BA1701- International Business

Unit I
Definition:
International Business is the process of focusing on the resources of the globe and
objectives of the organisations on global business opportunities and threats.
International business defined as global trade of goods/services or investment. More
comprehensive view does not focus on the “firm” but on the exchange process
Free Trade occurs when a government does not attempt to influence, through quotas
or duties, what its citizens can buy from another country or what they can produce and sell to
another country.
The Benefits of Trade allow a country to specialize in the manufacture and export of
products that can be produced most efficiently in that country.
The Pattern of International Trade displays patterns that are are easy to understand
(Saudi Arabia/oil or Mexico/labor intensive goods). Others are not so easy to understand
(Japan and cars).

Nature of International Business

1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

Scope of International Business

1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange
Need for International Business

1. To achieve higher rate of profits

2. Expanding the production capacity beyond the demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions
6. Availability of technology and managerial competence
7. Cost of manpower, transportation
8. Nearness to raw material
9. Liberalisation, Privatisation and Globalisation (LPG)
10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO),
decreasing costs in telecommunications and transportation; and freer capital
markets

Reasons for Recent International Business Growth

1. Expansion of technology
2. Business is becoming more global because
•Transportation is quicker
•Communications enable control from afar
•Transportation and communications costs are more conducive for international
operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources enable
Companies to take better advantage of international opportunities

International Business operations and influences

Problems in International Business
1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy
Theories of International Business
Mercantilism: mid-16th century
 A nation’s wealth depends on accumulated treasure
 Gold and silver are the currency of trade.
 Theory says you should have a trade surplus.
 Maximize exports through subsidies.
 Minimize imports through tariffs and quotas.
 Flaw: “Zero sum game”.
David Hume - 1752

 Increased exports leads to inflation and higher prices.

 Increased imports lead to lower prices.
 Result: Country A sells less because of high prices and Country B sells more because
of lower prices.
 In the long run, no one can keep a trade surplus.
Theory of Absolute Advantage
 Adam Smith: Wealth of Nations (1776).
 Capability of one country to produce more of a product with the same amount of
input than another country.
 Produce only goods where you are most efficient, trade for those where you are not
efficient.
 Trade between countries is, therefore, beneficial.
 Assumes there is an absolute advantage balance among nations.
 Ghana/cocoa.

Comparative Cost Theory

David Ricardo developed this theory in the year 1817.
1817. The theory says that the
countries which are having cost advantage will export goods to the countries with cost
disadvantage
Assumptions of Comparative cost theory:
1. The only element of cost of production is labour
2. Production is subject to the law of constant returns
3. There are no trade barriers
4. Trade is free from cost of transportation
Opportunity Cost Theory
Developed by Gottfried Haberler in 1959
The opportunity cost is the value of alternatives, which have to be foregone in order
to obtain a particular thing.
Modern Theory of Factor Endowments

Developed by Berlin Ohlin and Heli Heckscher

This theory explains the reasons for comparative cost differences. There are different
prevailing endowments of the factors of production. Different factors of production are to be
used in different degrees of intensity for producing different products.
Assumptions of Factor Endowments theory

1. Perfect competition is in existence for both product and factors in both countries
2. Factors of production are perfectly mobile within each country only
3. Factors supplies are fixed in each country
4. Factors of production are of equal quality in both the countries
5. Factors endowments vary from country to another country
6. Factors of production have full employment in both the countries
7. Business between two countries is free from all barriers
8. There is no cost of transportation
9. Production in both the countries is subject to law of returns
10. Factor intensity varies between goods

The Leontief Paradox, 1953

 Disputes Heckscher-Olin in some instances.
 Factor endowments can be impacted by government policy - minimum wage.
 US tends to export labour-intensive products, but is regarded as a capital intensive
country
Product Life-Cycle Theory (Raymond Vernon, 1966)

 As products mature, both location of sales and optimal production changes.

 Affects the direction and flow of imports and exports.
 Globalization and integration of the economy makes this theory less valid.
The New Trade Theory
 Began to be recognized in the 1970s.
 Deals with the returns on specialization where substantial economies of scale are
present.
 Specialization increases output, ability to enhance economies of scale increase.
Porter’s Diamond (Harvard Business School, 1990)
  The Competitive Advantage of Nations.

 Looked at 100 industries in 10 nations.
 Thought existing theories didn’t go far enough.

Implications for Business

 Location implications: makes sense to disperse production activities to countries
where they can be performed most efficiently.
 First-mover implications: It pays to invest substantial financial resources in building a
first-mover, or early-mover, advantage.
 Policy implications: promoting free trade is generally in the best interests of the home
country, although not always in the best interests of the firm. Even though, many
firms promote open markets.

Globalisation and Multi National Business

Globalisation Process
1. Domestic company exports to foreign countries through the dealers and distributors.
(Indirect exporting)
2. Domestic company directly exports
3. Domestic company becomes a multi national company by establishing production and
marketing.
4. Being full-fledged company like R& D, HR etc.
5. Becomes the true foreign company by satisfying the needs.
Ways of Globalisation
Globalisation may take place in four ways. They are
1. Globalisation of Markets
Globalisation of markets refers to the process of integrating and merging of the
distinct world markets into one single market.
Features of Globalisation of Markets
 8. The Size of the company needs not to be large to create a global market.
9. The distinctions of national markets are still prevailing even after the
globalisation
10. Most of the foreign markets are for non – consumer products.
11. The global business firms compete with each other frequently in different
national markets including home market. E.g. Pepsi and Coke
Reasons for Globalisation of markets
1. Large-scale industrialisation enabled mass production. The companies found
domestic market is very small. Thus opted for global markets.
2. To diversify risk
3. To increase profits
4. Adverse business environment in the home country
5. The failure of domestic companies
2. Globalisation of Production
The facilities for production may be cheap in the host country than home country.
(E.g. China is the international workshop due to cheap labour)
Reasons for Globalisation of Production
1. Import restrictions
2. Availability of quality raw material
3. Cheap labour
4. Liberal labour laws
5. Facility of transportation and cost
6. Facility of exporting the neighbouring countries
3. Globalisation of Investments
Globalisation of investments refers to investment of capital in any part of the
world. It also known as ‘Foreign Direct Investment (FDI)’. FDI occurs when a firm
directly in new facilities to produce or market in a foreign country.
34 countries have 85 changes in 1991 regarding investment. Government of
India is allowing 51% of FDI in India.
Reasons for Globalisation of Investment
1. Rapid increase in volume of trade
 2. Many countries provided more congenial environment for investment
3. Significant amount of FDI is directed to the developing countries in Asia and
Easter Europe
4. Small and medium size companies have started investing in various countries
5. Limitations of exporting and licensing for the domestic companies to invest in
foreign countries
6. In order to have control over MNC in marketing and manufacturing they invest
7. In order to avoid restrictions on exports
Modes of Globalisation of Investment
1. Acquisition
2. Joint venture
3. Long term loans
4. Issuing equity shares and debentures
5. GDRs
4. Globalisation of Technology
Companies with the latest technology produce goods with high quality at low cost.
Globalisation of technology can be done in the following ways:
1. Technological collaboration
2. Licensing and royalty
3. Joint ventures and mergers

Stages of Internationalisation
1. Domestic company
The company whose market and manufacturing activities are limited to the national
boundary
2. International company
The company will open a branch in foreign country. It will follow the strategies of
domestic company.
3. Multinational company
Multi domestic companies responding to the specific needs of different countries
4. Global company
 These companies will do production in home country and marketing in more
countries or production in several countries and marketing in one country.
5. Transnational company
These companies will do production in several countries and marketing in more
countries.
What is driving globalisation?
Market drivers;
Cost drivers,
Government drivers,
Competitive drivers and
other drivers
Market drivers Cost drivers
Per capita income converging among Continuing push for economies of scale
industrialised nations Accelerating technological innovation
Convergence of lifestyles and tastes Advances in transportation
Organisations beginning to behave as global Emergence of newly industrialised countries
customers with productive capability and low labour
Increasing travel creating global consumers costs.
Growth of global and regional channels Increasing cost of product development
Establishment of world brands relative to market life

Push to develop global advertising

Government drivers Competitive drivers
Reduction of tariff barriers Continuing increases in the level of world
Reduction of non-tariff barriers trade

Creation of blocs Increased ownership of corporations by

foreign acquirors
Decline in role of governments as producers
and customers Rise of new competitors intent upon
becoming global competitors
Privatisation in previously state-dominated
economies Growth of global networks making countries
interdependent in particular industries
Shift to open market economies from closed
communist systems in eastern Europe More companies becoming globally centred
rather than nationally centred
Increasing participation of China and India
in the global economy Increased formation of global strategic
alliances
Other drivers Globalisation of financial markets
Revolution in information and communication Improvements in business travel

Globalization - Pro
s
  Lower prices for goods and services.
 Economic growth stimulation.
 Increase in consumer income.
 Creates jobs.
 Countries specialize in production of goods and services that are produced most
efficiently.
Globalization – Cons
 Destroys manufacturing jobs in wealthy, advanced countries.
 Wage rates of unskilled workers in advanced countries declines.
 Companies move to countries with fewer labor and environment regulations.
 Loss of sovereignty.
Differences between International and Domestic Businesses
 Countries are different.
 The ranges of problems are wider and more complex.
 The intervention of governments that may limit international trade and investment.
 The need to convert into different currencies.
Unit II
International Business Environment
Internal Environment
1. Organisational structure
2. Production
3. Finance
4. Marketing
5. HRM & HRD
6. R&D
External Micro Environment
1. Share holders
2. Creditors
3. Bankers and financial institutions
4. Competitors
5. Suppliers of Raw material
6. Market intermediaries
7. Customers
External Macro Environment
1. Socio cultural environment
This part deals with attitude of the people to work, wealth, family, marriage,
religion, education, ethics, human relations, social responsibilities etc.
Culture is derived mostly from the climatic conditions of the geographical
regime and economic conditions of the country.
The features of culture are
1. Culture is based on perspective
2. It is socially shared
3. Culture facilitates communication
4. Culture is learned not inherited genetically
Social environment
1. Religion
2. Family
2. Technological environment
Influence of Technology
1. The way we cook (Electric rice cooker)
2. The way we drink water (Filtered mineral water)
3. Communication (Telephone, Fax, Email, Mobiles etc)
4. Trading (e- commerce)
5. Learning (e – learning)
6. Paying tax, getting information (e – governance)
Ranking of Asian countries based on technology
1. Singapore
2. Japan
3. South Korea
4. Malaysia & Taiwan
5. Hong Kong
6. Indonesia
7. India
Technology transfer
1. Establishing the subsidiaries in the developing countries
2. Establishing joint ventures
3. Acquisition
4. Mergers
5. Technological transfer for royalty
Procedure for scanning technological environment
1. The level of technology of the industry in the home country
2. The level of technology of the industry in the host country
3. Compatibility of the home country technology in the host country
4. If the technology is not compatible then select the appropriate technology for the
host country
5. Study the technology with culture, taste, Government regulations etc.
6. Study the mode of technology transfer
7. Study the impact on technology environment
3. Economic environment
International business is mostly and directly influenced by the economic environment
of various countries.
Economic system
1. Capitalism
2. Socialism
3. Mixed Economy
Based on the economic conditions the countries are classified as
1. Low income countries (Per capita Income Less than US $ 400)
Features
1. Limited industrialisation.
2. Excessive dependency of population on agriculture
3. High birth rates
4. Low literacy rates
5. Heavy reliance on foreign aid
6. Political instability and unrest
7. Excessive unemployment
8. Technological backwardness
9. Under utilisation of natural resources
10. Excessive dependency on imports
2. Lower middle income countries (Per capita Income US $ 400 -2000)
Features
1. Early stages of industrialisation
2. Expansion of consumer products market
3. Availability of cheap labour and motivated human resources
4. Domestic markets are dominated by the products like Clothing, batteries, tires
5. Location of production of standardised nature products like clothing for
exports
6. Pose threat to rest of the world in labour intensive products due to cheap
labour
3. Upper middle income countries (Per capita Income US $ 2000 – 12000)
 Features
1. Less dependency on agriculture
2. Occupational mobility of the people from agriculture to industry
3. People migrate from rural to urban areas which results in increased
urbanisation
4. Increase in literacy and wage rates
5. Formidable competition
6. High exports and rapid economic development
4. High income countries (Per capita Income More than US $ 12000)
Features
1. Oil rich countries are excluded from this category
2. Countries developed through industrial growth
3. Development of information and service sectors
4. Development of technology
5. Domination of professionals and scientists
6. Emphasis on future plans
7. The countries face the problems like pollution, excessive urbanisation,
increase in aged population etc.
4. Political environment
Types of Political system
1. Parliamentary system
- People are allowed to take part in the decision making process
2. Absolutist Government
- Ruling the Government like a dictator
Government may also be classified as
1. Two Party system – USA & UK
2. Multiparty System - India
3. Single party System - Egypt
4. One party dominated System - India
Political risk
 1. Confiscation: Process of nationalisation of the property with out compensation
e.g. China 1949.
2. Expropriation: Process of nationalisation with compensation e.g. India 1969
3. Nationalisation: 100 % role by the Government and no role for private e.g. Burma
and Poland
4. Domestication: No foreign ownership and only local players
5. General Instability Risk: Due to social, political and religious unrest e.g.
Mahendra Choudry Vs George Speight in Fiji Island
6. Operational Risk: Imposition of control over foreign business. E.g. Enron deal in
1992
Indicators of Political Instability
1. Social unrest
2. Attitudes of nations
3. Policies of the host Government
How to minimise political risk?
1. Stimulation of the local economy
2. Employment of local nationals
3. Sharing ownership
4. Being civic minded (Social responsibility)
5. Political neutrality
6. Behind the scenes lobby.

Democracy

 Representative Democracy
Freedoms:
•Expression, opinion, organization
•Media
•Regular elections with universal suffrage
•Limited terms for elected representatives
•Fair and independent court system
•Non political bureaucracy, police force and armed service
•Relatively free access to state information
Trade Policy and Politics
 Protecting jobs and industries:
 Emerging industries.
 Increasing exports.
 National security.
 Retaliation.
 International product domination:
 New trade theory and subsidies.

Instruments of Trade Policy

Tariffs
Tariffs - oldest form of trade policy
-Specific
-ad valorem
Good for Government
Good for producers
But reduces efficiency
Bad for consumers
Subsidies
It is a payment to a domestic producer.
 Cash grants
 Low-interest loans
 Tax breaks
 Government equity participation in the company
•Airbus
Subsidy revenues generated from taxes.
Import Quotas and Voluntary Export Restraints
Import Quota:
Restriction on the quantity of some good imported into a country.
Voluntary Export Restraint (VER):

Quota on trade imposed by exporting country, typically at the request of the importing
country.
Local Content Requirements
 Requires some specific fraction of a good to be produced domestically.
o Percent of component parts.
o Percent of the value of the good.
 Initially used by developing countries to help shift from assembly to production of
goods.
 Developed countries (US) beginning to implement.
 For component part manufacturer, LCR acts the same as an import quota.
 Benefits producers, not consumers.
Antidumping Policies

Defined variously as:

o Selling goods in a foreign market below production costs.
o Selling goods in a foreign market below fair market value.
Result of:
o Unloading excess production.
o Predatory behavior.
o Remedy: seek imposition of tariffs.
Administrative Policies
 Bureaucratic rules designed to make it difficult for imports to enter a country.
 Japanese ‘masters’ in imposing rules.
o Tulip bulbs.
o Federal Express
Political Arguments for Intervention
1. Protecting jobs and industries
-
VERs.
2. National security.
-
Defense industries - semiconductors.
3. Retaliation.
4.
Protecting consumers.
5.
Furthering foreign policy objectives.
-
Helms-Burton Act.
6. Protecting human rights.
-MFN.
Economic Arguments for Intervention
Infant industry

Oldest argument - Alexander Hamilton, 1792.

Protected under the WTO.
Only good if it makes the industry efficient. Brazil auto-makers - 10th largest - wilted
when protection eliminated.
Requires government financial assistance.
If a good investment, global capital markets would invest.
Strategic trade policy

Government helps raise national income if first-mover advantage successful.

Government intervention may help domestic firms overcome first-mover advantage
of foreign firms.
Development of the World Trading System

• Intellectual arguments for free trade:

o Adam Smith and David Ricardo.
• Free trade as government policy:
o Britain’s (1846) repeal of the Corn Laws.
• Britain continued free trade policy.
o Fear of trade war
World War I to World War II (1918 – 1939)

• Great Depression
-US stock market collapse
-Smoot-Hawley (1930)
•US had positive trade balance with world
•Foreign response was to impose own barriers

•US exports tumbled

General Agreement on Tariffs and Trade (GATT)

• WWII allies want international organization in trade arena similar to UN in political
arena.
• GATT proposed by US in 1947 as step toward ITO.
o 1948: Havana Conference.

o Failed charter for the International Trade Organization.

• GATT
o 23 original members
o Now 149 members including the Saudi Arabia
• Multilateral agreement: objective is to liberalize trade by eliminating tariffs,
subsidies, import quotas, etc.
• Used ‘rounds’ to gradually reduce trade barriers.
• Generalized System of Preferences
• MFN status
• Products of LDCs are given duty free access to IDCs.
Objectives of GATT
1. To raise the standard of living of the people in the world
2. To ensure full employment and steady income
3. To develop the use of resources of the world
4. To expand production and international trade
Several rounds of negotiations were held since the inception of the GATT.
The significant round is the Uruguay round of 1986.
Uruguay Round and Dunkel Proposal
 Uruguay round of multi national trade negotiations was initiated in September 1993.
 Mr. Arthur Dunkel, the Director General of GATT submitted a proposal on 20th
December 1991 popularly known as Dunkel Proposal which envisages many areas
like trade related investment measures (TRIMs), Trade related intellectual property
rights (TRIPs).
 An arrangement regarding multilateral trading system was finally signed in
Marrakesh, Morocco on 15th April 1994.
Establishment of WTO
In order to implement the final of Uruguay round agreement of GATT the WTO was
established on 1st January 1995. India is one of the founder members of WTO (Out of 104).
The WTO is an organisation GATT is a legal agreement. The WTO was designed to play the
role of ‘Watch Dog’.
Objectives of WTO
1. To raise the standard of living of the people
2. To introduce sustainable development
3. To ensure better growth of developing and least developed countries]
Functions of WTO
1. To administer and implement multilateral trade agreements
2. To act as a forum for multilateral trade negotiations
3. To resolve trade disputes
4. To examine national trade policies
5. To cooperate with other international organisations involved in the global economic
policy making
 6. To maintain trade related database.
7. To act a watchdog of international trade.
8. To act as a management consultant for world trade
9. To provide technical assistance and training for developing countries.
10. To administer trade policy review mechanism
Principles of WTO
1. Transparency
2. MFN treatment (Most Favoured Nation)
3. National treatment
- imported products should be treated on par with the domestic products
4. Free trade principle
5. Dismantling trade barriers (MFAs etc.)
6. Rule based trading system
7. Treatment for LDCs (Least Developed Countries)
8. Competition
9. Environment protection
GATT Vs WTO
S.NO GATT WTO
1 A set of rules and multilateral A permanent institution
agreement
2 Was designed with an attempt to It is established to serve its own purpose
establish international trade
organisation
3 It was applied on provisional basis Its activities are full and permanent
4 Its rules are applicable to trade in Its rules are applicable to trade in merchandise
merchandise goods and trade in related aspects of intellectual
property
5 GATT was originally a multilateral Its agreements are almost multilateral
instrument
6 Its dispute settlement system was Its dispute settlement system is fast and
not faster and automatic automatic
Impact of GATT & WTO
• Currently there are 149 members.
• Represents 90% of world trade.
• 9 of 10 disputes satisfactorily settled.
• Tariff reduction from 40% to 5%.
• Trade volume of manufactured goods has increased 20 times.
Impact of GATT & WTO to India
Benefits to India
1. The GATT secretariat estimated that largest increase in the level in goods in will be
in the areas of clothing (60%), agriculture, foresting and fishery (20%) and processed
foods and beverages (19%). India has competitive advantage in these fields.
2. India’s textile and clothing exports will increase due to the removal of Multi Fiber
Arrangements (MFA) by 2005.
3. Greater security in international trade
4. Market access to a number of advanced countries
5. The reduction of agricultural subsidies will increase agricultural exports.
Disadvantages to India
1. TRIPs (Trade Related Intellectual Property Rights) is against Indian Patent Act 1970.
Only process patents can be granted under this. TRIPs provides also product patents.
The duration of patents is 20 years under TRIPs.
2. Plant breeding and seed production will be affected severely
3. It will hike prices in Pharmaceuticals sector.
4. Patents has been extended to large area of micro organizations
5. Application of TRIM will affect the growth of local products.
6. Service sector like insurance, banking, telecommunications, transports are backward
in India compared to the developed countries. Therefore inclusion of trade in services
is detrimental to interest of India.
GATS (General Agreements on Trade in Services)
It is a known fact that trade in services is the rapidly growing field in the global
scenario. According to WTO, in the year 2001, services constituted about 60% of the world’s
output (in GDP). The trade in services has particularly increased in developing countries. The
total trade in services occupied more than 50% in the exports of the developing countries.
The rapid growth and change has prompted the members of the WTO to bring in changes in
rules and regulations on trade in services and GATS was introduced on 1st January 1995. This
is one of the important agreements of WTO which contains two main parts: the frame work
of agreement containing rules and regulations and the schedule of Nations who gave the
commitment on access to their domestic markets by foreign suppliers. Now WTO has 148
member countries.
Each WTO member lists in its national schedule those services, which it wished to
guarantee access to foreign suppliers. All member countries are considered as MFNs (Most
Favoured Nations) i.e, all commitments apply on non – discriminatory basis to all member
countries.
Coverage of GATS:

The GATS covers all internationally traded services with two exceptions: services
provided by the Government and services in Air transport sector. The GATS defines that
trade in services can be made in four ways, they are:
1. Services supplied from one country to another (e.g. International telephone calls)
2. Consumers from one country making use of another country (e.g. Tourism)
3. A company from one country setting up subsidiaries or branch to provide services in
another country (e.g. Banking)
4. Individual travelling from their own country to supply services in other country (e.g.
Actress or construction worker)
Benefits of Services Liberalisation:
1. An efficient services infrastructure provides a base for economic success. Services
such as telecommunications, banking, insurance and transport supply strategically
important inputs for all sectors.
2. People can have access to world-class services.
3. Trade liberalisation in services leads to low cost. The best e.g. telecommunications.
4. Faster innovation takes place with liberalised services e.g. ATM, Phone banking,
Internet banking etc.
5. Greater transparency and predictability benefit is there for customers. This makes
possible for the people to make their investments in service sector.
 6. More FDIs are attracted in the countries, which will bring the new skills and
technologies into the country. The domestic employees can learn the new skills from
the MNCs.
Service sector in India:
In the line with the global trend, the services sector in India is growing rapidly and
the contribution of services in India’s GDP increased to 54.2% in 2000-01 from 51.5% in
1998-99. The total trade in services from India is accounting to 1.3% in the total world trade
in services. India exhibits a strong revealed comparative advantage in services related goods.
The importance in service sectors in India are telecommunications, IT, ITES, BPO and
Banking and financial services. India has permitted 100% FDI in IT and ITES and more than
51% in telecommunications.
Trade Related Investment Measures (TRIMs)
It refers to certain condition or restrictions imposed by a Government in respect of
foreign investment in the country. The TRIM text provides that the foreign capital would not
be discriminated by the member Governments.
Features of TRIMs
1. Abolition of restriction imposed on foreign capital
2. Offering equal rights to the foreign investor on par with the domestic investor
3. No restrictions on any area of investment
4. No limitation or ceiling on the quantum of foreign investment
5. Granting of permission of without restrictions to import raw material and other
components
6. No force on the foreign investors to use the total products and or materials
7. Export of the part of the final product will not be mandatory
8. Restriction on repatriation of dividend interest and royalty will be removed
9. Phased manufacturing programming will be introduced to increase the domestic
content of manufacturer
Trade Related Intellectual Property Rights (TRIPs)
Intellectual property rights may be defined as “Information with commercial value”.
IPR have been characterised as a composite of “ideas and creative expression”. Plus “ the
public willingness to bestow the status of property. It include
 a. Protection of patent
b. Copyright
c. Industrial design
d. Geographical indication
e. Trademarks
f. Trade secrets
g. Layout design (topographies of integral circuits)
Regional Trade Blocks & Intra – Regional Trade
The growth of intra – regional trade is an important trend in international trade. Intra-
regional trade has been fostered by the economic integration schemes of trading blocks. The
share of intra – regional trade in the total world trade increased in the 1980 in Western
Europe, North America and Asia. In 1990, intra – regional trade in goods accounted for 61 %
of the total trade in goods of the European community
The countries which had something in common with respect to trade started joining
together and formed the economic unions for their mutual benefit. Such economic unions are
called Trade Blocks which will get additional advantageous terms especially for the import
of raw material from the developing countries.
Forms of Economic Integration
Economic integration is a general term which covers several kinds of agreements by
which two or more countries agree to draw their economies closer either in part or total. They
maintain the cohesiveness among or between the countries through tariffs. They discriminate
against the other countries which are not parties to the agreement through tariffs, they also
discriminate against the goods produced by other countries.
Forms:
1. Free trade area
A free trade area is a grouping of countries to bring about free trade between them.
The free trade area abolishes all restrictions on trade among the members but each
member is left free to determine its own commercial policy with non-members
2. Customs Union
 The customs union is a more advanced level of economic integration than the free
trade area. It not only eliminates all restriction on trade among members but also
adopts a uniform commercial policy against non - members
3. Common Market
The common market is a step ahead of the customs union. A common market allows
free movement of a labour and capital within the common market, besides having the
two characteristics of the customs union, namely, free trade among members and a
uniform tariff policy towards outsiders.
4. Economic Union
A still more advanced level of integration is the economic union. Apart from
satisfying the conditions of the common market, the economic union achieves some
degree of harmonization of economic policies such as monetary policy, fiscal policy
etc.
Advantages of Integration
1. It includes more trade among member countries
2. It help in sourcing of market from one country to another country
3. It eliminates or reduces the tariffs and a barrier reduces the import duties and thereby
reduces the prices of the products or services
4. Consumer get the advantage of having the product at less prices
5. Rapid technological innovation and development and consequent large size
operations demand heavy investment
6. Economic integration enables the group of countries to pool required financial
resources for the large – scale operations
7. It enables to reduce monopoly in the production of certain goods and services and
increase competition.
The main trade blocks are
1. European Economic Community (EEC)
 It is a powerful block comprising the developed countries of Western Europe
 It is also known as ECM (European Common Market)
 It was established by a treaty of Rome in 1957
 It came into operation in 1959
  The founder members are France, West Germany, Italy, Belgium, The
Netherlands and Luxemburg Greece and Turkey are associate members.
 In 1973 UK joined the community.
Features & Functions of EEE
 To coordinate the efforts of all member countries
 Separate tariff schedules for import from the member countries were
abandoned
 The member countries enjoy free movement of all goods and services
 Sometimes factors of production like labour and capital have free
movement
 The problems faced by the member countries related to balance of
payments were settled
 Though it is a political union it has worked as an economic union
2. European Free Trade Association (EFTA)
 It was established in 1960 with the member countries like Austria, Denmark,
Norway, Iceland, Portugal, Sweden and Switzerland. Finland is an associate
member
 The main aim of EFTA is to promote trade among the member countries in a
o Free and fair atmosphere
o To achieve full employment
o To have optimum use of resources
o To have equitable distribution of raw materials
 The protective import duties and other barriers were removed
3. Council for Mutual Economic Assistance (COMECON)
It was started by USSR as against EEC with the member countries Russia,
Rumania, East Germany, Poland, Hungary, Yugoslavia, Bulgaria and
Czechoslovakia.
Aims and objectives of COMECON
 To attain economic integration among member countries
 To have the coordinative five year plan
  To pool the resources with regard to technical skill and raw materials supply.
 Attempts were made to have integration raw materials processing, mining and
energy.
 COM-ECON discourages exports to capitalists countries in Western Europe
and North America
4. Association of South East Asian Nations (ASEAN)
 The member countries are five South East Asian Nations, namely Malaysia,
Thailand, Singapore, Indonesia and Philippines
 It is an economic union
 The main aim of the union is to get concessions and favourable terms from the
other countries for their exports particularly from developed ones
 Like other unions it is also aiming at better understanding.
5. Latin American Free Trade Association (LAFTA)
 It was established in the year 1960 with the member countries like Uruguay,
Argentina, Brazil, Mexico, Chile, Venezuela
 The purpose was to create South American common market.
6. Andean Group
 It is the union framed by a smaller group of countries
 The member countries are Bolivia, Chile, Columbia, Equator, Peru and
Venezuela. Chile has come out later.
 Unlike the other unions the Andean Group has successfully eliminated the
restriction on trade and achieved the free trade among the member countries
7. North American Free Trade Agreement
 Became law: January 1,1994
 Over 15 year period:
i. tariffs reduced (99% of goods traded)
ii. NTBs reduced
iii. investment opportunities increased
 Protects intellectual property
 Applies national environmental standards
  Special treatment for many industries

8. ASEAN Free Trade Association (AFTA)

The ASEAN countries are vigilant of the developments in the international
environment like the formation of NAFTA, SAARC and the introduction of Euro. In
the view of these developments, the Asian countries formed the AFTA in September
1994
Objectives
 To encourage inflow of foreign investment into this region
 To establish free trade area in the member countries
 To reduce tariff of the products produce in ASEAN counties.
9. South Asian Association for Regional Cooperation (SAARC)
The successful performance of EEC, NAFTA and other trade blocks in the economic
development of the member countries and in the process of improving employment
opportunities, incomes and living standard of people of the region gave impetus for the
formation of the South Asian Association for Regional Cooperation (SAARC). India,
Bangladesh, Sri Lanka, Bhutan, Pakistan and Maldives adopted a declaration on SAARC
in August 1983.
Objectives
 To improve the quality of life and welfare of the people of the member
countries
 To develop the region economically, socially and culturally
 To provide opportunity to the people of the region to line in dignity and to
exploit the potentialities
 To enhance the self-reliance of the member countries
 To provide conducive climate for creating and enhancing mutual trust and
understanding and applications of one another’s issue
 To enhance the cooperation with other developing economies
 To extend cooperation with other trade blocks
Unit III
Multinational Enterprise (MNE)
MNE is an organisation doing business in more than one country.
Factors considered for growth of MNE
1. Expansion of market territory
2. Market superiorities
 Up to date information
 Market reputation
 Less difficulties in marketing
 Effective advertising
3. Financial superiorities
4. Technological superiorities
5. Product innovation
Advantages of MNE to Host country
 Investment level, employment level and income level will increase
 Level of industrial and economic development
 Level of technology
 Level of management techniques
 More competition
 R&D
 Foreign culture
 Reduction in imports and increase in exports
 Foreign exchange
Advantages of MNE to Home country
 Marketing of home country products in the entire world
 Employment opportunities both home and abroad e.g. Hyundai
 Industry activity fully accelerated
 Knowledge of foreign culture
 Favourable balance of payments
Disadvantages of MNE to Host country
 Functioning of host country Government will be affected I It won’t operate with in
national boundary)
 MNE will kill domestic products (e.g. Parle products taken over by coke)
 The national resources will be exploited quickly
 Payment of dividends and royalty to MNEs
o Economic structure will be affected It will invest in high profit sectors only
 Political interference
 Technology transfer and implications
o Not relevant to host country
Disadvantages of MNE to Home country
 MNEs transfer capital from home country to other countries
 MNEs neglect the industrial and economic development of home country
 MNEs may bring foreign culture which may be detrimental to the culture of the
country
Organisation Design and Structure of MNEs
Organisations are usually framed to satisfy objectives that can be collectively met
- Argyris
Vertical Differentiation

 Concerned with where decisions are made.

o Where is decision-making power concentrated?
 Two Approaches
o Centralization
o Decentralization

Centralization -Pros:
 Facilitate coordination.
 Consistency of decisions.
  Easier to make changes.
 Avoids duplication.

Centralization -Cons:
 Overburdened top management.
 Motivational research favors decentralization.
 Decentralization permits flexibility.
 Decentralization lets decisions be made closer to the information source.
 Decentralization can increase control.
Strategy and Centralization

 Global strategy - centralization.

 Multi-domestic firms - decentralization.
 International firms - centralize for core competencies (R&D) and decentralize for
operating decisions.
 Transnational - use both.

Steps in designing organisation structure

Analysis of present and future circumstances and environmental factors
- External environment
- Over all aims and purpose of the enterprise
- Objectives (Specific aim)
- Activities (Functions and how to achieve the objectives)
- Decisions
- Relationship
- Organisation structure and climate
- Management style (leadership)
- HR
Approaches to Organisation structure in MNE
1. Product Organisation Structure
CMD / CEO

Head Quarters level managers

Product A Product B Product C Product D Product E Product F

Advantages
a. More appropriate than functional organisation
b. Coordination is good
c. No involvement of top management and no delay
d. Responsibility and accountability are clearly fixed
Disadvantages
a. Unnecessary duplication
b. No specialisation (decentralised)
c. Some decisions like pay, promotion, product quality may be inconsistent (no
uniformity)
d. Inter developmental conflicts regarding sharing of resources
 2. Geographical Organisation structure
CMD / CEO

Head Quarters level managers

Africa Asia Europe North America South America Australia

Production Sales
Advantages
a. Products and services are better designed based on culture and climate
b. A geographical structure allows the firm to respond to the technical needs of different
areas
c. Opportunity to serve the customers in a better way
d. To adopt varying legal systems
e. To pinpoint the responsibility for profit and loss
Disadvantages
a. More functional personnel are required
b. Duplication of equipments and facilities
c. Coordination of company wide activities would be difficult
d. No uniformity
e. Another layer of geographic units
3. Decentralised Business Unit Structure
CMD / CEO

Chief Manager X Chief Manager Y Chief Manger Z

Product A Product B Product C Product D Product E Product F

FM MM PM HRM R&D SM

Advantages
a. Diversification generally managed by decentralisation
b. Each unit is managed by entrepreneurially oriented General Manager
c. Each business unit operates as stand alone profit centre
Disadvantages
a. Lack of coordination
b. No control
4. Strategic Business Unit Structure
CMD

Head Quarters level functional managers

Group Manager SBU I Group Manager SBU II Group Manger SBU III

Strategically related
Business Unit
A strategic business unit is a grouping of business subsidiaries based on some
strategic elements common to each. The common elements may be overlapping set of
competitors, strategic mission etc.
Advantages
a. Reduction of corporate head quarters span of control
b. Better coordination
c. Strategic management at all levels
d. Helps to allocate corporate resources
e. Business units are organised based on strategically relevant method.
Disadvantages
a. More distance between head quarters and the division
b. Conflicts between strategic business unit managers
c. Corporate portfolio analysis is complicated in this structure
Strategies in International Business
Profiting from Global Expansion

 International firms can:

 Earn a greater return from distinctive skills or core competencies.
 Realize location economies by dispersing value creation activities to locations where
they can be performed most efficiently.
 Realize greater experience curve economies, which reduce the cost of value creation.
When making location decisions:
 Consider trade barriers and transportation costs.
 Assess political and economic risks

Experience Curve Economies

 Learning Effects:
o Labour productivity increases over time as individuals learn the most
efficient ways to perform particular tasks.
 Economies of Scale:
o Reductions in unit cost achieved by producing a large volume of a product.
 Strategic Significance:
o Moving down the experience curve allows a firm to reduce its cost of creating
value.

The Experience Curve

Unit
Costs B

A
 Accumulated Output

Note: Moving down the curve reduces the cost of creating value

Firms Face Two Conflicting Concepts (Pressures) Overseas

 Reduce costs.
 Be responsive to local needs.

Cost Reduction
 Desire to reduce costs by

-
 Mass production
- Product standardization.
- Optimal location production.
 Hard to do with commodity-type products.

o Products serving universal needs.

o Also hard where competition is in low cost producing location.
 Finally, int’l competition creates price pressures.
Local Responsiveness
 Different consumer tastes and preferences.
 Different infrastructure and practice.
 Differences in distribution channels.
 Government demands.
Strategic Choice - Four basic strategies:
I. International strategy.
II. Multidomestic strategy.
III. Global strategy.
 IV. Transnational strategy.
1. International strategy.
 Go where locals don’t have your skills.
 Little adaptation. Products developed at home (centralization).
 Manufacturing and marketing in each location.
 Makes sense where low skills, competition, and costs exist.
2. Multi-domestic Strategy
 Maximize local responsiveness.
o Customize the product and marketing strategy to national demands.
 Skill and product transfer.
 Transfer all value-creation activities, no experience curve rewards.
 Good for high local responsiveness and low cost reduction pressures.
3. Global Strategy

 Best use of the experience curve and location economies.

 This is the low cost strategy.
 Utilize product standardization.
 Not good where local responsiveness demand is high.

4. Transnational Strategy

 Christopher Bartlett and Sumantra Ghoshal

 Core competencies can develop in any of the firm’s worldwide operations.
 Flow of skills and product offerings occurs throughout the firm - not only from home
firm to foreign subsidiary (global learning).
 Makes sense where there is pressure for both cost reduction and local
responsiveness.
Advantages and disadvantages of Four Strategies
Strategy Advantage Disadvantage
Global Exploit experience curve effects Lack of local responsiveness
International Exploit location economies Lack of local responsiveness
Transfer distinctive In ability to realize location
Competencies to economies
Foreign Markets Failure to exploit experience curve
effects
Multidomestic Customise product offerings and Inability to realise location economies
Marketing in accordance with Failure to exploit experience curve
local responsiveness effects
Failure to distinctive competencies to
the foreign market
Transnational Exploit experience curve effects Difficult to implement due to
Exploit location economies organisational problems
Customise product offerings and
Marketing in accordance with
local responsiveness
Reap benefits of global learning

Market Entry Strategies

1. Exporting
It means the sale abroad of an item produced, stored or proposed in the supplying
firm’s home country. It is a convenient method to increase the sales. Passive exporting occurs
when a firm receives canvassed them. Active exporting controversy results from a strategic
decision to establish proper systems for organising the export functions and for procuring
foreign sales.
Types of exports
a. Indirect exports
b. Direct exports
c. Intra – corporate transfers e.g. HLL and Unilever of UK
Advantages of Exporting
1. Need only limited finance
2. Less risks
3. Motivation for exporting
2. Licensing
 In this mode of entry the domestic manufacturer leases the right to use his intellectual
property, copyrights, brand name to a manufacturer in a foreign country for a fee. Here the
manufacturer in the domestic country is called licensor and the manufacturer in the foreign
country is called licensee. The cost of entering market through this mode is less costly. The
domestic company can choose any international location and enjoy the advantages without
incurring any obligations of ownership, managerial, investment etc.
Advantages
1. Low investment on the part of the licensor
2. Low financial risk to the licensor
3. Licensor can investigate the foreign market without many efforts on his part.
4. Licensee gets the benefits with less investment on research and development
5. Licensee escapes himself from the risk of product failure
Disadvantages
1. It reduces market opportunities for both
2. Both the parties have to maintain the product quality and promote the product. Therefore
one party can affect the other party through their improper acts
3. Chance for misunderstanding between parties
4. Chance for leakages of the trade secrets of the licensor
5. Licensee may develop his reputation
6. Licensee may sell the product outside the agreed territory and after the expiry of the
contract
3. Franchising
Under franchising an independent organisation called the franchisee operates the
business under the name of the franchiser under the agreement and the franchisee pays the
fee to the franchiser for franchise. The franchiser provides following services to the
franchisee
a. Trade marks
b. Operating system
c. Product reputations
d. Continuous support system like advertising, employee training, quality assurance etc.
Advantages
1. Low investment and low risk
2. Franchiser can get information regarding the market culture, customs and environment of
the host country.
3. Franchiser learns more from the experience of franchisees
4. Franchisee gets benefits of R& D with low cost
5. Franchisee escapes from the risk of product failure
Disadvantages
1. It may be more complicating than domestic franchising
2. It is difficult to control the international franchisee
3. It reduce the market opportunities for both
4. Both the parties have to maintain the product quality and promote the product. Therefore
one party can affect the other party through their improper acts
5. There is a problem of leakage of trade secrets

4. Contract Manufacturing
Some companies outsource the part of or entire production and concentrate on
marketing operations. This practice is called the contract manufacturing or outsourcing.
Advantages
1. It can focus on the part of the value chain where it has
distinctive competence
2. It reduces the cost of production as the host country’s
companies with their
relative cost advantages produce at low cost
3. Small and medium industrial units in the host country can also
develop as
most of the production activities take in these units
4. The international company gets the locational advantages
generated by the
Host country’s production
Disadvantages
1. Host countries may take up the marketing also, hindering the interest of the
international company
2. Host country’s companies may not strictly adhere to the production design,
quality standard etc. These factors results in quality problems, design
problems etc.
3. The poor working conditions in the country may affect the image.
5. Management contract
The companies with low level technology and managerial expertise may seek the
assistance of a foreign company. Then the foreign company may agree to provide technical
assistance and managerial expertise. This agreement between these two companies is called
management contract. For the assistance and expertise provided by the foreign company it
may charge a fee.
Advantages
1. Foreign company earns additional income without any additional investment,
risks etc.
2. This agreement and additional income allows the company to enhance its
image among the investors and mobilise funds for expansion
3. It helps the companies to enter other business areas in the host country.
4. The companies act as dealer for the business of the host country business in
the home country
Disadvantages
1. Sometimes the companies allow the companies in the host country even to
use their trademarks and brand name. The host country companies spoil
the brand name of the home country companies
2. The host country companies may leak the secrets of technology
6. Turnkey project
A turnkey project is a contract under which a firm agrees to fully design, construct
and equip a manufacturing/ business /services facility and turn the project over to the
purchase when it is ready for operation for a remuneration like a fixed price e.g. Nuclear
power generation projects.
7. Green field strategy
It is starting of a company from the scratch in he foreign market. It involves market
survey, selection of location, make or buy decision, eructing of the organisation, recruitment
of human resource and starts the operations and marketing activities.
Advantages
1. The company selects the best location from all view points
2. The company can avail the latest models of the building, machinery
and
equipment technology
3. The company can also have its own policies and styles of HRM
4. It can avoid the cultural shock
Disadvantages
1. The longer gestation period as the successful implementation takes time and patience
2. Some companies may not get the land in the location of its choice
3. The company has to follow the rules and regulations imposed by the host country’s
Government
8. Mergers and acquisitions
A domestic company selects a foreign company and merge itself with the foreign
company in order to enter international business. Alternatively the domestic company may
purchase the foreign company and acquires the ownership and control it. It provides
immediate manufacturing facilities and marketing network.
Advantages
1. The company immediately gets the ownership and control over the acquired firm.
2. The company can formulate international strategy and generate more revenues
3. If the industry already reached the stage of optimum capacity level or overcapacity
level in the host country. This strategy helps the host country.
Disadvantages
1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers,
M&A specialists etc
2. This strategy adds no capacity to the industry
 3. Sometimes host countries imposed restrictions on acquisition of local companies by
the foreign companies
4. Labour problem and political threat
9. Joint ventures
Two or more firm join together to create a new business entity that is legally separate
and distinct from the partners. It involves sharing of ownership, various environmental
factors like socio-cultural, political, technical and cultural aspects e.g. Hero – Honda, Maruti
– Suzuki, TVS – Suzuki.
Advantages
1. Large capital and other resources
2. Risk being spread among all partners
3. Provides skills and knowledge development
4. It makes large projects and turnkey projects feasible and possible
5. Synergy advantage]
Disadvantages
1. Conflict may arise between the partners
2. Delay in decision making when dispute arises
3. Lifecycle of a joint venture is hindered by many causes of collapse.
4. Entry of new competitors
5. Changes in business environment may collapse the joint venture
6. Today’s partners may become tomorrow’s competitors
7. Changes in partners’ style
Global Strategic Management
It is the process of determining an organisation’s basic mission and long term
objectives, implementing a plan of actions for pursuing this mission and attaining these
objectives in systematic way.
Benefits of Strategic Planning
• It helps an MNC to deal with political risk problems, competitions and currency
instability cannot be downplayed
• It enables the management to perceive global opportunities and seize them, thereby
making use of optimum opportunities
 • It helps to monitor growth opportunities in overseas markets which might offer
improved horizons for expansion and exploitation of the firm’s existing product lines.
• It leads to better decisions
• It provides a base for objective based performance evaluation
• It coordinates the activities
• It provides the means for improvement of performance
Problems of Strategic Planning
• More complicated
• Un expected events will result in failure of plans
• Inadequate information is a risk
• Administering the mechanism of planning process is very difficult
• It can inhibit creativity and lateral thinking
• Decisions based on past may result in failure
Strategic Planning Process
1. Analysis of existing mission and goals
2. Organisation analysis of a global firm
3. Analysis of international environment
4. Formulation of alternative corporate level strategies
5. Formulation of the alternative unit level strategies
6. Selection of the best among the alternatives
7. Strategy implementation
8. Strategy evaluation and control
Corporate Level Strategies
1. Stability strategy
2. Growth strategy – Forward and backward integration
3. Retrenchment strategy – Disinvestment and liquidation
Business Unit Level Strategies
1. Low cost leadership strategy
2. Focus on niche strategy
3. Differentiation strategy
4. Offensive strategy
5. Defensive strategy
Strategy Selection Models
1. BCG model
The strategy with high industry growth rate and high relative market share is the best
2. GNL model
The strategy with long term industry attractiveness and high business strength is the
best strategy
3. Directional model
The strategy with high business sector prospects and high competitive abilities of the
company is the best.
Unit IV
Control of MNEs
Control focus on means to verify and correct actions that differ from
established plans. Compliances need to be secured from subordinates through
different means of coordinating specialised and interdependent parts of the
organisation. With in an organisation, control serves as an integrating mechanism.
Control are designed to reduce uncertainty, increase predictability and ensure
behaviour originating in separate parts of the organisation are compatible and in
support of common organisational goals.
Control has three aspects establishing standards and targets, monitoring
activities and comparing actual implementing measures to remedy deficiencies.
Types of Control
1. Internal control
From an internal control standpoint, an MNC will focus on the things that it
does best. At the same time, management wants to ensure that there is a
market for the goods and services that it is offering. Therefore, the company
first needs to find out what the customer want and be prepared to respond
appropriately. This requires an external control focus.
2. Direct control
It involves face-to-face or personal meeting to monitor operation
3. Indirect control
It uses reports and other written forms of communications to control
operations. E.g. Financial statement
4. Formalised control
The elements of a bureaucratic / formalised control system are
 An internal budget and planning system
 The functional reporting system
 Policy manual used to direct functional performance
 5. Cultural control
Sometimes MNC emphasise corporate values and culture, the evaluation
based on the extend to which an individual or an entity complies with the
norms. Culture controls require an extensive socialisation process to which
informal, personal interaction is central.
6. Exercising control
With in most corporation different functional areas subjected to different
guidelines because, they are subject to different constraints. For example
marketing function
Approaches to control
1. Control in US organisations are highly centralised
2. Control in Europe organisations are highly decentralised
3. German organisations favour vertical spans or reporting channels from the foreign
subsidiary to responsible positions in the parent.
4. Euro system is socio emotional control system where as Americans follow task
oriented objective control system
Control Mechanisms
1. Corporate culture
Maintaining organisation culture e.g. banning the use of cell phones
2. Coordinating mechanism
i. Strengthening the corporate staff
ii. Planning international and domestic personnel in closer
iii. Establishing liaisons among them
iv. Establishing teams from different countries to work in special projects
v. Placing the foreign personnel on Board of directors
vi. Giving equal importance for all individual units
vii. Job rotation
viii. Bringing different people from different countries
Control Techniques
A number of performance measure are used for control purpose. There are three most
important common types are used by the MNCs to control them. They are
 1. Financial performance
Financial performance evaluation of a foreign subsidiary us based on profit and return
on investment. Profit is the amount remaining after all expenses are deducted from
total revenues. Return on investment through dividing profit by assets. Some firms
use ratio analysis also for measuring financial performance.
2. Quality performance
Quality is an important technique to control the MNCs. The quality performance can
be done with the help of quality circles, which is propounded by the Japanese. A
quality circle is a group of workers who meet on a regular basis to discuss the ways of
improving the quality of work.
3. HR performance
Besides financial techniques and the emphasis on quality another key area of control
is HR performance evaluation. The most common approaches to personnel
performance evaluation are the periodic appraisal of work performance. In now a
days people are going for 360 Degree evaluation.
Control in special situations
1. Shared ownership
2. Change in strategies
3. Legal structure
4. Types of subsidiaries
Designing an International Control System
1. Establishing objectives
2. Selecting control method
3. Setting standards
4. Locate responsibility
5. Establishing communication system
6. Measuring actual performance
7. Comparison of actual and desired performance
8. Evaluating deviations
9. Taking corrective actions
 Factors influencing control
Internal factors
1. Corporate philosophy
2. Mode of operation
3. Nature of firm’s foreign business
4. Location of the foreign operation
5. Nature of technology
6. Nature of functions
7. Size and maturity of firms
External factors
1. Nature of commercial environment
2. Political environment
Significance of control
 It provides an insight into the efficacy and effectiveness of the over all
plan
 It also enables the management to judge the suitability of the ongoing
strategies
 It influences the behaviours of events and ensures programmes are
confined to plans.
 It avoids inefficient intra – company conflicts ranging from corporate
divisions
 It ensures harmonization and coordination between corporate and
subsidiary’s objectives, strategies etc.
 It serves as a potent instrument for the purpose of achieving stability and
continuity on one hand and adaptation and adjustment on the other
 It helps the management in making effective use of source and valuable
resources of the organisation
Problems of the control
 Language differences can distort communication between the head office and
subsidiaries
 Local cultural factors may cause the failure in some countries of motivational
incentive systems that were enormously at the expenses of the company
 Host country Government might force the management of a local subsidiary
to act in the interests of the host country
 Managers in the local subsidiaries might have difficulty in understanding the
control information requirement imposed by head office
 The cost of implementing control mechanisms are much higher than for a
domestic firm
 Physical distance separating countries and management
 Non availability of adequate and accurate information may be a problem
 Appointment of local nationals in the highest posts will be a problem
Unit V
Conflict
Conflict occurs whenever:
• Disagreements exist in a social situation over issues of substance
• Emotional antagonisms cause frictions between individuals or groups
Types of conflict
1. Conflict with in the individuals
2. Conflict between the individuals
3. Conflict between an individual and a group
4. Conflict between groups
5. Conflict with in organisation
6. Conflict between organisations
Conflict resolution
A situation in which the underlying reasons for a given destructive conflict is
eliminated. Effective solution begins with a diagnosis of the stage to which conflict has
developed and recognition of the causes of conflict.
Managing conflict successfully
• Compromise
• Competition and authoritative command
• Collaboration and problem solving
Negotiation
Bargaining with one or more parties for the purpose of arriving at a solution acceptable to all
Role of Negotiation
1. Rising joint ventures
2. In getting the operation of the firm
3. Different financial investment
4. Hiring practices
5. Taxes
6. Ownership control
7. Expansion of facilities
8. Additional imports and exports
 9. Recapture of profit
Process
1. Planning and determination of objectives
2. Impersonal relationship building
3. Exchanging task related information
4. Persuasion
5. Agreement
Negotiation Tactics
1. Selection of location
2. Time constraints
3. Buyer seller relations
4. Bargaining style
5. Promises, threats and other behaviours
6. Non –verbal behaviour
Behavioural characteristics affecting Negotiations
Cultural factors
1.Ethnocentrism
Giving importance to the culture of home country and discouraging host country’s
culture
2.Polycentrism
Giving more importance for the culture of the host country
3.Geo-centrism
Giving equal importance for the cultures of both the countries
Language Factors
It may be difficult for negotiations to find words to express their exact meaning in
another language, which may result in occasional pause while translator resort to dictionaries.
The pauses cause negotiation to take longer than if they were among people from the same
country. More over negotiation stop while an interpreter translator process takes more time.
Arbitration
Arbitration is the process by which parties voluntarily agree to refer a future or a
present dispute to an individual or individuals who after hearing submissions from the parties
will issue a legally binding decision (“an award”) determining the issues between the parties
liability and quantum of damages or giving other specific remedies.
Key elements of Arbitration
o Enforcement of awards
o Party control
o Party – nominated Arbitrators
o Neutrality
o Privacy and confidentiality
o Cost –effectiveness and speed