PGBM SSM

Principles of Global Business
Management
Preface
World, today is a global village and no country can now afford to live in isolation.
Globalization or integration of all the economies of the world has led to efficient
utilization of resources available all over the world. Reduced trade barriers and
technological revolution especially in the field of communication and
transportation has made international trade faster and simpler.
The study material on Principles of Global Business Management has been

developed to understand the cause and effects of international trade on global
economy. Benefits of International trade have been explained with the help of
trade theories of economists like Adam Smith, David Ricardo and Michael Porter
in Chapter 2.
Mergers and Acquisitions, Franchising etc are some of the popular strategies
used by different companies to enter different markets of the world. Strategies
like export/ import, franchising, licensing, turnkey operations, strategic alliances
and various other options available to a company to explore overseas market are
explained in Chapter 3.
Chapter 4 and 6 deals with how global companies can organize themselves to
ensure that their overseas operations are smooth and effective. It explains how
global companies should be organized and how they should control the
functioning of their overseas operations in the most efficient manner.
International Business is a complex process due to the difference in the Political,

economical, legal and cultural environment in different countries. Chapter 5 of the
study material deals with different business environment in different countries
and its implications on companies engaged in international business.
Marketing, Human Resource Management, Accounting and Finance and
Production are different functional areas in any business organization.
Organizations have to suitable modify their strategy to ensure that each of the
functional area is benefitted by international business. /marketing strategies
should be modified to ensure more share of the global market. Productions
strategies should be revised to bring down the cost of production. Finance
manager in a global organization should devise strategies to explore more
financing and investment options and Human Resource Manager should look for
more productive workforce from the global marketplace. Chapter 7 – 11 deals
with how companies develop strategies to ensure that they have operate most
efficiently in the global market place, where each business activity is very
complex and very challenging and until and unless they understand the business
environment and stakeholders they will not be able to succeed in the tough
competition.
International Business is a very exciting and fascinating subject and we hope that
students develop the enthusiasm for the subject through this study material.
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INDEX
9.1.2 Polycentric Staffing Policy ....................................................................65
3
Chapter 1
Globalization and trends in Management System
1.1 What is globalization?
Globalization is a process of interdependence and integration of world

economies, driven by international trade and investment and aided by
information technology.
The definition of globalization will become clearer with the following example:
In a local supermarket the consumers buy toys manufactured in Chile or
tomatoes grown in Mexico, apparels made in India, Mobile Phones designed in
Finland, assembled in Korea, Footwear designed in USA and made in Indonesia
or China. The personal computer at the delivery counter has been imported from
India. Person at the sales counter is wearing a shirt that bears a tag from China,
Indonesia or El Salvador and so on.
The example clearly indicates that production and marketing activities are no
longer confined within the boundary of a nation. Infact entire production and
marketing activities for a particulate product utilizes resources available in
different countries of the world. In we take example of clothes that we wear, the
cotton for the shirt might have been sourced from China, processing of raw
cotton could have been done in Indonesia, fabric was made in Malaysia, the shirt
was stitched in India as per the designs provided by US designer and finally shirt
was sold by the British Salesman in Retail store owned by a US multinational.
1.2 Components of Globalization
Thus it is clear from the above example that Globalization has two facets viz.
Globalization of Markets and Globalization of Production (Fig 1).
1.2.1Globalization of Markets
It refers to merging of different national markets into one global marketplace. It is

possible due to reduced trade barriers and development is technology. But to sell
the product in different markets companies have to decide whether they should
sell the standard product in all the market or they should adapt the product in
different counties according to local taste and preferences. The final decision
between standardization and Adaptation is based on individual market conditions
and the preferences of the consumer which is primarily determined by culture,
social conditions, and economic conditions etc. of a country.
4
1.2.2 Globalization of Production
Companies source goods

and services from different
countries of the world to Globalization of Globalization
take advantage of low cost Markets of Production
of various factors of
production like land, labor
and capital. The trend is Components
referred as Globalization of of
Production due to which the Globalization
companies are now able to
bring down their cost of
production and are able to Fig 1 Components of Globalization
offer the product at a more
competitive price in the international market.
1.3 Drivers of Globalization
This current wave of globalization has been driven by lot of factors, the most
important being the policies that have opened economies domestically and
internationally. Some of the factors behind globalization (Fig 2) are highlighted
below:
1.3.1 Liberalization
One of the most important factors behind globalization is opening up of the world
economy. With international organizations like WTO promoting free and fair trade
most of the member countries have made their foreign trade policy more liberal
and open. Lowering of trade barriers, removal of non tariff barriers like Quota etc.
and liberal norms for FII and FDIs
have fostered globalization to a Global
large extent. Liberal Institutions Consumer
Policies needs
1.3.2 Technological change
Another very important factor Drivers of

Globalization Strategic
behind globalization is Vision
technology. On one hand Technology
technology have enabled firms to
achieve economies of scale,
increase productivity, achieve
Growth
break even and on the other Competition
hand technology has also
Fig 2: Major Drivers of Globalization
revolutionsed the communication
and transportation system which
5
are backbone of international trade. Micro processor, internet, mobile phone,
wireless technologies and similar other technical advancement have contributed
enormously to the emergence of global village. Technical advancement in the
transportation like containerization and refrigeration has also made international
trade easier and faster. Advancement in the case of air and sea cargo transport
has made transportation of goods cheaper and faster.
1.3.3 Increased competition in the domestic market
Competition in the domestic market forces companies to explore new market. It

also compels an organization to explore new production centers in the global
market which can help them in reducing their production cost so that their
product is more competitive in the international market.
1.3.4 Profit advantage/ Growth opportunities / increase market share
Companies also go global to increase their market share, profit and also to look
for more avenues for growth.
1.3.5 Increasing consumer needs
World is a global village and with internet, consumers are aware about different
products being sold in the international market. If a product is launched in USA,
consumers in different part of the world are aware about the product. Demand by
these consumers force the organization to indulge in international trade. Further,
the consumers now have more disposable income therefore their demand is also
increasing day by day.
1.3.6 Strategic vision of the organization
One of the very important factors behind globalization is the willingness of the
management to make their organization a leading player in the global market.
1.3.7 Emergence of Global Institutions
Global Institutions like WTO, World Bank and IMF have also played an important
role in the globalization process.
1.3.7.1 World Trade Organization
WTO is responsible for ensuring free and fair trade between the member
countries. Any country who is a member of WTO has to ensure that its
International Trade is governed by the provisions in General Agreement on Tariff
and Trade (GATT) and General Agreement on trade in services (GATS). WTO
also has an effective dispute settlement mechanism to resolve trade dispute
between member countries.
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1.3.7.2 World Bank and International Monetary Fund
Both these organizations were created in 1944 during at Bretton Woods, New
Hampshire. The main aim of World Bank is to ensure economic development
whereas International Monetary Fund is responsible for ensure the stability of the
international monetary system for sustainable economic growth
1.3.7.3 United Nations
United Nations was created on 24th October 1945 with the main objective for
ensuring international peace and security through international cooperation.
1.4 Globalization: Good or Bad for global economy
Globalization in itself is a very controversial topic. Different set of people have

different view about globalizations, one group strongly favors globalizations and
emphasize that global economic development will not be possible without
globalization. While on the other hand there is a different set of people who
believe that because of opening up of the economies, MNCs are exploiting the
resources of the poor countries.
1.4.1 Globalization debate-Pro
Proponents of globalization argue that

• it allows poor countries and their citizens to develop economically and
raise their standards of living
• leads to employment generation
• lowers down the price of goods
• helps companies to focus on their core competencies
1.4.2 Globalization debate-Con
Opponents of globalization claim that

• creation of an free international free market has benefited
multinational corporations in the Western world
• destroys manufacturing job in developed countries
• MNCs shift to countries having liberal environmental and labor
regulations
1.5 Managing in Global Marketplace
Companies now have a huge global market from where they can source their
products and further sell it in different countries. Managing business is thus a
challenge in this huge market place. Companies can successfully manage their
operations in the global market place if they have:
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• proper understanding of business environment in different countries
and also have a proper knowledge of managing these differences.
• efficient system to control the production and marketing activities in
vast marketplace.
• thorough knowledge of trading and investment environment of
different marketplace
• good knowledge of the currency market i.e. how to manage currency
fluctuations
References
• Hodgetts Richard M, Luthans F. & Doh Johathan P., , International

Management, Tata McGrawHill Publishing Company Ltd., (2005)
Chapter 1
• Hill Charles W L & Jain Arun K, International Business, Tata
McGrawHill Publishing Company Ltd., (2005), Chapter 1
• Paul Justin (2005) International Business, Prentice Hall of India
Private Ltd., Chapter 1
• Cherunilam Francis, (2004), International Business, Prentice Hall of
India Private Ltd. 3rd Edition, Chapter 1
• Koontz Harold and Weihrich Heinz, (2001), Management : A Global
Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 1 & 4
• Thakur Manab, Burton Gene E. & Srivastava B. N. (2002),
International Management Concepts & Cases, Tata McGraw Hills
Publishing Co. Ltd., Chapter 1
• Gooderham Paul N. & Nordhaug Odd (2004), International
Management, Cross-Boundry Challenges, Blackwell Publishing Ltd.
Chapter 1
• Bhalla V. K. & Ramu Shiva S. ( 2005). International Business,
Environment and Management, Anmol Publications Pvt. Ltd., Chapter
1
• Sharan Vyuptakesh, (2006), International Business, Concept,
Environment and Strategy, Pearson Education, Chapter 1
8
Chapter 1
Globalization and trends in Management System
End Chapter Quizzes
1. What is the role of World Trade Organization?

a) settle trade-related disputes between countries
b) promote free trade between countries
c) make rules about trade between counties
d) All of the above
2. Which of the following organizations was established by industrialized nations

to loan money to underdeveloped and developing countries?
a) OPEC
b) The World Bank
c) The IMF
d) The United Nations
3. Which of the following is an example of a globalized product?

a) different formulations of leading soft drink in France, the United
Kingdom, and Canada
b) Lever Brothers bar soaps tailored to different countries' water conditions
c) American movies, and music
d) Colgate-Palmolive's hand-powered washing machine for LDCs
4. Which of the following is not a major driver leading behind globalization?

a) Political
b) Market
c) Environmental.
d) Technology
5. The most common definition of globalization is that of:

a) integration of political laws and customs
b) integration of countries in geographical proximity to one another
c) integration of people with similar cultural characteristics
d) integration of goods, technology, labor, and capital
6. Advances in computers and communications technology are permitting an

increased flow of ideas and information across boarders. This enables:
a) Manufacturing personnel to concentrate more on domestic
production
b) Customers to learn about foreign goods
c) Sellers of products to travel to more locations worldwide in
search of buyers
d) Advertisers to focus more on specific countries where demand
is the greatest
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7. One of management's goals is utilizing economies of scale to reduce unit
costs. Which of the following would not necessarily lead to realization of
economics of scale?
a) Globalizing product lines to reduce development costs.
b) Locating production in countries where the costs of the factors of
production are lower.
c) Locating production in countries where the labor force is the most
highly educated.
d) Globalizing product lines to reduce production and inventory costs
8. GATT stands for

a) General Agreement on Trade and Tariffs
b) General Agreement on Tariffs and Trade
c) General Arrangement on Tariffs and Trade
d) General Arrangement on Trade and Tariffs
9. Which of the following is not an advantage of globalization?

a) More job opportunities
b) goods and services available at less cost
c) helps companies to focus on their core competencies
d) MNCs shift to countries having liberal environmental and labor regulations
10. One of the first multinational companies in existence in the late 1800's to own
foreign production facilities, worldwide distribution networks, and market its
products under global brands was:
a) Eastman Kodak.
b) Singer Sewing Machines.
c) Ford Motor Company.
d) Coca-Cola
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Chapter 2
International Trade Theory
It is a fact that International trade is beneficial for overall economic development

of a country. Economists have given numerous theories to explain why countries
should engage in International Trade for their economic growth. This chapter will
examine all the trade theories starting from Mercantilism to Michael Porter’s
National Competitive advantage theory.
2.1 Mercantilism
This theory was propagated in the mid 16th century in England. According to this
theory, a country’s wealth is measured by its holding of treasure, usually gold.
During that time gold was the currency of trade between nations, therefore to
increase its wealth; a country should encourage export and restrict import,
thereby resulting in an increase of its gold reserves and also its national wealth.
The drawback of this theory is that it viewed trade as a zero sum game i.e. one
country’s gain results in another country’s loss. Which is not true as international
trade is a positive sum game as demonstrated by Adam Smith and David
Ricardo in their theory of Absolute and Comparative Advantage.
2.2 Theory of Absolute Advantage
Theory of Absolute Advantage was proposed in 1776 by Adam Smith in his book
“Wealth of Nations”. According to this theory countries should specialize in
producing goods which they can produce more efficiently and then trade these
for goods produced by other countries.
Consider the example of trade between Brazil and South Korea. Assume that
Brazil and South Korea have same amount of resources, i.e. 200 units, which
can be used to produce either rice or coffee beans. Further, Brazil requires 10
units of resources to produce one ton of coffee beans and 20 units of resources
to produce one ton of rice. On the other hand, South Korea requires 40 units of
resources to produce one ton of coffee beans and 10 units of resources to
produce one ton of rice. Different combinations of rice and Coffee Beans that
both Brazil and South Korea can produce are given in Table 1. As evident from
the table, Brazil has an absolute advantage in producing Coffee beans while
South Korea is more efficient in producing rice. If South Korea and Brazil do not
trade with each other then Brazil will produce and consume 10 tons of Coffee
beans and 5 tons of rice, whereas, South Korea will produce and consume 2.5
tons of coffee beans and 5 tons of rice. The total production of these two
countries without trade is 12.5 tons of coffee beans and 15 tons of rice. On the
other hand if they produce the commodity in which they are more efficient, i.e.
Brazil utilize all its resources in producing Coffee beans and South Korea devote
all the 200 units of resources in producing rice, then the total production is 20
tons each of coffee beans and rice. Now if Brazil exports 6 tons of coffee beans
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to South Korea and import 6 tons of rice from South Korea than Brazil will have
14 tons of coffee beans and 6 tons to rice for consumption and South Korea will
have 6 tons of coffee beans and 14 tons of rice to consume. After specializing in
production and trading Brazil had additional 4 tons of coffee beans and 1 ton of
rice for itself and South Korea has additional 3.5 tons of coffee beans and 4 tons
of rice. Therefore as a result of specialization and trade production and
consumption has increased thereby resulting in net gains for both Brazil and
South Korea.
Table 1: Theory of Absolute advantage
A. Resources required to produce one ton of coffee beans

Coffee Beans Rice
Brazil 10 20
South Korea 40 10
Total 50 30
B. Production and consumption without trade (100 units of resources are
utilized for producing Rice and 100 units for producing Coffee Beans)
Coffee Beans Rice
Brazil 10.0 5.0
South Korea 2.5 10.0
Total 12.5 15.0
C. Utilizing resources for producing commodity in which the country
specializes
Coffee Beans Rice
Brazil 20.0 0.0
Total 20.0 20.0
D. Brazil trades 6 tons of Coffee Beans for 6 tons of rice from South Korea
Coffee Beans Rice
Brazil 14.0 6.0
E. Consumption pattern after specialization and Trade (Difference between
B and D above)
Coffee Beans Rice
Brazil 10.0 16.0
South Korea 3.5 4.0
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2.3 Theory of Comparative Advantage
David Ricardo gave the Theory of Absolute Advantage in 1817. In his book on
“Principles of Political Economy” Ricardo proposed that a country should
specialize in production and export of those goods that it produces more
efficiently and import goods that it produces less efficiently from other countries.
Assume that Brazil requires 10 units of resources to produce one ton of coffee
beans and 13 1/3 units of resources to produce one ton of rice. South Korea on
the other hand requires 40 units of resources to produce one ton of coffee beans
and 20 units of resources to produce one ton of rice. Different combinations of
coffee beans and rice that both Brazil and South Korea can produce are given in
Table 2 (A).
Table 1: Theory of Comparative advantage
A. Resources required to produce one ton of coffee beans

Coffee Beans Rice
Brazil 10 13.33
South Korea 40 20
B. Production and consumption without trade (100 units of resources are
utilized for producing rice and 100 units for producing coffee beans)
Coffee Beans Rice
Brazil 10.0 7.5
South Korea 2.5 5.0
Total 12.5 12.5
C. Utilizing resources for producing commodity in which the country
specializes (Ghana devotes 150 units of resources to produce coffee beans
and 50 units of resources to produce rice and in case of South Koreas 200
units are utilized for producing rice)
Coffee Beans Rice
Brazil 15.0 3.75
Total 15.0 13.75
D. Brazil trades 4 tons of Coffee Beans for 4 tons of rice from South Korea
Coffee Beans Rice
Brazil 11.0 7.75
South Korea 4.0 6.0
E. Consumption pattern after specialization and Trade (Difference between
B and D above)
Coffee Beans Rice
Brazil 1.0 0.25
South Korea 1.5 1.0
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Utilizing 200 units of resources Brazil can produce 10 tons of coffee beans and
7.5 tons of rice whereas South Korea can produce 2.5 tons of coffee beans and 5
tons of rice (Table 2 B) From the table it is evident that even though Brazil has
absolute advantage in producing both coffee beans and rice, it has comparative
advantage in producing only coffee beans. Now when both the countries produce
those commodities in which they are more efficient, Brazil devote 150 units of
resources to produce coffee beans, in which it has comparative advantage, and
50 units if resources to produce rice. South Korea devotes all its resources in
producing rice (Table 2 C). Total production is 15 tons of coffee beans and 13.75
tons of rice.
If Brazil export 4 tons of coffee beans for 4 tons of rice, its consumption of coffee
beans and rice increases by 1.0 and 0.25 tons respectively. South Korea also
has additional 1.5 tons of coffee beans and 1.0 ton of rice to consume. Thus
production and consumption increases with unrestricted trade.
2.3.1 Limitations of Theory of Absolute and Comparative Advantage
Both these theories are based on lots of unrealistic assumptions like: there are
two countries and two commodities and both of them have fixed amount of
resources, which is not true in real world.
there is no transportation cost
Cost of resources is same in both the countries is same and resources can be
utilized freely from producing one commodity to another within a country.
commodities are swapped on a one to one basis, exchange rate are not
considered
2.4 Heckscher-Ohlin Theory
Swedish economist Eli Heckscher (1919) and Bertil Ohlin (1933) argued that
countries will export those goods that are made from factors of production that
are locally abundant and import goods that are made from factors of production
that are locally scarce. Factors of production are the resources available with a
country in terms of land, labor and capital.
Heckscher-Ohlin theory explains the fact that china excels in export of goods that
are produced utilizing labor that is available in abundance at a comparatively less
cost.
However the theory fails to prove the international trade pattern of US. As US
has more capital as compared to other nations of the world, therefore US should
be exporter of capital intensive goods and importer of labor intensive goods. On
the contrary, US exports are less capital intensive than US imports. This
exception to the Heckscher-Ohlin Theory is known as Leontif paradox.
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2.5 The Product Life-Cycle Theory
Raymond Vernon proposed this theory in mid 1960. The theory is based on the
observation that during 20th century majority of the new products were invented
and introduced by US firms in their home country.
To further explain the theory, he argued that in the introduction stage, the
demand of the product is growing rapidly is US while the demand in other
advanced countries is consumers in the high income bracket. The limited
demand for the product is fulfilled by production in US and exports to the other
advanced countries.
As the demand for the product increases in the other advanced countries, US
firms might set up production facilities in the advanced countries, limiting the
export from US to these advanced economies.
Further, in the product life cycle, as the demand for the product in US and other
advanced countries reaches a maturity stage, costs becomes a critical factor. By
this time the product has also become standardized, therefore, it becomes more
practical to export he product to US from advanced economies, rather then
continuing with the production facilities in US. As the labor cost is low in
advanced countries than in US, producers can significantly reduce the cost of
production.
When there is still more pressure to reduce cost, the production facilities are
shifted to developing countries. Thus the global production shifts from US to
other advanced nations and then to developing countries, as a result of which US
becomes an importer of product from being an exporter and inventor of a
product.
2.6 Theory of National Competitive Advantage: Porter’s Diamond Model
This theory is proposed by Michael Porter in 1990. According to the theory, four
attributes determine the competitive advantage of a particular nation. These
attributes are:
Factor endowments
Demand conditions
Relating and supporting industries
Firm strategy, structure and rivalry
Porter visualizes these four attributes as constituting a diamond. According to

Porter, Chance and Government are two more variables that influence the
diamond.
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2.6.1 Factor Endowments
Porters factor endowments are same as

that of Heckscher-Ohlin, but he further
categorized the factor of production as
Basic factor endowments ( natural
resource, climate, location and
demographics) and advanced factor
endowments ( communication
infrastructure, sophisticated and skilled
labor, research and technical know how).
Advanced factors play an important role in
determining competitive advantage of a
nation. He also stressed that by investing in advance factors a country can
overcome its disadvantageous position in basic factors.
2.6.2 Demand conditions
Nature of demand in home country plays an important role in determining the

attributes of the locally produced goods. If the domestic consumers are
demanding and sophisticated they will create pressure on firms to produce
innovative and better quality products.
2.6.3 Related and Supporting Industries
Presence of related and supporting industry of international standard also

contributes to a nation’s competitive advantage.
2.6.4 Firm Strategy, structure and rivalry
Different countries follow different management ideologies, and this ideology

plays an important role in determining their competitive advantage. In case of
most of the German companies, engineers occupy the top management
positions, as the focus is on manufacturing process and product design.
Further, apart from the ideology being followed by a company, presence of rivals
in the home market also makes an industry more competitive as it creates
pressure to innovate, improve quality and to reduce cost.
References:
• Hill Charles W L & Jain Arun K, International Business, Tata McGrawHill
Publishing Company Ltd., (2005), Chapter 3
• Thakur Manab, Burton Gene E. & Srivastava B. N. (2002), International
Management Concepts & Cases, Tata McGraw Hills Publishing Co. Ltd.,
Chapter 4
16
• Bhalla V. K. & Ramu Shiva S. ( 2005), International Business,
Environment and Management, Anmol Publications Pvt. Ltd., Chapter 2
17
Chapter 2
International Trade Theory
End Chapter Quizzes
1. Which one of the following is not an assumption of the Ricardo Model:

a) Constant returns to scale
b) Factors of production can be transferred easily one sector to
another
c) There is perfect competition in the market
d) Technological innovation is a unique feature of the market structure
2. Which of the following statement describes the Heckscher-Ohlin Theory?

a) Countries should export goods that are made of factors of
production that are available in abundance in the economy
b) Countries should produce and export those goods in which they
have absolute advantage
c) Countries should produce and export those goods in which they
have comparative advantage
d) Increase in the endowment of one of the factors will reduce the
production of goods that intensively use the other factor
3. “If US is capital rich and innovation increases the productivity of capital, then
labor intensive industries in US will get hurt” is
a) Stolper-Samuelson Theorem
b) Leontief Paradox
c) Rybczynski Theorem
d) Heckscher-Ohlin Theory
4. Which of the following pair is wrongly matched?

a) Theory of Absolute Advantage – Adam Smith
b) Theory of Comparative Advantage – David Ricardo
c) Heckscher-Ohlin Theory – Wassily Leontif
d) Product Life Cycle Theory – Raymond Vernon
5. According to Porter, which of the following factors will not help in determining
the Global Competitive Advantage of the company?
a) Monopoly market conditions i.e. Absence of Rivals

b) Firm Strategy
c) Presence of related and supporting industry
d) Factor conditions
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6. The international product lifecycle is a theory explaining why:
a) all international products eventually lose their profitability.
b) a product that begins as a nation's import eventually becomes its
export.
c) a product that begins as a nation's export eventually becomes its
import.
d) the demand for international products changes over time
7. Observation that “US exports were less capital intensive the US imports” which
is the contradiction to the HO model is known as
a) Leontif Paradox
b) Stopler-Samuelson Theorem
c) Rybczynski Theorem
d) New Product Life Cycle Theorem
8. The international product lifecycle is a theory explaining why:

a) all international products eventually lose their profitability.
b) a product that begins as a nation's import eventually becomes its
export.
c) a product that begins as a nation's export eventually becomes its
import.
d) the demand for international products changes over time.
9. International trade occurs primarily because of:

a) price differences among nations.
b) supply and demand.
c) capitalism.
d) none of the above
10. The Heckscher-Ohlin theory of factor endowment states that international

and interregional differences in production costs occur because of:
a) differences in the supply of production factors.

b) government controls.
c) differences in technology factors.
d) import and export regulations
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Chapter 3
Strategies for Going Global
The choice of which market to enter is driven by an assessment of long term

growth and profit potential. The choice of mode of entry can be exporting,
licensing, franchising, establishing joint ventures, setting a wholly owned
subsidiary, or acquiring an established firm in the host market. Naturally each
entry mode has its own advantages and disadvantages. Various factors which
can bring advantages or disadvantages to a firm can be transport costs, political
risk, trade barriers, economic risk, and firm’s strategy. The optimal entry mode
depends on these factors and varies by the situation. Thus whereas some firms
may work best by setting up a wholly owned subsidiary, others work best by
acquiring an established enterprise.
In this chapter we will also focus on strategic alliances. Strategic alliances are
cooperative arrangements between actual and potential competitors. It means a
variety of arrangements like cross share holding deals, licensing arrangements,
formal joint ventures, and informal cooperative arrangements.
3.1 Entry Decision
3.1.1 Choice of Foreign Markets
Two major considerations facing managers are which markets to serve and
where to locate the production to serve that market.
Because each company has unique competitive capabilities and objectives, the
factors affecting geographic expansion pattern is different from others. Most
companies take into consideration, environmental climate like relative size of the
country market, the ease of operating, the availability and cost of various
resources, the relative risk and uncertainties related to a particular market, the
purchasing power of consumers, and the likely wealth of the consumers in the
future.
Companies collect information about various countries through scanning

process. Scanning techniques help managers in considering alternatives that
might otherwise be overlooked. They also help limit the final detailed feasibility
studies to a manageable number of those that appear most promising. The
ranking of countries is done to determine the order of entry into potential markets
and for setting the allocation of resources and the rate of expansion to different
markets.
Companies frequently use several tools for comparing opportunities in various

countries like grids and matrices. Grids that rate country projects according to
separate dimensions and matrices on which companies may plot one attribute on
a vertical axis and another on horizontal axis.
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Companies must develop location strategies for new investments and devise
means of deemphasizing certain areas and divesting if necessary.
3.1.2 Timing of Entry
Ones attractive markets have been identified, it is important to conceder the time
of entry. Entry may be early when an international business enters a foreign
market before other foreign firms and late when it enters after other international
firms have already established and developed there business.
3.1.3 Scale of Entry
The entry can be a large scale or a small scale entry. Entering a foreign market
on a large scale implies rapid entry. The large scale entry gives both distributors
and customers reasons to believe that the company will remain in the market for
a long time. On the other hand small scale entry allows a firm to learn about the
foreign market while limiting the firm’s exposure to the market.
3.2 Entry Modes
Firms can use various entry modes to enter the foreign market: exporting,
turnkey projects, licensing, franchising, joint ventures, and setting up a wholly
owned subsidiary in the host country.
3.2.1 Exporting
Many manufacturing firms begin there global expansion as exporters and then
may switch to another mode for doing business in a foreign market.
Advantages:
• Avoidance of substantial costs of establishing manufacturing operations in

the host country.
• It helps a firm achieve experience curve and location economics.
Disadvantages:
• Exporting may not be appropriate if there are low cost locations for the
production abroad.
• High transportation costs can make exports uneconomical.
• Tariff barriers also can make exports non lucrative.
• Problems may arise due to the delegation of marketing activities to a local
agent.
21
3.2.2 Turnkey Projects
In a turnkey project, the contractor agrees to handle every detail of the project for
a foreign client including training. The contractor handovers the key of the plant
to the foreign client to simply ‘turnkey’ and start operation.
Advantages
• Best suitable for technologically complex projects.
• Good strategy when FDI is limited by the host government.
• This is useful in case of unstable political or economic environment in the
host country.
Disadvantages
• The contractor firm has no long term interest in the host country.
• The company may create its own competitor in a foreign land.
• If technology is the competitive advantage, then this advantage is lost.
3.2.3 Licensing
It is an arrangement in which a licensor grants the rights to intangible property to

another entity for a particular period, and the licensee in return, pays royalty fee.
Intangible property includes formulas, inventions, patents, processes, copyrights,
designs, trademarks etc.
Advantages
• The firm does not have to bear the development cost and risks associated
with the foreign market.
• If the firm lacks capital and other resources in developing a foreign
market, licensing can be very useful.
• Very useful in economically or politically volatile foreign market.
• Useful when participation is restricted by barriers to investments.
• If a firm posses some intellectual property, but does not want to involve in
the business directly, then licensing can be very useful.
Disadvantages
• The firm can not have a tight control over manufacturing or marketing
activities.
• The firm can not make a competitive move in other country by using the
money generated in a country, except the royalty money.
• The firm loses its competitive advantage of technical knowhow.
22
3.2.4 Franchising
It is a kind of licensing in which the franchiser gives the intangible property on

conditions that the franchisee abides by the rules as to how it does business.
Assistance to run the business on an ongoing basis is given. Royalty is paid in
form of some percentage of the revenues generated by the franchisee.
Advantages
• The firm does not have to bear the development cost and risks associated
with the foreign market.
• If the firm lacks capital and other resources in developing a foreign
market, licensing can be very useful.
• Very useful in economically or politically volatile foreign market.
• Useful when participation is restricted by barriers to investments.
• If a firm posses some intellectual property, but does not want to involve in
the business directly, then licensing can be very useful.
Disadvantages
• Managing quality control is difficult.
3.2.5 Joint Ventures
A joint venture entails establishing a firm that is jointly owned by two or more
otherwise independent firms.
Advantages
• A firm can take advantage from the knowledge and experience of local
partner about host country’s culture, politics, languages, social system etc.
• When costs and risks in operating in a foreign market are high, a firm can
share them with the local partner.
• Political opposition can be minimized by having a local joint venture
partner.
Disadvantages
• Risk of loosing control over technology.

• Tight control over subsidiaries is difficult.
• Shared ownership can lead to conflicts among the partners.
23
3.2.5 Wholly Owned Subsidiaries
The firm owns 100% of the stocks in a subsidiary located in a foreign land. It can
be done in two ways
a) Green Field Venture- The firm starts an entirely new operation.
b) Can acquire an established firm in the host country.
Advantages
• Technological competence remains intact.
• Better global strategic control and coordination.
• Helps in realizing location and experience curve economies.
Disadvantages
• Very costly method.

• Adapting with a new culture may be difficult.
3.3 Entry Mode Selection
The optimal choice of entry mode for firms pursuing a multinational strategy
depends to some degree on the nature of their core competency. If a firm’s
competitive advantage (its core competence) is based upon control over
proprietary technological know-how, licensing and joint venture arrangements
should be avoided if possible in order to minimize the risk of losing control over
that technology, unless the arrangement can be structured in a way where these
risks can be reduced significantly. When a firm perceives its technological
advantage as being only transitory, or the firm may be able to establish its
technology as the dominant design in the industry, then licensing may be
appropriate even if it does involve the loss of know-how. By licensing its
technology to competitors, a firm may also deter them from developing their own,
possibly superior, technology. The competitive advantage of many service firms
is based upon management know-how. For such firms, the risk of loosing control
over their management skills to franchisees or joint venture partners is not that
great, and the benefits from getting greater use of their brand names can be
significant.
References:
• John D Daniels, Lee H Radebaugh, Daniel P Sullivan (2004) International

Business, Pearson Education
• Charles W Hill, Arun K Jain (2005) International Business, Tata McGraw Hill
• Cavusgil, Knight, Riesenberger (2009) International Business, Pearson
Education
• Francis Cherunilam (2006) International Business, Prentice Hall
24
Chapter 3
Strategies for Going Global
End Chapter Quizzes
Q 1) One of the following is not among the main internal factors affecting the
choice for market entry mode:
a) international experience.
b) firm size.
c) product.
d) demand uncertainty.
Q 2) One of the following is not a main external factor affecting the choice for
market entry mode:
a) intensity of competition.
b) international experience.
c) market size.
d) demand uncertainty.
Q3) An appropriate entry strategy for a company seeking a limited form of

participation in global markets is:
a) licensing.
b) Internet selling.
c) Piggybacking.
d) joint-venturing.
Q 4) firm globalizing within the international tourism industry must be aware of

the fact that comparable international data is:
a) somewhat limited.
b) censored.
c) non-existent.
d) widely available.
Q 5) Which factors affecting the choice for foreign market entry are categorized
as being external?
a) Country risk, demand uncertainty and intensity of competition.
b) Direct and indirect trade barriers.
c) Socio-cultural distance between home country and host country.
d) All of the above.
Q 6) ______ is Africa's largest country.

a) Kenya
b) Zimbabwe
c) South Africa
d) Sudan
25
Q 7) Which country continues to be ruled by one of the most repressive regimes
in the world?
a) Burma
b) China
c) Belarus
d) Namibia
Q 8) When GDP growth falls below 2 %, tourism growth tends to:

a) double.
b) be higher.
c) be even lower.
d) stagnate.
Q 9) Franchising is a common route to internationalization used by

a) manufacturing industries
b) small firms
c) service industries
d) industrial conglomerates
Q 10) The Grummond Group buys computer peripherals in industrialized

countries and sells them to developing countries. Grummond would most likely
be classified as a
a) trading company.
b) strategic alliance.
c) joint venture.
d) licensee.
e) subsidiary
26
Chapter 4
Organization of International Business
The theme of this chapter is that in order to succeed an international business

must have the appropriate formal and informal organizational structure and
control mechanisms.
4.1 Organizational architecture
This term refers to the totality of firm’s organization including the formal
organization structure, control systems and incentives, organizational culture,
process and people.
What is appropriate depends upon the strategy of the firm, which as we saw in
the last chapter is inter-related with the demands of the industry environment.
4.1.1 Organization Structure
The organization structure means three things: the formal division of the
organization into sub units such as product divisions, national operations and
functions. (Organizational charts), the location of decision making responsibilities
within that structure (e.g., centralized or decentralized etc) and the establishment
of integrating mechanisms to coordinate the activities of sub units including cross
functional terms or regional committees.
4.1.2 Control systems
Control systems are the metrics used to measure the performance of sub units
and make judgments about how will the mangers are running the sub units.
Unilever measured the performance of its subsidiary companies according to
profitability. Profitability was the control systems.
4.1.3 Incentives
Incentives are the devices used to reward the appropriate managerial behavior.
Incentives are very ties to performance metrics. e.g. a bonus for exceeding
performance targets.
4.1.2 Process
Process are the manners in which the decisions are made and work is
performed within an organization. Examples are the processes for formulating
27
strategy, for deciding how to allocate the resources within the firm, or for
evaluating the performance of managers and giving feedback.
4.1.3 Organization culture
Organization culture are the norms and value systems that are shared among
the employees of an organization. Just are societies having distinct patterns of
culture and sub couture. The organizational culture can have a profound impact
on how a firm performs.
4.1.4 People
People comprises not just the employees of the organization but also the
strategy used to recruit, compensate and retain those individuals and the types of
people that they are in terms of their skills values and orientation.
4.2 Structure
Vertical differentiation is principally about the centralization and decentralization

of decision-making responsibilities. It is concerned with identifying where in a
hierarchy decision making power should be concentrated.
There are four main arguments for centralization:

(1) Facilitating coordination
(2) Ensuring consistency between decisions and organizational objectives
(3) Providing top managers the means to push through major changes, and
(4) Avoiding duplication of activities.
There are five main arguments for decentralization:

(1) Overburdened and hence poor decision-making at the top of the organization,
(2) Increased motivation at lower levels
(3) Greater flexibility
(4) Better decisions on the spot by the people directly involved, and
(5) Increased accountability and control.
The choice between centralization and decentralization is not an absolute one.

Frequently it makes sense to centralize some decisions and decentralize others
depending upon the type of decision and the strategy of the firm. For firms
pursuing a global strategy, there is clearly more of a need for centralized decision
making than for firms pursuing a multidomestic strategy. For transnational, it is
less clear, as some decisions should perhaps be centralized while others are
decentralized.
28
4.2.1 Horizontal Differentiation
Horizontal differentiation is concerned with how the firm decides to divide into
sub-units. The decision is typically made upon the basis of functions, business
areas, or geographical areas.
4.2.1.1 Functional organization
The firm is organized on the basis of various functions like Marketing, Finance,
Manufacturing and Purchasing as shown in the figure given below.
FUNCTIONA
TOP MA
4.2.1.2 Product organization
As firms diversify into multiple product lines, a product division structure that
allows autonomous responsibility in the operating units is usually chosen as is
shown in figure below. As can be seen in the figure for each product there are
separate functional department that is responsible for the marketing, finance,
manufacturing and purchasing activities.
29
PRODUCT
TOP MANAGEM
4.2.1.3 International division (functional)
Historically, when many firms began to expand abroad they typically grouped
their international activities into an international division. This tended to be the
case whether the firm was organized on a functional basis or based on product
divisions. No matter whether the domestic structure of the firm was based
primarily upon functions or upon product divisions, the international division tends
to be organized on geographical lines.
4.2.1.4 International division (product)
This structure rarely lasts due to the inherent potential for conflict and
coordination problems between domestic and foreign operations. Firms then DIVISION P
switch to one DIVISION PRODUCT
of two structures LINEarea
-- a worldwide A structure (undiversified firms)
and a worldwide product division structure (diversified firms).
4.2.1.5 Worldwide area structure
A worldwide area structure tends to be favored by firms that have a low degree of
diversification and domestic structure based on functions. Each area tends to
have a self contained largely autonomous entity with tits own set of value
creation activities.
PURCHASING MANUFACTURING
30
Worldwide product division structure:
A worldwide product division structure tends to be adopted by firms that are

reasonably diversified and accordingly, originally had a domestic structure that
was based on product divisions.
WORLDW IDE A
HEADQ
31
NORTH
LATIN EUR
AMERICAN
4.2.1.6 The Global Matrix Structure
Since neither of these structures achieves a balance between the need to be

both locally responsive and to achieve location and experience curve economies,
many multinationals adopt matrix type structures. However, global matrix
structures have typically failed to work well, primarily due to bureaucratic
problems.
The Global Matrix Structure contains simultaneous, intersecting differentiation
bases, with employees reporting to a functional and a product manager
simultaneously.
An example of global matrix structure is given below.
Matrix Organization
Area MediaG
Specialists Magazines
Internet
Books
4.2.1.7 The Mixed Structure
Is most common in the Multinational Enterprises. It uses localization in product

development, marketing, sales, and service. At the same time functions that
Cooking
benefit from scale advantages, like purchasing, are centralized.
4.2.2 Vertical differentiation

Entertainment
Vertical differentiation is principally about the centralization and
decentralization of decision-making responsibilities. It is concerned with
Weddings
32
Crafts
identifying where in a hierarchy decision making power should be
concentrated.
4.2.2.1 Centralization
There are four main arguments for centralization

(3) Providing top managers the means to push through major changes
4.2.2.2 Decentralization
There are five main arguments for decentralization
(1) Overburdened and hence poor decision-making at the top of the

organization
(4) Better decisions on the spot by the people directly involved
The choice between centralization and decentralization is not an absolute

one. Frequently it makes sense to centralize some decisions and decentralize
others depending upon the type of decision and the strategy of the firm.
4.3 Integrating Mechanisms
Both formal and informal mechanisms can be used to help achieve

coordination. The need for coordination (and hence integrating mechanisms)
varies systematically with the strategy of the firm. It is lowest in multidomestic
firms, higher in international firms, higher still in global firms, and highest of all in
transnational firms. Integration is inhibited by a number of impediments to
coordination, particularly different sub-unit orientations. To the extent that
different sub-units have different objectives and ways of operating, integration
becomes more difficult. Integration can be achieved through formal integrating
mechanisms. Formal integrating mechanisms vary in complexity from direct
contact and simple liaison roles, through teams, to a matrix structure. However,
formal integrating mechanisms can become bureaucratic. To overcome the
bureaucracy associated with formal integrating mechanisms, firms often use
informal mechanisms. These include management networks and organization
culture. For a network to function effectively it must embrace as many managers
within the organization as possible. Information systems and management
development policies (including job rotation and management education
programs) can be used to establish firm wide networks. For a network to function
properly, managers in different sub-units must be committed to the same goals.
33
One way of achieving this is to foster the development of a common organization
culture. Leadership by example, management development programs, and
human relations policies are all-important considerations in building a common
culture. Taken together, managerial networks and a common culture can serve
as valuable coordination mechanisms in international firms that can help
overcome the deficiencies of formal mechanisms.
References:

Education
34
Chapter 4
Organization of International Business
End Chapter Quizzes
Q 1) Which of the following is an example of a globalized product?

a) different formulations of Hills Bros. Coffee in France, the United Kingdom,
and Canada
b) Lever Brothers bar soaps tailored to different countries' water conditions
c) American clothing, movies, and music
d) Colgate-Palmolive's hand-powered washing machine for LDCs
Q 2) Being a global organization means:

a) customizing the product range for each segment in part.
b) creating standardized products for homogeneous markets.
c) creating both standardized and customized products.
d) any of the above.
Q 3) A global market leader is an organization which:

a) has more than 50% global market share.
b) is recognized as being ahead of the rest in terms of market share.
c) has the monopoly over several foreign markets.
d) is ahead of the competition in terms of global innovation.
Q 4) What elements can a global company choose to emphasize in selecting its

organization structure?
a) Technology, teamwork, or culture.
b) Regions, functions, or products.
c) Functions, technology, or country.
d) Regions, teamwork, or conflict.
Q 5) Why would a company expanding internationally choose to have an

international division?
a) It allows the firm to focus on international operations separately from
domestic operations.
b) Having an international division helps a company to find general
managers with international experience.
c) It allows the international division to develop critical mass and thus
compete effectively for scarce resources.
d) All of the above are correct.
Q 6) What kinds of organizations should use the matrix organizational structure?

a) Moderate sized organizations that have only a few product lines.
b) Large sized organizations that have many product lines.
c) Complex organizations that operate in several different industries.
d) Simple organizations that have a single product.
35
Q 7) What factors cause organizational structures to evolve over time?
a) Technology, cultural trends, and teamwork.
b) Technology, competition, and employee empowerment.
c) Growth, integration, and industry crisis.
d) Growth, strategy, and business crisis.
Q 8) Which of the following terms is incorrectly matched with its definition?

a) Vertical firms are companies in which decisions are made by matrix
managers.
b) Horizontal firms are companies in which decisions are made by teams
rather than through organizational hierarchy.
c) Horizontal differentiation - degree to which labor is divided.
d) Vertical differentiation - distribution of authority from lower to higher level
managers.
Q 9) Which organizational structure is considered to be the most complex one

a) Product structure
b) Matrix structure
c) Functional structure
d) Area structure
Q 10) when firms began to expand abroad they typically group their international
activities through
a) Product structure
b) International division
c) Functional structure
d) Area structure
36
Chapter 5
The Cultural, Political, Legal and Economic environment facing
Global Business
5.1 Influence of culture on international business
“Culture is the integrated sum total of learned behavior traits that are shared by
the members of a society”- Hoeble
Culture is the way that we do things around here. Culture could relate to a
country (national culture), a distinct section of the community (sub-culture), or an
organization (corporate culture). You are not born with a culture, and that it is
learned. So, culture includes all that we have learned in relation to values and
norms, customs and traditions, beliefs and religions and rituals.
International business needs to take into account the local culture of the
country in which you wish to market.
5.1.1 MAIN PROPOSITIONS ABOUT CULTURE
- Culture is learned
- Culture is structured
- It is divided into aspects
- Culture is dynamic
37
- Culture derives from the biological, environmental, psychological, and
historical components of human existence
- Culture is variable
- Culture exhibits regularities that permits its scientific analysis
5.1.2 Cultural Framework
It uses eight categories in its analysis. The Eight categories are Language,
Religion, Values and Attitudes, Education, Social Organizations, Technology
and Material Culture, Law and Politics and Aesthetics.
5.1.2.1 Language
With language one should consider whether or not the national culture is
predominantly a high context culture or a low context culture (Hall and Hall
1986). The concept relates to the balance between the verbal and the non-
verbal communication.
In a low context culture spoken language carries the emphasis of the
communication i.e. what is said is what is meant. Examples include Australia
and the Netherlands.
In a high context culture verbal communications tend not to carry a direct
message i.e. what is said may not be what is meant. So with a high context
culture hidden cultural meaning needs to be considered, as does body
language. Examples of a high context cultures include Japan and some
Arabic nations.
5.1.2.2 Religion
The nature and complexity of the different religions an international marketer

could encounter is pretty diverse. The organization needs to make sure that
their products and services are not offensive, unlawful or distasteful to the
local nation. This includes marketing promotion and branding.
• In China in 2007 (which was the year of the pig) all advertising which
included pictures of pigs was banned. This was to maintain harmony with
the country's Muslim population of around 2%. The ban included pictures
of sausages that contained pork, and even advertising that included an
animated (cartoon) pig.
• In 2005 France's Catholic Church won a court injunction to ban a clothing
advertisement (by clothing designers Marithe and Francois Girbaud)
based upon Leonardo da Vinci's Christ's Last Supper.
5.1.2.3 Values and Attitudes
Values and attitudes vary between nations, and even vary within nations. So
if you are planning to take a product or service overseas make sure that you
have a good grasp the locality before you enter the market. This could mean
38
altering promotional material or subtle branding messages. There may also
be an issue when managing local employees. For example, in France
workers tend to take vacations for the whole of August, whilst in the United
States employees may only take a couple of week's vacation in an entire
year.
• In 2004, China banned a Nike television commercial showing U.S.
basketball star LeBron James in a battle with animated cartoon kung fu
masters and two dragons, because it was argued that the ad insults
Chinese national dignity.
• In 2006, Tourism Australian launched its ad campaign entitled "So where
the bloody hell are you?" in Britain. The $130 million (US) campaign was
banned by the British Advertising Standards Authority from the United
Kingdom. The campaign featured all the standard icons of Australia such
as beaches, deserts, and coral reefs, as well as traditional symbols like
the Opera House and the Sydney Harbor Bridge. The commentary ran:
"We've poured you a beer and we've had the camels shampooed, we've
saved you a spot on the beach. We've even got the sharks out of the
pool,".
Then, from a bikini-clad blonde, come the tag line:
"So where the bloody hell are you?"
5.1.2.4 Education
The level and nature of education in each international market will vary. This
may impact the type of message or even the medium that you employ. For
example, in countries with low literacy levels, advertisers would avoid
communications which depended upon written copy, and would favor radio
advertising with an audio message or visual media such as billboards. The
labeling of products may also be an issue.
5.1.2.5 Social Organizations
This aspect of Cultural Framework relates to how a national society is

organized. For example, what is the role of women in a society? How is the
country governed - centralized or devolved? The level influence of class or
casts upon a society needs to be considered. For example, India has an
established caste system - and many Western countries still have an
embedded class system. So social mobility could be restricted where caste
and class systems are in place. Whether or not there are strong trade unions
will impact upon management decisions if you employ local workers.
39
5.1.2.6 Technology and Material Culture
Technology is a term that includes many other elements. It includes questions

such as is there energy to power our products? Is there a transport
infrastructure to distribute our goods to consumers? Does the local port have
large enough cranes to offload containers from ships? How quickly does
innovation diffuse? Also of key importance, do consumers actually buy
material goods i.e. are they materialistic?
5.1.2.7 Law and Politics
The underpinning social culture will drive the political and legal landscape.
The political ideology on which the society is based will impact upon your
decision to market there. For example, the United Kingdom has a largely
market-driven, democratic society with laws based upon precedent and
legislation, whilst Iran has a political and legal system based upon the
teachings and principles Islam and a Sharia tradition.
5.1.2.8 Aesthetics
Aesthetics relate to your senses, and the appreciation of the artistic nature of
something, including its smell, taste or ambience. For example, is something
beautiful? Does it have a fashionable design? Was an advert delivered in
good taste? Do you find the color, music or architecture relating to an
experience pleasing? Is everything relating to branding aesthetically
pleasing?
5.1.3 Cultural Attitude and International Business
Cross cultural literacy
Individuals and firms must develop cross-cultural literacy. International

businesses that are ill informed about the practices of another culture are
unlikely to succeed in that culture. One way to develop cross-cultural literacy
is to regularly rotate and transfer people internationally.
Dressing habits, living styles, eating habits and other consumption patterns,
priority of needs are dictated/influenced by culture. Some Thai and Chinese
and most of the Indians do not consume beef. Thailand Chinese believe that
consumption of beef is improper and Indians (particularly Hindus) believe that
eating beef is a sin as they believe cow is sacred. The eating habits vary
widely. Chinese cat fish stomachs, and bird’s nest soup, Japanese eat
uncooked sea food, Iraqis eat dried, salted locusts and snakes while drinking.
The French eat snails, Americans and Europeans eat mostly nonvegetarian
food. Indians eat mostly vegetarian food. It was surprising to the rest of the
world to know that there were pure vegetarians
40
in India. Similarly, dressing habits also vary from country to country based on
their culture. We observe different dress styles of West, Middle East, India,
and Pacific etc. Wearing ‘saree’ by Indian women is a peculiar dressing habit,
which is influenced by the culture. Similarly, wearing ‘burka/ parcia’ by the
women of Middle East is another example for the influence of culture on the
dressing.
5.2 Economic Environment and its implications on International Business
There are four broad types of economic systems: market, command, mixed, and
state-directed
.In reality almost all are mixed to some extent, for even the most market oriented
systems have some governmental controls on business and even the most
command based systems either explicitly allow some free markets to exist or
have black markets for some goods and services. Yet, all countries can be
considered to be at some point on a continuum between pure market and pure
command.
5.2.1 Market Economy
In a pure market economy, the goods and services that a country produces, as
well as the quantity in which they are produced, is not planned by anyone. Rather
price and quantity are determined by supply and demand.
5.2.2 Command economy
In a pure command economy, the government plans what goods and services a
country produces, the quantity in which they are produced, and the price at which
they are sold.
5.2.3 Mixed economy
A mixed economy includes some elements of each. In Canada, for example,

while most business is privately owned and operated under market principles,
health care, electrical power, and liquor distribution are run by state owned
enterprises in most provinces.
5.2.4 State-directed economy
In a state-directed economy, the government plays a significant role in directing

the investment activities of private enterprises through “industrial policy.” Both
Japan and South Korea are often cited as examples of state-directed economies.
41
5.3 Political Systems and International Business
Definition: Political system refers to the system pf Government in a nation. The

economic and legal systems of the country are often shaped by its political
system. There are two separate polarities to consider when discussing political
systems: collectivism vs. individualism and democracy vs. totalitarianism.
Democratic or totalitarian
.These two dimensions are interrelated, systems that emphasize collectivism

tend to be totalitarian while, systems, that pace a high value on individualism
tend to be democratic.
5.3.1 Collectivism vs. individualism
Collectivism
Definition: political system that stresses the primacy of collective goals over
individual goals.
The system, which advocates Collectivism, is called socialism and these activists
are called socialists.
Socialism
Socialism roots from the intellectual lessons from Karl Marx (1818-1883). Marx’s
basic argument is that in a capitalist society where individual freedom is not
restricted, the few benefit at the expense of many. Marx advocated state
ownership of the basic means of production, distribution and exchange
(business). His point is that if the state owned the means of production, the
states could ensure that the workers were fully compensated for their labor.
Individualism
This is the opposite of collectivism.

Individualism refers to a philosophy that an individual should have the freedom in
his or her economic and political pursuits.
Individualism focuses on (1) guaranteeing individual freedom and self-
expression, and (2) letting people pursue their own economic self-interest in
order to achieve the best overall good for society.
5.3.2 Democracy Vs. totalitarianism
Democracy
Democracy refers to apolitical system in which the government is by the people,

exercised either directly or through elected representatives.
42
Totalitarianism
Totalitarianism is a form of Government in which one person or political party

exercises absolute control over all spheres of human life, and opposing political
parties are prohibited.
There are four major forms of totalitarianism: communist, theocratic, tribal, right
wing (often military).
5.4 Legal Environment and International Business
5.4.1 Origins of International Law

• Commercial codes date back to Egypt in 1400 B.C.
• Early trade centered around law of the sea
• Greek/ Roman Empires both had codes of international trade
• Middle Ages: Lex Mercatoria (Merchant Law) – Governed trading customs
in Europe
• Today’s codes still partially derived from early efforts
5.4.2 Sources of International Law
• Individual countries create their own laws

• Trade agreements between countries
• Worldwide/regional organizations, i.e.
– United Nations
– European Union (EU)
• No universal international court system for resolving international conflicts
of businesses
• Difficult to enforce decisions and contracts
• Selected Organizations Affecting the International Legal Environment
5.4.3 International Trade Agreements
• Improve economic relations of countries

• Cover variety of commercial issues
• Tax agreements prevent double taxation
• Examples:
– North American Free Trade Agreement (NAFTA, 1992)
Canada/US/Mexico
– General Agreement on Tariffs & Trade (GATT) replaced in 1995 by World
Trade Organization (WTO)
43
5.4.4 International Dispute Resolution
• Litigation
– Differs within countries

– Complication of evidence, witnesses and documents
– Judicial system may be different from country to country
– Some courts more influenced by political pressures
– Not enforceable outside of country
– Treaties/Conventions may assist potential parties
– Contract clauses assist courts in enforcement of claims
– Usually need “minimum contacts” for jurisdiction
Arbitration
3rd neutral party decides outcome, which is binding. Rules and regulations for
arbitration laid down by International Court of Arbitration
Mediation
3rd neutral party “suggests” outcome, which is not binding
• International Court of Justice (ICJ)

– Only nations have standing--not individuals
– Nations may make claims on behalf of persons
– No mandatory compliance requirement
– UN Security Council must enforce
References:

Education
44
Chapter 5
The Cultural, Political, Legal and Economic environment facing Global
Business
End Chapter Quizzes
Q 1) Standardized Nike and Adidas shoes worldwide is an example of

a) globalization.
b) customization.
c) collateralization.
d) internationalization.
Q 2) Culture includes
a) a country's political system and national laws.
b) the concepts, values, and tangible items that make up a particular society.
c) a measure of a nation's economic standing.
d) quotas on imports and stringent health and safety requirements.
e) the stability of the government.
Q 3) ) When a glove manufacturer is allowed to sell only a certain number of

plastic gloves in a particular country, the firm is facing
a) a tariff.
b) an embargo.
c) a restrictive product standard.
d) a quota.
e) a balance of trade restriction
Q 4) Taxes levied by a nation on goods bought outside its borders and brought in
are called
a) import duties.
b) export duties.
c) export tariffs.
d) quotas.
e) import tariffs.
Q 5) ) When a firm's products are marketed outside its home market and home
production is used to supply these markets, the firm is engaging in
a) international marketing.
b) global marketing.
c) exporting.
d) domestic marketing.
e) unplanned exporting.
45
Q 6) Regionalism is:
a) an international management orientation.
b) a protectionist policy created to exclude third world countries from certain
forms of international trade.
c) an international management orientation and a protectionist policy created
to exclude third world countries from certain forms of international trade.
d) the grouping of countries into regional clusters based on geographic
proximity.
Q 7) The highest level of international business involvement is the
a) multinational corporation.
b) joint venture.
c) strategic alliance.
d) franchise.
e) contract manufacturer.
Q 8) The most recent round of GATT provided new rules to prevent dumping.
This round was the
a) Kennedy Round.
b) Uruguay Round.
c) Merry-Go Round.
d) American Round.
Q 9) If IBM was concerned about the interest rate it must pay in the next quarter
to acquire needed financial resources, this concern would involve which one of
the following
a) A business environment input
b) Its marketing mix
c) Its business approach
d) A business environment output
Q 10) Many companies view political forces as:

a) easily ignored
b) easily influenced
c) simple to recognize
d) beyond their control
46
Chapter 6
Control Strategies
6.1 International Planning Process
It is a 6 step process
A. Set long range strategic interest
B. Analyze internal corporate resources like financial, human, product
resources and environmental effects on them.
C. Set international corporate objectives
* Sales objectives
* Resource acquisition objectives
* Diversification objectives
* Competitive risk minimization objectives
D. Analyze local conditions in current or prospective host countries including

analysis of factors like financial and marketing factors.
E. Select various alternatives and priorities.
F. Implement strategy.
One of the most common sets of activities in the management is planning.

Very simply put, planning is setting the direction for something -- some
system -- and then working to ensure the system follows that direction.
Systems have inputs, processes, outputs and outcomes. To explain, inputs to
the system include resources such as raw materials, money, technologies
and people. These inputs go through a process where they're aligned, moved
along and carefully coordinated, ultimately to achieve the goals set for the
system. Outputs are tangible results produced by processes in the system,
such as products or services for consumers. Another kind of result is
outcomes, or benefits for consumers, e.g., jobs for workers, enhanced quality
of life for customers, etc. Systems can be the entire organization, or its
departments, groups, processes, etc.
6.2 Control in Internationalization Process
Various factors influence how much control a company needs at different

stages of internationalization. We discuss these factors below.
Level of Importance
The more important the foreign operation, the higher is the organizational
structure they report.
Changes in competencies
47
The larger the total foreign operations, the more likely that headquarters has
specialized staff with international expertise. The larger the operations in a
given country, the more likely that the country unit has specialized staff.
Changes in operating forms

The use of multiple operating forms such as exporting.
There are four main types of controls -- personal controls, bureaucratic

controls, output controls, and cultural controls.
6.2.1 Personal control
It involves control by personal contact with subordinates. This type of control

system tends to be most widely used within small firms where it finds
expression in the direct supervision of the actions of subordinates, but is also
applicable in large international firms.
6.2.2 Bureaucratic control
It involves control through the establishment of a system of rules and

procedures that are used to direct the actions of sub-units. With regard to
headquarters control of sub-units within multinational firms, the most
important form of bureaucratic controls are sub-unit budgets and capital
spending rules.
6.2.3 Output controls
It involve setting goals for sub-units to achieve, expressing those goals in

terms of relatively objective criteria such as profitability, productivity, growth,
market share, or quality, and then judging the performance of sub-unit
management by their ability to achieve these goals.
6.2.4 Cultural controls
Such controls exist when employees buy into the norms and value systems of
the firm. When this occurs, employees tend to control their own behavior,
which reduces the need for direct management supervision. Cultural controls
require substantial investments of time and money by the firm in building
organization wide norms and value systems.
6.3 Location of Decision Making
Vertical differentiation is principally about the centralization and

decentralization of decision-making responsibilities. It is concerned with
identifying where in a hierarchy decision making power should be
concentrated.
48
6.3.1 Centralization
There are four main arguments for centralization

(3) Providing top managers the means to push through major changes
6.3.2 Decentralization
There are five main arguments for decentralization
(1) Overburdened and hence poor decision-making at the top of the

organization
(4) Better decisions on the spot by the people directly involved
The choice between centralization and decentralization is not an absolute

one. Frequently it makes sense to centralize some decisions and decentralize
others depending upon the type of decision and the strategy of the firm.
References:

Education
49
CHAPTER 6
Control Strategies
End Chapter Quizzes
Q 1) A marketing plan
a) is characteristic of production-oriented firms and other mass producers.
b) provides a framework for implementing and controlling marketing
activities.
c) always increases the marketing manager's operating costs.
d) produces plans that are short-term in orientation.
e) restricts the marketing manager's future options.
Q 2) A firm should develop a marketing plan

a) for each strategic business unit.
b) for each different marketing strategy.
c) for each different target market.
d) for each good or service.
e) once a month.
Q 3) A marketing plan usually begins with a(n)

a) executive summary.
b) introduction to the company's marketing objectives.
c) summary of current performance as compared with past performance.
d) situation analysis.
e) opportunity and threat analysis.
Q 4) The __________ is sometimes considered to be the most important part of

a marketing plan because it is often given to people outside the firm.
a) SWOT analysis
b) market analysis
c) mission statement
d) marketing strategy
e) executive summary
Q 5) Which of the following is NOT a purpose of a marketing plan?

a) it specifies how resources are to be allocated
b) it co-ordinates marketing and production activities
c) it assigns responsibilities, tasks and timing
d) it assists in management control
e) it offers a road map for implementing marketing strategy
50
Q 6) In the marketing planning cycle, the final stage is:
a) implementation of the marketing plan.
b) revision or formulation of marketing strategy.
c) development or revision of marketing objectives
d) assessment of marketing opportunities and resources.
e) development or revision of the plan for implementation and control.
Q 7) Marketing plans that cover a period of more than 5 years are

a) long-range plans.
b) short-range plans.
c) medium-range plans.
d) average-range plans.
e) normal-range plans.
Q 8) An intuitive manager could best be described as one who:

a) uses scientific problem solving
b) eliminates uncertainty in decision making
c) searches out facts and data systematically
d) uses an orderly approach to gathering information
e) uses personal knowledge and experience to make decisions
Q 9) In a specific strategic market plan, a profit centre that is self-supporting in

terms of sales, markets, production, and other resources is known as:
a) profit unit.
b) strategic business unit.
c) marketing unit.
d) small business unit.
Q 10) The long-term view, or vision, of what the organization wants to become is
called the
a) mission statement
b) purpose statement
c) vision statement
d) marketing plan.
e) strategic vision.
51
52
Chapter 7
Issues In Global Marketing
7.1 Managing in the global marketplace
A firm does not have to be an MNC investing directly in operations in other

countries to engage in International Business. All a firm has to do is to start
exporting products or importing products from other countries. As the world shift
toward a truly integrated global economy, more firms, both the large and small,
are becoming international businesses. As their organizations increasingly
engage in cross-border trade and investment, it means managers need to
recognize that the task of managing an international business differs from that of
managing a purely domestic business in many ways. Countries differ in their
cultures, political systems, economic systems, legal systems, and levels of
economic development. These differences require that business people vary
their practices country by country, recognizing what changes are required to
operate effectively. It is necessary to strike a balance between adaptation and
maintaining global consistency.
7.2 Product Attributes
A product can be viewed as a bundle of attributes. Different customers value

different attributes, as well as value the same attributes differently. A soccer mom
in the USA may value her automobile for its ease of use, but her Latin American
counterpart may value its durability. Product attributes have to be varied from
country to country to account for differences in consumer tastes and preferences.
Differences in consumer tastes and preferences between countries are a function
of differences in culture and economic development.
New Product Development
New product development is a high risk but high return activity. In order to build
up a competency in new product development, the international business must
do two things:
1) Disperse R&D activities to those countries where new products are being
pioneered
2) Integrate R&D with marketing.
7.3 Distribution Strategy
Distribution strategy is about choosing the best channel to deliver a product to

the consumer. Significant country differences with regard to distribution systems
exist. In some countries, the retail system is very concentrated, whereas in
others it is very fragmented. In some countries channel length is short, whereas
in others it is long. While in some countries access to distribution channels may
be difficult.
53
The longer the channel, the greater the aggregate mark-up and the higher the
price that consumers are charged for the final product.
When there are exclusive distribution channels, it can be difficult for outsiders to
obtain access to markets. Exclusive channels are often based on long
established and successful relationships.
Occasionally in order to gain market access a firm may have to devise an entirely
new distribution strategy. While costly, that may be the only way to obtain
access, and it may even give the firm a competitive advantage.
7.4 Communication Strategy
A critical element in the marketing mix is communication strategy. This is the

process of communicating the attributes of a product to prospective customers. A
number of different communications channels are available to a firm. These
include direct selling, sales promotion, direct marketing, and advertising via many
different media.
7.4.1 Push strategy and a pull strategy
The main choice with regard to communication strategy is between a push

strategy and a pull strategy.
A push strategy emphasizes personnel selling which requires a competent sales
force and is costly. Whereas a pull strategy emphasizes mass media advertising
to communicate the marketing message to potential customers. The choice
between push and pull strategies depends upon product type and consumer
sophistication, channel length, and media availability.
Push strategies tend to be emphasized more in the following circumstances:
1) For industrial products and/or complex new products

2) When distribution channels are short
3) When few print or electronic media are available.
Pull strategies tend to be emphasized more in the following circumstances
1) For consumer goods products

2) When distribution channels are long
3) Sufficient print and electronic media are available to carry the marketing
message.
7.5 Pricing Strategy
The concept of strategic pricing has two aspects, which are referred as
predatory pricing and experience curve pricing.
Price discrimination exists whenever consumers in different countries are
charged different prices for the same product.
54
The concept of strategic pricing has two aspects, which are refereed as
predatory pricing and experience curve pricing. Predatory pricing involves
using the profit gained in one market to support aggressive pricing in another
market, the objective being to drive competitors out of the market. Here the price
is used as competitive weapon to drive weaker competitors out of a national
market by pricing very low. Once the competitors have left the market, the firm
can raise prices and enjoy high profits. Many Japanese firms have been accused
of pursuing this strategy.
Experience curve pricing involves aggressive pricing to build up accumulated
global volume as rapidly as possible, thereby moving the firm down the
experience curve as rapidly as possible. A firm builds its accumulated production
volume over time, unit costs fall due to “experience effects” due to learning
curves and economies of scale.
7.6 Configuring the Marketing Mix
Standardization versus customization
In reality, most firms standardize some things and customize others. When
looking at the overall marketing mix and message, one often finds some aspects
of standardization and some aspects of customization in all products depending
on local requirements and overall cost structures.
References
Management, Tata McGrawHill Publishing Company Ltd., (2005) Chapter
1
• Paul Justin (2005) International Business, Prentice Hall of India Private
Ltd., Chapter 1
• Cherunilam Francis, (2004), International Business, Prentice Hall of India
Private Ltd. 3rd Edition, Chapter 1
Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 1 & 4
Chapter 1
• Gooderham Paul N. & Nordhaug Odd (2004), International Management,
Cross-Boundry Challenges, Blackwell Publishing Ltd. Chapter 1
55
Chapter 7
Issues In Global Marketing
End Chapter Quizzes
Q 1) ) Swiss-based Nestlé takes a global approach to marketing its chocolate

products, it probably finds that which of the following is MOST easily
standardized?
a) Product
b) Promotion
c) Distribution
d) Advertising
e) Price
Q 2) The main aim of global marketing is to:

a) find global customers.
b) coordinate the marketing activities within the constraints of the global
environment.
c) satisfy global customers better than competition.
d) achieve all of the above.
Q 3) The work of an international marketer is mainly concerned with:

a) establishing global brands.
b) translating product instructions and advertising messages.
c) transferring a marketing mix to enter a market in another country.
d) adapting a marketing mix to enter a market in another country.
Q 4) Key controllable factors in global marketing are:

a) social and technical changes.
b) government policy and legislation.
c) marketing activities and plans.
d) all of the above.
Q 5) From the point of view of marketing, an organization that enjoys competitive

advantage in an industry has done so by:
a) creating superior value for customers.
b) constantly enlarging its marketing activities.
c) focusing on long-term profit.
d) charging lower prices than competition.
Q 6) Which of the following represents a company's effort to identify and

categorize groups of customers and countries according to common
characteristics?
a) Global market segmentation.
b) Global marketing research.
c) Global targeting.
56
d) Global positioning.
Q 7) The main advantage of a differentiation strategy in international markets lies

in that:
a) imitators cannot reduce margins.
b) consumers in foreign markets pay less for the same product.
c) it enables brand stretching and extension.
d) the focus is taken away from price.
Q 8) The goals of international marketing are to:

a) expand business activities abroad.
b) gain market share and increase profit.
c) create and retain customers in global markets.
d) eliminate competition in international markets.
Q 9) The target audience for an advertising campaign is the

a) information base on which to develop the campaign.
b) location and geographic distribution of persons.
c) group of people toward whom the advertisements are directed.
d) overall goal of the advertising campaign.
Q 10) A marketer that wanted to include detailed explanations in advertisements

would be most likely to use
a) radio
b) television.
c) outdoor displays.
d) magazines.
57
58
Chapter 8
Global Production and Operational Strategies
Globalization of Production
As discussed in chapter 1, due to globalization, companies have many options

for setting up their production facilities in different parts of the world. Rather than
opting for manufacturing facilities in the home country, companies are now
considering having production facilities in one, two or many countries depending
upon how much cost advantage they will get. But while deciding upon the
manufacturing strategies the company should carefully develop strategies to
decide upon the following points :
• Whether production should be centralized (factories at few locations) or
decentralized ( factories at multiple locations)
• Issues related to global sourcing
• Make or buy decisions I,e whether the company should manufacture the
goods itself or it should outsource to other companies that are most
efficient in manufacturing the product.
8.1 Factors determining Global Sourcing Strategy
8.1.1 Country Factors
Companies should critically evaluate the political, economical, cultural and other
relevant factors that vary from country to country to ascertain attractiveness of a
particular country. Apart
from these factors,
companies should also Country
Factors
look at country’s
comparative advantage
in terms of factor cost i.e
cost at which land, labor
and capital are Global
Production
available.. Product
Strategy
Technological
Factor Factors
Countries having
conducive political,
economical, cultural and
other relevant factors are Location of
the one preferred by manufacturing
companies for carrying facility
out the manufacturing
facilities. Fig 1 : Factors effecting global sourcing strategy
Apart from the factors

mentioned above, companies also analyze the country factors in terms of :
59
• Presence of skilled labor
• Supporting industries
• Formal (import duties etc.) and informal trade barriers (Quotas, subsidies
etc.)
• Transportation cost
• Regulations regarding FDI
• Stable exchange rate
8.1.2 Technological Factors
Technology plays a very important role in deciding upon the location of

manufacturing facility. In some cases due to technological limitations
manufacturing facility has to be located at just one location whereas in certain
other cases due to technical advancement goods can be produced at multiple
locations.
To understand the importance of technology in deciding upon the manufacturing
locations company must carefully look at the following three factors:
• Fixed Costs
Fixed Cost
• Minimum Efficient
Scale
• Flexible
Manufacturing Technological
Technology Factors
Minimum
Flexible
Efficient
8.1.2.1 Fixed Cost Manufacturing
Scale
These are the cost Fig 2 Technological Factors and location of manufacturing
incurred by the company facility
to set up a production
facility. Fixed cost includes cost of land, cost of procuring plant and machinery
etc.
If fixed cost are high it is more practical to serve the global market from
manufacturing facility located at one or few locations. On the other hand if the
fixed cost is less than companies can plan to have manufacturing facility at
multiple locations. This will also help them in responding quickly to consumer
demands and they do not have to rely on just one locations for souring the
products.
8.1.2.2 Economies of Scale
As the production output of a plant increase the cost per unit comes down i.e
plant achieves economies of scale and beyond a point there is not significant
change in coast with further increase in output. Point at beyond which producing
additional units will not result in lowering the production cost is known as
minimum efficient scale.
60
Companied should opt for centralized production facility i.e at one or few
locations if economies of scale is high and decentralised productions if
favourable in those cases where minimum efficient scale is low.
8.1.2.3 Flexibility
. Unlike mass production where company produced similar goods, in case of

flexible manufacturing companies produce different kind of goods to serve the
varied customer needs, while ensuring low per unit production cost.
8.1.3 Quality
Quality is the most important aspect of production process. Major characteristics

of product quality includes : product performance, timely delivery and most
importantly the quality of service before, during and after product delivery.
Companies all over the world try to maintain high quality standards. Some of the
techniques adopted by companies to maintain quality are :
8.1.3.1 TQM
This quality management technique focuses on the following aspects:

Elimination of defects, mistakes and poor quality inputs in the production process
Better supervision of the production process
Encouraging recommendations from employees for improving quality
Committed workers
8.1.3.2 Six Sigma
This techniques advocates producing 3.4 defects per million units i.e 99.99966
percent defects, by ensuring producing less number of defective units thereby
increasing productivity, eliminating waste and cutting costs.
8.1.4. Location of Manufacturing facility
Both centralized and decentralized production facilities have their own

advantages and disadvantages. Centralized production results in comparatively
less total production cost whereas decentralisations helps customizing the
product according to customer needs. A company can follow either a centralized
or a decentralized approach depending upon the following factors ::
8.1.4.1 Flexibility
With Flexible manufacturing facility decentralised production

Flexible manufacturing not possible – centralised production
8.1.4.2 Economies of scale
61
High minimum efficient scale – centralized production
Low minimum efficient scale – decentralized production
8.1.4.3 Fixed cost
High fixed cost – centralized production

Less fixed cost – decentralized production
References:

Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 22
62
Chapter 8
Global Production and Operational Strategies
End Chapter Quizzes
1. The most important reason for global sourcing is:

a) to procure foreign products
b) the firm's worldwide operation and attitude.
c) to procure advanced technology from foreign sources.
d) to procure lower prices from foreign sources.
2. Six sigma advocates many defects if one million units are produced?
a) 3.4 units
b) 1.7 units
c) 10 units
d) 99 units
3. To lower manufacturing costs, the principal goal of Japanese firms is to:

a) eliminate inventories.
b) reduce the process time.
c) lower labor costs.
d) reduce inventory costs.
4. Managing the entire organization in such a manner that it excels on all

dimensions of product and services is known as:
a) quality circles.
b) quality control circles.
c) total quality management.
d) just-in-time.
5. A radical redesign of business processes to achieve dramatic improvements in

critical measures of performance is referred to as:
a) redesign.
b) delayering.
c) reengineering.
d) TQM.
6. __________ has become a global center for labor intensive industry.

a) China
b) Indonesia
c) Vietnam
d) India
7. Which of the following is an unfavorable factor if a US automobile company

plans to set up a manufacturing facility in China?
a) Presence of ancillary units for supplying auto parts
b) Liberal norms for FDI
63
c) Government policies favoring domestic automobile industry
d) Presence of skilled labor
8. __________, the most comprehensive of standards applies to industries

involved in the design, development, manufacturing, installation and servicing of
products and services:
a) ISO 9001
b) ANSI/AQC90
c) ISO 9000.
d) ISO 14000.
9. Backward vertical integration refers to establishing facilities to manufacture:

a) products that are complementary to the firm's main product line.
b) inputs used in the production of the firm's final products.
c) products that are best capable of competing in the global marketplace.
d) outputs from the firm's main source of raw materials.
10. The company should not opt for decentralized manufacturing in which of the
following situations?
a) High Fixed cost
b) Non availability of flexible manufacturing facility
c) Low fixed cost
d) Minimum efficient scale is high
64
Chapter 9
Global Human Resource Management
The typical functions of HR department of any organization are staffing,

performance evaluation or appraisals, training and management development
and compensation (salary and perks) (Fig 1). All these activities become more
complex for an organization that has international operations. The reasons being
the complexity of the job is the difference in culture, labor market and regulations,
economic system and legal system. This chapter will be the focusing on how
these activities are managed a global environment.
9.1 Staffing
Staffing policy deals with

selecting the right person for Staffing
the right job. Staffing
becomes more complicated
in a global environment Global
because apart from Human
selecting the individual to do Salary & Training a
Resource
Perks and MDP
particular task it is equally Managem
important to ensure that he ent
will be able adapt to the
organization culture.
In International Business Fig 1 Managing Human Resources

Appraisal in Global Organizations
three different staffing
policies are in practice viz.
Ethnocentric, Polycentric and Geocentric (Fig 2).
9.1.1 Ethnocentric Staffing Policy
In this type of staffing policy key management positions are occupied by the
home country nationals. For example if a French MNC has a subsidiary in India
and Russia, then the key positions will be held by French nationals.
9.1.2 Polycentric Staffing Policy
As part of this staffing policy host country nationals manage the subsidiary
operations while the key positions in the home country are managed by the local
employees. Again in the example of the French MNC having operations in India
and Russia, subsidiaries in India and Russia will be managed by the Indians and
Russians respectively; however the key management positions in France in will
held by the French nationals.
65
9.1.3 Geocentric Staffing
Policy Ethnocent
ric
Firms using this staffing policy
look for the best professional
available, irrespective of the
nationality, for all the key
management positions in the Staffing
organization i.e. both in the Policies
headquarter and subsidiaries
Geocentri Polycentri
c c
Each of these staffing policies
has its merits and demerits
which have been summarized Fig 2 Different Staffing Policies
in table 1.
Table 1 Advantages and Disadvantages of Ethnocentric, Polycentric and

Geocentric staffing policy
Ethnocentric Staffing Policy

Advantage Disadvantage
Helps in maintaining unified corporate Limited growth opportunity for the host
culture country professions
Beneficial in those cases where Firm will not be able to understand the
qualified professionals are not available culture of the host country
in the host country.
Facilitate transfer to core competency
to host country. Host country managers
learn from the experience and
knowledge of the home country
national.
Polycentric Staffing Policy
Due to host country nationals No growth opportunities for host
occupying the top positions in the country nations beyond their own
subsidiary, firm will have a good subsidiary
knowledge of the culture
As local individuals will be hired to Due to language barrier, loyalty of their
manage the subsidiary operations, it is own countries and cultural difference
less expensive to maintain. this approach can lead to
communication gap between the home
country and host country nationals
Geocentric Staffing Policy
Use of best talent available globally.
This staffing policy is expensive as the
compensation package of the best
professional will be high
As key management positions are Immigration policies of certain countries
66
occupied by third country nationals may limit movement of an individual
therefore it helps in building strong from one country to another.
culture and also informal networks in
an organization
9.2 Management Development and Training
In International Business, it is important to provide training to the expatriate

manager (home country manager working in another country where the firm is
having its operations) in the following sphere:
9.2.1 Language Training
To acquaint the manager with the local language so that they can relate better
with the culture of the foreign country.
9.2.2 Cultural Training
Help in understanding the culture being practiced in a particular country.
9.2.3 Practical Training
Aimed at providing an understanding of the day to day activities in the host

country.
Apart from the training employees also learn through the management
development programs that imparted through:
Enrolling for various management education programs
Rotation of managers within the organization
9.3 Performance Appraisal
Performance Appraisal in international business is again a complicated process

due to unintentional bias of the person who is evaluating the performance on an
employee. Moreover, adverse business environment i.e. economical, political
and economic condition in the host country can also result in an adverse
appraisal of the host country manager even though these parameters are outside
his control.
Therefore if the home country manager is appraising an employee in the host
country, due care considerations should be given to the factors outlined below:
More weight age to be given to the appraisal done by the on-site manager as he
will be acquainted well with the external and internal environment in which
manager is operating.
Appraisals should also be done by the home country managers who have
worked in the country in which manager is working
67
On the other hands if on site manager is doing the appraisal, then home country
nationals should be consulted while doing the appraisal.
9.4 Compensation
To ensure that employees are motivated to work in foreign locations, proper

compensations should be given to them. Therefore apart from the basic salary,
compensation package should include some allowances to ensure that the
employees are able to maintain the same standard of living. The allowances can
be in terms of:
Foreign Service Allowance
Special Allowances
House Rent Allowance
Education Allowance etc.
Income Tax payable in the host country
Other Benefits
Medical Expenses
Pension Benefits
Travelling Expenses etc.
References
Management, Tata McGrawHill Publishing Company Ltd., (2005)
Chapter 14
• Paul Justin (2005) International Business, Prentice Hall of India
Private Ltd., Chapter 20
• Cherunilam Francis, (2004), International Business, Prentice Hall of
India Private Ltd. 3rd Edition, Chapter 19
Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 13, 14 & 15
• Gooderham Paul N. & Nordhaug Odd (2004), International
Management, Cross-Boundry Challenges, Blackwell Publishing Ltd.
Chapter 3
• Thakur Manab, Burton Gene E. & Srivastava B. N. (2002),
International Management Concepts & Cases, Tata McGraw Hills
Publishing Co. Ltd., Chapter 10
68
Chapter 9
Global Human Resource Management
End Chapter Quizzes
1. While selecting a good manager for an overseas operations organizations

should look at the following attributes :
a) being bicultural and bilingual.
b) knowing business practices in the home country and in the host country.
c) having a broader skill set than domestic managers.
2. An employee who is a citizen of neither the home nor the host country is
known as a:
a) third country national.
b) foreign national.
c) nonresident alien.
d) foreign employee.
3. ___________ is related to hiring and promoting employees on the basis of

ability and experience without considering race or citizenship.
a) Discrimination
b) Monocentric
c) Ethnocentric
d) Geocentric
4. A person living outside of his or her country of citizenship is known as:

a) a foreigner.
b) a nonresident alien
c) a resident alien.
d) an expatriate.
5. Before going on the first overseas assignment, you should:

a) arrange with someone fairly high in the company hierarchy to be your
mentor.
b) insist that your bosses tell you exactly what the company expects you to
accomplish.
c) Try and learn some basic facts about the culture of the country
69
6. The ability of a company to succeed in another country rests heavily on:
a) Favourbale environment in the host country
b) the managers' abilities to function in that country's culture.
c) adequate financing.
7. In selecting executives for foreign operations:

a) don't promote from within.
b) do promote an insider.
c) do assume that language fluency is the most important criterion.
d) do assess the total person.
.
8. Bonuses are paid by firms in recognition that expatriates and their families
undergo some hardships and inconveniences and make sacrifices while living
abroad. Bonuses include:
a) overseas premiums.
b) Overseas medical benefits.
c) Education benefits .
9. Employee compensation payments added to base salaries because higher

expenses are encountered when living abroad are known as:
a) bonuses.
b) add-ons.
c) allowances.
d) expatriate compensation
10. To truly understand a culture, it is necessary to:

a) speak the language.
b) Dress like the locals.
c) spend time in the locale.
d) all of the above
70
Chapter 10
Global Accounting and Financial Management
Overview
For any organization it is necessary to maintain a record of all the financial

transactions, as it helps them to
• evaluate and compare its performance with their previous performances
and also with its competitors
• control internal expenditure
• Provide an insight about the organization to the providers of capital so that
they can access the value of their investment and also the security of their
loan
• Assess the amount of Tax to be paid by them
• Plan efficiently for future expenditure and income
• Make decisions about future resource allocation
10.1 Accounting and Auditing Standards
Every country has its own set of rules to prepare the financial statements (known
as accounting standards) and also a set of rule for performing an audit for
ascertaining the accuracy of these financial statements (known as Auditing
standards).
10.2 Difference in Accounting Standards
Accounting and auditing standards vary from country to country. Various factors
that determine the standard to be followed by a country are:
10.2.1 Level of inflation
UK Accounting standards are based on current cost principle (inflation is taking

into accounting while ascertaining the current value of assets).
While other accounting standards like in US and Japan follow the historic cost
principle (historic value of asset is considered and inflation is not taken into
account)
10.2.2 Level of economic development
Financial statements of the developed nations are complex because of the

following factors:
Organizations in developed nation are huge and very complex e.g. a US MNC
might be having subsidiaries in 20 difference countries of the world.
Presence of sophisticated capital market
Highly educated workforce that can prepare complex financial statements
71
Whereas the financial statement of the organizations in developing and less
developed nations are simple in nature because of
Less complex nature of business organizations
No-availability of trained workforce and prepare complex financial statements.
10.2.3 Culture
As discussed in chapter 5, according to Hofstede one of the parameter to

understand the culture of a country is to look at the extent to which people in
different countries of the world can accept or avoid uncertain and ambiguous
situations, i.e. whether a country has low uncertainty avoidance (accept and cope
well with uncertain situations) and high uncertainty avoidance (try to avoid
uncertain situations).
Countries with low uncertainty avoidance rely heavily on rules and regulations
and ensure that financial statements comply with all the standards practiced in
the country.
10.2.4 Political and economical ties with other countries
Countries have historic political or economic ties with other countries follow the
same standards. For example Canada and Mexico follow US standard because
of economic ties with US. US, Mexico and Canada are members of NAFTA
India and all the other former British colonies follow the UK standard.
10.2.5 Relationship between business and providers of capital
Three main sources from where a business entity can raise capital are
Investors: Shares and Bonds
Banks
Government
Importance of these sources in a country also determines the standards being

followed in a country. For example US firms rely more on share and bond market
to fulfill their capital requirement, therefore the financial statements are prepared
in such a manner to ensure that it fulfills all the information need of the individual
investor. On the other hand in countries like Germany and Japan, bank play an
important role in fulfilling the capital needs of the business organizations, thus
financial statements are oriented towards providing maximum information to the
banks. In these countries assets are valued conservatively and liabilities are
overvalued to provide cushion for the banks. In countries like France
Government either invest or provide loans to the business organizations. The
financial accounting practices are therefore oriented towards providing
information to the government.
72
10.3 National and International Standards
Due to the different accounting standards being followed in different countries it

becomes difficult to compare the financial statement from one country to another.
Therefore efforts are being made to develop international accounting standards.
International Accounting Standards Board was set up in 2001 to form
international financial reporting standards. Even though the awareness is
increasing day by day about the international standards but the acceptability is
still less because IASB has no power to ensure strict compliance of these
standards and thus the Compliance of these standards is voluntary in nature.
10.4 Accounting aspects and control System
As discussed in Chapter 6 accounting is used as a tool by the parent company to

control the performance of their subunits in different countries of the world. The
control process involves setting up the targets for the subunit, monitoring the
performance of the subunits and take corrective steps if subunits fail to achieve
desired results. But the control aspect becomes a complicated process for a firm
engaged in international business due to the following reasons:
10.4.1 Exchange Rate Fluctuations
Targets agreed between the subunits and headquarter in the beginning of the
financial year and the actual performance towards the end of the financial year
may not tally due to adverse exchange rate fluctuations in the country where the
headquarter is located or the country in which the subunit is situated. Lessard-
Lorange model is used by most of the MNCs to tackle such problems. According
to this model:
• the target and performance should be evaluated at the spot rate on the
date when the budget is adopted.
• the target and performance should be evaluated according to the
projected rate towards the end of the budget period.
• the target and performance should be evaluated at the spot rate on the
date of the end of the budget period.
10.4.2 Transfer Pricing
Transfer pricing is the price at which the goods and services are transferred
between the different subsidiaries of the same company. These prices should
also be decided in the beginning of the budget period itself to avoid any
complexities in the control process later on.
73
10.5 Financing Management
Financial management involves taking decisions regarding the:
10.5.1 Investment Decision
Investment decisions are basically to evaluating various options available with a

firm to invest the capital and also evaluating identify the best option. Capital
budgeting technique is used by finance managers to identify the best alternative
where the financial resources should be invested. This technique evaluates given
project in terms of the benefits, costs and risks.
While evaluating different projects across different countries due care should be
taken to analyze the political and economic environment of the country as
unfavorable conditions might result in difference in parent and project cash flow.
10.5.2 Financing decisions
After deciding about the alternative where the firm will be investing its capital, its
must identify various sources from where it can raise the required capital. The
source can be internal or external i.e. shares, bonds, loan etc. While deciding the
source from where firm will be raising the capital it must ensure that its cost of
capital should be minimum and it should also have optimal capital structure i.e. a
perfect mix of debt and equity.
References:
Environment and Strategy, Pearson Education, Chapter 19 & 21
74
Chapter 10
Global Accounting and Financial Management
End Chapter Quizzes
1. Foreign currency exchange risk arises when:

a) business transactions are denominated in foreign currencies.
b) sales are made to customers in a foreign country.
c) goods or services are purchased from suppliers in a foreign country.
d) accounting reports are prepared in a foreign currency.
2. What is transfer pricing?”

a) The cost to convert from one country's standards to another country's
accounting standards.
b) The value of sales made in a foreign country.
c) The method of recording transactions between divisions within the same
company.
d) The taxes paid on sales in a foreign country.
3. The chance that events such as political uncertainty, economic downturn, or

natural disasters will weaken a nation's securities market is called:
a) currency risk.
b) foreign exchange risk.
c) country risk.
d) exposure
4. Which functional areas are included in the study of international Financial

Management ?
a) Investment decisions
b) Accounting Information Systems
c) Taxation
d) Auditing
5.Why is auditing a multinational corporation potentially more difficult than

auditing an
entity that has only domestic operations?
a) Cultural differences
b) Multiple sets of accounting standards
c) Different currencies
d) All of the above
6.Which group is primarily responsible for preparing international accounting

standards?
a) Financial Accounting Standards Board (FASB)
b) American Accounting Association (AAA)
c) International Federation of Accountants (IFA)
75
d) International Accounting Standards Board (IASB)
7.Which of the following is an advantage of having a single set of accounting

standards used worldwide?
a) Reduce the accounting costs for multinational corporations.
b) Increase the power of the IASB.
c) Reduce the number of multinational corporations on the NYSE
d) Increase the diversity of accounting methods used by multinational
corporations
8.The factor used to convert from one country's currency to another country's
currency is called the:
a) Hedging
b) Capital Budgeting
c) Exchange rate.
d) Transfer price
9. _________________ are set to rules that define how the financial statements
will be prepared.
a) Auditing Standards
b) Accounting Standards
c) Capital Budgeting
d) Transfer pricing
10. Which of the following is not a part of financial decisions making process?
a) Sourcing finance
b) Ensuring optimal capital structure
c) low cost of capital
d) capital budgeting
76
Chapter 11
Global Strategic Management
11.1 What is Strategic Management?
Strategic management is a process as part of which organizations evaluate the

environment in which they are operating and on the basis of the analysis of the
external and the internal environment sets goals and strategies to operate in the
most efficient manner. As part of strategic management organizations prepare
mission and vision statement and develop plans accordingly to ensure that they
are able to achieve the long terms objectives that are integral part of the mission
and vision of the organization.
11.2 Components of the

Strategic Management Process
Mission
Strategic management is a and Vision
combination of the following five
tasks:
11.2.1 Task 1 Identifying

Mission, Vision & Objectives Environmental
Scan
The mission statement describes
the purpose of the firm and its
goals whereas the vision of a firm
is its fundamental aspirations and
values. On the basis of the Strategy
mission and the vision statement Formulation
firms define strategic objectives
or financial objectives. Strategic
objectives are related to
enhancing firm's competitiveness
whereas financial objectives are Strategy
related with improving firms Implementation
financial performance.
11.2.1.1 Financial Objectives

• setting level of profits, Strategy
ROI, ROA etc. Evaluation
• market share – worldwide,
region, country, growth
• ratio of foreign to domestic Figure 1 Strategic Management Process
production volume, quality
and cost control
• minimizing tax burden globally, optimal capital structure
77
11.2.1.2 Strategic objectives
• improve quality
• focus on innovations
• be a cost leader
• improve technology
11.2.2 Task 2 Environmental Scan: Analyze the Internal and External

Environment
The environmental scan includes analyzing both the internal and the external
environment in which the firm is operating and includes the following
components:
11.2.2.1 External environment
Analyzing the Political, Social, Technological and Economic Business

environment in which the company is operating (PEST analysis) (discussed in
detail in chapter 5)
11.2.2.2 Internal analysis of the firm
SWOT Analysis:
The internal analysis is done by identifying the firm's own strengths and
weaknesses and the opportunities and threats in the external environment.
Porter's five forces (discussed in chapter 2)
This model helps in evaluating the entry barriers, suppliers, customers, substitute
products, and industry rivalry.
11.2.3 Task 3: Strategy Formulation
Third task involved in Strategic Management is related to forming the strategy.

On the basis of the environmental scan, the firms devise the strategy which
matches the long term objective of the firm. Michael Porter identified three
generic strategies from which the firm can choose.
• Cost leadership; by becoming the lowest cost producer
• Differentiation: by being unique in the industry.
• Focus: by choosing a narrow competitive scope within the industry
11.2.4 Task 4: Strategy implementation
It is very important to ensure that the strategy is implemented in such a way that
the firm is able to achieve its desired goals. Following process are normally
involved in strategy implementation:
• Allocation and management of available resources like financial,
personnel, operational support, and technology support etc.
78
• Assigning responsibility of specific tasks or processes to specific
individuals or groups
• Designing system to monitor results
• Utmost care must be taken to communicate the strategy to the
stakeholders. Otherwise, the implementation might not succeed if the
strategy is
11.2.5 Task 5: Strategy evaluation
Corporate activities and performance results are monitored so that the actual
performance can be measured with the desired results. Evaluation and control
consists of the following steps:
• Identify parameters and variable that can be measures
• Determine desired values for those parameters
• Tools for measuring the performance
• Comparison of the measured results with the pre-defined standard
• Make necessary changes to achieve desired results
References
Management, Tata McGrawHill Publishing Company Ltd., (2005) Chapter
8
Chapter 3
79
Chapter 11
Global Strategic Management
End Chapter Quizzes
1. To succeed in today's global market place, a company must:

a) have ample supplies of financing.
b) be able to quickly identify and exploit opportunities whenever they may occur.
c) world-wide sources of cheap raw materials.
d) form strategic alliances with competitors
2. The process of strategic planning provides a formal structure in which

managers:
a) analyze the company's external environments.
b) define the company's business and mission.
c) set corporate objectives.
3. A firm can evaluate its internal environment by analyzing

a) Its own Strengths
b) Competitor’s Weaknesses
c) Opportunities in the external environment
d) Proposed changes in the international trade laws
4. To find out what an organization's strategy is, you should:

a) Read the mission statement
b) Look at what the organization actually does
c) Read the strategic plan
d) Ask the CEO
5. The key activities in the strategic management process are:

a) Analysis, formulation, review
b) Analysis, implementation, review
c) Analysis, formulation, implementation
d) Formulation, analysis, implementation
80
6. The statement of an organization's aspirations can be found in the
organizations:
a) Mission statement
b) Strategic objectives
c) Actions
d) Vision statement
7. It is generally agreed that the role of strategy is to:

a) Make best use of resources
b) Achieve competitive advantage
c) Make profits for the organization
d) Make the best products and services
8. An organization's external environment consists of the general or macro

environment and:
a) The internal environment
b) The competitive environment
c) The specific environment
d) The micro-environment
9. Strategy formulation takes place at two levels. These are:

a) Conscious and sub-conscious
b) Implicit and explicit
c) Corporate and business
d) Business and operational
10. The PEST analysis consists of:

a) Political, economic, scientific, technological
b) Political, environmental, social, technological
c) Political, economic, social, technical
d) Political, economic, social, technological
81
KEY TO END CHAPTER QUIZZES
Chapter 1
1 d, 2 c, 3 c, 4 c, 5 d, 6 b , 7 c, 8 b, 9 d, 10 b
Chapter 2
1 d, 2 a, 3 b, 4 c, 5 a, 6 c, 7 a, 8 c, 9 b, 10 a
Chapter 3
1 d, 2 b, 3 a, 4 a, 5 d, 6 d, 7 a, 8 c, 9 c, 10 a
Chapter 4
1 c, 2 c, 3 b, 4 b, 5 d, 6 a, 7 d, 8 a, 9 b,10 b
Chapter 5
1 a, 2 b, 3 d, 4 e, 5 c, 6 d, 7 a, 8 b, 9 a,10 d
Chapter 6
1 b, 2 b, 3 a, 4 e, 5 b, 6 a, 7 a, 8 e, 9 b, 10 a
Chapter 7
1 a, 2 d, 3 d, 4 c, 5 a, 6 a, 7 d, 8 c, 9 c,10 d
Chapter 8
1 d, 2 a, 3 a, 4 c, 5 c, 6 a, 7 c, 8 a, 9 b, 10 c
Chapter 9
1 d, 2 a, 3 d, 4 d, 5 c, 6 b, 7 d, 8 d, 9 c, 10 a
Chapter 10
1 a, 2 c, 3 c, 4 a, 5 d, 6 d, 7 a, 8 c, 9 a, 10 d
Chapter 11
1 b, 2 d, 3 a, 4 a, 5 c, 6 d, 7 b, 8 b, 9 c, 10 d
82

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Principles of Global Business

The study material on Principles of Global Business Management has been

International Business is a complex process due to the difference in the Political,

1.1 What is globalization?

Globalization is a process of interdependence and integration of world

1.2 Components of Globalization

It refers to merging of different national markets into one global marketplace. It is

Companies source goods

1.3 Drivers of Globalization

Another very important factor Drivers of

1.3.3 Increased competition in the domestic market

Competition in the domestic market forces companies to explore new market. It

1.3.4 Profit advantage/ Growth opportunities / increase market share

1.3.5 Increasing consumer needs

1.3.6 Strategic vision of the organization

1.3.7 Emergence of Global Institutions

1.3.7.1 World Trade Organization

1.3.7.3 United Nations

1.4 Globalization: Good or Bad for global economy

Globalization in itself is a very controversial topic. Different set of people have

1.4.1 Globalization debate-Pro

Proponents of globalization argue that

1.4.2 Globalization debate-Con

Opponents of globalization claim that

1.5 Managing in Global Marketplace

• Hodgetts Richard M, Luthans F. & Doh Johathan P., , International

1. What is the role of World Trade Organization?

2. Which of the following organizations was established by industrialized nations

3. Which of the following is an example of a globalized product?

4. Which of the following is not a major driver leading behind globalization?

5. The most common definition of globalization is that of:

6. Advances in computers and communications technology are permitting an

8. GATT stands for

9. Which of the following is not an advantage of globalization?

It is a fact that International trade is beneficial for overall economic development

2.2 Theory of Absolute Advantage

Table 1: Theory of Absolute advantage

A. Resources required to produce one ton of coffee beans

Table 1: Theory of Comparative advantage

A. Resources required to produce one ton of coffee beans

2.3.1 Limitations of Theory of Absolute and Comparative Advantage

2.4 Heckscher-Ohlin Theory

2.6 Theory of National Competitive Advantage: Porter’s Diamond Model

Porter visualizes these four attributes as constituting a diamond. According to

Porters factor endowments are same as

2.6.2 Demand conditions

Nature of demand in home country plays an important role in determining the

2.6.3 Related and Supporting Industries

Presence of related and supporting industry of international standard also

2.6.4 Firm Strategy, structure and rivalry

Different countries follow different management ideologies, and this ideology

1. Which one of the following is not an assumption of the Ricardo Model:

2. Which of the following statement describes the Heckscher-Ohlin Theory?

4. Which of the following pair is wrongly matched?

a) Monopoly market conditions i.e. Absence of Rivals

8. The international product lifecycle is a theory explaining why:

9. International trade occurs primarily because of:

10. The Heckscher-Ohlin theory of factor endowment states that international

a) differences in the supply of production factors.

The choice of which market to enter is driven by an assessment of long term

3.1 Entry Decision

3.1.1 Choice of Foreign Markets

Companies collect information about various countries through scanning