MANAGEMENT OF INTERNATINAL BUSINESS (MS 203

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LECTURE 1
A. INTRODUCTION TO INTERNATIONAL BUSINESS The beverages you drink might be produced in India, but with the collaboration of a USA company. The tea you drink is prepared from the tea powder produced in Sri Lanka. The spares and hard disk of the computer you operate might have been produced in the United States of America. The perfume you apply might have been produced in France. The television you watch might have been produced with the Japanese technology. The shoe you wear might have been produced in Taiwan, but remarketed by an Italian company. Air France and so on so forth might have provided your air travel services to you. Most of you have the experience of browsing Internet and visiting different web sites, knowing the products and services offered by various companies across the globe. Some of you might have the experience of ‘even ordering and buying the products through Internet. This process gives you the opportunity of transacting in the international business arena without visiting or knowing the various countries and companies across the globe. You get all these even without visiting or knowing the country of the company where they are produced. All these activities have become a reality due to the operations and activities of international business. Thus, international business is the process of focusing on the resources of the globe and objectives of the organizations on global business opportunities and threats. Evolution of International Business The business across the borders of the countries had been carried on since times immemorial. But, the business had been limited to the international trade until the recent past. The post World War II period witnessed an unexpected expansion of national companies into international or multinational companies. The post 1990s period has given greater fillip to international business. In fact, the term international business was not in existence before two decades. The term international business has emerged from the term international marketing, which in turn, emerged from the term ‘export marketing’. Nature of International Business The 1990s and the new millennium clearly indicate rapid internationalization and globalization. The entire globe is passing at a dramatic pace through the transition period. Today, the international trader is in a position to analyze and interpret the global social, technical, economic, political and natural environmental factors more clearly. Conducting and managing international business operations is a crucial venture due to variations in political, social, cultural and economic factors, from one country to another country. For example, most of the African consumers prefer less costly products due to their poor economic conditions, whereas the German consumers prefer high quality and high priced products due to their higher ability to buy. Therefore, the international businessman should produce and export less costly products to most of the African countries and vice versa to most of the European and North American countries. High priced and high quality Palmolive soaps are marketed in European countries and the economy priced Palmolive soaps are exported and marketed in developing Countries like Ethiopia, Pakistan, Kenya, India, Cambodia etc. • International business houses need accurate information to make an appropriate decision. Europe was the most opportunistic market for leather goods and particularly for shoes. Bata based on the accurate data could make appropriate decision to enter various European countries. • International business houses need not only accurate but timely information. CocaCola could enter the European market based on the timely information, whereas Pepsi entered later. Another example is the timely entrance of Indian software companies into the US market

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compared to those of other countries. Indian software companies also made timely decision in the case of’ Europe. The size of the international business should be large in order to have impact on the foreign Economies. Most of the multinational companies are significantly large in size. In fact, the Capital of some of the MNCs is more than our annual budget and GDPs of the some of the African Countries. Most of the international business houses segment their markets based on the geographic market segmentation. Daewoo segmented its market as North America, Europe, Africa, Indian subcontinent and Pacific markets. International markets present more potentials than the domestic markets. This is due to the fact that international markets wide in scope, varied in consumer tastes, preferences and Purchasing abilities, size of the population etc. For example, the IBM’s sales are more in foreign countries than in USA. Similarly, Coca-Cola’s sales, Procter and Gamble’s sales and Satyam Computer’s sales are more in foreign countries than in their respective home countries. Therefore, the international business houses should consider the consumers’ willingness to buy and also ability to buy the products In fact, most of the multinational companies, which entered Indian market after 1991, failed in this respect. They viewed that almost the entire Indian population would be the customers. Therefore, they estimated that the demand for consumer durable goods would be increasing in India after globalisation. And they entered the Indian market. The heavy inflow of these goods and decline in the size of Indian middle class resulted in a slump in the demand for consumer durable goods.

Importance of International Business The growing importance of international business is reflected in several macro economic and micro indicators. The Foreign Trade: GDP ratio has been rising significantly, indicating that national economies are becoming more and more export and import dependent. International investment, both direct and portfolio, have been growing rapidly. A corollary of the rapidly growing international investment is the fast growing international business. A connotation of the growing export-GDP ratio is that the export intensity of the companies in general are rising. Many firms makes the most of their business, like the leading IT firms such as TCS, Infosys, Wipro etc. and pharmaceutical firms such as Ranbaxy, Dr. Reddy’s etc. from foreign markets. These are the companies, which do 100 % of their business abroad.

LECTURE 2
B. CONCEPT AND DEFINITION OF INTERNATIONAL MANAGEMENT Took and Beeman define international management as the determination and completion of actions and transactions conducted in and/or with foreign countries in support of organization policy. Czinkotra and Grosse and Kojawa define international business as transactions devised and carried out across international borders to satisfy corporations and individuals. International management by these definitions, is viewed as a subset of international business. The focus of international business is on international transactions, whereas international management deals with managing such transactions with in the boundary set by corporate strategy. Thus, when a company decides to enter a foreign market, that decision incorporates planning to establish the ways by which business functions-marketing, accounting, human resource management, and so on-are to be managed in that distinct location. Managing the various functions and coordinating them with the parent’s company’s overall strategy is the task of international management.

"International" covers both the crossing of national borders and the internal and external environmental diversity that organizations and their managers experience when functioning outside their home state. In other words, the concept "international," when applied to organizations, implies an interaction between two or more cultures. International Management is for All International management is a term that many people apply only to the realm of large corporations. This is a misconception, since medium and small- sized companies operate in the international arena, although the complexity may be less for the smaller firm. Let us put this in the context of a mediumsized ceiling fan manufacturer, which had been operating in the Eastern region of India since 1954. Its rate of return over the years had been more than adequate. Since the company did not foresee any worthwhile competitors on the horizon, it decided not to expand to other regions of the country.As soon as the government liberalized the economy in 1992, the company found itself cometing against similar products from foreign countries which penetrated rather quickly through licensing agreements with an Indian conglomerate. It becomes apparent that some drastic measures were necessary to match the competitors’ price, quality, and service. After several failed attempts at restructuring its portfolio, it had to get out of the business. A similar phenomenon is witnessed in most of the European countries and Russia. For instance, a soft drink manufacturer had been operating in the southern part of poland for the last 30 years. As the nation experienced a shift from a demand economy to a market- driven economy, Coke and pepsi landed like two sumo wrestlers and wiped out 90% of the firm’s business, forcing it to file for bankruptcy. Over 500 people lost their jobs, and the Polish government refused to follow the policy of protecting the “sick industries” that it once routinely followed. The lesson is clear. Your business may be limited to a certain region, or you feel that you are too small a company to be knocked out by the General Motiors-or the Mitsubishis of this world. Think again! As the economy becomes marketdriven, the need to operate with an international perspective becomes all the more important for all types and for all sizes of organizations. A Focus on International-Business Firms In US business schools, "international management" is predominantly applied to those firms engaged in private cross-border trade and foreign direct investment-mainly, importers, exporters, trade intermediaries, multinational enterprises and strategic-alliance partners. c. Who Are International Managers? A distinct group of people drive and handle the internationalization of firms, and are characterized by particular backgrounds, attitudes and behaviors. This issue has been particularly emphasized in the United States where the weight of the domestic market has long required an extra push to involve firms in exporting, importing, foreign licensing, investing and partnering. In other words, international management is the province of a particular breed and class of business managers who have been selected, trained and socialized in particular ways, and who can be studied in a comparative manner vis-a-vis their domestic and foreign counterparts. What Do International Managers Do? The managerial functions (planning, organizing, etc.) are rendered more complex on account of the addition of the "geographic" (or "area") dimension to the more traditional "product" and "function" (such as manufacturing and marketing) elements. International managers make decisions about "going international" and about implementing this process across areas, products and functions. Fayer-weather (1969, 1982) articulated this problem in terms of four key decisions: (1) what firmspecific economic advantages will allow firms to succeed in other countries; (2) which socio-cultural adaptations will be required in transferring and deploying these resources overseas; (3) how will political actors--particularly governments, but also interest groups and public opinion at home and abroad--be accommodated in reconciling the private and public interests associated with international trade and investment, and (4) how will foreign and domestic activities be integrated in the face of the

centrifugal pull of different markets, sovereignties and cultures--what Fayer-weather called the problem of "unification in the face of fragmentation?" How Are International Activities Structured? This problem is now articulated in terms of designing systems (authority and responsibility relationships, incentives, information flows, etc.) that provide some optimal if elusive combination of "national responsiveness and global integration". What Do International Managers Contribute? The benefits of good management are traditionally associated with efficiency and effectiveness, but the latter assume an expanded meaning in the context of the recent globalization that impacts most economies, societies, polities and cultures. "Good international management" now incorporates: (1) responding to a much greater variety of constituencies--at once domestic, foreign, international and supranational (2) providing models for other organizations that must also cope with globalization (3) contributing to worldwide development in all its facets--not only economic but also personal, political, social, cultural and ecological. This is the agenda of international firms, managers and management as seen through US businessfirm lenses. Some of it is shared around the world, and knowledge of multinational enterprises has significantly contributed to our understanding of how large business firms are managed around the world.

LECTURE 3
C. WHY GO INTERNATIONAL? We have discussed the nature of international business and the precautions that the multinational companies should take while operating in foreign countries. The basic question of “why do the Business firms of a country go to other countywide? ” might have been in your minds. Therefore, we answer this question, before proceeding further. To achieve Higher Rate of Profits As we have discussed in various courses/subjects like Principles and Practice of Management, Managerial Economics and Financial Management that the basic objective of the business firms is to earn profits. When the domestic markets do not promise a higher rate of profits, business firms search for foreign markets, which promise for higher rate of profits. For example, Hewlett Packard earned 85.4% of its profits from the foreign markets compared to that of domestic markets in 1994. Apple earned US $ 390 million as net profit from the foreign markets and only US $ 310 millions as net profit from its domestic market in 1994. Expanding the Production Capacities beyond the Demand of the Domestic Country: 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. Severe Competition in the Home Country: The countries oriented towards market economies since 1960s had severe competition from other business firms in the home countries. The weak companies, which could not meet the competition of the strong companies in the domestic country, started entering the markets of the developing countries. 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 internationalise their operations. For example, most of the Japanese automobile and electronic firms entered US, Europe and even African markets due to the smaller size of the home market. ITC entered

Sudan etc. Similarly. Pakistan and India are politically instable countries. Theses companies. Oman. Similarly. The developed countries due to these reasons attract companies from the developing world. Caterpillar located its manufacturing facilities at different centers in order to reduce the cost of transportation. Eritrea. Most of the US based and European based companies located their manufacturing facilities in Saudi Arabia.’ High Cost of Transportation Initially companies enter foreign countries through their marketing operations. developed European countries and Japan. Most of the African countries and some of the Asian countries like Malaysia. Business firms prefer to enter the politically stable countries and are restrained from locating their business operations Availability of Technology and Managerial Competence Availability of advanced technology and managerial competence in some countries acts as pulling factors for business firms from the home country. Hence these companies started their operations in India and other similar countries.the European market due to the lower purchasing power of the Indians with regard to high quality cigarettes. To Avoid Tariffs and Import Quotas It was quite common before globalization that governments imposed tariffs or duty on imports . the home companies enjoy higher profit margins whereas the foreign firms suffer from lower profit margins. depend on Japanese companies for technology and management expertise. In fact. India is a major source for high quality and low cost human resources unlike USA. the foreign companies are inclined to increase their profit margin by locating -their manufacturing facilities in foreign countries where there is enough demand either in one country or in a group of neighboring countries. Availability of Quality Human Resources at Less Cost This is a major factor. UK. American companies. Italy and Japan are also politically stable countries. This company produces high glue added parts in limited locations and less valued and non critical components and assembles the final products in a number of foreign countries. Bahrain. At this stage. Mobil. Added to this. high technology and telecommunication companies to locate their operations in India. the companies realise the challenge from the domestic companies. i. in recent years. but it does mean the continuation of the same policies of the Government for a quite longer period. which was supplying the petroleum products to Ethiopia. Similarly. thus. the mere six million population of Switzerland is the reason for Ciba Geigy to internationalise its operations. The major factor for this situation is the cost of transportation of the products. Qatar. Political Stability vs Political Instability Political stability does not simply mean that continuation of the same party in power. Importing human resources from India by these firms is costly rather than locating their operations in India. from its refineries in Saudi Arabia. Under such conditions. For example. Iran and other Middle East countries due to the availability of petroleum. In fact. established its refinery facilities in Eritrea in order to reduce the cost of transportation. in recent times. France. this company was forced to concentrate on global market and establish manufacturing facilities in foreign countries. It is viewed that USA is a politically stable country. Indonesia. reduced the cost of transportation. Kenya. for software. Nearness 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. Germany.

These companies analyze the national environment of the country. Coca Cola. USA imposed tariffs and quotas regarding import of automobiles and electronics from Japan. If it grows. Markets and extend the same domestic operations into foreign markets. The domestic company does not select the strategy of expansion/penetrating into the international markets. Harley Davidson of USA sought and got five years of tariffs protection from Japanese imports. The international company holds the marketing mix constant and extends the operations to new countries. These companies remain ethnocentric or domestic country oriented. Normally internationalization process of most of the global companies starts with this stage two process. the company selects the diversification strategy of entering into new domestic markets. Xerox. STAGES OF INTERNATIONALISATION The internationalization process generally includes fives stages. Phillips. companies like Sony. Those companies who decide to exploit the opportunities outside the domestic country are the stage two companies. The domestic Companies’ unconscious motto is that. we will study stage of internationalization in detail. Sometimes Government also fixes import quotas in order to reduce the competition to the domestic companies from the competent foreign companies. Similarly. Multinational company d. domestic financial companies. Lucky Gold Star. promotion and other business practices to the foreign markets. domestic price. Similarly. established manufacturing facilities in various foreign countries in order to avoid tariffs. import duties and quotas. Thus the international company extends the domestic country marketing mix and business model and practices to foreign countries. mission and vision to the national political boundaries. Pepsi. think of internationalizing their operations. Global company e. Stage 1: Domestic Company Domestic company limits its operations. Shell. LECTURE 4 D. beyond its present capacity. To avoid high tariffs and quotas. a. and Whirlpool also have foreign subsidiaries. Honda and Toyota preferred direct investment if] various countries by establishing subsidiaries or through joint ventures in various foreign countries including USA and India. In other words. which grow beyond their production and/or domestic marketing capacities. . These companies believe that the practices adopted in domestic business. domestic suppliers. the people and products of domestic business are superior to those of other countries. Most of the companies following this strategy due to limited resources and also to learn from the foreign markets gradually before becoming a global company without much risk. General Electrical. it is not happening” The domestic company never thinks of growing globally. These companies focus its view on the domestic market opportunities. Canon. technology etc. These practices are prevalent not only in developing countries but also in advanced countries. Japanese companies are competent competitors to the US companies. these companies extend the domestic product. new products. The focus of these companies is domestic but extends the wings to the foreign countries. “if its not happening in the home country. For example. Stage 2: International Company Some of the domestic companies. Japan places high tariffs on imports of rice and other agricultural goods from USA. Domestic company b. For example. Unilever. domestic customers etc.to protect the domestic company. International Company c. companies prefer direct investment to go globally. Mobil etc. South Korean Electronics Company. formulate the strategies to exploit the opportunities offered by the environment. Transnational company Now.

It used to have autonomous national organizations and formulate the strategies separately for each country. LECTURE 5 E. extending the domestic product. Similarly. Thus they operate like a domestic company of the country concerned in each of their markets.. However. Under polycentric orientation the offices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. Harley designs and produces super heavy weight motorcycles in USA and markets in the global market. It is an integrated global enterprise. design and low price to the customer. The international companies turn into multinational companies when they start responding to the specific needs of the different country markets regarding product. Philips lost its market share as Matsushita offered more value to the customer Consequently Philips changed its strategy and created “industry main groups” in Netherlands which are responsible for formulating a global strategy for producing. Toyota. Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in Germany. Thus gap is an example for global sourcing company. Thus these cars were not suitable for the US markets. Philips of Netherlands was a multi domestic company of this stage during 1960s. face the dilemma while deciding the method of entry into a given overseas location. Reddy’s Lab designs and produces drugs in India and markets globally. most of the transnational companies satisfy many of the characteristics of a global corporation. which has either global marketing strategy or a global strategy. marketing and R & D. quality. Multi domestic company formulates different strategies for different markets. MODES OF ENTRY Companies deciding to enter the foreign markets. or produces the products globally and focuses on marketing these products domestically.e. Toyota took this failure as a rich learning experience and as a source of invaluable intelligence but not as failure. Stage 5:Transnational Company Transnational company produces. Thus Harley and Dr. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based oil global strategy.Stage: 3 Multinational Company Sooner or later. Reddy’s Lab are examples of global marketing focus. The unsold cars were shipped back to Japan. Toyota could not sell these cars in USA as they were over priced. Analyzing the decision factors can reduce this dilemma. Gap procures products in the global countries and markets the products in its retail organization in USA. the international companies learn that the extension strategy (i. The Gap understands the US consumer and got competitive advantage. Stage 4: Global Company A global company is the one. But the Matsushita’s strategy was to give the value. underpowered and built like tanks. based on this experience designed new models of cars suitable for the US market. Dr. Global strategy was based on focusing the company resources to serve tile world market. price and promotion. markets. the orientation shifts from ethnocentric to polycentric . Toyopet was not successful in USA. This statue of multinational company is also referred to as multi domestic. which links global resources with global markets at profit. There is no pure transnational corporation. Philips strategy was to work like a domestic company. invests and operates across the world. The best example is that Toyota exported Toyopet cars produced for Japan in Japan to USA in 1957. price and promotion to foreign markets) will not work. . thus. Global company either produces in home country or in a single country and focuses on marketing these products globally. and produce a number of models of the product consequently it increased the cost of production and price of the product.

. /n contrast. Microsoft and Compaq. the company can enter the foreign markets through contract manufacturing. • • However. This ownership grants the advantage of low cost producer to the company. if the company thinks that the transaction costs are low. Firms also enter through FDI in order to take the advantage of economies of scale. owned its iron ore mines and coal mines. it enters foreign markets through direct investment. if the location of manufacturing facilities in home country is advantageous than in host country.. monitoring and enforcing an agreement with the host country's company would be difficult and costly. These locational factors include: o Customer Needs. Preferences and Tastes o Logistic Requirements o Cheap Land Acquisition Cost o Cheap Labour o Political Stability o Low Cost Raw Materials o Climatic Conditions. franchising or licensing. we shall shift our discussion to the different modes of enter to the foreign markets. cash rich firms may prefer FDI. to dominate the production of both primary nickel and nickel-based metal alloys. In such cases the company enters the international markets through direct investment. Thus. Now. Otherwise.Decision Factors • Ownership Advantages • Location Advantages • Internationalization Advantages • Ownership Advantages: Ownership advantages are those designed by a company by owning resources. Example Toronto-based Inco. These benefits provide competitive advantage to the company over its competitors. Similarly. and the local companies in the host country can produce efficiently without jeopardizing the interest. and synergies between their domestic « and international operations. companies with low cash reserves normally prefer licensing mode rather than foreign direct investment (FDI)• Merck entered Israel by issuing license to Teva Pharmaceutical an Israel company in order to save the expenses of establishing in Israel. nickel-bearing ores allowed the company. different firms select different modes based on the nature of the industry. of rich. 1. For example. the company enters foreign markets through exporting. EXPORTING . Otherwise. Internationalization Advantages Internationalization advantages are those benefits that a company gets by manufacturing goods or rendering services in the host country by itself rather than through contract arrangements with the companies in the host country.. Sometimes the cost of negotiating. Location Advantages Certain locational factors grant benefit to the company when the manufacturing facilities are located in the host country rather than in the home country. the software companies prefer licensing and franchising mode as they have to respond quickly to the market needs. Ltd. If the company has locational advantages. Tata Iron and Steel Company (TISCO) Ltd. Example Toyota enters foreign markets through direct investment and joint-ventures us the local companies in foreign countries cannot produce as efficiently as Toyota.

Direct Exports c. Intracorporate Transfers Intracorporate transfers are selling of products by a company to its affiliated company in host country (another country). warehousing costs. if the company chooses to distribute on its own. The company can enter the host country on a lull scale. Need for Limited Finance : If the company selects a company in the host country to distribute. but this amount would be quite less compared to that would be necessary under other modes. Factors to be considered while exporting a. it needs to invest financial resources. i. Finally in 1995 it established its ice cream plant in Moscow. the company can enter international market with no or less financial resources.e. distribution networks. if the product is accepted by the host country's market. Management Contracts c. customer and the market of the host country gradually. c. Indirect Exports b. customer awareness and customer preferences. Logistical consideration: These factors include physical distribution costs. EXPORTING Exporting is the simplest and widely used mode of entering foreign markets. Distribution Issues: These include own distribution networks. Less Risk: Exporting involves less risk as the company understands the culture. SPECIAL MODES a. Turnkey Projects 5. Alternatively. FRANCHISING International Franchising 4. The advantages of exporting include: a. LICENSING International Licensing 3. Marketing factors like image. Export Intermediaries . Various publishers ill India including Himalaya Publishing House. books to UBS publishers of India. Indirect Exporting Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. Minolta and Hitachi rely on the disrtibution networks Of' their subsidiaries in the host country. FOREIGN DIRECT INVESTMENT 1. b. This transaction is treated as exports in India and imports in USA. which in turn exports these books to various foreign countries. Intra corporate Transfers 2. responsiveness to the customer. Japanese companies like Sony. networks of host county's companies. sell their products. Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners. Direct Exporting Direct exporting is selling the products in a foreign country directly through its distribution arrangements or through a host country's company. b. b. Contract Manufacturing b. Selling of products by Hindustan Lever in India to Unilever in USA. British company selected this mode to export jams to Japan. inventory carrying costs." c. packaging. transporting..a. Forms of Exporting a.

Kirin Brewery . Under this agreement the boundaries are .. The cost of entering foreign markets through this mode is less costly. taking ownership of foreign-bound goods. c.' Licensing is a popular method of entering foreign markets. They sell the domestic manufacturers' products in the foreign markets and act as their foreign sales department. most of the companies prefer this mode of foreign entry. d. brand names. we shall discuss the next mode of entering foreign markets. Types of export intermediaries include: a. Export management companies act as export department of the exporting firm (its client). i. copy rights. e. Boundaries of the Agreements: The companies should clearly define the boundaries of agreements.Export intermediaries perform a variety of functions and enable tile small companies to export their goods to foreign countries. It buys the goods from the domestic companies and exports. These companies act as commission agents for exports or they take title to the goods. the domestic manufacturer leases the right to use its intellectual property." Here the manufacturer in the domestic country is called 'licensor' and the manufacturer in the foreign country is called `licensee. i.e. International Licensing. arranging customs documents and arranging transportation services. Hence. to a manufacturer in a foreign country for a fee. They solicit domestic orders for foreign manufacturers. technology. Export and Import Brokers: The brokers bridge the gap between exporters and importers and bring these two parties together.e. Cooperative Society: The domestic companies desire to export the goods form a cooperative society.. Common factors affecting international licenses a. h. Their functions include: handling transportation. Now. assuming total responsibility for exporting and financing. Freight Forwarders: Freight forwarders help the domestic manufacturers in exporting their goods by performing various functions like physical transportation of goods. LECTURE 6 II. f. b. documentation. Example: Pepsi-Cola granted license to Heineken of Netherlands with exclusive rights of producing and selling Pepsi-Cola in Netherlands. International Trading Company: This company is engaged in directly exporting and importing. work methods. As such. trade marks etc. Each international licensing is unique and has to be decided separately. Manufacturers' Agents: They work on a commission basis. The domestic company need not invest any capital as it has already developed intellectual property. managerial. the companies can export their goods by selling them to the international trading company. The domestic company can choose any international location and enjoy the advantages without -incurring any obligations and responsibilities of ownership. which undertakes the exporting operations of its members. LICENSING In this mode of entry. the domestic company earns revenue without additional investment.Japan's largest beer producer entered Canada by granting license to Molson and British market by granting license to Charles Wells Brewery. Manufacturers' Export Agents: These agents also work on a commission basis. g. patents. investment etc. They determine which rights and privileges are being conveyed in the agreement. Therefore. Basic Issues in International Licensing Companies should consider various factors in deciding negotiations.

Nintendo game designers have the relatively safety of knowing millions of game system units. e Agreement Duration: The two parties of the agreement specify the duration of the agreement. The best example is Oleg Cassini and Jovan.(i) Heineken should not export Pepsi-Cola to any other country. the image Of the Japanese licensor would be damaged. e. Licensee gets the benefits with less investment on research and development. c. There is scope for misunderstanding between the parties despite the effectiveness of the agreement. in order to reduce price. Licensing cannot he a short-term strategy. Tokyo Disneyland demanded on a 100-year licensing agreement With The Walt Disney Company. For example. Determining. (ii) Pepsi supplies concentrated cola syrupand Heineken adds carbonated water to produce beverage and (iii) Pepsi can grnatclicence. boost up sales and profit. However. Licensor can investigate the foreign market without much efforts on his part. c.. For example. f. h. The licensee may develop his reputation. It is needless to mention that the licensor expects high rate of royalty while licensee would be unwilling to par much royalty. Licensing mode carries relatively low investment on the part of licensor b. This is because. the licensing agreement clearly and Specifically' indicate the rights. Both the parties have the responsibilities to maintain the product quality and promoting the product. settlement of disputes in courts is costly. d. to other companies in Netherlands to produce other products of' Pepsi like Potatochips b. There is a problem of leakage of the trade secrets of the licensor. Licensee escapes himself from the risk of product failure. Licensing agreements reduce the market pportunities for both the licensor and licensee. Licensing mode carries low financial risk to the licensor. The another constraint is that the licensee may under report the volume of the sales in order to reduce tile royalty payment to tile licensor. Advantages a. in granting license is detremining clear and specifically the and constraints. one party can affect the other through their improper acts. time consuming and hinders business interests. Determination of Royalty: The most important factor in deciding the license is the amount of royalty. LECTURE 7 III.both the parties negotiate for a fair royalty for both the sides in order to implement the contract more c. It would always be appropriate to have long duration of the licensing. Costly and tedious litigation may crop up and hurt both the parties and the market. Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola. of both the parties and reduces tile freedom of the licensee in order to reduce the hurdles in the implementation of tile agreement. The liensee may sell the product outside the agreed territory and after the expiry of the contract. b. Rights. Therefore. FRANCHISING . d. If the Indian licensee off Aiwa TV uses interior input. Dispute Settlement Mechanism: The licensee and licensor should clearly mention the mechanism to settle the disputes as disputes are hound to crop up. Hence. Disadvantages a. Therefore. d. Privileges and Constraints: Another important factor. etc. e. the duration of the licensing should not be of the short-term. g.

Franchising is a form of licensing. financial reporting. Continuous support systems like advertising. Product reputations d. provides expertise. Franchisor helps the franchisee in establishing the manufacturing facilities. Operating systems c. b. It is difficult to control the international franchisee. advertising. The franchisor can exercise more control over the franchised compared to that in licensing. McDonald did revoke the franchise. International franchising is growing at a fast rate. reservation services. Disadvantages a. Franchisor learns more lessons from the experiences of the franchisees. McDonald opened its restaurants in downtown locations in various countries. Franchisor can get the information regarding the markets. which he could not experience front the home country's market. d. Franchising Agreements : The franchising agreement should contain important items as follows: a. employee training. an independent organisation called the franchisee operates the business under the name of another company called the franchisor. d. Franchisee escapes form the risk of product failure. Advantages a. culture. This location has become a more successful one. McDonnell was successful in USA due to the popular menu and fast and efficient services. The factors for the success of the McDonald are later transferred to other countries. McDonald restaurants in Germany sell beer also and McDonald restaurants in France sell wine also. Franchisee can early start a business with low risk as he selects an established and proven product and operating system. corporate image etc. The franchisor provides the following services to the franchisee: a. customer service etc. customs and environment of the host country. Franchisee has to pay a fixed amount and royalty based on the sales to the franchisor. The franchiser may have the experience in franchising in the home country before going for international franchising. International franchising may be more complicated than domestic franchising. b. McDonald is convinced to open a restaurant in inner-city office building in Japan. c." c. . Basic Issues in Franchising a. c. and preferences. Franchise gets the benefits of R & D with low cost. services facilities. Based on this lesson. b. f. McDonald taught the Russian farmers the methods of growing potatos to meet its standards. Under this agreement the franchisee pays fee to t e franchisor. Franchisee should agree to adhere to follow the franchisor's requirements like appearance. McDonald benefited from the world wide learning phenomenon. Franchisor can enter global markets with low investment and low risks. Foreign investors should come forward for introducing the product on franchising basis. The franchisor has been successful in his home country. Franchisor allows the franchisee some degree of flexibility in order to meet the local taste-. Under franchising. Trade marks b. e. operating procedures. b. As one of the French investor did not maintain the stores as per the standards. d. quality assurance programmes etc. c.

b. f. International business can focus on the part of the value chain where it has distinctive competence. c. Small and medium industrial units in the host country can also develop as most of the production activities take in these units. b. because of reports of unsafe and harsh working conditions in Vietnamese factories churning our Nike foot ware. Franchising agents reduce the market opportunities for both the franchisor and franchisee. c. It 'reduces the cost of production as the host country's companies with their relative cost advantage produce at low cost. quality standards etc. by the host country's production. b. Nike has suffered a string of blows to its public image.a Los Angeles based company contracts with Chinese plants to produce Toys and Mega Toys concentrates on marketing.d. Management Contracts The companies with low level technology and managerial expertise may seek tile assistance of a foreign company. g. d. SPECIAL MODES Sonic companies cannot make long-term investments or long-term contracts to enter markets. design problem and other surprises. Therefore. Disadvantages a. iii) Mega Toys . This practice is called the contract manufacturing or outsourcing. Host county's companies may not strictly adhere to the production design. Example: i) Nike has contracted with a number of factories in south-east Asia to produce its athletic foot ware and it concentrates on marketing. There is scope for misunderstanding between the parties. ii) Bata also contracted with a number of cobblers in India to produce its foot ware and concentrate on marketing. LECTURE 8 IV. Both the parties have the responsibilities to maintain product quality and product promotion. Contract Manufacturing Some companies outsource their part of or entire production and concentrate on marketing operations. c. Advantages a. These specialised strategies include: Contract manufacturing Management contract Turnkey projects a. . generated. hindering the interest of the international company. The international company `gets the location advantages. These factors result in quality problems. image. There is a problem of leakage of trade secrets. they may use specialised strategies. Host country's companies may take up the marketing activities also. e. The poor working countries in the host country's companies affect the company's. For example. b. Then the foreign company may agree to provide technical assistance a.

train the local people. A management contract is an agreement between two companies whereby one company provides managerial assistance. This arrangement and additional income allows the company to enhance its image in the investors and mobilize the funds for expansion. roads. Foreign company earns additional income without any additional investment. The Government of the Kingdom of Saudi Arabia nationalised Armco and requested the former owners to manage the company. Germany and Japan. development of the distribution channels in Indonesia.and managerial expertise. Hilton Hotels provided these services to other hotels without additional investment and earned additional income. power. Advantages a. production or quality measures. risks and obligations. Exxon and other former owners of Armco accepted the offer. development of seedlings. communication. The host country’s companies may leak the secrets of technology LECTURE 9 c. Management contract helps the companies to enter other business areas in the host country. e. Turnkey Project Indonesian Government during 1974 invited global tenders for construction of a sugar factory in the country. connecting the factory. Italy’s ENI (Ente Nazionale `Idrocarburi) used its knowledge of European energy industry 'to help the Algerian national oil firm: Later the Algerian national oil firm requested the ENI to increase their business in European petroleum 'market." It also made a provision for the transfer of the factory along with the total package to the Indonesian Government and follow-up the activities after it is transferred to the Indonesian Government.. b. Air France and KLM often provide technical and managerial assistance to the small airlines companies owned by the Governments. technical expertise and specialised services to the Second company of the argument for a certain agreed period in return for monetary compensation. UK. sales growth. Indonesian Government was very much satisfied with the total package and invited the Japanese company to implement the project. France. plans for the export of surplus sugar etc. water etc." Disadvantages Sometimes the companies allow the companies in the host country even to use their trade marks and brand name. construction of sugar factory. Management contracts are mostly due to governmental inventions. d. One of the Japanese Company quoted highest price compared to all other Companies.’ . Delta. This project is called 'Turnkey Project. ENI constructed network of Pipelines for the Algerian company to distribute petroleum in Europe.. production Of' by-products and their market. This quotation includes: development of the fields for growing sugarcane. Monetary Compensation may be in the form of: > A flat fee or > Percentage over sales and > Performance bonus based on profitability. c. Indonesia Government received the tenders from the companies of USA. The Japanese company and Indonesian Government entered an agreement for implantation of this project by the Japanese company for a price. This agreement between these two companies is called the management contract. the host country’s business in the home country. The host country's companies spoil the brand name.` Under a management contract. The companies can act as dealer for the business of. Indonesian Government studied the quotation of this Japanese company. if they do not keep up the quality of the product service.

The technology. Corporation. Mostly. Baskin-Robbins in Russia followed this strategy. Buy American. Advantages a. operates it for some time and then transfers it to the host country's Government. Disadvantages a. The recent approach of turnkey projects is Build. International companies involve in such projects include: Bechtel. national highways. licensing. FDI exposes the company (to a fullest extent) tothe host country's politicaL and economic risks. they are large and multiyear projects. The companies normally approach the host country's Governments or International Finance. etc. culture of the country. franchising etc. establish manufacturing and marketing.. the customers of the host country prefer to the products produced in their country like -'Be American. Export-Import Bank of USA and the like for financial assistance as the turnkey projects require huge finances. • • . some other companies enter the foreign market through ownership and control of assets in host countries. get the knowledge and awareness of the foreign markets.e. In such cases FDI helps the company to gain market through this mode rather than other modes.'. Foreign firm needs to control the operations when It has foreign firm's need to control the operations when it has subsidiaries to achieve strategic synergies. In contrast. construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for remuneration. Government of Gabon and the Electricity Supply Board International of Ireland and Campaginc Generale des Eaux of France agreed to establish electric supply system and water system in Gabon and operate for twenty five years and then transfer the ownership of these projects to the Government of Gabon. quality dependability and better communication with the supplier. political situation of the country etc. b. International turnkey projects include nuclear power plants. In this approach. Brown and Root. Friedrich Krupp Gmb H. total cost incurred plus profit) This form of pricing allows the company to shift the risk of inflation /enhanced costs to the purchaser. V. the contractor will not be paid the remuneration. The US companies transferred their managerial expertise and technological skills to their subsidiaries operating in UK and hence these subsidiaries have become successful competitors to UK companies. The company builds the manufacturing/services facility. facilities through ownership and control. and then establish manufacturing facilities by ownership in the foreign countries. The forms of remuneration include:  A fixed price (firm plans to implement the project below this price)  Payment on cost plus basis (i. railway lines etc. Hence. FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES Some companies. Purchase managers of most of the companies prefer to buy local production in order to ensure certainty of supply... oil refinery.A turnkey project is a contract under which a firm agrees to fully design. 'Be Indian. c. enter the foreign markets through exporting. intellectual property rights have potentialities and their full utilisation needs planned exploitation. manufacturing expertise. Companies which enter the international markets through foreign direct investment (FDI) invest their money. Operate and Transfer (B-O-T). Kennengen. air ports. faster services. Hyundai Group. Buy Indian. The company can produce based on the local environment and changing preferences of the cutomers. customers' preferences.

b. if necessary. Strategic alliance is a co-operative and collaborative approach to achieve the larger goals. LECTURE 10 VI. sometimes. This strategy results in a longer gestation period as the successful implementation takes time and patience.  Local employees resisted the firm's attempt to impose its US work values. The mode of FDI without alliances is Greenfield strategy. India has allowed IOO% convertibility. buys or leases land. d. and threatened the opening. FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES Innovations. e. contract manufacturing. . England. The company conducts the market survey. by Mercedes-Benz in locating automobile assembly plant in Alabama and by Nissan in locating its factory in Sunderland. also have its own policies and styles of human resources management. d. Thus it can avoid the cultural shock. acquisitions and joint-ventures. The company can have its gestation period to understand and adjust to the new culture of the host country.  Local contractors demanded $150 million extra at the time of opening . ban the acquisition of local companies by foreign companies." Disney management faced the problems in building Disneyland in Paris. selects the location. c. franchising. creates facilities. The Greenfield Strategy The term greenfield refers to starting with a virgin green site and then building is. e. Some countries discourage the entry of foreign companies through FDI in order to protect thedomestic industry. productivity. Changing Government policies of the host country may create uncertainties to the company. Host country Governments. creations. The company selects the best location from all viewpoints. remits or transfers the human resources and starts the operations and marketing activities. Strategic alliance takes different forms like licensing. b. to meet the company’s requirement.  Communication difficulties with painters. The company can. c. impose restrictions on repatriation of dividends and capital. The company can have latest models of the buildings. are mostly accomplished by the strategic alliances adopted by various companies like mergers. The company has to follow the rules and regulations imposed by the host country's Government in case of construction of the factory buildings. in the recent years. rebates and concessions offered by the host governments including local governments.b. erects the machinery. This strategy is followed by Fuji in locating its manufacturing. machinery and equipment technology. FDI also exposes the company to the exchange rate fluctuations. These problems include:  Problems in dealing with French construction contractors. The company can avail the incentives. expansions and diversifications. greenfield strategy is starting of the operations of a company from scratch in a foreign market. d. Host country's Government may impose conditions that the company should recruit local people and train them. c. facilities in South Carolina. Advantages a. growth. Disadvantages a. Some companies may not get the land in the location of its choice.

This strategy helps the economy of the host country.the two tyre making corporations -joined together in order to synergise the strength of marketing capabilities of Dunlop and R&D capabilities of Pirelli. ('()C Cola entered Indian market instantly 11V acquiring the Pane and its bottling units. . Otherwise. Joint ventures involve the local companies. Disadvantages a. economic and political encourage the formation of Joint ventures. Some times it Would he cheaper to a domestic company to have a green field strategy than by acquisitions. This strategy adds no capacity to the industry. Xerox of USA and Fuji of Japan collaborated to explore new markets in Europe and Pacific Rim. Mergers and Acquisitions Domestic companies enter international business though mergers and acquisitions. Example. a. the domestic company may purchase the foreign company and acquires its ownership and control. Joint ventures involve shared ownership. Procter and Gamble entered Mexican tissue products in 1997 by purchasing Loreto Y. the domestic company through this strategy of mercers and acquisition may also get access to new technology or a patent right. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. Various environmental factors like social. Acquiring a firm in a foreign country is a complex task involving bankers. it would be very difficult to appraise the cases of acquisitions and mergers. In addition. the domestic company faces serious problems in gaining access to international markets. This act improves the local image in the host country and also satisfies the governmental requirements regarding joint ventures. Sometimes mergers and acquisitions also result in purchasing the problems of a fore Advantages a. c. lawyers. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. Labour problems of the host country's company are also transferred to the acquired company. American Motor Corporation entered into ajoint venture with Beijing Automotive Works called Beijing Jeep to enter Chinese market by producing jeeps and other vehicles. mergers and acquisition specialists from the two distribution networks. latest technology required human talent etc. Joint Ventures Two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures provide required strengths in terms of required capital. technological. Alliance is a strategy to explore a new market which the companies individually cannot do. The company can formulate international strategy and generate more revenues. 1 Though mergers and acquisitions provide easy and instant entry to global business. and enable the companies to share the risks in the foreign markets. b. For example. technology. a. b. network. A domestic company selects a foreign company and merges itself with the foreign company in order to enter international business. The company immediately gets the ownership and control over the acquired firm's factories. Alternatively. c. employees. Joint Ventures are common in international business. In fact. b. Two companies join hands in order to align their distinctive and different strengths. brand names and distribution networks. Companies adopt this strategy just as a means of entering foreign markets. Pena Pobre's manufacturing and marketing systems. regulations. b. Joint ventures are established as corporations and owned by the funding partners in the predetermined proportions. Domestic business selects this mode of entering international business as it provides immediate access to international manufacturing facilities and marketing.joint ventures etc. Dunlop and Pirelli .

marketing skills or marketing networks. For example. Advantages a. partners. the growth phase of the joint venture takes place. the interest of a host country's company in developing countries would be to get the technology from its partner while the interest of a partner of an advanced county would be to get the marketing expertise from the host country's company. Joint ventures make large projects and turn key projects feasible and possible. b. The partners delay tile decision-making once the dispute arises. expertise. changes in the business environment in the two countries. They result in disputes between or among parties due to varied interests. changes in the partners' strengths etc.000 engines per year and called the Government to provide facilities for an additional production of 30. If not. e. Decision-making is normally slowed down in joint ventures due to the involvement of a number of parties. this phase leads to stability of the joint ventures.  Changes in partners' interests. the joint venture may collapse. Then the operations become unresponsive and inefficient. d. Scope for collapse of a joint venture is more due to entry of competitors. If the renegotiation is not successful. Joint ventures provide synergy due to combined efforts of varied parties.000 tractors a year. the changed interests of the parties force them to renegotiate regarding their interests and shares. The company needed Government support for its successful operation. It planned to produce 50. Joint ventures are suitable for major projects. c. technology.support of the host country's Government is essential for the success of the joint venture. The reasons for collapse include:  Entry of new competitors  Changes in Business Environment  Changes in partners' strengths  Today's partners may become tomorrow's competitors. Massey-Ferguson failed to understand economic. e. Even in the stability stage. d. Joint ventures provide large capital funds. Life Cycle of a Joint Venture i. human skills. Joint venture spread the risk between or among. the joint venture may collapse. political and Governmental factors in the country. LECTURE 11 . Disadvantages a. they will lead to collapse of the joint venture in this phase itself. Different parties to the joint venture bring different kinds of skills like technical skills. b. During this stage the prospective partners start making:  Alliances  Project Collaborations  Feasibility Studies ii. The venture is terminated as the Government of Turkey did not provide he support to the company. Joint ventures are also potential for conflicts. If the partners work together. c. If the interests of the parties vary at this stage. Massey-Ferguson entered into a 51% joint venture in Turkey to produce Tractors. Growth Stage After making alliances. Life cycle of a joint venture is hindered by many causes of collapse. Exploratory Stage The first stage of the life cycle of a joint venture begins with exploratory stage.

the type of the project and the time frame. a company in one country (the licensor) enters into an 'agreement with a company in another country (the licensee) to use the manufacturing. . the licensing firm can lose profits The second disadvantage is that licensees can take the knowledge and skill that they have been given access to for a foreign market and exploit them in the licensing firm s home market When this happens. Strategic alliances have both advantages and disadvantages. but the licensor does not wish to engage in foreign production itself. As such. Importing and Exporting The oldest strategy of internationalisation by business firms is to engage in export and import of goods and services. The approach is appropriate when foreign production is preferable to production at home. a joint venture (JV) consists of two or more partners 'sharing in a project through participation in equity capital_ Joint ventures may take many forms depending on what is shared. Factors that lead to licensing arrangements include excessive transportation costs. what used to be a business partner. These include a. Licensing or Franchising Under this strategy. the number of partners involved. Direct investment. The major advantage of licensing is that profitability can be increased by extending the brand into new markets This strategy is frequently used for entry into less developed countries where older technology is still acceptable and. Exports and imports are subject to duties. in fact. they can allow quick entry into a market by taking advantage of the existing strengths of participants. Importing and exporting b. This approach combines a proven. Under this arrangement.A firm can tie up control of its product or expertise for a -long period of time And if the licensee does no: develop the market effectively. Export means producing goods in one's own country and selling them to another country whereas import involves bringing goods into the home country from abroad. Where a firm allows some firm in a foreign market to use its trade mark and formula. marketing knowledge.STRATEGIES OF INTERNATIONALISATION The process of internationalisation of business could be managed with different strategies. Licensing or franchising c. it is known as franchising. Strategic Alliance The term 'strategic alliance' denotes a cooperative arrangement between two o or more firms for neutral benefit One such arrangement is joint venture A joint venture is a partnership arrangement in which the foreign operation is owned in part by the domestic company and in part by a foreign company. trademark or name. patents. Otherwise managing the firm involves the routine problems of managing the domestic business. government regulations and production costs in the home country. c. which have to be taken care of by the firm's management. b. the degree of sharing that occurs. processing. operating formula given by the franchiser with local knowledge and entrepreneurial initiative (possessed by the franchisee). For example. Thus. there are many options in this type of strategic alliance Strategic alliances might also involve non-equity arrangements. technical assistance. may be state of the art The primary disadvantage of licensing is inflexibility. a franchising firm (the franchiser) grants for a fee an independent foreign firm (the franchisee) the use of a trademark or other asset that is essential to the operation of the franchised business. It is appropriate for firms that have developed such a formula. becomes a business competitor. a. Strategic alliance or joint venture d. Such types of alliances have been entered into by different airlines to reduce costs and provide better customer services. A brief overview of these strategies of internationalisation is given below. tariffs and other regulations. trade secrets or some other skill provided by the licensor for an agreed compensation (royalty).

Foreign Direct Investment (FDI) is more risky than exporting and importing. And they allow the firms to share the risk and cost of the new venture. Acquisition is also a way to purchase the brand-name identification of a product as was done by Coca Cola when it acquired Indian brands 'Thumps Up’ and 'Limca’ from Parle Drinks. Passive to Active Pursuit of Opportunities The companies generally move from passive to active expansion Initially 'he companies fear they may not succeed and they know very little about foreign trade Even the environment in the other land is unknown. Passive to active pursuit of opportunities. However. they would plan to invest and set up production unit. Once they become familiar then . rules & regulations of business in that land. Once they become sure of the opportunities abroad. Once the business grows successfully the company prefer to run the operations by it own staff. The major benefits of direct investment are complete managerial control over operations and profits do not have to be shared as in case of a joint venture. External to internal handling of the business c. automobile manufacturers. Limited to Extensive Modes of Operation The company generally starts its international operations by exporting or importing as this minimizes risk. c. Limited to extensive modes of operations d. significant problem LECTURE 12 EVOLUTION OF GROWTH STRATEGIES IN INTERNATIONAL BUSINESS The evolution of growth strategies in international business may be categorised as follows: a. Purchasing an existing firm provides additional benefits in that the human resources. Similar to dissimilar environments a. It involves building production facilities in a foreign country. Although it reduces the risk for each participant. b.S.or subsidiaries in a foreign country. Once they capture the market and are quite sure of their success. External to Internal Handling of Operations The companies initially use intermediaries or someone from the host country to carry the operations in the foreign land because they are not aware of the environment. One major disadvantage of this approach lies with the shared ownership of joint ventures. market by using the already established distribution systems of U. plant and organizational infrastructure are already in place. they actively take on the assignment b. Few to many foreign locations. : d. However direct investment also increases complexity in decision-making and economic and political risks adjusting the management style with the foreign Culture may be another. it also limits the control and the return that each firm can enjoy. It also requires more international commitment of the company's resources because the company has to send qualified technicians to the foreign country to establish and help run the new operations. which are similar to their own country_ economically. Strategic alliances are also an effective way of gaining access to technology or raw materials. Direct Investment Many firms make direct investments in foreign countries to capitalize on lower labour costs and potentials of huge market. foreign direct investment (FDI) takes place when a company registered in one country builds or acquires production facilities. culturally and geographically.Few to Many Foreign Locations The companies initially expand to those foreign locations.Japanese automobile manufacturers employed this strategy to enter the U. e.S. Thus. d.

Now Korea is richer than . that we have before us the most successful example of countries leveraging themselves out of poverty ever known. while the term is new. And one should still remember. Thus. that is virtually no growth rate. like the use of internet. Poor countries which have kept fairly closed economies have only had a .” where it is an expression of how the global capitalist system operates to maximize profits. Thus. act locally. you can show that engagement with the global economy is actually the condition of the economic development of poorer countries. The key question concerning economic development is really under what conditions can poorer countries engage with globalizing forces. act locally. However if you look at the statistics. in terms of national societies or international relations.” which appears to be as popular with the major transnational corporations (as we shall see) as it is with sociologists. transformations in the technological base and subsequent global scope of the mass media. Most theory and research on transnational communities proceeds in a similar fashion. both in similar and dissimilar environment.they may expand to the other neighboring countries of the host country.04 growth rate. Developing Countries and the Global Marketplace Is it true that globalisation is the cause of the impoverishment of the poor countries of the world? Again. its common languages and level of economic development. there is no doubt that it can have disruptive consequences for some poorer countries. by and large. that is. trading agreements help in the free movement of goods among the foundaries. when those countries are not prepared to engage with the economic forces that are released. you have to say no. has prospered countries like Burma or North Korea that try to isolate themselves from the world system are among the poorest countries in the world. I think. which has sought to disengage from the global economy. cables. beyond the level of the nation-state Globalisation researchers have focused on two new phenomena that have become significant in the last few decades: one. geographers. environmentalists and the rest. but need to be theorized in terms of global transnational) processes. anthropologists. it has become easier from the companies to know about their market demand globally. GLOBALIZATION Introduction to Globalisation What is Globalisation? Globalization is a relatively new idea in the social sciences.5 percent growth rate over that period. The central feature of the idea of globalization that is current in the social sciences is that many contemporary problems cannot be adequately studied at the level of nation states. So you cannot blame globalisation for these inequalities. e. In spite of the crisis of 1997-98. or at least not novel. Further. There is also a perception of less risk because of greater familiarity with nearby areas. set of phenomena. without much expenses through website. it is increasingly important to analyse the world economy and society globally as well as nationally. there has never been an example in history of millions of people being leveraged out of poverty so quickly. Even they can market their products easily. No country. qualitative and quantitative changes in economic structures through processes such as the globalisation of capital and production. for example. they move from few to many countries. and two. Poor economies that have been more open have had an average 4. Similar to Dissimilar Environment Now-a-days because of the advancement technology. the companies instead of first moving to known countries alone. Global system theory has its own version of “think globally. which is the East Asian economies. Korea was poorer than Portugal. what the term denotes is an ancient. over the past fifteen years. When you expand free trade. In 1970. I think. may reach out globally. This happened over a period of some twenty-five or so years. The standard resolution of the difficulties this conclusion raises for concrete empirical research is an often rather vague injunction to “think globally. For these reasons. though some commentators argue that.

And that failed. The reason is that it is very hard to establish an appropriate legal system. For example. including sectors of the Democrat Party in the US. LECTURE 13 What’s New about Globalisation? On the one hand. in the period after the Second World War. The way in which you got things done was not through the use of money. To my mind. “What is new?” You could call this view a nothing-new-under-the-sun kind of position. who was a famous economist at The World Bank. Anyone who has studied recent events in Russia will know this.Portugal per head of GDP. you keep existing welfare institutions intact. there is no doubt that the truth is closer to the hyper-globalisers’ version. Market forces often tend to accentuate inequalities. you cannot simply leave everything to the global marketplace. because that would not get you anywhere. Stiglitz essentially argues for a “third way” in development studies. if the state cannot do it. Countries that tried to develop through expansion of state institutions. He says that there is no known example of successful economic development where a government has not been involved. it was through the use of favors. There are fundamental changes going on in the world economy which differentiate it from previous periods. many people thought. although he does not use that term. Out of this economy of favors has come a kind of corrupt gangster-style attempt at capitalism.” Stiglitz says this does not work. if you look back a hundred years to the late nineteenth century. and so on. had abysmal economic records. then we must turn toward the market.” Stiglitz argues that you need a certain measure of government involvement in order to facilitate economic development. For example. there was also mass migration. criticizing what he calls the “Washington Consensus. In Russia. Governments still have a Role to Play In order to produce a more egalitarian world and help the poorer countries to become richer. ha. rather than reduce them. well. you do not have to make too many political changes. but they are so fundamental they have already transformed most of the basic systems and structures of the world. As a result. there was already a good deal of trading across the world. So the skeptics say essentially. what you had under the Soviet system was essentially an economy of favours. very hard to establish appropriate norms of a cultural kind that underlie markets. You cannot have a successful market economy unless you have a successful civic culture. . either. That is one side of the great globalisation debate. At that time. The skeptics say that. You would have to ring someone if you needed something. either. many people thought that the state was the main medium of economic development. tend to like this skeptical position. and I believe this to be correct. Having a successful civic culture is also the condition of democracy. much harder to establish market institutions than we ever imagined in countries that do not have them. That means what you are looking for is a new kind of relationship between governments and markets. and these countries achieved it by engaging with the global economy. the Asian economies. They say not only are there fundamental changes going on. On the other side is what I call the hyper-globalisers. as everyone who knows American history will be very conscious of. like getting a telephone quickly without waiting years for it. He wrote a series of articles about the International Monetary Fund. Some of the best writing on this is by Joe Stiglitz. including the United States in its early years. The old left. You need a kind of partnership between government and market institutions. So there is a massive transformation. He says that. the UK in its early years. the traditional leftist parties across the world. And I think Stiglitz is quite right in some of the subtle and acute observations he makes. there are those who are skeptical of the term globalisation. he says that it has proved to be much. like Tanzania or India. not by disengaging from it. If you do not believe that too much is actually changing in the world. Japan. European countries. “Ha. which lacks the basic institutions out of which a successful capitalist economy and a successful democratic society can be built. liberalize the market and everything will suddenly come right.

which I call “globalisation from below. At one moment. we can build a League of Nations. “Join the worldwide movement against globalisation. we will not be able to handle the forces which globalisation has released. No matter what you are doing. I think we have an obligation to try again at the beginning of the twenty-first century. Strong brand names charging a premium price over generic competitors . The Role of Entry Barriers a. you will be watched. which play a crucial role in global society. much higher than it was 100 years ago.g. they talk about globalisation of markets.” Globalisation from below is the way in which interest groups. groups like Greenpeace and so forth. ENTRY BARRIERS ENTRY BARRIER is any obstacle making it more difficult for a firm to enter a product / service market  NON-TARIFF BARRIERS  TARIFF BARRIERS Customs duties enforced on imported products (final products or intermediate products) Different tariff rates for different countries and different products. If you are running a corporation. Globalisation from below When most people talk about globalisation. in whatever part of the world. third sector groups. especially in Europe. A lot of people thought well. And what happened was a century of warfare. Everybody knows that the protesters who assembled in Seattle did so by using the Internet. you could say that was the first age of globalization. It is a much more intense age of globalisation. you only had about 1000 non-governmental groups in the world. Managing the Forces of Globalisation If you look back to the beginning of the twentieth century.” If you go back 30 years. But they underestimated the power of consumer groups. They ignore fundamental further aspects of globalisation. there is going to be a period of economic prosperity and global cooperation. But if we do not effectively cope with issues.000 such groups. 200 million people killed in warfare in the twentieth century. especially of expanding global inequalities. Intense competition among several differentiated brands b. self-help groups. Monsanto seemed to have everything going for them in the area of genetic technology. You only have to consider the humbling of the Monsanto Corporation to see that.Recent research shows that the volume of trade in physical commodities is much. and so forth. many of them fairly well resourced. This is indeed what happened with the protests at the World Trade Organization meeting in Seattle. the open markets and so forth. it is trade in information and trade in currency. Now you have by some estimates 30. One of the themes of the Seattle protests was corporate power. slow customs procedures. The most important development in the global economy is not. many of them operating at a global level. May be adjusted by political influence from trade associations Include all other entry barriers E. of course. So corporations flirt with disaster if they ignore the leverage that the counter power which globalisation from below is promoting in the world. and a lot higher than it was 30 or 40 years ago. and volunteer associations themselves draw upon international communication systems to establish themselves in the global arena. you ignore these forces at your peril. My view is that the power of corporations can be readily exaggerated. etc. no matter how powerful you are as a corporation. trade in physical commodities. There was a very funny poster that some guy was holding in Seattle that said. transportation costs. you can be brought to your knees pretty quickly.

g. e. Government regulations. c. tile return of Hon:. Pro-domestic sentiment favoring local brands Limited distribution access Bureaucratic inertia Government regulations Limited access to technology Local monopolies a.c. in the world. . all companies compete on equal footing. b. limited distribution access.the two largest populated countries.86 billion recorded in India. d. e. to the fold was widely perceived as the link China needed to the economically tree world mid its ways. -f. More Entry Barriers Artificial Entry Barriers Natural Entry Barriers Tariffs Pro-domestic Markets Competition among differentiated brands. the firm will be likely to enter via exporting. d. a. f. h. investors will do well to consider regions of the world where economic growth and expansion have greater potential than in North America. g. alternative modes of entry have to be chosen: License a local producer Create a joint venture Engage in a distribution alliance Invest in a wholly owned subsidiary LECTURE 14 INDIA'S ATTRACTIVENESS With North American economies stuck in a condition of too much capital in pursuit of too few attractive opportunities. e. When barriers are high. Policies and strategies are falling into place in both countries to assure that happens. b. f. China has been catching much of the investment community's attention lately. it goes through a change of leadership. In ?004 cross border merger and acquisition in sales recorded US$ I. f. if only because they have so far to go to catch up to the developed world. These two countries will almost certainly enjoy far more rapid economic development than the rest of the world for years to come. a. tariff barriers Entry Barriers Protect Domestic Turf Barriers and Mode of Entry When barriers are low. d. In addition.1111011 and in purchases S0. Obvious candidates include India and China . Kong. c. 1.

Net investments by FII in Indian equities touched a new peak of $8. the government is working earnestly to create over 10 million jobs every year to maintain 8 per cent plus growth in the economy.Improve ® Stay the same Deteriorate FIGURE Perceptions of Local Economic Performance over the Next 12 Months . Foreigners pumped a record of $7. proactive manner to make India a world leader in IT services. The effectiveness of the changes in the FDI policy depends on the domestic investment environment and the global outlook. India is the hot spot for outsourcing of US corporates.0 per cent compared to 4-5 per cent for China. Based on neo IT (US based outsourcing consultancy firm) survey in October 2005. but core sector growth shows signs of slowing down. India now has about 2 per cent of the world's market in IT services.26 billion in 2003. On the upside. With the factors like India being the fastest growing economy in the world.5 compared to 12.Exports 4. owing to its skilled labour pool and mature level of service.. Even though it has managed to keep inflation in check. highly educated.2 per cent and further $87 billion till September 200. English speaking labour force available at a fraction of the cost of labour in most western countries. GAIL were a huge success on the back of huge demand from FIIs. The attractiveness of Indian fundamentals largely depends on the police measures of the government in earl}' 2003. Industrial progress has been better in 2003-4. a more liberal investment regime led to a 25 per cent jump in India's FDI flow in 2004 to $5. much better than was initially expected (Table 1.Top 10 Scores. attractive valuations compared to other emerging markets (in May 2005 )forward P/E at 16. With demonstrated capability in this field. The other factor that will play an imp important role in attracting FII flows is the continuation of domestic demand.9 per cent in 2004-5.1 UPA Report Card Growth rates (%) 2003-4 WPI-based inflation Index of industrial production Index of infrastructure industries .0 billion in 2004.6 7.33 billion compared to $9.7 billion into India in 2003 lifting the value c rupee by S.0 4. export growth has been better in 2003-4 and the economy is slated to grow at 6.0 6. The FDI capital in banking rose from 20 per cent to 49 per cent. FDI-GDP ratio in India is more 1. While the demographics of the Indian subcontinent has been the biggest strength is boosting demand and generating employment.. and the government's ongoing divestment programme invariably made India an attractive destination. India has promoted the channelling of its educated population to the knowledge-based field of information technology services. it is still a cause for worry. (b) Performance of UPA Government in 2005 The United Progressive Alliance has had mixed fortunes as it completes one year in May 2005. The recent removal of sectoral caps for FDI flow is expected to bring out a surge in foreign investments. have not exactly accelerated the FDI inflows.4 .3 2004-5 6. and NTPC. Over the next 20 years.1).2 21. India should emerge as world leader and driving force in this field.0 8. 2005. India is the only developing country in the world with a huge. Furthermore. (a) Impact o f Changes in FDI Policy According to World Investment Report. TCS. raising the limit in banking and permitting 100 per cent FDI in almost all manufacturing sectors.6 for Asia/ Pacific). Opening up of insurance sector.4 24. They should continue to work in a. Indian politicians and businessmen should expand upon this great strength. Mega offers from companies like ONGC. TABLE 1. Thailand and Malaysia.

growth. however. exchange rate and the political climate. Net foreign investment in India has grown from $4.5 6. a group of Six Industries . On the downside. • high tax rate . logistics costs. In a nutshell.6 per cent fall in production in these sectors in Feb 2005 and only 3 per cent growth in March 2005 GPD. reported a growth of 8 per cent in 2004-5. Lowering would bring about better compliance.87 (on 24 May.560 million in 2002-3 to $18. unemployment and external trade negotiations.5 percent growth in 2003-04. transactional cost due to long delays in duty refunds of excise and drawback. However. This trend has been seen in all k the developed economies of the globe. However.2005) Note: ` expected " Revised estimates 8. (NCAER) latest political confidence index. The same as in 2003-4..4 percent against 6. The Index of core infrastructure Industries. grew by 4. • export.41 per cent in 20045. • there should be a 5 per Lent gap between customs duties on finished goods . cement and petroleum products -which constitute a Significant portion of the lll'. 2004) 6. This increased figure is on top of 8. compared with 7.than.5 " The index of industrial production. India Inc was bullish on UPA's handling of trade negotiations with the index going up from 41 t6 47. Another good news is that exports. which grew at 21. which reflects the impact of political factors on economic growth. inverted taxes like CST/ octroi and the differential cost of credit all contribute to our exports being high priced. Would Include: • removal of inverted taxes. all taxes into a.including coal. As almost 20 per cent of manufacturing are exported. is expected to grow 6. • partial implementation of free Trade Agreement . Merging.4 'per cent in 2003-4.9 per cent in 2004-5. octroi . Measures soon to be adopted by the UPA government for further tax rationalisation. the total value of good and services produced each year by a country. Trade balance is widening from $6.. single VAT (GST) should be implemented In all stares at the earliest.only S2 items on the roster prevents. India Inc's confidence fell on the government's handling of its finances. the prognosis on that front is not too good either.069. Manufacturing in India becomes uncompetitive compared to imports. The UPA's performance has improved on most of the parameters like managing economic reforms. it is a good sign for the industrial sector. In 2004-5.8 per cent.54 (on 13 May. CST VAT. sourcing of components from abroad.S per cent of GDP..S 4. Coinciding with Prime Minister Manmohan Singh's assessment of the UPA's performance in the last 12 months.944 million in 2004-5. deficits will increase in 20056. . mainly on account of better. CST and present a national market to the buyer. steel. a measure of how the industrial sector has performed. from 7 per cent in 2003-4.451.2 per cent in 2003-04. However.expected growth in agriculture. The new Duty Entitlement Passbook Scheme (DEPS) substitute should look to subsidise exports to that extent..676 million deficit in 2004-5 (June 2005). India Inc has exhibited greater confidence in the F current regime as reflected in National Council of Applied Economic Research.infrastructure cost. excise.on raw material components to help manufacturing competitiveness. inflation. service tax.prevent industrialization.9 ` 4. • too many levels of taxes –sale tax. with growth in major export markets expected to slow down in 2005-6.31 per cent in 2003-4. the UPA managed to maintain fiscal deficit at 4. The industry hoped that the UPA government will continue to push forward the economic reforms process in days to come. it is positive that one step taken by the government in the direction of providing positive support to businesses will be doubly reciprocated by industry. .161 million to $11.Gross domestic product Fiscal deficit as percentage of GDP BSE Sensex 5. Manufacturing sector growth was up at 8. The index showed a 0. grew further at 24.the combined effect of all taxes constitutes 40 per cent of product price.

and imply an implicit decoding of an underlying pattern of cause and effect relationships. Religious faith and assumptions about human nature belong to this category. In the management field that. In such a case. This means a happy situation in which rest of the world parks a part of its savings in India and economy invests more and grows faster than what would be possible purely on the strength of domestic savings. by nature. Instead of a definition. culture will be manifest in four key dimensions: Corporate culture The accumulated assumptions. 1973) or `a set of basic assumptions. meanings and causal relationships that have been shaped by history and transmitted through the educational process to children. Behaviour is the most visible part of the iceberg. since they deal with ingrained models of understanding. will probably believe that only materialistic rewards will motivate employees. LECTURE 15 THE DIFFERENT FACETS OF CULTURE There is no universal definition of culture. values. Industry culture: any rules derived from the professional norms of a particular industry: heavy manufacturing. the services sector turned out to be the most bullish recording a PCI of 134. Clifford Geertz. In ascending order. values. Firms belonging to northern and southern parts of India showed greater confidence on UPA while it was the opposite in east and west. 1953). assumptions). publicly listed.. some scholars have attempted to describe the content of culture. Behavioral change does not imply a modification of beliefs or assumptions.India Inc was not satisfied with the government's foreign exchange management as the index fe1l from 40 to 37. UPA faltered on the inflation front too with the index falling from 31 to 29. Basic assumptions are difficult to change in adults. is concerned with economic achievement of social groups (companies). It is manifested in action and can be modified through education as well as through some forms of `conditioning'. Schein adds the dimension of generational transmission.561 million in 2003-4 for India during 2(1111-4 and turned negative $6. handed down from one generation to another' (Edward Schein. oil and gas. beliefs and preferences are the explicit expression of assumptions incorporated into a set of codes or. attitudinal/emotional (behavior) or decisional (solutions). for example. She/he may change this belief when exposed to situations where people sacrifice financial reward for others' benefit. The current account balance has been positive $10. `system of shared meaning or understanding' (Claude Levi-Strauss.. pupils and students. 1985). which implies a certain degree of stickiness of culture over time.431 million in 2005.6. 1971. whether cognitive (meaning. norms that provide some sort of ethical and normative governance mechanisms for social groups. beliefs and preferences. its existing and past leadership imprint (the legacy of charismatic CEOs) its ownership structure (family-owned. There are three major layers of culture: Basic assumptions and meaning. and governmentowned) and its size (big or small). services. and behavior. basic assumptions are the least visible and probably the most entrenched. Professional culture . private. Values. shared solutions to universal problems . behavioural change will be superficial. Among industry segments. All these definitions have in common the concept that culture is `shared'. Values can be changed to some extent by new information and confrontation with new situations. A manager whose assumption about human nature is that men or women are fundamentally greedy. More relevant broad definitions of culture include `a shared pattern of behavior' (Margaret Mead. Schneider and Barsoux (1997) identify 164 different definitions made by anthropologists. beliefs and behavioral norms resulting from the history of the company (good and bad experiences). An autocratic leader may be told to change her/his style of leading a meeting although she/he still believes that employees `have to be told' (belief) based on the assumption that human beings are fundamentally divided into 'born leaders' and `passive followers'. etc.

are confronted with corporate. Material goods The language of material goods is linked to the importance attached to financial wealth as a sign of status . as in the case of Germanic culture.as opposed other status signifiers such as family. National Cultural Differences The systematic analysis of national cultural differences in a business management context is the result of four main streams of research: 1. In Eastern cultures. Ethnological research: 'silent language' differences 2. Agreements The `silent language' of agreement quite often opposes Western cultures to Eastern ones. Time Cultures differ according to their perception of time. a. The `silent language' of this sort of friendship may shock people coming from societies where friendships are not so quickly built but last longer. leading to the quest for preciseness. They identify six `silent languages': a. production personnel. as in Arabic countries. .the Latin countries . In Western societies.a materialistic trait of Americans . professional orientation introduces a large amount of differentiation within organisations. where people will be less punctual and not really disturbed by delays and postponements. Space Differences in the perception of space relates to the concept of social distance that measures not only the length of physical proximity in social interaction but also of emotional intimacy. education or seniority Friendships Friendship is built and maintained quite differently.people will see no objection to physical contact and the sharing of emotions. In high-social distance cultures. According to Hall (1960). people will tend to avoid physical and emotional proximity . d. etc.Derived from the training and professional norms/constraints of different functions within corporations: accountants. Some cultures see time as fluid. but this complexity is compounded by national and ethnic differences stemming from their worldwide implantation.a typical British trait-while in low-social distance cultures . industrial and professional cultural diversity. e. Managerial values and assumptions 3. National or ethnic culture: derived from the national. c. Context. for instance. punctuality and deadline-keeping. In some societies. Countries clusters: the grouping of nations according to similarities of cultural traits 4. Friendships e. it is often difficult for a b. researchers. religious or ethnic origin of citizens or social groups Global companies. Time can be seen as sequential and scarce. Space c. circular and abundant. Time b. Economic cultures differences: how business systems are organised and business interactions are governed. cultures differ in the way they communicate through non-verbal means or `silent language'. As Lawrence and Lorsh (1969) have described. as any other firms. In Indonesia. verbal and sometime ambiguous agreements are accepted. sales and marketing people. most agreements or disagreements are explicitly stated and documented in writing. Agreements f. one can make friends rapidly but at the expense of superficiality and the friendship may not last long. Material goods d.

THE IMPACT OF CULTURES ON GLOBAL MANAGEMENT TECHNOLOGICAL ENVIRONMENT Meaning of Technology Most of the people did not trust the arrangement made by `Lord Sri Krishna' to 'Drutharastra' to get the information of 'Kurukshetra War' instantly until the live telecast of `cricket rnatch' through TV become reality. interpersonal relations and concern for the weak are dominant values. Masculinity refers to the high value given to assertive. in Malaysia while egalitarian societies will have a more democratic view of social control with no particular reverence for high-ranking functions . on the other hand. the illusions are becoming reality mostly due to technology. He asked questions related to their preferences in management styles and work values and related the answers to national origin. Feminity. Hofstede's original (1980) survey was made with 116. for instance. nonaggressive behavior.000 employees at IBM worldwide.f. The distance is shrinked among the . East Asian cultures commonly put society ahead of the individual. the power of the 'click-the-mouse' and 'get whatever you need at your door step' became reality while some of us did not believe the power of God waving his hand in the air like clicking the mouse on the computer and fulfilling the desire of his devotees. and there is a continual search to codify. South American or Latin . The 'silent language' of context attaches to the importance given to the person rather than the content in a communication. Similarly.the important part of an interaction is the person (with whom) and the emphasis given to the setting. in Denmark.mostly Asian. Similarly. the ambiance and ceremonials. have a somewhat egalitarian view of power distribution. on the other hand. refers to societies where quality of life. Uncertainty avoidance is typical of societies where ambiguity and unpredictability is not accepted. LECTURE 16 Hofstede's work-related values differences Hofstede's research is probably some of the most frequently quoted in the international management literature. Man of the third millennium is able to see any part of the world. High-power distance societies will accept hierarchical control and respect authority . In low-context societies . will put group interests above individuals: consensus anti harmony will be preferred to assertiveness. Thus. one will find social groups where tolerance and risk-taking is accepted and rewarded (United States.as. related to the vast amount of data collected by the author. Spain). Individualism characterizes a culture in which individuals look after their own or immediate relative interests.what dominates the communication. This will translate into individual assertiveness and initiative in business contexts. NASA has been researching in this direction and came with an aeroplane which could reach from one part of the world to the other part of the globe within two hours. This is the case in most Western cultures. plan and regulate the environment (Japan. on the contrary. In fact. competitive behavior. Sweden). The days of 'touring-the-world within hours' like 'Narada' are not far-off. for instance. we did not believe the power of gods 'Devine Vision' (Drivya Drusti) until the video conferencing was introduced. business partner to say a straight `no'. individualism. he found that national cultures differed according to four main dimensions: power distance.as. Collectivist cultures. but a 'maybe' may in fact have the same negative connotation Context. hence the importance attached to written documents and technical specifications. get any product from any country.Anglo-Saxon. At the opposite end of the scale. Uncertainty avoidance and masculinity: Power distance is the extent to which people in certain societies accept inequality in power distribution or. In high-context societies . get messages from all over the globe with bare minimum cost by simply staying at his home or office. Nordic or Germanic .

As stated by Alvin Toffler. Technological environment has significant and direct influence on business in general and international business in particular. 16-31 March 1997. `once-upon-a-time's' illusion has become reality. Galbraith defines technology as "a systematic application of scientific or other organised knowledge to particular tasks". K. 9. e-mail. International business. Exhibit 1 : The Asian Technology Leaders Rank . LECTURE 17 . fax. J. video conferencing. it brings change in the society. These technological changes-enabled international business to take-up the shape of transnational business through the concept of global business. licensing and franchisina. in fact gained significance due to the amazing advancements in technology. e-mail chatting etc. . miracle drugs. . we drink even water (filtered and mineral water). production. Japan spends only 30% on product innovation and the remaining 70% on process innovation. USA spends 70% on product innovation and only 30% on process innovation. Technology affects all walks of life. technology is selfreirrforcing. joint-ventures. The Japanese auto manufacturers gained incredible competitive advantage over US counterparts by reducing new products' time to market. new diagnostic methods. Japanese are investing money in innovations and creations in biotechnology. Investment in Technology Advanced countries spend considerable amount on research and development for further advancement of technology. all countries and the entire globe. economy and politic~. satellite networks. All this. selling (e-ccmmerce). communicate (telephone. Japanese companies introduce the products in three year whereas US firms need five years for the same job. technological alliances. Note: In socio-economic infrastructure. . Technology flows from the advanced countries to the developing world through the multinational corporations (MNCs). In contrast. preparing for a class or a case or reading a news paper through internet. "Technology feeds on itself. Source : Business World. marriage alliances through internet." Thus.countries due to technology. we cook (electric rice cooker). Technology makes more technology possible. . Exhibit 1shows the ranks of Asian countries in technology development/advancements. India's position is No. * Physical and human resources devoted to manufacturing products and the efficiency with which these are used. Germany spends 50% of its R & D budget on product innovation and the remaining 50% on process innovation. unmanned factories. Technology brings the globe closer. Technology changes at a faster rate. electronic fund transfers. National orientation Singapore Japan ~ South Korea Malaysia & Taiwan Hongkong Indonesia ChinaIndia Socio-economic Technological infrastructure infrastructure Taiwan Singapore Japan South Korea Hongkong alaysia ' Indonesia China Japan South Korea Singapore China Taiwan Malaysia India Indonesia Productive capacity** Japan Singapore Malaysia South Korea Taiwan Hongkong India China & ?ndonesia ' * Evidence that a nation is taking direct action to become competitive. computer aided design. The latest information technology has dissolved the national boundaries and the advancements of transportation technology_ have reduced the distance among the world nations.). Technology advanced phenomenally during the past 50 years. lasers. Technology is application of knowledge. Influence of Technology Technology influences the way we live. 2 3. Others also follow Japan as this is an emerging area. fibre optics. In fact.

If the technology is not compatible. Study the host country's governmental policies regarding technology transfer. The difference between the nations is mostly reflected by the level of technology. then select the appropriate technology for the host country. though Japan is endowed with poor natural resources. Thus. MNCs locate the plants with high technology in advanced countries and establish the labour driven manufacturing facilities in developing countries. Japan with its high level technology could export finished goods to India. technology is one of the important cause for globalisation. As such the countries develop appropriate technologies those suit their topographical conditions. Appropriate Technology As indicated earlier. technology that suits one country may not be suitable to other countries.Technology and Economic Development Technology is one of the significant factors which determines the level of economic development of a country. Study the compatibility of the technology to the culture of the host country including the taste and preferences of the host country's customers. the MNCs have to understand the technology. it remained as a major importing country due to its low level technology before 1991. If not. developing countries allow MNCs entry into their countries inorder to have benefits of latest technology and to develop the domestic industry. Therefore. International business spreads technology from advanced countries to developing countries by: • establishing the subsidiaries in developing countries • establishing joint ventures with the host country's companies • acquiring the host country's companies or by merging with the host country's firms • arranging technological transfer to the companies of developing countries through technological alliances. Technology Transfer Technology and global business are interdependent. Study the impact of the technology on the environment of the home country including the laws pertaining to environmental pollution. if possible. Japanese became rich and advanced due to technology. Compatibility of the home country's technology with the host country's technology. These factors forced the domestic companies to enter foreign countries in order to find markets for their products. Thus. For example. Japanese automobile industry and Korean automobile industry design different types of cars those suit to the Indian Roads. it is criticised that the MNCs transfer obsolete technology to developing countries. TECHNOLOGY AND GLOBALISATION The industrial revolution resulted in large-scale production. analyse it before entering the foreign markets. the recent technological revolution led to the production of high quality products at lower costs. The level of the technology of the industry in the proposed host country. For example. select the host country's that suits the home country's technology. MNCs have to procure the technological environmental information regarding: • • • • • • • • The level of technology of the industry in the home country. conditions of infrastructure etc. technological alliances etc. In other words. . As such. though India had vast natural resources. Study the modes of technology transfer like joint ventures. climatic conditions. Advanced countries enjoy the fruits of latest technology while the developing nations face the consequences of obsolete or outdated technology. Scanning of Technological Environment The level of the technology is not the same in all the countries. in order to get the advantages of cheap labour. Added to this. But often. Technology and Location of Plants In addition. MNCs relocate their manufacturing facilities based on the technology. soil conditions. by importing the raw material from India itself.

The major changes include: ECONOMIC SYSTEMS Economic system is an organisation of institutions established to satisfy human needs/wants. information super highways. e-mail. The results of these changes are emergence of global markets. www sites. The change is revolutionary after 1990. The B2C portal enable the company in one country to sell its products to any customer of any country without the involvement of market intermediaries. Computer Aided Design (CAD). and customers. As such. there are no examples of pure capitalistic or communistic . help the global companies in:  Reducing the size of inventories  Reducing delivery time  Reducing unproductive waiting time  Reducing the incidents of stock-outs and lost sales  Responding to market changes at a faster rate  Reducing Rush Orders. Capitalism b. accordino to M. For example.  Cutting down over production  Reducing unnecessary movements of forwarding and back-tracking  Reducing paper work and wasteful process  Planning production levels accurately  Reducing/avoiding physical movement of employees. the information technology redefined the global business through its developments like internet. we now discuss the economic environmental factors of the global countries. ECONOMIC ENVIRONMENT International business is mostly and directly influenced by the economic environment of various countries. Sundaram Fasteners has access to General Motor's production and inventory plans through intranet. e-commerce is creating revolution in retail business. Mixed Economic systems are based on resource allocation in the system. MNCs have to understand and analyse more of economic environment of the foreign countries for strategy formulation. international economic environment and global business interact with each other. Hence. Xavier. brought vital developments in favour of global business. emergence of global business houses and global competitors rather than local competitors. The concept of telemarketing is slowly being replaced by the concept of ecommerce. Thus. These facilities. In fact. The future revolution of information technology is expected to reduce the need for environmental scanning by the MNC for the purpose of deciding where to enter. Global economy has undergone a sea change during the last 50 years.2B portal enables a business firm in one country to have on-line production and marketing tieups with other business firms of a foreign country. information technology will reduce the gaps in the level of technologies of world countries. This is because. There are three types of economic systems: a. The B.J. They are market allocation in case of capitalistic. In fact. LECTURE 18 E-Commerce The method of doing business electronically (e-cornnzerce). suppliers. cyberspace. command/central allocation in case of communistic and mixed allocations in case of mixed economic system. establishment of World Trade Organisation.Information Technology and Globalisation As indicated earlier. Communism c. Computer Aided Production (CAP) and on-line transactions brought significant development to the global business.

his choice for products/services. but advocate. Later. security. This is also called 'Fabian socialism. The major lintitations of this system include: i. This system emphasises on the philosophy of individualism believing in private ownership of production and distribution facilities. ii. shoes.their size." Under this system.' As mentioned earlier. The number of automobiles. The state owns all the factors of production and distribution. communication. It believes in full employment. USA. there is no pure capitalistic system or communistic economic system. scooters are determined by government planners. features etc. This system does not distribute the existing wealth equally among the people. It has been obsessed with rights of workers.economies.the main plank of Marxism. France. The limitation of this economic system made the Governments to introduce the welfare state concept which includes: workmen's compensation law. It fails to get total commitment of people to work and country's welfare. consumers are free to spend their income on what is available. The command sector accounts for 32 per cent in USA. Yugoslavia. Capitalistic Economic System Under this system.. b. suitable rewards for the workers' efforts. for exarnple. UK. Communistic Economic System : In this. Most of the East European countries follow the Marxist ideologies. major factors of production an distribution are owned. Japan and UK are the examples of capitalistic countries. quality. The purpose is to provide the benefit to the public more or less on equity basis. In communistic/command allocation countries. The degree of command allocation has been declining even in China. c. All actual systems are mixed economic systems of varied degrees of market allocations and command allocations. move towards market allocation. economic system. This is mostly due to the changes towards privatisation. Lenin set up a communist state in Russia after the Great October Revolution of 1917. communism collapsed in most of the African countries. v. It failed to achieve significant economic growth. provision for social security." a. have reduced their command sector after 1990. labour legislations for state and housing. television sets . iv. Communism collapsed in the former USSR. All capitalistic systems have a command sector and communistic systems have a market sector. Holland and India. agriculture. education. the ideology spread to Czechoslovakia. It could not achieve equality . 40 per cent in India and 64 per cent in Sweden. Mixed Economic System Under this economic system.. Rumania. managed and controlled by the state. customer allocates resources. The trend that is taking place in the globe today is the move towards privatisation. This economic system provides for economic democracy. medical. Communism is also called Marxism.e. control over private wealth. Similarly. It reduces individual freedom of choice due to restrictions on items to be produced. China. private property and property rights to income are abolished. i. vi. colour. the egalitarian principle. The other factors of mixed economic system are developmen of strong public sector. LECTURE 19 . water. Italy and Malaysia have started shifting their economic systems towards this economic system. food. Customers' choice for product/services decides what will be produced by whom. Poland and Sweden. regulation of private investmen and national self-reliance. motor cycles. Most of the other countries like India. France. agrarian reforms. thus giving the customer. transportation. power supply etc. the resource allocation decisions are made by the government planners. The rules of this system did not set fine examples for the executors to follow or implement. iii. Cuba is an example of the last remaining predominantly communistic country. shirts.

a. • • • • • • • Characteristics of these countries include: Less dependency on agriculture. c. • Locations for production of standardised/mature products like clothing for exports. packaged foods etc. formal education and increased wage rates. Formidable competitors due to lower wage costs and with the capability of advanced countries.000 and 12. • Domestic markets are dominated with the products like clothing. • Have competitive advantage in mature and labour intensive products. World countries are divided into four categories a. People migrate from rural to urban areas which results in increased urbanisation. and excessive dependency of population on agriculture • High birth rates • Low literacy rates • Heavy reliance on foreign aid • Political instability and unrest • Concentrated in Africa. GNP per capita of these countries ranges between US $ 2. d. Characteristics of these countries include: • Limited industrialisation. Low-Income Countries These countries are also known as third world countries or preindustrial countries.BUSINESS DEVELOPMENT Stages of Business Development Different countries in the world are at different stages of development. • Pose threat to the rest of world in labour-intensive products due to cheap labour. Lower-Middle-Income Countries c. These countries are with a GNP per capita of US $ between 400 and 2000 (1992). Occupational mobility of the people from agriculture to industry. South of the Sahara • Excessive unemployment and underemployment • Technological backwardness • Underutilisation of natural resources • Excessive dependency on imports • Industrial development is characterised by consumer goods industries • The vicious circle of poverty. Low-Income Countries b. They are also those with 1992 incomes of less than US $ 400 per capita. Upper-Middle Income Countries d.000. High exports and rapid economic development. Upper-Middle Income Countries These countries are also known as industrialising countries. High-Income Countries. building materials. Low wage costs compared to advanced countries. • Availability of cheap and motivated human resources. tires. Countries are segments based on GNP per capita. High-Income Countries. batteries. • Expansion of consumer markets. b. Increase in literacy. . Characteristics of these countries include: • Early stages of industrialisation. Lower-Middle-Income Countries These countries are also known as less developed countries.

The Carlyle Group and Thomson (58 per cent owned by the French government) submitted a bid of $ 450 million which was accepted by the bankruptcy judge. first. The success and growth of international business depend upon the stable. increase in aged population etc. viz. post industrial or First World countries. • Countries developed through the codification of theoretical knowledge rather than from random inventions are included in this category.These countries are also known as advanced countries. Ultimately. Thus.S. These countries shift to information society.S. • Development of intellectual Technology over machine technology. business also streamlines the distribution of goods from the manufacturing centres to the customers. Third. fostering. • These countries face the problems like pollution.000 through the process of industrial growth are included in this category. a bankrupt U. . increasing production and productivity to meet the growing needs of the population. excessive urbanisation. • Domination of scientists and professionals over engineers and semi-skilled workers. sheltering. properties. industrialised.S. a foreign government-owned company was a buyer. POLITICAL ENVIRONMENT Political environmental factors also influence the operations of international business firms enormously. secured political system in a country. International business houses establish their manufacturing centres in various counties and distribute the goods to the customers of a number of countries. deciding. The developing countries concentrate on allocation of scarce resources. • Service sector contributes more than 50 per cent to the GNP. defense contractor which has operated under bankruptcy court protection for six years. it leads to economic development. The characteristics of these countries include: • Oil-rich countries are excluded from this category. promoting. The influence of the political system of a country influences the business from multiangles. The GNP per capita (1992) of these countries is more than US $ 12.000. • High income countries mostly aim at building the information society. had to sell its missile and aircraft business. POLITICS AND ECONOMICS DO NOT MIX LTV. • UK's work culture (mainly distrust and absence of sound relations) is in contrast to the needs of rapid industrialisation. Finally. • Emphasis on the future plans. wants. Further. LECTURE 20 Business and Economic Development Business helps for identification of people's needs. a storm of controversy ensued. • Deindustralisation is in the process in these countries. this particular instance was worse because it had to do with the purchase of a large U. production of goods. Thus. The critics and media were quite upset. • Product innovations are more prevelant in post industrial society compared to that in industrial society. economic depression. people participative. supply them to the people. dynamic. Second. directing and controlling the business activities. it creates for the conversion of inputs into output and enables for consumption. However. the fact that the government in question was France did not help the matter since France has always been willing to sell arms to almost anyone. • Japan's work culture (mainly co-operation and harmonious interaction) suits to the basic requirements o: post industrialised society. honest. they did not like the idea of foreign companies buying U. international business contributes for the economic development. • Countries reached the income level of more than US $ 12.. defense contractor developing top-of-the-line military technology. • Development of information sector. encouraging.

The political philosophy of the developing countries shifted from self-sufficient to self-reliant. while some other countries have simple and quick decision-making mechanisms with their democratic approach. the friendly diplomatic relations between India and the former USSR helped not only the Indian companies but also the MNCs operating in India to have close business linkages with the former USSR. custom duties. Mobutu and Zambia with Mr. the political environment includes the policies and characteristics of political parties. Zaire had similar experience with Mr. some other countries differ radically. Even USA has public sector organisations. Similarly. incentive systems etc.S. POLITICAL RELATIONS AND INTERNATIONAL BUSINESS Political friendship/friendly diplomatic relations result in the growth of bilateral or multilateral trade. even non-communistic countries. They have been progressively shifting towards liberalisation. For example. controls and curbs on private enterprises. . He resigned in 1985 leaving a near-ruined country behind him. The erstwhile communist countries including the former USSR countries."" The Government. encouraged public sector companies. Hence. technology and managerial expertise. they differ widely in imposing restrictions and regulations. trade policies. Thomson had to withdraw its takeover offer. privatisation and globalisation (LPG). Restrictions on international/multinational corporations. taxes."19 In addition to the stable and dynamic governments. According to John Kenneth Galbraith. it was considered the first requisite for economic progress. Some countries are highly bureaucratic in decisionmaking regarding foreign investment..Based strictly on the economic perspective. Many restrictions on imports and foreign capital both inflow and outflow. and the China are in the direction from Marx to the Market. "the early emphasis was not on capital investment but on political and then on cultural development. The political philosophy of most of the governments seems to be broadly one of convergence. Kenneth Kaunda. Thomson's bid made sense and should benefit both Thomson and LTV. John Kenneth Galbraith argues that. a secure political context was stressed in both thought and action on economic development. As discussed in economic environment. government's intense opposition. West Europe and more recently in Japan. technology imports etc. Similarly. USA is the best example for political stability and dynamism. This is more so in most of the developing countries including India. As many as 8. Rule of the trade is state trading and counter trading. Tanzania had a stable government during 1965 and 1985 with Mr. scope. the nature of the constitution and government system. no country with a stable and honest Government have or has not had a reasonably satisfactory state of economic progress. It does not mean that communist countries do not allow multinational corporations. Even today India reserved nine strategic industries exclusively for public sector. Some countries do not differ from other countries regarding the philosophies of the political parties.500 public sector enterprises were brought under the umbrella of private sector in over 80 countries upto 1991. business people prefer to locate their business operations in USA. because of the U. in all the advanced coup-tries. In USA. procedures. Countries with stable political system enjoyed the successful business operations. the former USSR allowed the Pepsi when India did not allow it to enter. in addition to being stable should also be efficient. there are command sectors in market economies and market sectors in communistic countries! The trend has changed even in communistic countries. As such they compete among themselves to woo foreign capital. However. the friendly diplomatic relations between Pakistan and USA helped Pakistan companies to have close business linkages with USA. In fact. However. Nyerere as the head of the Government. • • • • The characteristics of bureaucratic and communistic countries include: Limitations. before 1991.

In parliamentary governments people are consulted and are allowed to participate in decision-making on all important issues. Israel. Arab countries did not prefer to carry on business with the business firms of Israel. Arab countries insisted the companies to produce Israel boycott certificate. Chinese government's seizure of US property in 1949 when Chinese communist party took power is an example of confiscation.  One-party Dominated system : In this system. nationalisation. Risks are based on the host government's actions like confiscation. Therefore. Even in India. rules and regulations on all citizens without considering the latter's needs or views. expropriation. Vietnam is politically stable but economically developing country. Though Saudi Arabia and North Korea claim that they are of parliamentary type political system. geographical areas or customers in order to have large scale economies. religious issues/problems. India (during 1996-2000) and Poland are examples for multiparty system. Egypt is the best example for this. In fact. the firms follow the policy of `maintenance of arm's length' with the competing firms. they do not allow the people to express their voice. Types of Political Systems : Appraisal of political systems helps us in having an idea of political systems and their impact on international business. they come to an agreement among themselves regarding price. though several parties exist. . language. Cuba.the ruling government dictates government policies. The former USSR. France. US market is large enough to accommodate any number of firms to operate independent of competing firms. This difference is mostly due to the fact that. Political Risks : International business firms face political risks as and when there are changes in Government policies and /or changes in political parties in power. multiparty. domestication and creeping expropriation. Under absolutist government. a. Libya are examples of this system. Republican party in USA (is viewed as) represents the business interest and the Democratic party represent the Labour. the dominant party rules the government and it does not allow any opposition party to come up. But the size of the European countries is very small and the firms cannot enjoy large scale economies. Congress party ruled the country until 1997. South Africa has been facing internal and external problems and Italy has been facing labour problems and internal dissension. though there are more than one party. India is politically unstable and also a developing country.  Single party system : In this system only one dominant party almost gets the opportunity to control the Government. This is due to varied regional. divide the market among themselves either in terms of products. particularly in Europe and India. Hence they are classified as monarchies and dictatorships. division of markets etc. ethnic.Hostilities between countries affect the international business among the companies of these countries. These countries prefered business relations with those countries which boycotted the business with Israel. Thus a single party rules the Government during the early stages of development. But in other countries. Hence countervailing laws were adopted in USA to prevent US companies from complying with this boycott.  Multiparty system : There would be many parties and no party is strong to gain the control of the Government in multiparty system. Governments may be parliamentary (open) or absolutist (closed). LECTURE 21 Level of Economic Development and Political Stability : South Africa and Italy are economically developed countries. European firms.  Confiscation : The process of nationalisation of a property without compensation is called confiscation. Government may also be classified as two-party system. The business in these countries is completely based on government policies rather than the people's needs. b.  Two party system : Two major parties take turn of controlling the government under twoparty system. In USA. single party and one-party dominated. Germany. product design. USA and UK are the examples of two-party system.

it had to do so after winning the election. government loan guarantees.  Social Unrest : Social unrest is caused by clashes between or among community groups. Energy Department intervene only invited even more backlash. and a high rate of return (23 per cent) all contributed to a negative public perception. Policies of the Host Government : Host Government's policies affect the operation of international business firms directly and internally or externally. Poland and Czech communists nationalised 100 per cent of their economy.015megawatt Dabhol project. Enron and Prime Minister Narasimha Rao's reformist government quickly signed a memorandum of understanding to build a massive power complex. In the end. HOW TO MINIMISE POLITICAL RISKS? Political risks cannot be completely eliminated.Hindu-Muslim conflict in India. General Instability Risk : These risks are due to social. . with the $ 2. However. The dispute between Chile and Arcentina. religious groups and ethnic groups. The Party's 1995 campaign for state elections called for a revaluation of the 2. believing that it would become more difficult for a new government to reverse the process. political neutrality. employment of nationals.  Attitudes of Nationals : The negative attitude of nationals towards foreign business and  foreigners is a greater risk. Peugeot and Renault) to Chile. THE ENRON CORPORATION'S EXPERIENCE The experience of Enron Corp. For example. sharing ownership. attitudes of nationals and policies of host governments. Burma nationalised entire foreign trade. marketing. Pepsi. being civic minded. behind-the-scenes lobby. Janata Government in India asked Coca-Cola to leave the country in 1977 due to the policy of discouraging the multinationals. Operation Risk: These risks are due to the imposition of controls on the foreign business operation (like production levels. Domestication : In domestication. they can be minimised by contributing to the change of the attitudes of the people and Government of the host country like stimulation of the host country's economy. Nationalisation : Nationalisation is the process of shifting the ownership of private property from private individuals or institution to the Government. ethnic conflict between Christian in Armenia and Muslims in neighbouring Azerbaijan etc. made Argentina to restrict exports (including the foreign cornpanies operating in the country like General Motors. in India. The company failed to seriously consider the sentiment of an opposition coalition led by the Bharatiya Janata Party. employment to foreigners etc.    Indicators of Political Instability Political instability can be viewed from the social unrest. the lack of competitive bidding. The Enron Corporation's experience is another example. colonialism. General Motors and Barclays Bank in South Africa.8 billion Dabhol project in India is a good example. Expropriation : Expropriation is the process of nationalisation of a property with  compensation. Indian Leaf Tobacco Development Company Ltd. Indian Government nationalised commercial banks with compensation in July 1969. the deal's secrecy coupled with the company's effort to keep the details confidential. the civil war between Serbs and Croats in 1991 in Yugoslavia. religious unrest in the host country like the recent coup in Fiji and problems due to Muslim rebels in Philippines. For e. In 1992. Since the coalition pledged during the campaign that they would review the project. repatriation. observation of political mood and reduction of exposure. Christian-Muslim conflict in Lebanon. For exaniple. the project was suspended before being renegotiated. Enron responded by quickly beginning the construction. white-black conflict in USA. These negative attitudes include exploitation. finance and human resource) by the host Government. Having no domestic partner.S. foreign business firms relinquish control and ownership in favour of domestic investors either partly or fully. Enron's request that the U. political..rnniple.

Pizza Hut came to China's rescue when the US mushroom industry asked for a quota against imports from China. In many countries there is a lot of restriction on the use of the media." Multinational companies can minimise political risks by employing. the foreign company may encourage the local companies by purchasing the raw materials and other inputs from the latter. Eritrea is an example in this case." • Being Civic Minded : US based MNCs sometimes encounter the `Ugly American' label • • Behind-the-Scenes Lobby : Firms attempt to influence political decisions.. Du Pont supplied 1. it is suggested that the foreign company should allow the domestic investors to invest and share the ownership by converting the company into a public limited company.• • • Stimulation of the Local Economy : The foreign company can stimulate the economic development of the host country by investing in their priority areas / portfolios. Employment of Nationals : Mostly foreign companies feel that the people of developing countries are lazy. The MNCs in addition to doing business in foreign countries. the foreign company can stimulate the host economy by being export oriented. hospitals. unintelligent. Political Neutrality : It is criticised that the MNCs actively involve in political affairs of developing countries. For example. issued newspaper advertisements urging US to sell missiles to Saudi Arabia.. IBM donated computer equipment and expertise worth $ 60. business policies and regulations have much to do with the political system and the characteristics of the political parties and politicians. using the local companies as ancillary units etc. ATST entered France with an agreement with Gencrale de Electricite of France to produce digital switches and export to USA. is creating problems for regulation. Hence. Ford chose to merge its automobile operations in South Africa with Anglo American by reducing its share to a minority position of 40 per cent. Brazilian companies for example. do not involve in the political activities of Central American countries. . Ownership can be shared through joint ventures. in particular. There are wide variations between countries in the policies and regulations regarding the conduct of the business. are under State monopoly or under strict state control in a number of countries.J. As such foreign companies hire the people from advanced countries and do not employ the local people. Radio and Television. developing and promoting the local people Sharing Ownership : If the multinational company owns the entire capital by itself.000 to Costa Rica. however.V. roads. it magnifies political risks.4 million water jug filters to eight African countries. abroad. MNCs may help the foreign countries in different ways like constructing schools. some countries have imposed a condition that the foreign companies can enter the domestic country only with the participation of local investors. H. Mobil corporation LECTURE 22 INTERNATIONAL LEGAL ENVIRONMENT As indicated earlier in this chapter. For example. Similarly. certain trade practices or promotional methods/strategies allowed in some countries may be regarded as unfair by the laws of some other countries.000 to fund infant nutrition studies in China. they should also be good corporate citizens there. Further. water reservoirs etc. assist the local companies in technological aspects. It is suggested that the MNCs should not involve in political affairs or disputes among the local groups of the host countries from the point of view of long-run interests. and less educated. IBM is the foreign company allowed to sell switchboards in France. For example. In fact. Heinz spent US $ 94. unmotivated. The advent of cable T.

and legal precedents set by the courts through interpretations of statutes. Rules for conducting business transactions are a part of the code. Advertisements. Certain changes in government policies such as the industrial policy. tariff policy etc. and criminal. legal legislation. Some governments specify certain standards for the products (including packaging) to be marketed in the country: some even prohibit the marketing of certain products. the Federal Trade Commission is empowered to require a company to provide sufficient evidence to substantiate the claim concerning the quality." Code law. Regulations to protect the purity of the environment and preserve the ecological balance have assumed great importance in many countries. many seller's markets have given way to buyer's markets. and theocratic law. But they have also given rise to serious threat to many existing products by way of increased competition. and in many other countries. viz." The common law. An example of an area in which . Some policy developments create opportunities as well as threats. regulations have become stronger. promotion. apart from those laws that control investment and related matters. The basis for common law is tradition. These laws cover such matters as standards of product. In other words. Common law seeks "interpretation through the past decisions of higher courts which interpret the same statutes or apply established and customary principles of law to a similar set of facts. of cigarettes must carry the statutory warning that "cigarette smoking is injurious to health. Many countries today have laws to regulate competition in the public interest. including packaging. ethics. derived from English law." Similarly. is based on an allinclusive system of written rules (codes) of law. ecological factors etc. baby foods must not be promoted as a substitute for breast feeding. civil law or code law. This battle for the market has provided a splendid opportunity for the advertising industry. Kinds of Legal Systems The legal systems that exist in different countries across the world may be classified into three categories. with a view to protecting consumer interests. The two legal systems differ primarily in that common law is based on the courts interpretations of events. on the other hand. The civil or code law. Japan. performance or comparative prices of its products.. the legal system is generally divided into three separate codes: commercial. Although the controls have been substantially brought down as a result of the liberalization. a number of controls still prevail. derived from Roman law. the advertisement of alcoholic liquor is prohibited. fiscal policy. also called a codified legal system. past practices. civil. There are host of statutory controls on business in India. and many other countries which were once under English influence. In a number of countries. In countries like Germany. may have profound impact on business. Under code law. the United States. packaging. The civil law system. For example. Canada. Elimination of unfair competition and dilution of monopoly power are the important objectives of these regulations. In many countries.In most countries. common law. including India. They have provided a lot of opportunities to a large number of enterprises to diversify and to make their product mix better. is found in England. a development which brightens the prospects of some enterprises may pose a threat to some others. product comparison advertisements and the use of superlatives like best or excellent in advertisements is not allowed. In most nations. France. is based on a detailed set of laws that make up a code. there are a number of laws that regulate the conduct of the business. Several European countries restrain the use of children in commercial advertisements. the industrial policy liberalizations in India have opened up new opportunities and threats. while civil law is based on how the law is applied to the facts. Even products which were seldom advertised have come to be promoted very heavily. is found in Germany. In the United States. promotional activities are subject to various types of controls. and past rulings.

which is found in Muslim countries. • Laws of home country (i. The WTO principles and regulations have a very important bearing on the international business. these laws are yet to be given effect to by a number of countries. and. international regulations of the trade between countries.e. In a common law country. related to foreign trade. the consensus of Muslim countries' legal communities. The best example of this system is Islamic law. However.36 Also see the reference to the Islamic banking system in the sub-section Religion in this chapter. etc. Several attempts have been made to unify some of the commercial laws. conventions. There are.the two systems differ in practice is contracts. Islamic law. contracts tend to be shorter and less specific because many of the issues that a common law contract would cover already are included in the civil code. LECTURE 23 INTERNATIONAL REGULATIONS International business is governed or influenced by several laws. For example. • Laws of foreign countries. treaties. These are The Uniform Law on lnternationalSale Goods (Uniform Law on the Sales) and the Uniform Law on the formation of Contract for the International Sale of Goods (Uniform Law on Formation). however. it is important for the manager to understand which type of legal system will establish the contract. Disputes of certain nature are settled by the WTO or in accordance with WTO principles. etc. Settlement of Disputes Disputes are not uncommon in international trade. In a civil law country. treaties. and these were adopted by a conference at The Hague in 1964.. the Sunnah.. Incoterms In Incoterms brought out by the International Chamber of Commerce are common sale or trade terms used in international trade to express the sale price and the corresponding rights and responsibilities of the seller and the buyer. The theocratic law system is based on religious precepts. In other cases there are broadly two avenues for the settlement of the disputes . three sets of laws and regulations relevant to international business. when entering into contracts abroad. with all contingencies spelled out. is based on the following sources: The Koran. India). or Shair'a. The Islamic law is found in Muslim countries. agreements. viz. contracts tend to be detailed. the sacred text. in particular the obligations of the buyer and seller and the passing of the risk. who derive rules by analogy from the principles established in the Koran and the Sunnah. Categories of Laws There are broadly. • International laws. The former aims at the unification of the substantive law of international sales. the writings of Islamic scholars. As pointed out in chapter 6. several. Also civil law tends to be less adversarial than common law because judges rely on detailed legal codes rather than on precedent. The international Institute for the Unification of Private Law drafted two Uniform Laws on International Sales. The latter is complementary to the former: it attempts to reconcile the differences of common and civil law on offer and acceptance lending to the conclusion of an international contract. or decisions and sayings of the Prophet Muhammad. The purpose of the Incoterms is to provide a set of international rules for interpretation of the most commonly used trade terms in foreign trade. So. conventions.

Regulations related to environmental protection are growing in a number of countries.. The difference between conciliation. ISO 9000 accredition is necessary for certain products for selling in markets like the European Union. Such standards pertain to quality. potency. by judicial court. cheaper and private. The Indian Council of Arbitration promotes arbitration as a means of settling commercial disputes and popularises arbitration. so as to avoid ad hoc judgements.e. • Product Liability: In several countries. extrajudicial dispute settlement may be preferred. the height of the head lights. or they hope at least that an amicable settlement can be achieved. in some countries the steering wheel should be on the left-side while in others it should be on the right side. Extra-judicial dispute settlement. safety. Each country may have its own product standards or specifications.. i. a conciliation clause or an arbitration clause be incorporated in the sales contract. Laws related to product packaging and labelling. health consideration. though a decision of private judge of their choice and not judges appointed by the state. to get compensation for it. shelf life. International Council for Commercial Arbitration (ICCA) and the International Centre for Settlement of Investment Disputes. etc. If the motor vehicle is taken as an example. trade practices etc.. For an international businessman. etc. biologically non-degradable packaging may not be allowed or penalties or fees may have to be paid for the social costs of using such materials. Regulations Related to Products • Product Standards: Many countries have established standards for many of the products. Litigation often takes very long time. Further.that the producer was at fault in respect of the defect in the product (causing the damage. possible adverse effects (if any).. Judicial dispute settlement. is very expensive and strains relationship between the parties involved. It is desirable to entrust arbitration to established institutions. the dispute is settled by litigation. at least in principle. Therefore. Similarly. is final but a court case may go to appeal to higher courts. the product quality will have to be accredited by an approved organisation. ii. if a person suffers any damage because of a product. arbitration offers distinct advantages over litigation. the arbitration award. like international Chamber of Commerce (ICC). also called mediation. • Environmental Laws. they want an amicable settlement of their dispute with the active assistance of a third person.In case of several products. Arbitration is thus closer to court proceedings than conciliation. they intend to adopt an adversary stance and will demand the resolution of their dispute by a decision.i. For example. the injured person has to prove . promotion. In the first case. If the firm favours extra-judicial dispute settlement. But the product liabilities laws of countries like the USA and several European countries place the consumer . price. and arbitration lies in the different aims of these procedures. There may be specifications about things such as the distance between the head lights. In some countries. are among the important regulations which the exporter should consider. It has been stated: "If parties agree on conciliation. • Disclosures. etc. Products the production or harvesting of which cause serious ecological problem may not be permitted to be marketed in some countries. Laws of Foreign Countries A firm doing business abroad has to consider the relevant laws and regulations of the concerned foreign countries. in many countries it is mandatory to make certain disclosures about the products like the ingredients. The national laws governing business may be different in different countries. But if they agree on arbitration. the conciliator. because it is quicker.

there maybe regulations regarding the different aspects of packaging. generally.in a very comfortable position: the consumer does not have to prove that the producer was at fault. better or excellent is prohibited for product comparisons in some countries. method of packaging. For example. including India. or comparative prices of its products. use of both French and English is compulsory. Labelling in local language is compulsory in some countries. Packing and Labelling Regulations Many countries have their own regulations regarding packaging and labelling. cigars. A number of countries have regulations controlling false claims. Door Darshan does not entertain advertisements of certain products like alcoholic drinks. performance. This is true of even the market economies. etc. tobacco products etc. cigarettes. beedies and pan masala. Where the liability of the producer is based simply on the fact that the damage has been caused by a defect although no fault on his part is involved. Some countries have restrictions on illustrations and use of photographs of women in advertisements. the package and advertisements of cigarettes shall carry the statutory warning that cigarette smoking is injurious to health. Similarly. Baby food marketers are not allowed to promote the product as a substitute for breast feeding. in India. baby food etc. There may be regulations regarding the packaging materials. certain products like alcoholic drinks. There may be certain mandatory disclosures to be made. The use of superlatives like best. In some countries like Libya media advertising is not possible. Regulation of Price Many countries have laws regulating price. For example. . Regulation of Promotion Promotional activities are. In most of the countries. are not allowed to be advertised in any or some of the media. In the USA the Federal Trade Commission (FTC) may require a company to provide sufficient evidence to substantiate the company's claims concerning the quality. The nature of the controls vary widely between countries. In many countries. Product comparison advertisements are not permitted in some countries. product promotion is subject to various types of controls.. then the loss or damage suffered by the consumer is passed on to the producer. packaging standards. Alcoholic drinks are not allowed to be advertised in other media too. subject to various types of controls. In some countries. in Canada.

adopt or recognise one or more standard specifications for a notified commodity. there are also laws designed for consumer protection. which has replaced the Imports and Exports (Control) Act. known as Joint Director Generals. For example. (iii) Establish. and augmenting imports from India and matters connected therewith or incidental thereto. No export of any goods can be made without obtaining customs clearance under the Customs Act. unless it is accompanied by a certificate to the effect that the commodity satisfies the conditions relating to quality control or inspection. It also empowers the Government to prohibit the import or export of any goods. Similarly. which is intended to provide for the sound development of the export trade of India through quality control and inspection and for matters connected therewith. 1992. Under the Act. According to this Act. 1953. The Customs authorities at the ports exercise full control over entry inward. 1942. Indian Laws There are some important legislations in India pertaining to exports.LECTURE 24 Regulation of Trade Practices Many countries have laws regulating trade practices like restrictive trade practices. The objective of the Foreign Trade (Development and Regulation) Act. (ii) Specify the type of quality control or inspection which will be applied to a notified commodity. (iv) Prohibit the export of the notified commodity. no person shall make any import or export except under an ImportExport Code number granted by the DGFT or the officer authorised by him. empowers the Central Government to: (i) Notify commodities which shall be subject to quality control or inspection or both prior to export. 1963. the export of antiquities is regulated under the Antiquities and Art Treasures Act. export of coffee is regulated by the Coffee Board under the Indian Coffee Act. and export of tea is regulated under the Tea Act. Government has also appointed officers subordinate to the Director General. This Act. 1972. is to provide for the development and regulation of foreign trade by facilitating imports into. 1947. Besides the Foreign Trade (Development and Regulation) Act and Foreign Exchange Management Act (FEMA) there are some laws which control the trade in certain items. The Act empowers the Government to control the import or export of any commodity by licensing. 1992. 1962. Another important legislations for export regulation is the Export (Quality Control and Inspection) Act. the Central Government has appointed a Director General of Foreign Trade (DGFT) for carrying out the Government orders issued under this Act. restricting or otherwise regulating the imports and exports of goods. entry outward and loading of the export cargo in terms of the statutory provisions. and (ii) Make provisions for prohibiting. According to this Act. no carrier can accept any export cargo for shipment to foreign destination without ensuring that the formal permission has been granted by the Customs authorities. The Act empowers the Central Government to: (i) Make provisions for the development and regulation of foreign trade by facilitating imports and increasing exports. . The Foreign Trade (Development and Regulation) Act: The most important law regulating the foreign trade of India is the Foreign Trade (Development and Regulation) Act. unloading.

might be down to 54 or'SS million. By then Italy's population. factors such as size of the population. nature of the family. small firms may find promising niches in these markets. for the first' . In Western and Central Europe and in Japan. Japan's population .5 and falling. competition is generally strong in them. Source: Peter F. Falling Birth Rate and Changing Age Structure True. to retain the high . been a boon to certain industries.of Southern Europe . in Balagna.now 125 million -. Population Size The size of the population is an important determinant of demand for many products. to reposition their products (originally introduced as baby products) and to pay more importance to international business. And it is as high as it is only because Qf the large number of recent immigrants who still. however. the birthrate is now below 2 and going down steadily. population growth rates. for instance -.Portugal. tend.is the collapsing birthrate in the developed world. even such countries may hold out opportunities for some companies. Because of the decline in the birth rates and the consequent fall in the size of the baby population. industries such as hotels. density of population. But even in Western and Northern Europe the birthrates are down to 1. In fact. The major part of the international trade and foreign investments naturally take place between these nations. in Japan to 13 . In some of Italy's richest regions. there has been an explosive growth of the global population. As these markets may not be of interest for large companies. But in the United States.now 60 million .if only because there is no precedent for it all of history . for exampls. Japan and all ." Demographic. The collapse of population size has serious implications for business. In developed countries the fall in the birth rate is so steep that the population size would shrink drastically. although the total population is still growing at over one per cent annually. Drucker. age composition.their country of origin for example. are generally attractive markets. too. the birthrate has already fallen well below the rate needed to reproduce the population. is fall in birth rates. below 2:I live births for women of reproductive age. rural-urban distribution. however. the market for baby products has shrunk.LECTURE 25 DEMOGRAPHIC ENVIRONMENT Peter Drucker. such as Johnson and Johnson.$. Advanced countries. Developing countries are also experiencing significant decline in the population growth rates. particularly in the developing countries.might be down to 20 or 22 million. family size. The universal trend now. that is any commitment of present resources to the future expectations. Spain. has to start out with demographics. suggests that any strategy. birthrates of . the birthrate by the year 1999 had fallen to 0. This has prompted some companies. There are countries with less than a lakh of people on the one hand and those with thousands of millions on the other hand. For example. airlines and restaurants have benefited from the fact that young childless couples . Poor countries with small population are generally not attractive for business. Italy. particularly with large population. Because of the large potential of these markets. The declining birth rate has. have very significant implications for business. ethnic composition. income levels etc. who emphasises the tremendous economic and business implications of demographic changes. However. That is.generafion. The Collapsing Birth Rate and National Suicide The most important single new-certm bout future . Mexico. Because of the declining birth rate population is already peaking in a number of countries. Greece – are drifting toward collective national suicide by the end of the 21st century. Southern France. Management Challenges for the 215' Century The declining birth rate poses a problem for many businesses.

there.and especially of people under eighteen. and a very large number at least one-third of the population . water supply etc. preferences. For example. This coupled with a steady increase in income drives fast the growth of the markets of a number of developing economies. To solve the basic problems. It is obvious that business should necessarily ponder over whether the falling birth rate and the shrinkage in the number of young people . A very significant share of the Indian population is below $e poverty line. apparently spend more on the single child than they used to spend on three or four children. and many sociologists. the additional number of people to be provided with medical care. automation. politicians and economists in developing countries.. for a business that makes its living making goods for small children. religion and caste. Many families. the existence of such a large size of poor population has a lot of other implications. If the labour is highly heterogeneous in respect of language. It is conceivable that having fewer children means that the child becomes more and more precious and that a larger share of the disposable income is spent on it. wholl partially. it also indicates enormous business opportunities. While it is a formidable national challenge. This apparently has already happened in China where a majority of families have only one child. A highly heterogeneous population with its varied tastes. in the developing countries to reduce the labour costs. Cheap la and a growing market have encouraged many multinationals to invest in developing count Many companies in the developed countries have relocated their production facilities. the collapsing birth rate may be an opportunity. the population growth rates are still very high. ethnicity etc. . the young population is already growing much more slowly than the older population. are opposed labour. that is.well above sixty. If labour is very mobile between regions and occupations. W the Western countries experienced industrial revolution. who do not have sufficient income even to meet the bare minimum basic necessities of life. In the United States. a very small number will be under fifteen. do not come within the market for a large variety of goods and services. Small families have also similar advantages when compared with large families. despite their poverty. In Japan the disproportion between younger people and people above any traditional retirement age will be equally great if notgreater. even if the country is generally poor. As Drucker points out. There are signs in other countries like Germany. Italy and even in the United States of similar developments. labour problems are likely to be less than would otherwise be the case. if just five per cent of the Indian population is well to do. beliefs. High population growth rate also implies an enormous increase in the labour supply. Labour shortage and rising wages encouraged the growth of labour intensive method production. there could sizeable market even for those goods and services which are regarded luxuries in these count For example. temperaments etc. The problems of developing countries due to the population explosion also indicate the enormous scope for several industries. The proportion of aged in the total population will go up. The falling birth rate and rising longevity will significantly alter the age distribution within Ihe population." Although birth rates have fallen in developing countries.is a threat or an opportunity. The occupational and spatial mobilities of population too have implications for business. Although these people. When the population is very large. the absolute num (more than 50 million) is larger than the total population of many of the high income economies. of those 20-odd million Italians by the year 2080. give rise to differing demand patterns and calls for differing marketing strategies. Capital intensive technologies.have more time and income for travel and dining out. babies. and even rationalisation. personnel management is likely to become a more complex task. the additional number of children to be educated. during one Five Year Plan in India are more than what most nations have done over centuries. children and teenagers . the population growth was comparati slow.

. Still. the number of young people will still be growing in absolute numbers in the United States. But then it is likely togo down and quite rapidly.past traditional retirement. up to the year 2015 or so. The share of old in the total population will increase in the future in almost every nation.

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