Management of International Business

Unit-III

Dr. G. Ravindran,
Associate Professor
Karunya School of Management
 International Business Entry and
MNCs: Introduction, Basic Entry
Decisions, Timing of Entry, Scale
and Strategic Commitments, Entry
Mode, Selecting Mode. Green Field
Venture and Acquisition.
 Why we go Internationally
 Expand sales (market motives)
Companies’ sales are dependent on two factors:
the consumers’ interest in their product or services and the
consumers’ ability and willingness to buy them.
• Volkswagen (Germany)
• Ericsson (Sweden)
• IBM (United States)
 Acquire resources (economic motives)

• Better components, services, products

• Foreign capital
• Technologies
• information
  Minimize risk (strategic motives)
Take advantage of the business cycle for products/services

 Diversify among international markets

Diversify Sources of Sales and Supplies 
 Minimize Competitive Risk: companies move internationally for
defensive reasons. Profits from one market can be used to
expand operations in other markets
Eg. Yoga
Patterns of Internationalization

Figure 1.7
Reasons for Recent International
Business Growth        

 Expansion of Technology:
 transportation, telecommunications;
Transportation and telecommunications costs are
more conducive for international operations.  
 Liberalization of Cross-Border Movements:
 goods, services, labour, Capital 
 Development of Supporting Institutional
Arrangements: development by business and
governments of institutions that enable us to
effectively apply that technology.
 Increase in Global Competition:
new products become global; Globalization of
production
 Basic foreign expansion entry
decisions

A firm contemplating foreign expansion

must make three decisions

1. Which markets to enter

2. When to enter these markets
3. What is the scale of entry
 Which foreign markets
 Favorable
• Politically stable developed and
developing nations
• Free market systems
• No dramatic upsurge in inflation or
private-sector debt
 Unfavorable
• Politically unstable developing nations
with a mixed or command economy or
where speculative financial bubbles have
led to excess borrowing
 Timing of entry
 Advantages in early market entry:
• First-mover advantage.
• Build sales volume.
• Move down experience curve and
achieve cost advantage.
• Create switching costs.
 Tie customers to your product.
 Disadvantages:
• First mover disadvantage - pioneering
costs. Pioneering costs. (business system) Eg.
KFC introduced the Chinese to American style fast foods, but a
later enrant, Mcdonald’s, capitalized on the market in China
• Changes in government policy.
 Scale of entry
 Large scale entry
• Strategic Commitments - a decision that has
a long-term impact and is difficult to reverse.
• May cause rivals to rethink market entry.
• May lead to indigenous competitive response
• ? Good or Bad?
 Small scale entry:
• Time to learn about market.
• Reduces exposure risk.
 Lack of Commitment problems
 Entry modes
 Exporting
 Turnkey Projects
 Licensing
 Franchising
 Joint Ventures
 Wholly Owned Subsidiaries
 Exporting
 Advantages:
• Avoids cost of establishing manufacturing
operations
• May help achieve experience curve and
location economies
 Disadvantages:
• May compete with low-cost location
manufacturers
• Possible high transportation costs
• Tariff barriers
• Possible lack of control over marketing reps
 Local Agent Problems
 Turnkey projects
 The contractor agrees to handle every detail of the project for a
foreign client, including the training of operating personnel. At
completion of the contract, the foreign client is handed the ‘key’ to
a plant that is ready for full operation
 Advantages: Contractor agrees
• Can earn a return on knowledge asset to handle every
 Earn $ on Know How detail of project
for foreign client
• Less risky than conventional FDI
 Disadvantages:
• No long-term interest in the foreign country
• May create a competitor
• Selling process technology may be selling
competitive advantage as well
 Licensing
 Licensing is a legal arrangement whereby a firm in
one country licenses the use of its intellectual
property (patents, trademarks, brand names,
copyrights, or trade secrets) to a firm in a
second country in return for a royalty payment.
 A Licensee is buying the assets of another firm in the
form of know-how or R&D. The licensor can grant
these rights exclusively to one licensee or
nonexclusively to several licensees
 Both parties will get advantage. Licensor receives
profits in addition to those generated from operations
in domestic market. Additional revenue from Foreign
market. Protects piracy.
 Future profit opportunity associated with property is
limited if the party do not extend license.
 Licensing: Advantages

 Reduces development costs and risks of

establishing foreign enterprise.
 Lack capital for venture.

 Unfamiliar or politically volatile market.

 Overcomes restrictive

investment barriers.
 Others can develop business

applications of intangible Agreement where

licensor grants rights to
property. intangible property to another
entity for a specified period
of time in return
for royalties.
 Franchising
 Franchising, a specialized form of licensing, occurs
when a firm in one country (the franchisor)
authorizes a firm in a second country (the
franchisee) to utilize its operating systems as
well as its brand names, trademarks, and logos,
in return for a royalty payment.
 Generally it has larger degree of control over the
quality of product than it does under licensing
agreements
 Eg. McDonald, Disney in Japan
 Increased revenue and expansion of its brand name
identification and market reach. Big disadvantage is
coping with problems of assuring quality control and
operating standards
 Franchiser sells
intangible property
and insists on rules
for operating business

 Advantages:
• Reduces costs and risk of establishing
enterprise
 Disadvantages:
• May prohibit movement of profits from
one country to support operations in
another country
• Quality control
Strategic Alliances or joint Ventures
 Strategic alliances (joint ventures) are business
arrangements in which two or more firms or
entities join together to establish some sort of
operation. It may be formed by two MNCs, and
MNC and a government. If there are more than
two participants in deal, the relationship is called
a consortium operation.
 When entering a local market with a local partner, an
MNC finds an opportunity to increase its growth and
access to new market while avoiding excessive tariffs
and taxes associated with importing products.
 Nationalization by host country, problems of control
and decision making will create problem.
 Advantages:
• Benefit from local partner’s knowledge.
• Shared costs/risks with partner.
• Reduced political risk.
 Disadvantages:
• Risk giving control of technology to
partner.
• May not realize experience curve or
location economies.
• Shared ownership can lead to conflict
 Wholly owned subsidiary
 100% of the stock. 2 types. One is green
feild venture, next it can acquire an
established firm in that host nation and
use that firm to promote its product.
 Advantages:
• No risk of losing technical competence
to a competitor
• Tight control of operations.
• Realize learning curve and location
economies.
 Disadvantage:
• Bear full cost and risk
Advantages and disadvantages of entry modes
 Selecting an entry mode
Technological Know-How Wholly owned subsidiary, except:
1. Venture is structured to reduce
risk of loss of technology.
2. Technology advantage is
transitory.
Then licensing or joint venture OK

Management Know-How
Franchising, subsidiaries
(wholly owned or joint
venture)

Pressure for Cost

Combination of exporting and
Reduction
wholly owned subsidiary
 Acquisition and Green-field

A green-field strategy is to enter into a new

market without the help of another business
who is already there. An acquisition is the
opposite of a green-field entry.
 Acquisition and Green-field- pros & cons
Acquisition Greenfield
 Pro:  Pro:
• Quick to execute • Can build subsidiary it
• Preempt competitors wants
(right to do something b4 • Easy to establish
someone) operating routines
• Possibly less risky  Con:
 Con: • Slow to establish
Disappointing results • Risky
Overpay for firm • Preemption by
optimism about value aggressive competitors
creation (hubris)
Culture clash.
Problems with proposed
synergies
 Acquisition or Green-field?

Well-established,
incumbent firms.
Acquisition
Competitors
interested in
entry.

embedded skills,
routines, culture.
Green-field

No competitors
Ethics in International Business
 INTRODUCTION

Ethics refers to accepted principles of right

or wrong that govern the conduct of a person,
the members of a profession, or the actions
of an organization.
Business ethics are the accepted principles
of right or wrong governing the conduct of
business people.
Ethical strategy is a strategy, or course of
action, that does not violate these accepted
principles.
 Business ethics are principles of right
or wrong governing the conduct of
business people
• The text says, “the accepted principles
of right and wrong”
• But there are many differences of
opinion among highly ethical business
people
 Accountants and medical doctors have
organizations that try to establish
agreement in the profession
• And still there are major disagreements
 Some economists suggest that the practice
of giving bribes might be the price that must
be paid to do a greater good
 These economists believe that in a country
where preexisting political structures distort
or limit the workings of the market
mechanism, corruption in the form of black-
marketeering, smuggling, and side payments
to government bureaucrats to “speed up”
approval for business investments may
actually enhance welfare
 Other economists have argued that
corruption reduces the returns on business
investment and leads to low economic growth
 Religion, ethics,
and global diversity

 The world has many different ethical

systems
• mostly derived from different religions
 Different systems can lead to different
opinions about what is ethical
 ETHICAL ISSUES IN INTERNATIONAL
BUSINESS

The most common ethical issues in

business involve employment practices,
human rights, environmental regulations,
corruption, and the moral obligation of
multinational companies
 Many ethical issues and dilemmas in
international business are rooted in
the differences in political systems,
law, economic development, and
culture from nation to nation
 We face ethical issues involving
• Employment practices
• Human rights
• Environmental regulations
• Corruption
• Moral obligation of multinational corporations
(social responsibility)
Don’t start business with anyone unless you
believe they have strong ethics

 Work hard to understand your own ethics

 Work hard to apply them
 Work hard to understand others’ ethics
Employment Practices

 When work conditions in a host

nation are clearly inferior to those in
a multinational’s home nation,
companies must decide which
standards should be applied, those of
the home nation, those of the host
nation, or something in between
 When work conditions in a host
nation are clearly inferior to those
in a multinational’s home nation,
what standards should be
applied?
• Few would suggest that pay and
work conditions should be the
same across nations
• How much divergence is
acceptable?
 Human Rights

 Basic human rights still are not respected

in many nations
• Rights such as freedom of association, freedom
of speech, freedom of assembly, and freedom
from political repression are by no means
universally accepted
 The question that must be asked of firms
operating internationally is: ‘What is the
responsibility of a foreign firm in a
country where basic human rights are
trampled on?’
 Basic human rights taken for granted
in the developed world such as
freedom of association, freedom of
speech, freedom of assembly,
freedom of movement, and so on, are
by no means universally accepted
 Environmental Pollution
 Environmental regulations (or
enforcement) in host nations may be
inferior to those in the home nation
• This means multinationals can produce more pollution
than would be allowed at home
 Environmental questions take on
extreme importance because parts of
the environment are a public good
that no one owns, but anyone can
despoil
• The tragedy of the commons occurs when a resource
held in common by all, but owned by no one, is overused
by individuals, resulting in its degradation
 The water in the Mekong River
 Corruption
 Corruption has been a problem in almost every society
in history, and it continues today
 International businesses can, and have, gained
economic advantages by making payments to
government officials
 The United States passed the Foreign Corrupt
Practices Act to fight corruption
• Outlawed the paying of bribes to foreign government officials to gain
business
 In 1997, the trade and finance ministers from the
member states of the Organization for Economic
Cooperation and Development (OECD) followed the
U.S. lead and adopted the Convention on
Combating Bribery of Foreign Public Officials in
International Business Transactions
• Obliges member states to make the bribery of foreign public officials
a criminal offense
 Social responsibility
 Multinational corporations have power
that comes from their control over
resources and their ability to move
production from country to country
 Moral philosophers argue that with
power comes the social responsibility
for corporations to
give something back to the societies
that enable them to prosper
• Social responsibility refers to the idea that businesspeople
should consider the social consequences of economic
actions when making business decisions
• Advocates of this approach argue that businesses need to
recognize their noblesse oblige (benevolent behavior that is
the responsibility of successful people and enterprises)
Moral Obligations

 The concept of social responsibility refers to the

idea that business people should take the social
consequences of economic actions into account when
making business decisions, and that there should be a
presumption in favor of decisions that have both good
economic and good social consequences

 In its purest form, social responsibility can be

supported for its own sake simply because it is the
right way for a business to behave
 Power itself is morally neutral. It is how power is used that
matters. It can be used in a positive way to increase social
welfare, which is ethical, or it can be used in a manner that is
ethically and morally suspect. Consider the case of News
Corporation, one of the largest media conglomerates in the world,
which is profiled in the accompanying Management Focus.

 The power of media companies derives from their ability to shape

public perceptions by the material they choose to publish. News
Corporation founder and CEO Rupert Murdoch has long considered
China to be one of the most promising media markets in the world
and has sought permission to expand News Corporation’s
operations in China, particularly the satellite broadcasting
operations of Star TV.

 Some critics believe that Murdoch used the power of News

Corporation in an unethical way to attain this objective. Some
multinationals have acknowledged a moral obligation to use their
power to enhance social welfare in the communities where they
do business. BP, one of the world’s largest oil companies, has
made it part of the company policy to undertake “social
investments” in the countries where it does business.
 The Roots of Unethical Behavior
 Why do managers behave in a manner that is
unethical?
• Business ethics are not divorced from personal ethics
• Businesspeople sometimes do not realize they are
behaving unethical because they fail to ask if the
decision is ethical
• The climate in some businesses does not encourage
people to think through the ethical consequences of
business decisions
• Pressure to meet unrealistic performance goals
that can be attained only by cutting corners or acting
in an unethical manner

 Leaders help to establish the culture of an

organization and they set the example that others
follow
 ETHICAL DILEMMAS

Ethical dilemmas are situations in

which none of the available
alternatives seems ethically
acceptable.
THE ROOTS OF UNETHICAL BEHAVIOR

Personal Ethics

Business ethics reflect personal ethics (the

generally accepted principles of right and
wrong governing the conduct of individuals)

 Expatriates may face pressure to violate

their personal ethics because they are away
from their ordinary social context and
supporting culture, and they are
psychologically and geographically distant
from the parent company
Case. Management Focus: Pfizer’s Drug Testing
Strategy in Nigeria
Case Summary
 This feature raises questions as to whether

pharmaceutical giant, Pfizer, acted ethically when

testing a new drug. In 1996, Pfizer, was seeking FDA
approval for a new antibiotic. The company lacked the
necessary test results to have the drug approved for
children. The company saw an opportunity to quickly
test the drug when an outbreak of bacterial meningitis
hit a town in Nigeria. In 2003, two dozen Nigerian
families sued Pfizer arguing that their children either
died or were injured as a result of the drug testing.
They allege that Pfizer did not take the appropriate
steps to properly test the drug, and that the company
acted in an unethical manner.
 Suggested Discussion Questions
1. Was Pfizer irresponsible when it tested its
experimental drug in Nigeria? How could the company
have acted more ethically?

2. Pfizer saw the bacterial meningitis outbreak in Nigeria

as a means of quickly getting a large pool of sick
children to test its new antibiotic on. Consider the
dilemma facing pharmaceutical companies. In order to
get FDA approval to introduce their new drugs,
numerous studies must demonstrate the efficacy of the
drugs, studies that, as the Pfizer example
demonstrates, can be difficult to complete. Would you
have been tempted to follow Pfizer’s strategy? If you
waited, and completed the testing in the United States,
what might be the effect on your company’s bottom
line? Would you be acting in the best interests of your
stakeholder by waiting, or by testing in Nigeria?
Decision Making Processes

Studies show that business people

may behave unethically because they
fail to ask the relevant question—is
this decision or action ethical?
Organization Culture

In firms with an organization

culture (the values and norms that
are shared among employees of an
organization) that does not emphasize
business culture, unethical behavior
may exist
Unrealistic Performance Expectations

Pressure from the parent company to

meet performance goals that are
unrealistic, and can only be attained
by cutting corners or acting in an
unethical manner can cause unethical
behavior

Leadership
 If leaders are not acting ethically,

other employees may not act ethically

The causes of unethical behavior are shown in
Figure.
 Conclusion
 Overall ethics vary from country to
country and you must be aware of
the ethical norms of the country you
are doing business in.

 Complete international
standardization of ethics is
impossible to achieve.