entry strategy in which two or more firms represent one another’s
complementary (but non-competing) products in their respective markets.”

What is International Fisher effect?

The international Fisher effect (sometimes referred to as Fisher's open hypothesis) is a
hypothesis in international finance that suggests differences in nominal interest rates reflect
expected changes in the spot exchange rate between countries. The hypothesis specifically states
that a spot exchange rate is expected to change equally in the opposite direction of the interest
rate differential; thus, the currency of the country with the higher nominal interest rate is
expected to depreciate against the currency of the country with the lower nominal interest rate, as
higher nominal interest rates reflect an expectation of inflation.

Mention the important objectives of WTO.

The WTO has six key objectives:

(1) To set and enforce rules for international trade,

(2) To provide a forum for negotiating and monitoring further trade liberalization,

(3) To resolve trade disputes,

(4) To increase the transparency of decision-making processes,

(5) To cooperate with other major international economic institutions involved in global
economic management, and

(6) To help developing countries benefit fully from the global trading system.

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What is LOC?
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can
take money out as needed until the limit is reached, and as money is repaid, it can be borrowed
again in the case of an open line of credit.

A LOC is an arrangement between a financial institution—usually a bank—and a client that

establishes the maximum loan amount the customer can borrow. The borrower can access funds
from the line of credit at any time as long as they do not exceed the maximum amount (or credit
limit) set in the agreement and meet any other requirements such as making timely minimum
payments. It may be offered as a facility.

When does a domestic business become international?

What do you mean by international business?
International business refers to the trade of goods, services, technology, capital and/or
knowledge across national borders and at a global or transnational scale.

It involves cross-border transactions of goods and services between two or more countries.

Transactions of economic resources include capital, skills, and people for the purpose of the
international production of physical goods and services such as finance, banking, insurance, and
construction. International business is also known as globalization.

To conduct business overseas, multinational companies need to bridge separate

national markets into one global marketplace. There are two macro-scale factors that underline
the trend of greater globalization. The first consists of eliminating barriers to make cross-border
trade easier (e.g. free flow of goods and services, and capital, referred to as "free trade"). The
second is technological change, particularly developments in communication, information
processing, and transportation technologies.

What is meant by international business environment?

International Business Environment is multidimensional including the political risks, cultural
differences, exchange risks, legal & taxation issues. Therefore (IBE) International Business
Environment comprises the political, economic, regulatory, tax, social & cultural, legal, &
technological environments.

An international business environment is the surrounding in which international companies run

their businesses. It brings along it with many differences.
Thus, it is mandatory for the people at the managerial level to work on the factors that make an
International Business Environment.

What is strategic management?

Strategic management is the management of an organization’s resources to achieve its goals and
objectives. Strategic management involves setting objectives, analyzing the competitive
environment, analyzing the internal organization, evaluating strategies, and ensuring that
management rolls out the strategies across the organization.

Define international accounting.

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International accounting is a specialty within the entire discipline that is focused on using
specific accounting standards that are as relevant in the US as they are when you are balancing
the books of a company overseas.

Define international human resource management.

International Human Resource Management (IHRM) can be defined as a set of activities
targeting human resource management at the international level. It strives to meet organizational
objectives and achieve competitive advantage over competitors at national and international
level.
IHRM comprises of typical HRM functions such as recruitment, selection, training and
development, performance appraisal and dismissal done at the international level and additional
exercises such as global skills management, expatriate management and so on.
In short, IHRM is concerned with handling the human resources at Multinational
Companies (MNCs) and it includes managing three types of employees −
 Home country employees − Employees residing in the home country of the company
where the corporate head quarter is situated, for example, an Indian working in India for
some company whose headquarters are in India itself.
 Host country employees − Employees residing in the nation in which the subsidiary is
located, for example, an Indian working as an NRI in some foreign country.
 Third country employees − These are the employees who are not from home country or
host country but are employed at the additional or corporate headquarters.
For example, an Indian MNC, which has its corporate office in America, may employ a French
person as the CEO to the subsidiary. The Frenchman employed is a third country employee.

What is international marketing?

The International Marketing is the application of marketing principles to satisfy the varied
needs and wants of different people residing across the national borders.

Simply, the International Marketing is to undertake the marketing activities in more than one
nation. It is often called as Global Marketing, i.e. designing the marketing mix (viz. Product,
price, place, promotion) worldwide and customizing it according to the preferences of different
nation people.

What do you mean by a strategic alliance?

A strategic alliance (also see strategic partnership) is an agreement between two or more
parties to pursue a set of agreed upon objectives needed while remaining independent
organizations. A strategic alliance will usually fall short of a legal partnership entity, agency, or
corporate affiliate relationship. Typically, two companies form a strategic alliance when each
possesses one or more business assets or have expertise that will help the other by enhancing
their businesses. Strategic alliances can develop in outsourcing relationships where the parties
desire to achieve long-term win-win benefits and innovation based on mutually desired
outcomes.

This form of cooperation lies between mergers and acquisitions and organic growth. Strategic
alliances occur when two or more organizations join together to pursue mutual benefits.

Partners may provide the strategic alliance with resources such as products, distribution
channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or
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intellectual property. The alliance is cooperation or collaboration which aims for
a synergy where each partner hopes that the benefits from the alliance will be greater than those
from individual efforts. The alliance often involves technology transfer (access to knowledge and
expertise), economic specialization, shared expenses and shared risk.

What is an MNC?
What is a transnational company?
A multinational corporation (MNC) is a corporate organization that owns or controls
production of goods or services in at least one country other than its home country. Black's Law
Dictionary suggests that a company or group should be considered a multinational corporation if
it derives 25% or more of its revenue from out-of-home-country operations. However, a firm that
owns and controls 51% of a foreign subsidiary also controls production of goods or services in at
least one country other than its home country and therefore would also meet the criterion, even if
that foreign affiliate generates only a few percent of its revenue. A multinational corporation can
also be referred to as a multinational enterprise (MNE), a transnational enterprise (TNE),
a transnational corporation (TNC), an international corporation, or a stateless corporation.
There are subtle but real differences between these terms.

Define global trade.

Global trade, also known as international trade, is simply the import and export of goods and
services across international boundaries.
Goods and services that enter into a country for sale are called imports. Goods and services that
leave a country for sale in another country are called exports. For example, a country may import
wheat because it doesn't have much arable land, but export oil because it has oil in abundance.

What is cross cultural management?

What is cross-cultural management?
Cross-cultural management is the study of management in a cross-cultural context. It includes
the study of the influence of societal culture on managers and management practice as well as the
study of the cultural orientations of individual managers and organization members. At the
individual level, individuals' values as well as their understanding of and reactions to their
cultural context and experience figure prominently. Contributing disciplines include cross-
cultural psychology, sociology, and anthropology as well as the broader disciplines of
management and organizational behavior and the related area of international human resource
management. General topic areas include the cultural context in which management must take
place, the various roles of the international manager, the influence of culture on organizational
structure and processes, and management across nations and cultures.

What do you mean by international strategic management?

International Strategic Management is a planning process of developing international strategy in
the direction of achieving strategic-fit between the organization’s competence & resources and the
global environment under which it tends to operate. It is an ongoing process that adhere an
organization to compete in an international scenario. International Strategic Management (ISM) is
an ongoing management planning process aimed at developing strategies to allow an organization
to expand abroad and compete internationally. Strategic planning is used in the process of
developing a particular international strategy.

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Enlist any two issues in organization design.
1. Understanding what the core competences of the business are, and designing an
organization that enhances their effectiveness while mitigating their risks.
2. Understanding how the organizational design interacts with the environment:
recruiting, retaining, exiting; product development processes and markets; policy; and
investor relations.
3. The practical implications of change itself, and how to create movement into a new
organizational design that enhances the health of the organization. In other words, part
of organizational design is creating change processes that, themselves, enhance the
effectiveness of the organization.

What is international financial management?

International financial management, also known as international finance, is the management
of finance in an international business environment; that is, trading and making money through
the exchange of foreign currency. The international financial activities help the organizations to
connect with international dealings with overseas business partners- customers, suppliers, lenders
etc. It is also used by government organization and non-profit institutions.

When an importer buys goods from a foreign country, or an exporter sells goods, no movement
of currencies from one country to another need be generated. Instead, transactions are settled
through the banking system, which involves offsetting one debt against another.

What do you mean by financing foreign trade?

An importer of goods can make payments in variety of ways through the banking system. But
whatever method is used, the net effect will be to reduce the foreign currency balances of a
domestic bank or to increase the rupee balances of an overseas (foreign) bank.

List out any four benefits of international strategic alliances.

1. It allows all parties to reach their goals faster.
2. It expands your customer base.
3. It gives you access to greater levels of innovation.
4. It gives you access to positive brand awareness.
5. It can improve the quality of individual products.
6. It may involve financial assistance.
7. It allows businesses to avoid import/export controls.
8. It is not a merger or an acquisition.
9. It expands networking opportunities.

What is meant by balance of payments?

Define balance of payment.

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What is Franchising?
Franchising is a pooling of resources and capabilities to accomplish a strategic marketing,
distribution and sales goal for a company. It typically involves a franchisor who grants to an
individual or company (the franchisee), the right to run a business selling a product or service
under the franchisor's successful business model and identified by the franchisor's trademark or
brand.

The franchisor charges an initial upfront fee to the franchisee, payable upon the signing of the
franchise agreement. Other fees such as marketing, advertising, or royalties may be applicable
and largely based on how the contract is negotiated and set up.

Advertising, training and other support services are made available by the franchisor.

What is acculturation?
Acculturation is a process of social, psychological, and cultural change that stems from the
balancing of two cultures while adapting to the prevailing culture of the society. Acculturation is
a process in which an individual adopts, acquires and adjusts to a new cultural environment.
Individuals of a differing culture try to incorporate themselves into the new more prevalent
culture by participating in aspects of the more prevalent culture, such as their traditions, but still
hold onto their original cultural values and traditions. The effects of acculturation can be seen at
multiple levels in both the devotee of the prevailing culture and those who are assimilating into
the culture.

What is technology acquisition?

Acquisition of technology and knowledge involves the purchase of external knowledge and
technology without active co operation with the source. This external knowledge can be
embodied in machinery or equipment that incorporates this knowledge. It can also include the
hiring of employees who possess the new knowledge or the use of contract research and
consulting services. Disembodied technology or knowledge also includes other know-how,
patents, licenses, trademarks and software.

What is the product life cycle theory?

The international product life cycle theory puts forth a different explanation for the fundamental
motivations for trade between and among nations. It relies primarily on the traditional marketing
theory regarding the development progress, and life span of products in markets. This theory
looks at the potential export possibilities of a product in four discrete stages in its life cycle.
Stage 0 – Local Innovation
Stage 1 – Overseas Innovation
Stage 2 – Maturity
Stage 3 – Worldwide Imitation
Stage 4 – Reversal

What is dumping?
Dumping is an international price discrimination in which an exporter firm sells a portion of its
output in a foreign market at a very low price and the remaining output at a high price in the
home market Haberler defines dumping as: “The sale of goods abroad at a price which is lower
than the selling price of the same goods at the same time and in the same circumstances at home,
taking account of differences in transport costs” Viner’s definition is simple.

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What is exchange control?
Foreign exchange control is the procedure by which a government intervenes in the foreign
exchange market, banning or restricting sales and purchases of local currencies by non-residents
as well as sales and purchases of foreign currencies by residents.

In a context of free trade, the value of currencies fluctuates continuously according to dynamics
of demand and supply. In order to limit the volatility of their exchange rate and provide greater
economic stability to their countries, monetary authorities may implement foreign exchange
controls.

In the case of weaker economies, the main objective of foreign exchange controls is to avoid
speculation with their currencies. Such speculation could otherwise cause significant variations
in the exchange rate, potentially triggering capital flows with devastating economic
consequences for the country.

What is technology transfer?

Technology transfer covers various activities, including the internal transfer of technology from
the R&D or engineering department to the manufacturing department of a firm based in a
country. It also includes the same transfer of technology from a laboratory or operations of
MNCs in one country to its laboratory or operations in another country. Finally, it includes the
transfer of technology from a research consortium supported by many firms to one of the
members. International Technology Transfer, in which the transfer is across national boundaries.
Generally, such transfers take place between developed and developing countries.

Expand:
FDI
A foreign direct investment (FDI) is an investment in the form of a controlling ownership in
a business in one country by an entity based in another country.[9] It is thus distinguished from
a foreign portfolio investment by a notion of direct control.

The origin of the investment does not impact the definition, as an FDI: the investment may be
made either "inorganically" by buying a company in the target country or "organically" by
expanding the operations of an existing business in that country.

FII.
Foreign institutional investors (FIIs) are those institutional investors which invest in the assets
belonging to a different country other than that where these organizations are based

Give the meaning of Balance of Trade

The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is
the difference between the monetary value of a nation's exports and imports over a certain time
period. Sometimes a distinction is made between a balance of trade for goods versus one for
services. The balance of trade measures a flow of exports and imports over a given period of
time. The notion of the balance of trade does not mean that exports and imports are "in balance"
with each other.
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If a country exports a greater value than it imports, it has a trade surplus or positive trade
balance, and conversely, if a country imports a greater value than it exports, it has a trade
deficit or negative trade balance.

What is bilateral trade?

Bilateral trade or clearing trade is trade exclusively between two states, particularly, barter
trade based on bilateral deals between governments, and without using hard currency for
payment. Bilateral trade agreements often aim to keep trade deficits at minimum by keeping
a clearing account where deficit would accumulate.

What is culture shock?

Culture shock is the feeling of uncertainty, confusion, or anxiety that people experience when
visiting, doing business in, or living in a society that is different from their own. Social norms
can vary significantly across countries and regions. Culture shock can arise from an individual's
unfamiliarity with local customs, language, and acceptable behavior.
Culture shock can be daunting for those who do business abroad. Many international companies
provide training to help acclimatize employees and reduce cultural gaffes, which can affect
professional transactions, operations, and relationships.

8 MARKS

Explain the reasons why companies go overseas market.

Briefly explain the factors influencing on international business
Briefly explain the drivers of cross-border business.

In general, companies go international because they want to grow or expand operations. The
benefits of entering international markets include generating more revenue, competing for new
sales, investment opportunities, diversifying, reducing costs and recruiting new talent.

Going international is a strategy that is influenced by a variety of factors and is typically

implemented over time. Sometimes, a government will incentivize companies to enter their
country's market in an effort to build their economies.

 Improving Profit Margins

Improving profit margins is one of the most common reasons for entering international
markets. When growth strategies are used up on the national level, the next path is often
to seek out international growth. Distributing your products in additional countries
increases your customer base. As you offer compelling solutions and build loyalty
across international markets, revenue strengthens and escalates as well.

There are also significant cost savings that can be associated with going international. A
company may want to reduce costs by relocating closer to a supplier or benefit from

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 lower production costs by expanding operations to another country. Doing business
internationally may open up new investment opportunities. Further, a lower cost of
acquiring customers may be another compelling reason to expand internationally.

 Competing for New Sales

Closely connected to the goal of improved profit margins is the desire to increase sales.
Even if company operators generally are satisfied with revenue levels, international
expansion can further improve overall revenues. The race to expand internationally is
often about gaining a presence in foreign markets. Being the first to arrive in a new
market can provide significant advantages.

If you don't enter a ripe market with your solution, competitors do. Not only do you
miss the revenue source, but you lose out on other valuable assets that you could use to
promote your company at home and abroad. In some cases, a strong domestic company
gets overrun by a lesser player that succeeds globally and grows big through global
synergy.

Bear in mind that in the modern economy, many companies are already global thanks to
technology. Companies develop specific international strategies in order to gain
competitive advantages in the new global economy.

 Diversifying the Business

The international expansion allows a company to diversify its business in a couple of

key ways. First, you spread the risk of slowing demand across multiple countries. If one
market never gains or loses interest in your offerings, you can pick up the slack with
success in other countries. In addition, you can connect with suppliers in international
markets and take advantage of raw materials and resources unavailable in domestic
markets.

Also, companies often enhance innovation and develop additional variations of their
solutions when they operate in multiple countries. Product diversification similarly
insulates you from the risks of declining interest in a particular item.

Examples of Diversification
For example, Xiaomi, one of the most popular smartphone manufacturers in China,
seeks to expand in India over the next few years. In addition to mobile devices, the
company is planning to sell electric folding bikes, self-balancing scooters, fitness bands
and other products. This will allow it to reach a wider audience and diversify its
operations.

Diversifying your brand's offerings and its customer base are two popular reasons for
international business expansion. Sometimes, a product isn't a  bad product, but a bad fit
for the market where it was originally launched. Launching that product again in a
different market, toward people with a different culture and a different budget can mean
an entirely different, much more positive reception for that product.

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 Recruiting New Talent

Operating in international markets also gives businesses access to a larger and more
diversified talent pool. Employees who speak different languages and understand
different cultures enhance connections with a broader customer base. Having an
international brand that is well reputed will invite top talent to the company. Businesses
can also structure global work teams in a way that allows for synergy in building a
global brand.

 Some other factors are:

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Analyse the comparative cost theory as a base for International Business
Critical Appraisal of Comparative Cost Theory:
Theory of comparative cost which is the important doctrine of classical economics is still valid
and widely acclaimed as the correct explanation of international trade.

Most of the criticisms that have been leveled against this doctrine relate to the Ricardian version
of comparative cost theory based on labour-theory of value. Haberler and others broke away
from this labour-cost version and reformulated the comparative cost theory in terms of
opportunity costs which takes into consideration all factors.

The basic contention of the theory that a country will specialise in the production of a
commodity and export it for which it has a lower comparative cost and import a commodity
which can be produced at a lower comparative cost by others, is based on a sound logic. The
theory correctly explains the gain from trade accruing to the participating countries if they
specialise according to their comparative costs.
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These merits of the theory have led Professor Samuelson to remark, “If theories, like girls, could
win beauty contents, comparative advantage would certainly rate high in that it is an elegantly
logical structure.” He further writes, “the theory of comparative advantage has in it a most
important glimpse of truth…. A nation that neglects comparative advantage may have to pay a
heavy price in terms of living standards and potential rates of growth.”

Despite the sound logical structure and vivid explanation of gains from trade, the comparative
cost theory, especially the Ricardian version based on labour theory of value has been criticized.

The following criticisms have been leveled against this theory:

1. In the first place, Ricardian version of comparative cost theory has been attacked on the
ground that being based on labour theory of value, it considers only labour cost to measure the
comparative costs of various goods.

It has been pointed out that labour is not the only factor needed for the production of
commodities, other factors such as capital, raw materials, land also contribute to production.
Therefore, it is the total money costs incurred on labour as well as other factors that should be
considered for assessing comparative costs of various commodities.

Taussig tried to defend Ricardo by pointing out that even if labour theory of value was defective
and even if other factors made important contributions to the production of goods, comparative
costs could still be based on labour cost alone, if it is assumed that the trading countries are at the
same stage of technological development.

This is because, he argued that given the same technological development, the proportions in
which other factors could be combined with labour would be the same. In view of this he
asserted that other factors could be validly ignored and for purpose of comparative costs relative
efficiency of labour alone of different countries could be considered.

However, Taussig’s defense of Ricardian version of comparative cost theory is poor and invalid.
The various trading partners are not at the same stage of technological development and
therefore the factor proportions used for the production of commodities in different countries are
vastly different. Hence, it is quite unrealistic and improper to consider relative efficiency of
labour alone.

However, as stated earlier, Haberler rescued the comparative cost theory from labour theory of
value and reformulated it in terms of opportunity cost which covers all factors.

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2. The comparative cost theory explained that different countries would specialise in the pro-
duction of goods on the basis of comparative costs and that they would gain from trade if they
export those goods in which they have comparative advantage and import those goods from
abroad in respect of which other countries enjoyed comparative advantage.

But it could not provide a satisfactory explanation of why comparative costs of producing
commodities in various countries differ. Ricardo thought comparative costs of producing
commodities in various countries differed due to the differences in efficiency of labour. But this
begs the question why labour efficiency is different in various countries.

Factors for Variation in Comparative Costs of Different Commodities:

The credit of providing an adequate and valid answer to this question goes to Heckscher
and Ohlin who explained that comparative costs of different commodities in the two
countries vary because of the following factors:
1. The various countries differ in respect of factor endowments suited for the production of
different commodities.

2. The different commodities require different factor proportions for their production.

Thus Heckscher and Ohlin supplemented the comparative costs theory by providing valid
reasons for differences in comparative costs in various countries.

3. Against the Ricardian doctrine of comparative cost it has also been said that it is based on the
constant cost of production in the two trading countries. This assumption of constant costs leads
them to conclude that different countries would completely specialise in the production of a
single product on the basis of their comparative costs.

Thus, of the two commodities cloth and wheat, if India has a comparative advantage in the
production of cloth, it will produce all cloth and no wheat. On the other hand, if U.S.A. has a
comparative advantage in the production of wheat, it will produce all wheat and no cloth. But the
pattern of international trade shows that this is far from reality.

As a matter of fact, a stage comes when it is no longer advantageous for India to import wheat
from U.S.A. (because of increasing costs in producing wheat). Further, in the real world it is
found that countries do not have complete specialisation. Indeed, a country produces a certain
commodity and also imports a part of it.

However, it may be noted that even if the phenomenon of increasing costs is taken into account,
foreign trade can still be explained in terms of differences in comparative costs. Only in the
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situation of increasing costs, countries would not have complete specialisation. Opportunity cost
version of comparative costs theory does consider the case of increasing costs.

4. The Ricardian theory of comparative costs, has also been criticized for its not going into the
question what determines the terms of trade between the countries. Voicing this criticism Else-
worth remarks, “the comparative costs theorem, the way in which Ricardo set up his illustration,
tended to obscure the problem of the terms of trade.”

Ricardian theory of comparative costs explains what commodity a country will export and what
commodity it will import but it does not investigate at what rate it will exchange its exports for
imports (i.e. terms of trade). However, the fixation of terms of trade is a vital issue, for on it a
country’s share of gains from trade depends.

It is worthwhile to note that J.S. Mill, another noted classical economist, removed this shortcom-
ing of the comparative cost theory by supplementing it with Reciprocal Demand Theory which
explains the determination of terms of trade.

5. Ohlin attacked the comparative cost theory for its assumption that factors of production were
perfectly mobile within a country but immobile between countries. He pointed out that
immobility of factors between countries could not serve as a basis for international trade, since
immobility of factors is not peculiar the relations between countries but is also present between
different regions of the same country.

He further expressed the view that comparative cost doctrine applied not only to international
trade but also to inter-regional trade. Indeed, according to him, international trade is only a
special case of inter-regional trade. He further criticized the classical theory of comparative cost
for its emphasis on supply conditions as an explanation of international trade and its neglect of
the importance of demand conditions in determining the pattern of international trade.

He writes, “The comparative cost reasoning alone explains very little about international trade. It
is indeed nothing more than an abbreviated account of the condition of supply”. According to
him, prices of different goods and their quantities produced and consumed depend on both
supply and demand conditions. He therefore, propounded a new theory of international trade
based on general equilibrium theory of value.

It may be mentioned here that Ohlin’s criticisms do not invalidate comparative cost theory.
Indeed, he only refined and modified it. Even in his theory, popularly known as factor-

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proportions theory of international trade, comparative costs serve as a basis of international
trade.

His contribution lies in his inquiring into the question why comparative costs of commodities in
different countries differ and offering a satisfactory explanation of it in terms of different factor-
proportions required for the production of various goods.

He further improved the comparative cost theory by incorporating in his analysis the demand
aspect as be based his international trade theory on the general equilibrium theory of value.

6. It is alleged that comparative cost theory is static in character as it is based on fixed supplies of
factors of production, the given technology, and the fixed and identical production functions in
the trading countries. Its conclusions cannot therefore be applied in the context of a dynamic
economy, especially in the present-day developing countries where resources are being
developed, technology is being improved, production functions are undergoing a change.

Indeed, structural changes are being brought about in these economies. In view of the changes in
factor supplies and technology in developing countries, comparative costs of producing different
commodities are also changing. In this dynamic context, a developing economy may have a
comparative disadvantage in producing a certain commodity but may attain a comparative
advantage after a certain stage of its development.

Note that this criticism about the static character of the comparative cost theory does not invali-
date it. It only pinpoints the need for reformulating and refining it so as to make it applicable to
the dynamic conditions of the developing countries.

Explain the influence of behavioural factors on International Business.

Attitudes and values affect all dimensions of business activities, from what products to sell to
how to organize, finance, manage and control operations.
A.  Social Stratification Systems
People fall into social stratification systems according to group memberships that in turn
determine a person’s degree of access to economic resources, prestige, social relations and
power. Ascribed group memberships are defined at birth and are based on characteristics such as
gender, family, age, caste and ethnic, racial, or national origin. Acquired group memberships are
based on one’s choice of affiliations, such as political party, religion and professional
organizations. Social stratification affects both business strategy and operational practices.
1. Role of Competence. Some nations base a person’s eligibility for jobs and promotions
primarily on competence, but in others, competence is of secondary importance. In more
egalitarian societies, group membership is less important, but in more closed societies, group
membership may dictate one’s access to education, employment, etc.
2. Gender-based Groups. There are strong country-specific differences in attitudes
toward males and females, as well as vast differences in the types of jobs regarded as male or
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female. Nonetheless, barriers to employment based on gender are easing in many parts of the
world.
3. Age-based Groups. Many cultures assume age and wisdom are correlated; thus, they
usually have a seniority-based system of advancement. In others, there is an emphasis on youth,
particularly in the realm of marketing. All in all, age represents a complex, dynamic issue.
4.  Family-based Groups. In societies where there is low trust outside the family
(e.g., China and southern Italy), small family-run companies are generally more successful than
large firms. However, this may impede the economic development of the country if large-scale
operations are necessary to compete globally.
5.  Occupation. In every society certain occupations are perceived as having greater
economic and social prestige than others. Although some perceptions are universal, there are
significant national and cultural attitudes about the desirability of specific occupations as well as
the desire to work as an entrepreneur rather than as an organizational employee.
B. Motivation
Employees who are motivated to work long and hard are generally more productive than those
who are not. On an aggregate basis, this will have a positive effect on economic development
and national competitiveness.
1. Materialism and Leisure. People are motivated to work for various reasons,
including the desire for achievement. In some societies, people desire less leisure time than
others. In 1904 sociologist Max Weber claimed that predominantly Protestant Western
economies were the most economically developed because of the emphasis on hard work and
investment. Weber identified this view of work as a path to salvation as the Protestant ethic. In
rural India, however, where minimal material achievement is a desirable end, added productivity
will likely be taken in the form of leisure, rather than income.
2. Expectation of Success and Reward. Although the same tasks performed in different
countries will have different probabilities of success as well as different rewards for success and
different consequences for failure, people will usually work harder at any task when the reward
for success is greater than the consequence of failure. The greatest enthusiasm for work exists
when high uncertainty of success is combined with the likelihood of a very positive reward for
success and little or none for failure.
3. Masculinity Index. Hofstede’s study of employees from 50 countries defined a
high masculinity index as describing someone who holds the belief that it is better to live to
work than to work to live. However, such attitudes, as well as a preference for promotion and
profitability over quality of life and environment, are not shared by all. Those differences of
opinion present major challenges for international managers.
4. Need Hierarchy. Maslow’s hierarchy of needs states that people will try to fulfill
lower-order physiological needs before satisfying (in order) their security, social, esteem and
self-actualization needs. People from different countries attach different degrees of importance to
needs and may even rank some of the higher-order needs differently.
C. Relationship Preferences
In social stratification systems, not everyone within a given reference group is necessarily an
equal. In addition, there may be strong or weak pressures for conformity within one’s group.
Both of these differences influence management style and marketing behavior.
1.  Power Distance. Power distance describes the relationship between superiors and
subordinates. When power distance is high, the management style is generally distant, i.e.,
autocratic or paternalistic; when it is low, managers tend to interact with and consult

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subordinates as part of the decision-making process. [For example, Malaysians typically exhibit
high power distance, while Austrians typically exhibit low power distance.]
2.  Individualism vs. Collectivism. Nationalities differ as to whether they prefer an
autocratic or a consultative working relationship, whether they want set rules and how much they
compete or cooperate with fellow workers. Individualism is the trait that indicates a person’s
desire for personal freedom, time and challenge and one’s low dependence on the organization;
self-actualization is a prime motivator. On the other hand, collectivism indicates a person’s
desire for training, collaboration and shared rewards, i.e., one’s high dependence on and
allegiance to the organization. [For example, Americans tend to be individualistic, while the
Japanese tend to be collectivist.]
D. Risk-taking Behavior
Nationalities differ in their attitudes toward risk-taking. Uncertainty avoidance, trust and fatalism
are examined here.
1. Uncertainty Avoidance. Uncertainty avoidance describes one’s acceptance of risk.
When the score is high, people need precise directions and long-term assurances; when the score
is low, people are willing to accept the risk of trying new products or moving to new jobs. [For
example, Greeks tend to exhibit high uncertainty avoidance, while Swedes tend to be low on the
scale.]
2.  Trust. Trust represents one’s belief in the reliability and honesty of another. Where
trust is high, there tends to be a lower cost of doing business. [For example, Norwegians tend to
exhibit a high degree of trust, whereas Brazilians tend to be skeptical.]
3. Fatalism. Fatalism represents the belief that events are predestined. Such a belief may
discourage people from working hard to achieve an outcome or accepting responsibility.
[Muslim societies, for example, tend to be fatalistic.]
E. Information and Task Processing
People from different cultures obtain, perceive, and process information in different ways; thus,
they may also reach different conclusions.
1.  Perception of Cues. People identify things by means of their senses in various ways
with each sense. The particular cues used vary both for physiological and cultural reasons. [For
example, the richer and more precise a language, the better one’s ability to express subtleties.]
2. Obtaining Information. Language represents a culture’s means of communication. In
a low-context culture, people rely on first-hand information that bears directly on a decision or
situation; people say what they mean and mean what they say. In a high-context culture, people
also rely on peripheral information and infer meaning from things communicated indirectly;
relationships are very important. [For example, while Germany is considered to be a low-context
culture, Saudi Arabia is considered to be a high-context culture.]
3.   Information Processing. All cultures categorize, plan and quantify, but the ordering
and classification systems they use often vary. In monochronic cultures (e.g., northern
Europeans) people prefer to work sequentially, but in polychronic cultures (e.g., southern
European) people are more comfortable working on multiple tasks at one time. Likewise, in
some cultures people focus first on the whole and then on the parts; similarly,
in idealistic cultures people will determine principles before they attempt to resolve issues, but
in pragmatic cultures they will focus more on details than principles.

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What are the marketing related issues to be addressed by a firm in the Internationalization
process of its business?
What are the issues involved in international operations management

1. International company structure

If your aim is to be competitive globally, you must have a team in place that’s up for the
challenge. One fundamental consideration is the structure of your organization and the
location of your teams.

For instance, will your company be run from one central headquarters? Or will you
have offices and representatives “on the ground” in key markets abroad? If so, how
will these teams be organized, what autonomy will they have, and how will they
coordinate working across time zones? If not, will you consider hiring local market
experts who understand the culture of your target markets, but will work centrally?

2. Foreign laws and regulations

Along with getting your company structure in place, gaining a comprehensive

understanding of the local laws and regulations governing your target markets is key.
From tax implications through to trading laws, navigating legal requirements is a
central function for any successful international business. Eligibility to trade is a
significant consideration, as are potential tariffs and the legal costs associated with
entering new markets. It’s important to note that employment and labor
requirements also differ by country. 

Beyond abiding by official laws, engaging in international business often requires

following other unwritten cultural guidelines. This can prove especially challenging in
emerging markets with ill-defined regulations or potential corruption. In response,
companies doing business in the United States must abide by the Foreign Corrupt
Practices Act, which aims at eliminating bribery and unethical practices in
international business. A good rule of thumb is to beware of engaging in any
questionable activities, which might be legal but could have future reputational
repercussions.

3. International accounting

Of the main legal areas to consider when it comes to doing international business, tax
compliance is perhaps the most crucial. Accounting can present a challenge to
multinational businesses who may be liable for corporation tax abroad. Different tax
systems, rates, and compliance requirements can make the accounting function of a
multinational organization significantly challenging.

Accounting strategy is key to maximizing revenue, and the location where your
business is registered can impact your tax liability. Mitigating the risk of multiple layers
of taxation makes good business sense for any organization trading abroad. Being aware
of tax treaties between countries where your business is trading will help to ensure you’re
not paying double taxes unnecessarily.

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 A focus on tax efficiency is often the aim of international accounting efforts.

4. Cost calculation and global pricing strategy

Setting the price for your products and services can present challenges when doing
business overseas and should be another major consideration of your strategy. You must
consider costs to remain competitive, while still ensuring profit. Researching the prices of
direct, local-market competitors can give you a benchmark, however, it remains essential
to ensure the math still works in your favor. For instance, the cost of production and
shipping, labor, marketing, and distribution, as well as your margin, must be a taken into
account for your business to be viable.

Pricing can also come down to how you choose to position your brand

5. Universal payment methods

The proliferation of international e-commerce websites has made selling goods overseas
easier and more affordable for businesses and consumers. However, payment methods
that are commonly accepted in your home market might be unavailable
abroad. Determining acceptable payment methods and ensuring secure processing
must be a central consideration for businesses who seeks to trade internationally.

6. Currency rates

While price setting and payment methods are major considerations, currency rate
fluctuation is one of the most challenging international business problems to
navigate. Monitoring exchange rates must therefore be a central part of the strategy for all
international businesses. However, global economic volatility can make forecasting profit
especially difficult, particularly when rates fluctuate at unpredictable levels.

Major fluctuations can seriously impact the balance of business expenses and profit. For
instance, if your company is paying suppliers and production costs in U.S. dollars, but
selling in markets with a weaker or more unpredictable currency, your company could
end up with a much smaller margin — or even a loss. One way to protect yourself against
large fluctuations in currency is to pay suppliers and production costs in the same
currency as the one you’re selling in. This may mean switching to more local
production where possible in order to better balance your outgoings and sales revenue.

Another option for mitigating the risk of unpredictable currency rates can be setting up
a forward contract and agreeing a price in advance for future sales. Of course, this
potentially means missing out on greater profit should rates shift in your favor. However,
it can protect your sales from the risk presented by unstable currency.

7. Choosing the right global shipment methods

The potential of online sales presents a huge international business opportunity for
retailers in the 21st century, but finding reliable, fast, and cost-effective shipment and
distribution methods can be a difficult balance in some markets. Depending on the
volume and destination of your shipments, will you send by land, sea, air, or a
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 combination? Your choice of shipping method can be a major influence on your
revenue and may be a limiting factor to the products you can viably sell overseas.

Other considerations to address according to your company’s products and your target
markets include customs fees, the need and cost of storage, and local methods of
distribution. There are also country-specific regulations and shipping requirements to
take into account.

8. Communication difficulties and cultural differences

Good communication is at the heart of effective international business strategy.

However, communicating across cultures can be a very real challenge. At Hult,
developing cross-cultural competency and communication skills are a core focus inside
and outside of the classroom.

Effective communication with colleagues, clients, and customers abroad is essential for
success in international business. And it’s often more than just a language barrier you
need to think about — nonverbal communication can make or break business
deals too. Do your research and know how different cultural values and norms — such as
shaking hands — can and should influence the way you communicate in a professional
context. Being aware of acceptable business etiquette abroad, and how things like
religious and cultural traditions can influence this, will help you to better navigate
potential communication problems in international business.

Cultural differences can also influence market demand for your product or service.
The need your business may address at home may already be met or not exist at all
overseas. Local market insight is key, and there are a number of successful brands whose
business models simply weren’t viable in overseas markets.

Small practical considerations can also be easily overlooked, such as creating quality

translations of product and marketing materials, and even ensuring your brand name
works well abroad. A number of well-known companies have had to consider adapting
the names of their brand or product when launching in a foreign market. 

9. Political risks

An obvious risk for international business is political uncertainty and instability.

Countries and emerging markets that may offer considerable opportunities for expanding
global businesses may also pose challenges, which more established markets do not.
Before considering expansion into a new or unknown market, a risk assessment of the
economic and political landscape is critical.

Issues such as ill-defined or unstable policies and corrupt practices can be hugely
problematic in emerging markets. Changes in governments can bring changes in policy,
regulations, and interest rates that can prove damaging to foreign business and
investment.

A growing trend towards economic nationalism also makes the current global political

landscape potentially hostile towards international businesses.
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 10. Supply chain complexity and risks of labor exploitation

When it comes to sourcing products and services from overseas, managing suppliers

and supply chains can also be a tricky process. Unfortunately, the length and
complexity of supply chains increases the chance of working with suppliers who have
unethical — and even illegal — business practices. Of growing concern is the risk in
international business of forced labor and worker exploitation.

11. Worldwide environmental issues

As the environmental risks and effects of climate change are becoming better
understood, sustainability is high on the agenda of many major global corporations.
Recent international legislations and proposals, such as the UN’s Sustainable
Development Goals, have put environmental issues at the forefront of international
business development. The Ashridge Centre for Business and Sustainability at Hult
researches innovative ways that organizations can develop and implement more
environmentally sustainable business models.

On a practical level, if you’re considering expanding your business overseas, it’s

important to be aware of the country-specific environmental regulations and issues
associated with your industry. Some key considerations include how your production
methods might impact the local environment through waste and pollution.

Beyond a legal or ethical incentive to be more eco-friendly, establishing environmentally

conscious business practices can attract new, forward-thinking consumers to your
company. 

Explain the basic types of Economic integrations among the countries in the world.
There are four main types of regional economic integration.
1. Free trade area. This is the most basic form of economic cooperation. Member countries
remove all barriers to trade between themselves but are free to independently determine
trade policies with nonmember nations. An example is the North American Free Trade
Agreement (NAFTA).
2. Customs union. This type provides for economic cooperation as in a free-trade zone.
Barriers to trade are removed between member countries. The primary difference from
the free trade area is that members agree to treat trade with nonmember countries in a
similar manner.
3. Common market. This type allows for the creation of economically integrated markets
between member countries. Trade barriers are removed, as are any restrictions on the
movement of labor and capital between member countries. Like customs unions, there is
a common trade policy for trade with nonmember nations. The primary advantage to
workers is that they no longer need a visa or work permit to work in another member
country of a common market. An example is the Common Market for Eastern and
Southern Africa (COMESA).
4. Economic union. This type is created when countries enter into an economic agreement
to remove barriers to trade and adopt common economic policies. An example is the
European Union (EU).
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Briefly explain the product life cycle theory
The international product life cycle theory puts forth a different explanation for the fundamental
motivations for trade between and among nations. It relies primarily on the traditional marketing
theory regarding the development progress, and life span of products in markets. This theory
looks at the potential export possibilities of a product in four discrete stages in its life cycle.

Stage 0 – Local Innovation: Stage 0 depicted as time 0 on the left of the vertical importing/
exporting axis, representing a regular and highly familiar product life cycle in operation within
its original market. Innovations are most likely to occur in highly developed countries because
consumers in such countries are affluent and have relatively unlimited want. From the supply
side, the firms in advanced nations have both the technological know-how and abundant capital
to develop new products.

Stage 1 – Overseas Innovation: As soon as the new product is well developed, its original
market well cultivated, and local demand adequately supplied, the innovating firm will look to
overseas market in order to expand its sales and profits. Thus this stage is known as “Pioneering
or International Introduction” stage. The technological gap is first noticed in other advanced
nations because of their similar needs and high-income levels.
Countries with similar cultures and economic conditions are often perceived by the exporters as
posing less risk and thus are approached first before proceeding to less familiar territory.
Competition in this stage usually comes from US firms, since firms in other countries may not
have much knowledge about the innovation. Production cost tends to be decreasing at this stage
because by this time the innovating firm will normally have improved the production process.
Supported by overseas sales aggregate production costs tend to decline further because of
increased economies of scale. A low introductory price is usually not necessary because of the
technological breakthrough; a low price is not desirable because of the heavy and costly
marketing effort needed in order to educate consumers in other countries about the new product.

Stage 2 – Maturity: Growing demand in advanced nations provides an impetus for firms there
to commit themselves to starting local production, often with the help of their governments’
protective measures to preserve infant industries. Thus, these firms can survive and thrive in
spite of the relative inefficiency. Development of the competition does not mean that the
initiating country’s export level will immediately suffer. The innovating firms’ sales and export
volumes are kept stable because LDCs are now beginning to generate a need for the product.
Introduction about the product in LDCs helps offset any reduction in export sales to advanced
countries.

Stage 3 – Worldwide Imitation: This stage means tough times for the innovating nations
because of its continuous decline in exports. There is no more new demand anywhere to
cultivate. The decline will inevitably affect the US innovating firms’ economies of scale and its
production costs thus begin to rise again. Consequently, firms in other advanced nations use their
lower prices (coupled with product differentiation techniques) to gain more consumer acceptance
abroad at the expense of the US firm. As the product becomes more and more widely
disseminated, imitation picks up at a faster pace. Towards the end of this stage US export
dwindles almost to nothing and any US production still remaining is basically for local
consumption.

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Stage 4 – Reversal: Not only must all good things end, but misfortune frequently accompanies
the end of a favorable situation. The major functional characteristics of this stage are product
standardization and comparative disadvantage. The innovating country’s comparative advantage
has disappeared, and what is left is comparative disadvantage. This disadvantage is brought
about because the product is no longer capital-intensive or technology-intensive but instead has
become labor intensive – a strong advantage possessed by LDCs. Thus, LDCs – the last
innovators – establish sufficient productive facilities to satisfy their own domestic needs as well
as to produce for the biggest market in the world, the United States.

Write a short notes on the following:

a) Corporate citizenship.
Corporate citizenship involves the social responsibility of businesses and the extent to which
they meet legal, ethical, and economic responsibilities, as established by shareholders.

Corporate citizenship is growing increasingly important as both individual and institutional

investors begin to seek out companies that have socially responsible orientations such as
their environmental, social, and governance (ESG) practices

Corporate citizenship refers to a company’s responsibilities toward society. The goal is to

produce higher standards of living and quality of life for the communities that surround them
and still maintain profitability for stakeholders.

The demand for socially responsible corporations continues to grow, encouraging investors,
consumers, and employees to use their individual power to negatively affect companies that
do not share their values.

All businesses have basic ethical and legal responsibilities; however, the most successful
businesses establish a strong foundation of corporate citizenship, showing a commitment to
ethical behavior by creating a balance between the needs of shareholders and the needs of
the community and environment in the surrounding area. These practices help bring in
consumers and establish brand and company loyalty.

Companies go through different stages during the process of developing corporate

citizenship. Companies rise to the higher stages of corporate citizenship based on their
capacity and credibility when supporting community activities, a strong understanding of
community needs, and their dedication to incorporate citizenship within the culture and
structure of their company.

The Development of Corporate Citizenship

The five stages of corporate citizenship are defined as:

1. Elementary
2. Engaged
3. Innovative
4. Integrated
5. Transforming

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 In the elementary stage, a company’s citizenship activities are basic and undefined because
there are scant corporate awareness and little to no senior management involvement. Small
businesses, in particular, tend to linger in this stage. They are able to comply with the
standard health, safety, and environmental laws, but they do not have the time nor the
resources to fully develop greater community involvement.

In the engagement stage, companies will often develop policies that promote the
involvement of employees and managers in activities that exceed rudimentary compliance to
basic laws. Citizenship policies become more comprehensive in the innovative stage, with
increased meetings and consultations with shareholders and through participation in forums
and other outlets that promote innovative corporate citizenship policies.

In the integrated stage, citizenship activities are formalized and blend in fluidly with the
company’s regular operations. Performance in community activities is monitored, and these
activities are driven into the lines of business.

Once companies reach the transforming stage, they understand that corporate citizenship
plays a strategic part in fueling sales growth and expansion to new markets. Economic and
social involvement is a regular part of a company’s daily operations in this stage.

b. Ethical issues in international business:

What are the ethical issues in international business? Explain.
What are the issues involved in international operations management?
Employment Practices

• When work conditions in a host nation are clearly inferior to those in a multinational’s
home nation, companies must decide which standards should be applied, those of the
home nation, those of the host nation, or something in between
• When work conditions in a host nation are clearly inferior to those in a multinational's
home nation, what standards should be applied?
 Those of the home nation?
 Those of the host nation?
 Or something in between?

• Firms should establish minimal acceptable standards that safeguard the basic rights and
dignity of employees and audit the foreign subsidiaries and subcontractors on a regular
basis

Human Rights

• Basic human rights taken for granted in the developed world such as freedom of
association, freedom of speech, freedom of assembly, freedom of movement, and so on,
are by no means universally accepted
• Basic human rights are still not respected in many nations: Many rights are not
universally accepted such as freedom of:
 association
 speech
 assembly
 movement
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  political expression

Role of the Multinational Firm

 It is often argued that inward investment by a multinational firm can be a force for
economic, political, and social progress that ultimately improves the rights of
people
 But there is a limit to this argument because some governments are so repressive
that investment cannot be justified on ethical grounds

Environmental Pollution

• When environmental regulations in host nations are far inferior to those in the home
nation, ethical issues arise
• The tragedy of the commons occurs when a resource held in common by all, but owned
by no one, is overused by individuals resulting in its degradation
• Ethical issues arise when environmental regulations and/or enforcement are inferior to
those in the home nation
• This might result in higher levels of pollution from the operations of multinationals than
would be allowed at home
• Should a multinational feel free to pollute in a developing nation and is it the right and
moral thing to do?

Corruption

• In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying
bribes to foreign government officials in order to gain business
• The Organization for Economic Cooperation and Development (OECD) adopted a
Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions in 1997 which obliges member states to make the bribery of foreign public
officials a criminal offense
• Some economists suggest that the practice of giving bribes might be the price that must
be paid to do a greater good
• These economists believe that in a country where preexisting political structures distort or
limit the workings of the market mechanism, corruption in the form of black-
marketeering, smuggling, and side payments to government bureaucrats to “speed up”
approval for business investments may actually enhance welfare
• Other economists have argued that corruption reduces the returns on business investment
and leads to low economic growth
• Corruption has a been a problem in almost every society in history and it continues to be
one today
• Some international businesses can and have gained economic advantages by making
payments to government officials
• Two laws addresses this issue
 1977 U.S. Foreign Corrupt Practices Act
 1997 OECD Convention on Combating Bribery or Foreign Public Officials in
International Business Transactions

Moral obligation of multinational firms

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Explain the process of strategic management.
Explain the process of international strategic management.
The process of strategic management includes goal setting, analysis, strategy formation, strategy
implementation, and strategy monitoring. Let’s take a look at how each of these steps ties into
the overall strategic management process.
Goal Setting
The first part of strategic management is to plan and set your goals. Set the short- and long-term
goals of the organization and make sure that these are shared with all members of the
organization. Explain and share how each member of the team will have an impact on the
organization reaching this goal. This will help give each member of the team a sense of purpose
and will give their job meaning.
Analysis
During this stage of the process, it is important to gather as much information and data as
possible. This information will be integral to creating your strategy to reach your goals. This step
of strategic management entails becoming aware of any issues within the organization and
understand all of the needs of the organization.
Strategy Formation
In this strategic management step, you will use all the intelligence and data you have gathered to
formulate the strategy that you will use to reach whatever goal you set. Identify useful resources
you have, and also seek out other resources you will need to set up your strategy.
Strategy Implementation
This is arguably the most important part of the entire strategic management process. At this
point, each member of the team should have a clear understanding of the plan and should know
how they play a part within it. This is the stage where your strategy is put into action.
Strategy Monitoring
During this stage, your strategy will already be in play. At this point, you should be managing,
evaluating, and monitoring each part of your strategy, and ensuring that it aligns with the end
goal. If it does not, this is the time where you would make tweaks and adjustments to strengthen
the overall plan. This is the stage where you will track progress and have the opportunity to deal
with any unexpected shifts in the strategy.

What are the difference between domestic trade and international trade?
 The exchange of goods and services between countries and across borders is referred to
as international trade. Domestic trade happens when this business is conducted inside of a
country’s borders. There are many differences in international and domestic trade, but the
basic principals are the same.
 One of the main differences is cost. The cost of trading internationally is considerably
higher than trading domestically. This is true for many reasons. One reason is time. The
time that it takes to transport goods across oceans can cost businesses money. There can
be time wasted at borders, tariffs must be paid, and customs inspections can be
cumbersome. However, with today’s ocean shipping logistics and advances in ocean
freight transport, many of these problems are disappearing.
 Modern cargo ships can carry a lot of freight, reducing the cost of shipping for everyone.
Global standardization aspects of shipping containers have made the process of shipping
from one country to another much easier. When the equipment and cargo match from
country to country, there is no need to repack or transfer goods to new containers. This
also has increased the security of shipping overseas.
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 It may seem that importing and exporting goods could have a negative effect on a country
producing and transporting their own goods inside of their own borders, but that is not
necessarily true. Many countries benefit from importing the materials needed to drive
their own production industry. Even technologies and services shared across borders can
benefit a country’s production. Additionally, international trade motivates countries to
work together, empowering each country to benefit from the other.
 International trade has directly contributed to the industrialization of many countries.
Ocean shipping advances have made it possible for corporations to do business all over
the world. The standardization of practices is recognized worldwide. This helps countries
to overcome problems that used to be associated with international business.
 Take, for instance, the path that a standardized container can take. Goods that are
produced in the United States can be loaded directly into the container of a semi-trailer
truck. It can be taken and moved directly to a train car and then can be transported by rail.
From there, it can be unloaded at the dock and put directly on an ocean freight or cargo
ship. It travels across the ocean where it is met with the same standardized equipment that
can move it from the ship, to a barge, truck or train.
 In the past, international shipping was a lengthy, expensive, and sometimes unpredictable
endeavor. With modern tracking and standards put into place by industry leaders
worldwide, international trade is a reliable, beneficial and profitable way to do business.
Advancements in logistics have changed the face of global economics, industrialization,
and international trade.

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Explain the process to be considered in international strategic management
Explain the process of international strategic management
Examine the steps involved in global strategic management process
The process of strategic management includes goal setting, analysis, strategy formation, strategy
implementation, and strategy monitoring. Let’s take a look at how each of these steps ties into
the overall strategic management process.
Goal Setting
The first part of strategic management is to plan and set your goals. Set the short- and long-term
goals of the organization and make sure that these are shared with all members of the
organization. Explain and share how each member of the team will have an impact on the
organization reaching this goal. This will help give each member of the team a sense of purpose
and will give their job meaning.
Analysis
During this stage of the process, it is important to gather as much information and data as
possible. This information will be integral to creating your strategy to reach your goals. This step
of strategic management entails becoming aware of any issues within the organization and
understand all of the needs of the organization.
Strategy Formation
In this strategic management step, you will use all the intelligence and data you have gathered to
formulate the strategy that you will use to reach whatever goal you set. Identify useful resources
you have, and also seek out other resources you will need to set up your strategy.
Strategy Implementation
This is arguably the most important part of the entire strategic management process. At this
point, each member of the team should have a clear understanding of the plan and should know
how they play a part within it. This is the stage where your strategy is put into action.
Strategy Monitoring
During this stage, your strategy will already be in play. At this point, you should be managing,
evaluating, and monitoring each part of your strategy, and ensuring that it aligns with the end
goal. If it does not, this is the time where you would make tweaks and adjustments to strengthen
the overall plan. This is the stage where you will track progress and have the opportunity to deal
with any unexpected shifts in the strategy.

What are the major activities in international marketing operations management ?

The activities that take place on a marketing platform that has recently been established outside
the home country or parent country are known as international marketing tasks.
These tasks include the following operations −
 Observing and acknowledging customers’ buying behavior.
 Adapting to the changes in market trends.
 Identifying competitors and acquiring the required information about them.
 Acquiring knowledge about products.
 Conducting a Political, Economic, Social and Technological analysis, that is, PEST
analysis.
 Practicing SWOT analysis
 Selecting the right promotional mixture: Pricing, Promotion, Advertising, etc.

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Outcome of a Marketing Plan
The outcome of a marketing plan is affected by certain uncontrollable elements. These elements
include competition, culture, legal, and government controls over the business.
These elements cannot be controlled by the marketers, so they must adapt to them and also learn
to manage them. The only way to manage the uncontrollable elements is to design an efficient
framework to mold the controllable elements – price, product, promotion and place
(distribution).
The basic marketing concepts are the same for both the domestic and the international markets.
The marketing environment is extremely important, as the environment changes from country to
country.
International marketing activities are interlinked with a firm’s corporate goals, objectives and
strategy. The overall aims, objectives and strategy of a firm has a great impact on international
marketing decisions e.g, whether to enter new uncertain markets and how maximum would be
risk that the firm is ready to take or the level of control required over international operations.
There is no denying in fact that a person’s self reference criterion (SRC) and an associated
ethnocentrism are a two primary obstacles to success in international marketing self reference
criteria is defined as an unconscious reference to one’s own cultural values, experiences and
knowledge as a basis for decisions. Ethnocentrism is closely connected to self reference
criteria .It can be defined as the nations that one’s own culture or company knows best how to do
things. Ethnocentrism has been seen particularly a problem in the American managers at the
beginning of the 21st century just because of America’s dominance in the world economy during
the late 1990’s.

Ethnocentrism exists in the firm’s where the managers from affluent countries work with
managers and markets which are less affluent. Understanding and dealing with the self reference
criteria are two of the most important facets in international marketing. Even though self
reference criteria and ethnocentrism provides the ability to firm to understand better a foreign
markets in its true light. It is essential for eastern and western marketers to have a knowledge of
their cross cultures because if anyone from these is not aware, they may evaluate a marketing
mix on their respective market experiences (their SRC) without knowing and fully appreciating
the cultural differences attaining adaptation .Appropriateness of a domestically designed
marketing for a international markets is also of vital importance because its evaluation can be
badly affected by SRC.

What are the different modes of entry available for an MNC to enter into a new country of
operations ?
1) Types of Merger
2) Acquisitions
3) Difference between Mergers & Acquisitions
4) Licensing
5) Joint Ventures
6) Strategic Alliances
7) Franchising
8) Contract Manufacturing

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 What are
the different

organisational designs used by international businesses?

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
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 turnover, an independent exports department is often setup and separated from domestic
marketing.

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.

2) 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,

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 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.

3) 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:
 Extent or type of control exerted by the parent company headquarters over
subsidiaries.
 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.

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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.

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.

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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.

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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.
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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.

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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.

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.

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Discuss the advantages and disadvantages of technology transfer
Advantages of Technology Transfer:
In a competitive environment, technology transfer has become increasingly important for
commercial enterprises to gain competitive advantage over rivals. Some of the advantages of
technology transfer are the following:

 Technology transfer leads to competitive advantage for a company to edge out its rivals.
 Technology transfer helps in research & development (R&D) of a particular product
which helps to take into account public and private need.
 New technological innovations can lead to creation of new markets and birth of new
consumers.
 Long term advantages of technology transfer include sustainable economic growth in the
future and commercialization of technology.
 With the advent of new technologies, people are now able to do things in an efficient
way. The use of computers and other devices has helped education sector in many ways.
The use of equipment and machines has made manual labor easy in the agricultural
sector. The advancement in medical equipment and other devices has made hospital
industry advance in many areas.
 Another advantage that is coming with technology transfer is the cost saving factors.
When new equipment and machinery are used in place of old ones and new technology is
being applied for making process running in the industries becomes less costly. Money
can be saved in many ways which is beneficial for the business owners. The overall
economy of the industry also gets boosted with technology transfer.
 Competitive Advantage: The world is viewed globally, and with that said it’s important
to have a competitive edge and the technology transfer has become very much important
to commercial business, this becomes a driver in our economy.
 Research Development: Technology transfer sustains the research of a particular
product, which determines the need for public and private use.
 Furthermore more through technology transfer we see sustainable economic growth,
whereby it includes commercialization of technology. These improvements can be seen
in education within each passing day; today it is more convenient for students to attain
international studies without ever leaving the country. We have also seen changes in the
Agricultural industry, where there has been an energy transfer. Farms no longer need
mass amounts of labourers; majority of the heavy labour can be done automatically.

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Disadvantages of Technology Transfer:
 However there has been a disadvantage when it comes to the technology transfer, which
could mostly be overlooked. One of those factors can be dependency; due to the increase
of technology society has become less self-reliant, which may pose a problem in terms of
performing tasks normally handled by technological products. Another huge issue is the
fact that technology has displaced the need of human workers; this causes a direct impact
in unemployment. The number of workers who become jobless. Automation of many
jobs will make the human labor cheaper and more people will find it difficult to get a job.
 The dependency of people over machinery will be increased in long term. When there is
any breakage or stoppage of machines people will reach a helpless situation until the
problem is solved. The amount of self-reliance for people will become less and people
will try to find an alternative in technology for every problem they face.
 Many of the challenges to innovation and the dissemination of technology in general are
found in the field of eco-innovation. The three principal problems to be considered are:
asymmetric information, market power, and externalities. In addition, uncertainty
regarding the qualities of the innovation as well as future prices of inputs will complicate
the adoption process.
 The rate of diffusion is dependent on the cost-effectiveness of the new technology. Given
this, the firms with the greatest potential profits associated with the innovation will be the
first adopters. In addition, new technologies are often capital intensive and associated
with size and scale economies, requiring access to investment capital.
 Numerous studies find that the incentives to adopt new innovations are greater with
market-based tools than with regulatory tools. In an international context, uncertainty and
informational problems are exacerbated and contracting solutions are even more difficult
to achieve.
 New technologies frequently challenge existing legal systems in new ways and foster the
evolution of the law. However, innovative industries would benefit from greater
predictability in the legal realm. This is particularly important since the scope of patent
protection, as well as the incomplete enforcement of IP rights, mean that the effective
strength of intellectual property rights are determined by the implementation of the legal
system.
 Market forces and incentives may facilitate the dissemination of environmental
innovations or create insurmountable barriers to adoption. In this context, it is important
to be aware of the lessons learned about innovation: innovation responds quickly to
incentives; innovation in a given field experiences diminishing returns over time; the
social returns to environmental research are high; and the type of policy used affects the
nature of new innovations.
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 Green technology is characterized by two market failures, the public goods nature of
knowledge and environmental externalities.
 While developing nations frequently claim that strong intellectual property rights on
carbon abatement technologies hinder developing countries’ greenhouse gas abatement
efforts, it has been shown that IPRs do not constitute as significant a barrier as claimed
since a variety of technologies exist for reducing emissions. In many cases, IPR protected
technologies are not necessarily more costly than those not covered.
 There are a number of characteristics and circumstances of developing nations that hinder
innovation: a lack of scientists and researchers, brain drain, small market size, the lack of
infrastructure, importantly telecommunications infrastructure, the quality the business
environment and governance conditions, bureaucratic climate and the formal/informal
regulations regarding economic transactions, cash-strapped governments and inability to
make public investments in research and infrastructure.
 Environmental issues are frequently local or regional in nature, so local knowledge and
solutions are required. Further, many technologies are highly ecology-specific and while
appropriate in one setting may be difficult to employ in another.
 Adoption is facilitated by environmental feasibility as well as cultural and political
acceptance. Firms that effectively respond to such pressure and signals are more apt to
succeed. It is important to note that consumer perceptions of eco-friendly are unclear, and
often hinder diffusion and pricing
 It is critical that technology recipients have the prerequisite knowledge and scientific base
to best exploit the information. This includes domestic private and public research
laboratories and universities, in addition to a sound basis of technical skills and human
capital. Each of these help to reduce the costs of imitation, adaption, and follow-on
innovation. The greater the ‘technological distance’ of a recipient country from the global
frontier, the greater the challenge of effectively incorporating information into production
systems.
 Technology transfer is enhanced by stronger levels of patent protection, while
acknowledging the necessity of complementary factors such as infrastructure, effective
government policies and regulations, knowledge institutions, access to credit and venture
capital, skilled human capital, and networks for research collaboration. Economic studies
have found that while IP protection facilitates trade flows of patented goods into large
and middle-income nations, but has no impact on poor countries.
 Like many new technologies, environmental innovations may require significant on-
going support, training and assistance with maintenance. It is essential to consider the
skills required for continued use and repair of new technologies at the onset of adoption.

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Write a note on International Business theories
 Theory of Mercantilism (1500-1700)
Mercantilism became popular in the late seventeenth and early eighteenth
centuries in Western Europe and was based on the notion that governments (not
individuals who were deemed untrustworthy) should become involved in the transfer of
goods between nations in order to increase the wealth of each national entity. Wealth was
defined, however, as an accumulation of previous metals, especially gold.

Consequently, the aims of the governments were to facilitate and support all
exports while limiting imports, which were accomplished through the conduct of trader
by government monopolies and intervention in the market through the subsidization of
domestic exporting industries and the allocation of trading rights. Additionally, nations
imposed duties or quotas upon imports to limit their volume. During this period colonies
were acquired to provide sources of raw materials or precious metals. Trade opportunities
with the colonies were exploited, and local manufacturing was repressed in those
offshore locations. The colonials were often required to buy their goods from their
mother countries.

The concept of mercantilism incorporates two fallacies. The first was the incorrect
belief that old or precious metals have intrinsic value, when actually they cannot be used
for either production or consumption. Thus, nations subscribing the mercantilism notion
exchanged the products of their manufacturing or agricultural capacity for this non-
productive wealth. The second fallacy is that the theory of mercantilism ignores the
concept of production efficiency through specialisation. Instead of emphasizing cost-
effective production of goods, mercantilism emphasises sheet amassing of wealth with
acquisition of power.

Neo-mercantilism corrected the first fallacy by looking at the overall favourable

or unfavourable balance of trade in all commodities, that is, nations attempted to have a
positive balance of trade in all goods produced so that all exports exceeded imports. The
term “balance of trade” continues in popular use today as nations attempt to correct their
trade deficit positions by increasing exports or reducing imports so that outflow of goods
balances the inflow.

The second fallacy, a disregard for the concept of efficient production, was
addressed in subsequent theories, notably the classical theory of trade, which rests on the
doctrine of comparative advantage.

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 Theory of Economic Development:
The trade structure is also sought to be explained in terms of scale economies.
According to this theory, there is a relationship between the size of the internal market
and average unit cost of production and export competitiveness. A firm operating in a
country where the domestic market is large will be able to reach a high output level
thereby reaping the advantage of large-scale production. The lower cost of production
will increase its competitiveness enabling the firm to make an easy entry to the export
market. While prima-facie this logic appears to be valid, this hypothesis cannot be
generalized because it is possible that the pull of the domestic market will be so strong
that the export would not be promoted, as is the case with India in certain products.

 Rostow’s Stages of Economic Growth Theory:

A more recent and applicable theory of economic development was provided in
the 1960s by Walter W. Rostow, who attempted to outline the various stages of a nation’s
economic growth and based his theory on the notion that shifts in economic development
coincided with abrupt changes within the nations themselves. He identified five different
economic stages for a country – traditional society, preconditions for take off, take off the
drive to maturity, and the age of high mass consumption.

Stage 1: Traditional Society Rostow saw traditional society as a static economy, which
he likened to the pre-1700s attitudes and technology experienced by the world’s current
economically developed countries. He believed that the turning point for these countries
came with the work of Sir Isaac Newton, when people began to believe that the world
was subject to a set of physical laws but was malleable within these laws. In other words,
people could effect change within the system of descriptive laws as developed by Newton

Stage 2: Preconditions for takeoff Notes Rostow identified the preconditions for
economic takeoff as growth or radical changes in three specific, non-industrial sectors
that provided the basis for economic development:

1. Increased investment in transportation, which enlarged prospective markets and

increased product specialization capacity.
2. Agricultural developments providing for the feeding and nourishing of larger,
primarily urban, population.
3. An expansion of imports into the country. These preconditioning changes were to be
experienced in concert with an increasing national emphasis on education and
entrepreneurship.

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 Stage 3: Takeoff The takeoff stage of growth occurs, according to Rostow, over a period
of twenty to thirty years and is marked by major transformations that stimulate the
economy. These transformations could include widespread technological developments,
the effective functioning of an efficient distribution system, and even political
revolutions. During this period barriers to growth are eliminated within the country and
indeed the concept of economic growth as a national objective becomes the norms. To
achieve the takeoff, however, Rostow believes that three conditions must be met:

1. Net investment as a percentage of net national products must increase sharply.

2. At least one substantial manufacturing sector must grow rapidly. This rapid growth
and larger output trickles down as growth in ancillary and supplier industries.
3. A supportive framework for growth must emerge on political, social and
institutional fronts. For example, banks, capital markets, and tax systems should
develop and entrepreneurship should be considered a norm.

Stage 4: The Drive to Maturity Within Rostow’s scheme, this stage is characterised as
one where growth becomes self-sustaining and a widespread expectation within the
country. During this period, Rostow believes that the labour pool becomes more skilled
and more urban and that technology reaches heights of advancement.

Stage 5: The Age of Mass Consumption The last stage of development, as Rostow sees
it, is an age of mass consumption when there is a shift to consumer durables in all sectors
and when the populace achieves a high standard of living as evidenced through the
ownership of such sophisticated goods as automobiles, televisions and appliances. Since
its introduction in the 1960s, Rostow’s framework has been criticized as being overly
ambitious in attempting to describe the economic paths of many nations. Also, history
has not proved the framework to be true.

 Theory of Absolute Advantage

Here, we will discuss the principles of absolute and relative advantage.

Principle of Absolute Advantage: Adam Smith was the first economist to investigate
formally the rationale behind foreign trade. In his book, Wealth of Nations, Smith used
the principle of absolute advantage as the justification for international trade. According
to this principle, a country should export a commodity that can be used at a lower cost
than can other nations. Conversely, it should import commodity that can only be
produced at a higher cost than can other nations.

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 Principle of Relative Advantage: One problem with the principle of absolute advantage
is that it fails to explain whether trade will take place if one nation has absolute advantage
for all products under consideration.

 Theory of Comparative Advantage

This question was considered by David Ricardo, who developed the important concept of
comparative advantage in considering a nation’s relative production efficiencies as they
apply to international trade. In Ricardo’s view, the exporting country should look at the
relative efficiencies of production for both commodities and make only those goods it
could produce most efficiently.

 Factor Endowment Theory

The Eli Heckscher and Bertil Ohlin theory of factor endowment addressed the question of
the basis of cost differentials in the production of trading nations. They posited that each
country allocates its production according to the relative allocates its production
according to the relative proportions of all its production factor endowments – land,
labour and capital on a basic level, and, on a more complex level, such factors as
management and technological skills, specialised production facilities, and established
distribution networks.
Thus, the range of products made or grown for export would depend on the relative
availability of different factors in each country.

Explain the different strategies of FDI.

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 Open
markets
and allow
for FDI
inflows.
Reduce

restrictions on FDI. Provide open, transparent and dependable conditions for all kinds of
firms, whether foreign or domestic, including: ease of doing business, access to imports,
relatively flexible labour markets and protection of intellectual property rights.
 Set up an Investment Promotion Agency (IPA). A successful IPA could target suitable
foreign investors and could then become the link between them and the domestic
economy. On the one side, it should act as a one-stop shop for the requirements investors
demand from the host country. On the other side, it should act as a catalyst in the host’s
domestic economy, prompting it to provide top notch infrastructure and ready access to
skilled workers, technicians, engineers and managers that may be required to attract such
investors (Moran, 2014; Barnes et al., 2015; Harding and Javorcig, 2012).Moreover, it
should engage in after-investment care, acknowledging the demonstration effects from
satisfied investors, the potential for reinvestments, and the potential for cluster-
development because of follow-up investments.
 Think carefully about sectors/activities to be targeted. Investment and location
decisions of suppliers may be dependent on those of prime multinational investors in the
host economy (McKinsey, 2001; Javorcik et al., 2006).
 Put up the infrastructure required for a quality investor: such as sufficient close-by
transport facilities (airport, ports), adequate and reliable supply of energy, provision of an
adequately skilled workforce, facilities for the vocational training of specialised workers,
ideally designed in cooperation with the investor (Ibid.).
 Strengthen backward linkages from FDI into the indigenous economy. Allow for the
competitive pressure of foreign entrants on their local suppliers to raise competitiveness
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 of the latter (Rhee et al., 1990), and allow for multiple forms of direct assistance from
foreign to domestic firms, in the form of training, help with setting up production lines,
management coaching regarding strategy and financial planning, financing, assistance
with quality control and introduction to export markets (Javorcik and Spatareanu, 2005;
Blalock and Gertler, 2008; Godart and Görg, 2013; Görg and Seric, 2016).
 Encourage spillovers from FDI into the indigenous economy. Local firms set up by
managers who had started in multinational firms are more successful and more
productive than others (Görg and Strobl, 2005). Managers of local firms gain knowledge
of new technologies and marketing techniques by studying and imitating their
multinational competitors (Javorcic and Spatareanu, 2005; Boly et al., 2015). Similarly,
worker movements from multinational to local firms spread knowledge and skills.
 Encourage first-time foreign direct investors. Foreign firms that are not already part of
an extensive network of subsidiaries are readier to accept linkages to domestic suppliers
(Amendolagine et al., 2015).
 Encourage foreign direct investors from diaspora members. These are also more
likely to generate linkages to domestic firms and contribute to the internationalisation of
the host country (Boly et al., 2014).
 Provide access to credit by reforming domestic financial markets. Setting-up a
business-friendly financial system helps indigenous firms to respond to challenges and
impulses from foreign entrants, to self-select into supplier status, and to thereby grow and
prosper (Alfaro et al., 2009).
 Set up a vendor development programme to support the match making process
between foreign customer and local supplier. To strengthen the capacity of the
domestic economy, it may offer financing opportunities to indigenous suppliers for
required investment on the basis of purchase contracts from foreign buyers (see the Local
Industry Upgrading Program (LIUP) of Singapore), or reimburse the salary of a manager
in a foreign plant acting as a talent scout among domestic suppliers (see the example of
the Singapore’s Economic Development Board).
 Shape Export Processing Zones (EPZs) in a way that they spearhead into the
domestic economy. Avoid EPZ regulations discriminating against the creation of local
supplier relationships. Set up a secondary industrial zone for local suppliers, be it as a
geographical site adjacent to formal export processing zones, or be it as a legal status

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 allowing for easy foreign-domestic linkages with, for example, databanks and “marriage
counselors”, to assist in supplier selection (Moran et al., 2016).
 Refocus the “Who Is Us?” perspective and address related concerns adequately.
“Us” should be understood as the firms that are most beneficial to the domestic economy
irrespective of the nationality of their owners. Therefore, the firms that create the highest-
skilled and highest-paying jobs, the least-expensive products, and the most competitive
exports are considered “Us” (Reich, 1990).
 Be patient and rely on the gradual structural transformation of the domestic
economy. Investors may come in waves. For example, first, investors in thermionic
tubes, valves and transistors, then, in television and broadcasting systems, and finally, in
computers, computer peripherals, and data processing systems. Along such avenues, FDI
may contribute to diversifying and upgrading domestic production (Amendolagine et al.,
2013; Moran, 2014; Barnes et al., 2015).

Explain the nature and functions of International Business

Nature:
 International International Restrictions
In international business, there is a fear of the restrictions which are imposed by the
government of the different countries. Many country’s governments don’t allow
international businesses in their country. They have trade blocks, tariff barriers, foreign
exchange restrictions, etc. These things are harmful to international business.

 Benefits To Participating Countries

It gives benefits to the countries which are participating in the international business. The
richer or developed countries grow their business to the global level and they get
maximum benefits. The developing countries get the latest technology, foreign capital,
employment opportunities, rapid industrial development, etc. This helps developing
countries in developing their economy. Therefore, developing countries open up their
economy for foreign investments. 

 Large Scale Operations

International business contains a large number of operations at a time because it is
conducted on a large scale globally. Production of the goods at a large scale, they have to
fulfill the demand at a global level. Marketing of the product is also conducted at a large
scale to make them aware of the product. First, they fulfill the domestic demand and then
they export the surplus in the foreign markets. 

 Integration Of Economies
International Business combines the economies of many countries. The companies use
the finance, labor, resources, and infrastructure of the other countries in which they are
working. They produce the parts in different countries, assembles the product in other
countries and sell their product in other countries.
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  Dominated By Developed Countries
International business is dominated by developed countries and their MNC’s. Countries
like U.S.A, Europe, and Japan all are the countries that are producing high-quality
products, they have people working for them on high salaries. They have large financial
and other resources like the best technology and Research and Development centers.
Therefore, they produce good quality products and services at low prices. They help them
to capture the world market.

 Market Segmentation
International business is based on market segmentation on the basis of the geographic
segmentation of the consumers. The market is divided into different groups according to
the demand of the consumers in different countries. It produces goods according to the
demand of the consumers of the different market segmentations.

 Sensitive Nature
International Business is highly affected by economic policies, political environment,
technology, etc. It can play a positive role to improve the business and can also be
negative for the business. It totally depends on the policies made by the government, it
can help in expanding the business and maximizing the profits and vice-versa.

Functions:

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What is the role of SEZ’s in the growth of the nation?
The major contributions of SEZs for the development of the economy are briefly accounted as
follows:
 The SEZs attract foreign and domestic investment in enclaves. Because of the provision
of facilities and amenities on the one hand and incentives on the other, the capital flows
in.
 The SEZs stimulate exports. This is the major purpose of the SEZs.
 The SEZs cannot be counted as a solution to the unemployment problem, for they are a
viable source of employment creation.
 The creation of SEZ leads to balanced development of the region. Though it is good to
develop all the regions simultaneously, such balanced development requires a lot of
resources at a time. So the regional development can be undertaken in stages. Thus, to
develop certain areas as leading areas, SEZs is a solution.
 The SEZs foster linkages with the economy. Deepening backward and forward linkages
with the rest of the economy may bring in technological development and quality
production of goods when SEZs interact with DTA (domestic tariff area). New
production sectors and catalytic effect to export are induced into non-SEZ area due to
demonstration effect.

12 MARKS

Discuss the need and importance of international environmental scanning.

Environmental analysis will help the firm to understand what is happening both inside and
outside the organization and to increase the probability that the organisational strategies
developed will appropriately reflect the organizational environment.

Environmental scanning is necessary because there are rapid changes taking place in the
environment that has a great impact on the working of the business firm. Analysis of business
environment helps to identify strength weakness, opportunities and threats. SWOT analysis is
necessary for the survival and growth of every business enterprise.

The following is the need and importance of environmental scanning:

1. Identification of strength:

Strength of the business firm means capacity of the firm to gain advantage over its competitors.
Analysis of internal business environment helps to identify strength of the firm. After identifying
the strength, the firm must try to consolidate or maximise its strength by further improvement in
its existing plans, policies and resources.

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2. Identification of weakness:

Weakness of the firm means limitations of the firm. Monitoring internal environment helps to
identify not only the strength but also the weakness of the firm. A firm may be strong in certain
areas but may be weak in some other areas. For further growth and expansion, the weakness
should be identified so as to correct them as soon as possible.

3. Identification of opportunities:

Environmental analyses helps to identify the opportunities in the market. The firm should make
every possible effort to grab the opportunities as and when they come.

4. Identification of threat:

Business is subject to threat from competitors and various factors. Environmental analyses help
them to identify threat from the external environment. Early identification of threat is always
beneficial as it helps to diffuse off some threat.

5. Optimum use of resources:

Proper environmental assessment helps to make optimum utilisation of scare human, natural and
capital resources. Systematic analyses of business environment helps the firm to reduce wastage
and make optimum use of available resources, without understanding the internal and external
environment resources cannot be used in an effective manner.

6. Survival and growth:

Systematic analyses of business environment help the firm to maximise their strength, minimise
the weakness, grab the opportunities and diffuse threats. This enables the firm to survive and
grow in the competitive business world.

7. To plan long-term business strategy:

A business organisation has short term and long-term objectives. Proper analyses of
environmental factors help the business firm to frame plans and policies that could help in easy
accomplishment of those organisational objectives. Without undertaking environmental
scanning, the firm cannot develop a strategy for business success.

8. Environmental scanning aids decision-making:

Decision-making is a process of selecting the best alternative from among various available
alternatives. An environmental analysis is an extremely important tool in understanding and
decision making in all situation of the business. Success of the firm depends upon the precise
decision making ability. Study of environmental analyses enables the firm to select the best
option for the success and growth of the firm.

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