ESUT BUSINESS SCHOOL

20 GARDEN AVENUE, G.R.A. ENUGU

INTERNATIONAL BUSINESS (EBUS 830)

(A) INTRODUCTION TO INTERNATIONAL BUSINESS

Basic Concepts
A business is any activity that seeks profit by providing goods and or services to others.
Businesses exist to satisfy people’s needs. Any business that does not satisfy needs will not
survive. Businesses therefore provide us with necessities of life like food, clothing, shelter,
healthcare, means of transportation and many others. Need drives business, but profit
sustain it.

Businesses are mostly started by entrepreneurs to satisfy other peoples need while making
profit. When they do so, such businesses pay taxes to government for developmental
activities. They also employ people to assist them provide the needs of people. Those
employed also pay taxes to government and feed their families from their earnings. By doing
so, standard of living is increased. Standard of living is the amount of goods and services
people can buy with the money they have. The higher the good and services the higher the
standard of living. Businesses also increase quality of life. Quality of life is the general well-
being of a society in terms of freedom, clean environment, education, health care, safety, free
time and everything that can lead to satisfaction and joy. Both government and businesses
help in increasing quality of life of the people. When businesses have done well domestically,
they usually seek expansion across national boundaries. Once they do that, their operation
becomes international in nature.

Both profit and nonprofit making organizations use business principles in their operations
for survival and sustainability. Such principles include leadership, accounting, Marketing and
financial management and entrepreneurial skills.

International Business Defined

An international business is any firm or company or activity that engages in international
trade and or investment. International trade occurs when a firm exports goods or services to

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consumers or customers in another country. International investments on the other hand,
occur when a firm invests resources in business activities outside its home country.
International Business is therefore made up of International trade and international
investment. International business Management is the management of business in a country
other than one’s own.

Therefore, when a Business man based in Lagos Nigeria sells his goods and or services in
Lome, Togo, he is trading and it is and international business. If he decides not to sell his
goods and or services in Lome but decides to buy substantial shares of a Togolese Business
company, he is into international investment and therefore into international business.

Some key concepts to note in international Business

1. International business is trading or investing across national boundaries.
2. Foreign business denotes the domestic operations within a foreign country.
3. Multidomestic Company (MDC) is a firm with multi-country affiliates, each of which
formulates its own business strategy based on perceived market differences and host
country laws and principles. They can appear in different subsidiary names.
4. Global Company is one that attempts to standardize and integrate operations
worldwide in all functional areas with high level products and services. They usually go with
their brand name. A global firm is one that attempts to standardize operations in all
functional areas but that responds to national market differences when necessary.
i. It searches the world for market opportunities and threats,
ii. Searches for strength and weaknesses within each market,
iii. Seeks to maintain presence in key markets around the world
5. International business can be global, multidomestic or simply foreign in nature. It is a
company operating in international market.
6. Multinational corporations (MNCs) are firms that operate in so many countries of the
world. They are similar to multidomestic and global companies but they are in-
between the two.

International Business is very old practice but international business management as a field of
study is relatively new. This course is however on International business.

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Globalization
Globalization is the shift towards a more integrated and interdependent world economy.
Globalization has been categorized variously and we will look at two different categories.
The first is categorizing globalization into markets and products. Globalization of markets
is the merging of historically distinct and separate physical (national) markets into one
huge global market. This has made taste and preferences of customers in different nations
to coverage on some global norms. For instance, during the Administration of President
Ibrahim Babangida in the late 1980s when late Senator Chukwumereije was the Minister for
Information, Cable Network News (CNN) and South African Broadcasting Corporation
(SABC) were barred from airing their programmes in Nigeria and Nigerians were barred
from watching foreign television programmes. It was to protect our taste, preferences, norms,
values and attitude which make up our culture. That was during the military era. Today,
globalization of market and advancement in technology has made it difficult for any country
to stop anybody from watching what he wants to watch. It has also created new taste and
preferences which even appear to be converging globally. Globalization thrives more in a
democratic world. Dictatorship stifles globalization.

The second aspect of globalization is that of product. Product globalization is the sourcing
of inputs and raw materials for the production of goods and services from locations
around the globe to take advantage of national differences in the cost and quality of
factors of production (such as labour, energy, land, and capital). It also takes advantage in
natural endowments. Companies use this to lower their overall cost structure and/or improve
the quality or functionality of their product offering, thereby allowing them to compete more
effectively. For instance, Channels television in Nigeria can have their correspondents across
the globe without having their offices in those countries. All they do is to engage a staff of
CNN in Washington, a staff of British Broadcasting Corporation (BBC) in London and a staff
of Aljazera in Doha, Kuwait to report important events to them and get paid for their services.

Globalization can also be categorized into five other areas (political, technological, market,
cost and completion)

1. Political globalization is a trend toward the unification and socialization of the

global community through leadership. That is why we have ECOWAS, AU, EU
etc. That was also why Russia allegedly aided the wining of Trump as a USA

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 President. Political globalization has brought so much influence of the super powers
on who becomes leader in any less powerful country of the world.

2. Technological globalization makes the advancement in computers and

communications technology to permeate an increasing flow of ideas and information
across borders, enabling customers to learn more about foreign goods through
advertisement. Creativity and innovation can no longer be hidden once they have the
necessary new value and can improve life of the people. Today, we are using
ZOOM App for this lecture because of advancement in technology and
globalization. It is an aspect of innovation in lecture delivery with which students and
audience from many countries of the world can receive lecture and interact with one
another without travelling out.

3. Market globalization helps those micro businesses who have found home markets
saturated to go foreign for more profits and sales. Market globalization has almost
diminished the physical markets as sales can be concluded between buyers and sellers
in two locations including within two or more countries in matters of minutes using
online platforms like Jumia, Konga, Aliexpress, OLX, and Jiji.

4. Cost globalization helps companies to reduce cost in materials, production, inventory

and personnel. This is done by accessing resources from cheaper areas for use in
costly areas of the world. Many companies from the United States of America employ
and sometimes locate their factories in Northern Mexico to cut costs.

5. Competitive globalization has driven companies away from their former strongholds
into the third world countries. With competitive globalization, there is no hiding area
for companies anywhere in the world. Globalization has removed competitive
boundaries from anywhere in the world. With globalization, a firm in China is a
potential competitor of a firm in Nigeria.

Steps in Exportation
1. Identify foreign market opportunities
2. Avoid a host of unanticipated problems in a foreign market (ie threats)
3. Assess yourself (analysis of strength and weaknesses)

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 4. Familiarize self with mechanics of export and import procedures
5. Learn how and where to get export credit insurance and credit
financing
6. Learn about foreign exchange risk and how to mitigate them.
7. Understudy existing exporters and importers
8. Enter the market on a small scale and grow gradually
9. Employ locals in the host country to assist you and promote firm’s
products or services.
NB: Currencies that are not easily convertible has more unanticipated
problems. Goods can be exported in return for cash or through
countertrading.
Countertrading is a process hereby payment for exports is received in goods and services
rather than money because of weak currency.

Sources of Information for Exportation

i The US Department of Commerce at Victoria Island can be of help. They provide
Best Prospect list to new exporters to more than 14 countries that USA has exporting
links.

ii You can conduct a market survey of your product and services which will give you
information on marketability, competition, comparative prices, distribution channels,
names of potential sales representatives, etc.

iii Trade fairs and other trade events can also give you opportunity to make physical
contacts and get vital information.

iv Export management companies act as consultants to new exporters and guide them
with an agreed fee. In some cases the EMC even accept to market the product for the
exporter because they have a network of contacts which the new entrant may not
know. The EMC may have built trust among consumers which the new entrant would
take advantage of.

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 (B) THEORIES OF INTERNATIONAL BUSINESS

Every field of study has underlying concepts, principles and theories that lay foundation for
practice within such field. There is no field without those three elements and their
relationships help practitioners in every field. To be able to understand theories with ease, we
will first understand concepts, principles, and then theories but in briefs.

Concepts are abstractions formed from generalizations from particulars like a mental image,
or perception (Udu and Udu 2015). They are generally formed and accepted mental images
or perceptions of objects, events, or processes. It is a commonly agreed upon definition of an
object, event, or process. It is also the symbol through which we communicate.
Understanding concepts the same way makes communication very easy and smooth.
According to Nwachukwu (1988) concepts are the corner stone for the development of
principles and theories. If concepts are not clear to those we intend to communicate with
them, understanding will be difficult. Some well known childhood concepts are head, ear,
festival, marriage etc. in International Business, we have concepts such as importation,
exportation, currency, national borders, and investment. If our understanding of national
borders or currency is not the same, discussion on that would be difficult to understand.

Principles are descriptive, prescriptive and normative fundamentals of general truth upon
which other truths stand. It describes and prescribes what should happen if other things
happen, depending on the situation or circumstance. Normative here means relating to, or
stating particular rules of behavior. Creating what is normal or not to the knowlwdge of all
concerned. Principles are only guides to action and they are not the actions themselves. They
is an Igbo adage (principle) that says“Agwa nti, nti anughi, ebere isi, nti adaa”. International
business principle requires honesty, fairness and trust. There is also the principle that for
you to import from the host country to the home country, you must be ready to part with
something of value commensurate with what you want to take home.

Theories are scholarly grouping of concepts and principles to lay a framework or foundation
for the achievement of set goals or the performance of meaningful activities. Without
concepts and principles, there cannot be a theory. Theory therefore synthesizes both concepts
and principles and provides foundation for practice. Good understanding of theories will
assist us in understanding behavioural pattern, strength and weaknesses of countries in

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international trade and investment. It will also help us to understand reasons behind national
trade and investment policies.

International Trade/Business theories

Seven types of International Business theories are briefly discussed here.
i. Mercantilism theory of the 16th and 17th century
ii Adam Smith’s Absolute Advantage theory of 1776
iii. David Ricardo’s Comparative Advantage theory of 1817
iv Heckscher (1919) and Ohlin (1933) Natural Endowment theory
v Raymond Vernon Product Life-Cycle theory of 1960s
vi Michael Porter National Competitive advantage theory of 1990
vii First- Mover theory by Economics of 1970s

i. Mercantilism theory
This theory which is the earliest of recorded International theory was postulated in the 16th
and 17th centuries. It advocates that countries should encourage exports but discourage
imports. Although the theory is old and popularly criticized, many countries and opinion
leaders still advocate it in their trade policies. The theory assumes that Silver and Gold is
the mainstay of national wealth and essential to vigorous commerce. They were the
currencies of trade between countries and countries were exporting goods to get Gold and
Silver then. Exportation brings in cash while importation parts with cash. Importing goods
from other countries entails giving out your Silver and or Gold considered abnormal. The
main tenet of the theory is that it is better for a country to accumulate Silver and Gold by
exporting more and importing less if there must be import. Accumulation of Silver and
Gold will increase national wealth and prestige according to Thomas Mun in 1930.
Remember that there was no globalization when this theory was postulated neither was
there free trade anywhere in the world.

In 1972, David Hume criticized the theory that the theory instigates inflation in the
exporting country and deflation in the importing country over a long period which will
make continuous exportation and importation unreasonable on both sides.

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 ii. Absolute Advantage Theory
Adam Smith in his landmark book titled The wealth of Nations first attacked the
Mercantilism theorists’ assumption that trade is a zero-sum game. He argued that
countries differ in their ability to produce goods efficiently. At that time England by
virtue of their superior manufacturing processes was the world’s best and highest producer
of textile materials. France on the other hand was the best and highest producer of wine
because of favourable climate, good soils and accumulated expertise. Therefore Smith
argued that a country has an absolute advantage in the production of product when it is
more efficient than any other country producing it. Countries should therefore
specialize in the production of products they have absolute advantage in and export
that while importing the product they don’t have absolute advantage in the
production. If a country tries to produce a product it has no absolute advantage in, it
would be spending more and achieving less. This is because the cost of production will be
very high and not profitable.

This theory is based on productivity and not on factors of production. In this theory, free
labour and material movement are not considered but it’s based on superior manufacturing
prowess. Liberalization and free trade are also not considered.

iii. Comparative Advantage Theory

David Ricardo in his book titled Principles of Political Economy published in 1817
extended Adam Smith’s theory by stating that even if a country can have absolute
advantage in the production of all goods, such country should still specialize in the
production of only the goods that can produce most efficiently while importing the
ones they can produce less efficiently. Ricardo was the first to suggest a free trade
among countries. He argued that trade restriction is not beneficial but free trade is
beneficial universally. This theory is based on productivity of a country. A more
productive country will have a comparative advantage over the other. According to him,
no country can have absolute advantage in the production of all products forever if there is
free trade among countries.

iv. Natural Endowment theory

Eli Heckscher (1919) and Bertil Ohlin (1933) came up with the National Endowment
Theory which stresses natural factor endowment rather than productivity as the basis

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for comparative advantage. This theory assumes that a country with more quality and
quantity of natural resources will produce and export more. Factor endowment means the
extent to which a country has high quality and quantity factors of production, land, labour
and capital. Factor availability determines factor costs. The theory further assume that
countries will export those goods that make intensive use of factors that are locally abundant
while importing goods that make intensive use of factors that are locally scarce. They also
support Ricardo that free trade is universally beneficial. Unlike Ricardo, Heckscher-Ohlin
argues that pattern of international trade is determined by differences in productivity. To
support this theory, the United States with unusual abundance of arable land is a substantial
exporter of agricultural goods while China excels in export of good produced in labour
intensive manufacturing industries like textile and foot wears reflecting their abundant labour
force.

v. The Product Life-Cycle Theory

Raymond Vernon initially proposed the product life-cycle theory in the mid 1960s. In most
part of the 20th century, a very large proportion of the world’s new products had been
developed by U.S. firms and sold first in the U.S. market (e.g. mass produced automobiles,
televisions, instant cameras, photocopiers). Vernon argued that the wealth and size of the
U.S. market gave U.S. firms a strong incentive to develop new customer products. In
addition, the high cost of U.S. labour gave them the incentive to develop and use cost-saving
process innovation. Early in the life cycle of a typical product, while demand is starting
to grow rapidly in the United States, demand in other advanced countries is limited to
high-income groups. The limited initial demand in other advanced countries does not make
it worthwhile for firms in those countries to start producing the new products, but does
necessitate some exports from the U.S. to those countries.

However, overtime demand start to grow in other advanced countries like Britain, France,
Germany and Japan. With the growth in sales, it becomes worthwhile for other advanced
countries to start producing such goods. Standardization increased and prices stabilize.
Overtime, U.S. who started producing it can decide to start importing if it is cheaper to do so.
Note that natural endowment and absolute advantage are not considered here.

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vi. National Competitive Advantage Theory
In 1990, Michael Porter of Harvard Business School published his research on why some
countries succeed and others fail in International trade. He studied 100 industries in 10
countries. His aim was to discover why some countries do so well in some industries while
others do not. Porter’s theory has four broad attributes of a nation shape the environment in
which local firms compete and these attributes promote or impede the creation of competitive
advantage.
1. Factor endowments – Skilled labour and infrastructure.
2. Demand condition – Nature of home demand for goods.
3. Relating and supporting industries – The presence or absence of supplier industries
and related industries that are internationally competitive. Example is the relationship
between the Banking sector and the manufacturing sectors. Strong regulatory agencies
like the CBN and NDIC are necessary factors for consideration.
4. Firm strategy, structure and rivalry – Conditions governing how companies are
created, organized, managed and the nature of domestic rivalry. Strategy here is the
means of achieving goals, structure is the framework for performance, while rivalry is
the competitive nature of the environment.

vii. First-Mover Advantage

According to the new trade theory, firms that establish a first-mover advantage with
regard to the production of a new product may subsequently dominate global market in
that product. This is especially in industries where global market can profitably support only
a few numbers of firms such as the Aerospace market for U.S., Wine for France, Wrist watch
for Switzerland, Automobile for Japan and Fish for Iceland. In national markets, products that
are first introduced in the market usually dominate the market too. In Nigeria, Maggi as a
seasoning, Omo as a detergent, Coke as a soft drink etc were first movers and are certainly
the market leaders for years now not necessarily because of their qualities.

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 (C) INTERNATIONAL BUSINESS ENVIRONMENT

* Concept of the Environment

Natural factors
Laws and politics
of host country
Changing
Socio-cultural Government politics Economic
HC of HC
factors of host
HC legal country
Organization
structure Political
instability of Technological
Economic stability HC factor
HC

Demographic
Global factors factors
Socio-cultural
factors

External Environment of International Business at home and in the host country

The environment of an International business is a critical part of the concept of International

business management. A business environment, to a very great extent can determine the
success or failure of an organization. To properly understand a business environment, we
should borrow some concepts from the systems theory. The basic assumption of the systems
theory is that organizations are not self-sufficient, self-contained or self-reliant. They
exchange resources with and are dependent upon the external environment, because of the
dependence of organizations on the environment for their inputs and another dependence on
the environment for their output to be consumed, the environment cannot be ignored by the
management of any business organization whether at national or international level.

There are basically two categories of business environment: thus internal and external. The
internal environment which is not our focus here looks a the strengths and weaknesses of the
organization in areas of quality of personnel, quality of assets, good brand name, strategic
location, good corporate governance, edge in product or service area among others.

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The external environment which is our focus from the international perspective can be
defined as all elements outside on organization that are relevant to is operations. It can also
be defined as all relevant forces outside a firm’s boundaries that can influence it’s operations.
Any factor in the external environment that cannot directly or indirectly influence the
operation of a firm is not relevant to such organization at that moment. A factor which is not
relevant today could be relevant tomorrow.

Domestic, Foreign and International Environment

The domestic environment includes all the uncontrollable forces originating in the home
country that surround and influence the firm’s life and development (operations). There are
forces which most managers of the firm are familiar with because it is coming from their
country. However, the managers of the firm that are non-nationals will not be very familiar
with such forces. Although those forces are domestic, they can influence foreign operations
to a great extent. For instance, if a country (as it is in Nigeria today in 2019) is suffering from
shortage of foreign currency, the domestic national government can place, restrictions on
overseas investment to reduce its outflow. That would make it difficult for their foreign firms
to expand their overseas facilities, as they may deem fit. Another example was the increase in
capital base of Nigeria Banks in 2004 which forced Nigeria Banks that were in the process of
establishing the foreign (off shore) branches to suspend such actions within that period.
Remember that Banks consolidation exercise in Nigeria affected their offshore operations.

Foreign environment consist of all uncontrollable forces originating outside the home but
within the host country of the firm which surround and influence the firm’s operations.
Although the kinds of forces in the two environments are identical, their values and effects on
firm’s operations often differ very widely and sometimes they are even opposed to each
other. For instance, Nigeria Government may seek expansionary strategy in oil which could
allow chevron to increase production. If it happens that it coincided with when America
Government reduced or banned importation of Nigeria crude oil, chevron would be in a
difficult situation. International environment is the interaction (1) between the domestic
environmental forces and the foreign environmental forces and (2) between the foreign
environmental forces of two or more countries when an affiliate or affiliates in one country
does business with customers in one or more countries.

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For example, managers at the home country headquarters of a multidomestic or global firm
work in the international environment if they are involved in any way with another nation,
whereas those in a foreign subsidiary do not, unless they too are engaged in international
business through exportation or the management of other affiliates in other country. For
instance, if Dangote Cement Nigeria Ltd has a subsidiary called Dangote Cement Ghana Ltd,
it means that Dangote Cement Nigeria Ltd is in International business and they are also in
International business management. However, if Dangote Cement Ghana Ltd produces and
sells only within Ghana territory, they cannot be said to be in International business except if
they too sells to customers in another country like Liberia. That was why we differentiated
multidomestic from global companies and foreign companies.

Options available to an International Company

International business manager has three main options with his product or services.
1. Transfer the product or service intact as it is (global)
2. Adopt or modify it to local, domestic, or host country taste and preferences (multi
domestic)
3. Sell your goods and services only within your country of origin

To deepen our study of international business environment, we will discuss the impact of
religion on international business. Students are expected to study the impact of other
environmental factors on international business in details.

MSc. ASSIGNMENT
Effect of COVID 19 related Economic lockdown on International Business Survival.
NB: Between 20 and 25 typed pages on 12 point Time Roman including references.

MBA ASSIGNMENT
Effect of COVID 19 related Social Distancing Policy on International Businesses
Profitability
NB: Between 20 and 25 typed pages on 12 point Time Roman including references.
Dr. G.O.C. Udu
08037416277
Course Lecturer

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(D) RELIGION AND INTERNATIONAL BUSINESS

Type of Religions

1. Christianity

Christianity is defined as a group of people who believe in Jesus Christ as the Savior of the
world and as those whose lives are guided by the principles of His teachings (Deem, 2011).

It is a monotheistic (belief in one God) religion that grew out of Judaism and the division is
as shown in chart below. Christianity is the most widely practiced religion in the world (about
20% of the world's population) and vast majority live in Europe and the Americas.
Christianity is responsible for the way our society is organized and for the way we currently
live. The Christian contribution is extensive. It has contributed to laws, economic, politics,
arts, and more of countries where the adherents are many and or in power.

The Economic Implication of Christianity: the protestant work Ethic

Max Weber (1904/1949) is known for the work, the Protestant Work Ethic and the Spirit
of Capitalism. Weber is one of the first researchers to connect religion to the marketplace,

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focusing on western cultures and economies. Weber posited that Western countries that
embraced the Protestant work ethic had the highest rate of business and economic growth. He
also argued that in Calvinist and Puritan societies, there was more entrepreneurial activity.

"Business Leaders and owners of capital, as well as the higher grade of skilled labor, and
even more the higher technically and commercially trained personnel of modern enterprises
are overwhelmingly Protestant".

The development of capital economy in Western Europe by the Protestants were largely due
to

a. The importance of hard work and wealth creation emphasis

b. The ascetic beliefs lead to reinvestment in expansion of capitalist enterprises

c. The nonconformist nature of Protestants may pave the way for subsequent emphasis on
individual economic and political freedoms and the development of individualism as an
economic and political philosophy.

Note that businesses boom in Christian dominated areas. Gambling and speculations are
allowed.

2. Islam

Islam is the second largest of the world's religions and dates back to 610AD when Prophet
Mohammed began spreading the religion. Adherents of Islam are referred to as Muslims and
they are majority in 35 countries from Northwest Africa through the Middle East to China
and Malaysia in the Far East.

Islam is monotheistic religion with the principle that there is no god but one true omnipotent
God. Islam belief is that as God's surrogate in this world, a Muslim is not a free agent but is
circumscribed.

Islamic Fundamentalism

 In the West, Islamic fundamentalism is associated in the media with militants, terrorists,
and violent upheavals, however, the vast majority of Muslims point out that Islam
teaches peace, justice, and tolerance.
 Perhaps in response to the influence of Western ideas, some Muslims feel threatened,

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 and are promoting a commitment to traditional beliefs and practices.
 Fundamentalists have gained political power in many Muslim countries, and have tried
to make Islamic law the law of the land.
Economic Implications of Islam

 Under Islam, people do not own property, but only act as stewards for God and thus
must take care of that which they have been entrusted with
 While Islam is supportive of business, the way business is practiced is prescribed
 Businesses that are perceived to be making a profit through the exploitation of others, by
deception, or by breaking contractual obligations are unwelcome and even punishable
when practiced. Islam therefore prescribes certain businesses and restrains people from
them.
Note: riba= Excess gain is prohibited by Islam

The basic frame work for an Islamic business system is a set of rules and laws, collectively
referred to as Shariah, governing economic, social, political, and cultural aspects of Islamic
societies. Shariah originates from the rules dictated by the Quran and its practices, and
explanations from Sunnali by the prophet Muhammad. Further elaboration of the rules is
provided by scholars in Islamic jurisprudence within the framework of the Quran and
Sunnah. (Saeed, M . Ahmed, Zr . Mukhtar, S 2001).

This framework clarifies the prohibition of interest. Prohibition of riba, a term of literally
meaning "an excess" and interpreted as "any unjustifiable increase of capital whether in loan
or sales" is the central tenet of the system. More precisely, any positive, fixed predetermined
rate tied to the maturity and the amount of principle is considered riba and is prohibited. The
general consensus among Islam scholars is that riba cover not only usury but also the
charging of "interest" as widely practiced.

This prohibited is based on argument as social justice, equity, and property right. Islam
encourages the earning of profit but forbids the charging of interest because profits,
determined ex post, symbolize successful entrepreneurship and creation of additional wealth
where as interest, determined ex ante, is a cost that is accrued irrespective of the outcome of
business operations and may not create wealth if there are business justice demands that
borrowers and the lender share rewards as well as losses in an equitable fashion and that the
process of wealth accumulation and distribution in the economy be fair and representative of

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true productivity risk sharing. Because interest is prohibited, suppliers of funds become
investors instead of creators financial capital and the entrepreneur share business risks in
return for shares of the profits. Money as potential capital is treated as actual capital only
when it joins hand with other resources to undertake a productive activity. Islam recognizes
the time value of money, but only when it acts as capital, not when it is potential capital.

Prohibition of speculative behavior: An Islamic financial system discourages boarding

prohibits transactions featuring extreme uncertainties, gambling and risks.

Sanctity of contracts: Islam upholds contractual obligation and the disclosure of information
as a sacred duty. This feature is intended to reduce the risk of asymmetric information and
moral hazard. Shanah approved activities. Only those business activities that do not violate
the rules of shariah qualify for investment {Saeed, M . Ahmed, Zr . Mukhtar, S2001).

Some of the more popular instruments in Islamic business markets are trade with markup or
cost-plus sale (murabaha). One of the most widely used instruments for short-term financing
is passed on the traditional nation of purchase finance. The investor undertakes to supply
specific goods or commodities, incorporating a mutually agreed contact for resale to the
client and a mutually negotiated margin.

Profit-sharing agreement (mudaraba): This is identical to an investment fund in which

managers handle a pool of funds. The agent-manager has relatively limited liability while
having sufficient incentives to perform. The capital s invested in broadly defined activities,
and the terms of profit and risk sharing are customized for each investment. The maturity
structure ranges from short to medium term and is more suitable for trade activities.

Traditional Islamic business partnerships are arguably more applicable to small businesses
than multinational corporations, where the companies are usually listed and their stock
traded. The main objective of most multinational corporations is the enhancement of
shareholder value, and although they may also have social responsibility policies, these are
more a matter of corporate image and public relations rather than being what the business is
primarily about. Multinational corporations are not usually associated with any particular
religious faith; indeed, any discrimination on the grounds of religion with regard to
employment policy, suppliers used, or the award of contracts would be regarded as
inappropriate, if not totally wrong, and in many jurisdictions may actually be illegal. While
few multinational corporations would designate themselves as specifically secular, and many

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of their employees may be regular worshipers, religious faith is kept strictly separate from
business considerations.

Saudi Basic Industries Corporation (SABIC), a world leader in petrochemical production and
the second-largest company in the Islamic world, can be considered a multinational
enterprise, as it has a wholly owned subsidiary in the Netherlands and is actively further
considering international diversification. Etisalat, the UAE telephone company and the
fourth-largest company in the Islamic world, won the second mobile phone license in Saudi
Arabia and can now be regarded as a multinational.

Although the majority of employees of these large businesses are Muslim, they do not
designate themselves as Islamic, their major adaptation being to provide prayer facilities for
their employees that are well used.

In other words, multinational corporations should embrace multiculturaiism and not simply
transmit and impose the dominant culture of the country in which they are based (Pomeranz,
2004).

3. Hinduism

Hinduism, practiced primarily on the Indian sub-continent (500 million adherents), focuses
on the importance of achieving spiritual growth and development (Nirvana), which may
require material and physical self-denial.

 Hindus also believe that there is a moral force in society that requires the acceptance of
certain responsibilities, called dharma. This makes them regulate their morality.
 Hindus believe in reincarnation, rebirth into a different body after death.
 Hindus believe in Karma, the spiritual progression of each person's soul. The moral
state of each person's Karma determines the challenges each person will face in the next
life.
 Finally the Hindus believe that an individual can eventually achieve Nirvana, a state of
spiritual perfection that renders reincarnation no longer necessary by living ascetic
lifestyle of material and physical self-denial. People are valued by their spiritual and not
their material wealth.

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Economic Implication of Hinduism

 Hindus are valued by their spiritual rather than material achievements.

 Promotion and adding new responsibilities may not be the goal of an employee, or may
be infeasible due to the employee's caste. Labour mobility is through reincarnation.
 Hinduism supports the India caste system which sees mobility between castes as
something that is achieved through spiritual progression and reincarnation that is
individuals can be reborn into a higher caste in their next life if they achieve spiritual
development in this life. The caste system limits the able individuals to adopt position of
higher responsibility and influence in society which results in negative economic
consequences. Example most able individuals find their route to higher levels in business
organization blocked because they are of lower caste while individual get promoted to
higher position within a firm because of their caste background rather than their ability.
 Max Weber stated that the ascetic principles embedded in Hinduism do not encourage
the kind of entrepreneurial activity in pursuit of wealth creation that is in Protestantism,
although today there are millions of hardworking entrepreneurs in India.

4. Buddhism

Buddhism was founded in India in sixth century BC by Siddhartha Gautama who pursued an
ascetic lifestyle and spiritual perfection. He achieved nirvana and became known as the
Buddha ('"the awakened one"") and has 250 million followers.

 Buddhists, found mainly in Central and Southeast Asia, China, Korea, and Japan,
stress spiritual growth and the afterlife, rather than achievement while in this world.
 Buddhists believed that misery' is everywhere and originates in people's desire for
pleasure which can be curbed by Noble Eightfold Path (right seeing, thinking, speech,
action, living, effort, mindfulness and meditation).

Economic Implication of Buddhism

 Buddhism does not support the caste system, so individuals do have some mobility
and can work with individuals from different classes.
 Entrepreneurial activity is acceptable in Buddhist Societies

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5. Confucianism

Confucianism founded by K'ung-Fu-tzu (Confucius) in the fifth century BC is followed

by 150 million people in China, Korea and Japan.

 Confucianism, practiced mainly in China, teaches the importance of attaining personal

salvation through right action.
 The need for high moral and ethical conduct and loyalty to others is central in
Confucianism
 3 values of Confucianism :
i. Loyalty

ii. Reciprocal Obligations

 Honesty in dealings with other.

Economic Implication of Confucianism

 Three key teachings of Confucianism - loyalty, reciprocal obligations, and honesty -

may all lead to a lowering of the cost of doing business in Confucian societies like
china, Korea and Japan.
 The value of loyalty binds employees to the heads of their organization because
loyalty to one's superior is regarded as sacred duty and it reduced conflict between
management and labor and at a lower cost.
 The value of reciprocal obligation in Confucian ethics makes superiors to the loyalty
of their subordinate by bestowing blessings on them. In Japanese organization the
Confucianism ethics exhibit itself in the concept of lifetime employment and the
employees are loyal to the organization.
 The value of honesty is exhibited in Confucian societies with major economic
implications.
 Expensive lawyers are not required to resolve major disputes because companies trust
each other not to break contractual obligations. The costs of doing business are lowered.
 There is less hesitation to commit substantial resources to cooperative ventures
because they trust each other not to violate terms of cooperative agreements as a result
of honesty thus the cost of achieving cooperation is lowered in societies like Japan. This
is seen in Japan auto industry competitive advantage.

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 (E) STRATEGY AND STRUCTURE OF INTERNATIONAL BUSINESS

Having discussed the environment of International business we shift our attention in this
section to actions international business managers can take to effectively and efficiently
compete in international business under the environment conditions discussed earlier. It
includes how firms expand by extending business operations to international market, how
profit can be increased, and strategies necessary for that among other things.

STRATEGY AND THE FIRM

Literature has defined strategy in many ways. Basically, strategy is a means through which
goals of firms can be achieved. Mintzbery (1987) defined strategy in five different ways to
the care of different situations firms could find themselves in and their industry.

According to him strategy as a plan is a consciously intended course of action or an intended

choice made out of many alternative an intended choice made out alternative. Strategy as a
ploy is a maneuver used to cleverly outwit an opponent or competitor. This is more suitable
in a competitive environment while the first one (plan) is more suitable in a relatively stable
environment. Strategy as a pattern is a consistency in behavior or actions that benefits the
organization whether intended or not. Such actions or behavior must be beneficial to the firm
an must be difficult for others to copy. Strategy as a positions is a choice made or position
taken among many alternatives that distinguishes you from others which benefits your firms
also. This strategy is usually taken by new entrants or market challengers or as a survival
strategy.

Strategy as a perspective is a way of perception of organization decision makers. Some

perceive themselves as aggressive, pacesetters, market leaders, and they create new products,
markets and technologies while exploiting new opportunities. Others perceive the world as
stable and they sit back in long established markets, watching and reacting to other peoples
actions (Uud and Ndieze 2013).

According to Mile and snow (1978) four strategic management orientation exist. They are
prospectors who are creative and innovative organization, who are risk takers. They see
themselves as market leaders and the scan and quickly respond to emerging environmental
threats and opportunities. They are creative, innovation, foresighted, adaptive and enjoy

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taking risk. The second is the Defenders who compete mainly on price and quality and are
always in faviour of preserving the status quo and traditional values and customs against
abrupt circumstances They are more interested in stability and less concerned with risk
taking, creativity and innovativeness. They control their domain aggressively.

The Analyzers are the third group who share the features of both. Prospectors and defenders.
They are interested in minimizing risk and cost while trying to maximize opportunities. They
watch their competitors, could copy them but can hardly initiate new ideas themselves. They
can only invest when the are sure of profit. Finally, we have the Reactors who lack strategic
will to cause any change in the face of threats and opportunities in the environment. They
perceive change and uncertainty but cannot react to them unless they re force to do so (Udu
and Nome 2016).

Chandler (1962) defined strategy as the determination of the basic long term goals and
objectives of an enterprise and the adoption of the courses of action and allocation of
resources necessary for carrying out these goals.

But Andrew (1965) rather see strategy as a pattern of objectives, purpose, goals, and major
policies and plans for achieving stated goals in such a way as to define what business the
company is in, or is to be. The above are slightly different from porter (1972) who defined
strategy as developing and communicating the company’s unique position, making tradeoffs
and forging fit among alternatives.

MAJOR STRATEGIES OF A FIRM

In this discussion we our focus is on a business organization. The major objective of a firm is
to maximize long term profitability. A firm makes a profit if the price it can charge for its
output is greater than its cost of producing the output.

P = TR – TC
Where P = Profit
TR = Total revenue
TC = Total cost

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Profit which is a ratio or rate of return concept can also be stated in terms of rate of return on
sales or rate of return on investment.

To be able to make profit and continue to maximize it a firm most clearly identify and take
actions that could lower their costs of value creations, differentiate the firms product
offerings through superior design, quality, service, functionality and consistency. Any or a
combination of the above can only be achieved through a clear strategic thinking and actions.

(a) Growth strategy

Growth strategy is simply the means of increasing the value of the firm. Growth can be
in terms of increase in capital, assets, product lines, customer base, markets outreach,
collaborations, quality of goods and services and the like. It is the urge to grow that
motivates a firm to go international growth can be achieved through many strategies as
briefly stated below.
i. Integration strategies
- Forward integration
- Backward integration
- Vertical integration
- Horizontal integration

ii. Intensive strategies

- Market penetration (eg increase current market share)
- Market development (eg introduce current product to new geographical
areas)
- Product development (eg improving or modifying current product or
services)

iii. Diversification strategies

- Concentric (adding new but related product or services to existing ones)

iv. Other growth strategic means

- Joint venture
- Contract manufacturing

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 - Net working
- For enchasing
- Licensing

WHEN TO USE GROWTH STRATEGY

- When the environment demands increase in the pace of activity
- During economic boom and when an industry is new
- When a firm is interested in controlling market and competitors
- For pride and satisfaction
- When there are new feasible and viable business opportunities to exploit
- When there is idle fund to invest

(b) Stability strategy

Stability strategy is adopted when firms try to consolidate on their domain or in areas
where they have comparative advantage over others.

A firm that adopts stability strategy will minimize risk taking, creatively and
innovativeness. They will only engage in them to save or continue to control their
domain. Stability strategy has the following advantages.
- Less risky, involves fewer changes and people feel comfortable with things as
they are
- Environment faced is relatively stable
- Expansion could be threatening
- Consolidation is necessary after a period of rapid expansion

(c) Retrenchment strategy

This is a strategy that is adopted to reduce redundancy in a firm. It is preferred in
difficult times when maintaining many product lines or plants or breaches are no
longer fanciful. Retrenchment is a survival strategy which seeks to close up
unprofitable plants, braches or drop unprofitable products and or services.

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 (F) INTER BUSINESS MANAGEMENT PHILOSOPHIES AND MNCs

ETHNOCENTRIC Management philosophy is the attitude of a firm's decision maker in

another country that believes in the superiority of his country's ideas, personnel, materials and
processes of doing things. Such manager prefers to employ people from his home country for
all key positions and at best give temporary' employment to people in the host country. Profits
made by the company in this philosophy should be repatriated home and organizational culture
of the firm should be that of the home not host country. And this philosophy is imposed on the
host country in the area of planning, staffing, organizing, controlling and leading.

POLYCENTRIC management philosophy is the attitude of a firm's decision makers that

tend to reorganize environmental differences and show a permissive attitude. They use
their home country philosophy when permissible and the host country philosophy when
permissible. They don't really have a visible preference for either's culture.

GEOCENTRIC management philosophy is that which accepts that differences in culture are
real and should be respected. They believe that no culture is superior to the other hence the
exhibit cooperative attitude. Such firms go for quality irrespective of (the country of origin of
the candidate but could also bend some rules to accommodate the interest of the host country in
areas not inimical to their business.

Religion and Management Philosophies

Religion affect me International business management philosophies of most companies as

because it shapes the culture of both the home country and the host country and this is reflected
in the way companies do business in international environment and in managing their
subsidiaries.

The adopted management philosophy largely depends on

• If the company is from a developed home country and host country in a developing country
• If the company is from a developing home country and host country is a developed country
• If the home country and host country are both developed or developing.
• Expensive lawyers are not required to resolve major disputes because companies trust
each other not to break contractual obligations. The costs of doing business are lowered.

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• There is less hesitation to commit substantial resources to cooperative ventures because
they trust each other not to violate terms of cooperative agreements as a result of honesty
thus the cost of achieving cooperation is lowered in societies like Japan. This is seen in
Japan auto industry competitive advantage.

Emerging Country MNCs

Companies from developing countries in Middle East and Asia like Saudi Arabia, India and
China are referred to as Emerging Multinationals (MNCs). They practice Islam, Hinduism,
Buddhism and Confucianism as religion and this is reflected in their culture and management
philosophies. Their countries also form emerging markets when it is the host country.

Developed Country MNCs

Companies from developed countries in America, Europe and Asia like USA, Germany,
Netherlands etc. and Japan practice Christianity. Buddhism and Confucianism as religion and
also guide their management philosophy. Their countries also form developed market when it
is the host country.

Emerging country MNCs tend to be smaller in size with considerably less resources and
international experience than their counterparts from developed markets. This limits their
ability to transfer management practices across their subsidiaries (Hussain & Jian, 1999;
LalL, 1983; Wells, 1983) Guillen and Garcia-Canal, 2009). While there is growing
recognition of and research on this contextual aspect with respect to some relatively advanced
Asian economies, such as Japan. Korea. Taiwan and Singapore (Chang & Taylor, 1999;
Chang, Mellahi, & Wilkinson, India, have been much less explored (Feraer, 2009).

Previous research on MNCs had identified dual pressures for the need to conform to home
country (push force) and host country (pull force) institutional environments when adopting
management strategies and practices (e.g. Farley, Hoenig, & Yang, 2004; Hillman& Wan,
2005; Rosenzweig & Nohria, 1994).

While previous comparative research on HRM in the Asia Pacific region (Awasthi, Chow, &
Wu, 2001; Bae & Lawler, 1998; Chow, Shields, & Wu, 1999; Hofstede, 1993, 1997;
Hofstede & Bond, 1988; Ulgado, Yu, & Negandhi, 1994)) has identified the national origin

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of firms including its national institutions and culture as the Key shapers of HRM practices in
the region, these studies do not address how cultural and institutional differences affect the
dissemination of HRM strategics and practices by MNCs from emerging economies
operating in a developed economy (Chang, Wilkinson, & Mellahi, 2007).

A key research question relates to exploring the issues associated with the transfer of
management philosophies across borders within MNCs. As Martin and Beaumont (1998)
comment, diffusion has to take into account the local cultural and institutional context and the
ability and incentive of local managers to implement best practice (see Glover & Wilkinson,
2007).

In discussing the management philosophies as it affects the companies in international

environment we will look at

 Country of origin as influencing factor

 Control of subsidiaries in developed markets
 Control of subsidiaries in emerging markets
Country of Origin as Influencing Factor-Ethnocentrism

One of the key challenges facing the countries operating in international environment is how
to balance between the need for global integration and local adaptation. National origin of
these companies is seen as a major influence in determining this balance (Ngo, Turban, Lau,
& Lui, 1998, p. 632). Researchers, such as Ferner (1997) and Gamble (2003) examined the
issues dealing with how MNCs manage their foreign subsidiaries and concluded that the main
influence on the MNCs effort to have a degree of control over their subsidiaries was their
country of origin (Harzing & Sorge, 2003; Hu, 1992) which interpreted further means
religion.

Supporting this view, Harzing and Sorge (2003) state that although multinationals are highly
internationalized, their organizational coordination and control practices at the international
level tend to be explained by their country of origin which is portrayed by their culture and
religion.

There is empirical evidence that suggests that almost all MNCs have a trace of their country
of origin within them. It could be subconscious choices which are influenced by the cultural
and religious characteristics of the country (Harzing & Sorge, 2003). U.S. multinationals

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have been typically contrasted with Japanese multinationals in respect of their styles of HRM
employed in their subsidiaries (Ferner, 1997), Japanese multinationals have the characteristic
of being strong but with informal centralization and are highly reliant on establishing
international networks (polycentrism and Buddhism) (Bartlett & Ghoshai, 1992). U.S.
multinationals appear to have elaborate systems of control and standardized worldwide
systems in place (Christianity and Ethnocentrism) (Ferner, 1997). Moreover, whether the
country is high or low on cultural context will also determine the impact of their country of
origin on the management practices. This work draws on the work of Hall (1976) and his
distinction between situations where things are less explicit where the context exerts more
influence (high context) and those that are much more explicit where the context is less of an
influence (low context). Western countries are seen as generally low on cultural context
whereas Eastern countries are mainly seen as high on cultural context (Hofstede, 1984). The
interplay between national and organizational culture is a significant factor in the success of
global mergers, acquisitions and alliances (Thite, 2004).

Companies from emerging economies enter developed economies for 'exploration' and other
emerging economies for 'exploitation'(Wright, FUatotchev, Hoskisson, & Peng, 2005). While
in the past Japan and Korea internationalized through Greenfield expansion, founding their
own subsidiaries that mitigated cultural clashes, China and India are expanding mainly
through acquisitions in Western countries (HofsLede, 2007). Moreover, their
internationalization is very rapid and different from that of the conventional Western MNCs
and erstwhile developing country MNCs (Matthews & Zander, 2007).

The MNCs from the emerging economies, organizational culture, decision making and
control on subsidiaries can be noticeably different as compared to their counterparts in
developed markets due to national culture (religion) and economic differences (Hofstede,
2007). They are Ethnocentric in emerging markets and Polycentric in developed markets. In
the same way, the MNCs from developed economies are Ethnocentric.

Taylor et al (1996) model of IHRM considers that the transfer of management policies and
practices 'can go in any direction', not just from home to host countries.

Similarly, American and European management philosophies influence and are influenced by
East Asian management philosophies (Chew & Zhu. 2002). Empirical studies on the
diffusion of management practices by MNCs across their subsidiaries indicate that they
predominantly adopt hybrid methods, combining both push force for control from

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headquarters and pull factors for conformity to host country, to suit the markets they are
serving (Rose & Kumar, 2007). They are Polycentric in emerging markets and Geocentric in
developed markets.

Control of subsidiaries in developed markets:

MNCs exercise a degree of control over their subsidiaries to ensure their resources and efforts
are directed towards attaining the main objectives of the MNC (Chang & Taylor, 1999).
Control refers to the processes by which an MNC ensures that their subsidiaries operate in a
particular way as determined by the headquarters in order to achieve organizational goals
(Chang & Taylor, 1999). According to Harzing and Sorge (2003), corporate control
"comprises of all the mechanisms instituted to tie the operations and decisions within and
across components into a larger whole and establish coherence of meaning and purpose
within the larger enterprise. We adopt the Harzing's (1999) typology that suggests two
dimensional classification between direct (personal & impersonal) and indirect (personal &
impersonal) control. Complementary to the above typology is Taylor et al. "& (1996)
classification of adaptive or polycentric approach vs. exportive or ethnocentric approach to
management control of subsidiaries.

Unlike developed country MNCs engaging in 'forward diffusion' of superior home country
practices into developing country subsidiaries, emerging economy MNCs utilize the
knowledge gained in operating in developed markets to transfer best practices across the
entire organization (Zhang, Tsui, Song, Li, & Jia, 2008). They are expected to adopt an
"adaptive" or "polycenlric" approach to management in developed country subsidiaries
(Edwards & Rothbard, 2000; Kaye & Taylor, 1997). In terms of HR strategy, this could mean
low internal consistency with the rest of the firm and high external consistency with the
external environment. Accordingly, HR practices may include hiring host country managers
with local knowledge and transfer of practices "'both" ways, depending on which is seen as
working better.

Control of subsidiaries in emerging markets:

MNCs from emerging economies entering other emerging markets may follow their
counterparts in developed markets by adopting an ethnocentric approach. They attempt
wholesale transfer of the parent firm's HRM systems to their subsidiaries, especially with

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regard to their core competencies (Pudelko & Harzing, 2007), to achieve high internal
consistency.

The other reason identified is the limited availability of management and technical skills in
some countries (Delios & Bjorkman, 2000; Scullion, 1994). Some authors have noted that
MNCs are more likely to adopt an adaptive or polyccnlric approach in developed countries
than lesser-developed countries due to the greater availability of managerial skills in
developed countries (Bazeley & Richards, 2000; Richards, 2001; Shen, 2006).

Religion and Ethnocentric Philosophy

Americans, Europe, Japan, Indian and China which are predominantly Christians, Buddhist
and Confucians Exhibits the ethnocentric attitude n when home nationals of various countries
believe they are superior to, more trustworthy and more reliable than their foreign
counterparts. Ethnocentric attitudes are often expressed in determining the managerial
process at home and overseas.

There is a tendency towards ethnocentrism in relations with subsidiaries in developing

countries and in industrial product 'divisions. They have the home country orientation and
their attitude towards international business management reflects home country goals and
objectives with respect to management strategies and planning procedures.

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Conclusion

 MNCs from emerging economies adopt control and coordination mechanisms because of
the double hurdle they face of 'liability of foreignness' and 'liability of country of origin".
 MNCs from emerging economies adopt a predominantly 'adaptive' or 'polycentric'
approach to manage their subsidiaries in developed markets.
 MNCs from emerging economies adopt predominantly an 'exportive' or 'ethnocentric'
approach managing their subsidiaries in other emerging markets.
 MNCs from developed economics adopt ethnocentric or polycentric approach managing
their subsidiaries in emerging markets.
 MNCs from developed economies adopt Geocentric approach managing their subsidiaries
in developed market.

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