INTERNATIONAL BUSINESS MANAGEMENT
LESSON 2:
WHY GO INTERNATIONAL?
We have discussed the nature of international business and the
precautions that the multinational companies should take while
operating in foreign countries. The basic question of “why do the
Business firms of a country go to other countywide?” might have
been in your minds. Therefore, we answer this question, before
proceeding further.
To achieve Higher Rate of Profits: As we have discussed in
various courses/subjects like Principles and Practice of Manage-
ment, Managerial Economics and Financial Management that
the basic objective of the business firms is to earn profits.
When the domestic markets do not promise a higher rate of
profits, business firms search for foreign markets, which
promise for higher rate of profits. For example, Hewlett Packard
earned 85.4% of its profits from the foreign markets compared
to that of domestic markets in 1994. Apple earned US $ 390
million as net profit from the foreign markets and only US $
310 millions as net profit from its domestic market in 1994.
Expanding the Production Capacities beyond the Demand of
the Domestic Country: Some of the domestic companies
expanded their production capacities more than the demand for
the product in the domestic countries. These companies, in
such cases, are forced to sell their excess production in foreign
developed countries. Toyota of Japan is an example. (See Box 1.
3 for Economies of Developed Countries).
Article 2.1
The Economies of Developed Countries
United States
In the US, the rate of growth of Gross Domestic Product
(GDP) rose by 2.6 per cent in the second quarter of 1996 over
the corresponding period of 1995 much higher than the first
quarter growth rate of 1.7 per cent. The rate of growth of
personal consumption rose strongly throughout the first half
of 1996 overshadowing the economy’s performance on the
business investment front, which slowed between April and
June 1996. Buoyant consumer demand has prompted further
speculation about the future course of the inflation curve and
shortterm interest rates.
Recent data present a contradictory picture. While some surveys
point to a stronger rate of growth of industrial production in
the third quarter of 1996, the growth rate of durable goods
orders fell by 0.8 per cent between May and June 1996. Besides,
statements by Alan Greenspan, the Chairman of the Federal
Reserve, confirm a weaker growth prognosis. With growth
showing signs of easing, there is a likelihood that interest rates
will be on hold. But Consensus Inc. predicts that 10-year
treasury bond rates will increase from the 1995 level of 5.6 per
cent to 6.7 per cent by November 1996,
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Canada
The Canadian economy’s growth rate is like ly to pick up in
1996. An index of business confidence shows higher real
spending on machinery and equipment in the first half of 1996,
reflecting a high level of producer confidence. On the consump-
tion side, however, the picture is less promising. Low consumer
demand has been strengthened by a high unemployment rate
of 9.8 per cent, high household debt levels, and consumer
worries over job security. Even so, retail sales are expected to
pick up soon. So, the forecast for personal expenditure growth,
rather than being downgraded, remains unchanged.
But the low spending level has helped in restraining inflation.
Consumer prices rose by only 13 per cent in the first half of’
1996 well within the central bank’s target range of between 1
and 3 per cent allowing the fifth round of interest rate cuts in
1996 independent of US economic conditions. As the data
available so far suggest that an upturn on the industrial front is
Linder way. Also, the trade surplus is favourable as strong net
external demand enhanced by the low Canadian dollar, low
domestic demand, and a stronger US growth rate led to a
Canadian $4.10 billion trade surplus in May 1996.
Japan
In recent months, the prospects of a sustained recovery in
Japan have improved although the Economic Planning Agency
has warned that the recovery ‘is still fragile, and that expansion-
ary trends have yet to be confirmed. Recently, there have been
increasing signs of an upturn in private consumption, led by
Improving job opportunities and rising wages. Retail sales
rebounded in June 1996, rising by 2 per cent over June 1995,
after posting declines in two previous months. Consensus Inc.’s
forecasts for private consumption growth in both 1996 and
1997 have been upgraded to 3.5 and 2.6 per cent respectively.
On the supply side, however, the picture is less optimistic, with
another fall industrial output growth indicating that inventories
are still being worked off. Meanwhile, utility costs rose by 1.3
per cent while food prices jumped by 6.8 per cent in July 1996.
However, Consensus Inc. forecasts negligible inflation pressure
in 1996 although more significant price rises are expected in
1997, Although the trade surplus narrowed to Y3 trillion in the
first, half of 1996, the pace of contraction is slowing due to
Japan’s higher competitiveness following the depreciation of
the yen last year
Australia
Despite stronger thanexpected economic growth in the first
quarter of 1996, the “Reserve Bank of Australia (RBOA)
lowered the cash rate by 0.5 per cent to 7 per cent in endJuly
1996. The governor of the RBOA said that the lower, and
declining, rate of growth o f wages suggested that economic
growth had fallen below its potential levels. Moreover, recent
indicators of consumer spending point to a softer private
consumption growth rate in the second quarter of 1996 while
excess capacity and high inventories suggest that industrial
Production growth is likely to remain depressed over the next
few months.
After a peak of 5.1 per cent in the last quarter of 1995, inflation
declined to 3.4 per cent in the first half of 1996. This trend has
also been reinforced by the weakening growth of weekly
earnings, which averaged 3.7 per cent in the first six months of
1996. However, an upward pressure on wages is building,
which will determine the course of both inflation and monetary
policy in the short run. In fact, Consensus Inc, expects that the
90day ‘bank bill rate will fall to 6.8 per cent over the next three
months.
Severe Competition in the Home Country: The countries
oriented towards market economies since 1960s had severe
competition from other business firms in the home countries.
The weak companies, which could not meet the competition of
the strong companies in the domestic country, started entering
the markets of the 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 compa-
nies internationalise their operations. For example, most of the
Japanese automobile and electronic firms entered US, Europe
and even African markets due to the smaller size of the home
market. ITC entered the European market due to the lower
purchasing power of the Indians with regard to high quality
cigarettes.
Similarly, the mere six million population of Switzerland is the
reason for Ciba Geigy to internationalise its operations. In fact,
this company was forced to concentrate on global market and
establish manufacturing facilities in foreign countries.
Political Stability vs Political Instability: Political stability does
not simply mean that continuation of the same party in power,
but it does mean the continuation of the same policies of the
Government for a quite longer period. It is viewed that USA is
a politically stable country. Similarly, UK, France, Germany, Italy
and Japan are also politically stable countries.
Most of the African countries and some of the Asian countries
like Malaysia, Indonesia, Pakistan and India are politically
instable countries.
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 their
operations from politically instable countries into politically
stable countries.
Availability of Technology and
Managerial Competence:
Availability of advanced technology and managerial competence
in some countries act as pulling factors for business firms from
the home country. The developed countries due to these
reasons attract companies from the developing world. In fact,
American companies, in recent years, depend on Japanese
companies for technology and management expertise.’ (Box 1.4
presents information regarding latest technology in computers).
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Article 2.2
INTERNATIONAL BUSINESS MANAGEMENT
Ibm Gives Fastest Computer to the World
International Business Machines Corporation unveiled the
fastest computer in the world, which the US government will
use to simulate nuclear weapons tests.
The supercomputer, able to process more in a second than one
person with a calculator could do in 10 million years, was made
for the US department of energy’s Accelerated Strategic Com-
puting Initiative (ASCI.). The system could ease congressional
opposition to the United States signing the Comprehensive
Test Ban Treaty, banning all actual nuclear weapons testing
worldwide.
“Without underground testing, we need simulations to make
sure the stockpile is safe, reliable and operational,” said David
Cooper, a member of the President’s Council on Computing
and chief information officer of Lawrence Livermore Lab in
California, where the system will be run. Called ASCI, White
super computer will churn the factors involved in a nuclear
detonation, including the weapon’s age and design. This could
eventually allow the government to manage its entire stockpile
of nuclear weapons without any real nuclear tests, Cooper said.
The US Senate last year filed to ratify the test ban treaty, insisting
on the nation’s right to continue testing nuclear weapons
underground.
“If you polled the weapons designers right now, they would
say that testing is still more effective,” Cooper said. The new
supercomputer is a major step toward full simulation but is not
yet capable of testing the nuclear weapons stockpile to stan-
dards set by experts. A system that could replace actual nuclear
tests must have a computing capability of 100 teraflops, or
trillions of operations per second, versus the ASCI White
computing capacity as tested by IMB of 12.3 teraflops, Cooper
said “We’re still on timescale to do by 2004,” he added. The
system contains 8,192 copper microprocessors and is 1,000
times more powerful than its chess playing predecessor ‘Deep
Blue,’ which defeated World Champion Gary Kasparov in 1997.
IBM Is selling the system, which will take up the floor space
equivalent to two basketball courts and weighs as much as 17
fullsized elephants to the DOE for $110 million.
But designing the most powerful computer in the world has
other pay-offs of IBM, including bragging rights that could
allow it to take a greater share in the supercomputer market, as
well as the use of the advanced technology in its lower-level
computer products.
“We’re seeing more and more that deep computing will become
a critical element In how real business is run every day, and that
It’s not just in the territory of the propeller heads,” said
Nicholas Donofrio, IBM senior vicepresident technology and
manufacturing.
High Cost of Transportation:
Initially companies enter foreign countries through their
marketing operations. At this stage, the companies realise the
challenge from the domestic companies. Added to this, the
home companies enjoy higher profit margins whereas the
foreign firms suffer from lower profit margins. The major
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 factor for this situation is the cost of transportation of the
INTERNATIONAL BUSINESS MANAGEMENT
products.
Under such conditions, the foreign companies are inclined to
increase their profit margin by locating -their manufacturing
facilities in foreign countries where there is enough demand
either in one country or in a group of neighboring countries.
For example, Mobil, which was supplying the petroleum
products to Ethiopia, Kenya, Eritrea, Sudan etc. from its
refineries in Saudi Arabia, established its refinery facilities in
Eritrea in order to reduce the cost of transportation. Similarly,
Caterpillar located its manufacturing facilities at different centers
in order to reduce the cost of transportation. This company
produces highvalue added parts in limited locations and less
valued and noncritical components and assembles the final
products in a number of foreign 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 various foreign countries. Most
of the US based and European based companies located their
manufacturing facilities in Saudi Arabia, Bahrain, Qatar, Oman,
Iran and other Middle East countries due to the availability of
petroleum. Theses companies, thus, reduced the cost of
transportation.
Availability of Quality Human Resources at Less Cost :
This is a major factor, in recent times, for software, high
technology and telecommunication companies to locate their
operations in India. India is a major source for high quality and
low cost human resources unlike USA, developed European
countries and Japan. Importing human resources from India by
these firms is costly rather than locating their operations in
India. Hence these companies started their operations in India
and other similar countries.
To Avoid Tariffs and Import Quotas: It was quite common
before globalization that governments imposed tariffs or duty
on imports to protect the domestic company. Sometimes
Government also fixes import quotas in order to reduce the
competition to the domestic companies from the competent
foreign companies. These practices are prevalent not only in
developing countries but also in advanced countries.
For example, Japanese companies are competent competitors to
the US companies. USA imposed tariffs and quotas regarding
import of automobiles and electronics from Japan. Harley
Davidson of USA sought and got five years of tariffs protec-
tion from Japanese imports. Similarly, Japan places high tariffs
on imports of rice and other agricultural goods from USA.
o avoid high tariffs and quotas, companies prefer direct
investment to go globally. For example, companies like Sony,
Honda and Toyota preferred direct investment if] various
countries by establishing subsidiaries or through joint ventures
in various foreign countries including USA and India, Similarly,
General Electrical, and Whirlpool also have foreign subsidiaries.
Xerox, Canon, Phillips, Unilever, Lucky Gold Star, South
Korean Electronics Company, Pepsi, Coca Cola. Shell, Mobil etc.
established manufacturing facilities in various foreign countries
in order to avoid tariffs, import duties and quotas.
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Having discussed the need for international business, we shall
discus the basis for international business.
Stages of Internationalisation
The internationalization process generally includes fives stages.
Viz domestic company, international company, multinational
company, global company and transnational company. Now, we
will study stage of internationalization in detail.
Stage 1: Domestic Company
Domestic company limits its operations, mission and vision to
the national political boundaries. These companies focus its
view on the domestic market opportunities, domestic suppliers,
domestic financial companies, domestic customers etc.
These companies analyze the national environment of the
country, formulate the strategies to exploit the opportunities
offered by the environment. The domestic companies’ uncon-
scious motto is that, “if its not happening in the home country,
it is not happening”
The domestic company never thinks of growing globally. If it
grows, beyond its present capacity, the company selects the
diversification strategy of entering into new domestic markets,
new products, technology etc. The domestic company does not
select the strategy of expansion/penetrating into the interna-
tional markets.
Stage 2: International Company
Some of the domestic companies, which grow beyond their
production and/or domestic marketing capacities, think of
internationalizing their operations. Those companies who
decide to exploit the opportunities outside the domestic
country are the stage two companies. These companies remain
ethnocentric or domestic country oriented. These companies
believe that the practices adopted in domestic business, the
people and products of domestic business are superior to those
of other countries. The focus of these companies is domestic
but extends the wings to the foreign countries. Markets and
extend the same domestic operations into foreign markets. In
other words, these companies extend the domestic product,
domestic price, promotion and other business practices to the
foreign markets. Normally internationalization process of most
of the global companies starts with this stage two process.
Most of the companies following this strategy due to limited
resources and also to learn from the foreign markets gradually
before becoming a global company without much risk.
The international company holds the marketing mix constant
and extends the operations to new countries. Thus the
international company extends the domestic country marketing
mix and business model and practices to foreign countries.
Stage: 3 Multinational Company
Sooner or later, the international companies learn that the
extension strategy (i.e., extending the domestic product, price
and promotion to foreign markets) will not work. The best
example is that Toyota exported Toyopet cars produced for
Japan in Japan to USA in 1957. Toyopet was not successful in
USA. Toyota could not sell these cars in USA as they were over
priced, underpowered and built like tanks. Thus these cars were
not suitable for the US markets. The unsold cars were shipped
back to Japan.
Toyota took this failure as a rich learning experience and as a
source of invaluable intelligence but not as failure. Toyota,
based on this experience designed new models of cars suitable
for the US market. The international companies turn into
multinational companies when they start responding to the
specific needs of the different country markets regarding
product, price and promotion.
This statue of multinational company is also referred to as
multidomestic. Multidomestic company formulates different
strategies for different markets; thus, the orientation shifts from
ethnocentric to polycentric. Under polycentric orientation the offices
/branches/subsidiaries of a multinational company work like
domestic company in each country where they operate with
distinct policies and strategies suitable to that country con-
cerned. Thus they operate like a domestic company of the
country concerned in each of their markets.
Philips of Netherlands was a multidomestic company of this stage
during 1960s. It used to have autonomous national organizations and
formulate the strategies separately for each country. Its strategy did
work effectively until the Japanese companies and Matsushita started
competing with this company based oil global strategy. Global strategy
was based on focusing the company resources to serve tile world market.
Philips strategy was to work like a domestic company, and
produce a number of models of the product consequently it
increased the cost of production and price of the product. But
the Matsushita’s strategy was to give the value, quality, design
and low price to the customer. Philips lost its market share as
Matsushita offered more value to the customer
Consequently Philips changed its strategy and created “industry
main groups” in Netherlands which are responsible for
formulating a global strategy for producing, marketing and R &
D.
Stage 4: Global Company
A global company is the one, which has either global marketing
strategy or a global strategy.
Global company either produces in home country or in a single
country and focuses on marketing these products globally, or
produces the products globally and focuses on marketing these
products domestically.
Harley designs and produces super heavy weight motorcycles in
USA and markets in the global market. Similarly, Dr. Reddy’s
Lab designs and produces drugs in India and markets globally.
Thus Harley and Dr. Reddy’s Lab are examples of global
marketing focus. Gap procures products in the global countries
and markets the products in its retail organization in USA.
Thus gap is an example for global sourcing company.
Harley Davidson designs and produces in USA and gains
competitive advantage as Mercedes in Germany. The Gap
understands the US consumer and got competitive advantage.
Stage 5:’Fransnational Company
Transnational company produces, markets, invests and operates
across the world. It is an integrated global enterprise which links
global resources with global markets at profit. There is no pure
transnational corporation. However, most of the transnational
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companies satisfy many of the characteristics of a global
INTERNATIONAL BUSINESS MANAGEMENT
corporation.
Characteristics of a Transnational Company
The characteristics of a transnational company include: geocen-
tric orientation, scanning or information acquisition, longrun
visions etc. We discuss these characteristics in detail.
(i)Geocentric Orientation: A transnational company is
geocentric in its orientation. This company thinks globally and
acts locally. This company adopts global strategy but allows
value addition to the customer of a domestic country. This
company allows adaptation to add value to its global offer.
Table 1.1 presents stages of internationalization.
The assets of a transnational company are distributed through-
out the world, independent and specialized. The R & D facilities
of a transnational company are spread in many countries, but
specialized in each Country based on the local needs and
integrated in world R & D project. Similarly, the production
facilities are spread but specialized and integrated.
In case of Caterpillar, manufacturing and assembly facilities are
located in many countries. Components are shipped for
assembly and the assembled product is shipped to the place o f
the customer.
Units of the transnational corporation in different countries
create and develop the knowledge in all functions and share
among them. Thus knowledge and experience is shared jointly.
Transnational gains power and competitive advantage by
developing and sharing knowledge and experience. of the
knowledge among all, Colgate operating companies across
globe is an example here.
(ii) Scanning or information Acquisition: Transnational
companies collect the data and information worldwide. These
companies scan the environmental information regarding
economic environment, political environment, social and
cultural environment and technological environment. These
companies collect and scan the information regardless geo-
graphical and national boundaries.
(iii) Vision and Aspirations: The vision and aspiration of
transnational companies are global, global markets, global
customers and grow ahead of other global/transnational
companies
(iv) Geographic Scope: The transnational companies scan the
global data and information. by doing so, they analyze the
global opportunities regarding the availability of resources,
customers, markets, technology, research and development etc.
Similarly, they also analyze the global challenge and threats like
competition from the other global companies, local companies
of host countries, political uncertainties and the like. They
formulate global strategy. Thus the geographic scope of a
transnational company is not limited to certain countries in
analyzing opportunities, threats and formulating strategies.
(v) Operating Style: Key operations of a transnational are
globalize. The transnational companies globalize the functions
like R & D, product development, placing key human resources,
Procurement of high valued material etc. For example, the R
&D activity of Proctor & Gamble, and key human resource
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 activity of Colgate are the joint and shared activity of the units Unfortunate you cannot find good foreigners who are willing to
INTERNATIONAL BUSINESS MANAGEMENT

of these companies in various countries. . live in the United States, were out headquarters is located.
vi) Adaptation: Global and transnational companies adapt American executives are more mobile. In addition, American
their products, marketing strategic and other functional have the drive and initiate we like. In fact, the European
strategies to the environmental factors of the market concerned, nationals would prefer to report to an American rather than to
For example, Mercedes Benz is a super luxury car in North so other European”.
America, luxury automobile in Germany, standard taxi in Company C: “We are a multinational firm. Our product
Europe. division executives have world w profit responsibility. As our
(vii) Extensions: Some products do not require any change organizational chart shows, the United States is just one region
when they are marketed in other countries. Their market is just o par with Europe, Latin America, Africa, etc. in each division”.
extension. For example, Casio calculators of Japan, Hero pens of The executives from company C go on to explain, “the
China, and BIC’s line of pens, butane lighters and razors. worldwide product division cone is rather difficult to imple-
ment. The senior executives in charge of these divisions have Ii
(viii) Creation through Extension: Transnational companies
overseas experience. They have been promoted from domestic
create the global brand through extending the product to the
posts and tend to view fore consumer needs as really basically
new market. Rothmans Cigarette extended its product to many
the same as ours. Also, product division executives tend focus
European countries and African countries and created it as
on the domestic market because the domestic market is larger
global and national basis
and generates more revenue than the fragmented foreign
(ix) Human Resource Management Policy: The markets. The rewards are for global performance, but strategy is
transnational company’s human resource policy is not restricted focus on domestic. Most of our senior executives simply do
by national political or legal constraints. It selects the best not understand what happens overseas and really do not trust
human resources and develops them regardless of nationality, foreign executives, even those in key positions”.
ethnic group etc. But the international company reserves the top
Company D (nonAmerican) : ‘We are a multinational firm.
and key positions for nationals
We have at least 18 nationalities represented at our headquarters.
(x) Purchasing: Transnational company procures world-class Most senor executives speak at least two languages. About 30
material from the best source across the globe. percent of our staff at headquarters is foreigners.
Tutorial He continues by explaining “since the voting shareholders must
Questions for Discussion by law come from the home country, the home country’s
interest must be given careful consideration. But we are proud
Q:1 what are the various reasons which motivates the domestic
of our nationality; we should not be ashamed of it. Infact,
firms to go for international business?
many times we have been reluctant to use homecountry ideas
Q:2 what are the stages of internationalization? overseas, to our detriment, especially in our U.S. Subsidiary. Our
Tutorial country produces good executives’ who tend to stay with us a
long time. It is harder to keep executives from the United
Case Discussion States.
Which Company is Truly Multinational? Questions for Discussion
Four senior executives of the world’s largest firms with 1. Which company is truly multinational?
extensive holdings outside the host country speak.
2. What are the attributes of a truly multinational
Company A: “We are a multinational firm. We distribute our company?
products in about 100 countries We manufacture in over 17
3. Why quibble about how multinational a company is?
countries and do research and development in three countries.
We look at all new investment projects both domestic and
overseas using exactly the same criteria”.
The execution from company A continues, “of course most of
the key posts in our subsidiaries are held by homecountry
nationals. Whenever replacements for these men are sought, it
is practice, if not the policy, to look next to you at the head
office and pick someone (usually a ho country national) you
know and trust”.
Company B. “We are a multinational firm. Only 1 percent of
the personnel in our affiliate companies are nonnational. Most
of these are US executives in temporary assignments. In major
markets, the affiliates managing director is of the local national-
ity”. He continues, “Of course there are very few nonAmericans
in the key posts at headquarter. The few we have are so Ameri-
canized that we usually do not notice their nationality.

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