Question -2. What is the meaning and concept of International Business?

Why the business organizations decide to go international? What are

various types of International Business?

Answer :
International Business
International business is a term used to collectively describe all commercial
transactions
(private and governmental, sales, investments, logistics,and transportation) that take
place between two or more regions, countries and nations beyond their political
boundary. Usually, private companies undertake
such transactions for profit; governments undertake them for profit and
for political reasons. It refers to all those business activities which involves cross
border transactions of goods, services, resources between two or more nations.
Transaction of economic resources include capital, skills, people etc. for international
production of physical goods and services such as finance, banking, insurance,
construction etc.
A multinational enterprise (MNE) is a company that has a worldwide approach to
markets and production or one with operations in more than a country. An MNE is
often called Multinational corporation (MNC) or Transnational company (TNC). Well
known MNCs include fast food companies such as McDonald's and Yum Brands,
vehicle manufacturers such as General Motors, Ford Motor Company and Toyota,
consumer electronics companies like Samsung, LG and Sony, and energy companies
such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple
national markets.
Areas of study within this topic include differences in legal systems, political
systems, economic policy, language, accounting standards, labor standards, living
standards, environmental standards, local culture, corporate culture, foreign
exchange market, tariffs, import and export regulations, trade
agreements, climate, education and many more topics. Each of these factors requires
significant changes in how individual business units operate from one country to the
next.
The conduct of international operations depends on companies' objectives and the
means with which they carry them out. The operations affect and are affected by the
physical and societal factors and the competitive environment

Why Business Organizations Go International?

The basic question of “why do the businesses organizations of a country go to the
other countries?” might have been in your minds. Therefore, we answer this
question, before proceeding further.
 To achieve higher rate of profits
  Expanding the production capacities beyond the demand of the domestic
country
 Severe competition in the home country
 Limited home market
 Political stability vs. Political instability
 Availability of technology and managerial competence
 High cost of transportation
 Nearness to raw materials
 Availability of quality human resources at less cost
 Liberalization and Globalization
 To increase market share
 To avoid tariffs and import quotas
Types of International business
There are different ways through which we can invest in foreign countries. These
modes of International business are as follows:

1. Exporting- Exporting is the simplest and widely used mode of entering foreign
markets. There are three forms of exporting includes: indirect exporting,
direct exporting, and intra-corporate transfers.

 Indirect exporting: Indirect exporting is exporting the products either in

their original form or in the modified form to a foreign country through
another domestic company. Various publishers in India including
Himalaya Publishing House sell their products, i.e., books to UBS
publishers of India, which in turn exports these books to various foreign
countries.

 Direct Exporting: Direct exporting is selling the products in a foreign

country directly through its distribution arrangements or through a host
country’s company. Baskin Robbins initially exported its ice-cream to
Russia in 1990 and later opened 74 outlets with Russian partners. Finally
in 1995 it established its ice-cream plant in Moscow.

 Intracorporate transfers: Intra corporate transfers are selling of products

by a company to its affiliated company in host country (another
country). Selling of products by Hindustan Lever in India to Unilever in
USA. This transaction is treated as exports in India and imports in USA.

2. Licensing- In this mode of entry, the domestic manufacturer leases the right to
use its intellectual property, i.e., technology, work methods, patents, copy
rights, brand names, trade marks etc. to a manufacturer in a foreign country
 for a fee. Here the manufacturer in the domestic country is called ‘licensor’
and the manufacturer in the foreign country is called ‘licensee.’ Licensing is a
popular method of entering foreign markets. The cost of entering foreign
markets through this mode is less costly. The domestic company need not
invest any capital as it has already developed intellectual property. As such,
the domestic company earns revenue without additional investment. Hence,
most of the companies prefer this mode of foreign entry.
The domestic company can choose any international location and enjoy
advantages without incurring any obligations and responsibilities of ownership,
managerial, investment etc. Kirin Brewery- Japan’s largest beer producer entered
Canada by granting license to Molson and British market by granting license to
Charles Wells Brewery.

3. Franchising- Franchising is a form of licensing. The franchisor can exercise

more control over the franchised compared to that in licensing to licensing.
International franchising is growing at a fast rate.
Under franchising, an independent organization called the franchisee operates the
business under the name of another company called franchisor. Under this
agreement the franchisee pays a fee to the franchisor. The franchisor provides the
following services to the franchisee:
 Trade marks
 Operating systems
 Product reputations
 Continuous support systems like advertising, employee training, reservation
services, and quality assurance programmes etc.
Basic Issues in Franchising
 The franchisor has been successful in his home country. McDonald was
successful in USA due to the popular menu and fast and efficient services.
 The factors for the success of the McDonald are later transferred to other
countries.
 The franchiser may have the experience in franchising in the home country
before going for international franchising.
 Foreign investors should come forward for introducing the product on
franchising basis.

4. Contract Manufacturing
Some companies outsource their part of or entire production and concentrate on
marketing operations. This practice is called contract manufacturing or outsourcing.
The advantages are as follows:
 International business can focus on the part of the value chain where it has
distinctive competence.
 It reduces the cost of production as the host country’s companies with their
relative cost advantage produce at low cost.
  Small and medium industrial units in the host country can also develop as
most the production activities take in these units.
 The international company gets the locational advantages generated by the
host country’s production.
The disadvantages are as follows:
 Host country’s companies may take up the marketing activities also, hindering
the interest of the international company.
 Host country’s companies may not strictly adhere to the production design,
quality standards etc. These factors result in quality problems, design
problems and other surprises.
 The poor working countries in the host country’s companies affect the
company’s image. For example, Nike has suffered a string of blows to its public
image because of reports of unsafe and harsh working conditions in
Vietnamese factories churning our Nike foot ware.

5. Management Contracts
The companies with low level technology and managerial may seek the assistance of a
foreign company. Then the foreign company may agree to provide technical
assistance and managerial expertise. This agreement between these two companies is
called the management contract.
A management contract is an agreement between two companies, whereby one
company provides managerial assistance, technical expertise and specialized services
to the second company of the argument for a certain agreed period in return for
monetary compensation. Monetary compensation may be in the form of:
 A flat fee or
 Percentage over sales and
 Performance bonus based on profitability, sales growth, production or quality
measures.
Management contracts are mostly due to governmental inventions. The Government
of the Kingdom of Saudi Arabia nationalized Armco and requested the former owners
to manage the company. Exxon and other former owner of Armco accepted the offer.
Delta, Air France and KLM often provide technical managerial assistance to the small
airlines companies owned by the Governments.
Advantages
 Foreign company earns additional income without any additional investment,
risks and obligations.
 Hilton Hotels provided these services to other hotels without additional
investment and earned additional income.
 This arrangement and additional income allows the company to enhance its
image in the investors and mobilize the funds for expansion.
  Management contract helps the companies to enter other business areas in
the host country.
Disadvantages:
 Sometimes the companies allow the companies in the host country even to
use their trade marks and brand name. The host country’s companies spoil
the brand name, if they do not keep up the quality of product service.
 The host country’s companies may leak the secrets of technology.

6. Turnkey project
Indonesia government during 1974 invited global tenders for construction of a sugar
factory in the country. Indonesia Government received the tenders from the
companies of USA, UK, France, Germany and Japan. One of the Japanese Company
quoted highest price compared to all other companies.
Indonesia Government was very much satisfied with the total package and invited
the Japanese company to implement the project. The Japanese company and
Indonesian Government entered an agreement for implantation of this project by
Japanese company for a price. This project is called “Turnkey Project.”
A turnkey project is a contract under which firm agrees to fully design, construct
and equip a manufacturing/business/service facility and turn the project over the
purchaser when it is ready for operation for a remuneration. The form of
remuneration includes:
 A fixed price (firm plans to implement the project below this price)
 Payment on cost plus basis (i.e., total cost incurred plus profit)
This form of pricing allows the company to shift the risk of inflation/enhanced costs to
the purchaser.
International turnkey projects include nuclear power plants, airports, oil refinery,
national highways, railway lines etc. Hence, they are large and multiyear projects.
International companies involve in such projects include: Bechtel, Brown and Root,
Hyundai Group, Kennengen, Friedrich Krupp Gmb H. etc.

7. The Greenfield Strategy

The term Greenfield refers to starting with a virgin green site and then building on it.
Thus, Greenfield strategy is starting of the operations of a company from scratch in a
foreign market. The company conducts the market survey, selects the location, buys
or leases land, creates the new facilities, erects the machinery, remits or transfers the
human resources and starts the operations and marketing activities. This strategy is
followed by Fuji in locating its manufacturing facilities in South Carolina, by Mercedes-
Benz in locating automobile assembly plant in Alabama and Nissan in locating its
factory in Sunderland, England.
Disney management faced the problems in building Disneyland in Paris.
These problems include:
 Problems in dealing with French construction contractors.
 Communication difficulties with painters.
 Local contractors demanded $150 million extra at the time of opening and
threatened the opening.
  Local employees resisted the firm’s attempt to impose its US work values.

Advantages:
 The company selects the best location from all view points.
 The company can avail the incentives, rebates and concessions offered by the
host governments including local governments.
 The company can have latest models of the buildings, machinery and
equipment technology.
 The company can also have its own policies and styles of human resource
management.
 The company can have its gestation period to understand and adjust to the
new culture of the host country. Thus, it can avoid the cultural shock.
Disadvantages:
 This strategy results in a longer gestation period as the successful
implementation takes time and patience.
 Some companies may not get the land in the location of its choice.
 The company has to follow the rules and regulations imposed by the host
country’s Government in case of construction of the factory buildings.
 Host country’s Government may impose conditions that the company should
recruit local people and train them, if necessary, to meet the company’s
requirements.

8. Mergers and Acquisitions

Domestic companies enter international business though mergers and acquisitions. A
domestic company selects a foreign company and mergers itself with the foreign
company in order to enter international business. Alternatively, the domestic
company may purchase the foreign company and acquires its ownership and control.
Though mergers and acquisitions provide easy and instant entry to global
business, it would be very difficult to appraise the cases of acquisitions and mergers.
Sometimes it would be cheaper to a domestic company to have a green field strategy
than by acquisitions. Sometimes mergers and acquisitions also result in purchasing
the problems of a foreign company.
Advantages:
 The company immediately gets the ownership and control over the acquired
firm’s factories, employees, technology, brand names and distribution
networks.
 The company can formulate international strategy and generate more
revenues.
  If the industry already reached the stage of optimum capacity level or
overcapacity level in the host country. This strategy helps the economy of the
host country.
Disadvantages:
 Acquiring a firm in a foreign country is a complex task involving bankers,
lawyers, regulations, mergers and acquisition specialists from the two
countries.
 This strategy adds no capacity to the industry.
 Sometimes host countries imposed restrictions on acquisitions of local
companies by the foreign companies.
 Labour problems of the host country’s company are also transferred to the
acquired company.

Joint Ventures:
Two or more firms join together to create a new business entity that legally separate
and distinct from its parents.
Joint ventures are established as corporations and owned by the funding partners in
the predetermined proportions. American Motor Corporation entered into joint
venture with Beijing Automotive Works called Beijing Jeep to enter Chinese markets
by producing jeeps and other vehicles. Joint ventures involve shared ownership. Joint
ventures are common in international business. Various environmental factors like
social, technological, economical and political encourage the formation of joint
ventures. Joint ventures provide required strengths in terms of required capital, latest
technology required human talent etc. and enable the companies to share the risk in
the foreign markets.

Advantages:
 Joint ventures provide large capital funds. They are suitable for major
products.
 Joint ventures spread the risk between or among partners.
 Different parties to the joint venture bring different kinds of skills like
technical skills, technology, human skills, expertise, marketing skills or
marketing networks.
 Joint ventures make large projects and turnkey projects feasible and possible.
 Joint ventures provide synergy due to combined efforts of varied parties.

Disadvantages:
 Joint ventures are also potential for conflicts. They result in disputes between
or among parties due to varied interests. For example, the interest of a host
country’s company in developing countries would be to get the technology
 from its partner while the interest of a partner of an advanced county would
be to get the marketing expertise from the host country’s company.
 The partners delay the decision-making once the dispute arises. Then the
operations become unresponsive and inefficient.
 Decision-making is normally slowed down in joint ventures due to the
involvement of a number of parties.
 Scope for collapse of a joint venture is more due to entry of competitors,
changes in business in business environment in the two countries, changes in
partners’ strengths etc.
 Life cycle of a joint venture is hindered by many causes of collapse.
Question-3 What is International Business Environment? What do you
understand by the basic structure of International Business Environment?
Answer :

Business Environment : It refers to all external forces which have a bearing on the
functioning of the business. In fact Environment consists of factors that are largely if
not totally, external and beyond the control of individual industrial enterprise and
their managements. These are essentially the ‘givers’ within which firms and their
management must operate in a specific country and they vary, often greatly, from
country to country.
Business environment can be defined as the process by which strategists monitor the
economic, governmental, market, supplier, technological, geographic, and social
settings to determine opportunities and threats to their firms.
From the above definitions we can extract that business environment consists of
factors that are internal and external which poses threats to a Business Organization
or these provide opportunities for exploitation.
In business all the activities are being organized and also carried out by the people to
satisfy the needs of the consumers. So, it is an activity carried out by the people for
the people which means people occupy a central place around which all the activities
revolve. It means business is people and a human is always a dynamic entity who
believes in change and it may be right to say that the only certainty today is change. It
poses a huge challenge for today’s and especially tomorrow’s businessmen and
managers to be aware of specific changes so as to keep themselves abreast with the
latest happenings in the field of business to maintain their survival and sustainability
in the market. Therefore, the study of business environment is of atmost importance
for the managers and practitioners.

International Business Environment

International Business Environment can be defined as the environment in different

sovereign countries, with factors exogenous to the home environment of the
organization, influencing decision making on resource use and capabilities. This
includes the social, Cultural, Technological, Economic, Politico-Legal or regulatory, tax,
Global and Natural environments.
As Business Organizations have no control over the external environment, their
success depends upon how well they adapt to the external environment. A Business
Organization's ability to design and adjust its internal variables to take advantage of
opportunities offered by the external environment, and its ability to control threats
posed by the same environment, determine its success.

Basic Structure of International Business Environment

The Basic structure of international Business environment is very complex, dynamic
and multifarious in nature so it is very much significant to study, understand and
conceptualize the structure of International Business Environment in a
comprehensive manner. The structure of International Business Environment can be
categorized in to some very significant categories which can be understood by a
simple Word STEP IN as follows

1. S – Socio Cultural Environment

2. T – Technological Environment

3. E – Economic Environment

4. P – Politico-Legal Environment

5. I – International Environment

6. N – Natural Environment

Socio-Cultural Environment

Social and cultural factors in various countries of the globe affect the international
business. These factors include attitude of the people to work, attitude to wealth,
family, marriage, religion, education, ethics, human relations, social responsibilities
etc.

Social and Cultural Environment

Religion- Religion is one of the most important social institutions influencing business.
Religions play significant role in normal and ethical standards in production and
marketing of goods and services. Most of the religions indicate in providing truthful
and honest information. But most of the marketing practice deviates from these
standards.

Family Systems- In addition to religion, family system has its impact on international
business. In most of the Islamic countries, women play less significant role in the
economy and also in the family with limited rights. In Latin Americans countries,
though the role of women is better compared to that in Islamic countries, women’s
role is limited in economies and in families. But, women play a dominant role in
European and North American countries.
In addition, joint families are more prevalent in Islamic and Hindu religions. Joint
family system reduces the demand for goods and service compared to nucleus
families.

Culture- Culture is, the thought and behaviour patterns that member of a society
earns through language and other forms of symbolic interaction- their customs,
habits , beliefs and values, the common viewpoints which bind them together as an
social entity… Cultures change gradually picking up new ideas and dropping old ones,
but many of the cultures of the past have been so persistent and self contained that
the impact of such sudden change has torn them apart, uprooting their people
psychologically.

Characteristics of culture:
1. Learned- culture is not inherited nor biologically based; it is acquired by
learning and experience.
2. Shared- People as members of a group, organization, or society share culture;
it is not specific to specific individuals.
3. Trans generational- Culture is correlative passed from one generation to the
next.
4. Symbolic- culture is based on the human capacity to symbolize or use one
thing to represent another.
5. Patterned- Culture has structure and is integrated; a change in one part will
bring changes in another.
6. Adaptive- Culture is based on the human capacity to change or adapt, as
opposed to the more genetically driven adaptive process of animals.

Language and Culture

Language is the foundation of any culture. It is an abstract system of word meanings

and symbols for all aspects of culture. Language includes speech, written characters,
numerals, symbols, and gestures of non-verbal communication. The interrelationship
between language and culture is very strong and often the former determines the
latter. Words provide the concepts for understanding the world. In an organization,
different people related with different culture speak different languages. Sometimes
this language creates communication barriers so we can say that there is close
interrelationship between language and culture.

Cultural Attitude and Organization

Dressing habits, living styles, eating habits and other consumption patterns, priority of
needs are dictated or influenced by culture. Some Thai and Chinese and Indians do
not consume beef. Thailand and Chinese believe that consumption of beef is
improper and Indians believe that eating beef is a sin because cow is sacred. On the
other hand, Americans and European eats mostly non-vegetarian foods and also
prefer beef.
Similarly, dressing habit also vary from country to country based on their culture.
For example an Indian woman wears ‘saree’ and the woman of Middle East wears
burka, naqab aur parda.

Education and culture

In its broad sense, education is the lifelong process of learning through which
members of a society acquire knowledge and develop skills, ideas, values, norms, and
attitudes which they share other members of the society Countries rich in educational
facilities attract high-wage industries. Educationally advanced countries such as
England, France, and Germany are more likely to be markets for computers and high-
tech equipment than are less educated countries such as Poland, the Czech Republic,
and Romania.

Technological Environment
“Technological Environment means the development in the field of technology which
affects business by new inventions of productions and other improvements in
techniques to perform the business work.
Explanation
We see that in 21st century, technology is changing fastly. Now, all work is done
online and business shops are using machinery at high level. There are following
technological environment factors which affects business.
• New inventions to produce the products.
• New inventions relating to marketing like BPO for selling online in international
market.

Among all the segments of environment, technological environment exerts

considerable influence on business. Thus this section requires more devotion. J.K.
Galbraith defines technology as a systematic application of scientific or other
organized knowledge to practical tasks. During the last 150 years, technology has
developed beyond anybody’s comprehensions. Year 1983 was particularly considered
by scientists as the year of scientific success. In this year scientists put a billion dollars
technology into space, produced the world’s first test-tube triplets and obtained
evidence of another solar system. A major break through was achieved in the field of
genetic engineering. to cure dwarfism. Technology, thus, is the most dramatic force
shaping the destiny of people and business all over the world.
Changes in the technological environment have had some of the most dramatic
effects on business. A company may be thoroughly committed to a particular type of
technology, and may have made major investments in equipment and training only to
see a new, more innovative and cost-effective technology emerge.Indeed, the
managing director of a multinational organisation manufacturing heavy machinery
once said that the hardest part of his job had nothing to do with unions, pay or
products, but with whether or not to spend money on the latest technologically
improved equipment.

Computer technology has had an enormous impact on education and health care, to name but
two areas affected. The advancements in medical technology, for example, have contributed to
longevity in many societies. In addition, the introduction of robots in many factories has
reduced the need for labour, and the use of VCR's and microcomputers has become
commonplace in many homes and businesses.

Unfortunately, there is a negative side to technological progress. The introduction of nuclear

weapons, for example, has made the destruction of the human race a frightening possibility. In
addition, factories using modern technologies have polluted both air and water and
contributed to various environmental and health-related problems.

Technology is a critical factor in economic development. Because of the advances of

international communication, the increasing economic interdependence of nations,
and the serious scarcity of vital natural resources, the transfer of technology has
become an important preoccupation of both industrialised and developing countries.
For many industrialised countries, the changes in the technological environment over
the last 30 years have been immense particularly in such areas as chemicals, drugs,
and electronics. It is vital that organisations stay abreast of these changes - not only
because this will allow them to incorporate new and innovative designs into their
products, but also because it will give them a firmer base from which to anticipate
and counteract competition from other organisations.

When the Gillette company developed a superior stainless steel razor blade, it feared
that such a superior product might mean fewer replacements and sales. Thus, the
company decided not to market it. Instead, Gillette sold the technology to Wilkinson,
a British garden tool manufacturer, thinking that Wilkinson would use the technology
only in the production of garden tools. When Wilkinson Sword Blades were
introduced and sold quickly, Gillette understood the magnitude of its mistake.

Economic Environment
International business is mostly and directly influenced by the economic environment
of various countries. Global economy has undergone a sea change during the last 50
years. The change is revolutionary after1990. The results of these changes are
emergence of global markets, establishment of World Trade organization, emergence
o0f global business houses and global competitors rather than local competitors. The
major changes include:
 Capital flow rather than trade or product flow across the globe.
 Establishment of production facilities in various countries
  Technological revolution delinked the relation between the size of production
and level of employment.
 Primary products are delinked from the industrial economies.
 The macroeconomic factors of individual nations independently do not
significantly control the global economic outcomes.
 The contest between ‘capitalism’ and ‘communism’ is over. Capitalism
succeeded over communism/socialism as a model for the organization of
economic activity.

Economic Systems
Economic system is an organization of institutions established to satisfy human
needs/wants. There are three types of economic system, viz., capitalism, communism
and mixed. These are as follows:

i. Capitalism Economic Systems- Under this system, customer allocates resources.

Customers’ choice for product/services decides what will be produced by whom. This
economic system provides for economic democracy, thus giving the customer, his
choice for products/services.
This system emphasizes on the philosophy of individualism believing in private
ownership of production and distribution facilities. The limitation of this economic
system made the governments to introduce the welfare state concept which includes:
workmen’s compensation law, provision for social security, labour legislation for state
and housing, agriculture, medical, food, transportation, communication, security,
education, water, power supply etc.
USA, Japan and UK are the examples of capitalistic countries. Most of the other
countries like India, France, Italy and Malaysia have started shifting their economic
system towards this economic system.

ii. Mixed Economic System- Under this economic system, major factors of production
and distribution are owned, managed and controlled by the state. The purpose is to
provide the benefits to the public more or less on equity basis. The other factors of
mixed economic system are development of strong public sector, agrarian reforms,
control over private wealth, regulation of private investment and national self-
reliance.
This system does not distribute the existing wealth equally among the people, but
advocates the egalitarian principle. It believes in full employment, suitable rewards
for the workers’ efforts. This is also called ‘Fabian socialism.’
The trend that is taking place in the globe today is the move towards privatization
i.e., move towards market allocation. UK, France, Holland and India, for example,
have reduced their command sector after 1990.

iii. Communistic Economic System- In this, economic system, private property and
property rights to income are abolished. The state owns all the factors of production
and distribution. Communism is also called Marxism.
In communistic/command allocation countries, the resource allocation decisions
are made by the government planners. The number of automobiles, shoes, shirts,
television sets- their size, colour, quality, features etc., motor cycles, and scooters are
determined by government planners. Under this system, consumers are free to spend
their income on what is available.
The major limitations of this system include:
 It reduces individual freedom of choice due to restrictions on items to be
produced.
 It fails to get total commitment of people to work and country’s welfare.
 It failed to achieve significant economic growth.
 It could not achieve equality- the main plank of Marxism.
 The rules of this system did not set fine examples for the executors to follow
or implement
 It has been obsessed with rights of workers.
Cuba is an example of the last remaining predominantly communist country.

Business Development
Stages of business Development
Different countries in the world are at different stages of development. Countries are
segments based on GNP pr capita. World countries are divided into four categories,
viz., Low-Income Countries, Lower-Middle- Income Countries, Upper-Middle Income
Countries and High-Income Countries.

Low-Income Countries- These countries are also known as third world countries or
pre-industrial countries. They are also those with 1992 incomes of less than US $ 400
per capita. Characteristics of these countries include:
 Limited industrialization, and excessive dependency of population on
agriculture
 High birth rates
 Low literacy rates
 Heavy reliance on foreign aid
 Political instability and unrest
 Concentrated in Africa, South of the Sahara
 Excessive unemployment and underemployment
 Technological backwardness
 Underutilization of natural resources
 Excessive dependency on imports
 Industrial development is characterized by consumer goods industries
 The vicious circle of poverty.

Lower-Middle-Income Countries- These countries are also known as less developed

countries. These countries are with a GNP per capita of US $ between 400 and 2000
(1992). Characteristics of these countries include:
 Early stages of industrialization
 Expansion of consumer markets.
 Availability of cheap and motivated human resources
 Domestic markets are dominated with the products like clothing, batteries,
tires, building materials, packaged foods etc.
  Locations for production of standardized/mature products like clothing for
exports.
 Pose threat to the rest of world in labour-intensive products due to cheap
labour.
 Have competitive advantage in mature and labour intensive products.

Upper-Middle-Income Countries- These countries are also known as industrializing

countries. GNP per capita of these countries ranges between US $ 2,000 and 12,000.
Characteristics of these countries include:
 Less dependency on agriculture.
 Occupational mobility of the people from agriculture to industry.
 People migrate from rural to urban areas which results in increased
urbanization.
 Increase in literacy, formal education and increased wage rates.
 Low wage costs compared to advanced countries.
 Formidable competitors due to lower wage costs and with the capability of
advanced countries.
 High exports and rapid economic development.

High-Income Countries- These countries are also known as advanced countries,

industrialized, post industrial or First World countries. The GNP per capita (1992) of
these countries is more than US $ 12,000. The characteristics of these countries
include:
 Oil-rich countries are excluded from this category.
 Countries reached the income level of more than US $ 12,000 through the
process of industrial growth are included in this category.
 Countries developed through the codification of theoretical knowledge rather
than from random inventions are included in this category.
 Service sector contributes more than 50 percent to the GNP.
 Development of information sector.
 Development of intellectual Technology over machine technology.
 Domination of scientist and professionals over engineers and semi-skilled
workers.
 Emphasis on future plans.
 Japan’s work culture (mainly co-operation and harmonious interaction) suits
to the basic requirements of the post industrialized society.
 UK’s work culture (mainly distrust and absence of sound relations) is in
contrast to the needs of rapid industrialization.
 High income countries mostly aim at building the information society.
 These countries face the problems like pollution, excessive urbanization,
economic depression, increase in aged population etc.
 Deindustrialization is in the process in these countries. These countries shift to
the information society.
 Product innovations are more prevalent in post industrial society compared to
that in industrial society.
Politico-Legal Environment

Politico-Legal environment factors also influence the operations of international

business firms enormously. The influence of the political system of a country
influences the business from multi-angles, viz., deciding, promoting, fostering,
encouraging, sheltering, directing and controlling the business activities. The success
and growth of international business depend upon the stable, dynamic, honest,
people participative, secured political system in a country.

Political Relations and International Business

Political friendship/friendly diplomatic relations result in the growth of bilateral or
multilateral trade. For example, the friendly diplomatic relations between India and
the former USSR helped not only the Indian companies but also the MNCs operating
in India to have close business linkages with the former USSR. Similarly, the friendly
diplomatic relations between Pakistan and USA helped Pakistan companies to have
close business linkages with USA.
Hostilities between countries affect the international business among the
companies of these countries. Arab countries did not prefer to carry on business with
the business firms of Israel. In USA, the firms follow the policy of ‘maintenance of
arm’s length’ with the competing firms. But in other countries, particularly in Europe
and India, they come to an agreement among themselves regarding price, product
design, division of markets etc.

Types of political systems: Appraisal of political systems helps us in having an idea of

political systems and their impact on international business. Governments may be
parliamentary (open) or absolutist (closed).
 In parliamentary governments people are consulted and are allowed to
participate in decision-making on all important issues.
 Under absolutist government the ruling government dictates government
policies, rules and regulations on all citizens without considering the
latter’s needs or views. Though Saudi Arabia and North Korea claim that
they are of parliamentary type political system, they do not allow the
people to express their voice. Hence they are classified as monarchies and
dictatorships. The business in these countries is completely based on
government policies rather than the people’s needs.
Government may also be classified as two-party system, multiparty, single party and
one-party dominated.
 Two-party system- Two major parties take turn of controlling the government
under two-party system. USA and UK are the example of two-party system.
 Multiparty system- There would be many parties and no party is strong to gain
the control of the Government in multiparty system. Germany, France, Israel,
India (during 1996-2000) and Poland are examples for multiparty system.
 Single-party system- In this system only one dominant party almost gets the
opportunity to control the government, though several parties exist. Egypt is
the best example for it. Even in India, Congress party ruled the country until
1997. Thus a single party rules the Government during the early stages of
development
  One-party dominated system- In this system, though there are more than one
party, the dominant party rules the Government and it does not allow any
opposition party to come up. The former USSR, Cuba, Libya are example of
this system.

Level of Economic Development and Political Stability: South Africa and Italy are
economically developed countries. South Africa has been facing internal and external
problems and Italy has been facing labour problems and internal dissension. Vietnam
is politically stable but economically developing country. India is politically unstable
and also a developing country. This is due to varied regional, ethnic, language,
religious issues/problems.

Political Risks- International business firms face political risks as and when there are
changes in Government policies and /or changes in political parties in power. Risks are
based on the host government’s actions like confiscation, expropriation,
nationalization, domestication and creeping expropriation.
 Confiscation- The process of nationalization of a property without
compensation is called confiscation. Chinese government’s seizure of US
property in 1949 when Chinese communist party took power is an example of
confiscation.
 Expropriation- Expropriation is the process of nationalization of a property
with compensation. Indian Government nationalized commercial banks with
compensation in July 1969.
 Nationalization- Nationalization is the process of shifting the ownership of
private property from private individuals or institution to the Government.
Burma nationalized entire foreign trade. Poland and Czech communist
nationalized n100 percent of their economy.
 Domestication- In domestication, foreign business firms relinquish control and
owner ship in favour of domestic investors either partly or fully. For example,
Indian Leaf Tobacco Development Company Ltd., in India, Pepsi, General
Motors and Barclays Bank in South Africa.
 General Instability Risk- These risks are due to social, political, religious unrest
in the host country like the recent coup in Fiji and problems due to Muslim
rebels in Philippines.
 Operation Risk- These risks are due to the imposition of controls on the
foreign business operation (like production levels, marketing, finance and
human resource) by the host Government.

Indicators of Political Instability

Political instability can be viewed from the social unrest, attitudes of nationals and
policies of host Governments.
 Social unrest- Social unrest is caused by clashes between or among
community groups, religious groups and ethnic groups. For example,
Christian-Muslim conflict in Lebanon, Hindu-Muslim conflict in India, White-
Black conflict in USA etc.
  Attitudes of nationals- The negative attitude of nationals towards foreign
business and foreigners is a greater risk. These negative attitudes include
exploitation, colonialism, repatriation, employment to foreigners etc.
 Policies of the Host Government- Host government’s policies affect the
operation of international business firms directly and internally or externally.
For example, janata Government in India asked Coca-Cola to leave the country
in 1977 due to the policy of discouraging the multinationals.

How to Minimize Political Risks?

Political risks cannot be completely eliminated. However, they can be minimized by
contributing to the change of the attitudes of the people and Government of the host
country like as:
 Stimulation of the host’s country economy.
 Employment of Nationals.
 Sharing ownership
 Being civic minded
 Political neutrality
 Behind-the-scenes lobby
 Observation of political mood reduction of exposure

International Environment
The International (or global) environment consists of all those factors that
operate at the transnational, cross-cultural, and across-the-border level which
have an impact on the business of an organization. Some of the important factors
and influences operating in the international environment are as below:
1. Globalization, its process, content, and direction
2. Global economic forces, organizations, blocs, and forums.
3. Global trade and commerce, its process and trends.
4. Global financial system, source of financing, and accounting standards
5. Geopolitical situation, equations alliances, and strategic interest of
nations
6. Global demographic pattern and shifts.
7. Global human resources- institutions, availability, nature and quality of
skills63999and expertise, mobility of labor and other skilled personnel.
8. Global information systems, communication networks, and media.
9. Global technological and quality systems and standards
10. Global markets and competitiveness
11. Global legal system, adjudication and arbitration mechanisms
12. Globalization of management and allied disciplines, and the diffusion of
management techniques in industry.
The multinational environment constitutes a special class of the
environmental sector. While the preceding seven sectors are largely limited
and exclusive in nature, the multinational environment encompasses all the
sectors, albeit in global context. What we mean to say is that while for
 instance, the political environment within a country could consist of certain
factors related to national politics, the international environment would also
have a geopolitical component including the political factors and influences at
the global level.

Natural Environment
Equally significant, but sadly ignored, are the factors like climate, minerals, soil,
landform, rivers and oceans, coast lines, natural resources, flora and fauna etc. Which
have considerable influence on the functioning of a business. It is the natural
environment which decides the resources for any business. Manufacturing, which is
one of the aspects of business, depends on physical environment for inputs like raw
material, labour of various
skills, water, fuel etc. Trade between two regions of a nation or between two nations
is the result of geographic factors. Because of natural factors, certain areas are more
suitable for production of certain goods and other areas are in need of such goods.
Transportation and
communication, the main prop of business, depend to a larger extent on geographic
factors. Uneven landforms, desserts, oceans, forest, rivers etc. are barriers to develop
this vital infrastructure. Some businesses like mining of coal and ores, drilling of oil
and most important agriculture which depends most on nature. Thus the impact of
natural environment can not be ignored moreover it should be given top priority for
any
successful business.

Question – What are the prominent Risks in International Business and

How these can be averted in International Business Organizations?
or
Question- Explain the major risks and challenges faced by a firm involved in
International Business. July, 2010

Answer:
Risks in International Business

Just as there are reasons to get into global markets, and benefits from global markets,
there are also risks involved in locating companies in certain countries. Each country
may have its potentials; it also has its woes that are associated with doing business
with major companies. Some of the rogue countries may have all the natural minerals
but the risks involved in doing business in those countries exceed the benefits. Some
of the risks in international business are:

(1) Strategic Risk

(2) Operational Risk
(3) Political Risk
(4) Country Risk
(5) Technological Risk
(6) Environmental Risk
(7) Economic Risk
(8) Financial Risk
(9) Terrorism Risk

Strategic Risk: The ability of a firm to make a strategic decision in order to respond to
the forces that are a source of risk. These forces also impact the competiveness of a
firm. Porter defines them as: threat of new entrants in the industry, threat of
substitute goods and services, intensity of competition within the industry, bargaining
power of suppliers, and bargaining power of consumers.

Operational Risk: This is caused by the assets and financial capital that aid in the day-
to-day business operations. The breakdown of machineries, supply and demand of
the resources and products, shortfall of the goods and services, lack of perfect logistic
and inventory will lead to inefficiency of production. By controlling costs, unnecessary
waste will be reduced, and the process improvement may enhance the lead-time,
reduce variance and contribute to efficiency in globalization.

Political Risk: The political actions and instability may make it difficult for companies
to operate efficiently in these countries due to negative publicity and impact created
by individuals in the top government. A firm cannot effectively operate to its full
capacity in order to maximize profit in such an unstable country's political turbulence.
A new and hostile government may replace the friendly one, and hence expropriate
foreign assets.

Country Risk: The culture or the instability of a country may create risks that may
make it difficult for multinational companies to operate safely, effectively, and
efficiently. Some of the country risks come from the governments' policies, economic
conditions, security factors, and political conditions. Solving one of these problems
without all of the problems (aggregate) together will not be enough in mitigating the
country risk.

Technological Risk: Lack of security in electronic transactions, the cost of developing

new technology, and the fact that these new technology may fail, and when all of
these are coupled with the outdated existing technology, the result may create a
dangerous effect in doing business in the international arena.
Environmental Risk: Air, water, and environmental pollution may affect the health of
the citizens, and lead to public outcry of the citizens. These problems may also lead to
damaging the reputation of the companies that do business in that area.

Economic Risk: This comes from the inability of a country to meet its financial
obligations. The changing of foreign-investment or/and domestic fiscal or monetary
policies. The effect of exchange-rate and interest rate make it difficult to conduct
international business.

Financial Risk: This area is affected by the currency exchange rate, government
flexibility in allowing the firms to repatriate profits or funds outside the country. The
devaluation and inflation will also impact the firm's ability to operate at an efficient
capacity and still be stable. Most countries make it difficult for foreign firms to
repatriate funds thus forcing these firms to invest its funds at a less optimal level.
Sometimes, firms' assets are confiscated and that contributes to financial losses.

Terrorism Risk: These are attacks that may stem from lack of hope; confidence;
differences in culture and religious philosophy, and/or merely hate of companies by
citizens of host countries. It leads to potential hostile attitudes, sabotage of foreign
companies and/or kidnapping of the employers and employees. Such frustrating
situations make it difficult to operate in these countries.

Although the benefits in international business exceed the risks, firms should take a
risk assessment of each country and to also include intellectual property, red tape and
corruption, human resource restrictions, and ownership restrictions in the analysis, in
order to consider all risks involved before venturing into any of the countries.

Dr. Sidney Okolo is a professor, consultant, strategist, and Africa expert. He is

affiliated to several universities, the Managing Director of International Business
Associates, a management consulting firm, and also the CEO of Global Education
Support, an education assistance program.

Among other things, he engages in all aspects of learning, knowledge, organization

and human change. His focus is on leadership, management, entrepreneurship, profit
engineering, human potential, excellence, achievement, business strategy, research
and development. Product management, change management, conflict management,
athlete management, marketing, business development and operations. He works
with clients to adapt to change due to change in factors of production, technology,
goods and services. He engages clients in training, retraining, development, skills
enhancement, association, behavior modification, ways of thinking, and attitude
adjustment. In addition to his work in the United States, his focus is also on
developing countries in the continent of Africa, their leadership, culture, economic
and market structure, community planning and development, and his created four
letter word, "PIES", which stands for: poverty, instability, ethnicity, and sectarianism.

Question-5. What are the motives of entering in International Business?

Or
Question- What are the major reasons for getting engaged in International
Business?
Answer: Motives of International Business: All organizations, irrespective of their
size, are keen to enter in to international business. Established companies are
expanding their business. Many countries encourage trade, and removal of
strangulating trade barriers. It motivates companies to aggressively multiply their
targets. The governments of various countries are also determined to make their
economy grow through international business that has therefore become a inevitable
part of their economic policy. The objective behind international business can be
looked at:
1. From an individual company’s angle.
2. From the government angle.
From an individual company’s angle
1. Managing the product life cycle:
All companies have products, which pass through different stages of their life cycles.
After the product reaches the last stage of the life cycle called the declining stage in
one country, it is important for the company to identify other countries where the
whole cycle process could be encashed. For example, Enfield India reached maturity
and declining stage in India for the 350 cc motorcycle. The company entered Kenya,
West Indies, Mauritius and other destinations where the heavy engine two-wheeler
became popular. The Suzuki 800 cc vehicle reached the last stage of its life cycle in
Japan and entered India in the early 1980’s, where it is still doing good business
today. HP laptops are moving all the developing countries the moment they reached
maturity in the U.S. market.
2. Geographic expansion as a growth strategy:
Even if companies expand their business at home, they may still look overseas for
new markets and better prospects. For example, Arvind mills expanded their business
by either setting up units or opening warehouses abroad. Ranbaxy’s growth is mainly
attributed to geographic expansion every year to new territories. Arobindo Pharma,
Cipla and Dr. Reddys follow the same.
3. The adventurous spirit of the younger generation
The younger generation of business families has considerable International exposure.
They are willing to take risks and challenges And also create opportunities for their
business. Laxmi Mittal has Emerged as the steel king of the world and Vijay Mallya of
the UB Group took a major risk in setting up operations in South Africa. Kumar Birla
expands to Australia and Europe through acquisitions.
4. Corporate ambition:
Every corporate in the country has strategic plans to multiply its sales turnover. In
case some of the ventures fail, others will offset the losses because of multi-location
operations. For example, Coco Cola is still to day not earning any profit in a number of
countries. But this will not affect the company because more than a hundred
countries are contributing to offset losses. Kellogge cannot think of profits in India for
further five years. They are ambitious to be visible and then revenue.
5. Technology advantage:
Some companies have outstanding technology through which they enjoy core
competency.
There is a need for such technology in all countries. Biocon, Infosys, Gharda chemicals
are known for their core competency in biotechnology, IT and pesticides respectively
and a huge demand exists throughout the world for their technology. Thermax, Ion
Exchange, Bharat Heavy Electricals and Larsen & Toubro have marched ahead in
International business.
6. Building a corporate image
Prior to profits and revenue generation, many companies first build their corporate
image
abroad. Once the image is built, generating revenues is a comparatively easy task.
Samsung and LG built their image in India for the first three years and generation of
revenue and profits has been considerable, as they have expanded to semi-urban and
rural India as well. Today their market share and penetration levels have gone far
ahead of other players in India.

7. Incentives and business impact

Companies, which are involved in international business, enjoy fiscal, physical and
infrastructural incentives while they setup business in the host country. The Aditya
Birla Group enjoyed such incentives in Thailand and Indonesia. All such incentives
contribute to the company to enjoy multiple advantages like economies of scale,
access to import inputs, competitive pricing and aggressive promotion.
8. Lobour advantage
Many companies have a highly productive lobour force. Their unique skills may not be
available throughout the world. Manufacturing units in India have consistently
performed well, whether in a diamond industry, handicraft, woodwork or leather.
Companies nurture the skills of the artisans and win world markets. Knitwear,
handlooms, embroidery, metal ware, carpet weaving, cashew processing and seafood
call for cost-effective lobour force. India is endowed with such skills.
9. New business opportunities
Many companies have entered in to business abroad, seeing unlimited opportunities.
National foreign trade policy emphasizes focus markets. Enormous amount of growth
potential is untapped in Latin America, Sub-Saharan Africa, CIS countries and China.
10. Emergence of SEZ’S, EOU’S, AEZ
Current approvals of Special economic zones, Agrizones and Technology parks by
Ministry of Commerce & Industry give new dimensions to international business. The
companies setting up units in SEZ’s enjoy innumerable benefits and competitiveness.

From a Government Angle

1. Earning valuable foreign exchange
Foreign exchange earning is necessary to balance the payments for imports. India
imports crude oil, defense equipments, essential raw materials and medical
equipments for which the payments have to be made in foreign exchange. If the
exports are high and imports are low it indicates a surplus balance of payment. On the
other hand if imports are high and exports are low it indicates an adverse balance of
payment, which all economies would want to avoid. A vast majority of the nations in
the world are facing adverse balance of payment.
2. Interdependency of nations
From time immemorial, nations have depended on each other. Even during the era of
Indus valley civilization, Egypt and the Indus Valley depended on each other for
various items. Today, India depends on the Gulf regions for crude oil and in turn the
Gulf region depends on India for tea, rice etc. Developed countries depend on
developing countries for primary goods, whereas developing countries depend on
developed countries for value added finished products. No single country is endowed
with all the resources to survive on her own.
3. Trade theories and their impact
The theories of absolute advantage, comparative advantage and competitive
advantage, which have been propounded by classical economists, indicate that a few
nations have certain advantages of resources. The resources may be in the form of
labour or infrastructure or technology or even a proactive policy of the government.
Such theories are remaining foundations till today, for international business practices
with few changes and trends.
4. Diplomatic relations
Diplomacy and trade always go hand in hand. Many sovereign nations send their
diplomatic representatives to other countries with a motive of promoting trade
besides maintaining cordial relations. Indian diplomats in Latin America have done a
remarkable job of promoting India’s business in the 1990’s. Indian embassies and high
commissions in all the countries around theworld play a catalytic role of promoting
trade and investment.
5. Core competency of nations
Many countries are endowed with resources, which are produced at an optimum
level. Such countries can compete well anywhere in the world. Rubber products from
Malaysia, knitwear from India, rice from Thailand and wool from Australia are a few
illustrations. Competing with a focused competency in any major resource or
technology gives core competency status. India’s core competency in IT is known
throughout the world.
6. Investment for infrastructure
Over the years all countries have invested huge amounts of money on infrastructure
by building airports, seaports, economic zones and inland container terminals. If the
trade activities do not increase, the country cannot recover the amounts invested.
Hence, the government fixes targets for every infrastructure unit and time frame to
achieve it. Economies like Mauritius, Hong Kong, Singapore, Malta and Cyprus invest
in trade related infrastructure in order to elevate themselves to be foreign trade
oriented economies. Infrastructure and international business are the two eyes of a
growing economy.
7. National image
A new era has emerged from conquering countries by sword to winning it by trade. A
businessman gives priority to the image of the country he belongs to. We come
across products with labels such as “made in China” and “Japan” & “made in India”.
Businessmen from India, China and Japan bring credentials to their country. When
L.N.Mittal operates in Indonesia or Kazakhstan or Trinidad he is perceived by the
people as Indian. The stigma cannot be detached.
8. Foreign trade policy and targets
All developing countries announce their trade policies. A clear road map is drafted
and given to promotional bodies so that timely implementation is possible. Every
trade policy in India, in the past had its agenda and action plans right from import
control order in 1947. All the trade policies had three fold objectives in their agenda-
production promotion and competitiveness.
9. National targets
By the year 2010, India aims to have a 2% share of the global market from the current
level of 1.5 %. By the year 2009-10, our trade status was expected to cross $ 500
billion. The global melt down and its impact on low consumption around the world
has limited the target unachievable for India.
10. WTO and international agencies
The apex body of world trade, the WTO, a free, transparent and regulatory body
upholds
provisions related to the elimination of tariffs and non-tariff barriers. The
International Bank for Reconstruction and Development (IBRD), popularly called the
World Bank extends financial assistance on a soft loan basis in order to assist
developing countries in their infrastructure and industrial development. The
International Monetary Fund (IMF) maintains currency stability in various countries
through regulatory mechanisms. Many more organizations like International Maritime
Organization, International Standard Organization, International Telecommunication
Union, International Civil Aviation Organization are major catalysts to promote trade
between nations. Over the past few years their role in promotion of trade, especially
amongst developing economies is unprecedented.

Or
Question- What are the major reasons for getting engaged in International
Business?
Answer: Motives of International Business: All organizations, irrespective of their
size, are keen to enter in to international business. Established companies are
expanding their business. Many countries encourage trade, and removal of
strangulating trade barriers. It motivates companies to aggressively multiply their
targets. The governments of various countries are also determined to make their
economy grow through international business that has therefore become a inevitable
part of their economic policy. The objective behind international business can be
looked at:
1. From an individual company’s angle.
2. From the government angle.
From an individual company’s angle
1. Managing the product life cycle:
All companies have products, which pass through different stages of their life cycles.
After the product reaches the last stage of the life cycle called the declining stage in
one country, it is important for the company to identify other countries where the
whole cycle process could be encashed. For example, Enfield India reached maturity
and declining stage in India for the 350 cc motorcycle. The company entered Kenya,
West Indies, Mauritius and other destinations where the heavy engine two-wheeler
became popular. The Suzuki 800 cc vehicle reached the last stage of its life cycle in
Japan and entered India in the early 1980’s, where it is still doing good business
today. HP laptops are moving all the developing countries the moment they reached
maturity in the U.S. market.
2. Geographic expansion as a growth strategy:
Even if companies expand their business at home, they may still look overseas for
new markets and better prospects. For example, Arvind mills expanded their business
by either setting up units or opening warehouses abroad. Ranbaxy’s growth is mainly
attributed to geographic expansion every year to new territories. Arobindo Pharma,
Cipla and Dr. Reddys follow the same.
3. The adventurous spirit of the younger generation
The younger generation of business families has considerable International exposure.
They are willing to take risks and challenges And also create opportunities for their
business. Laxmi Mittal has Emerged as the steel king of the world and Vijay Mallya of
the UB Group took a major risk in setting up operations in South Africa. Kumar Birla
expands to Australia and Europe through acquisitions.
4. Corporate ambition:
Every corporate in the country has strategic plans to multiply its sales turnover. In
case some of the ventures fail, others will offset the losses because of multi-location
operations. For example, Coco Cola is still to day not earning any profit in a number of
countries. But this will not affect the company because more than a hundred
countries are contributing to offset losses. Kellogge cannot think of profits in India for
further five years. They are ambitious to be visible and then revenue.
5. Technology advantage:
Some companies have outstanding technology through which they enjoy core
competency.
There is a need for such technology in all countries. Biocon, Infosys, Gharda chemicals
are known for their core competency in biotechnology, IT and pesticides respectively
and a huge demand exists throughout the world for their technology. Thermax, Ion
Exchange, Bharat Heavy Electricals and Larsen & Toubro have marched ahead in
International business.
6. Building a corporate image
Prior to profits and revenue generation, many companies first build their corporate
image
abroad. Once the image is built, generating revenues is a comparatively easy task.
Samsung and LG built their image in India for the first three years and generation of
revenue and profits has been considerable, as they have expanded to semi-urban and
rural India as well. Today their market share and penetration levels have gone far
ahead of other players in India.
7. Incentives and business impact
Companies, which are involved in international business, enjoy fiscal, physical and
infrastructural incentives while they setup business in the host country. The Aditya
Birla Group enjoyed such incentives in Thailand and Indonesia. All such incentives
contribute to the company to enjoy multiple advantages like economies of scale,
access to import inputs, competitive pricing and aggressive promotion.
8. Lobour advantage
Many companies have a highly productive lobour force. Their unique skills may not be
available throughout the world. Manufacturing units in India have consistently
performed well, whether in a diamond industry, handicraft, woodwork or leather.
Companies nurture the skills of the artisans and win world markets. Knitwear,
handlooms, embroidery, metal ware, carpet weaving, cashew processing and seafood
call for cost-effective lobour force. India is endowed with such skills.
9. New business opportunities
Many companies have entered in to business abroad, seeing unlimited opportunities.
National foreign trade policy emphasizes focus markets. Enormous amount of growth
potential is untapped in Latin America, Sub-Saharan Africa, CIS countries and China.
10. Emergence of SEZ’S, EOU’S, AEZ
Current approvals of Special economic zones, Agrizones and Technology parks by
Ministry of Commerce & Industry give new dimensions to international business. The
companies setting up units in SEZ’s enjoy innumerable benefits and competitiveness.

From a Government Angle

1. Earning valuable foreign exchange
Foreign exchange earning is necessary to balance the payments for imports. India
imports crude oil, defense equipments, essential raw materials and medical
equipments for which the payments have to be made in foreign exchange. If the
exports are high and imports are low it indicates a surplus balance of payment. On the
other hand if imports are high and exports are low it indicates an adverse balance of
payment, which all economies would want to avoid. A vast majority of the nations in
the world are facing adverse balance of payment.
2. Interdependency of nations
From time immemorial, nations have depended on each other. Even during the era of
Indus valley civilization, Egypt and the Indus Valley depended on each other for
various items. Today, India depends on the Gulf regions for crude oil and in turn the
Gulf region depends on India for tea, rice etc. Developed countries depend on
developing countries for primary goods, whereas developing countries depend on
developed countries for value added finished products. No single country is endowed
with all the resources to survive on her own.
3. Trade theories and their impact
The theories of absolute advantage, comparative advantage and competitive
advantage, which have been propounded by classical economists, indicate that a few
nations have certain advantages of resources. The resources may be in the form of
labour or infrastructure or technology or even a proactive policy of the government.
Such theories are remaining foundations till today, for international business practices
with few changes and trends.
4. Diplomatic relations
Diplomacy and trade always go hand in hand. Many sovereign nations send their
diplomatic representatives to other countries with a motive of promoting trade
besides maintaining cordial relations. Indian diplomats in Latin America have done a
remarkable job of promoting India’s business in the 1990’s. Indian embassies and high
commissions in all the countries around theworld play a catalytic role of promoting
trade and investment.
5. Core competency of nations
Many countries are endowed with resources, which are produced at an optimum
level. Such countries can compete well anywhere in the world. Rubber products from
Malaysia, knitwear from India, rice from Thailand and wool from Australia are a few
illustrations. Competing with a focused competency in any major resource or
technology gives core competency status. India’s core competency in IT is known
throughout the world.
6. Investment for infrastructure
Over the years all countries have invested huge amounts of money on infrastructure
by building airports, seaports, economic zones and inland container terminals. If the
trade activities do not increase, the country cannot recover the amounts invested.
Hence, the government fixes targets for every infrastructure unit and time frame to
achieve it. Economies like Mauritius, Hong Kong, Singapore, Malta and Cyprus invest
in trade related infrastructure in order to elevate themselves to be foreign trade
oriented economies. Infrastructure and international business are the two eyes of a
growing economy.
7. National image
A new era has emerged from conquering countries by sword to winning it by trade. A
businessman gives priority to the image of the country he belongs to. We come
across products with labels such as “made in China” and “Japan” & “made in India”.
Businessmen from India, China and Japan bring credentials to their country. When
L.N.Mittal operates in Indonesia or Kazakhstan or Trinidad he is perceived by the
people as Indian. The stigma cannot be detached.
8. Foreign trade policy and targets
All developing countries announce their trade policies. A clear road map is drafted
and given to promotional bodies so that timely implementation is possible. Every
trade policy in India, in the past had its agenda and action plans right from import
control order in 1947. All the trade policies had three fold objectives in their agenda-
production promotion and competitiveness.
9. National targets
By the year 2010, India aims to have a 2% share of the global market from the current
level of 1.5 %. By the year 2009-10, our trade status was expected to cross $ 500
billion. The global melt down and its impact on low consumption around the world
has limited the target unachievable for India.
10. WTO and international agencies
The apex body of world trade, the WTO, a free, transparent and regulatory body
upholds
provisions related to the elimination of tariffs and non-tariff barriers. The
International Bank for Reconstruction and Development (IBRD), popularly called the
World Bank extends financial assistance on a soft loan basis in order to assist
developing countries in their infrastructure and industrial development. The
International Monetary Fund (IMF) maintains currency stability in various countries
through regulatory mechanisms. Many more organizations like International Maritime
Organization, International Standard Organization, International Telecommunication
Union, International Civil Aviation Organization are major catalysts to promote trade
between nations. Over the past few years their role in promotion of trade, especially
amongst developing economies is unprecedented.

Question-What is meant by Exchange rate? Explain various factors

affecting exchange rates.

Answer:
The global trading and financial system is the financial system consisting
of institutions and regulators that act on the international level, as opposed to those
that act on a national or regional level. The main players are the global institutions,
such as International Monetary Fund and Bank for International Settlements, national
agencies and government departments, e.g., central banks and finance ministries,
private institutions acting on the global scale, e.g., banks and hedge funds, and
regional institutions, e.g., the Eurozone. Deficiencies and reform of the GFS have been
hotly discussed in recent years.
Euro Currency Market
Another component of international financial markets is the Eurocurrency market.
Originally called the Eurodollar market, the Eurocurrency market first made its
appearance in the early 1950s when the communist-controlled governments of
Central and Eastern Europe needed dollars to finance their international trade but
feared that the US government would confiscate or block their holdings of dollars in
the US banks for political reasons. These governments solved their problem by using
European banks that were willing to hold their dollar accounts for them. In this way,
the Eurodollar was born-US dollar deposited in the European bank accounts. As other
currencies became stronger in the post-war era- particularly the yen and the
Deutsche mark-the Eurocurrency market broadened to include Europounds, Euroyen,
Euromarks, and other currencies. Today, a Eurocurrency is defined as a currency on
deposit outside of its country of issue. Obviously, the terms Eurocurrency is a
misnomer because a Eurocurrency can be created anywhere in the world; the
persistent Euro-prefix reflects only the European origin of the market.
Eurocurrency markets serve two valuable purposes:
1. Eurocurrency deposits are an efficient and convenient market device for
holding surplus cash; and
2. Eurocurrency market is a major source of short-term bank loans to finance
corporate working capital needs, including the financing of imports and
exports.
The unique feature of the Eurocurrency market is the relatively low cost of
borrowings. The Eurocurrency market loans are low cost because of three reasons-
1. Firstly, the loans are free from costly government banking regulations, such as
revenue requirements, that are designed to control the domestic money
supply but which push up lending costs.
 2. Secondly, these loans involve large transactions, so the average cost of making
the loan is less.
3. Thirdly, since the most creditworthy borrowers avail the loans, the risk
premium that lenders charge is also less.

Exchange Rate
In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX
rate) between two currencies is the rate at which one currency will be exchanged for
another. It is also regarded as the value of one country’s currency in terms of another
currency. For example, an interbank exchange rate of 91Japanese yen (JPY, ¥) to
the United States dollar (US$) means that ¥91 will be exchanged for each US$1 or
that US$1 will be exchanged for each ¥91. Exchange rates are determined in
the foreign exchange market,[2] which is open to a wide range of different types of
buyers and sellers where currency trading is continuous: 24 hours a day except
weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday.
The spot exchange rate refers to the current exchange rate. Theforward exchange
rate refers to an exchange rate that is quoted and traded today but for delivery and
payment on a specific future date.
In the retail currency exchange market, a different buying rate and selling rate will be
quoted by money dealers. Most trades are to or from the local currency. The buying
rate is the rate at which money dealers will buy foreign currency, and the selling rate
is the rate at which they will sell the currency. The quoted rates will incorporate an
allowance for a dealer's margin (or profit) in trading, or else the margin may be
recovered in the form of a "commission" or in some other way. Different rates may
also be quoted for cash (usually notes only), a documentary form (such as traveller's
cheques) or electronically (such as a credit card purchase). The higher rate on
documentary transactions is due to the additional time and cost of clearing the
document, while the cash is available for resale immediately. Some dealers on the
other hand prefer documentary transactions because of the security concerns with
cash.
Exchange Rate Determination
The transactions in the foreign exchange market, viz., buying and selling foreign
currency take at a rate, which is called ‘exchange rate’. Exchange rate is the price paid
in the home currency for a unit of foreign currency. The exchange rate can be quoted
in two ways, viz.,
 One unit of foreign money to a number5 of units of domestic currency.
 A certain number of units of foreign currency to one unit of domestic
currency.
For example, 1 US $ = Rs. 50 or Re. 1 = US $ 0.02
Exchange rate in a free market is determined by the demand for and the supply
of exchange of a particular country. The equilibrium exchange rate is the rate at
which demand for foreign exchange and the supply of foreign exchange are
equal. Ragnar Nurske defined the equilibrium exchange rate as, “that rate which
 over a certain period of time keeps the balance of payments in equilibrium.”
Equilibrium exchange rate can be determined by two methods:
 The exchange rate between US dollars and Indian Rupees can be
determined by demand for and supply of US dollars in India or by Indians.
The price of US $ is fixed in Indian Rupees.
 The exchange rate between Indian Rupees and US dollars can also be
determined by demand for and supply of Indian Rupees by Americans or
in USA. The price of Indian Rupee is determined in US dollars.
 The prices are the same in both these methods.

Determinants of Exchange Rates

Numerous factors determine exchange rates, and all are related to the trading
relationship between two countries. Remember, exchange rates are relative, and are
expressed as a comparison of the currencies of two countries. The following are some
of the principal determinants of the exchange rate between two countries. Note that
these factors are in no particular order; like many aspects of economics, the relative
importance of these factors is subject to much debate.

1. Differentials in Inflation

As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. During
the last half of the twentieth century, the countries with low inflation included Japan,
Germany and Switzerland, while the U.S. and Canada achieved low inflation only later.
Those countries with higher inflation typically see depreciation in their currency in
relation to the currencies of their trading partners. This is also usually accompanied
by higher interest rates.

2. Differentials in Interest Rates

Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates,
and changing interest rates impact inflation and currency values. Higher interest rates
offer lenders in an economy a higher return relative to other countries. Therefore,
higher interest rates attract foreign capital and cause the exchange rate to rise. The
impact of higher interest rates is mitigated, however, if inflation in the country is
much higher than in others, or if additional factors serve to drive the currency down.
The opposite relationship exists for decreasing interest rates - that is, lower interest
rates tend to decrease exchange rates.

3. Current-Account Deficits

The current account is the balance of trade between a country and its trading
partners, reflecting all payments between countries for goods, services, interest and
dividends. A deficit in the current account shows the country is spending more on
foreign trade than it is earning, and that it is borrowing capital from foreign sources to
make up the deficit. In other words, the country requires more foreign currency than
it receives through sales of exports, and it supplies more of its own currency than
foreigners demand for its products. The excess demand for foreign currency lowers
the country's exchange rate until domestic goods and services are cheap enough for
foreigners, and foreign assets are too expensive to generate sales for domestic
interests.

4. Public Debt

Countries will engage in large-scale deficit financing to pay for public sector projects
and governmental funding. While such activity stimulates the domestic economy,
nations with large public deficits and debts are less attractive to foreign investors. The
reason? A large debt encourages inflation, and if inflation is high, the debt will be
serviced and ultimately paid off with cheaper real dollars in the future.
In the worst case scenario, a government may print money to pay part of a large debt,
but increasing the money supply inevitably causes inflation. Moreover, if a
government is not able to service its deficit through domestic means (selling
domestic bonds, increasing the money supply), then it must increase the supply of
securities for sale to foreigners, thereby lowering their prices. Finally, a large debt
may prove worrisome to foreigners if they believe the country risks defaulting on its
obligations. Foreigners will be less willing to own securities denominated in that
currency if the risk of default is great. For this reason, the country's debt rating (as
determined by Moody's or Standard & Poor's, for example) is a crucial determinant of
its exchange rate.

5. Terms of Trade

A ratio comparing export prices to import prices, the terms of trade is related to
current accounts and the balance of payments. If the price of a country's exports rises
by a greater rate than that of its imports, its terms of trade have favorably improved.
Increasing terms of trade shows greater demand for the country's exports. This, in
turn, results in rising revenues from exports, which provides increased demand for
the country's currency (and an increase in the currency's value). If the price of exports
rises by a smaller rate than that of its imports, the currency's value will decrease in
relation to its trading partners.

6. Political Stability and Economic Performance

Foreign investors inevitably seek out stable countries with strong economic
performance in which to invest their capital. A country with such positive attributes
will draw investment funds away from other countries perceived to have more
political and economic risk. Political turmoil, for example, can cause a loss of
confidence in a currency and a movement of capital to the currencies of more stable
countries.
The exchange rate of the currency in which a portfolio holds the bulk of its
investments determines that portfolio's real return. A declining exchange rate
obviously decreases the purchasing power of income and capital gains derived from
any returns. Moreover, the exchange rate influences other income factors such as
interest rates, inflation and even capital gains from domestic securities. While
exchange rates are determined by numerous complex factors that often leave even
the most experienced economists flummoxed, investors should still have some
understanding of how currency values and exchange rates play an important role in
the rate of return on their investments.

Demand for Foreign Exchange

The demand for foreign exchange is determined by the country’s:

 Import of goods and service.
 Investment in foreign countries (flow of capital to other countries), i.e.,
establishment of an industry by Indians in USA.
 Other payments involved in international transactions like payment of Indian
Government to various foreign governments for settlement of their
transactions.
 Other types of outflow of foreign capital like giving donations etc. The demand
curve indicates the amount of foreign exchange demanded (for example, US
dollars).
Supply of Foreign Exchange
Supply of foreign exchange of a particular country (i.e., US dollars) indicates the
availability of foreign currency of a particular country to the country concerned
(i.e., India) in its foreign exchange market. The supply of foreign exchange
includes:
 Country’s exports of goods and services to foreign countries.
 Inflow of foreign capital.
 Payments made by the foreign governments to Indian government for
settling their transactions.
 Other types of inflow of foreign capital like remittances by the Non-
Resident Indians, donations received etc.
The supply curve of foreign exchange is shown by ‘SS’.The equilibrium
exchange rate is determined at ‘P’ where the demand curve ’DD’ intersects
the supply curve ‘SS’. Both the supply of foreign exchange and demand for
foreign exchange is ‘OQ’ and the exchange rate is ‘OP’.
If the demand for foreign exchange is in excess of supply, i.e., the demand is
at the point of ‘b’ on the demand curve and the supply is ‘a’ on the supply
curve (demand>supply), the exchange rate is fixed at ‘OP2’. In contrast, if the
demand is less than the supply, i.e. , demand is at point ‘c’ on demand curve
and the supply is at point ‘d’ on the supply curve (demand< supply), the
exchange rate is fixed at ‘OP1’.
Thus the excess demand over supply results in the exchange rate higher than
the equilibrium exchange rate and vice versa is true if the demand is less than
the supply.
Foreign Exchange Market Mechanism

The subject of foreign exchange is, in the words of H.E. Evitt, “that section of
economic science which deals with the means and methods by which rights to wealth
in one country’s currency are converted into rights to wealth in terms of another
country’s currency.” As he further observes, it “involves the investigation of the
method by which the currency of one country is ex changed for that of another, the
causes which render such exchange necessary, the forms which such exchange may
take, and the ratios or equivalent values at which such exchanges are effected.”
There are different interpretations of the term foreign exchange, of which the
following two are important and common:
1. Foreign exchange is the system or process of converting one national currency
into another, and of transferring money from one country to another.
2. Secondly, the foreign exchange is used to refer to foreign currencies. For
example, the Foreign Exchange Regulation Act, 1973 (FERA) defines foreign
exchange as foreign currency and includes all deposits, credits and balance
payable in any foreign currency and any drafts, travellar’s cheques, letters of
credits and bills of exchange, expressed or drawn in Indian currency, but
payable in any foreign currency.
Functions of Foreign Exchange Market
The foreign exchange market is a market in which foreign exchange transactions take
place. In other words, it is a market for sale and purchase of different currencies.
A foreign exchange market performs three important functions:
1. Transfer of Purchasing Power- The primary function of a foreign exchange
market is the transfer of purchasing power from one country to another and
from one currency to another. The international clearing function performed
by foreign exchange market plays a very important role in facilitating
international trade and capital movements.
2. Provision of Credit- the credit function performed by foreign exchange
markets also plays a very important role in the growth of foreign trade, for
international trade depends to a great extent on credit facilities. Exporters
may get pre-shipment and post-shipment credit. Credit facilities are available
also for importers. The Euro-dollar market has emerged as a major
international credit market.
3. Provision of Hedging Facilities- The other important function of the foreign
exchange market is to provide hedging facilities. Hedging refers to covering of
export risks, and it provides a mechanism to exporters and importers to guard
themselves against losses arising from fluctuations in exchange rates.

Question- What do you understand by Foreign Direct Investment? What are the
major decisions concerning foreign direct investment?
or
Question- Explain the basic motives and determinants of Foreign Direct Investment.
July, 2010.

Answer:
Foreign Direct Investment
Foreign direct investment (FDI) plays an extraordinary and growing role in global
business. It can provide a firm with new markets and marketing channels, cheaper
production facilities, access to new technology, products, skills and financing. For a
host country or the foreign firm which receives the investment, it can provide a source
of new technologies, capital, processes, products, organizational technologies and
management skills, and as such can provide a strong impetus to economic
development. Foreign direct investment, in its classic definition, is defined as a
company from one country making a physical investment into building a factory in
another country. The direct investment in buildings, machinery and equipment is in
contrast with making a portfolio investment, which is considered an indirect
investment. In recent years, given rapid growth and change in global investment
patterns, the definition has been broadened to include the acquisition of a lasting
management interest in a company or enterprise outside the investing firm’s home
country. As such, it may take many forms, such as a direct acquisition of a foreign
firm, construction of a facility, or investment in a joint venture or strategic alliance
with a local firm with attendant input of technology, licensing of intellectual
property, In the past decade, FDI has come to play a major role in the
internationalization of business. Reacting to changes in technology, growing
liberalization of the national regulatory framework governing investment in
enterprises, and changes in capital markets profound changes have occurred in the
size, scope and methods of FDI. New information technology systems, decline in
global communication costs have made management of foreign investments far easier
than in the past. The sea change in trade and investment policies and the regulatory
environment globally in the past decade, including trade policy and tariff
liberalization, easing of restrictions on foreign investment and acquisition in many
nations, and the deregulation and privitazation of many industries, has probably been
been the most significant catalyst for FDI’s expanded role.
For small and medium sized companies, FDI represents an opportunity to become
more actively involved in international business activities. In the past 15 years, the
classic definition of FDI as noted above has changed considerably. This notion of a
change in the classic definition, however, must be kept in the proper context. Very
clearly, over 2/3 of direct foreign investment is still made in the form of fixtures,
machinery, equipment and buildings. Moreover, larger multinational corporations and
conglomerates still make the overwhelming percentage of FDI. But, with the advent
of the Internet, the increasing role of technology, loosening of direct investment
restrictions in many markets and decreasing communication costs means that newer,
non-traditional forms of investment will play an important role in the future. Many
governments, especially in industrialized and developed nations, pay very close
attention to foreign direct investment because the investment flows into and out of
their economies can and does have a significant impact. State and local governments
watch closely because they want to track their foreign investment attraction programs
for successful outcomes.
It is nowadays accepted that Foreign Direct Investment plays a crucial role in
industrial development of the developed and developing countries alike and can help
in boosting economic growth through, for example, total factor productivity growth.
FDI increasingly comprises sets of inter-connected operationalized business decisions
by multinational enterprises (MNEs) in response to changing global and regional
competitive, strategic considerations and factor conditions . As such, Foreign Direct
Investment Policy Instruments, which have analytical and regulatory dimensions, are
required to manage the landscape of MNEs’ FDI operations in order to maximize
positive externalities accruing to the host location, as well as optimizing the allocative
efficiencies involved in Foreign Direct Investment. The policy framework for Foreign
Direct Investment is a crucial part of the overall national strategy for industrialization.
As the ratio of inward Foreign Direct Investment to GDP is, in general, relatively high
for developing countries in comparison to industrialized countries, the role of well-
designed Foreign Direct Investment Policy Instruments in economic development
cannot be overestimated.
From the outset, one needs to appreciate that when reference is made to the
advantages and disadvantages of FDI PIs, it is in terms of the relative merits of the
policy tools. It is also
important to indicate that, from a policy perspective, the pros and cons of Policy
Instruments are framed by considerations of who (interest groups) gains or loses. This
is not a trivial issue, depending not only on the demographic structure of employment
distribution of the labour force in the economy, but also on the changing nature of the
relative balance of competitive advantage between countries. These two influences
move at two very distinct ‘policy speeds’ – the first, in generational terms, the second,
in business cycle terms.
In many cases, large companies still play a dominant role in investment activities in
small, high tech oriented companies. However, unlike in the past, these larger
companies are not necessarily acquiring smaller companies outright. There are
several reasons for this, but the most important one is most likely the risk associated
with such high tech ventures. In the case of mature industries, the products are well
defined. The manufacturer usually wants to get closer to its foreign market or wants to
circumvent some trade barrier by making a direct foreign investment. The major risk
here is that you do not sell enough of the product that you manufactured. However,
you have added additional capacity and in the case of multinational corporations this
capacity can be used in a variety of ways.
High tech ventures tend to have longer incubation periods. That is, the product tends
to require significant development time. In the case of software and other intellectual
property type products, the product is constantly changing even before it hits the
marketplace. This makes the investment decision more complicated. When you invest
in fixtures and machinery, you know what the real and book value of your investment
will be. When you invest in a high tech venture, there is always an element of
uncertainty. Unfortunately, the recent spate of dot.com failures is quite illustrative of
this point.
Therefore, the expanded role of technology and intellectual property has changed the
foreign direct investment playing field. Companies are still motivated to make foreign
investments, but because of the vagaries of technology investments, they are now
finding new vehicles to accomplish their goals. Consider the following:
1. Licensing and technology transfer. Licensing and tech transfer have been
essential in promoting collaboration between the academic and business communities.
Ever since legal hurdles were removed that allowed universities to hold title to
research and development done in their labs, licensing agreements have helped turned
raw technology into finished products that are viable in competitive
marketplaces. With some help from a variety of government agencies in the form of
grants for R&D as well as other financial assistance for such things as incubator
programs, once timid college researchers are now stepping out and becoming cutting
edge entrepreneurs. These strategic alliances have had a serious impact in several high
tech industries, including but not limited to: medical and agricultural biotechnology,
computer software engineering, telecommunications, advanced materials processing,
ceramics, thin materials processing, photonics, digital multimedia production and
publishing, optics and imaging and robotics and automation. Industry clusters are now
growing up around the university labs where their derivative technologies were first
discovered and nurtured. Licensing agreements allow companies to take full
advantage of new and exciting technologies while limiting their overall risk to royalty
payments until a particular technology is fully developed and thus ready to put new
products into the manufacturing pipeline.
2 .Reciprocal distribution agreements. Actually, this type of strategic alliance is
more trade-based, but in a very real sense it does in fact represent a type of direct
investment. Basically, two companies, usually within the same or affiliated
industries, agree to act as a national distributor for each other’s products. The classical
example is to be found in the furniture industry. A U.S.-based manufacturer of tables
signs a reciprocal distribution agreement with a Spanish-based manufacturer of chairs.
Both companies gain direct access to the other’s distribution network without having
to pay distributor support payments and other related expenses found within the
distribution channel and neither company can hurt the other’s market for its
products. Without such an agreement in place, the Spanish manufacturer might very
well have to invest in a national sales office to coordinate its distributor network,
manage warehousing, inventory and shipping as well as to handle administrative tasks
such as accounting, public relations and advertising.
3. Joint venture and other hybrid strategic alliances. The more traditional joint
venture is bi-lateral, that is it involves two parties who are within the same industry
who are partnering for some strategic advantage. Typical reasons might include a
need for access to proprietary technology that might tip the competitive edge in
another competitor’s favor, desire to gain access to intellectual capital in the form of
ultra-expensive human resources, access to heretofore closed channels of distribution
in key regions of the world. One very good reason why many joint ventures only
involve two parties is the difficulty in integrating different corporate cultures. With
two domestic companies from the same country, it would still be very difficult.
However, with two companies from different cultures, it is almost impossible at
times. This is probably why pure joint ventures have a fairly high failure rate only five
years after inception. Joint ventures involving three or more parties are usually called
syndicates and are most often formed for specific projects such as large construction
or public works projects that might involve a wide variety of expertise and resources
for successful completion. In some cases, syndicates are actually easier to manage
because the project itself sets certain limits on each party and close cooperation is not
always a prerequisite for ultimate success of the endeavor.
4. Portfolio investment. Yes, we know that you’re paying attention and no we’re
not trying to trip you up here. Remember our definition of foreign direct investment
as it pertains to controlling interest. For most of the latter part of the 20th century
when FDI became an issue, a company’s portfolio investments were not considered a
direct investment if the amount of stock and/or capital was not enough to garner a
significant voting interest amongst shareholders or owners. However, two or three
companies with "soft" investments in another company could find some mutual
interests and use their shareholder power effectively for management control. This is
another form of strategic alliance, sometimes called "shadow alliances". So, while
most company portfolio investments do not strictly qualify as a direct foreign
investment, there are instances within a certain context that they are in fact a real
direct investment.
Importance of Foreign Direct Investment for any consideration of going global?

It is very clear that making a direct foreign investment allows companies to

accomplish several tasks:

1 Avoiding foreign government pressure for local production.

2.Circumventing trade barriers, hidden and otherwise.
3.Making the move from domestic export sales to a locally-based national sales office.
4.Capability to increase total production capacity.
5.Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in
very general terms. While it is nice that many business writers like the expression,
“think globally, act locally”, this often used cliché does not really mean very much to
the average business executive in a small and medium sized company. The phrase
does have significant connotations for multinational corporations. But for executives
in SME’s, it is still just another buzzword. The simple explanation for this is the
difference in perspective between executives of multinational corporations and small
and medium sized companies. Multinational corporations are almost always
concerned with worldwide manufacturing capacity and proximity to major
markets. Small and medium sized companies tend to be more concerned with selling
their products in overseas markets. The advent of the Internet has ushered in a new
and very different mindset that tends to focus more on access issues. SME’s in
particular are now focusing on access to markets, access to expertise and most of all
access to technology.

Basic Requirements for Business Organizations considering a foreign investment?

Depending on the industry sector and type of business, a foreign direct investment
may be an attractive and viable option. With rapid globalization of many industries
and vertical integration rapidly taking place on a global level, at a minimum a firm
needs to keep abreast of global trends in their industry. From a competitive
standpoint, it is important to be aware of whether a company’s competitors are
expanding into a foreign market and how they are doing that. At the same time, it
also becomes important to monitor how globalization is affecting domestic clients.
Often, it becomes imperative to follow the expansion of key clients overseas if an
active business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At
some stage, export of product or service reaches a critical mass of amount and cost
where foreign production or location begins to be more cost effective. Any decision
on investing is thus a combination of a number of key factors including:
i. assessment of internal resources,
ii. competitiveness,
iii. market analysis
iv. market expectations.

From an internal resources standpoint, does the firm have senior management
support for the investment and the internal management and system capabilities to
support the set up time as well as ongoing management of a foreign subsidiary? Has
the company conducted extensive market research involving both the industry,
product and local regulations governing foreign investment which will set the broad
market parameters for any investment decision? Is there a realistic assessment in
place of what resource utilization the investment will entail? Has information on local
industry and foreign investment regulations, incentives, profit retention, financing,
distribution, and other factors been completely analyzed to determine the most
viable vehicle for entering the market (greenfield, acquisition, merger, joint venture,
etc.)? Has a plan been drawn up with reasonable expectations for expansion into the
market through that local vehicle? If the foreign economy, industry or foreign
investment climate is characterized by government regulation, have the relevant
government agencies been contacted and concurred? Have political risk and foreign
exchange risk been factored into the business plan?

Project Portfolio Management

Project portfolio management is a term used by project managers and project

management organizations, or PMOs, to describe methods for analyzing and
collectively managing a group of current or proposed projects based on numerous key
characteristics. The fundamental objective of PPM is to determine the optimal mix
and sequencing of proposed projects to best achieve the organization's overall goals -
typically expressed in terms of hard economic measures, business strategy goals, or
technical strategy goals - while honouring constraints imposed by management or
external real-world factors. Typical attributes of projects being analyzed in a PPM
process include each project's total expected cost, consumption of scarce resources
(human or otherwise) expected timeline and schedule of investment, expected
nature, magnitude and timing of benefits to be realized, and relationship or inter-
dependencies with other projects in the portfolio. Some commercial vendors of PPM
software emphasize their products' ability to treat projects as part of an overall
investment portfolio. PPM advocates see it as a shift away from one-off, ad hoc
approaches to project investment decision making. Most PPM tools and methods
attempt to establish a set of values, techniques and technologies that enable visibility,
standardization, measurement and process improvement. PPM tools attempt to
enable organizations to manage the continuous flow of projects from concept to
completion.
Treating a set of projects as a portfolio would be, in most cases, an improvement on
the ad hoc, one-off analysis of individual project proposals. The relationship between
PPM techniques and existing investment analysis methods is a matter of debate.
While many are represented as "rigorous" and "quantitative", few PPM tools attempt
to incorporate established financial portfolio optimization methods like modern
portfolio theory or applied information economics, which have been applied to
project portfolios, including even non-financial issues.
Regional blocks and trading agreement

In business there are many trading blocks comes in it. The most important trade
blocks include: EEC, NAFTA, ASEAN, and SAARC.

European Economic Community (EEC)

The successful functioning of European Coal and Steel Community (ECSC) stimulated
the member countries to extend this facility to all commodities by Treaty of Rome in
1957. This Treaty gave birth to European Economic Community (EEC).
The European Economic Community is also known as European Common market.
Originally six countries, viz., France, Federal Republic of Germany, Italy, Belgium,
Netherlands and Luxembourg formed into the European Economic Community (EEC)
by the Treaty of Rome, 1957. It came into being on 1st January 1958. The number of
member countries of the EEC increased from six to nine on January 1, 1973 as United
Kingdom, Ireland and Denmark joined the community. Greece joined the EEC in 1981
and Portugal and Spain joined in 1984. Austria, Finland and Sweden joined the
community on January 1, 1986. Now the EEC has 15 members. The requirements for
joining the EEC as members are (1.) the country must be European country and (2.) it
must be a democratic country.
Objectives
EEC consists of three organizations, viz., the European Coal and Steel Community
(ECSC), the European Economic Community (EEC) and the European Atomic Energy
Community (Euratom). ECSC functions for 50 years and the EEC and Euratom function
for unlimited time duration.
The main objective of the EEC according to Article of the Rome Treaty of 1957 is:
“The community shall have its task, by setting up a common market. To promote
throughout the community a harmonious development by economic activities, a
continuous and balanced expansion, an increase in stability and accelerated raising of
the standard of living and closer relations between the Member States belonging to
it.”
Activities of the EEC
The activities of the EEC based on the objectives are:
 Elimination of customs duties, quantitative restrictions with regard to exports
and imports of goods among member countries.
 Establishment/formulation of a common customs tariff and common
commercial policy with regard to non-member countries.
 Abolition of all obstacles for movement of persons, services and capital among
member countries.
  Formulation of common policy in the area of agriculture.
 Formulation of common policy in the area of transport.
 Establishment of a system which would ensure competition among member
countries.
 Application of procedures and programmes to control the disequilibrium in
the balance of the payments of member countries.
 Application of programmes in order to coordinate the economic policies of the
member countries.
 Approximation of legislation of the member governments to the extent
required for the proper functioning of the commo0n market.
 Establishment of European Social Fund with a view to enhance the
employment opportunities for workers and to improve their living standards.
 Establishment of European Investment bank for mobilization of fresh
resources and to contribute to the economic development of the community.
 Development of association with foreign countries to promote jointly the
economic and social development of the EEC.
Organization of EEC
European Council is the main administrative body of the EEC. Each member country is
represented by a minister in this council. Each member country holds the presidency
of the council for six-monthly period by rotation. A committee of permanent
representatives acts as the secretariat of the council. This committee is also called,
“Corper”. The Corper makes all important decisions. The Corper is the link between
the EEC and member Governments.
European Council
European Council acts as the executive agent of the EEC in
 Making routine decisions.
 Formulating rules of conduct.
 Preparing new legislations.
 Enabling members to carry out the provisions of the Treaty.
European Commission
The European Commission assists the Council. This is the executive body of the EEC.
The members of this commission are appointed for5 a period of four years which can
be renewed. One or more EEC policies are entrusted to each commissioner. Each
commissioner is assisted by a chief of cabinet of his country. These assistants take
decisions on behalf of their commissioners.
Court of Justice
There is a court of justice to adjudicate disputes relating to agriculture, social security
for migrants among the member countries and competition policy. The court also
adjudicates disputes between the member countries brought by the commission
against the council or commission reported by a person or a company.
Court of Auditors
Court of auditors was appointed as a part of the EEC by amending the Treaty of
Rome. The activities of the court of auditors include:
 Auditing the EEC budget.
 Monitoring the EEC’s expenditure.
 Laying down improved procedures for collection of duties and levies.
European Parliament
The European Commission should consult the Parliament before a final decision is
taken. The parliament acts through the Parliamentary Committee. The activities of
the European parliament include:
 Provide consultation and information to the Commission.
 Approve or reject the draft budget prepared by the Commission.
 Dismiss the Commission, if necessary.

Advisory Committees:
There are several advisory committees to advise the European Commission. These
committees include:
 Economic and Social Committee
 Monetary Committee
 Consultative Committee on Coal and Steel industry
Economic and Social Committee
This committee represents the activities like employers, employee unions, farmers,
retail traders, liberal professions and public. European commission appoints the
members on this committee.
Monetary Committee
This committee examines the monetary problems, problem of the balance of
payments and suggests measures to overcome them.
Consultative Committee on coal and Steel Industry:
This committee studies the problem of coal and steel industries and offers
suggestions.
Functioning of the EEC
Complete customs union became reality among the member countries of the EEC by
July 1, 1968. We study the functioning of the EEC under the following aspects:
Common agricultural policy, Common fisheries policy, European Monetary Union,
Factor mobility, Regional development policy, and Common transport policy.
Different member countries of the EEC were following different agricultural
policies before the formati0on of EEC. For example, the then West Germany and Italy
fixed high support prices due to the inefficiency of their agricultural sector. The vice
versa was true in case of France and Netherlands. The treaty favoured common
agricultural policy.

North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) came into being on January 1,
1994. The most affluent nations of the world, i.e., USA and Canada along with Mexico-
a developing country joined together to form a trade bloc. A free trade agreement
was signed by USA and Canada in 1989. This was extended to Mexico in 1994. NAFTA
is expected to eliminate all the tariffs and trade barriers among these countries by
2009. However, internal tariffs on a large number of product categories were
removed already.
NAFTA has a population of 363 million and hence it is one of the significant
trading areas in the globe.

Objectives
  The objectives of the NAFTA include:
 To create new business opportunities particularly in Mexico.
 To enhance the competitive advantage of the companies operating in USA,
Canada and Mexico in wider international markets.
 To reduce the prices of the products and services by enhancing the
competition.
 To enhance industrial development and thereby employment throughout the
region.
 To provide stable and predictable political environment for the investors.
 To develop industries in Mexico in order to create employment and to reduce
migration from Mexico to USA.
 To assist Mexico in earning additional foreign exchange to meet its foreign
debt burden
 To improve and consolidate political relationship among member countries.

Measures
The measures as per the agreement of NAFTA include:
 Opening up of Government procurement markets in each member country of
NAFTA.
 Resident of NAFTA countries can invest in any other NAFTA countries freely.
 Protection of intellectual property rights of the NAFTA member countries.
 Simplification and harmonization of product standards in all the member
countries of NAFTA.
 Free-flow of employees and business people from one member country to
another. Prevention of non-Mexican firms assembling goods in Mexico.
 Avoidance of re-export of the products imported by any member country from
the third party. This condition is not applicable, in case certain percentage of
manufacturing costs is incurred in the importing country. This percentage is 50
in case of USA and Canada and 80 in case of Mexico.
 Pollution control along the USA-Mexico border.
Critical Appraisal
It was felt that the emergence of NAFTA enables for the further development of USA
and Canada and for the significant development of Mexico. Further, the free flow of
capital and human resources enables for achieving equilibrium in the regional
development.
 However the formation of NAFTA is criticized on the following grounds:
 Most of the US industries will shift to Mexico as Mexico has less stringent
environmental protection and health and safety legislation than USA.
 NAFTA agreement is implemented without prior preparations,. Therefore,
Mexican economy may face adjustment and assimilation problems than USA
and Canada.
 Despite these criticisms, the emergence of NAFTA helps all the three member
countries in the area of industrial development, increase in employment
opportunities, incomes and living standards of the people. However, this trade
block is a major hurdle for the globalization of the business as two major
developed countries are involved in this agreement.
The Association of South-East Asian Nations (ASEAN)

A group of six countries, Singapore, Brunei, Malaysia, Philippines, Thailand and

Indonesia, agreed in January 1992 to establish a Common Effective Preferential
Tariffs (CEPT) plan. This plan helped to create an association of South-East Asian
Nations (ASEAN) free trade area in 15 years with effect from January 1993. The
CEPT allows for tariffs cut ranging from 0.50 per cent to 20.00 per cent beginning
with 15 products.
The emergence and successful operation of EEC and NAFTA gave impetus for
the forming of ASEAN. The ASEAN member countries have developed
economically at a fast rate in the globe. Their strength is well educated and
skilled human resources. This strength enabled them to achieve faster
industrialization. Further the ASEAN member countries are rich in oil, mineral
resources, agricultural goods and modern industrial products. These countries
invite and allow the free-flow of foreign capital.
The formation of ASEAN enables the member countries to have close
cohesiveness, share their economic and human resources and achieves synergy
in the development of their agricultural sectors, industrial sectors and service
sectors. The common historical and cultural background made the member
countries to maintain their unity and solidarity by establishing a trade block.
ASEAN countries have the determination to develop south-east Asia a nuclear
weapons free area and a zone of peace, freedom and neutrality.

Asian Free Trade Area (AFTA)

The ASEAN countries are vigilant of the developments in the international
environment like the formation NAFTA, SAARC and the introduction of Euro. In
view of these developments, the ASEAN countries formed the Asean Free Trade
Area (AFTA) in September 1994. The AFTA initially set to function for 10 years in
order to develop inter ASEAN trade.

The objectives of the AFTA are:

 To encourage inflow of foreign investment into this region.
 To establish free trade are in the member countries.
 To reduce tariff of the product produced in ASEAN countries. 40% value
addition in the ASEAN countries to the product value is treated as
manufactured in ASEAN countries.

European Free Trade Association (EFTA)

The European Free Trade Association (EFTA) was formed in 1959. The member
countries of EFTA include: Norway, Portugal, Sweden and Switzerland. The associate
member countries are: Finland and Iceland, Great Britain and Denmark.
The objectives of EFTA are:
 To eliminate almost all tariffs among member countries.
 To abolish trade restrictio0ns regarding imports and exports of goods among
member countries.
 To enhance economic development, employment, incomes and living
standards of the people of the member countries.
 To enable free trade in Western Europe.
The EFTA achieved most of its objectives during its 40 years of existence. EFTA does
not regulate the agriculture and economy of the member countries and members’
trade outside the EFTA.
The EFTA is managed by a council. Each member country is represented by its
representative to the EFTA Council makes policy decisions of the organization.
Secretary-General implements the policies.

Latin American Integration Association (LAIA)

Latin American Free Trade Association (LAFTA) on the lines of EFTA was formed in
1960. The countries signed the LAFTA agreement were Argentina, Brazil, Chile,
Mexico, Paraguay, Peru, Uruguay, Colombia, Ecuador, Venezuela and Bolivia. Later
the Latin American Integration Association (LAIA) replaced LAFTA.

Objectives
The objectives of LAIA are:
 To eliminate restrictions on trade among the member countries and
 To reduce the customs and tariffs and eliminate them gradually.

Organization Structure: LAIA is managed by a Council of Ministers. Foreign Ministers

of the member countries represent the council. The Council of Ministers is assisted by
a conference of contracting parties which makes discussions on issues requiring a
joint resolution of the members and a permanent Executive Committee. Executive
Committee Implements the Treaty. The Executive Committee is assisted by a
secretariat.
Operations: Members prepare a list of goods on which they consider duty reductions.
Member countries negotiate once in three years for complete exemption of tariffs
and decide the list of products eligible for complete exemption of tariffs. In fact, they
include all the products which are traded in the region in the list. More favourable
terms are granted for the less developed countries of the region.

Critical Appraisal: The performance of the LAIA is only modest. The reasons for
modest performance include:
 Delay and negative approach of the members in preparing common list.
 High cost of transportation.
 Contentment of the members with the sheltered markets.
 Forces of nationalism.
South Asian Association for Regional Cooperation (SAARC)
The successful performance of EEC, NAFTA and other trade blocks in the economic
development of the member countries and in improving the employment
opportunities, incomes and living standards of the people of the region gave impetus
for the formation of South Asian Association for Regional Cooperation (SAARC).
India, Bangladesh, Bhutan, Pakistan, The Maldives and Sri Lanka adopted a
declaration on SAARC in August 1983. The charter of the SAARC was formally adopted
in December 1985 by the heads of the member countries.

Objectives
The objectives of the SAARC are:
 To improve the quality of life and welfare of the people of the SAARC member
countries.
 To develop the region economically, socially and culturally.
 To provide the opportunity to the people of the region to live in dignity and to
exploit their potentialities.
 To enhance the self-reliance of the member countries jointly.
 To provide conducive climate for creating and enhancing mutual trust,
understanding and application of one another’s issues.
 To enhance the mutual assistance among member countries in the areas of
economic, social cultural, scientific and technical fields.
 To enhance the co-operation with other developing economies.
 To have unity among the member countries regarding the issues o common
interest in the international forums.
 To extend co-operation to other trade blocks.

Organization Structure
The Council of the SAARC is the highest policy making body.
The Council is represented by the heads of the Government of the member countries.
The Council meets once in two years. This council is assisted by the ‘Council of
Ministers.’
The Council of Ministers is represented by the foreign ministers of member
governments. It formulates policies, reviews the functioning and decides the new
areas of co-operation, establishes additional mechanism, decides the issues of
general interests to the SAARC member countries. The Council meets twice a year and
more times, if necessary. The Council of Ministers is assisted by the standing
committee.
Standing committee consists of foreign secretaries of member governments. The
functions of the standing committee include:
 Monitoring and coordinating the programmes.
 Determining inter-sectoral priorities.
 Mobilizing co-operation within and outside the region.
 Formulating the modalities of financing.
Standing committee is expected to meet as and when necessary and submits the
report to the Council of Ministers. This committee sets up action committee for the
project implementation. The standing committee is assisted by the programming
committee.
Programming committee includes the senior officials of the member governments.
The functions of the programming committee are:
 Scrutinizing the budget of the secretariat.
 Finalizing the annual schedule of the secretariat.
 Carrying out the activities assigned by the standing committee.
 Analyzing the reports of the technical committees and SAARC regional centers
and submitting them to the standing committee along with its comments.
Technical committees comprise the representatives of all member countries. Their
functions
 Formulating projects and programmes in their respective areas.
 Monitoring and implementing the projects.
 Submitting the reports to the standing committee through the programme
committee.
The technical committees of SAARC include:
 Agriculture
 Communications
 Environment
 Health and Population Activities
 Rural Development
 Science and Technology
 Tourism and Transport
All the secretarial work is done by the SAARC secretariat, which is located in Nepal.
The activities of the secretariat include:
 Co-ordinating, monitoring and implementing SAARC and other international
forums.
 Servicing the meetings of the SAARC.
 Serving as communication link between SAARC and other international
forums.
The Secretary-General is the chief of the secretariat. He/She is appointed by the
Council of Ministers on rotation basis among members for a period of three years. He
is assisted by seven Directors (one from each member country) and general service
staff.

SAARC Preferential trading Arrangement (SAPTA)

The Council of Ministers has signed the SAARC Preferential Trading Arrangement
agreement on April 11, 1993.
Objectives of SAPTA are:
 To gradually liberalize the trade among member countries of SAARC.
 To eliminate trade barriers among SAARC countries and reduce or eliminate
tariffs.
 To promote and sustain mutual trade and economic co-operation among
member countries.
Administration of SAPTA: SAARC Preferential Trading Arrangement agreement would
be administered on the following lines:
  The benefits to the member countries would be accorded on equitable basis
of reciprocity and mutuality.
 The Agreement would be improved step by step through mutual negotiations.
 The Agreement has taken the special needs of the less developed countries
into consideration.
Product Areas: All raw materials, semi-finished products and finished products are3
included for mutual concessions.
Tariffs: Concessions would be given in tariffs, Para-tariffs, non-tariffs and trade
measures. Special treatment for the least developed countries would be provided in
the following ways:
 Providing technical assistance, establishment of industrial and agricultural
projects in order to boost up their exports.
 Enhancing their exports by eliminating non-tariff and para-tariff barriers,
providing duty free access etc.
 Establishing training facilities in the areas of export trade.
 Providing export credit insurance and market information.
 Entering into long-term contracts.
Balance of Payments
If the concessions enhance the imports resulting in serious balance of payments
problem, the importing country can suspend the concessions.
 Provision for information, consultation and dispute settlement are provided.
 Extension of concessions: The concessions would be extended to all member
countries (expect those meant for least developed countries).
 Committee of participants: Committee of participants would review the
implementation of this agreement and distribution of the benefits among
member countries equitably.
 Non-application of the provision: If the benefits similar to those stated in the
provisions of this agreement, the provisions in this agreement are not
applicable to the same case distribution of benefits among member countries
equitably.
 Modification and withdrawal of concessions: Concessions provided under this
agreement can be withdrawn or modified through the mutual consultations
and agreement of the countries concerned after three years. However,
Committee on Economic Cooperation (CEC) will monitor these aspects.
 Withdrawal from SAPTA: Member countries by giving six months’ notice to
SAARC Secretariat and committee on Economic Cooperation can withdraw
from the SAPTA.

Question-14. What is the concept of Product and Brand? What are the
Product and Branding decisions concerning International markets?

Or
Question . How are products designed for foreign markets in International
business? July 2010
Answer:
Product- A product can be defined as a collection of physical, service and symbolic
attributes which yield satisfaction or benefits to a user or buyer. A product is a
combination of physical attributes say, size and shape; and subjective attributes say
image or "quality". A customer purchases on both dimensions. As cited earlier, an
avocado pear is similar the world over in terms of physical characteristics, but once
the label CARMEL, for example, is put on it, the product's physical properties are
enhanced by the image CARMEL creates. In "post-modernization" it is increasingly
important that the product fulfills the image which the producer is wishing to project.
This may involve organisations producing symbolic offerings represented by meaning
laden products that chase stimulation-loving consumers who seek experience -
producing situations. So, for example, selling mineral water may not be enough. It
may have to be "Antarctic" in source, and flavoured. This opens up a wealth of new
marketing opportunities for producers.

A product's physical properties are characterised the same the world over. They can
be convenience or shopping goods or durables and nondurables; however, one can
classify products according to their degree of potential for global marketing:

i) Local or Domestic Products - seen as only suitable in one single domestic market.

ii) International Products - seen as having extension potential into other markets.

iii) Multinational Products - Products adapted to the perceived unique characteristics

of national markets.

iv) Global Products - Products designed to meet global segments.

Quality, method of operation or use and maintenance (if necessary) are catchwords in
international marketing. A failure to maintain these will lead to consumer
dissatisfaction. This is typified by agricultural machinery where the lack of spares
and/or foreign exchange can lead to lengthy downtimes. It is becoming increasingly
important to maintain quality products based on the ISO 9000 standard, as a
prerequisite to export marketing.

Consumer beliefs or perceptions also affect the "world brand" concept. World brands
are based on the same strategic principles, same positioning and same marketing mix
but there may be changes in message or other image. World brands in agriculture are
legion. In fertilizers, brands like Norsk Hydro are universal; in tractors, Massey
Ferguson; in soups, Heinz; in tobacco, BAT; in chemicals, Bayer. These world brand
names have been built up over the years with great investments in marketing and
production. Few world brands, however, have originated from developing countries.
This is hardly surprising given the lack of resources. In some markets product
saturation has been reached, yet surprisingly the same product may not have reached
saturation in other similar markets. Whilst France has long been saturated by
avocadoes, the UK market is not yet, hence raising the opportunity to enter deeper
into this market.

One of the fundamental decisions for successful international marketing

relates to product policy and planning. It can be argued that product. decisions are
probably the most crucial as the product is the very epitome of marketing planning.
Errors in product decisions can include the imposition of a global standardised
product where it is inapplicable and the attempt to sell products into a country
without cognisance of cultural adaptation needs. An international marketer has the
option of exporting ',the home market product to foreign markets, adapting the home
market product to meet the needs of the foreign customers more closely, or
developing new products to meet the specific needs of the customers in foreign
markets. The selection process needs a careful analysis of the foreign market needs,
appraisal of the market opportunity and detailed product planning. Decisions
regarding the product, price, promotion and distribution channels are decisions on
the elements of the "marketing mix". Many product decisions lie between the two
extremes i.e. whether to sell globally standardised or adapted products.

Product design

Changes in design are largely dictated by whether they would improve the prospects
of greater sales, and this, over the accompanying costs. Changes in design are also
subject to cultural pressures. The more culture-bound the product is, for example
food, the more adaptation is necessary. Most products fall in between the spectrum
of "standardisation" to "adaptation" extremes. The application the product is put to
also affects the design. In the UK, railway engines were designed from the outset to
be sophisticated because of the degree of competition, but in the US this was not the
case. In order to burn the abundant wood and move the prairie debris, large smoke
stacks and cowcatchers were necessary. In agricultural implements a mechanised
cultivator may be a convenience item in a UK garden, but in India and Africa it may be
essential equipment. As stated earlier "perceptions" of the product's benefits may
also dictate the design. A refrigerator in Africa is a very necessary and functional item,
kept in the kitchen or the bar. In Mexico, the same item is a status symbol and,
therefore, kept in the living room.

Factors encouraging standardisation are:

i) economies of scale in production and marketing.

ii) consumer mobility - the more consumers travel the more is the demand
iii) technology
iv) image, for example "Japanese", "made in".

The latter can be a factor both to aid or to hinder global marketing development.
People found the "made in USA" image has lost ground to the "made in Japan" image.
In some cases "foreign made" gives advantage over domestic products. In Zimbabwe
one sees many advertisements for "imported", which gives the product advertised a
perceived advantage over domestic products. Often a price premium is charged to
reinforce the "imported means quality" image. If the foreign source is negative in
effect, attempts are made to disguise or hide the fact through, say, packaging or
labelling. Mexicans are loathe to take products from Brazil. By putting a "made in
elsewhere" label on the product this can be overcome, provided the products are
manufactured elsewhere even though its company maybe Brazilian.

Factors encouraging adaptation are:

i) Differing usage conditions. These may be due to climate, skills, level of literacy,
culture or physical conditions. Maize, for example, would never sell in Europe rolled
and milled as in Africa. It is only eaten whole, on or off the cob. In Zimbabwe, kapenta
fish can be used as a relish, but wilt always be eaten as a "starter" to a meal in the
developed countries.

ii) General market factors - incomes, tastes etc. Canned asparagus may be very
affordable in the developed world, but may not sell well in the developing world.

iii) Government - Taxation, import quotas, non tariff barriers, labelling, health
requirements. Non tariff barriers are an attempt, despite their supposed impartiality,
at restricting or eliminating competition. A good example of this is the Florida tomato
growers, cited earlier, who successfully got the US Department of Agriculture to issue
regulations establishing a minimum size of tomatoes marketed in the United States.
The effect of this was to eliminate the Mexican tomato industry which grew a tomato
that fell under the minimum size specified. Some non-tariff barriers may be legitimate
attempts to protect the consumer, for example the ever stricter restrictions on
horticultural produce insecticides and pesticides use may cause African growers a
headache, but they are deemed to be for the public good.

iv) History. Sometimes, as a result of colonialism, production facilities have been

established overseas. Eastern and Southern Africa is littered with examples. In Kenya,
the tea industry is a colonial legacy, as is the sugar industry of Zimbabwe and the
coffee industry of Malawi. These facilities have long been adapted to local conditions.

v) Financial considerations. In order to maximise sales or profits the organisation may

have no choice but to adapt its products to local conditions.

vi) Pressure. Sometimes, as in the case of the EU, suppliers are forced to adapt to the
rules and regulations imposed on them if they wish to enter into the market.

Production Decisions concerning Foreign Markets

In decisions on producing or providing products and services in the international

market it is essential that the production of the product or service is well planned and
coordinated, both within and with other functional area of the firm, particularly
marketing. For example, in horticulture, it is essential that any supplier or any of his
"outgrower" (sub-contractor) can supply what he says he can. This is especially vital
when contracts for supply are finalised, as failure to supply could incur large
penalties. The main elements to consider are the production process itself,
specifications, culture, the physical product, packaging, labelling, branding, warranty
and service.

Production process

The key question is, can we ensure continuity of supply? In manufactured products
this may include decisions on the type of manufacturing process - artisanal, job,
batch, flow line or group technology. However in many agricultural commodities
factors like seasonality, perishability and supply and demand have to be taken into
consideration. Quantity and quality of horticultural crops are affected by a number of
things. These include input supplies (or lack of them), finance and credit availability,
variety (choice), sowing dates, product range and investment advice. Many of these
items will be catered for in the contract of supply.

Specification

Specification is very important in agricultural products. Some markets will not take
produce unless it is within their specification. Specifications are often set by the
customer, but agents, standard authorities (like the EU or ITC Geneva) and trade
associations can be useful sources. Quality requirements often vary considerably. In
the Middle East, red apples are preferred over green apples. In one example French
red apples, well boxed, are sold at 55 dinars per box, whilst not so attractive Iranian
greens are sold for 28 dinars per box. In export the quality standards are set by the
importer. In Africa, generally, that there are no consistent standards for product
quality and grading, making it difficult to do international trade regionally.

Culture

Product packaging, labeling, physical characteristics and marketing have to adapt to

the cultural requirements when necessary. Religion, values, aesthetics, language and
material culture all affect production decisions. Effects of culture on production
decisions have been dealt with already in chapter three.

Physical product

The physical product is made up of a variety of elements. These elements include the
physical product and the subjective image of the product. Consumers are looking for
benefits and these must be conveyed in the total product package. Physical
characteristics include range, shape, size, color, quality, quantity and compatibility.
Subjective attributes are determined by advertising, self image, labelling and
packaging. In manufacturing or selling produce, cognisance has to be taken of cost
and country legal requirements.

Again a number of these characteristics is governed by the customer or agent. For

example, in beef products sold to the EU there are very strict quality requirements to
be observed. In fish products, the Japanese demand more "exotic" types than, say,
would be sold in the UK. None of the dried fish products produced by the Zambians
on Lake Kariba, and sold into the Lusaka market, would ever pass the hygiene laws if
sold internationally. In sophisticated markets like seeds, the variety and range is so
large that constant watch has to be kept on the new strains and varieties in order to
be competitive.

Packaging

Packaging serves many purposes. It protects the product from damage which could
be incurred in handling and transportation and also has a promotional aspect. It can
be very expensive. Size, unit type, weight and volume are very important in
packaging. For aircraft cargo the package needs to be light but strong, for sea cargo
containers are often the best form. The customer may also decide the best form of
packaging. In horticultural produce, the developed countries often demand blister
packs for mangetouts, beans, strawberries and so on, whilst for products like
pineapples a sea container may suffice. Costs of packaging have always to be weighed
against the advantage gained by it.

Increasingly, environmental aspects are coming into play. Packaging which is non-
degradable - plastic, for example - is less in demanded. Bio-degradable, recyclable,
reusable packaging is now the order of the day. This can be both expensive and
demanding for many developing countries.

Labelling

Labelling not only serves to express the contents of the product, but may be
promotional. The EU is now putting very stringent regulations in force on labelling,
even to the degree that the pesticides and insecticides used on horticultural produce
have to be listed. This could be very demanding for producers, especially small scale,
ones where production techniques may not be standardised. Government labelling
regulations vary from country to country. Bar codes are not widespread in Africa, but
do assist in stock control. Labels may have to be multilingual, especially if the product
is a world brand. Translation could be a problem with many words being translated
with difficulty. Again labelling is expensive, and in promotion terms non-standard
labels are more expensive than standard ones. Requirements for crate labelling, etc.
for international transportation will be dealt with later under documentation.

Branding and trademarks

As mentioned in chapter four, it is difficult to protect a trademark or brand, unless all

countries are members of a convention. Brand "piracy" is widespread in many
developing countries.

Other aspects of branding include the promotional aspects. A family brand of

products under the Zeneca (ex ICI) label or Sterling Health are likely to be recognised
worldwide, and hence enhance the "subjective" product characteristics.

Warranty
Many large value agricultural products like machinery require warranties.
Unfortunately not everyone upholds them. It is common practice in Africa that if the
original equipment has not been bought through an authorised dealer in the country,
that dealer refuses to honour the warranty. This is unfortunate, because not only may
the equipment have been legitimately bought overseas, it also actually builds up
consumer resistance to the dealer. When the consumer is eventually offered a choice,
the reticent. dealer will suffer. For example when new dealers spring up.

Service

In agricultural machinery, processing equipment and other items which are of

substantial value and technology, service is a prerequisite. In selling to many
developing countries, manufacturers have found their negotiations at stake due to
the poor back-up service. Often, this is no fault of the agent, distributor or dealer in
the foreign country, but due to exchange regulations, which make obtaining spare
parts difficult. Many organisations attempt to get around this by insisting that a Third
World buyer purchases a percentage of parts on order with the original items. Allied
to this problem is the poor quality of service due to insufficient training. Good original
equipment manufacturers will insist on training and updating as part of the agency
agreement. In order to illustrate the above points, cotton can be used as an example.
Cotton is a major foreign exchange earner for Zimbabwe. In 1990/91, 52,000 tonnes
were sold overseas at a value of Zim$ 238 million. As the spinners, particularly those
in the export market, are in a highly competitive industry, it is essential that the raw
material is as clean as possible. Also today's spinning equipment is highly technical
and the spinner wishes to avoid costly breakdowns by all means.

Product strategies

There are five major product strategies in international marketing.

Product communications extension

This strategy is very low cost and merely takes the same product and communication
strategy into other markets. However it can be risky if misjudgments are made. For
example CPC International believed the US consumer would take to dry soups, which
dominate the European market. It did not work.

Extended product - communications adaptation

If the product basically fits the different needs or segments of a market it may need
an adjustment in marketing communications only. Again this is a low cost strategy,
but different product functions have to be identified and a suitable communications
mix developed.
Product adaptation - communications extension

The product is adapted to fit usage conditions but the communication stays the same.
The assumption is that the product will serve the same function in foreign markets
under different usage conditions.

Product adaptation - communications adaptation

Both product and communication strategies need attention to fit the peculiar need of
the market.

Product invention

This needs a totally new idea to fit the exclusive conditions of the market. This is very
much a strategy which could be ideal in a Third World situation. The development
costs may be high, but the advantages are also very high.

The choice of strategy will depend on the most appropriate product/market analysis
and is a function of the product itself defined in terms of the function or need it
serves, the market defined in terms of the conditions under which the product is
used, the preferences of the potential customers and the ability to buy the product in
question, and the costs of adaptation and manufacture to the company considering
these product - communications approaches.

Product decisions epitomise marketing planning and are the manifestation of

marketing strategy. These decisions are not to be taken lightly. The end consumer and
channel considerations have to be taken into account and the product extended or
adapted accordingly.

Branding Decisions for International Markets

Global brand
A global brand is one which is perceived to reflect the same set of values around the
world. Global brands transcend their origins and create strong enduring relationships
with consumers across countries and cultures. They are brands sold in international
markets. Examples of global brands include Facebook, Apple, Pepsi, McDonald's,
Mastercard, Gap, Sony and Nike. These brands are used to sell the same product
across multiple markets and could be considered successful to the extent that the
associated products are easily recognizable by the diverse set of consumers.
Benefits of global branding

In addition to taking advantage of the outstanding growth opportunities, the

following drives the increasing interest in taking brands global:

 Economies of scale (production and distribution)

 Lower marketing costs
 Laying the groundwork for future extensions worldwide
 Maintaining consistent brand imagery
 Quicker identification, recognition and integration of innovations (discovered
worldwide)
 Preempting international competitors from entering domestic markets or locking
you out of other geographic markets
 Increasing international media reach (especially with the explosion of the
Internet) is an enabler
 Increases in international business and tourism are also enablers
 Possibility to charge premium prices
 Internal company benefits such as attracting and retaining good employees, and
cohesive company culture
Global brand variables

The following elements may differ from country to country:

 Corporate slogan
 Products and services
 Product names
 Product features
 Positionings
 Marketing mixes (including pricing, distribution, media and advertising execution)
These differences will depend upon:

 Language differences
 Different styles of communication
 Other cultural differences
 Differences in category and brand development
 Different consumption patterns
 Different competitive sets and marketplace conditions
 Different legal and regulatory environments
 Different national approaches to marketing (media, pricing, distribution, etc.)

Generic or No Brand: The first decision regarding branding is whether to brand or not.
The trend towards non-branding products is increasing world-wide. In fact, the scales
of non-branded products is increasing particularly in retail stores. The increase in
demand for non-brand products is due to the availability of these products at less
price. In addition, non-brand products are available - In a number of sizes and
models.
Branded Products: Most of the global companies go for branding. The customers of
different countries find it easy to identify the branded products and they are aware of
the ingredients and utility of the branded products. For example" the customers
throughout the world are aware of the products of Colgate-Palmolive, Pepsi or Coke
etc. The global company can get better price and profits through branded products.
Private Brand: Most of the exporting companies go for dealer's brand or private
brand. The advantages of private branding include: easy in giving dealer's acceptance,
possibility of getting larger market share, less promotional expenses etc. Private
branding is more appropriate for the small companies who export to various foreign
countries.
Manufacturer's Brand: The manufacturer sells the products in his own brand. The
advantages of manufacturer's brand include: better control of products and features,
better price due to more price inelectricity, retention of brand loyalty and better
bargaining power.

•Single Brand: The global company go for a single brand for all its exports to the same
country (or Single Brand): The advantages of single brand in single market include:
better impact on marketing ,permittmg more focussed marketing, brand receives full
attention, reduction in cost of promotion etc.

Multiple Brands: The marketing conditions and the features of the customers vary
wIdely from one region to the other, in the same country. Therefore, the exporter
uses multiple branding decisions in such cases. Multiple branding enables the
exporter to meet the needs of all segments. Theother advantages of multiple
branding include: creation of excitement among employees, gaining of more shelf
space, avoidance of negative connotation of existing brand etc.

Local Brands: Global companies have started widely using the local brands in order to
give the impression of cultural compatibility of the local market. The advantages of
local branding include: elimination of difficulty in pronunciation, elimination of
negative connotations, avoidance of taxation on international brand etc.

Global brands or World Wide Brand: Exporters normally go for global brand. The
advantages of global brand include: reduction of advertising costs, elimination of
brand confusion, better marketing impact and focus, status for prestigious brands and
for well-known designs etc.

Strategies for Branding Decisions

(1) If the product has production consistency and salient attributes which can be
differentiated, then it would be better for the manufacturer to go for branding
otherwise better to sell the product without any brand .

(2) If the manufacturer is least dependent person, it would be feasible to go for the
manufacturer's own brand otherwise, it would be feasible to go for a private brand .

(3) If there are intermarket differences like demographic and psychological, it would
be feasible for having a local brand. Otherwise, it would be better to go for global
brand .

(4) If there are intermarket differences like demographic and psychological, it would
be feasible for multibrands. Otherwise it would be feasible to go for single brand.
uestion-15. What is International Pricing? What are various approaches
and strategies for International Pricing?

or
Question. Explain various factor affecting pricing decisions in international
business. July 2010
Answer:
Pricing
Pricing is the process of determining what a company will receive in exchange for its
products. Pricing factors are manufacturing cost, market place, competition, market
condition, and quality of product. Pricing is also a key variable in microeconomic price
allocation theory. Pricing is a fundamental aspect of financial modeling and is one of
the four Ps of the marketing mix. The other three aspects are product, promotion,
and place. Price is the only revenue generating element amongst the four Ps, the rest
being cost centers.
Pricing is the manual or automatic process of applying prices to purchase and sales
orders, based on factors such as: a fixed amount, quantity break, promotion or sales
campaign, specific vendor quote, price prevailing on entry, shipment or invoice date,
combination of multiple orders or lines, and many others. Automated systems require
more setup and maintenance but may prevent pricing errors. The needs of the
consumer can be converted into demand only if the consumer has the willingness and
capacity to buy the product. Thus pricing is very important in marketing.
A well chosen price should do three things:

 achieve the financial goals of the company (e.g., profitability)

 fit the realities of the marketplace (Will customers buy at that price?)
 support a product's positioning and be consistent with the other variables in
the marketing mix
 price is influenced by the type of distribution channel used, the type of
promotions used, and the quality of the product
 price will usually need to be relatively high if manufacturing is expensive,
distribution is exclusive, and the product is supported by
extensive advertising and promotional campaigns
 a low price can be a viable substitute for product quality, effective
promotions, or an energetic selling effort by distributors
From the marketer's point of view, an efficient price is a price that is very close to the
maximum that customers are prepared to pay. In economic terms, it is a price that
shifts most of the consumer surplus to the producer. A good pricing strategy would be
the one which could balance between the price floor (the price below which the
organization ends up in losses) and the price ceiling (the price beyond which the
organization experiences a no demand situation).
Whether the orientation is towards control over end prices or over net prices,
company policy relates to the net price received. Cost and market considerations are
important as a company cannot sell goods below cost of production and remain in
business and it sells goods at a price unacceptable in the marketplace. Firms
unfamiliar with overseas marketing and firms producing industrial goods orient their
pricing solely on a cost basis. Firms that employ pricing as part of the strategic mix,
however, are aware of such alternatives as market segmentation from country to
country or market to market competitive pricing in the marketplace and other market
oriented pricing factors including cultural differences in perceptions of pricing.

Full-cost versus Variable-Cost Pricing:

Firms that orient their thinking around cost must determine whether to use variable
cost or full cost in pricing the goods. In variable –cost pricing, the firm is concerned
only with the marginal or incremental cost of producing goods to be sold in overseas
markets. Such firms regard foreign sales and assume that any return over their
variable cost makes a contribution to net profit. These firms may be able to keep a
price most competitively in foreign markets but because they are selling products
abroad at lower net prices than they are selling them in the domestic market they
may be subject to charge to dumping . In that case they open themselves to anti
dumping tariff penalties that take away from their competitive advantage.
Nevertheless variable cost (or marginal cost) pricing is a practical approach to pricing
when a company has high fixed costs and unused production capacity. Any
contribution to fixed cost after variable costs are covered is profit for the company.
On the one hand companies following the full cost pricing philosophy insist that no
unit of a similar product is different from any other unit in terms of cost and that each
unit must bear its full share of the total fixed and variable cost. This approach is
suitable when a company has high variable costs relative to its fixed costs. In such
cases prices are often set on a cost plus basis, that is, total costs plus profit margin.
Both variable costs and full cost policies are followed by international markets.

Skimming versus penetration pricing:

Firms must also decide when they follow a skimming or a penetration pricing policy.
Traditionally the decisions of which policy to follow depends on the level of
competition, the innovativeness of the product market, characteristics and company
characteristics.
A company uses skimming when the objective to reach a segment of the market that
is relatively price insensitive and thus wiling to pay premium price for the value
received. If limited supply exists, a company may follow skimming approach in order
to maximize revenue and to match demand to supply. When a company is the only
seller of a new or innovative product, skimming price may be used to maximize profits
until competition forces a lower price. Skimming often is used in markets with only
two income levels the wealthy and the poor . Costs prohibit setting a price that will be
attractive to the lower income market, so the marketer charges a premium price and
directs the product to the high income, relatively price insensitive segment.
Apparently this was the policy of Johnson & Johnson ‘s pricing of diapers in Brazil
before the arrival of P&G. Today such opportunities are fading away as the disparity in
income levels is giving way to growing middle income market segments. The existence
 of larger markets attracts competition and as is often the case the emergence of
multiple product lines, thus leading to price competition.

Influences on pricing for international marketing.

 The cost of manufacturing, distributing and marketing your product.
 The physical location of production plants might influence price. For example, Toyota
have plants in their European market, in the United Kingdom and Turkey.
 Of course fluctuations in foreign currencies affect pricing. Many companies are
benefiting from a relatively low US Dollar price during the 2010s. This make imports
to the United States expensive, but exports relatively cheap to other nations.
However fluctuations make it very difficult for companies to make long-term
decisions - such as building large factories in global markets i.e. costs of production
are cheap today, but could be expensive in the future, impacting upon the price that
your business is forced to charge.
 The price that the international consumer is willing to pay for your product.
 Your own business objectives will influence price. For example, large international
companies such as Starbucks may operate at a loss in some locations but still need a
local presence in order to maintain their economies of scale, as well as their
reputation as a global player.
 The price that competitors in international markets are already charging.
 Business environment factors such as government policy and taxation.
Grey Markets
A business can expect problems with grey markets where it trades across national
boundaries. So if Company Y is English it will trade in Stirling or Pound notes. If it
trades in the United States during the 2010s, to be competitive it will need to sell at a
reduced price in the US. However, there is little to stop an entrepreneur from
traveling to the US, filling up a transport container with products, which have been
exported from Company Y in England, then returning them back to England and
marketing the same product at a lower price than Company Y is willing to trade. This
is an example of parallel trade, which is legal - just. Therefore it is known as grey
marketing.
International Pricing Approaches
 Export Pricing - a price is set for by the home-based marketing managers for the
international market. The pricing approach is based upon a whole series of factors
which are driven by the influences on pricing listed above. Then mainstream
approaches to pricing may be implemented - see below.
 Non-cash payments - less and less popular these days, non-cash payments include
counter-trade where goods are exchanged for goods between companies from
different parts of the World.
 Transfer Pricing - prices are set in the home market, and goods are effectively sold to
the international subsidiary which then attaches its own margin based upon the best
price that local managers decide that they could achieve. Then mainstream
approaches to pricing may be implemented - see below.
 Standardization versus adaptation - do you use a standard, common approach to
pricing in each market, or do you decide to adapt the price to local conditions?

Generic Marketing Approaches to Pricing

There are many ways to price a product. Let's have a look at some of them and try to
understand the best policy or strategy in various situations.

1. Premium Pricing.
2. Penetration Pricing.
3.Economy Pricing.
4. Price Skimming.
5. Psychological Pricing.
6. Product Line Pricing.
7. Optional Product Pricing.
8. Captive Product Pricing.
9. Product Bundle Pricing.
10. Promotional Pricing.
11.Geographical Pricing.
12. Value Pricing.

Premium Pricing.
Use a high price where there is a uniqueness about the product or service. This
approach is used where a a substantial competitive advantage exists. Such high prices
are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde
flights.

Penetration Pricing.
The price charged for products and services is set artificially low in order to gain
market share. Once this is achieved, the price is increased. This approach was used by
France Telecom and Sky TV.

Economy Pricing.
This is a no frills low price. The cost of marketing and manufacture are kept at a
minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.
Charge a high price because you have a substantial competitive advantage. However,
the advantage is not sustainable. The high price tends to attract new competitors into
the market, and the price inevitably falls due to increased supply. Manufacturers of
digital watches used a skimming approach in the 1970s. Once other manufacturers
were tempted into the market and the watches were produced at a lower unit cost,
other marketing strategies and pricing approaches are implemented.

To watch the full Pricing Models video please register FREE here
Premium pricing, penetration pricing, economy pricing, and price skimming are the
four main pricing policies/strategies. They form the bases for the exercise. However
there are other important approaches to pricing.
Psychological Pricing.
This approach is used when the marketer wants the consumer to respond on an
emotional, rather than rational basis. For example 'price point perspective' 99 cents
not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts
of the range. For example car washes. Basic wash could be $2, wash and wax $4, and
the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to
buy. Optional 'extras' increase the overall price of the product or service. For example
airlines will charge for optional extras such as guaranteeing a window seat or
reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where
the consumer is captured. For example a razor manufacturer will charge a low price
and recoup its margin (and more) from the sale of the only design of blades which fit
the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move
old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.
Pricing to promote a product is a very common application. There are many examples
of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.
Geographical pricing is evident where there are variations in price in different parts of
the world. For example rarity value, or where shipping costs increase price.

Value Pricing.
This approach is used where external factors such as recession or increased
competition force companies to provide 'value' products and services to retain sales
e.g. value meals at McDonalds.
Question-16 What are International Channels and Logistic decisions?

Or

Question- How do the logistic decisions and marketing channels influence

the business at international scenario?

Answer:

International Logistics

International marketing is becoming more important to companies as the worldshifts

from distinct national markets to linked global markets. Globalization
bringshomogenization of consumer needs, liberalization of trade, and
competitiveadvantages of operating in global markets. Companies are forced to think
and actglobally in order to survive in such a dynamic environment. All these elements
havea deep impact on the development and the positioning of companies on
internationalmarketplaces where competition is cruel. Furthermore, another
significant changeconcerns the customers since they are more demanding in term of
quality, lead timeand order fulfilment. In this context, firms must be more and more
flexible andreactive to anticipate and to adapt to such changes. This quest for
flexibility and reactivity affects the conception and the management of firms and
more generally their logistic systems and contributes to the development of
partnership relations, to the emergence of mergers or strategic alliances between
companies. As a result, a Business Organization can no longer be considered as an
isolated entity but as a component of a wider supply network. International Firms
have begun to implement various strategies in order to remain competitive in world
market. Logistics is one of the key areas in the process of international marketing as
the delivery of goods to the buyer is as important as any other activity in business and
marketing. Quite often, the most crucial part in International trade is the timely
delivery of goods at a reasonable cost by the exporter to the importer. In fact, the
prospective buyer may be willing to pay even higher price for timely supplies. The
emergence of logistics as an integrative activity, with the movement of raw materials
from their sources of supply to the production line and ending with the movement of
finished goods to the customer has gained special importance. Earlier on, all
the functions comprising logistics were not viewed as components of a single system.
But, with emergence of logistic as an important part of corporate strategy due to
certain developments in the field of international marketing has gained special
significance. Before discussing the various aspects of logistics, let us look at its
definition

“Logistics is the process of planning, implementing and controlling the efficient,

effective flow and storage of goods, services and related information from point of
origin to point of consumption for the purpose of conforming the customer
requirement”.
This definition clearly points out the inherent nature of logistics and it conveys that
Logistics is concerned with getting products and services where they are needed
whenever they are desired. In trade Logistics has been performed since the beginning
of civilization: it’s hardly new. However implementing best practice of logistics has
become one of the most exciting and challenging operational areas of business and
public sector management. Logistics is unique, it never stops! Logistics is happening
around the globe 24 hours a days Seven days a week during fifty-two weeks a year.
Few areas of business involve the complexity or span the geography typical of logistics

CONCEPT OF INTERNATIONAL MARKETING LOGISTICS

Word, ’Logistics’ is derived from French word ‘loger’, which means art of
warpertaining to movement and supply of armies. Basically a military concept, it
isnow commonly applied to marketing management. Fighting a war requires
thesetting of an object, and to achieve this objective meticulous planning is needed
sothat the troops are properly deployed and the supply line consisting,
interalia,weaponary, food, medical assistance, etc. is maintained. Similarly, the plan
shouldbe each that there is a minimum loss of men and material while, at the same
time, itis capable of being altered if the need arises. As in the case of fighting a war in
thebattle-field, the marketing managers also need a suitable logistics plan that
iscapable of satisfying the company objective of meeting profitably the demand of the
targeted customers. From the point of view of management, marketing logistics or
physical distribution has been described as ‘planning, implementing and controlling
the process of physical flows of materials and final products from the point of origin
to the pointof use in order to meet customer’s needs at a profit. As a concept it
means the art of managing the flow of raw materials and finished goods from the
source of supply to their users. In other words, primarily it involves efficient
management of goods from the end of product line to the consumers and in some
cases, include the movement of raw materials from the source of supply to the
beginning of the production line. These activities include transportation warehousing,
inventory control, order processing and information monitoring. These activities are
considered primary to the effective management of logistics because they either
contribute most to the total cost of logistics or they are essential to effective
completion of the logistics task. However, the firms must carry out these activitiesas
essential part of providing customer with the goods and services they desire.

SIGNIFIGANCE OF MARKETING LOGISTICS

The important of a logistics systems lies in the fact that it leads to ultimate
consummation of the sales contract. The buyer is not interested in the promises
of the seller that he can supply goods at competitive price but that he actually does
so. Delivery according to the contract is essential to fulfilling the commercial and legal
requirements. In the event of failure to comply with the stipulated supply of period,
the seller may not only get his sale amount back, but may also be legally penalized ,if
the sales contract so specifies. There is no doubt that better delivery schedule is a
good promotional strategy when buyers are reluctant to invest in warehousing and
keeping higher level of inventories. Similarly, better and/or timely delivery helps in
getting repeat orders through creation of goodwill for the supplier. Thus, as effective
logistics system contributes immensely to the achievements of the business and
marketing objectives of a firm. It creates time and place utilities in the products and
thereby helps in maximizing the value satisfaction to consumers. By ensuring quick
deliveries in minimum time and cost, it relieves the customers of holding excess
inventories. It also brings down the cost of carrying inventory, material handling,
transportation and other related activities of distribution. In nutshell, an efficient
system of physical distribution/logistics has a great potential for improving customer
service and reducing costs.

Logistics has gained importance due to the following trends

•Raise in transportation cost.
•Production efficiency is reaching a peak
•Fundamental change in inventory philosophy
•Product line proliferated
•Computer technology
•Increased use or computers
•Increased public concern of products Growth of several new, large retailchains or
mass merchandise with large demands & very sophisticated logistics services, by pass
traditional channel & distribution.
•Reduction in economic regulation
•Growing power of retailers
•Globalization

As a result of these developments, the decision maker has a number of choices to

work out the most ideal marketing logistics system. Essentially, this system implies
that people at all levels of management think and act in terms of integrated
capabilities and adoption of a total approach to achieve pre-determined logistics
objectives.

Logistics is also important on the global scale. Efficient logistics systemsthroughout

the world economy are a basis for trade and a high standard of living forall of us.
Lands, as well as the people who occupy them, are not equally productive.That is, one
region often has an advantage over all others in some productionspecialty. An
efficient logistics system allows a geographical region to exploit itsinherent advantage
by specializing its productive efforts in those products in whichit has been an
advantage by specializing its productive to other regions. The systemallows the
products’ landed cost (production plus logistics cost) and quality to becompetitive
with those form any other region. Common examples of this specialization have been
Japan’s electronics industry, the agricultural, computer and aircrafts industries of
United States and various countries dominance in supply in graw materials such as oil,
gold, bauxite, and chromium. Further more Logistics has gained importance in the
international marketing with the following reasons:
1.Transform in the customers attitude towards the total cost approach rather than
direct cost approach.
2.Technological advancement in the fields of information processing and
communication.
3.Technological development in transportation and material handling.
4.Companies are centralizing production to gain economies of scale.
5.Most of the MNC organizations are restructuring their production facilities on a
global basis.
6. In many industries, the value added by manufacturing is declining as the cost of
materials and distribution climbs.
7.High volume data processing and transmission is revolutionizing logistics control
systems.
8.With the advancement of new technologies, managers can now update sales and
inventory planning faster and more frequently, and factories can respond with more
flexibility to volatile market conditions.
9.Product life cycles are contracting. Companies that have gone all out to slash costs
by turning to large scale batch production regularly find themselves saddled with
obsolete stocks and are unable to keep pace with competitors’ new-product
introductions.
10.Product lines are proliferating. More and more product line variety is needed to
satisfy the growing range of customer tastes and requirements, and stock levels in
both field and factory inevitably rise.
11.The balance of power in distribution chain is shifting from the manufacturers to
the trader.

iii) - OBJECTIVES OF MARKETTING LOGISTICS

The General objectives of the logistics can be summarized as:

1.Cost reduction
2.Capital reduction
3.Service improvement

Thespecific objectives of an ideal logistics system is to ensure the flow of supply to the
buyer, the:
•right product
•right quantities and assortments
• right places
•right time
•right cost / price and,
•right condition
This implies that a firm will aim at having a logistics system which maximizes the
customer service and minimizes the distribution cost. However, one can approximate
the reality by defining the objective of logistics system as achieving a desired level of
customer service i.e., the degree of delivery support given by the seller to the buyer.
Thus, logistics management starts with as curtaining customer need till its fulfillment
through product supplies and, during this process of supplies, it considers all aspects
of performance which include arranging the inputs, manufacturing the goods and the
physical distribution of the products. However, there are some definite objectives to
be achieved through a proper logistics system. These can be described as follows:

1. Improving customer service:

As we know, the marketing concept assumes that the sure way to maximize profits in
the long run is through maximizing the customer satisfaction. As such, an important
objective of all marketing efforts, including the physical distribution activities, is to
improve the customer service. An efficient management of physical distribution can
help in improving the level of customer service by developing an effective system of
warehousing, quick and economic transportation, all maintaining optimum level of
inventory. But, as discussed earlier, the level of service directly affects the cost of
physical distribution. Therefore, while deciding the level of service, a careful analysis
of the customers’ wants and the policies of the competitors is necessary. The
customers may be interested in several things like timely delivery, careful handling
of merchandise, reliability of inventory, economy in operations, and so on. However,
the relative importance of these factors in the minds of customers may vary. Hence,
an effort should be made to ascertain whether they value timely delivery or economy
in transportation, and so on. One the relative weights are known, an analysis of what
the competitors are offering in this regard should also be made. This, together with
an estimate about the cost of providing a particular level of customer service, would
help in deciding the level of customer service.

Scope of International Marketing Logistics

The development of interest in logistics after industrial revolution and world war II
contributed to the growth in scope of logistical activities. The following areas are the
major scope of logistics:
•Demand forecasting
•Distribution communication
•Inventory Control
•Material Handling
•Order Processing
•Part & Service Support
•Plant and Warehouse side selection
•Procurement
•Packaging
•Salvage & scrap disposal
•Traffic & transportation
•Warehousing & Storage
•Time & Place Utility
•Efficient Movement to Customer
•Return goods handling
•Customers Service

Marketing Channels
• The Network of partners in the value chain that cooperate to bring

products from producers to ultimate consumers

• Imagine Nike again

• All those who help in bringing shoes to the consumer from the

factories (or is it sweatshops ?) in Indonesia are the channel

members (except transporters)

• These include wholesalers, retailers, agents, brokers etc

• They are called intermediaries, middlemen, dealers, resellers or distributors

• However, the prevailing view is that channel members are more than just
middlemen

• They are comrade-in-arms

• They are marketer’s first customers and partners; they add value to the marketer’s
offer

• What are some functions that channel members perform?

Functions of Channel Members

Making Products Available

• This is the most obvious and first function

• Retailers are critical here

• As also wholesalers in rural marketsInformation

• Retailers are a great source of information

• Why is this so?

• What makes the retailer good here?

• The retailer is closest to the consumer

• Hence knows more than you, the marketer

• Which models are liked? Which models are moving fast, slow and so on?
• Also very useful for certain institutional purchases like hotels for tiles Promotion

• Channel members also indulge in sales promotion and advertising

• Deals, flyers, cooperative advertising Transfer of Title

• If ITC sells 100 packets of Aashirwad aata to Nilgiris, the title is now transferred

• Ownership is transferred Physical possession

• Thus “your” goods are now possessed by Nilgiris

• Imagine what would happen if retailers did not take physical possession?

Financing

• Now that Nilgiris owns it, they need to finance the inventory

• Inventory always has carrying costs

Risk Taking

• Now the onus is on Nilgiris to sell

• What if they are unable to sell?

• They are stuck with the product

• Hence perishables always carry a large margin e.g. vegetables

• What are some other risks?

• What if a kid breaks some bottles of jam in the st

Question-17. What is International accounting and how International

Accounting Standards are set by different International Organizations?
Or
Question- What do you understand by Accounting Difference across
countries?

Answer:
International Accounting

Comparable, transparent, and reliable financial information is fundamental for the

smooth functioning of capital markets. In the global arena, the need for comparable
standards of financial reporting has become paramount because of the dramatic
growth in the number, reach, and size of multinational corporations, foreign direct
investments, cross-border purchases and sales of securities, as well as the number of
foreign securities listings on the stock exchanges. However, because of the social,
economic, legal, and cultural differences among countries, the accounting standards
and practices in different countries vary widely. The credibility of financial reports
becomes questionable if similar transactions are accounted for differently in different
countries.
To improve the comparability of financial statements, harmonization of accounting
standards is advocated. Harmonization strives to increase comparability between
accounting principles by setting limits on the alternatives allowed for similar
transactions. Harmonization differs from standardization in that the latter allows no
room for alternatives even in cases where economic realities differ.
The international accounting standards resulting from harmonization efforts create
important benefits. Investors and analysts benefit from enhanced comparability of
financial statements. Multinational corporations benefit from not having to prepare
different reports for different countries in which they operate. Stock exchanges
benefit from the growth in the listings and volume of securities transactions. The
international standards also benefit developing or other countries that do not have a
national standard-setting body or do not want to spend scarce resources to
undertake the full process of preparing accounting standards.
The most important driving force in the development of international accounting
standards is the International Accounting Standards Committee (IASC), an
independent private-sector body formed in 1973. The broad objective of the IASC is
to further harmonization of accounting practices through the formulation of
accounting standards and to promote their worldwide acceptance.
International Accounting Standards initially tended to be too broad, allowing many
alternative accounting treatments to accommodate country differences. This was a
serious weakness in achieving the objective of comparability. To gain acceptability of
its standards, in 1989 the IASC undertook a project (called the Comparability Project)
aimed at enhancing comparability of financial statements by reducing the alternative
treatments. An important part of this effort was its work plan to produce a
comprehensive core set of high-quality Standards (Core Standards project). The IASC
has completed its Core Standards project, and the revised standards are a significant
improvement over the earlier ones.
Many other organizations also play an important role in the march toward
international accounting standards. Among the more important are those discussed
below.
IFAC.- The International Federation of Accountants is a worldwide association formed
in 1977 to develop the accounting profession, harmonize its auditing practices, and
reduce differences in the requirements to qualify as a professional accountant in its
member countries. It currently has a membership of one hundred and forty-three
national professional organizations in one hundred and four countries representing
more than 2 million accountants. The IFAC issues International Standards on Auditing
(ISA) aimed at harmonizing auditing practices globally. The IFAC Council also appoints
country representatives on the IASC Board (thirteen in total).
UN.- Several organizations within the United Nations have been involved in
international accounting standards. Its Group of Experts prepared a four-part report
in 1976, "International Standards of Accounting and Reporting for Transnational
Corporations." The report listed financial and nonfinancial items that should be
disclosed by multinational corporations to host governments. More recently, it has
worked to promote the harmonization of accounting standards by discussing and
supporting best practices in a variety of areas, including environmental disclosures.
OECD.- The Organization for Economic Cooperation and Development formed in 1960
currently has twenty-nine of the world's developed, industrialized countries as its
members. A valuable contribution of the OECD is its surveys of accounting practices in
member countries and its assessment of the diversity or conformity of such practices.
Its Working Group on Accounting Standards supports efforts by regional, national,
and international bodies promoting accounting harmonization. In 1998, the OECD
issued "Principles of Corporate Governance" that support the development of high-
quality, internationally recognized standards that can serve to improve the
comparability of information between countries.
EU.- The European Union, the powerful regional alliance of fifteen nations, aims to
bring about a common market that allows free mobility of people, capital, and goods
among member countries. To promote the cross-country economic integration, the
EU has made significant progress in the harmonization of laws and regulations. Its
Commission (European Commission) establishes standardization and harmonization
of corporate and accounting rules through the issuance of Directives. Directives
incorporate uniform rules (to be implemented exactly in all member states),
minimum rules (which may be strengthened by individual governments), and
alternative rules (which members can choose from). Directives are mandatory in that
each member country has the obligation to incorporate them into its respective
national law. However, each country is free to choose the form and method of
implementation and also to add or delete options.
NAFTA-. The North American Free Trade Agreement was formed in 1993 among
Canada, Mexico, and the United States to create a common market. It will phase out
duties on most goods and services and promote free movement of professionals,
including accountants, among the three countries. There are projects under way to
analyze the similarities and differences between financial reporting and accounting
standards of the member countries of NAFTA.
Other organizations.- Some regional organizationsuch as the Association of Southeast
Asian Nations (ASEAN), Community of Sovereign States, Economic Cooperation
Organization (ECO), Baltic Council, Asia Pacific Economic Cooperation (APEC),
Confederation of Asian and Pacific Accountants (CAPA), and Nordic Federation of
Accountants (NFA)ave made efforts toward harmonizing accounting and disclosure
standards. G4 group of standard-setting bodies in Australia, Canada, the United
Kingdom, and the United States, has also started playing an important role in the
harmonization of international accounting standards.
The process of harmonizing international accounting standards has come a long way
on a path that has been far from smooth. While some critics still doubt the need and
feasibility of such standards, it is becoming increasingly clear that the question is not
whether but when the Inter national Accounting Standards will be required and
followed by business and other entities worldwide. The likely endorsement by the
IOSCO and SEC will make that time sooner rather than later.

Accounting Difference across the Countries

Although accounting standards and practices are the same across the board in
their origin, the accounting and taxation structures of different countries around the
world makes them vary between countries. Different countries apply different
accounting practices. This accounting diversity is the reason that one company may
seem profitable while another seems to be operating at a loss, in extreme cases. The
disparity between global accounting practices can lead to poor business decision-
making, difficulties in raising capital in different or foreign markets, and difficulty in
monitoring competitive factors across firms, industries, and nations. Their accounting
practices are linked to the objectives of the parties who will use the financial
information, including people like investors, lenders, and governments.
While the IASC, the International Accounting Standards Committee, is trying to
make a single set of high-quality, understandable, enforceable accounting standards
worldwide, the USA is resisting, insisting that no standards are as good as ours. We
use the GAAP, or the Generally Accepted Accounting Principles. However, through the
whole Enron thing, the US standards dropped and support of the international
standards was given an unexpected boost. Through the international standards and
practices, Enron's accounting mistakes would have been caught long before the
destruction of the whole company.
A difference in accounting principles between countries, for example, would
include one such as that capitalization of R&D costs are allowed in Japan, the United
Kingdom, France, the Netherlands, Switzerland, Canada, and Brazil, but not in
Germany or the United States. Similarly, book and tax timing differences being
recorded on the balance sheet as deferred taxes is required in the United States and
the Netherlands, but merely allowed in some cases in the other countries. These
accounting differences could really cause conflict between countries because of
international transactions and stuff.
There are substantial questions of competitive advantages and informational
deficiencies that may result from these continuing differences across countries, and
the differences from the accounting practices from across different countries are very
real and persistent. Some of the differences between countries include fixed asset
revaluations stated at an amount in excess of the cost, inventory valuation using LIFO,
finance leases capitalized, pension expense accrued during period of service, current
rate method of currency translation, pooling method used for mergers, and an equity
method used for 20-50% ownership. The way of accounting between many countries
are very different, especially in what is and is not allowed.
The differences in accounting principles between countries could really cause
inconsistencies between international operations. Maybe if an international standard
were set for all countries, there would be less quarreling and more agreement in
accounting between countries. That way there would be less discrepancy in the
accounting principles and the balance sheets for each country.
Question-18. What are significant Cross Culture challenges in International
Business and what are the solutions to cross culture challenges?
Or
Question- How the cross cultures challenges and their solutions can be
integrated in business organizations dealing with global texture?

Answer :

Cross Culture Challenges in International Business

Cross National Differences

In recent years, with the increase in globalization and diversity in the workplace, cross
cultural management has become an important element of organizational. Culture
can be analyzed from a country, language, religion, value, ethical and/or many other
areas of study as a frame of reference. The main cross national differences are-

· Social & cultural Environment

Social structure of the society
Values and belief of people
· Political environment
· Legal system
· Education system and standard
· Quality of quantity knowledge work force
· Level of available technology
Global HR issues
Global human resource strategy is the framework built around managing a global
workforce; including recruiting, hiring, setting compensation levels and benefits, and
retaining workers in a global organization. Global companies must make decisions
about hiring locally, recruiting expatriates, or utilizing emerging new worker groups to
fill the needs of a particular region.
Additionally, global HR strategy must consider the complexities of regional
government interaction with the business, as well as social programs that may
compensate for benefits offered by the employer in other regions. Other global HR
issues that impact the development of a cohesive strategy include cost of living, local
pay scales, retention issues, pension issues, organized labor, and regional leave
policies.

A)-Standardization and adaptation of HR practices

1 .Host country culture and work place environment

2. Firm’s size, maturity and level of international experience

3. Mode of operation
B).Retaining, developing and retaining local Staff

C). HR implication of Language Standardization

D). Monitoring HR practices of host Country

Managing Multiculturalism Cultural diversity

Cultural diversity is the variety of human societies or cultures in a specific region, or in

the world as a whole. Human have spread throughout the world, successfully
adapting to widely differing conditions and to periodic cataclysmic changes in local
and global climate. The many separate societies that emerged around the globe
differed markedly from each other.
Cultural differences that exist between people, such as language, dress and traditions,
there are also significant variations in the way societies organize themselves, in their
shared conception of morality, and in the ways they interact with their environment.
Most people would agree that cultural diversity in the workplace utilizes country’s
skills to its fullest, and contributes to overall growth and prosperity.
Diversity at its core is about people and the behavioral characteristics that guide how
we interact, i.e. “culture.” To better understand this notion, let’s examine the impact
of culture within our workplace organizations. Several aspects of culture shape
today’s workplace. For example, employees’ communication style, time
consciousness, and work practices all stem from their cultural programming. The
dominant cultural norm here in the United States dictates that business
communication be specific and explicit. Meaning is found in the actual content of
words with very little left to interpretation. However, in many ethnic and international
cultures, communication is more implicit and indirect: meaning is found in and
around the words themselves.
By better understanding the cultural norms and values within their organization,
leaders and their units benefit. When this enhanced comprehension becomes a way
to guide efforts, hiring practices, and employee relations strategies, diversity
initiatives move away from lip service and become actualized. An honest cultural
audit of an organization not only helps drive diverse policies and procedures, but goes
far in the creation of welcoming workplace communities in which genuine cross-
cultural interaction and respect for diversity are naturally occurring. And as an
organization’s culture is identified and shared, diverse employees are more likely to
express their cultural uniqueness within the context of stated organizational norms
and values. When organizational culture and individual human values work together,
there can be synergy: the interaction or cooperation of two or more entities to
produce a combined effect greater than the sum of their separate effects. That is a
definition of diversity in which we can all find meaning.

Reasons for Expatriate Failure

• Inability of spouse to adjust

• Manager's inability to adjust
• Other family reasons
• Inability to cope with larger international responsibility
• Difficulties with new environment
• Personal or emotional problems
• Lack of technical competence

Factors of Expatriate Selection

(a)Technical ability
(b)Cross- cultural Suitability
(c)Family Requirements
(d)language
(e)Cross- cultural Requirements

Training for Expatriates:

An expatriate needs following trainings to cope with cross cultural challenges:

(1) cultural training,
(2) language training, and
(3) practical training.

Cultural Adjustment of expatriate

An expatriate's cultural adjustment typically comprises three stages .
1st Stage : Tourist Stage
the expatriate enjoys a great deal of excitement as he or she discovers the new
culture. This stage is called the tourist stage.
2nd Stage Disillusionment:
In this stage, the curve hits the bottom and is characterised by what is called culture
shock.

3rd Stage : adapting or adjustment phase.

If culture shock is handled successfully, the expatriate enters the third stage, which
may be called the adapting or adjustment phase.

Solutions to the Cross Culture Challenges in International Business

Globalisation, the expansion of intercontinental trade, technological advances and the

increase in the number of companies dealing on the international stage have brought
about a dramatic change in the frequency, context and means by which people from
different cultural backgrounds interact.

Cross cultural solutions to international business demands are increasingly being

viewed as a valid and necessary method in enhancing communication and interaction
in and between companies, between companies and customers and between
colleagues. Cross cultural consultancies are involved in aiding companies to find
solutions to the challenges cross cultural differences carry.
International and national businesses are ultimately the result of people. As with
incompatible software, if people are running on different cultural coding, problems
can occur. Cross cultural consultancies therefore concentrate their efforts on
interpersonal communication. Different cultures and cultural backgrounds between a
highly diverse staff base brings with it obstacles, challenges and difficulties. Cross
cultural differences manifest in general areas such as in behaviour, etiquette, norms,
values, expressions, group mechanics and non-verbal communication. These cross
cultural differences then follow on through to high level areas such as management
styles, corporate culture, marketing, HR and PR.

In order to overcome potential pitfalls, specialist attention is required in the form of a

cross cultural consultant. As one would approach a doctor for a medical diagnosis or
an accountant to examine finances, cross cultural consultants offer the expertise,
experience and know-how to diagnose problems and provide solutions to
interpersonal cultural differences. Within Business organizations there are many
facets in which cultural differences manifest. Some key areas which cross cultural
consultants deal with include, but are not exclusive to, the following:

Cross Cultural HR: HR covers a wide range of business critical areas that need cross
cultural analysis. Consultants may offer advice on a number of areas including
recruitment, relocation, international assignments, staff retention and training
programmes.

Cross Cultural Team-Building: in order to have a well functioning business unit within a
company, communication is critical. Cross cultural consultants will provide tools and
methods to promote staff integration, reduce cross cultural conflicts and build team
spirit. This is essentially done through highlighting differences and building on
strengths to ensure they are used positively.

Cross Cultural Synergy: international mergers, acquisitions and joint-ventures require

people from different cultural backgrounds to harmonise in order to succeed. Cross
cultural consultants counsel on group mechanics, communication styles, norms,
values and integration processes.

Cross Cultural Awareness Training: working with colleagues, customers or clients from
different cultural backgrounds, with different religions, values and etiquettes can
occasionally lead to problems. Cross cultural awareness training is usually a generic
introduction into a culture, country, region or religion. The aim is to equip the trainee
with the adequate knowledge to deal comfortably with people from different
cultures, avoiding misunderstandings and mistakes.

Cross Cultural Training for Expatriate Relocation: staff that travel overseas need to
understand the cultural basics of the host country or region. Knowledge of the
country's history, culture, laws, traditions, business practices and social etiquettes all
help to minimise the impact of culture shock and hence smooth their transition
overseas.
Cross Cultural Negotiations: equipped with their knowledge of the two or more
cultures that can be meeting around the negotiation table, a cross cultural consultant
advises on areas such as negotiation strategies, styles, planning, closure and etiquette
in order to increase the chance of a successful outcome, free from
misunderstandings, suspicions and general cross cultural communication breakdown.

Cross Cultural PR Consultancy: brand image, public relations and advertising are all
areas companies must be careful of when moving out of the national context. Tastes
and values change dramatically from continent to continent. It is crucial to
understand whether the brand name, image or advertising campaign is culturally
applicable in the target country. Cross cultural consultants examine words, images,
pictures, colours and symbols to ensure they fit well with the target culture.

Cross Cultural Language Training: Language training is an area where little investment
is made by companies, but where the business advantages are great. Linguistic
knowledge goes a long way in bridging cultural gaps and smoothing lines of
communication. Cross cultural consultancies provide language training to business
staff, moulding their learning to the business environment in which they work.

In conclusion, clearly the role and expertise of cross cultural communication

consultants is important for today's international business. The potential pitfalls cross
cultural differences present to companies are extensive. In essence a cross cultural
consultant's primary objective is integration. This integration, between colleagues,
clients and customers is crucial for business success. Equipped with experience,
knowledge and above all objectivity, a cross cultural consultant creates bridges of
understanding and opens lines of communication

Question-19. What do you understand by International Staffing

decisions? Explain in detail.
or
Question- How an International Business Organization go for the
procurement of its human resources in a systematic and perfect
manner? Write in detail.
Answer:

In International Business Organizations it is very crucial to procure suitable

human resources of to take international staffing decisions. In fact it is a
perfectly sequential process in which first we will go for human resource
planning at international level then we will move recruitment and selection
process according to international scenario.

1. International Human Resource Planning

International Human Resource Planning can be defined as the process by which
an International business organization ensures that it has the right number of people
of right competencies at the right positions and places, at the right time and capable
of effectively & efficiently accomplishing all the tasks to achieve its overall goals &
objectives. In fact the process of International Human Resource Planning basically
translates the organizational plans & objectives to the number of exactly capable
employees required at different foreign locations to achieve those objectives
according to decided plans.

a. Objectives & Policies of International Business Organization: Organizational

objectives and policies at international levels are thoroughly studied in context
with the future vision. International Human Resource Planning must be based
on organizational objectives and it must cope with the organizational policies.
The objectives of Human Resource Plans are designed after the
conceptualization and as according to the overall Organizational objectives &
policies.
b. International Human Resource Needs Forecast: Human Resource need forecast
at international level is very essential for the process of International Human
Resource Planning. It is the process of estimating the future requirement of the
quantity & quality of Workforce in the International Business Organization.
International Human Resource need forecast is not a rough guess work only
rather it considers both internal as well as external factors. The internal factors
include production plans & their levels, new products and services,
organizational structure, international organizational budget and organizational
plans for employee separation. The external factors cover competition,
economic environment, law making bodies, fastly changing global scenario in
field of technology or social understanding. As we have already discussed
International Human Resource need forecast is based on various factors but the
techniques being used for this forecasting also matters a lot as another factor.
There are so many Human Resource needs forecasting techniques such as
Expert Judgment, Trend analysis, Job analysis, Work Study Techniques, Delphi
Technique and Budget & Planning analysis.
c. International Human Resource Supply Forecast: International Human Resource
need analysis provide the HR practitioners an estimate of the number and kind
of employees that will be required to the global organization at different
locations for coming future but this is not enough. The next step for Human
Resource Practioners is to be aware of the futuristic situations whether the
organization will in a position to procure the required number of employees of
required skills & capabilities at different locations along with the source of such
procurement. For this information International Human Resource supply
forecast is required to be conducted for so many valid reasons. These reasons
are (a) International Human Resource Supply forecast helps the business
organization to ensure the availability of the quantity of employees along with
their expected skills and positions. (b) International Human Resource Supply
forecast helps the organizations to have an analytical screening & assessment of
its existing workforce. (c) International Human Resource Supply forecast save
the organization from the sudden shortage of workforce where and when it is
highly needed.
The analysis of International Human Resource Supply covers three major factors
 1. Existing Human Resource at different levels and locations with different skills
& qualification.
2. The internal sources of Human Resource Supply at International level.
3. The external sources Human Resource Supply at International level.
The International Human Resource Supply forecast is so important that it
measures the number of specific employees likely to be available from within or
outside an organization. International Human Resource Supply forecast is just
like creating a skill inventory for global organizations with consolidated
information.
d. International Human Resource Programming: International Human Resource
Programming is the forth step in the process of International Human Resource
Planning. After forecasting the demand and supply of Human Resource an
International business organization has to formulate a program for its Human
Resource Requirements at International level as according to its corporate
objectives. International Human Resource need forecast and International
Human Resource supply forecast both these must be reconciled or balanced in
such a way that organization can ensure the vacancies be filled by right kind of
employees with right skills at right time. This is called International Human
Resource Programming.
e. Implementation of International Human Resource Plan: Formulation of any plan
is useless if implementation is not carried out in a proper manner at
predetermined & appropriate time. Implementation of International Human
Resource Plan requires converting conception of the plan into action in real
terms. A series of action programs such as Recruitment, Selection, Placement,
Training & Development, Retaining, Succession Planning & Redeployment are
initiated as a part of Human Resource plan implementation.

2. International Recruitment
International Recruitment attracts a large number of qualified applicants who
desire to work in a global or international organization. The recruitment information
given by the global companies helps the qualified candidates who are willing to work
to send their resume, along with a letter expressing their desire to work. It also helps
the unqualified candidates to self select themselves out of the job candidacy. Thus, the
accurate information provided by the global or international business organizations
attracts the qualified and repels the unqualified candidates.
Thus, recruitment helps the global or international business organizations in
finding out potential candidates for actual or anticipated vacancies in the
company.

Traditional Sources of Recruitment by International Business

organizations
International or Global business organizations use the traditional sources of
recruitment, which are appropriate for finding the right candidates. These
Traditional sources of recruitment are classified as Internal Sources and External
Sources
a. Internal Sources - Internal sources are traditional sources from within the
organization. International business Organization prefers to depend upon
internal sources in order to build good public relations, build employee morale,
and to retain the competent employees. In addition, internal recruitment is less
expensive and enhances good selection, as the employee’s performance is in
accordance with the organizational requirements and the employees are
adjusted to the company’s culture.
Internal sources include existing employees and past employees.

Existing Employees - Global business organizations consider the present employees

for the present and future vacancies at both the parent organization and
subsidiaries in various countries. The techniques of recruiting the candidates
from the source of present employees include promotion and transfers. The
global business organizations fill the vacancies by promoting the qualified
candidates and by promotion culturally fit candidates from the lower levels or by
transferring the candidates.
Previous Employees - Global business organizations started depending upon this
source due to job-hopping and high rate of business fluctuations in high
technology based industries. The advantage of this source of previous employees
is that the candidate’s performance and behavior fit to the business organization
and its culture and also the compensation suit the candidate expectations.

b. External Sources - External Sources are those sources, which are the
organizational pursuits. Global business organizations search for the required
candidates from these sources. The reasons for searching for the candidates from
these sources include availability of candidates with required skills, knowledge,
talent and cultural background, possibility of selecting the candidates without
any preconceived notion or reservation.
The sources of external recruitment generally include:
1. Multi National Companies visit the premier institutes and select the
candidates.
2. Private employment agencies or Consultants like Global placements.
3. Public employment agencies like Ministry of Foreign Affairs.
4. Professional organizations.
5. Databanks maintained by the global organizations.
6. Causal Applicants through Internet services and various websites.
7. Similar organizations at International level
The International or Multinational business organizations mostly use the
modern recruitment sources, in addition to the sources listed above.

Modern Techniques of International Recruitment

The international business organizations in addition to traditional sources and
techniques are using a number of modern recruitment techniques and sources.
These Techniques include walk in and consult in, headhunting, body shopping,
business alliances, and tele-recruitment.
Walk-In - The busy global business organizations and the rapid changing
companies do not find time to perform various functions of recruitment.
Therefore, they advise the potential candidates to attend for an interview
directly and without a prior application on a specified date, time and at a
specified place..
Consult–In - The busy and dynamic international business organizations
encourage the potential job seekers to approach them personally and consult
them regarding the jobs.
Head-hunting - The International business organizations request the
professional organizations to search for the best candidates particularly for the
senior executive positions. The professional organizations search for the most
suitable candidates and advise the International business organizations
regarding the filling up of the positions. Head–hunters are also called search
consultants.
Body Shopping - Professional organizations and the hi-tech training institutes
develop the pool of human resources for the possible employment. The
prospective employers contact these organizations to recruit the candidates.
Otherwise, the organizations themselves approach the prospective employers to
place their human resources. These professional and training institutions are
called body shoppers and these activities are known as body shopping.
Business Alliance - Business Alliances like acquisitions, mergers, and take over
helps in getting human resources. In addition, the International business
organizations do also have alliances in sharing their human resources on ad-hoc
basis.
Tele-Recruitment - The technological revolution in telecommunication field
helped the International business organizations to use Internet as sources of
recruitment. Organizations advertise the job vacancies through the World Wide
Web www Internet. The job seekers send their applications through e-mail or
Internet websites.
Modern Sources of International Recruitment
Modern Sources of global recruitment include: Parent country nationals, Host
country nationals and third country nationals.
Parent Country Nationals - Parent Country Nationals are employees of a
business organization or its subsidiaries located in various countries who are the
citizens of the country where the headquarters of International business
organizations is located. Parent country nationals in international business
normally are managers, heads of subsidiary companies, technicians,
troubleshooters and experts. They visit subsidiary companies and operations to
help them in carrying out their operations, to ensure their smooth functioning
and control them. However, sending parent country nationals involves cost and
causes ego and cultural problems.
Host Country Nationals - Host Country Nationals are the employees of the
subsidiary of International business organizations who are the citizens of the
country where the subsidiary is located. Employing host country nationals is
advantageous as they are familiar with native culture, local business norms and
practices, local bureaucrats, market intermediaries and suppliers of inputs so
they can manage local workers efficiently. They also know the tastes and
preference of the local customers. But sometimes they may not be familiar with
the objectives, goals and strategies of the parent business organizations and the
needs of the headquarters.
Third Country Nationals - Third Country Nationals is an employee of a
subsidiary of International business organizations located in a country, which is
not its home country. The software professional of India work in American
Subsidiaries located in various countries of Europe are called third country
nationals. The advantage of employing Third Country National includes less cost
with required expertise, skill knowledge and foreign language skills and cultural
fit due to work experience in multicultural environment. However, the local
government may impose conditions and regulate in employing third country
nationals.

3. International Selection Decisions

International business organizations need people with higher order skills,
balanced emotions, and ability to adjust to multi-cultural environment. Hence
the selection process of International business organizations varies from that of
a domestic business organization. Selection process of an International business
organization includes selection procedure, selection approach and selection
methods.

Selection Procedure
The International business organizations conduct the selection procedure after
receiving the applications from qualified candidates. The selection procedure
includes:
Appraisal of Application or Resume - The candidate’s qualifications, family
background, experiences, age, skill are provided in the resume’ are analyzed and
compared with the job analysis in order to find the match between the job and
candidates. Some of the candidates are selected at this level for further stages.
Written Test - Candidates found suitable at the first level are called for written
test. The written test examines the candidate’s knowledge in the job related
areas and aptitude. Some candidates are selected at this stage based on their
scores.
Preliminary Interview - The selected candidates at the previous stage are
called for preliminary interview. The purpose of preliminary interview is to
solicit necessary in formation from the prospective candidates and to assess the
applicant’s suitability to the job.
Psychological Tests - Psychological Tests are conducted to the selected
candidates. The International business organizations conduct various tests to
screen the candidates. The important among are Aptitude Tests, Intelligence
Test, Skill Test, Mechanical Aptitude Test, Psychomotor Test, Job Knowledge
Test, In-Basket Games, Interest Test and Personality Tests.

Secondary Interview - International business organizations thoroughly

examine the candidate regarding his or her suitability to the job through
interview process. The International business organizations use video
conferencing or telephonic interview rather than conducting physical interview,
as the former is less costly. The candidates selected at the previous stage are
called for final interview.
Medical Test - In fact, due to the variations in climate conditions in various
International business organizations give more weight age to the health and
medical fitness of the candidate. Hence, International business organizations
insist complete medical check-up of the candidate to check his or her suitability.
Reference Checks - Despite the conduct of various selection tests, it would be
very difficult to the International business organizations to get reliable
information regarding the candidate’s preference, skill, values, ethics etc.,
through application, tests and interview. Hence, International business
organizations rely mostly on reference letters for this purpose. Reference
checks play vital role in the selection process of International business
organizations.
Final Decision - The International business organizations take the final decision
regarding the candidate’s selection based on the scores of the tests and
interview. A global firm takes the final decision very carefully.
Employment- Thus, after taking the final decision, the International business
organizations intimated its decisions to the selected candidates and they
communicate their acceptance.
International Selection Approach
Selection policy is vital in global business as it deals with the various types of
people, jobs and placement. In fact, selection policy contributes for the
achievement of the strategic goal of International business organizations. There
are three types of approaches followed in selection policies in International
business organizations viz., the ethnocentric approach, the polycentric approach
and the geocentric approach.
The Ethnocentric Approach - Under this approach, parent country nationals
are selected for all the key management jobs.
The Polycentric Approach - Under this approach, the host country nationals fill
the positions including the senior management positions of the subsidiaries.
The Geocentric Approach - Under this approach, the most appropriate
candidates are selected for jobs from any part of the globe. International
business organizations generally follow this approach
International Selection Techniques
International business organizations require the human resources adaptable
not only to the job and organizational requirements, but also to the emotions of
the people of difference countries of the world. As such, the selection techniques
for global jobs vary from that of domestic jobs. The selection techniques for
global jobs are:
a. Screening the background of the applicant.
b. Conducting tests to determine the candidate’s suitability to the job norms.
c. Conducting tests to evaluate the candidate’s suitability and adaptability to
the new culture and environment.
d. Conducting tests to evaluate the suitability and adaptability of
candidate’s spouse and family members to the new culture and environment.
e. Predicting the adjustment of the candidate, his or her spouse and family
members to the new job, culture of the company, country and the new
environment.

The candidate must be asked specifically structured questions relating to His

or her adjustment, Interaction with the host nationals, Technical competence,
Cultural novelty, Family situation and Communication skills.

4. Expatriates
 International or Global Business Organizations, after selecting the candidates
place them on the jobs in various countries, including the home country of the
employee. However, the employees of the International Business Organizations
are also placed in foreign countries. Even those employees who are placed
initially in their home countries are sometimes transferred to various foreign
countries. Thus, the employees of International Business Organizations working
and living in foreign countries and their family members living or working in
foreign countries are called Expatriates in the foreign country.
Expatriates are those living or working in a foreign country. The parent country
nationals working in foreign subsidiary and third country nationals are
expatriates. Large numbers of expatriates normally have adjustment problems
with the working culture of the International Business Organization, culture of
the foreign country or laws of that country. Some expatriates adjust themselves
easily, while some others face severe problems of adjustments. Such employees
may leave their assignments in between and return to home country by
terminating their work contracts. Many Indian expatriate in some gulf countries
could not adjust to the culture and returned India before their assignments are
completed. Thus, the major problem with expatriates is adjustment in the new
international environment.

International Adjustment - International Adjustment is the degree to which

the expatriates feel comfortable living and working in the host country culture.
This significantly influences job performance. The expatriate is completely new
to the host country environments, social rules, norms etc. The expatriates have a
strong desire to reduce psychological uncertainty in the new environment.
Psychological uncertainty is also called cultural shock.

Cultural Shock – It may be defined as frustration and confusion that result from
being bombarded by uninterruptible cues. For example, students in USA drink
beverages in the classroom; students in African countries leave the class
immediately after the close of the lecture but before the teacher leaves the class,
people in USA wish you immediately when there is eye-to-eye contact with you.
These cultural differences cause cultural shock to Indians.
Researchers found that to a large degree cultural shock follows the general
pattern of a U-shaped curve. This figure presents the relationship between
culture shock and the length of time the expatriate has been working in the host
country’s culture. The ‘U’ is divided into four stages, viz., honeymoon, culture
shock, adjustment and mastery.

Honeymoon stage - The expatriate and his or her family members are fascinated
by the culture of the host country, the different accommodation, the
transportation facilities and educational facilities to the children during the early
stage of arrival. This stage last up to a period of three to four months.
Culture shock stage - The International Business Organizations take care of the
new arrivals and completely neglects the previously arrived employee and his or
her family after three four months. During this stage, the employees have to take
care of themselves and their family members. Expatriates may get frustrated,
confused and unhappy with living and working abroad. Their social relations are
disillusioned during this stage. The shock of the existing culture may trouble
them.
Adjustment stage - Gradually the expatriates start learning the values, norms,
behaviour and culture of the people in host country and adjust themselves to the
culture of the host country.
Mastery stage - The expatriates concentrate on working efficiently after
adjusting themselves with the culture of the host country. They learn and adapt
the new environment thoroughly and become like citizens. Now in this stage the
Expatriates behave and function like the citizens of the host country.

Dimensions of International Adjustment - It is very significant to

understand the major dimensions of International Adjustment, which are three
in numbers as adjustment to the foreign workplace, adjustment to interacting
with the host nationals and adjustment to the general environment of foreign
host country. The research studies discovered certain skills, which would help
both the individual expatriate and international organizations in dealing with the
adjustments. There are four dimensions of adjustment skills as Individual, Job,
Organization culture, and Non-Work dimensions.

Individual Dimension - Individual Dimension includes the skills and the

capabilities that an individual expatriate possess. There are three sets of
individual skills such as self-efficacy, Interpersonal and Perceptual skills are:
Self-Efficacy Skills - The expatriate must have self-confidence, self-esteem and
mental hygiene. He or she must be able to keep mental and social health with a
feeling of being able to control or deal with surprises from cultural environment
of the host country. Areas of self-efficacy are stress reduction, technical
competence and reinforcement substitution.
Interpersonal Skills -Interpersonal Skills include expatriate’s ability, desire and
tendency to interact, mix or involve and develop relationships with host
nationals.
Perceptual Skills - These skills include expatriate’s ability to understand the
behavior of the host nationals, their practices, belief, liking disliking and culture.
These skills reduce the degree of psychological uncertainties associated with
cross-cultural experiences.
Job Dimensions – It is understood that the expatriate must have required skills,
knowledge and abilities to carry out the job successfully in the host country.
However, certain factors like Role clarity, Role Discretion, Role Novelty and Role
conflict help or hamper the expatriate’s adjustment in the host country.
Role Clarity - Role clarity deals with the degree of clarity that the employee
understands the job duties, responsibilities, tasks, demands and roles..
Role Discretion - Role discretion is the degree of flexibility of work place rules,
regulations, expectations, procedures and policies.
Role Novelty - Role Novelty refers to the degree of distinctiveness of the duties,
responsibilities and the tasks of the new job compared to those of the old job in
the home country.
Role Conflict - Role conflict occurs when the expatriates start receiving conflicting
signals regarding their roles, duties, and behavior and performance levels from
the people at work place.
Organizational Culture Dimension - Organizational Culture is very significant
in International human resource management. It is pattern of basic assumptions
innovated, discovered or developed by the organizational group as it learns to
cope with its problems of external adaptation and internal integration that had
worked well enough to be considered valuable, and, therefore, to be taught to
new members as the most accurate way to perceive, think and feel regarding
those problems. Every business organization has its own culture with different
rules, regulations customs, traditions, norms, expectations and the expatriates
are informed of this culture. Similarly, the expatriate must also learn culture of
the new organization in the foreign country.
The expatriates may find it difficult during the early days of their assignments
due to the cultural novelty but gradually they learn and adapt it.
Non-work Dimension - The non-work dimension includes culture novelty and
adjustment of spouse or family.
Culture Novelty - Culture Novelty includes differences in values, beliefs, norms,
religious faith, sex roles or myths. The degree of culture novelty is more, if these
factors of the host country differ much from those of the home country of the
expatriate.
Spouse or Family Adjustment - The adjustment with the host country and its
environment may be a factor of decision to leave the host country before the
contract expires, if the spouse and family members of the expatriate fail to adjust
to the host country’s culture. Some of the Indian expatriates decided to leave as
their wives fail to adjust to foreign culture regarding sexual relations and
marriage system particularly when their female children enter the teenage and
force the husbands to leave the foreign job and country.

Question-20. What is Compensation? How an International

Business organizations work out their Compensation
decisions?
or
Question- What are the fundamentals and Components of
International Compensation?

Answer:
Compensation of Human Resources
Compensation of Human resource is a form of insurance providing wage replacement
and medical benefits to employees injured in the course of employment in exchange
for mandatory relinquishment of the employee's right to sue his or her employer for
the tort of negligence. The trade off between assured, limited coverage and lack of
recourse outside the worker compensation system is known as "the compensation
bargain."
While plans differ between jurisdictions, provision can be made for weekly payments
in place of wages (functioning in this case as a form of disability insurance),
compensation for economic loss (past and future), reimbursement or payment of
medical and like expenses (functioning in this case as a form of health insurance), and
benefits payable to the dependents of workers killed during employment (functioning
in this case as a form of life insurance). General damages for pain and suffering,
and punitive damages for employer negligence, are generally not available in workers'
compensation plans, and negligence is generally not an issue in the case. These laws
were first enacted in Europe and Oceania, with the United States following shortly
thereafter.

International Compensation and Benefits

Business Organizations with worldwide operations need to develop compensation

plans for employees that are in line with their global business strategy. Companies
that articulate a clear global pay philosophy and develop the corresponding
compensation programs are best positioned to effectively execute their strategy,
since executives and key contributors around the globe are unified on a common set
of goals.

The idea of integrating a company's global rewards strategy for executives with
business objectives is not new. What gets less attention is the process and elements
that companies should analyze when developing a truly global compensation
program. Before a company can design a program, it must assess where it falls
currently on the "global" spectrum. For instance, an "international" company might
have an R&D center in the U.S, manufacture in a low-cost region, and send
expatriates to help execute the business strategy in a particular region or country. A
company that is truly global operates seamlessly across borders, developing products
and services at various locations around the world. Typically, truly global companies
have executives that hail from a variety of countries.

Top 5 consultants have assisted established multi-nationals and emerging growth

companies by helping them assess where they are on the global spectrum and in
determining what types of compensation programs are needed to help globalize the
company. This entails reviewing current programs and assessing their effectiveness as
a company continues to expand internationally. We then begin designing, as
appropriate, the following:

 Global and local salary structures (who should participate in the global pay
plan?)
 Annual incentive programs (what target levels are appropriate for various
regions, and what performance measures are needed?)
 Long-term incentive programs specific to each country (what equity vehicles
are appropriate for specific countries when considering local laws and
employee expectations?)
 Overall global employee stock ownership (to what extent can broad based
equity programs such as ESPPs be rolled out internationally?)
 Expatriate policy development (what policies need to be in place?)
  Communications plans (how do you communicate your plans to ensure that
managers and employees understand them and make best use of them?)

Apart from the career opportunities, International Compensation and benefits

are the most important and major factor of attraction for the expatriate
employees to accept the international assignment. It is the amount of
remuneration paid by the International Business Organizations to the expatriate
employees in return to their services and contribution to the organization.
International Compensation includes the amount of salary, foreign allowances,
the different kinds of fringe benefits and employee’s welfare, bonus, profit
sharing, stock options and the like.
International Business Organizations give a number of benefits to their
expatriate employees in addition to the salary. These benefits include Air fare,
Paid leave, Medical allowance and Conveyance allowance, Educational allowance
for employee’s children, Gratuity, Resettlement allowance and Profit sharing
employee’s stock option in some cases.

Significance Of International Compensation – In International Human

resource Management, Compensation plays the most vital role as expatriate
employees leave their home country, relatives and friends mostly to earn money
and better prospects. Some employees even sacrifice the family life in order to
make good money at the shortest span of time therefore the International
Business Organizations must give due importance to the international
compensation plans failing which they will not be able to procure human
resource with higher skills and potential. The International Business
Organizations have to formulate and administer the international compensation
and benefits very carefully as mostly employee’s satisfaction and work
performance are based on alluring compensation and expatriate employees
compare the pay of different employees with their skill, knowledge performance.

Objectives of International Compensation - International Business

Organization formulate the compensation policy with the specific and well-
defined objectives as follows:
1. International Compensation is designed to acquire qualified and
competent candidates.
2. It helps to retain the present competent employees with high
performance.
3. It is formulated to secure equity between employee performance and
salary levels.
4. Attractive International Compensation ensures desired employee
behavior.
5. International Compensation is designed to pay according to the content,
difficulty of the job and in tune with the effort and merit of the employees.
6. International Compensation helps to simplify collective bargaining
procedure and negations.
7. International Compensation is used promote organization feasibility.
Factors affecting International Compensation - International Compensation is
directly as well as indirectly affected by a number of factors in International
Business Organizations, which are as follows:
1. Compensation levels in comparable International Business Organization
2. Ability of International Business Organization to pay
3. Cost of living in various countries of international assignments.
4. Potential and Productivity of expatriate employee.

Compensation Plans in International Business Organizations

In International Compensation Management two major issues involved are

national economic differences and payment practices. The second issue is the
mode to payment to expatriate employees. There are significant differences in
the compensation levels and structures among different countries. This is
because; the International Business Organizations have to compensate the
expatriates employees based on the local compensation levels.
Expatriate pay – In most of the International Business Organizations Expatriate
pay is based on the balance sheet approach. Under the balance sheet approach,
the compensation package enables the Expatriate employee in various countries
to maintain the same standard of living.
Gratuity - Gratuity is the inducement to the expatriates to work for quite longer
period in the foreign country. Expatriate employees are paid gratuity at a fixed
rate for every year of completion of service in the foreign country.
Allowances in International Compensation - Expatriate employees are paid
various allowances like car allowance, resettlement allowance, housing
allowance, hardship allowance, cost of living allowance, education allowance,
medical allowance etc.
Taxation - Some countries pay tax-free salary or tax-free gratuity. Most of the
countries pay taxable salary and gratuity.

Compensation for expatriate employees includes:

Profit Sharing and ESOP - The International Business Organizations or

multinational corporations have introduced a scheme of profit sharing in order
to motivate the expatriate employees for improved and higher performance.
Under this scheme, if the profit of International Business Organization cross a
certain limit, the employees with foreign assignment get a right have a share in
the net profit of the organization to motivate them.
The expert and efficient employees go on shifting to the other
organizations, which pay higher salary and offers better facilities. Another plan
introduced to motivate the employees and to retain them is the Employee Stock
Ownership or ESOP. It allows the employee to purchase the share or stock of the
company at a fixed and reduced price. Employees are motivated when the
company allows them to buy the shares at concessional price. The stock
ownership is viewed as performance based incentives. In corporate world this
plan is described as Golden Hand- cuffs.
The advantages of Employee stock ownership plan include:
1. ESOP increases employee involvement and participation.
2. This plan links compensation package closely to performance.
 3. The plan enables the International Business Organizations to improve
their performance.
4. This scheme establishes significance of team effort among employees.

Fundamentals of International Compensation

Increasingly, today, globalization is a reality for organizations of almost any size. Only
the smallest companies seem unaffected by the disappearance of global boundaries
among organizations, markets, and people. Globalization has increased awareness of
and concern for creating internationally equitable compensation systems in many
companies. The complex nature of international compensation dictates that it receives
special attention from organization operating in a multi-national environment. It is
crucial that organizations understand the kind of employees employed by international
firms, the elements that comprise an international compensation system, and the
special problems associated with returning citizens on overseas assignments to their
home corporation.

An expatriate, sometimes referred to as an expat, is a citizen of the country in which

the organization's headquarters is domiciled. For example, an American working for
U.S. subsidiary or branch located in Thailand is an expatriate. An organization may elect
to send a domestic employee or manager to an overseas assignment for any number of
reasons: to broaden an employee's or manager's perspectives relative to international
operations, to start or staff new ventures, to train local employees, to utilize specific
expertise possessed by the employee, to protect the organization's interests, to help
develop the employee or manager, to assist in the transfer of technology or skills, or to
market products. Evidence suggests that American firms use expatriates to a much
lesser extent than do Japanese firms.

Components of International Compensation

Compensation for employees of U.S. organizations operating in an international

environment consists of four components: base salary, indirect monetary
compensation (benefits), equalization benefits, and incentives.

Base Salary. Two alternatives exist for determining base salary for an expatriate: (1)
adhering to the established policies and procedures of the parent company's country,
including formal job evaluation; or (2) following the policies and practices of the
country in which the expatriate works. Since many international assignments are for
short durations, usually 3 to 5 years, it may be wise to keep base salary aligned with
salaries in the home country. Doing so makes the transition back to the U.S. less
complicated since major salary changes do not have to be made.

Indirect Monetary Compensation (Benefits). The benefits package for expatriates is

generally the same as the one provided in the home country. However, an organization
must be aware that specific countries require benefits that may not be offered in the
home country. For example, in France employers are required by law to provide every
employee with 25 days of vacation. Although an American working for an American
company in France is not legally entitled to such a vacation, the organization may want
to follow this practice to avoid morale problems with expatriates. Other countries have
retirement, disability, and termination that are different from the U.S.

Equalization Benefits. These benefits are intended to keep expatriates in the same
financial condition they were in before accepting an overseas assignment and to reduce
any negative aspects of living in a foreign country. A limited selection of the benefits
available includes the following:

* Housing allowance

* Educational allowance for children

* Foreign service premium

* Assignment completion bonus

* Emergency leave

* Home leave

* Language training

* Domestic staff

* Club membership

* Spousal employment

* Cultural training for family

This list only scratches the surface of the equalization benefits that can be offered in
terms of financial allowances, social adjustment assistance, and transitional support for
the expatriate's family.

Incentives. Expatriates may receive a variety of incentives ranging from cash bonuses of
various kinds, to stock options, and performance-related payments. Crafting an
effective international compensation plan requires a careful consideration of the
various types of compensation as well as the specifics of the assignment and employee
involved.

The Problem of the Repatriation

While some may regard an overseas assignment as glamorous, others may also view it
as hindering career progression. Organizations must be sensitive to those employees it
is considering sending on overseas assignments. The organization must provide as
much information as possible about returning from an international assignment. This
repatriation policy must be well thought out and incorporated into a repatriation plan.

Additionally, organizations must provide information about career path opportunities

for employees accepting overseas assignments. The organization must do as much as
possible to let employees working abroad know that they will not be forgotten and will
be re-assimilated into the organization upon their return to the home country. Failure
to have a sound repatriation policy and plan will make it difficult to get sufficient
numbers of employees to accept international assignments.