INTERNATIONAL

BUSINESS

NOTES

By AMZA SIDDIQUI

RIZVI INSTITUTE OF MANAGEMENT STUDIES G RESEARC

 What is International Business?
Deffinitions of International Business

● "International business is all business transactions-private and governmental-

that involve two or more countries. Private companies undertake such
transactions for profits, governments may or may not do the same in
their transactions."

~ John D. Daniels and Lee H. Radebaugh

● "International business involves commercial activities that cross

national frontiers"

~ Roger Bennet

● "International business focuses on any commercial activity or

transaction between companies, organizations, individuals, or
government entities that cross borders into diLerent countries and
regions. These global transactions are not limited to a specific currency,
interest, or asset. International commerce comprises anything of value
exchanged between the involved parties, such as goods and services,
technology, capital, employees, and intellectual property."

~ Pearson

● “International business is the process of focusing on the resources of

the globe and objectives of organizations on the global business
opportunities and threats, in order to produce, buy, sell, or exchange
goods/services worldwide."

~ P. Subba Rao

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Approaches or Strategies of International Business
(By Douglas Wind and Pelmutter)

1. ET NOCENTRIC APPROAC
● Under this approach, domestic companies normally formulate their
strategies, product design, and operations in accordance with national
markets, customers, and competitors. But, excessive production more than
the demand for the product, either due to competition or due to changes in
customer preferences pushes the company to export the excessive
production to foreign countries.
● Domestic companies continue the exports to foreign countries and view the
foreign markets as an extension of domestic markets.
● The executives at the head o ce of the company make the decisions relating
to exports and the marketing personnel of the domestic company monitor
export operations with the help of an export department.

2. POLYCENTRIC APPROAC
● Under this approach, companies establish foreign subsidiaries and empower
their executives.
● Domestic companies that export to foreign countries using the ethnocentric
approach find at a later stage that foreign markets need an altogether
diLerent approach.
● As a result, such companies establish a foreign subsidiary company and
decentralize all operations, and delegate decision-making and policy-making
authority to its executives.
● In fact, companies following the polycentric approach appoint executives and
personnel, including a chief executive who reports directly to the Managing
Director of the company. The key personnel are appointed from the home
country and all other vacant positions are filled by people of the host
country.

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3. REGIOCENTRIC APPROAC
● Under this approach, subsidiaries consider the regional environment for
policy and strategy formulation.
● Companies, after operating successfully in a foreign country, think of
exporting to the neighboring countries of the host country. At this stage, the
foreign subsidiaries consider the regional environment for formulating
strategies and policies.
● However, in other countries in the region, they market essentially the same
product designed using a polycentric approach, but with diLerent marketing
strategies.

4. GEOCENTRIC APPROAC
● Under this approach, companies view the entire world as a single market.
● They select employees from around the globe and operate with a number of
subsidiaries. The headquarters coordinates the activities of the subsidiaries.
Each subsidiary functions like an independent and autonomous company in
formulating policies, strategies, product design, human resource policies,
operations, etc.

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 Stages of Internationalization
STAGE 1: DOMESTIC COMPANY

● Domestic companies limit their operations, mission, and vision to the national
political boundaries. This company focuses its view on domestic market
opportunities, domestic suppliers, domestic financial companies, domestic
customers, etc.
● These companies analyze the national environment of the country and
formulate strategies to exploit the opportunities oLered by the environment.
● The domestic companies’ unstated motto is: if it is not happening in the
home country, it is not happening.
● The domestic company never thinks of growing globally. If it grows beyond
its present capacity, the company selects the diversification strategy of
entering into new domestic markets, new products, technology, etc. The
domestic company does not select the strategy of expansion/penetrating
into the international markets.

STAGE 2: INTERNATIONAL COMPANY

● Some domestic companies, which grow beyond their production and/or

domestic marketing capacities, think of internationalizing their operations.
Those companies which decide to exploit the opportunities outside the
domestic country are stage two companies.
● These companies remain ethnocentric or domestic country oriented.
● These companies believe that the practices adopted in domestic business,
the people, and the products of domestic business are superior to those of
other countries.
● These companies select the strategy of locating a branch in foreign markets
and extend the same domestic operations into foreign markets. In other
words, these companies extend the domestic product, domestic price,
promotion, and other business practices to foreign markets.

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● Normally, the internationalization process of most global companies starts
with this stage due to limited resources and also to learn from foreign
markets gradually before becoming a global company without much risk.

STAGE 3: MULTINATIONAL COMPANY

● Sooner or later, international companies learn that the “extension strategy”

(i.e. extending the domestic product, price, promotion, etc. to foreign
markets) will not work.
● The best example being Toyota which exported Toyopet cars produced for
Japan in Japan to the USA in 1957. Toyopet was not successful in the USA.
Toyota could not sell these cars in the USA as they were overpriced,
underpowered, and built like tanks. Thus, these cars were not suitable for
the US markets. The unsold cars were then shipped back to Japan. Toyota
took this failure as a rich learning experience and as a source of invaluable
intelligence but not as a failure. Toyota then designed new models of cars
suitable for the US market based on this experience.
● International companies turn into multinational companies when they start
responding to the specific needs of the diLerent country markets regarding
the product, price, and promotion.
● This stage of multinational companies is also referred to as multi-domestic.
Multi-domestic companies formulate diLerent strategies for diLerent
markets. Thus, the orientation shifts from ethnocentric to polycentric. Under
polycentric orientation, the o ces/branches/subsidiaries of a multinational
company work like a domestic company in each country where they operate
with distinct policies and strategies suitable to the country concerned. Thus,
they operate like a domestic company of the country concerned in each of
their markets.

STAGE 4: GLOBAL COMPANY

● A global company has either a global marketing strategy or a global

strategy.

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● Global companies either produce in their home country or in a single country
and focus on marketing these products globally, or produce the products
globally and focus on marketing these products domestically.
● For example, Harley-Davidson designs and manufactures super heavyweight
motorcycles in the United States and sells them on a global scale. Similarly,
Dr. Reddy’s Lab designs and produces drugs in India and markets them
globally. Thus, Harley and Dr. Reddy’s Lab are examples of global
marketing-focused companies. GAP sources products from around the world
and sells them through its retail organization in the United States. Thus, GAP
is an example of a global sourcing company.

STAGE 5: TRANSNATIONAL COMPANY

● A transnational company produces, markets, invests, and operates across the

world.
● It is an integrated global enterprise that links global resources with global
markets at profit.
● There is no pure transnational corporation. However, most transnational
companies satisfy many of the characteristics of a global corporation. For
example: Coca-cola, Pepsi-cola, etc.

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Drivers of International Business / Important Factors
to be considered by MNCs before entering any
foreign country to conduct business
1. Developing markets have huge opportunities to increase their profits and
sales
2. Many MNCs are locating their subsidiaries in low-wage countries to take
advantage of the low cost of production
3. Trading blocks seek to promote International Business by removing trade
and investment barriers
4. Changing demographics also add to increasing globalization
5. Declining investment and trade barriers have vastly contributed to
cross-border business
6. The most powerful instrument that triggered internationalization is
technology
7. Resource seeking is another motive for firms going international
8. Internationalization is triggered by world bodies and institutions like the
World Trade Organization (WTO)

OR

1. igher Rate of Proffits

The basic objective of the business is to achieve profits. When the domestic
markets don’t promise a higher rate of profits, business firms search for
foreign markets where there is a scope for a higher rate of profits. As a
result, the profit goal influences and motivates the business to expand
operations to foreign countries. For example, Hewlett Packard in the USA
earns more than half of its profits from foreign markets as compared to that
of domestic markets.

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2. Expanding the Production Capacities beyond the Demand of
Domestic Country

Some domestic companies expand their production capacities more than the
demand for the product in the domestic countries. In such cases, these
companies are forced to sell their extra production in foreign developed
countries. Toyota of Japan is an example.

3. Limited ome Market

When the size of the home market is limited either due to the smaller size of
the population or due to the lower purchasing power of all people or both,
the companies internationalize their operations. For example, most of the
Japanese automobile & electronics firms entered the USA, Europe & even
African markets due to the smaller size of the home market. ITC entered the
European market due to the lower purchasing power of the Indians with
regard to high-quality cigarettes.

4. Political Stability vs. Political Instability

Political stability doesn’t simply mean the continuation of the same party in
power; it means the continuation of the same policies of the Government for
a quite long period. It is viewed that the USA is a politically stable country;
countries like the UK, France, Germany, Italy, & Japan are also politically
stable. Most African countries & some Asian countries are politically unstable
countries. Business firms prefer to enter politically stable countries & are
restrained from locating their own business operations in politically unstable
countries. In fact, business firms shift their operations from politically
unstable countries to politically stable countries.

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5. Availability of Technology and Competent uman Resources

The Availability of advanced technology & competent human resources in

some countries acts as pulling factors for business firms from other
countries. For example, American & European companies, in recent years,
have been dependent on Indian companies for software products & services
through their business process outsourcing (BPO). This is due to the cost of
human resources in India being almost/approximately 10 to 15 times less
compared to the US & European labor markets.

6. igh Cost of Transportation

Initially the companies enter foreign countries for their marketing operations.
But the home companies in any country enjoy higher profit margins as
compared to the foreign firms on account of the cost of transportation of the
products. Under such conditions, foreign companies are inclined to increase
their profit margin by locating their manufacturing facilities in foreign
countries through Foreign Direct Investment (FDI) route to satisfy the
demand of either one of the countries or the group of neighboring countries.
For example, Mobil which was supplying petroleum products to Ethiopia,
Kenya, Eritrea, Sudan, etc., from its refineries in Saudi Arabia, established its
refinery facilities in Eritrea in order to reduce the cost of transportation.

7. Availability of Raw Materials

The source of highly qualitative raw materials and bulk raw materials is a
major factor in attracting companies from various foreign countries. For
example, Vedanta Resources is a London Stock Exchange (LSE) listed
UK-based company operating principally in India due to the availability of
raw materials such as iron ore, copper, zinc & lead.

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8. Liberalization G Globalization

Most countries around the globe liberalized their economies and opened their
countries to the rest of the globe. These policy changes enticed multinational
corporations to expand their operations into these countries.

9. Growth in Market Share

Some large-scale business firms would like to increase their global market
share by expanding and intensifying their operations in various foreign
countries. The smaller companies expand internationally for survival, while
the larger companies expand to increase their market share. For example,
Ball Corporation, the 3rd largest beverage can manufacturer in the USA,
bought the European packaging operations of Continental Can Company.

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 Di erences between
Domestic Business vs. International Business

PARAMETER DOMESTIC BUSINESS INTERNATIONAL BUSINESS

MEANING ● A business is said to be ● A business is said to

domestic when its
economic transactions
are conducted within
the geographical
boundaries of the
country i.e. Business is
carried out within the
national or geographical
borders of the country
(Intra-country).
be international when
it is engaged in
economic transactions
with several countries
in the world i.e.
Business is carried out
across borders and
national territories of a
country (Inter-
country).

APPROAC ● Ethnocentric. ● Can be polycentric or

● It means that domestic regiocentric or
companies formulate geocentric.
strategies, product ● International business
design, etc. towards the under a polycentric
national markets, approach enters
customers and foreign markets by
competitors. establishing foreign
subsidiaries.
● Under a regiocentric
approach, they export
the product to the
neighboring countries
of the host country.
● Under the geocentric
approach, they treat
the entire world as a
single market for
production, marketing,
investment, and
drawing various inputs.

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GEOGRAP IC ● Within the
SCOPE national
boundaries of the
domestic country.
OPERATING ● Operating style
STYLE including production,
marketing, investment,
RnD, etc. is limited to the
domestic country.
ENVIRONMENT ● Mostly analyzes and
scans the domestic
environment.
QUOTAS ● Quotas imposed by
various countries on
their exports and
imports do not directly
or significantly influence
domestic business.
TARIFFS ● TariL rates of various
countries do not
directly and significantly
influence domestic
business.
FOREIGN ● Forex rates and their
EXC ANGE fluctuations do not
RATES directly and significantly
aLect domestic
business.
CULTURE ● Mostly, the domestic
culture of the
country aLects the
business operations
including product
design.
● Varies from the
international
boundaries of a
minimum of two
countries to a
maximum of the
entire globe.
● Operating style can be
spread to the entire
globe.
● Analyzes and scans
the international
environment.
● International business
has to operate within
the quotas imposed by
various countries on
their exports and
imports.
● TariL rates of various
countries directly and
significantly influence
international business.
● Forex rates and their
fluctuations directly
and significantly aLect
international business.,
● Mostly, the culture of
various countries
aLects the business
operations including
product design of
international business.
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 UMAN ● Normally employs ● Normally employs
RESOURCE people from the same people from various
MANAGEMENT country. countries.
● Thus, the task of ● Thus, the task of
human resource human resource
management is not management is very
very complicated. complicated.

RISK INVOLVED ● Low. ● High.

ADVERTISING G ● Advertising, personal ● In the case of

PROMOTION selling, and other international business
promotional methods diLerent countries
are subject to the have diLerent
regulations prevailing regulations regarding
in domestic business advertisement and
operations. For e.g. promotion. For e.g.
advertisement and advertisements for
promotion of cigarettes and alcohol
pharmaceutical drugs, are permitted in some
cigarettes, and alcohol developed nations.
are restricted in India.

QUALITY ● May be low. ● Are very high.

STANDARDS ● Global standards are
set.

RESEARC G ● Conducting business ● It is very di cult and

DEVELOPMENT research, performing costly. The reliability
demand analysis, and of information
customer surveys is depends upon the
easy. individual country.

LEGAL ASPECTS ● In respect of domestic ● In the case of

business only the local international business,
laws and regulations are international
fully applicable to regulations and host
conduct business. There country laws are
is minimum adherence applicable. Developed
to international countries impose strict
regulations related to regulations as
Intellectual Property compared to Least
Rights in domestic Developed Countries
operations. (LDCs)

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 Reasons to enter International Business:
FOR COMPANIES
1. Managing the Product Life Cycle
● All companies have products that pass through diLerent stages of their life
cycles. After the product reaches the last stage of the cycle called the
declining stage in one country, it is important for the company to identify a
few other countries where the whole life cycle stages could be encased.
● For example, Enfield India reached maturity and the declining stage in India
for the 350cc Royal Enfield motorcycle. The company entered Kenya, West
Indies, Mauritius, and other destinations where the heavy-engine two-
wheeler became popular. The Suzuki 800cc vehicle reached the last stage of
its life cycle in Japan and entered India in the early 1980s, where it is still
doing good business as the bread and butter model in Maruti Udyog Ltd.’s
stable.

2. Geographic Expansion as a growth strategy

● Even if companies expand their business at home, they may still look
overseas for new markets and better prospects.
● For example, Arvind Mills expanded their business by either setting up units
or opening warehouses abroad. Ranbaxy’s growth is mainly attributed to
geographic expansion every year to new territories.

3. The adventurous spirit of the younger generation in

the organization
● The younger generation of business families has considerable international
exposure.
● They are willing to take risks and challenges and create opportunities for
their business.

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● For example, Kumar Mangalam Birla of the Aditya Vikram Birla Group of
companies has managed to establish their business operations in several
countries across the globe in the last decade.

4. Corporate ambition
● Every corporation in the country has strategic plans to multiply its sales
turnover.
● In case some of the ventures fail, others will oLset the losses because of
multi-locational operations.
● For example, Coca-cola is not doing well in several countries including India.
But this will not aLect the company because more than a hundred countries
are contributing to oLset the losses.

5. Technological advantage
● Some companies have outstanding technology through which they enjoy
core competencies. There is a need for such technology in all countries.
● Biocon, Infosys, and Tata Consultancy are known for their core competencies
in biotechnology and software development respectively and a huge demand
exists across many developed economies of the world for their technology.

6. Building a Corporate Image

● Prior to profits and revenue generation, many companies first build their
corporate image abroad.
● Once the image is built up, generating revenue is a comparatively easy task.
● For example, LG Electronics and Samsung Electronics built their image in
India during the initial three to five years after their entry, and the
generation of revenues and profits has been considered as they have
expanded to semi-urban and rural India overtaking traditional Indian brands
Godrej and Videocon.

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7. Incentives and Business Impact
● Companies, which are involved in international business, enjoy fiscal,
physical, and infrastructural incentives while they set up business in the host
country. For example, the Aditya Vikram Birla group enjoyed such incentives
in Thailand and Indonesia.
● The home country may also oLer many incentives in order to neutralize the
cost and allow the country to compete in the world market. For example,
recently the Prime Minister of Bangladesh Sheikh Hasina invited Indian
companies to invest in proposed Special Economic Zones (SEZ) oLering
infrastructure facilities and tax holidays to such Indian companies.

8. Labour advantage
● Many companies have a highly productive labour force. The unique skills
of such a force may not be available throughout the world.
● Manufacturing units in India have consistently performed well, whether in
the diamond industry (E.g. Surat) or automobile manufacturing (E.g.
Hyundai Motor car manufacturing plant near Chennai).
● Companies nurture the skills of such labour forces and win world markets.

9. New Business Opportunities

● Many companies have entered businesses abroad, seeing
unlimited opportunities.
● For example, healthcare companies like Cipla, Dr. Reddy’s Laboratories,
and Aurobindo Pharma have entered South American countries like Brazil
and Argentina looking at the attractive business opportunities in such
countries.

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 Reasons to enter International Business:
FOR GOVERNMENT
1. Earning valuable Foreign Exchange
● Foreign Exchange is necessary to balance the payments for imports.
● India imports crude oil, defense equipment, essential raw materials, and
medical equipment for which the payments must be made in foreign
exchange.
● If the exports are greater than imports it indicates a surplus in the balance of
payments, on the other hand, if the imports are higher and the exports are
lower as has always been the case with India it indicates an adverse balance
of payments.

2. Interdependence of Nations
● From time immemorial, nations have mutually depended on each other.
● Even during the era of Indus Valley civilization, Egypt and the Indus Valley
depended on each other for various items.
● Today India depends on the Gulf regions for crude oil and in turn, the Gulf
region depends on India for rice, tea, etc.
● Developed countries depend on developing countries for primary goods,
whereas developing countries depend on developed countries for
value-added finished products.

3. Trade theories and their impact

● The theories of absolute advantage, comparative advantage, and
competitive advantage, which have been propounded by classical
economists, indicate that a few nations have cost advantages in the
procurement of resources and production of finished products than other
nations.
● Such advantages enable them to be competitive.

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● These resources may be in the form of labour, infrastructure, technology,
natural resources, or even a proactive policy of the government.
● For example falling land prices in the South American countries of Paraguay
and Uruguay have thrown open a tremendous opportunity for Indian edible
oil companies to venture into oLshore oilseeds cultivation with the industry
representative body Solvent Extractor’s Association (SEA) negotiating with
ICICI Bank for Rs. 150 Crore loan to part the proposed investment in the
project.

4. Diplomatic Relations
● Diplomacy and trade always go hand in hand.
● Many sovereign nations send their diplomatic representatives to other
countries with the motive of promoting trade besides maintaining cordial
relations.
● Indian diplomats in Latin America have done a remarkable job of promoting
India’s business in the 1990s. However, Pakistan being a failed nation has
not seen much success in this endeavor.

5. Core Competency of Nations:

● Many countries are endowed with resources, which are produced at an
optimum level. Such countries can compete well anywhere in the world.
● Rubber products from Malaysia, knitwear from India, rice from Thailand, and
wool from Australia are a few illustrations.

6. Investment for Infrastructure

● Over the years all countries have invested huge amounts of money in
infrastructure by building airports, sea ports, economic zones, and inland
container terminals.
● If the trade activities do not increase and flourish, the country cannot
recover the amounts invested.

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● Hence, the government fixes targets for every infrastructure unit and the
time frame to achieve them.
● Economies like Mauritius, Hong Kong, Singapore, Malta, and Cyprus invest in
trade-related infrastructure in order to elevate themselves to be foreign
trade-oriented economies.

7. National Image
● A new era has emerged from conquering countries by a sword to winning by
trade.
● A businessman gives priority to the image of the country he belongs to.
● We come across products with labels such as ‘Made in Japan’, ‘Made in
China’, and ‘Made in India’.
● Businessmen from Japan, China, and India endeavor to make their products
world-class and bring credentials to their countries while citizens achieve
business success elsewhere in the world.

8. Foreign Trade Policy

● All developing countries announce their foreign trade policies.
● A clear-cut road map is drafted and given to promotional bodies so that
timely implementation is possible.
● For instance, the Commerce and Industry minister Mr. Anand Sharma has
assured that the Government of India would extend its support to the
slowdown-hit export sector by providing more SOPs in the Foreign Trade
Policy (FTP) which will be unveiled next month at a conference organized by
the industry body Federation of Indian Chambers of Commerce and Industry
(FICCI). He said that the FTP would be a mix of fiscal incentives and
simplification of procedures for carrying out foreign trade.

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9. WTO G International Agencies
● The apex body of world trade, the World Trade Organization (WTO), is a
free, transparent, and regulatory body that upholds provisions related to the
elimination or reduction of tariL and non-tariL barriers.
● The International Bank for Reconstruction and Development (IBRD),
popularly called the World Bank, extends financial assistance on a soft loan
basis in order to assist developing countries in their infrastructure and
industrial development.
● The International Monetary Fund (IMF) maintains currency stability in various
countries through regulatory mechanisms.
● Many more organizations like International Maritime Organization,
International Standard Organization, International Telecommunication Union,
and International Civil Aviation Organization are major catalysts to promote
trade between nations.

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Importance G Advantages of International Business
1. igh Living Standards
● Comparative cost theory indicates that the countries which have the
advantages of raw materials, human resources, natural resources, and
climatic conditions in producing goods can produce the products at low cost
and of high quality.
● Customers in various countries can buy more products with the same amount
of money. In turn, it can also enhance the living standards of the people
through enhanced purchasing power and by consuming high-quality
products.

2. Increased Socio-Economic Welfare

● International business enhances the consumption level and economic welfare
of the people of the trading countries.
● For example, the people of China are now enjoying a variety of products
from various countries than before as China has been actively involved in
international business-like Coca-Cola, McDonald’s range of products,
electronic products from Japan, and coLee from Brazil. Thus, the Chinese
consumption levels and socio-economic welfare have enhanced.

3. Wider Market
● International business widens the market and increases the market size.
● Therefore, the companies need not depend on the demand for the product in
a single country or the customer’s tastes and preferences in a single country.
● For example, due to the enhanced market Air France now, mostly depends
on the demand for air travel of customers from countries other than France.
This is true in the case of most MNCs like Toyota, Honda, Xerox, and Coca-
Cola.

4. Reduced E ects of Business Cycles

● The stages of business cycles vary from country to country.
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● Therefore, MNCs shift from a country experiencing a recession to a country
experiencing ‘boom’ conditions. This enables international firms to escape
recessionary conditions.

5. Reduced Risks
● Both commercial and political risks are reduced for the companies engaged
in international business due to the spread in diLerent countries.
● Multinationals that were operating in the erstwhile USSR were aLected only
partly due to their safer operations in other countries. But the domestic
companies of the then USSR collapsed completely.

6. Large-scale Economies
● Multinational companies due to wider and larger markets produce larger
quantities, which provide the benefits of large-scale economies like reduced
cost of production, availability of expertise, quality etc.

7. Potential Untapped Markets

● International business provides the chance of exploring and exploiting the
potential markets which are untapped so far. These markets provide the
opportunity of selling the product at a higher price than in domestic markets.
● For example, Bata sells shoes in the UK at £ 100 (Around Rs. 8000) whose
price is around Rs. 1200 in India.

8. Provides the Opportunity for and Challenge to

Domestic Business
● International Business firms provide opportunities to domestic companies.
● These opportunities include technology, management expertise, market
intelligence, product developments, etc.
● For example, Japanese firms like Honda, Yamaha, Suzuki, and Kawasaki have
combined to form Joint Ventures with Indian companies to form Hero Honda,

22
 Birla Yamaha, Maruti Suzuki, and Kawasaki Bajaj to share technology and
product development expertise. Similarly, MNCs pose challenges to domestic
business initially. Domestic firms develop themselves to meet these
challenges. For example, the entry of whitegoods MNCs LG and Samsung
posed challenges to homegrown companies Godrej and Videocon in the
Indian consumer durables market. But Godrej and Videocon have evolved
and reinvented themselves to face up to the challenges.

9. Division of Labour and Specialization

● International business leads to the division of labor and specialization.
● For example, Brazil specializes in coLee, Kenya in tea, Japan in automobiles
and electronics, India in textile garments, etc.

10. Economic Growth of the World at large

● Specialization, division of labour, enhancement of productivity, posing
challenges, development to meet them, innovations, and creations to meet
the competition lead to the overall economic growth of the world nations.
● International business particularly helped Asian countries like Japan, Taiwan,
Korea, Philippines, Singapore, Malaysia, and the United Arab Emirates.

11. Optimum and Proper Utilization of World Resources

● International business provides for the flow of raw materials, natural
resources, and human resources from the countries where they are in excess
supply to those countries where they are in short supply or need most.
● For example, the flow of human resources from India, and consumer goods
from the UK, France, Italy, and Germany to developing countries. This, in
turn, helps in the optimum and proper utilization of world resources.

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12. Cultural Transformation
● International business benefits are not purely economic or commercial, they
are even social and cultural.
● These days, we observe that the West is slowly tending towards the East and
vice-versa. It does mean that the good cultural factors and values of the East
are acquired by the West and vice-versa. Thus, there is a close cultural
transformation and integration.

13. Knitting the World into a Closely Interactive Traditional

Village
● International business ultimately knits the global economies, societies, and
countries into a closely interactive traditional village where one is for all and
all are for one.

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 Transfer Price
What is Transfer Price?

● Transfer price, also known as transfer cost, is the price at which related
parties transact with each other, such as during the trade of supplies or labor
between departments.
● The price at which related parties transact with each other, such as during
the trade of supplies or labour between departments, is known as Transfer
Price.
● Transfer prices may be used in transactions between a company and its
subsidiaries, or between divisions of the same company in diLerent countries.
● In terms of international business, funds can be moved out of a particular
country by setting high transfer prices for goods and services supplied to a
subsidiary in that country and by setting low transfer prices for goods and
services sourced from that subsidiary.
● For example, assume entity A and entity B are two unique segments of
Company ABC. Entity A builds and sells wheels, and entity B assembles and
sells bicycles. Assuming entity A is in a high-tax country, while entity B is in a
low-tax country. It would benefit the organization as a whole for more of
Company ABC's profits to appear in entity B's division, where the company
will pay lower taxes. In that case, Company ABC may attempt to have entity
A oLer a transfer price lower than market value to entity B when selling them
the wheels needed to build the bicycles. As explained above, entity B would
then have a lower cost of goods sold (COGS) and higher earnings, and entity
A would have reduced sales revenue and lower total earnings. Companies
will attempt to shift a major part of such economic activity to low-cost
destinations to save on taxes. This practice continues to be a major point of
discord between various multinational companies and tax authorities like the
Internal Revenue Service (IRS). The various tax authorities each have the
goal to increase taxes paid in their region, while the company has the goal to
reduce overall taxes.

25
What gains can be derived from adjusting Transfer Prices?

OR

What are the uses of Transfer Prices?

1. Firms can reduce their tax liabilities by using transfer prices to shift earnings
from a high-tax country to a low-tax country.
2. Transfer pricing can be used to move funds out of a country where a
significant currency devaluation is expected. Thus, exposure to foreign
currency risk can be reduced.
3. Transfer prices can be used to move funds from a subsidiary to the parent
company or a tax haven when financial transfers in the form of dividends are
restricted or blocked by the host country's government.
4. Transfer prices can also be used to reduce import duties when the
Ad-Valorem TariL is in force.

26
 Modes of Entering International Business

A) EXPORTING

What is Exporting?

● The act of selling goods and services produced domestically in other

countries is known as exporting.
● It is the simplest way to get started in foreign business. As a result, most
businesses begin their global expansion in this manner.
● Exports are classified into three forms:
a. Direct exports are transactions in which a company sells its products
directly to a buyer in another country. At this company, you will gain
firsthand market knowledge. For example, Baskin Robbins initially
exported its ice cream to Russia in 1990 and later opened 74 outlets
with Russian partners. Finally, in 1995, it established its ice cream
business plant in Moscow.
b. Indirect exports includes exporting products either in their original form
or in the modified form to a foreign country through another domestic
company. For example, various publishers in India including Himalaya
Publishing House sell their products i.e.. books to various exporters in
India, which in turn export these books to various foreign countries.
c. Intra-corporate transfers are selling of products by a company to
its a liated company in another country (host country). For example,
Hindustan Lever in India to Unilever in the USA. This transaction is
treated as exports in India and imports in the USA.

Exporting is appropriate in case of:

● Low trade barriers

● Home location has cost advantage
● Customization not crucial

27
 Advantages of Exporting

● Low initial investment

● Quicker customer reach / market access
● Complete control over production
● Benefit of learning for future expansion
● Permits gradual market entry
● Under direct export the exporter has control over selection of market

Disadvantages of Exporting

● High start-up costs in case of direct exporting

● The exporter has little to no control over distribution of products
● Lack of information about external environment or unknown market
● Exporting through export intermediaries increases the cost of product
● Vulnerable to TariLs and Non-tariL barriers
● Logistical complexities
● Potential conflicts with distributors

B) TURNKEY PROJECTS

What is a Turnkey Project?

● A turnkey project is a contract under which a firm agrees to fully design,

construct and equip a manufacturing/business/service and turn the project
over to the purchaser when it is ready for operation, in exchange of a
remuneration fee.
● Under this system, a foreign company is given the contract to set up
the entire plant or a project including the training of operating
personnel. After the completion of the contract, the foreign client is
handed the “key” to the plant that is ready for operation.
● The forms of remuneration includes:
○ A fixed price (firm plans to implement the project below this price)
○ Payment on a cost plus basis (i.e., total cost incurred plus profit)

28
● Under this system, a foreign company is given the contract to set up
the entire plant or a project including the training of operating
personnel. After the completion of the contract, the foreign client is
handed the “key” to the plant that is ready for operation.
● Turnkey projects are common in fertilizer, chemical, pharmaceutical,
petroleum refining, cement industries in which complicated processes
and huge investments are required.
● Companies normally approach the host country’s Governments or
International Finance Corporations, Export-Import Banks, etc. for financial
assistance as turnkey projects require huge financial resources.
● Turnkey projects may be of various types such as:
○ BOT: Built, Operate & Transfer
○ BOOT: Built, Owned, Operate & Transfer
○ BOLT: Built, Owned, Leased & Transferred

Advantages of a Turnkey Project

● Focuses firm’s resources on its own area of expertise

● Avoids all long-term operational risks
● No risk of leakage of technology or trade secrets
● Host country is benefited enormously
● High returns

Disadvantages of a Turnkey Project

● Financial risks such as cost overruns involved

● Construction risks such as delays, problems with suppliers, etc. involved

29
C) LICENSING

What is Licensing?

● In this mode of entry, the domestic manufacturer leases the right to use its
intellectual property i.e. technology, work methods, patents, copyrights,
brand names, trademarks, etc., to a manufacturer in a foreign country for a
fee.
● Here the manufacturer in the domestic country is called “licensor” and the
manufacturer in the foreign country is called “licensee”.
● In other words, an international licensing agreement allows a foreign
company (the licensee) to sell the products of a producer (the licensor) or to
use its intellectual property (such as patents, trademarks, copyrights) in
exchange for royalty fees.
● For example: Arvind Mills got licenses from reputed International brands
such as Arrow, Lee Cooper, Wrangler, etc. for the Indian market.
● The process of licensing is shown in the figure below:

● A license can be exclusive, non-exclusive or cross.

● In an exclusive license, this arrangement provides exclusive rights to
produce and market the product in a specified region.
● On the contrary, a non-exclusive license does not grant a firm sole
access to the market. a licensor can grant more companies the right
to use the Intellectual Property Right (IPR) in the same region.
30
● A cross license is reciprocal where intangible property is transferred
between two firms. For example, in the 90's there was cross licensing
between Fujitsu of Japan and Texas Instruments of the US..

Licensing is appropriate in case of:

● Well codified knowledge

● Strong property rights regime
● Location advantage

Advantages of Licensing

● Low investment on the part of the licensor

● Low financial risk to the licensor
● Licensee can escape from the risk of product failure
● Low-cost way to assess market potential
● Avoids trade barriers
● Potential for utilizing location economies
● Access to local knowledge
● Easier to respond to customer needs

Disadvantages of Licensing

● One party’s dishonesty can aLect the other

● Chances of trade secrets leakage of the licensor
● Reduce market opportunities for both: the licensor and licensee
● Lack of control over operations
● Di culty in transferring tacit knowledge
● Potential for creating a future competitor
● Limited market opportunities/profits
● Dependence on licensee
● Potential conflicts with licensee
● Decline in product quality may harm the reputation of licensor

31
D)FRANC ISING

What is Franchising?

● Franchising is a form of licensing but the franchisor can exercise more

control over the franchisee as compared to that in licensing.
● Under this, an independent organization called the franchisee operates the
business under the name of another company called the franchisor. Under
this agreement, the franchisee pays a fee to the franchisor.
● In other words, under an international franchise agreement, a company (the
franchiser) grants a foreign company (the franchisee) the right to use its
brand name and to sell its products or services.
● The franchisee is responsible for all operations but agrees to operate
according to a business model established by the franchiser. In turn, the
franchiser usually provides advertising, training, and new-product assistance.
● The process of franchising is shown in the figure below:

32
● Franchising is a natural form of global expansion for companies that operate
domestically according to a franchise model, including restaurant chains,
such as McDonald’s and Kentucky Fried Chicken, and hotel chains, such as
Holiday Inn and Best Western.
● Businesses for which franchising is said to work best have the following
characteristics:
a. Businesses with a good track record of profitability.
b. Businesses built around a unique or unusual concept.
c. Businesses with broad geographic appeal.
d. Businesses which are relatively easy to operate.
e. Businesses which are relatively inexpensive to operate.
f. Businesses which are easily duplicated.

Advantages of Franchising

● Low investment
● Low financial risk
● Franchisor understands market culture, customs and environment of the host
country
● Franchisor learns more from the experience of the franchisees
● Franchisee gets the R&D and brand name with low cost
● Franchisee has no risk of product failure
● Franchisee provides knowledge of local market
● Maintains more control than with licensing

Disadvantages of Franchising

● Can be complicated at times

● Di cult to control
● Reduced market opportunities for both franchisee and franchisor
● Responsibilities of managing product quality and product promotion for both
● Leakage of trade secrets
● Potential misunderstandings and conflicts with franchisee

33
● Possibility of creating future competitor

Di erences between Licensing vs. Franchising

BASIS LICENSING FRANC ISING

Meaning Licensing is a contractual Franchising is basically a

agreement in which one
firm grants access to its
patents, trade secrets,
and technology to another
firm in a foreign country
for a fee. This fee is called
a royalty.
Governed by Contract Law
specialized form of
licensing in which the
franchisor sells intangible
property to the franchisee
but also imposes strict
rules on the franchisee as
to how the business is to
be done.
Securities Law

Registration Not required Required

Territorial Not oLered; licensee can OLered to franchisee

Rights sell similar licenses and
products in same area

Support Not provided Provided by franchisor

G
Training
Use of Can be licensed Logo and trademark
trademark/logo retained by franchisor and
used by franchisee.

Examples Microsoft O ce McDonalds, Subway, 7-11,

Dunkin’ Donuts, etc.

Control Licensor does not have Franchisor exercises control

control over licensee over franchisee

34
E) CONTRACT MANUFACTURING

What is Contract Manufacturing?

● Because of high domestic labor costs, many companies manufacture their

products in countries where labor costs are lower. This arrangement is called
international contract manufacturing or outsourcing.
● A U.S. company might contract with a local company in a foreign country to
manufacture one of its products. It will, however, retain control of product
design and development and put its own label on the finished product.
● Contract manufacturing is quite common in the U.S. apparel business, with
most American brands being made in a number of Asian countries, including
China, Vietnam, Indonesia, and India.
● For example, Nike has contracted with a number of factories in South-East
Asia to produce its athletic footwear, and it focuses on marketing. Bata also
contracted with a number of cobblers in India to produce its footwear and
concentrate on marketing. Mega Toys - a Los Angeles based company
contracts with Chinese plants to produce toys, while Mega Toys concentrates
on marketing.
● The process of contract manufacturing is shown in the figure below:

35
 Advantages of Contract Manufacturing

● Low cost of production

● Development of medium and small scale industries
● No dilution of control

Disadvantages of Contract Manufacturing

● Di culty in maintaining quality standards

● Local manufacturers may lose business in foreign markets.

F) MANAGEMENT CONTRACT

What is a Management Contract?

● A management contract is an agreement between two companies, whereby

one company provides managerial assistance (management services),
technical expertise and specialized services to the second company of the
agreement for a certain agreed period of time in return for monetary
compensation.
● Monetary compensation may be in the form of:
○ A flat fee or
○ Percentage over sales, or
○ Performance bonus based on profitability, sales growth, production or
quality measures, etc.
● Management contracts involve not just selling a method of doing things (as
with franchising or licensing) but involves doing them. It can involve a wide
range of functions, such as technical operation of a production facility,
management of personnel, accounting, marketing services and training.
● This strategy of entering international markets is frequently used with a new
facility after a company has been seized by the national government or when
a business is experiencing di culties.
● For example, the British airport authority has a contract to manage
some airports in the US, Italy and Australia.

36
 Advantages of a Management Contract

● Focuses firm’s resources on its area of contracts

● Minimal financial exposure

Disadvantages of a Management Contract

● Potential returns limited by contract expertise

● May unintentionally transfer proprietary knowledge and techniques to the
contractee

G)FOREIGN DIRECT INVESTMENT

What is meant by FOREIGN DIRECT INVESTMENT?

Foreign Direct Investment involves a company entering an overseas market

by making a substantial investment in the share capital of a country. Some
of the modes of entry into international business using the foreign direct
investment strategy include:

● foreign acquisitions (mergers and acquisitions),

● joint ventures,
● greenfield investments (wholly owned subsidiaries) and
● brownfield investments.

This strategy is viable when the demand, size, or growth potential of the
market is su ciently large to justify the investment.

Some of the reasons for which companies opt for foreign direct investment
strategies as the mode of entry into international business can include:

● Restriction or import limits on certain goods and products.

● Manufacturing locally can avoid import duties.
● Companies can take advantage of low-cost labour, cheaper materials
etc.

37
 What is meant by FOREIGN ACQUISITIONS (MERGERS G ACQUISITIONS)?

● In Mergers & Acquisitions, a home company may merge itself with a foreign
company to enter an international business.
● Alternatively, the home company may buy a foreign company and acquire
the foreign company’s ownership and control.
● M&A oLers quick access to international manufacturing facilities and
marketing networks.

What is a Merger?

● A merger is the combination of two or more distinct entities into one, with
the desired eLect being the accumulation of assets and liabilities of the
distinct entities and several other benefits such as economies of scale, tax
benefits, quicker growth, synergy, diversification, etc.
● It is a combination of two companies into one larger company. This action
involves stock swap or cash payment to the target.
● In a merger, the acquiring company takes over the assets and liabilities of
the merged company.
● All the combining companies are dissolved, and only the new entity
continues to operate.
● Merger commonly take two forms:
○ In the first form amalgamation, two entities combine together and
form a new entity, extinguishing both the existing entities.

Hence. A + B = C, where C is an entirely new company is

AMALGAMATION or CONSOLIDATION. For example, Citigroup was
created after the consolidation of Citicorp and Travellers Insurance
Group

○ In the second form, absorption, one entity gets absorbed into another.
The latter does not lose its entity. Thus, in any type of merger, at least
one entity loses its entity.

Hence, A + B = A, where company B is merged into company A is

ABSORPTION. TOMCO Ltd. with HLL is a classic example of absorption.

38
 What is an Acquisition?

● Acquisition is a more general term, enveloping in itself a range of acquisition

transactions. It could be the acquisition of control, leading to takeover of a
company. It could be acquisition of tangible assets, intangible assets, rights
and other kinds of obligations. They could be independent transactions, and
may not lead to any kind of takeovers or mergers.
● When one company takes over another and clearly establishes itself as the
new owner, the purchase is called an acquisition.
● Acquisitions are often made as part of a company's growth strategy when it
is more beneficial to take over an existing firm's operations than it is to
expand on its own.
● Hence, Company A + Company B = Company A is a form of acquisition.
● Acquisition may be in the form of:
○ A Minority
○ A Majority
○ Full Outright Stake (Brown-field Investment)
● Tata Motors acquired Jaguar and Land Rover is an example of acquisition.

Advantages of Foreign Acquisitions

● Access to target’s local knowledge

● Control over foreign operations
● Control over own technology

Disadvantages of Foreign Acquisitions

● Uncertainty about target’s value

● Di culty in “absorbing” acquired assets
● Infeasible if local market for corporate control is underdeveloped

39
 Foreign Acquisitions are appropriate in case of:

● Developed market for corporate control

● Acquirer has high “absorptive” capacity
● High synergy

Factors determining volume of FDI / Factors infiuencing FDI

● Supply Factors
○ Production costs
○ Logistics
○ Resource availability
○ Access to technology
● Demand Factors
○ Customer access
○ Marketing advantages
○ Exploitation of competitive advantage
○ Customer mobility
● Political Factors
○ Avoidance of trade barriers
○ Economic development incentives

What are GREENFIELD INVESTMENTS (W OLLY OWNED SUBSIDIARIES)?

● A greenfield investment is a type of foreign direct investment (FDI) in which

a parent company creates a subsidiary in a diLerent country, building its
operations from the ground up. It entails the establishment of a completely
new Wholly Owned Subsidiary (WOS) from the ground up on a location
where formerly no existing facilities were present.
● In this type of investment, a company establishes a new subsidiary on
foreign soil by investing in new facilities such as o ces, factories, staL
accommodation, and distribution hubs. They are named after the notion that
a company launching a new venture from scratch starts with nothing but a
green field.

40
● A greenfield investment is a form of market entry commonly used when a
company wants to achieve the highest degree of control over its foreign
activities. It can be compared to other foreign direct investments such as the
purchase of foreign securities or the acquisition of a majority stake in a
foreign company in which the parent company exercises little to no control
over daily business operations.
● Apart from potential tax breaks or subsidies in establishing a greenfield
investment, the overarching goal of such an investment is to achieve a high
level of control over business operations and to avoid intermediary costs.

41
 Advantages of Greenffield Investments

● High level of control over business operations

● High level of quality control over the manufacturing and sale of products
and/or services
● High control over brand image and sta ng
● Economies of scale and economies of scope can be achieved in terms of
marketing, research and development, and production
● Brand image of parent company expands
● Creating jobs for the economy where the greenfield investment is taking
place

Disadvantages of Greenffield Investments

● An extremely high-risk investment – a greenfield investment is the riskiest

form of foreign direct investment
● Potentially high market entry cost (barriers to entry)
● Government regulations that may hamper foreign direct investments
● High fixed costs involved in establishing a greenfield location

Greenffield Investments are appropriate in case of:

● Lack of proper acquisition target

● In-house local expertise
● Embedded competitive advantage

42
 What are BROWNFIELD INVESTMENTS?

● A brownfield (also known as "brown-field") investment is when a company or

government entity purchases or leases existing production facilities to launch
a new production activity. This is one strategy used in foreign direct
investment.
● A brownfield investment is often undertaken when a company wants to
invest and start operations in a new country but does not want to incur the
high start-up costs associated with a greenfield investment (a greenfield
investment is a foreign direct investment where, instead of using existing
businesses in the foreign country, the investor opens their own new business
there—basically, a “from the ground up” approach).
● The underlying rationale behind a brownfield investment is to enter into a
new foreign market through businesses that already have a presence there.
● In a brownfield investment, the company either invests in existing facilities
and infrastructure through a merger and acquisition (M&A) deal or leases
existing facilities in the foreign country.

43
 Advantages of Brownffield Investments

● The ability to gain access to a new foreign market swiftly

● Lower fixed costs due to using already established facilities, infrastructure,
and network
● Lower sta ng and training costs, due to the presence of already-employed
workers at the facility
● May include existing approvals and licenses from the government or
regulators
● Depending if the facility is made to fit, whether modifications exist, or if the
facility can be utilized without major alterations and upgrades, a brownfield
investment can be a very cost-eLective option when compared to a
greenfield investment

Disadvantages of Brownffield Investments

● The facility or infrastructure may require major upgrades, which would

increase the foreign investment cost
● The facility may be old and, therefore, require high maintenance and upkeep
cost
● There may be operational ine ciencies if the facility cannot be adapted to
new production needs
● There may be scalability and expansion issues related to using already
constructed facilities
● Locational constraints
● There may be unforeseen tax and regulatory issues

Brownffield Investments are appropriate in case of:

● Availability of proper acquisition target

● Rapid globalization
● Attractive destination

44
 Di erence between Greenffield vs. Brownffield Investments

GREENFIELD INVESTMENTS BROWNFIELD INVESTMENTS

Whenever any company wants to enter a new country, it can invest

in building new facilities or it can invest in the existing facilities.

Here, investments are made in Here, investments are made in

building new facilities. existing facilities.

Greenfield investment builds new The acquisition of an existing plant

plants and manufacturing facilities
from scratch. It starts with land
acquisition.
Coca Cola, Pepsi, Hyundai, P&G,
Caterpillar, and Ford are examples
of greenfield investment.
or manufacturing unit that is idle,
unutilized, or underutilized is
referred to as brownfield
investment. It is upgraded or
modified. It is acquired through
M&A.
Daiichi Sankyo acquired Ranbaxy
in 2008, Vodafone acquired
Hutchison Essar in 2007

) JOINT VENTURE

45
 What is meant by a Joint Venture?

● A joint venture (JV) is a business arrangement in which two or more parties

agree to pool their resources for the purpose of accomplishing a specific
task. This task can be a new project or any other business activity.
● Each of the participants in a JV is responsible for profits, losses, and costs
associated with it. However, the venture is its own entity, separate from the
participants’ other business interests.
● Here are the four main reasons why companies form JVs:
1. To Leverage Resources: A JV can take advantage of the combined
resources of both companies to achieve the goal of the venture. One
company might have a well-established manufacturing process, while
the other company might have superior distribution channels.
2. To Reduce Costs: By using economies of scale, both companies in
the JV can leverage their production at a lower per-unit cost than they
would separately. This is particularly appropriate with technological
advances that are costly to implement. Other cost savings as a result
of a JV can include sharing advertising or labor costs.
3. To Combine Expertise: Two companies or parties forming a JV
might each have diLerent backgrounds, skill sets, or expertise. When
these are combined through a JV, each company can benefit from the
other’s talent.
4. To Enter Foreign Markets: Another common use of JVs is to partner
with a local business to enter a foreign market. A company that wants
to expand its distribution network to new countries can enter into a JV
agreement to supply products to a local business, thus benefiting from
an already existing distribution network. Some countries have
restrictions on foreigners entering their market, making a JV with a
local entity almost the only way to do business in the country.
● A joint venture (JV) is a business arrangement in which two or more parties
agree to pool their resources for the purpose of accomplishing a specific
task. This task can be a new project or any other business activity.
● A JV has three principal forms:
○ Minority JV
○ 50/50 JV

46
 ○ MAJORITY JV
● For example, Sony-Ericsson is a joint venture by the Japanese company Sony
Corporation and the Swedish telecommunications company Ericsson to make
mobile phones.

Advantages of Joint Ventures

● Both partners can leverage their respective expertise to grow and expand
within a chosen market
● The political risks involved in joint-venture is lower due to the presence of
the local partner, having knowledge of the local market and its business
environment
● Enables transfer of technology, intellectual properties and assets, knowledge
of the overseas market, etc. between the partnering firms

Disadvantages of Joint Ventures

● Joint ventures can face the possibility of cultural clashes within the
organization due to the diLerence in organization culture in both partnering
firms
● In the event of a dispute, dissolution of a joint venture is subject to lengthy
and complicated legal process.

Advantages G Disadvantages of Di erent Modes of Entry

MODE ADVANTAGES DISADVANTAGES

EXPORTING ● Relatively low financial ● Vulnerable to

exposure tariLs and
● Permits gradual NTBs
market entry ● Logistical
● Acquire knowledge complexities
about local market ● Potential conflicts
with distributors

47
 ● Avoid restrictions
on foreign
investment
LICENSING ● Low financial risks ● Limits market
● Low-cost way to opportunities/
assess market profits
potential ● Dependency on
● Avoid tariLs, NTBs, licensee
restrictions on ● Potential conflicts
foreign investments with licensee
● Licensee provides ● May be creating
knowledge of local future competitor
markets

FRANC ISING ● Low financial risks ● Limits market

● Low-cost way to opportunities/
assess market profits
potential ● Dependence on
● Avoid tariLs, NTBs, franchisee
restrictions on ● Potential conflicts
foreign investment with franchisee
● Maintain more control ● May be creating
than with licensing future competitor
● Franchisee provides
knowledge of local
market
CONTRACT ● Low financial risks ● Reduce control
MANUFACTURING ● Minimize (may aLect
resources devoted quality,
to manufacturing delivery
● Focus firm’s resources schedules,
on other elements of etc.)
the value chain ● Reduced learning
potential
● Potential public
relations problems,
may need to
monitor working
conditions, etc.

48
MANAGEMENT ● Focus firm’s resources ● Potential returns
CONTRACTS on its area of limited by contract
expertise
expertise
● Minimal financial
exposure

48
 ● May
unintentionally
transfer
proprietary
knowledge and
techniques to the
contractee

TURNKEY ● Focuses firm’s ● Financial risks such

PROJECTS resources on its as cost overruns
own area of involved
expertise ● Construction risks
● Avoids all long-term such as delays,
operational risks problems with
● No risk of leakage suppliers, etc.
of technology or involved
trade secrets
● Host country is
benefited enormously
● High returns
FOREIGN DIRECT ● High profit potential ● High exposure
INVESTMENTS ● Maintain control over to political risk
operations ● Vulnerable to
● Acquire knowledge of restrictions on
local market foreign
● Avoid tariLs and NIBs investment
● Greater
managerial
complexity

49
Government Intervention in International Business:
ECONOMIC G NON-ECONOMIC ARGUMENTS IN
FAVOUR OF PROTECTIONIST POLICY

T E INFANT or FLEDGLING INDUSTRY AGREEMENT

● Infant Industry Argument is an economic concept that favors the protection

of the new industries from competition on an international level until they
gain maturity and become strong enough to face competition.
● This argument clarifies those countries that impose levies on imports
because they want to protect the new industries and help them sustain
themselves.
● There are many industries in a country that are in their infancy, but have a
potential to grow. In the short-term, these industries may be too small to
gain economies of scale. Without protection, these infant industries will not
survive competition from abroad. Protection will allow such industries to
grow and become more e cient.
● Evidently, the infant industry argument is not against free trade. It advocates
protection temporarily only in the initial stages, so that all countries should
develop themselves fully and the volume of trade is maximized. Once the
industry becomes mature enough, protection should be withdrawn.
● Though its theoretical validity cannot be disputed, the infant industry
argument is opposed by economists for the following reasons:
○ It is di cult to decide correctly if an infant industry deserves
protection.
○ Once protection is given, even if it is found unsound, vested interests
are created and it becomes almost impossible to withdraw it.
○ All sorts of industries begin to claim protection once this basis of infant
industry is admitted. The result may be political corruption.
○ An infant is always an infant. Thus, it is rare for protection to be given
up once it is oLered. Protected industries tend to become negligent
and depend more and more upon state assistance.

50
● Despite these criticisms, it cannot be denied that protection can speed up
industrialisation through encouragement to newly-started industries.
● In fact, the infant industry argument has wider scope of applicability in
underdeveloped countries. As such, the infant industry argument gradually
becomes the infant country argument, when the government of an
underdeveloped country is inclined to extend the list of infant industries in
order to augment the quantity and quality of scarce resources, of creating
the infrastructure, and of increasing the basic economic and social overhead
requirements.

REVENUE ARGUMENT

● Where protectionism takes the form of a tariL, apart from reducing demand
for imports via the impact of a higher price, this will also raise revenue for
the government, like any other tax.
● It is claimed that tariLs kill two birds with one stone. They yield revenue along
with providing protection against foreign competition.
● There is, however, a counter-argument that these two objectives of tariLs
are not consistent with each other. Generally, tariLs that yield more
revenues, aLord less protection and vice-versa.
● In this regard, it must be pointed out that the revenue is not a fundamental
consideration for the imposition of tariLs. The prime goal is that of
protection, additional revenue is just a by-product. Therefore, it may be
stated that tariL can provide protection plus some amount of revenue.
● Another relevant fact in this regard is the incidence of import duties, which
may be wholly or partially borne by the domestic consumers. The revenue
yield from tariLs must be evaluated keeping in consideration the burden that
it imposes upon the people of the home country.

EMPLOYMENT ARGUMENT

● It is believed that the imposition of tariLs leads to an expansion of

employment and incomes.

51
● It is certainly tempting for a country suLering from excess capacity or
structural unemployment to rely upon protection to create additional jobs in
the import-competing industries.
● As tariLs are imposed, there is a reduction in imports. Consequently,
import-competing industries find opportunities to enlarge their sales in the
home market. That assures generation of additional employment directly in
such industries.

ANTI-DUMPING ARGUMENT

● The imposition of tariL has a strong justification when the foreign producers
have been resorting to dumping.
● This practice means sales in a foreign market at a price lower than that
received in the home market, after allowing transport and other charges
involved in transfer.
● Since dumping results in the flooding of a given market with low priced
foreign products, the import-competing firms are likely to be hit very hard.
● The protective tariL can be enforced to prohibit dumping by the foreign
producers.
● Although the members of GATT agreed to curb such practices in 1967, yet this
practice still continues.

COUNTERVAILING ARGUMENT

● Countervailing Duties (CVDs) are tariLs levied on imported goods to oLset

subsidies made to producers of these goods in the exporting country.
● CVDs are meant to level the playing field between domestic producers of a
product and foreign producers of the same product who can aLord to sell it
at a lower price because of the subsidy they receive from their government.
● CVDs are special measures meant to neutralize the negative eLects that
subsidies for the production of a good in one country have on that same
industry in another country, in which the production of that good is not
subsidized.

52
● For example, CVD is imposed on the import of Sodium Nitrite and hot
rolled/cold rolled flat stainless steel products from China.

RETALIATORY ARGUMENT

● Countries may also set tariLs as a retaliation technique if they think that a
trading partner has not played by the rules.
● For example, if France believes that the United States has allowed its wine
producers to call its domestically produced sparkling wines "Champagne" (a
name specific to the Champagne region of France) for too long, it may levy a
tariL on imported meat from the United States. If the U.S. agrees to crack
down on the improper labeling, France is likely to stop its retaliation.
Retaliation can also be employed if a trading partner goes against the
government's foreign policy objectives.
● Another example: The US imposed 25% duty on steel products and 10%
duty on aluminum products that are exported from india. This would
help the US govt to collect the revenue of $241 million in import duty. In
response, India announced higher tariLs on 29 US products including
apples, almonds and chemicals like phosphoric acid etc. worth $10.6
billion. However, it was postponed by the Indian government. till 3
November as both the countries are trying to find some solution.

PAUPER LABOUR ARGUMENT

● Protection is sometimes advocated, especially in the industrially advanced

countries, in order to safeguard the interests of labour.
● It is argued that in the absence of protection, there will be an unhealthy
competition faced by countries having a dear labour economy from those
having cheap labour.
● The product of high wage labour of these countries will be undersold by the
“pauper labour’ countries.

53
● Thus, in the advanced countries where the people enjoy high real wages, it
is often felt that their standard of living will be undermined if cheap goods
are imported from low wage countries.
● Hence, to protect a country’s high standard of living and maintain its high
wages, tariLs become essential to rule out competition from “pauper labour”
countries.
● This argument, however, overlooks two points:
○ Labour is not the only factor of production. Dear labour does not
necessarily mean higher cost of production. When capital-intensive
techniques are adopted, productivity is very high, the average cost
may be reduced considerably. Labour-intensive techniques, on the
other hand, adopted by the pauper labour country, may have low
productivity and, as such, high costs of production.
○ Industrially advanced countries pay high wages not only because
labour is scarce, but because it is more e cient and productive. Thus,
high wages are no bar to low cost of production. Cheap labour does
not necessarily imply low cost of production. For had the pauper
labour argument been correct, low-wage nations of Asia and Africa
should have swept away their competitors from the western countries
in the world market.

BALANCE OF PAYMENTS ARGUMENT

● When a country is faced with balance of payments deficits and the payments
due to import goods and services are an excess of receipts from abroad, the
protective tariL may assist in removing the balance of payments deficits.
● TariLs can restrict imports from abroad and allow the growth of import-
substitution industries within the home country. This measure may become
unavoidable, if the deficit country does not possess su cient reserves of gold
or foreign exchange to adjust the payments deficit.
● The neutralization of payments deficit through protective tariLs is considered
more expedient than even devaluation for certain reasons.

54
 ○ Firstly, the devaluation is likely to have more widespread eLects than
tariLs, which are applicable to a specific commodity or group of
commodities.
○ Secondly, devaluation is not likely to have the desired impact on
imports, if the demand for imports in the home country is less elastic,
so that a rise in the import price causes little reduction in payments for
imports.

NATIONAL PRIDE ARGUMENT

● In a particular country, there may be certain classes of population or

occupations, which are very vulnerable to foreign competition. For instance,
artisans having special skills cannot produce goods at costs low enough to
face competition from machine-made imported products. Their interests
should be protected through tariLs for the sake of preserving social ethos
and national pride. Similarly agriculture is a depressed sector in developing
countries.
● The farm producers, faced with competition from abroad, have to be
protected, otherwise the production process in that sector is likely to get
seriously disorganized. In this regard, Haberler remarked, “Agriculture is the
well-spring from which the human race is physically and mentally
regenerated.”
● Therefore, agriculture should be protected from foreign competition at all
costs to preserve the special ethos of the nation.

NATIONAL DEFENSE ARGUMENT

● The policy of protection is supported on the basis of the argument that a

country must be self-su cient in the matters of defense production. It is
considered risky and dangerous to depend on the foreign countries for the
supply of war materials.
● Given the importance of maintaining independence from other countries in
this critical area, it is believed that industries producing defense materials

55
 should be granted protection regardless of cost. But the military
requirements in modern times are so extensive that a developing country is
not likely to achieve self-su ciency in defense production even if it stretches
its available resources to the fullest extent.
● As a result, it is more practical for poor countries to strive for maximum
possible self-su ciency in defense rather than the unattainable goal of
complete independence from defense imports. Strategy-wise, it is
appropriate to procure the latest and more eLective defense materials than
producing obsolete and less eLective materials at home through ine cient
sheltered industries. But the security of a nation is of such paramount
importance that no economic argument can cut any ice.

56
 TRADE BARRIERS
What are Trade Barriers?

● Trade Barriers are defined as government-induced restrictions on

international trade. They are imposed for various reasons, primarily to
protect the domestic market and to earn revenue.
● Trade barriers are thus essentially interventions in markets that happen to
operate internationally.

Types of Trade Barriers

Tari Barriers

● A TariL Barrier is imposed by the government of the country importing

goods. It has two-fold objectives, one to increase the government revenue

57
 and two, to raise the cost of foreign goods so that domestic companies can
compete with the foreign goods.
● Types of TariL Barriers include Specific and Ad Valorem tariLs.

Speciffic Tari s

A fixed fee levied on one unit of an imported good is referred to as a specific

tariL. This tariL can vary according to the type of goods imported. For example, a
country could levy a $15 tariL on each pair of shoes imported, but levy a $300 tariL on
each computer imported.

Ad Valorem Tari s

The phrase "ad valorem" is Latin for "according to value," and this type of tariL is
levied on a good based on a percentage of that good's value. An example of an Ad
Valorem tariL would be a 15% tariL levied by Japan on U.S. automobiles. The 15%
is a price increase on the value of the automobile, so a $10,000 vehicle now
costs
$11,500 to Japanese consumers. This price increase not only protects domestic
producers from being undercut but also keeps prices artificially high for Japanese
car shoppers.

Non-Tari Barriers (NTBs)

● Non-tariL barriers are defined as non-tax measures adopted by a nation's

government to limit imports from foreign countries. These can be in the form
of laws, policies, practices, conditions, requirements, etc. and are specified
by the government to restrict imports.

Quotas

Countries often issue quotas for importing and exporting both goods and services.
With quotas, countries agree on specified limits for products and services allowed

58
for importation into their country. In most cases, there are no restrictions on
importing these goods and services until a country reaches its quota, which it can
set for a specific timeframe. Additionally, quotas are often used in international
trade licensing agreements.

Voluntary Export Restraints (VER)

This type of trade barrier is "voluntary" in that it is created by the exporting country
rather than the importing one. A voluntary export restraint (VER) is usually levied at
the behest of the importing country and could be accompanied by a reciprocal VER.

For example, Brazil could place a VER on the exportation of sugar to Canada, based
on a request by Canada. Canada could then place a VER on the exportation of coal
to Brazil. This increases the price of both coal and sugar but protects the domestic
industries.

Local Content Requirement

Instead of placing a quota on the number of goods that can be imported, the
government can require that a certain percentage of a good be made domestically.
The restriction can be a percentage of the good itself or a percentage of the value
of the good.

For example, a restriction on the import of computers might say that 25% of the
pieces used to make the computer are made domestically, or that 15% of the value
of the goods must come from domestically produced components.

Import Licenses

A license is granted to a business by the government and allows the business to

import a certain type of good into the country. For example, there could be a
restriction on imported cheese, and licenses would be granted to certain companies
allowing them to act as importers. This creates a restriction on competition and
increases the prices faced by consumers.

59
Embargoes

Embargoes are when a country—or several countries—o cially ban the trade of
specified goods and services with another country. Governments may take this
measure to support their specific political or economic goals.

Sanctions

Countries impose sanctions on other countries to limit their trade activity. Sanctions
can include increased administrative actions–or additional customs and trade
procedures–that slow or limit a country’s ability to trade.

60
 EASE OF DOING BUSINESS (EoDB) INDEX
The Ease of Doing Business (EoDB) index is a ranking system established by the
World Bank Group. In the EODB index, ‘higher rankings’ (a lower numerical value)
indicate better, usually simpler, regulations for businesses and stronger protections
of property rights.

The research presents data for 190 economies and aggregates information from 10
areas of business regulation:

1. Starting a Business
2. Dealing with Construction Permits
3. Getting Electricity
4. Registering Property
5. Getting Credit
6. Protecting Minority Investors
7. Paying Taxes
8. Trading across Borders
9. Enforcing Contracts
10. Resolving Insolvency

Rankings and weights on each of the mentioned parameters are used to develop an
overall EoDB ranking. A high EoDB ranking means the regulatory environment is
more conducive for starting and operating businesses.

61
 RISK G EXPOSURE
What is Risk?

● A risk refers to an unanticipated event with adverse financial

consequences by way of loss or reduced earnings. risk represents
uncertainty or unpredictability. it may generate loss or profit.
● Risk management is the way to reduce uncertainty.
● However, there is a link between risk and returns. profit is the reward
for risk. so, risk management is not to avoid or eliminate risk totally. it
deliberately accepts risk the extent to which it has the capacity and
the returns associated with that much of risk is consistent with its
profitability objective

What is Exposure?

● Exposure is the gross amount of the transaction which is subject to

risk. it is in terms of foreign currency e.g. if an investor who has
invested $1,00,000 in the US.
● This entire amount is subject to risk as a result of a change in the
exchange rate. Hence, exposure is $1,00,000.

Di erence between Risk G Exposure

RISK EXPOSURE

Risk is the chance of any financial loss Exposure refers to the entire amount
or gain due to future uncertainty. of a transaction on which a loss could
be incurred.

Risk is expressed in terms of domestic Exposure is determined in terms of

currency. foreign currency.

Risk always needs to be minimized. Minimization of exposure means limiting

the growth of business.

62
 Foreign Exchange Risks G its Types

What is meant by Foreign Exchange?

● Foreign exchange, or forex, is the conversion of one country's currency into

another. In a free economy, a country's currency is valued according to the
laws of supply and demand. In other words, a currency's value can be
pegged to another country's currency, such as the U.S. dollar, or even to a
basket of currencies. A country's currency value may also be set by the
country's government.
● However, many countries float their currencies freely against those of other
countries, which keeps them in constant fluctuation.

What is meant by Foreign Exchange Risk?

● Foreign exchange risk refers to the losses that an international financial

transaction may incur due to currency fluctuations.
● Also known as currency risk, FX risk and exchange-rate risk, it describes the
possibility that an investment’s value may decrease due to changes in the
relative value of the involved currencies. Investors may experience
jurisdiction risk in the form of foreign exchange risk.

Types of Foreign Exchange Risks

A) TRANSACTION RISK
● This is the risk that a company faces when it's buying a product from a
company located in another country.
● The price of the product will be denominated in the selling company's
currency.

63
● If the selling company's currency were to appreciate versus the buying
company's currency then the company doing the buying will have to make
a larger payment in its base currency to meet the contracted price.
● Transaction risk is directly related to the delay between committing to a deal
and actually making payment. The longer the time period between the
agreement to make payment and the payment actually occurring, the
greater the risk of the value of a currency going down, so that a company
may end up paying more than what was initially intended.
● For example, a Canadian company with operations in China is looking to
transfer CNY600 in earnings to its Canadian account. If the exchange rate at
the time of the transaction was 1 CAD for 6 CNY, and the rate subsequently
falls to 1 CAD for 7 CNY before settlement, an expected receipt of CAD100
(CNY600/6) instead of CAD86 (CNY600/7).

B) TRANSLATION RISK
● A parent company owning a subsidiary in another country could face losses
when the subsidiary's financial statements, which will be denominated in that

64
 country's currency, have to be translated back to the parent company's
currency.
● Where a business organization has a foreign subsidiary whose reporting
currency is other than the reporting currency of the parent company, then
for consolidation purposes, the subsidiary balance sheet items are converted
into the parent company’s reporting currency based on the prevailing
accounting standards. The risk of movement in the consolidated financial
position and earnings resulting from exchange rates is termed as Translation
Risk.
● Translation risk is higher when a company holds a greater portion of its
assets, liabilities, or equities in a foreign currency.
● For example, a parent company that reports in Canadian dollars but oversees
a subsidiary based in China faces translation risk, as the subsidiary’s financial
performance, which is in Chinese yuan, is translated into Canadian dollars for
reporting purposes.

C) ECONOMIC RISK
● Economic risk occurs when a company’s market value is shifted due to
currency fluctuations.
● This can aLect the company’s market share when measured by its
competitors and the firm’s future cash flow.
● There is also the possibility that macroeconomic conditions will influence an
investment in a foreign country, such as exchange rates, interest rates,
government regulations and political stability within that specific country.

65
● When a project is being financed, a company’s operating costs, debt
obligations, and the prediction of economic circumstances can be calculated
in order to produce adequate revenue that covers these risks, in other
words, this is known as risk management and can lead to the calculation of
profit margins.
● For example, an Australian furniture company that sells locally will face
economic risk from furniture importers, especially if the Australian currency
unexpectedly strengthens.

D) CONTINGENT RISK
● A firm has contingent risk when bidding for foreign projects, negotiating
other contracts, or handling direct foreign investments.
● Such a risk arises from the potential of a firm to suddenly face a
transnational or economic foreign-exchange risk contingent on the outcome
of some contract or negotiation.
● For example, a firm could be waiting for a project bid to be accepted by a
foreign business or government that, if accepted, would result in an
immediate receivable. While waiting, the firm faces a contingent risk from
the uncertainty as to whether or not that receivable will accrue.

66
E) COMPETITIVE RISK
● This type of risk arises when the international business exchange rate
changes in favour of the competitor.
● As a result, the competitor benefits.
● For example, an Indian firm and a Japanese firm supply the same
item to the USA. Both these firms oLer the item at the price of $1.
However, the exchange rate between US dollar and Japanese yen
changes from $1 = 100 yen to $1 = 125 yen, the Japanese firm would
reduce the price from $1 to $0.8 without reducing its revenue in terms
of yen. It would be a disadvantage for the Indian firm.

67
 Country Risk
What is meant by Country Risk?

● Country risk refers to the uncertainty associated with investing in a particular

country, and more specifically the degree to which that uncertainty could
lead to losses for investors.
● This uncertainty can come from any number of factors including political,
economic, exchange-rate, or technological influences.
● In particular, country risk denotes the risk that a foreign government will
default on its bonds or other financial commitments increasing transfer risk.
● In a broader sense, country risk is the degree to which political and
economic unrest aLect the securities of issuers doing business in a particular
country.
● Tensions between countries can have tremendous implications on
international business operations.
● Friction between nations arise due to a variety of reasons:
○ there may be long-standing territorial disputes e.g. Arab - Israel
○ diLerences in national ideology, for example: cold war between
liberal capitalist western bloc and the authoritarian communist
eastern bloc
○ cultural or historical diLerences result in mistrust. For example, the
suspicion between China and Japan was caused by Japanese
imperialism of 1930’s and 1940’s
● Country Risks also arise due to the following reasons:
○ Domestic unrest
○ Terrorism
○ Ine cient legal system
○ Corruption, etc.

68
 PESTLE Analysis
● PESTLE Analysis is a tool or a strategic framework used to identify potential
macro (external) factors that impact a business/industry and its operations.
● It is a mnemonic which stands for:
○ P - Political
○ E - Economic
○ S - Social
○ T - Technological
○ L - Legal
○ E - Environmental

Political Factors

● Defines the extent to which a Government impacts a business/industry

● Various factors include: Tax policies, fiscal policies, trade tariLs, etc.

Economic Factors

● Defines how a change in economy aLects the operations of an

organization/industry
● Various factors include: Interest rates, inflation rates, forex rates, etc.

Social Factors

● Considers social elements that aLect a business/industry

● Factors include: cultural trends, lifestyle changes, population analytics, etc.

69
Technological Factors

● Defines how technological innovations may impact a business/ industry,

either positively or negatively
● Factors include: Automation, RnD, Cybersecurity, etc.

Legal Factors

● This factor has both external and internal considerations.

● A business may change its strategies/ operating procedures due to the laws
of the country it is operating within and an organization may also want to
maintain internal policies for themselves.
● Organizations must understand what is legal and permissible in the
territories in which they operate.
● Factors include: Consumer laws, safety standards, labour laws, etc.

Environmental Factors

● Defines how businesses/industries are impacted based on the surrounding

environment that they operate in
● Are applicable for specific industries such as tourism, agriculture, farming, etc.
● Factors include: Weather, climate, geographical location, carbon footprint, etc.

70
 Political Risk

What is meant by a Political Risk?

● Political risk is the risk an investment's returns could suLer as a result of

political changes or instability in a country. Instability aLecting
investment returns could stem from a change in government, legislative
bodies, other foreign policymakers or military control.
● Political risk is also known as "geopolitical risk," and becomes more of a
factor as the time horizon of investment gets longer. They are considered
a type of jurisdiction risk.

TOTALITARIANISM DEMOCRACY

The political system in which power is The political system in which power is
vested in the hands of a single person is vested in the hands of the people in
known as totalitarianism. general, it is called democracy.

Types of Totalitarianism

Communist Totalitarianism

Political power is concentrated in the hands of a single person, a group, or a party.

People are also deprived of economic freedom. All means of production are
forcibly taken over by the ruler. In 1917 in Russia, in 1949 in China this form of
totalitarianism came into existence. Similarly, countries like Laos, Vietnam,
North Korea, and Cuba fall in this category. However, slowly, its political power
is waning.

71
Right-wing Totalitarianism

Right–wing totalitarianism holds political power, but allows economic freedom

to people. During 1930–1940, in Germany and Italy, we found such a system.
Again, until the 1980s, there were right-wing dictators in Latin America and Asian
countries such as Thailand, Indonesia, South Korea, Singapore, and the Philippines.

Theocratic

A religious leader who rules over a country according to his religion, such as in Iran
or Afghanistan, is known as a theocratic totalitarian.

Tribal

This type of totalitarian is the head of a tribe, and by virtue of being the
strongest leader of the tribe, he becomes a totalitarian. Such totalitarians were
in African states like Kenya, Tanzania etc.

Secular

A secular type of leader is in power because of the backing of the military.

Di erent types of Political Risks

Conffiscation

Confiscation refers to a situation in which a government forfeits a foreign

investment. It means that the government does not pay any compensation for
taking over the foreign investment. For example, the Chinese government’s seizure
of US property in 1949 when the Chinese communist party took power.

72
Expropriation

Expropriation refers to a situation under which a government takes over a foreign

investment by paying some compensation. This compensation may not be equal to
the market value of foreign investment. It implies that compensation is paid for
taking over the foreign investment. For example, the Indian Government
nationalized commercial banks with compensation in July 1969.

Political Boycott

A political boycott uses economic coercion to force companies against operating in

certain regions due to various factors such as rivalry against the host country,
political instability in the host country, etc.

For example, after 1955, Arab countries boycotted firms against having branches in
Israel.

Nationalization

Nationalization refers to a situation under which a government takes over the

ownership of the entire industry. It means that nationalization aLects the entire
industry rather than a single company. Nationalization involves the transfer of
ownership of a business to a government agency. The process of nationalization
may or may not require any compensation to be paid to previous owners of the
business. It means that compensation may be paid or may not be paid to the
previous owners. For example, Burma nationalized its entire foreign trade. Poland
and Czech communists nationalized 100% of their economy.

Domestication

Domestication refers to a situation under which a government gradually restricts

the freedom of operation of a foreign business firm. The purpose of domestication
is to bring the activities of a foreign business firm in line with national interests. It
implies

73
that domestication is a mild form of government intervention. Domestication is a
gradual encroachment of the freedom of a business firm. Domestication can be
either firm or government initiated or predetermined. The government-initiated
domestication is quite risky and is treated on par with expropriation. For example,
Indian Leaf Tobacco Development Company Ltd., in India, Pepsi, General Motors
and Barclays Bank in South Africa.

Instability Risk

These risks are due to social, political, religious unrest in the host country like the
recent coup in Fiji and problems due to Muslim rebels in the Philippines.

Operation Risk

● These risks are due to the imposition of controls on the foreign business
operation (like production levels, marketing, finance and human resource) by
the host Government.

Measures to avoid or minimize Political risks

● Avoiding investment
● Adaptation
● Assistance to host country
● Stimulation of local economy
● Political neutrality
● Lobbying
● Limiting responsibility of local personnel
● Threat
● Insurance
● Sharing ownership
● Terrorism consultants
● Dispersing production among many countries
● Borrowing in host country
● Minimum fixed investment and depending on leasing, outside suppliers

74
 GDP, Infiation
What is meant by
GDP?

● Gross domestic product (GDP) is the total monetary or market value of all
the finished goods and services produced within a country’s borders in a
specific time period. As a broad measure of overall domestic production, it
functions as a comprehensive scorecard of a given country’s economic
health.
● Though GDP is typically calculated on an annual basis, it is sometimes
calculated on a quarterly basis as well.
● In the U.S., for example, the government releases an annualized GDP estimate
for each fiscal quarter and also for the calendar year. The individual data sets
included in this report are given in real terms, so the data is adjusted for price
changes and is, therefore, net of inflation.

75
What is meant by Infiation?

● Inflation is a rise in prices, which can be translated as the decline

of purchasing power over time.
● The rate at which purchasing power drops can be reflected in the average
price increase of a basket of selected goods and services over some period
of time.
● The rise in prices, which is often expressed as a percentage, means that a
unit of currency eLectively buys less than it did in prior periods.
● Inflation can be contrasted with deflation, which occurs when prices
decline and purchasing power increases.

76
 Porter’s Diamond Theory
What is the theory about?

● Porter Diamond is a model that emphasizes the competitive advantage of an

industry or business that makes it work better than other competitors in a
region or country.
● Also known as the Porter Diamond Theory of National Advantage, the model
explains why certain industries thrive in particular nations.
● Companies use this model to analyze the competitive environment in foreign
markets before entering them.

● The model outlines factors that determine the relative strength of entities,
which drives them to become better than the rest.
● Besides some of the attributes that are available and identifiable in the
environment itself, businesses have the liberty to create their own strengths
to empower their presence and become an entity of national importance.

77
Understanding the theory

● The Porter Diamond suggests that countries can create new factor
advantages for themselves, such as a strong technology industry, skilled
labor, and government support of a country's economy.
● Most traditional theories of global economics diLer by mentioning elements,
or factors, that a country or region inherently possesses, such as land,
location, natural resources, labor, and population size as the primary
determinants in a country's competitive economic advantage.
● Another application of the Porter Diamond is in corporate strategy, to use as
a framework to analyze the relative merits of investing and operating in
various national markets.

Porter’s Diamond Theory Framework

78
● The unique Porter Diamond framework consists of four attributes/factors. If
all these four factors are favorable, companies will innovate and stay
competitive. This domestic competitiveness prepares them to excel in
international markets as well. Besides, the role of government and chance or
unpredictable external events also influence competitive advantage:

A) Firm Strategy, Structure G Rivalry

This aspect of the theory focuses on the competition in the native markets
that businesses have to excel against. The region in which the firms operate
determines the structure and strategies to be framed to compete in the
home market.

As a result, the strategies diLer from nation to nation. For example, Italy,
known for its fashionable clothing, will definitely have a diLerent approach
than Greece, which emphasizes tourism and related facilities.

In addition, rivalry plays an important role in driving every entity operating in

the same sector to improve, innovate, and perform better than each other.
Therefore, the businesses have to be consistent. This makes them
trustworthy and reliable national companies around the globe in the long
run.

B) Demand conditions

The demand for a particular product or service also plays an essential factor.
Porter Diamond model’s third attribute indicates how the increase in demand
for an item among local customer boosts the growth of a brand or business.

When customers want a product, businesses strive to improve the quality

and live up to their expectations. As a result, they become competent
enough to acquire the number one position on the global platform.

79
 C) Related and Supporting Industries

Another factor that influences business growth is the complementary services

that lend support to companies of national advantage. For example, the
tourism services in Greece would never be the best if the accommodation
facilities and food units over there did not support the industry.

D) Factor conditions

Factor conditions include resources available to businesses that help them

perform well. The availability of resources could be influenced by the skillset,
strategies, infrastructure, or nature. For example, Italy performs well
because of its ability to choose better fabrics; Greece’s tourism market is
influenced by the weather, which might keep changing.

The natural resources constitute the basic factors, while the infrastructure,
skilled experts, and capital form the advanced factors. A nation develops a
real competitive advantage with the development of advanced elements. In
contrast, the contribution of basic factors to regional advantage is
comparatively lower.

Uses of the Porter Diamond Theory

● It helps businesses understand the structure and techniques of their

rival companies, allowing them to frame their strategies accordingly.
● Businesses use regional advantages to capture international markets.
● They value suppliers as they understand the importance of their support.
● Firms of national importance get to know the power of buyers in
enhancing business growth.
● The model teaches market players to innovate, remain updated, and put in
their best eLorts to fight the fear of being substituted.

80
Purchasing Power Parity (PPP)

81
What is meant by PPP?

● Purchase power parity (PPP) is an economic theory that allows for the
comparison of the purchasing power of various world currencies to one
another. It is the theoretical exchange rate at which you can buy the same
amount of goods and services with another currency.
● According to this concept, two currencies are in equilibrium—known as the
currencies being at par—when a basket of goods is priced the same in both
countries, taking into account the exchange rates.
● The purchasing power parity calculation tells you how much things would
cost if all countries used the same currency. In other words, it is the rate at
which one currency would need to be exchanged to have the same
purchasing power as another currency.
● Purchasing power parity is based on an economic theory that states the
prices of goods and services should equalize among countries over time.

Calculating PPP

The relative version of PPP is calculated with the following formula:

𝑃1
S 𝑃2
=

Where:

S = Exchange rate of currency 1 to currency 2

P1 = Cost of good X in currency 1

P2 = Cost of good X in currency 2

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SOCIAL STRUCTURE

RELIGION EDUCATION

CULTURE

AESTHETICS LANGUAGE

SOCIAL STRUCTURE

THERE ARE TWO DIMENSIONS:

A] INDIVIDUALISM vs. COLLECTIVISM

B] MOBILITY

A] INDIVIDUALISM EMPHASISES INDIVIDUAL , HIS ACHIEVEMENTS etc.

COLLECTIVISM EMPHASISES TEAM WORK, LOYALTY.

B] MOBILITY REFERS TO THE DEGREE OF FLEXIBILITY WITHIN SOCIAL

GROUPS OR STRATA SUCH AS CASTES, CLASSES etc.

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IN AMERICA, EXTREME EMPHASIS ON INDIVIDUALISM AND SOCIAL

MOBILITY, THERE IS LIMITED IMPACT OF CLASS BACKGROUND ON
BUSINESS.

IN BRITAIN, THERE IS LACK OF CLASS MOBILITY. IT RESULTS INTO

CLASS CONSCIOUSNESS. IT CREATES HOSTILITY BETWEEN UPPER - MIDDLE
CLASS MANAGERS AND THE WORKING-CLASS EMPLOYEES.
BRITISH COMPANIES FACED RELATIVELY A HIGH LEVEL OF INDUSTRIAL
DISPUTES.

EDUCATION

➢THE AVAILABILITY OF SKILLED & EDUCATED WORKERS IS A MAJOR

DETERMINANT OF ECONOMIC PROGRESS OF A COUNTRY.

➢ SOUND EDUCATION BASE WAS THE REASON BEHIND JAPAN’S

POST – WAR PROGRESS.

➢EVEN A NATION WITH EDUCATED HUMAN RESOURCE IS A

DESIRED DESTINATION FOR A BUSINESS UNIT.

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LANGUAGE

THERE ARE MORE THAN SIXTY KINDS OF ‘WHITE’ IN ARCTIC.

IN FINLAND, THERE ARE DIFFERENT WORDS FOR SNOW DEPENDING ON WHETHER IT IS

SOFTLY FALLING SNOW, HARD SNOW, SOFT SNOW, WATERY SNOW, RAINY SNOW.

IN INDIA, THERE ARE MORE THAN 200 VARIETIES OF MANGO. IN FRANCE, THERE ARE MORE
THAN 200 KINDS OF CHEESE.

EUROPEAN COMMUNITY HAD TO TAKE A COMPLEX DECISION ABOUT DEFINITION OF

CHOCOLATE BECAUSE TRADITION OF COCOA-BASED CHOCOLATES CO-EXISTED WITH CHOCOLATES
MADE OUT OF PEANUT BUTTER.

LANGUAGE ONE SPEAKS REFLECTS ONE’S CULTURE. PROVERBS

THAT ARE USED IN A LANGUAGE ALSO TELL US ABOUT THE CULTURE.

JAPANESE PROVERBS:

- THE NAIL WHICH STICKS OUT WILL GET HAMMERED.

- THE BAMBOO THAT BENDS IS STRONGER THAN THE OAK THAT RESISTS.

CHINESE PROVERB:

- ONE BEAM, NO MATTER HOW BIG, CAN NOT SUPPORT AN ENTIRE

HOUSE ON ITS OWN.

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LANGUAGE CAN BE LOW-CONTEXT OR HIGH-CONTEXT.

A LOW-CONTEXT LANGUAGE IS ONE IN WHICH PEOPLE STATE THINGS DIRECTLY AND EXPLICITLY.

THE WORDS PROVIDE MEANINGS.

MOST NORTH EUROPEAN LANGUAGES INCLUDING GERMAN ARE LOW-CONTEXT LANGUAGES.

A HIGH-CONTEXT LANGUAGE COMMUNICATES MULTIPLE MEANINGS. ONE NEEDS TO

INTERPRET THE SITUATION IN ORDER TO UNDERSTAND THE MEANING. ASIAN AND ARABIC

LANGUAGES ARE HIGH-CONTEXT LANGUAGES.

THE LANGUAGE USED FOR COMMUNICATION HAS TWO PARTS:

(A) SPOKEN PART.
(B) THE SILENT OR UNSPOKEN PART.
COMMUNICATION THROUGH VOCAL SOUNDS OR WRITTEN SYMBOLS
FORMS THE SPOKEN PART.
DIFFERENT LANGUAGES DO NOT LITERALLY TRASLATE FROM ONE TO
ANOTHER.
PEPSI COLA’S “COME ALIVE WITH PEPSI” CAMPAIGN, WHEN IT
WAS TRANSLATED FOR THE TAIWANESE MARKET, CONVEYED TO THE
CONSUMERS THAT “PEPSI BRINGS YOUR ANCESTORS BACK FROM THE
GRAVE”

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UNSPOKEN LANGUAGE REFERS TO THE NUMEROUS NON-VERBAL

COMMUNICATION MECHANISM THAT PEOPLE USE TO SEND MESSAGE
ACROSS. FOR EX. GESTURES, BODY LANGUAGE, EYE CONTACT etc.

KINESICS: IT IS THE BODY LANGUAGE.

‘THE THUMBS UP’ IS CONSIDERED AS A SIGN OF GOOD LUCK IN THE

WEST, BUT SUCH A GESTURE IS CONSIDERED TO BE OFFENSIVE IN MOST
ARAB COUNTRIES

THE AMOUNT OF KINESICS VARIES FROM CULTURE TO CULTURE.

ASIAN CULTURES ARE LESS INCLINED TO SHOW KINESICS WHILE
SOUTHERN EUROPEANS USE IT FAR MORE.

PROXIMICS: IT IS THE PHYSICAL DISTANCE THAT PEOPLE

MAINTAIN FROM ONE ANOTHER.

EYE CONTACT: THE USE OF EYES IN THE PROCESS OF

COMMUNICATION IS CALLED OCULESICS. IN MOST
WESTERN COUNTRIES, THE USE OF DIRECT EYE
CONTACT SYMBOLIZES ATTENTIVE LISTENING, BUT IN
ASIAN CULTURE, EXTENDED EYE CONTACT IS
CONSIDERED AGGRESSIVE.

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AESTHETICS

AESTHETICS INCLUDES THE ART, DRAMA, MUSIC AND

ARCHITECTURE PRESENT IN A SOCIETY. THIS ASPECT USUALLY
CAPTURES THE IDEAS AND EXPRESSIONS THAT ARE INHERANT IN A
CULTURE. FOR EXAMPLE, COLOUR CARRY DIFFERENT MEANINGS
ACROSS THE GLOBE. IN WESTERN SOCIETIES, WEDDING GOWNS ARE
USUALLY WHITE SYMBOLIZING PURITY, BUT IN ASIA WHITE
SYMBOLIZES SORROW. IN INDIA WIDOWS IN SOME STATES WEAR
BLACK AND IN SOME OTHER STATES THEY WEAR WHITE.

AESTHETIC VALUES SHOWN STYLE, COLOUR, SYNBOLS, EMOTIONS

COULD MEAN A LOT TO A BUSINESS MANAGER DESIGNING A
PRODUCT TO SUIT THE LOCAL CULTURAL SETUP.

AN MNC IN THE FOOD AND BEVERAGE INDUSTRY, LAUNCHED A PRODUCT IN NEPAL WITH
THE NAME ‘NAULO’ (WHICH MEANS ‘NEW’ IN NEPAL. CONSUMERS IN NEPAL WERE VERY
ANXIOUS ABOUT NAULO, BUT WHEN THEY SAW RED PACKAGING, IT REMINDED THEM OF
BLOOD & THE PRODUCT FAILED MISERABLY.

BUT WHEN THE SAME PRODUCT WAS RELAUNCHED IN BLUE AND WHITE PACKAGING WITH
THE PICTURE OF MOUNT EVEREST, RENAMED ‘SHIKHAR’, IT WAS A ROARING SUCCESS.

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RELIGION

CHRISTIANITY: PROTESTANT IS A BRANCH OF CHRISTIANITY. PROTESTANTISM

LED TO THE EMERGENCE OF CAPITALISM AS ITS ETHICS
EMPHASISES THE IMPORTANCE OF HARD WORK &
ACCUMULATION OF WEALTH.

ISLAM: ISLAM ADVOCATES FREE ENTERPRISE AND EARNING LEGITIMATE

PROFIT THROUGH TRADE & COMMERCE.

ISLAM IS AGAINST CHARGING INTEREST.

HINDUISM: HINDUISM DOES NOT FAVOUR PURSUIT OF MATERIAL

ACHIEVEMENTS. IT EMPHASISES ‘KARMA’ i.e. ONE’S DUTY.

CONFUCIANISM: CONFUCIAN ETHICS HAVE GREAT INFLUENCE ON THE

CULTURE OF CHINA, JAPAN, SOUTH KOREA & TAIWAN.

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CONFUCIAN SYSTEM OF ETHICS STRESSES THREE VALUES;

1] LOYALTY
2] RECIPROCAL OBLIGATIONS
3] HONESTY
THESE VALUES BIND EMPLOYEES TO THEIR ORGANISATIONS.
THE CONCEPT LIKE ‘GUANXY’ PLAYS VERY IMPORTANT ROLE IN
CHINA.

- A NOD MEANS “NO” IN BULGARIA & SHAKING HEAD SIDE-TO-SIDE

MEANS “YES”

- NO. 7 IS CONSIDERED BAD LUCK IN KENYA AND GOOD LUCK IN THE

CZECH REPUBLIC.

- PEPSODENT TOOTHPASTE WAS UNSUCCESSFUL IN SOUTHEAST ASIA,

BECAUSE IT PROMISED WHITE TEETH TO A CULTURE WHERE BLACK
OR YELLOW TEETH ARE SYMBOLS OF PRESTIGE.

- IN HONG KONG, KOREA & TAIWAN, TRIANGULAR SHAPES HAVE - VE

CONNOTATION.

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- AMERICANS SMILE AS THEY SHAKE HANDS. GERMANS CONSIDER IT

OVERLY FAMILIAR FROM NEW BUSINESS ACQUINTANCES.

- ITALIANS WAVE GOODBYE WITH PALM UP & FINGERS MOVING

BACK & FORTH; BUT IN ASIA IT IS INTERPRETED AS “COME HERE”

WHY CULTURE MATTERS IN INTERNATIONAL BUSINESS

▪ DEVELOPING PRODUCTS & SERVICES

▪ INTERACTING WITH BUSINESS PARTNER

▪ DEALING WITH EMPLOYEES FROM HOST COUNTRY

▪ NEGOTIATING INTERNATIONAL BUSINESS VENTURES

▪ INTERACTING WITH CURRENT / POTENTIAL CUSTOMERS

▪ PREPARING ADVERTISING AND PROMOTION

▪ PREPARING FOR OVERSEAS TRADE FAIRS AND EXHIBITIONS

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In August 2006 Wal-Mart, the world’s largest retailer, announced that it was exiting operations in

Germany. People living in USA who observed Wal-Mart’s business operations and shopped there, were
surprised as the news came in. In fact, it was Wal-Mart’s cultural insensitivity that led to its failure in
Germany.

The fundamental problem with Wal-Mart’s global expansion plans lies with its core advantage – a

fully owned distribution network, standardized store layouts, warm and welcoming employees who

greet customers. These factors enabled Wal-Mart to succeed in the US – But these factors became a

major disadvantage while operating in Germany.

Wal-Mart stores are designed for customers who are willing to spend lot of time shopping. But in
Germany, the shopping hours are shorter. Shops close by 5 p.m. on weekdays and no shopping on
Sundays. This meant that customers don’t have the habit of spending lots of time in a store –
wandering around for the things they need. Coupled with this problem, German customers do not like
to be assisted by Wal-Mart’s friendly store assistants. Germans prefer to do their own search for
bargains.

Wal-Mart got its store merchandising wrong: Germans like to see the advertised discount products
upfront – without having to ask the store assistant. This implies that the discount products must be
placed at the eye level. Instead Wal-Mart chose to use its US style merchandise display strategy – where
premium priced products are kept at eye level and discount products are kept at higher shelf or in the
bottom racks. This irritated the German shoppers.

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Wal-Mart stocked its store with clothes, hardware, electronics, and other non-food products were
given much bigger floor space than food products, as a result more than 50% of the revenue was from
non-food products. But other German retailers stock more of food products. For example, for Metro,
food products constitute more than 75% of the revenue.

The biggest mistake of Wal-Mart was to ignore the local culture, local buying habits and impose an
American boss on its German operations. The first head of German operation was an expat from the USA
– who did not understand Germany or its culture and insisted that all business operations be carried out in
English language. Cultural insensitivity started right at the top.

Cross-border, cross-cultural business is a challenge even for the biggest companies. Companies have to

be sensitive to the local cultures and tailor their offerings to the local market. The Wal-Mart example tells
us that even the biggest of the companies are not immune to failures. Companies need to understand the
local culture in order to capitalize on the local market.

KURT LEWIN, THE GERMAN-AMERICAN PSYCHOLOGIST, REPRESENTED THE PERSONALITY AS

A SERIES OF CONCENTRIC CIRCLES WITH LIFE SPACES OR PERSONALITY LEVELS. THE MOST

PERSONAL AND PRIVATE SPACES ARE NEAR THE CENTRE. THE MOST SHARED AND PUBLIC

SPACES ARE AT THE OUTER PERIPHERIES. AS A GERMAN-JEWISH REFUGEE IN THE US, LEWIN

WAS ABLE TO CONTRAST U-TYPE (AMERICAN) LIFE SPACES WITH G-TYPE (GERMAN) LIFE SPACES.

CAR
PUBLIC
PVT JOB PRIVATE
DRESS G-TYPE
U-TYPE

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 10-01-2023

A HOME TOOL BEING ADVERTISED IN GERMANY IS LIKELY TO EMPHASIZE THAT THE TOOL
IS CERTIFIED AS TECHNICALLY ROBUST BY A TECHNOLOGY STANDARDS INSTITUTION.

THE SAME TOOL WOULD BE POSITIONED AS AN ECONOMIC AND GREEN ALTERNATIVE FOR
CARRYING OUT MINOR DIY (DO-IT-YOURSELF) REPAIRS IN SWEDEN.

IN ITALY, THE AESTHETIC DESIGN, ATTRACTIVE APPEARANCE OF THE TOOL WOULD BE

EMPHASIZED.

THE SAME TOOL WOULD HAVE GREATER APPEAL IN UK AS A TRADITIONAL HOME APPLIANCE
USED BY THE ELITE.

IN INDIA, CELEBRITY ENDORSEMENT BY A SPORTS PERSON OR A FILM STAR MIGHT WORK.

BUSINESS CULTURE OF BIHAR IS DIFFERENT THAT OF GUJARAT. CULTURE OF TATA MOTORS IS

DIFFERENT FROM THAT OF MAHINDRA. CULTURE OF INFOSYS IS DIFFERENT FROM WIPRO’S.

IT IS WELL KNOWN THAT THE CULTURE OF PRIVATE SECTOR COMPANIES IS DIFFERENT FROM
THAT OF PUBLIC SECTOR UNITS.

EVEN THERE ARE DIFFERENCES BETWEEN HMT, ONGC, IOL AND SAIL.

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IN ORDER TO AVOID CROSS-CULTURAL RISK, IT IS VERY ESSENTIAL FOR

AN MNC.
TO ACQUIRE CROSS-CULTURAL LITERACY.

TO DO SO, THE FOLLOWING MEASURES CAN BE TAKEN;

➢ AWARENESS

➢ ACCEPTANCE

➢ ADAPTATION

➢ INTEGRATION

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 10-01-2023

TECHNOLOGICAL FACTORS

➢TECHNOLOGY DEVELOPMENT

➢RESEARCH FUNDING

➢INNOVATION POTENTIALS

➢INFORMATION AND COMMUNICATION

➢REPLACEMENT TECHNOLOGY

➢INTELLECTUAL PROPERTY ISSUES

DISRUPTIVE TECHNOLOGY

DISRUPTIVE TECHNOLOGY IS TERMED AS ‘CREATIVE DESTRUCTION’. SOMETIMES NEW TECHNOLOGY

DEVELOPS. INITIALLY IT LOOKS UNATTRACTIVE. EVEN THE EXISTING CONSUMERS DO NOT ACCEPT IT WHOLE

HEARTEDLY. THE NEW PRODUCT OFFERRED BY THIS TECHNOLOGY FAILS TO SCORE HIGH ON THE

ESTABLISHED PERFORMANCE ATTRIBUTES, BUT OVER A PERIOD OF TIME IT PROGRESSES ON ALL FRONTS SO

RAPIDLY THAT IT TOTALLY DESTROYS THE WELL ESTABLISHED INDUSTRY.

AN EVOLUTIONARY TECHNOLOGY BRINGS INNOVATION THAT IMPROVES THE PRODUCT IN AN EXISTING

MARKET IN WAYS THAT CUSTOMERS EXPECT. IT BRINGS IMPROVEMENT IN TRADITIONAL PERFORMANCE

PARAMETERS.

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A REVOLUTIONARY OR DISRUPTIVE TECHNOLOGY BRINGS INNOVATION THAT CREATES NEW MARKET BY

PROVIDING A DIFFERENT SETS OF PERFORMANCE PARAMETERS WHICH ULTIMATELY AND UNEXPECTEDLY

OVERTAKES THE EXISTING MARKET.

THIS TECHNOLOGY DISPLACES AN ESTABLISHED TECHNOLOGY AND SHAKES UP THE INDUSTRY AND

CREATES A COMPLETELY NEW INDUSTRY. PC REPLACED TYPEWRITER, E-MAIL REPLACED LETTER WRITING,

3-D PRINTING, ARTIFICIAL INTELLIGENCE, GENETIC ENGINEERING ARE THE EXAMPLES OF DISRUPTIVE

TECHNOLOGY.

THE EFFECT OF DISRUPTIVE TECHNOLOGY ON KODAK CORPORATION WAS SO DISASTROUS THAT THE

EMERGENCE OF DIGITAL CAMERA ELIMINATED THE CORE OF THEIR PRIMARY REVENUE STREAM. THREE

IMPORTANT INPUTS viz. 1. FILM 2. FILM PROCESSING 3. FILM PROCESSING PRODUCT (e.g. PAPER AND

CHEMICALS). THE CORE OF KODAK’S REVENUE STREAMS WERE BASED ON THESE THREE INPUTS AND

THEY WERE ALL DESTROYED WITH THE ADVENT OF DIGITAL CAMERAS, CELL PHONE DIGITAL CAMERAS,

IN-HOME LASER PRINTERS.

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THE SUSTAINING TECHNOLOGY IMPROVES THE PERFORMANCE OF THE ESTABLISHED PRODUCT. EARLIER
RADIO MANUFACTURERS FOCUSSED ON THE SOUND QUALITY. EMERGENCE OF TRANSISTOR DID NOT HAVE A
HIGH SOUND QUALITY, BUT IT WAS PORTABLE, LIGHT-WEIGHT AND BATTERY-OPERATED. THESE ATTRIBUTES
BECAME MORE AND MORE ACCEPTABLE AND THEN IT ALSO IMROVED SOUND QUALITY. IT TOTALLY REMOVED
ESTABLISHED PRODUCT.

THE FOLLOWING IS THE LIST OF PRODUCTS LAUNCHED BY ESTABLISHED TECHN OLOGY AND ONE
OFFERRED BY DISRUPTIVE TECHNOLOGY.
ESTABLISHED TECHNOLOGY DISRUPTIVE TECHNOLOGY
1. PHOTOGRAPHIC FILM DIGITAL PHOTOGRAPHY
2. WIRELESS TELEPHONY MOBILE TELEPHONY
3. BRICKS & MORTAR RETAILING ON-LINE RETAILING
4. PRINTED GREETING CARDS FREE DOWNLOADABLE GREETING CARDS OVER INTERNET
5. MANNED FIGHTER & BOMBER AIRCRAFT UNMANNED AIRCRAFT
6. CLASSROOM INSTRUCTION DISTANCE EDUCATION OVER INTERNET

AUSTRIAN ECONOMIST JOSEPH SCHUMPETER COINED THE TERM ‘CREATIVE DESTRUCTION’ IN 1940 TO
DESCRIBE THE WAY TECHNOLOGICAL PROGRESS IMPROVES THE LIVES OF MANY AT THE COST OF A FEW.

1. TRAVEL WEBSITES SUCH AS EXPEDIA WHICH IS AN APP THAT HELPS YOU TO ORGANIZE YOUR ENTIRE
TRIP & SAVE MONEY. TRAVELOCITY HELPS YOU TO BOOK FLIGHTS, CARS, CRUISES AND PACKAGES. SUCH
PROGRAMMES HAVE ELIMINATED THE NEED FOR HUMAN TRAVEL AGENTS.

2. TAX SOFTWARE LIKE TURBOTAX WHICH HELPS YOU TO FILE INCOME-TAX RETURNS AS WELL AS GST, HAS
ELIMINATED THOUSANDS OF JOBS FOR TAX ACCOUNTANTS.

3. ONLINE MEDIA AND BLOGS HAVE REPLACED NEWS PAPERS.

4. TRANSLATION IS BECOMING MORE AND MORE ACCURATE, REDUCING THE NEED FOR HUMAN
TRANSLATORS. THE SAME IS THE CASE FOR DICTATION AND PROOF-READING.

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5. ONLINE BOOK-STORES SUCH AS AMAZON HAVE FORCED THE BRICK-AND-MORTAR BOOKSELLERS TO CLOSE
THEIR DOORS PERMANENTLY.

6. INVESTMENT ADVISING APP LIKE BETTERMENT TRADING WEBSITES LIKE E TRADE ARE TAKING THE PLACE
OF FINANCIAL PROFESSIONALS AND STOCK-BROKERS.

7. JOB RECRUITERS ARE DISPLACED BY WEBSITES LIKE LINKEDIN. IT IS AN AMERICAN BUSINESS AND
EMPLOYMENT ORIENTED ONLINE SERVICE. IT PROVIDES PLATFORM FOR PROFESSIONAL NETWORKING. JOB
SEEKERS POST THEIR CVs AND EMPLOYERS POST THEIR JOBS.

8. DEVELOPMENT OF DRIVERLESS CARS BY GOOGLE MAY REPLACE ALL SORTS OF DRIVING JOBS.

9. DRONE TECHNOLOGY MAY REVOLUTIONIZE DELIVERY BUSINESS.

IN THE FIELD OF MANUFACTURING, 3D PRINTING, CRITICAL DECISION MAKING ARTIFICIAL INTELLIGENCE

WILL MAKE MANY JOBS REDUNDANT.
POSTAL SERVICES SAW BAD NEWS WITH THE WIDESPREAD USE OF EMAIL.

MANY INDUSTRIES AND JOBS WILL BE LOST WITH TECHNOLOGICAL ADVANCEMENT, BUT AGAIN SOME
NEW JOBS WILL BE CREATED.

BUT THE PROBLEM IS, MANY JOBS THAT ARE LOST BECAUSE OF TECHNOLOGY, ARE NOT TECHNOLOGICAL.

THEREFORE, THOSE WORKERS MAY NOT HAVE THE TECHNICAL SKILL NEEDED TO FILL UP NEW JOBS. THOSE

WHO CAN INTERFACE WITH TECHNOLOGY, MAY NOT REMAIN JOBLESS FOR LONG, BUT THOSE WHO CAN

OFFER ONLY PHYSICAL LABOUR WILL HAVE TOUGH TIME. THIS WILL BE THE DECIDING FACTOR WHETHER

NEW TECHNOLOGY WILL BE MORE CREATIVE OR MORE DESTRUCTIVE IN TERMS OF EMPLOYMENT.