International Business VI Semester BBA

Chapter-3
Globalisation
Introduction: -

The medieval proverb says ‘a merchant has no nation’; it means that a businessman can
view the entire world as one country for his operations. In fact, business operations existed
across countries even centuries ago. Therefore, the concept of globalisation is as old as
civilisation. The concept of global business gradually encompassed into globalisation with the
addition of a few wings to it.

Nearly all business enterprises, large and small are inspired to carry on business across
globe this may involve purchase of raw materials from foreign suppliers, assembling products
from components made in several countries, or selling goods or services to customers in other
nations. One of the most important trends in the 20th century has been the lowering of barriers
to facilitate easy movements of goods and services across national borders.

Meaning: -

It is the connection of different parts of the world resulting in the expansion of international
culture, economic and political activities. It is the movement and integration of goods and
people among different countries.

It is the process of international integration arising from the interchange of world views,
products, ideas, and other aspects of culture.

It implies the opening of local and nationalistic perspective to a broader outlook of an

interconnected and interdependent world with free transfer of capital, goods and services
across national frontiers.

Definition: -

Economic definition: Globalisation may be defined as the process of integration of economies

across the world through cross border flow of factors, products and information.

IMF definition: “The growing economic interdependence of countries worldwide through

increasing volume and variety of cross border transactions in goods and services and of
International Business VI Semester BBA

international capital flows, and also through more rapid and widespread diffusion of
technology.”

Globalisation implies the opening of national and regional economies to other markets around
the globe for interlacing of economic and cultural activity.

Evolution of globalisation: -
Robertson’s historical periodization model is among the most cited attempts to trace the
evolution of globalisation. Robertson put forward five phases through which globalisation has
reached its current form
First phase: The germinal phase [early fifteenth century to mid eighteenth century]
Milestones:
• The medieval system was replaced by national communities led by Europe
• Rise of ideas of humanity and individualism

Second phase: The incipient phase [from mid eighteenth century to the 1870’s]
Milestones:
• Emphasised the rise of legal conventions and agencies contributing to a
formalised international relation and the diffusion of ideas about nation

Third phase: The take-off phase [from 1870’s to 1920’s]

Milestones:
• Emerging international society.
• Launch of Nobel prize, Olympics, for world unity.

Fourth phase: The struggle for hegemony phase [from mid-1920 to 1960’s]
Milestones:
• Witnessed the clash of different conceptions of the global system and modernity
during the World War I and II and Cold War.
• Rise of UNO.

Fifth phase: The uncertainty phase [since 1960’s]

Milestones:
• Simultaneous revival of Universalist and parochial identities, movements, and vision
based on culture, ethnicity, religion, gender.
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Features of Globalisation: -
• Operating and planning to expand business throughout the world: Globalisation is
a concept that enlarges the market area of business creating a worldwide approach. The
managers plan their operations for a larger group of multicultural market.
• Erasing the differences between domestic market and foreign market:
Globalisation views the world as one single larger market. The free movement of
factors of production removes the differences of domestic and foreign market.
• Buying and selling goods and services from/to any country in the world:
Globalisation involves exchange of goods, services and assets of one country with other
country.
• Establishing manufacturing and distribution facilities in any part of the world:
Globalisation not only moves goods from one country to another country but also takes
the manufacturing plants and distribution facilities to different parts of consumption
countries where the merits of locational advantages are found.
• Product planning and development are based on market consideration of the
entire globe: Market research based on which a product is developed now studies the
global potentiality of the product. The acceptability and adoptability to different group
or sects of customers is the basic condition for product development. A product is a
choice of multicultural and multidimensional feasibility decision.
• Global orientation in strategies, organisation structure, organisation culture and
managerial enterprise: The organisation internal management should evolve with the
globalisation requirements where in the vision, mission, organisation structure and
strategies that define its business should add a new feather to its wings.
• Setting the mind and attitude to view the entire globe as a single market: The idea
of globalisation is a new approach to business that needs different planning and mind
set of viewing and doing business the market of global nature provides enormous
opportunity and challenges that requires a dynamic personality in operation for its
management.

Globalisation Process of a Business Unit: -

A business organisation does not become a global player in a single instance but overtime
through an evolutionary approach. According to Ohmae, globalisation has five stages:
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1. Domestic company exports to foreign countries through the dealers of distributors of

the home country.
2. The domestic company exports to foreign country directly on its own
3. The domestic company becomes an international company by establishing production
and marketing operations in various key foreign countries.
4. The company replicates a foreign company in the foreign country having all the
facilities including R&D.
5. The company at last becomes a true foreign company by serving the needs of foreign
customers just like the host country’s company serves.

Drivers of Globalisation: -
International business is not a new phenomenon, trade across the globe is as old as business
itself, however the volume of international trade and number of players have increased in the
previous decades. The developments that fuelled this activity are,
• Establishment of WTO.
• Regional integration of the countries of the same region.
• Declining trade barriers by respective governments.
• Increase in foreign direct investment.
• Technological advancements since 1980’s.
1. Microprocessors and telecommunications
2. Internet and world wide web
3. Transportation technology
4. Online globalisation
• Growth of multinational companies.
• Huge potential of developing country market.
• Changing demographics in developed and developing countries.

Components of Globalisation: -

i. Globalisation of markets: It refers to the process of integrating and merging of the

distinct world markets into a single market
Features:
• The size of the company need not be too large for creating a global market
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• The distinctions of notional markets are still prevailing even after the globalisation of
markets.
• Most of the foreign markets are the markets for non-consumer goods.
• Global business firms compete with each other frequently in different notional markets.
Reasons:
• Large scale production
• Diversification as a tool of reduce risk
• To increase profits and achieve company goals
Adverse home country market
• To meet growing demand of foreign markets
• Failure of domestic companies to satisfy customer needs.
ii. Globalisation of production: The factor of production –cost advantage theory
suggests company to produce the product of high quality and low cost in various foreign
countries.
Reasons:
• Import restrictions on MNC’S by foreign country government
• Availability of raw material and components in other countries
• Availability of inputs at low cost in foreign countries
• Availability of skilled human resource at low cost
• Liberal labour laws in the foreign countries
• To reduce cost of transportation
• Creating an export facility in neighbouring foreign countries.

iii. Globalisation of investment: - It refers to the investment of capital by a global

company in any part of the world global company after conducting financial feasibility
of the new projects in different countries and invests the capital in the country where
the profits are relatively higher. Globalisation of investment also refers to foreign direct
investment.

Reasons: -
• Rapid increase in the volume of global trade
• Attractive investment climate in foreign countries
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• Liberalisation and privatisation in most of the developing countries

• Lack of investment opportunity in home country
• To avoid the restrictions imposed by the host country on exports
• To have control over manufacturing and marketing activities

iv. Globalisation of Technology: - Technology is a game changer for competitive

advantage, which has been enjoyed by few good countries and companies keeping
technology to oneself and for limited markets yields lower during globalised business
scenario.

Methods:
• Companies with latest technology enjoy distinctive competency advantage in new
markets
• Technology collaborations between home company and foreign company creates new
market for its usage and profits for its parent company.
• Foreign companies allow companies of various countries to adopt technology on
royalty payment
• technology can be globalised through joint ventures and mergers

Different forms of Globalization / Manifestations of Globalization: -

Manifestation refers to implication of globalization in terms of interconnectedness

among the world’s populations, economically, politically, socially, culturally, technologically
and environmentally.

i. Economic Globalization: - It is the integration with the world economy through the
removal of trade barriers, privatisation and liberalization. Worldwide transactions of
product, service and finance is special trait of economic globalization. development of
transportation and communication enhancing the economic globalization and world
trade organisation, multinational companies and IMF are playing vital role in boost up
of the economic globalization. Eg., NAFTA, EU.
ii. Cultural Globalization: - It is worldwide assimilation of cultural value and norms
through communication, tourism and television network, co-operation, peace, co-
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existence cultural exchange are its important aspects. Globalization has changed some
cultural aspects such as lifestyle, food, ideas and values etc.
iii. Political Globalization: - Traditionally politics has been undertaken within national
political systems. National government have been ultimately responsible for
maintaining the security and economic welfare of their citizen as well as the protection
of human rights and the Environment within their borders and with global ecological
changes, political activity increasingly takes place at the global level. It implies the
concept of different government sects and political groups, adopting similar ideologies,
methods and practices. It involves various actors like global political institutions and
non-government organizations that try to deal with global issues .it is like –IMF, WTO,
WHO, World Bank etc.
iv. Technological Globalization: - Advances in technology are one of the main reasons
that globalization has escalated in the past decades. Global communication plays a vital
role in the globalization, it is the use of new information communication technologies
such as the Internet, Mobile phones, E-Mail etc. these technologies are becoming
cheaper and widely available cell phones connect people all over the world like never
before. Transport technology is growing focus on affordability, comfort, speed and
being environmentally friendly.
v. Environmental Globalization: - It is the world effort on protection of global ecology.
It is specially concern on global warming, depletion of ozone layer, growing pollution,
and flood, land slide, acid rain etc.
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• Indirect exporting
Exporting • Direct exporting
• Intra-corporate transfers

Licensing • International licensing

Franchising • Interational franchising

• Conract manufacturing
• Business process outsourcing
Special modes
• Management contracts
• Turnkey projects

Foreign direct • Merger and acquisition

investment with
alliances • Joint ventures

Foreign direct
investment without • Green field strategy
alliance

Methods of Globalization: -

It is the simplest and most widely used mode of entering foreign markets. It is the
selling of goods to other countries. The different forms are:

i. Indirect exporting
It is exporting the products either in their original form or in the modified form to a foreign
country through another domestic company
Example: Various publishers in India sell their books to various exporters in India, who in turn
export these books to various foreign countries.

i. Direct exporting
It is selling the products in a foreign country directly through its distribution arrangement or
through a host country company.
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Example: Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened
74 outlets with Russian partners and finally in 1995 ice-cream plant was established in
Moscow.
• Intra- corporate transfers
It is selling of products by a company to its affiliated company in host country (another
country)
Example: Selling of products by Hindustan Lever in India to Unilever in USA.

2. Licensing
It is a business arrangement in which one company gives another company permission to
manufacture its product for a specified payment.
➢ International licensing.
In this mode of entry, the domestic manufacturer leases the right to use its intellectual
property i.e. technology, work methods, patent, copy rights, trade mark etc. to a manufacturer
in a foreign country for a free.
The manufacturer in the domestic country is called Licensor and the manufacturer in the
foreign country is called Licensee. The cost of entering foreign markets through this mode is
less costly. The domestic company need not invest any capital as it has already developed
intellectual property so it can earn revenue without additional investment. It can choose any
international location and enjoy the advantage without incurring any obligations and
responsibilities of ownership, managerial, investment.
Example: Kirin Brewery –Japan’s largest beer producer entered Canada by granting license to
Moissan and British market by granting license to Charles Wells Brewery.
3. Franchising
It is a type of license that a party (franchisee) acquires to allow them to have access to a
business (the franchiser) proprietary knowledge processes and trade marks in order to allow
the party to sell a product or provide a service under the business name. In other words, it is a
form of contractual agreement in which a franchisee enters into an agreement with a franchisor
to sell the goods and services for a specified fee or commission.
➢ International franchising
It is a form of licensing; under this an independent organisation called the franchisee
operates the business under the name of another company called franchisor. Under this
agreement the franchisee pays a fee the franchisor and in turn he provides the following
services to franchisee.
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• Trade marks
• Operating systems
• Product reputations
• Continuous support like advertising, employee training, and reservation
services etc.
Example:
Franchising is more popular in USA. NIIT has the franchised computer training centres
throughout India. Hotels like Hilton and Marriott, rental cars like Hertz also have international
franchises.
4. Special modes
➢ Contract manufacturing
Some companies outsource their part of or entire production and concentrate on marketing
operations. This practice is called the contract manufacturing or outsourcing.
Example: Nike has contracts with a number of factories in south-east Asia to produce its
athletic footwear and it concentrates on marketing.
➢ Business process outsourcing
It is the long –term contracting out of non-core business processes to an outside provider to
help achieve increased shareholder value. some forms of BPO may include both information
technology, management and business operations ,the approach is primarily about turning over
functions such as payroll, accounting, billing, real-estate management to a third party.
➢ Management contract
It is an agreement between the companies whereby one company provides managerial
assistance, technical assistance and specialised services to the second company of the
agreement for a certain agreed period in return for monetary compensation may be in the form
of
• A flat fee.
• Percentage over sale.
• Performance bonus based on profitability, sales growth, production etc.
Example: The government of the Kingdom of Saudi Arabia nationalised Armco and
requested the former owners to manage the company. Exxon and other former owners accepted
the offer.
➢ Turnkey projects
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It 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:
• A fixed price (firm plans to implement the project below this price).
• Payment on cost plus basis (i.e., total cost incurred plus profit).
International turnkey projects include nuclear power plants, air ports, oil
refinery, national highways, railway lines etc. international companies
involved in such projects include: Bechtel, Brown and Root, Hyundai group
etc.
Example: Indonesia government during 1974 invited global tender for the construction of a
sugar factory in the country. It received the tenders from the companies of USA, UK, France,
Germany and Japan. One Japanese company quoted highest price compared to all others which
include development of the field for growing sugarcane, seedling, construction of sugar factory,
roads, communication, power, water, connecting the factory, train the local people, distribution
channels etc. the Indonesia government was happy and entered an agreement for the
implementation of this project this is called as turnkey project.
5. Foreign Direct Investment with alliances
Strategic alliance is a co-operative and collaborative approach to achieve the larger goals. It
takes place in different forms like licensing, franchising, contract manufacturing etc. alliance
is a strategy to explore a new market which the companies individually cannot do.
Example: Xerox of USA and Fuji of Japan collaborated to explore new markets in Europe and
Pacific Rim.
Dunlop and Pirelli, two tyre making corporations, joined together in order to synergise the
strength of marketing capabilities of Dunlop and R&D capabilities of Pirelli.
ii. Mergers and Acquisitions
Merger and acquisitions are transactions in which the ownership of companies, other
business organisations, or their operating units are transferred or consolidated with other
entities.
Merger is the combination of two companies to form one, while Acquisition is one company
taken over by the other. Merger and Acquisition involves the process of combining two
companies into one. The end result of both processes is the same, but the relationship between
the two companies differs based on whether a merger or acquisition occurred.
Example of Mergers and Acquisitions:
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• Amazon buys Whole Foods

• United Technologies buy Rockwell Collins in is one of the biggest moves
in aviation history.
• Intel acquires Mobil eye, a company that develops sensors and cameras for
advanced driver assisted systems (ADAS).
• JAB, a European investment firm, reached to buy bakery- café Paneer
Bread.
Domestic companies enter international business through mergers and acquisition. It may
select a foreign company and merges itself with it in order to enter international business or it
may purchase the foreign company and acquires its ownership and control. Though it provides
easy and instant entry to global business, it would be difficult to appraise the cases of
acquisition and mergers. Sometimes it would be cheaper for a domestic company to have a
green field strategy than by acquisition.
Example: Procter and Gamble entered Mexican tissue products in 1997 by purchasing Loreto
Y. Pena Pbre’s manufacturing and marketing systems.
➢ Joint venture
Two or more firms join together to create a new business entity that is legally separate and
distinct from its parents. It is established as a corporation and owned by the funding partners
in the predetermined proportions. It involves shared ownership.
Example: American Motor Corporation entered into a joint venture with Beijing Automotive
works called Beijing jeep to enter Chinese market by producing jeeps and other vehicles.
6. Foreign direct investment without alliances
These are companies which enter the international markets through foreign direct investment
(FDI)- invest their money, establish manufacturing and marketing facilities through ownership
and control.
Example: The US companies transferred their managerial expertise and technological skills to
their subsidiaries operating in the UK and hence these subsidiaries have become successful
competitors to the UK companies.
➢ Greenfield-strategy
It refers to starting with a virgin green site and then building on it. Thus, it 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 lease land, creates the new facilities, erects the machinery,
transfer the human resource and starts the operating and marketing activities.
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Example: Fuji located its manufacturing facilities in South Carolina, Mercedes-Benz is

locating automobile assembly plant in Alabama and Nissan is locating its factory in
Sunderland, England.

Advantages of Globalisation
• Free flow of capital and increase in the total capital employed.
• Free flow of technology.
• Spread of production facility across the globe.
• Global development in balanced manner.
• Increased production and consumption.
• Commodities and services at lower price and of high quality
• Cultural exchange creates increased demands,
• Increase in jobs and income.
• Increase in standard of living.
• Balanced human development.
• Increase in welfare and prosperity

Free flow of capital and increase in the total capital employed: Globalisation attracts
investment world-wide and with minimum or no restrictions by respective nation governments,
capital flows easily from place of unproductivity to place of productivity.

Free flow of technology: Technology moves from developed country to developing country,
from huge corporations to small and medium firms, through franchising, licensing, technology
transfers, joint ventures, mergers, etc.

Spread of production facility across the globe: Production facilities of organisation stationed
in home countries or in selected places shall move to various locations through FDI.

Global development in balanced manner: The classification of different nations based on

development such as developed, developing, under developed can be removed as with increase
in economic activity, employment, improvement in infrastructure, standard of living gradually
every nation in the world moves to be a developed one and this is made possible by
globalisation.
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Increased production and consumption: Globalisation drives increased economic activity in

home and host county through migration of companies from each one of them hence the level
of production activity increases and with increase in employment, income the level of
consumption shall also increase

Commodities and services at lower price and of high quality: The increased competition
brought in by globalisation results in usage of advanced technology which results in increased
efficiency, productivity, effectiveness and availability of economical products in the society.

Cultural exchange creates increased demands: Globalisation results in cultural exchange

due to movement of men, goods, services, increased communication and marketing efforts of
MNC’S as such the cultural transformation increases the demand for goods and services

Increase in jobs and income: Globalisation brings in upward movement of economic activity
which results in increase of a country’s gross national product as well as per capita income.

Increase in standard of living: People in developing economies are still deprived of various
basic goods and services because of the closed economic practices and poor economic
development. With participation in globalisation and improvement in economy, these countries
can afford to use the best goods and services and improve their living standard.

Balanced human development: Globalisation cuts down the shackles of poverty caused by
poor economic development social up-liftment and empowerment and gives away the people
with good education, basic facilities of living, employment,

Increase in welfare and prosperity: Globalisation provides respective governments with high
foreign exchange reserves, increased international support and international recognition
because of which they can undertake more and more welfare activities for their people.

Disadvantages of Globalisation: -
• Globalisation kills domestic business.
• Exploits human resources.
• Leads to unemployment and under employment.
• Decline in demand for domestic products.
• Leads to decline in income.
• Creates a widening gap between rich and poor.
• Transfer of natural resources.
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• Commercial and political colonisation.

Globalisation kills domestic business: Globalisation brings competition from international

and global corporation to host country and people start sourcing the products and services from
foreign markets which is cheaper and of good quality this reduce the domestic business
opportunity.

Exploits human resources: Globalisation leads to creation of more number of MNC’S and
global corporation who are self-centred and greedy and do not care for human rights and
privileges rather use them as a commodity.

Leads to unemployment and under employment: Globalisation if properly managed and

utilised by a government may lead to employment but if they fail to strategically plan a road
map for the country and industry, global market driven business may take away the
employment in a country

Leads to decline in demand for domestic products: Domestic goods were considered to be
superior before opening of the economy by the customer and lack of international competition
created demand for domestic products. But, with globalisation and increased competition from
MNC’S who deliver the best products, variety of range of products and increased
communication through marketing customer have shifted their loyalty to international brands
and domestic brands have lost out its business.

Leads to decline in income: The income of the people in a economy declines with the decline
in economic activities, reduced job opportunities, lack of required skills for employment,
technological advancements resulting in unemployment these possibilities can be seen in
developing economies where its manpower have lost its jobs to highly skilled people, and
technological changes and this results in the income decline.

Creates a widening gap between rich and poor: Globalisation is a manifestation of world-
wide capitalistic approach. Capitalistic economy always creates a gap between the rich and
poor that is the person with capital and without capital the industrialists and common man

Transfer of natural resources: Globalisation leads to transfer of natural resource of a country

in the form of raw materials to a foreign partner to meet its import and other essential needs
such as defence and oil. This leads to erosion of its resources and next generation is left with
no resource so a country loss its future competency.
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Leads to commercial and political colonisation: The opening up of the economy, liberal
foreign policy and privatization and reduced public sector role in the economy helps the global
industrial giants take control of the economy. Backed by their respective home governments,
they start plundering the host country economy for their benefit; through these corporation
their governments indirectly control such economies.

Essential Conditions of Globalisation:-

Elimination of trade
Adequate infrastructure Government support
barriers

Resources availabiliity Competitiveness

• Elimination of trade barrier: Nationalistic thinking among countries lead to

imposition of various restrictions on international business and trade by way of levying
tariffs, strict licensing, import quotas, etc. elimination of such restrictive policies of
government leads increase in international business, free flow of resources.
• Adequate infrastructure: Infrastructure refers to physical assets such as
transportation, power, communication networks, required for the extraction and
movements of resources. The availability of infrastructure in adequate way helps by
attracting investment both domestic and abroad creates competitive edge at the
international arena.
• Government support: Government support for globalisation is primary, The
government willingness for globalisation is a manifestation for capitalism in its
economy which can be seen in its liberal economic policies and creating a transparent
and facilitating business environment for the international players and becoming a good
host country.
• Resources availability: The availability of various resources such as natural resources,
agricultural resources, human resource, capital resource, etc. attracts global investment
as the MNC’S are always trying to reduce cost create good quality products hence
resource availability is a advantage to a nation endorsing globalisation.
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• Competitiveness: Competition is always a doubled edged sword- it has certain

advantages and disadvantages too. However, its benefits outweigh its limitations.
Efficiency, productivity, low-cost, best quality, high customer orientation and true
market driven scenario can be seen through competitive force existence in a economy
and industry.

Barriers to Globalisation in India: -

The common hurdles encountered in globalisation process of our economy as per the
report published by Ministry of Economy, Trade and Industry are:
• Inadequate infrastructure
• Rigid bureaucratic procedures
• Inconsistent industrial policies and rules
• Stringent labour laws
• Foreign exchange control
• Regulations on foreign investment
• Stock price control
• Resistance to change
• Political instability

Inadequate infrastructure: Having minimum infrastructure in an economy is a prerequisite

for globalisation. Having better roads, power facilities banks and financial institutions,
communication networks etc. provides better chances for participation of MNC’S and other
international organisation in the economy and vice versa.

Rigid bureaucratic procedures: The developing economies face lack of transparent business
and industrial policy; the bureaucracy imposes rigidity and uneasiness in doing business

Inconsistent industrial policies and rules: The industrial policy of a country should be stable
and consistent as it is the image of countries attitude towards business and economy. Frequent
changes in government and changes in policy leads to dilemma in the minds of corporate class.

Stringent labour laws: The labour regulations in the country have effect on the flow of foreign
direct investment and readiness of MNCs to participate and do business. Out-dated labour laws
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and its strict enforceability and lack of changes make the economy unappealing to the
international corporate giants

Foreign exchange control: Countries which have strict foreign exchange control through not
allowing capital account convertibility fail to attract global giants. International participants
want to take back the profits of international investment to their home country investors which
get restricted through tight regulations.

Regulations on foreign investment: Globalisation requires opening up of the economy; the

government should allow for foreign direct investment in most of the sectors except few
without which the economy cannot globalise itself

Stock price control: The prices of goods and services should be decided by market rather by
governments; a country where prices of goods and services are controlled by governments are
less attractive to private and global players as such globalisation becomes impossible hence the
prices shall be market decided.

Resistance to change: Countries which do not want to change with the changing times cannot
bring globalisation to its people. Change of thinking, perception of business, economy and
international relations is a necessity for globalisation

Political instability: The political stability of a region or nation supports and endorses the
business friendliness and instability takes away the goodies of the economy and make
miserable to trade.

Multinational Corporations and Transnational Corporations: -

The emergence of Multinational Corporations (MNCs) or Transnational Corporations (TNCs)

is not a new phenomenon in the world economy. However, since the fag end of 20th century
and the beginning of the 21st century, they have become more important and prominent in the
global economy. The process of globalisation, based on fast changing technology, has
propelled the emergence of MNCs and TNCs. Globalisation has come to revolutionize the
global economy wherein the distinction between economic (non-state) and political actors
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(state) has become blurred. The global economy has come to be driven by powerful private
actors which include both financial corporation (bank and other financial firms) as well as non-
financial corporation involved in the global production network (MNCs/TNCs). These
transnational corporations have come to exercise unprecedented influence in the global
economy so much so that they are
considered as key pillars of economic activities and markets. Along with it, the TNCs have also
grown in their size so much so that they have become an integral part of daily lives of people
across countries. Their presence and significance in human lives finds manifestation in their
profound role in economic and political realm. They have become extremely powerful
institutions in possession of resources far in excess of many of the nation states in the world.
These corporations have become centres of power having the capability to exert influence
in the international organizations, nation states, and the relations among them, and domestic
economy of countries. In short, the MNCs and TNCs have come to define the global economy
of 20th and 21st centuries, particularly because of the expanding role of Foreign Direct
Investments (FDI) and technological innovation in international trade. Just look at the
following to understand and gauge what can kind of weight and influence MNCs and TNCs
carry in global economy;
i) Of the 100 largest economies in the world, 51 are now global corporations; only 49 are
countries;
ii) the top 200 corporations’ combined sales are bigger than the combined economies of all
countries minus the biggest 9; that is they surpass the combined economies of 182 countries;
and
iii) the top 200 corporations have almost twice the economic clout of the poorest four-fifths of
humanity.

An MNC is an organisation doing business in at least one country other than the home
country. An MNC, emerges in various activities like, exporting, importing, manufacturing, in
different countries, it has a global vision in its management and decision making.
\
Definition: -

A large commercial organisation with affiliate operating companies in number of different

countries. A typical one normally functions with headquarters in one country, while other
facilities are based in other countries.
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MNCs respond to the specific needs of different country markets regarding the 4 P’s of
marketing mix; hence it is a corporation that operates at many countries but act as a domestic
company of the country operating.
Example: Adidas, AEGON, Amazon, Barclays, Capgemini.

TNC: Transnational companies: A commercial enterprise that operates substantial facilities

does business in more than one country and does not consider any particular country as its
national home. Example: Procter and Gamble, Coca cola, Wal-Mart.
Definition: According to Biersteker a transnational company is “Any enterprise that undertakes
foreign direct investment, owns or controls income- gathering assets in more than one country
reduces goods or services outside its country of origin, or engages in international production”

Global Corporation: A commercial enterprise which has the four dimensions viz, market
presence, supply base, capital base, and corporate mind-set at global level that is across
countries .example: Starbucks, Apple etc.,

Why companies become MNC’s: -

• To protect themselves from uncertainty and risks of business cycle: The economy
of home country may be in the decline or depression stage of the business cycle where
the opportunities for business is nil or less hence companies migrate to international
heavens where opportunities are plenty.
• To tap the opportunity at international level: The domestic market saturation or the
heavy competition or the vast international untapped market opportunity attracts the
domestic company to internationalise itself.
• To increase the market share: The domestic company may think of increasing the
market at international level as the domestic market has saturated or there is no scope
for further expansion. The attractiveness of foreign markets for increasing the profits
may lead to internationalisation of a company.
• To reduce the costs: The prospects of a company to increase its profits depend on
increasing sales and reducing costs. If the costs are escalating in the domestic market,
then the company may think of sourcing of inputs from foreign markets or moving its
production facility to international location.
International Business VI Semester BBA

• To overcome tariffs: The heavy imposition of duties and tariffs by respective home
country governments on its import and exports make domestic companies to rest instead
of imbibing competitiveness.
• To have technological advantage: The lack of technology, out-dated technology or
the lack of research and development facility of resources promotes a company to reach
for technology available at the international level.

Characteristics of different organisational models

International Multinational Global Transnational
A firm
An enterprise
An enterprise pursues a Essentially
which exists
operating in unified shed their
in one country
several strategy to home nation
Meaning but sells
countries but coordinate identity and act
products in
managed from various as state less
more than one
one country international organization
country
operations
Sources core
Dispersed.
Configuration competences Decentralized Centralized
Interdependent
of assets and centralized and nationally and globally
and
capabilities and others self sufficient scaled
specialized
decentralized
Adopting and Differentiated
Sensing and Implementing
Roles of leveraging contribution
exploiting parent
overseas parent by national
local company
operation company units to
opportunities strategy
strategies integrated
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worldwide
operation
Knowledge
Knowledge Knowledge
developed at Knowledge
Development developed and developed
the centre and developed
and diffusion retained jointly and
transferred to and retained
of knowledge within each shared world-
the overseas at the centre
unit wide
unit

Nature of MNC’s :-
MNC engages in production or service activities in several countries through its affiliates, they
control the policies of the affiliates and manage from global perspective.
• Huge assets and turnover
• International operations through network of branches
• Unity of control
• Mighty economic power
• Advanced and sophisticated technology
• Professional management
• Aggressive advertising and marketing

Multinational corporations are successful business organisations having presence in various

countries and huge market presence. They have sound financial stability and solvency position
hence the varied assets support them to take risk-oriented decision.

International operations through network of branches: Multinational Corporation does

business in many countries through its affiliates or branches or international partners they have
a wide market presence and chain of partners to support them at global level

Unity of control: Though Multinational Corporation do business in several countries, the

decisions related to policy matters are made in the headquarters; hence the control of all the
subsidiary businesses are made by the home country head office.

Mighty economic power: Multinational corporations are financially strong and are economic
power by themselves with ability to influence the policy decisions of a country and at
International Business VI Semester BBA

international level. The economic power of MNCs comes from their wide global presence,
strong brand equity, innovation and research and development continuous and stable financial
performance and huge assets backup.

Advanced and sophisticated technology: Multinational corporations invest a good sum of

their earnings consistently on research and development as such they are able to secure latest
advanced technology to their strides through which they make their presence felt in the markets
and minds of customers and face competitors challenge successfully.

Professional management: Multinational corporations’ business is managed by professionals

recruited from various countries for the management positions at all levels. The financial
soundness helps the MNC’S to recruit the best in the industry and potential leaders for its
organisation.

Aggressive advertising and marketing: Multinational corporations believe in right

communication and strategic planning in communication of its expectations to the customers.
They spend heavily on all forms of promotion that is advertising, salesmanship, sales
promotion, publicity.

Critics of MNC’s: -
MNCS are criticized particularly by developing countries on grounds of low wages,
exploitation of labour, depletion of resources and abuse of human rights etc. The various
criticisms of MNCs are as follows:

• Self-centred and self-interested: Multinational corporations are eager to meet their

goals and missions stated and achieve their targets rather worry about the host economy
or any country or other social or cultural upheavals. Their only aim shall be growth of
itself and focus to fulfil it.
• Promote corruption: Multinational corporations in the process of getting various
permissions, approvals and clearances from various government departments influence
financially and bribe the officials to get their work done.
• Small and medium firms suffer considerably: Multinational corporations are shrewd
business organisations which pose high competitive challenge through its strong
International Business VI Semester BBA

financial, technological, management strength so that the small and medium firms leave
the market and business in no time.
• Cause irreparable damage and do not respect law of justice: Multinational
corporations create huge damages in some of the operating countries through gross
violations of human rights and do not accept its negligence or mistake by following the
law of the land rather acting above it.
• Interference with economic objective of host country: Multinational corporations
with the mighty economic and political power try to interfere in the economic policy
making and exert influence in such a manner that the laws are framed to its benefit
rather the country’s needs.
• Cause social disruptions: The greed of Multinational Corporations brings social
disruptions in the society to which they take no responsibility their aim to profits and
growth makes society suffer in the name of unemployment, high prices, huge royalties,
control over resources, and collapse of ethical and social values.
• Cause environmental degradation: Multinational corporations loot the host countries
and leave them when their resources become extinct. The great irreparable damage done
to nature in the form of pollutions and green damage is very high to which the
generations of future shall suffer.
• Imperialism: Multinational corporations move to country where they can find some
green pastures, they invade the land through economic and technological strength ruin
the economy and culture and make them depend on goods and services delivered by
them.
• Inappropriate transfer of technology: Multinational corporations transfer technology
to the developing countries which are not practically suitable to the local conditions.
The technology so transferred becomes a waste on which the developing economies
have spent their scarce financial resource.
• Contributes to over exploitation of natural resources of host country: Multinational
corporations do not care for the next generations but think of their self-centred growth
and exploit the natural resources available
• Attempt dominance in host country: Multinational corporations have long history of
dominance in countries wherever they have done business. They try, bend, and make
rules to their needs rather work for the needs of the host nations.

Defence of MNC’s: -
International Business VI Semester BBA

➢ Provide employment: Multinational corporation presence leads to increased demand

and sales which in turn leads to increased employment opportunities.
➢ Train managers: Multinational corporations follow innovative management styles to
build a strong and successful organisation. Training is given to new host nations
incumbents to the managerial position and equips them with required skills to perform
their roles.
➢ Raise standard of living: Multinational Corporations provide the host nation
customers with products and services of high quality and at economical prices. They
also increase the basic standard of infrastructure in the host nation. The overall living
standard improves over a period of time.
➢ Introduce and develop new technical skills: Multinational Corporations use and
adopt latest technology in their every operation as such it becomes necessary to develop
skills of the existing employees and make them updated with the changing needs of the
business.
➢ Introduce new managerial techniques: The level of management techniques change
with the changing scenario of business multinational corporation try to introduce new
management techniques to overcome the new challenges posed by the external and
internal environment.
➢ Provide greater access to international markets: International markets and the
network of business is established at ease by the multinational corporation as they focus
at getting advantage irrespective of the nation, region, people, government, and culture.
➢ Raise the GNP: The increased existence of multinational corporations in the host
nation increases the demand and economic activity and in turn leads rise in the gross
national product of the country through increased investment, production and
consumption.
➢ Increase the productivity: Multinational Corporation always aims to achieve the
highest utilisation of assets and try to operate at fullest capacity and with minimised
normal and abnormal loss.
➢ Help build foreign exchange reserves: Multinational Corporations make foreign
direct investment flow and helps the host nation to increase its foreign exchange
reserves.
➢ Encourage the development and spin- off of new industries: The operation and
growth of Multinational Corporation in the host nation triggers the need for various
International Business VI Semester BBA

inputs and services and supplies, the entrepreneurs can take advantage of the situation
and build and operate small and medium firms.
➢ Assume investment risk: Multinational Corporation enters new markets sighting
opportunities but the presence of risk is certain and the success is hard earned. With the
due limitations and challenges posed by the market and the hostile country they make
investment and assume the risk.
➢ Mobilise capital for productive purposes: Multinational corporation have a good
track record of running successful business world-wide hence the investors have
reliability over investments in MNC’S which results in mobilisation of capital for
productive purposes.

TNCs:-

MNCs have a long history of evolution. They have transformed over the years on account of
internationalization process, rapid liberalization, globalisation and technological change
especially in information and communication technology (ICT). As a result both the scale and
scope of MNCs have enlarged. Accordingly, they have largely evolved in terms of motives;
the way companies integrate and expand their business around the world.

The major reasons for TNCs becoming the ‘engine of growth’ of the world economy are
embedded in the following developments:

1) An increasing emphasis on market forces and a growing role for the private

sector in nearly all developing countries.

2) Rapidly changing technologies that are transforming the nature of international production
and the organization and location of such activity.

3) The globalisation of firms and industries whereby production chains span national and
regional boundaries.

4) The rise of services to become the largest single sector in the world economy.

5) Regional economic integration.

International Business VI Semester BBA

The modern MNCs or TNCs developed in the decades after Second World War. However, the
origin of multinational enterprises can be traced back to the emergence of early signs of
international trade. Some says that the roots of the modern multinationals can be traced back
to as early as the second millennium B.C. associated with the businesses operated by the ancient
Assyrian colonists, Phoenicians, Greeks and Romans to that of medieval Europe. Others finds
resemblance in the established companies of East India Company (1600) and the Dutch East
India Company (1602), Royal African Company (1660) which was chartered to trade in gold
and slaves from Africa, and the Hudson Bay Company (1670) which was chartered to trade in
fur and colonization of North America.

However, it was not until late 18th and the early 19th century, coinciding with the Industrial
Revolution, that corporations, on the line of the contemporary ones, emerged. The emergence
of new production processes on account of changes in the production processes and
technological development led to the emergence of modern corporations, with characteristics
similar with the modern TNCs.

However, it was only in the beginning of the 20th century that large enterprises managed by
qualified professionals, particularly modelled on the United States corporate economy
emerged.

In the two decades after the Second World War, US TNCs dominated economic activities,
particularly foreign direct investments. The value of US direct investment increased from $11.8
billion in 1950 to approximately $ 233.4 billion by 1984. The share of US FDI was more than
two-fifths of the world’s FDI in 1981. There was also marked change in the direction of FDI
post-Second World War. From Latin America, US investment shifted to Canada, Western
Europe, and other industrial regions. Sector-wise, large chunk of investment went into
advanced manufacturing industries i.e. advanced industrial sectors (automobiles, chemicals
and electronics). Meanwhile by the early 1970s, European and Japanese Multinational
Corporations also emerged, along with the ones in Newly Industrialised Countries (NICs) such
as Brazil and India, and in eastern bloc communist countries. It is important to note that
technological advancement, political uncertainties and the dramatic rise of trade barriers in
both developed and developing countries resulted in the establishment of foreign subsidiaries
or joint ventures with local firms. This in turn led to intensified competition among

the MNCs of many countries by the fag end of 20th century. In the late 1990s and beginning
of 2000s, international mergers and acquisitions (M&A) became the preferred mode of
International Business VI Semester BBA

overseas investment by multinational companies, accounting for the bulk of FDI in the
developed world and for increasing shares in the developing world. According to World
Investment Report, 2002, cross-border Working of MNCs and TNCs M&As rose from $ 100
billion in 1987 to $ 720 billion in 1999. The ratio of cross-border M&As to world FDI flows
reached 80 per cent in 1999. Due to the various changes in the world economy induced by the
processes of globalisation, accelerated by advances in technology and communications, the
role for TNCs has become far more significant having economic, social and cultural
implications.

You should know that Mergers and Acquisitions (M&A) are part of strategic management of
business firms. M&A are transactions in which the ownership of companies, other business
organizations, or their operating units are transferred or consolidated with other entities. With
M&A, companies grow, downsize or even disappear. M&A also result in the change and the
nature of firms’ businesses or competitive position.

In simple terms, a merger is a consolidation of two entities into one entity; whereas an
acquisition means that a firm has taken over ownership of another entity’s stock, equity
interests or assets. In commercial terms, both types of transactions generally result in the
consolidation of assets and liabilities under one entity; hence the distinction between a
“merger” and an “acquisition” remains blurred.

In the evolutionary process, global strategies of TNCs to tap foreign markets have also seen
changes: The five different means to engage with the world markets are:

1) No direct investment by serving the market by exports or licensing local firms.

2) Invest directly by a greenfield venture.

3) Invest directly by acquiring a local firm.

4) Invest directly by merging with a local firm.

5) Enter into a strategic alliance with a local firm.

TNCs relationship with home country and host country

The relationship between TNCs with both the home and the host countries is complex. The
TNCs can have both positive and negative implications for both the home and host country.
Positive implications are as below:
International Business VI Semester BBA

i) TNCs can and do generate revenues and employment, particularly in the host countries,
which can help in poverty reduction and unemployment.
ii) In the context of globalisation and neoliberalism, TNCs are considered crucial for the
stimulation of economic growth by raising exports and bringing in direct foreign investments
in the host country.
iii) There are several international agreements and national laws of developed countries
which regulate the working of TNCs. TNCs can facilitate in building transparent framework
to conduct economic activities based on standard rules and practices, including environment
and labour conditions.
iv) Governments in developed countries are invariably short of funds and also capacity to
undertake meaningful R&D. R&D-related FDI can directly benefit economic growth by
stimulating, through the R&D activity undertaken by TNC affiliates, technological efficiency
and technological change. This adds to the ‘competitive advantage’ developing economies do
acquire in niche areas. Besdies, R&D contributes to employment generation in the host
country. However, FDI into R&D may also divert scarce local R&D resources of host
countries from local firms and research institutions.
On the negative side, scholarly analyses complain a lot about the working of the MNCs in the
developing world and how MNCs have caused distortions in global economy.
(i) it is said that both home and the host countries may use the TNCs to serve their
own national interests. Home countries utilize and manipulate the TNCs in order
to achieve foreign policy and other objectives by ways of lobbying, advertising
and others. Inversely, the host country may also put pressure on the subsidiaries
from the home country to (re) consider any negative decisions through
confiscation of their subsidiaries.
(ii) It is said that MNCs and TNCs are not leading to a global system of free and fair
trade. About one third of the global trade today is actually intra-firm trade.

India and Globalisation: -

International Business VI Semester BBA

The seeds of globalisation were gown in 1980 by granting concession for inflow of
foreign capital, allowing MNCs to enter crucial sector, liberalising the provisions of FERA
acceleration of import liberalisation process and the downward adjustment of exchange rate of
the rupee.

However, the real thrust of globalisation process has been provided in the new economic policy
in July 1991, at the behest of the IMF and IBRD following three concepts

• Cutting down the fiscal deficit and the growth rate of money supply to achieve
economic stabilisation.
• Liberalising the domestic economy by releasing the restrictions on production,
investment, prices and by increasing the role of market economy, guiding and deciding
resource allocation.
• Relaxing the restriction on external sector. These measures include international flow
of goods, services, technology and capital.

Measures towards globalisation:

Government of India has taken the following measures in order to globalise the Indian
economy

• Permitting Indian companies to collaborate with foreign companies in the form of

joint ventures.
• Establishment of joint ventures by Indian companies in various foreign countries
• World Bank advocated import liberalisations. Consequently, the government of
India reduced the import tariffs to 15 percent.
• Replacing the licences of imports with tariffs.
• Elimination of various imports duties and reduction of other import duties
drastically.
• Removal of export subsidies.
• Replacing licensing of export with duties.
• Levying low, flat tax on export income
• Reformulating export processing zone and export oriented unit policy.
• Liberalising the inflow of foreign direct investment.
• Offering incentives to MNCs and NRIs to invest in India.
• Allow the foreign institutional investors to invest in Indian capital market.
International Business VI Semester BBA

• Resolve market access issues in services.

• Full convertibility of the rupee in the current account.

Merits of Globalisation in India: -

• Globalisation has increased the opportunity for employment creation through increased
investment by Indian and foreign companies
• Change in economic structure caused through globalisation has shifted the Indian
economy from agriculture oriented to service oriented
• The status of women from home makers to economic game changers is the result of
globalisation with increased opportunity, equal pay and constitutional provisions.
• Globalisation has helped the Indian economy to become more stable that it earlier was.
The consistent investment, increased consumption, steady economic growth factors
supporting the economic consistency.
• The Indian youth are now empowered through increased employment and educational
opportunities. The rapid change in technology and communication adaptation has made
them progressive global partners in thinking and better global citizens.
• The open market system with a greater number of private players competing with public
corporations has increased the choice of customers with wide range of products
• Indian consumers now have increased consumption capacity, wide range of products,
increased and better services, and quality delivered at need has increased the standard
of living
• Globalisation has created opportunity for Indian companies to evolve themselves as
international and global market players; many Indian companies have expanded their
operations diversified their business and become competent global players.

Demerits of Globalisation in India

Globalisation provides and challenges to India, it has increased India’s dependence on other
countries for essential goods and services.

• Increased competition forced by globalisation has forced many Indian companies

to close business due to lack of technology, capital, and management skills.
International Business VI Semester BBA

• Indian small and medium enterprises have closed down due to its inability to
compete with global players
• The cultural shock brought in by global players has angered conservative thinkers.
• Multinational companies have started to dominate the Indian economy and foreign
governments have started to influence in the Indian domestic business policy
decisions.
• Indian economy is making a structural change as its moving from mixed economy
to capitalistic economy; as such the public sector enterprises are losing their
importance in the economy.
• Increased usage of technology in business has made less need of blue collared jobs;
instead, there is a great need of white collared and yellow collared (skilled) jobs.
• Dumping from economies such as China, Korea and Taiwan are causing economic
slowdown.

TECHNOLOGY TRANSFER

Transfer of technology involves the transfer of physical goods i.e. capital goods and the
transfer of tacit knowledge. The transfer of tacit knowledge is becoming more important and
involves acquiring new skills and technical and organisational capabilities. Needless to say
that the innovation of technology requires large amount of investment, hence, Transnational
Corporation play an important role in the transfer of technology. In this unit, you will learn
the recent trends and issues in transfer of technology, role of Transnational Corporation,
nonequity forms of technology transfer and the vital components of the contract related to the
transfer of technology. You will also be acquainted with the International agreement for
Intellectual Property Rights and the trend in ‘India’s technology transfer.

RATIONALE OF TRANSFER OF TECHNOLOGY

It is important to understand what is meant by technology. Technology normally implies a
way of producing goods or establishing services; it manifests itself in production process and
product development. Modern understanding of technology is more comprehensive, than
conventional understanding. It also includes organizational, informatory and motivator areas.
Transfer of technology can be defined as the transfer effected from one agency to the other.
There are various levels of transfer of technology. First, when the technical knowledge is
International Business VI Semester BBA

transferred from the laboratory and scientific establishment to students of technology; it can
be called transfer of knowledge. For example, the principles of physics and chemistry are
transferred through teaching to the students. An advanced form of transfer of technology in
this category is high level seminars where advancements made in a number of basic sciences
and their applications are discussed. The same is also published for wider use. It must be
noted here that there is no relationship between the costs incurred and price paid by the users.
The second level of transfer is the general knowledge of production of a product. Firms and
individuals in this area would be broadly knowledgeable about the process and requirements
which constitute part of the general knowledge of a concerned industry. Here again there is
no relationship between costs and benefits.
Third, it can be said when a new product is either introduced in the market or imported, one
can get an idea of technological possibilities.
Fourth, which is the focus of this unit is the transfer of technology which is commercially
successful and this technology normally is owned by a firm with necessary property
protection. Therefore, it can be transferred only through the market transaction, i.e., buying
and selling.
Before identifying the main features of technology market, it is useful to understand the
rationale of technology transfer. We are confining here to technology transfer between two
firms which are located in two different countries, i.e., international transfer of technology.
Over about a century, firms all over the developed world are buying and selling technology.
Over the last 40 years in particular the technology transfer is also taking place between the
firms of developed and developing countries. In this context, it is necessary to briefly
understand the rationale guiding the buying and selling of technology.
A seller of technology finds that it can earn returns from selling the technology. This is
particularly so in view of the fact that life cycle of the technology is short. The advances
made in technological innovations are so fast that there is a tendency to sell previous
generation of technology. In addition, the proprietarily right in a number of cases is for a
short period. Hence, the firm is induced to sell technology.

Transfer of technology among various units of TNCs, which are globally operating, that is
subsidiaries, affiliates and joint venture partners, also takes place at a price and also enjoys
the benefits of total production of products and services.
Buyers of technology have three main reasons for purchasing technology. They are:
i) Innovating a new process or a product by a firm is costlier than buying
International Business VI Semester BBA

technology in the market. It is often said that one does not need to invent a wheel
again and again.
ii) Since a commercially successful technology has already proved its utility the
buyer finds it very attractive to buy the technology.
iii) A firm which has no incentive to become a leader in the market either by
innovating a new product or a new process would find it more convenient to buy
the most modem technology from the owner which is most often a TNC than
taking the risk of innovating a similar technology.
Main Features of the Technology Market
Technology market is a seller's market. The owners of proprietarily technology are a few
large TNCs, although there are a few medium and small scale enterprises in the market. So
the TNCs control the sale of technology. The buyers of technology are a large number of
firms specially from developing countries. Effective purchase of technology can be done
only when a buyer knows about various aspects of transfer of the technology. This
knowledge includes information on a number of companies owning similar technology,
whether it is still subject to proprietarily regulations and what are the terms and conditions
under which that concerned technology is traded in the market. In technology purchase
knowledge is power. It is, therefore, imperative that a technology buyer makes necessary
home work in this regard.

RECENT TRENDS AND CURRENT ISSUES

i) Technology is increasingly globalized as :
a) trade in technology is growing tremendously as measured by increased
technological collaboration agreements;
b) The research and development activities of the firms are also getting
globalized for a number of TNCs are increasingly establishing their R & D
units in various countries.
ii) The diffusion of technology globally has caused a radical alteration of the world
trading system. Technology which was considered in any case a strategic factor in
national development has now emerged as an equally vital and critical element for
achieving control of international markets. In all countries, science and technology
policy is thus now perceived as having effects that go beyond national boundaries
and having consequences for international trade.
iii) Technology is considered not only in the national context of industrialization or
International Business VI Semester BBA

modernization of agriculture, but also in improving the services sector as well.

iv) Technology is considered as the prime factor in creating comparative advantage and
acquiring competitiveness in international markets.
v) There has been a growing tendency for companies to seek increased
governmental protection for intellectual property rights.
vi) The protection of intellectual property rights is also considered by many as a
necessary condition for increased flow of foreign direct investment. Therefore, there
has been pressure on various governments to build stricter intellectual property
rights regimes through unilateral action and multilateral agreements.
vii) The decade of 'sixties' and 'seventies' had witnessed serious attempts on the part of the
United Nations Conference on Trade and Development (UNCTAD) to step up
technology transfer to developing countries, reduce the costs of technology transfer
and make them acquire technology on less onerous terms. But there appears to be a
setback to these efforts. It is feared that the terms of transfer of technology are
becoming more stringent and costs are becoming higher.
viii) Protection of technology means protection of market power and prevention of
competition. Hence the developed countries have pursued their objective of
protection through various international agreements.
Issues
1) One of the major issues with regard to technology transfer is the proprietoriai rights
of the owner of technology. They have been made more stringently enforceable by
unilateral action by a single country, the United States of America, and multilateral
agreements, e.g., Trade Related Intellectual Property Rights. This development, it is
feared, has adversely affected the development of national technology in many
countries.
2) Political linking such as of providing protection to the owner of technology to
various other international economic transactions, and violation of proprietorial
regimes by any one country calling for retaliation/cross retaliation are adversely
affecting many international transactions of a country.
3) If a country desires to attract Foreign Direct Investment (FDI) it is forced to
liberalize its technology policy resulting in increased vulnerability of a large number
of developing countries.
4) Protection of technology has been extended to not only then manufacturing sector
but also agriculture and services sector. Patents of bio-technological inventions and
International Business VI Semester BBA

micro-organisms as provided in Trade Related Intellectual Property Rights of the

Marrakesh Agreement (1994) have raised a large number of complex issues.

TRANSFER OF TECHNOLOGY, FDI AND TNCs

Since the TNCs are the main actors in technology development, attention is focused on their
role in transfer of technology. A large proportion of R&D expenditure that forms the basis of
technology development in today's world is concentrated within the TNC system.
All important mode of transfer of technology is trade. Trade in capital goods is a means of
transfer of technology. All developing countries except perhaps some African countries
import technology through capital goods. A dramatic growth has taken place in imports of
capital goods by Asia and the Pacific region. The share of TNCs in capital goods imports of
developing countries is quite high.
A TIC normally undertakes FDI when it possesses certain technological or other economic
advantages over its competitors. Many firms choose to service their foreign markets through
FDI not only to exploit that advantage but also to retain the company's control over its
technology. TNCs generally transfer their most recent technology to their affiliates, while
selling or licensing older technologies to locally owned firms and joint ventures. Hence, it is
argued that FDI may be the only way for many developing countries to gain access to the
latest technology, especially certain key technologies.
As noted earlier, the introduction of new products or qualitatively superior old products is
one of the ways by which technology promotes growth. One important way of assessing how
transfer of technology is taking place by the TNCs is to measure the expansion of the share of
sales of high and medium research intensive industries.
The creation of production facilities by TNCs in high and medium research intensive
industries can imply technology transfer not merely through a changing product composition
but also through the training of host country personnel in new skills and introduction of new
management methods and a new way of organizing the production process.
As evidence, an overwhelming proportion of the foreign R&D of TNCs is located in
developed countries. However, in countries like India, the Republic of Korea and Singapore,
the TNCs have established R&D units of significance. But most often these R&D units are
typically confined to adapting the technology of the parent company to local conditions. In a
sample of 218 Japanese TNCs, 57 per cent expressed the view that the main objective of their
International Business VI Semester BBA

foreign R&D facilities was to develop products tailored to meet local demand. The effects of
TNCs on deeper indigenous research and innovation capabilities (know-why) in
developing countries is less evident.
It may also be that a strong presence of TNCs inhibits the development of indigenous
technology. Foreign competition could also induce domestic firms producing similar products
to undertake R&D that otherwise would not have taken place. FDI could also improve the
local innovating capacity in areas in which the host country and its firms are strongest and
have a competitive market structure.

ORGANISATIONAL INNOVATION AND MANAGEMENT

PRACTICES
Organisational innovation and improved managerial practices are being increasingly viewed
as a major aspect of technological development for enhancing productivity and accelerating
growth. The principal components of these aspects that have evolved over the last decades
can be summarised as follows:
• The underlying philosophy of production has been altered; instead of producing to stock,
goods are produced to order. That necessitates a demand-driven system capable of producing
a variety of product types in much smaller volumes. Hence, lot sizes have been reduced
dramatically.
• The efficient production of different products in small lot sizes requires minimising
downtime. That, in turn, requires quick line changeovers and tool set ups. Machinery
redesign becomes necessary but, more importantly, production-line workers must be trained
to do changeovers rather than having them done by separate teams as in mass production.
• Production layouts need to be restructured, and changes made in the use and
management of machines in order to create a smooth flow of smaller lot sizes.
• Inventories have to be reduced to a minimum “just-in-time” level rather than being stocked
“just-in-case”, so that the increased number of different product types can be accommodated
without large carrying costs.
• Maintaining a smooth flow of production without inventories requires that
components have zero defects /or be of perfect quality, whether they are from
suppliers or from in-house sources further back in the production line.
• Skill and craft demarcations among workers are eliminated and workers are trained to be
multi-skilled; they are paid according to their skill level and the quality of their work.
The organizational changes involved extend throughout the firm from design to
International Business VI Semester BBA

production; to marketing from senior management to the shop floor.

NON-EQUITY FORMS OF TECHNOLOGY TRANSFER BY TNCs

AND SMALL AND MEDIUM ENTERPRISES
There are a number of mechanisms other than equity participation through which technology
transfer takes place. It includes outright-sale of technology, subcontracting of production of
parts, components and services, management contracts, franchise, exports, strategic alliances
and technology collaboration agreements.
Outright Sale/Purchase of Technology: Firms, at times, prefer outright purchase of
technology while the seller also opts for it. The advantage of this mode of transfer to the
purchaser is that the buying firm gets technologies at one go and has freedom to use the
technology without the interference of the seller. Further, the buyer may find it economical.
But there are certain disadvantages as well. First, outright purchase may not be adequate to
transfer technology without the support of the seller. Further, the buyer will be deprived of
advances that would be subsequently made. In addition, in the absence of well planned R&D,
the
technology absorption by the firm may not be adequate. The firm may, in the ultimate
analysis, have to depend on outside sources for all technological inputs.
Sub-Contracting: Many foreign enterprises sub-contract the purchase of inputs to host
country's producer. This is called supplier/user relationship. Under this arrangement the
TNC's affiliate, for instance, not only assists the local firm technically but also provides
information which is important in enhancing its ability to coordinate the production of
components and other intermediate products. (This should not be mistaken for licensing
agreements.) Technology passes to sub-contractors or suppliers coming in the form of
technical assistance, material handling, product and process technology, and general
information with regard to production and finance, etc. This form of technology transfer is
widespread in automobile industry, radio and television industries. It has also expanded to
highly sophisticated products such as those in the semiconductor industry.
Management Contracts: Under these Contracts, a foreign enterprise advises the host about
various management practices which are in use in the parent company. Occasionally, under
this contract, the entire management is handled by the foreign firm, in which case, the host
company pays management fees, either as a lump sum or in instalments.
International Business VI Semester BBA

Franchises: Under this arrangement, the owner of a specific technology allows a host
company to use its specific knowledge for a franchise fee. This is a widespread practice in
food industry, hotels, etc.
Exports and Technology Transfer: National firms may acquire technology through
exports. Let us learn this concept with the help of the following case. This case has been
taken from World Development Report, Vol. 18, No.2 (Young Whee Rhee, The Catalytic
Model of Development: Lessons from Bangladesh's Success with Garment Exports, pp.333-
346.)
Acquisition of Export Marketing Skill from Transnational Corporations: The Case of
Garments Exports from Bangladesh: The phenomenal success of garments exports from
Bangladesh vividly illustrates the positive impact of learning through trade in association
with TNCs. Starting from virtually zero in 1978, export earnings from garments reached $
560 million in the fiscal year 1989-90 and may have been higher still in' the fiscal year 1990-
91 (data for the whole year are not available). The average growth rate in garment export
value was over 120 per cent in the 1980s; during that period, the absolute value of exports of
garments surpassed that of jute manufactures, traditionally the highest foreign exchange
earning item of the country. The contribution of garment exports to foreign exchange
earnings, a vital but scarce resource for the economic development of Bangladesh, was
enormous, amounting to 40 per cent of the total by the fiscal year 1989-90. The process
started in 1979 with a non-equity arrangement with a developing country TNC, the Daewoo
Corporation of the Republic of Korea. That company signed a five-year collaboration
agreement with the Desh Garment Company of Bangladesh, under which Daewoo provided:
six months of training for Desh workers, in the Republic of Korea (later extended to seven
months); assistance in start-up activities, including the installation of machinery purchased
from Daewoo; supervision of production managed by Desh; and
marketing services. In December 1979, 130 Desh workers trained by Daewoo in the Republic
of Korea returned to Bangladesh, along with three Daewoo engineers assigned to assist
startup activities. In April 1980; production of garments began with 500 employees and 450
machines. Desh exported its first products in 1979-80, amounting to about $ 56,000.
It was initially impossible for Desh to sell garments in the international market without
Daewoo's expertise. A so-called “triangular trade” arrangement was established: first,
Daewoo received a letter of credit from an overseas buyer; second, it opened a back-to-back
letter of credit addressed to Desh; and, finally, Desh shipped its garments under the Daewoo
International Business VI Semester BBA

brand name directly to the overseas buyer, while it received payment from Daewoo. In this
triangular trade, Daewoo assured product quality through production line supervision and
quality inspection, while Desh could fully utilize the established marketing networks of
Daewoo and learn the necessary marketing techniques.
The speed of learning was so rapid that Desh cancelled its collaboration agreement in June
1981, after only about one-and-a-half years of factory operation, long before the expiry of the
agreement. Export performance following the cancellation was impressive, as Desh acquired
the ability to handle all its export marketing and to purchase all its inputs from abroad,
including from non-Daewoo sources. Its exports reached $10 million in 1987-1988.
Meanwhile, 115 of the 130 Daewoo-trained workers left Desh to set up their own, or to join
other newly established, garment companies. Those workers were major agents for imparting
export skills throughout the whole garment industry, leading to its dramatic success in foreign
exchange earnings. Indeed, many new garment companies did not need the expertise of
foreign companies because of the existence of those workers. The remarkable speed with
which the ex-Desh workers transmitted their production, marketing and management
knowhow
to hundreds of their factories demonstrates the potential for learning through initial exposure
to trade in association with a TNC. It should also be noted that the spread of learning was
facilitated by government policies that permitted automatic access to inputs at world prices,
provided adequate trade financing at reasonable costs and exempted the industry from
investment licensing.
Strategic Alliances and Technology Transfer: High risks and rising R&D costs (especially
in the area of new technologies) and the rapid obsolescence of new products have forced
many TNCs to form technology-related strategic alliances to share development costs,
acquire new technologies and make better use of scarce qualified personnel. The substantial
number of strategic alliances in existence now is a relatively new phenomenon;
there are indications, however, of an emerging trend towards a very high proportion of
agreements involving the development of and access to technologies. The alliances of firm
with several other corporations for the purpose of developing its personal computer are an
example: the
Lotus Corporation provided the application software, and Microsoft wrote the operating
system, for a micro-processor that was produced by Intel. IBM (traditionally reluctant to
conclude alliances) has now created alliances with more than 40 partners around the world,
International Business VI Semester BBA

pooling technology and customer bases in the telecommunications and related fields. As a
response to competition from IBM, the Japanese computer firm Fujitsu formed alliances with
Texas Instruments, Siemens and Hitachi. Such alliances are often undertaken for the joint
development of new generations of products and to set industry standards. Transnational
Corporations from the United States and Europe are the most active participants in strategic
alliances, most of which take place in information technologies.
Technological alliances can be viewed as a way of providing collective protection to
technological advances among a few partners. The increasing incidence of such alliances,
combined with the current pace and cost of technological development makes it more
difficult for developing countries to acquire technology through traditional non-equity
arrangements. Many alliances also involve common actions for setting international standards
that increase the barriers to entry (including, for new products from developing countries) in
the international market. Some developing countries have the potential and
capability, however, to become partners in technology alliances.
A typical example to use is in the area of computer software, where the Government has set
up two software engineering firms in cooperation with IBM. Taiwan provides good quality
engineers at a relatively low cost while IBM provides experience in software research and
development. Similarly, the Sony Group is to transfer advanced technology to the electronics
industry in Taiwan. Sony has announced that it has entered into alliances with 130 electronics
companies from that country working with a “technology development centre” to
create a production base for export to Japan and affiliated companies of Sony world-wide.
Similarly, several firms in the automobile industry in the Republic of Korea have entered into
alliances with TNCs from the Triad. Examples are those of Hundai with Mitsubishi and
Chrystler, Daewoo with General Motors, Suzuki and Isuzu; and Kia with Ford and Mazda.
These examples, however, represent only a small number of alliances that include developing
countries. For most developing countries, however, the acquisition of new technologies is
likely to rely — at least for the present – on intro-firm transfers by TNCs, rather than on
inter-firm alliances between independent firms.
In services, non-equity arrangements have played an important role. There are some groups
of services which have used non-equity firms.
1. Hotels, restaurants, fast food and car rental companies: Their preferred way to
produce abroad is a management contract or franchising. In most cases, the agreement is
sufficient because it protects the contractor's assets related to technology, operating methods
or information and with respect to the performance of the contractee.
International Business VI Semester BBA

2. Business and professional services such as accounting, consulting and legal services
whose main assets are human capital, reputation, connections and brand names:
Those do not require expensive fixed assets that could be the basis for capital equity, but their
key competitive advantages can be codified and easily transferred through nonequity
arrangements, such as partnership.
3. Business services such as engineering, architectural and technical services, and some
advertising requiring adaptation to local tastes, accounting and legal services. Partnerships or
joint ventures with local partners provide access to local knowledge. This can also lead to
preliminary transfer of technology.
International Business VI Semester BBA

Title: Google Pay's Global Expansion Strategy

Background: Google Pay, a digital wallet platform developed by Google, has seen
rapid growth since its launch in 2015. By 2021, Google Pay was available in over 40
countries, offering a range of services including peer-to-peer transfers, online
payments, and in-store transactions.

Challenge: Google Pay faced several challenges in its international expansion. These
included adapting to diverse regulatory environments, addressing local payment
preferences, and competing with established players in each market.

Strategy:

1. Localization: Google Pay localized its app and services for each market,
offering language support, local currency options, and integration with local
payment methods.
2. Partnerships: The company formed strategic partnerships with banks,
financial institutions, and payment processors to facilitate transactions and
gain local market insights.
3. Regulatory Compliance: Google Pay worked closely with regulators to
ensure compliance with local laws and regulations related to digital payments.
4. Marketing and Branding: The company invested in localized marketing
campaigns to raise awareness and build trust among consumers in new
markets.
5. Innovation: Google Pay continued to innovate, introducing new features and
services to differentiate itself from competitors and meet the evolving needs
of users.

Results: Google Pay's global expansion strategy has been largely successful. The
platform has gained millions of users worldwide and has become a key player in the
digital payments industry. Its focus on localization, partnerships, and innovation has
enabled it to compete effectively in diverse markets.

Key Takeaways:

1. Localization is Key: Adapting to local preferences and regulations is crucial

for success in international markets.
2. Partnerships Drive Growth: Strategic partnerships can help companies
navigate complex markets and gain local insights.
3. Innovation is Continuous: Staying ahead of the competition requires a
commitment to innovation and meeting the changing needs of consumers.

Questions for Discussion:

International Business VI Semester BBA

1. How important is localization for Google Pay's success in international

markets?
2. What role do partnerships play in Google Pay's global expansion strategy?
3. How can Google Pay continue to innovate and differentiate itself in the
competitive digital payments industry?

This case study provides a glimpse into Google Pay's global expansion strategy,
highlighting the importance of localization, partnerships, and innovation in
international business.