INTERNATIONAL BUSINESS MANAGEMENT

UNIT-I
INTRODUCTION

Definitions:
John D Daniels and Lee H Radebaugh in their book, ‘International Business’,
define international business as, ‘all commercial transactions- private and
governmental-between two or more countries. Private companies undertake such
transactions for profit; governments may or may not do the same in their
transactions. These transactions include sales, investments and transportation’.
The Internet Public Library (IPL) defines International Business as, ‘doing
business in international markets, and business information specific to various
countries or geographic regions of the world’. A great part of international business
is international trade which is defined as, ‘The business of buying and selling
commodities / services / investments beyond national borders’.
According to Harcourt Brace & Company, Orlando, Florida, ‘International
business consists of transactions that are devised and carried out across national
borders to satisfy the objectives of individuals and organizations’.
According to International Business Journal, ‘International business is a
commercial enterprise that performs economical activity beyond the bounds of its
location, has branches in two or more foreign countries and makes use of
economic, cultural, political, legal and other differences between countries’.
Wasser man & Haltman: International trade consists of transaction between
residence of different countries –
Thus domestic trade occurs within the political boundaries of nations, whereas
international trade occurs across the political boundaries of different nations. The
trade is made up of transactions in goods or exchanges of goods or purchase & sale
of goods between countries collectively called import & export.

Why Go International?

The factors which motivate or provoke firms to go international may be broadly

divided
In to two groups, they are
1. Push Factors 2. Pull Factors

Push Factors:

It refers to the compulsions of domestic market like saturations of market, which

prompt companies to internationalize. Most of the push factors are reactive
reasons.

 Saturation in domestic markets

 Economic difficulty in domestic markets
 Near the end of the product life cycle at home
 Excess capacity
 Risk diversification
Pull Factors:

These are the proactive reason which forces the business to the foreign markets. In
other words, companies are motivated to internationalize because of the
attractiveness of the foreign market, such attractiveness includes profitability &
growth prospects.

 The attraction of overseas markets

 Increase sales
 Enjoy greater economies of scale
 Extend the product life cycle
  Exploit a competitive advantage
 Personal ambition
Reasons of International Business /Trade

1. Profit:

The main aim of any business organization is profit. When the domestic markets
do not promise high rate of return, business firm search for foreign market which
promises for high rate of profits.

2. Expanding the production capacities:

Some of the domestic companies expanded their production capacities, more than
the demand for the product in the domestic countries. These companies in such
cases are forced to sell their excess production in foreign developed countries.

3. Severe Competition in the home country:

The countries oriented towards market economics since 1960 had severe
competition from other business firms in home countries. The weak companies
which could not meet the competitions of the strong companies in the domestic
country started entering the markets of the developing countries.

4. Limited home market:

When the size of the home market is limited, either due to the smaller size of the
population or due to lower purchasing power of the people or both. The companies
internationalize their operations.

5. Political stability Vs Political instability:

Political stability does not simply mean that continuation of same policies of the
govt. For a quiet longer period, business firms prefer to enter the politically stable
countries that are restrained from locating the business operations in politically
instable countries.

6. Availability of technology & managerial competence:

Availability of advanced technology & managerial competence in some countries

act as a pulling factor for a business firm from the home country. The companies
from developing countries are attracted by the developed countries due to these
reasons.

7. High cost of transportation:

At initial stage companies enter foreign countries through marketing suffer

because of domestic competition. The domestic company may enjoy high profit
margin due to localized manufacturing. Hence foreign companies are also inclined
for locating their manufacturing facilities in foreign itself. It may increase their
profit margin due to reduction of transportation facilities.

8. Nearness (proximity) to raw materials:

The source of highly qualitative raw materials and bulk raw materials is a major
factor for attracting the companies from various foreign countries.

9. Availability of quality human resources at less cost.

The sources of highly qualitative & bulk raw materials and is a major factor for
attracting the companies from various for attracting the companies from various
foreign countries. Most of the US and European based companies locate their
manufacturing facilities in India due to availability of high quality and low cost
human resources.

10. To increase market share:

Some of the large scale business firms would like to enhance their market share in
the global market by expanding and intensifying their operations in various foreign
countries. Companies that expand internally tend to be oligopolistic. Smaller
companies expand internationally for survival while the larger companies expand
to increase the market share.

11. To avoid tariffs and import quotas:

It was quite common before globalization that government imposed tariffs or duty
on imports to protect the domestic company. The government also fixes quotas in
order to reduce the competition to the domestic companies from the competent
foreign companies. To avoid high tariffs and quotas, companies prefer direct
investment to go globally.
 Stages in Internationalization.

1. Domestic Company:

It limits operation, mission and vision to the national political boundaries. These
companies focus its view on the domestic market opportunities domestic suppliers,
domestic financial companies, domestic customers etc. It never thinks of growing
globally. If it grows, beyond it present capacity the company selects the
diversification strategy of entering into new domestic markets, new products,
technology etc. It does not select the strategy of expansion into the international
markets.

2. International Company: Low Integration and Low Responsiveness

Some of the domestic companies which grow beyond their production / marketing
capacities think of internalizing their operations. Those companies who decide to
exploit the opportunity outside the domestic country. The focus of these companies
is domestic but extends the wings to the foreign countries. These companies extend
the domestic product, domestic price, promotion and other business practices to the
foreign markets.

3. Multinational Company: Low Integration and High Responsivenes

It formulates different strategies for different markets thus the MNC operate its
offices, branches, subsidiaries in other country like domestic company. They
formulate distinct polices and strategies suitable to that country. Thus they operate
like concerned in each of their markets.

Export of Toyota cars (designed for Japan) to USA failed due to product design. It
did not meet the local requirements Toyota later became MNE to respond to the
local demand

4. Global company: High Integration and Low Responsiveness

A global company is the one which has either global marketing strategy or a global
sourcing strategy. Global company either produces in home country or in a single
country and focuses on marketing these products globally or produces globally or
focuses on marketing these products domestically.
5. Transnational company: High Integration and High Responsiveness

It produces, markets, invests and operates, across the world. It is an integrated

global enterprise which links global resources with global markets at profit. There
is no pure transnational companies satisfy many of the characteristics of a global
corporation.

Characteristics of International Business:

1. Geocentric Orientation:

These companies think globally and act locally. This company adopts global
strategy but allows value addition to the customer of a domestic country. The
assets of a transnational company are distributed throughout the world.

2. Scanning or information acquisition:

It collects the data and information worldwide. These companies scan the
environmental information regarding economic environment, political
environment, social and cultural environment and technological environment.

3. Vision & Aspirations

The vision & aspiration of transnational companies are global markets, global
customers and grow ahead of global companies.

4. Geographic scope:

The transnational companies scan the global data and information. They analyze
the global opportunities regarding the availability of resources customers, market,
technology, research and development etc. Similarly they also analyze the global
challenge and threats like competition from the other global companies, local
companies etc. They formulate global strategy.

5 Operating Style:

Key operations of a transnational are globalised. The transnational companies

globalize the function like R & D, Product development, placing key human
resources procurement of high valued material etc.
6. Adaptation:

These companies adapt their products, marketing strategies and other functional
strategies to the environment factors of the market concerned.

7. HRM Policy:

This company is not restricted by national political or legal constraints. It selects

the best human resources and develops them regardless of nationality, ethnic group
etc. But the international company reserves the top and key positions for national.

8. Purchasing;

It procures world’s class material from the best source across the globe.

International Business Approaches:

The EPRG frameworks identify four types of attitudes or orientations towards

internationalization that are associated with successive stages in the evolution of
international operations these four orientations are:

1. Ethnocentric Approach

The domestic company normally formulates their strategies, their product design
and their operations towards the national markets, customers and competitors. But
the excessive production more than the demand for the product , either due to
competition or due to changes in customer preferences push the company to export
the excessive production to foreign countries. They continue the exports to the
foreign countries and view the foreign market as an extension to the domestic
markets just like a new region. This organization is suitable for smaller companies.

The example of such change is NISSAN which in the first years of its existence on
international arena was following ethnocentric approach by selling its cars abroad
exactly as they were sold in their domestic market in Japan, after several years of
its international trading the company realized that ethnocentric international
marketing orientation is no longer relevant for some industries including
automobile industry in which they were operating and changed its approach to
polycentric.
2. Polycentric Approach

The domestic companies which are exporting to foreign countries using the
ethnocentric approach find that the foreign market needs a altogether different
approach. Then the company establishes foreign subsidiary companies and
decentralizes all the operation and delegates decision –making and policy making
authority to its executives. In fact the company appoints executives and personnel
including chief executives who reports directly to the Managing director of the
company. The executives of the subsidiary formulate the policies and strategies
design the product based on the host country’s environment and the customer
preferences.

Examples of companies marketing their brands according to this approach are:

Ford Motors, Suzuki, Toyota, General Motors, Nissan, etc. – all these companies
adapt their brands to specific needs of each country’s consumer.

3. Regio - Centric Approach:

The company offer operating successfully in a foreign country thinks of exporting

to the neighbouring countries of the host countries. At this stage the foreign
subsidiary considers the regional environment for formulating policies and
strategies. However it markets more or less the same product designed under
polycentric approach in other countries of the region, but with different market
strategies.
For example, countries of former USSR can form one group as needs and tastes of
consumers of these countries are very similar as they were representatives of one
nation not so long ago. The same products and strategies can be used in such set of
countries like Denmark, Norway, Finland and Sweden or Pakistan, Bangladesh and
India as they possess a strong regional identity and belong to the same cultural
dimensions. Pepsi and Coca-Cola are examples of international companies which
are successfully using this Regio-Centric approch.
4. Geocentric Approach:
Under this approach the entire world is just like a single country for the company.
They select the employees from the entire globe and operate with a number of
subsidiaries. The head quarters co-ordinate the activities of the subsidiaries. Each
subsidiaries function like an independent and autonomous company in formulating
policies , strategies , product design , human resources policies, operation etc.
The European Silicon Structures is a pure example of geocentric international
marketing orientation: the company is incorporated in Luxembourg, its headquarter
was established in Munich, research facilities are in England, and France has its
factory; the company went even further by assigning its eight directors from seven
different countries.

Advantages/Benefits of International Business:

1. High Living Standard:

Comparative cost theory indicates that the countries which have the advantages of
raw materials human resources and climatic conditions in producing particular
goods can produce the products at low cost and also of high quality. Customer in
various countries can buy more products with the same money. In turn it can also
enhance the living standard of the people through enhanced purchasing power and
by consulting high quality.
2. Increased socio- Economic Welfare
International business enhances consumption level and economic welfare of the
people of the trading countries.
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 customer’s tastes and preferences of a single country.
4. Reduced effects of business cycles:
The stages of business cycle vary from country to country. Therefore the
companies shift from the country experiencing a recession to the country
experiencing a boom conditions. Thus international business firms can escape from
the recessionary conditions.
5. Reduced risks:
Both commercial and political risks are reduced for the companies engaged in
international business due to spread in different countries. Multinationals which
were operating in erstwhile USSR were affected only partly due to their safer
operations in other countries.
6. Larger –scale economics
Multinational companies due to the wider and larger markets produce larger
quantities. Invariably it provides the benefits of large-scale economics 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. These markets provide the opportunity of selling the
product at higher price than in domestic markets.
8. Provides the opportunity & challenges to domestic business:
International business firms provide the opportunities to the domestic companies.
These opportunities include technology, management expertise, market
intelligence, product developments etc.
9. Division of labour and specialization
International business of labour, enhancement of productivity posing challenges
development to meet them innovation and creations to meet the competition lead to
overall economic growth of the world nations.
10. Optimum & proper utilization world resources:
International business provides for flow of raw materials from the countries where
they are in excess supply to those countries which are in short or need most.
11. Cultural Transformation:
International business benefits are not purely economical or commercial they are
even social and cultural.
12. Knitting the world into a closely interactive traditional village.
International business ultimately knits the global economics, societies and
countries into a closely interactive and traditional village where one is for all and
all are for one.

Problems in International Business:

1. Political Factors:
Political instability is the major factor that discourages the spread of international
business.
2. Huge Foreign Indebtness;
The developing countries with less purchasing power are lured into debt trap due to
the operations of MNCs in these countries.
3. Exchange Instability:
Currencies of countries are depreciated due to imbalances in the balance of
payment political instability and foreign indebtness. This in turn leads to instability
in the exchange rates of domestic currencies in terms of foreign currencies.
4. Entry requirements:
Domestic governments impose entry requirements to multinationals. Eg, Joint
venture, % of FDI, tariff , quota, trade barriers etc
5. Corruption.
Corruption has become an international phenomenon. The higher rate bribes and
kickbacks discourage the foreign investor to expand their operations.
6. Bureaucratic practices of government:
Bureaucratic attitudes and practices of government delay sanctions, granting
permission and licenses to foreign companies.
7. Technology pirating:
Copying the original technology producing imitative products other areas of
business operations were common in Japan during 1950s and 1960s in Korea, etc
This practices invariably alarms the foreign companies against expansion.
8. High Cost:
Internationalizing the domestic business involves market survey product
improvement quality up gradation. Managerial efficiency and the like. These
activities need larger investment and involve higher cost and risk. Hence most of
the business houses refrain themselves from internalizing their business.

National Gains from International Trade:

1. Availability of variety of goods:
Often it is either impossible or not economically feasible to produce certain goods
within a country even though the demand for them may be great. Importation
results in availability at a lower cost which in turn presents the possibility of more
widespread consumption.
2. Enhances the standard of living:
It provides new consumption experiences plus the possibility of buying products
that more closely meet the requirements of varying life style. International track
opens the world market to producers of these goods thereby allowing more
efficient and profited production with only local sales.
3. To get non available natural resources;
The significance of imports is obvious where the country lacks a strong resources
base but similar conditions exist even in more endowed nations. The production of
many items in India for example depends on the importation of critical raw
material and energy supplies.
4. Quantity goods available will increases;
A nation by concentrating production on the items having the greatest comparative
advantage and trade a portion of this output for goods that have comparative
disadvantages at home. The importation of goods that are produced more
efficiently abroad results in a greater variety and quantity of goods on the local
market than if resources were applied to the production of where applied to the
production of goods where the country does not have a comparative advantage.
5. Wider market availability leads for low cost production.
The international trade led to the expansion of plant size. If such expansion in trade
leads to scale economics there is a good possibility that the benefits of lower cost
will be available to either or both the domestic and foreign consumers. The
presence and the degree of domestic competition will be available to either or both
the domestic and foreign consumers. The presence and the degree of domestic
competition will determine whether and how much of the savings will be passed on
to consumer. This lower cost may further broaden the domestic market and make
luxury products available to lower income segments.
6. Transfer of technology;
Even when the foreign market is serviced by producing abroad there are
advantages for domestic consumers and producers. Since both from the transfer of
products and technology among countries.
7. Provides the means of exports:
While imports sometimes are viewed as competing with domestic products it must
be recognized that imports of goods services and capital are necessary to provide
foreigners with the means of payments for domestically produced exports without
imports a country merely sends away it resources and products without receiving
usual products in return.
 Salient Features of International Trade:
1. Heterogeneous market
2. Different national groups
3. Different political unit
4. Different national policies
5. Government intervention
6. Different currencies
7. Immobility of factors.