INTERNATIONAL BUSINESS

Business:
James Stephenson says that:
Every human activity which is engaged in for the sake of earning profit
may be called business.

International business:
Transactions across the borders to satisfy the individuals, organizations
and due to some other reasons.
These reasons are foreign exchange, foreign currency, enhancing
organization network, alternative process, surplus and economy of scale.
Economy of scale: is to minimize cost due to large scale production.

Difference between international and domestic business:

Culture, Level of competition, Market intelligence, Politics Government,
legal system, Technology, Logistics Media, Religion issue, Currencies,
Global standard, Resource advantage, Benefits.

No direct foreign marketing:

A company in this stage does not actively cultivate customers outside
national boundaries; however this companys products may reach foreign
markets. Sales may be made to trading companies as well as foreign
customers who come directly to the firm. Or products may reach foreign
markets via domestic wholesalers or distributors who sell abroad without
explicit encouragement or even knowledge of the producer. As companies
develop web sites on the internet, many receive orders from international
Web surfers. Often an unsolicited order from a foreign is what piques the
interest of a company to seek additional international sales.

Infrequent Foreign marketing:

Temporary surpluses caused by variations in production levels or demand
may result in infrequent marketing overseas. The surpluses are
characterized by their temporary nature; therefore sales to foreign
markets are made as goods are available, with little or no intention of
maintaining continuous market representation. As domestic demand
increases and absorbs surpluses, foreign sales activity is withdrawn. In
this stage, little or no change is seen in company organization or product
lines. However, few companies today fit this model because customers
around the world increasingly seek long term commercial relationships.
Further, evidence exists that financial returns from initial international
expansions are limited.
Benetton, one of the largest clothing manufacturers in Italy has a global
presence across 120 countries and more than 5,000 stores.
While it is initial few years of operation witnessed expansion within Italy,
the company ventured outside Italy for the first time in 1969 when it
opened its store in Paris.

Benetton entered India in 1991-92 as a joint venture with DCM Group, now
a 100 per cent subsidiary. Brand United Colors of Benetton is present
across 106 stores in 45 cities and brand Sisley was launched in India in
2006.

Regular Foreign marketing:

At this level, the firm has permanent productive capacity devoted to the
production of goods to be marketed in foreign markets. A firm may employ
foreign or domestic overseas intermediaries or it may have its own sales
force or sales subsidiaries in important markets. The primary focus of
operations and production is to service domestic market needs. However,
as overseas demand grows, production is allocated for foreign markets,
and products may be adapted to meet the needs of individual foreign
markets. Profit expectations from foreign markets move from being seen
as a bonus to regular domestic profits to a position in which the company
becomes dependent on foreign sales and profits to meet its goals.

Global marketing:
Marketers use many words when referring to the term international
marketing; they may use foreign marketing, multinational marketing, or
transnational marketing. They all basically imply marketing in more than
one country.
Global marketing is a newer term and most marketers agree that it has a
somewhat different meaning than the above words. The global marketer
"sells the same thing in the same way everywhere."23 Many feel that
segmenting markets on political boundaries and producing special
products for each country is cost inefficient. The global corporation views
the world as one market and sells a global product.

Major obstacles to internationalization

Following are the major obstacles to internationalization

Obstacles within the company:

Finances
Psychological: unknown environment
Self-Reference Criterion

Obstacles outside the company:

Government Barriers
Barriers imposed by International Competition

Self-Reference Criterion:

Conscious and unconscious reference to own national culture while

operating in the host country. (e.g. eye contact US-Japan)
To counter the impact of the self-reference criterion, the corporation
must select appropriate personnel for international assignments and
engage in sensitivity training.

Government Barriers:

Restriction placed on foreign corporations by imposing tariffs,

import quotas and other limitations, such as restrictive import
license awards.

Barriers imposed by International Competition:

Blocked channels of distribution
Exclusive retailer agreements
Cutting prices
Advertising blitzes
DRIVERS OF IM
Now a days many firms look beyond home country market to make sure
their growth, to recover investment cost, to get competitive advantages
such as low cost, to get maximum profit, to expand their market share, to
get cheap labor, to get quality raw material. For getting these advantages
firms have to become internationalize. Here are some drivers of IM
through which firms can go to international market from domestic market.
There are two major types of entry modes:
1) Non-equity mode, which includes export and contractual agreements,
2) Equity mode, which includes joint venture and wholly owned
subsidiaries.
The non-equity modes category includes export and contractual
agreements. The equity modes category includes joint venture and wholly
owned subsidiaries.
The market-entry technique that offers the lowest level of risk and the
least market control is export and import. The highest risk, but also the
highest market control and expected return on investment are connected
with direct investments that can be made as an acquisition (sometimes
called Brownfield) and Greenfield investments.
Modes of entry include:
Exporting
Direct export
Indirect export
Licensing

Franchising

Turnkey projects
Wholly owned subsidiaries (WOS) OR FDI

Joint venture
EXPORT:
Exporting is the process of selling of goods and services produced in one
country to other countries.
There are two types of exporting: direct and indirect.
Direct Exports:

Direct involvement means that the firm works with foreign customers or
markets with the opportunity to develop a relationship. Direct export
works the best if the volumes are small. Large volumes of export may
trigger protectionism. The main characteristic of direct exports entry
mode is that there are no intermediaries.
Advantages:
Control over selection of foreign markets and choice of foreign
representative companies
Good information feedback from target market, developing better
relationships with the buyers
Better protection of trademarks, patents, goodwill, and other
intangible property
Potentially greater sales, and therefore greater profit, than with
indirect exporting.
Disadvantages:
Higher start-up costs and higher risks as opposed to indirect
exporting
Requires higher investments of time, resources and personnel and
also organizational changes
Greater information requirements
Longer time-to-market as opposed to indirect exporting.
Indirect exports:
Indirect exports are the process of exporting through domestically based
export intermediaries. The exporter has no control over its products in the
foreign market and does not deal with foreign customer or market.
Advantages:
Fast market access
Concentration of resources towards production
Little or no financial commitment as the clients' exports usually
covers most expenses associated with international sales.
Low risk exists for companies who consider their domestic market to
be more important and for companies that are still developing their
R&D, marketing, and sales strategies.
Export management is outsourced, alleviating pressure from
management team
No direct handle of export processes.
Disadvantages:
Little or no control over distribution, sales, marketing, etc. as
opposed to direct exporting
Wrong choice of distributor, and by effect, market, may lead to
inadequate market feedback affecting the international success of
the company

Potentially lower sales as compared to direct exporting (although

low volume can be a key aspect of successfully exporting directly).
Export partners that incorrectly select a specific distributor/market
may hinder a firm's functional ability.
LICENSING:
Licensing is when a firm, called the licensor, leases the right to use its
intellectual propertytechnology, work methods, patents, copyrights,
brand names, or trademarksto another firm, called the licensee, in
return for a fee. The property licensed may include Patents, Trademarks,
Copyrights, Technology, Technical know-how, Specific business skills etc.
Advantages:
Obtain extra income for technical know-how and services
Reach new markets not accessible by export from existing facilities
Quickly expand without much risk and large capital investment
Pave the way for future investments in the market
Retain established markets closed by trade restrictions
Political risk is minimized as the licensee is usually 100% locally
owned
Is highly attractive for companies that are new in international
business.
Disadvantages:
Lower income than in other entry modes
Loss of control of the licensee manufacture and marketing
operations and practices leading to loss of quality
Risk of having the trademark and reputation ruined by an
incompetent partner
The foreign partner can also become a competitor by selling its
production in places where the parental company is already in.
FRANCHISING:
Under franchising, an independent organization called the franchisee
operates the business under the name of another company called the
franchisor. In such an arrangement the franchisee pays a fee to the
franchisor. Franchising is a form of Licensing but the Franchisor can
exercise more control over the Franchisee as compared to that in
Licensing.
Advantages:s
Low political risk
Low cost
Allows simultaneous expansion into different regions of the world
Well selected partners bring financial investment as well as
managerial capabilities to the operation.
Disadvantages:
Franchisees may turn into future competitors

Demand of franchisees may be scarce when starting to franchise a

company, which can lead to making agreements with the wrong
candidates
A wrong franchisee may ruin the companys name and reputation in
the market
Comparing to other modes such as exporting and even licensing,
international franchising requires a greater financial investment to
attract prospects and support and manage franchisees.
TURNKEY PROJECT:
A turnkey project refers to a project when clients pay contractors to
design and construct new facilities and train personnel. A turnkey project
is a way for a foreign company to export its process and technology to
other countries by building a plant in that country. Industrial companies
that specialize in complex production technologies normally use turnkey
projects as an entry strategy.
Advantages
Focus firms resources on its area of expertise
Avoid all long-term operational risks
Disadvantages
Financial risks
o Cost overruns
Construction risks
o Delays
o Problems with suppliers
WHOLLY OWNED SUBSIDIARIES (WOS) OR FDI:
A wholly owned subsidiary includes two types of strategies

Greenfield investment

Acquisitions
Greenfield investment:
Greenfield investment is the establishment of a new wholly owned
subsidiary. It is often complex and potentially costly, but it is able to
provide full control to the firm and has the most potential to provide
above average return. Greenfield investment is more likely preferred
where physical capital intensive plants are planned. This strategy is
attractive if there are no competitors to buy or the transfer competitive
advantages that consists of embedded competencies, skills, routines, and
culture. Greenfield investment is high risk due to the costs of establishing
a new business in a new country.
Acquisitions:
When one company takes over another and clearly established itself as
the new owner, the purchase is called an acquisition. HDFC Bank
acquisition of Centurion Bank of Punjab for $2.4 billion. Acquisition has
been increasing because it is a way to achieve greater power. The market

share usually is affected by market power. Therefore, many multinational

corporations apply acquisitions to achieve their greater market power
require buying a competitor, a supplier, a distributor, or a business in
highly related industry to allow exercise of a core competency and
capture competitive advantage in the market.
JOINT VENTURE:
A joint venture is an entity formed between two or more parties to
undertake economic activity together. The parties agree to create a new
entity by both contributing equity, and then they share in the revenues,
expenses, and control of the enterprise.
Advantages:

Benefit from local partners knowledge.

Shared costs/risks with partner.

Reduced political risk.

Disadvantages:

Risk giving control of technology to partner.

May not realize experience curve or location economies.

Shared ownership can lead to conflict.

INTERNATIONAL MARKETING TASK MODEL

The task of the international marketer is more complicated since he has to
deal with two levels of uncertainties instead of one. Such uncertainty is
created due to uncontrollable factors and each foreign country in which
the company operates adds its own unique set of uncontrollable factors.
This model includes:
Marketing controllable factors
Domestic uncontrollable factors
Foreign uncontrollable factors

Marketing controllable factors:

It includes 4 ps
Product
Price
Placement
Promotion
Product: include goods and services.
Price: Pricing includes discounts, allowances and incentives, and
strategies like penetration pricing or skimming.
Placement: Includes warehousing, fulfillment, electronic download,
shipping, middlemen.
Promotion: Includes advertising, copywriting, media selection, sales force,
personal and mass selling, sales promotion, positioning.

Domestic uncontrollable factors:

These include home country elements which can directly affect thesuccess
of a foreign venture and these factors are out of immediate control of the
marketer. These factors are as under:
Political decisions: involving domestic foreign policy Examples are that of
US restrictions of trade with countries like Libya, Iraq and South Africa,
due to so called support to terrorists in Libya and Iraq and due
to apartheid policies in South Africa.
Domestic economic climate: This has far reaching effects oncompetitive po
sition in foreign markets. The capacity to invest in plants and facilities are
directly affected with this variable, which could in turn create a positive or
negative effect on foreign trade.
Competition within home country: This can also have a profound effect
upon the international marketers task. Competition within their home
country affects the companys domestic as well as international plans.

Foreign uncontrollable factors:

Political/Legal forces: One example is that of China which hasmoved from
a communist legal system in which all business was done with the State,
to a commercial legal system. Another example is that of the Indian
Government, which in 1977 gave Coca Cola the choice of either revealing
its secret formula or leaving the country.
Economic forces: The local economic forces in the foreign country may
have strong influence on the currency value and repatriation.
Competitive forces: The nature of competition may vary fromcountry to
country and will have different responses, depending
ondeep rooted cultural factors to competition in terms of price,
distribution, advertising and sales promotion.
Level of Technology: There are vast differences that may existbetween
developed and underdeveloped countries. Technical expertise may not be
available at a level necessary for product support and for maintenance.
Structure of Distribution: The channels of distribution vary fromcountry to
country and there could even be state controls on distribution in some
countries.
Geography and infrastructure: The transportation and physicaldistribution
depends on these factors and this will also be different indifferent
countries.
Cultural forces: Each countrys culture is different and this couldaffect all t
he marketing variables like product design, brand name,logo, advertising
campaigns, sales promotions, pricing policies, price negotiations,
distribution networks and strategies, etc.

GLOBAL INSTITUTIONS
WTO:

The World Trade Organization (WTO) is the only international organization

dealing with the global rules of trade between nations. Its main function is
to ensure that trade flows as smoothly, predictably and freely as possible.
Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
Membership: 160 countries on 26 June 2014 in which 117 are developing
countries.
Budget: 197 million Swiss francs for 2013
Secretariat staff: 640
Head: Roberto Azevdo (Director-General)

Functions of WTO:
Negotiating the reduction or elimination of obstacles to trade
(import tariffs, other barriers to trade) and agreeing on rules
governing the conduct of international trade (e.g. antidumping,
subsidies, product standards, etc.)

Administering and monitoring the application of the WTO's agreed

rules for trade in goods, trade in services, and trade-related
intellectual property rights

Monitoring and reviewing the trade policies of our members, as well

as ensuring transparency of regional and bilateral trade agreements

Settling disputes among our members regarding the interpretation

and application of the agreements

Building capacity of developing country government officials in

international trade matters

Assisting the process of accession of some 30 countries who are not

yet members of the organization

Conducting economic research and collecting and disseminating

trade data in support of the WTO's other main activities

Explaining to and educating the public about the WTO, its mission
and its activities.

Technical barriers to trade:

Technical regulations and product standards may vary from country to
country. Having many different regulations and standards makes life difficult
for producers and exporters. If regulations are set arbitrarily, they could be
used as an excuse for protectionism.

The Agreement on Technical Barriers to Trade tries to ensure that regulations,

standards, testing and certification procedures do not create unnecessary
obstacles, while also providing members with the right to implement
measures to achieve legitimate policy objectives, such as the protection of
human health and safety, or the environment.

GATT: The General Agreement on Tariffs and Trade (GATT) was a

multilateral agreement regulating international trade. According to its
preamble, its purpose was the "substantial reduction of tariffs and other
trade barriers and the elimination of preferences, on a reciprocal and
mutually advantageous basis." It was negotiated during the United
Nations Conference on Trade and Employment and was the outcome of the
failure of negotiating governments to create the International Trade
Organization (ITO). GATT was signed in 1947, took effect in 1948, and
lasted until 1994; it was replaced by the World Trade Organization in 1995.
The original GATT text (GATT 1947) is still in effect under the WTO
framework, subject to the modifications of GATT 1994.
General Agreement on Tariffs and Trade (GATT): set up to avoid the trade
protection that was so disastrous during the period 1918 to 1939
First agreement 1947, 23 countries signed: now 140 signed
Since 1947, GATT has sponsored eight major rounds of tariff and other
barriers reductions now administered by WTO
GATT embodies three principles:
Non-discrimination: each country gives all others the same import
duties
Consultation over disputes
Sanctions for non-compliance

International Trade Organization:

Prior to world war 2
many countries employed "beggar thy neighbor" tradepolicies, raising tari
ffs and instituting non-tariff barriers that impeded imports in anattempt to
reduce unemployment and increase domestic output. However, othercount
ries retaliated by raising their own barriers against imports. This resulted
inreducing export markets, which then only worsened the already poor ec
onomicconditions. The problems created by such policies led United States
to proposethat a new international trade organization be established to re
gulate trade policiesand settle disputes between trading partners. Under t
he U.S. proposal, theInternational Trade Organization (ITO) was to be a sp
ecialized agency of theUnited
Nations and was to have several broad functions: promoting the growth of
trade by eliminating or reducing tariffs or other barriers to trade; regulati
ngrestrictive business practices hampering trade; regulating international
commodityagreements; assisting economic development and reconstructio
n; and settlingdisputes among member nations regarding harmful trade p
olicies. Negotiations toestablish the ITO began in Geneva, Switzerland, in
1947, with a more completecharter being drafted later in Havana, Cuba. O
pposition to the charter of the ITOsoon emerged, especially in the U.S. Co
ngress. Subsequently, President harry
truman's administration withdrew its support for the ITO, and interest in t

he ITOfaded. The void left by the collapse of the ITO has been filled by oth
er institutions,like the General Agreement on Tariffs and
Trade (GATT), the World
Bank, and theUnited Nations Conference on Trade and Development (UNCT
AD).

PORTERS FIVE FORCES MODEL

OR
WHICH MARKET TO ENTER

Porters model includes 5 forces and are as follows

Threats of New Entrants
Threat of Substitutes
Intensity of rivalry among established firms
Bargaining power of Customers
Bargaining power of Suppliers

Importance of five forces model:

What strategy to use?
Basic knowledge of business strategy & forces that influence the decision
making
Industry analysis :
1) Industry relevance
2) Industry players
3) Industry structure
Future changes Strategize:
Competitive advantage, Cost advantage, Market dominance, New
product development, Contraction / Diversification, Price leadership,
Global Re-engineering, Downsizing, De-layering and Restructuring.
Measure and monitor strategy effectiveness.

Threats of New Entrants:

The easier it is for new companies to enter the industry, the more
difficult competition there will be. Factors that can limit the threat of new
entrants are:
1. How loyal are the end users in this industry?
2. How troublesome or hard is it for the end users to switch and
use another product?
3. Does it require a large seed capital to enter this industry?
4. Do entries to this industry regulated by government?
5. How hard is it to gain access to the distribution channels?
6. How long does it take for new staff to acquire the necessary
skills to do the work?

Example:
Large established companies with strong brand names such as
McDonalds make it more difficult to enter the market because new
entrants are faced with price competition from existing chain restaurants.
Thus, it takes a pretty much time for a new business to establish in the
fast food industry.

Threat of Substitutes:
Threats of Substitute in the Porters theory actually means goods and
services that does similar functions
How many close substitutes are available?
How pricy are the substitutes?
What is the perceived quality of the substitutes?
When there is one product successful, it also leads to the
creation of other products that can perform the same functions
as the product of the same industry.
Porter recommends that by doing advertising, product quality
improvement, marketing, R&D and product distribution, an
industry can improve its collective position against the
substitute.

Examples:
Google and Yahoo
Facebook and Twitter
Bing and g+

Intensity of rivalry among established firms:

1. How many close competitors exist in the industry?
2. What are the sizes of your close competitors?
3. What is the industry structure? Is it a fragmented, consolidated,
oligopoly or monopoly industry?
4. What is the current industry growth rate?
5. How high are the exit barriers? Do your competitors have a high
committed fixed cost thus they have to operate even at a loss?
6. How diversified are your competitors?

7. How extensively do your direct competitors advertise?

8. Each competitors aim to serve different needs and market segment
with different mixes of
price
products
service
features

Examples:
Subway and Burger king
KFC and Pizza Hut

Bargaining power of Customers:

How large are your buyers company?

How many companies are there for the buyer to choose from?
Are the buyers buying a huge volume?
Do you depend only on a few buyers to sustain your sales?
How hard is it for the buyers to switch and use a competing product?
Are the buyers purchasing from you as well as your competitors?
Do the buyers have the capacity to enter your business and produce
the goods themselves?

Example:
Coca cola:
Depends on the marketing channel used for Coca-Cola,
1. Super Markets
2. Convenience Stores
3. Mass Merchandisers
4. Soda Shop
5. vending machine
6. Restaurants and Food stores

Bargaining power of Suppliers:

Are there substitutes for your suppliers products?

Do your suppliers serve multiple industries? Does the total industry
revenue accounting for only a small portion of the suppliers total
revenue?
Are there substitutes for your suppliers products?
Do your suppliers serve multiple industries? Does the total industry
revenue accounting for only a small portion of the suppliers total
revenue?

Trade barriers:

A trade barrier is an obstacle to (or something that stops) trade

A physical trade barrier is a natural barrier like mountains,
rainforests, deserts

Tariffs:
A tariff is a tax on imported products or services. In the case of tariffs
imposed by the United States, the business that imports or produces the
foreign product must pay the tax to the U.S. government. The tariff
revenue goes directly to the U.S. Treasury.
Example:
Two companies sell athletic shoes in the US.
Company 1 is located in Brazil.
Company 2 is in Hershey, Pennsylvania.
A tariff must be paid on all shoes made outside the US and sold in the US.
The tariff is 10% of all sales. Both companies sell shoes at a price of $100
per pair
1. Which company must pay the tariff? Which company benefits from the
tariff?
2. How much will the tariff cost the company?
3. Who receives the revenues generated by the tariffs?

Non-Tariff Barriers:

Measures, other than traditional tariffs, that are used to distort

international trade flows
Raise prices of both imports and import-competing goods.
Favor domestic over foreign supply sources by causing importers to
charge higher prices and to restrict import volumes.

Quota:
A quota is a limit on the amount of goods that can be imported. Putting a
quota on a good creates a shortage (or a scarcity), which causes the price
of the good to rise and allows domestic (inside the country) producers to
raise their prices and to expand their production.
Example:
Germany has imported 2 million tons of steel from France every year for
the past decade.
Germany then started an import quota on steel.
Germany now only imports around 1 million tons of steel from France, but
the country of Germany still uses around 3 tons of steel a year.
1. How will this impact German steel company?
2. How will this impact french steel company?
3. Why would a country do this?

Embargos:
Embargos are government orders which completely prohibit trade with
another country.
If necessary, the military actually sets up a blockade to prevent movement
of merchant ships into and out of shipping ports.

The embargo is the harshest type of trade barrier and is usually enacted
for political purposes to hurt a country economically and thus undermine
the political leaders in charge.
EXAMPLE: The United States placed an embargo on Cuba after the Cuban
Missile Crisis. We do not refuse with Cubathis is still in effect today.

Benefits of Trade Barriers:

Most barriers to trade are designed to prevent imports from

entering a country.
Trade barriers provide many benefits:
Protect homeland industries from competition
Protect jobs
Help provide extra income for the government.
Increases the number of goods people can choose from.
Decreases the costs of these goods through increased competition

FDI:
Purchase of physical assets or significant amount of ownership of a
company in another country to gain some measure of management
control.
Simply defines as an investment made by a company in one country, into a
company of the another country.

Reasons for FDI growth:

Increasing globalization
International mergers and acquisitions
Entrepreneurship and small firms

Types of FDI:

Inward FDI:

Inward (inflow) is when the foreign capital are invested in local

resources.
Inward FDI is encouraged by Tax breaks, subsidies, low interest
loans, grants.

Inward FDI is restricted by Ownership restraints or limits,

differential performance requirements
For example: General Motors decide to open a factory in Brunei. They are
going to need some human capital. That human capital is inward FDI for
Brunei.

Outward Direction:

Outward (outflow) is when the local resources are invested to

another country
The outflow of Brunei capital to other country
For example: Brunei invest in Dorchester Hotel
Outward FDI is encouraged by Government-backed insurance to
cover risk
Outward FDI is restricted by Tax incentives or disincentives on firms
that invest outside of the domestic country.

Greenfield Target:

An investment involve the flow of FDI by building up

New production capacities
Expansion of the existing production
Greenfield Investing is offered as an alternative to another types of
investment, for example as mergers and acquisitions, joint ventures,
or licensing agreements.

Foreign Horizontal Direct Investment:

An investment made by a multinational company in different

nations.
It is the investment made for conducting similar business
operations.
For example: Apple Inc. factory in Brunei
Horizontal FDI results in expansion of the parent company and
brings FDI in the other economy

Vertical Foreign Direct Investment:

Backward Vertical = It is when an industry abroad provides inputs for a
firm's domestic production process
For example: Brunei Shell Petroleum with Royal Dutch Shell
Forward Vertical = industry abroad sells the outputs of a firm's
domestic production process.
For example: when Volkswagen entered the United States market it
acquired a large number of dealers rather than distribute
its cars through independent United States dealers

METHODS OF FDI:

by incorporating a completely owned subsidiary or company

anywhere

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise
participating in an fairness joint venture with another investor or
enterprise

Importance of FDI:

Resource for economic growth

Money inflow from overseas
Business grows in several countries
FDI & Economic development
Opportunities
Competitive requirement
Corporative Activities
Branch plant or subsidiary company operations
Rise in National Income