ib m1m2m3 prof patil 2013-14
TRANSCRIPT
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Prof. Purshottam Patil
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Course Content University Assessment 100 Marks
1. Overview of the International Business Process
2. PEST factors affecting International Business
3. Government influence on trade
4. International Trade Theories
5. FDI
6. Country Evaluation and Selection
7. Collaborative Strategies
8. International Marketing
9. International Trade Agreements
10. International Trade Organizations
11. International HR Strategies .
12. International Diplomacy - .International Business Prof Purshottam Patil 2013 2
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Reference Text 1. International Business - Daniels & Radebouqh
2. International Business Sundaram & Black
3. International Business Roebuck & Simon
4. International Business Charles Hill
5. International BusinessSubba Rao
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International Business Prof Purshottam Patil 2013 4
1. Overview of the International Business Process
Differentiate between exports & IB
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Exports vs. International Business
IB has wider spectrum unlike exports, include
1. Indian Companies acquire/ take over Companiesabroad.
2. They invest huge amounts to find right locationfor cost effective production base.
3. They are on a look out for a precise JV partneroverseas.
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Definition : International BusinessAny commercial transaction taking place
across the boundary lines of a sovereign (self
governing) entity. It may take place betweentwo Companies (for profit/prosperity) orNations (for goodwill/economic growth)
Export or Perish is now Globalize or Perish.
Discuss E-Merck, Emerging Economies
What are motives of Companies for IB?
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Motives of Companiesfor International Business
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1. PLC Management.decline phase in onenation > replicatewhole process in
other (Enfield India,
Suzuki 800cc, HPLaptops:)
2. Geographical Expansions: A growth strategy Doingwell at home country, looknew overseas markets. e.g.
Ranbaxy,, Cipla, & Dr Reddy.
Apollo Tyres, Tata Motors/Tea, Sun Pharma
3.Adventurous
youngergeneration:
L N Mittal,Kumar Birla
4. Corporate Ambition:Multi-national operations willmake-up losses in one nation.
Coca Cola, Kelloggs
5. Technological Advantage: Core
Competencies>Global Advantage.Bicon. Infosys/TCS. GhardaChemicals, Jain Irrigation, Thermax,
Ion Exchange, Bharat HeavyElectricals, L & T
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Motives of Companies for International Business contd.
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6. Labor Advantage:Indian Manu. units
perform well due to ^lyproductive workforce.,Diamond, handicraft,
wood work, leatherindustry, handlooms,
embroidery, carpetweaving, cashew process,
& sea food industry
7. CorporateImage
Building :First built
image >generaterevenues.
Samsung, LG
8. Govt Incentives : Fiscal,& infrastructural incentive
by host nation. Aditya Birlagroup in Thailand &
Indonesia.
9. New businessopportunities : untapped
Latin America, Sub-SaharanAfrica, CIS nations, & China
10. Emergence of SEZ', EOUs,AEZ's : new dimension to IB.
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What are motives of Nations for IB?
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Motives of Nationsfor International Business
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1. Earn foreign exchange:
balance payments for imports.e.g. India imports crude oil,
defense equipment , medical
equipments, etc . If exports>imports= surplus of BOP. Ifexports < Gulfnations_ crude
oil
3. Trade Theories: ofAbsolute Advantage,
Comparative Advantage& Competitive
Advantage indicate
certain nations haveresources advantage asin labor, techno,
infrastru, etc thanothers.
4. Diplomatic Relations:National embassies & highcommissions, world over, are
catalysts promote trade & investts,e.g. remarkable job done by Indian
Diplomats in Latin America to
promote India Inc.
5. Core Competency of nations:Rubber products # Malaysia, IT &
Knitwear # India , Rice #Thailand, Wool # Australia.
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6. Investt for Infrastru :Heavy investt of nationsin infrastru as airports,
seaports, economic zones& inland container
terminals. Have to ^trade activities to recover
these amounts. e.g.Mauritius, Hong Kong,
Singapore, Malta &Cyprus
7. National
Image:Conqueringnations by
trade. Made inIndia, Made inJapan bring
credentials torespectivenations.
8. Foreign TradePolicy & Targets:
Developing nationsdraft road map &implement trade
policies . e.g. India(import control
order in 1947).ppc
9. National Targets:By 2015: India Aims
1% > 2% globalmarket share
10. WTO & Global Agencies : WTO, WorldBank, IMF, IMO, ISO, ITU, ICAO promote
inter-national trade.
Motives of Nationsfor International Business, contd.
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Similarities: Domestic vs. International Business
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Discuss differences wrt Environment, Plan & Strategy, Competitive forces,
currency movements, Research, HR, Legal Aspects, Pricing Strategy,Distribution Channels, Promotion, Logistics cost.
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Dimension Domestic Business International Business
1.Evironment PEST, legal, competitive are
known
not fully known
2. Plan & Strategy Short term_ workable, may
be carried to long term
only long term will work,
multiple strategies
required
3. Competitiveforces & their
intensity
movement of domesticcompetitive forces are visible
difficult to understandmovement of global
competitive forces
4.Currencies
movements
Cost, Price, Revenue &
Margins computed in localcurrency. Volatility has min.
impact on business.
Various currency
transactions. Fluctuationsin cross currency
movements & related risks
common.
5. Business risks Comparatively, one canredict future risks & shocks
Difficult to predict & riskma cro u at an time
Differences : Domestic vs. International Business
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Differences : Domestic vs. International Business
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Dimension Domestic Business International Business
6. Research Easier, reliable Expensive, difficult, no
uniformity in output &findings.
7. Human
Resources
Established reputation help
business survive even if HR have
min. skills & knowledge
Multi-lingual/cultural HR,
individual a profit centre &
accountable
8. Corporate
vision &
objective
Narrowed down to a single nation
with a steady growth.
Covers nations. Cultural,
geographical influence may be
on vision & objective
9. Product &
usage
As per need of domestic
customers affordability, beliefs,
values, culture & buying behavior
Nation specific. Subject to
regulations.
10. legal
aspects
Local regulations fully apply. Min.
adherence to global regulations.
Global & host nation
regulations apply.
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Differences : Domestic vs. International Business
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Dimension Domestic Business International Business
11. investt. &
sourcing
Start: Min. invest. Individual ability &
repayment terms determine funding.
Except exports all overseas
operations need huge investts.12. Pricing strategy Majorly Cos use cost-plus margin or
competitive pricing.
Cos use marginal cost pricing,
transfer pricing or competitive
pricing to succeed.
13. Distribution
Channels
Any channel can be used, without
restrictions.
Govt./market practice governs
distribution channel. Cash &carry, shopping malls & mail-
order services popular in IB.
14. Promotion Advertising, personal selling & other
promotional methods are not
restricted through a strict legal
framework, if socially acceptable
Restrictions are nation
specific. E.g. advertisements
for liquor, cigarettes not
permitted in some nations.
Campaigns using female
models banned in others.
15.Logistics Domestic players are involved in all
activities. cost very high locally
Advanced technology &
systems reduce Cost
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International Business Prof Purshottam Patil 2013 17
UEQ.2012.3 Export or physical movement of goods andservices alone cant justify international business. Explainbriefly. 10 marks
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IB Quiz No. 1 ..Chairman, Federal Reserve, the Central Bank of US Martin Pieters, Chief Executive Full Form UNCTAD: Full form FIPB: ..22ndGovernor of RBI .Union Civil Aviation Minister Jet- Etihad stuck a landmark agreement in April 2013, under which the Middle East
carrier agreed to buy 24 % of Jet for about $ 600 million, a premium of 34% over themarket price though it was not getting control. was first government agency
to question the Jet-Etihad deal, especially the powers in the agreement giving Etihad thepower to approve a number of transactions. The top 15 Indian TNCs (Transnational Companies, MNCs), with assets of $ 500 million
or more, earned % of their total revenues from global operations, held % of theirtotal assets overseas & employed 20% of their total workforce abroad.
US apparel retailer: having partnership with DLF Brands Ltd, India, plans toinvest $ 50 million in Indian Market.
Author of the book: Screw Business as Usual is .. Ans: 1. Ben S Bernanke, 2. Vodafone India, 3. United Nations Conference on Trade and
Development 4. Foreign Investment Promotion Board, 5. Duvvuri Subbarao 6. AjitSingh, 7. SEBI (Securities & Exchange Board of India), 8. 75 & 57, 9. Forever 21, 10.Richard Branson, founder of Virgin Atlantic, Virgin Mobile
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Methods of Entry In International Business
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Modes of Entryfor International
Business
1.Export
s2.
International
Licensing
3. Franchising
4. ContractManufactur
ing
5.
ContractMarketing
6.Management
Contracts7. Joint
Venture
8.
Collaboration
9. ForeignDirect
Investment
10. Mergers &
Acquisitions
11. Take-Overs
12. Turn-KeyProjects
13.Counter
Trade
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Classification
of Exporters
ExporterInvolvement
1. Direct:exports byexporter'sown name
2.Indirect: lackexpertize,overseas
contacts &manpower.
supply goods todirect exporters,
farmers,artisans, etc
Business size
1. smallexporters
2. Largeexporters
Productlines
1SingleProductExporter
2. MultipleProductExporter
Legal status
1. Proprietory
2.Partnership
3. Pvt Ltd
4. Public Ltd
Destination
1. SingleDestination
2. MultiDestination
Frequency
1.Occassional
2. Dynamic
1. Exports
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2 I t ti l Li i
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2. International Licensing
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. ranc s ng
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4. Contract Manufacturing
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6 M t C t t
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6. Management Contracts
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Agreements between 2 cos. where 1 co.
provides managerial & technical assistance, inreturn of proper monetory compensation, asflat, lump-sum fee, % of sales or profit
sharing.
e.g.1 Delta Airlines, Air France offer services
in developing areas.e.g.2 Exxon operates in oil exploration in theGulf region.
7 Joint Venture
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7. Joint Venture
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Binding contract between 2 venture partners to set up a
project, either in home / host / 3rd nation.
Both parties committed to joint risk-taking & joint profitsharing.
JVs, promising excellent opportunities initially to bothpartners, may fail due to functional level grievances &issues. Hence understanding all aspects of management,investment & regulations in operating nations, by both
partners is crucial.
E.g.1 In 1980s, Taj group of Hotels had JV in Russia. Forsetting up 5 star hotels. e.g.2 Mahindra & Mahindra JV withRenault to manufacture cars, with brand name Logan.
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8. Collaboration
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JV : deals with complete project in financial terms &
proportionate partnership commitments.Collaboration (=Tie-ups) deals with only some functions.
Investors in US, Japan, Germany, & UK offer technicalexpertise to developing nations.
E.g1 Technological collaboration of Bajaj Auto with
Kawasaki Japan. Kinetic & Hero with Honda.
E.g2 Kellogg Business School collaborated with Indian
School of Business(ISB), Hyderabad.
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9. Foreign Direct Investments (FDI)
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Direct investment contributes to optimization of resources in host nation,
generating employment & enhancing its standard of living.
Yesteryears: funds flow was amongst developed nations only. Today: China,India, Brazil & Argentina attracting huge foreign investments.
Investments in infrastructure, mining, marine technology & agro-processingbeneficial to both host & investor nation.
Disadvantages: lack of clarity regarding repatriation (send back/ doubts),imposition of restrictions by host nation, elimination of SMEs. E.g.s Indonesia,
Argentina victims to the dominant overseas investors
Kellogg, Pepsi, Coca Cola & Hyatt groups willing to invest even if profitsexpected after long gestation period
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10. Mergers & Acquisitions
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Company in the host country selects a foreign company & merges itselfwith it. The foreign Co acquires the control of ownership.
Cos strengthen their international manufacturing facilities &marketing networks.
Cross Border Acquisitions Volume growing at a rapid rate for 2 decades:
2001: M & As accounted for approx. 78% FDI inflows
Disadvantages: 1. Complex task involving banks, lawyers, bureaucrats& politicians. 2. Host nations may impose restrictions on acquisitions.
3. Labor issues is a big challenge for acquisitions, especially indeveloping nations, where unemployment is a critical issue.
e.g1 P & G entered Mexico & became a leader in 5 years by acquiringLoreto. e.g2 Steel Magnet L. N. Mittal first acquired a steel mill inIndonesia, followed by those in Trinidad, Kazakhstan, Hungary, etc.e.g3 The acquisition of Novelis strengthened Hindalco, an Aditya Birla
Cos production synergy & market access globally, in the non-ferrouscategory.
10 M & A Ad
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10. M & As: Advantages
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1. Quick to execute: Acquire established enterprise> rapidpresence in target foreign market. E.g1 Diebold: 144 years old,Ohio, US, based Co., into ATM machines. 1990_ 70:30 JV with IBMInterbold. 1997: Acquired remaining 30%. 1999: acquired BrazilsProcompAIE, Frances Groupe Bull, Hollands Getronics, openedmanufacturing JVs in China. Result_ 2002: Presence in 80 nations,international sales accounted for 37% of $ 1.94 Billion. E.g2German automobile Co. Daimler-Benz growth in US > acquired #3
US Co. Chrysler to form Daimler-Chrysler
2. Preempt Competition: The largest acquisition ever in 1999_British Co. Vodafones $ 60 Billion acquisition of Air touchCommunications in US.
3. Acquisitions(buy tangible & intangible assets, generating knownrevenue & profits) seem less risky than Green-Field Ventures (buildsubsidiary from start_ uncertain revenue & profits_ although givesfirm greater ability to build kind of subsidiary co. it wants)
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10. M & As: Limitations
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Study1: Mercer ManagementConsulting study of 150 acquisitions
(period 1990-95) worth more than $500 Million each. Findings: 50%eroded share holder value, 33%created marginal returns, 17%
successful.
Study2: KPMG, accounting &management consulting Co., study
of 700 large acquisitions (period1996-98). Findings: 30% created
value, 31% destroyed value & othershad little impact.
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10. M&As: Reasons for Failure
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1.Acquiring firm overpay forassets of acquired Co. due to: i)
price bid up by multiple firms.ii)Hubris Hypothesis : Top
managers have exaggerated senseof their own capabilities. e.g.
Daimler acquired Chrysler in 1998@ $ 40 Billion, 40% over Chryslersmarket value before bid. This tookplace at end of multi year boom in
US auto sales & paid a largepremium over Chryslers market
value just before demand
slumped.
2.Acquiring Acquired firmscultural clash:high
management turnover-causing loss of local
knowledge- post acquisitiondue to cultural & working
differences. Many sr. managersleft Chrysler, 1styear post
merger: Chrysler executivesdisliked dominant DaimlersGerman managers decisions-
Germans resented the 2-3times pay to Chryslers
American counterparts.
3. Inadequate Pre-acquisition screening: absence of potentialbenefit-cost analysis pr-acquisition. In cross border acquisition,
acquiring firm fails to understand target firms national culture &business system.
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11. Take-over
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Co. identifies & brings under its management, a healthy unitwith a strong brand name & network, to be the leader in givensegment.
Takeover maybe for product, brand, business & co.
Multiple parties aspiring to takeover may generatecompetition. Only one party wins & may hence withstandhostilities. Hence hostile takeover & winner as takeovertycoon e.g. Hindujastakeover of Ashok Leyland. Unilever
takeover of Lipton & Brooke Bond (enhanced its position as aleader in Tea industry in India).
Inevitably, takeovers cost more than acquisitions, but theprobability is high.
12 T K P j t
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12. Turn Key Projects
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Contract under which Co. fully involved from Concept to
Completion. A means of exporting process technology toother nations.
Depending on involvement & obligations terms are: BOT (Build, Operate & Transfer) & BOOT (Build, Own, Operate &
Transfer)
Turn key project contractors either get a fixed fee/ the costplus profits are collected over a period of time.
Profitability increases as there is enhancement in cost cuttingon material & manpower, finances or speed of completion.
E.g. infrastructure projects as power plants, airports,petroleum/ metal refineries, railway lines, highways & dams.International Turnkey contractors e.g. Bechtel, Brown Bovery,Hyundai, Mitsubishi, L & T & Deawoo
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12. Turn Key Projects
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Advantages: Turnkey strategy less risky than FDI. In political/
economic unstable nation, long term investments not feasible (e.g.risk of nationalization /economic collapse)
Disadvantages: 1. Firm entering into turnkey deal have no longterm interest in foreign nation.
2. Firm entering turnkey deal may create own competitor. E.g.Western firms that sold oil refining technology to Gulf nation firmsnow compete with them in global oil market.
3. If firms process technology is competitive advantage, thenselling this technology through turnkey project may beunfavorable.
13 Counter Trade
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13. Counter Trade
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13 C T d T
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13. Counter Trade Types
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Counter Trade
i. Pure Barter(product-to-
productexchange)
ii. Buy Back (buyend product
from hostpartner)
iii. Counter Purchase(Exchange of goodsin various nations
until forex is found)
13 i Pure Barter
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13.i. Pure Barter
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Goods / services mutually exchangedbetween 2 nations depending on the surplusavailable & their bargaining strength
E.g. Russia supplied newsprint & crude oil toIndia for decades. In return India supplied
tea, garments, medicines & tobacco to Russia,at comparatively low prices.
13 ii B B k
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13.ii. Buy Back :
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Home country Co. sets up project in host country- having sufficient forexto fully pay the supplier. Project amount is partially paid in forex &
remaining in kind. Home country representative purchases end productof same project at relatively low price, which could be marketed in homecountry or even to third country to maximize profit.
Advantages to Host nation: 1. The project is located & owned by it. 2. Itneed not pay the full sum of money needed for the project.
Advantages to Home nation: Buy back arrangements popular as manyturnkey project contractors reap better benefits by marketing end
product globally at higher margin.
E.g. BHEL (Bharat Heavy Electricals Ltd) sets up projects in othercountries for equipments, markets them in other nations including Indiafor higher margins
13 iii C t P h
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13.iii.Counter Purchase
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Company A (Country A)supplies product X
to country B (having surplus product Y)
Country B compensates by supplyingproduct Y to company A
company A finds a market for product Y incountry C
Country C sells product Z to CountryDcountry D having sufficient forex & payscountry C
Country C pays toAcountry A pays to company B.Thus: purchasing takes place against supply until
nation D with adequate forex is found for thetransaction.
13 iii Counter Purchase
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Pepsi International supplies rice to S Africa
from India.
From S Africa it procures steel equivalent tothe rice amount & supplies it to Ghana.
From Ghana it procures coffee & cocoa equivalentto steel imports & sells them to Canada,possessing adequate forex reserves.
13.iii.Counter Purchase
By appointing one employee, the Co conducts routine functions.
Due to counter purchase mechanism, very few nations withsufficient forex reserves can comfortably contribute to world trade
transactions. International Business Prof Purshottam Patil 2013 41
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Foreign Entry Decision
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Exploit competitiveadvantage through
entry abroad
Produce atHome &Export
ProduceAbroad
Licensing/Management
Contracts
MaintainControl
over assetsabroad
Majority / Whollyowned affiliate
Build fromScratch
Acquire /Merge /
Takeover
JointVenture
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UEQ.2008Dec.2
Why do Companies & Countriesenter into International Business
when the opportunities exist intodomestic market (10 marks)
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MNCs
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MNCs
MNCs ( Multi National Corporations). Also called MNEs
(Multi National Enterprises) Business unit which operates simultaneously in different
parts of the world, either by manufacturing or/&marketing. E.g1 1600: British East India Company. 1602:
Dutch East India Co.
e.g2. Manhattan (US) based Co. Colgate Palmolive Inc.manufactures & markets dental care, health care, hair
care & skin care products in more than 120 nations. E.g4. Procter & Gamble, based in Cincinnati (US) with
similar product lines, operates in more than 150 nations
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MNCs
Few MNCs total turnover > GDP ofmany small / Less developed nations.
e.g. In 2005:
Sales of General Motors: $ 195 Billion.
GDPs: Poland (US $ 149 Billion),
Algeria (US $ 29.6 Billion), Kenya ( US $11.1 Billion)
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MNC Influence on Economies Globally
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Money Power
Muscle
Power
Mangerial Power
Technology Power
Political
Power
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Specific Product based MNCs created by Nations
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Typical MNC HQ : Key Roles
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Reasons for Growth of MNCs
Non TransferableKnowledge: MNC havingprocess / product patent
makes ^er profit by
venturing overseas itself,unlike just selling patents
SecrecyProtection :Licensee will
protect patentrights, however
may be lessconscious thanoriginal owner.
ProtectingReputations:
inferior job of foreignlicensee > hits MNCreputation. Hence
investment overseasto licensing/franchising
Building Reputations:MNCinvestment > builds reputation >
attract business/ deposits. e.g. banksas Citibank, HSBC, Standard
Chartered Bank, etc
PLC: Further growth in home
nation dries up. marketsoverseas may have less
competition & penetration. e.g.Gillette, HP laptops, Sony
Walkmans & Xerox faced various
PLC in home nationInternational Business Prof Purshottam Patil 2013 49
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Reasons for Growth of MNCs, contd..
Capital Availability:Capital Markets' access toMNCs favors their
overseas establishments
Strategic Motive: Potential entry ofindigenous firms/ overseas MNCs> Threatto MNCs. Overseas Investt > Solution for
growth e.g. MNCs from US, Japan, Europeinto India / China.
Avoid Tariffs & Quotas:Produce goods at home, ship
overseas> face T & Qs.Solution: direct investt in
target nation. e.g. overseasentry of Automobile giants asFiat, Volkswagen, Hyundai &Honda with techno & money,
not products
Symbiotic Relationship: Firmsopen offices in nations where clientsopen subsidiaries. e.g. Accounting/
Consultants as Templeton, GoldmanSachs, Ernst & Young offices even insmall nations as Panama, Mauritius,
Malta & Sri Lanka.
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ro ems rom row
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ro ems rom rowof MNCs
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Case 1 MNCs Controversies: Royalty
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Case 1_ MNCs Controversies:Royaltyissues at SmithKline Beecham 1997: SKB India decided to pay 5% Horlicks sales revenues
to parent Co., towards use of brand name. Horlicks had80% of Cos Rs 430 Crores net sales, then. It paid Rs 5Crores. Estimated annual outgoings: Rs 20 Crores againstnet profit of Rs 45.6 Crores, that year.
Impact: Feb 1997_ SKB Consumer Healthcare stockplunged by Rs 100, to Rs 365, in 10 days. Loss_ about 27%,Rs 275 Crores in Market Capitalization.
Issue with investors: should royalty payments be made toparent Co.? Though Indian Co. is not brand owner, hasspent ^ amount on Horlicks brand promotion since last 4decades & nearly Rs 175 Crores over past 10 years. The Co.
could use this money to promote its own brand,International Business Prof Purshottam Patil 2013 52
Case 2 MNCs Controversies: Parke Davis
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Case 2_ MNCs Controversies: Parke-DavisParke-Davis India is 40% subsidiary of Parke-Davis
Inc, USA. In 1995, the latter set up 100% subsidiary.
It planned to manu. & mkt. confectionary
products, where Parke-Davis was already operating.Bought Halls & Chiclets brand from Parke-Davis
India @ Rs 10 Crores, considerably low price.
Impact : Post transfer, within 17 months fromSept94, Parke-Davis shares plunged almost 70%- aloss of about Rs 285 Crores in marketcapitalization.
International Business Prof Purshottam Patil 2013 53
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UEQ.2008.3:By using appropriate examples,
explain various modes of entry intoInternational Business. 20 marks
(except M & A, Take-Over, Turnkey
Projects & Counter Trade)
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Currency-Capital Test
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Currency Capital Test 1. Argentina Buenos Aires Peso
2. Brazil Brasilia Real
3. Canada Ottawa Canadian Dollar
4. China Beijing Yuan
5. Denmark Copenhagen Krone
6. Egypt Cairo Egyptian Pound
7. Indonesia Jakarta Rupiah
8. Iran Tehran Rial
9. Israel Jerusalem1 Shekel
10. Japan Tokyo Yen
11. Korea S. Seoul Won 12.Pakistan Islamabad Pakistan Rupee
13.S. Arabia Riyadh Riyal
14.Switzerland Bern Swiss Franc
15.UK London Pound SterlingInternational Business Prof Purshottam Patil 2013 56
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2. PEST factors affecting International Business
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Why to study Environmental Factors?
Pilot checks atmosphere prior to take off /landing
Sailor understands water depth sailing
Farmer plants seeds depending on soil/monsoon
Similar for IB understanding environment
of operation is necessary
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I f IB E i d
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Importance of IB Environment study..Why did Enron fail in India?
What is the hindrance for Kelloggs success in India?
Why has KFC not made any breakthrough in India, unlike its
success in other nations?
Why did P&Gs American Style of Sales Force Management fail
in Japan?
Why did Amways multilayer marketing technique fail in South
Korea?
Why did KFC & McDonalds fail in Brazil & Tashkent,respectively?
International Business Prof Purshottam Patil 2013 59
hi h d i i d d i ?
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Which decisions depend upon Environment?
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Decisionsdepending
uponEnvironment
Selectionof
Country
Selectionof Plant
Location
Liason with
Govt.
ProductLaunches
ChannelManagement
Promotion/outlet
opening
MNCs hire Expert Risk Analysts to
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MNCs hire Expert Risk Analysts to
Advice Management
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PoliticalScience
Economics
SociologyIndustrial
Psychology
PolicyMatters
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Major RiskAnalyses Priorto Cos Entry
Political
Economic
ExchangeRelated
Socio-Cultural
Financial
Legal
Technolo--gical
Competiti-on
Infrastruct-ure
LaborRelated
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Classification of Political Environment
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Classification of Political Environment
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PoliticalEnvironment
a. Home
CountryPolitical
Environment
b. Host
CountryPolitical
Environment
c. GlobalPoliticalEnvironment
2.1 Political Environment
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2.1 Political Environment
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2.1 Political Environment
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2.1 Political Environment
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2.1 Political Environment
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2.1 Political Environment
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Classification of Economic Environment
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EconomicEnvironment
a. Home
CountryEconomy
b. Host
CountryEconomy
c. Global
LevelEconomy
2.a.1 Economic Policies
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2.a.1 Economic Policies
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Impact of National Economic Policies
2 a 2 Trade & Commercial Policies: process
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2.a.2 Trade & Commercial Policies: process
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Ministry of Commerce &
Industry announces Trade Policy
Foreign Trade Target is fixed
Promotions gear up to reachtarget. Global Cos incentivized to
set operations in home nation
e.g. Indonesia, Thailand & Brazilextend facilities in home nation
for same
2.a.3 Promotional & Regulatory Measures
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g y
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Restrictions &
BureaucraticHurdles Imposed
Risk AverseBusiness
Community
Exchange ControlRestrictions &
Draconian Codes ofBusiness Eliminated
Favorable ForeignTrade
Small nations as Malta, Cyprus & Mauritius transformed intoforeign trade economies due to conducive promotional &
regulatory measures
2.b Host Nation Economy
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2.b Host Nation Economy
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1. Market Size: MNCs enterpotential EMs as BRICS &
MIKT (Mexico, Indonesia,South Korea & Turkey).Coca Cola, Pepsi, HP &Samsung consider India
future destination.
2. GDP: ^GDP ^attractive
IB market. Thailand,Malaysia & Indonesia
attractive in 1990s due to ^GDP growth rate.
3. Industrialization:Developing nations keen to
enter US, EU. Indian Cos.keen to enter L. America,Brazil, Argentina, & Chiledue to industrialization
4. Banking: Crucial IBremittance channel. SSA
(Sub Saharan Africa)depend on EU, US & fareast nations due to their
efficient banking services.
2.b Host Nation Economy contd..
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y
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2.c Global Level Economy
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2.c Global Level Economy
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3. Social Environment
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Importance of Social Environment in IB
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p
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1. National Taste
Thailand: Peopleprefer BlackShampoo
Nestle brews varietyof coffee as perdifferent nations'taste
Arab Nations: Greenis favourite color
Russia: Red, thoughcommunism is notprevalent, widelyused in banners,posters, hoardings,etc
2. Language
Language skillsimperative. Hyundai &LG operations in India>
S. Koreans learnt Indianlanguages
Customize Brand names& slogans. In Japan,General Motors' 'Bodyby Fisher'= 'Corpse by
Fisher' & Pepsi's 'ComeAlive'= 'Come out ofGrave'
3. Values & Beliefs
Blue: Masculine >Sweden. Feminine >Holland,
Green: Favorite>Muslim nations, asillness> Muslim nationMalaysia,
White: Bridal Dresscolor> Europe. Death >
China & Korea. Red: Favourite> Russia.
Danger> Many nations.
Swastika: Sacred>India, unlike Westernnations
Importance of Social Environment in IB contd..
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p
4.Demography
Age, sexratio, familysize,occupation >influence
buisness Barbie> ^
revenuethroughchildrensegment.
5. LiteracyRate
^ Literacy rates:
Better Std ofLiving
^ Literacy rates:std'ized goods
with technical
services support ^ Literacy Rate:Lesser trainingrequired for staff
6. Female Workforce
China, Russia, Indonesia &Thailand > Women
contribute higher to GDP. Dulux: Campaigns directedto women in Europe, as it
was felt that they haveaesthetic taste for colors.
Apple's iPod ^recordrevenues due to womencustomers
Women ^ contributors:India_ IT, handicrafts.China_ Soft toys, ceramics.
Indonesia_ garments, paperwork
Importance of Social Environment in IB contd..
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p
4. Technological Environment
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g
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Multimedia using Pentium 4 chips common in DMs. will take at
least 5 years more to enter Africa.Cos. able to maintain & enhance technological activities remaincompetitive.
Cos invest millions in R&D, despite less projected revenue. e.g.Hoffkins, Pfizer invest ^ in R&D, as sure on ROI over period. In20th century, Asian Tigers, Japan, S. Korea, Hong Kong, Singapore& Taiwan achieved ^ success due to efficient technology policy.
Nations as Japan in electronics equipment, Germany in medicalequipment & US for pharma are leaders since decades.
Technology leaders encash on price skimming strategies wheremargins are huge. e.g. Eriksson, Motorola, Nokia & LG successful
as they manufactured cell phones
UEQ 2001 3
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UEQ.2001.3
A French Co. wants to sell
cosmetics in Asia. However, Asian
skin reacts differently to cosmetics
compared to Europeans. The Co. isnot willing to specially formulate
their offerings for the Asian skin.How should French Co. go about
their entry into Asia? (20 marks)International Business Prof Purshottam Patil 2013 80
5. Cultural Environment
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primaryinfluence on
lifestyle,attitude &
behaviors ofconsumer
material &psychologi
caldevelopment of
nation
Cultural Environment for International Business refers to
5. Cultural Environment:
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5 Cu tu a o e t
Crucial Task in International Business
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Identify relevant similarities & differences amongnations, also means to match culture of organization& nation.
e.g.1 when Toshiba gained 100% ownership of Rank-Toshiba in Plymouth, all managers in charge learntBritish style of working.
e.g.2 Branded products move fast in EU & US, butAfricans perceive them as being very expensive.
5. Cultural Environment:
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3 Characteristics of Culture
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5. Cultural Environment:Influence of culture on IB
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Influence of culture on IB
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1. Differences in beliefs,
values & lifestyles amongnations > difference in
product utility. Fast foodas KFC, McDonalds,
hamburgers, pizzaspopular in modern than
traditional societies
2.Products launched onbasis of perceived or realutility value. Products fromWestern Europe, Japan &
US priced @ premium indeveloping nations due tobetter quality perception
3. Culture influences acceptability of advertisementsamong nations. e.g. advertisements acceptable world-
over are not accepted in S. Arabia. Liquoradvertisements prohibited in many nations.
. u tura nv ronment:Influence of culture on IB contd
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Influence of culture on IB contd..
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6. Legal Environment
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g
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Cos. toavail local
legalservices
related to:
Pollution
investments
laborlegislatio
ns
distribution &
logisticsTaxes
Contracts
environment
6. Legal Environment
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6. Legal Environment
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i. Home Country Laws:
Usually facilitating in nature
Deal with
International Business Prof Purshottam Patil 2013 88
conduct of firmin domestic
market Trade with other
nations
6. Lega Environment
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Host Country Laws include
International Business Prof Purshottam Patil 2013 89
g
1. InvestmentRegulations
2. Tariffs &Duties
3. Anti-Dumping
Regulations
4. Protection oflocal industries
from unfaircompetition by
DMs
6. Lega Environment
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Host Country LawsDiscourage of imports of non-essential products due
to Tariffs & Duties helps to:
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g
6. Lega Environment
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iii. International Laws:
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g
Include treaties, conventions & agreements between nations,having the same standing as laws.
Prevalent in areas of Patents, Trademarks, Protection & PrivacyLaws.
Cos. to understand broad provisions of UN resolutions &multilateral trade agreements as WTO.
FDA, Health regulations & registration formalities are judiciouslyimplemented in IB.
E.g. Nigerian Govt. nationalized assets of British Petroleum, as theCo. sold Nigerian crude oil to S. Africa, despite an embargo.
7. Competitive Environment
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Competition:
Environmental threat that affects, hampers,challenges operations of International firm.
Reasons for Product related competition:
International Business Prof Purshottam Patil 2013 92
substitutes
low-costproduction
process
technology
cost
reduction byeconomies of
scale
7. Competitive Environment
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Competition encountered at various stages in IB:
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Entry
Production
HRM
FinancialResources
7. Competitive Environment
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Competition encountered at various stages in IB:
E.g1. Motorola faced competition from Nokia. Nokiafocused on fast growing markets as India & China, thefollower became leader, then.
E.g2 Late entrant, Cuba based Havana Club, surpassedleaders as Smirnoff & Bacardi.
Hyundai Motors (India), Honda Motors (Europe) &Tata Motors (S. Africa) withstood competition &succeeded.
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UEQ.2012.3Explain characteristics ofMNCs. How are they different from
domestic companies? How do MNCstake advantage in emerging economieslike India & how do they benefit these
economies? (20 marks)
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IB UEQ
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3. Government influence on trade
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3. Government influence on trade
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In IB, policies of national govts. are either on equal terms& conditions or on discriminatory term & conditions.
E.g. Russias trade policy allows Indian imports, thoughthe price & quality are unfavorable compared to those ofother nations.
Similarly China imports goods from Pakistan onpreferential terms like lower rate of tariffs, etc.
Government policies aim at 1protecting domesticindustry from competition of advanced nations byimposing quotas, also at 2building competencies ofdomestic companies by providing subsidies.
MNCs formulate strategies regarding entry & conduct of
business in various nations, based on these govt. policies.
G t i fl t d b t l t d t
3. Government influence on trade
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Governments influence trade by announcements related tothe instruments of the trade policy, viz.
International Business Prof Purshottam Patil 2013 98
i) Tariffs
ii)Subsidies
iii)
ImportQuotasiv)
VoluntaryExport
Restraints
v)LocalContent
Requirements
vi)Administrative Policies.
3. Government influence on trade
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Tariffs:
Refer to tax imposed on import
Purpose: To protect domesticindustry by increasing cost ofimported goods. Govt. of Indiaimposed tariffs to protect domesticindustries as automobile, sugar,cement & steel.
3. Government influence on trade
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Advantages of Tariffs:
1. Govt. of the importing country> gets revenuesin form of import duties.
2. Industry of Importing country: cost ofimported goods will be ^er vis--vis domesticgoods, so importing country products exploremarkets
3. Jobs> in domestic nation saved 4. Ancillary Businesses> servicing, etc protected
3. Government influence on trade
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Limitations of Tariffs:
1. Consumers>ofdomestic nation lose,as they pay ^er price.
They pay forinefficiency ofdomestic industry.
2. Exporting country>
loses demand for itsproduct, sales &profit.
Implication
1. Tariffs enhanceefficiency of fewnations & curtail
growth of mostefficient nations.
2. Thus reduceefficiency of world
economies & resultsin inefficientutilization of allkinds of resources.
Types of Tariffs
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ased on Origin & Destination, 3 Types:
Based on Quantification 3 types:
Types of Tariffs
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Based on Quantification, 3 types:
Average Tariffs (Ad valorem Method) (source www.worldbank.org)Types of Tariffs
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International Business Prof Purshottam Patil 2013 104
Country Name
5.05 4.46 3.02 1.84 1.81 1.51 1.097.74 3.07 1.75 4.96 1.81
32.2 14.1 4.83 4.68 4.23 4.1
5.05 4.46 3.02 1.84 1.81 1.51 1.09
5.05 4.46 3.02 1.84 1.81 1.51 1.0954 27.5 26.5 13.4 8.18
13.3 4.13 4.39 3.85 3.15 2.59
3.37 3.93 4.35 2.5 3.07 1.98 1.29
0.03 0.03 0.01 0.0710.1 4.93 5.46 5.03 3.91 4.46
4.56 3.84 3.73
5.05 4.46 3.02 1.84 1.81 1.51 1.09
. . 8 1.8 1. 8 1.6 1.62 1. 8
Based on Purpose, 4 typesTypes of Tariffs
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International Business Prof Purshottam Patil 2013 105
Based on Purpose, 4 types
i) Revenue Tariff
Aims to collectsubstantialrevenues forgovt. withoutobstructing flow
of imports Imposed on
items of massconsumption,but rate of dutyis low.
ii) ProtectiveTariff
Aim to protecthome industries
usually high, toreduce imports
may hurtconsumers, dueto shortages asimports maystop.
iii) Anti-Dumping Duty
Dumping:selling goods inforeign marketsat price belownormal cost to
capture foreignmarket
harmful to lessdevelopednations wherecost of
production ishigh.
iv)Countervailing
Duty same as anti-
dumping duties,less severe
imposed thrucash assistance /
subsidies byforeign nationto itsmanufacturersto nullifybenefits offered
to host nationscos.
duties ratesproportional tocash assistance/subsidies
granted.
Based on Trade Relations, 3 types
Types of Tariffs
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Based on Trade Relations, 3 types
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i) Singlecolumn tariff
Same, fixedrates
applicable toall nations.
ii) Doublecolumn tariff
2 rates,
lower rates
applicable tofriendlynation,
higher rate
for othernations
iii) Triplecolumn tariff
3 rates:general,
international& preferentialtariffs.
First two have
minimaldifferencethan the leastrate of 3rd .
3. Government influence on trade
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ii) Subsidies
To encourage/ protect domesticproducer from foreign producer, govt.
pays to domestic producer by reducingoperations costs. Such paymentsknown as subsidies.
E.g. cash grants, loans & advances atlow rates of interest, tax holidays &supply of inputs at lower rates.
Subsidies in Developing NationsGOI t t d ithd i b idi f tili
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GOI started withdrawing subsidies on fertilizers,pesticides, prices of agricultural output, output of small
scale industries, etc. > led to closure of certain SMEs. Also^ed losses, indebtedness & suicides of Indian farmers.
Subsidies in developing nations 1reduce losses & provide2insurance against crop failure, market fluctuations, shift incustomer tastes & technology changes
Thus, subsidies provide sustainability for agriculturalsector & small scale industrial sector, thereby employment& livelihood for masses.
Subsidies in Advanced Nations
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Subsidies: Advantages1) Domestic producer becomes low cost producer> enjoys
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1) Domestic producer becomes low cost producer> enjoys^profit margins, also fixes minimum price.
2) Help domestic producer compete with foreignproducer in domestic market.
3) Enhance international competitiveness of domestic
industry & can also have the first mover advantage.4) Consequently get tax gains & employment to domesticnation.
E.g1 Dr Reddys Lab got the low cost producer & firstmover advantage in Asian & African markets.
E.g2 US subsidies helped Boeing have first moveradvantage.
Subsidies: Limitations
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1) Subsidies paid by govt. by taxing
individuals> national cost. Thus,subsidies>> national benefit < nationalcost=national waste.
2)At times, reduce internationalcompetitiveness of domestic companies>
Protect inefficiency & lethargy of domesticfirms> WTO proposed phased withdrawalof subsidies.
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Administrative Policies
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Administrative Policies include
bureaucratic rules & processes, formulatedto make it tough for imports to entercountry.
Governments use formal & informalpolicies to restrict imports & boost exports.
Japan: Least formal trade barriers as tariffs
& quotas. Uses administrative policiesinstead.
Govt. intervention: Perspectives
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Political
Govt. intervention: Perspectives
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Political
i) National Security: Strategic industries (defense, aerospace,posts, railways, etc) as in US & Japan, to be run by govt. GOIhas reserved these industries for exclusive public sectoroperation.
ii) Protecting Industries: Govt. to protect domestic industry
else foreign competitors can easily kill pvt industries. E.g.Healthy SMEs turned sick due to cheap Chinese & East Asiannations (Thailand, S. Korea, Malaysia) products.
iii) Protecting Jobs: Liberalization of India> Closure of SMEs,downsizing of MNCs, outsourcing of employees, privatizationof PSUs, etc.> reduce jobs.
iv) Retaliation: Only govt. can deal with tough approach withforeign firms, as it has power & machinery to implementdecisions.
Govt. intervention: PerspectivesEconomic:
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Economic:
i) Infant Industry Argument:Industry in infant stageof life cycle> cannot invest heavily then> it needsprotection from foreign competition.
ii) Strategic Trade Policy:
Govt. intervention, as in subsidies to certain domesticfirms having competitive advantage is essential. Thisenhances first mover advantages, abroad.
Foreign competing firms may create entry barriers to
domestic firms in home nation. Govt. interventionprovides support to firms in domestic market. USgovt s role to support domestic firms when Japanese