ibm unit i notes

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BA6221- INTERNATIONAL BUSINESS MANAGEMENT Unit - 1

B.Narayanan, Assistant Professor, Shivani School of Business Management

Why study international business?

Any business - related to global business environment

Obtaining employment overseas or with foreign-owned business

Languages to communicate for business manager

As an informed citizen

What is International Business

International business is any business transaction that involves parties from more than one country.

International business consists of transactions that are devised and carried out across national

borders to satisfy the objectives of individuals, companies, and organizations.

These transactions can take various forms and can involve different kinds of participants, e.g.,

individuals, non-profit organisations, companies, groups of companies, and government agencies

IB is the process of focussing on the resources of the globe

International business: all commercial transactions between parties in two or more countries

Private firms are profit-oriented.

Government organizations may or may not be profit-oriented.

The international business environment is more complex and diverse than the domestic business

environment.

Need for International Business

More and more firms around the world are going global, including:

o Manufacturing firms

o Service companies (i.e. banks, insurance, consulting firms)o Art, film, and music companies

International business:

o causes the flow of ideas, services, and capital across the world

o offers consumers new choices

o permits the acquisition of a wider variety of products

o facilitates the mobility of labor, capital, and technology

o provides challenging employment opportunities

o reallocates resources, makes preferential choices, and shifts activities to a global level

DEFINITION OF INTERNATIONAL BUSINESS

The economic system of exchanging good and services, conducted between individuals and

businesses in multiple countries

Differences between domestic and international businesses.

Currency (payments)

Legal systems

Culture Differences

Language Differences

Resource availability (Technical Differences)

Distances

Tariff Barriers





Documentations

Transport and Insurance cost

Why Go International

To Achieve Higher rate of Profits

Expanding the production capacities beyond the demand of the Domestic Country

Severe Competition in the Home Country

Limited Home Market

Political Stability Vs Political Instability

Availability of Technology and Managerial Competence

High Cost of Transportation

Nearness to Raw Materials

Availability of Quality Human Resources at less cost

Liberalisation and Globalisation

To increase Market Share

To avoid tariff and import Quotas

Stages of Internationalisation

Domestic Company

International Company

Multinational Company

Global Company

Transnational Company

Domestic Company

These Companies view on the domestic market opportunities, domestic suppliers, domestic

financial companies, domestic customers etc.

Unconscious motto “If it is not happening in the home country, it is not happening”

International Company

The focus of these companies is domestic but extends the wings to the foreign countries

These companies select the strategy of locating the branch in the foreign markets and extend the

same domestic operations into foreign markets. Multinational Company

MNC – Multinational Corporation is a company, which produces goods or markets its services in

more than one country.

In a narrow sense it is a company that through foreign direct investment controls and manages

subsidiaries in a number of countries outside its home base.

It formulates different strategies for different markets

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.

Manufacture globally and sell locally and vice versa





Transnational Company

It’s sales, investments, production, R&D activities and other business related operations are carried

out in many countries.

It is an integrated global enterprise which links global resources with global markets at profit.

Manufacture @ low cost and sell globally

Think globally and act locally

Modes of Entry: International Entry Strategies

Modes of entry into international business (Different Forms /Global Entry strategy)

Export

Licensing

Franchising

Management contracts

Turnkey Projects Foreign direct investment

Contract Manufacturing

Strategic alliance

Joint venture

Merger

Acquisition

Exporting : Forms of exporting

Firms can export using the following methods:

Indirect involvement means that the firm participates in international business through an intermediary

and does not deal with foreign customers or markets.

Direct involvement means that the firm works with foreign customers or markets with the opportunity to

develop a relationship.

Intra corporate transfers are selling of products by a company to its affiliated company in host country

(another country).

Licensing

Under a licensing agreement , one firm permits another to use its intellectual property for compensation

designated as royalty. The property licensed may include:

Patents

Trademarks

Copyrights

Technology

Technical know-how

Specific business skills

Benefits and Costs of Licensing

Benefits

It requires neither capital investment nor detailed involvement with foreign customers.

It capitalizes on research and development already conducted.

It helps avoid host country regulations applicable to equity ventures.

Costs

It is a very limited form of foreign market participation.

It does not guarantee a basis for future expansion.

The licensor may create its own competitor.





Franchising:

A firm (the franchisor ) allows another firm (the franchisee) to operate a business under the name of the

first firm, in return for a fee (normally a fixed payment and royalty). The franchisor provides trademarks,

operating systems, product reputation & support services (advertising, training, quality assurance).

Franchising is the granting of the right by a parent company to another independent entity to do

business in a prescribed manner.

The major forms of franchising are: Manufacturer-retailer systems such as car dealerships,

Manufacturer-wholesaler systems such as soft drink, companies

Service-firm retailer systems such as fast-food outlets.

To be successful, the firm must offer unique products or propositions, and a high degree of

standardization.

Key Reasons for Franchising:

Financial Gain

Market Potential

Saturated DomesticMarkets

Management Contract:

One firm provides managerial assistance, technical advice or specialized services to another firm for an

agreed time period in return for a fee (flat fee or percent of revenues).

Turnkey Project:

One firm (or firms) agrees to fully design, construct and equip a facility and then “turn the key” over to the

purchaser when the plant is ready for operation. May be a fixed price or a cost plus contract. Often donewith large construction projects in developing countries.

Foreign Direct Investment

Direct investment in productive assets by a company incorporated in a foreign company.Acquisition of

foreign assets for the purpose of control.

Methods for FDI:

Greenfield entry (start froms cratch, with clean slate)

Brownfield entry (acquisition of existing firm)

Joint venture (go with a partner)

Contract Manufacturing

A company contracts with a foreign producer to manufacture products for sale in the foreign market.It is

also called as outsourcing.

Globalization: the ongoing social, economic, and political process that deepens and broadens the

relationships and inter-dependencies amongst nations—their people, their firms, their organizations,

and their governments

International business facilitates globalization process

Four Dimension of Globalization Index are: Economic, Technological, Personal Contact, and Political





The Forces Driving Globalization

1. Increased in and expansion of technology

2. Liberalization of cross-border trade and resource movements

3. Development of services that support international business

4. Growing consumer pressures

5. Increased global competition

6. Changing political situations

7. Expanded cross-national cooperation

Criticisms of Globalization

1. Threats to national sovereignty

2. Economic growth and environmental stress

3. Growing income inequality and personal stress

BUSINESS ENVIRONMENT

Environment- Sum total of all the forces

surrounding & influencing the life and

development of the firm.Business involves

activities, which links an organization with

outside world. Within an organization, a

business is governed by the behaviour of its employees, management or decision makers. But externally a

business is influenced by a score of factors, which range from customers to competitors and government.

Therefore, a business cannot be independent of the influence of these external factors

Demographic Environment: This refers to the size and behaviour of population in a country.

Suppose a country has a huge size of population, then, the country would provide extensive business or

marketing opportunities for all types of business organizations.





On the other hand, a country with low size of population would force the business organizations to seek

external market for their products or services. Similarly, if the population in a country is well - tuned to 'use

and throw concept’ *like most of the Western countries+ then there would be limited scope for repair

shops and employment scope in that

segment would be almost nil.

But alternatively this would give wide

marketing opportunities for

manufacturing organizations.

Hence, the size and quality of

population emerges as a vital factor

influencing business environment.

Economic environment: Economic

environment refers to the overall

economic factors like economic

philosophy of the country, economic

structure, planning, economic policies, controls and regulations, etc.

All these have a serious impact on the functioning of business organizations in a country. For example, in a

Capitalistic economic system, business organizations would be subjected to limited government

regulations and controls. They would be more governed by market forces [demand and supply] rather than

by other factors. On the other hand, in a Socialist system, the government would determine everything on

behalf of the country.

In a Communist set up, the government has absolute control over every aspect over production that

private enterprises may not exist at all. In a Mixed economic system, government would be selective in

allowing die presence of private enterprises in certain activities, reserving some spheres completely for

governmental operations.

Geographical and ecological environment: Geographical environment refers to climatic conditions and

natural resources, which determines flu manufacturing scope and the nature of the products that could be

marketed.

For example, a country like Kenya has to manufacture more of products based on forest resources, while

the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc.,

Countries in the tropical region would have organizations specializing in products from geographical

resources available in abundant in that region. Hence, while identifying the business opportunities,

business organizations have to be conscious of the limitations posed by the geographical and ecological

considerations.





Legal environment: It is well known that every country has a number of legal regulations to ensure that

the interests of business organizations do not run counter to national interests.

Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of customer

complaints, payment of tax to government, manufacturing practices, human resources development to

pricing of products and services, a number of legal regulations have to be fulfilled.

For example, in USA and several western countries, consumer protection is very active, that even a

medical practitioner is subjected to huge liabilities in limes of deficiency in services.

In India and other countries, very rigorous legal provisions are in place to prevent hunting of rare species,

that any organization, which manufactures products based on such species, have lo get legal sanctions.

In case of failure to honor cheques issued, organizations are now a days made to pay hefty

compensations.

Technological environment: This is a very significant external factor determining the destiny of

business organizations. Supported by computerize operations, modern business organizations have

succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time

and place, etc.

While communications use to take unduly long time in those days, business communications are

instantaneous these days, to modern satellite technology. Modern organizations have recognized that

research and development alone can ensure organizational growth and stability.

They have become more and more pro-active and remain as change agents of the economy. Governmentshave also become more technology conscious that right from police controls to registration of title deeds,

computerizations has been adopted.

Customer servicing through call centers is the latest necessity of organizations. Manufacturing activities

have become more and more technically sophisticated.

Social environment: Social environment today has brought compulsions on business organizations to

adhere to certain business ethics and morals.

Social responsibility of business is an important force that modern business organizations cannot wriggle

out of their duties and responsibilities towards the society. For example, every leather manufacturing or

process unit is made to install pollution prevention system.

Similarly, the expectations of various interests in the society have undergone a sea of change. The

shareholders, promoters and owners expect a reasonable return on their investments.

The workers expect security of service, terminal benefits, accident relief and various other compensations

from the organizations.





Government expects the business units to pay tax regularly and participate in social improvement. The

distributors and agents expect the organizations to ensure smooth delivery process and demand more

commission and compensation.

Suppliers expect the organizations to give them continuous business and prompt payment of bills.

Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure

on the business unit. A business unit which succeeds in meeting the interests of all these groups remainssuccessful and grows.

Educational and cultural environment: Educational environment in a country determines the quality of

population. A country with very high illiterate population would always experience political and economic

instability. Similarly, lack of education may also give scope for the existence of superstitious beliefs,

fatalistic attitude, etc.

People's choice of goods and services would be more governed, by their religious faiths and beliefs.

economic development of a country completely depends on the literacy level which alone can pave the

way for improvement in science and technology, modernization, industrialization, etc. In such a country,

the business opportunities are plenty.

Cultural environment refers to the values, norms, customs, ethics, goals and other accepted behaviour

pattern of people in a country. In olden days, religion was the basis of all activities in a society.

The religious leaders and institutions determined what business should do and what people must

consume. In India, the existence of caste system has done more damage than any good.Caste based politics has become the order of the day. Under the pretext of working for backward and

downtrodden people, several persons have amassed fortune.

This is worsened by political support and policies. A modern organization does not have the liberty to

recruit people on merit but it has to follow strictly die reservation policy of the government.

Another serious aspect of the cultural environment is the attitude and behaviour of the people in urban

and rural areas.

The urban - rural divide has created enormous problems for administrators and specifically business

organizations prefer urban educated person to persons from rural areas.

Political environment: Political stability is one important factor winch determines the business growth or

downfall.

A country with relative political stability would witness inflow of foreign capital and collaboration.

By political stability we mean that the policies of government remaining consistent. As the business

decisions are based on government policies, frequent changes in these policies would force business

organizations to change their policies too which, makes functioning very difficult. Sometimes, when the

policies determined by a party in power are reversed by the succeeding party forming the government,there would be far reaching changes in business environment.





In the absence of competition, the business organizations, made people to accept inferior quality goods

and services. Once, the liberalization policy is adopted, the scene has completely changed. Today, no

business can survive unless it provides quality goods or services on par with the multinational corporations.

India had to accept various trade and monetary policies. This has brought about a complete change in

business environment.Protectionism and Trade Liberalisation

Protectionism- Means by which trade between countries is restricted in some way – normally through

measures to reduce the number of imports coming into a country

Tariff:

-A tax on a good coming into a country

-Increases the price of the good and makes it less

competitive

-Export – good which leave the country or

-Transit – pass through one country bound for

another

-Import – imposed on goods to country or goods

imported

-Advalorem – imposed on percentage on values of

goods imported

-Specific – attributes like weight, quantity, value etc.

-Compound- partly as a % on value and as a rate /unit or weight

Non – Tariff Barriers

-Quotas – refers to numerical limits on the quantity of goods during a specified period

-Quantity must be stated in the licence

- Has the penalty exceeds the limit

Voluntary Export Restraints (VERs) – quota on trade imposed by exporting country, at the request of

importing country

Subsidies

- Government payment to domestic producer

- Several forms cash grants, low-interest loans, tax breaks, government participation

- Helps in foreign imports ar low-cost

- Gain access to export markets

Other Non-Tariff Barriers

Embargo

- refers to complete ban to trade in one or more products

- Most restrictive trade barrier

- Use less today were in the past





Product & Testing standards

- Meet the requirements of their specifications and they test the quality standards

Currency Controls

- Must pay in a common, internationally acceptable currency such as US Dollar etc.

- Must obtain the currency from domestic banking system

Administrative Delays

- Requiring product inspection, custom office to cause unusual delays, requiring special licenses that

take a long time

Local Content Requirement

- Legal stipulation of specified amount of goods and services supplied by the producers in domestic

market

- Government may state that input used partially at least in the production of goods.

Examples include setting exacting standards on fuel emissions from cars, the documentation required to be

able to sell drugs in different countries, the ingredients in products – some of which may be banned in the

destination country

NTBs are difficult to prove – when do you accuse a country of protectionism – could be a legal or cultural

issue?

The main method involved in NTBs is not to prevent trade but to make the cost of doing so prohibitive to

the potential exporter

Trade Liberalisation

Aims to free up world trade and break down the barriers to international trade

Basic philosophy rests on the principle of comparative advantage

Talks to achieve trade liberalisation have been ongoing for many years

GATT – General Agreement on Tariffs and Trade

First signed in 1947 – talks on-going since then!

Uruguay Round 1994 – set up the World Trade Organisation (WTO) as well as agreements covering a range

of trade liberalisation measures

WTO provides the forum through which trade issues can be negotiated and works to help implement and

police trade agreements

Potential benefits: Promotes international specialisation and increases world output

Promotes efficient use and allocation of world resources

Allows developing countries access to the heavily protected markets of the developed world thus

helping promote development

Facilitates the working of the international market system and the working of price signals to ensure

efficient allocation of resources, international competition and the associated benefits to all

Limitations:

World agreements are very difficult to achieve.

Witness the issues over the removal or reduction of agricultural subsidies, tariffs

ibm unit i notes

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