VI SEM BBA INTERNATIONAL BUSINESS

UNIT - I
INTRODUCTION TO INTERNATIONAL BUSINESS

Introduction- Meaning and definition of international business need and importance of

international business, stages of internationalization, tariffs and non-tariff barriers to
international business.

Mode of entry into international business - exporting (direct and indirect), licensing and
franchising, contract manufacturing, turnkey projects, management contracts, wholly
owned manufacturing facility, Assembly operations, Joint Ventures, Third country
location.

International business is defined as commercial transactions that occur across country

borders. When a company sells products in the US, Japan and throughout Europe, this is an
example of International business.
 The exchange of goods and services among individuals and businesses in multiple
countries.
 A specific entity, such as a multinational corporation or international business
company that engages in business among multiple countries. International Business
conducts business transactions all over the world. These transactions include the
transfer of goods, services, technology, managerial knowledge, and capital to other
countries. International business involves exports and imports.

International Business is also known, called or referred as a Global Business or an

International Marketing.

Features of International Business

Large scale operations: In international business, all the operations are conducted on
a very huge scale. Production and marketing activities are conducted on a large scale.
It first sells its goods in the local market. Then the surplus goods are exported.

Integration of economies: International business integrates (combines) the economies

of many countries. This is because it uses finance from one country, labour from
another country, and infrastructure from another country. It designs the product in one
country, produces its parts in many different countries and assembles the product in
another country. It sells the product in many countries, i.e. in the international market.

Dominated by developed countries and MNCs: International business is dominated

by developed countries and their multinational corporations (MNCs). At present,
MNCs from USA, Europe and Japan dominate (fully control) foreign trade. This is

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because they have large financial and other resources. They also have the best
technology and research and development (R & D). They have highly skilled
employees and managers because they give very high salaries and other benefits.
Therefore, they produce good quality goods and services at low prices. This helps
them to capture and dominate the world market.

Benefits to participating countries: International business gives benefits to all

participating countries. However, the developed (rich) countries get the maximum
benefits. The developing (poor) countries also get benefits. They get foreign capital
and technology. They get rapid industrial development. They get more employment
opportunities. All this results in economic development of the developing countries.
Therefore, developing countries open up their economies through liberal economic
policies.

Keen competition: International business has to face keen (too much) competition in
the world market. The competition is between unequal partners i.e. developed and
developing countries. In this keen competition, developed countries and their MNCs
are in a favourable position because they produce superior quality goods and services
at very low prices. Developed countries also have many contacts in the world market.
So, developing countries find it very difficult to face competition from developed
countries.

Special role of science and technology: International business gives a lot of

importance to science and technology. Science and Technology (S & T) help the
business to have large-scale production. Developed countries use high technologies.
Therefore, they dominate global business. International business helps them to
transfer such top high-end technologies to the developing countries.

International restrictions: International business faces many restrictions on the

inflow and outflow of capital, technology and goods. Many governments do not allow
international businesses to enter their countries. They have many trade blocks, tariff
barriers, foreign exchange restrictions, etc. All this is harmful to international
business.

Sensitive nature: The international business is very sensitive in nature. Any change in
the economic policies, technology, political environment, etc. has a huge impact on it.
Therefore, international business must conduct marketing research to find out and
study these changes. They must adjust their business activities and adapt accordingly
to survive changes.

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Nature of International Business

Accurate Information is required to make an appropriate decision.
Information not only accurate but should be timely
The size of the international business should be large
Market segmentation based on geographic segmentation
International markets have more potential than domestic markets

Scope of International Business

International Marketing
International Finance and Investments
Global HR
Foreign Exchange

Stages of Internationalisation
Stage 1: - Domestic company – this company focuses its view on the domestic market
opportunities, domestic suppliers, domestic financial companies, domestic customers
etc.
Stage 2: - International Company – these companies extend the domestic product,
domestic price, promotion and other business practices to the foreign markets.
Stage 3: - Multinational Company – this stage of multinational company is also
referred to as multidomestic. Multidomestic company formulates different strategies
for different markets. Thus, the orientation shifts from ethnocentric to polycentric.
Stage 4: - Global Company – Global Company either produces in home country or in
a single country and focuses on marketing these products globally, or produces the
products globally and focuses on marketing these products domestically.
Stage 5: - Transnational Company – transnational company produces, markets,
invests and operates across the world. It is an integrated global enterprise that links
global resources with global markets at profit.

Need for International Business

Here are some key reasons highlighting the necessity of engaging in international business: -
 Market Expansion and Growth: - Domestic markets may become saturated, limiting
growth opportunities for businesses.
 Diversification of Revenue Streams: - Relying solely on a single market can expose
businesses to economic fluctuations and uncertainties.
 Access to Resources: - Some regions possess unique resources, technology, or skills
that businesses may require.
 Competitive Advantage: - The global marketplace is highly competitive, demanding
continuous innovation and adaptation.
 Economies of Scale: - Achieving economies of scale may be challenging in smaller
domestic markets.

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 Technology Transfer and Innovation: - Innovation and advanced technologies may be

concentrated in specific regions.
 Risk Diversification: - Relying solely on a domestic market increases exposure to
local economic, political, or regulatory risks.
 Access to New Talent: - Companies may seek access to a diverse pool of talents and
expertise.
 Financial Opportunities: - Businesses may seek better financial opportunities,
including higher returns on investment.
 Cultural Exchange and Understanding: - Global markets require an understanding of
diverse cultures and consumer preferences.
In summary, the need for international business is driven by the pursuit of growth, access to
resources, competitive advantage, and the imperative to navigate the complexities of an
interconnected global economy. It has become a strategic imperative for companies to thrive
and succeed in the dynamic and ever-expanding international marketplace.

Importance/Advantages of International Business

High living standards
Increased socio-economic welfare
Wider market
Reduced effects of business cycles
Reduced risks
Large-scale economies
Potential untapped markets
Provides the opportunity for and challenges to domestic business
Division of labour and specialization
Economic growth of the world
Optimum and proper utilization of world resources
Cultural transformation

Tariff Barriers and Non-Barriers of International Business

Tariff Barriers
When two nations trade in commodities, the country in which the goods are exported levies
a tax in order to generate revenue for the government while also raising the price of foreign
goods so that domestic firms can compete with foreign products. The fee is in the form of a
tax or duty which is referred to as a Tariff Barrier. The amount of tax or duty levied as a
tariff is added to the cost of the import, making foreign goods more expensive, which is
ultimately borne by the product’s customer. The tariff is paid to the customs authorities of
the country where the goods are being sent.

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Examples of Tariff Barriers:

 Export Duties
 Import Duties
 Transit Duties

Non-Tariff Barriers
Non-tariff Barriers are non-tax measures used by the government of a country in order to
restrict imports from foreign countries. It includes constraints that result in prohibition,
formalities, or circumstances that make imports of commodities difficult and reduce market
potential for foreign products. These are quantitative and exchange controls that have an
impact on trade volume, pricing, or both. It might be in the form of laws, policies,
practices, conditions, and requirements imposed by the government to limit imports.

Example of Non-Tariff Barriers:

 Import Quotas
 VERs, i.e. Voluntary Export Restraints
 Import Licensing
 Technical and Administrative Regulations
 Foreign Exchange Regulations

Difference between Tariff and Non-tariff Barriers

Basis Tariff Barriers Non – Tariff Barriers

Non-tariff barriers include all

Tariff Barriers are taxes or fees
the limitations other than taxes
imposed by the government on
imposed by the government on
Meaning imports in order to protect
imports in order to protect domestic
domestic industries and boost
enterprises and discriminate against
revenue for the government.
new entrants.

The World Trade Organisation

Import quotas and voluntary export
authorised its members to
Permissibility barriers were eliminated by the World
impose tariff barriers but only at
Trade Organisation.
reasonable rates.

Nature Tariff barriers are explicit in Non-tariff barriers are implicit in

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Basis Tariff Barriers Non – Tariff Barriers

nature. nature.

Non-tariff barriers are imposed in the

Tariff barriers are imposed in the
Form form of Regulations, Conditions,
form of Taxes and Duties.
Requirements, Formalities, etc.

Tariff barriers generate revenue Non-tariff barriers do not generate

Revenue
for the government. revenue for the government.

Tariff barriers affect the price of Non-tariff barriers affect the quantity
Affects
imported goods. or price or both of the imported goods.

Import Duties, Export Duties, Import Licensing, Foreign Exchange

Example
Ad-valorem Duties, etc. Regulations, Import Quotas, etc.

International Business Approaches

1. Ethnocentric approach: - under this approach the domestic companies view foreign
markets as an extension to domestic markets. The company export the same product
designed for domestic market to foreign countries. The maintenance of domestic
approach towards international business is called ethnocentric. This approach is
suitable to the companies during the early days of internationalisation and also to the
smaller companies.

2. Polycentric approach: - under this approach the company establishes a foreign

subsidiary company and decentralizes all the operations and delegates’ decision-
making and policy making authority to its executives. The executives of the
subsidiary formulate the policies and strategies, design the product based on the host
country’s environment (culture, customs, design, taste, preferences, policies etc.) of
the local customers.

3. Regiocentric approach: - at this stage, the foreign subsidiary considers the regional
environment (for example, Asian environment like laws, culture, polices etc) for
formulating policies and strategies. It markets more or less the same product designed

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under polycentric approach in other countries of the region, but with different market
strategies.

4. Geocentric approach: - under this approach, the entire world is just like a single
country for the company. They select employees from the entire globe and operate
with a number of subsidiaries. Each subsidiary functions like an independent and
autonomous company in formulating policies, strategies, product design, human
resources policies, operations etc.

Table showing different modes of entry to international business

I. EXPORTING
a. Indirect Exports
b. Direct Exports
c. Intra-corporate Transfers
II. LICENSING
d. International Licensing
III. FRANCHISING
e. International Franchising
IV. SPECIAL MODES
f. Contract Manufacturing
g. Management Contracts
h. Business Process Outsourcing
i. Turnkey Projects
V. FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES
j. Green Field Strategy
VI. FOREIGN DIRECT INVESTMENT WITH ALLIANCES
k. Mergers & Acquisition
l. Joint Ventures
VII. THIRD COUNTRY LOCATION

EXPORTING
Exporting is the simplest and widely used mode of entering foreign markets.

Forms of Exporting: -
Indirect Exporting – is exporting the products either in their original form or in the
modified form to a foreign country through another company. For instance, various
publishers in India including Himalaya Publishing House sell their products, i.e.,
books to UBS publishers of India, which in turn export these books to various foreign
countries.

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Direct Exporting – is selling the products in a foreign country directly through its
distribution arrangements or through a host country’s company. For instance, Baskin
Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets
with Russian partners.
Intracorporate Transfers – are selling of products by a company to its affiliated
company in host country (another country). Selling of products by Hindustan Lever in
India to Unilever in USA. This transaction is treated as exports in India and imports in
USA.
Factors to be considered
Government policies like export policies, import policies, export financing, foreign
exchange etc.
Marketing factors like image, distribution networks, customer expectation,
preferences etc.
Logistical consideration – include physical distribution costs, warehousing costs,
transportation costs, inventory carrying costs etc.

Advantages & Disadvantages of Exporting

Advantages Disadvantages
 Less investments & less risk  may compete with low-cost location
 Avoids cost of establishing manufacturer
manufacturing operations  possible high transportation costs
 May help achieve experience curve  tariff barriers
and location economies  Possible lack of control over
marketing representatives.

LICENSING – International Licensing

In this mode of entry, the domestic manufacturer leases the right to use its intellectual
property, i.e., technology, work methods, patents, copy rights, brand names, trademarks etc.
to a manufacturer in a foreign country for a fee. The manufacturer in the domestic company
is called “Licensor” and the manufacturer in the foreign country is called “Licensee”.

Basic issues in International Licensing

Boundaries of the Agreement
Determination of Royalty
Determination of Rights, Privileges & Constraints
Dispute settlement mechanism
Agreement duration

Advantages & Disadvantages of Licensing

Advantages Disadvantages
 Licensing mode carries relatively low  Licensing agreements reduce the market
investment on the part of licensor. opportunities for both licensor and

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 Licensing mode carries low financial licensee.

risk to the licensor.  Both the parties have the responsibilities
 Licensor can investigate the foreign to maintain the product quality and
market without much effort. promotion.
 Licensee gets the benefits with less  Scope for misunderstanding between the
investment on research and parties.
development.  Problem of leakage of the trade secrets of
the licensor.
 Licensee may develop his reputation.
FRANCHISING – International Franchising
Franchising is a form of Licensing. An independent organization called the franchisee
operates the business under the name of another company called the franchisor. Under this
agreement the franchisee pays a fee to the franchisor. The franchisor provides the following
services to the franchisee: -
 Trade marks
 Operating systems
 Product reputations
 Continuous support system like advertising, employee training, quality assurance
programmes etc.

Basic Issues in Franchising

The franchisor should be successful in his home country
The factors of success later transferred to other countries.
The franchisee has to pay a fixed amount and royalty based on sales to the franchisor.
Franchisee should agree to the franchisor’s requirements like appearance, financial
reporting, customer service etc.
Franchisor helps the franchisee in establishing the manufacturing facilities, services
facilities, advertising etc.
Franchisor allows the franchisee some degree of flexibility in order to meet the local
tastes and preferences. For instance, McDonald restaurants in Germany sell beer also
and McDonald restaurants in France sell wine also.

Advantages & Disadvantages of Franchising

Advantages Disadvantages
 Franchisor can enter global markets  Both the parties have the
with low investments and low risks responsibilities to maintain product
 Franchisor can get information quality and promotion.
regarding markets, culture,  There is a scope of misunderstanding
environment of the host country  There is a problem of leakage of
 Franchisor learns more lessons from trade secretes
the experiences of the franchisees.  Franchising reduce the market
 Franchisee can start a business with opportunities for both
low risk  Franchisee may damage the image of
 Franchisee gets the benefits of R & D franchisor
with low cost.  Franchisor may fail to provide
 Franchisee escapes from the risk of marketing and other facilities to
product failure. franchisee.

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SPECIAL MODES

Contract Manufacturing
Some companies outsource their part or entire production and concentrate on
marketing operations. This practice is called the contract manufacturing. For instance, Nike
has concentrated with a number of factories in south-east Asia to produce its athletic
footwear and it concentrates on marketing. Bata also contracted with a number of cobblers
in India to produce its footwear and concentrate on marketing.
Advantages & Disadvantages of Contract Manufacturing

Advantages Disadvantages
 Low financial risks  Reduced control – may affect quality,
 Minimize resources devoted to delivery etc.
manufacturing  Reduce learning potential
 Focus firm’s resources on other  Potential public relation problems
elements of the value chain

Management Contracts
A management contract is an agreement between two companies, whereby one
company provides managerial assistance, technical expertise and specialized services
to the second company of the agreement for a certain period in return for monetary
compensation.
Monetary compensation may include – a flat fees or percentage over sales or
performance bonus based on profitability, sales growth etc.
The companies with low level technology and managerial expertise may seek the
assistance of a foreign company.

Advantages & Disadvantages of Management Contracts

Advantages Disadvantages
 Foreign company earns additional  The host country’s companies spoil
income without any additional the brand name, if they do not keep
investment and risks up the quality of the product.
 Additional income allows the
company to enhance its image with  The host country’s companies may
the investors and mobilize the funds leak the secrets of technology.
for expansion.
 It helps the companies to enter other
business areas in the host country

Business Process Outsourcing

Business process outsourcing is the long-term contracting out of non-core business
process to an outside provider to help achieve increased shareholder value.

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Some forms of BPO may include IT, management and business operations, the
approach is primarily about turning over functions such as payroll, accounting, billing
etc. to a third party.

Why BPO
To enable executives to concentrate on strategy – traditionally executives spend 80%
of their time managing employees and work flow and only 20% on strategy. Once a
process is successfully outsourced the ratio can be reversed.
To improve processes and save money – are often able to re-engineer those processes
and capture new efficiencies.
Increase organizational capabilities – with this, expertise often comes increased
capability. In addition to doing things more efficiently organization can expand their
ability to deliver new product and services to customers.

Why BPO in India

Language – the largest English speaking population after the USA.
A vast workforce of educated, English speaking, tech savvy personnel
Cost effective manpower – per agent cost in the USA is approximately $40,000/ -
while in India it is only $5,000/-
Technical support – India graduates about lakhs of engineers each year.

Advantages & Disadvantages of BPO

Advantages Disadvantages
 Productivity improvements  Knowledge disappears and is
 Cost savings transferred to the outsourcing partner.
 Improved HR  Poor quality control
 Focus on core business competency  Restoring operations is complicated
 Improve service level  Lack of loyal employees
 Reengineer business process  Reduction in strategic alignment
 Access to world class facilities  Political and religious instability
 Higher level of service with lower
cost

Trunkey Projects
A turnkey project is a contract under which a firm agrees to fully design, construct
and equip a manufacturing/business/service facility and turn the project over to the
purchaser when it is ready for operation for remuneration. The forms of remuneration
include – fixed price or payment on cost plus basis.
The recent approach to turnkey projects is Build, Operate and Transfer (B-O-T). the
company builds the manufacturing/services facility, operates it for some time and then
transfers it to the host country’s government.
International turnkey projects include nuclear power plants, air ports, oil refinery,
highways, railway lines etc.

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Advantages & Disadvantages of Turnkey projects

Advantages Disadvantages
 Focus firm’s resources on its area of  Financial risks – cost over runs
expertise  Construction risks – delays, problems
 Avoid all long-term operational risks with suppliers

FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES

Companies which enter the international markets through FDI invest their money;
establish manufacturing and marketing facilities through ownership and control.

Green Field Strategy

The Greenfield refers to starting with a virgin green site and then building on it. Thus,
Greenfield strategy is starting of the operations of a company from scratch in a
foreign market.
The company conducts the market survey, selects the location, buys or leases land,
creates the new facilities, transfers the human resources and starts the operations and
marketing activities.

Advantages & Disadvantages of Greenfield strategy

Advantages Disadvantages
 The company selects the best location  This strategy results in a longer
from all viewpoints. gestation period as the successful
 The company can avail the incentives, implementation takes time and
rebates and concessions offered by patience.
the host governments including local  Some companies may not get the land
governments in the location of its choice
 The company can also have its own  Host country’s government may
policies and styles of human impose conditions that the company
resources management. should recruit local people and train
 The company can produce based on them, if necessary, to meet the
the local environment and changing company’s requirements.
preferences of the customers.  Some countries discourage the entry
of foreign companies through FDI in
order to protect the domestic industry.

FOREIGN DIRECT INVESTMENT WITH ALLIANCES

Strategic alliance is a co-operative approach to achieve the larger goals. Strategic
alliance takes different forms like licensing, franchising, contract manufacturing,
mergers & acquisition, joint ventures.

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Alliance is a strategy to explore a new market which the companies individually

cannot do.
Alliances play pivotal role in providing competitive advantage
Alliances may be in the form of production alliance/marketing alliance/financial
alliance/R&D alliance.

Mergers & Acquisition

A domestic company selects a foreign company and merges itself with the foreign
company in order to enter international business. Alternatively, the domestic company
may purchase the foreign company and acquire its ownership and control.
Though mergers and acquisitions provide easy and instant entry to global business,
sometimes it would be cheaper for a domestic company to have a green field strategy
than by acquisitions.
Successful acquisition in India – Tata motors with Jaguar Land Rover, Mahindra &
Mahindra with Schonewewiss, ONGC-Imperial energy, Tata steel-Corus, Walmart-
Flipkart.

Advantages & Disadvantages of Acquisition strategy

Advantages Disadvantages
 The company immediately gets the  Acquiring a firm in a foreign country
ownership and control over the is a complex task involves bankers,
acquired firm lawyers, regulations of two countries.
 The company can formulate  Sometimes host countries imposed
international strategy and generate restrictions on acquisition of local
more revenues companies by the foreign companies.
 If the industry already reached the  Labour problems of the host
stage of optimum capacity level then country’s company are also
this strategy helps the economy of the transferred to the acquired company.
host country.

Joint Ventures
Two or more firms join together to create a new business entity that is legally separate
and distinct from its partners. Joint ventures are established as corporation and owned
by the funding partners in the predetermined proportions.
Joint venture involves shared ownership. It involves the local companies. Various
environmental factors like social, technological, economic and political encourage the
formation of joint ventures.
Different types of partners join the joint ventures. They include – Host country’s
venture (public – private venture) or private partners.
Successful Joint ventures in India -
o Vistara is the brand name of TATA SIA Airlines Ltd, a JV between TATA &
Singapore Airlines.

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o Tata Starbucks – a JV between Tata Global beverages with Starbucks

corporation from USA
o Bharti-AXA General Insurance – a JV between Bharati enterprises and
insurance major from france, AXA
o Mahindra – Renault Ltd – a JV between Mahindra & Mahindra and world-
renowned vehicle maker, Renault SA of france.
o ICICI Prudential Life insurance Company Ltd – A JV between ICICI bank and
UK based Prudential Corporation Holdings Ltd.
o ICICI Lombard – A JV between ICICI Bank and Fairfax Financial Holdings
Ltd of Canada.
o AirAsia India – A JV between Malaysia based Air Asia and Tata Sons.

Life cycle of a joint venture

It includes 4 stages: -
Exploratory stage – during the first stage the prospective partners start making:
Alliances, project collaborations & feasibility studies.
Growth stage – if the interests of the parties vary at this stage, they will lead to
collapse of the joint venture in this phase itself. If the partners work together, this
phase leads to stability phase.
Stability stage – even in the stability stage, the joint venture may collapse. If not, the
changed interests of the parties force them to renegotiate phase
Renegotiation stage – if the renegotiation is not successful, the joint venture may
collapse.
The reasons for collapse include: -
 Entry of new competitors
 Changes in business environment
 Changes in partners’ strength
 Today’s partners may become tomorrow’s strength
 Changes in the partners interest

Advantages & Disadvantages of Joint Ventures

Advantages Disadvantages
 Joint ventures provide large capital  JV are also potential for conflicts
funds.  The partners delay the decision-
 Joint ventures are suitable for major making once a dispute arises then the
projects. operations become inefficient
 Joint ventures spread the risk between  Life cycle of a JV is hindered by
or among partners many causes of collapse
 Parties to the JV bring different kinds  Decision making in JV is normally
of skills like technical, HR, marketing slowed down due to involvement of a
etc. number of parties.

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COMPARISON OF DIFFERENT MODES OF ENTRY

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THIRD PARTY LOCATION

In the context of international business, the term "third country location" refers to a location
that is neither the home country of the business nor the host country where the business is
establishing its operations. When considering modes of entry into international markets,
businesses may choose a third country location for various strategic reasons. Here are a few
modes of entry where the concept of a third country location becomes relevant:

 Exporting via Third Country: In this mode, a company exports its products to a third
country before they are shipped to the ultimate destination. This can be a strategic
move to leverage distribution networks, benefit from trade agreements, or overcome
logistical challenges.
 Third-Country Warehousing and Distribution: Some companies use third-country
locations as centralized warehouses or distribution hubs. This allows for more
efficient regional distribution and can be cost-effective. For example, a company may
use a third country in a strategic location to store and distribute products across
neighbouring countries.
 Outsourcing Production to a Third Country: Businesses might choose to outsource
manufacturing or production to a third country, which can offer cost advantages,
specialized skills, or better infrastructure. This is common in global supply chain
strategies where components are sourced from various countries before assembly.
 Third-Country Joint Ventures or Alliances: Companies may form joint ventures or
alliances with partners from a third country. This collaborative approach can provide
access to new markets, share risks and costs, and leverage the strengths of each
partner.
 Financial and Banking Services in a Third Country: Businesses may choose a third-
country location for financial services, banking, or investment purposes. This could be
due to favourable regulatory environments, tax considerations, or the presence of
specialized financial institutions.

Strategic Considerations:

Trade Agreements: Leveraging trade agreements that a third country has with both
the home and host countries can provide favourable conditions for business
operations.
Logistics and Distribution: Selecting a third-country location strategically placed for
efficient logistics and distribution can streamline supply chain processes.
Risk Diversification: Using a third country as an intermediary can help diversify risks
associated with political instability, currency fluctuations, or regulatory changes in the
home or host country.

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Access to Resources: Choosing a third-country location with access to specific

resources, technologies, or expertise that complements the business's operations can
be advantageous.
Market Intelligence: Utilizing a third-country location for market research and
intelligence gathering can provide insights into both the home and host markets.

Challenges:

Complex Logistics: Managing operations across multiple countries can introduce

complexities in logistics and supply chain management.
Regulatory Compliance: Navigating diverse regulatory environments in the home
country, host country, and the third-country location may pose challenges.
Cultural Differences: Dealing with cultural nuances and business practices in the
third-country location requires careful consideration.

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