International Business

Meaning of International Business

• International business consists of transaction that are
devised and carried out across national borders
to satisfy the objectives
individuals, companies
of and
organizations.

• The economic system of exchanging good and services,

conducted between individuals and businesses in
multiple countries.

• The specific entities, such as multinational corporations

(MNCs) and international business companies (IBCs),
which engage in business between multiple countries.
 Need for International Business

• Causes the flow of ideas, services and capital across the world.

• Offer consumer new choices.

• Permits the acquisition of a wider variety of products.

• Facilitate the mobility of labor, capital and technology.

• Provide the challenging employment opportunities.

• Reallocate resources makes preferential choices and shifts activities to

global level.
Types of International Business

• Export –Import trade

• Foreign Direct investment

• Licensing

• Franchising

• Management contract
 Franchising
• Franchising refers to the methods of practicing and
using another person's business philosophy. The
franchisor grants the independent operator the right to
distribute its products, techniques, and trademarks for a
percentage of gross monthly sales and a royalty fee.
Various tangibles and intangibles such as national or
international advertising, training, and other support
services are commonly made available by the franchisor.
Agreements typically last from five to thirty years,
with
premature cancellations or terminations of
most contracts bearing serious consequences for
franchisees.
 Businesses for which franchising
works best
Businesses for which franchising is said to work best have
the following characteristics:
• Businesses with a good track record of profitability.
• Businesses built around a unique or unusual concept.
• Businesses with broad geographic appeal.
• Businesses which are relatively easy to operate.
• Businesses which are relatively inexpensive to operate.
• Businesses which are easily duplicated.
 Licensing
• A business arrangement in which one company
gives another company permission to
manufacture its product for a specified payment.

• There are few faster or more profitable ways to

grow your business than by licensing patents,
trademarks, copyrights, designs, and other
intellectual property to others .
• For example, about 90 percent of the
$160 million a year in sales at Calvin Klein
Inc. comes from licensing the designer's
name to makers of undergarments, jeans
and perfume.
 Management contracts
• Agreement between investors or owners
of a project, and a management company
hired for coordinating and overseeing a
contract. It spells out the conditions and
duration of the agreement, and the
method of computing management fees.
• An agreement by which a company will
provide its organizational and
management expertise in the form of
services.
 FDI
• FDI stands for Foreign Direct Investment,
component
a of a country's national financial
accounts. Foreign direct investment is
investment of foreign assets into domestic
structures, equipment, and organizations. It
does not include foreign investment into the
stock markets. Foreign direct investment is
thought to be more useful to a country than
investments in the equity of its companies
because equity investments are potentially "hot
money" which can leave at the first sign of
trouble, whereas FDI is durable and generally
useful whether things go well or badly.
 Drivers of International business
• Regional developments helping internationalization:

1)Emergence of NAFTA comprising united states, Canada and Mexico has created a
huge north American market. Movement of goods and services among these
countries is easy as all trade barriers have been removed. The result will be a giant
“American market” that would parallel similar development in Asia and Europe.

2)The most recent changes of GAAT are stimulating increased world trade. Under the
new agreement, tariffs would be reduced world wide by 38%and in some cases,
eliminated completely.

3)Japan, of late has invested relatively more in Asia than in any part of the world.
Japanese corporations want to take advantage of the underdeveloped but growing
Asian market.

4)Export potential is vast in central and eastern Europe, Russia which are converting
themselves into market economies.

5)There is also recent economic progress among less developed economies. For
example India Globalization and liberalization approach toward economy

6) The new economy, a characteristic feature of the present century, itself demands
trading across the globe.
International Investment and Trade
• Developed countries are active players in
international investment. Approx. 80% of the
global investment emanate from rich countries.
For example FDI in the US stands at over $600
billion, while the US FDI is almost $ 800 billion.
• The developed and developing countries are the
major recipient of FDI
Other reasons of Internationalization
• There is a lot of money in the overseas market. The MNCs from the triad-
the US, Europe and Japan – have huge assets than a quarter of these
assets are found in foreign market. GE of the US is one of the top MNC with
assets of over $ 300 billion in 1997 and nearly a third of its assets were
found in overseas countries. The Dutch /UK firm shell has huge assets and
three fifth of these are located overseas.

• It is being realized that the domestic markets are no longer adequate and
rich. Japan flooded American with automobiles and electronics because
domestic market was not large enough to absorb whatever was produced.

• Companies often set up overseas plant to reduce high transportation cost.

The higher the ratio of unit cost to the selling price per unit, the more
significant the transportation factor becomes.

• The motivation to go global in high tech industries is slightly different. They

spend lot on research and development for new products. If domestic sales
and export do not generate sufficient cash flow, the company naturally might
look to overseas manufacturing plants and sales branches to generate
higher sales and better cash flow.
 Continue………………..
• Firms go global to access resources that are unavailable or more
expensive at home ( Japan largest paper company Nippon
Seishi, needs to do more than import of wood pulp. It owns huge
forests and processing facilities in Australia, Canada and US.

• Labor market also attract companies into international business.

One way companies gain competitive advantage is by locating
production facilities in low cost countries.

• Firms go global to avoid protectionist barrier imposed by local

government. Government erect various forms of barriers to entry in
their domestic markets by foreign firms

• Companies enter foreign markets because competitors have

already done it.

• Govt. throughout the world offer a variety of incentives to attract

MNCs
 International Vs. Domestic Business
Basis International business Domestic business

Payment Mostly in foreign currency In domestic currency

Laws and Subject to international laws and Subject to national rules and regulations
rules regulations

Custom Different custom and traditions Same custom & Traditions

&
Tradition
s

Legal Have to face different legal It is almost the same.

and economic and tax rate system
economic
system
Approach Have to follow geocentric approach Have to follow ethnocentric approach
Organization that engage in IB
vary considerably in size and
the extent
 Globalization
• Globalization refers to the shift towards a more
integrated and independent world economy.
Globalization has several facets, including the
globalization of markets and the globalization of
production.

• Globalization of markets: refers to the merging

of historically distinct and separate national
markets into one huge global marketplace.
Falling barriers to cross border trade have made
it easier to sell internationally.
 Continue……………
• It has been argued for some time that the taste
and preferences of customers in different
nations are beginning to converge on some
global norm, thereby helping to create a global
market.
• For example consumer products such as coca-
cola soft drink, Sony play station videogame,
McDonald hamburger are frequently held up as
prototypical example of this trend. Sony,
McDonald, coca-cola are more than just
benefactors of this trend: they are also facilitator
of this trend. By offering the same basic product
world wide they help to create a global market.
 Continue…………………..
• A co does not have to be the size of these multination giant to
facilitate and benefit from the globalization of market. For example
firms with less than 5oo employee accounted for 97% of all US
exporters and almost 30% of all the export value. In Germany co
with less than 500 employees account for about 30% of the Nation
import.

• It is important to note that to push too far the view that national
markets are giving way to the global market. Very significant
differences still exist among national markets including consumer
taste and preferences, distribution channel, value system, business
system and legal regulation.

• These differences frequently require that marketing strategies,

product features and operating practices be customized to best
match conditions in the country.

• Many companies need to vary aspects of their product mix and

operations from country to country depending on local taste and
preferences
 Continue……………
• Global market for industrial goods and material that serve
a universal need the world over for example aluminum, oil and
wheat.
• In many global markets the same firms frequently confront each
other as competitors in nation after nation for example Pepsi and
coca cola is a global one.

• If one firm moves into a nation that is not currently served by rivals,
those rivals are sure to follow to prevent their competitors from
gaining an advantage.

• As firms follow each other they bring with them many of the assets
that served them well in other national market including their
products, market strategies and brand image- creating homogeneity
across market.

• In an increasing no of industries it is no longer meaningful to talk

about the local market for many firms there is only the global
market.
 Globalization of Production
• Globalization of production refers to the sourcing of
goods and services from locations around the globe to
take the advantage of national difference in the cost and
quality of factor of production. By doing this companies
hope to lower their overall cost structure or improve the
quality or functionality of their product offering, thereby
allowing them to compete more effectively.
• For example- IBM ThinkPad X31 laptop computer. The
product was designed in the united states by IBM
engineers because IBM believed that was the best
location in the world to do the design work. The case
keyboard and hard drive were made in Thailand, display
screen and memory were in south Korea, the built in
wireless card in Malaysia, and the microprocessor was
manufactured in US. In each these components were
manufactured in the optimal location given an
assessment of production cost and transportation cost.
 Emergence of Global Institutions
• As markets globalize and as increasing proportion of
business activity transcends national border, institutions
are needed to help manage regulate and police the
global market place and to promote the establishment of
multinational treaties to govern the global business
system.

• The world trade organization is primarily responsible for

policing the world trading system and making sure
nation-states adhere to the rules laid down in trade
treaties signed by WTO members.

• WTO has promoted the lowering the barriers to cross

border trade and investment. Without an institution such
as WTO the globalization of market and production is
unlikely to have proceeded as far as it has
 IMF and World Bank
• The task of IMF is to maintain order in the international
monetary system and that of the world bank is to
promote economic development. It has focused n
making low interest loan to cash strapped governments
in poor nations that wish to undertake significant
infrastructure investment.

• IMF is often seen as the lender of last resort to nation-

states whose economies are in turmoil and currencies
are losing value against those of other nations.

• The IMF loan come with strings attached; in return for

loans, the IMF requires nation-states to adopt specific
economic policies aimed at returning their troubled
economies to stability and growth.
 Drivers of Globalization
Two macro factors seem to underlie the trend
toward greater globalization:
• Decline in barriers to the free flow of goods and
services and capital.
• Technological change

• Declining Trade and Investment Barriers

• After the formation of WTO, many talks were scheduled
to cutting tariffs on industrial goods, services
and
agricultural products, phasing out subsidies to
agricultural producers; reducing barriers to cross border
investment and limiting the use of antidumping laws.
• Many countries have also been progressively removing
restrictions to FDI . According the UN some 94% of the
1885 changes made worldwide between 1991 and 2003
in the laws governing FDI created a more favorable
environment
• The lowering of trade and investment barriers also allows firms to
base production at the optimal location for that activity. Thus a firm
might design a product in one country, produce components parts in
to other countries , assemble the product in yet another country and
then export the finished product around the world.

• According to WTO data the volume of world merchandise trade has

grown faster than the world economy since 1950. From 1970 – 2004
the volume of world merchandise trade expanded almost 26 fold,
outstripping the world production which grew about 7.5 times in real
terms.

• Value of international trade in services grew robustly. Trade in

services now account for almost 20% of the value of all the
international trade . This increase is due to advances in
communication which allow co to outsource service activities to
different locations around the world
• FDI is also playing an increasing role in the global economy as firms
increases their cross border investments. The average yearly
outflow of FDI increased from $25 billion in 1975 to a record in
$1.3trillion . Despite the slowdown in 2001-04 the flow of FDI not
only accelerated over the past quarter but also accelerated faster
than the growth in world trade.

• Between 1992-04 the total flow of FDI from all countries increased
by about 360% while world trade doubled and world output grew by
35%.

• As a result of the strong FDI flow by 2003 the global stock of FDI
exceeded $8.1 trillion. In total at least 61000 parent cos. had 90000
affiliates in foreign market that collectively employed some 54 million
people abroad and generated value accounting for about one tenth
of global GDP.

• Foreign affiliates of MNC had an estimated $17.6 trillion in global

sales nearly twice as high as the value of global export of goods and
services combined which stood at 49.2 trillion.
• The globalization of markets and production and
the resulting world growth of world trade
FDI and imports all imply that firms are finding
their home market under attack from
foreign competitors.
• The growing integration of the world economy
into a single huge marketplace is increasing the
intensity of competition in a range of
manufacturing and service industries.
• If trade barriers decline no further at least for the
time being this will put a brake upon the
globalization of both markets and production.
 Globalization of Investment
• Globalization of investment refers to investment of capital by global
company in any part of the world. Global company conducts the financial
feasibility of the new projects in different companies of the world and invests
the capital in that country where it is relatively more profitable. Globalization
of investment is also known as foreign direct investment.

• Reasons for Globalization of investment :

• There has been a rapid increase in the volume of global trade.

• Many countries are providing more congenial environment for attracting

direct investment.

• Global co in order to have the control over manufacturing and marketing

activities invest in foreign countries.

• International co go for FDI in order to avoid the restrictions imposed by the

host country on exports.

• After liberalization, the flow of foreign fund cross the border by various
countries.
 Modes of Globalization
of Investment
• Acquisition of foreign companies

• Joint ventures

• Long term loans

• Issuing equity shares, debentures and bonds.

• Global depositary receipts etc.

 Globalization of Technology
• Technological change is amazing and phenomenal after
1950. Infact it is like a revolution in case
of
telecommunication, information technology
and transportation technology.
• Methods of Globalization technology:
• Companies with latest technology acquire distinctive
competencies and gain the advantage of producing high
quality products at low cost
• Co may have technological collaboration with the foreign
co through which technology spreads from one to
another country.
• The foreign co allow the companies of various other
countries to adopt their technology on royalty payment
basis.
• Companies also globalize the technology through the
modes of joint ventures and mergers.
 Advantages of Globalization
• Free flow of capital
• Free flow of technology
• Increase in
• industrialization
• Spread up of production facilities throughout the globe
• Balanced development of world economies.
• Increase in production and consumption
• Lower prices with high quality
• Cultural exchange and demand for a variety of products.
• Increase in employment and income
• Higher standard of living
• Balanced human development
Increase in welfare and
prosperity.
 Disadvantages of Globalization
• It kills domestic business
• Exploits human resources
• Violation of labor and environmental laws
• Leads to unemployment
• Decline in domestic demand
• Decline in income
• Widening the Gap between rich and poor
• Transfer of natural resources
• Leads to commercial and political colonialism
• National sovereignty at stake
STAGES IN GLOBALISATION
• Domestic company links with dealer &
distributor.
• Company does activities its own.
the on
Company begins
manufacturing to &carryout
, marketing sales in theitsforeign
own
markets.
• Company starts full fledged operations including
business systems and R&D. At this stage the
managers are expected to perform the tasks
which they were doing in domestic markets to
replicate them in foreign markets.