Unit I: Introduction to

International Business
Globalization and its growing importance in world economy
Globalization is the process of increasing economic, social, cultural and political
integration and interdependence among countries and regions in the world. It has
several dimensions, such as trade, investment, migration, technology, communication,
culture and governance. Globalization has been growing in importance in the world
economy for several reasons, such as:

The rapid development of information and communication technologies (ICTs) has

enabled faster, cheaper and easier exchange of information, goods, services and
people across borders.

The liberalization of trade and investment policies has reduced barriers and
increased opportunities for cross-border transactions and cooperation.

The emergence of new markets and actors, such as multinational corporations

(MNCs), international organizations (IOs), civil society organizations (CSOs) and
global networks, has increased the complexity and diversity of the global economic
system.

The growing interdependence and interconnectedness of countries and regions has

increased the need for global governance and cooperation to address common

Unit I: Introduction to International Business 1

 challenges and opportunities, such as climate change, poverty, inequality, security
and human rights.

Impact of globalization
Globalization is the process of integration and interconnection of the world's
economies, politics, and cultures. It is driven by the development of new
technologies, especially in communication and transportation, and by the adoption
of liberal trade policies by many countries.

Globalization has positive and negative impacts on different aspects of human life.
Some of the positive impacts are:

It enhances economic growth and development by increasing trade, investment,

capital flows, and productivity.

It introduces new technologies and innovations that improve the quality of life
and facilitate scientific research.

It raises the living standards and reduces poverty by creating more

opportunities and choices for people.

It fosters cultural diversity and exchange by exposing people to different ideas,

values, and lifestyles.

Some of the negative impacts are:

It creates income inequality and social injustice by benefiting some groups more
than others.

It erodes national sovereignty and identity by imposing external influences and

pressures on domestic policies and decisions.

It causes environmental degradation and climate change by increasing the

consumption of natural resources and the emission of greenhouse gases.

It threatens local cultures and traditions by promoting homogenization and

westernization.

International business contrasted with domestic business

International business refers to the trade of goods, services, technology, capital
and/or knowledge across national borders and at a global or transnational scale. It

Unit I: Introduction to International Business 2

 involves cross-border transactions of value creation by entities from two or more
countries. International business is different from domestic business because it
involves different laws, cultures, currencies, tariffs, regulations and political systems.
International business also faces more risks and uncertainties than domestic
business, such as exchange rate fluctuations, political instability, cultural differences
and trade barriers. However, international business also offers more opportunities
and benefits, such as access to new markets, resources, technologies and
customers.

Complexities of international business

International business involves a range of complexities that are not present in
domestic business. Some of these complexities include:

Different legal and regulatory systems that may affect the operations, taxation,
and profitability of a firm.

Different cultural and social norms that may influence the preferences,
expectations, and behaviors of customers, suppliers, employees, and partners.

Different political and economic risks that may affect the stability, security, and
growth potential of a market.

Different currency and exchange rate fluctuations that may affect the costs,
revenues, and profits of a firm.

These complexities require international business managers to have a high level of

knowledge, skills, and adaptability to deal with the challenges and opportunities of
operating in diverse and dynamic environments.

Internationalization Stages and Orientations

Internationalization is the process of designing and developing products or services
that can be adapted to different markets, languages, and cultures. There are
different stages and orientations of internationalization, depending on the goals and
strategies of the organization.

One way to classify the stages of internationalization is by using the EPRG

framework, which stands for ethnocentric, polycentric, regiocentric, and geocentric.
These terms describe the degree of integration and standardization of the
organization's operations across different countries.

Unit I: Introduction to International Business 3

 Ethnocentric: The organization operates from a home-country perspective and
does not adapt to local markets. The products or services are designed for the
domestic market and exported to other countries with minimal or no changes.

Polycentric: The organization recognizes the differences between markets and

adapts to each one separately. The products or services are customized for
each country or region, and the organization has a decentralized structure with
local decision-making.

Regiocentric: The organization groups countries into regions based on

similarities and coordinates its activities within each region. The products or
services are standardized within each region, but may differ across regions. The
organization has a regional structure with some centralization of functions.

Geocentric: The organization views the world as a single market and seeks to
optimize its operations globally. The products or services are designed for
global markets, but may be adapted to local preferences if needed. The
organization has a global structure with a high degree of integration and
standardization.

Another way to classify the orientations of internationalization is by using the

Uppsala model, which describes the incremental steps that an organization takes to
enter foreign markets. According to this model, there are four stages of
internationalization:

No regular export activities: The organization has no or sporadic involvement in

foreign markets, usually through indirect exporting via intermediaries.

Export via independent representatives: The organization starts to export

regularly through agents or distributors who act on its behalf in foreign markets.

Establishment of a foreign sales subsidiary: The organization establishes its

own presence in a foreign market by setting up a sales office or a subsidiary
that handles marketing and distribution.

Foreign production/manufacturing units: The organization invests in production

facilities or joint ventures in foreign markets to reduce costs, increase control, or
access resources.

These models are not mutually exclusive, and an organization may adopt different
stages and orientations of internationalization depending on the product, market,

Unit I: Introduction to International Business 4

 industry, and competitive environment. Internationalization is a dynamic and
complex process that requires careful planning, research, and adaptation.

OR

Internationalization is the process of expanding a business beyond its domestic

market and adapting to the different cultural, legal, and economic environments
of foreign countries. There are different stages and orientations of
internationalization that reflect the degree of involvement and commitment of a
firm in the global market.

The stages of internationalization are:

Domestic: The firm operates only in its home country and has no intention or
capability to enter foreign markets.

Export: The firm sells its products or services to foreign customers, but does
not have any physical presence or direct investment in the foreign markets.

Contractual: The firm engages in contractual agreements with foreign

partners, such as licensing, franchising, joint ventures, or strategic alliances,
to access foreign markets and resources.

Investment: The firm establishes a physical presence or direct investment in

foreign markets, such as subsidiaries, branches, or manufacturing plants, to
gain more control and autonomy over its operations and strategy.

The orientations of internationalization are:

Ethnocentric: The firm views its home country as superior and applies the
same policies and practices to all foreign markets, regardless of the
differences and preferences of the local customers and stakeholders.

Polycentric: The firm recognizes the diversity and complexity of foreign

markets and adapts its policies and practices to each local market, treating
them as separate and independent entities.

Regiocentric: The firm groups foreign markets into regions based on their
similarities and differences, and develops regional policies and practices that
balance the need for adaptation and integration.

Geocentric: The firm views the world as a single market and develops global
policies and practices that leverage the best resources and capabilities from

Unit I: Introduction to International Business 5

 each country, regardless of their location.

Modes of entry into international business

Modes of entry into international business are the ways that a firm can establish
its presence and operations in a foreign market. There are different modes of
entry, such as exporting, licensing, franchising, joint ventures, strategic alliances,
foreign direct investment, and greenfield ventures. Each mode of entry has its
advantages and disadvantages, depending on the firm's objectives, resources,
capabilities, and competitive environment. The choice of the mode of entry
depends on various factors, such as the level of control, risk, commitment, and
flexibility that the firm desires.

OR

Modes of entry into international business are the ways that a firm can establish
its presence in a foreign market. There are different modes of entry, each with its
own advantages and disadvantages. Some of the common modes of entry are:

Exporting: This is the simplest and most common mode of entry, where a
firm sells its products or services directly or indirectly to customers in
another country. Exporting can be done through intermediaries, such as
agents or distributors, or directly by the firm itself. Exporting allows a firm to
reach a large market without investing much in production facilities or
marketing activities in the host country. However, exporting also exposes a
firm to risks such as exchange rate fluctuations, trade barriers,
transportation costs, and quality issues.

Licensing: This is a mode of entry where a firm grants another firm the right
to use its intellectual property, such as patents, trademarks, or technology, in
exchange for a fee or royalty. Licensing allows a firm to leverage its existing
assets and expertise without investing much in the host country. However,
licensing also limits the control and profits that a firm can have over its
products or services, and may create potential competitors or damage its
reputation if the licensee does not maintain quality standards or comply with
regulations.

Franchising: This is a mode of entry where a firm allows another firm to

operate under its brand name and follow its business model, in exchange for

Unit I: Introduction to International Business 6

 a fee or royalty. Franchising is similar to licensing, but involves more control
and support from the franchisor to the franchisee. Franchising allows a firm
to expand rapidly and benefit from the local knowledge and networks of the
franchisee. However, franchising also requires a high level of
standardization and coordination across different locations, and may create
conflicts or disputes between the franchisor and the franchisee.

Joint venture: This is a mode of entry where a firm forms a partnership with
another firm in the host country, and shares ownership, control, and profits
of the venture. Joint venture allows a firm to access the resources and
capabilities of the partner firm, such as technology, distribution channels, or
market knowledge. However, joint venture also involves sharing risks and
costs with the partner firm, and may create challenges in managing cultural
differences, communication issues, or strategic conflicts.

Wholly owned subsidiary: This is a mode of entry where a firm establishes

its own subsidiary in the host country, either by acquiring an existing local
firm or by setting up a new one from scratch. Wholly owned subsidiary gives
a firm the most control and flexibility over its operations and strategy in the
host country. However, wholly owned subsidiary also requires the most
investment and commitment from the firm, and exposes it to the political,
economic, and legal risks of the host country.

Unit I: Introduction to International Business 7

 Unit –III: Theories of International
Trade
Commercial Policy Instruments
Commercial Policy Instruments are the tools that governments use to regulate trade
with other countries. They can be divided into two main categories: tariff and non-tariff
measures.
Tariff measures are taxes or duties levied on the traded goods as they cross a national
boundary. They can be imposed on imports or exports, and they can vary depending on
the type, origin, or destination of the goods. Tariffs can affect the price, quantity, and
composition of trade, as well as the welfare of consumers, producers, and governments.
Non-tariff measures (NTMs) are policy measures other than tariffs that can potentially
have an economic effect on international trade in goods. They include quotas,
subsidies, technical regulations, sanitary and phytosanitary standards, anti-dumping
duties, countervailing duties, safeguards, and other administrative or procedural
barriers. NTMs can affect the quality, safety, and environmental impact of trade, as well
as the competitiveness and market access of traders.
Both tariff and non-tariff measures can be used to protect domestic industries from
foreign competition, to promote exports of domestic products, to correct trade
imbalances, to raise government revenue, to achieve social or environmental
objectives, or to pursue strategic or political goals. However, they can also have

Unit –III: Theories of International Trade 1

 negative consequences such as distorting resource allocation, creating inefficiencies,
increasing costs, reducing consumer choice, and triggering trade disputes.

Balance of payment account and its components

The balance of payment account is a systematic record of all the economic/monetary
transactions between the residents of a country and the rest of the world in an
accounting year. It is prepared on the principles of the double-entry system. It consists
of two main components: the current account and the capital account.

The current account records all transactions involving goods, services, investment
income, and current transfer payments. It includes:

Visible trade: the net of exports and imports of goods (visible items). The
balance of this trade is known as the trade balance.

Invisible trade: the net of exports and imports of services (invisible items).
Transactions mainly consist of shipping, IT, banking, and insurance services.

Unilateral transfers to and from abroad: payments that are not factor payments,
such as gifts or donations sent to or received from non-residents.

Income receipts and payments: factor payments and receipts, such as rent on
property, interest on capital, and profits on investments.

The capital account records all transactions of assets between residents and non-
residents. It includes:

Loans to and borrowings from abroad: all loans and borrowings given to or
received from abroad, both by the private sector and the public sector.

Investments to/from abroad: investments made by non-residents in shares or

real estate in the home country or vice versa.

Changes in foreign exchange reserves: foreign exchange reserves maintained

by the central bank to control the exchange rate and balance the BOP.

WTO and Its Objectives

OWS (Occupy Wall Street) is a social movement that emerged in 2011 in response
to the global financial crisis and the perceived injustices of the economic system.

Unit –III: Theories of International Trade 2

 One of the main objectives of the Occupy Wall Street (OWS) movement was to
challenge the global economic system and the role of international trade in creating
inequality and injustice. Some of the points that OWS raised were:

International trade agreements often favor the interests of corporations and

financial elites over the rights and needs of workers, consumers, and the
environment.

International trade can undermine the sovereignty and democracy of nations by

imposing rules and regulations that limit their ability to pursue their own social
and economic policies.

International trade can exacerbate the gap between rich and poor, both within
and between countries, by creating winners and losers in a competitive global
market.

International trade can contribute to the exploitation and oppression of

marginalized groups, such as women, indigenous peoples, and minorities, by
exposing them to unfair labor practices, environmental degradation, and cultural
erosion.

organizational structure
The World Trade Organization (WTO) is a multilateral organization that facilitates
global trade and resolves trade disputes among its 164 member countries. The
organizational structure of WTO consists of the following bodies:

The Ministerial Conference: This is the top decision-making body that meets
every two years and has the authority to make decisions on any aspects of all
multilateral agreements made under the WTO. It also appoints the director-
general of WTO.

The General Council: This is the representative of the Ministerial Conference

that oversees the daily operations of the WTO. It comprises representatives of
all member countries and acts as the Trade Policy Review Body and the
Dispute Settlement Body.

The Councils and Committees: These are specialized bodies that deal with
specific topics such as goods, services, intellectual property, environment,
development, etc. All WTO members may participate in all councils and
committees, except for the Appellate Body and Dispute Settlement panels.

Unit –III: Theories of International Trade 3

 The WTO secretariat, headed by the director-general, provides administrative and
technical support to the WTO bodies and members.

principles
The World Trade Organization (WTO) is an international body that regulates trade
among its member countries. The WTO operates on some basic principles that aim
to ensure fair and open trade in the global market. Some of these principles are:

Most-favoured-nation (MFN) treatment: This means that every member of the

WTO must grant the same advantages to all other members, without
discrimination. For example, if a country lowers its tariffs on a certain product, it
must do so for all WTO members, not just for some selected partners.

National treatment: This means that foreign goods, services and intellectual
property must be treated the same as domestic ones, once they enter a
member's market. For example, a country cannot impose higher taxes or
stricter regulations on imported products than on its own products.

Transparency: This means that members must make their trade policies and
practices clear and accessible to other members and the public. For example, a
country must publish its laws and regulations related to trade, and notify any
changes to the WTO.

Freer trade: This means that members should lower trade barriers and
negotiate market access through rounds of multilateral talks. For example, a
country should reduce its tariffs, quotas and subsidies that distort trade and
create unfair competition.

These principles are enshrined in various WTO agreements that cover different
aspects of trade, such as goods, services, intellectual property, dispute settlement
and trade facilitation. The WTO also provides a forum for members to discuss trade
issues, monitor compliance and resolve disputes.

functioning
The World Trade Organization (WTO) is an international organization that deals with
the rules of trade between countries. Its main function is to ensure that trade flows
smoothly, predictably and freely as possible. The WTO has the following features
and functions:

Unit –III: Theories of International Trade 4

 It covers trade in goods, services and intellectual property, and provides a
framework for negotiating trade agreements and resolving trade disputes.

It has 164 member countries that are bound by the WTO rules and policies.
Each member country has the right to be treated fairly and consistently in other
members' markets.

It conducts regular trade policy reviews to monitor the implementation of the

WTO agreements and to assess the impact of trade policies on the global
trading system.

It helps developing and least-developed countries to benefit from trade by

offering them special provisions, technical assistance and capacity building.

It cooperates with other international organizations, such as the United Nations,

to promote global economic development and stability.

Overview of UNCTAD
UNCTAD stands for United Nations Conference on Trade and Development. It is an
intergovernmental organization within the UN Secretariat that promotes the interests
of developing countries in world trade. UNCTAD was established in 1964 by the UN
General Assembly and reports to that body and the UN Economic and Social
Council. UNCTAD has 195 member states and works with nongovernmental
organizations worldwide. Its headquarters are located in Geneva, Switzerland, and
it has offices in New York and Addis Ababa. UNCTAD's main objective is to
formulate policies relating to all aspects of development, including trade, aid,
transport, finance and technology. One of its achievements was the Generalized
System of Preferences, which promotes the export of manufactured goods from
developing countries.

World Bank
The World Bank is an international financial institution that provides loans and
grants to low- and middle-income countries for the purpose of pursuing capital
projects. It comprises two institutions: the International Bank for Reconstruction and
Development (IBRD), and the International Development Association (IDA). The
World Bank's stated goal is to reduce poverty by providing countries with money to
improve sectors such as education, health, infrastructure, and the environment.

Unit –III: Theories of International Trade 5

 IMF
The International Monetary Fund (IMF) is an organization of 190 countries that
works to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth,
and reduce poverty around the world. The IMF's primary purpose is to ensure the
stability of the international monetary system—the system of exchange rates and
international payments that enables countries (and their citizens) to transact with
each other. The IMF's mandate was updated in 2012 to include all macroeconomic
and financial sector issues that bear on global stability.

Unit –III: Theories of International Trade 6

 Unit –IV: International Financial
Environment
International financial system and institutions
The international financial system and institutions are the set of rules, norms,
mechanisms and organizations that govern the global flow of money, trade and
investment. The main components of the international financial system are the
international monetary system, the international trade system, the international
investment system and the international financial institutions. The international
monetary system is the framework that determines how different currencies are
exchanged and valued. The international trade system is the network of agreements
and organizations that facilitate the exchange of goods and services across borders.
The international investment system is the regime that regulates the movement of
capital and assets among countries. The international financial institutions are the
multilateral bodies that provide financial assistance, advice and governance to countries
and regions in need.

Foreign exchange markets

Foreign exchange markets are places where currencies are traded. They allow people
and businesses to exchange one currency for another, such as dollars for euros or
pounds for yen. The exchange rate is the price of one currency in terms of another, and

Unit –IV: International Financial Environment 1

 it fluctuates depending on the supply and demand of each currency. Foreign exchange
markets are important for international trade, investment, tourism, and financial stability.

spot market
A spot market is a financial market where financial instruments and commodities are
traded for immediate delivery. Delivery refers to the physical exchange of a financial
instrument or commodity with a cash consideration. The spot market is also known as
the cash market or physical market because cash payments are processed immediately,
and there is a physical exchange of assets .
The spot price or spot rate is the current price of a financial instrument or commodity in
the spot market. It is determined by the supply and demand of the asset, as well as the
expectations of future price movements. The spot price may change by the second, as
orders get filled and new ones enter the marketplace .
Some of the assets traded on spot markets include equity, fixed-income instruments,
bonds, treasury bills, foreign exchange, and commodities such as crude oil, metals,
agriculture, and livestock. Spot markets can exist wherever there is an infrastructure to
carry out such a trade, such as exchanges or over-the-counter (OTC) markets .

spot rate quotations

Spot rate quotations are the prices of currencies, commodities, securities or other
assets that are available for immediate delivery or settlement. They are based on the
current market supply and demand, and reflect the real-time value of the asset at the
moment of the quote. Spot rate quotations can be used to determine the forward rate,
which is the agreed-upon price for future delivery of the asset. Spot rate quotations can
also be used to compare the value of different assets or currencies across markets and
time zones.

For example, the spot rate quotation for the currency pair EUR/USD is the current
exchange rate at which one euro can be bought or sold for US dollars. The spot rate
quotation for gold is the current price at which one ounce of gold can be bought or sold
for US dollars. The spot rate quotation for a bond is the current price at which the bond
can be bought or sold, which is related to its zero-coupon rate.

Spot rate quotations can vary depending on the source, the time and the place of the
quote. Different sources may use different methods to calculate or estimate the spot
rate, such as using interbank rates, bid-ask spreads, rollover credits or debits, or

Unit –IV: International Financial Environment 2

 delivery times. The spot rate quotation may also change depending on the time of day,
the market conditions, the liquidity, the volatility and the risk factors affecting the asset.
The spot rate quotation may also differ depending on the place of the quote, such as
different countries, regions or exchanges.

Spot rate quotations are important for traders, investors, businesses and consumers
who want to buy or sell an asset at its current market value. They can also be used to
hedge against future price movements, to speculate on market trends, to arbitrage
between markets, or to evaluate the performance of an asset over time.

cross exchange rates

A cross exchange rate is a currency exchange rate between two currencies that are not
the official currency of the country where the quote is given. For example, if a trader in
India wants to know the exchange rate between the euro and the Japanese yen, they
can use a cross exchange rate that is calculated from the exchange rates of both
currencies against the U.S. dollar, which is a common base currency. A cross exchange
rate can be expressed as EUR/JPY, which means how many Japanese yen are needed
to buy one euro. To calculate a cross exchange rate, we need to know the bid and offer
prices of both currencies against the U.S. dollar. For instance, if the bid/offer for
USD/EUR is 1.2191-1.2193 and the bid/offer for USD/JPY is 109.744-109.756, we can
use the following formula:
EUR/JPY = (USD/EUR) / (USD/JPY)

Using the bid prices, we get:

EUR/JPY = 1.2191 / 109.744 = 0.01111

Using the offer prices, we get:

EUR/JPY = 1.2193 / 109.756 = 0.01110

Therefore, the cross exchange rate for EUR/JPY is 0.01110-0.01111, which means that
one euro can buy between 0.01110 and 0.01111 Japanese yen.

Hedging and Speculation

Hedging and Speculation are two different strategies that investors and traders use in
the financial markets. Hedging is a way of reducing the risk of adverse price movements
in an asset or a portfolio. Speculation is a way of making a profit from the price
fluctuations in an asset or a market.

Unit –IV: International Financial Environment 3

 Hedging involves taking an opposite position in a related asset or market to offset the
potential loss or gain in the original position. For example, if an investor owns a stock
that is expected to decline in value, they can hedge their risk by buying a put option on
the same stock. This way, if the stock price falls, the investor can exercise the option
and sell the stock at a higher price than the market price, thus limiting their loss.
Hedging can also be used to protect against currency risk, interest rate risk, commodity
risk, and other types of market risks.
Speculation involves buying or selling an asset or a market based on a prediction or
expectation of its future price movement. For example, if a trader believes that the price
of gold will rise in the future, they can buy a futures contract on gold and sell it later at a
higher price, thus making a profit. Speculation can also involve using leverage,
derivatives, short selling, and other techniques to amplify the potential return or loss
from a trade. Speculators aim to exploit price volatility and market inefficiencies to earn
profits.

Hedging and Speculation have different objectives, risks, and rewards. Hedging is
mainly used to protect an existing position or portfolio from unfavorable price
movements, while Speculation is mainly used to create a new position or portfolio based
on favorable price movements. Hedging reduces the risk and volatility of an investment,
but also limits its potential return. Speculation increases the risk and volatility of an
investment, but also enhances its potential return.

Hedging and Speculation are both important and useful strategies in the financial
markets. They serve different purposes and suit different types of investors and traders.
Hedging can help reduce uncertainty and stabilize returns, while Speculation can help
generate income and capitalize on opportunities.

Types of Foreign investments

Foreign investment is the process of investing capital or assets in a business or project
located in another country. There are different types of foreign investment, depending
on the degree of control, ownership and involvement of the foreign investor. Some of
the common types are:

Foreign Direct Investment (FDI): This is when a foreign entity acquires more than
10% of the shares or voting rights of a domestic company, or establishes a
subsidiary or a joint venture in the host country. FDI implies a long-term
commitment and active participation in the management and decision-making of the

Unit –IV: International Financial Environment 4

 domestic company. FDI can bring benefits such as technology transfer, market
access, employment generation and economic growth to the host country. However,
it can also pose challenges such as environmental and social impacts, loss of
sovereignty and national security risks.

Foreign Portfolio Investment (FPI): This is when a foreign entity purchases less than
10% of the shares or debt securities of a domestic company, or invests in mutual
funds, exchange-traded funds or other financial instruments in the host country. FPI
implies a short-term or passive investment that does not involve significant influence
or control over the domestic company. FPI can provide liquidity, diversification and
risk-sharing opportunities to the host country. However, it can also create volatility,
currency fluctuations and capital flight risks.

Official Flows: This is when a foreign government or an international organization

provides loans, grants, aid or technical assistance to the host country for
development purposes. Official flows can help finance infrastructure, health,
education and other social sectors in the host country. However, they can also entail
conditionalities, debt burdens and political interference.

Commercial Loans: This is when a foreign bank or a financial institution lends

money to a domestic company or a government in the host country for business or
public purposes. Commercial loans can facilitate trade, investment and
consumption in the host country. However, they can also increase indebtedness,
interest payments and default risks.

Foreign investments flow

Foreign investments flow refers to the movement of capital across national borders in
the form of direct or portfolio investments. Direct investments are those that involve
acquiring or establishing a business in another country, while portfolio investments are
those that involve buying or selling stocks, bonds, or other financial assets. Foreign
investments flow can have significant impacts on the economic growth, development,
and competitiveness of both the source and destination countries. Foreign investments
flow can also affect the exchange rates, balance of payments, and financial stability of
the countries involved.

Foreign investment in Indian perspective

Unit –IV: International Financial Environment 5

 Foreign investment refers to the inflow of capital from other countries into the domestic
economy. It can take various forms, such as foreign direct investment (FDI), foreign
portfolio investment (FPI), foreign institutional investment (FII), foreign venture capital
investment (FVCI), etc. Foreign investment can have positive impacts on the Indian
economy, such as creating employment opportunities, enhancing productivity and
competitiveness, facilitating technology transfer and innovation, increasing exports and
foreign exchange earnings, etc. However, foreign investment can also pose some
challenges, such as exposing the economy to external shocks and volatility, creating
balance of payments problems, affecting domestic industries and markets, raising
environmental and social concerns, etc. Therefore, the Indian government has adopted
a balanced approach to regulate and promote foreign investment, keeping in mind the
national interest and development goals.

Unit –IV: International Financial Environment 6

 Unit –V: International business
operations
Key issues involved in making international production
International production refers to the process of producing goods or services in different
countries, often to take advantage of lower costs, access to markets, or specialized
skills. Some key issues involved in making international production decisions are:

The trade-offs between centralization and decentralization of production activities.

Centralization can reduce costs, increase efficiency, and ensure quality control, but
it can also limit flexibility, responsiveness, and customization. Decentralization can
allow for more adaptation to local needs, preferences, and regulations, but it can
also increase complexity, coordination costs, and risks of inconsistency or
duplication.

The choice of entry mode and ownership structure for foreign operations. Firms can
enter foreign markets through exporting, licensing, franchising, joint ventures,
strategic alliances, or wholly owned subsidiaries. Each mode has different
implications for the degree of control, risk, investment, and potential returns that the
firm can expect from its international production.

The challenges of managing a global supply chain and logistics network. Firms
need to consider how to source, transport, store, and distribute their inputs and
outputs across multiple locations and countries. They also need to balance the
trade-offs between efficiency and responsiveness, as well as deal with
uncertainties, disruptions, and regulations that may affect their global operations.

The impact of international production on the firm's competitive advantage and

performance. Firms need to evaluate how their international production strategy
aligns with their overall business strategy and goals. They also need to assess how
their international production affects their ability to create and sustain value for their
customers, shareholders, employees, and other stakeholders.

International finance

Unit –V: International business operations 1

 International finance is the study of how money flows across borders and how different
countries manage their currencies, exchange rates, trade balances, and capital
markets. Some of the key issues involved in making international finance are:

How to measure and compare the economic performance of different countries,

using indicators such as gross domestic product (GDP), inflation, unemployment,
and purchasing power parity (PPP).

How to determine the optimal exchange rate regime for a country, whether it is
fixed, floating, or somewhere in between, and how to manage the risks and benefits
of currency fluctuations.

How to balance the trade and current account of a country, which reflect its exports
and imports of goods and services, as well as its income and payments from
abroad.

How to attract and regulate foreign direct investment (FDI) and portfolio investment,
which are the main sources of capital inflows and outflows for a country, and how to
deal with the issues of capital mobility, capital controls, and capital flight.

How to coordinate monetary and fiscal policies among different countries, especially
in times of crisis or instability, and how to foster international cooperation and
integration through institutions such as the International Monetary Fund (IMF), the
World Bank, and the World Trade Organization (WTO).

marketing and human resource decisions

Marketing and human resource decisions are two important aspects of international
business. Marketing decisions involve choosing the best strategies to promote and sell
products or services in different markets, while human resource decisions involve
managing the recruitment, training, compensation, and retention of employees across
different countries.
Some of the factors that influence marketing and human resource decisions in
international business are:

Cultural differences: Different cultures have different values, preferences, norms,

and behaviors that affect how consumers perceive and respond to products or
services, as well as how employees perform and interact in the workplace.
International businesses need to understand and adapt to these cultural differences
to avoid misunderstandings, conflicts, or ethical issues.

Unit –V: International business operations 2

 Legal and political environment: Different countries have different laws and
regulations that affect how businesses can operate, such as trade barriers, tariffs,
taxes, labor laws, intellectual property rights, etc. International businesses need to
comply with these laws and regulations to avoid legal problems or penalties.

Economic conditions: Different countries have different levels of economic

development, income, inflation, exchange rates, etc. that affect the demand and
supply of products or services, as well as the costs and benefits of doing business.
International businesses need to monitor and adjust to these economic conditions to
optimize their profitability and competitiveness.

Technological factors: Different countries have different levels of technological

advancement, innovation, infrastructure, etc. that affect the availability and quality of
products or services, as well as the efficiency and effectiveness of business
processes. International businesses need to leverage and integrate these
technological factors to enhance their productivity and innovation.

International business negotiations

International business negotiations are complex and challenging processes that require
careful preparation, effective communication, and cultural awareness. Successful
negotiators must be able to identify their own interests and goals, as well as those of
their counterparts, and find mutually beneficial solutions that create value for both
parties. Negotiators must also be aware of the potential pitfalls and risks that may arise
during the negotiation process, such as misunderstandings, conflicts, or impasses, and
be ready to overcome them with appropriate strategies and tactics. International
business negotiations can be influenced by various factors, such as the legal, political,
economic, and social context of the countries involved, the power dynamics and
relationships between the negotiators, the cultural differences and expectations of each
side, and the ethical and moral issues that may arise. Negotiators must be able to adapt
to these factors and adjust their behavior and style accordingly. International business
negotiations are not only a means to achieve economic outcomes, but also an
opportunity to build trust, rapport, and long-term relationships with potential partners
and stakeholders.

Outsourcing and its potentials for India

Unit –V: International business operations 3

 Outsourcing is the practice of hiring external parties to perform certain tasks or services
for a company or organization. Outsourcing can offer many benefits for India in
international business, such as:

Cost savings: Outsourcing can help reduce labor costs, operational expenses, and
capital investments, as well as improve efficiency and productivity.

Access to talent: Outsourcing can enable India to tap into a global pool of skilled
and experienced workers, especially in fields such as information technology,
engineering, and finance.

Innovation and competitiveness: Outsourcing can foster innovation and creativity by

exposing India to new ideas, technologies, and best practices from different markets
and cultures. Outsourcing can also enhance India's competitiveness by allowing it
to focus on its core competencies and strategic goals.

Risk management: Outsourcing can help mitigate risks associated with fluctuations
in demand, quality issues, regulatory compliance, and security threats, by sharing
them with the outsourcing partners.

Outsourcing has the potential to boost India's economic growth, create employment
opportunities, and increase its global presence and influence. However, outsourcing
also poses some challenges and risks for India, such as:

Loss of control: Outsourcing can reduce India's control over its business processes,
resources, and outcomes, as well as its ability to protect its intellectual property and
confidential information.

Cultural and communication barriers: Outsourcing can create difficulties in

communication, coordination, and collaboration between India and its outsourcing
partners, due to differences in language, time zones, work styles, and cultural
norms.

Quality and reliability issues: Outsourcing can compromise the quality and reliability
of the products or services delivered by the outsourcing partners, due to factors
such as lack of supervision, standards, or accountability.

Social and ethical concerns: Outsourcing can have negative impacts on India's
social and environmental conditions, such as job losses, wage depression, skill
erosion, labor exploitation, and environmental degradation.

Unit –V: International business operations 4

 Therefore, outsourcing is a complex and dynamic phenomenon that requires careful
planning, management, and evaluation by India in order to maximize its potentials and
minimize its pitfalls in international business.

Strategic alliances
Strategic alliances are long-term partnerships between two or more organizations that
share resources, capabilities, and risks to achieve a common goal. Strategic alliances
can help organizations gain access to new markets, technologies, or skills, as well as
enhance their competitive advantage and innovation potential. However, strategic
alliances also entail challenges such as managing cultural differences, aligning
objectives and expectations, and ensuring trust and commitment among the partners.
Therefore, strategic alliances require careful planning, execution, and evaluation to
ensure their success and sustainability.

mergers and acquisitions

Mergers and acquisitions (M&A) are transactions in which the ownership of companies,
other business organizations, or their operating units are transferred or consolidated
with other entities. M&A can have significant implications for international business, as
they can create new opportunities for market entry, expansion, diversification, or
synergy. However, M&A also pose many challenges and risks, such as cultural
differences, regulatory barriers, integration issues, or valuation problems. Therefore,
M&A require careful planning, due diligence, negotiation, and execution to ensure a
successful outcome.

Role of IT in international business

Information technology (IT) plays a vital role in international business, enabling firms to
communicate, collaborate, and compete across borders. IT facilitates the exchange of
information, the coordination of activities, and the integration of processes among
different locations and stakeholders. IT also enables firms to leverage their resources
and capabilities, create value for customers, and achieve competitive advantage in the
global market. Some of the benefits of IT for international business include:

Reducing transaction costs and enhancing efficiency

Improving quality and innovation

Expanding market reach and access

Unit –V: International business operations 5

 Customizing products and services

Enhancing customer satisfaction and loyalty

Strengthening relationships and networks

Managing risks and uncertainties

International business and ecological considerations

International business and ecological considerations are two important factors that
affect the global economy and the environment. International business refers to the
exchange of goods, services, capital, and knowledge across national borders.
Ecological considerations refer to the awareness and respect for the natural resources,
biodiversity, and ecosystems that sustain life on Earth.

International business and ecological considerations are often seen as conflicting or

competing interests, as some business activities may have negative impacts on the
environment, such as pollution, deforestation, or greenhouse gas emissions. However,
international business and ecological considerations can also be aligned and mutually
beneficial, as some business activities may have positive impacts on the environment,
such as renewable energy, green technology, or sustainable development.

Therefore, international business and ecological considerations should not be viewed as

separate or incompatible domains, but rather as interrelated and interdependent
aspects of the global system. By integrating international business and ecological
considerations into their strategies and operations, businesses can create value for
themselves and for society, while also contributing to the protection and enhancement
of the natural environment.

Unit –V: International business operations 6