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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:
Objectives:
Physical and social
Major advantage in price,
Sales expansion
factors
marketing, innovation or
other factors
Political and legal
Resources
Capability of competitors
acquisition
Cultural
Risk minimization
Competitive country
Economic
differences
Geographical
Modes:
Functions:
Overlaying alternatives:
Import and Export
Marketing
Choice of countries
Licensing and
Global
Organisation and control
franchising
manufacturing and
mechanism
supply
chain
Turnkey operations
management
Management
Accounting
contracts
Finance
Direct and portfolio
Human Resources
investment
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
GATT
No
WTO
YES
Dispute Settlement
Meeting
Coverage
Covers Trade
Organisation
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
factor.
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
interests.
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
product.
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
(FDI)
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
pressure.
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)
Standardization:
Advantages : Simplicity, economy of scale, cost effective.
Disadvantages: May become unsuitable for alternative markets.
Differentiation:
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
price.
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.
Distribution policy
Channel choice and
distribution system
Promotion Policy
Brand building
Adapt Product
Product Adaptation.
Product change + No
marketing change
Altering the product
to meet local
conditions.
New Product
Product Adaptation:
Adapt
Communication
Communication
Dual Adaptation
Adaptation
Both product and
Change marketing
marketing are
alone to suit local
changed.
condition.
1. Same message
everywhere.
2. Same theme
3. Global pool of
advertisements.
4. Country specific
adds.
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
Resources
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
sale.
Transport practically
Cost saving through scale and
scope
International Corporate
Objective
Sales Objectives:
Maintain Volume
Expand Volume
Increase Markup
Spread fixed cost
Local Condition
Financial factors
Timing of receivable and
payable
Govt. priorities for fund use
Resource Acquisition:
Gain complementary
resources
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
general
Attitude towards foreign
business
Political and economic
stability
Organisational Structures:
International Division Structure
Centralized control of overseas business.
Advantages:
More efficient in overall resource usage
Companys global performance is highlighted
Challenges in Production:
Compatibility:
Cost Minimization
Dependability
Quality
Flexibility
Innovation
Configuration:
Centralized Manufacturing, Regional Manufacturing, Multi-domestic manufacturing.
Coordination:
Linking or integrating activities into an unified system.
Control:
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
High
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.
Mediation Third states offers services and takes part in talks to resolve the
issue.
Conciliation Impartial persons tries to resolve by different means.
Enquiry Enquiry commission.
UNCTAD United nation council trade and development.