SEMESTER V

GBCH5E02T: INTERNATIONAL BUSINESS

Contact Hours per week: 4 Max. Marks: 80 Credits: 4

Course Objective

This course aims to introduce students to the international business, trading and
financial environment. Students are also expected to understand the basic
features of the foreign exchange market and types of exchange rates. The course
also creates awareness about emerging issues such as outsourcing and
environmental sustainability in the context of international business.

Module I

Introduction to International Business: Globalization and its growing

importance in the world economy; Impact of Globalization; International
business contrasted with domestic businesses- complexities of international
business; Internationalization stages and orientations; Modes of entry into
international businesses. International Business Environment: Economic,
demographic, cultural and political-legal environment. (15 Hours)

Module II

International Trade: Theories of International trade- Absolute advantage

theory, Comparative advantage theory, Factory proportion theory and Leontief
paradox, Product life cycle theory, National competitive advantage theory;
Tariff and Non-Tariff Barriers. BOP- Balance of payment account and its
components. (15 Hours)
Module III

Regional Economic Integration: Forms of regional integration; Integration

efforts amongst countries in Europe, North America and Asia: EU, NAFTA and
SAARC; Cost and benefits of regional economic integration. International
Economic Organisations: WTO, UNCTAD, World Bank and IMF. (15 Hours)

Module IV

International Financial Environment: Foreign exchange markets, Spot

market, spot rate quotations, bid-ask spreads, trading in spot markets, cross
exchange rates, forward markets, forward rate, long and short forward positions,
forwards premium and discount; Arbitrage, Hedging and Speculation; Types of
exchange rate systems- fixed and floating, soft peg, crawling peg, free float,
managed float; Foreign exchange risk and exposure. Exchange rate
Determination: Types of Exchange rates, Factors affecting exchange rate-
relative inflation rates, interest rates, relative interest rates, relative income
levels, government controls, expectations. (20 Hours)

Module V

Foreign Direct Investment: Types of FDI- Greenfield investment, Brownfield

investments, Mergers & Acquisition, Strategic alliances; Benefits and
drawbacks of FDI Developments and Issues in International Business:
Outsourcing and its potential for India; International Business & Ecological
considerations. (15 Hours)
References

1. Bennett, Roger. International Business, Delhi: Pearson

2. Charles, W L Hill and Jain, Arun Kumar, International Business, New Delhi:
Tata McGraw Hill

3. Daniels John. D. Lee H. Radenbaugh and David P Sullivan. International

Business, Pearson Education.

4. Griffin, Ricky W and Michael W Pustay- International Business-A

Managerial Perspective Prentice Hall

5. Michael R. Czinkota, et al. International Business. Fortforth. The Dryden

Press.

6. Menipaz, E., Menipaz A. and Tripathi S.S. International Business: Theory

and Practice. New Delhi. Sage Publications India Pvt. Ltd.

Note: Latest edition of the text books may be used.

Additional Resources

1. Economic Survey, various issues

2. RBI Report on Currency & Finance, various issues.

3. UNCTAD Reports

4. Websites: RBI, IMF, WORLD BANK, WTO.

5. WTO Annual report, various reports

 MODULE I

INTRODUCTION TO INTERNATIONAL BUSINESS

SYLLABUS

Introduction to International Business: Globalization and its growing

importance in the world economy - Impact of Globalization - International
business contrasted with domestic businesses- complexities of international
business - Internationalization stages and orientations - Modes of entry into
international businesses - International Business Environment: Economic,
demographic, cultural and political-legal environment.

INTERNATIONAL BUSINESS – INTRODUCTION

The beverages you drink might be produced in India, but with the
collaboration of a USA company. The tea you drink is prepared from the tea
powder produced in Sri Lanka. The television you watch might have been
produced with Japanese technology. Most of you have the experience of
browsing internet and visiting different websites, purchasing the goods and
services without visiting those manufacturing countries. All these activities have
become a reality due to the operations and activities of International Business.
Thus, international business is the process of linking the global resources
with global people.

Globalisation is the order of the day with most countries eliminating trade
barriers and paving the way for growth and expansion of international business.
International business has become lifeline of every economy and country. For
countries to flourish economically it is very important for them to encourage
international business. The benefits of international business are immense.
International business when undertaken with specific objectives by companies
and promoted by governments of nations can lead to overall economic growth
of the world at large. Every corporate and government has numerous and
concrete reasons to take their business international. However, it is necessary to
keep in view various limitations of the globalisation also.

International business means the buying and selling of the goods and
services across the border. International business is the process of linking
the global resources with global people.

These business activities may be of government or private enterprises.

Here the national borders are crossed by the enterprises to expand their business
activities like manufacturing, mining, construction, agriculture, banking,
insurance, health, education, transportation, communication and so on.
International business is defined as global trade of goods/services or investment.
International business is the process of fulfilling the objectives of the
organizations by utilising the resources available in any part of the globe
and converting global business threats into business opportunities.

A business enterprise who goes for international business has to take a

very wide and long view before making any decision. It has to refer to the
social, political, historical, cultural, geographical, physical, ecological and
economic aspects of the other country where it has to do business. One of the
results of the increasing success of international business ventures is
globalization.

International business covers movement of goods or services across

national borders. Any business transaction between parties from more than one
country is a part of international business. The buying and selling of goods,
services, technology, capital or knowledge across the national boundaries of a
country are known as international business.

EVOLUTION OF INTERNATIONAL BUSINESS

The origin of International Business goes back to human civilization.

Sindh civilization had many traces of having a trade relationship with the
Eastern civilization. Later the concept of International Business – a broader
concept of integration of economies goes back to 19th century.

The first phase began with the end of first World War in 1919 with the
import of raw materials by colonial countries emperor from colonies and
exporting the finished goods again to the colonies. There was an increase in the
level of international business.

But after second world war in 1945, the most of the colonial governments
refused to export the raw materials and import finished goods for the purpose of
protecting the domestic companies. There was a decrease in international
business.

The consequences of World War II had made the world countries to feel
the need of international co-operation of global trade which led to the formation
of various organizations like International Monetary Fund (IMF) and
International Bank for Reconstruction and Development (IBRD), now called as
World Bank.

GLOBALISATION

Globalization – is an attitude of mind – it is a mindset which views the

entire world as a single market so that the corporate strategy is based on the
dynamics of global business environment. The concept of globalization has
filled up the concept of international business. In fact, the term International
Business was not popular before 2 decades. International Business has come
from the word International Marketing and International Marketing has come
from the word International Trade.

International Trade – International Marketing: Originally, the producers used to

export their products to the nearby countries and gradually extended the export
to far-off countries. Gradually the companies extended the operations beyond
trade.

International Marketing – International Business: The MNC’s which are

producing in home country and marketing them in foreign countries, now
started locating their plants and other manufacturing facilities in foreign/ host
countries. Later they started producing in one country and marketing in other
foreign countries.

A true global company views the entire world as a single market. There is a
great renovation, given by Arvindh Mills:

 Source raw material wherever they are cheapest

 Manufacture wherever in the world is most cost effective
 Sell in those markets where the prices are highest
 Raise finance globally
 Forge international strategy alliance
 To manage all these, take the best talent from all over the world.

And the organisation will achieve the stature of a true multinational.

Globalisation is a more advanced form of internationalisation of business

that implies a degree of functional integration between internationally dispersed
economic activities. It denotes the increased freedom and capacity of
individuals and firms to undertake economic transactions with residents of other
countries.

According to International Monetary Fund (IMF), globalisation

means “the growing economic interdependence of countries worldwide
through increasing volume and variety of cross-border transactions in
goods and services and of international capital flows and also through the
more rapid and widespread diffusion of technology”.

Globalisation refers to the process of increasing economic integration and

growing economic interdependence between nations. It means integration of
different economies of the world into one global economy thereby reducing the
economic gap between different countries. This is achieved by removing all
restrictions on the movement of goods, services, capital, labour and technology
by removing all restrictions on the movement of goods, services, capital, labour
and technology between nations. Globalisation leads to an increased level of
interaction and interdependence among different countries. There is free flow of
goods, services, technology, management practices and culture across national
boundaries. From a country’s view point, globalisation means integration of the
domestic economy of a country with the world economy.
BENEFITS OF GLOBALISATION

1.Increase in Competitive Strength of domestic industry:

Globalisation exposes domestic industry in developing countries to foreign

competition. This put domestic companies under pressure to improve efficiency
and quality and reduce costs. Under a protective regime industry lose the urge to
improve efficiency and quality. Globalisation helps to improve the competitive
strength and economic growth of developing nations.

2. Access to Advanced Technology:

For a developing country like India, globalisation provides access to new

technology; Indian companies can acquire sophisticated technology through
outright purchase or through joint ventures and other arrangements.

3. Access to Foreign Investment:

Globalisation has attracted the much needed foreign capital towards developing
countries like India. Foreign multinationals have invested billions of dollars in
India. In addition, foreign institutional investors have brought in huge funds in
stock markets in India.

4. Reduction in Cost of Production:

In a globalised environment, companies can secure cheaper sources of raw

materials and labour. For example, several foreign companies have set up BPOs
and call centres in India due to lower cost of labour. Sometimes, a company
may carry out its entire manufacturing in a foreign country to minimize cost of
production.
5. Growth and Expansion:

When the domestic market is not large enough to absorb the entire production,
domestic companies can expand and grow by entering foreign markets.
Japanese firms flooded the US markets with automobiles and electronics
because of this reason. Companies from USA, Europe and other developed
regions are increasing their presence in Asia due to growing population and
increasing income levels in Asian countries.

6. Higher Volume of Trade:

Due to globalisation, each country can specialize in the production of goods and

services in which it has a comparative advantage. It can export its surplus output
and import their items freely from other nations. This will lead not only to a
phenomenal increase in the world trade but also to better allocation and
utilization of resources in each country.

7. Consumer Welfare:

Better quality and low-priced goods and services will become available to
consumers. This along with a wider choice in consumption will help improve
standards of living of people in developing countries. Over a period of time, the
proportion of people below the poverty line will go down. Consumers also get
access to products manufactured in any part of the world.

8. Other benefits:

Globalisation also offers some spin off benefits. It helps in the

professionalization of management. Globalisation brings people of different
races and ethnic backgrounds closer. It helps to promote mutual cooperation and
world peace.
CRITICISMS OF GLOBALISATION

1. Threat to Domestic Industry: Globalisation leads to increasing role of

foreign companies in the domestic economy of a country. This is likely to
hamper the growth of domestic companies. Small and medium firms in a
developing country like India are not in a position to compete with giant firms
of developed nations.

2. Unemployment: Globalisation brings about rapid technological changes.

Advanced technology might create unemployment problems, particularly in
developing country.

3. Threat to Democracy: Globalisation requires very fast movement of capital

and labour across national frontiers. These increase the pressure for conceptual
and structural re-adjustments to the breaking point. The social and human costs
of globalisation may put the social fabric of a democracy in danger.

4. Economic Instability: Globalisation leads to a tremendous redistribution of

economic power. Such re-distribution will translate into a re-distribution of
political power. The change is likely to have a destabilizing effect.

5. Disregard of National Interest: A developing economy might become

excessively dependent on global corporations. This may not be in the national
interest.

MEANING AND DEFINITION OF INTERNATIONAL BUSINESS

International Business refers to the exchange of goods and services

between two parties of different countries. International Business may be
understood as those business transactions that involve crossing of national
boundaries. International Business is the process of focusing on the resources of
the globe and objectives of the organization on the global business opportunities
and threats in order to produce/buy/sell or exchange of goods and services
worldwide. International business is defined as global trade of goods/services or
investment.

FEATURES OF INTERNATIONAL BUSINESS:

1. Large Scale Operations:

In International business, all the operations including production and

marketing activities are conducted on a very huge scale. It first sells its goods in
the local market and then the surplus goods are exported.

2.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 them in
another country and sells in many countries.

3. Dominated by developed countries and MNC’s:

International Business is dominated by developed countries and their

multinational companies. Europe and Japan dominate the foreign trade because
of their high financial and other resources.

4. Benefits to Participating countries:

International Business gives benefits to all participating countries.

However, the developed countries get the maximum benefits, the developing
nations also get benefitted. They get foreign capital and technology. They gain
access to rapid industrial development and increased employment opportunities.

5. Keen Competition:
 International Business has to face tough competition in the world market.
The competition is between unequal partners. In this situation, the developed
countries are in a favourable position as they produce superior quality goods
and services, but developing countries find it difficult to face the competition.

6.Special role of science and technology:

International Business gives a lot of importance to science and

technology. Science and Technology helps the business to have large-scale
production. Developed countries use high technology. International business
helps them to transfer top-end technology to the developing countries.

7.International Restrictions:

International Business faces many restrictions on the inflow and outflow

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

8. Sensitive Nature:

The International Business is very sensitive in nature. Any changes in the

economic policies, technology, political environment has a huge impact.
Therefore, it must conduct marketing research to find out and study these
changes. They must adjust their business activities and adopt accordingly to
survive changes.

9. International Business need accurate information to make appropriate

decision.

10. International Business houses need not only accurate, but also timely
information.

11. International Business house segments their markets based on the

geographic market segment.
REASONS FOR THE EMERGENCE OF INTERNATIONAL BUSINESS:

 To achieve higher rate of profits

The basic objective of the business firm is to earn profit. The domestic
markets do not promise a higher rate of profits. Business firms search for
foreign market which hold promise for higher rate of profits. Thus, the objective
of profits affects and motivates the business to expand its operations to foreign
countries.

 Expanding the production capacity

Domestic companies expanded their production capacities more than the

demand for product in domestic countries. In such cases, these companies are
forced to sell their excessive production in foreign developed market.

 Severe competition in home country

The countries oriented towards market economies since 1960’s,

experience severe competition from other business firm in the home country.
The weak companies which could not meet the domestic countries started
entering the markets of developing countries.

 Limited home market

When the size of the home market is limited either due to the smaller size
of the population or due to lower purchasing power of the people or both, the
companies internationalize their operations.

 Political Stability v/s Political Instability

Business firms prefer to enter the politically stable countries and are
restrained from locating their business operations in politically instable
countries. In fact, business firms shift the operations from politically instable
countries to the politically stable countries.

 Availability of Technology and Managerial Competency

Availability of advanced technology and competent human resource in

some countries acts as pulling factors for business firms from the home country.
The developed countries due to these reasons attract companies from
developing world. In fact, American and European countries depend on Indian
Companies for software products and services through their BPO’s.

 High cost of transportation

Initially companies enter foreign countries through their marketing

operations. At this stage, the companies realize the challenge from the domestic
companies. Added to this, the home companies enjoy higher rate of profit
margins whereas the foreign firms suffer from lower profit margins. The major
factor for this situation is the cost of transportation. Under such conditions, the
foreign companies are inclined to increase their profit margin by locating their
manufacturing unit in foreign countries where there is enough demand either in
one country or in a group of neighbouring countries.

 Nearness to Raw materials

The source of highly qualitative raw materials and bulk raw materials is a
major factor for attracting the companies from the various foreign countries.
Most of the US based companies open their manufacturing unit in Middle East
countries due to the availability of petroleum. These companies, thus, reduces
the cost of transportation.

 Availability of Quality HR at less cost

 This is the major factor, in recent times, for software, high technology
and tele-communication companies to locate their operations in India. India is a
major source for high quality and low-cost human resources unlike USA and
other developed countries.

 Liberalization and Globalization

Most of the countries in the globe liberalized their economies and opened
their countries to the rest of the globe. These changed policies attracted the
multinational companies to extend their operations to these countries.

 To increase market share

Some of the large-scale business firms would like to enhance their market
share in the global market by expanding and intensifying their operations in
various foreign countries.

 To achieve higher rate of economic development

International Business helps the governments to achieve higher growth

rate of the economy, increases the total and per-capita income, GDP, industrial
growth, employment and income levels.

APPROACHES TO INTERNATIONAL BUSINESS:

Douglas Wind and Pelmutter advocated four approaches of International

Business.

They are:

Ethnocentric Approach
Polycentric Approach
Regiocentric Approach
Geocentric Approach
Ethnocentric Approach:

The domestic companies normally formulate their strategies, their

product design and their operations towards the national markets, customers and
competitors. The company exports the same products designed for domestic
markets to foreign countries. Thus, maintenance of domestic approach towards
international business is Ethnocentric Approach.

Polycentric Approach:

The company establishes a foreign subsidiary company and decentralizes

all the operations and delegates decision-making and policy making authority to
its executives. In fact, company appoints executives and personnel who direct
reports to managing Director of that company. Company appoints key personnel
from the home country and all other vacancies are filled by people of host
country.

Regiocentric Approach:

The company after operating successfully in a foreign country, thinks of

exporting to the neighbouring countries of the host country. At this stage, the
foreign subsidiary considers the regional environment for formulating policies.
It markets more or less the same product design, under polycentric approach in
other country of region with the different market strategy.

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

DIFFERENCES BETWEEN DOMESTIC AND INTERNATIONAL

BUSINESS:
Basis Domestic Business International Business

Approach DB’s approach is IB’s approach is either

Ethnocentric Approach Polycentric or Regiocentric
Approach
Operating Db formulates the strategies, IB formulates the strategies,
Activities product design towards the product design towards the
national markets, customers international markets,
and competitors customers and competitors
Geographic scope DB’s geographic scope is IB’s geographic scope varies
within the national from the national boundaries of
boundaries of the domestic 2 countries up to a maximum
country of the entire globe
Operating Style Operating style including Operating style can be spread
production, marketing is to the entire globe
limited to the domestic
country
Environment It analyses and scan the It analyses and scan the
domestic environment relevant international
environment
Quotas Quotas imposed by various Quotas imposed by various
countries on import and countries on import and export
export not influence the significantly influence the
domestic business international business
Tariffs Tariff rates of various Tariff rates of various countries
countries do not affect the do affect the international
domestic business business
Foreign Exchange Foreign exchange rates and Foreign exchange rates and
rates their fluctuations do not their fluctuations directly and
 directly and significantly significantly affect the
affect the domestic business international business
Culture Mostly domestic culture of Mostly cultures of the various
the country affects the countries affect the operations
business operations of the international business
Export-Import Domestic business is not International business is
procedure affected affected by the procedure of
the various countries
Human Resources Domestic business normally International business normally
employs the people from the employs the people from
same country various countries
Markets and Meets the needs of the Meets the needs of the markets
customers domestic markets and and customers of the different
customers countries
Scope of Business Business transaction with in Business transaction between
transaction the country two different countries

ADVANTAGES OF INTERNATIONAL BUSINESS:

1. High Living Standard

Customers in various countries can buy more products with the same
amount of money in the International Markets. In turn, it can also enhance the
living standard of the people through enhanced purchasing power and by
consuming high quality products.

2. Increased Socio-Economic Welfare

International business enhances the consumption level, and economic

welfare of the trading countries.

3. Wider Markets
 International business widens the market and increases the market size.
Therefore, the companies need not depend on the demand for the product in one
single country or customer’s taste and preferences.

4. Reduced effects of Business Cycle

The stages of business cycle vary from country to country. Therefore,

MNC’s shift from the country experiencing a recession to the country
experiencing the boom conditions. Thus, international business firms can escape
from the recessionary conditions.

5. Reduced Risks

Both commercial and political risks are reduced for the companies engaged in
international business due to spread in different countries.

6.Large Scale Economies

MNC, due to the wider and larger markets, produce larger quantities, which
provide the benefit of large-scale economies like reduced cost of production,
availability of expertise, etc.

7. Potential Untapped Markets

International business provides the chance of exploring and exploiting the

potential markets which are untapped so far. These markets provide the
opportunity of selling the product at a higher price than in domestic markets.

8. Provide the opportunities for and challenge to domestic business

International Business firms provide the opportunities to the domestic

companies. These opportunities include technology, management expertise,
market intelligence, etc.

9. Division of Labour and Specialisation

 International business leads to division of labour and specialization.
Brazil specializes in coffee, Kenya in tea, Japan in automobiles.

10. Economic Growth of the world

Specialisation, division of labour, enhancement of productivity, posing

challenges, development to meet them, innovations and creations to meet the
competition led to overall economic growth of the world nations.

11. Optimum and proper utilization of world resources

International business provides for the flow of raw materials, natural

resources and human resources from the countries where they are in excess
supply to those countries which are in short supply or need most.

12. Cultural Transformation

International business benefits are not purely economic or commercial,

they are even social and cultural. There is a close cultural transformation and
integration.

13. Knitting the world into a closely interactive Traditional Village

International business ultimately knits the global economies, societies and

countries into a closely interactive and traditional village where one is for all
and all are for one.

DISADVANTAGES OF INTERNATIONAL BUSINESS:

1.Political Factors

Political instability is the major factor that discourages the spread of

international business.
2. Huge Foreign Indebtedness

The developing countries with less purchasing power are lured into a debt
trap due to the operations of MNCs in these countries.

3. Exchange Instability

Currencies of countries are depreciated due to imbalances in the balance

of payments, political instability and foreign indebtedness. This, in turn, leads to
instability in the exchange rates of domestic currencies in terms of foreign
currencies.

4. Entry Requirements

Domestic governments impose entry requirements to multinational.

5. Tariff Quotas and Trade Barriers

Governments of various countries impose tariffs, import and export

barriers in order to protect the domestic business. Further these barriers are
imposed based on the political and diplomatic relations between or among
various governments.

6. Corruption

Corruption has become an international phenomenon. The higher rate

bribes and kickbacks discourage the foreign investors to expand their
operations.

7. Bureaucratic Practices of Government

Bureaucratic attitudes and practices of government delay sanctions,

grants permission and licenses to foreign companies.

8. Technological Pirating
 Copying the original technology, producing imitative products, imitating
other areas of business operations were common in Japan. These practices
invariably alarm the foreign companies against expansion.

9. Quality maintenance

International business firms have to meticulously maintain quality of the

products based on quality norms of each country. The firms have to face severe
consequences, if they fail to conform to the country standards.

10. High Cost

Internationalizing the domestic business involves market survey, product

improvement, quality upgradation, managerial efficiency and the like. These
activities need larger investments and involve higher cost and risk. Hence, most
of the business houses refrain themselves from internationalizing their business.

STAGES OF INTERNATIONALISATION
Stage 1: Domestic Company

Most international companies have their origin as domestic companies.

The orientation of a domestic company is essentially ethnocentric. A purely
domestic company operates domestically because it never considers the
alternative of going international. It limits its operations, vision, mission to
national political boundaries. This company focus its view on the domestic
market opportunities, supplies and customers. These companies analyze the
national environment of the country, formulate the strategies to exploit the
opportunities offered by environment. They believe in saying, “if it is not
happening in home country, it is not happening”.

Stage 2: International Company

Domestic companies which grow beyond their production capacities,

think of internationalizing their operation. Those companies which decide to
exploit the opportunities outside the domestic country are stage – 2 companies.
These companies believe that the practices the people and products of domestic
business are superior to those of other countries. These companies select the
strategy of locating a branch in foreign markets and extend same domestic
operations into foreign markets. International companies are importers and
exporters, they have no investment outside their home country. They focus on
domestic practices but extend wings to foreign countries (mere export-import).

Stage 3: Multi-National Company

International companies turn into the multi-national companies when they

start responding to the specific needs of different country markets with regard to
product, price and promotion. Multinational companies have investment in
other countries but do not have coordinated product offerings in each country.
They are more focused on adapting their products and services to each
individual local market. They adopt different strategy for different market. They
operate like a domestic market of country concerned in each of their market.
This stage is also referred as multi-domestic companies.

Stage 4: Global Company

Global companies have invested and are present in many countries. They
market their products through the use of the same co-ordinated image/brand in
all markets. Generally, it has one corporate office that is responsible for the
global strategy. Emphasis is on volume, cost management and efficiency. They
either produce in one country and market globally or produce globally and
market domestically.

Stage 5: Transnational Company

Transnational companies are much more complex organisations. They

have invested in foreign operations, have a central corporate facility but give
decision making, R&D and marketing powers to each individual foreign market.
It produces, markets, invests and operates across the world. It is an integrated
global enterprise that links global resources with global markets at profits.
There is no pure Transnational.

MODES OF ENTRY TO INTERNATIONAL BUSINESS

Since huge amount of funds are involved in international business, the

choice of a particular mode or modes is very significant for carrying on business
across national borders. The choice of entry mode is also significant in view of
the fact that different firms prefer different levels of involvement in
international business. If a firm is in favour of least involvement, only trade
may suffice the purpose. On the contrary, if a firm is in favour of maximum
involvement in international business, the investment mode will be most
suitable. But the question is whether the firm is capable of making investment.
Even if it is capable of making investment, the host country environment may
not be congenial for making investment. So a firm may go for different entry
modes in different countries. The choice of entry mode takes a number of
factors into account.

DETERMINANTS OF ENTRY MODE

A firm adopts various modes for its entry into business transaction across
borders.

Which particular mode a firm should adopt depends, at least, upon four
factors. They are:

1.Subservience of the corporate objective

When the objective of a firm spreading internationally is simply to earn

profits and not necessarily to maintain control over the entire operation, only
trading activities will serve its purpose. But if control is the primary objective,
the investment mode, and especially investment in a wholly owned foreign
subsidiary, will be the best course of action. Thus, a particular mode is selected
in tune with the very objective of the firm behind international business

2.Corporate capability

The corporate objective shaping the entry mode must be supported by the
company’s capability to select the particular entry mode. For example, if the
company financial position is not strong enough to make large investment
abroad, it will be difficult for the company to make such investment even if it is
desirable on the grounds of fulfilling corporate objectives. Thus, the choice of
the entry mode depends, to a considerable extent, on the capability of the
company going international.

3.Host country environment

Host country environment includes many aspects, such as the regulatory

environment, cultural environment, political and legal environment, economic
environment, especially the size of the market and the production, the shipping
cost, etc. When the managers of a firm are not well acquainted with the values,
beliefs, customs, language, religion, and other aspects of the target market, the
firm does not prefer to invest there. Rather, it limits its business only to trading
activities.

If the political conditions are not congenial in the target market or if the
legal formalities are lengthy, large investment is often avoided. When the host
government bans certain types of investment, foreign investors cannot make
such investments even if they wish to make them.

Size of the market in the host country influences the entry mode of
foreign firms. When the market is large and ever expanding, foreign firms prefer
to enlarge their involvement through investment. But if the size of the market
remains small, trade is the only suitable option. If the cost of production in the
host economy is lower than in the home country, the host country attracts
foreign investment. If the shipping cost is also low, it is possible that the firm
may shift the entire production process to the low-cost host country and may
ship the output back to the home country for meeting the domestic demand.

4. Perceived risk

Different modes involve varying degrees of risk. The lesser the

amount of control in a particular mode, the lower the risk. If trading activities
are ranked on the lowest rung of the ladder from the viewpoint of control, it
carries the least risk. On the contrary, if investment in a wholly owned
subsidiary possesses the largest element of control, it is supposed to be highly
risky. Thus, the choice of the entry mode depends, among other things, upon the
control-risk consideration of the firm

A mode of entry into an international business is the channel which

your organization employs to gain entry to a new international market.

There are two major types of entry modes:

1. Equity modes: The equity modes category includes: joint venture and wholly
owned subsidiaries.

2. Non-equity modes: The non-equity modes category includes export and

contractual agreements.
 1. EXPORTING

Export deals with physical movement of goods and services from one
place to another through a customs port following the rules of both the country
of origin and country of destination. Exporting is the simplest and widely used
mode of entering foreign markets.

The advantages of exporting include:

 ~ Need for limited finance: If the company selects a company in the host
country to distribute, the company can enter international market with no or less
financial resources. Alternatively, if the company chooses to distribute on its
own, it needs to invest financial resources, but this amount would be quite less
compared to that under other modes.

~ Less risk: Exporting involves less risk as the company understands the
culture, customer and the market of the host country gradually. The company
can enter the host country on a full-scale, if the product is accepted by the host
country’s market.

~ Motivation for exporting: Motivations for export are proactive and

reactive. Proactive motivations are opportunities available in the host country.

Exporters can be classified in various ways as given below.

Exporting includes indirect exporting, direct exporting and intra-corporate
transfers.

Indirect Exporting

Indirect exporting is exporting the products either in their original form or

in the modified form to a foreign country through another domestic company. It
is the market entry technique which offers lowest risk & least market control.
The firm is not engaged in international marketing and no special activity is
carried out within the firm. The sale is handled just like domestic sales. Various
publishers in India including Himalaya Publishing House sell their products i.e.
books to UBS publishers of India, which in turn exports these books to various
foreign countries.
Direct Exporting

Direct exporting is selling the products to a country directly through its

distribution arrangement or through a host country's company. Baskin Robins
initially exported its ice-cream to Russia in 1990 and later opened 74 outlets
with Russian partners. Finally in 1995 it established its ice cream plant in
Moscow.

Intra-corporate Transfers

Intra-corporate transfer means selling of product by a company to its affiliated

company in host country (another country). For example, selling of products by
Hindustan Lever in India to Unilever in USA. This transaction is treated as
exports in India and imports in USA.

Some of the factors to be considered by a company while exporting are as

follows:

– Government policies like export policies, import policies, export

financing, foreign exchange.

– Marketing factors like image, distribution networks, responsiveness to

the customer, customer awareness and customer preferences

– Location consideration: These factors include physical distribution

costs, warehousing costs, transportation costs, inventory carrying costs etc.

2. LICENSING

Licensing is the method of foreign operation whereby a firm in one

country agrees to permit a company in another country to use the
manufacturing, processing, trademark, know-how or some other skill provided
by the licensor. Coca Cola is an excellent example of licensing. In Zimbabwe,
United Bottlers have the license to make Coke. In return the licensee produces
the licensor’s products, market these products in his assigned territory and pay
the licensor loyalties related to the sales volume of the products.

International licensing is an agreement between the licensor and the

licensee over a period of time for the use of brand name, marketing knowhow,
copyright, work method, and trade mark by paying a licence fee. For example,
British American tobacco company (BATS) has given licenses in many
countries for the manufacture of their brand of cigarettes “555”. In India, ITC is
the licensed producer of “555”. Pepsi cola granted license to Heineken of the
Netherlands giving them the exclusive right to produce and sell Pepsi cola in the
Netherlands.

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. As such, the domestic company earns revenue without
additional investment. The licensor has minimum involvement in day-to-day
functions. Therefore, the returns are also comparatively low. The domestic
company can choose any international location and enjoy the advantages
without incurring any obligations and responsibilities of ownership, managerial,
investment etc.
Basic issues in International Licensing:

Companies should consider various factors in deciding negations. Each

international licensing is unique and has to be decided separately. However,
there are certain common factors, which affect most of the international
licenses. They are specifying the agreement’s boundaries, determining the
royalty, determining rights, privileges and constraints, defining resolution
methods, specifying the duration of the contract.

 Boundaries of the agreements: The companies should clearly define

the boundaries of agreements. They determine which rights and privileges are
being conveyed in the agreement.

 Determination of royalty: The most important factor in deciding the

licence is the amount of royalty. It is needless to mention that the licensor
expects high rate of royalty while the licensee would be unwilling to pay much
royalty. However, both the parties negotiate for a fair royalty for both the sides
in order to implement the contract more successfully.

 Determining right, privileges and constraints: Another important

factor in granting license is determining clearly and specifically the rights,
privilege and constraints. For example, if the Indian licensee of Aiwa TV uses
inferior inputs in order to reduce price, boost up sales and profits, the image of
the Japanese licensor would be damaged.

 Dispute settlement mechanism: The licensee and licensor should

clearly mention the mechanism to settle he disputes as disputes are bound to
crop up. This is because, settlement of disputes in courts is costly, time
consuming and hinders business interests.
  Agreement duration: The two parties of the agreement specify the
duration of the agreement. Licensing cannot be a short-term strategy. Hence, the
duration of the licensing should not be of short-term. It would always be
appropriate to have long duration of the licensing. Tokyo Disneyland demanded
on a 100-year licensing agreement with the Walt Disney company.

Licensing gives the following advantages:

 Licensing mode carries relatively low investment on the part of licensor.

 Licensing mode carries low financial risk to the licensor.
 Licensor can investigate the foreign market without much efforts on his
part.
 Licensee gets benefits with less investment on research and development.
 Licensee escapes himself from the risk of product failure.

Some of the disadvantages of licensing are as follows:

 Licensing agreements reduce the market opportunities for both the

licensor and licensee.
 Both the parties have responsibilities to maintain the product quality and
promoting the product. Therefore, one part can affect the other through
their improper acts.
 Costly and tedious litigation may crop up and hurt both the parties and
the market.
 There is scope for misunderstanding between the parties despite the
effectiveness of the agreement.
 There is a problem of leakage of the trade secrets of the licensor.
 The licensee may develop his own reputation.
 The licensee may sell the product outside the agreed territory and after
the expiry of the contract.
3.FRANCHISING

Franchising refers to the methods of practicing and using another person's

business philosophy. Franchising is a form of licensing. The franchisor can
exercise more control over the franchised compared to that in licensing. Under
franchising, 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 grants the independent operator the right to distribute its
products, techniques, and trademarks for a percentage of gross monthly sales
and a royalty fee. Various tangibles and intangibles such as national or
international advertising, training, and other support services are commonly
made available by the franchisor. Agreements may typically last from five to
thirty years.

A business for which franchising is said to work best have the following
characteristics:

– Businesses with a good track record of profitability.

– Businesses built around a unique or unusual concept.

– Businesses with broad geographic appeal.

– Businesses which are relatively easy to operate.

– Businesses which are relatively inexpensive to operate.

– Businesses which are easily duplicated.

The franchisor provides the following services to the franchisee:

 Trade mark

 Operating systems

 Product reputations

 Continuous support systems like advertising, employee training, reservation

services, quality assurance programs etc.

Advantages:

 Franchisor can enter global markets with low investment and low risks.
 Franchisor can get the information regarding the markets, culture,
customs and environment of the host country.
 Franchisor learns more lessons from the experiences of the franchisees,
which he could not experience from the home country’s market.
McDonald benefited from the worldwide learning phenomenon.
McDonald is convinced to open a restaurant in inner-city office building
in Japan. This location has become a more successful one. Based on this
lesson, McDonald opened its restaurants in downtown locations in
various countries.
 Franchisee can also start a business with low risk as he selects an
established and proved product and operating system.
 Franchisee gets the benefits of R&D with low cost.
 Franchisee escapes from the risk of product failure.

Disadvantages:

 International franchising may be more complicated than domestic

franchising. McDonald taught the Russian farmers the methods of
growing potatoes to meet its standards.
  It is difficult to control the international franchisee. As one of the French
investors did not maintain the stores as per the standards, McDonald did
revoke the franchise.
 Franchising agents reduce the market opportunities for both the
franchisor and the franchisee.
 Both the parties have the responsibilities to maintain product quality and
product promotion.
 There is scope for misunderstanding between the parties.
 There is a problem of leakage of trade secrets.

SPECIAL MODES OF ENTRY

4. CONTRACT MANUFACTURING

Contract manufacturing is a process that established a working agreement

between two companies. As part of the agreement, one company will custom
produce parts or other materials on behalf of their client. In most cases, the
manufacturer will also handle the ordering and shipment processes for the
client. As a result, the client does not have to maintain manufacturing facilities,
purchase raw materials, or hire labour in order to produce the finished goods.
The basic working model used by contract manufacturers translates well into
many different industries. Since the process is essentially outsourcing
production to a partner who will privately brand the end product, there are a
number of different business ventures that can make use of a contract
manufacturing arrangement.

There are a number of examples of pharmaceutical contract

manufacturing currently functioning today, as well as similar arrangements in
food manufacturing, the creation of computer components and other forms of
electronic contract manufacturing. Even industries like personal care and
hygiene products, automotive parts, and medical supplies are often created
under the terms of a contract manufacture agreement.

Advantages:

 International business can focus on the part of the value chain where it
has distinctive competence.
 It reduces the cost of production as the host country’s companies with
their relative cost advantage produce at low cost.
 Small and medium industrial units in the host country can also develop as
most of the production activities take in these units.
 The international company gets the locational advantages generated by
the host country’s production.
 For the manufacturer, there is the guarantee of steady work. Having
contracts in place that commit to certain levels of production for one, two
and even five-year periods makes it much easier to forecast the future
financial stability of the company.
 For the client, there is no need to purchase or rent production facilities,
buy equipment, purchase raw materials, or hire and train employees to
produce the goods. There are also no headaches from dealing with
employees who fail to report to work, equipment that breaks down, or any
of the other minor details that any manufacturing company must face
daily.
 All the client has to do is generate sales, forward orders to the
manufacturer, and keep accurate records of all income and expenses
associated with the business venture.

Disadvantages:

 Host country’s companies may take up the marketing activities also,

hindering the interest of the international company.
  Host country’s companies may not strictly adhere to the production
design, quality standards etc. These factors result in quality problems,
design problem and other surprises.
 The poor working conditions in the host country’s companies affect the
company’s image. For example, Nike has suffered a string of blows to its
public image because of reports of unsafe and harsh working conditions
in Vietnamese factories churning our Nike foot ware.

5. MANAGEMENT CONTRACTS

A management contract is an arrangement under which operational

control of an enterprise is vested by contract in a separate enterprise which
performs the necessary managerial functions in return for a fee. Management
contracts involve not just selling a method of doing things (as with franchising
or licensing) but involves actually doing them. A management contract can
involve a wide range of functions, such as technical operation of a production
facility, management of personnel, accounting, marketing services and training.
Management contracts have been used to a wide extent in the airline industry,
and when foreign government action restricts other entry methods. Management
contracts are often formed where there is a lack of local skills to run a project. It
is an alternative to foreign direct investment as it does not involve as high risk
and can yield higher returns for the company.

6. TURNKEY PROJECTS

Turn-key refers to something that is ready for immediate use. 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 a remuneration.

The forms of remuneration include:

  A fixed price (firm plans to implement the project below the price)
 Payment on cost plus basis (total cost incurred plus profit)

In a turnkey business transaction, different entities are responsible for

setting up a plant or equipment (e.g. trains/infrastructure) and for putting it into
operation. It can include contractual actions - at least through the system,
subsystem, or equipment installation phase. It may also include follow-on
contractual actions, such as testing, training, logistical, and operational support.
It is often given to the best bidder in a procurement process. Turnkey projects
can also be extended, known as turnkey plus, where there is perhaps a small
equity interest by the supplier and it will later on continue its operation through
a management contract or licensing.

Eg: Indonesian Government during 1974 invited global tenders for

construction of a sugar factory in the country. Indonesian Government received
the tenders from the companies of the USA, the UK, France, Germany and
Japan. One of the Japanese companies quoted highest price compared to all
other companies. So, Indonesian Government studied the quotation. This
quotation includes: development of the fields for growing sugarcane,
development of seedling, construction of sugar factory, roads, communication,
connecting the factory, train the local market, plans for the export of surplus
sugar, etc. It also made provision for the transfer of the factory along with the
total package to the Indonesian Government and follow-up the activities after it
is transferred to the Indonesian Government. Indonesian Government was very
much satisfied with the total package and invited the Japanese company to
implement the project. The Japanese company Indonesian Government entered
an agreement for implementation of this project by the Japanese company for a
price. This project is called “Turnkey Project”.

International Turnkey Projects include:

  Nuclear Power Plants

 Air Ports

 Oil refinery

 National Highways

 Railway Lines

The companies normally approach the host country’s government or

International Finance Corporation, Export-Import Bank and the like for
financial assistance as the turnkey projects require huge finances.

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.

7. FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES

Some companies enter the foreign markets through exporting, licensing,

franchising etc., get the knowledge and awareness of the foreign markets,
culture of the country, customers' preferences, political situation of the country
etc and then establish manufacturing facilities by ownership in the foreign
countries. Baskin Robbin’s in Russia followed this strategy. In this arrangement,
the internationl firm makes a direct investment in a production unit in a foreign
market. It requires greatest commitment since there is 100% ownership. It is
also called the Greenfield investment. The parent company starts a new
venture in a foreign country by constructing new operational facilities from the
ground up. In addition to building new facilities, most parent companies also
create new long-term jobs in the foreign country by hiring new employees.
Green field investments occur when multinational corporations enter into
developing countries to build new factories and/or stores. Developing countries
often offer prospective companies’ tax-breaks, subsidies and other types of
incentives to set up green field investments. Governments often see that losing
corporate tax revenue is a small price to pay if jobs are created and knowledge
and technology is gained to boost the country's human capital.
FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES

Strategic alliances are a co-operative approach to achieve the larger goals.

Innovations, creations, productivity, growth, expansions and diversifications in
recent years are mostly accomplished by strategic alliances adopted by various
companies. Strategic alliances can take different forms like licensing,
franchising, contract manufacturing, JVs etc. Alliances are 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.

8. MERGERS AND ACQUISITIONS:

International mergers and acquisitions are also termed as global mergers

and acquisitions or cross-border mergers and acquisitions. These mergers and
acquisitions refer to those mergers and acquisitions that are taking place beyond
the boundaries of a particular country. International mergers and acquisitions are
taking place in different forms, for example horizontal mergers, vertical
mergers, conglomerate mergers, congeneric mergers, reverse mergers, dilutive
mergers, accretive mergers and others. International mergers and acquisitions
are performed for the purpose of obtaining some strategic benefits in the
markets of a particular country. With the help of international mergers and
acquisitions, multinational corporations can enjoy a number of advantages,
which include economies of scale and market dominance. These deals or
transactions help a large number of companies penetrate into new markets fast
and attain economies of scale. Domestic business selects this mode of entering
international business as it provides immediate access to international
manufacturing facilities and marketing network. In addition, the domestic
company may also get access to new technology or a patent right. They also
stimulate foreign direct investment or FDI.
 For ex. Coca cola entered Indian market instantly be acquiring the Parle
and its bottling units. Procter and Gamble entered Mexican tissue products in
1997 by purchasing Loreto Y. Pena Pobre’s manufacturing and marketing
systems.

9. JOINT VENTURES

Two or more firms join together to create a new business entity that is
legally separate and distinct from its parents. Joint ventures are established as
corporations and owned by the funding partners in the predetermined
proportions. The parties agree to create a new entity to share in the revenues,
expenses, and control of the enterprise. Joint ventures can be defined as "an
enterprise in which two or more investors share ownership and control over
property rights and operation". The venture can be for one specific project only,
or a continuing business relationship. Businesses of any size can use joint
ventures to strengthen long-term relationships or to collaborate on short-term
projects.

Joint ventures involve shared ownership. Joint ventures are common in

international business. Various environmental factors like social, technological,
economic and political encourage the formations of joint ventures. Joint
ventures provide required strengths in terms of required capital, latest
technology, required human talent etc., and enable the companies to share the
risk in the foreign markets. Joint ventures involve the local companies. This act
improves the local image in the host country and also satisfies the governmental
requirements regarding joint ventures. In fact, support of the host country’s
Government is essential for the success of the joint venture.

Eg: 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.
Advantages:

 Joint venture provides large capital funds.

 Joint ventures are suitable for major projects.
 Joint ventures spread the risk between or among partners.
 Different parties to the joint venture being different kinds of skills like
technical skill, technology, human skills, expertise, marketing skills or
marketing networks.
 Joint ventures make large projects and turn key projects feasible and
possible.
 Joint ventures provide synergy due to combined efforts of varied parties.

Disadvantages:

 Joint ventures are also potential for conflicts. They result in disputes
between or among parties due to varied interest.
 The partners delay the decision-making once a dispute arises. Then the

operations become unresponsive and inefficient.

 Decision-making is normally slowed down in joint ventures due to the
involvement of a number of parties.
 Possibility of collapse of a joint venture is more due to entry of
competitors, changes in the business environment in the two countries,
changes in the partners’ strengths etc.
 Life cycle of a joint venture is hindered by many causes of collapse.
 INTERNATIONAL BUSINESS ENVIRONMENT

Introduction:

Strategy formulation is a must for a global company to make decisions

regarding the markets to enter, product/service range to introduce in the foreign
countries. The fundamental basis for strategy formulation is the environmental
analysis. Environment provides the opportunities to the business to produce and
sell a particular product. Environment sometimes poses threats and challenges
to business. Business should enhance its strengths in order to face the
challenges posed by the environment. Study of environment helps the business
to formulate strategies and run the business efficiently in the competitive global
markets.

According to David Keith, “Business environment is the aggregate of all

conditions, events and influences that surround and affect business.”

Meaning of International Business Environment:

International business environment means the factors/activities those

surround/encircle the international business. In other words, business
environment means factors that affect or influence the MNC’s and transnational
companies. The international business environment (IBE) can be defined as the
environment in different countries, with factors prevalent in the home
environment of the organisation which influences decision making of the
business by affecting use of resources and capabilities. IBE is defined as a set of
activities relating to industry and commerce, on an international level. IBE is
unfamiliar and different from domestic environment. Thus, extra vigilance is
required to these environmental differences. IBE includes the social, political,
economic, regulatory, tax, cultural, legal, and technological environments.
 Factors that affect International Business include Social and Cultural
factors, Technological Factors, Economic Factors, Political/Governmental
factors, international factors and Natural factors.

William F. Glueck defined the term environmental analysis as, ‘the

process by which strategists monitor the economic, governmental/legal,
market/competitive, supplier/technological, geographic and social settings to
determine opportunities and threats to their firms”.

Factors of International Business Environment:

Business environmental factors are broadly divided into internal

environmental factors and external environmental factors.

Internal environmental factors include human resource management,

trade unions, organization structure, financial management, marketing
management and production management management/leadership style, etc.

External environmental factors are further divided into micro and

macro external environmental factors. Micro environmental factors include
competitors, customers, market intermediaries, suppliers of raw materials,
bankers and other suppliers of finance, shareholders and other stakeholders of
the business firm. External macro environmental factors include social and
cultural factors, technological factors, economic factors, political and
governmental factors, international factors and natural factors.

1. CULTURAL ENVIRONMENT:

Culture is, “the thought and behaviour patterns that member of a society learns
through language and other forms of symbolic interaction – their customs,
habits, beliefs and values, the common viewpoints which bind them together as
a social entity. Cultural change is gradually picking up new ideas and dropping
old ones, but many of the cultures of the past have been so persistent and self-
contained that the impact of such sudden change has torn them apart, uprooting
their people psychologically.”

Characteristics:

 Culture is derived from the climatic conditions of the geographical region

and economic conditions of the country.
 It is a set of traditional beliefs and values which are transmitted and
shared in a given society.
 It is a total way of life and thinking patterns that are passed from
generation to generation.
 It is norms, customs, art, values, etc.
 It prescribes the kind of behaviour considered acceptable in the society.
 It is based on social interaction and creation.
 Culture is acquired through learning but not inherited genetically.
 Culture is not immune to change. It goes on changing.

Cultural Factors influencing International Business:

1.Cultural attitude and International Business:

Dressing habits, living styles, eating habits and other consumption

patterns, priority of needs are influenced by culture. The eating habits vary
widely. Similarly, dressing habits also vary from country and county based on
their culture.

2. Cultural Universal

Irrespective of the religion, race, region, caste, etc, all of us have more or
less the same needs. These common needs are referred as “Cultural Universal”.
The cultural Universal enable the businessmen to market the products in many
foreign countries with modifications.
Example: TV’s, cars, video games.

3. Communication with languages

Language is the basic medium of communication. There are more than

5000 spoken languages in the world. The same words in the same language may
mean different things in the different regions of the country.

4. Time and Culture

Time has different meaning in different cultures. People in some parts of

the world do not find it necessary to take appointments to meet someone. But
the practice is different in certain parts of the world where they prefer prior
appointments to meet someone. There are cultures who believe some auspicious
time as most important for the business, admission in a college, travel, etc.

5. Space and Culture

Space between one person to another person plays a significant role in

communication. But culture determines the space/distance between one person
and another person. When some cultures give personal space and privacy
utmost importance, certain cultures consider it as unimportant.

6. Culture and Agreement

There are very legalistic societies who are very specific and explicit in
their terms of agreement, whereas some never pick up face to face
confrontation. They keep quiet in case of disagreement.

7.Culture and Friendship

Americans develop friendship even in short time. In fact, they don’t

develop deep personal ties. Sometimes, people in the US complete the business
and then develop friendship. People in India, Japan and China first develop
friendship through several means including eating together, presenting gifts and
then transact business.

8. Culture and Negotiation

Americans are straightforward. Chinese negotiations are generally tough-

minded and well prepared and use various tactics to secure the best deal. Thus
negotiation tactics also differs among cultures.

9. Culture and Superstition

Superstitious beliefs like fortune telling, palm reading, dream analysis,

phases of the sun and moon, Vaastu are prominent in Asian Countries and also
in some African Countries. Americans knock on wood, cross their fingers and
feel uneasy when a black cat crosses their path. Even Indians feel uneasy when
a cat crosses their path.

10. Culture and Gifts

Culture attitudes concerning the presentation of gifts vary widely across

the world. In Japan and India gifts are given first, but in Europe only after a
personal relationship is developed. The international businessmen should study
the customs of the society in offering gifts.

2. SOCIAL ENVIRONMENT

It consists of religious aspects, language, customs, traditions, tastes and

preferences, living habits, dressing habits, etc. It also influences the level of
consumption. Example: The economic position of Germans and French people
is more or less same, culturally different. So, study of social environment helps
in deciding type of market, product, etc.
 The various factors of social environment effecting international business
are:

1. Religion:

Religion is one of the important social institutions influencing the

business. The religions play a vital role in normal and ethical standards in
production and marketing of goods and services. Most of the religions insist on
providing truthful and honest information.

2. Family system:

In addition to religion, family system has an impact on international

business. Example: In some countries, women play a less significant role in the
economy as well as in the family, though recently positive changes are being
seen. But in Latin American countries, role of women is better compared to that
of other countries. Women play a dominant role in European and North
American countries.

3. Behavioural factors affecting the business:

Human behaviours that affect the business include employee behaviour,

consumer behaviour and behaviour of stake holders (holders of debentures,
bonds, etc.) Cultural factors also influence the human behaviour. Cultural
differences in various countries results in variations in human behaviour from
country to country. Business should consider behaviour pattern of social groups
in hiring, marketing and in selecting supplier of inputs and market
intermediaries.

4. Behaviour based on group membership:

Attitude towards female employment vary from country to country.

Example: Certain countries discourage females from seeking employment.
Family membership is paramount rather than individual achievements in certain
societies like India, China, etc.,

5. Motivation and Achievements:

Economic development of a country depends on motivation of people to

work hard and their desire for achievement. People rank the motivational needs
differently from country to country. People from poor countries are mostly
motivated by compensation while their counter parts in rich countries are
motivated by the higher order needs like more responsibility, recognition and
other esteem needs.

6. Power Distance:

Power distance denotes the relationship between superior and sub-

ordinates. People in low power distance prefer little consultations between
superior and subordinate. Subordinates in high power distance may prefer
participating in decision making among themselves excluding the superior.

7. Individualism V/s Collectivism:

Individualism and collectivism are consequences of the culture and

affects the formation of groups, productivity and marketing practices.

8. Risk taking behaviour:

Employees in countries with the highest scores of uncertainty avoidance

prefer a system and a methodological work based on rules that are not to be
deviated. Employees in countries with low scores of uncertainty avoidance
prefer flexible organization and flexible work.

Example: People in some countries like Norway trust most of the people
and people in some other countries like Brazil are very cautious in dealing with
others.
3. TECHNOLOGICAL ENVIRONMENT:

Technology is the application of knowledge. In other words, technology

has a systematic application of scientific or other organized knowledge to a
particular task.

Features: a) Technology brings changes in the society, economy and politics.

b) Technology effects on entire globe.

c) Technology makes more technology possible.

Impact of technology on international business:

1.Investments in technology:

Advanced countries spend considerable amount on research and development

for further advancement of technology. Example: Germany spends 50% of
research and development budget on product innovation and remaining 50% on
process innovation. But Japanese spend 70% on process innovation and 30% on
product innovation.

2.Technology and economic development:

Technology is one of the significant factors that determine the level of

economic development of a country. The differences between nations are mostly
reflected by the level of technology. Example: India has vast natural resources.
It remains importing the products from other countries through exporting raw
materials due to its low level of technology.

3.Technology and International competition:

A few companies invent, but many companies adopt scientific knowledge to

generate wealth by application and communication. The invention process and
global competitiveness are the two determinants of a national wealth. Example:
Japan concentrates on innovation of automobiles. But Italy concentrates on
innovation of textiles and leather.

4.Technology Transfer:

Technology and global business are interdependent. International business

spread technology from advanced countries to developing countries by
establishing the subsidiaries or establishing joint ventures with the host
countries and arranging technological transfer to the company in developing
countries through technological alliances.

5.Technology and location of plants:

MNCs locate their plants with high technology in advanced countries and
establish the labour driven manufacturing facilities in developing countries in
order to get the advantages of cheap labour.

6.Scanning of Technological environment:

The level of technology is not same in all the countries. Advanced countries
enjoy the latest technology while the developing nations face the consequences
of outdated technology. Therefore, MNCs have to understand technology and
analyse it before entering foreign market.

7.Appropriate technology:

The technology that suits one country may not be suitable for other countries.
Countries develop appropriate technologies which suit their climatic conditions,
social conditions, conditions of infrastructure etc. Ex: Japanese automobile
industry design different type of cars which suits the Indian roads.

8.Technology and globalization:

 The industrial revolution resulted in large scale production and the recent
technological revolutions leads to the production of high-quality products at
lower cost. These factors forced the domestic company to enter the foreign
countries in order to find market for their products. Thus, technology is one
important cause for globalization.

9.Information technology and globalization:

The information technology redefined the global business through its

development like internet, www sites, e-mails. Information super highways and
on-line transactions brought significant development to the global business.

Impact of technology on globalization:

 Technological advances have tremendously fostered globalization.

Technology have been a very important facilitating factor of
globalization.
 Several technological developments have become a compelling reason for
internationalization. Technology has substantially increased the scale
economies.
 Global sourcing encouraged not only trade liberalization but also
technological developments, which reduces transportation cost involved.
 Technology monopoly encourages internationalization because the firm
can exploit the respective demand without any competition.
 Development in telecommunication and information technologies have
reduced the barriers to time and place in doing a business. It is possible
for customers and suppliers to transact the business at any time and any
part of the globe.

4. ECONOMIC ENVIRONMENT
 Economic environment refers to all those economic factors which have a
bearing on functioning of a business unit. Economic environment of various
countries directly influences the international business. In fact, international
economic environment and global business interact with each other.

Economic system:

Economic system is one of the important factors of economic

development that influences the international business to a great extent.
Economic system is an organization of institutions established to satisfy human
needs or wants.

There are three types of economic system viz.,

 Capitalistic Economic System

 Communistic Economic System
 Mixed Economic System

Capitalistic Economic System: This system provides for economic democracy

and customer choice for product or service. This system emphasizes on the
philosophy of individualism, believing in private ownership of production and
distribution facilities Ex: USA, Japan, UK.

Communistic Economic System: Under this system private properties and

property rights to income are abolished. The State owns all the factors of
production and distribution, but the major limitation of this system is that it
reduces the individual freedom of choice; and failed to achieve significant
economic growth.

Mixed Economic System: Under this system, major factors of production and
distribution are owned, managed and controlled by the State. The purpose is to
provide benefits to public more or less on an equal basis. This system, does not
distribute the existing wealth equally among people, but believes in full
employment and suitable rewards for the workers efforts. Ex: India, UK,
France, etc.

Countries are also classified on the basis of income:

 Low-income countries
 Lower middle-income countries
 Upper middle-income countries
 Higher income countries

Low Income Countries: This country is also known as third world countries or
pre industrial countries. The characteristics includes, high birth rate, low literacy
rate, political instability and unrest, technological backwardness,
underutilization of natural resources, excessive unemployment and
underemployment, and excessive dependency on imports.

Lower Middle-Income Countries: These countries are known as less developed

countries. The characteristics of these countries include early stage of
industrialization, expansion of consumer market, availability of cheap and
motivated human resource, location for production of standardized products or
exporting.

Upper Middle-Income Countries: These countries are called industrializing

countries. The characteristics of these countries are less dependency on
agriculture, high exports, increase in literacy, formal education, rapid economic
development, occupation mobility of people from agriculture to industry and
increased wage rate.
High Income Countries: These countries are known as advanced countries,
industrialized, post-industrialized or first world countries. The characteristics
include development of information sector, emphasize on future plan,
development of intellectual technology over machine technology and it aims at
building information society.

Impact of economic environment on international business:

1.Economic growth:

Business helps for the identification of peoples’ needs, wants, production

of goods and services and supply to the people. Thus, it creates the conversion
of inputs into outputs and enables for consumption. It leads to economic
development. The high economic growth rate of the countries providing an
opportunity of expanding market shares to international business firms,
managers of the MNCs are interested in knowing the future economic growth
rate of various countries in order to select the market either to enter or
concentrate more resources to the market.

2.Inflation:

It is another important factor that affects the market share of the

international business firm. It affects the interest rate as the demand for money
is high due to the higher prices and it also affects the exchange rate of the
domestic currency in terms of various foreign currencies.

3. Balance of payments:

Balance of Payments position of a country is an outcome of international

business and also affects the future of the international business. Export and
import trade in goods and services affects the current accounts position and flow
of capital affects capital accounts position. The managers of MNCs should
monitor the balance of payment position of the countries.

4.Economic Transition:

The process of liberalization provided a significant opportunity to MNCs to

enter most of the countries of the world either by locating their manufacturing
facilities or expanding or both. Thus, MNCs are immediate and greatest
beneficiaries of L, P and G of world economies.

While analysing the economic environment, the organisation intending to

enter a particular business sector may consider the following aspects:

1. The economic system to enter the business sector.

2. The stage of economic growth and the pace of growth.

3. The level of national and per capita income.

4. The incidents of taxes, both direct and indirect.

5. The infrastructure facilities available and the difficulties thereof.

6. Availability of raw materials and components and the cost thereof.

7. The sources of financial resources and their costs.

8. Availability of manpower-managerial, technical and workers available and

their salary and wage structures.

5.POLITICAL ENVIRONMENT:

The influence of political environment on business is enormous. Political

system prevailing in a country promotes, decides, encourages, directs and
control the business activities of that country. It includes factors such as
characteristics and policies of political parties, the nature of constitution and
Government system and the Government environment influencing the economic
and business policies and regulation.

1. Political ideology:

Political ideology is the body of complex ideas, theories and objectives that
constitute a sociopolitical program. Political ideologies of the people in the
same country vary widely due to the variations in culture, ethic group,
community groups, religious and the economic groups. These variations
influence the people to form different political parties. The difference in
political ideologies change the national boundaries. The IB manager should
understand these ideologies in the countries in order to know the possible
political tensions and instabilities.

2. Democracy:

It refers to political arrangement in which the supreme power is vested in the

hand of people. The level of democracy also decides the business decisions.

3. Political rights and Civil liberties:

It helps for evaluating the freedom of citizens. The major indicators of

political liberties include: conduct of elections fairly and competitively, power
and ability of the voters in casting their votes in elections, people ability in
forming political parties and groups.

The major indicators of civil liberties include: Degree of freedom of the press,
and equality for all individuals under the law.

4. Totalitarianism:

It refers to the situation in which individual freedom is completely

subordinated to the power of authority of the state or concentrated in the hands
of one person or in a small group. Such conditions should also be analysed
before deciding international business relations.

5. Political Relations and International business:

Political friendly relationship results in the growth of bi-lateral or multi-

lateral trade. Ex: The friendly relationship between Indian companies but also
the MNCs operating in India to have a close business linkage with the USSR.
Similarly, the friendly relationship between Pakistan and USA helped the
Pakistan companies to have a close business linkage with USA.

6. Types of Political System:

Appraisal of political system help us in having an idea of political system

and their impact on international business. The are classified as:

Two party system: Two parties take turn of controlling the Government under
two party system. Ex: USA and UK.

Multiparty system: In a multiparty system, there are many parties and no party
is strong to gain the control of the Government: Ex: Germany, France and India.

Single party system: In this system, only one dominant party gets the
opportunity to control the Government even through several parties exists Ex:
Egypt.

One party Dominated system: In this system, dominate party rules the
Government even though there are more than one party. Ex: USSR, Cuba.

7.Political Risk:

Political risk refers to risk of loss of assets, earning power or managerial

control, due to the events or action that are politically motivated. The
international business firms face political risk as and when there are changes in
Government policies or changes in political parties in power.
Risks are based on host Government actions like:

Confiscation: The process of nationalization of property without compensation

is called confiscation.

Expropriation: It is the process of nationalization of a property with

compensation.

Nationalisation: It is a process of shifting the ownership of private property

from private individuals to Government.

Domestication: In this, foreign business firm’s control and ownership in favour

of domestic investors either partly or fully.

General Instability risk: These risks are due to social, political, religious, unrest
in the host country.

Operation risk: These risks are due to imposition of controls on foreign business
operations by the host Government.

Political instability can be viewed from the corruption, social unrest, attitudes of
nationals and policies of host Government.

How to minimize the political risk?

The risk that are involved in international business cannot be avoided but it
can be minimized. It can be minimized from the following:

Stimulation of the local economy: The foreign company can stimulate the
economic development of host country by investing in their priority area. The
foreign countries can stimulate the host country economy by being export
oriented.

Employment of nationals: MNCs can minimize political risk by employing,

developing and promoting the local people.
Sharing ownership: Foreign company should allow the domestic investors to
invest and share the ownership by converting the company into public limited
company and ownership can be shared through joint ventures.

De-civic minded: The MNCs in addition to doing business in foreign countries

should also be good corporate citizen. It may help the foreign countries in
different ways like constructing schools, hospitals, roads, etc.,

Political Neutrality: MNCs should not involve in political risk or disputes

among the local group of host countries from the point of view of long run
interest.

SELF TEST QUESTIONS

1. What is international business? Differentiate between domestic and

international business.

2. Examine the impact of globalisation on financial markets citing some recent

data and statistics.

3. Has globalisation led to increase in inequality and poverty? Critically

examine.

4. Explain the different stages of globalisation.

5. Discuss the problems and prospects of globalisation of Indian business.

6. Examine the pros and cons of globalisation with special reference to India.

7. Explain different modes of entry in international trade with examples.

8. What are the drivers of international trade? explain.

9. Discuss the risks and issues in global business.

10. Describe the objectives of international business.

11. What do you mean by international business environment? Explain internal
and external business environment.

12. How economic environment affects the international business? Explain

citing real examples.

13. Technology has become very important nowadays. How technological

environment affects business decisions in global world?

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