Module 1

Introduction to International Business

International business includes any type of business activity that crosses national borders.
Though a number of definitions in the business literature can be found but no simple or
universally accepted definition exists for the term international business. At one end of the
definitional spectrum, international business is defined as organization that buys and/or sells
goods and services across two or more national boundaries, even if management is located in
a single country. At the other end of the spectrum, international business is equated only with
those big enterprises, which have operating units outside their own country. In the middle are
institutional arrangements that provide for some managerial direction of economic activity
taking place abroad but stop short of controlling ownership of the business carrying on the
activity, for example joint ventures with locally owned business or with foreign governments.

International business involves commercial activities that cross national frontiers. It concerns
the international movement of goods, capital, services, employees and technology; importing and exporting;
cross-border transactions in intellectual property (patents, trademarks, know-how, copyright
materials, etc.) via licensing and franchising; investments in physical ; financial assets in
foreign countries; contract manufacture or assembly of goods abroad for local sale or for
export to other nations; buying and selling in foreign countries; the establishment of foreign
warehousing and distribution systems; and the import to one foreign country of goods from a
second foreign country for subsequent local sale.

IB field is concerned with the issues facing international companies and governments in
dealing with all types of cross border transactions. IB involves all business transactions that
involve two or more countries. IB consists of transactions that are devised and carried out
across borders to satisfy the objectives of individuals and organizations. IB consists of those
activities private and public enterprises that involve the movement across national boundaries
of goods and services, resources, knowledge or skills.
Reasons for international business
 To expand sales
 To acquire resources
 To minimize risk
 Rapid increase in and expansion of technology

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  Liberalization of government policies on cross border movement of trade and
resources
 Development of institutions/services that facilitate international trade
 Growing consumer pressures
 Changing political situations
 Increased global competition
 Expanded cross-national cooperation
Entry of International Business
Businesses can enter foreign markets via exporting, use of agents and/ or distributors,
licensing and franchising, joint ventures, management contracts, contract manufacturing or
direct foreign investment.
Also the firm might wish to establish branches in various nations. Exporting, joint ventures
and the operation of branches are dealt with in this chapter: other forms of market entry are
covered elsewhere. The expansion activity requires the home company to adapt one or more
of the following strategies to enter host countries
Exporting means the sale abroad of an item produced stored or processed in the supplying
firm’s home country. Some firms regard exporting as little more than a convenient way of
increasing total sales; others see it as a crucial element of overall corporate strategy. ‘Passive’
exporting occurs when a firm receives orders from abroad without having canvassed them.
‘Active ‘exporting, conversely, results from a strategic decision to establish proper systems
for organizing the export function and for procuring foreign sales. Exporting may be direct or
indirect. With direct exporting the exporter assumes full responsibility for the transfer of
goods to foreign customers, for
Customs clearance, local advertising and final sale of the goods. Indirect exporting uses
intermediaries. Export merchants for example, reside in the exporter’s country acting as
principals in export transactions (ie buying and selling on their own accounts). They are
wholesalers who operate in foreign markets through their own salespeople, stockists and
perhaps, retail outlets. Exporters are relieved of administrative problems, documentation,
shipping, internal transport and so on, and do not carry the risks of market failure.
Licensing is giving permission to use important business aspects like (a) Brand name (b)
Trade mark (c) Patent, (d) Technology (e) Processing and methods to a manufacturer/trader
in a foreign country. The license could be for one or more of such aspects which help the
licensee to boost his sale. In return the licensee pays royalty (on sales) or contract amount to
the licensor. This is equivalent to transfer of intellectual property rights.

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Franchising is a form of licensing in which parent company (franchiser) grants a
foreign company (franchisee) the right to do business in a prescribed manner. The
nature of right could be selling the franchisers product, using its name, product and
marketing techniques or general business approach. One of the methods of
franchising is to provide an important component or ingredient. The business
relation between a automobile manufacturer and its dealer is an example of
franchising.
Contract manufacturing Many large size companies and MNCs organize their
production requirements by contract manufacturing. This can be used partly or fully.
For example the automobiles manufacturers get most of their components from
outside sources and do mainly assembly and testing work. Bata shoes and foot wear
gets the products done from Asian countries (due to cheap labour) and sell them
worldwide. Many big firms of USA and Europe gets the garments stitched in India
and sell in their country with their trade marks. In this way the rich businessmen
exploit the small scale manufacturers by money and reputation power.
Joint Ventures are collaborative arrangements between unrelated parties which
exchange or combine various resources while remaining separate and independent
legal entities. There are two types of JV: Equity and Contractual. The former involves
each partner taking an equity stake in the venture (e.g. through setting up a joint
subsidiary with its own share capital), the latter rely on contractual agreements
between the partners. Joint ventures are an example of the wider concept of the
strategic alliance which embraces knowledge sharing arrangements, mutual
licensing, measures to control and utilize excess capacity etc. Usually JVs are formed
to undertake a specific project that has to be completed within a set period. JVs are a
flexible forms of business arrangement, can be quickly entered into and shut down,
enable the sharing of costs yet are frequently just as effective a means for entering
markets are more direct forms of foreign investment. Often they are used to
establish bridgeheads in a foreign market prior to more substantial operations within
the market by individual participants.

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Mergers and Acquisitions: within the country and cross border are on the increase
due to globalization and consolidation process. Merger and acquisition takes place by
foreign direct investment in new projects or in the existing local company in the host
country. TNCs grow by mergers and acquisitions. There are three types of mergers
and acquisitions.
1. Horizontal: The competing companies in the same industry go in for mergers and
acquisitions. Takeover of Novelis Canada Company by Birla Group.
2. Vertical: When a company with buyer seller relationship companies have a merger
and acquisition.
3. Conglomerate: Companies in different activities go for merger and acquisitions.
Strategic Alliance between two companies is mutual cooperation in research and
development efforts, joint use of production or marketing facilities. The strategic
alliance can be with equity or non equity. The teaming is for win-win situation for all
strategic alliance partners for development of new products the strategic alliance is
used. Alliance may give competitive advantage to partners. GM and Toyota are
collaborating for development of small cars.Alumax an aluminium company has
strategic alliance with auto manufacturer for aluminium car body.
TURNKEY PROJECTS A company may expand internationally by making use of its core
competitiveness in designing and executing infrastructure, plants, or manufacturing
facilities overseas. Conceptually, ‘turnkey’ means handing over a project to the
client, when it is complete in all respect and is ready to use on turning the key.
International turnkey projects include conceptualizing, designing, constructing,
installing and carrying out preliminary testing of manufacturing facilities or
engineering projects at overseas locations for a client organization. It often includes
providing training to the client’s personnel to operate the plant.
The major types of turnkey project include the following.
Build and Transfer (BT)
Build, Operate and Transfer (BOT)
Build, Operate and Own (BOO)
Build, Operate, Lease and Transfer (BOLT)

STAGES OF INTERNATIONALIZATION
Stage-1 • Domestic Operation : The firm’s market is exclusively domestic.  Most
international companies have their origin as domestic companies. These companies focus on
domestic operations only.  Example: Patanjali have currently its major operations in India
only
Stage-2 • Export Operations : The firm expands its market by engaging into export
operations and offering the domestic products to other countries also, but retains production

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facilities within domestic borders.  Example: Indian firms exporting textiles, jute, spices,
nuts, rice all around the world.
Stage-3 • Subsidiaries or Joint Venture : The firm physically moves some of its operations
out of the home country.  There is a mutual cost, profit sharing and management in such
method.  Example: A joint venture between Maruti (Indian Company) and Suzuki (Japanese
Company).
Stage-4 • Multi- National Operations: The firm becomes the fully fledged multinational co.
[MNC] with the assembly of production facilities in several countries & regions of the world.
Some decentralization of decision making is common but many personnel decisions are still
made at corporate level in headquarters.  Example: Mc Donalds is a MNC operating
worldwide.
Stage-5 • Transnational Operations: In this the firms that reach this particular stage are
often called transnational companies because they achieve both global efficiency and local
responsiveness. They use global market and resources for their functioning.  Example: Coca-
Cola, Nestle
Nature of International Business Environment
The business operations performed without any barriers, with the implementation of L.P.G
(Liberalization, Privatization, Globalization) there is boom in the global business and the
trade barriers have been liberalized. This has given rise to
Attracted F.D.I Foreign direct investment
Encouraged flexible important and export policies
Import of jobs in the field of I.T enabled services (B.P.O)
Increase in foreign currency reserves
Improved standard of living
Increase in purchasing power
Improved quality of goods and services
Today, and company which is going globally need to assess different environmental factors
like economic, technological, political, culture, legal and design their operations.
To understand the international business environment we divide the terms
International
Integration and interrelation of different nations.
Business

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Systematic effort of an organization to meet the needs of customers with goods
and services for profit.
Environment is surroundings which we live in, the external forces acting upon the business
is business environment. The environment includes the factors outside the firm, which can
lead to opportunities for or threats to the firm. These factors can be economic,
technological, political, cultural etc.
Thus international business environment is the business operations in different
countries with different external forces acting upon them. Environment is further classified
as domestic environment, foreign environment, and international environment.
Domestic Environment: Forces within a country, which are very familiar and which are
controllable or uncontrollable.
International Environment: Forces acting on business from different nations which are not
familiar and which are controllable or uncontrollable.

The Forces Forces acting upon business are classified as follows

International Environmental Forces: Forces within the organization, which are controllable,
like production, finance, marketing, human resources research and development etc.
External Micro Environmental Forces: Forces outside the organization, which are
controllable, like competitors, suppliers, creditors, consumers, financial institutions etc.
External Macro Environmental Forces: Forces outside the organization, which are
uncontrollable, like political environment, legal environment, technological, environment,
economic environment, cultural environment etc.
The General Agreement on Tariffs and Trade (GATT) is neither an organization nor a
court of justice. It is simply a multinational treaty which now covers eighty percent of the
world trade. It is a decision making body with a code of rules for the conduct of international
trade and a mechanism for trade liberalization. It is a forum where the contracting parties
meet from time to time to discuss and solve their trade problems, and also negotiate to
enlarge their trade. The GATT rules provide for the settlement of trade disputes, call for
consultations, waive trade obligations, and even authorize retaliatory measures.
The GATT has been a permanent international organization having a permanent Council of
Representative with headquarters at Geneva. 25 Governments have signed it. Its function is to
call International conferences to decide on trade liberalizations on a multilateral basis.

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WORLD TRADE ORGANIZATION (WTO)
The WTO was established on January 1, 1995. It is the embodiment of the Uruguay Round
results and the successor to GATT. 76 Governments became members of WTO on its first
day. It has now 146 members, India being one of the founder members. It has a legal status
and enjoys privileges and immunities on the same footing as the IMF and the World Bank. It
is composed of the Ministerial Conference and the General Council. The Ministerial
Conference (MC) is the highest body. It is composed of the representatives of all the
Members. The Ministerial Conference is the executive of the WTO and responsible for
carrying out the functions of the WTO. The MC meets at least once every two years.
Differences between GATT and WTO
The WTO is not an extension of the GATT but succession to the GATT. It completely
replace GATT and has a very different character. The major differences between the two are:
1. The GATT had no status whereas the WTO has a legal status. It has been created
a by international treaty ratified by governments and legislatures of member states.
2. The GATT was a set of rules and procedures relating to multilateral agreements of
selective nature. There were separate agreements on separate issues, which were not binding
on members. Any member could stay out of the agreement. The agreements, which form part
of the WTO, are permanent and binding on all members.
3. The GATT dispute settlement system was dilatory and not binding on the parties
to the dispute. The WTO dispute settlement mechanism is faster and binding on all parties.
4. GATT was a forum where the member countries met once in a decade to discuss
and solve world trade problems. The WTO, on the other hand, is a properly established rule
based World Trade Organization where decisions on agreement are time bound.
5. The GATT rules applied to trade in goods. Trade in services was included in the Uruguay
Round but no agreement was arrived at. The WTO covers both trade in goods and trade in
services.
6. The GATT had a small secretariat managed by a Director General. But the WTO
has a large secretariat and a huge organizational setup
Bretton Wood institutions

The International Monetary Fund and the World Bank were both created at an international

conference convened in Bretton Woods, New Hampshire, United States in July 1944. The
goal of the conference was to establish a framework for economic cooperation and

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 development that would lead to a more stable and prosperous global economy. While this
goal remains central to both institutions, their work is constantly evolving in response to new
economic developments and challenges.

The IMF’s mandate. The IMF promotes international monetary cooperation and

provides policy advice and capacity development support to help countries build and
maintain strong economies. The IMF also makes loans and helps countries design policy
programs to solve balance of payments problems when sufficient financing on affordable
terms cannot be obtained to meet net international payments. IMF loans are short and
medium term and funded mainly by the pool of quota contributions that its members provide.
IMF staff are primarily economists with wide experience in macroeconomic and financial
policies.

The International Monetary Fund (IMF) is an organization of 189 countries, working to foster
global monetary cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty around the world.
 Exchange Stability: ...
 Eliminating BOP Disequilibrium: ...
 Determination of Par Value: ...
 Stabilize Economies: ...
 Credit Facilities: ...
 Maintaining Balance Between Demand and Supply of Currencies: ...
 Maintenance of Liquidity: ...
 Technical Assistance:
The International Bank for Reconstruction and Development (IBRD), commonly referred to
as the World Bank provides low-interest loans, interest-free credit, and grants. It focuses on
improving education, health, and infrastructure. It also uses funds to modernize a country's
financial sector, agriculture, and natural resources management.

The World Bank’s mandate. The World Bank promotes long-term economic development
and poverty reduction by providing technical and financial support to help countries reform
certain sectors or implement specific projects—such as building schools and health centres,
providing water and electricity, fighting disease, and protecting the environment. World Bank
assistance is generally long term and is funded both by member country contributions and
through bond issuance. World Bank staff are often specialists on particular issues, sectors, or
techniques.

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Challenges of International Business

Political, economic, and environmental issues are increasingly becoming the remit

of international business leaders as much as governments. Aim is to prepare our students to
become the next generation of global business leaders, embracing the opportunities and
challenges of international business. While the global marketplace becomes more
interconnected and accessible, the risks involved in doing business abroad are not to be taken
lightly.

Expanding business overseas means reaching new clients or customers and potentially
boosting profits. Despite all the uncertainty of 2017 and the challenges that have yet to
reveal themselves, there are some guidelines for conducting business on a global scale that
you should always consider before leaping into new international operations. Here is our
advice on how to tackle the 11 biggest challenges for international business:

1. International company structure

2. Foreign laws and regulations
3. International accounting
4. Cost calculation and global pricing strategy
5. Universal payment methods
6. Currency rates
7. Choosing the right global shipment methods
8. Communication difficulties and cultural differences
9. Political risks
10. Supply chain complexity and risks of labour exploitation
11. Worldwide environmental issues.

International company structure: If 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.

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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?

Coca-Cola offers one example of effective multinational business structure. The company is

organized into continental groups, each overseen by a President. The central Presidents
manage Presidents of smaller, country-based or regional subdivisions. Despite its diverse
global presence, the Coca-Cola brand and product is controlled centrally and consistent
around the world. While Coca-Cola is a vast international brand, the structure of business and
the number, nationality, and level of expertise of your team will vary depending on industry,
product, and the size of business.

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. For
instance, European countries stipulate that a minimum of 14-weeks maternity leave be
offered to employees, while on the other hand, there is no such requirement for U.S.
employers. With the complexity involved in foreign trade and employment laws, investing in
knowledgeable and experienced corporate counsel can prove invaluable.

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.

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

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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. A focus
on tax efficiency is often the aim of international accounting efforts. Tax consolidation is a
feature of several multinationals’ decision to be headquartered in Dublin, as Ireland is known
for its “business-friendly” corporate tax policy. Well-known companies with operational
headquarters in the Republic of Ireland include Google, Facebook, and Intel.

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.

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.

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

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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.

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 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.
For a quick check of costs and compliance, UPS International has created an online tool
called Tradability to help businesses and individuals manage the movement of good overseas.

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. 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.

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. For instance, American coffee company
Starbucks seriously struggled in Australia, where the demand for local, independent cafes and
coffee shops vastly outweighed the appeal of the corporate giant.

Politicalrisks: 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.

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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. For instance, companies like Facebook are banned in
China, partially in preference for national social networks and also due to government
regulation over internet content. Monitoring political developments and planning
accordingly can mitigate political risks of doing business abroad.

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.

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..

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.
With a number of brands such as Dell, Renault, and MUD Jeans leading a shift towards
the circular economy, there is an opportunity and demand for changing production methods
and consumer behavior to establish a more sustainable future for the environment and society
as a whole.

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