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Introduction to International Business

International Business Transaction between two countries both private and government.
profit motive (private) . sales, investment, transportation.
International Business Operations and its Influences:
External Influence:
Strategy Operational
Competitive Environment:
Physical and social
Major advantage in price,
Sales expansion
marketing, innovation or
other factors
Political and legal
Capability of competitors
Risk minimization
Competitive country
Overlaying alternatives:
Import and Export
Choice of countries
Licensing and
Organisation and control
manufacturing and
Turnkey operations
Direct and portfolio
Human Resources

International Business Why Company go international?

Expand Sales, Acquire Resources, Minimize Risk
Advantages of International Business:
Growth of Business, Diversification of Business, Earning more Margins (Exchange rate
variance), Receiving early payments (Factoring), Diversification of Risk (Financial meltdown,
unrest), Lesser Competition.
Provides economics of scale and growth, Mitigate domestic recession.
International Companies Different term to define them:
Multinational Enterprise (MNE), Multinational Company(MNC), Transnational Company (TNC),
Global, Multi-domestic, multinational
Shift towards more interdependent and integrated world economy. Two components:
Globalization of production, Globalization of marketing.
Factors leading to Globalization of business:
Rapid change in technology, Reduction in transportation cost, Change in consumer taste,
Growth of new markets, Fierce competition, Liberalization of cross-border trade and resource
movement, Increase in development of services that support international business, Change
in political situation (Communist to democratic), Expansion of cross-national co-operation.
Features of globalization:
Expand business, erase difference between domestic and foreign, Buying and Selling from any
Process of globalization:
Domestic company exports to foreign country through distributors
Export to foreign country on its own.
Establishing production and marketing operations in various key foreign countries
Handing R&D, full-fledged human resources in foreign country

Becomes true foreign company by serving the needs of foreign customers.

International Business Environment

Country Attractiveness:
Political, Legal, economic and cultural environment decides country attractiveness.
Size of country economy is decided by the growth rate, per capita income, government policy
Challenges: corruption, lack of infrastructure, legal cost
Political Risk: Social unrest, riots, regionalism, anti-business trends.
Economic Risk: Economic growth, investment trends, economic diversification.
Legal Risk: Failure to safeguard property rights.
Socio-Cultural Risks:ethnic, religious, linguistic, traditional norms
International Business Environment:
Internal Environment
External Environment
Behaviours of employees, Leadership
Government rules, Economic stability, public
styles, mission statement, org culture
opinion, competition
Micro Environment
Suppliers, Market intermediaries,
competitors, customers and public
Political Environment
1. Collectivism, Socialism
and Individualism
2. Democracy and

Macro Environment
Demographic, economic, natural, technological,
political and cultural forces.

Economic Environment
1. Market economy (laissezfaire), command economy
and mixed economy.

Cultural Environment
1. High context culture and
low context culture

Determinants of Economic progress:

1. Innovation and entrepreneurship are the engines of growth
2. Innovation and entrepreneurship requires market economy and strong property right
3. Strong property right is provided by Individualism and democracy
Economic Transformation:
Deregulation (Removing price control), Privatization (Transfer of ownership from state to
individuals), Legal systems (protecting property right, well-functioning market economy)
Cultural environment:
Culture: A system of values and norms shared by group of people.
High Context Culture Vs Low Context Culture.
Primary Characteristics:
Learnt behaviour, Interrelated, Adaptive, Shared,
Spoken and Unspoken
Cultural and Competitive Advantage:
Value system and norms. (Attitude towards work, cooperation between management
and labour)
Culture and Business Ethics:
Protection Vs Liberalization of Global business:

Reason for protection:

Infant industry argument, Diversification argument, Improving the terms of trade, Improving
balance of payment, Anti-dumping, Bargaining, Employment argument, National defence, Key
Industry argument, Size of the home market, Equalization of costs of production, Strategic
trade policy.
International Trade and Investment
Promotion of global business:
Organisations which promote exports:
Ministry of Commerce:
Eight Departments : Administrative and general division, Finance division, Economic
division, Trade and policy division, Foreign trade Territorial division, Services division,
Industries Division
Autonomous Bodies:
Commodity Boards(CBs) (Tea, coffee, rubber, spices, tobacco), Export Inspection
council Inspection, enforce quality control, Indian Institute of foreign trade training,
Indian Institute of packaging, Export promotion council, Federation of Indian export
organisation, Indian Council of Arbitration, Marine Products Export Development
Authority, Agricultural and processed food products export development authority,
Indian trade promotion organisation.
Public Sector Undertaking(PSU)
Advisory Body
Central Advisory council on trade
Role of General Agreement on Tariffs and Trade (GATT):
Multinational treaty which covers 80% of world trade
Role of World Trade Organisation (WTO):
Members : 76 countries (Starting), 146 countries (Current)
Highest Body: Ministerial Conference(MC). MC meets once in every two years.
GC: General Council which discharges the following functions:
Council for Trade in Goods, Council for Trade in Services and Council for Trade-related
Aspects of Intellectual Property rights (TRIPS)
Third pillar of UNO : world bank, international monitory fund, wto.
Objectives of WTO:
1. Raise standard of living, ensure full employment.
2. Optimal use of world resources, to protect and preserve environment, enhance the means
for doing so.
3. Ensure developing and least developed countries gets a share in international trade
4. Mutually advantageous arrangements, substantial reduction of tariffs and other barriers
5. Ensure linkage between trade policy, environmental policy and sustainable development.
Trade without discrimination:
1. Most Favoured Nation(MNF): Treating other people equally.
2. National Treatment : Treating Foreigners and Locals equally.
3. Freer Trader: Gradually, through negotiations reduce barriers (custom duties, import bans
4. Predictability: Through Binding and Transparency
5. Promoting fair competition: (Open, fair, undistorted competition, dumping:Exporting below
the cost to gain market share)
6. Encouraging Development and Economic Reforms
Difference between GATT and WTO:
Legal Status



Rule and agreements

No binding on the members

Dispute Settlement

Dilatory and not binding


Meets once in a decade


Covers Trade


Small secretariat managed by

a Director General

Permanent and binding on

Faster and binding on all
Rule based meeting and time
bound agreements
Covers both Trade and
Large secretariat and huge
organisational setup.

Challenges for Global Business:

1. Narrow perspective of managers
2. Conflicting interest of employees
3. International HRM challenges
a. Identify and retain highly qualified people, quality management, management
succession, sustaining and improving performance at all levels, depth of talent in
the organisation, technical and managerial skills, peoples attitude to quality,
4. Creating New Partnerships and Relationships on Competitiveness:
5. Replacing rivalry with Collaboration
6. Highly demanding customers
7. High risk and speedy hearing process
a. Luxury of low-risk and slow learning process does not exists
b. Problems: lack of detailed market knowledge, unfamiliar with different distribution
8. High quality service and Know-how:
9. Speculative International Currency Market
Global Trade and Investments:
Global Trade: Exchange of goods and services with foreign countries. More difficult and risky.
Third party for export and Import:
1. Importer obtains banks promise to pay on importers behalf
2. Bank promises exporters to pay on behalf of importers
3. Exporter ships to the bank trusting banks promise to pay
4. Bank pays exporter
5. Bank gives merchandise to importer
6. Importer pays bank
Global Investments:
Foreign Direct Investment(FDI) Investment made by the foreign investor. An
independent company, subsidiary or branch is established.
No Discrimination between foreigner and domestic, transfer their return on
investment and dividend abroad.
Foreign collaborations Joint participation between private parties / government.
Intergovernmental loans Loans, Grants and public loans.
International Financial Institutions:
IMF International Monitory Fund, World Bank, International Development
Association (IDA), International Finance Corporation (IFC), Asian Development
Bank (ADB).
International Trade Theories
Theories of International Trade:
Mercantilism: (1500 1800) Countrys wealth measured in terms of treasure or gold. Gold
and silver were currencies. It is a zero sum game. However , international trade is positive
sum game.

Absolute Advantage: (1776 Adam smith) A country can maximise its own economic wellbeing by specializing in the production of those goods it can produce most efficiently than any
other countries. (Positive sum game)
Absolute Advantage : Natural advantage, Acquired advantage.
David Ricardos Comparative Advantage Theory: - 1817 Comparatively better advantage
and can produce more efficiently. Disadvantage : No other cost considered, labour is the only
Theory of country size: Large countries have more self-varied climates and resources. They
are self-sufficient. It has more advantage than small countries.
Heckscher-Ohlin Theory of Factor Endowment: - The resources such as land, labour and capital
are denoted by the term factor endowment. Different nations possess different gravity of
these factors. Low factor cost are exported and high factor cost items are imported.
Vemons International Product life cycle theory of trade: The product which is exported, ends
up in importing the product. 1. Home country production High profit margin. Premium price
2. Export takes place. 3. Matured product is exported to developing countries 4. Production is
shifted to low cost nations 5. Original manufacturer switches to some other product. The
product is imported from developing countries.
Country Similarity Theory: Traditional Theory (Greater Dissimilarity = Greater Trade) But in this
theory, (Greater Similarity = Greater Trade). Similarities : economic and industrial similarity,
transport advantages, similar language, religion and culture, similar political and economic
Porter Diamond Model of International Trade:
1. Demand Condition Nature and size of demand in home market leads to production of
particular product
2. Factor Condition Input resources vs.Labour, capital and technology in competing nation
for international trade.
3. Relating and support industries
4. Firm strategy, structure and rivalry is one of the major factors to produce world class
Theories of International Investments:
Macdougall-Kemp Theory
Two country model price of capital = marginal productivity, Investing country receives
return on investment. Host country also enjoys increased income.
Market Imperfection Theory
When transaction cost of contract and licensing are high, FDI route is taken.
Industrial Organisational Theory
Despite the disadvantages in a foreign country (unknown culture, language, legal
system etc), the investing country possess specific advantages (advanced technology,
superior management system etc)
Product Life Cycle Theory
New products Host country, mature and standardised products development country
Eclectic Theory
Ownership advantage, Location advantage, Internalization advantage
Market Power Theory
Dominant market presence results in greater profits to the firm. Through backward
integration and forward integration.
Internalization Theory
Primary Motives: Foreign market seeking FDI, Efficiency seeking FDI, Resource seeking
FDI, Market seeking FDI.
Appropriability Theory
The firm should be able to appropriate the benefits from R & D. If the condition is not
met, it follows FDI route.
Location specific advantage theory
Labour cost, Market factor, Trade barriers, Government policy.
Politico-economic theories
Political stability
Global Competitiveness:

Under free market condition, the ability to produce goods that can withstand international
Porter Diamonds for Competitive Advantage:
Factor condition, Demand condition, Related and supporting industry, Firm strategy & rivalry.
Additional Factors: Role of government and chance.
Regional Trade blocks:
NAFTA North American free trade agreement.
Advantages and disadvantages of regional trade bloc.
International Strategic Management
Strategic Compulsion Pattern of Internationalisation Pattern of Expansion:
Path A Passive to active Expansion:
Passive response to proposals (Low)
Active search for opportunities (High)
Path B Internal Vs External handling of foreign operations
Other firms handle external operations (Low)
Company handles its own foreign operations (High)
Path C Depending on the mode of commitment
Limited foreign funtions, usually export / imports (Low)
Limited foreign production and multiple functions (Medium)
Extensive production in abroad with FDI and all functions (High)
Path D Number of countries in which firm does business (Geographical diversification)
One (Low)
Several (Medium)
Many (High)
Path E Degree of Similarity between foreign and domestic countries (Expansion)
Quite similar (Low)
Moderately Similar (Medium)
Very dissimilar (High)
Advantages : Simplicity, economy of scale, cost effective.
Disadvantages: May become unsuitable for alternative markets.
Uniqueness adopted by firm targeting different segments
Through market Segment: (geography, demography, socio-cultural factors,
psychological factors)
Product differentiation: (Bundle of attributes car power, comfort etc)
Cultural differences: (Hamburger)
Economic development: (Lot of performance attributes vs basic features)
Product and Technical standards: (Government mandated products)
Price Discrimination: Based on elastic demand.
Strategic pricing:
Predatory pricing: lower the price, completion leaves the market, increase the
Multipoint pricing strategy: Two or more firms meet in different countries.
Experience Curve Pricing
Differentiation through Distribution Channel
Retail concentration: Concentrated System A very few retailers Vs fragmented
many retailers.
Channel length:
Channel exclusivity:
Differentiation through communication Channel:
Mass communication vs point-of-sale or direct marketing.

Strategic options for Exports and imports.

1. Assess the companys export potential
2. Obtaining expert counselling on exporting
3. Selecting a market or markets
4. Formulating and Implementing an export strategy
Global Entry Strategies Different form of international business:
Exporting - Home Market Production:
Little or no investment abroad.
Direct Export
1. Agent or Distributors 2. Government / overseas subsidiary
Indirect Method of Export
Trading Company Bears all the responsibilities of further selling of the product
in overseas market.
Export Management Company Does all the formalities and act on behalf of the
Piggyback Bulk buying from many smaller firms and do bigger contract.
Counter Trade Both Export and import. (Barter, Counter Purchase, Offset,
Switch trading, Buyback)
Foreign Production:
Licensing Originator pass all or some of the rights to the foreign firm. Less capital
and time investment.
Franchising Little control over the sale condition. Financial commitment are limited.
Joint Venture Two or more partners share the ownership of the organisation and
control property right. Lesser Investment.
Contract manufacturing manufacturing through contract. Profit sharing and risk
Sole Proprietorshp 100% ownership remains with domestic owners.
Management contracts Foreign company manages the entire operation.No capital
and no risk employed by the contractor.
TurnKey Contract To design and build an entire operations. On completion, the
operation is transferred to the local personnel.
Foreign direct investment (FDI) : Leads to profitability. Tax avoidance through
transfer pricing.
Global portfolio:
Allow multinational companies to further diversify their products as per the need and
requirements of that particular country where they are operating.
International Marketing Mix and Focus
Product Adaptation
Export Pricing
Product line
Foreign market
Price co-ordination
Transfer pricing

Distribution policy
Channel choice and
distribution system

Promotion Policy
Brand building

Adapt Product

Develop new product

Product Adaptation.
Product change + No
marketing change
Altering the product
to meet local

New Product

Product Adaptation:

Do not change the


Do not change the

Straight Extension.
No change in product
or marketing
Cameras, consumer
No additional R&D or
other expenses


Dual Adaptation
Both product and
Change marketing
marketing are
alone to suit local
1. Same message
2. Same theme
3. Global pool of
4. Country specific
Product Line Management:
Cater to a particular market segment.
Product Counterfeiting:
Unauthorised representation Legal action, bilateral negotiation etc
Export Pricing:
1. Standard worldwide price (fixed cost+ variable cost + export releated cost)
2. Dual pricing Domestic and export pricing are different.
3. Market Differential pricing Based on demand oriented strategy.
Foreign market pricing:
Based on individual market. Determined by 1. Corporate objectives, 2. Costs 3. Customer
behaviour and market condition 4 Market structure and 5. Environmental constraints.
Price co-ordination:
Transfer pricing: Sales to members of the corporate family.
1. Transfer at direct cost
2. Transfer at direct cost + additional expenses
3. Transfer at end market prices
4. Transfer at arm length prices (Acting in once own interest)
Distribution Policy:
Channel = Wholesale distribution, Retailers .
Different distribution systems
Retail can be concentrated or fragmented, Channel length can be short or long, Fully
accessible or partially accessible, Channel quality good or bad.
Promotion Policy:
Brand Salience (Brand recalled or recognized), Brand Performance (How it meets customer
functional needs), Brand Imagery (How people think abstractly), Brand judgement (Opinion),
Brand feeling (emotional response and reaction. 6 types : Warmth, Fun, Excitement, Security,
Social approval, Self respect), Brand Resonance (Behavioural loyalty, Attitudinal attachment,
Sense of community, Active engagement)
Organisational Issues of International Business
Organisational Issues:
Internal Corporate
Financial Resources:
Cash flow, Capital Availability,
Ability to transfer funds, Profit
and dividend targets

Human Resources:
Product / Special Skills,
Functional Skills,
Transferability, Attitude
towards foreign activity

Product resources:
Capacity use and bottleneck,
Adaptation needed for foreign
Transport practically
Cost saving through scale and

International Corporate
Sales Objectives:
Maintain Volume
Expand Volume
Increase Markup
Spread fixed cost
Local Condition
Financial factors
Timing of receivable and
Govt. priorities for fund use

Resource Acquisition:
Gain complementary
Gain Tax advantages
Reduce direct cost

Diversification objectives:
Diversify market
Diversify supply

Marketing Factors
Cost and availability of
market data
Nature of competition
Govt. price regulation

Other Factors
Attitude towards business in
Attitude towards foreign
Political and economic

Organisational Structures:
International Division Structure
Centralized control of overseas business.

Geographic Division Structure

Domestic retains best resources

Large foreign operation that are not

dominated by a single country or region.
Costly duplication of work among areas.

Product Division Structure

Most popular among international companies
Diverse product with high technological
Coordination of product activities on one

International Functional structure

Limited range of product, production and
marketing methods are not different.

International Matrix Structure

More efficient in overall resource usage
Companys global performance is highlighted

Conflict resolved at the lowest level

Dual-Boss, quick decision making is

Production and Marketing of Global Business

Global Production:
Production- Activity involved in creating a product. (Denotes both service and manufacturing)
Material management activity that controls the transmission of physical materials through
the value chain.
Objectives of Manufacturing unit of an International firm:
Lower cost, increase product quality by eliminating waste, able to accommodate demands for
local responsiveness, able to respond quickly to shifts in customer demands.
Location of manufacturing unit.
Centralized Vs Decentralized:
Country Factors: Difference in political economy, culture, factor cost, trade barriers,
Exchange rates,
Technology factors : Fixed costs, Flexible manufacturing technology
Product factors: Value to weight ratio, Serves universal needs.
Scale of Operation:
Refers to the sequential operational manufacturing activity of a firm.
Order Processing Customer order processing. Objective : deliver quickly and accurately.
Warehousing Storing. More warehouse = less delivery time = greater storage cost.
Inventory control and mgmt. JIT. Proper inventory control = cost control. Based on accuracy
of sales forecast.
Transportation Point of production to sale to consumption.
Information management upto date info on inventory, warehouse and transportation.
Cost of production:
Export price = Total cost + profit margin
Total Cost = Direct cost + fixed cost + freight and insurance
Direct Cost = Direct labour cost + Variable production overhead + Variable administrative
overhead + Other costs (advertising + bank charges + warehouse + etc)
Fixed Cost = Production overhead + administrative overhead
Freight and Insurance = Freight + Cost Insurance Freight (CIF)
Make or Buy Decisions:
Advantages of Make: Lower Cost, Facilitating specialized investment, Proprietary product
technology protection, Improved scheduling.
Advantages of Buy: Lower Cost, Offsets (Capture more orders from the country)
Product Development:
Idea Generation : Objectives of new product should be clearly stated.
Idea Screening: Evaluation process. Drop Errors (dropping potential ideas) , Go
errors(Selecting wrong ideas)
Concept Development and Testing : Test with group of target audience. (Benefits, fulfilment,
cost, value, purchase indent, usage)
Testing new product in national market: Product Adaptation, communication adaptation.
Commercialization: How to launch a new product? For which target segment?

Challenges in Production:
Cost Minimization
Centralized Manufacturing, Regional Manufacturing, Multi-domestic manufacturing.
Linking or integrating activities into an unified system.
Respond to changing conditions.
Challenges in Pricing:
Product characteristics and Nature of its demand: Elasticity of demand.
Philosophy of management:
Market Characteristics: Number of competitors , degree of competition, product substitues.
Challenges in channel management:
Environmental Characteristics:
Political stability, Market opportunity, Economic development and performance, Cultural unity
Legal Barriers / restrictions, Physiographic barriers, Geo-cultural distance Low (Hot country)
Legal regulations:
Mode of transport: Market location, cost and speed.
Financial and Human Resource Management of Global Business
Main tasks of International Manager while taking investment decision:
1. Forecast the financial environment : forecast exchange rate, interest rate, inflations etc
2. Exchange Risk Management : Effort on Balance sheet, Income statement and cash flow.
3. Management of Assets
4. Management of Liabilities
5. Performance Evaluation and Control.
Economic and Political Risk in Financing Decision:
Economic Risk Exchange rate fluctuation, Currency devaluation.
Political Risk: Convertible Currency and Non-Convertible currency.
Letter of Credit:
Issuing Bank, Applicant, Beneficiary are involved. Payment is made against the document.
Based on scope for Cancellation
Revocable LC
Irrevocable LC
Confimed LC - Third bank called confirmation bank is involved.
Based on payment mode
Payment credit Immediate payment
Deferred payment credit- Deffered payment as per due dates mentioned.
Acceptance credit- Beneficiary should accept
Negotiation Credit- Can be transferrable. Sold . Any bank can be approached.
Based on Tenor
Sight Credit Payment is made on sight.
Usance Credit As per credit terms
Based on Availability Stype
Revolving Credit Amount is reinstalled every time once drawn.
Installment Credit- due date and quantity specified
Deferred Credit Payment date not known. Should be confirmed by beneficiary.
Transit Credit A bank in third country is used.
Reimbursement Credit Credit is demoninated in third currency.

Anticipatory Credit- Payment made at preshipment stage.

Standby letter of Credit
Transferable Credit

Conflict Management and Resolution

Disadvantages of International Business:
Globalization Kills domestic business, Exploits human resources and environment, Leads to
unemployment and underemployment, Decline in demand for domestic product, Widen the
gap between rich and poor, Transfer of natural resources, Leads to commercial and political
Characteristics universal, inevitable, normal in our life, cannot be eliminated, do not
disappear by themselves.
Sources Insecure, competition for political power, value system are not compatible, personal
differences, domination through power, stress related to environment,
Controlling area, Lack of clarity of goals, no clear cut agreements or goals, ethics not followed,
misleading communication
Types of conflict Constructive and Destructive
Constructive Conflict introduce different solution, clear definition of power
relationships, creativity and testing of ideas, pays attention on individual contribution.
Destructive Conflict deviates attention from task, lead to disintegration, losers will
Conflict Indicators - Disagreements, Powerful public statements, spreading disagreements
through media, Aiming for power, Lack of respect gets increased, Lack of focused goals.
Reasons for Conflict in International Environment:
1. Parties are not familiar with each other. They are not familiar about other country laws.
2. International transactions are relatively uncertain. Transactions are not completed to
satisfaction of both the parties.
3. Business ethics, practices and cultures vary considerably.
4. Communication is also hampered due to distance.
Five Steps:
1. Should be unambiguous, clear and cover every aspect
2. Applicable law should be used
3. Relevant jurisdiction should be mentioned (Known as choice of forum)
4. Risk transfer should be clearly outlined
5. Provision to resolve the conflict without resorting to arbitration or litigation.
Conflict Resolution:
Adaptation contract can be modified based on circumstances. Flexible
Mediation Using third party office known as mediators. Long and tedious process.
Settlement of Conflict:
Pacific Means of Settlement:
Arbitration Third party called agency of independent arbitration, arbitration forums in
which each side choose equal number of arbitrators.
Compulsive or forcible method of settlement:
Judicial Settlement Through court.
Good Offices A third state may offer its good offices, does not participate in

Mediation Third states offers services and takes part in talks to resolve the
Conciliation Impartial persons tries to resolve by different means.
Enquiry Enquiry commission.
UNCTAD United nation council trade and development.

Negotiations and Ethics in International Business

1. Two or more entities 2. To discuss common and conflicting interest 3. Objective : to reach
an agreement of mutual benefit. 4. By applying various techniques
Negotiation process:
1. Preparation Background research, Collection and analysis of data, preparation of plan
and strategy for presentation.
a. Setting Objectives of bargaining, b. Deciding Place of negotiations. C. Send
proper team agenda.
2. Non Task sounding - Introduction, Building interpersonal relationships.
3. Task related Information Exchanges Establish common fact and set context for
4. Persuasion Attempt to make other party to accept their position.
a. Identify similarities and differences b. Create new options.
5. Concessions Offer and receive concessions. Two approaches Sequential and Holistic
6. Agreement Mutually acceptable exchange.
Ethical issues in International Business:
Ethics Rules and regulations that defines the right and wrong.
Issues in Employment practices, Human rights, Environmental pollution, corruption, social
Ethical Decision Making:
1. Identification of ethical problem.
2. Collecting the relevant information
3. Evaluate the information
4. Consider the alternatives
5. Make a decision
6. Act or implement
7. Review the action