INTERNATIONAL BUSINESS lees ee chal MBA, THIRD SEMESTER S. Jebastine Suthan Raja Ph.D.(Pursu.), M.Phil, M.Com Assistant Professor C. S. 1. Institute of Technology, Thovalai A Manikandan MBA HOD & Assistant Professor St Joseph College of Engineering, Thanjavur THAKUR PUBLICATION PVT. LTD., CHENNAL * Ahmedabad + Bengaluru * Bhopal * Bhubaneswar * Dehradun * Emakulam * Hyderabad » * Jaipur * Jalandhar * Kolkata * Lucknow * Nagpur * Patna * Pune # Raipur * Ranchi * Rohtak *International Business + S. Jebastine Suthan Raja -A Manikandan Published by: Thakur Publication Pvt. Ltd. HO: Abhishekpuram. 60 Feet Road, Jankipuram, Lucknow-226021 Mob.z 9235318591/95/94/97/22, 9335318517 Branch Office: House No.: 8. Ambu Nagar, Main Road, Goverthanagiri, Avadi, Chennai-600071. Mob.: 9543605656, 8144126950, 9543247241, 9543247130 Website: www.tppLorg.in Email: thakurpublication@ gmail.com ISBN No. 978-93-5480-491-5 First Edition 2022 %255/- Printed at: Savera Printing Press Tirupatipuram, Jankipuram Extension, Near AKTU, Lucknow-226031 E-mail: lkospp@ gmail.com Mobile No. 9235318506/07 Copyright © au Rights Reserved This book is sole subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired Gut. of otherwise circulated without the publisher's prior written consent, in any form of binding or cover, other than that in which it is published and without including a similar condition. This condition being imposed on the subsequent purchaser and without limiting the rights under copyright reserved above, no part of this publication photocopying. recording or otherwise), without the prior written permission of both the copyright owner ard the below mentioned publisher of this book.“Dedicated to my Wife Mrs. J. Sunitta Beautlin Wise & my Daughters Ms J. Shantina and Ms. J. Shanitta .” - S. Jebastine Suthan Raja “Dedicated to my Family, Friends and my Students” - A. Manikandanrer ot ht ma bt rn LO Nm Preface 4 . «ote inthe economic development of mos gy é | ——— ee the wort ouput emis - om dynamic ang ‘enterprises, the potential market is not confined to the national frontiers. For ® ae of, ‘orp overseas market isnot a secondary market but a primary marke, The IFES an ae 8 World oi great growth and market opporturities than the domestic market. With the a ‘i of Elobalisang , across different parts of the world, intemationsl trade has become 22 a Pervasive function of wa ‘snterprises. This transformation calls for a paradigm shift in the operating environment for the on International business now touches the lives of everyone across the globe, in ways not always easy 1. Moreover, events and trends, which once unfolded gradually, are now racing ahead with Dreathakn testing even experienced managers. Understanding the ‘how" and ‘why’ of current trends is beconisg more urgent for tomomow's managers and decision makers, a5 global and local impacy jg increasingly interrwined. ‘The imparties ofthis transformation call fora paradizm shift inthe operating environment for the coo international basiness. The international business would have to follow the highly professional, ‘This book addresses intemational issues and describes concepts relevant to all international mu regandless of the extent of their international involvement. This book is a straight and humble attempt to the various aspects of international business management, ‘We sincerely believe that students should acquire balanced knowledge of theory as well as practical asp the subject. We have structured the fundamentals in concise and accurate form. We are expecting va suggestions for improvements from our dear students and lecturers, which will be useful for our next edit Please e-mail us at, thakurpublication@gmail.com Website, www.tpplorginAcknowledgement It gives me great pleasure to acknowledge the efforts of all those who have belped me in writing this book. 1 thank our Lord Almighty for having bestowed his blessings on me to cay out the work in pleasant environment with good health and strength. I dedicate my heartfelt thanks to my Mentors and Well-Wishers for their timely advice, sustained guidance and encouragement while writing this book I wish to extend my gratitude to the Principal of our Esteemed Institution, HOD of Mazazement Studies, Faculty Members and my dear Students for their support. Towe my deep sense of gratitude to my Wife Mrs. J. Sunitta Beautlin Wise, Assistant Professor, Department of Civil Engineering, C.S.L Institute of Technology, Thovalai Kanyakumari District, Tamil Nadu India. and my daughters Ms. J. Shantina and Ms. J. Shanitta for their valuable suggestions, motivation and co-operation. My sincere obligation to my Parents and Parents-in-law Mr. M. Jacob Jose (Rid Teacher) and Mrs. J. Beaulah Gnana Bai for their support and Guidance. T submit my total gratitude ever to my Family members and my dear Friend Er. moral support. '. Antony Arul Bens for their Finally, I thank Thakur Publications Pyt. Ltd, especially the Ms. Namrata Dubey (Copy Editor). Ms. Saumya Sheelan (Assistant Copy Editor) and Ms. Shweta Bhargava (Marketing Coordinator) for their efforts to make my dream come true. -S. Jebastine Suthan Raja It is with due credit that I have to thank the Almighty, the Institution, my Family, Friends and Students for their valuable support of all to complete this book in time. I won't believe that this book would have been possible without the inputs from my Colleagues and Friends, who contributed innovatively to make this book simple, resourceful and useful. I stay immensely thankful to publishing team of Thakur Publication Pvt. Ltd., who let me express my ideas, thoughts and knowledge through this book. - A. Manikandanas Syllabus BA4302: International Business Unit I: An Overview of International Business 9 Definition and Drivers of International Business- Changing Environment of International Business- Country Atrractiveness- Trends in Globalization Effect and Benefit of Globalization-Intemational Institution; UNCTAD Basic Principles and Major Achievements, Role of IMF, Features of IBRD, Role and Advantage of WTO. Unit Il: Theories of International Trade and Investment 9 ‘Theories of International Trade: Mercantilism, Absolute Advantage Theory, Comparative Cost Theory, Hecksher-Ohlin Theory-Theories of Foreign Direct Investment: Product Life Cycle, Eclectic, Market Power, Internationalisation-Instruments of Trade Policy: Voluntary Export Restraints, Administrative Policy, Anti-Dumping Policy, Balance of Payment. Unit MT: Global Entry 2 Strategic Compulsions~ Strategic Options ~ Global Portfolio Management- Global Entry Strategy, Different Forms of Intemational Business, Advantages - Organisational Issues of International Business — Organisational Structures — Controlling of International Business, Approaches to Control — Performance of Global Business, Performance Evaluation System. Unit IV: Production, Marketing, Financials of Global Business 2 Global Production: Location, Scale of Operations- Cost of Production- Standardization vs Differentiation- Make ‘or Buy Decisions- Global Supply Chain Issues- Quality Considerations, Globalization of Markets: Marketing ‘Strategy- Challenges in Product Development- Pricing- Production and Channel Management. Foreign Exchange Determination Systems: Basic Concepts-Types of Exchange Rate Regimes- Factors Affecting Exchange Rates. Unit V: Human Resource Management in International Business ° Selection of Expatriate Managers- Managing Across Cultures ~Training and Development- Compensation- Disadvantages of International Business — Conflict in Intemational Business- Sources and Types of Conflict — Conflict Resolutions — Negotiation —Ethical Issues in International Business ~ Ethical Decision-Making.in Overview of International Business P International Business W Meaning and Definition of International 11 Business ‘Characteristics of Intemational Business 11 Drivers/Reasons Underlying 12 International Business Intemationalising Business 14 Approaches of Intemational Business 15 Advantages of International Business 16 Disadvantages of International Business 17 Modem Challenges in Intemational 18 Business Domain Domestic Business vs. Intemational “19 Business Globalisation 19 Meaning and Definition of 19 Globalisation Features of Globalisation 20 Factors Causing Globalisation of 20 Business if Stages of Glob: 21 ‘Trends in Globalisation 2 Effect of Globalisation 24 BenefivPositive Effect of Globalisation _ 24 Negative/Challenges Associated with 24 Globalisation Changing Environment of Business 25 International Business Environment Introduction 25 World Trade Trends 2s Factors Affecting Intemational 26 Business Environment Political Environment 26 Political System 27 Influence of Political Environment on 28 International Business Economic Environment 29 Determinants of _~—Economic 29 Development Economic Conditions 30 Economic Policies 3 Influence of Economic Environment on 32 International Business ‘Cultural Environment 2 Elements of Cultural Environment 32 Influence of Cultural Environment on 33 Intemational Business. Social Environment 4 Social Factors Affecting Intemational 34 Business Impact of Social Environment on 35 International Business “1 Contents Technological Enviroument 35 Features of Technological Environment 35 Influence of Tectrological 36 Environment on International Business Legal Environment 38 Legal Factors Affecting International 38 Marketing 13.9.2. Influence of Legal Environment on 39 International Business 13.10. Physical Environment x» 1310.1. Factors of Natural Environmest in 40 International Business 13.102. Influence of Physical Environment 41 14. Country Attractiveness az 14.1, Introduction 2 142. Framework of Country Anractiveness 43 143. Process of Evaluating Counny 4 Attractiveness 144. Criteria for Assessing Country 45 Anmactiveness 15. International Institutions a 15.1. UNCTAD: United Nations Conference 43 on Trade and Development 15.11. Objectives of UNCTAD. 3 15.1.2. Basic Pritciples of UNCTAD 43 15.13. Functions of UNCTAD 43 15.1.4. Major Achievements of UNCTAD 49, 9 0 0 152. IMF: Intemational Monetary Fund 152.1. Objectives of IMF 1522. Organisational Structure of IMF 1523. Roles and Functions of IMF 31 1524. World Bank vs. iF St 153. IBRD (International Bank for $2 Re-Construction And Development) 153.1, Features of IBRD 2 1532 ObjectivesPurposes of IBRD 2 1533. Functions of IBRD 2 153, Operations and Services of IBRD 3 15.4. WTO: World Trade Organisation st US.1. Origin and Rounds of WTO s 1S42. Objectives of WTO. 35 1SA3. Principles of WTO 35 AS44. Functions and Roles of WTO in the 56 (Current International Business Scensrio SAS. Advantage of WTO ST 16 Exercise 7 Unit 2: Theories of International Trade 2h InternationaVGlobal Trade & 58. Investment sl. Introduction 88 2.1.2. Need for Foreign Trade and Investment $8 2.13. Risk Involved in Intemational Trade 59 and Lavestment22, Theories of International Trade 60 Introduction 60 222, Relevance of Intemational Trade 61 Theories 22.3, Role of Intemational Trade Theories in 61 the Evolution of Intemational Business 22.4. Typesof Intemational Trade Theories 62 225. Mercantilism Theory a 226. Classical Trade 62 226.1, Absolute Advantage/Cost Theory 6 22.6.2. Comparative Cost Theory: Ricardian 64 Theory 2.27. Heckscher-Ohlin Theory: Factor 66 Endowment Theory 22.7.1. Factor lntensity in Production 66 22.7.2. Assumptions of Heckscher-Ohlin 66 2273. Significance of Factor Endowment 67 Theory 228. — Oppornmnity Cost Theory a 228.1. Merits of Opportunity Cost Theory 67 22.8.2. Demerits of Opportunity Cost Theory 67 229. New Trade Theory 6 229.1. Economies of Scale and Imperfect 68 Competition 2292. Impact of New Trade Theory 6 22.10. International Product Life Cycle (PLC) 69 Theory 2210.1. Assumptions of Intemational Product 70 Life Cycle Theory 22.102. Stages of Intemational Product Life Cycle 70 22.103. Importance of Product Life Cycle 71 Theory 22.104. Limitations of Intemational Product life 71 Cycle Theory 22.11, National Competitive Advantage 72 Theory: Porter's Diamond Model 2211.1. Components of Porter's Diamond Model 72 22.112. Limitations of Porter’s Diamond Theory 73 22.12, Review on Trade Theories "4 23. Theories of foreign Direct 74 Investment/ International Investment 23.1. Introduction 4 23.2. Theory of Capital Movements 5 23.3. Market Imperfections Theory 75, ‘Monopolistic Advantage Theory 23.4. Intemalisation Theory 16 2.3.5. Location Specific Advantage Theory 76 23.6. Eclectic Theory 16 23.7. Market Power Theory n 24. _ Instruments of Trade Policy 7 24.1. Introduction 7 24.2. Impact of Declining Trade and 78 Investment Barriers on Intemational Trade Types of Instruments of Trade Policy 78 Tariff Barriers 79 244.1, Direction: Import and Export Tariffs 79 244.2. Purpose: Protective and Revenue 79 Tariffs 2443, Length: Toriff Surcharge versus 79 Countervailing Duty 244.4. Rates: Specific, Ad valorem, and 89 ‘Combined ; Distribution Point: Distribution and g9 ‘Consumption Taxes Non-Tariff Barriers (NTBs) 80 8) Import Quotas 81 Voluntary Export Restraints 81 ‘Administrative Policy 82 ‘Anti-Dumping Policy 82 Local Content Requirements 82 Customs Valuation 2 Standards : 3 Reciprocal Requirements 83 Tariff versus Non-tariff Barriers 83 Balance of Payments (BOP) 83 Introduction 83 Components of BOP 84 Importance of BOP 85 Disequilibrium in BOP 86 Causes of Disequilibrium in BOP 86 Methods of Correcting Disequilibrium 87 in BOP 255. Difference Between BOT and BOP 87 2.6. Exercise 88 Unit 3: Global Strategic Management and Global Entry Strategies Strategy of International Business 89 Introduction 89 Framework for Intemational Strategic 89 Management Stages in International Strategic Planning 90 Strategic Compulsions 91 Areas of Strategic Compulsions 92 Pursuing Competitive Advantage by 92 Competing Multinationally 3. i 3.14.3. Competing in Emerging Foreign Market 93 3.1.5. Strategic Choice/Options 94 345.1. Swategic Choice in Intemational 94 Business Factors Affecting Strategic Choice 95 Global Portfollo Management 96 Introduction 96 3.22. Factors Affecting International 97 Portfolio Management Decisions 3.2.3. Decisions Concerning to Global 97 Ponfolio Management 3.2.4. Benefits of Internaticnal Portfoljo 98. Management } 3.25. Problems of Intemational Portfolio 98 Management33. 33.1, 33.2, 33.3. 3.3.4, 33.4.1. 33.4, 3.3.5. 3.3.6. 3.37. 34. 34.1. 3.4.2. 3.43. 344, 345. 35. 35.1. 352, 353: 35.4, 35.5. 3.6. 3.6.1. 3.6.2. 3.63. 3.6.4, 3.6.5. Global Entry Strategy: Forms of 99 International Business Introduction Pactors Affecting the Selection of Global Market Entry Strategies Modes of Entries in Global markets 1 2, Direct Exporting Strategies without Investment Sategies of Foreign Direct Investment D1) ‘Comparison of Different Modes of Entry Organisation in Global Business Introduction Designing Organisational Structure Organisational Structures Factors Influencing Organisational Structure Organisational Issues of International business Performance Evaluation: Performance of Global Business Introduction Performance Measurement Indicators of a Multinational Corporation Process of Performance Measurement Performance Evaluation System Problems of Performance Evaluation of MNCs Control Introduction Features of an Effective Mechanism Approaches to Control Control Methods in International Business Steps in Controlling International Business Operations Constraints in Controlling International Business Operations Exercise Unit 4: Production, Marketing and Financials of Global Business Global Production Introduction Forces Accelerating Global Production Key Issues in. International Manufacturing Management Decisions Concerning Production Location De Scale of Opera Cost of Production Make or Huy Decisions Standardisation and Differentiation Foreign Direct International of International Business Control Global ” » 100 100 101 102 103 108 12 13 413 113 114 116 7 118, 18 19 19 19 120 120 120 121 121 12 123, 124 124 125 125 125 125 126 126 127 128 129 131 415.1. 415.2. 415.3, 4.154, 42. 424, 422. 423. 424, 425. 43. 431. 432. 433. 434. 4A. 441. 442. 443. 444. 452. 453. 454, 4542. 455. 45.6. Perspectives on Standardisation and 131 Differentiation Effects of Standardisation and 132 Differentiation Factors Favouring Standardisation and 132 Differentiation Standardisation vs. Differentiation 132 Global Supply Chain 133 Introduction 133 Driving Forces of Global Supply Chain 134 Management Globalisation Approaches & Supply 134 Chain Strategy Importance of International Supply 135 Chain Global Supply Chain Issues Bs Quality Aspects in Global Basiness 137 Introduction 37 Quality Issues in Global Business 137 Quality Consideration 139 Quality Standard 139 Globalisation of Markets 140 Introduction 140 Features of Globalisation of Markets 140 Reasons for Globalisation of Markets 141 Implications for the Globalisation of 141 Markets: International/Global Marketing 142 Introduction 142 ‘Nature of Global Marketing 142, Marketing Strategy for Global Markets 143 Targeting and Segmenting Markets 144 ‘Targeting International Market 144 International Market Segmentation ‘145 Impact of Global Marketing 197 Domestic Marketing vs. International 143 Marketing International Product Ms Introduction 3 International Product Decisions 139 New Product Development in Global 150 Markets Process of New Product Development 151 Challenges in Product Development ‘152 Product Planning in Global Markets 153 Global Pricing 153 Introduction 153 International Pricing Objectives 153 International Price Determination 154 Global Pricing Approaches 155 Price Standanfistion versus 156 Differentiation Issues in Global Pricing 157 Global Distribution Channels 157 Introduction 157 ‘Types of Intermediaries in International 158 Distribution Channels4.83. Channel Management in Global 160 Markets 484, Challenges in Managing Global 161 Distribution Strategy 49. International Financial Management 162 49.1. Meaning of International Financial 162 Management 49.2. Nature of Intemational Financial 163 Management 4.93. Functions of Intemational Financial 163 Management 494, Importance of Intemational Financial 164 Management 495, — Risks in International Financial 164 Management 4.10. Foreign Exchange Markets 16s 4.10.1. Meaning & Definition of Foreign 165 Exchange 4.102. Functions of Foreign Exchange Markets 165 4103. Basic Concepts Relating to Foreign 166 Exchange 4.104. Major Foreiga Exchange Instruments 166 4.11. Exchange Rate 167 4.11.1. — Meaning of Exchange Rate 167 4.112. Factors Determining Exchange Rates 167 4.113. Foreiga Exchange Determination 169 System/Determination of Exchange Rate Measuring Exchange Rate Movements 169 4.115. Types of Exchange Rate Regimes m 4.116. Theories of Exchange Rate 175 Determination 4.11.7, Exchange Rate Risk and Management 177 4.12, Exercise 179 Unit 5: Human Resource Management and Conflict Resolution in International Business 5.1. MANAGING ACROSS 180 CULTURE/CROSS-CULTURAL MANAGEMENT 5.1.1. Meaning and Definition of Cross- 180 Cultural Management 5.1.2. Characteristics of | Cross-Cultural 180 Management 5.13. Dimensions of Cross-Cultural 181 Management 5.14. Significance of Cross-Cultural 182 Management 5.15. Problems in. Cross-Cultural 182 ‘Management 5.2. International Human — Resource 183 ‘Management (International HRM) 5.2.1. Meaning and Definition of IHRM 183 5.2.2, Characteristics of Intemational HRM 183 5.23. Functions of Intemational 183 5.2.4, Strategic Orientations: Approaches to International HRM Importance of Intemational HRM Challenges of International HRM Expatriates Management Introduction ‘Types of Expatriates Role of Expatriates Guidelines for Expatriate Management Selection of Expatriate Managers [Expatriate Training and Development Expatriate Compensation Repatriation of Expatriates Cont International Business Introduction Nature of Conflict in International Context 5.4.3. Sources of Conflict in International Business 5.4.4. Types of Conflict 5.4.5... Conflict Management Styles 5.4.6: Conflict Resolution/Reconciliation in International Business SAJ. Problems in Resolving Conflicts in International Business 55. Negotiation in International Business 55.1, Introduction 55.2. Role of Negotiations in Intemational Business 55.3. ° Factors Affecting Intemational Business Negotiation 55.4: Process of Negotiation in Intemational Business Negotiation Strategies in International Business 55.6. Role of International Agencies in Negotiation 55.7. Problems in Intemational Business ‘Negotiation 55.8. Guidelines for Negotiating in International Business 5.6. Ethics in International Business 5.6.1. Introduction" 5.6.2. Ethical Values in International Business 5.6.3. Ethical Issues in International Business 5.6.4. Importance of Intemational Business Ethics e 5.65. Ethical Behaviour of Employer Helping in Growth of Business 5.6.6. Ethical Decision-Making : 5.6.7. International Codes of Business Conduct 5.7. Exercise Case Studies Solved Paper (2016) Solved Paper (2017) ‘Solved Paper (2018) 184 185 185 186 186 186 187 187 188 189 190 191 192 192 193 193 195 198 198 200 201 201 201 202 203 205 207 208 209 209 209 210 2 2i1 212 215 217 27 226 228 230‘An Overview of International Business (Unit 1) Unit 1 | 4 An Overview of International Business 1.4. INTERNATIONAL BUSINESS 1.1.1, Meaning and Definition of International Business The business and its related transactions taking place beyond national boundaries are termed as international business. International business is an all-inclusive term which includes FDI (foreign direct investment), globalisation, trade policies, multinational companies and their tactics, mergers and acquisitions, export import, managing intemational human resource, cross- cultural management, and the effects of dynamic global factors on business. Itis a known fact that no country is capable enough to produce all the goods and commodities required by it. Hence, countries have to import these commodities. Also, they export the commodities produced by them. which are in surplus after consumption. All these factors have led to the rising importance of international business not only at the macroeconomic level but also at the microeconomic level. Presently, international business has become a necessity for every country whether developed or developing. When economic resources like goods, capital, services (i.e., skilled labour, technology, transportation) and intemational production are exchanged across international borders, international business takes place. This production does not necessarily involve tangible products but it also involves services like finance, banking, construction, etc. Intemational business also encompasses FDI (foreign direct investment). According to Robock and Simmonds, “Intemational business is defined as a field of management training (that) deals with the special features of business activities that cross national boundaries’ Czinkotra and Grosse and Kojawa, “Intemational business is defined as transactions devised and caries out across international borders to satisfy corporations and individuals", International business Business transactions crossing national borders at any stage of the transaction All commercial tansactions related to sales, transportation, investments, insurance, commodities, tc, among nations whether private or government ‘come under international business. While the main aim of govemments is not to cam profits, private organisations undertake international business with the sole motive of earning huge profits. Three categories of organisations operate under international business. The first category is of organisations which have managerial operations in only ‘one country but involve in transactions of goods and services beyond borders of two or more than two nations. The second category involves large organisations having managerial operations outside their home country. The third and final category falls somewhere in between both the above categories. The organisations may form joint ventures with overseas governments or local businesses. These institutions just give a little direction to the economic transactions but do not exercise full control over the business and its transactions. 1.1.2. Characteristics of International Business International business is considered highly risky as compared to domestic business. The major contributor to this is its complex nature. A detailed view of the various features of international business is given below: 1) Includes Commercial Activity: The transactions i place across the boundaries in international business are commercial in nanure. These include overseas exchange of skilled labour, human resource, copyTight, trademarks," patents, commodities, services, capital. insurance, technology, etc., by means of franchising and licensing. Investments in financial and physical assets also come under international business. 2) Prone to Political Risk: International business is complex and always surrounded by risks of political nature. This is because in overseas markets, managers have to continuously alter their strategies Keeping in mind the changes in economy, regulations and political stability. Also, adjustments have to be made in marketing initiatives that are greatly affected by cultural and national factors of that country.3) Proactive or Reactive: International business can ‘be done in pre-emptive or responsive manner. If an organisation senses an opportunity and makes full use of it beforehand, it is termed as proactive approach. On the other hand, reactive approach is when organisation waits for competitors’ moves and acts or protects itself accordingly. 4) Different from Domestic Business: As business is cartied out beyond intemational boundaries, international business differs a lot from domestic business. Intemational business takes place beyond domestic boundaries, in different economic conditions, with people of different cultures living in distinct geographical locations. It is also affected by national markets that vary significantly in area and population, and industrial revolution around the world. 5) Large-Scale Operations: Activities and operation are performed at very large scale in international business, These activities involve producing and marketing of goods at intemational level. The surplus good is exported to the intemational market ‘once the goods have been sold in the local market. 6) Amalgamation of Economies: Finance, labour, infrastructure, raw materials, and other factors of production are procured from distinguished economies. Even the designing, production, assembling. and marketing of the products takes place in different countries. Hence, more than one economy is combined together in international business. 7) Maximum Control Enjoyed by MNCs and Developed Countries: As the MNCs and developed countries possess huge capital, skilled workforce, latest technology, and efficient R&D (research and development) teams; they are in a better position to produce improved quality of goods at a nominal cost. Also, they tend to retain employees as they can afford to compensate a premium salary to them. All these advantages have led to the dominance of developed countries and MNCs iin the international markets. 8) Advantageous for Involved Countries: Though there is a gap between the proportions of advantages received by developed and developing countries, there are considerable advantages for developing countries as well. Developing countries can widen up their economies through liberal economic policies to gain advantage of latest technology, more capital, employment opportunities, and rapid industrial development. 9) Excessive Competition: As mentioned earlier, MNCs and developed countries tend to dominate international business due to their massive capital [MBA Thind Semester (International Business) AUC. and ability to produce high quality products at low prices. An added advantage is the significant links these countries have in the world market, Hence, the developing countries that possess. limited resources have to face a lot of competition and find it difficult to survive in the international market. 10) Significance of Science and Technology: In ‘ensuring increased output and achieving economies of scale, science and technology play a vital role in the international business scenario. In fact, a major reason for developed countries dominating the intemational market is that they focus a lot on using advanced technology. When MNCs and developed countries use advanced technologies in their international business activities, there is a high possibility of these technologies getting transmitted, to developing countries as well 11) Regulations and Limitations: As international business has to be carried out across boundaries Of several countries, it has to go through a lot of laws, regulations, barriers to entry, etc., which vary from country to country. Few countries tend to resist international business and have very stringent rules including trade barriers, constraints on foreign exchange, etc., which is detrimental for international business. 12) Gets Easily Affected: Due to its sensitive nature, {international business is instantly impacted by even a minute change in laws, procedures, policies, political scenarios, technology, etc. Organisations involved in international business need to adjust themselves according to these changes and are advised to indulge into thorough study and market research, to study the pattems of these dynamic factors. 1.1.3. Drivers/Reasons International Business The factors which persuade companies to opt for international business are known as the drivers or motives of international business. These are classified in following categories: Underlying Reasons Undertying International Business Pull Facor H Grows Pash Factors Profitability = Uniqueness of Product or ‘Achieving Economies of Seale | Service Risk Spread ~ Marketing Oppoctniies Due to Access to Imported Inputs Wie chetes Beonomic legion & Free |” SPrewling RED Coss Markets = Resource Uilisation Emergence of WTO = Competition and Costs Unifying Erect and Peace | ~ Quality improvement Government Policies and Regulations‘An Overview of International Business (Unit 1) ') Pull Factors: Basically, the pull factors are Proactive factors and tend to pull organisations towards international business. Organisations are attracted towards international business duc to massive profitability and opportunities to grow. ‘The significant pull factors are as follows: i) Growth: After the saturation of growth ‘opportunities in the domestic markets, organisations look forward to tap the market Potential in the intemational market. Indian domestic market being so huge gives enough growth opportunities to the organisations. Hence, only a few organisations opt for going. international in search of growth opportunities. ii) Profitability: Though domestic markets are ‘more profitable, intemational markets can raise gross profits, This has been proved through numerous cases where organisations have reaped more than 100 per cent gains in the intemational markets in the events of regular losses in domestic markets. Hence, profitability along with the differences in prices in markets is an important factor inducing organisations to internationalise. iii) Achieving Economies of Scale: Organisations sell their surplus produce in intemational markets in case of very large scale production. This helps them in achieving economies of scale, Internationalisation takes place when the organisations have reaped the most out of domestic markets. Most countries motivate industries to go for large-scale production. iv) Risk Spread: When organisations operate in both domestic as well as international markets, their market risk is scattered and they do not have to be dependent on a single market. An organisation is more prone to risks if it ‘operates only in domestic markets. ¥) Access to Imported Inputs: Advance licensing, export promotion, duty exemption, duty drawback, capital goods scheme, ete., are some of the relaxations and remittances provided by trade laws of different countries which promote the import of inputs or raw materials, ‘Theses inputs are utilised in designing and upgrading the exported goods. By granting access to imported inputs, countries also help organisation to develop technologically. vi) Economie Integration and Free Markets: As a result of worldwide liberalisation, intemmational markets have opened up and integrated, The import and export between countries has eased up and become smoother. This has led to increased growth opportunities. German ‘chemical organisations going 2 3 intemational are a good example of free markets as consumption of chemicals is very less in Germany at the local level. vil) Emergence of WTO: In 1994, World Trade Orgmisation (WTO) replaced General Agreement on Tariffs and Trade (GATT). It has total of 164 members. The aim of WTO is wo develop and promote multilateral trade. It has regulated and helped countries to enter into trade agreements across their national boundaries. viii)Unifying Effect and Peace: Peace as well as prosperity prevails when there is trust and strong relationship between countries and economies. This also promotes economic growth and development. Push Factors: Being reactive in nature, push factors are basically the pressures pertaining to domestic markets which fluence the organisations to tap foreign markets. Some of the significant push factors are as follows: i) Uniqueness of Product or Service: A unique product or service faces a fairly lesser dezree of competition in international markets. It also has more opportunities than any other product. India has added advantage over other nations and hence finds it easier to isternationalise. This is because of unique products and services like handicrafts, spices. BPO services, cheaper software development, medicinal and herbal plants, etc. i) Marketing Opportunities Due to Life Cycles: As the product life cycle of every Product is different in every market, organisations can adopt two different strategies to capture the international market, i.s., either by introducing new product in existing market or tapping new market for existing product. This can be done when any of the domestic or overseas market reaches the point of saruration. iii) Spreading R&D Costs: In intemational business, organisations can very quickly and easily recover the costs incurred on research and development by expanding the size of market. This phenomenon holds correct especially for products which involve higher R&D costs and uses price skimming strategy, ie., pharmaceutical products, microprocessors, and software. Faster recovery of these costs is also possible if an organisation correctly performs market segmentation internationally. iv) Resource Utilisation: There is a huge reduction in transportation costs when an industry is established at a place where resources are available in ample amount and are easily accessible. Mineral based industries are an apt example of this.u ¥) Competition and Costs: After the Tiberalisation of economy in 1991, there was a rise in competition level among international as well as domestic organisations which changed the entire business scenario in India, Organisations in India have stared to intemationalise and adopt —_counter- competition strategy to tackle competition. Under this strategy, organisations target the home market of an overseas competitor to lessen its competitive power and save its own domestic market from competitor's invasion. ¥i) Quality Improvement: When organisations g0 global, they eam more profits and expand their markets, These increased profits are invested in improving quality and adopting more qualitative systems. Improvement in quality, equipment, and systems help ‘companies to expand further which in tum increases profits. vii) Government Policies and Regulations: The wade laws and regulations of govemments in different countries are also a big push factor for organisations to intemnationalise. While few countries promote exports through incentives and flexible laws, others focus on imports and overseas investments. 1.1.4. Internationalising Business It is not necessary that only MNCs conduct intemational business. As shown in figure 1.1, the last stage of intemnationalisation is to set-up a wholly-owned subsidiary, Figure 1.1 illustrates the step-by-step procedure for an organisation to enter into the international market. The international markets. are considered risky as they are completely new and organisations have to incur huge costs pertaining 10 export marketing. Organisations can hire or take outside assistance from experts in overseas business and try 10 intemationalise at slower and watchful pace. This would enable them to cut down on information costs. Gradually, these information costs and risk will start to diminish as the organisation gets settled firmly in the international market. s ror be ‘oclPactaing 7 i andlor Assembly £& Export through own Sales St Represeoave or Sales Subsidiary Fr Expr vis Agente Disulbator Figure Lt: Batry Into Foreign Markets: Time Internationalisation Process (MBA Third Semester (Ineratonsl Business) AUC 1) License: Licensing is the first mode which is considered by an organisation as it reduces the risk of intemationalising. The licensing agreement is usually due for renewal after five to seven years on the consent of parties attached to it. There are basically two partes ina licensing agreement, ie, licensor and the licensee. Licensee is the firm to which the licensor gives authority to use few of its technology, trademarks, patents, ete, it lew of monetary consideration often called royalty or fee, {As licensing is a contract, the licensee has to pay a fixed amount called fee upon signing the contract and a royalty thereafter of 2-5 per cent based on the ‘volume of sales. When an organisation plans to go overseas, it is not wortied to lose its firm-specific advantages. Licensing proves best when the organisation has a standardised product and the licensee cannot misuse the licensor's technology and patents. In other cases, such as exercising complete control over technology, patents, firm- specific advantages, ctc., licensing is not considered the foremost option. 2) Export via Agent or Distributor: The organisation takes the help of a distributor or local agent to export its products eyeing increased sales Volume. Using an agent is basically a small opening into the intemational market and the organisation may not necessarily have very long.term plans to continue. It is a reactive approach and if the ‘organisation sees itself performing well overseas, it ‘might look forward to establish its own marketing subsidiary or local sales representatives to ensure massive sales through exports. 3) Export through own Sales Representative or Sales, ‘Subsidiary: At this stage, the organisations look to expand their capabilities to meet the needs of export market by establishing themselves inthe intemational market through fully owned sales subsidiaries and office for the sales representatives. At this stage, exporting is not merely an opening in the international market to sell the surplus volume. A dedicated export department is set up to regulate intemational sales. ‘Also, product design and production process is altered {in accordance with the export markets. 4) Local Packaging and/or Assembly: As stated earlier, the risks of interationalisation tend to diminish when the organisation gets accustomed to the overseas market. At this stage, the organisation may take steps towards production in the overseas market by using the workers from the host country to assemble and package its products, This step could also prove challenging for the organisation as it is exposed to the trade environment of foreign market. It has to manage the wage rates, working hours regulations, cross-cultures, expectations of workforce, etc, in the host country factor market.‘An Overview of Intemational Business (Unit |) is 5) FDI: FDI or Foreign Direct Investment is the last and final step to enter into the international market. It is undertaken once the organisation js fully familiar with the foreign market and the uncertainties linked with Under this step, the organisation starts the whole sole production and selling activity in the foreign market. It might also te-export the products to the home country depending upon the cots involved in different countries. 1.1.5. Approaches of International Business When management is inclined towards entry into the foreign markets, all the functional areas get affected but marketing faces a direct influence. The decisions of an organisation to tackle the international threats, (ap opportunities, and allocating resources depends upon the ideologies possessed by the management of respective organisation. As shown in figure 1.2, the approaches to international business and marketing are summed up in the EPRG schema (ethnocentrism, polycentrism, regiocentrism, geocentrism). This also illustrates various stages in corporate development. Ethnocentrle Hore Couns Sopenot (Serulanten Bats) Regloceatet Geocente Similrines & Similan & Differences Difereeces tn home & bot eomnenes Ina world repo “Potyeentrte Each H&l Coury Unique (Bred on Dilfoeness) Figure 1.2: Approaches of International Basiness 1) Ethnocentric Approach: Ethnocentric approach is maintaining the same approach for both domestic and international business. In this approach, organisations perceive that the products and services which have done well in the domestic market are superior in quality and hence, should be introduced in the international markets. ‘The domestic operations are considered primary and internationalisation is viewed as just a way of selling off the surplus production. ‘The blueprint of overseas operations is chalked out in the home country and is not different from the domestic plans. Also, ethnocentric organisations do not give importance to detailed marketing research, tailored products, understanding consumer needs and wants, etc. All the important export decisions are undertaken by company executives and export operations are regulated by marketing staff through an export department. This approach is ‘most suitable for small and newly internationalised organisations. The entire notion of ethnoceninc approach is explained in figure 1.3. Nonaang, Dascicr = T Manager | [Miser ] [Stam Vong Snags R&D Finance || Predaeoe || Huma Rewcures || strtecog ‘Assnuat Manger | [Anion stauge] [Ansan Sima Noch Ent ‘South tna gers Figure 12: Organisation Structure of Exhnocratric Company 2) Polycentric Approach: Ultimately, the ethnocentric organisations realise that international markets require a distinct approach, Being just opposite of the ethnocentric approach, this approach understands the distinctiveness of each country and strives towands adapting to the unique conditions of foreign markets. Polycentric approach believes that same products cannot be marketed in both domestic and foreign markets. Organisations set up their own subsidiaries in international markets which work autoaomously with their own marketing strategies and goals, A dedicated marketing policy is designed for every country. This approach decentralises the operations through setting up of subsidiarics and delegating decision-making power to the executives. A chief erecutive who reports directly to the MD is also appointed alongwith executives. The main positions are filled up by professionals from home country and appointments on other positions are from the hast country. This approach is illustrated in the figure 1416 MBA Third Semester (Intemational Business) AUc Nimogis Dieser LI ceo orsign util (Uganda) I 1 Mager re ieecten || ae Rab Peas || “adore | | stetctas Figure 14: Organtsation Structure of Polycentric Company 3) Regiocentrie Approach: When the organisation becomes completely familiar with overseas market and functions successfully, it can also start exporting its products to the countries adjacent to the host country. The regional environment and legislative framework of these countries are taken into consideration to frame the plans and policies. A distinct marketing plan is acquired for these countries but the product marketed is the same as developed in the polycentric approach. Figure 1.5 elaborates the regiocentric approach. Managing Director (CEO Foreign Subsidiary (South Afgea Marketing Marketing Marketing esto) (Kenya) (Namibia) ares [epee [tgs Manager | [Manager | ["Masaser | [Manager Homan] [Manager R&D Finance_| |_Produeson Revources Marketing Figure 15: Organisation Structure of Reglocentrie Company 4) Geocentric Approach: The whole world is considered as one country under the geocentric approach. Organisations hire personnel from all over the world and set up numerous subsidiaries in foreign markets with a headquarter monitering their operations. Policies, product design, personnel decisions, plans, functions, etc., are framed by these subsidiaries independently as explained in figure 1.6. Managing Director Headquarerstadia ee Ee Subsidiny | [Subsidiary ‘Subsidiary Soath odin ‘Nambis ‘Aiea Figure 1.6; Organisation Structure of Geocentric Company The distinct competence of corporates and subsidiaries is acknowledged under this approach. The operations are taken to a global level in the multinational environment. The trade is unified and ability is given preference over nationality. 2) Social as well as Economic Welfare: When a 1.1.6. Advantages of International country gets involved in international business, it Business gets access to consumption of a wide range of 1) Enhances Standard of Living: According to the products. This turns out to be beneficial for social as well as economic well-being of comparative cost theory, nations which enjoy easy availability of labour, raw materials, natural its people. resources, etc., have the ability to manufacture : qualitative products at much lower costs. As a More foreign companies start selling their products result, consumers from various nations can in that country which increases the consumption purchase increased quantities of these products level. After the economic liberalisation, numerous with same money. When the purchasing power of foreign companies came to India and the people started enjoying new products which further raised the socio-economic level of the country.‘An Overview of International Husiness (Unit 1) 3) Expands the Market: The size of the market expands when an organisation taps the overseas market. This also reduces the dependency upon a single market's demand. The organisation needs ot fo worry ahout the needs and wants of only one market as it can expand into new markets globally. ‘Most of the MNCs have expanded their markets through internationatisation, Some of the examples are Suzuki, Pepsico, Philips, etc, 4) Helps in Avoiding Recession: When an organisation is running successfully in international market, it has the leverage of moving lowards an economy which is developing rapidly from an economy where conditions are recessionary. This is possible because different countries have distinct business cycles and intemational business helps the organisations in diminishing the effects of business cycles. 5) Risk Reduction: When organisations are spread into several countries, international business acts asa cushion against the political and operational uncertainties, If an organisation is distorted in its home country or the domestic market, it only feels a partial impact because it is doing well in foreign markets. 6) Economies of Scale: The cost of production is reduced as a result of large scale production in several markets, The organisation achieves economies of scale along with qualitative output and technical exper 7) Helps in Exploring New Markets: By opting for internationalisation, organisations can explore and. (arget potential markets which have been unexploited since long. Unlike the domestic markets, they can also. sell their products at premium in these untapped markets. For example whirlpool sclls refrigerator in USA at $833 (55000) and in India it costs around 24000. 8) Helps as well_as Challenges Domestic Organisations to Evolve: Intemational business assists as well as challenges the domestic players. ‘The domestic organisations are benefitted by the know-how, expertise, advanced technology, ete. of MNCs when they opt for amalgamation. For example, Hero Honda, Maruti Suzuki, Kawasaki Bajaj, ete. On the other hand, by giving tough competition and posing uhreat tthe domestic players, MNCs help them to develop and evolve. For example, when Samsung started. selling its mobile phones in Indian market, domestic producers such as Micromax took up the challenge and surpassed Samsung's market share in Indian market. 9) Product Specialisation and Division of Labour: Internationalisation helps an organisation to exploit its area of product specialisation and expand into 0 new markets. For example, India specialises in spices and textile. Also, di of labour takes place in overseas markets allowing the workers to ‘concentrate on small tasks individually. 10) Global Economic Development: All the above factors including challenges. innovation division of labour, product specialisation, increased consumption levels, high productivity, etc.. assist in development of global economy. Many countries like UAE, Singapore, Japan, India, etc., have been benefitted by intemnationalisation. 11) Efficient and = Maximam Utilisation of Resources: The resources available worldwide are utilised to the optimum in international business. Resources are transported from countries which are extremely rich in certain resources to countries Where these resources are scarce. Supply of personnel from India. electronic goods from Japan, and consumer goods from U.K. are a few examples. 12) Cultaral Development and Cobesiveness: Apart from the monetary and expansion advantages of international business, there are advantages of cultural nature as well. Positive cultural waits of countries worldwide are being shared among themselves. Hence, international business leads to cultural integration and transformation. 13) Transforming the World into an Intact Global Village: Inemationalisation or internations| business is the common thread that birds the worldwide ations, culrures, societics, communities, and economies together. In international business nations develop their trade on the basis of munal belp and understinding. 1.1.7. Disadvantages of International Business Following are the challenges faced by international business: 1) High Costs: Seating up infrastructure, recruiting, transportation, technology, travel overheads, etc. in foreign markets leads to buze costs. 2) Alterations as per different Legislative Frameworks: Organisations need to adjust theraselves in according to different laws prevailing in different countries. Also, altering the production Process, product design, and packaging as per new standanls leads to extra costs. 3) Affects Cash Flow: The cash flow of the organisation may be hampered due to postponed and untimely receipt of payments, 4) Complicated Organisational Framework: As intemational business demands organisational restructuring, intensive training has (0 be given to employees to ensure successful re-structuring.5) Depletion of Natural Resources: An organisation involved in overseas business especially from an under-developed country has to start exporting raw material at a very early stage which leads to depletion of the natural resources it possesses. 6) Disparities in Cultures: The organisations have to possess an outward cultural outlook. They should be willing to spread operations in all markets: wherever they sense potential, imespective of the cultural differences, 7) Highly Competitive Foreign Markets: The incompetent and weaker organisations have to wind-up their operations when the competition from big organisations deepens in foreign markets, 8) Barriers to Trade: Some countries have very stringent trade bartiers which restrain foreign countries from entering into their markets. These barriers are either direct or indirect. Direct rade barriers are high custom duties and indirect barriers are quotas, licensing, hewtic documentations and certification. Prior to 1991, India had numerous trade barriers which were later lifted during liberalisation, 9) Inadequate Domestic Support: For smooth and successful functioning of intemational business, the support of the domestic country is essential. The policies and procedures prescribed by govemment may sometimes hamper the growth of international business. 10) Extreme Dependence on Imported Produ Countries have become so dependent on the forcign countries’ imported products that their own production stops completely. 11) Disadvantageous to Agro-Based Economies: Due to the inelastic demand of agricultural products, their demand does not rise, even if the prices are lowered. Hence, international business does not benefit agro-based countries. 1.1.8. Modern Challenges in International Business Domain Because of the advent of globalisation and intemet, various boundaries in the business and trading world ‘are not disappearing. Imespective of the size of the company, reaching to new markets and customers for selling the products and finding out the vendors are becoming easier day by day. Despite having the notion of abundance of opportunities, there are a number of, challenges in front of international business. The various top 5 intemational challenges alongwith the precautions and solutions are discussed as below: 1) Laws and Regulations: Different countries have its own regulations and laws and knowing these regulations is the responsibilities of companies. All the international laws must be known (0 importers and exporters. Once the company decides 10 go to intemational trade, it must first perform the research. Some countries might have banned some 2a 3 4) 5) MBA Thind Seinester (Intemational Business) Aug certain products and despite not being aware abou, these regulations, the organisations can face serious trouble if these products are shipped. Cost: The main factor which can drive any organisation towards the intemational business is the cost. All the possible costs which might incur must be determined by the organisations. What is the most economic manner of delivering the products? This can bee seen as one of te most important questions which each firm has to respond. In the end, if the total cost exceeds the expectations, then the company can think of taking the risk of going for international trade. Communication Difficulties and Cultural Differences: The inteational partners may not have the common language which is familiar to the employees of the organisation and this can be seen as fone of the main restrictions to the international business. The key to success in our lives is a successful communication and in the absence of effective communication among the manpower, one cannot expect them to buy or sell the suitable products in the comrect quantities. This can create some problems in having smooth transactions as wished by the organisations. Some issues can also be imposed in front ofthe business due to cultural differences, When the people have knowledge about the cultural eiffecences in terms of communication styles, religious beliefs, power structures, and attitudes towanl time and work, there are greater chances of raving improved business relationships among. the people belonging to different cultures. Thus, it is important to understand and study the culture of the country before going for the business in that nation, Payment Methods and Currency Rate: These are the other important issues which must be dealt effectively by the business owners before accepting or placing any kind of intemational orders. Various Countries have various payments metdods which are popular only in those countries but they may not be used in other countries, The safest payment option is always selected by the business 1o safeguard the business. The role of currency exchange rate is also vital. While buying or selling the products, the current exchange rate must be known to the organisation Business can be negatively affected by the major cchanges in the exchange rates. Choosing the Right Shipping Method: Wha timely, safe and cost effective manner of sh the cargo? Which is the best alternative for the ‘organisation and the product offering LCL, FCL or Air? These questions are ifficult to respond if the ‘company is a new entrant in the shipping industry. In order to reduce risks, company may go for the 3PL's due to their logistics experience, knowledge, and | software which may not be owned by the small organisations and they are cheaper than hiring the | ‘manpower with similar expertise the‘An Overview of oteratoal Busines (Unit 1) " 1.1.9, Domestic Business vs; International Business All organisations at domestic and intemational level, whether public cr private aim at effective functioning to camry on their business for longest time possible. However, an additional objective of private organisations is ta earn profits, Despite of these similarities between domestic and international business, they differ from each other on the bass of cross-border disparities. Every country has distinct cultures, legal frameworks, policies, taxes, trade barier, Cie. For example, an individual wavelling to 4 foreign country has 0 go through fulfilling cenain conditions like documentation, communication, converted currency. etc. So, an organisation deciding ta interationalise alvo has to deal with matters which are way more complicated than domestic business. asi of Dierence Domestic Tatereatonal J 1) Seope Domestic business has a limited scope avi ts| Ba a wide serge as its exied ont yea | | | confined within a country's bode along wit ll|eational boucdares and focindes licensing. the business sctiities irespective of being ranching. expor-impor. FDL = established at numerous locations ofthe country. 2) Benefis Domestic businesses are less beneficial Organisations as well a cominin ae bacfited| from international businews i 3) Market Fluctuations Market Mucwuaions greatly affect demewic| Due to the expanded market each, Racial | ‘organisations resulting in nominal gains and| business faces lest impact fom market| sometimes huge losses as they operate in a single | fluctuations as they can recover the losses froma | ‘market within the national boundaries. nother market and withstand the markt ucruation. 4) Polteal Relations It does not promote cross-national eropertion | Global political latices we eaiaaccd Gromeh| and hence does not improve global political] intemational business stich in tx improves | relations, oss national eonperation. 5) Parvey (Deals in) | Domestic business is comparatively easier af Iteraatonal organisations face Gificlscs Be] ‘does not need to follow trade barriers. form of strict tariffs, customs, and cher rade. ‘umes | 6) Sharing of Domestic organisations only adopt the ew | The ten technology provaling wow Gon] Technology technology and donot share it only adopted but also shared by ixereaicnal | crranicsons, | 7) Trade Restrictions |The trade restrictions faced are forest and. | Government ws, Geemen GaHiG Go aS Be) agricultural area, area development, etc. trade restrictions. | Distance Consumes less ime in business operations due to Delay in payments and tarsaciaas cam xe ©] shor distances long diseces. | 9) Modes of Entry] Domestic business has Limited modes of erty as|A wide range of tades of eazy a Bai Fr] licensing, franchising, ccnmract. canufacoring. joint ventures, acquisitions, wholly owned subsidiaries etc. | compared to international busines. a firm opting for international business. These are | 10) Location Domestic business does not enjoy location | Building plants in locations with cheaper and] advantage as it is difficult t9 shift lovatices | easly available resources proves advascageous fem final aan | 11) Cost Advantage [They derive cost advantage throogh new | Cow vantage is achieved through economies of | ! {echniques, automation, etc. | scale. te. large scale prtuction. 1.2. .GLOBALISATION 1.2.1. Meaning and Definition of Globalisation The term ‘globalisation’ was evolved in 1980, but itis an older concept and is understood! differently by different People all over the world, These varied conceptions gave an unclear view about ‘globalisation’, Different scholars, Policymakers, and activists regarded it as a stimulus forthe warldwide economic growth. While, the same people simultaneously also assumed it as a crucial threat to the World economic system Slobalisavion i an intemationa integration which involves exchange of product, services, ideas, business practices and cultures, It has emerged as one of the most dominant factory responsible for shaping the future parems of the vorkd marke, In other worls, globalisation isa pravess which integrates regional economies and their culture, by leveloping a network of world trade, transportation, immigration and communication,20 According to International Monetary Fund (IMF), “Globalisstion isthe growing economic imerdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of intemnational capital flows and also through the more rapid and widespread diffusion of technology”. According to Charles Hill, “Globalisation is the shift towards a more integrated and interdependent world economy. Globalisation has two main components - the globalisation of markets and the globalisation of production”. Globalisation has also played a significant role in the development of the Indian economy. Since 1991, globalisation has contributed considerably to the economic growth of India by eliminating restrictions en MNCs to enter India, permitting Indian firms to trade outside national borders, liberalising imports, encouraging international investment, ete. All these initiatives have been implemented under the policy reforms of 1991 in India. 1.2.2. _ Features of Globalisation The features of globalisation may be understood with the help of following points: 1) Improved Technology: Under globalisation, new and improved technologies have been introduced, which has facilitated production activities. As a result of this revolution in technology, the world economy has witnessed a rapid growth in kmowledge-based and high-tech industries and IT sectors. The technological advancement like — high-speed internet, satellite television, smartphones, etc.. has interconnected the different economies of the world. Due to globalisation, people from all over the world are able to share information and contribute to increasing stock of knowledge. 2) Movement of People and Capital: With rapid increase in globalisation people are becoming more conscious about their living standards, occupation and general amenities. The new globalised economy has equipped people with current information regarding migration options, new technologies in wansporation, employment opportunities. ete. For example, people belonging to developing countries are migrating to more developing and developed nations in order 10 achieve economic success 3) Diffusion of Knowledge: Globalisation facilitates diffusion of new and innovative knowledge across different economies of the world. Through this, new inventions and new information are shared and disseminated to different economies of the world MBA Thitd Semester (Intemational Business) AUC Globalisation 4) Talents Mobility and Integratto allows integration of two organizations of different countries to overcome their inabilities and improve their performance. MNCs can also set-up their subsidiaries in other countries for enhancing theit operations and adapting new business methods by employing local talents. International corporations can send their employees to foreign countries for acquiring new skills and knowledge. 5) Rise in Competition: Another feature of slobalisation is that it leads to rise in the level of global competition. The removal of foreign trade barriers help the intemational companies to ‘compete with firms of other countries in terms of product prices, level of technology, market share, customer service, fulfilling customer demands, ete. Companies can expand their markets by gathering ‘optimum resources from other countries at low cost for producing quality products and selling them at competitive prices. This improves living standards of people and provides advantage to the customers and economy as a whole. 1.2.3. Factors Causing Globalisation of Business ‘There are seven factors which leads to globalisation are as follows: Factors Causing Globalisation of Business Increase and Expansion of Technology Liberalisation of Gross- Border Trade and Resource ‘Movements Development of Services | ‘that Soppor International Growing Consumer Business Pressures Increased Global ‘Competition Changing Political ‘Situations Expanded Cross-National Cooperation 1) Increase and Expansion of Technology: Conducting business on an international level usually involves greater distances than docs conducting domestic business, and gregter distances increase operating costs and make control of a company's foreign operation more difficult. But improved communications and transportation | speed up interactions and improve a manager's ability to control foreign operation, Recall in our ‘opening case that satelite television permits sports | organisers 10 reach worldwide consumers immediately and at very ‘litle additional cost. Improved transportation allows players and teams fo compete all over the world.‘An Overview of International Business (Unit 1) 2 32 4) Liberalisation of Cross-Border Trade and Resource Movements: To protect itt own industries, every country restricts the movement across its borders of goods and services and the Fesources, such as workers and capital, tn produce both. Such restrictions make international business more expensive to undertake, Because the regulations may change at any time, international business is also riskier. However, aver time most governments have lowered some restrictions on trade for the following reasons: i) Their citizens have expressed the desire for easier access to a greater variety of goods and services at lower prices. ii) The reason that their domestic producers will become more efficient as a result of foreign competition. iii) They hope to induce other countries to lower their barriers in tum. Fewer restrictions enable companies. _ and individuals to take better advantage of international ‘opportunities. However, with more competition, people have to work harder. Development of | Services__ that Support International Business: Companies and governments have developed services that ease the conduct of intemational business. For example, banks have developed efficient means for companies to receive payment in their home-country currencies. Although companies do barter intemationally. it can be cumbersome, time-consuming, risky, and expensive. Today most producers can be 2 paid relatively easily for goods and services sold abroad because of bank credit agreements, clearing arrangements that convert one country’s currency into another's, and insurance that covers risks like damaze en route and non-payment by the buyer. Growing Consumer Pressures: Because of innovations in transportation and communications, consumers know about products and services available in other countries. Further, global discretionary income has risen to the point that there is now widespread demand for products and services that would have been considered luxuries in the past. Thus, consumers want more, new, better, and differentiated products. However, this, greater affluence has not been evenly spread, either among or within countries, thus companies have recently responded more to those markets, such as China, where incomes and consumption fare growing most rapidly. This. greater demand has also spurred companies to spend heavily on research and development and to search worldwide - via the internet, industry journals, trade fairs, and trips to foreign countries — for innovations and differentiated products that they an sell to ever-more-demanding consumers. 5) Increased Global Competition: Consumers have had mene discretionary meme, which means that Gissimiter products and services compre for the tame comumer experdizue Thi expaision of competition, forces mont companies to seek any means to gain oompzitive advantages. inctading a global search for quality imprvemcot or cont reduction advantages. 6) Changing Political Situations: A majen season for porath in international business has been te end of he breach (break) between most commonist 2nd non-communist countries. Even wihin the communist bloc. countries strove to be 2a self sufficient 2s powsible, with the traesformation of political and economic policies ia the former Soviet Union. most of Eastern Exrope. China. and Vietnam. wade now flourshes berween those courtries and the rest of the sorld A forber political factor relates to governments abilities to respond (o pressures to enhance world trade. As incomes have grown, so has tat reverse. Much of the revenue has gone to programmes and projects that enkance the potential of ineraatonal business. Further. governments cow provide an aay of services that help their companies sell more abroad. such as information about foreign makets, coctacts with potential buyers abroad, and insurance against non-payment in the home country currency. 7) Expanded Cross-National Cooperation: Government increasinely realise that the oon countries’ interest can be enhanced by cooperating with other countries through treaties, agreements, and consultation. They do so primmily for the followin reasons: i) To gain reciprocal advantages, ii) To smack problems jointly thar one country acting alone cannot solve, and iii) To deal with areas of concer that lie eutside the territory of all countries. 1.2.4. Stages of Globalisation The process of going global involves five stages. These five stages recount notable differences ia the strategy. inclination, world view and practice of firms functioning across the globe. Company orientation is one of the significant bases for differentiating companies at different stages of globalisation. Figure 1,7 spots these five stages of globalisation. 1) Domestic Company: The emphasis, perception and operations are domestic in nature of the company operating at stage-one. The domestic. familiar and home country envireament governs the environmental scanning of the company at this stage. The mind-set of the domestic firm is govemed by the motto ~ “If it is not happening ia the homie country. it is not happening.”2 ‘Domestic Company C Txcrnaional Company y Mulizatonal Company ‘Global Company Transatonsl Company Figure 17: Stages of Globalization ‘The operations and mission of a stage-one company are confined to the national boundaries. During this stage, a company intends to serve home-country consumers to benefit from domestic market opportunities, acquire finance from financial institutions within the country. They focus on appraising domestic environment and attempt to take optimum benefit of opportunities Presented within the domestic environment. The national boundaries define the scope of activities of such companies. Such company always elects to remain domestic and under no circumstances can think of entering the world of globalisation ‘The stage-one companies introduce new product lines and try to serve new domestic markets. The entire planning of such companies is restricted to national markets only. International Company: Such type of companies expands their activities like marketing, manufacturing, etc, beyond the national boundaries. A company advances into this category when it plans to seck opportunities outside the home country. The indicator of the intemational company is the thesis that the different ways of a home country in conducting business, products, people, values and practices are exclusive and Superlative to those located in other parts of the world. The home country market is the focal point of the international company, In order to concentrate on _ international opportunities, an international company distinctively depends on an international division structure which employs people with intemational experience and interest as there are very less people associated with a domestic company holding international experience. The marketing strategy of an international company is an expansion of the strategies developed for the home country. The business practices, pricing, promotion, products and advertising evolved for the home country are further “expanded” into markets across the globe. 3 4 5D MBA Third Semester (International Business) AUC Multinational Company: In duc course, the international company identifies that differences actoss various markets worldwide insist for a transformation of its marketing mix (9 achieve success. company develops into a multinational company. when it aims to acknowledge the market differences. Such kind of a multinational company seeks a multi-domestic strategy. The focal point of a multinational company is multinational or if describing in strategic terms, it is multi-domestic, This means that the company lays a peculiar strategy for every country where it operates and conducts business activities. There is a shift in the orientation of such a company, ‘ethnocentric to polycentric. Global Company: A global company can be differentiated from a multinational company on many strategic bases. Such type of company will cither have a global sourcing strategy or a global marketing strategy but it cannot have both at one Point of time. Taking into consideration these two strategies, a global company will either concentrate fon the local market and source from cuher countries fo supply its local channels or else, it will emphasise on global markets and obtain source from the home country or another single country to supply these markets, The cost advantage gained from the location economics and experience curve effects helps these companies to increase their profitability that seek a global strategy. They tend to strive for a low cost strategy. Companies seeking a global strategy mainly focus their R&D, Production and marketing activities in a few advantageous locations. Transnational Company: A company following this strategy intends to focus on local responsiveness and at the same time also benefits from location economies and core competencies. This kind of strategy is the most explicit response 10 the dynamic and evolving globalisation of business. A transnational company is something more than a company that has investments, operations and sales in different countries. A_ wansnational company is an integrated enterprise that connects global resources with markets worldwide at a profit. Such companies are commanding industries and markets across the globe. Undoubtedly, there is no example of a “pure” transnational company. However, there is increasing number of companies that indicate several, | |‘An Overview of International Business (Unit 1) 1.2.5. Trends in Globalisation There are several rising trends towards the growing globalisation and interdependence of markets, organisations and nations. This is due to the great levels of competition between various economies of the world. The major globalisation trends are as follows: 1) Cooperation among Countries: Countries cooperate with each other in many ways. The cooperation among different nations typically happens through international organisations, agreements, treaties or consultations. This is possible because of the increasing tend of globalisation as it has removed various restrictions by determining frameworks and guidelines about, what firms are allowed to do, Many reasons why countries cooperate with each other are as follows: i) For gaining reciprocal advantages, ii) For resolving problems that cannot be solved alone, and, iil) For dealing with issues that lie outside the geographical area of the country. Countries usually gain reciprocal advantages through agreements that happen on a variety of areas ranging from transportation to trade. Liberalisation of Cross-Border Movements: Every country normally has some degree of control on the movement of goods and services acros: borders. This also extends to the factors of production like workers and capital, However, these restrictions put limitations on the operations of international companies. It also increases the level of uncertainty in which the firm has to operate. In comparison to a decade ago, the governments these days impose lesser restrictions on cross-border operations, thereby allowing organisations (0 utilise international opportunities. Restrictions have come down because of the following reasons: i) Prevalence of open economies which believe that lesser restrictions will lead to the creation of a market in which consumers get access to cheaper and better products. ii) Domestic companies become better when they compete with foreign companies. i) Other companies will also ceciprocate when trade restrictions are reduced, 2) ) Technology Transfer: Technology transfer is the process by which commercial technology gets disseminated, This happens through a technological transfer agreement which may or may not be legally binding. However, it involves a communication between the transferor and the transferee, The United Nations Conference on ‘Trade and Development (UNCTAD) has given the B following types of transactions that may be allowed under technology transfer. i) The licensing, sale and transfer of all types of industrial property with the exception of trademarks, service names and trade cames which do not fail under the parriew of technological transfer. ii) The provision of technical knowledge and expertise in the form of feasibility studies, plans, diagrams, prototypes. engineering designs, instructions and guides. exc. This mary also involve taining which is imparted to personnel. iii) The provision of necessary technological knowledge required for the installation and execution of tumkey projects, and for the maintenance and upkeep of /— plants and machinery. iv) The provision of expertise and technical knowledge needed to install and employ machinery, plants and equipment, intermediate goods, and raw materials which have been obtained through purchase. lease. etc. ¥v) The provision of hi-tech contents of technical and industrial cooperation arrangements. Reasons for Technology Transfer Technology transfer is undertaken becane of the following reasons: i) Profit from Selling Technology: The main reason why technology is cansfered is because of profit. For example, when Kodak had to leave Japanese market, it sold its technology to local players like Konica and Fuji so that it could make a profit. ii) Location and Logistics Advantage: In several cases, it is often cheaper and easier to manufacture technology in overseas markets as they have major cost advantages. It also helps in saving logistics costs for the manufacturers as they can aggregate the end product and achieve economies of scale. iii) Competitive Edge: Technology transfer helps the company to get an edge over local competitors. iv) Grants and Subsidies: The underdeveloped and developing economies of the world are starved in terms of technology. They offer many sops in the form of tax incentives to foreign companies that are willing to transfer technology. ¥) Limitations of Home Country: The opportunities in the local market are often limited for companies. For this reason, they need to focus on the eppertunities available in4 For this perform the extemal business environment, purpose, companies need to technology transfers. vi) Superior Capital Markets: Companies also et access to cheaper labour and other factors Of production in the foreign country. This helps them to make greater utilisation of capital. vii) Enhance Competence: Technology: transfer helps companies to increase their efficiency and competence of their subsidiaries in the foreign market, 1.2.6. Effect of Globalisation There are both positive and negative effects of slobalisation, These can be explained as follows: 126.1. BenefivPositive Effect of Globalisation The importance of globalisation in India is discussed below: 1) Boost in the Economy: Globalisation has boosted the flow of foreign investments in India through certain industries like petroleum, BPO, manufacturing, and pharmaceutical industries. The ‘economy of India has increased rapidly due to these international investments. 2) Increased Rate of Employment: Various international firms have set-up industries in India mainly in sectors like IT, manufacturi Pharmaceuticals, etc. This helps the Indian economy is providing employment opportunities to the people. As a result, a large amount of unemployment and poverty has been reduced. 3) Availat of Advanced Technol Globalisation has not only opened the boundaries for India but also provides new and advanced technologies. This helps the economy to become technologically competitive in the world market. 4) Goods and Services: The availability of goods and services at low cost to the worldwide market has been made possible with the help of globalization. ‘This has increased the level of consumer's demand and in tum has enhanced the living standards of people. Besides thi, the supply of imported goods has maintained and controlled the inflation situation and price mechanism in the county. 5) Removal of Restrictions from Capital Flow: Globalisation encourages inflow and outflow of capital among different countries. It also assists the international firms to obtain capital at low cost and thereby provide investors to cam interests or dividends at reasonable rates. In addition, globalisation motivates developed countries to invest in the developing countries tp increase their foreign investments, ~ MIVA Third Semester (Intemational Business) Aug 6) Boost in Industrialisation: With the advancemen of technologies and liberalisation of trade policies, developing countries like India have witnessed rapid. industrialisation in various. Hence, globalisation plays an important role in industrialising the world economy. 7) Balanced Development of World Economies: The benefits of globalisation are not limited to powerful and developed countries only. With the help of globalisation, different economies of the world, and even the less-developed countries, an expand their trading activities and achieve global presence, 8) Adaptation of Foreign Taste and Trend: With the globalisation of markets, different countries are able to adopt and acquire the trends, taste and culture of other countries. This increases the demand and supply of a huge variety of goods and services. For example, demand for ‘Pizza’ in India and "Masala dosa’ in USA, Associated 1.2.6.2. Negative/Challenges with Globalisation Different challenges associated with globalisation are as follows: 1) Reduced Jobs and Incomes: With advancement of technologies and new production facilities, ‘manpower requirements in industries like cement, chemical, manufacturing, pharmaceutical, etc. have considerably reduced. Hence, due to globalisation, many people in developing countries like India have lost their jobs. 2) Improper Labour Practices and Environmental Policies: Free trade facilitates developed countries {0 set-up their manufacturing units outside national borders in order to gain cheap labour and resources. Hence, this leads to exploitation of labour and national resources of developing and underdeveloped countries. 3) Cutthroat Competition: Globalisation has enabled severe competition, due to which domestic ‘markets are incurring huge losses. Now, people are willing to spend their money for quality products at Jow cost. As a result, the market share of local manufacturers is reducing rapidly. 4) Inequality: Globalisation is one of the major causes of poverty in developing countries like India. With increasing economic growth, gap between rurals and urbans is also increasing. Rapid globalisation of markets has widened the gap between rich and poor. Developed countries are becoming more wealthy and powerful by exploiting resources of underdeveloped and developing countries, Hence, globalisation of the world economy has led to unequal distribution of income and wealth,‘An Overview of lteratonl Busnes (Ui |) $) Inflation: Globalisation is significant factor behind cise in inflation, With improving economic Conditions and inereasing demand for food and nergy there as also been an unreasonable increase ‘in prices of commodities, also kaown as aplation. 6 Loss of Cultures Every country and its people have ther own cultural beliefs and values, With increased awareness of cultural practices in other counties, people are losing their own cultural values and adopting forcign. People are migrating (o other countries for increasing the living standards at the cost of their own culture and values. This is Fading towards cultural conflict between counts, MeO LL eN aC al tes sy) OMe aE ry ENVIRONMENT. g Introduction International business or global business can be defined a a set of all the commercial activities such as sales, logistics, investments, transportation, etc, performed by govemment and private firms across the najonal borders. Such commercial activities are generally underaken with different motives by the Private and government firms, where private firms focus on profit-making and the goverament firms have both profit as well as politcal motive behind it Intemational business environment is composed of various legal and political systems, economic policies, accounting standards, environmental standards, Inbour polices, language and cultural differences, expon and import regulations, tariffs, foreign exchange policies, trade agreements, etc, All these elements may undergo significant variations from one county to another. Objectives of a business enterprise and methods to achieve them are the governing factors for its business operations in an international business environment, The level of compeition and the societal facors prevailing in intemational business environment affects 28 wells get affected bythe fm’s operations, According to ICFAL centre for management research, “Global Business Environment isthe eaviroament in different sovereign countries, wih factors exogenous to the home environment of the organisation, influencing decision making on resouree use and capabilites: This includes the soil, politcal, economic, regulatory, tax, cultural, legal, and technological environments” 1.3.2, World Trade Trends Some important word trade wends for present times are follow: 1) Slowing Economle Growth: After a difficult 2019, moxt global outlooks were projecting subdaed 2020 global trade growth late this year, This was largely due to a sharp downturn in ‘manufacturing activity and global trade volatility with Brexit and China-US. relations. The weakness in growth is driven by higher tviffs and prolonged trade policy uncertainty damaging investment and demand for capital goods. In Canada, specifically, global groath forecasts were downsifted in EDC's fall update to the 2020 outlook. However, with the very recent and significant progress made on the Casado-US- Mexico Trade Agreement and the “phase one” US- China trade deal, growth forecasts into 2029 may soon be revised again, tothe postive this tie 2) Service Export Opportunities Growing in New Regions: Canadian trade in services contimsed to row forthe uh year ina row, wit industries such 38 travel, finance, resource —developrent, techoology, wansponation, and agriculze Presenting the best opportunites. While the US. is sal the biggest impor of Canadian services, the fastest growing relationship in commercial service expors was with Afican nations (13%). Inte US. service expors are increasing as well, reaching S71. billion for the year 35 of October, Service ‘exports also seem to have been immune tthe downtum weakening goods expors. “Goods expors have been more negatively impacted by softening global conditions and are expected to grow ata modest 3.3% in 2019, sowing farther to 23% in 2020" 3) China “Decoupling,” or in “phase one” of renewing trade relations!: After almost three years of escalating tensions and retatey tariffs between the US-China and Carads-China, lk began to ‘emerge of a “Uevewpling” soategy. This would sce (Chia drastically educe rade with Non America, replacing it with domestic tersegionl tate. Already, Chinas foreiza direct iavestmens in the US. dropped 88% from 2010-2018. The potential for 2 drastic dp in China US. tade is rising alums about possible ech wars, and remapping supply chains to leave out te west all gece. However, ths fall sow the US. and China put tmush of the contention behind them anal most revenly, signoff on "phase one” of a China-US, trade deal. The sifing dynamics between China and North America will send shockwaves throvgh the global market so we will ceainly be watching focany developments,6 4) Tariff Workarounds: Because of the continued uncertainty between China ~ North America trade, companies have started looking for workarounds to avoid getting caught by tariffs. Other nearby regions, such as Vietnam, South Korea and Taiwan, as well as Mexico have been seeing increased imports as North American companies have tweaked their supply chains to reroute around China. ‘A little lesson the up-and-up, some North American-based companies have been exploiting Yoopholes in trade policy to circumvent paying increased tariffs on Chinese-manufactured goods. Some are stretching the legitimate rules, which USS. Customs is aware of and claims to be cracking down on. Others are using the rule to apply correctly o their goods. Either way, some of those that can’t avoid China- North American trade uncenainty are finding ways around paying the tariffs, for now. We're keeping an eye on new manufacturing hot spots as they pop up and trade policy continues to shift. I's a good time to be a trade lawyer. 5) More New Supply Chain Tech: The adoption of buzzworthy technology, such as_antficial intelligence, blockchain, drones and robotics have been revolutionizing supply chains for the past few ‘years. This is reaching a new level of maturity as companies big and small take agility and automation to the next level into 2020. It is predicted by experts tat by the end of 2021, half of all manufacturing supply chains will have invested in supply chain resiliency and antficial intelligence (Ab, resulting in productivity improvements of 15%. And by the end of 2020, half of all large manufacturers will have automated supplier and spend data analysis, resulting in a 15% procurement productivity gain 6) Localisation in Supply Chains and Communications: Other trade tends together usher in a new era of localisation. Businesses are ooking for ways to bring manufacturing closer to their consumers, allowing them to sidestep tariff uncertainty. They are engaging new tech in wringing every last drop of inefficiency and waste ‘out of their supply chains, a move that will please their climate conscious consumers. ‘As consumers are getting increased access 10 wider range brands and products and the concem for climate issues accelerates, many are also fuming to products and services that speak more directly 10 them and come from closer by. Here's where the other type of localisation ~ adapting your product or service to a local market ~ will be increasingly important into 2020. S MOA Tid Semester ematons Busine 449 \er-Driven Data Privacy: Privacy » mee in the spotlight over 2019 wid a ; Tage orgriztion being serutinized for day jet and, questionable practices. With yt implementation of the European Union's Geng Data, Protection Regulation (GDPR) in May, 2914 Companies were more of e88 fOFEEU 10 sit yp at take data protection seriously. nto. 2020 companies will continue 10 feet tye implications of GDPR around the world, and oer regulations are making their way through approval processes as well, such as the California Consume, Privay Act (CCPA) which will come into effect on January 1, 2020. South Korea and Brazil are alg ‘working on similar protection policies. E-Privacy and the transferring of personal data wil also be under the microscope this year, along wit the application of artificial intelligence technology, Companies who have put little priority inp complying with privacy regulations should re: ‘evaluate their stance, as more companies are bein ‘uted for breaches in privacy and data leaks, which ‘comes with fines, fees, and often significant losses. 13.3. Factors Affecting International Business Environment ‘The factors influencing international business ‘environment are as follow: Factors Affecting International Dusiness Environment Political Environment Economie Environmext Cultural Environment ‘Social Environment Technological Environment Legal Enviroamest _t Physical Environment 13.4. Political Environment Governmental activities and actions that influence tH, ally business operations of a company or business constitute the politcal environment. ‘The poliied environment in which an organisation works (of Planning to work) has a substantial influence 09 16 Slobal marketing actions. There is a greater need, regulate political environments of the nations in whic business is being carred-out. In other words, 0 glob! | company needs to assess the political environment of hhost country before conducting its business actives Alleraion in goverment generally brings 0 alterations in rules, policies of conduct" intematonal business, Mou“ ‘ aa‘An Overview of International Business (Unit 1) A. political system refers to sum total of all organisations and political institutions, how they are associated and the political system and regulations that, direct their business operations, The marketing environment of a country is directly influenced by its, Political environment, Enhanced business environments might emerge from some political environment and vice versa, For example, business operations of Bangladesh are greatly affected by its unsteady political environment, However, almost two decades ago, Bangladesh was at the same level with countries like Malaysia and Vietnam in terms of economics and industry. At present, Vietnam and Malaysia have accomplished tremendous success with the help of their appropriate political judgments, capable and liable leadership and stable political situation. The political environment of a nation also creaies a great impact on its companies and managers. For example, China's political system has permitted foreign investors to enter in its market, plan actions, design processes and finally acquire significant gains. 1.3.4.1. Political System A political system can be defined as a system of government and politics. There is a comparison between the political system, economic system, law system and various other types of social system, There is a difference between these systems and political system and it can be explained with the help of a spectrum from the left which is communism to socialism in the right, i.e., fascism and anarchism. In fact, none can be said to be pure and thus a majority of these are in the middle where capitalism is said to be present. There is a greater impact of the government system of a country on its business. The business of a certain country is decided, protected, developed, encouraged, protected, directed and controlled by the nature and formation of the prevailing government in that nation. The major factor for the economic development of any country can be scen as its political system (which is a different name of the type of government) which should be stable, honest, effective and active, and ensuing the participation of the citizens in the politics and at the same time, ensuring the security of the citizens. The success of the developed ‘economies is largely dependent on the political system which is enjoyed by them. The government system in any country can be regarded as its political system. ‘The political system of any country forms the economic and legal system in that country. There are mainly two major foundations on which the political system or ‘government can be classified: 1) Political System as the Basts: One of the manners for classifying the government is to treat them as: i) Parliamentary Governments: Parliamentary governments seek suggestions from the citizens n ‘occasionally in order to gain understanding of Wir views and preferences, Thus, the government policies are formed in such a manner that it represents the majority of the society. Majority of industrialized countries and democratic countries are considered to be the parliamentary. ii) Absclutist System: On the other side are the absolutist governments which are constituted by monarchies and dictatorships. In these kinds of systems, the government policies are controlled by the ruling regime without giving any consideration to the needs and views of the common citizens. Most commonly, these kinds of systems include the newly formed nations or the countries having some sort of transition phase. Number of political parties can also be used as a toll to classify the governments. There are mainly four types of government in this category: i) Two-Party System: In this kind of set-up, there are mainly two major political parties which take the control of the government. However, other parties can also function. The typical examples of these are United States and United Kingdom. There are various philosophies in the two parties which cause the change in the policies of the government ben one party replaces the other. ii) Maltiparty System: In case of a multiparty set-up, a number of political parties are present and no party is strong enough to gaia coctrel of the government. There can be some strong and large parties but the elected representutives may not be able to gain the majority. With the help of coalitions berween the different parties, the formation of government takes place and each pany locks to protect its own interest. The co-operation among the party partners decides the longevity of the coalition government. Normally, a continuous challenge is poised by the opposing parties to the coalition. ili) Single-Party: In case of a single party system, there can be a oumber of parties but the dominance of a particular party is so prominent that there is handly any chance for the other Parties to elect the representatives for ruling the county. For example, for more than thiry years, the single pany system was used in Egypt. This kind of set-up is used by the countries which are in their early phase of the development of a true parliamentary set-up. iv) Dominated One-Party: When it comes to dominated one pany set-up, no opposition is Permitted by the dominant party and thus, thereis no option presented to the citizens. On the other side, there will be some kind of ‘tion in case of a single party sm, Toe pried examples of this kind of ‘setup are former Soviet Union, Cuba, and Libya. These kinds of systems can give birth to the dictatorship. 2) Economic System as the Basis: There are mainly following three types of systems: i) Communist Theory: As per the communist theory, all the resources should be controlled and shared by the citizens (i... rather than by profitoriented organisations) forthe beterment of the society. Practically. it is the goverment which regulates the different productive resources and industries and as a result, jobs, price. production, education and other Similar aspects are determined by the government. The main focus remains on the human welfare. As the main objective of the government is not to eam profit, there is hardly aay Kind of impetus for the managers and workers to have greater efficiency. ii) Socialism Theory: In comparison to the communism, the level of control in the socialism is relatively easier. All the basic and major indusries are regulated by the socialist govemment and the ownership of the small ‘business is left for the private owners. Socialism is the level of extent and different socialist countries are different. For example, the socialist country such as Poland is more anracted towards commumism which is quite visible from its strict control over process and distribution. iii) Capitalism Theory: The other side of the communism can be seen in the form of capitalism. The main concept of capitalism depends on the free market system which enables the competition among business and freedom of selection for both the companies and the common individual. This is mainly 2 market governed system in which the individuals who ‘are motivated by the private profits have the freedom of producing the products or services for the consumption of common public under the compztitive situation, Demand and supply decides the market price. The requirements of the society are fulfilled by promoting decentralised decision-making, innovation and risk-taking ability, 1.3.4.2. Influence of Political Environment on International Business Following are the implications of political environment of a country on its companies and managers: 1) Political Ideology of the Government: Government's political ideology discusses the 3 4) 3) 6) [MBA Thind Semester (Intemational Business) AUC thoughts, vision and approach towards social and tcomnomic activities of the country. It determines the {ype of business operations the country should have, operations to be included in the private and public ecrors respectively, areas to be opened for foreign fnvestment, areas to be marked for small scale operations, etc. Therefore, political ideology of a country greatly influences the global marketers. Political Stability in the Country: The most important factor for economic growth of a country js a steady political system, which comprises honest, dynamic and efficient members. who make sure that the citizens are safe within the country. ‘The reason behind the success of major developed countries and their economic stability is the political system of those countries. In the absence of an effective political system. it is difficult to define the long-term goals of the global organisation. With the changing government, the economic policies also change frequently, leading to the uncertainty of business class. The various factors related to the instability of political system are communal riots, declaration of emergency, civil war, etc. Government Relations with Other Countries: Government relations of a country with other nations significantly influence its marketing operations. Intemational trade becomes favourable when friendly and cordial relationships are developed with other countries. Furthermore, such relations also help in decreasing the defence budget thereby increasing investments in infrastructures and fostering the growth of marketing activities. Defence and Military Policy: Allocation of huge funds for armed forces can be harmful for marketing and economic system as the government will also impose heavy taxes, remove inducements and might also cut down the expenditure on the financial infrastructure. Friendly relationships between the central and state goverment also prove to be conducive for the marketing activities. Thinking of Opposition Parties towards Business: At times political panties form union government with different economic ideas, which adds complication to the political atmosphere of the country. Such scenarios also create complexity in conducting business operations. Policies towards International Marketing: Political environment greatly influences each and every marketing process irrespective of its dimensions and teach, MNCs deal with several complicated political environments as they manage their busines operations in more than one country. Facing sue complex situations compels them to anticipate thre 4ifferent types of political environment, ic, fore’ domestic and international,‘An Overview of International Business (Unit 1) 7) Government Control and Restrictions: Government control and restrictions can be favourable or unfavourable for different businesses. They can either support the business activities of a firm or can prohibit and discourage its business ‘operations. However, this varies from government to goverment. Intemational law gives liberty to the countries to either permit or withhold the permission of conducting marketing operations ‘within its political regions. 1.3.5. Economic Environment Economic environment refers to those economic factors which largely influence the functioning of a global business organisation in any country. These factors consist of production processes and wealth distribution system prevalent in countries. The economic environment also affects the marketing activities of the organisation. In addition to this, the market size and consumers" willingness to spend also plays a vital role jin determining the economic environment of a particular nation. Thus, some of the other economic factors arc interest rates, inflation, disposable income, savings of the society, etc. All these factors prevalent in the environment influence the purchasing power of the consumers in that particular country. Moreover, ‘economic development leads to changes in the tastes and preferences of the customers. Understanding the economic environment of other nations and their markets, will prove beneficial for the Management, to anticipate the impact of latest trends and happenings on the future performance of the ‘organisation. The fact that a country will prove good as a host for global business projects depends upon its size, rate of economic growth and its per capita income. Countries having lower per capita income are not profitable for heavy machineries market but are better for agricultural equipment. Such countries cannot bear the price of technical machines. Countries with good growth rate are prospective markets for latest industry items and consumer goods/services. However, few industrially backward nations are developing at a faster pace. For example, the USA will face competition from China and India in the near future. Even though the per capita income of the USA is seven times and twelve times than China and India respectively, these (wo countries are rich in human resource as their population is very high. Infrastructure and marketing practices like public services, banking, utilities, communication and Uanspontation facilities are also considered while making plans 10 enter an intemational market. Inadequacy on account of infrastructure can hinder the plan related (0 manufacturing, promoting and distributing products and services in certain countries. >» 1.35.1. Determinants of Economic Development The economic development of a courtry is mainly affected by two main factors which are as below: 1) Economic Factors in Economic Development: The various factors which can be analysed for determining their role in economic developmest are as below: (Capital Formation: Convextioraily. the sxateric role of capital has been idextified in economics 1 increase the produccon level. fn the exe word. it has been identified tat a coumry atach is bokiez to increase the economic developmen: bs he only option of saving ich rato cf es txcome so that it cn imomse he meet intl Ove depeodence on the forsiza ais is not we xt tos it advintle w vod Ge ii) Natural Resources: Nao! rewccces =z the main factors which affect the development of any county. This consis of the qakn of the soil, forest wealth. cood river Qim micenls aad oil-rsocces, good and bray cle land area and so on Ib order to hve economic development. it is quite impouct i kre the mmol recures m oeter quemmexs The coumny shich bas Emited nama! rewurce an struggle in order to acquire higher development, ) Marketable Sarplus of Agriculture: Fra the viewpoict of nanonal developmect it is imporast wo have the ioee in the agiculmnl yield along with the incemed Productivity. But the moa imporant thing is to bave an increased mrtontle soplss of agriculmre The term “markenble epics’ can be defined as the additonal espa is te agiculmral sector, mere tao the requaed quantity by the rural populsnca wo avn. The main significance of the murkenble serplas in the developing economy is mainly related 19 the fact that the survival of the urban mizsrris} Population depends cpoa it, iv) Conditions in Foreign Trade: Eccoomisss used the classical theory of make quite commealy for a fairly long nme in order to discuss that there are some atvastazes to the countries by trating among each other. From the current perspective, this theney advises lesser countries to focus on haviog the specialisation in the prediction of pnmary goods dze to comparahve cost atvantage in the Production of these goods. The countnes which are able to develop the industnes in a shorter lime penod can be benefited from the forsien trade. For their industnal products, these countries will be able tw find out the international market somehow30 v) Economic System: The —_ economic development prospect is also greatly affected by the economic system and the historical setting of the nation, In recent past, a country could have the fair economy and yet having the economic development. But at present, the situation is completely changed; it will be very difficult for a country to have economic development by following the path of England's development. 2) Non-Economic Factors in Economic iv) Social Organisati Development: It is quite evident from the historical evidences that for the development both the economic as well as non-economic factors are important. Now we will try to explain how these factors affect the economic development process: Human Resources: One of the most important factors for the economic development is the human resource. For the production, the labour power is facilitated by the man, if the labour of 2 country is efficient and skilled labour, it will have a higher contribution towards the development of the country. There will be a low productivity for the illiterate, unskilled, disease ridden and superstitious people and thus the chances of economic development are quite rare in any country. ii) Technical Know-How and General Education: There was a lot of douist about the direct influence of technical know-how on the developmental growth. With the advent of scientific and technological knowledge, more sophisticated technologies were discovered by the human being which ukimately resulted in the continuous increase in the productivity levels. The current level of the technology is quite sophisticated, yet there is a requirement to give alot of significance to the Research and Development activities in order to boost the development. iii) Political Freedom: If we observe the present modem history, it will be found that the activities of development and under development are inter-connected and treating them in isolation is not the correct approach. It is a common fact that the development of England was inter-connected with the under- development of many countries such as India, Pakistan, Bangladesh, Sri Lanka, Malaysi Kenya, ctc., which were the British colonies. These countries were exploited by England unconvollably and utilised the major part of these countries” economic surplus. In order to have the fast growth process, it is important to have tie mass participation in the development programmes. MBA Third Semester (International Business) AUc When the individuals feel that the outcomes of the development will be distributed fairly then ‘only the common persons take part in the development activities. With the help of the insight gained from the experiences of various nations, itis found that when the major benefits of the growth are being utilised by the elite “groups of the society due to defective social organisation, then common public will not show any interest towards the development programmes of the State. In these cases, it is not useful to consider the active participation of common people in the development projects which are nun by the State. v) Corruption: The developing nations experience the uncontrolled corruption in different levels and it proves to be the negative factor for the development process. Unless the phenomenon of corruption is eradicated from the administrative set-up, it will be quite common to obverse the exploitation of natural resources by the capitalists, traders and other powerful economic classes for their own benefits. Even the misuse of regulatory system is also seen and merit does not become the prime factor to issue the license, vi) Desire to Develop: Development process is not mechanical in nature, The desire of the common citizens of a country to have the development decides the economic growth pace in any country. If a country has a low level of consciousness and poverty is accepted as the fate by the common public, then the chances of development are quite bleak. 13.5.2. Economic Conditions Business is greatly affected by the general economic conditions. Economies face the period of both booms and recession. Boom can be seen as a period of high output level with higher employment and increased prices and demand. Recession is just adverse to these features. If a certain region relies heavily on a certain sector ot industry, then the fortunes of this industry will have a deciding impact on the business in that region. Crude oil price has a significant impact on the economic and business fortunes in main oil exporting nations. There can be a close relation between the economic situation of a region and the prices of major crops of that region. A certain economic situation can be spread both nationally and internationally or it can be restricted 10 4 certain region. Some of the specific economic police: ‘and business environment can be affected by the curren account and balance of payments positions of a countryof Inter: 1a Business (Unit 1) For example, due to a prevailing current’ account surplus, the government can be motivated (o relax the imports and capital glow. A number of international and national factors decide the exports and imports of acertain country. ‘ For example, it was found from the analysis of the empirical data that there are some vital factors which have the deciding influence over India's export performance. This mainly consists of external factors and internal factors alongwith the real exchange rates. ‘Various external factors are stated below: 1) Economic development rate of the importing countries. 2) Growth rate of world trade 3) Importing country's rate of price level change. ‘The internal factors are illustrated as below: 1) Indian economy's development growth. 2) Domestic price level change rate. 1.3.5.3. Economic Policies Types of Economic policies that affect intemational business are as follows: 1) Fiscal Policy: The fiscal policy aims at increasing the revenue receipts of the goverment and bringing the expenditure under control while ensuring that the various developmental and societal objectives of the government are not impacted adversely. With the help of introducing compensatory variations in the public expenditure and taxes, the private investments as well as the consumption level are changed. Changes in fiscal policy cause the changes in monetary policy. The fiscal policy of a country is concemed for: i) Maintaining the balance of payment equilibrium, Stabilising the price level, Achieving and maintaining the full employment, iv) Improving the growth rate of the concemed economy, and ¥) Facilitating the economic development of the country. 2) Monetary Policy: The monetary policy of any country is responsible for regulating the money supply in the market with the help of controlling the interest rates. In order to attain the significant economic growth as well as the price stability, the monetary authority of the concemed country devises the monetary policy. In India, the RBI, ie Reserve Bank of India, devises the monetary policy, ‘The monetary policy of a country is concemed fe i) Controlling arid regulating the banking system of the country,’ = ning'the rate of money supply in the 9 4) 9 n 31 iii) Providing credit for the priority sector, iv) Achieving price stability, and ¥) Achieving and maintaining economic growth. Forelgn Trade Policy: Exchanging goods, services as well as capital across international borders is called foreign trade. The Central Government of the country devises its foreign trade policy. This policy is focussed towards improving forcign trade as well as balance of payments, developing export capacity and facilitating export performance. It includes different import and export related instructions and guidelines suggested by the Ministry of Commerce (Directorate General of Foreign Trade). Industrial Sector Policy: India’s industnal policy can be seen as one of the fields which have wimessed a lot of change dee to the economic liberalisation of the 1990s. Due to this, early policy changes. a trend was forming ever ¢ the pro-business approach was adopted by the government towards the iedustnal policy during the 1980s. In the following years. there was a transition from the centrally plaaned and functioning economy to the market contro! economy in India which represented the 2! trend of minimal controlled economies. Majority of government controlled organisations were privatised yet some political dispures are still Prevailing over the eradication of reservanon. Privatisation Policy: Not only the coal mines bat various other vital sectors are operated by the Government of India. Approximately bulf of the capital stock of India is made ep by the public caterprises and they have the major market shares in the industries such as mining. smelting. banking, and railways. However, these industries suffer from lower productivity and capital. Due to political reasons, a number of public enterprises were established and sustained. For example, there were thousands of workers on the Payroll of a fertilizer factory in Haldia, West Bengal for many years despite having no initiation of production. Foreign Exchange Policy: Policies related to exchange rates and cross border movement of capital are quite vital for the business. For example, the cross-border movement of capital was boosted by the removal or liberalisitien of exchange control in the entire work! beginning from the later part of the 1970s. Foreign Investment and Technology Policy: Till the Late 1980s, when the liberalisation was initiating globally, there were a lot of restrictions fon the foreign capital and technology in majonty of developing and socialistcommunist countries. }