INTERNATIONAL BUSINESS

- refers to the trade of goods, services, technology, capital and/or knowledge across
national borders and at a global or transnational level. It involves cross-border
transactions of goods and services between two or more countries.
- International business is evolved from international trade and international marketing.
- International business is a crucial venture due to the influence of varied social,
cultural, political, economic, natural factors, and government policies and laws.
- Business firms go globally to maximize benefits and minimize risks.
- The advantages of international business include: wider markets, high living
standards, optimum utilization of resources, etc.
- Problems of international business include: political factors, foreign exchange, tariffs,
cost, etc.
- The firms get the competitive advantages like economies of scale, latest technology,
expert human resources, etc., by going global

FORMS OF INTERNATIONAL MARKET/MODE OF ENTRY

A. EXPORTING
- Exporting is frequently employed mode of internationalization. It is one of the
simplest and most common approaches adopted by firms in their endeavor to enter
foreign markets.
- Exporting is marketing and sale of domestically produced goods in another country.

1. Direct export
- Producer sells directly to the importer. This mode gives the company a greater
degree of control over its distribution channels.

2. Indirect export
- Indirect exporting is the process of exporting through domestically based export
intermediaries.
B. LICENSING
- is when a firm, called the licensor, leases the right to use its intellectual property-
technology, work methods, patents, copyrights, brand names, or trademarks—to
another firm, called the licensee, in return for a fee.
- The property licensed may include:
1. Patents
1. Copyrights
2. Technology
3. Technical know-how
4. Specific business skills
- Example: using the design of a popular logo or character

C. FRANCHISING
- Under franchising, an independent organization called the franchisee operates the
business under the name of another company called the franchisor. In such an
arrangement the franchisee pays a fee to the franchisor. Franchising is a form of
Licensing but the Franchisor can exercise more control over the Franchisee as
compared to that in Licensing.

- Examples:
D. SPECIAL MODES

1. Management Contract
- A management contract is an agreement between two companies whereby one
company provides managerial assistance, technical expertise and specialized
services to the second company for a certain period of time in return for monetary
compensation.
- Some examples of a first-tier management company include Accor, Hilton,
Hyatt, IHG, Marriott, Rezidor, and Starwood.

2. Turnkey Projects
- A turnkey project is a contract under which a firm agrees to fully design,
construct and equip a manufacturing/business/service facility and turn the project
over to the purchaser when its ready for operation, for a remuneration.
- Example: Toyota’s car plant in Adapazari, Turkery

3. Contract Manufacturing
- Contract manufacturing is outsourcing entire or part of manufacturing
operations.
- Example: Foxconn, who manufactures parts or even whole products for giants
like Apple, Amazon, and Microsoft.

E. Foreign Direct Investment without alliances

- Companies enter the international market through FDI, invest their money, establish
manufacturing and marketing facilities through ownership and control.
- Greenfield strategy- the term Greenfield refers to starting of the operations of a
company from scratch in a foreign market.

F. Foreign Direct Investment with alliances

- Strategic alliance is a cooperative and collaborative approach to achieve the larger
goals.
Role of alliances:
o Many complicated issues are solved through alliances
o They provide the parties each other’s strengths
o Helps in developing new products with the interaction of 2 or more
industries
o Meet the challenges of technological revolution.
o Managing heavy outlay
o Become strong to compete with a multinational

1. Mergers and acquisitions

MERGER
- The combining of two or more companies, generally by offering the
stockholders of one company securities in the acquiring company in exchange for
the surrender of their stock.
- Example: the infamous Daimler Benz and Chrysler merger (car developing,
manufacturing and retailing).

ACQUISITION
- When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition.
- Example: Disney acquire Pixar

2. Joint ventures
- A joint venture is an entity formed between two or more parties to undertake
economic activity together. The parties agree to create a new entity by both
 contributing equity, and then they share in the revenues, expenses, and control of
the enterprise.
- Example: Sony-Ericsson is a joint venture by the Japanese consumer electronics
company Sony Corporation and the Swedish telecommunications company
Ericsson to make mobile phones.

APPROACHES OF INTERNATIONAL BUSINESS

A. Ethnocentric Approach

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

- The Ethnocentric Approach is one of the methods of international recruitment

wherein, the HR recruits the right person for the right job for the international
businesses, on the basis of the skills required and the willingness of the candidate to
mix with the organization’s culture.

- In Ethnocentric Approach, the key positions in the organization are filled with the
employees of the parent country. All the managerial decisions viz. Mission, vision,
 objectives are formulated by the MNC’s at their headquarters, and the same is to be
followed by the host company.

It is based on the rationale that, the staff of the parent country is best over the others,
and also, they can better represent the interest of the headquarters.

Advantages of Ethnocentric Approach

- Better coordination between the host and the parent company.

- The culture of the parent company can be easily transferred to the subsidiary
company, thereby infusing beliefs and practices into the foreign country.
- Effective control over the subsidiary.
- The parent company can have a close watch on the operations of the subsidiary.
- Better transfer of technical know-how.
- Effective communication between the host and the parent company.
- No need to have a well-developed international local labor market.

Disadvantages of Ethnocentric Approach

- The staff of the parent country may find it difficult to adjust in the host country due to
the cultural differences.
- Difficulty in guiding employees living far away from the parent country.
- Missed out the opportunity to hire the best personnel from the host country.
- The cultural clashes between the executives of parent country and the staff members
of the host country.
- The expatriates from the parent country are much expensive as compared to the
employees in the host country.
- The government restrictions in the host country may hamper the business of the
parent company.
- The failure rate is very high.

This approach is beneficial in a situation when a new subsidiary is set up in

the host country, and the employees of the parent company visit there and initializes
its operations.

Example:

- Typical example of ethnocentric approach company are Japanese firms such as

Panasonic, Sony and Hitachi. In Mastec organization, the staffing approach for
subsidiaries in Thailand, Vietnam and India adopted ethnocentric system due to lack
of competency of HCNs and the needs for corporate communication.

B. Polycentric Approach
- The domestic companies which are exporting to foreign countries using the
ethnocentric approach find at the later stage that the foreign markets need an
altogether different approach.
- Then, the company establishes a foreign subsidiary company and decentralizes all
the operations and delegates decision-making and policy-making authority to its
executives. In fact, the company appoints executives and personnel including a chief
executive who reports directly to the Managing Director of the company. Company
appoints the key personnel from the home country and all other vacancies are filled by
the people of the host country.

- The executives of the subsidiary formulate the policies and strategies, design the
product based on the host country’s environment (culture, customs, laws, government
policies, etc.), and the preferences of the local customers. Thus, the polycentric
approach mostly focuses on the conditions of the host country in policy formulation,
strategy implementation and operations.
 - The Polycentric Approach is the international recruitment method wherein the HR
recruits the personnel for the international businesses.

- In Polycentric Approach, the nationals of the host country are recruited for the
managerial positions to carry out the operations of the subsidiary company. The
rationale behind this approach is that the locals of the host country know their culture
better and can run the business more efficiently as compared to their foreign
counterparts.

Advantages of Polycentric Approach

- The difficulty in the adjustment of expatriates from the parent country gets
eliminated.
- The hiring of locals or the nationals of the host country is comparatively less
expensive.
- The morale of the local staff increases.
- Better productivity due to better knowledge about the host market.
- The career opportunities for the nationals of the host country increases.
- Better government support.
 - Chances of success are high.

Disadvantages of Polycentric Approach

- Lack of coordination between the host and the parent company, due to the absence of
a link that gets created when expatriates from the parent country hold the managerial
positions at the subsidiary.
- The lack of effective communication between the staff members of both the host and
the parent company, due to the language barrier.
- Difficult to exercise control over the subsidiary.
- Lack of knowledge about the market conditions of the host country.
- The conflict may arise between the managers of both the host and the parent company
due to the different thinking processes.

In this approach, the natives of the host country are chosen to run the
operations of the subsidiary and are given the authority to formulate strategies for the
business keeping the mission and vision of the subsidiary company in mind. Whereas
the parent country nationals hold key positions at the corporate headquarters and
scrutinize the operations of the subsidiary from the home office.

Example:
- The polycentric approach to recruitment means that we hire locals to fill our positions
in a host country. For example, we could advertise on local job boards or create a
contract with a local recruitment agency. We use the polycentric approach when [we
need the skills of locals to conduct our business.

C. Regiocentric Approach

- The company after operating successfully in a foreign country, thinks of exporting to

the neighboring countries of the host country. At this stage, the foreign subsidiary
considers the regional environment (for example, Asian environment like laws,
culture, policies, etc.), for formulating policies and strategies. However, it markets
more or less the same product designed under polycentric approach in other countries
of the region, but with different market strategies.
 - The Regiocentric Approach is an international recruitment method wherein the
managers are selected from different countries lying within the geographic region of
business.

- In other words, the managers are selected from within the region of the world that
closely resembles the host country.

Advantages of Regiocentric Approach

- Culture fit, i.e. the managers from the same region as that of the host country may not
encounter any problem with respect to the culture and the language followed there.
- Less cost is incurred in hiring the natives of the host country.
- The managers work well in all the neighboring countries within the geographic region
of the business.
- The nationals of host country can better influence the decision of managers at
headquarters with respect to the entire region.
Disadvantages of Regiocentric Approach

- The managers in different regions may not understand the viewpoint of the managers
employed at the headquarters.
- There could be a communication barrier because of different languages.
- The manager selected from a particular region may lack the international experience.
- It may lead to the confusion between the regional objectives and the global objectives.
The regional managers may only focus on accomplishing the regional targets and may
oversee the impact on the firm as a whole.

The rationale behind the Regiocentric Approach is that the person belonging
to the same region as that of the host country is well versed in the language and the
culture that prevails there and would better understand the problems that arise in the
market, as compared to the foreign counterparts.

Example:

- For example, companies such as Coca Cola have been using this kind
of regiocentric orientation approach. For marketing purposes, countries such as India,
Pakistan and Bangladesh have been grouped together due to their similarities, and a
similar marketing strategy is used across these countries.

D. Geocentric Approach

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

- The Geocentric Approach is a method of international recruitment where the MNC’s

hire the most suitable person for the job irrespective of their Nationality.

- The rationale behind the Geocentric Approach is that the world is a pool of talented
staff and the most eligible candidate, who is efficient in his field, should be appointed
for the job irrespective of his nationality. This approach is followed by the firms that
are truly global because they follow the integrated global business strategy.
-

Advantages of Geocentric Approach

- MNC’s can develop a pool of senior executives with international experiences and
contacts across the borders.
- The expertise of each manager can be used for the accomplishment of MNC’s
objective as a whole.
- Reduction in resentment, i.e. the sense of unfair treatment reduces.
- Shared learning, the employees, will learn from each other’s experiences.

Disadvantages of Geocentric Approach

- The cost of training, compensation, and relocation of an employee is too high.

- Highly centralized control of staffing is required.
- Proper scrutiny is required by the HR to select the most suitable person for the job,
which could be time-consuming.
- This approach is very costly since the recruitment agencies or the consultants are to be
hired for the global search for eligible candidates.

Generally, the recruitment agencies or the consultants are hired to find the
most suitable employee equipped with all the necessary skills, residing in any part of
the world, to be employed in the global business.

In addition to this, MNC’s can make use of their internal source of

recruitment, by maintaining a track record of its employees, and scrutinize these to
find the most suitable candidate for the global posting.

Example:

- The geocentric approach uses the best available managers for a business without

regard for their country of origin. In this example, the UK parent company uses
natives of many countries at company headquarters and at the U.S. subsidiary.
CONCLUSION
The process of location of foreign operation in a new country must be carried out
carefully. When an organization is choosing to internationalize their operations, they
will first need to decide what its optimal levels of: commitment, flexibility, control,
presence and risk are in order to select the most appropriate entry mode. Entry modes
in international business can be successful if implemented in the right circumstances.