UNIT I

International Business Management: Introduction, Concept, Definition

With the globalization of the world economy, there has been a concomitant rise in the number of companies that
operate globally. Though international business as a concept has been around since the time of the East India
Company and continued into the early decades of the 20th century, there was a lull in the international
expansion of companies because of the Two World Wars. After that, there was a hesitant move towards
internationalizing the operations of multinational companies.
What really provided a fillip to the global expansion of companies was the Chicago School of Economic
Thought propelled by the legendary economist, Milton Friedman, which championed neoliberal globalization.
This ideology, which started in the early 1970s gradually, became a major force to reckon with in the 1980s and
became the norm in the 1990s. The result of all this was the frenzied expansion of global companies across the
world.
Thus, international businesses grew in scope and size to the point where at the moment; the global
economy is dominated by multinationals from all countries in the world. What was primarily a
phenomenon of western corporations has now expanded to include companies from the East (from countries
like India and China). This module examines the phenomenon of international businesses from different aspects
like the characteristics of international business, their effect on the local, target economies, and the ways and
means with which they would have to operate and succeed in the global competition for ideas and profits.
Above all, international businesses have to ensure that they blend the global outlook and the local adaptation
resulting in a “Glocal” phenomenon wherein they would have to think global and act local.
Further, international businesses need to ensure that they do not fall afoul of local laws and at the same
time repatriate profits back to their home countries. Apart from this, the questions of employability and
employment conditions that dictate the operations of global businesses have to be taken into consideration as
well.
Considering the fact that many third world countries are liberalizing and opening up their economies, there can
be no better time than now for international businesses. This is balanced by the countervailing force of the
ongoing economic crisis that has dealt a severe blow to the global economy. The third force that determines
international businesses are that not only is the third world countries eager to welcome foreign investment, they
seek to emulate the international businesses and become like them. Hence, these aspects would be discussed in
detail in the subsequent articles.
Finally, international businesses have to ensure that they have a set of operating procedures and norms that are
sensitive to the local culture and customs and at the same time, they stick to their brand that has been developed
for global markets. This is the challenge that we discussed earlier as “Glocal” orientation.
Any business that involves operations in more than one country can be called an international business.
International business is related to the trade and investment operations done by entities across national borders.
Firms may assemble, acquire, produce, market, and perform other value-addition-operations on international
scale and scope. Business organizations may also engage in collaborations with business partners from different
countries.
Apart from individual firms, governments and international agencies may also get involved in international
business transactions. Companies and countries may exchange different types of physical and intellectual assets.
These assets can be products, services, capital, technology, knowledge, or labor.

Internationalization of Business
Let’s try to explore the reasons why a business would like to go global. It is important to note that there are
many challenges in the path of internationalization, but we’ll focus on the positive attributes of the process for
the time-being.
There are five major reasons why a business may want to go global −
 First-mover Advantage− It refers to getting into a new market and enjoy the advantages of being first. It is
easy to quickly start doing business and get early adopters by being first.
 Opportunity for Growth− Potential for growth is a very common reason of internationalization. Your market
may saturate in your home country and therefore you may set out on exploring new markets.
 Small Local Markets− Start-ups in Finland and Nordics have always looked at internationalization as a major
strategy from the very beginning because their local market is small.
 Increase of Customers− If customers are in short supply, it may hit a company’s potential for growth. In such
a case, companies may look for internationalization.
 Discourage Local Competitors− Acquiring a new market may mean discouraging other players from getting
into the same business-space as one company is in.

Advantages of Internationalization
There are multiple advantages of going international. However, the most striking and impactful ones are the
following four.
Product Flexibility
International businesses having products that don’t really sell well enough in their local or regional market may
find a much better customer base in international markets. Hence, a business house having global presence need
not dump the unsold stock of products at deep discounts in the local market. It can search for some new markets
where the products sell at a higher price.
A business having international operations may also find new products to sell internationally which they don’t
offer in the local markets. International businesses have a wider audience and thus they can sell a larger range of
products or services.
Less Competition
Competition can be a local phenomenon. International markets can have less competition where the businesses
can capture a market share quickly. This factor is particularly advantageous when high-quality and superior
products are available. Local companies may have the same quality products, but the international businesses
may have little competition in a market where an inferior product is available.
Protection from National Trends and Events
Marketing in several countries reduces the vulnerability to events of one country. For example, the political,
social, geographical and religious factors that negatively affect a country may be offset by marketing the same
product in a different country. Moreover, risks that can disrupt business can be minimized by marketing
internationally.
Learning New Methods
Doing business in more than one country offers great insights to learn new ways of accomplishing things. This
new knowledge and experience can pave ways to success in other markets as well.

Globalization
Although globalization and internationalization are used in the same context, there are some major differences.

 Globalization is a much larger process and often includes the assimilation of the markets as a whole. Moreover,
when we talk about globalization, we take up the cultural context as well.
 Globalization is an intensified process of internationalizing a business. In general terms, global companies are
larger and more widespread than the low-lying international business organizations.
 Globalization means the intensification of cross-country political, cultural, social, economic, and technological
interactions that result in the formation of transnational business organization. It also refers to the assimilation
of economic, political, and social initiatives on a global scale.
 Globalization also refers to the costless cross-border transition of goods and services, capital, knowledge, and
labor.
Factors Causing Globalization of Businesses
There are many factors related to the change of technology, international policies, and cultural assimilation that
initiated the process of globalization. The following are the most important factors that helped globalization
take shape and spread it drastically.
The Reduction and Removal of Trade Barriers
After World War II, the General Agreement on Tariffs and Trade (GATT) and the WTO have reduced tariffs
and various non-tariff barriers to trade. It enabled more countries to explore their comparative advantage. It has
a direct impact on globalization.
Trade Negotiations
The Uruguay Round of negotiations (1986–94) can be considered as the real boon for globalization. It is
considerably a large set of measures which was agreed upon exclusively for liberalized trade. As a result, the
world trade volume increased by 50% in the following 6 years of the Uruguay Round, paving the way for
businesses to span their offerings at an international level.
Transport Costs
Over the last 25 years, sea transport costs have plunged 70%, and the airfreight costs have nosedived 3–4%
annually. The result is a boost in international and multi-continental trade flows that led to Globalization.
Growth of the Internet
Expansion of e-commerce due to the growth of the Internet has enabled businesses to compete globally.
Essentially, due to the availability of the Internet, consumers are interested to buy products online at a low price
after reviewing best deals from multiple vendors. At the same time, online suppliers are saving a lot of
marketing costs.
Growth of Multinational Corporations
Multinational Corporations (MNCs) have characterized the global interdependence. They encompass a number
of countries. Their sales, profits, and the flow of production is reliant on several countries at once.
The Development of Trading Blocs
The ‘regional trade agreement’ (RTA) abolished internal barriers to trade and replaced them with a common
external tariff against non-members. Trading blocs actually promote globalization and interdependence of
economies via trade creation.

Scope
International business is much broader than international trade. It includes not only international trade (i.e.,
export and import of goods and services), but also a wide variety of other ways in which the firms operate
internationally. International Management professionals are familiar with the language, culture, economic and
political environment, and business practices of countries in which multinational firms actively trade and invest.
Major forms of business operations that constitute international business are as follows.
(i) Merchandise exports and imports: Merchandise means goods that are tangible, i.e., those that can be seen
and touched. When viewed from this perceptive, it is clear that while merchandise exports means sending
tangible goods abroad, merchandise imports means bringing tangible goods from a foreign country to one’s own
country.
(ii) Service exports and imports: Service exports and imports involve trade in intangibles. It is because of the
intangible aspect of services that trade in services is also known as invisible trade.
(iii) Licensing and franchising: Permitting another party in a foreign country to produce and sell goods under
your trademarks, patents or copy rights in lieu of some fee is another way of entering into international
business. It is under the licensing system that Pepsi and CocaCola are produced and sold all over the world by
local bottlers in foreign countries.
(iv) Foreign investments: Foreign investment is another important form of international business. Foreign
investment involves investments of funds abroad in exchange for financial return. Foreign investment can be of
two types: direct and portfolio investments.

Trends
As the economy grows slowly at home, your business may have to look at selling internationally to remain
profitable. Before examining foreign markets, you have to be aware of the major trends in international business
so you can take advantage of those that might favor your company. International markets are evolving rapidly,
and you can take advantage of the changing environment to create a niche for your company.
Growing Emerging Markets
Developing countries will see the highest economic growth as they come closer to the standards of living of the
developed world. If you want your business to grow rapidly, consider selling into one of these emerging
markets. Language, financial stability, economic system and local cultural factors can influence which markets
you should favor.
Demographic Shifts
The population of the industrialized world is aging while many developing countries still have very youthful
populations. Businesses catering to well-off pensioners can profit from a focus on developed countries, while
those targeting young families, mothers and children can look in Latin America, Africa and the Far East for
growth.
Speed of Innovation
The pace of innovation is increasing as many new companies develop new products and improved versions of
traditional items. Western companies no longer can expect to be automatically at the forefront of technical
development, and this trend will intensify as more businesses in developing countries acquire the expertise to
innovate successfully.
More Informed Buyers
More intense and more rapid communications allow customers everywhere to purchase products made
anywhere around the globe and to access information about what to buy. As pricing and quality information
become available across all markets, businesses will lose pricing power, especially the power to set different
prices in different markets.
Increased Competition
As more businesses enter international markets, Western companies will see increased competition. Because
companies based in developing markets often have lower labor costs, the challenge for Western firms is to keep
ahead with faster and more effective innovation as well as a high degree of automation.
Slower Growth
The motor of rapid growth has been the Western economies and the largest of the emerging markets, such as
China and Brazil. Western economies are stagnating, and emerging market growth has slowed, so economic
growth over the next several years will be slower. International businesses must plan for profitability in the face
of more slowly growing demand.
Clean Technology
Environmental factors are already a major influence in the West and will become more so worldwide.
Businesses must take into account the environmental impact of their normal operations. They can try to market
environmentally friendly technologies internationally. The advantage of this market is that it is expected to
grow more rapidly than the overall economy.

Challenges and Opportunities

Inevitably such challenges and opportunities vary between companies and sectors but some frequently cited
opportunities and challenges include:
Opportunities Challenges

New competition for existing customers in

Access to customers in new countries
domestic markets

Learning about customers in new Adjusting products to local tastes and cultural
markets peculiarities

Access to new, cheaper sources of

Global financial contagion
finance

Costs of meeting a multitude of local/national

Government incentives to relocate
laws and regulations

Access to regional trading

Exchange rate fluctuations
agreements/avoidance of trade barriers

Economies of scale Managing long supply chains

Access to new resources (e.g. cheap of New competition for local resources (e.g. more
skilled labour, natural resources) demand for labour pushing up local wage costs)

Cross-cultural communication e.g. language

 
barriers, differing body language and etiquette

  Corporate social responsibility issues

  Capricious political environments/political

 risk /bias in favour of domestic companies
Meaning and Importance of International Competitive Advantage

Participation in international business allows countries to take advantage of their comparative advantage.

The concept of comparative advantage means that a nation has an advantage over other nations in terms of
access to affordable land, resources, labor, and capital. In other words, a country will export those products or
services that utilize abundant factors of production. Further, companies with sufficient capital may seek another
country that is abundant in land or labor, or companies may seek to invest internationally when their home
market becomes saturated.
Participation in international business allows countries to take advantage of specialized expertise and abundant
factors of production to deliver goods and services into the international marketplace. This has the benefit of
increasing the variety of goods and services available in the marketplace.
International business also increases competition in domestic markets and introduces new opportunities to
foreign markets. Global competition encourages companies to become more innovative and efficient in their use
of resources.
For consumers, international business introduces them to a variety of goods and services. For many, it enhances
their standard of living and increases their exposure to new ideas, devices, products, services, and technologies.

The Growth of International Business

The prevalence of international business has increased significantly during the last part of the twentieth century,
thanks to the liberalization of trade and investment and the development of technology. Some of the significant
elements that have advanced international business include:

 The formation of the World Trade Organization (WTO) in 1995

 The inception of electronic funds transfers
 The introduction of the euro to the European Union
 Technological innovation that facilitates global communication and transportation
 The dissolution of a number of communist markets, thus opening up many economies to private business
Today, global competition affects nearly every company—regardless of size. Many source suppliers from
foreign countries and still more compete against products or services that originate abroad. International
business remains a broad concept that encompasses the smallest companies that may only export or import with
one other country, as well as the largest global firms with integrated operations and strategic alliances around
the globe.

The Challenges and Considerations of International Business

Because nation-states have unique government systems, laws and regulations, taxes, duties, currencies, cultures,
practices, etc. international business is decidedly more complex that business that operates exclusively in
domestic markets.
The major task of international business involves understanding the sheer size of the global marketplace. There
are currently more than 200 national markets in the world, presenting a seemingly endless supply of
international business opportunities. However, the diversity between nations presents unique considerations and
a plethora of hurdles, such as:

 National wealth disparities: Wealth disparities among nations remain vast.

 Regional diversity according to wealth and population: North America is home to just 5 percent of the world’s
population, yet it controls almost one-third of the world’s gross domestic product.
 Cultural/linguistic diversity: There are more than 10,000 linguistic/cultural groups in the world.
 Country size and population diversity: There were about 60 countries at the start of the twentieth century; by
2000, this number grew to more than 200.
Some of the challenges considered by companies and professionals involved in international business include:
Economic Environment
The economic environment may be very different from one country to the next. The economy of countries may
be industrialized (developed), emerging (newly industrializing), or less developed (third world). Further, within
each of these economies are a vast array of variations, which have a major effect on everything from education
and infrastructure to technology and healthcare.
A nation’s economic structure as a free market, centrally planned market, or mixed market also plays a distinct
role in the ease at which international business efforts can take place. For example, free market economies
allow international business activities to take place with little interference. On the opposite end of the spectrum,
centrally planned economies are government-controlled. Although most countries now function as free-market
economies, China—the world’s most populous country—remains a centrally planned economy.
Political Environment
The political environment of international business refers to the relationship between government and business,
as well as the political risk of a nation. Therefore, companies involved in international business must expect to
deal with different types of governments, such as multi-party democracies, one-party states, dictatorships, and
constitutional monarchies.
Some governments may view foreign businesses as positive, while other governments may view them as
exploitative. Because international companies rely on the goodwill of the government, international business
must take the political structure of the foreign government into consideration.
International firms must also consider the degree of political risk in a foreign location; in other words, the
likelihood of major governmental changes taking place. Just a few of the issues of unstable governments that
international companies must consider include riots, revolutions, war, and terrorism.
Cultural Environment
The cultural environment of a foreign nation remains a critical component of the international business
environment, yet it is one of the most difficult to understand. The cultural environment of a foreign nation
involves commonly shared beliefs and values, formed by factors such as language, religion, geographic
location, government, history, and education.
It is common for many international firms to conduct a cultural analysis of a foreign nation as to better
understand these factors and how they affect international business efforts.
Competitive Environment
The competitive environment is constantly changing according to the economic, political, and cultural
environments. Competition may exist from a variety of sources, and the nature of competition may change from
place to place. It may be encouraged or discouraged in favor of cooperation, and the relationship between
buyers and sellers may be friendly or hostile. The level of technological innovation is also an important aspect
of the competitive environment as firms compete for access to the newest technology.
International Business Theories

For the success of business, it is important to understand all the key types of international trade theories. The
concept of international trading is not limited to, just sending and receiving products and services and putting all
of the profits in the pockets. Instead, it’s a lot more complicated thing. In fact, its current shape is the result of
many different types of international trade theories that helped it in its evolution through various eras.
Honestly saying, apart from making your syllabus boring, these theories can be of great assist in the long run
since most parts of these ideas still, hold right. So in this article, we will go through each and every theory and
will provide you with a somewhat in-depth detail of these.
 7 Types of International Trade Theories
1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher-Ohlin Theory
5. Product Life Cycle Theory
6. Global Strategic Rivalry Theory
7. National Competitive Advantage Theory
Above are the 7 different types of international trade theories, which are presented by the various authors in
between 1630 and 1990.
Mercantilism
The oldest of all international trade theories, Mercantilism, dates back to 1630. At that time, Thomas
Mun stated that the economic strength of any country depends on the amounts of silver and gold holdings.
Greater are the holdings, more economically independent a country is.
Furthermore, the idea of favoring greater exports and promoting efforts to minimize imports also belongs to the
same theory. Well! The thinking behind this concept is evident since you pay for the imports from the pay that
you get from exports. So, if you a country has a lot to pay for the imported products then it will get from
exported products, its economy will get inclined towards declination. Even though the view is old but the roots
of modern thinking towards the financials is deeply embedded in it.
Absolute Advantage
The Theory of Absolute Advantage is based on the notion of increasing the efficiencies in the production
processes. In 1776, Adam Smith, a renowned financial expert of the time being, proposed the theory that the
manufacturing a product with high efficiency as compared to any other country on the globe is highly
advantageous.
The concept can just be understood by the idea that if two countries specialize in exactly same kind of product.
But the product of one country being better in quality or lower in price will bring tremendous absolute
advantage to the country as compared to the other one. From another point of view, if two countries specialize
in entirely different products, then they can quickly increase their influence in their localities by having trade
with each other (by creating absolute advantages at both ends).
Comparative Advantage
As compared to absolute advantage, Comparative Advantage favors relative productivity. According to this
concept, as put forward by David Ricardo in 1817, a country with maximum absolute advantage in the creation
of more than one product as compared to other, can still trade with another country with less efficient ways to
create that product, that’s readily available in first, to boost its productivity.
To illustrate this idea with an example, let’s say that I have expertise in two fields like graphics designing and
writing, where designing lets me earn a lot more than writing. Keeping in mind that I can work on only one side
at a time, I will most likely hire a writer, and we both will work in a comparative atmosphere.
Heckscher-Ohlin Theory
Both the Absolute as well as Comparative international trade theories assume that the choice of the product that
can prove itself to be of great advantage is led by free and open markets instead of using the resources available
inland. That’s what caused Bertil Ohlin and Eli Heckscher to put forward the idea of determination of the
prices that relies on the differences in supply and demands.
This can just be understood as, if the supply of a product grows greater than it is in demand in the market, its
price falls and vice versa. So, export of a country should mainly consist of the product that is abundantly
available in it, and imports should count the products that are in high demand. Since, this concept ensures
utilization the country’s factors like labor, land and funding sources for the purpose of product manufacturing
that’s why it is also known by the name of “factor proportion theory.”
Product Life Cycle Theory
In the 1970s, Raymond Vernon introduced the notion of using a product’s life cycle to explain global trade
patterns, in the field of marketing. According to theory, as the demand for a newly created product grows, the
home country starts exporting it to other nations. Where when the demand grows, local manufacturing plants
are opened to meet the request. And the scenario covers the whole globe time to time, thus making that product
a standardization.
You can take the example of computers in consideration to understand how this works. The earlier personal
computers appeared in 1970’s available only in a few countries and from 1980’s to 1990’s, the product was
moving through the stage of maturity where the production spread to many other nations. And now in 21st
century, every third house has a PC in it.
Global Strategic Rivalry Theory
The continuous evolutionary behavior of international trade theories brings us back in the 1980’s where Kalvin
Lancaster and Paul Krugman introduced the concept of strategies, based on global level rivalries, targeting
multinational corporations and the struggle needed in achieving higher advantages as compared to other
international companies.
According to the concept, a new firm needs to optimize a few factors that will lead the brand in overcoming all
the barriers to success and gaining an influential recognition in that global market. In all these factors, a
thorough research and timed developmental steps are crucial. Whereas, having the complete ownership rights of
intellectual properties is also necessary. Furthermore, the introduction of unique and useful methods for
manufacturing as well as controlling the access to raw material will also come handy in the way.
National Competitive Advantage Theory
Michael Porter in 1990’s suggested that the success of any business in international trade depends on
upgradable and innovational capacities of the industry as well as four other factors, which determine how that
firm is going to perform in this global level race. The main concept behind this theory gives the feel of holding
factor proportion as well as many other international trade theories in it.
One of those factors is the availability of resources in the local market and their prices which are necessary for
providing a sustainable and stable environment for the trade to grow. Moreover, the ability of the firm to face
competitors and its capacity to upgrade itself also determines the success rate of that brand. Furthermore,
keeping the track of the change in demand and the behavior of local suppliers is also important.

Framework for Assessing Competitiveness: Various Approaches

Global competitiveness is a multidimensional concept and has various definitions.

Thus, according to Rapkin, et al. competitiveness is “…a political and economic concept that affect military,
political and scientific potential of the country and is an integral factor in the relative position of the country in
the international political economy.”
Krugman defines competitiveness as a concept equivalent of productivity. On the other hand, he claims that
competitiveness is “wrong and dangerous definition” if to apply for the international level.
According to Porter, this concept deals with the policy and institutions in the state that promotes long-term
growth. “National competitiveness” corresponds to the economic structures and institutions of the state
for economic growth within the structure of global economy.
Another outstanding definition states, that competitiveness “… refers to a country’s ability to create, produce,
distribute, and/or service products in international trade while earning rising returns on its resources”.
Kulikov claims that there are real and nominal competitiveness. Real competitiveness requires openness and
fairness of markets, the quality and innovation of products and services in the country of origin and the
continued growth of life standard of its citizens. Therefore, the actual degree of competitiveness is a possibility
of national industries to have a free and fair market of goods and services that meet the requirements of both
domestic and foreign markets, and simultaneous growth of real income. Since the nominal competitiveness can
be achieved by a particular government policy, creating a macroeconomic environment for domestic producers
through direct state subsidies and wage restraint. Thus, the real competitiveness is possible only if national
companies are able to effectively design, produce goods and sell them at prices and quality that meets both
external and internal customers’ requirements – without direct subsidies, control of wages and unemployment.
Thus, it can be inferred, that competitiveness reflects the favourable position of the national economy in the
global space. This position can be reflected in many areas, mainly in the field of international trade as the
country’s ability to strengthen this position.
The competitiveness of the national economy is its concentrated expression of economic, scientific,
technological, organizational, managerial, marketing and other capabilities. This concept embodies an ability of
a state to achieve high rates of economic growth, ensure a steady increase in real wages, promotion of domestic
firms on the world market.
In this regard, economies that are more competitive tend to be able to produce higher levels of income for their
citizens, thus achieve a higher level of the quality of life. In other words, competitiveness can be described as
the ability of an economy to produce, promote and sell goods and services in the global economy.
It can be inferred, that a more competitive economy is the one that is likely to grow faster over the medium to
long run.
The term itself came into use in the USA, in 1985. Than it became famous worldwide. Nowadays the principle
of competitiveness is one of the most important components of qualitative analysis, trying to assess a country’s
attractiveness and its engagement in global processes.
Given this importance of maintaining competitiveness, governments of different countries targeted their policies
towards becoming more competitive and gaining their niche in this globalized world. Thus, national
governments’ principal goal is to establish an environment that fosters wellbeing for its citizens by addressing
health, safety, environmental issues and laws. Undoubtedly, this goal can be achieved through effective
management and allocation of resources, and active political interventions. Therefore, it becomes imperative for
governments to coordinate a comprehensive approach towards trade and investment that incorporates a
competition orientation6. However, governmental bodies and decision makers must be cognizant of the fact that
their nation’s competitiveness depends upon their ability to sustain trade and attract foreign investment.
Competitiveness is, perhaps, one of the widely discussed, criticized phenomena of international economics.
This fact explains existing of many theories discussing features of competitiveness.
Global competitiveness owes its origin to the theory of comparative advantage, which historically was an
antithesis to the perspective of the mercantilists. They believed in exports and recommended strict government
control of all economic activity with economic nationalistic ideas. Mercantilists’ approach became a
cornerstone to the many other theories that came into use later. Among them are Ricardo’s theory of
comparative advantage and Heckscher-Ohlin’s factor abundance theory (according to this theory, countries will
produce and export those goods and services in which they have a comparative advantage in price or factor
cost). Initially Heckscher-Ohlin’s theory takes two factors as basic indicators determining competitive
advantages. Later some studies went beyond the two-factor analysis.
Another theory is ascribed to the Bank of England. According to this theory, competitiveness should be
measured in terms of relative indicators (i.e. relative export prices, relative export productivity, relative unit
labor cost, etc.).
Using a slightly different approach, the Economics and Statistics Department of Organization for Economic
Cooperation and Development (OECD) measures competitiveness as a sum of export and import
competitiveness.
One of the most well-known theories of national competitiveness is Michael Porter’s ‘National Diamond’ 7,
which represents a useful grouping of the concepts appropriate to analysis of competitiveness and trade, thus is
usually viewed in the context of case studies used to assess the prospects of an industry, product or economic
activity. According to prof. Porter, there are four driving factors, cornerstones in the competitiveness, entitled as
“diamond”;
Many international, national, non-governmental organizations assess the level of competitiveness of various
countries.
 Historically the first attempt made by the IMD World Competitiveness Center 9, which publishes its “World
competitiveness yearbook” since 1989. One of the most outstanding characteristics of the WCY is that it is the
first comprehensive annual report and a worldwide reference pointing on the competitiveness of countries. The
yearbook provides benchmarks and trends, statistics and survey data based on extensive research. According to
the WCY a country’s competitiveness is assessed and ranked according to how they manage their competencies
to achieve long-term value creation. According to the methodology report published by the IMD World
Competitiveness Center, an economy’s GDP and productivity cannot be assesses as the only important
indicators for its competitiveness, political, social and cultural dimensions also play a vital role in the process of
formatting competitive advantages10. Thus, governments need to provide an environment for business
enterprises. This environment is to be characterised by efficient infrastructures, institutions and policies that
encourage sustainable value creation by these enterprises.
According to the WCY, observed countries’ ranking is calculated as the composite index. The latter is based on
nearly 340 indicators that measure competitiveness. Comparative data on the abovementioned indicators are
collected through various international, national, regional sources, statistic databases, as well as from surveys
conducted within business communities, government agencies. The above-mentioned indicators are grouped in
four major sets described as follows.

1. A country’s economic Performance (assessed through 78 macroeconomic indicators);

2. Government Efficiency (government policy supports national competitiveness or not). These set includes 70
indicators;
3. Business Efficiency – 67 indicators;
4. Infrastructure (do they fulfil business requirements or not) – 114 indicators.
The above-mentioned indicators are described in detail in the Table 1.
Economic Government’s
Business efficiency Infrastructure
performance efficiency
Extent to which
Extent to which Extent to which basic,
Macroeconomic enterprises are
government policies are technological, scientific
evaluation of the performing in an
conductive to and human resources meet
domestic economy (5 innovative, profitable
competitiveness (5 sub- the needs of business (5
sub-factors) and responsible manner
factors) sub-factors)
(5 sub-factors)
 Domestic, economy, Public finance Productivity  Basic infrastructure
 Technological
 International trade Fiscal policy Labour market
infrastructure
International
Institutional framework Finance  Scientific infrastructure
investment
Employment Business legislation Management practices Health and environment
Societal framework (70 Attitudes and values (67
 Prices (78 criteria) Educations (96 criteria)
criteria) criteria)
Table 1: Indicators are grouped in four major sets.
Each of these four sets is, in turn, divided into 5 sub-sectors. Thus, the ranking is based on 20 sub-factors. When
describing the methodology of the WCY, it should also be noted that the methodology has changed since 1989.
These changes have been applied in accordance with the challenges and changes of the global economy. It is
notable, that WCY methodology relies on four dimensions shaping a country’s competitiveness and determining
countries’ development strategies and participation in international division of labour. These four dimensions
are listed as follows;
1. Attractiveness vs. aggressiveness;
2. Proximity vs. globalism;
3. Assets vs. processes;
4. Individual risk taking vs. social cohesiveness.
To sum up, the WCY methodology emphasizes the multifaceted nature of the competitiveness concept. One of
the outstanding characteristics of this methodology is that it aggregates a set of indicators, which determine the
overall competitiveness index and rankings of the countries included in the WCY database.
Another well-known and broadly used approach in assessment of the competitiveness is The Global
Competitiveness Report (Index) published (measured) by the World economic forum international
organization11. The Report was first published in 1979, when the world was facing the worst and longest lasting
financial and economic crisis of the last 80 years – in order to get the pre-crisis situation. The Global
Competitiveness Report ranks countries based on the Global Competitiveness Index (calculated since 2004),
taking into account the country’s ability to ensure welfare for their citizens, which depends on the effectiveness
of using all resources of a given country.
The Global Competitiveness index is a comprehensive tool, that measures the competitiveness of 148 countries,
contains 3 sub-indexes: basic requirements, efficiency enhancers, innovation and sophistication factors that are
based on 12 pillars (institutions, infrastructure, macroeconomic environment, health and primary education,
higher education and training, etc.) including 119 indicators 12 pillars of competitiveness are:

1. Institutions;
2. Infrastructure;
3. Macroeconomic environment;
4. Health and primary education;
5. Higher education and training;
6. Goods market efficiency;
7. Labour market efficiency;
8. Financial market development;
9. Technological readiness;
10. Market size;
11. Business sophistication;
12. Innovation.
The 12 pillars are grouped in 3 sub-indexes described below in Table 2.
Basic requirements Efficiency enhancers Innovation and sophistication
Institutions Higher education and training Business sophistication
Infrastructure Goods market efficiency Innovation
Macroeconomic environment Labor market development  
Health and primary education Financial Market development  
  Technological readiness  
  Market size  
Table 2: 12 pillars are grouped in 3 sub-indexes.
The GCI is calculated as a weighted average of its components. The Harvard Institute proposes one of well-
known methodologies in assessment of competitiveness for International Development (HIID). This
methodology assesses competitiveness as the ability of a national economy to achieve sustained high rates of
economic growth, mainly focusing on the competitiveness possibilities of economies in transition. The HIID
mainly follows the theoretical and methodological approaches of GCR and is based on the WEF’s
competitiveness definition presented in the Global Competitiveness Report. The main feature of this
 methodology is that it puts emphasis on the initial conditions of transition and the ability of the countries to
improve the competitive positions of their economies. Thus, the HIID differentiates three main types or initial
conditions in transition, presented in the Table 3.
Fixed Hard Soft
These conditions are Refer to government
invariant and cannot be These conditions can be changed but not quickly policy and can be changed
changed easily
(Geography, topography, (The quality of institutions, industrial structure, (Tax code, international
natural resource ownership, public attitudes, composition of relations and agreements,
endowment, culture, economic output, level and quality of human and laws, regulating
history, climate, etc.) physical capital stocks, etc.) frameworks, etc.)
Table 3: Three main types or initial conditions in transition.
The HIID calculates the overall competitiveness index basing on scores of its indices or factors, collecting
statistical data of international and national organizations and of survey data.
The HIID overall competitiveness index is composed of the following components;

 Openness of the economy,

 Government’s efficiency,
 Infrastructure,
 Technology,
 Financial sector,
 Efficiency of institutions,
 Management and labour.
International Monetary System

Paper Currency Standard & Purchasing Power Parity 

With the breakdown of the gold standard during the period of the First World War, gold parities and
free movements of gold ceased, therefore the mint par of exchange lost significance in the exchange
markets.
Exchange rates fluctuated far beyond the traditional gold points and there was complete confusion. Hence, to
explain this phenomenon and the problem of determination of the equilibrium exchange between inconvertible
currencies, the theory of purchasing power parity was enunciated.
The basic idea underlying the purchasing power parity theory is that the foreign currencies are
demanded by the nationals of a country because it has power to command goods in its own country.
When domestic currency of a nation is exchanged for foreign currency, what is in fact done is that domestic
purchasing power is exchanged for foreign purchasing power. It follows that the main factor determining the
exchange rate is the relative purchasing power of the two currencies.
For, when two currencies are exchanged, what is exchanged, in fact, is the internal purchasing power of
the two currencies.
Thus, the equilibrium rate of exchange should be such that the exchange of currencies would involve the
exchange of the equal amounts of purchasing power. It is the parity of the purchasing power that determines the
exchange rate. Thus, the purchasing power theory states that exchange rate tends to rest at the point at which
there is equality between the respective purchasing power of the currencies. In other words, rate of exchange
between two inconvertible paper currencies tends to close to their purchasing power ratio. Hence,
The Purchasing Power Theory
(PPT) seeks to explain that under the system of autonomous paper standard the external value of a
currency depends ultimately and essentially on the domestic purchasing power of that currency relative
to that of another currency.
The PPT has been presented in two versions, namely
(1) Absolute Version of Purchasing Power Parity and
(2) Relative Version of Purchasing Power Parity.
Absolute Purchasing Power Parity
The absolute version of the purchasing power parity theory stresses that the exchange rates should
normally reflect the relation between the internal purchasing power of the various national currency
units.
The price of a tradable commodity in one country should theoretically be equal to the price of the same
commodity in another country, after adjusting for the foreign exchange rate. The theory is known as the
international law of one price. When the international law one price applied to the representative good or basket
of goods, it is called the absolute purchasing power parity condition.
To illustrate the point, let us assume that a representative collection of goods costs Rs.9,625/- in India and US$
195 in USA. As per the Absolute PPP theory, the exchange rate between US$ and Indian Rupee is the ratio of
two price indices.
Spot price (In Indian Rupee) = Price Index of India/ Price Index of USA
Spot Rate = PRupee / PUSA
As per the example mentioned above, the exchange rate would be;
Spot (in Rupee) = 9625/195 = Rs.47.5128
The theoretical argument behind the Absolute PPP condition is that a country’s goods are relatively cheap
internationally;goods market arbitrage would create pressure on both foreign prices and goods prices to correct,
and thereby conform to uniform international prices.
Relative Purchasing Power Parity
Purchasing Power for two currencies can be different not because of differences in their internal purchasing
power, but some other factors also.
Relative purchasing power parity relates the change in two countries’ expected inflation rates to the change in
their exchange rates. Inflation reduces the real purchasing power of a nation’s currency.
If a country has an annual inflation rate of 5%, that country’s currency will be able to purchase 5% less real
goods at the end of one year. Relative purchasing power parity examines the relative changes in price levels
between two countries and maintains the exchange rates, which will compensate for inflation differentials
between the two countries.
The relationship can be expressed as follows, using indirect quotes:
St / S0 = (1 + iy) ÷ (1 + ix) t
Where,
S0 is the spot exchange rate at the beginning of the time period (measured as the “y” country price of one unit
of currency x)
St  is the spot exchange rate at the end of the time period.
iy  is the expected annualized inflation rate for country y, which is considered to be the foreign country.
Ix  is the expected annualized inflation rate for country x, which is considered to be the domestic country.
Example
The annual inflation rate is expected to be 8% in the India and that for the US is 3%. The current exchange rate
is Rs.46.5500/- per US $. What would the expected spot exchange rate be in six months for Indian Rupee
relative to US$.
Answer:
So the relevant equation is:
St / S0 = (1 + iy) ÷ (1 + ix)
= S6month ÷ Rs.46.5500 = (1.08 ÷ 1.03)0.5
Which implies S6month = (1.023984) × Rs.46.550 = Rs.47.6665.
So the expected spot exchange rate at the end of six months would be Rs.47.6665 per US$.
Inflation, taxes, quality of products, and other circumstances that change the market also have bearing
on the price or internal purchasing power. All these factors need to be adjusted while estimating the
exchange rate under in-convertible paper currency standard. PPP theory may not reflect the true
exchange rate in the short-run however; it actually indicates the fundamental equilibrium exchange rate
in the long-run.
International Monetary System – The Bretton Woods System
Attempts were initiated to revive the Gold Standard after the World War I, but it collapsed entirely during the
Great Depression of the 1930s.
It was felt that adherence to the Gold Standard prevented countries from expanding the money supply
significantly so as to revive economic activity.
However, after the Second World War, representatives of most of the world’s leading nations met at Bretton
Woods, New Hampshire, in 1944 to create a new international monetary system.
United States of America, at that time, was accounted for over half of the world’s manufacturing capacity
and held most of the world’s gold, the leaders decided to tie world currencies to the US dollar, which, in
turn, they agreed should be convertible into gold at $35 per ounce. Under the Bretton Woods system,
Central Banks of participating countries were given the task of maintaining fixed exchange rates between
their currencies and the US-dollar.
They did this by intervening in foreign exchange markets. If a country’s currency was too high relative to the
US-dollar, its central bank would sell its currency in exchange for US-dollars, driving down the value of its
currency. Conversely, if the value of a country’s money was too low, the country would buy its own currency,
thereby driving up the price. The purpose of the Bretton Woods meeting was to set up new system of rules,
regulations, and procedures for the major economies of the world.
The principal goal of the agreement was economic stability for the major economic powers of the world. The
system was designed to address systemic imbalances without upsetting the system as a whole.
The Bretton Woods System continued until 1971. By that time, high inflation and trade deficit in the USA
were undermining the value of the dollar. Americans urged Germany and Japan, both of which had
favorable payments balances, to appreciate their currencies.
But those nations were reluctant to take that step, since raising the value of their currencies would increase
prices for their goods and hurt their exports. Finally, the USA abandoned the fixed value of the US-dollar and
allowed it to “float” against other currencies, which led to collapse of the Bretton Woods System.
The Bretton Woods system established the US Dollar as the reserve currency of the world. It also required
world currencies to be pegged to the US-dollar rather than gold. The demise of
Bretton woods started in 1971 when Richard Nixon took the US off of the Gold Standard to stem the outflow of
gold. By 1976 the principles of Bretton Woods were abandoned all together and the world currencies were once
again free floating.
World leaders tried to revive the system with the so-called “Smithsonian Agreement” in
1971, but the effort could not yield. Economists call the resulting system a “managed float regime,”
meaning that even though exchange rates most currencies float, central Banks till intervene to prevent
sharp changes.
As in 1971, countries with large trade surpluses often sell their own currencies in an effort to prevent them from
appreciating. Similarly, countries with large trade deficits buy their own currencies in order to prevent
depreciation, which raises domestic prices. But there are limits to what can be accomplished through
intervention, especially for countries with large trade deficits. Eventually, a country that intervenes to support
its currency may deplete its international reserves, making it unable to continue support the currency and
potentially leaving it unable to meet its international obligations.
At present almost all countries having their own paper currencies standard which is neither linked to
gold or US-dollar or any other foreign currencies and they have adopted the currency system which is
“managed floating” in nature.
The Mint Par Parity Theory
This theory is associated with the working of the international gold standard. Under this system, the currency in
use was made of gold or was convertible into gold at a fixed rate. The value of the currency unit was defined in
terms of certain weight of gold, that is, so many grains of gold to the rupee, the dollar, the pound, etc. The
central bank of the country was always ready to buy and sell gold at the specified price.
The rate at which the standard money of the country was convertible into gold was called the mint price
of gold.
If the official British price of gold was £6 per ounce and of the US price of gold $12 per ounce, they were the
mint prices of gold in the respective countries. The exchange rate between dollar and pound would be fixed at
$12/£6 =2, which in other words, one pound is equal to two dollar.
This rate is called mint parity rate or mint par of exchange because it was based on the mint price of gold.
However, the actual exchange rate between these currencies would vary above or below the mint parity rate by
the cost of shipping gold between two countries. To illustrate this, suppose the US has a deficit in its balance of
payments with Britain. The difference between the value of imports and exports will have to be paid in gold by
the US importers because the demand for pounds exceeds the supply of pounds. But the transshipment of gold
involves cost. Suppose the shipping cost of gold from the US to Britain is 5 cents. So the US importers would
have to pay $2.05 per £1. This is exchange rate, which is equivalent to US gold
Because currencies were convertible in gold, then nations could ship gold among themselves to adjust their
“balance of payments.”
In theory, all nations should have an optimal balance of payments of zero, i.e. they should not have either
a trade deficit or trade surplus.
For example, in a bilateral trade relationship between Australia and Brazil, if Brazil had a trade deficit with
Australia, then Brazil could pay Australia gold. Now that Australia had more gold, it could issue more paper
money since it now had a greater supply of gold to support new bills.
With an increase of paper bills in the Australian economy, inflation, i.e. a rise in prices due to an overabundance
of money, would occur. The rise in prices would subsequently lead to a drop in exports, because Brazil would
not want to buy the more expensive Australian goods.
Subsequently, Australia would then return to a zero balance of payments because its trade surplus would
disappear.
Likewise, when gold leaves Brazil, the price of its goods should decline, making them more attractive for
Australia. As a result, Brazil would experience an increase in exports until its balance of payments reached zero.
Therefore, the gold standard would ideally create a natural balancing effect to stabilize the money supply of
participating nations.
The Gold Standard in Operation
However, the operation of the gold standard in reality caused many problems. When gold left a nation, the ideal
balancing effect would not occur immediately. Instead, recessions and unemployment would often occur. This
was because nations with a balance of payments deficit often neglected to take appropriate measures to
stimulate economic growth. Instead of altering tax rates or increasing expenditures – measures which should
stimulate growth – governments opted to not interfere with their nations’ economies. Thus, trade deficits would
persist, resulting in chronic recessions and unemployment.
With the outbreak of the First World War in 1914, the international trading system broke down and nations
valued their currencies by fiat instead, i.e. governments took their currencies off the gold standard and simply
dictated the value of their money. Following the war, some nations attempted to reinstate the gold standard at
pre-war rates, but drastic changes in the global economy made such attempts futile. Britain, which had
previously been the world’s financial leader, reinstated the pound at its pre-war gold value, but because its
economy was much weaker, the pound was overvalued by approximately 10%. Consequently, gold swept out of
Britain, and the public was left with valueless notes, creating a surge in unemployment. By the time of the
Second World War, the inherent problems of the gold standard became apparent to governments and
economists alike.
Following the second world war, the International Monetary Fund replaced the gold standard as a means
for nations to address balance of payments problems with what became a “gold-exchange” standard.
Currencies would be exchangeable not in gold but in the predominant post-war currencies of the allied nations:
British sterling, or more importantly, the U.S. dollar. Under the new International Monetary Fund approach,
governments had a more pronounced role in managing their economies. Ideally, governments would hold
dollars in “reserve.” If an economy needed an influx of money because of a balance of payments deficit, the
government could exchange its reserve dollars for its own currency, and then inject this money into its
economy. The dollar would ideally remain stable since the U.S. government agreed to exchange dollars for gold
at a price of $35 an ounce. Thus, world currencies were officially off the gold standard. However, they were
exchangeable for dollars. Because dollars were still exchangeable for gold, the “gold-exchange” standard
became the prevailing monetary exchange system for many years.
The effect of the gold-exchange system was to make the United States the center for international currency
exchange. However, due to the inflationary effects of the Vietnam War and the resurgence of other economies,
the United States could no longer comply with its obligation to exchange dollars for gold. Its own gold supply
was rapidly declining. In 1971,
President Richard Nixon removed the dollar from gold, ending the predominance of gold in the international
monetary system.
In retrospect, the gold standard had many weaknesses. Its foremost problem was that its theoretical balancing
effect rarely worked in reality. A much more efficient means to resolve balance of payments problems is
through government intervention in their economies and the exchange of reserve currencies. Today, very few
commentators propose a return to the gold standard.
International Monetary Fund

The International Monetary Fund (IMF) is an international 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. It now plays a central role in the
management of balance of payments difficulties and international financial crises. The IMF also works to
improve the economies of its member countries.

The organization’s objectives stated in the Articles of Agreement are:

To promote international monetary co-operation, international trade, high employment, exchange-rate stability,
sustainable economic growth, and making resources available to member countries in financial difficulty
 Other objective includes:

 To facilitate the expansion and balanced growth of International Trade

 To establish a multilateral system of payments
Facts
⇒ Abbreviation: IMF
⇒ Formation: 7 July 1944
⇒ Type: International Financial Institution
⇒ Purpose: Promote international monetary co-operation, facilitate international trade, foster sustainable
economic growth, and make resources available to members experiencing balance of payments difficulties
⇒ Headquarters: Washington, D.C., United States
⇒ Membership: 189 countries
⇒ Managing Director: Christine Lagarde
⇒ Main Organ: Board of governors
⇒ Parent Organization: United Nations
⇒ Staff: 2,700
Functional Departments

Functions: The IMF has three principal functions and activities: surveillance of financial and monetary
conditions in its member countries and of the world economy, financial assistance to help countries overcome
major balance of payments problems, and technical assistance and advisory services to member countries

 It works to foster global growth and economic stability

 It helps to achieve macroeconomic stability and reduce poverty
 The IMF provides alternate sources of financing
 It oversee the fixed exchange rate arrangements between countries
 It helps national governments to manage their exchange rates and allowing these governments to prioritise
economic growth
 It helps to provide short-term capital to aid the balance of payments.
 The IMF was also intended to help mend the pieces of the international economy after the Great Depression and
World War II
 To provide capital investments for economic growth and projects such as infrastructure
 To examining the economic policies of countries with IMF loan agreements to determine if a shortage of capital
was due to economic fluctuations or economic policy.
 The IMF also researched what types of government policy would ensure economic recovery.
 A particular concern of the IMF was to prevent financial crisis, from spreading and threatening the entire global
financial and currency system
 The IMF negotiates conditions on lending and loans under their policy of conditionality

Purpose of IMF

1. Promote International monetary cooperation

2. Expansion and balanced growth of international trade
3. Promote exchange rate stability
4. The elimination of restrictions on the international flow of capital
5. Make resources of the fund available to the members
6. Help establish multilateral system of payments and eliminate foreign exchange restrictions.
7. Shorten the duration and lessen the degree of disequilibrium in international balances of payment.
8. Foster economic growth and high levels of employment.
9. Temporary financial assistance to countries to help the balance of payments adjustments

Success of IMF

1. International Monetary Cooperation

2. Reconstruction of European Countries
3. Multilateral System of Foreign Payments
4. Increase in International Liquidity
5. Increase in International Trade
6. Special Aid to Developing Countries
7. Providing Statistical Information
8. Helpful in Times of Difficulties
9. Easiness & Flexibility in Making International Payments

Failures of IMF

1. Lack of Stability in Exchange Rate

2. Lack of Stability in the Price of Gold
3. Inability to Remove Restrictions on Foreign Trade
4. Rich Nations Club
5. No help for development projects
6. No Solution of International Liquidity
7. Interference in Domestic Economies
8. Inability to tackle the Monetary Crisis of August 1971
9. Less Aid for Developing Countries
10. High Rate of Interest
 India & IMF
India is a founder member of IMF. Earlier India was made a permanent Executive Director of the Board of
Directors. At present India is no longer a permanent director. India is now an elected member of IMF.India’s
rank is 13th among 185 member nations.
Advantages from Membership of IMF to India:

 Facility of Foreign Exchange

 Freedom from British Pound
 Membership of the World Bank
 Importance of India in International Sector
 Economic Consultation
 Help during Emergency
 Financial help for five Year Plans
 Special Drawing Rights
 Help in Foreign Exchange Crisis
 Profit from Sale of Gold
→ The relationship between the IMF and India has grown strong over the years. In fact, the country has turned
into a creditor to the IMF. India and IMF must continue to boost their relationship this way, as it will prove to
be advantageous for both.
→ The IMF’s primary purpose is to safeguard the stability of the international monetary system—the system of
exchange rates and international payments that enables countries (and their citizens) to buy goods and services
from each other.
→ The IMF works to foster global growth and economic stability. It provides policy advice and financing to
members in economic difficulties and also works with developing nations to help them achieve macroeconomic
stability and reduce poverty.
World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital
programs. It comprises two institutions: the International Bank for Reconstruction and
Development (IBRD) and the International Development Association (IDA). The World Bank is a
component of the World Bank Group, and a member of the United Nations Development Group.
The World Bank’s official goal is the reduction of poverty. According to its Articles of Agreement, all its
decisions must be guided by a commitment to the promotion of foreign investment and international trade and
to the facilitation of Capital investment.
During World War II, in the year 1944, a decision for the establishment of two institutions was taken in a
Conference held at Bretton Woods in America. The institutions to be established were
(1) International Monetary Fund and
(2) International Bank for Reconstruction and Development or World Bank.
The objective of IMF was to stabilize exchange rates by removing temporary balance of payments deficits. On
the other hand, the objective of the International Bank for Reconstruction and Development (IBRD) or the
World Bank was the reconstruction of war-ravaged economies and provision of necessary capital for the
economic development of underdeveloped countries. The bank was established in 1945 and started its function
in June 1945. The World Bank is an inter-governmental institution and corporate in form. Its capital is wholly
owned by its member countries.
Objectives of the World Bank
The main objectives of the World Bank are:
(1) Reconstruction and Development
The main objective of the bank is to reconstruct the war devastated economies like Britain, France, Holland etc.
and to provide economic assistance to underdeveloped countries like India, Pakistan, Sri Lanka, Burma etc.
 (2) Encouragement to Capital Investment
An other important objective of the Bank is to encourage private investors to invest capital underdeveloped
countries, by means of guarantee of participation in loans and other investment made by private investors and
when private capital is not available on reasonable terms, to supplement private investment by providing on
suitable conditions finance for productive purposes out of its own capital, funds raised by it and its other
resources.
(3) Encouragement to International Trade
The third objective of the bank is to encourage international trade. It aims at promoting long-range growth of
international trade and maintenance of equilibrium in member’s international balance of payments, so that
standard of living of the people of member-countries is raised.
(4) Establishment of Peace Time Economy 
The fourth objective of the Bank is to help the member-countries changeover from war-time economy to peace-
time economy.
(5) Environmental Protection 
Global environmental protection is also an objective of Bank. To this end, World Bank gives substantial
financial assistance to those underdeveloped countries which are engaged in the task of environmental
protection.
(6) Maintenance of equilibrium in balance of payment
To promote long term balanced growth of international trade and the maintenance of equilibrium in balance of
payments of member countries by encouraging long term international investment so as to develop productive
resources of members and thereby raising its productivity, the standard of living and labor conditions.
Capital of the World Bank
Initially, the authorized capital of the World Bank was to the tune of $ 10,000 million, which was divided into
1,00,000 shares of $ 1,00,000 each. All these shares were made available to member countries only. As per the
system of the Bank, out of each share.
(a) 2 per cent in payable in gold or U.S. dollars;
(b) 18 per cent of the subscription is to be paid in terms of member’s own currency;
(c) The remaining 80 per cent of the subscription is not immediately collected from the members but can be
called up by the Bank as a Callabh fund whenever it requires to meet its obligation. Thus it is observed that only
20 per cent of the total capital is called by the Bank and the same is available for its lending purposes.
The capital of the World Bank has also been increased time to time with the consent of its members. After the
admission of new members, the authorized capital of the Bank has been increased to $ 171 billion. In its annual
meeting held in September 1983, the World Bank decided to go in for a selective capital increase of 8.4 billion
dollars and accordingly the share holding of different member countries were suitably adjusted.
Achievements
The following are the major achievements of World Bank:
(i) Membership
The total membership of the Bank has increased from a mere 30 countries initially to 68 countries in 1960 and
then to 151 countries in 1988.
(ii) Increase in Working Capital
The bank has been increasing its Working Capital from time to time. Accordingly, it has raised its capital by
selling its securities and bonds at different times to different countries like USA, UK etc. Accordingly, its
capital has trebled during the past 40 years. In September, 1987, the Bank approved on increase in general of
74.8 billion dollars in its capital and thereby raised its lendable resources to 170 billion dollars.
(iii) Increase in Subscribed Capital
The Bank has also raised its subscribed capital from $ 10,000 million initially to $ 19,300 million in 1960 and
then to $ 91,436 million in 1988. As a result of following such process, the lending capacity of the Bank has
expanded.
(iv) Loan Approval
The amount of approval of loan to the member countries has been increasing and accordingly the amount
increased from $ 659 million in 1960 to $ 14,762 million in 1988.
(v) Loan Disbursement
The volume of loan disbursement by the Bank among its members has also been increasing and accordingly the
volume of loan disbursement has increased from $ 544 million in 1960 to $ 11,636 million in 1988.
(vi) Total Loan
The World Bank has advanced a significant amount of loan to its member countries. During the past 40 years of
its existence since inception (up to June, 1989) the Bank had lent to the extent of $ 1,36,596 million to 115
member countries for various developmental projects.
(vii) Loans for Productive Purposes
The World Bank is granting loans to member countries for productive purposes, especially for the development
of agriculture, irrigation, electricity and transportation projects. Economic development of a country depends on
the basic infrastructure. Therefore, the Bank is lending for these aforesaid projects for this rapid economic
development.
(viii) Technical Assistance
As per provisions of the Bank, the World Bank has been sending technical missions to member countries for
collecting necessary information regarding the functioning of their economies. The Bank has been giving
technical assistance to its member countries in order to solve their complicated economic problems and for
assessing economic resources of the country and setting up of priorities for development programmes.
(ix) New Loan Strategy
In recent years, the Bank has introduced new loan strategy for giving more emphasis of financing different
schemes for influencing the well being of the poor masses of member developing countries, especially for the
purpose of agricultural marketing, forestry, fishery, development of feeder roads in rural areas, rural
electrification, spread of education in rural areas etc. In respect of industry, the Bank made provision for direct
lending to industries, more emphasis on heavy industries, fertilizer industry, labour intensive small scale
industry etc.
(x) Assistance to Underdeveloped Countries
(a) Financial assistance for the promotion of development;
(b) Developing ‘third window’ to advance loan at lower rate of interest to the underdeveloped countries;
(c) Providing technical assistance;
(d) Organizing meetings of creditor countries for providing loan to developing countries such as Aid India Club
etc.;
(e) Setting up of subsidiary financial institutions like International Finance Corporation (IFC), International
Development Association (IDA) for providing soft and concessional finance to developing countries etc.
(xi) Settlement of Disputes
The World Bank has been playing an important role in the settlement of international disputes successfully for
the promotion of world peace. Accordingly it has resolved Indus river water dispute between India and Pakistan
and Suez Canal dispute between England and Egypt.
IFC, IDA

The International Finance Corporation (IFC) is an organization dedicated to helping the private sector
within developing countries. It provides investment and asset management services to encourage the
development of private enterprise in nations that might be lacking the the necessary infrastructure
or liquidity for businesses to secure financing.
The IFC was established in 1956 as a sector of the World Bank Group, focused on alleviating poverty and
creating jobs through the development of private enterprise. To that end, IFC also ensures that private
enterprises in developing nations have access to markets and financing. Its most recent goals include the
development of sustainable agriculture, expanding small businesses’ access to microfinance, infrastructure
improvements, as well as climate, health, and education policies. The IFC is governed by its 184 member
countries and is headquartered in Washington, D.C.
 The IFC views itself as a partner to its clients, delivering not only support with financing but also technical
expertise, global experience, and innovative thinking to help developing nations overcome a range of problems,
including financial, operational, and even at times political.
The IFC also aims to mobilize third-party resources for its projects, often engaging in difficult environments
and leading crowding-in private finance, with the notion of extending its impact beyond its direct resources.
International Development Association (IDA)
IDA is the largest source of concessional finance for the world’s 75 poorest countries, 39 of which are in Africa.
Resources from IDA bring positive change to the 1.3 billion people who live in IDA countries.
With the ratification of the Sustainable Development Goals (SDGs) in 2015, along with a historic agreement in
Addis Ababa on ways to mobilize financing needed for the SDGs, the world has a new roadmap for ending
poverty by 2030. The International Development Association (IDA) is poised to play a key role in this mission,
by catalyzing trillions of dollars in needed investment – public and private, national and global—and translating
the SDGs into country-led action.
As the largest source of concessional finance, IDA is recognized as a global institution with a transformative
effect that individual national donors cannot match. Here’s why:

 IDA provides leadership on global challenges. From its support for climate resilience to the creation of jobs to
get former combatants back into society, IDA rallies others on tough issues for the common good and helps
make the world more secure.
 IDA is transformational. IDA helps countries develop solutions that have literally reshaped the development
landscape—from its history-changing agriculture solutions for millions of South Asians who faced starvation in
the 1970s to its pioneering work in the areas of debt relief and the phase-out of leaded gasoline.
 IDA is there for the long haul. IDA stays in a country after the cameras leave, emphasizing long-term growth
and capability to make sure results are sustained. 
 When the poorest are ignored because they’re not profitable, IDA delivers. IDA provides dignity and quality of
life, bringing clean water, electricity, and toilets to hundreds of millions of poor people.
 IDA makes the world a better place for girls and women. IDA works to reverse gender discrimination by getting
girls to school, helping women access financing to start small businesses, and ultimately helping to improve the
prospects of families and communities.
 Working with the World Bank Group, IDA brings an integrated approach to development. IDA helps create
environments where change can flourish and where the private sector can jumpstart investment.
 IDA is also a global leader in transparency and undergoes the toughest independent evaluations of any
international organization. For example, IDA placed in the highest category in the 2018 Aid Transparency
Index every year since the index was first published in 2010—ranking highest among multilateral development
banks.
 Equally, a 2018 assessment by the Center for Global Development and the Brookings Institution named IDA
one of the international community’s top performing providers of development assistance, citing IDA’s low
administrative costs, more predictable aid flows, and large project size relative to other donors.
 And a 2017 survey of policymakers from 126 low- and middle-income countries by AidData ranked the World
Bank 2nd out of 56 bilateral donors and multilateral institutions on its agenda-setting influence in developing
countries. The report cites the World Bank as “punching above its weight” on value for money.
 Unit II
Globalization
With the globalization of the world economy, there has been a concomitant rise in the number of companies that
operate globally. Though international business as a concept has been around since the time of the East India
Company and continued into the early decades of the 20th century, there was a lull in the international
expansion of companies because of the Two World Wars. After that, there was a hesitant move towards
internationalizing the operations of multinational companies.
What really provided a fillip to the global expansion of companies was the Chicago School of Economic
Thought propelled by the legendary economist, Milton Friedman, which championed neoliberal globalization.
This ideology, which started in the early 1970s gradually, became a major force to reckon with in the 1980s and
became the norm in the 1990s. The result of all this was the frenzied expansion of global companies across the
world.
Thus, international businesses grew in scope and size to the point where at the moment; the global
economy is dominated by multinationals from all countries in the world. What was primarily a
phenomenon of western corporations has now expanded to include companies from the East (from countries
like India and China). This module examines the phenomenon of international businesses from different aspects
like the characteristics of international business, their effect on the local, target economies, and the ways and
means with which they would have to operate and succeed in the global competition for ideas and profits.
Above all, international businesses have to ensure that they blend the global outlook and the local adaptation
resulting in a “Glocal” phenomenon wherein they would have to think global and act local.
Further, international businesses need to ensure that they do not fall afoul of local laws and at the same
time repatriate profits back to their home countries. Apart from this, the questions of employability and
employment conditions that dictate the operations of global businesses have to be taken into consideration as
well.
Considering the fact that many third world countries are liberalizing and opening up their economies, there can
be no better time than now for international businesses. This is balanced by the countervailing force of the
ongoing economic crisis that has dealt a severe blow to the global economy. The third force that determines
international businesses are that not only is the third world countries eager to welcome foreign investment, they
seek to emulate the international businesses and become like them. Hence, these aspects would be discussed in
detail in the subsequent articles.
Finally, international businesses have to ensure that they have a set of operating procedures and norms that are
sensitive to the local culture and customs and at the same time, they stick to their brand that has been developed
for global markets. This is the challenge that we discussed earlier as “Glocal” orientation.
Any business that involves operations in more than one country can be called an international business.
International business is related to the trade and investment operations done by entities across national borders.
 Firms may assemble, acquire, produce, market, and perform other value-addition-operations on international
scale and scope. Business organizations may also engage in collaborations with business partners from different
countries.
Apart from individual firms, governments and international agencies may also get involved in international
business transactions. Companies and countries may exchange different types of physical and intellectual assets.
These assets can be products, services, capital, technology, knowledge, or labor.
Internationalization of Business
Let’s try to explore the reasons why a business would like to go global. It is important to note that there are
many challenges in the path of internationalization, but we’ll focus on the positive attributes of the process for
the time-being.
There are five major reasons why a business may want to go global −

 First-mover Advantage− It refers to getting into a new market and enjoy the advantages of being first. It is
easy to quickly start doing business and get early adopters by being first.
 Opportunity for Growth− Potential for growth is a very common reason of internationalization. Your market
may saturate in your home country and therefore you may set out on exploring new markets.
 Small Local Markets− Start-ups in Finland and Nordics have always looked at internationalization as a major
strategy from the very beginning because their local market is small.
 Increase of Customers− If customers are in short supply, it may hit a company’s potential for growth. In such
a case, companies may look for internationalization.
 Discourage Local Competitors− Acquiring a new market may mean discouraging other players from getting
into the same business-space as one company is in.

Advantages of Internationalization
There are multiple advantages of going international. However, the most striking and impactful ones are the
following four.
Product Flexibility
International businesses having products that don’t really sell well enough in their local or regional market may
find a much better customer base in international markets. Hence, a business house having global presence need
not dump the unsold stock of products at deep discounts in the local market. It can search for some new markets
where the products sell at a higher price.
A business having international operations may also find new products to sell internationally which they don’t
offer in the local markets. International businesses have a wider audience and thus they can sell a larger range of
products or services.
Less Competition
 Competition can be a local phenomenon. International markets can have less competition where the businesses
can capture a market share quickly. This factor is particularly advantageous when high-quality and superior
products are available. Local companies may have the same quality products, but the international businesses
may have little competition in a market where an inferior product is available.
Protection from National Trends and Events
Marketing in several countries reduces the vulnerability to events of one country. For example, the political,
social, geographical and religious factors that negatively affect a country may be offset by marketing the same
product in a different country. Moreover, risks that can disrupt business can be minimized by marketing
internationally.
Learning New Methods
Doing business in more than one country offers great insights to learn new ways of accomplishing things. This
new knowledge and experience can pave ways to success in other markets as well.

Globalization
Although globalization and internationalization are used in the same context, there are some major differences.

 Globalization is a much larger process and often includes the assimilation of the markets as a whole. Moreover,
when we talk about globalization, we take up the cultural context as well.
 Globalization is an intensified process of internationalizing a business. In general terms, global companies are
larger and more widespread than the low-lying international business organizations.
 Globalization means the intensification of cross-country political, cultural, social, economic, and technological
interactions that result in the formation of transnational business organization. It also refers to the assimilation
of economic, political, and social initiatives on a global scale.
 Globalization also refers to the costless cross-border transition of goods and services, capital, knowledge, and
labor.

Factors Causing Globalization of Businesses

There are many factors related to the change of technology, international policies, and cultural assimilation that
initiated the process of globalization. The following are the most important factors that helped globalization
take shape and spread it drastically.
The Reduction and Removal of Trade Barriers
After World War II, the General Agreement on Tariffs and Trade (GATT) and the WTO have reduced tariffs
and various non-tariff barriers to trade. It enabled more countries to explore their comparative advantage. It has
a direct impact on globalization.
Trade Negotiations
The Uruguay Round of negotiations (1986–94) can be considered as the real boon for globalization. It is
considerably a large set of measures which was agreed upon exclusively for liberalized trade. As a result, the
world trade volume increased by 50% in the following 6 years of the Uruguay Round, paving the way for
businesses to span their offerings at an international level.
Transport Costs
Over the last 25 years, sea transport costs have plunged 70%, and the airfreight costs have nosedived 3–4%
annually. The result is a boost in international and multi-continental trade flows that led to Globalization.
Growth of the Internet
Expansion of e-commerce due to the growth of the Internet has enabled businesses to compete globally.
Essentially, due to the availability of the Internet, consumers are interested to buy products online at a low price
after reviewing best deals from multiple vendors. At the same time, online suppliers are saving a lot of
marketing costs.
Growth of Multinational Corporations
Multinational Corporations (MNCs) have characterized the global interdependence. They encompass a number
of countries. Their sales, profits, and the flow of production is reliant on several countries at once.
The Development of Trading Blocs
The ‘regional trade agreement’ (RTA) abolished internal barriers to trade and replaced them with a common
external tariff against non-members. Trading blocs actually promote globalization and interdependence of
economies via trade creation.
Globalization and the National Economy

Globalization can usefully be conceived as a process or set of processes which embodies a transformation in the
spatial organization of social relations and transactions, generating transcontinental or interregional flows and
networks of activity, interaction and power.
Globalization has four types of change. Firstly, globalization includes growing social, political and economical
actions across political limits of countries and continents. Secondly, it recommends the growth of inter
bondness and flows of trade, investment, finance, and society. Third, it is developing extensity and intensity of
global inter bondness can be depended to a speeding up of global connections and developments as the progress
of world wide actions of transport and communication speed up the flow of ideas, goods, information,
investment and communities. Fourthly, the growing extensity, intensity and speed of global communications
can be attached with their developing impression such that the results of indistinct actions can be very important
else where and yet all the local growth may come to have massive global consequences. It makes the sense, that
the boundaries between local affairs and global matters can become increasingly blurred.
In total globalization can be consideration of as expanding, increasing speed up, and developing influence of
world wide inter connections. In sum globalization in this way, it makes possible to draw observe patterns of
world wide contacts and business across all type of fields of human activity, from the military to the cultural.
Effects of globalization on national economies
Globalization creates major change on the economic environment of any nation; it changes any nation in terms
of economic development policies under national government. The globalization provides the free movement of
trade and investment, labour and assets. Through globalization nation’s economy growth globally so it opening
up the barriers of international trade which increase the stability and creates positive impact on quality of life
with in a nation’s individuals.
Economic growth through Globalization has both positive and negative impacts on the society. One of the main
benefits of economic growth is the higher incomes per capita and higher living standards due to an increase in
output. It increase in output has also created employment opportunities which takes the nation towards
prosperity.
Example
The best example of Globalization is Microsoft Windows which is done in United State of America but the
technical support is provided in India which provides support to Indian economy. Job opportunities create in
India for IT professionals and government’s income increases in terms of Taxes. In same way Toyota cars made
some cars others are made in United State of America.
The animation on cartoons is done in South Korea. The characters voices are done in the United State of
America or in country who buys these cartoons.
The native impact of Globalization is that the revenue earned in the nation is not spend in that particular country
for growth of this country’s economic conditions of its people, this revenue is spend in other countries along the
globe and the ultimate benefit goes to the company’s home country, For Example the American based company
Nike is one of the company around the glob where ever in the world Nike products sale the ultimate benefit
goes to America but the Nike enjoys the cheep labour and resources of that country. It also eliminates the
difference of skilled and unskilled persons.
Other main weakness of Globalization is that it increases possibilities of unintentional motion of diseases
between the countries. Globalization gives attraction towards the money oriented lifestyles and selfish attitudes,
which suppose to consumption to be a mean to manage overall economic affluence.
As Amartya Sen said in 2002 “The market economy does not work by itself in global relations indeed, it cannot
operate alone even within a given country”
Some believer of globalisation has the aim to expand market relations, push back state and interstate
interference, and create a global free market. It is a political plan that seen at work in the activities of
transnational organizations like the World Trade Organization (WTO), the International Monetary Fund (IMF),
and the Organization for Economic Cooperation and Development (OECD), and has been a significant
objective of United States involvement. Part of the impetus for this project was the limited success of
corporate/state structures in planning and organizing economies. However, even more significant was the
growth in influence of neo-liberal ideologies and their promotion by powerful politicians like Reagan in the
USA and Thatcher in the UK.
Technology and its Impact, Enhancing Technological Capabilities
Advancements in technology have considerably facilitated globalization. In fact technological progress has been
one of the main forces driving globalization. Technological breakthroughs compel business enterprises to
become global by increasing the economies of scale and the market size needed to break even.
Technological advancements reduce costs of transportation and communication across nations and thereby
facilitate global sourcing of raw materials and other inputs. Patented technology encourages globalization as the
firm owning the patent can exploit foreign markets without much competition.
Information technology has led to the emergence of the global village. For example, the World Wide Web has
reduced the barriers of time and place in business dealings. Buyers and sellers can now make transactions at any
time and any part of the globe. Technological change also affects investments.
Earlier, high technology production was limited to rich countries with high wages. Now technology is easily
transferable to developing countries where high tech production can be combined with low wages. A large
number of firms in advanced countries are now outsourcing labour intensive services from developing countries
like India.
Technology is understood to be the driving force of globalization that began in the 18th century and has
continued ever since to the 21st century, in-between three industrial revolutions have taken place. The 1st
industrialization revolution was in the 18th century that took place in manufacturing industries. The 2nd
industrialization revolution was in the services industries. The 3rd industrialization revolution of the 21st
century which we are going through is know as information age as described by Adam Smith.
This technological development has helped globalise the world economy and it is also known as the
“Kondrative long Wave process” (K-wave). As the diagram below shows:-
The diagram describes the tends of technological changes that have taken place since the industrialization
revolution, relating from production, distribution and communication, that has fueled the globalization. It has
brought about innovation and interaction between nations that weren’t possible before. That has led to some of
the greatest invention that revolutionized trade, communication and interaction to a whole new level and
increased globalization .As Thomas Friedman’s said “Globalization is not a choice. Basically, 80% of it is
driven by technology” .
According to Cable (1995) Transportation costs are falling with improved physical communication with the
help of improved technological advances in telecommunication, computing, fibre optics and
satellites. [5] Which has resulted in the speeding up of information flow and the transportation of goods across
nations more quickly and efficiently. This is being achieved through the technologies mentioned above, that is
at the heart of the communication and transportation globalization, which is ongoing. Joseph Schumpeter has
called it a “glaze of creative distraction”. Take for instance transportation system wouldn’t have been made
possible without the invention off “steam engine in 1796 a problem solved by James Watts”
The diffusion of steam engine technology to streamline ships, with the help of propulsion technology and the
introduction of “Jet Aircraft in 1950s” brought about new dynamics of globalization which has allowed
flexibility in movement of labour freely. This innovation has allowed massive economic expansion to take place
and caused “Global Shrinkage,” in terms of distances. As the Diagram below illustrates on how travelling
distances have been reduced over time and made world smaller: –
The diagram shows the Global Shrinkage: the effect of changing transportation technologies on Real distances.
Improvements made in transportation and the development of containerization allowed goods to move from
place to place and continent to continents ever since its launch in “1956 to move goods from Newark, New
Jersey to Houston Texas through the Gulf of Mexico”. Shipping ports around the world have cranes built to lift
the containers more efficiently and thus saving money and speeding trade. Compare to pre-containership era of
1960s where trade was slow and unreliable that also fall due to bad weather or thieves. As Economist Paul
Kurgnam says that the result is “new economic geography” requiring new theories of location and trade. The
changes have been both technological and political.
Technological development has helped increased globalization. A prime example of technological globalization
is that China and India have benefited economically as technologies like airplane, container ships have allowed
China to export its goods to Europe and US vice versa and allowed countries to exploit their comparative
advantage in trade. Article named “The container that changed the world” published by Virginia Postrel in New
York times re-enforces the point that” Low transport costs help make it economically sensible for a factory in
China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off
to eager girls all over the world,” writes Marc Levinson in … “The Box: How the Shipping Container Made the
World Smaller and the World Economy Bigger”.
According to “Kondrative Wave” (K Wave) system we are in the fifth cycle that is known as the “Information
Age”. The Internet /World Wide Web has been the biggest thing to come out of Information technology
advancements. That has revolutionized how information is passed or its availability thus creating an economy
based on knowledge. The Internet has been described as “a decentralized, global medium of communication
comprising a global web of linked networks and computers.” As people across countries can trade and
communicate instantaneously economically, for example e-mail has allowed instant communication through the
World Wide Web, World Wide Web on the other has made “World One” as countries can now trade with each
other, all made possible due to the cost effectiveness technological advance like the internet /world wide web.
Where information is been exchanged at a global level instantaneously. As “Information is the new mantra that
spells success in the modern world”
Technology like the Internet has given rise to E-commerce; E-commerce that refers to business conducted
through means of electronic communication networks like Internet. That has brought about new dynamics to the
globalization of businesses. Where virtual business can be set up and trade worldwide without any barriers
stopping them. For example business like Amazon, Borders and eBay that have sprung up because of Internet
have transformed the way small business operate and have given opportunity to individuals to enter these global
markets. As Internet help provides a cheaper faster way of communication between business and its consumers
worldwide.
Another sector that has seen the biggest impact because of technological globalization is the financial sector,
where diffusion of information based technology has made possible people around the world to trade 24/7
trading has moved to electronic system from the physical system making money move more efficiently and on a
faster level, thus allowing more participation of those people who are connected with the internet.
Technology has also impacted the cultural globalization with inventions like telephone and television.
Telephone has made it feasible for any one to talk to each other regardless of where they are geographically in
the world, all made possible with the help of satellites and mobile phones that has made possible to make a call,
receive e-mail, texts and even allow video call. It is due to technological advancements made in the field of
communication, as seen no countries are now really apart. All made possible due to technological breakthrough
in communication that have revolutionized business, commerce, and linked millions of people. TV on the other
hand has connected parts of world, where they feel and see without having to leave the room. On TV’S by just a
touch of the remote button, that allows people to explore worlds on different channels it is made available
because of Internet, communication advances and with the help of sounds and visual that are transmitted
through the TV. Communication technology has brought the world closer and people closer regardless of where
they are in the world.
We have found out that form the 1st industrial revolution Technology has had a great impact in the
globalization as it help join the world together, where distance is no barrier for trade and is considered to be an
essential part of economic globalization activity. As Friedman pointed out that 80% of globalization is
technology driven. The technological development made in areas like communication and the invention of
telephone and Mobile phones all with the help of satellites has made help removed the time and distance that
has excited before. Transportation on the other hand has allowed trade to take place more efficiently and cost
effectively with the help of the containerships, Jet Airplane and electric trains. It has helped facilitated growth
between nations, as countries are able to take advantage of their comparative advantages as large goods can be
exported and imported between countries.
The spread of information technology has made production networks cheaper and easier, all made possible
because of digital networks like the Internet that is cost effective. This has been one of the fundamental
economic globalization factors that have helped overcome the friction of distance and time. Without these
technological advancements globalization would not be made possible or even achieved As the K-Wave shows
the types of technologic advances at different stages of industrialization and there economic impact that all
began in the late 18th century.
Technology Generation, Technology Transfer, Technology Diffusion

Technology Generation
Technology refers to the use of tools, machines, materials, techniques and sources of power to make work easier
and more productive. While science is concerned with understanding how and why things happen, technology
deals with making things happen.
Development is closely related with technology. The stage of development the human being has arrived could
have been possible without the advancement in technology. The radical change and advancement in the
economy, as we observe today, is the result of the modern technology.
Technology has brought about efficiency and quality in the manufacturing sector. Technological advancement
has reduced the risk involved in manufacturing enterprises. There has been tremendous improvement in the
field of health the world over not only the average age of people has increased but the mortality rate has also
declined considerably.
This could be possible only because of technological advancement in health sector. There is perhaps no field of
human life which has not been affected by technology. Agriculture, industry, profession, health, education, art,
 political processes, recreation, religious activities and daily life activities all are under the influence of
technology.
But, it is important to keep in mind that technological advancement has affected human life both positively as
Well as negatively. Not only that life has become easy and comfortable, there are also indications of several
threats to life and society in the future due to use/misuse of modern technology.
The nature and extent of development the human society has experienced by now is heading towards crises in
future. The sustainability of development is in question today. This has happened only due to irrational use of
technology.
It has been discussed here as to how development – economic as well as social – takes place with the
advancement of technology but not without leaving a scar to threaten the human society. The development of
technology, which itself is symptomatic of development, has brought about not only economic development but
also radical changes in the social and cultural spheres of society.

Technology Transfer
For a long time economists considered investment as a means of growth. However, today, the rate of
technological innovation and development is considered as a dominant factor leading to economic growth and
long-term improvements in living standards.
It is now widely accepted that comparative advantage (leave aside a few exceptions) no longer depends on
natural endowments, but is policy created.
Countries that fail to keep up with global technology often collapse, unable to maintain a given standard of
living, much less to increase it. According to International Code 1981, technological transfer is defined as the
transfer of systematic knowledge for the manufacture of a product, for the application of a process, or for the
rendering of a service, and does not extend to the mere sale or lease of goods.
The contents include “knowledge, skills, and means to use and control the elements of production for the
purpose of developing, delivering to users, and maintaining goods and services for which there is an
economic and (or) social needs.” According to Alkhafaji, technology transfer can imply three different
meanings:

1. It can be used to indicate the process whereby technical information originating in one institutional setting is
adapted for use in another institutional setting.
2. It can refer to moving something from one person to another.
3. It can specifically indicate that technology has been transmitted, received, and applied.
The articulation of the concept of technology transfer is about four decades old. But now it is of importance to
both the developed and developing countries as it has proved to be crucial to the processes of industrial growth
and global integration.
Countries that fail to keep up with global technology often collapse, unable to maintain a given standard of
living, much less to increase it. Technology transfer normally refers to transfer from advanced economies to
developing or industrializing countries, but it may take place among the industrializing countries also.
The process of technology transfer is quite complex. Modes available are many and actors to participate may
also be many. In terms of phases, they may be as under in a chronological sequence:

1. Material Transfer (transfer of new product or new material)

2. Design Transfer (to enable manufacture new product / material in host country)
3. Capacity transfer (transfer of capacity to adapt technology to local conditions)
In terms of players involved in transfer it may be:

1. Point-to-Point (single donor and single recipient)

2. Diffusion (many recipients)
Technology Diffusion
Technology diffusion can be defined as the process by which innovations are adopted by a population. Whether
diffusion occurs and the rate at which it occurs is dependent on several factors including the nature and quality
of the innovation, how information about the innovation is communicated, and the characteristics of the
population into which it is introduced. Americans have come to demand state-of-the-art medical technology,
despite its astronomical costs, and we place a huge emphasis on medical specialization. As we have seen, the
coverage of health services by insurance companies actually creates a moral hazardtext annotation indicator to
use high-cost services. And keep in mind “supply-side” competition—which can result in duplication of
services and equipment.
Dissemination and Spill Over of Technology

Foreign Direct Investment (FDI) by multinational corporations (MNCs) has grown recently, especially

penetrating middle-income countries. During the 1990s, the growth of FDI flows trebled the growth that was
witnessed in international trade. Most FDI flows are concentrated in the developed nations with international
trade transactions and inter-trade linkages. In present trends, the principal source of international finance to
developing countries is in the form of FDI.
FDI has been widely recognized as a growth enhancing factor for host countries; it not only brings capital but
also introduces advanced technology that can enhance the technological capability of the host country firms
such that it can generate long-term and sustainable economic growth for the host countries. The technological
benefit is not limited to locally-affiliated firms but it can also spread to non-affiliated firms. The latter benefit is
usually referred as the technology spillover.
Technology has been seen as a major driving force in output growth and economic integration of the global
economy.Neoclassical economic theory has focused on factor accumulation which refers to the source of
factor expansion and factor productivity.
Technological progress is often treated as an exogenous factor. However, the recent research has treated the
technological change in accounting for economic growth. The endogenous growth model suggests that
innovation relies on knowledge resulting from cumulative R&D expenditure and at the same time it also
contributes to the growth of knowledge stock of R&D activities, which drives economic growth by the creation
of new products according to the horizontally differentiated input models; or improvement in the quality of
existing ones according to the vertically differentiated input models. The non-rival characteristics of
technology, which distinguishes it from other factor inputs make the marginal costs of technology to the
additional firms negligible.
Technological investments not only confer benefits to the investors but also contribute to the knowledge base
which is then publicly available to the firms/industry. These externalities are called “technology spillovers”.
The technology spillover effect is a driving force in economic growth and through different channels the
technology diffuses across industries of a host country. Trade is a crucial conduit for technology transfer. With
the rapid growth of FDI after the 1990s, an increasing tendency to develop R&D in the host country affiliated or
non-affiliated firms has resulted in FDI which is seen as an engine of economic growth. Although the
theoretical models for FDI and technology transfers are well developed, empirical studies provide mixed results.
Another potential channel for technology spillover is information technology (IT), which is well known for
improving the efficiency of production and reduce the cost of communication and monitoring among the distant
firms.
Further, with easy access to modern communications technology, firms in all globalizing countries are under
pressure to improve their productive efficiency in the face of competition from newly-emerging domestic firms
on one the hand and foreign competition on the other. This is especially true in the case of India, which initiated
major economic reforms in 1991, for shift towards an open economy along with privatization of a large segment
of the economy. These reforms were phased over a number of years and several reforms have been recently
implemented after 2000.
 The removal of quantitative restrictions and trade barriers to entry has opened up the economy to international
market forces which coupled with the rising economic and social aspirations of the population, has again led
to the rapid emergence of a competitive environment especially in the industrial sector.1 Continuous
improvement in productivity and efficiency is necessary particularly if India is to achieve a high growth rate
and competitive target set for the industrial sector in the international market. International investors are now
evaluating the different local business environment or investment climate (IC), geographical features, local
labor laws, transport facilities offered by various regional areas, as well as capabilities and strategies of the local
firms, etc. So the technology spillovers are varied across the firms of an industry located in different regional
areas in India.
The technology spillover for the host country firms has been an important route of the outsourcing of
knowledge, embodied in FDI brought in by the MNCs. So, the expectation of gaining technology spillover has
persuaded many developing countries to offer various incentives to attract FDI. In fact, the results of empirical
research to test the validity of technology spillover are far from conclusive. From the empirical findings, it
appears that the positive technology spillover from FDI is not automatic, but it depends on both country-
specific factors and policy environment. An analysis of the technology spillover impact of FDI on host
economies has typically assumed this impact to occur in two linked steps: First, MNCs parent to subsidiaries
international transfer of technology that is superior to the prevailing technology in the host economy; and
Second, the subsequent spread of this technology to domestic firms in technological spillover effect.
Rationale for Globalization

Imagine a small village market where all are free to come and sell their products at whatever price they desire.
There are no limitations on control of their products or the prices. This is a globalized trade. Anyone, in general
context referring to any country, that can participate to set up, acquire, merge industries, invest in equity and
shares, sell their products and services in India.
Globalization is the free movement of people, goods, and services across boundaries. This movement is
managed in a unified and integrated manner. Further, it can be seen as a scheme to open the global economy as
well as the associated growth in trade (global). Hence, when the countries that were previously shut to foreign
investment and trade have now burned down barriers.
Considering a precise definition, countries that abide by the rules and regulations set by WTO (World Trade
Organization) are part of globalization. These procedures include oversees trade conditions among countries.
Apart from this, there are other organizations such as the UN and different arbitration bodies available for
supervision. Under this, non-discriminatory policies of trade are also enclosed.

Indian Economy Reacts to Globalization

When we talk about globalization and the Indian economy, one name strikes our mind, that is, Dr.
Manmohan Singh. He was the finance minister in the 1990s when globalization was fully implemented and
experienced in India. He was the front man who framed the economic liberalization proposal. Since then, the
nation has gradually moved ahead to become one of the supreme economic leaders in the world.
Below mentioned are some of the quick reactions which were felt after the introduction of globalization:

 After 1991, the rise in GDP that dropped to 13% in 1991 -92 extended momentum in the following five years
(1992-2001). Moreover, the annual average rate of growth in GDP was recorded to be 6.1%.
 Furthermore, export growth skyrocketed to 20% in 1993-94. For 1994-95, the figures were recorded to be 18.4
per cent. Export growth statistics in recent years have been very impressive.

Benefits of Globalization Impacting India

Rise in Employment: With the opening of SEZs or Special Economic Zones, the availability of new jobs has
been quite effective. Furthermore, Export Processing Zones or EPZs are also established employing thousands
of people. Another factor is cheap labour in India. This has motivated big firms in the west to outsource work to
companies present in this region. All these factors are causing more employment.
Surge in Compensation: After the outburst of globalization, the compensation levels have stayed higher. These
figures are impressive as compared to what domestic companies might have presented. Why? The level of
knowledge and skill brought by foreign companies is obviously advanced. This has ultimately resulted in
modification of the management structure.
Improved Standard of Living and Better Purchasing Power: Wealth generation across Indian cities has
enhanced since globalization has fully hit the nation. You can notice an improvement in the purchasing power
for individuals, especially those working under foreign organizations. Further, domestic organizations are
motivated to present higher rewards to their employees. Therefore, a number of cities are experiencing better
standards of living together with business development.

Disadvantages of Globalization in India

If we are discussing globalization and the Indian economy, then talking about the negative effects is also
important. The informal sector is purposely not listed in the labor legislation. For example, informal workers
aren’t the subject considering the 1948 Factories Act. This scheme covers vital factors such as common
working conditions, safety, and health, the ban on child labor, working hours etc.  Also, globalization has
caused poor health, disgraceful working conditions, as well as bondage, happening in different parts of the
country.
Liberalization and Unification of World Economics
THESTREAK22 FEB 2019 2 COMMENTS
When a nation becomes liberalized, the economic effects can be profound for the country and for investors.
Economic liberalization refers to a country “opening up” to the rest of the world with regards to trade,
regulations, taxation and other areas that generally affect business in the country. As a general rule, you can
determine to what degree a country is liberalized economically by how easy it is to invest and do business in the
country. All developed (first world) countries have already gone through this liberalization process, so the focus
in this article is more on the developing and emerging countries.
Removing Barriers to International Investing
Investing in emerging market countries can sometimes be an impossible task if the country you’re investing in
has several barriers to entry. These barriers can include tax laws, foreign investment restrictions, legal issues
and accounting regulations, all of which make it difficult or impossible to gain access to the country. The
economic liberalization process begins by relaxing these barriers and relinquishing some control over the
direction of the economy to the private sector. This often involves some form of deregulation and privatization
of companies.
Unrestricted Flow of Capital
The primary goals of economic liberalization are the free flow of capital between nations and the efficient
allocation of resources and competitive advantages. This is usually done by reducing protectionist policies such
as tariffs, trade laws and other trade barriers. One of the main effects of this increased flow of capital into the
country is it makes it cheaper for companies to access capital from investors. A lower cost of capital allows
companies to undertake profitable projects they may not have been able to with a higher cost of capital pre-
liberalization, leading to higher growth rates.
We saw this type of growth scenario unfold in China in the late 1970s as the Chinese government set on a path
of significant economic reform. With a massive amount of resources (both human and natural), they believed
the country was not growing and prospering to its full potential. Thus, to try to spark faster economic growth,
China began major economic reforms that included encouraging private ownership of businesses and property,
relaxing international trade and foreign investment restrictions, and relaxing state control over many aspects of
the economy. Subsequently, over the next several decades, China averaged a phenomenal real GDP growth rate
of over 10%.
Stock Market Performance
In general, when a country becomes liberalized, stock market values also rise. Fund managers and investors are
always on the lookout for new opportunities for profit, so a whole country that becomes available to be invested
in tends to cause a surge of capital to flow in. The situation is similar in nature to the anticipation and flow of
money into an initial public offering (IPO). A private company previously unavailable to investors that
suddenly becomes available typically causes a similar valuation and cash flow pattern. However, like an IPO,
the initial enthusiasm also eventually dies down and returns become more normal and more in line with
fundamentals.
Political Risks Reduced
In addition, liberalization reduces the political risk to investors. For the government to continue to attract more
foreign investment, other areas beyond the ones mentioned earlier have to be strengthened as well. These are
areas that support and foster a willingness to do business in the country, such as a strong legal foundation to
settle disputes, fair and enforceable contract laws, property laws, and others that allow businesses and investors
to operate with confidence. Also, government bureaucracy is a common target area to be streamlined and
improved in the liberalization process. All these changes together lower the political risk for investors, and this
lower level of risk is also part of the reason the stock market in the liberalized country rises once the barriers are
gone. (For related reading, see: What risks do organizations face when engaging in international finance
activities?)
Diversification for Investors
Investors can also benefit by being able to invest a portion of their portfolio into a diversifying asset class. In
general, the correlation between developed countries such as the United States and undeveloped or emerging
countries is relatively low. Although the overall risk of the emerging country by itself may be higher than
average, adding a low correlation asset to your portfolio can reduce your portfolio’s overall risk profile. (For
more, see: Does Investing Internationally Really Offer Diversification?)
However, a distinction should be made that although the correlation may be low, when a country becomes
liberalized, the correlation may actually rise over time. This happens because the country becomes more
integrated with the rest of the world and becomes more sensitive to events that happen outside the country. A
high degree of integration can also lead to increased contagion risk, which is the risk that crises occurring in
different countries cause crises in the domestic country.
A prime example of this is the European Union (EU) and its unprecedented economic and political union. The
countries in the EU are so integrated with regard to monetary policy and laws that a crisis in one country has a
high probability of spreading to other countries. This is exactly what happened in the financial crisis that started
in 2008-2009. Weaker countries within the EU (such as Greece) began to develop severe financial problems
that quickly spread to other EU members. In this instance, investing in several different EU member countries
would not have provided much of a diversification benefit as the high level of economic integration among the
EU members had increased correlations and contagion risks for the investor.
Tariffs and Non-Tariffs Barriers in International Trade

Trade barriers are restrictions imposed on movement of goods between countries. Trade barriers are imposed
not only on imports but also on exports. The trade barriers can be broadly divided into two broad groups: (a)
Tariff Barriers, and (b) Non-tariff Barriers.

TARIFF BARRIERS
Tariff is a customs duty or a tax on products that move across borders. The most important of tariff barriers is
the customs duty imposed by the importing country. A tax may also be imposed by the exporting country on its
exports. However, governments rarely impose tariff on exports, because, countries want to sell as much as
possible to other countries. The main important tariff barriers are as follows:
(1) Specific Duty: Specific duty is based on the physical characteristics of goods. When a fixed sum of money,
keeping in view the weight or measurement of a commodity, is levied as tariff, it is known as specific duty.
 For instance, a fixed sum of import duty may be levied on the import of every barrel of oil, irrespective of
quality and value. It discourages cheap imports. Specific duties are easy to administer as they do not involve the
problem of determining the value of imported goods. However, a specific duty cannot be levied on certain
articles like works of art. For instance, a painting cannot be taxed on the basis of its weight and size.
(2) Ad valorem Duty: These duties are imposed “according to value.” When a fixed percent of value of a
commodity is added as a tariff it is known as ad valorem duty. It ignores the consideration of weight, size or
volume of commodity.
The imposition of ad valorem duty is more justified in case of those goods whose values cannot be determined
on the basis of their physical and chemical characteristics, such as costly works of art, rare manuscripts, etc. In
practice, this type of duty is mostly levied on majority of items.
(3) Combined or Compound Duty: It is a combination of the specific duty and ad valorem duty on a single
product. For instance, there can be a combined duty when 10% of value (ad valorem) and Re 1/- on every meter
of cloth is charged as duty. Thus, in this case, both duties are charged together.
(4) Sliding Scale Duty: The import duties which vary with the prices of commodities are called sliding scale
duties. Historically, these duties are confined to agricultural products, as their prices frequently vary, mostly due
to natural factors. These are also called as seasonal duties.
(5) Countervailing Duty: It is imposed on certain imports where products are subsidised by exporting
governments. As a result of government subsidy, imports become more cheaper than domestic goods. To nullify
the effect of subsidy, this duty is imposed in addition to normal duties.
(6) Revenue Tariff: A tariff which is designed to provide revenue to the home government is called revenue
tariff. Generally, a tariff is imposed with a view of earning revenue by imposing duty on consumer goods,
particularly, on luxury goods whose demand from the rich is inelastic.
(7) Anti-dumping Duty: At times, exporters attempt to capture foreign markets by selling goods at rock-
bottom prices, such practice is called dumping. As a result of dumping, domestic industries find it difficult to
compete with imported goods. To offset anti-dumping effects, duties are levied in addition to normal duties.
(8) Protective Tariff: In order to protect domestic industries from stiff competition of imported goods,
protective tariff is levied on imports. Normally, a very high duty is imposed, so as to either discourage imports
or to make the imports more expensive as that of domestic products.
Note: Tariffs can be also levied on the basis of international relations. This includes single column duty, double
column duty and triple column duty.

NON-TARIFF BARRIERS
A non tariff barrier is any barrier other than a tariff, that raises an obstacle to free flow of goods in overseas
markets. Non-tariff barriers, do not affect the price of the imported goods, but only the quantity of imports.
Some of the important non-tariff barriers are as follows:
(1) Quota System: Under this system, a country may fix in advance, the limit of import quantity of a
commodity that would be permitted for import from various countries during a given period. The quota system
can be divided into the following categories:
(a) Tariff/Customs Quota    (b) Unilateral Quota
(c) Bilateral Quota               (d) Multilateral Quota

 Tariff/Customs Quota: Certain specified quantity of imports is allowed at duty free or at a reduced rate of
import duty. Additional imports beyond the specified quantity are permitted only at increased rate of duty. A
tariff quota, therefore, combines the features of a tariff and an import quota.
 Unilateral Quota: The total import quantity is fixed without prior consultations with the exporting countries.
 Bilateral Quota: In this case, quotas are fixed after negotiations between the quota fixing importing country
and the exporting country.
 Multilateral Quota: A group of countries can come together and fix quotas for exports as well as imports for
each country.
(2) Product Standards: Most developed countries impose product standards for imported items. If the
imported items do not conform to established standards, the imports are not allowed. For instance, the
pharmaceutical products must conform to pharmacopoeia standards.
(3) Domestic Content Requirements: Governments impose domestic content requirements to boost domestic
production. For instance, in the US bailout package (to bailout General Motors and other organisations), the US
Govt. introduced ‘Buy American Clause’ which means the US firms that receive bailout package must purchase
domestic content rather than import from elsewhere.
(4) Product Labelling: Certain nations insist on specific labeling of the products. For instance, the European
Union insists on product labeling in major languages spoken in EU. Such formalities create problems for
exporters.
(5) Packaging Requirements: Certain nations insist on particular type of packaging materials. For instance,
EU insists on recyclable packing materials, otherwise, the imported goods may be rejected.
(6) Consular Formalities: A number of importing countries demand that the shipping documents should
include consular invoice certified by their consulate stationed in the exporting country.
(7) State Trading: In some countries like India, certain items are imported or exported only through canalising
agencies like MMTC. Individual importers or exporters are not allowed to import or export canalised items
directly on their own.
(8) Preferential Arrangements: Some nations form trading groups for preferential arrangements in respect of
trade amongst themselves. Imports from member countries are given preferences, whereas, those from other
countries are subject to various tariffs and other regulations.
(9) Foreign Exchange Regulations: The importer has to ensure that adequate foreign exchange is available for
import of goods by obtaining a clearance from exchange control authorities prior to the concluding of contract
with the supplier.
(10) Other Non-Tariff Barriers: There are a number of other non – tariff barriers such as health and safety
regulations, technical formalities, environmental regulations, embargoes, etc.
UNIT 3 Strategy Making and International Business
Structure of Global Organization

#1 Expo-documents against acceptancert Department:

Exports are often looked after by a company’s marketing or sales department in the initial stages when the
volume of exports sales is low. However, with increase in exports turnover, an independent exports department
is often setup and separated from domestic marketing, as shown in Fig. 17.2

Exports activities are controlled by a company’s home-based office through a designated head of export
department, i.e. Vice President, Director, or Manager (Exports). The role of the HR department is primarily
confined to planning and recruiting staff for exports, training and development, and compensation.
Sometimes, some HR activities, such as recruiting foreign sales or agency personnel are carried out by the
exports or marketing department with or without consultation with the HR department.
 #2 International Division Structure:
As the foreign operations of a company grow, businesses often realize the overseas growth opportunities and an
independent international division is created which handles all of a company’s international operations (Fig.
17.3). The head of international division, who directly reports to the chief executive officer, coordinates and
monitors all foreign activities.

The in-charge of subsidiaries reports to the head of the international division. Some parallel but less formal
reporting also takes place directly to various functional heads at the corporate headquarters.
The corporate human resource department coordinates and implements staffing, expatriate management, and
training and development at the corporate level for international assignments. Further, it also interacts with the
HR divisions of individual subsidiaries.
The international structure ensures the attention of the top management towards developing a holistic and
unified approach to international operations. Such a structure facilitates cross-product and cross-geographic co-
ordination, and reduces resource duplication.
Although an international structure provides much greater autonomy in decision-making, it is often used during
the early stages of internationalization with relatively low ratio of foreign to domestic sales, and limited foreign
product and geographic diversity.

#3 Global Organizational Structures:

Rise in a company’s overseas operations necessitates integration of its activities across the world and building
up a worldwide organizational structure.
While conceptualizing organizational structure, the internationalizing firm often has to resolve the
following conflicting issues:

1. Extent or type of control exerted by the parent company headquarters over subsidiaries
2. Extent of autonomy in making key decisions to be provided by the parent company headquarters to subsidiaries
(centralization vs. decentralization)
It leads to re-organization and amalgamation of hitherto fragmented organizational interests into a globally
integrated organizational structure which may either be based on functional, geographic, or product divisions.
Depending upon the firm strategy and demands of the external business environment, it may further be
graduated to a global matrix or trans-national network structure.
Global Functional Division Structure:
 It aims to focus the attention of key functions of a firm, as shown in Fig. 17.4, wherein each functional
department or division is responsible for its activities around the world. For instance, the operations department
controls and monitors all production and operational activities; similarly, marketing, finance, and human
resource divisions co-ordinate and control their respective activities across the world.

Such an organizational structure takes advantage of the expertise of each functional division and facilitates
centralized control. MNEs with narrow and integrated product lines, such as Caterpillar, usually adopt the
functional organizational structure.
Such organizational structures were also adopted by automobile MNEs but have now been replaced by
geographic and product structures during recent years due to their global expansion.
The Major Advantages of global functional division structure include:

1. Greater emphasis on functional expertise

2. Relatively lean managerial staff
3. High level of centralized control
4. Higher international orientation of all functional managers
The Disadvantages of such divisional structure include:

1. Difficulty in cross-functional coordination

2. Challenge in managing multiple product lines due to separation of operations and marketing in different
departments
3. Since only the chief executive officer is responsible for profits, such a structure is favoured only when
centralized coordination and control of various activities is required.
Global product structure:
Under global product structure, the corporate product division, as depicted in Fig. 17.5, is given worldwide
responsibility for the product growth.
The heads of product divisions do receive internal functional support associated with the product from all other
divisions, such as operations, finance, marketing, and human resources. They also enjoy considerable autonomy
with authority to take important decisions and operate as profit centres.
The global product structure is effective in managing diversified product lines.
Such a structure is extremely effective in carrying out product modifications so as to meet rapidly changing
customer needs in diverse markets. It enables close coordination between the technological and marketing
aspects of various markets in view of the differences in product life cycles in these markets, for instance, in case
of consumer electronics, such as TV, music players, etc.
However, creating exclusive product divisions tends to replicate various functional activities and multiplicity of
staff. Besides, little attention is paid to worldwide market demand and strategy. Lack of cooperation among
various product lines may also result into sales loss. Product managers often pursue currently attractive markets
neglecting those with better long-term potential.
Global Geographic Structure:
Under the global geographic structure, a firm’s global operations are organized on the basis of geographic
regions, as depicted in Fig. 17.6. It is generally used by companies with mature businesses and narrow product
lines. It allows the independent heads of various geographical subsidiaries to focus on the local market
requirements, monitor environmental changes, and respond quickly and effectively.
The corporate headquarter is responsible for transferring excess resources from one country to another, as and
when required. The corporate human resource division also coordinates and provides synergy to achieve
company’s overall strategic goals between various subsidiaries based in different countries.
Such structure is effective when the product lines are not too diverse and resources can be shared. Under such
organizational structure, subsidiaries in each country are deeply embedded with nationalistic biases that prohibit
them from cooperating among each other.
Global Matrix Structure:
It is an integrated organizational structure, which super-imposes on each other more than one dimension. The
global matrix structure might consist of product divisions intersecting with various geographical areas or
functional divisions (Fig. 17.7). Unlike functional, geographical, or product division structures, the matrix
structure shares joint control over firm’s various functional activities.

Such an integrated organizational structure facilitates greater interaction and flow of information throughout the
organization. Since the matrix structure has an in-built concept of interaction between intersecting perspectives,
it tends to balance the MNE’s prospective, taking cross-functional aspects into consideration.
It facilitates ease of technology transfer to foreign operations and of new products to different markets leading
to higher economies of scale and better foreign sales performance. Matrix structure is used successfully by a
large number of MNEs, such as Royal Dutch/Shell, Dow Chemical, etc.
In an effort to bring together divergent perspectives within the organization, the matrix structure may also lead
to conflicting situations. It inhibits a firm’s ability to respond quickly to environmental changes in case an
effective conflict resolution mechanism is not in place.
Since the structure requires most managers to report to two or multiple bosses, Fayol’s basic principle of unity
of command is violated and conflicting directives from multiple authorities may compel employees to
compromise with sub-optimal alternatives so as to avoid conflict which may not be the most appropriate
strategy for an organization as a whole.
Transnational Network Structure:
Such a globally integrated structure represents the ultimate form of an earth-spanning organization, which
eliminates the meaning of two or three matrix dimensions. It encompasses elements of function, product, and
geographic designs while relying upon a network arrangement to link worldwide subsidiaries (Fig. 17.8).
This form of organization is not defined by its formal structure but by how its processes are linked with each
other, which may be characterized by an overall integrated system of various inter-related sub-systems.
The trans-national network structure is designed around ‘nodes’, which are the units responsible for
coordinating with product, functional and geographic aspects of an MNE. Thus, trans-national network
structures build-up multidimensional organizations which are fully networked.
The conceptual framework of a trans-national network structure primarily consists of three components:
Disperse sub-units:
These are subsidiaries located anywhere in the world where they can benefit the organization either to take
advantage of low-factor costs or provide information on new technologies or market trends
Specialized operations:
These are the activities carried out by sub-units focusing upon particular product lines, research areas, and
marketing areas design to tap specialized expertise or other resources in the company’s worldwide subsidiaries.
Inter-dependent relationships:
It is used to share information and resources throughout the dispersed and specialized subsidiaries.
Organizational structure of N.V. Philips which operates in more than 50 countries with diverse range of product
lines provides a good illustration of a trans-national network structure.
#4 Evolution of Global Organizational Structures:
Organizational structures often exhibit evolutionary patterns, as shown in Fig. 17.9, depending upon their
strategic globalization. The historical evolution of organizational patterns indicates that in the early phase of
internationalization, most firms separate their exports departments from domestic marketing or have separate
international divisions.
Companies with emphasis on global business strategies move towards global product structures whereas those
with emphasis on location base strategies move towards global geographic structures.
Subsequently, a large number of companies graduate to a matrix or trans-national network structure due to dual
demands of local adaptations pressures and globalization. In practice, most companies hardly adopt either pure
matrix or trans-national structures; rather they opt for hybrid structures incorporating both.
Types of Strategies used in Strategic Planning for achieving global Competitive advantage

1. Make time for Marketing Research and Planning

The most important quality that an organization needs if it wants to make understanding its customers a key part
of its long term strategic planning is the development of a deep understanding of those customers real needs.
You will have to get to know these needs so well that your long term strategies become not just adaptive but
also downright anticipatory of what the people you’re serving will want and respond to. This in essence is the
antithesis of being reactive or behind the competitive curve and it can be achieved by digging deeply into the
information you gain from your target market so that you instinctively learn what makes them tick and click
with regards to your brand. In other words, you want to know your buyers enough so that you can accurately
anticipate what they’ll want to buy and why.
Following this core process of strategic planning will put public perception of your company to a level that’s at
least a cut above that of your competitors. Most fundamentally, achieving this requires asking questions which
will define your long term company goals and then finding answers to those same questions through careful
study of your customers behavior, effective viewing mediums (for marketing) and the market dynamic as a
whole in your niche. Doing this will let you get to know your customers not just as superficial consumers but
also as fully fleshed out human beings.
2. Know your Customers better than any competitor
Understanding your customers is a continuous process that your organization will have to start living and
breathing on a daily basis, as part of its internal culture. As this quote from David Ogilvy shows, you must go
further than simple surveys or basic client-related facts such as their age and spending budgets. Creating quality
marketing research to fully understand customers is involved. You have to dig much deeper through the use of
an assortment of tools on the web and in human resources so that you can create an integral customer profile
which is constantly added to and made to evolve.
With this grade of in depth research, you will be much more adept at anticipating your buyers wishes and
emotional trigger much more effectively than your competition. Achieving this will then let you then market
strategically instead of reactively. And if you want an excellent example of a real world company that follows
through on this exact philosophy and process, look no further than Apple Computer and its cult-like loyal
following of buyers. Here are some of the more useful customer information metrics you might want to start
looking at:
 Daily online and even offline habits
 Information about your buyers professional, personal and family lives
 Their interests, personal passions, hobbies and assorted worries
 Their communications, social media and online browsing preferences
 Awareness of advertising and different marketing platforms you might use or want to use
 The dynamics of your customers buying, shopping and desire related habits.
These are just some obvious examples and the more you flesh them out while also finding other information
points to investigate, the better you’ll be able to make strategic predictions about what your consumers will
respond to. Fleshing out this information and other, related metrics will let you better grasp your buyers’
emotional triggers.
3. Avoid Reactiveness at all Costs
Being purely reactive means playing a game of catch-up, and when you’re constantly trying to catch up, you’ll
have no time to create any kind of long term strategic plan. This will make you fall behind your competitors and
disappoint your existing customers eventually. More importantly still, a reactive marketing response will ruin
your breathing space for guiding a clear course to the future of your company. While you’re busy reeling from
surprises in your target market, your competitors are going to move ahead of you inexorably, particularly if they
are actually implementing their own strategic planning process. Strategic planning concepts are covered in
much greater detail within the pages of this Business guide to strategic planning from Insights into Marketing.
Different Strategies Used
1. Balanced Scorecard
The Balanced Scorecard is a strategy management framework created by Drs. Robert Kaplan and David Norton.
It takes into account your:

 Objectives, which are high-level organizational goals.

 Measures, which help you understand if you’re accomplishing your objective strategically.
 Initiatives, which are key action programs that help you achieve your objectives.
There are many ways you can create a Balanced Scorecard, including using a program like Excel, Google
Sheets, or PowerPoint or using reporting software. For the sake of example, the screenshot below is
from ClearPoint’s reporting software.
This is just one of the many “views” you’d be able to see in scorecard software once your BSC was complete. It
gives you high-level details into your measures and initiatives and allows you to drill down into each by
clicking on them. At a glance, you can tell what the RAG status of each objective, measure, or initiative is.
(Green indicates everything is going as planned, while yellow and red indicate that there are various degrees of
trouble with whatever is being looked at.)
All in all, a Balanced Scorecard is an effective, proven way to get your team on the same page with your
strategy.
2. Strategy Map
A strategy map is a visual tool designed to clearly communicate a strategic plan and achieve high-level business
goals. Strategy mapping is a major part of the Balanced Scorecard (though it isn’t exclusive to the BSC) and
offers an excellent way to communicate the high-level information across your organization in an easily-
digestible format.
 A strategy map offers a host of benefits:

 It provides a simple, clean, visual representation that is easily referred back to.
 It unifies all goals into a single strategy.
 It gives every employee a clear goal to keep in mind while accomplishing tasks and measures.
 It helps identify your key goals.
 It allows you to better understand which elements of your strategy need work.
 It helps you see how your objectives affect the others.
3. SWOT Analysis
A SWOT analysis (or SWOT matrix) is a high-level model used at the beginning of an organization’s
strategic planning. It is an acronym for “strengths, weaknesses, opportunities, and threats.” Strengths and
weaknesses are considered internal factors, and opportunities and threats are considered external factors.
Below is an example SWOT analysis from the Queensland, Australia, government:
Using a SWOT analysis helps an organization identify where they’re doing well and in what areas they can
improve. If you’re interested in reading more, this Business News Daily article offers some additional details
about each area of the SWOT analysis and what to look for when you create one.
4. PEST Model
Like SWOT, PEST is also an acronym—it stands for “political, economic, sociocultural, and technological.”
Each of these factors is used to look at an industry or business environment, and determine what could affect an
organization’s health. The PEST model is often used in conjunction with the external factors of a SWOT
analysis. You may also run into Porter’s Five Forces, which is a similar take on examining your business from
various angles.
You’ll occasionally see the PEST model with a few extra letters added on. For example, PESTEL (or PESTLE)
indicates an organization is also considering “environmental” and “legal” factors. STEEPLED is another
variation, which stands for “sociocultural, technological economic, environmental, political, legal, education,
and demographic.”
5. Gap Planning
Gap planning is also referred to as a “Need-Gap Analysis,” “Need Assessment,” or “the Strategic-Planning
Gap.” It is used to compare where an organization is now, where it wants to be, and how to bridge the gap
between. It is primarily used to identify specific internal deficiencies.
In your gap planning research, you may also hear about a “change agenda” or “shift chart.” These are similar to
gap planning, as they both take into consideration the difference between where you are now and where you
want to be along various axes. From there, your planning process is about how to ‘close the gap.’
The chart below, for example, demonstrates the difference between the projected and desired sales of a mock
company:
6. Blue Ocean Strategy
Blue Ocean Strategy is a strategic planning model that emerged in a book by the same name in 2005. The book
—titled Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition
Irrelevant—was written by W. Chan Kim and Renée Mauborgne, professors at the European Institute of
Business Administration (INSEAD).
The idea behind Blue Ocean Strategy is for organizations to develop in “uncontested market space” (e.g. a
blue ocean) instead of a market space that is either developed or saturated (e.g. a red ocean). If your
organization is able to create a blue ocean, it can mean a massive value boost for your company, its buyers, and
its employees.
For example, Kim and Mauborgne explain via their 2004 Harvard Business Review article how Cirque du
Soleil didn’t attempt to operate as a normal circus, and instead carved out a niche for itself that no other circus
had ever tried.
Below is a simple comparison chart from the Blue Ocean Strategy website that will help you understand if
you’re working in a blue ocean or a red ocean:
 7. Porter’s Five Forces
Porter’s Five Forces is an older strategy execution framework (created by Michael Porter in 1979) built around
the forces that impact the profitability of an industry or a market. The five forces it examines are:

1. The threat of entry.Could other companies enter the marketplace easily, or are there numerous entry barriers
they would have to overcome?
2. The threat of substitute products or services.Can buyers easily replace your product with another?
3. The bargaining power of customers.Could individual buyers put pressure on your organization to, say, lower
costs?
4. The bargaining power of suppliers.Could large retailers put pressure on your organization to drive down the
cost?
5. The competitive rivalry among existing firms.Are your current competitors poised for major growth? If one
launches a new product or files a new patent—could that impact your company?
The amount of pressure on each of these forces can help you determine how future events will impact the future
of your company.
 8. VRIO Framework
The VRIO framework is an acronym for “value, rarity, imitability, organization.” This framework relates
more to your vision statement than your overall strategy. The ultimate goal in implementing the VRIO model is
that it will result in a competitive advantage in the marketplace.
Here’s how to think of each of the four VRIO components:

 Value: Are you able to exploit an opportunity or neutralize an outside threat using a particular resource?
 Rarity: Is there a great deal of competition in your market, or do only a few companies control the resource
referred to above?
 Imitability: Is your organization’s product or service easily imitated, or would it be difficult for another
organization to do so?
 Organization: Is your company organized enough to be able to exploit your product or resource?
Meaning, Concept and Scope of Distinctive Competitive Advantage
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A distinctive competency is a competency unique to a business organization, a competency superior in some
aspect than the competencies of other organizations, which enables the production of a unique value proposition
in the function of the business. A distinctive competency is the basis for the development of an unassailable
competitive advantage. The uniqueness differentiates this competency from all others, whether a core
competency or simply a competency.
Sources of Distinctive Competency:
Distinctive competencies, the basis for competitive advantage, can come from technology, industry position,
market relations, cost, business processes, manufacturing processes, people, customer satisfaction, or just being
first.
The insightful integration of complementary elements of the business model is the strongest form of
competitive advantage known. This is because it is so difficult for competitors to understand and even more
difficult to replicate, especially when the business model elements of value, purpose, vision, culture, and
identity are intertwined in a powerful business solution.
Examples of distinctive competency:
Toyota has a distinctive competency in lean manufacturing. GE has a distinctive competency in management
development. These companies also have core competencies, core to their particular lines of business. They also
have competencies necessary to operate their business but of not of strategic significance, such as payroll, the
processes used to pay their employees. On the other hand, a company like ADP, which provides payroll and
benefits services, certainly has payroll processing as a core competency, if not a distinctive competency.
Competency and Advantage
For a business to develop and sustain a competitive advantage, it must have some sort of competitive advantage,
based on a distinctive competency, which enables it to produce a unique value proposition. A distinctive
competency is a competency that is maintainable in the face of competition. It is not imitable, at least for a
while. This can be thought of as an “”unfair advantage””.
In a dynamic environment, ultimately distinctive competencies, or the uniqueness of the value proposition
produced using them, becomes less distinct or less unique. Therefore, in order to sustain advantage,
competencies must be dynamic, evolving to more favorable forms in order to sustain advantage over the long
haul.
Dynamic capability refers to the development of competencies, both in reaction to the environment and
deliberately as part of learning and knowledge development. See dynamic capability for a perspective on the
development of capability, i.e. competency.
Distinctive competency should be explicitly defined to insure that it is profoundly understood, it should be
protected from loss to competitors whether through trade secrets, intellectual property, or simply by making it
such an integral component of an overall competitive business model that it cannot be replicated. Leadership
must nurture, tune, and renew the distinctive competency in order to have it remain distinctive.
John Kay on distinctive competency — (Kay, 1999)
The success of corporations is based on those of their capabilities that are distinctive. Companies with
distinctive capabilities have attributes which others cannot replicate, and which others cannot replicate even
after they realise the benefit they offer to the company which originally possesses them.
Distinctive vs. Reproducible capabilities
The opportunity for companies to sustain competitive advantage is determined by their capabilities. The
capabilities of a company are of many kinds. For the purposes of strategy the key distinction is between
distinctive capabilities and reproducible capabilities. Distinctive capabilities are those characteristics of a firm
which cannot be replicated by competitors, or can only be replicated with great difficulty, even after these
competitors realise the benefits which they yield for the originating company.
Distinctive capabilities can be of many kinds. Government licences, statutory monopolies, or effective patents
and copyrights, are particularly stark examples of distinctive capabilities. But equally powerful idiosyncratic
characteristics have been built by companies in competitive markets. These include strong brands, patterns of
supplier or customer relationships, and skills, knowledge and routines which are embedded in teams.
Reproducible capabilities can be bought or created by any firm with reasonable management skills, diligence
and financial resources. Most technical capabilities are of this kind. Marketing capabilities are sometimes
distinctive, sometimes reproducible.
The importance of the distinction for strategy is this. Only distinctive capabilities can be the basis of sustainable
competitive advantage. Collections of reproducible capabilities can and will be established by others and
therefore cannot generate rents in a competitive or contestable market.
Matching Capabilities to Markets
So the strategist must first look inward. The strategist must identify the distinctive capabilities of the
organisation and seek to surround these with a collection of reproducible capabilities, or complementary assets,
which enable the firm to sell its distinctive capabilities in the market in which it operates.
While this is easier said than done, it defines a structure in which the processes of strategy formulation and its
implementation are bound together. The resource based view of strategy – which emphasises rent creation
through distinctive capabilities – has found its most widely accepted popularisation in the core competences
approach of C. K. Prahalad and Gary Hamel. But that application has been made problematic by the absence of
sharp criteria for distinguishing core and other competencies, which allows the wishful thinking characteristic
of vision and mission- based strategising. Core competencies become pretty much what the senior management
of the corporation wants them to be.
The perspective of economic rent – which forces the question ‘why can’t competitors do that?’ into every
discussion – cuts through much of this haziness.
Characteristics such as size, strategic vision, market share and market positioning – all commonly seen as
sources of competitive advantage, but all ultimately reproducible by firms with competitive advantages of their
own – can be seen clearly as the result, rather than the origin, of competitive advantage.
Strategic analysis then turns outward, to identify those markets in which the company’s capabilities can yield
competitive advantage. The emphasis here is again on distinctive capabilities, since only these can be a source
of economic rent, but distinctive capabilities need to be supported by an appropriate set of complementary
reproducible capabilities.
Markets have product geographic dimensions, and different capabilities each have their own implications for
the boundaries of the appropriate market. Reputations and brands are typically effective in relation to a specific
customer group, and may be valuable in selling other related products to that group. Innovation based
competitive advantages will typically have a narrower product focus but may transcend national boundaries in
ways that reputations cannot. Distinctive capabilities may dictate market position as well as market choice.
Those based on supplier relationships, may be most appropriately deployed at the top of the market, while the
effectiveness of brands is defined by the customer group which identifies with the brand.
Since distinctive capabilities are at the heart of competitive advantage, every firm asks how it can create
distinctive capabilities. Yet the question contains an inherent contradiction. If irreproducible characteristics
could be created, they would cease to be irreproducible. What is truly irreproducible has three primary sources:
market structure which limits entry; firm history which by its very nature requires extended time to replicate;
tacitness in relationships – routines and behaviour of “”uncertain imitability”” which cannot be replicated
because no-one, not even the participants themselves, fully comprehend their nature.
So companies do well to begin by looking at the distinctive capabilities they have rather than at those they
would like to have. And established, successful companies will not usually enjoy that position if they do not
enjoy some distinctive capability. Again, it is easy to overestimate the effect of conscious design in the
development of firms and market structures.
The evolution of capabilities and environment
Strategy, with its emphasis on the fit between characteristics and environment links naturally to an evolutionary
perspective on organisation. Processes which provide favourable feedback for characteristics which are well
adapted to their environment – and these include both biological evolution and competitive market economies –
produce organisms, or companies, which have capabilities matched to their requirement.
Recent understanding of evolutionary processes emphasises how little intentionality is required to produce that
result. Successful companies are not necessarily there because (except with hindsight) anyone had superior
insight in organisational design or strategic fit. Rather there were many different views of the firm capabilities a
particular activity required: and it was the market, rather than the visionary executive, which chose the match
that was most effective. Distinctive capabilities were established , rather than designed.
This view is supported by detached business history. Andrew Pettigrew’s description of ICI shows an
organisation whose path was largely fixed – both for good and for bad – by its own past. The scope and
opportunity for effective management strategic choice – both for good and bad – was necessarily limited by the
past. This is not to be pessimistic about the potential for strategic direction or the ability of executives to make
important differences, but to reiterate the absurdity and irrelevance of using the blank sheet of paper approach to
corporate strategy.
New Paradigm
The resource based view of strategy has a coherence and integrative role that places it well ahead of other
mechanisms of strategic decision making. I have little doubt that for the foreseeable future major contributions
to ways of strategic thinking will either form part of that framework or represent development of that
framework. After thirty years or so, the subject of strategy is genuinely acquiring what can be described as a
paradigm – to use the most overworked and abused term in the study of management.
Financial Integration
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Financial integration is a phenomenon in which financial markets in neighboring, regional and/or global
economies are closely linked together. Various forms of actual financial integration include: Information
sharing among financial institutions; sharing of best practices among financial institutions; sharing of cutting
edge technologies (through licensing) among financial institutions; firms borrow and raise funds directly in the
international capital markets; investors directly invest in the international capital markets; newly engineered
financial products are domestically innovated and originated then sold and bought in the international capital
markets; rapid adaption/copycat of newly engineered financial products among financial institutions in different
economies; cross-border capital flows; and foreign participation in the domestic financial markets.
Because of financial market imperfections, financial integration in neighboring, regional and/or global
economies is therefore imperfect. For example, the imperfect financial integration can stem from the inequality
of the marginal rate of substitutions of different agents. In addition to financial market imperfections, legal
restrictions can also hinder financial integration. Therefore, financial integration can also be achieved from the
elimination of restrictions pertaining to cross-border financial operations to allow
(a) Financial institutions to operate freely
(b) Permit businesses to directly raise funds or borrow and
(c) Equity and bond investors to invest across the state line with fewer restrictions.
However, it is important to note that many of the legal restrictions exist because of the market imperfections
that hinder financial integration. Legal restrictions are sometimes second-best devices for dealing with the
market imperfections that limit financial integration. Consequently, removing the legal restrictions can make the
world economy become worse off. In addition, financial integration of neighboring, regional and/or global
economies can take place through a formal international treaty which the governing bodies of these economies
agree to cooperate to address regional and/or global financial disturbances through regulatory and policy
responses. The extent to which financial integration is measured includes gross capital flows, stocks of foreign
assets and liabilities, degree of co-movement of stock returns, degree of dispersion of worldwide real interest
rates, and financial openness. Also there are views that not gross capital flows (capital inflow plus capital
outflow), but bilateral capital flows determine financial integration of a country, which disregards capital
surplus and capital deficit amounts. For instance, a county with only capital inflow and no capital outflow will
be considered not financially integrated.
Benefits
Benefits of financial integration include efficient capital allocation, better governance, higher investment and
growth, and risk-sharing. Levine (2001) shows that financial integration helps strengthen domestic financial
sector allowing for more efficient capital allocation and greater investment and growth opportunities. As a result
of financial integration, efficiency gains can also be generated among domestics firms because they have to
compete directly with foreign rivals; this competition can lead to better corporate governance (Kose et al.,
2006). If having access to a broader base of capital is a major engine for economic growth, then financial
integration is one of the solutions because it facilitates flows of capital from developed economies with rich
capital to developing economies with limited capital. These capital inflows can significantly reduce the cost of
capital in capital-poor economies leading to higher investment (Kose et al., 2006). Likewise, financial
integration can help capital-poor countries diversify away from their production bases that mostly depend on
agricultural activities or extractions of natural resources; this diversification should reduce macroeconomic
volatility (Kose et al., 2006). Financial integration can also help predict consumption volatility because
consumers are risk-averse who have a desire to use financial markets as the insurance for their income risk, so
the impact of temporary idiosyncratic shocks to income growth on consumption growth can be softened.
Stronger comoverment of consumption growth across the globe can also be a results of financial integration
(Kose et al., 2006). Furthermore, financial integration can also provide great benefits for international risk-
sharing.
Adverse effects
Financial integration can also have adverse effects. For example, a higher degree of financial integration can
generate a severe financial contagion in neighboring, regional and/or global economies. In addition, Boyd and
Smith (1992) argue that capital outflows can journey from capital-poor countries with weak institutions and
policies to capital-rich countries with higher institutional quality and sound policies. Consequently, financial
integration actually hurts capital-scarce countries with poor institutional quality and lousy policies.
Recent Development
During the past two decades, there has been a significant increase in financial integration; this increased
financial integration generates a great deal of cross-border capital flows among industrial nations and between
industrial and developing countries. In addition, this increase in financial integration pulls global financial
markets closer together and escalates the presence of foreign financial institutions across the globe. With rapid
capital flows around the world, the currency and financial crises in the late 1980s and 1990s were inevitable.
Consequently, developing countries that welcomed excessive capital flows were more vulnerable to these
financial disturbances than industrial nations. It is widely believed that these developing economies were much
more adversely impacted as well. Because of these recent financial crises, there has been a heated debate among
both academics and practitioners concerning the costs and benefits of financial integration.
Cross Border Merger and Acquisitions
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Cross border Mergers and Acquisitions or M&A are deals between foreign companies and domestic
firms in the target country. The trend of increasing cross border M&A has accelerated with the globalization
of the world economy. Indeed, the 1990s were a “golden decade” for cross border M&A with a nearly 200
percent jump in the volume of such deals in the Asia Pacific region. This region was favored for cross border
M&A as most countries in this region were opening up their economies and liberalizing their policies, which
provided the much, needed boost to such deals. Of course, it is another matter that in recent years, Latin
America and Africa are attracting more cross border M&A. This due to a combination of political gridlock in
countries like India that are unable to make up their minds on whether the country needs more foreign
investment, the saturation of China, and the rapid emergence of Africa as an investment destination. Further, the
fact that Latin America is being favored is mainly due to the rapid growth rates of the economies of the region.
Factors to be considered in Cross Border Mergers and Acquisitions
Having said that, it must be remembered that cross border M&A’s actualize only when there are incentives to
do so. In other words, both the foreign company and the domestic partner must gain from the deal as otherwise;
eventually the deal would turn sour. Given the fact, that many domestic firms in many emerging markets
overstate their capabilities in order to attract M&A, the foreign firms have to do their due diligence when
considering an M&A deal with a domestic firm. This is the reason why many foreign firms take the help of
management consultancies and investment banks before they venture into an M&A deal. Apart from this, the
foreign firms also consider the risk factors associated with cross border M&A that is a combination of political
risk, economic risk, social risk, and general risk associated with black swan events. The foreign firms evaluate
potential M&A partners and countries by forming a risk matrix composed of all these elements and depending
upon whether the score is appropriate or not, they decide on the M&A deal. Third, cross border M&A also
needs regulatory approvals as well as political support because in the absence of such facilitating factors, the
deals cannot go through.
Some Recent Examples of Cross Border M&A
If we take some recent examples of cross border M&A deals, the Jet-Etihad deal and the Air Asia deal in the
aviation sector in India are good examples of how cross border M&A deals need to be evaluated against the
points mentioned previously. For instance, there is both support and resistance to the Jet-Etihad deal as well as
for the Air Asia deal. This has made other foreign companies weary of entering India. On the other hand, if we
consider the cross border M&A deals in the reverse direction i.e. from emerging markets to the developed
 world, the Chinese oil major SNOPC had to encounter stiff resistance from the US Senate because of security
concerns and potential issues with ownership patterns. Of course, the recent Unilever takeover of its
subsidiaries around the world is an example of a successful deal. The clear implications of these successes as
well as failures is that there must be a process that is structured and standardized in each country and by each
firm on how to approach the M&A deal. Otherwise, there are chances of hostility creeping into the process and
vitiating the economic atmosphere for all stakeholders. More than this, the due diligence must be carried out
before any such deals are considered.
Finally, there has been a huge outcry from civil society in almost all the emerging markets in recent months.
This has been mainly due to public anger at crony capitalism and tiny elite cornering all the benefits. Therefore,
the most essential condition before cross border M&A is actualized is that there must be regulatory scrutiny
about the ownership patterns and the holding structures.
UNIT 4 Socio Cultural Environment
Managing diversity within and across Cultures
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From our increasingly diverse domestic workforce to the globalization of business, cultural competence is
arguably the most important skill for effective work performance in the 21st century.
Cultural competence, in brief, is the ability to interact effectively with people from different cultures. This
ability depends on awareness of one’s own cultural worldview, knowledge of other cultural practices and
worldviews, tolerant attitudes towards cultural differences, and cross-cultural skills.
The more different cultures work together, the more cultural competency training is essential to avoid
problems.  Cultural problems can range from miscommunication to actual conflict, all endangering effective
worker productivity and performance.
Managing Cultural Diversity in the Workplace
Developing cultural competence results in an ability to understand, communicate with, and effectively interact
with people across cultures, and work with varying cultural beliefs and schedules. While there are myriad
cultural variations, here are some essential to the workplace:

1. Communication: Providing information accurately and promptly is critical to effective work and team
performance. This is particularly important when a project is troubled and needs immediate corrective actions.
However, people from different cultures vary in how, for example, they relate to bad news. People from some
Asian cultures are reluctant to give supervisors bad news – while those from other cultures may exaggerate it.
2. Team-Building: Some cultures – like the United States – are individualistic, and people want to go it alone.
Other cultures value cooperation within or among other teams. Team-building issues can become more
problematic as teams are comprised of people from a mix of these cultural types. Effective cross-cultural team-
building is essential to benefiting from the potential advantages of cultural diversity in the workplace
3. Time: Cultures differ in how they view time. For example, they differ in the balance between work and family
life, and the workplace mix between work and social behavior. Other differences include the perception of
overtime, or even the exact meaning of a deadline. Different perceptions of time can cause a great
misunderstanding and mishap in the workplace, especially with scheduling and deadlines. Perceptions of time
underscore the importance of cultural diversity in the workplace, and how it can impact everyday work.
4. Schedules: Work can be impact by cultural and religious events affecting the workplace. The business world
generally runs on the western secular year, beginning with January 1 and ending with December 31. But some
cultures use wildly different calendars to determine New Years or specific holy days. For example, Eastern
Orthodox Christians celebrate Christmas on a different day from western Christians. For Muslims, Friday is a
day for prayer. Jews observe holidays ranging from Rosh Hashanah to Yom Kippur. These variations affect the
workplace as people require time off to observe their holidays.
 To develop cultural competence, training should focus on the following areas:

1. Awareness. Cultural Awareness is the skill to understand one’s reactions to people who are different, and how
our behavior might interfere with effective working relationships. We need to learn to overcome stereotypes?
We need to see people as individuals and focus on actual behavior, rather than our preconceived and often
biased notions.
2. Attitude. This is the companion skill to awareness. Attitude enables people to examine their values and beliefs
about cultural differences, and understand their origins. It is important that to focus on facts, rather than
judgment. Also, note that suggesting that some people are more biased and prejudiced than others can quickly
sabotage cultural training.  The goal is managing cultural diversity in the workplace, and creating effective
working relationships – not to make converts.
3. Knowledge Social science research indicates that our values and beliefs about equality may be inconsistent
with behavior. Ironically, we are often unaware of this. Knowledge about our own behavior – and how it relates
to fairness and workforce effectiveness – is an essential skill.  It’s also essential to be knowledgeable about
other cultures, from communication styles to holidays and religious events.  The minimum objective is
tolerance, which is essential for effective teamwork. Differences are what make tolerance necessary , and
tolerance is what makes differences possible.
4. Skills The goal of training – in awareness, attitude, and knowledge – should be skills that allow organizational
leaders and employees to make cultural competence a seamless part of the workplace. The new work
environment is defined by understanding, communicating, cooperating, and providing leadership across
cultures.  Managing cultural diversity in the workplace is also the challenge for organizations that want to profit
from a competitive advantage in the 21st century economy.
for an organization to actually profit from the “diversity of thought” of its diverse workforce the following
factors have to come together:

 Commitment to the diversity development process by top management and all employees
 Diversity promoting and supporting companywide structures and processes
 Development and training of the workforce’s cross-cultural (leadership) competencies and conflict management
skills
Without the necessary organizational framework, intercultural training, and support, diverse teams will have
difficulties becoming cohesive, innovative, and productive units. Let’s take a detailed look at the steps needed
achieve this goal.

1. Select a cross-culturally competent team leader Leading a multicultural team successfully requires

competencies that go well beyond the technical knowledge and the leadership qualities usually required. To be
effective, leaders of multicultural teams need:

 A high level of cultural flexibility

 Robust ambiguity tolerance
 Low levels of ethnocentrism
These intercultural competencies are best learned through cross-cultural training combined with personal work
experience (e.g., being a member of a diverse team, working in an unfamiliar environment, having a mentor
with a different cultural background).
Select the team members Next, a team leader who already has the necessary cross-cultural proficiency selects
the members based on specific criteria related to the team’s/project’s target population (adapted from Jent, N.,
“Diversity: Zauberwort zur Leistungssteigerung des HR-Bereichs,” 2005). These selection criteria need to be
clearly defined and transparently communicated to all team members.
Reminder: The organizational framework, the hierarchy within the broader organization, and the actual
physical/virtual space have to be already defined.
2. Make the kick-off phase personal Start any project or team kick-off phase with a team event that gives
members an opportunity to get to know each other personally, such as a shared meal. And if for some reason the
team can’t meet in person, at the very least a friendly videoconference allowing for small talk is recommended.
3. Take the time to build relationships and trust Personal relationships and trust are a central element of doing
business in many cultures around the globe. Other cultures (e.g., the Germans) prefer to approach negotiations
and projects head-on without much time given to relationship building. However, unless you are German and
manage a team of Germans (especially men), investing time to build trusting relationships is never wrong. By
the way, even German men like to socialize and build relationships after work.
4. Learn about differences While team members might have similar educations, professional experience, and
work in the same industry, there are still considerable differences to be found between team members. It is those
differences (e.g., career path, education, culture, hobbies, social background) that will lead to creative and
innovative ideas, and eventually will influence the quality of team performance.
For example, a large American telecom company increased sales and retention of customers calling to Brazil by
listening to its South American team member. She explained that Brazilians like to take their time talking to
friends and family back home. As a result, the company lowered the call rate, but still increased its profit
because of the longer call times.
5. Clarify expectations:
Leaders:The process of discussing and clarifying expectations is a necessary step for any team, but is
particularly crucial for multicultural teams. Diverse employees will have different expectations about leadership
due to factors such as age and professional or cultural background. Consider the varying patterns of
expectations and common processes that need to be negotiated. Who expects what, and why? How will
decisions be reached? Who decides ultimately? Who can voice criticism?
Team members:The members need to be able to voice and discuss their expectations before some kind of
common ground can be negotiated. Clarify potential conflicts and explore possible remedies. How different are
the issues raised, and the troubleshooting plans imagined by the various team members? If team goals cannot be
met in a timely manner, can a plan B be envisioned and implemented?
6. Communicate, communicate, communicate Choosing adequate communication channels and cooperating
consistently are essential for local and virtual teams. Which tools fit the team’s framework and work methods?
As we all know, communicating clearly and without conflict is challenging even in our mother tongue. The
difficulties multiply exponentially when different vocabularies are at play such as in the case of
interdisciplinary and/or international teams. Therefore, it becomes even more important to apply the golden
rules of communication:

 Communicate with a positive attitude

 Be clear about who you are addressing
 Be descriptive
 Avoid making value judgments
 Rephrase what you heard
 Give examples
 Speak only for yourself
 Suggest changes that can be linked to behaviors
By working hard to create a team culture, communication and collaboration just might become a pleasure and
an inspiration instead of hard work.

8. Set and respect deadlines It is a well-known fact that time does not mean the same to everybody; after all, who
does not get annoyed by chronic latecomers? Time can be a sensitive issue personally and culturally. To get
everybody on the same page, communicate the rules about time keeping and deadlines clearly. This is especially
important if some of the team members are not working in the same time zone and the common work hours are
limited. In this scenario, team members have to be even more flexible, as returning a phone call might have to
wait for the next day. What time frames are acceptable, and when is a call-back considered late? What are the
consequences if deadlines are not respected?
9. Be alert to signs of trouble Inconsistencies and delays might signal issues with team collaboration. Don’t
procrastinate when you become aware of deadlines not being met or people avoiding direct contact. Helpful
interventions to prevent trouble may include personal talks, social gatherings, reminders of milestones achieved,
or teambuilding events. When considering any intervention, cultural intelligence and sensitivity are of utmost
importance to achieve the goal of better collaboration.
10. Assess the team’s work Of course, feedback about the team’s progress needs to be given. But a majority of
cultures consider public critique offensive and improper, and only allow for indirect or private face-to-face
critique. To work together successfully, it, thus, is necessary to tailor any critique to the member’s cultural
background. While it might be acceptable to give critique directly and rather bluntly when working with a
Dutch team member, for example, this will not be acceptable to individuals from other cultures such as China or
India. It might be helpful to call upon a (cultural) facilitator/mediator if the issue involves more than one team
member, as that is usually a signal of a bigger issue. Again, don’t procrastinate.
Reap the Benefits
A multicultural team, like any other team, needs room and time to get to know each other, experiment, and
build trust. To create room for the diversity of thoughts, multicultural teams need to find the balance between
time-tested (cultural) practices and the development of novel ideas. Team members need to commit fully to the
process, and be willing to go beyond their comfort zone. If they do, the diverse team offers each member a
chance to bring his or her personal and professional expertise to the table, and to be recognized and valued for
it.
Country Risk Analysis
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 Country Risk Assessment, also known as country risk analysis, is the process of determining a nation’s ability
to transfer payments. It takes into account political, economic and social factors, and is used to help
organizations make strategic decisions when conducting business in a country with excessive risk.
Different types of country risk
Country risk assessments are generally segregated into different categories, which take a closer look at some of
the factors we mentioned prior.
1. Political Risk
Political risk determines a country’s political stability, either internally or externally. For instance, a recent
military coup would increase a nation’s internal political risk for businesses as rules and regulations suddenly
shift. Other risks in this category could include war, terrorism, corruption and excessive bureaucracy (i.e. host
government red tape is preventing certain fund transfers or other transactions).
Political risk can affect a country’s attitude to meeting its debt obligations and may cause sudden changes in the
foreign exchange market.
2. Sovereign Risk
There is some crossover between political and sovereign risk, although the latter – also known as sovereign
default risk – primarily examines debt. Specifically, this risk category measures the build up of debt that is the
obligation of a government or its agencies (or that is guaranteed by the government), and how much said
government is anticipated to fulfil these obligations.
For example, if a government agency refuses to carry out debt refunding, this could impact local lenders and
lead to losses. This would of course have roll-on effects to local businesses and anyone undertaking trade with
them.
3. Neighbourhood Risk
Neighbourhood risk, also known as location risk, may not be the direct fault of the country with which your
clients are dealing, but instead is caused by trouble elsewhere. This can have spillover effects on other
sovereign nations, creating turmoil in the foreign market or putting pressure on local lenders and businesses.
Neighbourhood risk can be caused by:

 Geographic neighbours.
 Trading partners.
 Co-members of certain institutions or organisations.
 Strategic allies.
 Nations with similar perceived characteristics.
4. Subjective Risk
Subjective risk is not a term that is used everywhere, but it measures factors that are common to most risk
assessments – and could greatly impact foreign business owners trading with a host nation. Subjective risk is
about attitudes, and can include social pressures and consumer opinions – whether to certain types of goods or
certain types of enterprise.  
5. Economic Risk
Economic risk encompasses a wide range of potential issues that could lead a country to renege on its external
debts or that may cause other types of currency crisis (i.e. recession). A major factor here is economic growth –
the health of a nation’s GDP and the outlook for its future. For instance, if a country relies on a few key exports
and the prices for these are dropping, this creates a negative outlook and may increase the economic risk for
foreign trading partners.
Acts of government may also impact economic risk, such as intervention in the money market or policy changes
that cause tax instability. One other factor is issues with foreign currency exchange, for instance a shortage in
certain currencies or a devaluation of the exchange rate.
Predicted loss created by sudden changes in exchange rate are generally covered under the exchange risk
factor.
6. Exchange Risk
 Any predicted loss created by sudden changes in exchange rate are generally covered under the exchange risk
factor. This is another all-encompassing term as fluctuations in the foreign exchange can be caused by a wide
variety of factors. Economic and political factors such as those mentioned above can be significant drivers of
exchange risk, although currency reserves, interest rates and inflation are also potential factors.
One example of political change that can harm economic risk is a change in currency regime, for example from
fixed regime to floating.
7. Transfer Risk
The final country risk assessment factor we’ll discuss today is transfer risk. This is where the host government
becomes unwilling or unable to permit foreign currency transfers out of the nation. Sweeping controls such as
these may be a side effect of a nation in crisis attempting to prevent creditor panic turning into significant
capital outflow. A major example of this occurring is the Malaysia credit controls after the 1997-98 Asian
currency crisis.
Regardless of cause, capital control can prevent foreign traders from retrieving profits or dividends from the
host country.
Environmental Risk Assessment
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An environmental risk assessment allows you to assess the likelihood of your business causing harm to the
environment. This includes describing potential hazards and impacts before taking precautions to reduce the
risks.
It uses similar techniques to the health and safety risk assessment your business already has to perform.
How to carry out an environmental risk assessment
There are five key steps to carrying out an environmental risk assessment. You need to:

1. Identify any hazards, ie possible sources of harm

2. Describe the harm they might cause
3. Evaluate the risk of occurance and identify precautions
4. Record the results of the assessment and implement precautions
5. Review the assessment at regular intervals
How to identify potential environmental hazards
When looking for environmental hazards in your business, you should consider:

 Waste storage and disposal, eg making sure that proper containers are used, and are located away from drains
and watercourses
 Emissions, eg dust and other substances to the air
 Hazardous substance storage, use and disposal
 Liquid wastedrainage and disposal
 Environmental impact of raw materials, eg potentially toxic metals or other materials
 Environmental impact of packaging
There are statutory minimum standards to maintain in some of these areas.
Macro Environment Risk Assessment
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There are a range of environmental risks that arise from industrial activities and society in general. These risks
must be viewed in the context of the natural ecological changes that occur in the environments and the natural
variability of ecosystems.
Businesses need to constantly manage risk from a variety of sources, including financial, technical and safety.
The treatment of environmental risk is a more recent activity attracting increasingly greater attention from
regulatory agencies,  industry and the general public.
 In conducting environmental risk assessment it is essential to correctly formulate the risk assessment problem;
to identify the sources and characteristics of risk, the potentially vulnerable aspects of the surrounding
environment, and the criteria that will be used to rank significance of effects on the environment.
Macro Environmental risk assessments include consideration of process engineering, facilities design,
ecological sensitivities and social surroundings.
Corporate Governance
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Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are
directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted
by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about
balancing individual and societal goals, as well as, economic and social goals.
Corporate Governance is the interaction between various participants (shareholders, board of directors, and
company’s management) in shaping corporation’s performance and the way it is proceeding towards. The
relationship between the owners and the managers in an organization must be healthy and there should be no
conflict between the two. The owners must see that individual’s actual performance is according to the standard
performance. These dimensions of corporate governance should not be overlooked.
Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair
return on their investment. Corporate Governance clearly distinguishes between the owners and the managers.
The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers
should be clearly defined, rather, harmonizing.
Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate
authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the need
for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate
governance. Corporate Governance is essential to develop added value to the stakeholders.
Corporate Governance ensures transparency which ensures strong and balanced economic development. This
also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It
ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.
Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment.
Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.

2. Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital
efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the
shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.
Globalization with Social Responsibility
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Globalization is a dynamic set of social processes that is transforming our present social condition of
nationality into one of globality, characterised by tight global economic, political, cultural, and environmental
interconnections that make most of the currently existing borders and boundaries irrelevant. 
The economic dimension of globalisation is highly significant in shaping contemporary societies and
organisations through the intensification and stretching of economic interrelations worldwide. Its key
components include the deregulation of interest rates, the removal of credit controls, and the privatisation of
government-owned banks and financial institutions. Globalisation of financial trading allows for increased
mobility among different segments of the financial industry, with fewer restrictions and greater investment
opportunities. 
The enhanced role of international economic institutions such as the International Monetary Fund (IMF), World
Bank, and World Trade Organisation (WTO) enjoy the privilege position of making and enforcing the rules of
the global economy. In return for supplying much-needed loans to developing countries these institutions
implemented the structural adjustment programs, mainly directed at countries with large foreign debts. It can be
observed the impacts that trade liberalisation policies have on industries in the third world. 
But globalisation is a multidimensional concept that is not easily reduced to just the economic dimension. The
intensification of global economic interconnections is set into motion by a series of political decisions. The
political dimension of globalisation refers to the intensification and expansion of political interrelations across
the globe. Recent economic developments such as trade liberalisation and deregulation have significantly
constrained the set of political options open to states. Thus, global markets frequently undermine the capacity of
governments to set independent national policy restrictions. 
However, the worldwide intensification of economic and political interaction does not consider in sufficient
detail the cultural feasibility of global democracy, which makes the possibility of resistance and opposition just
as real as the mutual accommodation and tolerance of differences.
The cultural dimension of globalisation refers to the intensification and expansion of cultural flows across the
globe facilitated by the Internet and global media empires that rely on powerful communication technologies to
spread their message, giving rise of an increasingly homogenised popular culture underwritten by western
culture industry.
Corporate social responsibility (CSR) of business activity is strongly influenced by globalisation, particularly
through the change and erosion of national political power.  CSR has four kinds of social responsibilities,
economic, legal, ethical, and philanthropic. These four components of CSR might be represented as a pyramid
with economic responsibilities ‒ and profit motive as the primary incentive ‒ underpinning all other business
responsibilities. 
Business organisations have also to comply with laws and regulations as the ground rules under which they
must operate. These legal responsibilities establish the ground of fair operations and are represented as the next
layer on the pyramid. In this way, organisations are expected to perform in a consistent manner with the
government and law expectations. 
However, society also expects from organisations other activities and practices that are not codified into law.
These ethical responsibilities embrace those norms that reflect a concern for what consumers, employees,
shareholders and community regard as right, just, and fair (i.e. moral rights), and are represented as the next
layer of the CSR pyramid. Thus, corporate behaviour goes beyond mere compliance with laws and regulations. 
Globalization, as defined in terms of the deterritorialisation of economic activities, is particularly affecting
business ethics in three main areas – culture, law, and accountability.
Within the cultural issues, it could be seen how corporations increasingly engage in overseas markets, suddenly
finding themselves confronted with new and diverse ethical demands.
Moral values, which were taken for granted in the home market, may get questioned as soon as corporations
enter foreign markets. 
The legal issues are closely linked with ethics and law. As soon as a company leaves its home territory the legal
framework becomes very different. Consequently, managers can no longer simply rely on the legal framework
when deciding on the right or wrong of certain business practices. 
Finally, globalization leads to a growing demand for corporate accountability where business ethics can respond
to the various stakeholders’ claims.
Writing CRS strategies is an important step but implementing them can be a different story as the good
intentions do not always come into practice as planned.
Social Responsibility of TNC
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Privatization, Deregulation and Liberalization create more space for firms to pursue their corporate
objectives. International agreements give more rights to firms to operate internationally.
Should this expansion of action, space and rights be accompanied by an increase in corporate responsibilities?
In the international context, this question attracts particular attention because transnational corporations (TNCs)
are one of the principal drivers of globalization.
They are also seen to be the most important beneficiaries of the liberalization of investment and trade regimes,
with rising influence on the development of the world economy and its constituent parts. The concept of “social
responsibility” captures the search for an answer to this question. It implies that firms have obligations that go
beyond what countries require individually, and agreements prescribe internationally. The assumption of greater
social responsibility by TNCs would be particularly important in light of the economic and social disruptions
that accompany the globalization process, which — if not tackled — could threaten the very framework within
which firms build their international production systems.
Corporate social responsibility concerns how business enterprises relate to, and impact upon, a society’s needs
and goals.
All societal groups are expected to perform certain roles and functions that can change over time with a
society’s own evolution. Expectations related to business enterprises, and particularly TNCs, are undergoing
unusually rapid change due to the expanded role these enterprises play in a globalizing society. Discussions
relating to TNC social responsibility standards and performance therefore comprise an important component of
efforts to develop a stable, prosperous and just global society.
TNCs, by definition, operate in multiple societies around the world, responding to each country’s legal
requirements while adjusting to diverse social and economic conditions. Occasionally,
TNCs are caught between conflicting requirements or expectations in different countries. Multiple public and
private sector groups comprise overlapping societies in the local, national and regional settings in which TNCs
operate. At the same time, TNCs seek to maintain their corporate identity and the operating procedures of an
integrated global enterprise. The context for the social responsibility of TNCs therefore encompasses a
multilayered environment of societal requirements and expectations. Overlaying this collage is the fabric of an
emerging global society in which emerging common standards and expectations must also be met, including
concerns for the special development needs of the world’s poorest countries.
Economic models that rely on competitive market disciplines and the regulatory functioning of public
authorities do not fully capture the dynamics of the current globalizing economy, particularly for developing
countries in which marketplace competition is often insufficiently developed and governmental resources are
often inadequate for the task of effective regulation. Under these circumstances, a governance vacuum may
develop, underlining the responsibilities of TNCs. Indeed, greater corporate social responsibility may prove
important for broad support for a globalizing world economy.
The increased importance of TNC social responsibility corresponds to the growing scope of activities
undertaken by these enterprises in the globalizing world economy (UNCTAD, 1999).
Another factor that explains the broadened importance of TNCs in the global economy is the conceptual as well
as operational expansion in the definition of TNCs, as they are now – in addition to their traditional FDI mode –
increasingly defined by a variety of low- or non-equity investments.
Large retailers, for example, face calls for action against abusive working conditions in foreign plants that
produce clothing for them under sub-contracting arrangements, although the retailer has no equity ownership or
even foreign presence in the country in which the abusive labour conditions exist.
A similarly broadened scope arises with enterprises whose valuable brand-names reflect many years of
significant financial investments in building a product’s reputation and image. These firms seek to protect their
assets from misappropriation or misuse in foreign markets, establishing contractual obligations and
accompanying controls that shape related business activities in those markets, with or without an actual
presence by the TNC itself. Other low or non-equity TNC investments are reflected in the rapidly expanding
range of international strategic alliances and partnerships that blend the comparative and competitive
advantages of firms from several different countries in complex sets of evolving TNC linkages (UNCTAD,
1995, 1997).
 The changes in the magnitude and nature of TNC activity increase the relevance and importance of social
responsibility in two interrelated ways. First, the impact of TNCs on people around the world has grown
exponentially as these agents of economic globalization reach into the life of domestic societies through both
equity and non-equity mechanisms. Reflecting their increased global span and scope, TNCs have become more
capable, proximate and aware actors whose activities can create causal links to societal outcomes in multiple
countries and cultures. This impact can raise particular concerns for governments if the main TNC purveyor of
change does not even have an invested local presence that is susceptible to the country’s legal jurisdiction. This
situation is most likely to occur in smaller developing countries whose societies may already be among the most
vulnerable to the impact of external forces.
Among linked social responsibility variables, TNC capability seems to emerge as the most prominent factor in
recent calls for greater corporate responsiveness. Proximity through FDI certainly increases a TNC’s awareness
and capability to act in local situations.
But – as was evident with social pressures on non-invested retailers – neither a local presence nor direct
causality links to abusive conditions are necessary preconditions for asserting that a firm’s foreign business ties
produce significant social responsibility obligations.
TNCs can be called upon to use their expanded capabilities to prevent or to rectify offensive conditions even in
countries in which a firm has played no causal role in their creation.
Recent development in CSR and Policy Implications
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Recent developments influencing the application of social responsibility concepts to international business
derive from many different sources that comprise the stakeholders of TNCs, as well as from the corporations
themselves. The major new development, at least in developed countries, is a proliferation of groups
representing general public or specific issue interests that utilize a wide array of public pressure tactics,
intermingled with instances of more direct dialogue, to promote an activist view of TNC duties towards an
expanding agenda of social responsibility objectives. An expanding number of private enterprises are creating
and/or revising individual statements of business principles or codes, although this group would still constitute
only a small percentage of the total TNC community. Collective business organizations have adopted a mixed
approach. Some sectoral groups actively responded to social responsibility pressures with industry-specific
initiatives, while most organizations take a more cautionary approach, with the notable exception of a new
statement on environmental principles.
Governments continue to use international organizations to promote guidelines or codes of conduct on issues or
in sectors in which international consensus is insufficient to support more precise legal standards. Only
occasionally do national governments individually endeavour to develop TNC social responsibility initiatives.
1. Increased Activities by Civil Society Groups
A major development, particularly evident over the past decade, is the expanding number, range, coordination
and activism among parts of civil society on issues relating to TNC social responsibility. Although some groups
organize around very specific products, such as tobacco or nuclear energy, most activism focuses on a relatively
small set of major issue themes that are then exemplified and addressed in terms of specific products,
companies or events.
As mentioned before, the issues most prevalent over the past decade involve labour rights and working
conditions, the environment and human rights, reflecting primarily a developed country perspective on TNC
social responsibility (box 2). Some groups choose to focus principally on one of these areas, such as
Greenpeace on the environment or Amnesty International on human rights. Others, such as religious
organizations or other socially-directed institutional investors, may be active across a spectrum of social issues.
Although most groups originate in the developed countries and draw their most involved membership from that
base, an increasing number of organizations is emerging in developing countries as well. Where interests and
perspectives are shared, groups may forge ties internationally through affiliated networks, conferences,
newsletters and an exponential growth in relatively inexpensive Internet linkages.
In fact, the emergence of the Internet is virtually unparalleled in its impact, both on increasing international
communication among elements of civil society and on facilitating these groups’ outreach to media channels
that can focus instant attention on TNC activities worldwide.
This section offers only an illustrative description of the growth, activism and impact of these groups relative to
TNC social responsibility developments, but informative examples can suggest the diverse and evolving nature
of their activities. For instance, a particularly comprehensive set of social responsibility standards has been
developed by several religious organizations and issued by the
Ecumenical Committee for Corporate Responsibility as international benchmarks that could be used in TNC
codes and against which TNC performance might be measured. This set of standards draws from a number of
ILO conventions and other documents to address issues related to a broad range of TNC stakeholders, including
employees, customers, suppliers, contractors, shareholders, community relations and the environment (Wild,
1998).
Another recent initiative aimed directly at monitoring TNC performance on social responsibility issues is the
Council on Economic
Priorities Accreditation Agency (CEPAA), established in 1997 by the Council on Economic Priorities (CEP).
An advisory board that included participants from unions, universities, human rights groups, corporations and
accounting firms helped draft a Social Accountability standard (SA 8000), conceptually mirroring the ISO 9000
quality standard that has been widely accepted within the international business community. Drawing from
provisions of selected ILO conventions and human rights principles, the drafters of SA 8000 constructed a set of
specific standards addressing many labour and work condition issues, including child labour, health and safety,
freedom of association, collective bargaining, discrimination, work hours and wages. Signatory companies can
be measured, audited and accredited under SA 8000, which might provide labelling or reputational advantages
if the standards are met. Several international accounting firms are closely associated with this undertaking
while some other companies have indicated their intention to use this programme.
Trade unions actively participated in the development of several international standards relating to TNCs,
including the OECD
Guidelines and, principally, ILO instruments (conventions, recommendations, the Tripartite Declaration and the
Declaration on Fundamental Principles and Rights at Work). Union concerns encompass both operational
conditions in the workplace and process rights such as freedom of association and collective bargaining.
Trade unions occupy a somewhat different position than other civil society groups, however, due to their
traditional economic Human rights groups such as Amnesty International and Human Rights Watch are
sometimes aligned closely with labour groups because a number of human rights principles pertain to labour
relations and working conditions, exemplified by some of the recent high-profile cases involving forced labour,
child labour, restrictions to freedom of association and the right to collective bargaining, as well as abusive
“sweatshop” working conditions. Other human rights issues extend to cases involving political oppression,
where the relationship to TNC operations may be indirect rather than causal. Following from experiences with
the successful fight against apartheid in South Africa, many of these groups employ similar tactics and
standards in pressing for socially-responsible business behaviour in other countries in which human rights
abuses exist.
Goals may extend from respecting and preserving employees’ human rights in the workplace and beyond, in
order to not take advantage of the situation in these countries, to intervening actively to promote change in
political conditions, or discontinuing business ties with the offending country.
A range of measures may be employed to urge TNCs to adopt a human rights agenda among their social
responsibility obligations, with an evolving list of countries as applied targets for action.
Recent activities have focused on generating public as well as private commercial sanctions on TNCs that
continue an involvement with regimes that significantly abuse human rights. This approach is exemplified by
the steps taken by some United States’ state and metropolitan governments to enact selective procurement bans
on products from such companies. Business organizations oppose this use of purchasing sanctions, and a
number of governments accept that such regulations violate WTO trade rules (Kline, 1999).
Debates involving human rights standards and TNC social responsibility usually revolve around two
fundamental issues. The first concerns who should decide whether and when significant human rights violations
are occurring in a specific country. The second issue is determining the appropriate relationship between human
rights obligations and the actions that business entities (particularly foreign-based TNCs) might take to
influence a host country’s domestic political affairs. Failure to achieve a broad consensus on these issues,
perhaps backed by the institutional processes of a relevant international organization, risks placing corporations
in a difficult position. Target TNCs can be caught between competing value standards of political non-
interference in a country’s domestic affairs and the pursuit of either activist involvement in such politics or a
penalizing withdrawal from the country aimed at forcing changes in the host government’s policies.
Civil society groups have been particularly successful “drivers” of environmental concerns (UNCTAD, 1999).
Recent activities by environmental NGOs have focused primarily on urging governments to adopt and improve
international and regional accords related to the protection of the environment. Some of this emphasis
undoubtedly stems from the relative success of international negotiations of the Montreal and Kyoto Protocols,
with their attendant need for a resource commitment to follow-up activities. Nevertheless, efforts continue to
define and apply social responsibility concepts to TNC environmental practices, ranging from the Ceres
Principles (box 2) developed in the aftermath of the Exxon Valdez oil spill to various initiatives related to
forestry management and the protection of sensitive rain forest regions (IRRC, 1999c). TNCs may also be
targeted more individually as particular events or actions unfold, such as Shell’s Brent Spar decision. This
particular case is noteworthy because Shell altered its course of action under concerted pressure from
environmental groups, even though the company’s original plans had been approved by the Government of the
United Kingdom.
Global Human Resource Management: Selection, Development
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Due to increased globalization and easy mobility and communications between countries, companies operate at
international level. Major task for organizations which operate across international boundaries is to manage the
dissimilar stresses of the drive for integration and differentiation. In broader sense, International human
resource management process has same activities as in Domestic HRM such as planning and staffing however
domestic HRM is operated in one nation And IHRM activities are involved in different countries. International
Human Resource Management is a branch of management studies that examines the design and effects of
organizational human resource practices in cross-cultural contexts. It occupies an exciting position in the
interstices of international business, human resource management and organizational behaviour, scholarships.
Theoretical studied explained that International HRM is the interplay between three dimensions: HR activities,
the types of people being employed in the organisation and the different countries that an organisation is
operating in (Dowling, 1999). Complexities caused by these last two variables, are what differentiates
international HRM from domestic HRM, as the HR activities themselves are relatively similar.
Concept of International Human Resource Management
Broadly defined, International human resource management is the study and application of all human resource
management activities as they impact the process of managing human resources in enterprises in the global
environment. IHRM can be explained as “The set of distinct activities, functions and processes that are directed
at attracting, developing and maintaining an MNC’s human resources. It is the aggregate of the various HRM
systems used to manage people in the MNC, both at home and overseas” (Taylor, Beechler et al. 1996). An
international organization or firm is one in which operations take place in subsidiaries overseas, which rely on
the business expertise or manufacturing capacity of the parent company. Such companies or organizations bring
with them their own management attitudes and business styles.
Human resource managers of such organizations cannot afford to ignore the international influences on their
work. International human resource management play significant role in providing solution to global business
issues. Theorists explained that International HR management denotes to an extension of HR that relates to
having people working abroad. These can be either expatriate staff, those who are recruited from or work within
their own home countries (locally recruited staff), or even third country nationals (individuals from neither the
‘parent’ nor ‘home’ country, but rather a third country. The kinds of organizations in which this is the case can
range from those with a small office or subsidiary based abroad, to major multinational corporations,
international public-sector organizations, or international NGOs (charities) with sites all over the world. It can
also encompass an organization working in a joint partnership with another organization overseas. Alternatively
it could be a home based organization with overseas offices or a company with selected departments which are
offshore. The differences between IHRM and HRM is that IHRM is being unpredictable and influenced more
by external factors, requiring more functions, having continuously changing perspectives, requiring more
intervention in employees’ personal lives, and being more risky.
Major functions of International Human Resource Management
In International human resource management, there are five functional areas that include recruitment and
selection, development and training, performance evaluation, remuneration and labor relations. In the first
function of IHRM, Recruitment and selection, company employs new qualified candidates for international
operations. Selection requires choosing from this pool the candidate whose qualifications most closely match
the job requirements. Staffing is a complex function of international human resource management. In an global
firms, the managing and staffing approach strongly affects the type of employee the company prefers. In a
company with an ethnocentric approach, parent country nationals usually staff important positions at
headquarters and subsidiaries. In recruitment and selection methods, firms consider both headquarters’ practices
and those widespread in the countries of its subsidiaries. Local culture also have great impact on recruitment
and selection practices, and in some countries, local laws require a specific approach. In choosing the suitable
candidate, it is needed to make balance between internal corporate consistency and sensitivity to local labor
practices.
Another significant function of IHRM is Development and training which is aimed to offer sufficient training to
personnel in a company and enable them to fulfil their goals, as well as show better performance and growth
with their work. At global level, human resource development experts must have responsibility for training and
development of employees located in subsidiaries around the world, specialized training to prepare expatriates
for assignments abroad, and lastly development of a special group of worldwide minded managers. International
human resource development programs may be done in two ways such as centralized and decentralized. In a
centralized approach, training originates at the headquarters and corporate trainers travel to subsidiaries, often
adapting to local situations. This fits the ethnocentric model. A geocentric approach is also centralized, and
trainers could be sent from various positions in either the headquarters or subsidiaries to any other location in
the company. In a decentralized approach, training is given locally, following a polycentric model. When
training is decentralized, the cultural backgrounds of the trainers and trainees are usually similar. Local people
develop training materials and techniques for use in their own area. It is important that trainer must be qualified.
Performance evaluation is the effective function of international human resource management. In companies,
the performance evaluation is regularly performed for administration or development intentions. Usually,
administration conduct evaluation when there is doubt of performance of candidate and there is a need of
performance evaluation on work conditions of employees, promotions, rewards and/or layoffs. In multinational
companies, performance appraisals are usually done annually and use a standardized evaluation form.
Performance evaluation is complex task for International HR managers because the organization must evaluate
employees from different countries working in different subsidiaries. Performance evaluation depends on the
organization’s overall human resource management strategy.
Remuneration and benefits is other functional approach of IHRM. Remuneration of employees plays an
important role in hiring new employees because pay is the major source of people to live in the world. To
develop an international system of compensation and benefits, firms have two primary concerns. The first is
comparability. A good compensation system disperses salaries to employees that are internally equivalent and
competitive within the marketplace. The international organization must also consider the salaries of people
who may transfer from other locations. The second major concern is cost. Organizations struggle to reduce all
expenses, and payroll is one of the largest.
Lastly, the labor relations function of IHRM which describes the role of management and workers in the
workplace. In many countries, the government regulates labor relations practices.
Laurent (1986) recommends that international approach to human resource management would require
numerous steps, Firstly, an explicit recognition by the parent organization that its own peculiar ways of
managing human resources reflect some of the assumptions and values of its home culture. Secondly, an clear
recognition by the parent organization that its peculiar ways are neither universally better nor worse than others,
but are different and likely to exhibit strengths and weaknesses, particularly abroad. Next step is unambiguous
recognition by the parent organization that its foreign subsidiaries may have other preferred ways of managing
people that are neither intrinsically better nor worse, but could possibly be more effective locally. Next step is
preparedness from headquarters not only to acknowledge cultural differences, but also to take action in order to
make them discussable and therefore useable. Last step is developing genuine belief by all parties that more
creative and effective ways of managing people could be developed as a result of cross-cultural learning.
Some people consider international HRM is similar to expatriate management. But IHRM has more importance
and it includes more activities as compared to just the management of expatriates. It involves the international
management of people. Although International HR managers assume the same activities as their domestically-
based colleagues, the scope and intricacy of these tasks will depend on the extent of internationalisation of the
organisation. Moving in global economy, organisations have to amend their traditional ways of managing
people. The human factor is progressively more acknowledged as critical to organizational success. Theorists,
Bohlander and Snell commented that “In the past, observers feared that machines might one day eliminate the
need for people at work”. Actually, just the opposite has been occurring. People are more important than earlier
time.
In fast-growing economies, it is easy to access money and technology than good people. Competitive advantage
belongs to companies that know how to attract, select, deploy, and develop talent. In multinational companies,
major objective of HRM function is to make certain that the most effective use is made of its human resources.
To accomplish this, HR professionals undertake a range of activities around sourcing, development, reward and
performance management, HR planning, employee involvement and communications. If the organisation has a
strategic HR function, these activities will support and inform organisational strategy. HR professionals are also
used extensively in organisational change and development initiatives. For international organisations, these HR
activities need to be co-ordinated across both the home country and different national subsidiaries and to take
into account the needs of both parent country nationals (PCNs), host country nationals (HCNs) and third
country nationals (TCNs).
Model of IHRM
The role of the IHR manager will differ and it depends on the international orientation of the organisation. It is
critical that managers must be able to interpret international organisational strategy and develop IHR policies
and practices which support that focus. As a strategic partner, the IHR manager should equally advise senior
management of any mismatch between stated organisation internationalisation goals and actual IHR practice. In
order to enhance the competitive advantage of firm, the IHR professionals must focus on their international
competencies and learn about the basics of global business.
International Human Resource Management
Strategies of International Human Resource Management
To respond major challenges in business, International HR executives are forced to formulate strategies and
practices that will make their organizations successful. At the macro level, strategic global HRM is used to
ensure that the organization overarching values, objectives and goals are supportedby the HR policies,
procedures and practices (Brewster & Suutari, 2015). At the meso level, HR executives are mainly concerned to
deal with issues relating to unions in the host country. At the micro level, HR executives are attempting to foster
a global mindset among the workforce through developing HR competencies and business-related.
While implementing an IHR strategy, management team must ascertain the current and intended nature of
international operations in the organisation (multi-domestic, international, global or transnational. Mangers
should determine the extent to which HR policies and practices should be standardised or localised in
accordance with overall organisational strategy. They must assess the extent to which local cultural, social,
political, economic and legal factors will impinge on any attempts to apply standard HR policies if integration is
a key factor in organisational strategy and ensure a computerised database of global human resources is used if
integration is desired. In formulation of IHRM strategy, it is recommended to work with the senior management
team to identify the competencies required to achieve global organisational objectives and also work with
national HR and line managers to formulate IHR policies and practices in the key areas of sourcing,
development and reward which will embed a transnational mindset in the organisation.
Major issues/ challenges of international Human Resource Management
A crucial challenge for all international organisations is the need to achieve target in relation to the competing
demands of global integration and co-ordination versus local responsiveness, the “global versus local” debate.
Main challenges in IHRM include high failure rates of expatriation and repatriation, Deployment, getting the
right mix of skills in the organization regardless of geographical location, Knowledge and innovation
dissemination and managing critical knowledge and speed of information flow, Talent identification and
development and identify capable people who are able to f unction effectively, Barriers to women in IHRM,
International ethics, language (e.g spoken, written, body). Other challenges are Different labor laws, Different
political climate, and different stage of technological advancement, different values and attitudes e.g. time,
achievement risk taking, Roles of religion e.g. sacred objects, prayer, taboos, holidays, etc, Educational level
attained, Social organizations e.g. social institutions, authority structures, interest groups, status systems.
Major issues for IHRM include the variety of international organizational models that exist, the extent to which
HRM policy and practice should vary in different countries, the problem of managing people in different
cultures and environments, the approaches used to select, deploy, develop and reward expatriates who could be
nationals of the parent company or ‘third-country nationals’ (TCNs), nationals of countries other than the parent
company who work abroad in subsidiaries of that organization. Cultural and environmental diversity is main
problems in international HRM. Haley stated that in culture where people are emphasized, it is the quality of
international relationships which is important. In cultures where ideologies are emphasized, sharing common
beliefs is more important than group membership. Hofstede (1980) emphasizes that there are a number of
cultural dimensions that affect international operations. Sparrow and Hiltrop (1997) recognize various HR areas
that may be affected by national culture such as decisions on what makes an effective manager, giving face-to-
face feedback, readiness to accept international assignments, pay systems and different concepts of social
justice, approaches to organizational structuring and strategic dynamics.
These cultural differences mentioned gave the saying ‘think globally and act locally’. This means that an
international balancing act is essential, which leads to the important assumption given by Bartlett and Ghoshal
(1991) that denotes ‘Balancing the needs of co-ordination, control and autonomy and maintaining the
appropriate balance are critical to the success of the multinational company.’
Ulrich (1998) proposed that to accomplish this balancing act, there are six capabilities that enable firms to
integrate and concentrate international activities and also separate and adopt local activities that include being
able to determine core activities and non-core activities, achieving consistency while allowing flexibility,
building global brand equity while honouring local customs, obtaining leverage (bigger is better) while
achieving focus (smaller is better, sharing learning and creating new knowledge andengendering a global
perspective while ensuring local accountability.
Other problems are managing international assignments, employee and family adjustment, selecting the right
person for international task, culture and communication barrier. Challenges of IHRM are clarifying taxation
issues, coordinating foreign currencies, exchange rates, compensation plans, working directly with the families
of employees, more involvement in employees personal life, facility etc, Different HR systems for different
geographic locations, More complex external constituencies, foreign Governments, political and religious
groups, heightened exposure to risks such as health, terrorism, legal issues, human and financial consequences
of mistakes.
Laurent (1986) stated that “in order to build, maintain and develop the corporate identity, multinational
organizations need to strive for consistency in their ways of managing people on a worldwide basis. Yet, and in
order to be effective locally, they also need to adapt those ways to the specific cultural requirements of different
societies. While the global nature of business may call for increased consistency, the variety of cultural
environments may be calling for differentiation.”
 From a business perspective, forces for global integration include operational requirements, strategic co-
ordination and multinational customers. In contrast, forces for local responsiveness include highly diverse
consumer requirements, tailored distribution channels and broader social and political constraints to market
entry. From an HR perspective, there are many factors constraining the use of standardised HR practices
including differing national business systems, labour laws, national HR practice, education systems and national
cultural norms. Organisations still want to implement standardised HR systems internationally. Their option
depends on their stage of internationalisation and international mindset. Major barriers to effective global HRM
are variations, perception, of HR, Attitude and actions of headquarters towards, HR, resistance to change,
cultural differences in learning and teaching styles.
To summarize, International human resource management has important role in a company to survive in global
business. International HRM scrutinizes the way in which international organisations manage their human
resources across these different national contexts It is a Procuring, Allocating, and Effectively utilizing human
resources in a multinational corporation, while balancing the integration and differentiation of HR activities in
foreign locations. HR managers have to sort out problems with globalisation and internationalisation due to
dissimilar cultures, different policies or procedures, language and legislation. The International HRM assists in
organizational remodel as it plays a role of innovator. International human resource management professionals
have not only begun to frame their research in terms of organization theories, they are also increasingly using
the international context to extend existing theories.
International Compensation
THEINTACTFRONT13 DEC 2018 3 COMMENTS
Designing and developing a better compensation package for HR professionals for the international
assignments requires knowledge of taxation, employment laws, and foreign currency fluctuation by the HR
professionals. Moreover, the socio-economic conditions of the country have to be taken into consideration while
developing a compensation package. It is easy to develop the compensation package for the parent country
national but difficult to manage the host and third country nationals. When a firm develops international
compensation policies, it tries to fulfills some broad objectives:

1. The compensation policy should be in line with the structure, business needs and overall strategy of the
organization.
2. The policy should aim at attracting and retaining the best talent.
3. It should enhance employee satisfaction.
4. It should be clear in terms of understanding of the employees and also convenient to administer.
The employee also has a number of objectives that he wishes to achieve from the compensation policy of the
firm

 He expects proper compensation against his competency and performance level.

 He expects substantial financial gain for his own comfort and for his family also.
 He expects his present and future needs to be taken care of including children’s education, medical protection
and housing facilities.
 The policy should be progressive in nature.
Major Components in an International Compensation Package
International Compensation is an internal rate of return (monetary or non monetary rewards / package)
including base salary, benefits, perquisites and long term & short term incentives that valued by employee’s in
accordance with their relative contributions to performance towards achieving the desired goal of an
organization.
 The following are the major components of an international compensation package.
1. Base Salary
This term has a slightly different meaning in an international context than in a domestic one. In the latter case, it
denotes the amount of cash compensation that serves as a benchmark for other compensation elements like
bonus, social benefits. For the expatriate, it denotes the main component of a package of allowances directly
related to the base salary and the basis for in-service benefits and pension contributions. Base salary actually
forms the foundation block of the international compensation.
2. Foreign Service Inducement Premium
This is a component of the total compensation package given to employees to encourage them to take up foreign
assignments. This is with the aim to compensate them for the possible hardships they may face while being
overseas. In this context, the definition of hardship, the eligibility criteria for premium and the amount and
timing of this payment are to be carefully considered. Such payments are normally made in the form of a
percentage of the salary and they vary depending upon the tenure and content of the assignment. In addition,
sometimes other differentials may be considered. For instance: if a host country’s work week is longer that of
the home country, a differential payment may be made in lieu of overtime.
3. Allowances
One of the most common kinds of allowance internationally is the Cost of Living Allowance (COLA). It
typically involves a payment to compensate for the differences in the cost of living between the two countries
resulting in an eventual difference in the expenditure made. A typical example is to compensate for the inflation
differential. COLA also includes payments for housing and other utilities, and also personal income tax. Other
major allowances that are often made are:

 Home leave allowance

 Education allowance
 Relocation allowance
 Spouse assistance (compensates for the loss of income due to spouse losing their job)
Thus, multinationals normally pay these allowances to encourage employees to take up international
assignments to make sure that they are comfortable in the host country in comparison to the parent country.
4. Benefits
The aspect of benefits is often very complicated to deal with. For instance, pension plans normally differ from
country to country due to difference in national practices. Thus all these and other benefits (medical coverage,
social security) are difficult to imitate across countries.
Thus, firms need to address a number of issues when considering what benefits to give and how to give them.
However, the crucial issue that remains to be dealt with is whether the expatriates should be covered under the
home country benefit programmes or the ones of the host country. As a matter of fact, most US officials are
covered by their home country benefit programmes. Other kinds of benefits that are offered are:

 Vacation and special leaves

 Rest and rehabilitation leaves
 Emergency provisions like death or illness in the family
These benefits, however, depend on the host country regulations.
5. Incentives
In recent years some MNC have been designing special incentives programmes for keeping expatriate
motivated. In the process a growing number of firms have dropped the ongoing premium for overseas
assignment and replaced it with on time lump-sum premium. The lump-sum payment has at least three
advantages. First expatriates realize that they are paid this only once and that too when they accept an overseas
assignment. So the payment tends to retain its motivational value. Second, costs to the company are less
because there is only one payment and no future financial commitment. This is so because incentive is separate
payment, distinguishable for a regular pay and it is more readily for saving or spending.
6. Taxes
The final component of the expatriate’s compensation relates to taxes. MNCs generally select one of the
following approaches to handle international taxation.

1. Tax equalization: Firm withhold an amount equal to the home country tax obligation of the expatriate and pay
all taxes in the host country.
2. Tax Protection: The employee pays up to the amount of taxes he or she would pay on remuneration in the
home country. In such a situation, The employee is entitled to any windfall received if total taxes are less in the
foreign country then in the home country.
7. Long Term Benefits or Stock Benefits
 The most common long term benefits offered to employees of MNCs are Employee Stock Option Schemes
(ESOS). Traditionally ESOS were used as means to reward top management or key people of the MNCs. Some
of the commonly used stock option schemes are:

 Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and issuance to key
employees. Such shares serve as incentive for employees to build long term value for the company.
 Restricted Stock Unit (RSU) – This is a plan established by a company, wherein units of stocks are provided
with restrictions on when they can be exercised. It is usually issued as partial compensation for employees. The
restrictions generally lifts in 3-5 years when the stock vests.
 Employee Stock Purchase Plan (ESPP) – This is a plan wherein the company sells shares to its employees
usually, at a discount. Importantly, the company deducts the purchase price of these shares every month from
the employee’s salary.
Motivating employee in global Context and groups across cultures, Multicultural Management
THESTREAK25 FEB 2019 2 COMMENTS
Motivation is the activation or energization of goal-oriented behavior. Motivation may be intrinsic or extrinsic.
The term is generally used for humans but, theoretically, it can also be used to describe the causes for animal
behavior as well. This article refers to human motivation. According to various theories, motivation may be
rooted in the basic need to minimize physical pain and maximize pleasure, or it may include specific needs such
as eating and resting, or a desired object, hobby, goal, state of being, ideal, or it may be attributed to less-
apparent reasons such as altruism, morality, or avoiding mortality.
The Nature of Motivation
The Universalist Assumption
The first assumption is that the motivation process is universal, that all people are motivated to pursue goals
they value – what the work-motivation theorists call goals with “high valence” or “preference”

1. The process is universal

2. Culture influences the specific content and goals pursued
3. Motivation differs across cultures
The Assumption of Content and Process
Content Theories of Motivation
Theories that explain work motivation in terms of what arouses, energizes, or initiates employee behavior.
Process Theories of Motivation
Theories that explain work motivation by how employee behavior is initiated, redirected, and halted.
The Hierarchy-of-Needs Theory
The Maslow Theory
Maslow’s theory rests on a number of basic assumptions:

1. Lower-level needs must be satisfied before higher-level needs become motivators

2. A need that is satisfied no longer serves as a motivator
3. There are more ways to satisfy higher-level than there are ways to satisfy lower-level needs
The Hierarchy-of-Needs Theory
International Findings on Maslow’s Theory
With some minor modification researchers examined the need satisfaction and need importance of the four
highest-level needs in the Maslow hierarch
Esteem needs were divided into two groups:
1. Esteem – including needs for self-esteem and prestige
2. Autonomy – including desires for authority and opportunities for independent thought and action
The Hierarchy-of-Needs Theory
International Findings on Maslow’s Theory
The Haire study indicated all these needs were important to the respondents across cultures

1. International managers (not rank-and-file employees) indicated the upper-level needs were of particular
importance to them
2. Findings for select country clusters (Latin Europe, United States/United Kingdom, and Nordic Europe)
indicated autonomy and self-actualization were the most important and least satisfied needs for the respondents
3. Another study of managers in eight East Asian countries found that autonomy and self-actualization in most
cases also ranked high.
The Hierarchy-of-Needs Theory
International Findings on Maslow’s Theory
Some researchers have suggested modifying Maslow’s “Western-oriented” hierarchy by reranking the needs
Asian cultures emphasize the needs of society
Chinese hierarchy of needs might have four levels ranked from lowest to highest:

1. Belonging (social)
2. Physiological
3. Safety
4. Self-actualization (in the service of society)
The Hierarchy-of-Needs Theory
International Findings on Maslow’s Theory
Hofstede’s research indicates:

1. Self-actualization and esteem needs rank highest for professionals and managers
2. Security, earnings, benefits, and physical working conditions are most important to low-level, unskilled workers
3. Job categories and levels may have a dramatic effect on motivation and may well offset cultural considerations
4. MNCs should focus most heavily on giving physical rewards to lower-level personnel and on creating a climate
where there is challenge, autonomy, the ability to use one’s skills, and cooperation for middle- and upper-level
personnel.
The Two-Factor Theory of Motivation
The Herzberg Theory
Two-Factor Theory of Motivation
A theory that identifies two sets of factors that influence job satisfaction:

1. Motivators
2. Job-content factors such as achievement, recognition, responsibility, advancement, and the work itself.
3. Hygiene Factors
The Two-Factor Theory of Motivation
The Herzberg Theory
The two-factor theory holds that motivators and hygiene factors relate to employee satisfaction – a more
complex relationship than the traditional view that employees are either satisfied or dissatisfied

1. If hygiene factors are not taken care of or are deficient there will be dissatisfaction
2. There may be no dissatisfaction if hygiene factors are taken care of – there may be no satisfaction also
3. Only when motivators are present will there be satisfaction
Views of Satisfaction/Dissatisfaction
The Two-Factor Theory of Motivation
 International Findings on Herzberg’s Theory
Two categories of International findings relate to the two-factor theory:

1. One type of study consists of replications of Herzberg’s research in a particular country

2. Do managers in country X give answers similar to those in Herzberg’s original studies?
3. The others are cross-cultural studies focusing on job satisfaction
What factors cause job satisfaction and how do these responses differ from country to country?
Two-Factor Replications
A number of research efforts have been undertaken to replicate the two-factor theory – they tend to support
Herzberg’s findings

1. George Hines surveyed of 218 middle managers and 196 salaried employees in New Zealand using ratings of
12 job factors and overall job satisfaction – he concluded “the Herzberg model appears to have validity across
occupational levels”
2. A similar study was conducted among 178 Greek managers – this study found that overall Herzberg’s two-
factor theory of job satisfaction generally held true
Cross-Cultural Job-Satisfaction Studies
Motivators tend to be more important to job satisfaction than hygiene factors

1. MBA candidates from four countries ranked hygiene factors at the bottom and motivators at the top while
Singapore students (of a different cultural cluster than the other three groups) gave similar responses
2. Result:- Job-satisfaction-related factors may not always be culturally bounded
3. Lower- and middle-management personnel attending management development courses in Canada, the United
Kingdom, France, and Japan ranked the importance of 15 job-related outcomes and how satisfied they were
with each
Result:- Job content may be more important than job context
Job-Context Factors
In work motivation, those factors controlled by the organization, such as conditions, hours, earnings, security,
benefits, and promotions.
Job-Content Factors
In work motivation, those factors internally controlled, such as responsibility, achievement, and the work itself.
Achievement Motivation Theory
The Background of Achievement Motivation Theory
Characteristic profile of high achievers:

1. They like situations in which they take personal responsibility for finding solutions to problems.
2. Tend to be moderate risk-takers rather than high or low risk-takers.
3. Want concrete feedback on their performance.
4. Often tend to be loners, and not team players.
A high nAch can be learned. Ways to develop high-achievement needs:

1. Obtain feedback on performance and use the information to channel efforts into areas where success will likely
be attained
2. Emulate people who have been successful achievers;
3. Develop an internal desire for success and challenges
4. Daydream in positive terms by picturing oneself as successful in the pursuit of important objectives.
International Findings on Achievement Motivation Theory

1. Polish industrialists were high achievers scoring 6.58 (U.S. managers’ scored an average of 6.74)
2. Managers in countries as diverse as the United States and those of the former Soviet bloc in Central Europe
have high needs for achievement
3. Later studies did not find a high need for achievement in Central European countries
Average high-achievement score for Czech industrial managers was 3.32 (considerably lower than U.S.
managers)
International Findings on Achievement Motivation Theory
Achievement motivation theory must be modified to meet the specific needs of the local culture:
The culture of many countries does not support high achievement
Anglo cultures and those that reward entrepreneurial effort do support achievement motivation and their human
resources should probably be managed accordingly
Hofstede offers the following advice:
The countries on the feminine side . . . distinguish themselves by focusing on quality of life rather than on
performance and on relationships between people rather than on money and things. This means social
motivation: quality of life plus security and quality of life plus risk.
Select Process Theories
Equity Theory

1. When people perceive they are being treated equitably it will have a positive effect on their job satisfaction
2. If they believe they are not being treated fairly (especially in relation to relevant others) they will be dissatisfied
which will have a negative effect on their job performance and they will strive to restore equity.
There is considerable research to support the fundamental equity principle in Western work groups. When the
theory is examined on an international basis, the results are mixed.

1. Equity perceptions among managers and non-managers in an Israeli kibbutz production unit:- Everyone was
treated the same but managers reported lower satisfaction levels than the workers. Managers perceived their
contributions to be greater than other groups in the kibbutz and felt under compensated for their value and
effort.
2. Employees in Asia and the Middle East often readily accept inequitable treatment in order to preserve group
harmony
3. Men and women in Japan and Korea (and Latin America) typically receive different pay for doing the same
work – due to years of cultural conditioning women may not feel they are treated inequitably
Goal-Setting Theory
A process theory that focuses on how individuals go about setting goals and responding to them and the overall
impact of this process on motivation .
Specific areas that are given attention in goal-setting theory include:

1. The level of participation in setting goals

2. Goal difficulty
3. Goal specificity
4. The importance of objective
5. Timely feedback to progress toward goals
Unlike many theories of motivation, goal setting has been continually refined and developed
There is considerable research evidence showing that employees perform extremely well when they are
assigned specific and challenging goals that they have had a hand in setting
Most of these studies have been conducted in the United States – few have been carried out in other cultures

1. Norwegian employees shunned participation and preferred to have their union representatives work with
management in determining work goals.Researchers concluded that individual participation in goal setting was
seen as inconsistent with the prevailing Norwegian philosophy of participation through union representatives
2. In the United States employee participation in setting goals is motivational – it had no value for the Norwegian
employees in this study
Expectancy Theory
A process theory that postulates that motivation is influenced by a person’s belief that

1. Effort will lead to performance

2. Performance will lead to specific outcomes, and
3. The outcomes will be of value to the individual.
Expectancy theory predicts that high performance followed by high rewards will lead to high satisfaction
Does this theory have universal application?

1. Eden found some support for it while studying workers in an Israeli kibbutz
2. Matsui and colleagues found it could be successfully applied in Japan
Expectancy theory could be culture-bound – international managers must be aware of this limitation in
motivating human resources since expectancy theory is based on employees having considerable control over
their environment (a condition that does not exist in many cultures) Motivation Applied:- Job Design, Work
Centrality, and Rewards
Quality of Work Life: The Impact of Culture
Quality of work life (QWL) is not the same throughout the world.

1. Assembly-line employees in Japan work at a rapid pace for hours and have very little control over their work
activities.
2. Assembly-line employees in Sweden work at a more relaxed pace and have a great deal of control over their
work activities.
3. S. assembly-line employees typically work somewhere between – at a pace less demanding than Japan’s but
more structured than Sweden’s.
Sociotechnical Job Designs:-
The objective of these designs is to integrate new technology into the workplace so that workers accept and use
it to increase overall productivity.New technology often requires people learn new methods and in some cases
work faster. Employee resistance is common. Effective sociotechnical design can overcome these problems.
Some firms have introduced sociotechnical designs for better blending of their personnel and technology
without sacrificing efficiency
Eg:- General Foods- Autonomous groups at its Topeka, Kansas plant, Workers share responsibility and work in
a highly democratic environment
Other U.S. firms have opted for a self-managed team approach
Multifunctional teams with autonomy for generating successful product innovation is more widely used by
successful U.S., Japanese, and European firms than any other teamwork concept
Work Centrality:-
The importance of work in an individual’s life can provide important insights into how to motivate human
resources in different cultures

1. Japan has the highest level of work centrality

2. Israel has moderately high levels
3. The United States and Belgium have average levels
4. The Netherlands and Germany have moderately low levels
5. Britain has low levels
Value of Work
Work is an important part of most people’s lifestyles due to a variety of conditions

1. Americans and Japanese work long hours because the cost of living is high
2. Most Japanese managers expect their salaried employees who are not paid extra to stay late at work, and
overtime has become a requirement of the job. There is recent evidence that Japanese workers may do far less
work in a business day than outsiders would suspect
3. In recent years, the number of hours worked annually by German workers has been declining, while the number
for Americans has been on the rise. Germans place high value on lifestyle and often prefer leisure to work,
while their American counterparts are just the opposite.
Research reveals culture may have little to do with it
A wider range of wages (large pay disparity) within American companies than in German firms creates
incentives for American employees to work harder.
Impact of overwork on the physical condition of Japanese workers
One-third of the working-age population suffers from chronic fatigue
The Japanese prime minister’s office found a majority of those surveyed complained of :-

1. Being chronically tired

2. Feeling emotionally stressed
3. Abusive conditions in the workplace
4. Karoshi (“overwork” or “job burnout”) is now recognized as a real social problem
Job Satisfaction

1. EU workers see a strong relationship between how well they do their jobs and the ability to get what they want
out of life
2. S. workers were not as supportive of this relationship
3. Japanese workers were least likely to see any connection
This finding suggest difficulties may arise in American, European, and Japanese employees working together
effectively
Reward Systems
Managers everywhere use rewards to motivate their personnel. Some rewards are financial in nature such as
salary raises, bonuses, and stock options. Others are non-financial such as feedback and recognition. Significant
differences exist between reward systems that work best in one country and those that are most effective in
another.
Incentives and Culture
Use of financial incentives to motivate employees is very common in countries with high individualism.
Financial incentive systems vary in range

1. Individual incentive-based pay systems in which workers are paid directly for their output
2. Systems in which employees earn individual bonuses based on organizational performance goals
Many cultures base compensation on group membership. Such systems stress equality rather than individual
incentive plans
An individually based bonus system for the sales representatives in an American MNC introduced in its Danish
subsidiary was rejected by the sales force because

1. It favored one group over another

2. Employees felt that everyone should receive the same size bonus
Eg:- Indonesian oil workers rejected a pay-for-performance system where some work teams would make more
money than others.
Workers in many countries are highly motivated by things other than financial rewards

1. The most important rewards in locations at 40 countries of an electrical equipment MNC involved recognition
and achievement.
2. Second in importance were improvements in the work environment and employment conditions including pay
and work hours.
Factors that concern employees across cultures

1. French and Italian employees valued job security highly while American and British workers held it of little
importance
2. Scandinavian workers placed high value on concern for others on the job and for personal freedom and
autonomy but did not rate “getting ahead” very important
3. German workers ranked security, fringe benefits, and “getting ahead” as very important
4. Japanese employees put good working conditions and a congenial work environment high on their list but
ranked personal advancement quite low