INTERNATIONAL

BUSINESS
MANAGEMENT
MADE BY
JYOTSNA
ASSISTANT PROFESSOR
 UNIT 1
Overview: International Business-
Introduction,Concept,Definition,Scope,trends,Challenges and Opportunities; Nature,
Meaning and Importance of International Competitive Advantage ,Mutinational View
of Competitiveness.
Financial Perspectives: International Monetary Systems and Financial Markets,
IMF, World Bank, IBRD, IFC, IDA, Existing International Arrangements;
Globalisation and Foreign Investment-Introduction FDI, national FDI Policy
Framework, FPI.
 EVOLUTION OF INTERNATIONAL
BUSINESS (P.SUBBA RAO)
• First phase of globalisation in 1870
• Ended with World War I driven by Industrial Revolution in the UK, Germany and
USA.
• Felt need for International Cooperation (IMF & IBRD)
• Prolonged recession before World War II
• GATT by 23 countries
• GATT------WTO
• International Trade----International Marketing---International Business
 WHY INTERNATIONAL BUSINESS?

1. To export surplus stock

2. To explore growth opportunities
3. To increase profitability
4. To achieve economies of scale
5. To generate employment
6. To raise standards of living
 Concept and Definition of International
Business
• International business refers to business across countries. It includes any type of
business activity that crosses national boundaries. International business
involves transfer of goods, services, capital , labour, knowledge and information
across national boundaries with a view to satisfy the needs of individuals,
organisations and governments.
• International business is the study of transactions taking place across national
borders for the purpose of satisfying the needs of individuals and organisations.
These economic transactions consist of trade, as in the case of exporting or
importing and direct investment of funds in overseas operations.
 Features/Characteristics of International
Business
1.International business relates to transactions involving more than one country.
2. To satisfy the needs of customers who may be individuals, organisations and
governments.
3. The scope of IB is very vast. It includes not only exchange of goods and services but also
transfer of knowledge, skills, people technology capital, information and other resources.
4.Declining trade barriers
5.Growth in FDI
6.Growth of MNCs
 STAGES/SCOPE OF
INTERNATIONALIZATION (P.SUBBA RAO)
1.Domestic Company:
Limits operation, Vision, Mission to National Political boundaries.
2.International Company:
Focus on domestic practices but extent wings to foreign countries.
3.Multinational Company
Different strategy for different market.
4.Global Company
Either produce in one country and market globally or produce globally and market domestically.
5.Transnational Company
Produces, markets, invests and operates across the world.
 INTERNATIONAL BUSINESS
APPROACHES
1. Ethnocentric Approach
The domestic companies normally formulate their strategies, their product design and
their operations towards the national markets, customers and competitors. But the
excessive production more than the demand for the product, either due to competition
or due to changes in customer preferences push the company to export the excessive
production to foreign countries.
The company exports the same product designed for domestic markets to foreign
countries under this approach. Thus, maintenance of domestic approach towards IB is
called ethnocentric approach.
2. Polycentric Approach

The domestic companies which are exporting to a foreign countries using

the ethnocentric approach find at the later stage that the foreign markets
need an altogether different approach.
Then, the company establishes a foreign subsidiary company and
decentralises all the operations and delegates decision-making and policy
making authority to its executives. Company appoints the key personnel
from the home country and all other vacancies are filled by the people of the
host country.
3.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 example Asian
environment like laws, culture, policies etc.) for formulating policies and
strategies.
However, it markets more or less the same product designed under
polycentric approach in other countries of the region, but with different
market strategies.
4.Geocentric Approach

Under this approach, the entire world is just like a single country for the
company. They select the employees from the entire globe and operate with
a number of subsidiaries. The headquarters coordinate the activities of the
subsidiaries.
Each subsidiary functions like an independent and autonomous company in
formulating policies, strategies, product design, human resource policies,
operations
TRENDS IN INTERNATIONAL BUSINESS

1. World trade has been growing faster than world output.

2. International Trade in service has been increasing fast.
3.Global trade and investment have been tying economies together.
4. Global capital flows are shaping international trade and the world
economy.
5.The role of WTO and other international bodies in international business
has been growing.
 INTERNATIONAL BUSINESS
ENVIRONMENT
• Environment of an international firm consists of micro and macro factors.
Micro or direct action environment comprises all stakeholders influencing
a particular firm. Shareholders, creditors, bankers and financial
institutions, competitors, suppliers, market intermediaries and customers
are these stakeholders.
• Macro environment includes economic, social and cultural, technological,
political, international and natural forces.(STEPIN)
 OPPORTUNITIES FOR INTERNATIONAL
BUSINESS
1. Policies, laws and regulations of national governments are becoming
increasingly liberal to cross border transactions.
2. Nations particularly developing countries are offering incentives to attract FDI.
3. Potential rates of return in foreign countries are increasing.
4. Political stability is increasing in many countries. Political risk for foreign firms
is declining.
5. Good quality raw materials and labour at comparatively lower costs are
available in several developing countries.
 CHALLENGES IN INTERNATIONAL
BUSINESS
1.Language: English is a major language; there are still a large number of ‘non-language’
speaking countries. IB should train their employees in the local language of host country.
2.Long distance: Due to greater geographical distances between countries the cost and
time involved in transport are high.
3.Differences in Natural Resources: Every country is rich in some natural resources and
poor in others. For example, countries in the Middle East are rich in oil resources but
suffer from shortage of food grains. Therefore, they export oil and import food grains.
Geographical and climatic conditions also lead to international division of labour or
specialisation.
 CONTINUATION
4. Laws and Regulations: International business houses have to follow the rules and
regulations of several countries. These rules and regulations are not uniform but
differ from country to country.
5.Different currencies: Each country has its own currency. In International business
one currency has to be exchanged for another. The exchange rate keeps on fluctuating
from time to time. These fluctuations create a unique risk, called exchange risk for
international business firms.
6.Varying Trade Policies
7.Different market conditions
 INTERNATIONAL COMPETITIVE
ADVANTAGE
INTRODUCTION:
Competitive advantage involves communicating a greater perceived value to a target market
than its competitors can provide. This can be achieved through many avenues including
offering a better-quality product or service, lowering prices and increasing marketing efforts.
MEANING:
A competitive advantage arises when a firm is able to give its customers the same thing as its
rivals but with more benefits, the same thing but at lower cost, or both. Coca-Cola’s
competitive advantage, for example, could be said to arise due to its supreme brand
recognition.
 SOURCES OF GLOBAL COMPETITIVE
ADVANTAGE
1. Conventional Comparative Advantage: A country which has
significant advantage in cost or quality of an input used in the production
of a product is likely to be the centre of production.
2. Global experience: A global competitor can have a cost advantage by
selling similar varieties of the product in several national markets. For
example, Toyota has gained a commanding position in the manufacture
of light duty lift tracks. Global competition can allow faster learning.
CONTINUE:
3. Product Differentiation: Global competition can provide an edge in
reputation and credibility to a firm, particularly in technologically
progressive industries. For example, in the high fashion cosmetics industry a
firm having presence in Paris, London and New York can create an image
for competing successfully in Japan or China.
4.Technological innovation: A firm that can apply proprietary technology
in several national markets can gain a cost advantage. Global firms in
computers, semi conductors, aircrafts and turbines has this advantage.
 STRATEGIES FOR ACHIEVING
COMPETITIVE ADVANTAGE
• Overall cost leadership: A firm that can produce the product/service at a
low cost and operate with lower cost than competitors can earn above
average returns. Its cost position gives the firm a defense against rivalry
from competitors.
• Differentiation: In this strategy the firms offers a product/service in a
unique way which buyers perceive as important. There can be different
form of differentiation: design or brand image (Mercedes in
automobile ),product customer service, dealer network and so on.
 TO BE CONTINUED:
For example, Maruti Suzuki is known not only by its dealer network and
excellent availability of spare parts but also for its high quality products and
after sale services. In order to achieve differentiation, a firm might have to
sacrifice cost advantage.
Focus : Under this strategy, the firms selects a segment within the industry
and tailors its product/service to serve that segment exclusively. It is not
sufficiently merely to target certain customers. The product must provide an
added value through cost or differentiation that the rivals can not offer.
 THE VALUE CHAIN ANALYSIS
• Michael Porter’s value chain consists of two types of activities:
1.Primary activities: These activities in-bound logistics (storing, receiving,
packaging etc.),operations (transforming inputs into outputs),outbound logistics (order
processing, shipping, vehicle scheduling),marketing and sales (advertising, channel
selection, channel relations),and service (after sale service, parts supply and repairs.)
2.Supporting activities: These include procurement (acquiring inputs),technology
and development (engineering and R&D),human resource management (hiring,
training, compensation etc.) and firm infrastructure (accounting, finance, general
management, legal and other systems.
 THE COMPETITIVE ADVANTAGE OF
NATIONS
According to Michael Porter, a nation’s ability to upgrade its competitive
advantage to the next level of productivity and technology is the Key to
international success. To explain his argument, he has developed a Diamond
of National Competitive Advantage consisting of four variables:
1.Factor conditions: A country may have a competitive advantage due to its
natural resource, education system and infrastructure. For example, India has
a competitive advantage due to its young population and trained manpower.
2.Demand conditions: The nature and size of domestic demand can provide a competitive
advantage. India's mass-demand and mass-market is forcing telecom firms to reduce prices
and improve quality of service.
3.Related and supported Industries: Supply and other related industries enable an
industry to be competitive. For example, Maruti Udyog gained a competitive advantage
due to its vendor network.
4.Company strategy, structure and Rivalry: How businesses are managed and controlled
can affect a nation’s competitive advantage. For example, the domestic rivalry between
Japanese firms has been the key to Japan’s success in electronics and auto mobiles.
Two other factors, namely Government and chance also influence business
success, Government can influence an industry’s structure through regulations For
example, economic liberalisation changed the structure of banking and insurance
in India. Chance events such as war can also shape the structure of an industry.
Porter suggests that business firms should focus on the goals of investors,
managers and employees. On the other hand, the government should focus on
corporate governance, permit banks to own equity shares in companies to promote
long term relationships, prohibits mergers and alliances between leading
competitors, and environmental protection and energy efficiency.
 International Monetary System
• Since the nineties there has been an increasing deregulation of banking and other
financial services all over the world. Liberalisation and rapid progress of
information technology have led to global finance. This has created new
opportunities as well as new risks. In order to sustain the international monetary
and financial systems the policy makers must ensure broad based division of the
benefits among countries and people. The number of international transactions
have increased tremendously with rapid growth of trade and investment. Ways and
means must be created to ensure that these transactions are carried on smoothly. An
international monetary system has been developed for this purpose.
 Concept of International Monetary
System
International Monetary system means the body of rules and conventions
which have been developed for conducting international financial
transactions and which deal with imbalances in international payments.
IMS is concerned with determination of exchange rates between different
national currencies, provision of international liquidity and the role of
capital markets of different countries. The system influence the sources of
finance available to international firms and their countries. It also determines
how exchange rates are determined by government and market forces.
• Until 1914 the international monetary system was based on the classical gold
standard. The governments of developed countries like the UK ,the USA and
France were committed to convert paper money for gold at a fixed rate. The
UK was the anchor of this system.
• Relations between different countries strained due to World War-I. Many of
them imposed restrictions on export of gold. By the time the war ended, gold
standard was virtually dead. The USA and the UK returned to the gold standard
in 1919 and 1925 respectively. But the international monetary system broke
down due to various problems.
 ORIGIN OF THE IMF
• In order to solve the monetary problems and to increase international liquidity
International monetary and Financial Conference was held at Bretton Woods,
USA in July 1944.It was decided to establish the IMF and the World Bank.
This system came to be known as Bretton Woods System. The IMF began its
operation on March, 1947 and the first drawing was made by France on May
8,1947.The IMF lays down ground rules for the conduct of international
finance. It also provides financial assistance for overcoming short term
deficits in balance of payment. The IMF suggests several measures to help a
country which is facing serious financial crisis. This measures include:
1.Reducing government expenditure, cutting subsidies and raising taxes to
reduce deficit.
2.Reduction on government borrowings.
3.Reduce tariffs and non-tariff barriers to foreign trade.
4.Devaluation of the national currency.
 Bretton Woods System of Exchange Rates
• The demise of the gold standard led to large scale oscillation in the
exchange rate. It required the creation of an international body that could
help create an orderly exchange rate regime and could have surveillance
over it. The Bretton Woods Conference of July 1944 resolved to create the
IMF for this purpose. The IMF was established in 1945. A new system of
exchange rate evolved. Since this new system was the aftermath of the
Bretton Woods Conference, it was known as the Bretton Woods system of
exchange rates.
 International Financial Market
• International Financial Market can be divided into 2 segments. One is
the international money market represented by the flow of short terms
funds.
• International capital market forms the other segment where medium
and long term funds flow. There are a number of agencies and instruments
through which funds move to resource needy institution or firms.
A. Official Sources:
1.Multilateral Agencies:
1.International Development Banks such as World Bank, IFC and others.
2.Regional Development Banks such as Asian Development Bank etc.
B. Non-Governmental Agencies:
1.Borrowing and lending Market Involving International Banks.
2.Securities market
C. Multilateral Agencies: IBRD,IDA,IFC and MIGA-together are known
as the World Bank Group. The 1960s were marked with the establishment of
regional development banks in Latin America, Africa and Asia. The Asian
Development Bank, meant for the development of the Asian region, began
operations from 1967.
D. Bilateral Agencies: Different governments joined hands with private
agencies and the exports credits came to form a sizeable part of the bilateral
assistance programme.
E. International Banks:
Euro Banks: Euro Banks deal with both residents and non-residents. They
essentially deal in any currency other than currency of the host country. For
example if a Euro Bank is located in London, it will deal in any currency other
than the British Pound. The deposits and loans of the Euro Bank are remunerated
at the interest rate set by the market forces operating in the euro currency market
and not by the interest rate prevailing among the domestic banks in the host
country. Euro banks are free from the rules and regulations of the host government
as they are concerned with the movement of funds of the foreign currency.
 Globalisation
• Meaning of Globalisation
Globalisation means integration of the economy of a country with the world
economy. It refers to interdependence of national economies in Trade,
finance and macroeconomic policy.
According to IMF globalisation is “the process through which an
increasingly free flow of ideas, people, goods, services and capital leads to
the integration of economies and societies.
 Features of Globalisation
1.Reduction of trade barriers so as to ensure free flow of goods and services across
national boundaries.
2.Creation of an environment which permits free flow of capital, technology and
labour between countries.
3.Sourcing of factors of production from any part of the globe.
4.Establishment of manufacturing and marketing facilities in any part of the world.
5.Viewing the entire world as a single market.
 Rationale/Advantages of Globalisation
1.Cost Reduction
2.Global Learning
3.Rapid Industrialisation
4.Better allocation of Resources
5.Reduction in Poverty.
6.Employment generation
7.Balanced development
8.Better quality of life
 Disadvantages of Globalisation
1.Threat to Domestic Industry
2.Unemployment
3.Exploitation of Labour
4.Overuse of Natural Resources
 Impact of Globalisation on International
Business
1.Globalisation of markets
2.Globalisation of Production
3.Globalisation of Investment
4.Globalisation of Technology
Globalization and Foreign Direct Investment

• Globalization of investment refers to investment of capital by a global company

in any part of the world. A global company conducts the assessment of the
financial feasibility of new projects in different countries of the world and
invests capital in that country where it is relatively more profitable. Globalization
of investment is also known as Foreign Direct Investment (FDI).
• FDI occurs when a firm invests directly in new facilties to produce and/or
market a product or service in a foreign country. Coca-Cola acquired a number of
bottling companies throughout India by investing the capital directly.