SUBJECT : GLOBAL BUSINESS

III SEMESTER

COURSE CODE: BM.10.301.11T

 OVERVIEW OF 5 UNITS
• Unit - I: International Business and Theories of
International Trade
• Unit - II: International Trade policies and Trade
blocks
• Unit – III: Global Market Entry Strategies
• Unit – IV: Export Promotion in India
• Unit - V: Managing Global Business
 CLASSIFICATION OF BUSINESS
• Industry • Commerce
– Primary – Trade
• extractive (ores-coal,gold) • Internal - wholesale and
retails
• Genetic – animal
husbandry, fisheries • External – import, export ,
entreport
– Secondary
manufacturing – Auxiliaries to trade
• Warehousing
• analytical
• Transportation
• Synthetical
• Insurance
• processing and
• Banking and finance
• assembling
• Advertising
• construction
– Tertiary – distribution
 INTRODUCTION
• There are two ways of looking at the term
‘international business’.
• One is the ‘action’ and the other is the‘actor’.
• As an ‘action’, ‘international business’ refers to
the types, process, scale, governance and
other aspects of carrying out international
business.
• As referring to actor, the term ‘international
business’ refers to ‘the entity carrying out the
international business.
• International Business conducts business
transactions all over the world.
• International Business is also known, called or
referred as a Global Business or an
International Marketing.
Unit - I: International Business and
Theories of International Trade
1. International Business – Meaning, Evolution of international
business
2. drivers of globalization
3. stages of internationalization
4. differences between Domestic Business and international
business
5. approaches to international business
6. Benefits of foreign trade.
7. Theories of International Business
1. Country based theories: Mercantilism, theory of Absolute Advantage, Theory
of Comparative Advantage, Factor Endowment theory /Heckscher -Ohlin
Theory,
2. Firm Specific Theories - Product Life-Cycle, New trade theory, Porter’s
National Competitive Advantage.
 What is International Business?
• International business encompasses all commercial activities
that take place to promote the transfer of goods, services,
resources, people(managerial knowledge), capital, ideas,
and technologies across national boundaries.
• International business occurs in many different formats:
– The movement of goods from country to another (exporting,
importing, trade)
– Contractual agreements that allow foreign firms to use products,
services, and processes from other nations (licensing, franchising)
– The formation and operations of sales, manufacturing, research and
development, and distribution facilities in foreign markets
– Starting a joint venture with a company
– Opening a branch for producing & distributing goods in the host
country.
– Providing managerial services to companies in the host country.
 International Business
• It is the process of focusing on the resources
of the globe and objectives of the
organisations on global business
opportunities and threats, in order to
produce, buy, sell or exchange of
goods/services worldwide.
 Definition
• “According to International Business Journal,
‘International business is a commercial
enterprise that performs economical activity
beyond the bounds of its location, has
branches in two or more foreign countries and
makes use of economic, cultural, political,
legal and other differences between
countries.”
 INTRODUCTION
1. Beverages you drink (in India in collaboration
with USA)
2. Tea you drink (tea powder from Sri Lanka)
3. Spares and hard disk of computers (USA)
4. Perfume you apply (France)
5. Television (Japan)
6. Shoes (Taiwan)

Without visiting or knowing the country of the

company – due to its operations and activities we
buy
 International Business

•International business consists of all

commercial transactions—including
sales, investments, and transportation—
that take place between two or more
countries.

•Increasingly foreign countries are a

source of both production and sales for
domestic companies
Copyright © 2011 Pearson Education 1-14
 Companies Engage in International Business

• To Expand Sales: pursuing international sales

increases the potential market and potential profits
• To Acquire Resources: may give companies lower
costs, new and better products, additional operating
knowledge
• To Diversify or Reduce Risks: international
operations may reduce operating risk by smoothing
sales and profits, preventing competitors from
gaining advantage.

1
Copyright © 2011 Pearson Education 1-15
 Global business
1. causes the flow of ideas, services, and
capital across the world
2. permits the acquisition of a wider variety
of products
3. facilitates the mobility of labor, capital,
and technology
4. provides challenging employment
opportunities
5. reallocates resources, makes preferential
choices, and shifts activities to a global
level
 EVOLUTION OF IB
1. Origin goes back to human civilisation
2. Integration of economies on a broader concept - First phase of
globalisation began around 1870 and ended with the world war- I
(1919) driven by the industrial revolution in UK, GERMANY & THE
USA.
3. International trade between two world wars has been described as
“a vast game of beggar-my-neighbour” (vacuum of trade and needed
international cooperation of trade and balance of payments affairs)
4. The efforts resulted in International monetary Fund , World
Bank (International Bank of Reconstruction and Development) &
World Trade Organisation (to liberalise their economies led to
globalisation- Limitations of closed economies- 1990s).
1. To revive the economies from recession ( led to International
Trade organisation) 23 countries in 1947 negotiations.
2. GATT was replaced by WTO in 1995 (trade and
liberalisation) – 1st Jan 1995
4. International business term has emerged from the
term international marketing which in turn emerged
from international trade
– International Trade to international marketing
• Exports to nearby countries and gradually to far-off (1900s (from
raw material) – 1960s (products))
• Create markets for its products – 1980s
Hence shift from exporting/importing to international
marketing.(textiles-cotton, jute, electronics, tea, coffee)
– International marketing to international Business
• MNCs producing products in their home countries and marketing
them in various foreign countries before 1980s, starting locating
their plants (Unilever (subsidiary - Hindustan lever ltd) produces
its products in India and markets them in Bangladesh, Srilanka,
Nepal etc.)

• 1990s- rapid internationalisation and

gloablisation
Unilever is a Dutch-British transnational consumer
goods company co-headquartered in Rotterdam,
Netherlands and London, United Kingdom

designed to include 25 icons-From a lock of hair symbolising our

shampoo brands to a spoon, an ice cream, a jar, a tea leaf, a hand
and much more, the little icons all have a meaning.

Hindustan Unilever Limited (HUL) is the Indian wing of the

Multinational consumer goods company Lever International
 GLOBALISATION
• International monetary Fund defines globalisation
as “the growing interdependence of countries
worldwide through increasing volume and variety of
cross-border transaction in goods and services and
of international capital flows and also through more
rapid and widespread diffusion of technology”
• Charles U. L. Hill defines globalisation as “ The shift
towards a more integrated and interdependent
world economy. Globalisation has two main-
components – the globalisation of markets and
globalisation of production”
 Example : globalisation
• Production:
– Toyota of Japan- established in USA & UK
– Boeing 777 Jet passenger aircraft has 1,32,500
major components produced in 545 locations
– Swan optical manufacturers in USA as low cost
factories in Hongkong, China, Japan & Italy.
 FUNDAMENTAL SHIFT IN THE
WORLD ECONOMY
• Moving from (national economies)
– Relatively self- contained entities, isolated from
each other by barriers to cross border trade and
investment
– Distance, time zones and language and by national
difference in government regulation culture and
business systems –distance shrinking due to
advances in transportation and
telecommunication technology, material culture is
similar to world over and interdependent global
economic system
 Kenichi Ohamae- global companies develop a
genuine equidistance of perspective
• Coca-cola, Honda, P & G, Toyota, Xerox, Mazda, Dr.
Reddy’s Lab, Reliance etc….
• EX: Mazda’s sport car Mx- 5 Miata
– Designed in California
– Prototype product created in England
– Assembled in Michigan and Mexico using advanced
electronic components invented in New Jersey
– Fabricated in Japan by sourcing finance from Tokyo and
New York
– Marketed worldwide
 INTERNATIONAL BUSINESS
- FOUR MAJOR CHARACTERISTICS
1. Globalisation of market presence – the extent to
which a company targets customers in all major
markets within its industry throughout the world.
Ex: Walmart
2. Internationalisation of supply chain- the extent to
which a company is assessing the most optimal
locations for the performance of various activities in
its supply chain. Ex: Toyota Cars (south east Asian
regional network – exported diesel engines form
Thailand, transmission from Philippines, steering
gears from Malaysia and engines from Indonesia.
3. Globalisation of capital base: the extent to
which the company is accessing optimal
sources of capital on a worldwide basis. Ex:
HongKong based internet service provider
China.com – 1999 listed in NASDAQ (National
Association of Securities Dealers Automated
Quotations).
4. Globalisation of corporate mindset: ability of
the company to understand and integrate
diversity across cultures, and markets. ex: GE
Globality of companies is assessed considering:
1. Political engagement 2. technological
connectivity 3. personal contract 4. economic
integration
 DRIVERS OF INTERNATIONAL
TRADE
• Shifts in globalisation and international business have been at
a fast rate after 1990s.
• The external environmental factors have been contributing
significantly for the remarkable strides in global business.
1. Establishment of WTO
2. Emergence & Growth of Regional Integration
3. Decline in Trade barriers
4. Decline in Investment barriers
5. Growth in FDI
6. Strides in Technology
7. Changing world GDP and world exports trends
8. Growth of MNC’s
 DRIVERS OF INTERNATIONAL
TRADE
1. Establishment of WTO: govts. Of GATT(general
agreement on trade and tariff) concluded in Uruguay
round negotiations – 15th Dec 1994 and WTO was
established in 1st Jan 1995.
– Strengthen the world economies and lead to more
trade, investment, employment and income growth .
– Implementation, administration and operation of
multilateral agreements and plurilateral trade
agreements
• Value of exports and imports increased during 1995 -
2013 despite recession 2007-2010 (approx. 400+%)
 The drivers of globalisation are:
2. Emergence and Growth of Regional integration : of
the countries of the same region or areas increases
the size of market, aggregate demand for products
and services, quantity of production, employment
and ultimately the economic activity of the
region.(get a variety of products at comparatively
lower prices)
• This factor, in turn, enhances the purchasing power
and living standards of the people.
• The significant regional integrations include
European Union, NAFTA,ASEAN, SAARC, EFTA, APEC,
MERCOSUR and ANDEAN. (known as trade blocks)
 TRADE BLOCKS
• North American Free Trade Agreement NAFTA
• Association of Southeast Asian Nations –ASEAN
• South Asian Association for Regional Cooperation- SAARC
• European Free Trade Association EFTA
• Asia Pacific Economic Cooperation Forum - APEC
• European Union EU
• MERcado COmún del SUR (Southern Common Market) –
MERCOMSUR
• ANDEAN COMMUNITY – South America- five andean
countries – Bolivia, Colombia, Ecuador, Peru, Venezuela
 3. Declining Trade barriers
• Governments used to impose trade barriers like quotas
and tariffs in order to protect domestic business from
the competition of international business.
• Advanced countries after World War II agreed to
reduce tariffs in order to encourage free flow of goods.
(General Agreement on Trade and Tariff (GATT))
• USA, JAPAN, FRANCE, GERMANY, SPAIN reduced rate of
tariffs
• Growth of international trade between 1950 – 2013
increased 35 fold.
 4. Declining investment barriers
• Global business firms invest capital in order to establish
manufacturing and other facilities in foreign countries. Foreign
governments impose barriers on foreign investment in order to
protect domestic industry.
• Various governments made more than 1,238 changes in the laws
governing foreign direct investment between 1991 and 2009. Out
of these amendments, more than 95% were in favour of foreign
direct investment.
• In addition, bilateral treaties increased from 181 as of 1980 to
1,856 as of 2000 among 160 countries.
• These treaties, which were designed to promote and protect
investment among countries, enabled the fast growth of
globalization of not only trade, but also production.
• Consequently, the global production increased by 9.5-fold between
1950 and 2009.
 5. Growth in FDI
• The investment made by a company in new manufacturing
and/or marketing facilities in a foreign country is referred to
as Foreign Direct Investment (FDI).
• These reasons include: increase in sales and profits, enter
into rapidly growing markets, reduce costs, consolidate trade
blocs, protect domestic markets, protect foreign markets, and
acquire technological and managerial know-how
• The outflow of FDI was more than 15 times after 1990s
compared to that during 1970s.
• 82.21% of FDI was provided by advanced countries and they
received 70% of the FDI in 2007.
• developing countries provided 34.66% of total FDI and
received 58.48% of total global FDI in 2012
FDI IN INDIA - India one of world's largest
recipients of FDI: Economic Survey
• The government has liberalised and simplified the
foreign direct investment (FDI) policy in sectors
like defence, railway infrastructure, civil aviation,
construction and pharmaceuticals.
• It said many new initiatives have been taken up to
facilitate investment and ease of doing business in
the country such as Make-in-India, Invest India,
Start Up India and e-biz Mission Mode Project
• China, Hong Kong, Brazil, Mexico, India and
Singapore are receiving over 50% of FDI among
developing countries
 6. Strides in Technology
• Companies spread latest technology (revolution)
throughout the globe and technology itself makes
the global company possible and fastens the process
of globalization. (develop a virtual global co. & )
1. Microprocessor and Telecommunications:
Companies
• Growth of high-power, superior-speed low cost
computing and handling vast amount of
information(speed & efficiency coordinating the
operations of global business firms)
2. Information Technology
• The Internet and World Wide Web : backbone of future
global business The activities of the global companies across
the globe are coordinated, monitored and controlled with
the help of Internet. The various facilities of the internet and
World Wide Web like e-mail; voice mail, data, and real-time
video communications such as videoconferencing. People
speak to each other at lowest cost using Yahoo Voice Mail,
Skype, MSN voice messenger, etc.
• Online Globalization: send information regarding changes in
raw material, customer preferences, changes in product
designs, etc., through the internet all over the globe. Even
the customer enquiries and complaints can be received and
redressed through internet.
• IT enabled the globalization process at a faster rate with more
efficiency at low cost.
• Transportation Technology: The significant
development in transportation technology
reduced the distance among the countries
drastically. The important developments in the
transport technology include: commercial jet
aircraft, super fighters, containers, etc.(the
transhipment from one mode to another easy
and reduced the travel time from one country
to another drastically.)
 7. TRENDS IN WORLD TRADE VOLUMES
AND PRICES
• World trade in terms volume increased significantly during
2010 as the growth rate of world trade in terms of volume
was 12.8% during this period.
 7. GROWTH OF MULTINATIONAL COMPANIES
• A multinational corporation/company is an organization doing
business in more than one country.
• Transnational company produces, markets, invests and
operates across the world. (GE, Seimens, Honda)
• MNCs and TNCs have been growing and spreading their
operations due to market, financial and other superiorities
and the expansion of international markets.
• USA had 132 out of top 500 MNCs of the world in 2012
followed by China (89), Japan (62), and United Kingdom (37).
India’s largest MNCs increased from 6 in 2007 to 8 in
2012.(coco cola, nestle,P &G, SONY, IBM, Citigroup etc..,)
 STAGES OF
INTERNATIONALISATION
1. Domestic Company
2. International Company
3. Multinational Company
4. Global Company
5. Transnational Company
 Stage – I: DOMESTIC COMPANY
• Domestic company limits its operations,
mission and vision to the national political
boundaries.
• This company focuses its view on the domestic
market opportunities, domestic suppliers,
domestic financial companies, domestic
customers, etc.
• unstated motto is that “if it is not happening
in the home country, it is not happening”
 STAGE - 2: INTERNATIONAL
COMPANY
• International companies focus on domestic practices, but
extend the wings to foreign countries.
• Some of the domestic companies, which grow beyond their
production and/or domestic marketing capacities, think of
internationalizing their operation.
• These companies remain ethnocentric or domestic country
oriented.
• These companies select the strategy of locating a branch in
the foreign markets and extend the same domestic operations
into foreign markets.
• In other words, these companies extend the domestic
product, domestic price, promotion (marketing mix), business
model and other business practices to the foreign markets.
 STAGE - 3: MULTINATIONAL COMPANY
• The international companies learn that the extension strategy
(i.e., extending the domestic product, price and promotion to
foreign markets) will not work.
• The best example is that Toyota exported Toyopet cars
produced for Japan in Japan to the USA in 1957. Toyopet was
not successful in the USA. Toyota could not sell these cars in
the USA as they were overpriced,underpowered and built like
tanks. Thus, these cars were not suitable for the US markets.
The unsold cars were shipped back to Japan.
• The international companies turn into multinational
companies when they start responding to the specific needs
of the different country markets regarding product, price and
promotion
• This stage of multinational company is also referred to as
multidomestic.
• Multidomestic company formulates different strategies for
different markets; thus, the orientation shifts from
ethnocentric to polycentric.
• 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 the country concerned.
Thus, they operate like a domestic company of the country
concerned in each of their markets.
 EX: MULTINATIONAL COMPANY
• Philips of Netherlands was a multidomestic company of this stage during
1960s. It used to have autonomous national organizations and formulate
the strategies separately for each country.
• Its strategy did work effectively until the Japanese companies and
Matsushita started competing with this company based on global strategy.
• Philips strategy was to work like a domestic company, and produce a
number of models of the product.
• Consequently, it increased the cost of production and price of the
product. But the Matsushita’s strategy was to give the value, quality,
design and low price to the customer.
• 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, marketing and R&D.
 STAGE - 4: GLOBAL COMPANY
• Global company either produces in home country or in a
single country and focuses on marketing these products
globally, or produces the products globally and focuses on
marketing these products domestically.
• A global company is the one, which has either global
marketing strategy or a global strategy
• Ex: global marketing focus: Harley Davidson designs and
produces super heavy weight motorcycles in the USA and
markets in the global market. Similarly, Dr. Reddy’s Lab
designs and produces drugs in India and markets globally.
• Gap procures products in the global countries and markets the
products through its retail organization in the USA. Thus, Gap
is an example for global sourcing company
 STAGE - 5: TRANSNATIONAL
COMPANY
• Transnational company produces, markets, invests
and operates across the world. It is an integrated
global enterprise that links global resources with
global markets at profit.
• There is no pure transnational corporation. However,
most of the transnational companies satisfy many of
the characteristics of a global corporation. For
example, Coca-Cola, Pepsi-Cola, etc
 Stage of internationalisation
DOMESTIC INTERNATIONAL MULTINATIONAL GLOBAL TRANSNATIONAL

EXAMPLES

Dr. Reddy Dr. Reddy Labs Philips in Harley Coca Cola

labs - drugs Toyota Netherlands Davidson Caterpillar
Toyota – Toyota Mazda Sports CAR
Toyopet cars Gap
TISSOT WATCHES
• Tissot Watches - since 1853,
Tissot are known as one of the
most innovative brands in
modern watch making. Featuring
nearly all styles of watches, from
sports to classic, and luxury to
high-tech.
• famous sports ambassadors, and
currently include Michael Owen
(football), Danica Patrick
(Indycar), Nicky Hayden
(MotoGP), Deepika Padukone
(Actress/model), Thomas Luthi
(MotoGP) and Barbie XU
(Actress/model)
 TISSOT – WATCH COMPANY
Global company – global marketing focus
• The company was founded in Le Locle, Switzerland by Charles-
Félicien Tissot and his son Charles-Émile Tissot in 1853.
• Tissot is a subsidiary of The Swatch Group.
• Tissot merged with the Omega watch making family in 1930.
• Tissot has been a member of The Swatch Group Ltd. since
1983, the largest watch producer and distributor in the world.
• Still based in Le Locle, Switzerland and marketed in 160
countries around the world. Tissot watches are currently
classified by Swatch Group as "mid-range market" products
 Approaches to International
Business
• Douglas, Wind & Pelmutter advocated four
approaches of International business:
1. Ethnocentric approach
2. Polycentric approach
3. Regiocentric approach
4. Geocentric approach
 1.Ethnocentric Approach
1. The domestic companies normally formulate their
strategies, their product design and their operations
towards the national markets, customers and
competitors
2. Under ethnocentric approach, the domestic
companies view foreign markets as an extension to
domestic markets.
3. The executives at the head office of the company
make the decisions relating to exports and, the
marketing personnel of the domestic company
monitor the export operations with the help of an
export department
• This approach is suitable to the companies
during the early days of internationalization
and also to the smaller companies

Managing
director

Manager MANAGER Manager Manager Manager

marketing Finance Production HR R&D

Asst manager Asst Mgr Asst Mgr

North India South India Exports
 II. Polycentric Approach
• The domestic companies which are exporting
to foreign countries using the ethnocentric
approach find at the later stage that the
foreign markets need an altogether different
approach.
• Then, the company establishes a foreign
subsidiary company and decentralizes all the
operations and delegates decision-making and
policy-making authority to its executives
 Polycentric Approach
• The executives of the subsidiary formulate the
policies and strategies, design the product
based on the host country’s environment
(culture, customs, laws, government policies,
etc.), and the preferences of the local
customers.
• Thus, the polycentric approach mostly focuses
on the conditions of the host country in policy
formulation, strategy implementation and
operations
• The company appoints executives and personnel
including a chief executive who reports directly to
the Managing Director of the company. Company
appoints the key personnel from the home country
and all other vacancies are filled by the people of
the host country

Managing director

CEO
Foreign subsidiary
(uganda)

Manager Manager Manager

MANAGER Finance Manager marketing
Production R& D HR
 III. Regiocentric Approach
• The company after operating successfully in a foreign
country, thinks of exporting to the neighbouring
countries of the host country. At this stage, the
foreign subsidiary considers the regional
environment (for example, Asian environment like
laws, culture, policies, etc.),for formulating policies
and strategies.
• However, it markets more or less the same product
designed under polycentric approach in other
countries of the region, but with different market
strategies.
 Managing director

CEO
Foreign subsidiary
India

Marketing
Marketing Marketing Bangladesh
Nepal Srilanka

MANAGER MANAGER
MANAGER R& D MANAGER Finance MANAGER HR
PRODUCTION MARKETING
 iv. Geocentric Approach
• Under this approach, the entire world is just
like a single country for the company. They
select the employees from the entire globe
and operate with a number of subsidiaries.
• The headquarters coordinate the activities of
the subsidiaries. Each subsidiary functions like
an independent and autonomous company in
formulating policies, strategies, product
design, human resource policies, operations,
etc.
 Managing director
Head quarters India

Subsidiary
Subsidiary India Subsidiary Namibia Subsidiary Kenya Subsidiary China
Srilanka
Changing Scenario of International
Business
• These factors resulted in enhancement of opportunities for
higher value addition in developing countries.
1. Globalization of various economies including the former
communist countries and socialist pattern of societies.
2. Establishment of World Trade Organization on the 1st
January, 1995 in place of General Agreements on Trade and
Tariffs.
3. Information technology revolution and its wider
applications to business across the globe.
4. Higher growth rate of transport technology and consequent
reduction in cost, increase in speed and efficiency.
5. Enlargement of European Union from 15 members to 28
members in 2013.
6. Higher growth rate of GDP of China, India, South
Korea, Singapore, Malaysia, Thailand, Brazil and
Mexico.
7. Spread of production activities of multinational
companies in the newly globalized economies in
addition to the developed economies.
8. Increase in business alliances in degree and variety
like alliances, joint ventures, mergers,
amalgamations and takeovers.
9. Increased globalization of culture.
10. Increase in educational opportunities and career-
orientation among the people of developing
countries particularly China and India.
• A Starbucks-United Airlines alliance has resulted in
their coffee being offered on flights with the
Starbucks logo on the cups and a partnership with
Kraft foods has resulted in Starbucks coffee being
marketed in grocery stores.
• Apple has partnered with Sony, Motorola, Phillips,
and AT&T; in the past. Apple has also partnered
more recently with Clearwell in order to jointly
develop Clearwell's E-Discovery platform for the
Apple iPad. E-Discovery is used by enterprises and
legal entities to obtain documents and information in
a "legally defensible" manner,
Heritage Foods announces 50:50 JV
with French company Novandie
1. Andhra Pradesh chief minister N.
Chandrababu Naidu-founded dairy firm
Heritage Foods. - tied with French dairy
company Novandie to set up a 50:50 joint
venture for manufacturing of flavoured
yogurt and desserts.
2. The joint venture will set up a Greenfield
plant with a capacity of 20 tons per day at
an investment of Rs 16 crore for the first
plant, which is expected to be operational by
2018.
3. To achieve Rs 6,000 crore revenues by 2022
 TERMINOLOGY
• Balance of Trade
The balance between a country's exports and imports.
• Beneficiary: The person in whose favor a letter of credit is
issued or a draft is drawn.
• Bill of Lading
A document which provides the terms of the contract
between the shipper and the transportation company to
move freight between stated points at a specified charge.
• Bonded Warehouse
A building authorized by customs authorities for the storage
of goods without payment of duties until removal.
 MARKET & STATE
• The market (price mechanism) is an
institution of resource allocation, based on
voluntary exchanges (transactions) by
individuals, motivated by preferences and
market prices.
• The state is an institution which allocates
resources and influences the organization of
economic activity through a legal monopoly
on force.
 FIRM/MNC
• A firm is an organisation which produces commodities
for sale in the market for a profit, and allocates
resources (such as capital and labour) without direct
reliance on the price mechanism (the market) on the
basis of internal entrepreneurial decisions (hierarchy).
• An MNC is a firm which controls production in
countries other than (and including) its home base.
MNCs - A multinational corporation or worldwide
enterprise is a corporate organization that owns or
controls production of goods or services in two or
more countries other than their home country

https://www.youtube.com/watch?v=DmI
ZvoOwtfA
 Some facts and trends in IB (i)
• International trade inside the world’s largest 350 MNCs
accounts for almost 40 per cent of world merchandise
trade.
• The world’s largest MNCs (e.g., General Motors, Exxon,
Microsoft etc) have annual sales higher than the annual
gross national product (GNP) of all but around 15 nation
states.
• In the early 2000s in the USA, nearly half of
manufacturing exports and around two thirds of imports
were flowing within MNCs (intra-firm trade).

80
• MNEs - multinational enterprise - A firm with over
10% of foreign ownership and the movement of long-
term capital to finance business activities abroad
(with foreign investors controlling at least 10% of the
enterprise)
– A multinational enterprise is a firm that has
productive capacity in a number of countries. The
profit and income flows that they generate are
part of the foreign capital flows moving between
countries
– Companies who are MNEs such as McKinsey,
Unilever and Wipro generate sales and profits in
multiple locations across the world
FDI- FOREIGN DIRECT INVESTMENT
• The investment made by a company in new
manufacturing and/or marketing facilities in
a foreign country is referred to as Foreign
Direct Investment (FDI).
• FDI is the control of production which takes
place in one country (‘host country’) by a firm
based in another country (‘home country’).
• FDI is the defining feature of the multinational
corporation (MNC).
https://www.youtube.com/watch?v=V8lGeq
Jt00E
 TRANSNATIONAL
COMPANY
• Transnational company produces, markets, invests and
operates across the world.
• Characteristics
1. Geocentric Orientation (Ex: specialized and integrated:
Caterpillar , Sharing of knowledge: French subsidiary of
Colgate)
2. Scanning or Information Acquisition
3. Vision and Aspirations
4. Geographic Scope (the availability of resources,
customers,markets, technology, research and development)
5. Operating Style (globalize the functions like R&D, product
development, placing key human resources, procurement of
high valued material ex: Proctor & Gamble & Colgate)
6. Adaptation: (products, marketing strategies other functional
strategies to the environmental factors of the market concerned.
Ex: Mercedes Benz is a super luxury car in North America, luxury
automobile in Germany, standard taxi in Europe.)
7. Extensions: For example, Casio calculators of Japan, Hero pens of
China, and BIC’s line of pens, butane lighters and razors.
8. Creation through Extension: (create the global brand through
Rothman's Cigarettes extended its product to many European
countries and African countries)
9. Human Resource Management Policy: (not restricted by
national, political or legal constraints. selects the best human
resources and develops them regardless of nationality, ethnic
group, etc. )
10.Purchasing: Procures world-class material from the best source
across the globe.
 GOALS OF INTERNATIONAL
BUSINESS
1. To Achieve Higher Rate of Profits (ex: HP, Apple)
2. Expanding the Production Capacities beyond the
Demand of the Domestic Country (Ex: US, Canada,
Australia, Japan economies)
3. Severe Competition in the Home Country
4. Limited Home Market (Ex: Japanese automobile and
electronic firms entered the US, Europe and even
African markets, ITC entered the European market,
Ciba-Geigy- Switzerland)
5. Political Stability vs. Political Instability (Ex: UK, France,
Germany, Italy and Japan & instable: African countries
and some of the Asian countries)
6. Availability of Technology and Competent Human
Resources:
7. High Cost of Transportation (Ex:Mobil -petroleum
products to Ethiopia, Kenya, Eritrea, Sudan, etc.,
from its refineries in Saudi Arabia, established its
refinery facilities in Eritrea, Similarly Caterpillar)
8. Nearness to Raw Materials (Ex: US & European
companies located their manufacturing facilities in
Saudi Arabia, Bahrain, Qatar, Oman, Iran and other
Middle East countries
9. Availability of Quality Human Resources at Less
Cost (Ex: USA, developed European countries and
Japan take from India. (India, China & Thailand)
10. Liberalization and Globalization
11.To Increase Market Share: (Ex: Ball
Corporation, the third largest beverage cans
manufacturer in the USA, bought the
European packaging operations of
Continental Can Company (200% demand))
12.To Achieve Higher Rate of Economic
Development ( growth rate, total and per
capita GDP, industrial growth, employment
and income levels)
13.Tariffs and Import Quotas (Ex: Harley-
Davidson of the USA(Japan), Japan restricts
rice and other agricultural goods from USA
 BECOS OF INCREASE OF
Tariffs & Quotas
• For example,
– companies like SONY, Honda and Toyota preferred
direct investment in various countries by
establishing subsidiaries or through joint ventures
in various foreign countries, USA and India.
– General Electricals and Whirlpool also have
foreign subsidiaries.
– Xerox, Canon, Philips, Unilever, Lucky Gold Star,
South Korean Electronics Company, Pepsi, Coca-
Cola, Shell, Mobil, etc. established manufacturing
facilities
TOP TEN SUCCESSFUL COMPANIES
• https://www.youtube.com/watch?v=Zii22W5Z
1jY
 Contributions to International trade
Theories of international business
(Limitations/ Conclusion)
1. Classical Theory
Country based theories
1. Mercantilism,
2. Absolute cost Advantage,
3. Comparative cost Advantage,
4. Heckscher (1919)-Ohlin (1933) Theory or Relative
factor endowments
Firm based theories
1. International Product Life-Cycle (Vernon),
2. New Trade Theory:
1. National Competitive Advantage (Porter, 1990)
• Free trade - a situation where a government
does not attempt to influence through quotas
or duties what its citizens can buy from
another country or what they can produce
and sell to another country.
• Trade theory: shows why it is beneficial for a
country to engage in international trade even
for products it is able to produce for itself
 INTRODUCTION
• International trade becomes possible for
mutual benefit to the two countries due to
the differences in opportunity costs.
• International trade between two countries can
benefit both countries if each country exports
the goods in which it has a comparative
advantage.
 1. MERCANTILISM
• Mercantilism (1500 – 1800) promoted the
idea of encouraging exports and discouraging
imports.
• According to this theory the holdings of a
country’s treasure primarily in the form of
gold/precious metals constitutes its wealth.
• This theory specifies that countries should
export more than they import and receive the
value of trade surplus in the form of gold
(where trade deficits)
• Mercantilism (mid-16th century) suggests that
it is in a country’s best interest to maintain a
trade surplus -to export more than it imports
• Advocates government intervention to
achieve a surplus in the balance of trade.
• Colonial powers like the British used to trade
with their colonies like India, Srilanka
etc..,(importing raw material and exports the
finished goods to colonies) – hence benefited
the colonial powers and caused much
discontent in the colonies.
 MERCANTILISM
• Mercantilism theory suggests for maintain favourable
balance of trade in the form of import of gold for
export of good and services. But the decay of gold
standard reduced the validity of this theory.
• Neo – Mercantilism: produce more than the demand
in the domestic country – full employment
• CRITICISM:
– Mercantilism views trade as a zero-sum game (Adam smith
and David Ricardo revealed short-sightedness)
– Measure the wealth of the nation by the stock of precious
metals (stock of HR, man made and natural resources –
used for producing goods & services - greater stock,
greater flow, increase SOL)
 2. THEORY OF ABSOLUTE COST
ADVANTAGE (1776)
• According to Adam Smith(scottish economist) free trade
enables a country to produce a variety of goods and
services and increases a country’s wealth.
• Specialising in the production of some goods and
services (in which we have the cost advantage or
produce at the cost less than that of other countries) and
importing others.
• Proposed the theory based on the principle of division of
labour.
• Trade between two countries takes place when one
country produces one product at less cost than that of
the other country.
 ADVANTAGE OVER THE OTHER
COUNTRY
1. Skilled labour and specialisation advantage
– Suitability of the skill of the labour of the country in producing
certain products.
– Specialisation of labour in producing certain products leads to
higher productivity and less labour cost per unit of output.
– Economies of scale would reduce the labour cost per unit of
output
2. Natural Advantage
– Climatic conditions, natural resources etc… (USA climate :
wheat, srilanka – tea, rubber)
3. Acquired Advantage
– Technology and skill development (Japan in steel (iron and
coal)- labour saving and material saving technology, Denmark
exports silver table ware – Danish companies ability
 Examples – Absolute advantage
• India – pens
• England – textiles
• France – wines
• Japan – audio tape recorders
 ASSUMPTION OF THE THEORY
• Trade between two countries
• Only two commodities are traded
• Free trade exists between the countries
• The only element of cost of product is labour

https://www.youtube.com/watch?v=Vvfzaq
72wd0
 NUMERCIAL EXAMPLE – Absolute advantage
using two countries and two products
Output per one day
of labour
Japan India Japan India
Pens 20 60 40 – 2 days 40 – 0.67 days

Audio tape 2 4 – 0.67 days 4 – 2 days

6
recorders
Save 2-0.67 = Save 2-0.67 =
1.33 days 1.33 days

Ability of the labour to produce different goods/Services in a day

is known as production possibilities
Ex: Japan exchanges 4 Audio tape recorders with 40 pens
Japan saves if it imports pens and exports audio tape recorders
 ABSOLUTE COST ADVANTAGE
Output per one day
of labour
Japan India Japan India
Pens 10 30 30 Pens from
+ India
30 -10= +20
gain in pens
Audio tape 1 3 ATR from
3 Japan
recorders
3-1 = +2 Gain in
ATR
When not When traded or exchanged
traded
 3. Comparative cost advantage
theory
• As absolute cost advantage theory fails to
explain the situation when one country
has absolute cost advantage in producing
many products.
• David Ricardo, a British economist –
expanded the absolute cost advantage
theory to clarify this situation and
developed the theory of comparative cost
advantage.
 COMPARATIVE COST ADVANTAGE
THEORY
• It states that a country should produce and
export those products for which it is
relatively more productive than that of other
countries and import those goods for which
other countries are relatively more productive
than it is.
• It is based on relative productivity differences
and incorporates the concept of opportunity
cost.
 Output per one day
of labour
Japan India Japan India
Pens 60 50 10 more than 50/60 = 0.83
India times as good
1.2 times
better than
India
Audio tape 6 2 4 more than 2/6 = 0.33 times
recorders India good
3 times more
productive

Japan is more productive than India

In absence of trade labour in Japan can produce either pens or ATR or 30 pens
And 3 ATR Similarly India 25 Pens and 1 ATR
IMPLIES Concept of
from the opportunity cost
earlier slide
Japan India Japan India
Pens 10 25 Japan trades India produce
(adv) for 17 pens pens
with India with
1 ATR
17-10 = 7 pens
it gains
Audio tape 1 1 So let Japan India sells 17
recorders (if it produce ATR pens for 1 ATR
25-17 =8 pens it
produces gain
ATR it 25 pens if it sells
forgoes it get 1.47 ATR
Pens) from Japan
 4. RELATIVE FACTOR ENDOWMENTS OR
HECKSCHER-OHLIN THEORY (H-O Theory)

ELI HECKSCHER & BERTIL OHLIN (Swedish Economists)

• Factor endowments are land, capital, natural resources,
labour , climate etc….
• Observations:
– Factor endowments vary among countries (USA – Capital ,
India- Labour, South Africa – Gold mines)
– If labour is available in abundance in relation to land and
capital in a country, the price of labour would be low
– These relative factor costs would lead countries to
produce the products at low costs
– Countries have comparative advantage based on the
factors endowed and in turn the price of the factors.
(textile , tobacco – labour intensive in India hence become
the exports)
– Countries participate in International trade by exporting
those products it can produce at low cost and import –
which produce at high cost
• Land – labour relationship: less land (light –
weight products ) – clothing – Hong Kong,
Large land – sheep, wheat etc… Canada,
Australia, India etc..
• Labour – Capital Relationship: More labour –
India (textile), Iran (hand made carpets) &
More Capital – Japan (computers, televisions,
refrigerators, cars etc…)
• Leontief Paradox : (Exception case) -Wassily
Leontief - US Exports labour intensive
products (developed countries have higher
labour skills)
• TECHNOLOGICAL COMPLEXITIES:
Technological advancements produce in
different method products.(Canada produces
using machines wheat, India – labour)
CRITICISM
Capital is endowment & homogenous
No unemployment
Two firms
Factor equalisation theory
Poor predictive power
 5. PRODUCT LIFE CYCLE THEORY
• Firm based international theory
• Raymond Vernon of the Harvard Business
School developed PLC theory.
• Traces: roles of innovation, market expansion,
comparative advantages and strategic
response of global rivals in International mkt,
trade and investment decisions
• Four stages : New product introduction,
growth, maturing product and decline
 STAGE 1: NEW PRODUCT
• Firms innovate new products based on the
needs and problems in domestic country
(photocopier, personal computer, pentium
(1.5 lakhs initially), frozen food in USA)
• Produced anywhere in the world and
marketed in domestic market, Few exports,
near monopoly position, product
characteristics, short production run, high
labour & labour skills relative to capital.
 STAGE 2: GROWTH
• Increase of sales - Attracting competitors
• Increased awareness in the new product increases
demand for the product
• Innovation in product, cost reduction , market
process etc. increases capital intensity of the industry
• Competitors concentrate on process technology
rather than product technology
• Labour intensive type
• Increased exports and shift manufacturing to foreign
countries
 STAGE 3: MATURITY
• Worldwide production increases along with the
demand, Decline in exports
• Increased competition - Standard products
• Large-scale production and economies
• Low unit cost of production results in exports to
developing countries
• Technology become standard
• Shift manufacturing to developing countries
• Lower labour costs (cost of prod per unit reduces and
increases the competition based on cost)
 STAGE 4: DECLINE
• Markets for the product concentrate in less
developed countries
• Location of manufacturing facilities in
developing countries
• Exports decline (original innovating country
may become net importer)
• Volume and direction of international trade
comes down
 Suitability of the theory
• Inconsistent for certain consumer durables,
synthetic materials and electronics
• Production movements did not take place as
predicted in the PLC model
•Globalisation enabled Transnational global companies to
innovate simultaneously
•MNCs establish production process in many countries to
take advantage of materials Human resources etc… not on PLC model
RESEARCH, INNOVATION AND TRAINING
 SCOPE FOR DEVELOPMENT OF SUPPLIERS

Firms continuously improve the quality of product design, Invest in R&D

HRD, technology In order to compete domestically
PORTERS THEORY BLENDS TRADITIONAL COUNTRY BASED THEORIES
AND THE FIRM BASED THEORIES
https://www.slideshare.net/NeerabImAn/chap-5-international-
business-international-trade-theory
https://dsim.in/blog/2016/01/13/case-study-
how-starbucks-leveraged-the-power-of-
social-media-in-their-marketing-strategy-
and-increased-user-base/

http://www.drypen.in/case-
studies/starbucks-case-study-starbucks-
growth-strategies.html

https://www.ukessays.com/essays/busines
s/case-study-starbucks.php

https://businessteacher.org.uk/case-
studies/starbucks.php

https://wenku.baidu.com/view/f96e2a31580
216fc700afdfe.html?re=view