Unit-1

Foundations of International Business

International business refers to those business activities that take place beyond the geographical limits of a country. It involves

not only the international movements of goods and services, but also of capital, personnel, technology and intellectual property

like patents, trademarks, knowhow and copyrights.

“International business consists of transactions that are devised and carried out across national borders to satisfy the objectives

of the individuals, companies and organisations. These transactions take on various forms which are often interrelated.” –

Michael R. Czinkota

International Business – Introduction

The world has become a ‘global village’. Business has expanded and is no longer restricted to the physical boundaries of a

country. Even countries which were self-reliant are now depending upon others for procurement of goods and services. They are

also ready to supply the goods and services to developing countries. There is a change from self-reliance to dependence. This is

because of the development of new modes of telecommunication and infrastructure facilities like faster and efficient means of

transportation. They have brought countries closer to each other. Besides development in technology, infrastructure and

communication efforts of World Trade Organisation (WTO) and the reforms carried out by governments of different countries

have also been a major reason for increasing commercial interactions among the countries. India has been trading with other

countries for a long time but now it has caught up in the process of globalisation in a big way and is integrating its economy with

the world economy.

International business refers to those business activities that take place beyond the geographical limits of a country. It involves

not only the international movements of goods and services, but also of capital, personnel, technology and intellectual property

like patents, trademarks, knowhow and copyrights.

“International business involves commercial activities that cross national frontiers” – Roger Bennett

Thus, it involves not only the international movement of goods and services, but also of capital, personnel, technology and

intellectual property like patents, trademarks, knowhow and copyrights etc. It is a business which takes place outside the

boundaries of a country, i.e., between two countries. It includes the international movements of goods and services, capital,

personnel, technology and intellectual property rights like patents, trademarks and knowhow. It refers to the purchase and sale of

goods and services beyond the geographical limits of a country.

It is of three types:

(i) Export Trade – It is selling of goods and services to foreign countries

(ii) Import Trade – It is buying goods and services from other countries.

(iii) Entreport Trade – It is import of goods and services for re-export to other countries.

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International Business – Nature and Scope

Nature:

International Business is much broader term than that of International Trade. International business includes:

(a) Export and import of goods.

(b) Export and import of services or intellectual property rights.

(c) Licensing and franchising.

(d) Foreign Investments including both direct investment and portfolio investments.

International Trade refers to only export and import of merchandise, i.e., goods only. It is also called visible trade. The goods are

tangible, like machinery, gold, silver, electronic goods etc.

Scope:

(i) International Trade:

International business involves export and import of goods.

(ii) Export and Import of Services:

It is also called invisible trade. Items of invisible trade include tourism, transportation, communication, banking, warehousing,

distribution and advertising.

(iii) Licensing and Franchising:

Licensing is a contractual agreement in which one firm (the licensor) grants access to its patents, copyrights, trademarks or

technology to another firm in a foreign country (the licensee) for a fee called royalty. It is under the licensing system that Pepsi

and Coca Cola are produced and sold all over the world. Franchising is also similar to licensing, but it is a term used in

connection with the provision of services. For example, McDonald’s operates fast food restaurants all over the world through its

franchising system.

(iv) Foreign Investments:

It involves investments of funds abroad in exchange for financial return.

Foreign investments can be of two types:

(a) Foreign Direct Investment (FDI) – Investment in properties such as plant and machinery in foreign countries with a view to

undertaking production and marketing of goods and services in those countries.

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(b) Portfolio Investment – Investments in shares or debentures of foreign companies with a view to earn income by way of

dividends or interest.

International Business – Features

The main features of international business are as follows:

 Involves Two Countries – International business is possible only when there are transactions across different countries.

 Use of Foreign Exchange – Every country has its own different currency. This gives rise to the problem of exchange of

currencies as foreign currency is used in making transactions.

 Legal Obligations – Each country has its own laws regarding foreign trade, which have to be complied with. Further,

there is more government intervention in case of international transactions.

 High Degree of Risk – International business faces huge risk due to long distances, risk of fluctuations in two

currencies, fear of obsolescence, etc.

 Heavy Documentation – It is subject to number of formalities. Many documents have to be filled in and dispatched to

the other party.

 Time Consuming – The time gap between sending and receiving of goods and payment is wider as compared to inland

trade.
 Lack of Personal Contact – It lacks direct and personal contact between importer and exporter.

International Business – Factors Influencing International Business:

When a firm engages in international business, it must consider the following characteristics of foreign countries:

1. Culture

2. Economic system

3. Economic conditions

4. Exchange rates

5. Political risk and regulations

Factor # 1. Culture:

Because cultures vary, a firm must learn a foreign country’s culture before engaging in business there. Poor decisions can result

from an improper assessment of a country’s tastes, habits, and customs. Many U.S. firms know that cultures vary and adjust their

products to fit the culture. For example, McDonald’s sells vegetable burgers instead of beef hamburgers in India. PepsiCo (owner

of Frito Lay snack foods) sells Cheetos without cheese in China because Chinese consumers dislike cheese, and it has developed

a shrimp-chip to satisfy consumers in Korea. Beer producers sell nonalcoholic beer in Saudi Arabia, where alcohol is not

allowed. Wal-Mart is still learning from its experience in many countries. When it established stores in Argentina, it initially used

the same store layout as in the United States, but it quickly learned that the local people preferred a different layout. In addition, it
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conducted meetings with suppliers in English, even though the primary language of the suppliers was Spanish. Wal-Mart’s

expansion into Mexico was more effective because it acquired a large Mexican retail firm and was able to rely on it for

information about the local culture.

Factor # 2. Economic System:

A firm must recognize the type of economic system used in any country where it considers doing business. A country’s economic

system reflects the degree of government ownership of businesses and intervention in business. A U.S. firm will normally prefer

countries that do not have excessive government intervention.

Although each country’s government has its own unique policy on the ownership of businesses, most policies can be classified as

capitalism, communism, or socialism.

i. Capitalism:

Capitalism allows for private ownership of businesses. Entrepreneurs have the freedom to create businesses that they believe will

serve the people’s needs. The United States is perceived as a capitalist society because entrepreneurs are allowed to create

businesses and compete against each other.

In a capitalist society, entrepreneurs’ desire to earn profits motivates them to produce products and services that satisfy

customers. Competition allows efficient firms to increase their share of the market and forces inefficient firms out of the market.

U.S. firms can normally enter capitalist countries without any excessive restrictions by the governments. Typically, though, the

level of competition in those countries is high.

ii. Communism:

Communism is an economic system that involves public ownership of businesses. In a purely communist system, entrepreneurs

are restricted from capitalizing on the perceived needs of the people. The government decides what products will be produced

and in what quantity.It may even assign jobs to people, regardless of their interests, and sets the wages to be paid to each worker.

Wages may be somewhat similar, regardless of individual abilities or effort. Thus, workers do not have much incentive to excel

because they will not be rewarded for abnormally high performance.In a communist society, the government serves as a central

planner. It may decide to produce more of some type of agricultural product if it observes a shortage. Since the government is not

concerned about earning profits, it does not focus on satisfying consumers (determining what they want to

purchase).Consequently, people are unable to obtain many types of products even if they can afford to buy them. In addition,

most people do not have much money to spend because the government pays low wages.Countries in Eastern Europe, such as

Bulgaria, Poland, and Romania, had communist systems before 1990. During the 1990s, however, government intervention in

these countries declined. Prior to the 1990s, communist countries restricted most U.S. firms from entering, but as they began to

allow more private ownership of firms, they also allowed foreign firms to enter.

iii. Socialism:

Socialism is an economic system that contains some features of both capitalism and communism. For example, governments in

some so-called socialist countries allow people to own businesses and property and to select their own jobs.

However, these governments are highly involved in the provision of various services. Health-care services are run by many

governments and are provided at a low cost. Also, the governments of socialist countries tend to offer high levels of benefits to
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unemployed people. Such services are indirectly paid for by the businesses and the workers who earn income. Socialist

governments impose high tax rates on income so that they have sufficient funds to provide all their services.

Socialist countries face a tradeoff when setting their tax policies, though. To provide a high level of services to the poor and

unemployed, the government must impose high tax rates. Many businesses and workers in socialist countries, however, would

argue that the tax rates are excessive. They claim that entrepreneurs may be discouraged from establishing businesses when the

government taxes most of the income to be earned by the business. Entrepreneurs thus have incentive to establish businesses in

other countries where taxes are lower. But if the government lowers the tax rate, it may not generate enough tax revenue to

provide the services. A socialist society may discourage not only the establishment of new businesses but also the desire to work.

If the compensation provided by the government to unemployed workers is almost as high as the wages earned by employed

workers, unemployed people have little incentive to look for work. The high tax rates typically imposed on employed people in

socialist countries also discourage people from looking for work.

iv. Privatization:

Historically, the governments of many countries in Eastern Europe, Latin America, and the Soviet Bloc owned most businesses,

but in recent years they have allowed for private business ownership. Many government-owned businesses have been sold to

private investors. As a result of this so- called privatization, many governments are reducing their influence and allowing firms to

compete in each industry. Privatization allows firms to focus on providing the products and services that people desire and forces

the firms to be more efficient to ensure their survival. Thousands of businesses in the former Soviet Bloc have been privatized.

Some U.S. firms have acquired businesses sold by the governments of the former Soviet republics and other countries.

Privatization has provided an easy way for U.S. firms to acquire businesses in many foreign countries. Privatization in many

countries, such as Brazil, Hungary, and the countries of the former Soviet Bloc, is an abrupt shift from tradition. Most people in

these countries have not had experience in owning and managing a business. Even those people who managed government-

owned businesses are not used to competition because the government typically controlled each industry.Therefore, many people

who want to own their own businesses have been given some training by business professors and professionals from capitalist

countries such as the United States. In particular, the MBA Enterprise Corps, headquartered at the University of North Carolina,

has sent thousands of business students to less-developed countries. Even the industrialized countries have initiated privatization

programs for some businesses that were previously owned by the government. The telephone company in Germany has been

privatized, as have numerous large government-owned businesses in France.

Factor # 3. Economic Conditions:

To predict demand for its product in a foreign country, a firm must attempt to forecast the economic conditions in that country.

The firm’s overall performance is dependent on the foreign country’s economic growth and on the firm’s sensitivity to conditions

in that country.

Economic Growth: Many U.S. firms have recently expanded into smaller foreign markets because they expect that economic

growth in these countries will be strong, resulting in a strong demand for their products. For example, Heinz has expanded its
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business throughout Asia. General Motors, Procter & Gamble, AT&T, Ford Motor Company, and Anheuser-Busch plan new

direct foreign investment in Brazil. The Coca-Cola Company has expanded in China, India, and Eastern Europe. The primary

factor influencing the decision by many firms to expand in a particular foreign country is the country’s expected economic

growth, which affects the potential demand for their products. If firms overestimate the country’s economic growth, they will

normally overestimate the demand for their products in that country. Consequently, their revenue may not be sufficient to cover

the expenses associated with the expansion.

In addition, foreign countries may experience weak economies in some periods, which can adversely affect firms that serve those

countries. For example, during the Asian crisis of 1997-1998, Asian economies were weak, and U.S. firms with business in Asia,

such as Nike and Hewlett-Packard, experienced a decline in the demand for their products. In 2001-2002, worldwide economic

conditions were generally weak, and many U.S. companies that served foreign countries were adversely affected. Economic

conditions in the United States were also weak. Consequently, firms with business diversified across different countries were not

insulated from the weak economic conditions because these conditions existed in most countries during this period. For example,

DuPont, Nike, 3M, and Hewlett-Packard experienced lower-than-expected revenue because of weak European economies in the

2001-2002 period. To illustrate the impact of global economic conditions, consider the comments made by Dell, Inc., in a recent

annual report- “During 2002, worldwide economic conditions negatively affected demand for the Company’s products and

resulted in declining revenue and earnings The Company believes that worldwide economic conditions will improve. However, if

economic conditions continue to worsen, or if economic conditions do not improve as rapidly as expected, the Company’s

revenue and earnings could be negatively affected.”

Factor # 4. Exchange Rates:

Countries generally have their own currency. The United States uses dollars ($), the United Kingdom uses British pounds (£),

Canada uses Canadian dollars (C$), and Japan uses Japanese yen (¥). 12 European countries recently adopted the euro (€) as their

currency.Exchange rates between the U.S. dollar and any currency fluctuate over time. Consequently, the number of dollars a

U.S. firm needs to purchase foreign supplies may change even if the actual price charged for the supplies by the foreign producer

does not.When the dollar weakens, foreign currencies strengthen; thus, U.S. firms need more dollars to purchase a given amount

of foreign supplies. Exchange rate fluctuations can also affect the foreign demand for a U.S. firm’s product because they affect

the actual price paid by the foreign customers (even if the price in dollars remains unchanged).

Factor # 5. Political Risk and Regulations:

A firm must also consider the political risk and regulatory climate of a country before deciding to do business there. Political risk

is the risk that a country’s political actions may adversely affect a business. Political crises have occurred in many countries

throughout Eastern Europe, Latin America, and the Middle East. U.S. firms are subject to policies imposed by the governments

of the foreign countries where they do business. Firms are also vulnerable to the possibility that political problems between two

governments may cause consumers to react negatively against the firms because of their country of origin. During the war in Iraq

in 2003, anti-American protests against the war in the Middle East and other countries forced some U.S.-based multinational
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corporations to temporarily shut down their operations in some countries. In addition, the protests led to a decline in the demand

for the products of some U.S.-based firms.

As an extreme form of political risk, a foreign government may take over a U.S. firm’s foreign subsidiary without compensating

the U.S. firm in any way. A more common form of political risk is that the foreign government imposes higher corporate tax rates

on foreign subsidiaries.

Some governments impose a tax on funds sent by a subsidiary to the parent firm (headquarters) in the home country. They may

even prevent the funds from being sent for a certain period of time.

The exposure of multinational companies to political risks is clearly emphasized in a recent annual report of Dell, Inc.-

“The Company’s future growth rates and success are dependent on continued growth and success in international market. The

success and profitability of the Company’s international operations are subject to numerous risks and uncertainties, including

local economic and labor conditions, political instability, and unexpected changes in the regulatory environment, trade protection

measures, tax laws, and foreign currency exchange rates.”

Corruption:

Corruption is a form of political risk that can have a major impact on firms attempting to do business in a country. For example, a

firm that wants to establish a business in a specific country may obtain a quick approval only if it provides payoffs to some

government officials.

Thus, corruption increases the cost of doing business. It may also be viewed as illegal. Firms may therefore be discouraged from

doing business in those countries that have more corruption. Transparency International calculates a corruption index for most

countries. Countries with relatively high ratings have less corruption.

Regulatory Climate:

Government regulations such as environmental laws vary among countries. By increasing costs, these laws can affect the

feasibility of establishing a subsidiary in a foreign country. Stringent building codes, restrictions on the disposal of production

waste materials, and pollution controls are examples of regulations that may force subsidiaries to incur additional costs. Many

European countries have recently imposed tougher anti-pollution laws as a result of severe pollution problems.

Another type of regulatory problem occurs when countries do not enforce their laws. Some countries do not enforce regulations

that protect copyrights laws. Thus, a firm that produces products such as books or music CDs may not benefit from establishing a

business in these countries because the product may be easily copied by local firms without any penalty for violating copyright

laws.

Some countries also do not enforce bribery laws. As a result of the Foreign Corrupt Practices Act, U.S. firms are not allowed to

offer bribes to government officials or political candidates. Some U.S. firms argue that they are at a disadvantage because they

are unable to offer bribes to government officials in a foreign country, when some other firms can.

Countries also differ in the penalties they may impose on businesses for producing defective products or discriminating against

employees. The U.S. court system has a worldwide reputation for imposing excessive penalties on businesses. In numerous cases,
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a person who was injured because of poor judgment blamed the injury on the product and won a lawsuit against a business in a

U.S. court. Even if a business can prove that it was not at fault, defending against a lawsuit can be very expensive. Non-U.S.

firms may be discouraged from establishing businesses in the United States for this reason. Given the major differences in

regulations among countries, a firm must understand the rules of any country where it is considering conducting business. Firms

should pursue only those international business opportunities where the potential benefits are not offset by costs associated with

regulations.

International Business – Reasons for International Business:

The international business is needed due to the following reasons:

1. Uneven Distribution of Natural Resources – All the countries cannot produce equally well or cheaply due to unequal

distribution of natural resources among them or differences in their productivity levels. As a result, they exchange their

surplus production with goods that they are in short supply in their country.

2. Availability of Factors of Production – The various factors of production such as labour, capital and raw materials,

needed for producing different goods and services differ among nations.

3. Specialisation – Some countries specialise in the production of goods and services for which they have some

advantages like advanced technical know-how, high labour productivity, suitable climatic conditions, etc. For example,

West Bengal specialises in jute products.

4. Cost Benefits – Production costs differ in different countries due to difference in socio-economic, geographical and

political conditions. Some countries are in a better position to produce some goods more economically than other

countries. As a result, firms engage in international business to import what is available at lower prices in other

countries and export goods on which they can fetch better prices.

Forms of IB/ Types

There are various ways in which a company can enter into international business. Let us discuss the important ways or modes

along with their advantages and limitations.

Exporting and Importing:

Exporting refers to selling of goods and services by a firm of home country to a firm of foreign country. For example, sale of

sweets by Haldiram to WalMart Store in USA. Importing refers to buying of goods and services by a firm of home country from

a firm of foreign country. For example, purchase of toys by an Indian toy dealer from a Chinese firm.

Two Important Ways to Export and Import:

(i) Direct Exporting/Importing – The firm deals directly with the overseas buyers or suppliers and carries out all

formalities related to shipment and financing of goods and services.

(ii) Indirect Exporting/Importing – The firm employs a middleman (such as export houses or buying offices of

overseas customers), who deals with the overseas buyers or suppliers and carries out all the formalities. The firm’s

participation is minimum.Tangible vs. Intangible Exports and Imports:

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The exports and imports can be of two types:

1. Merchandise exports and imports – Merchandise means goods that are tangible, i.e., which can be seen and touched.

The trade in merchandise is also known as ‘Visible Trade’. Merchandise exports involves sending tangible goods

abroad, while merchandise imports means bringing tangible goods from a foreign country to the home country.

2. Service exports and imports – It involves trade in intangibles, i.e., which cannot be seen and touched. The trade in

services is also known as ‘Invisible Trade’. It includes trading in wide variety of services, such as tourism,

entertainment, transportation, communication, banking, etc.

Advantages of Exporting and Importing:

(i) Easy Mode – As compared to other modes of international business, it is the easiest way to get entry into international

market.

(ii) Less Investment – It does not require heavy investment as needed in case of other modes of entry. Moreover, firm is

not required to invest much of its time in business operations.

(iii) Less Risk – It is less risky due to negligible or low foreign investment as compared to other modes of en

Limitations of Exporting and Importing:

(i) High Cost – As goods physically move from one country to another, it involves heavy additional packaging,

transportation and insurance costs (especially in case of heavy items). Moreover, such goods are also subject to custom

duty and other levies and charges.

(ii) Import Restrictions – Where import restrictions exist in a foreign country, then other modes of entry (like joint venture

or licensing) are suitable.

(iii) Lack of Direct Contact – Exporters normally do not have much contact with the foreign markets as they have with their

local market. It puts the export firms in a disadvantageous position.

Conclusion: Even though exporting/importing suffers from certain limitations, still it is the most preferred mode of international

business. Firms generally start their overseas operations with exports and imports and then switch over to other forms of

international business operations.

Contract Manufacturing:

Contract manufacturing is a type of international business, in which a firm enters into a contract with another firm in foreign

country to manufacture certain components or goods as per its specifications. For example, international companies such as Nike,

Reebok, Levis, etc. get their products or components produced in the developing countries under contract manufacturing.

Contract manufacturing is also known as outsourcing.

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Contract manufacturing can be done in three ways:

(i) Production of certain components to be used in producing final products – For example, giving contract to manufacture

car accessories (like door handles, rear mirror) so that they can be used in manufacturing the final product (i.e. car).

(ii) Assembly of components into final products – For example, assembly of processor, mother board, hard disk, RAM, etc.

into a computer.

(iii) Manufacture of the complete product – The contract may also be given to manufacture the complete product. For

example, companies like Sony, Samsung get most of the products manufactured as per their specifications.

Advantages of Contract Manufacturing:

Contract manufacturing offers several advantages to both the international company and local producers in the foreign countries.

(i) No need to set Production Facilities – It allows the international firms to get the goods produced on a large-scale

without requiring investment in setting up production facilities.

(ii) Low Investment Risk – The investment risk is almost negligible due to no/ little investment in the foreign countries.

(iii) Lower Cost of Production – It benefits the international company to get the products manufactured or assembled at

lower costs. For example, many foreign firms get their goods manufactured in India due to cheap labour.

(iv) Better utilisation of idle capacity – Local producers in foreign countries also gain as contract manufacturing ensures

better utilisation of their production capacity. For example, Godrej group has been benefitted by using its excess soap

manufacturing capacity in manufacturing Dettol soap for foreign company, Reckitt and Colman.

(v) Benefits of Export Incentives – The local manufacturers can get benefits of export incentives if the produced goods are

to be delivered to a foreign country (as per requirements of the international firm.

Limitations of Contract Manufacturing:

The major disadvantages of contract manufacturing are as follows:

(i) Risk of Poor Quality – Local firms may not be so rigid or concerned with regard to production design and quality

standards, which may lead to product quality problems to the international firm.

(ii) Loss of control over production process – The local manufacturer in the foreign country loses his control over the

manufacturing process as goods are strictly produced according to terms and specifications of the contract.

(iii) No Control over Output – The local manufacturer is not allowed to sell the contracted output in the open market. It has

to sell the goods to the international company at predetermined prices. It reduces the profits of the manufacturer if

prices in the open market are higher than the prices agreed upon under the contract.

Licensing and Franchising:

Licensing:

Licensing is a contractual arrangement in which one firm grants access to its patents, trade secrets or technology to another firm

in a foreign country for a fee called royalty. For example, Pepsi and Coca Cola are produced and sold all over the world by local

bottlers in foreign countries under the licensing system.

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The firm that grants such permission is known as ‘Licensor’ and the other firm in the foreign country that acquires such rights are

known as ‘Licensee’. When there is mutual exchange of knowledge, technology and/or patents between the firms, it is known as

‘Cross-licensing’.

It may be mentioned here that it is not only technology that is licensed. For example, in the fashion industry, designers license the

use of their names.

Franchising:

Franchising is a contractual agreement which involves grant of rights by one party to another for use of technology, trademark

and patents in return of the agreed payment for a certain period of time. The company that grants the rights (i.e. parent company)

is known as ‘Franchiser’ and the other company (which acquires the rights) is known as ‘Franchisee’.

Why is Franchising so Popular?

The franchiser has developed a unique technique for creating and marketing of services under its own name and trade mark. This

uniqueness enables the franchiser to have a competitive edge in the market and induces the firms to become their franchisee. For

example, McDonald, Pizza Hut and Wal-Mart are some of the leading franchisers operating worldwide.

Franchising vs. Licensing:

1. Franchising is used in connection with service business, while licensing is used in connection with production and marketing

of goods.

2. Franchising is relatively more rigid than licensing, i.e., franchisers usually set strict rules and regulations as compared to

licensing.

Except for these two differences, franchising is pretty much the same as licensing.

Advantages of Licensing and Franchising:

(i) Less Expensive Mode – It is a less expensive mode for licensor/franchiser to enter into international business as

investment in business is made by the licensee/franchisee.

(ii) No Risk of Loss – Licensor/franchiser do not face risk of losses in the foreign business because of no or negligible

foreign investment. Moreover, they are entitled to license fees and royalty.

(iii) Low Risk of Takeover – There are lower risks of business takeovers or government interventions as business is carried

on by the licensee/ franchisee who is a local person.

(iv) Benefits of Market knowledge – Licensor/franchiser can successfully conduct their marketing operations as they can

take advantage of market knowledge and contacts of licensee/franchisee.

(v) Prevents misuse of Trademarks and Patents – Only licensee/franchisee is legally entitled to make use of the

licensor’s/franchiser’s copyrights, patents and brand names. It prevents misuse of such trademarks and patents by other

firms.

Limitations of Licensing and Franchising:

(i) Risk of competition from licensee/franchisee – There is a danger of severe competition to the licenser/ franchiser as

licensee/franchisee can start marketing an identical product under a different brand name. It may happen because

licensee/franchisee gains full knowledge in the manufacturing and marketing of licensed/franchised products.
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 (ii) Risk of leakage of trade secrets – There is always a risk of disclosure of trade secrets to outsiders in case of any lapse

on the part of the licensee/ franchisee.

(iii) Conflicts – The conflicts may arise between the licensor/franchiser and licensee/franchisee over issues like

maintenance of accounts, payment of royalty, non-adherence to quality standards, etc. These differences are harmful to

both the parties.

Joint Ventures:

When two or more firms join together for a common purpose and mutual benefit, it is known as joint venture. For example, joint

venture of Hero of India with Honda of Japan. It involves establishing a firm that is jointly owned by two or more otherwise

independent firms.

In India, joint venture is very popular as it not only attracts foreign capital but also foreign technology.

Formation of Joint Venture:

A joint venture company can be formed in any of the following ways:

1. A foreign company acquires interest (i.e. portion of equity shares) in an existing Indian company.

2. An Indian company acquires interest in an existing foreign firm.

3. Both foreign company and Indian company join together to form a new enterprise.

Advantages of Joint Venture:

(i) Less Financial Burden in Global Expansion – It is financially less burdensome to expand globally for the international

firm as local partner also contributes to the equity capital of such venture.

(ii) Facilitates Large-scale Operation – Joint ventures make it possible to operate on large-scale and execute heavy projects,

which require huge capital and manpower.

(iii) Benefits of Local Partner’s knowledge – The joint venture helps to take advantage of knowledge of local partner

regarding the competitive conditions, culture, business and political systems.

(iv) Sharing of Cost and Risks – Generally, business in foreign market is very costly and risky. Joint venture facilitates

sharing of such costs and risks with a local partner.

Limitations of Joint Venture:

(i) Risk of Loss of Trade Secrets – There is a risk of disclosure of technology and trade secrets to outsiders as foreign

firms share them with local firms in the foreign country.

(ii) Conflict of Interest – The dual ownership may lead to conflicts between the partners over control of business.

Wholly Owned Subsidiaries:

A ‘wholly owned subsidiary’ is a company in which 100 per cent investment in its equity capital is made by a parent company.

The company making the investment is known as ‘Parent Company’ or ‘Holding Company’. This mode of entering into

international business is preferred by those companies, which want full control over their overseas operations.

There are two ways of establishing a wholly owned subsidiary in a foreign market:

i. Setting up a new company by making 100% investment in a foreign country. It is also referred to as a Green Field Venture.

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ii. Acquiring an established company by investing 100% in its equity in a foreign country and using that firm to manufacture

and/or promote its product in the host country.

A company becomes the holding company when it acquires more than 50% equity shares in another company (known as

subsidiary company). However, if the holding company holds 100% equity shares in a company, then the latter is termed as

‘wholly-owned subsidiary company’.

Advantages of Wholly Owned Subsidiaries:

The major advantages of a wholly owned subsidiary in a foreign country are as follows:

(i) Full Control – The parent company is able to exercise full control over the management of wholly owned subsidiary

company in the foreign country.

(ii) No Disclosure of Trade Secrets – As the parent company has full control over operations of foreign subsidiary, it

prevents leakage of technology or trade secrets to others.

Limitations of Wholly Owned Subsidiaries:

(i) Huge Investment – This mode is not suitable for small and medium size firms who do not have sufficient funds to make

100% equity investment.

(ii) Huge Risk – The parent company has to bear the risk of entire losses in the event of business failure because of its

100% investment.

(iii) High Political Risk – This mode of international business is subject to high political risk as some countries do not

permit 100% wholly owned subsidiaries by foreigners in their countries.

International Business –Motives

International business can enhance a firm’s performance by increasing its revenue or reducing its expenses. Either result leads to

higher profits for the firm. There are various motives for international business, and each of them allows the firm to benefit in a

manner that can enhance its performance.

Some of the more common motives to conduct international business are:

(i) Attract foreign demand

(ii) Capitalize on technology

(iii) Use inexpensive resources

(iv) Diversify internationally

Firms that engage in international business are commonly referred to as multinational corporations. Some multinational

corporations such as Amazon.com, The Gap, IBM, and Starbucks are large well-known firms, but many small U.S. firms also

conduct international business so that they can enhance their performance.

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(i) Attract Foreign Demand:

Some firms are unable to increase their market share in the United States because of intense competition within their industry.

Alternatively, the U.S. demand for the firm’s product may decrease because of changes in consumer tastes. Under either of these

conditions, a firm might consider foreign markets where potential demand may exist.

Many firms, including DuPont, IBM, and PepsiCo, have successfully entered new foreign markets to attract new sources of

demand. Wal-Mart Stores has recently opened stores in numerous countries, including Mexico and Hong Kong. Boeing (a U.S.

producer of aircraft) recently received orders for jets from China Xinjiang Airlines and Kenya Airways.

Avon Products has opened branches in many countries, including Brazil, China, and Poland. McDonald’s is now in more than 80

different countries and generates more than half of its total revenue from foreign countries. Hertz has expanded its agencies in

Europe and in other foreign markets. Amazon.com has expanded its business by offering its services in many foreign countries.

Blockbuster has more than 3,000 stores located in 27 markets outside the United States. It is focusing its efforts for future growth

in those markets because it already has business there and therefore has some name recognition. General Electric’s philosophy is

that economic growth will be uneven across countries, so it must position its businesses in those markets where demand will

increase. It believes that as globalization continues, only the most competitive companies will be able to effectively serve their

employees and stockholders.

In 1999, AutoZone established its first retail store for auto parts in Mexico because many older vehicles are still in use in that

country, so demand for auto parts is high. Today, AutoZone has 49 stores in Mexico. eBay has provided some foreign markets

with a service that was not previously available in those areas. It has served hundreds of millions of requests to buy or sell

products from consumers in more than 150 countries. The Coca-Cola Company’s business has also expanded globally over time.

Now the company has a significant presence in almost every country. It expanded throughout Latin America, Western Europe,

Australia, and most of Africa before 1984. Since then, it has expanded into Eastern Europe and most of Asia.

(ii) Capitalize on Technology:

Many U.S. firms have established new businesses in the so-called developing countries (such as those in Latin America), which

have relatively low levels of technology. AT&T and other firms have established new telecommunications systems in developing

countries.

Other U.S. firms that create power generation, road systems, and other forms of infrastructure have extensive business in these

countries. Ford Motor Company and General Motors have attempted to capitalize on their technological advantages by

establishing plants in developing countries throughout Asia, Latin America, and Eastern Europe.

IBM is doing business with the Chinese government to capitalize on its technology. Amazon.com can capitalize on its technology

advantage by expanding in foreign countries where technology is not as advanced.

(iii) Use Inexpensive Resources:

Labor and land costs can vary significantly among countries. Firms often attempt to set up production at a location where land

and labor are inexpensive. The costs are much higher in the developed countries (such as the United States and Germany) than in
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other countries (such as Mexico and Taiwan). Numerous U.S. firms have established subsidiaries in countries where labor costs

are low.

For example, Converse has shoes manufactured in Mexico. Dell, Inc., has disk drives and monitors produced in Asia. General

Electric, Motorola, Texas Instruments, Dow Chemical, and Corning have established production plants in Singapore and Taiwan

to take advantage of lower labor costs.

Many firms from the United States and Western Europe have also established plants in Hungary, Poland, and other Eastern

Europe countries, where labor costs are lower. General Motors pays its assembly-line workers in Mexico about $10 per day

(including benefits) versus about $220 per day for its assembly-line workers in the United States.

(iv) Diversify Internationally:

When all the assets of a firm are designed to generate sales of a specific product in one country, the profits of the firm are

normally unstable. This instability is due to the firm’s exposure to changes within its industry or within the economy. The firm’s

performance is dependent on the demand for this one product and on the conditions of the one economy in which it conducts

business.

The firm can reduce such risk by selling its product in various countries. Because economic conditions can vary among countries,

U.S. firms that conduct international business are affected less by U.S. economic conditions. A U.S. firm’s overall performance

may be more stable if it sells its product in various countries so that its business is not influenced solely by the economic

conditions in a single country.

For example, the demand for PepsiCo’s products in Mexico might decline if the Mexican economy is weak, but at the same time

economic growth in Brazil, the Netherlands, and Spain might result in a higher overall demand for PepsiCo’s products.

DuPont has diversified its business across countries. Because DuPont has achieved geographic diversification, it is not as

exposed to the economic conditions in the United States. Of course, it is somewhat exposed to economic conditions in the foreign

countries where it conducts its business.

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16

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International Business – Benefits: To Nations and To Business Firms

International business is important to both ‘Nations’ and ‘Business Firms’ and offers them several benefits.

Benefits to Nations:

1. Earning of Foreign Exchange:

It helps a country to earn foreign exchange, which can be further used to import capital goods, technology, petroleum products,

etc. which are not available domestically.

2. More Efficient Use of Resources:

External trade enables the countries to specialise in production of those goods for which they possess natural resources and can

produce more economically and efficiently. The countries export surplus production of such goods to import those goods in

which other countries have specialisation. It facilitates more efficient and optimum use of resources.

International Business operates on a simple principle- Produce what your country can produce more efficiently and trade the

surplus production with other countries, to procure what they can produce more efficiently.

3. Improving Growth Prospects and Employment Potentials:

International business improves the growth prospects of many countries, especially the developing ones as firms can raise their

production capacity and export surplus output to foreign countries. Countries can also import technical know-how and capital

equipments to boost up the economic growth.

External trade also creates employment both directly and indirectly. It provides direct employment to those people who are hired

by different firms to meet increased demand for exports. Indirectly, a number of intermediary firms (like forwarding and clearing

agents) are established to facilitate business of export-oriented industries.

4. Increased Standard of Living:

External trade enables each country to obtain all types of goods and services from different foreign countries, which the country

was unable to produce. It improves standard of living of people, especially of developing and underdeveloped countries.

Benefits to Business Firms:

1. Prospects for Higher Profits – International business can be more profitable than the domestic business, especially when the

firms are able to sell their products at higher prices in foreign countries as compared to home country.

2. Increased Capacity Utilisation – Firms can utilise their surplus production capacity and improve profitability by getting

engaged in international business. With increase in production capacity, firm is able to take advantage of economies of scale,

which reduces the production cost and improves profit margin.

3. Prospects for Growth – When demand for the products starts getting saturated in the domestic market, then international

business enables the firm to enhance its growth prospects by entering into overseas market. For your reference: Many MNCs like

General Motors, Ford entered Indian market when they recognised the potential of demand for cars in India.

4. Way out to Intense Competition in Domestic Market – When there is intense competition in the domestic market, then the

international business facilitates the firms to grow and expand by operating in the foreign market.

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5. Improved Business Vision – International business enables the firms to improve their business vision. The vision to become

international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic

advantages of internationalization.

International Business – 7 Major Problems:

 Different currencies – Every country has its own currency. So, importer has to make payment in the currency of
exporter’s country. It involves risk of loss due to exchange-rate fluctuation.
 Legal Formalities – International business is subject to a large number of legal formalities and restrictions. The
government of every country exercises strict control over business with other nations. Heavy documentation and
various legal formalities involve much time and effort.
 Distance Barriers – Due to large distances between countries, it is difficult to establish quick and personal contacts
between traders from different countries. It also creates problem of time-gap between placement of order and its
execution, transport of goods and greater transit risk.
 Language Barrier – Due to different languages in different countries, it becomes difficult for traders to understand the
terms and conditions of the contract.
 Difference in laws – International business transactions are subject to laws, rule and regulations of multiple countries.
 Information Gap – It is difficult to obtain accurate information about foreign markets and about the financial position of
foreign merchants.
 Transport Problem – Water (shipping) and air transport (airways) are the important modes of transport used in
international business. Shipping is less costly but time-consuming. On the other hand, airways are faster but the cost
involved is very high.

Basic Structure of International Business

International Organizational Structures: Type # 1.

Expo-documents against acceptance 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.

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

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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.

International Organizational Structures: Type # 2

International division structure: As the foreign operations of a company grow, businesses often realize the overseas growth
opportunities and an independent international division are created which handles all of a company’s international operations.
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.

International Organizational Structures: Type # 3.

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

 Extent or type of control exerted by the parent company headquarters over subsidiaries
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  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, 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:

i. Greater emphasis on functional expertise

ii. Relatively lean managerial staff

iii. High level of centralized control

iv. Higher international orientation of all functional managers

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The disadvantages of such divisional structure include:

i. Difficulty in cross-functional coordination

ii. Challenge in managing multiple product lines due to separation of operations and marketing in different departments

iii. 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.

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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.

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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.

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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.
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:

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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.

International Organizational Structures: Type # 4.

Evolution of Global Organizational Structures: Organizational structures often exhibit evolutionary patterns, 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.

Risks in International Business

Risk happens on account of uncertainty about happening of an event like loss, damage, variations in foreign exchange rates,
interest rate variations, etc. Every business manager is always risk averters, i.e., managers usually do not want to take risk.
Hence, he likes to work out higher probability for creating wealth and profit. He likes to work as hedger. The risk taker would
like to take risk. He normally works as speculator. Any change in the business environment, would bring the same type of risk.
Generally, the areas of business prone to risks are shortage of inventory, shortage of business orders, shortage of manpower,
shortage of utilities like power and fuel, changes in government policies, etc.

The international business faces the risk due to the following reasons:
i. Operations across and with different political, legal, taxation and culture systems.

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ii. Operations across and with a wider range of product and factor markets, each with different levels of competition and
efficiency.

iii. Trades in wider range of currencies and frequent resort to foreign exchange markets.

iv. Unregulated international capital markets.

In other words, risk is the main measurement of the probability of incurring a loss or damage. The chance and possibility that the
actual outcome from an activity will differ from the expected outcome normally gives rise to risk. This means that, higher the
variability the possible outcomes that can occur (i.e. broader the range of possible outcomes), results in to greater risk

Types of Risks:
The value of firm’s assets, liabilities, operating incomes, operating expenses, and other abnormal incomes, expenses differ from
expected one clue to changes in many economic and financial variables like exchange rates, interest rates, inflation rates etc. The
appreciation of a local currency results in decreasing the local currency value with respect to exports receivable denominated in
foreign currency. Such appreciation or depreciation of local currency makes effect on the cash flow of domestic currency due to
the transactions’ exposure of merchandise and non-merchandise exports and imports. Exposure is a measure of the sensitivity of
the value of a financial item (cash flow, assets, liability etc.) to changes in variables like exchange rates, etc., while risk is a
measure of the variability of the value of the financial item. A firm always encounters a number of risks during the course of
business, i.e. political instability, technical obsolescence, availability of skilled labour, extent of trade unionism, infrastructural
bottlenecks and financial risks.

Generally risks which a firm has been categorized as:

1. Foreign exchange rate risk- The variance or changes of the real domestic currency value of assets, liabilities or
operating income on account of unanticipated changes in exchange rates referred as Foreign Exchange Risk. This risk
relates to the uncertainty attached to the exchange rates between the two currencies.If an Indian businessman borrows
some amount viz. dollars and has to repay the loan in dollars only over a period of time, then he is said to be exposed to
the foreign exchange rate risk during the currency of loan. Thus, if the dollar becomes stronger (costly) vis-a-vis rupees
(cheap) or depreciated during the period then the businessman has to repay the loan in terms of more rupees than the
rupees he obtained by way of loan. The extra rupees which he pays are not due to an increase of interest rates, but
because of the unfavourable foreign exchange rate. On the contrary, he gains if the dollar weakens vis-a-vis rupee
because of favourable exchange rate. Anyway, the businessman would like to protect his business from unfavourable
exchange rate by adopting a number of hedging techniques and would like to optimise his gains in case of favourable
exchange rate situation. This mechanism, in short, is known as Foreign Exchange Risk Management. Indian business
was not very much exposed to this risk as the exchange rate in India operated in RBI controlled regime. However, with
the advent of the budget for 1993-94, a new era was ushered in by opening up Indian economy to the International
market. The various steps taken for encouraging globalization have made the Indian business vulnerable to foreign

26
 exchange rate risk. Hence, exchange rate risk exposure is considered to be an important factor while conducting
business in India.

2. Interest rate risk- Interest rate uncertainty exposes a firm to the following types of risks. Borrowings on floating rate
bring uncertainty relating to future interest payments, for the firm. The floating rate makes borrowing cost of capital
unknown. The problem is that there is a rise of variation in interest rate risk for the firm due to the fluctuating or
floating rate clause in loan agreement. Hence, firm management not sure about the interest payment they have to make
whenever interest amount is payable to financial institutions or lenders of the funds. Borrowings on fixed rate basis
results in risk if future periods interest rates may come down, and the firm has to continue with a heavy burden on debt
servicing. In the Indian environment, the management of interest rate risks has been a comparatively new concern. The
behaviour of interest rates during the period of 2003-2008 has upset the cost and return calculations of many
industries.The exchange rate fluctuation in the South East Asian Countries or the nosedive (sudden plunge or changes)
of rupee in terms of dollars shows the extreme sensitivity of exchange rates, and in turn the extent to which the firm’s
exposures affected.Interest rates in India were regulated and controlled by the dictates of the Reserve Bank of India.
This ensured a stability of interest rate mechanism and the Indian business was not very much bothered about them.
However, with changes being brought out by the Government and Reserve Bank of India, it is quite clear that interest
rates will henceforth be market driven.

3. Credit risk-A credit risk is the risk, in a transaction, of counter party of the transaction failing to meet its obligation
towards the transaction. This risk is present in all trade and commerce transactions, thus it also includes the transactions
relating to foreign trade and foreign exchange.

4. Legal risk-The risk arising due to legal enforceability of a contract or a transaction is known as legal risk. The contract
is normally unenforceable due to pending, or newly created, political and legal issues between the two trading
countries. The various legal taxes, controls, regulations, exchange and trade controls, controls on financial transactions,
controls on tariff, and quotas system, are risks factors or elements in foreign trade and finance flows.

5. Liquidity risk-If the markets turn illiquid or the positions in market are such that cannot be liquidated, except huge
price concession, the resultant risk is known as liquidity risk. It can also be termed that the risks which, though directly
or indirectly, affect the liquidity and in turn long term solvency of the parties in the market, is known as liquidity risk.
The international financial system failed to support the increasing demands of expanding trade and finance due to lack
of enough resources, efficient and quick actions of surveillance on capital flows and inadequate liquidity to meet
emerging crisis situations.

6. Settlement risk-This is the risk of counterparty failing during settlement, because of time difference in the markets in
which cash flows the two currencies have to be paid and received viz. settled. Settlement risk depends on the various
risks like risk of the borrowing company’s ability to meet its debt service obligation in time, represented by the risk of

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 its business, financial risk, market risk, labour problems, restrictions on dividend distribution, fluctuations in profits and
a host of other company related problems. Unanticipated depreciation of a country’s currency might hurt a company
which is net importer but it may benefit exporter.

7. Political risk-Political Risk is the risk that results from political changes or instability in a country. Such variability or
changes always result into some kind of changes in the monetary, fiscal, legal, and other policies of the country facing
the changes. It has adverse impact on the working of the financial and commercial operation carried out by the country
with the globe, and also of foreign enterprise located in host country. When a factor of instability is found with a
country, such kind of risk crop up, and affect the foreign trade and exchange of the country adversely. The political risk
results in to uncertainty over property rights and protection of wealth.

Barriers to IB

1. Language Barriers

When engaging in international business, it’s important to consider the languages spoken in the countries to which you’re looking
to expand. One example of a product “lost in translation” comes from luxury car brand Mercedes-Benz. When entering the
Chinese market, the company chose a Mandarin Chinese name that sounded similar to “Benz”: Bēnsǐ. The name translates to
“rush to death” in Mandarin Chinese, which wasn’t the impression Mercedes-Benz wanted to make with its new audience. The
company quickly adapted, changing its Chinese name to Bēnchí, which translates to “run quickly, speed, or gallop.”

2. Cultural Differences

Just as each country has its own makeup of languages, each also has its own specific culture or blend of cultures. Culture consists
of the holidays, arts, traditions, foods, and social norms followed by a specific group of people. It’s important and enriching to
learn about the cultures of countries where you’ll be doing business. When managing teams in offices abroad, selling products to
an international retailer or potential client, or running an overseas production facility, demonstrating that you’ve taken the time to
understand their cultures can project the respect and emotional intelligence necessary to conduct business successfully. One
example of a cultural difference between the United States and Spain is the hours of a typical workday. In the United States,
working hours are 9 a.m. to 5 p.m., often extending earlier or later. In Spain, however, working hours are typically 9 a.m. to 1:30
p.m. and 4:30 to 8 p.m. The break in the middle of the workday allows for a siesta, which is a rest taken after lunch in many
Mediterranean and European countries.

3. Managing Global Teams

Another challenge of international business is managing employees who live all over the world. When trying to function as a
team, it can be difficult to account for language barriers, cultural differences, time zones, and varying levels of technology access
and reliance.

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4. Currency Exchange and Inflation Rates

The value of a dollar in the country won’t always equal the same amount in other countries’ currency, nor will the value of
currency consistently be worth the same amount of goods and services. Familiarize yourself with currency exchange rates
between your country and those where you plan to do business. The exchange rate is the relative value between two nation’s
currencies. For instance, the current exchange rate from the Canadian dollar to the US dollar is 0.77, meaning one Canadian
dollar is equal to 77 cents in US currency. It’s also important to monitor inflation rates, which are the rates that general price
levels in an economy increase year over year, expressed as a percentage. Inflation rates vary across countries and can impact
materials and labor costs, as well as product pricing.

5. Nuances of Foreign Politics, Policy, and Relations

Business doesn’t exist in a vacuum—it’s influenced by politics, policies, laws, and relationships between countries. Because
those relationships can be extremely nuanced, it’s important that you closely follow news related to countries where you do
business. The decisions made by political leaders can impact taxes, labor laws, raw material costs, transportation infrastructure,
educational systems, and more.

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