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INTRODUCTION TOINTERNATIONAL BUSINESS

Prof. Bimal JaiswalFaculty of CommerceUniversity of Lucknow

Dr. Richa BanerjeeDepartment of Business Administration

University of Lucknow

© AUTHORS

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First Edition : 2019

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Dedicated toOur Parents

Mrs. M. JAISWAL Mrs. NANDITA BANERJEE

Mr. SIYA RAM Mr. SUBRATO BANERJEE

(Parents of Bimal Jaiswal) (Parents of Richa Banerjee)

Introduction to International Business – In its First edition introduces the

undergraduate and the postgraduate students to the emerging and challenging

field of international business. This is an introductory textbook of International

Business with the primary objective of enabling students to acquire and develop

knowledge and basic understanding of the concepts and problems of international

business in general. This book provides a thorough understanding about domestic

business vis-a-vis international business operations, the mode of entering the global

markets and surviving in the long-run. It attempts to provide an overview of the

international bodies, agreements, treaties and their contribution in developing

international trade. The book gives detailed explanation about the functioning and

importance of Regional Groupings and Emphasizing the roles they play in enhancing

international business. Subsequently, it presents the role played by the International

Financial Institutions in providing financial assistance for expansion of trade all

over the world.

This book attempts to present the subject in a simple, lucid and logical manner

for the students to grasp easily. Suitable tables and diagrams have been used

wherever required for better explanation to the target audience.

This book is best suited to all the students of undergraduate and postgraduate

level of B.Com, B.Com (Hons.), BBA, MBA and M.Com.

We are highly thankful to those who gave their valuable suggestions, with

the hope that their future suggestions would encourage us to come out with next

edition. We sincerely hope that the students and the teachers will find the book

quite useful.

Suggestions and corrections for improvement of the book are welcome.

BIMAL JAISWALRICHA BANERJEE

Preface

Chapter No. Description Page No.

Chapter - 1 INTRODUCTION 1-19

Concept, Features and Evolution/Historical View Point of InternationalBusiness, Features of International Business, Factors Encouraging andModes of International Business, Difference between Domestic andInternational Business, Advantage of Domestic Trade, Disadvantagesof Domestic Trade, Scope of International Business in India, Sectorshaving Potential for International Business in India, Reasons forEntering into International Business, Advantages of InternationalBusiness, Disadvantages of International Business, InternationalBusiness Approaches, Operations and Influencing Factors ofInternational Business, Conclusion. References, Short and LongQuestions.

Chapter - 2 INTERNATIONAL BUSINESS ENTRY STRATEGIES 20-31

Concept of International Business Strategies/Strategic Decision,International Business Entry Strategies – Exporting; Licensing andFranchising; Contract Manufacturing; Management Contracts; TurnkeyProjects; Green Field Strategy; Mergers and Acquisitions; JointVentures; Assembly Operations; Fully Owned Subsidiaries; StrategicAlliance; Third Country Location, Counter Trade, References, Shortand Long Questions.

Chapter - 3 MULTINATIONAL CORPORATION 32-43

Concept, MNC’s Operating Model, Code of Conduct, Multinationals inIndia, Reasons for Growth of MNCs, Need for Multinationals in India,Categories of MNCs, Merits and Demerits of MNC’s, Perspectivetowards MNC’s, References, Short and Long Questions.

Chapter - 4 THE CHANGING ENVIRONMENT OF INTERNATIONAL BUSINESS 44-52

Globalization Features, Essence of Globalization, Stimulators ofGlobalization, Highlights of 2011 BCG Global Challengers Report,Changing World Output, Reasons for Change in the Export Scenario,Changing Foreign Direct Investment Picture, Main Causes of Changein Foreign Direct Investment, Rise of Multinational Firms (Outside Us),Rise of Mini- multinationals, References, Short and Long Questions.

Chapter - 5 GATT & WORLD TRADE ORGANISATION 53-80

Introduction to GATT, Major Provisions of GATT, GATT Proposal, NewAreas: TRIPs, TRIMS, GATS, Financial Services, Problems of GATT, WTO-Ministerial Conference, Objectives, Functions, Benefits and Drawbacksof WTO, WTO and India, Benefits to India, Organization Structure,Understanding WTO, Trade Without Discrimination, EncouragingDevelopment and Economic Reform, Implementation of Current WTOAgreements, UNCTAD – Objectives, Membership, Organization

Contents

Structure, Main Activities of UNCTAD, UNCTAD Report ’08, References,Short and Long Questions.

Chapter - 6 REGIONAL BLOCKS 81-114

Introduction, Reasons for Economic Integrations, Levels of RegionalEconomic Integration – Free Trade Area, Customs Union, CommonMarket, Economic Union, Political Union, Preferential Trade Area,Limitation of Regional Economic Integration, Trade Creation and TradeDiversion, ECONOMIC INTEGRATION- Regional Economic Integrationin Europe, NAFTA, ASEAN, SAPTA/SAFTA, SAARC, References, Short andLong Questions.

Chapter - 7 INTERNATIONAL ECONOMIC FORUMS 115-124

The G8/G7 Nations – Structure and Activities, Criticisms; G-20- Structureand Activities; Bric, References, Short and Long Questions.

Chapter - 8 NATIONAL FINANCIAL INSTITUTIONS 125-147

EXIM Bank- Salient Policies and Features, Objectives, Functions,Organization Set Up, Assistance Programme, ECGC – Background,Need for Export Credit Insurance, Objectives, Functions, OrganizationStructure, Insurance Policies and Guarantees Issued by ECGC, RiskCovered, Commercial Banks, References, Short and Long Questions..

Chapter - 9 INTERNATIONAL FINANCIAL INSTITUTIONS 148-160

World Bank – Organization, Membership, Capital, Objectives/Functions, Bank’s Lending Operations, World Bank and India; IMF-Membership, Organization Structure, Objectives, Functions, IMF andIndia – Recent Scenario; ADB – Fund Sources, Membership,Management, Functions, Bank Operations, Appraisal of ABD,References, Short and Long Questions.

Chapter - 10 EXPORT HOUSES AND EXPORT ASSISTANCE 161-170

Export Houses, Trading Houses and Star Trading Houses, 100% ExportOriented Units (EOU), Special Economic Zone (SEZ), The ExportProcessing Zones: Export Processing Zones (EPZs), The Agriculturaland Food Processed Products Export Development Authority (APEDA),References, Short and Long Questions.

Chapter - 11 FOREIGN DIRECT INVESTMENT 171-197

Concept, Significance and Role of FDI, Key Highlights, Determinantsof International Investments, Global Trends of Foreign DirectInvestment, FDI by Region: FDI Performance Index, Effect of FDI inFuture International Business, Adverse Impacts of Foreign DirectInvestment, Type of FDI in India, Factors Responsible for FDI in India,Countrywise Analysis of FDI, FDI in Major Sectors in India, FDI Statusin Different States of India, Overseas FDI by Indian Corporations,Business Process Outsourcing, Role of BPO, References, Short andLong Questions.

Chapter - 12 FOREIGN TRADE POLICY 198-213

FTP 2009-14 – Objectives, Strategies Adopted in India’s Foreign TradePolicy, Highlights of the Foreign Trade Policy 2009-14, Foreign TradePolicy 2015-20 – Vision, Mission, Objectives and Strategies Adoptedin FTP 2015-20, Highlights of the Foreign Trade Policy 2015-2020,Scheme under the Foreign Trade Policy 2015-20. Requiring SpecialMention, Highlights of Midterm Review of FTP 2015-20, References,Short and Long Questions.

Chapter - 13 GLOBALIZATION AND PRIVATIZATION 214-228

Concept of Globalization, Globalization of Business, Reasons forGlobalization of Business, Trends in Globalization, Benefits ofGlobalization, Drawbacks of Globalization, Effects of Globalization,Governmental steps taken towards Globalization, Globalization inIndian Context, Impact of Globalization on Indian Industry,PRIVATIZATION: Concept, Pre-requisites for Privatization, Objectives,Ways of Privatization, Arguments in Favour and Against ofPrivatization, DISINVESTMENT: Objectives, Methods of DisinvestmentReferences, Short and Long Questions.

Chapter - 14 PORTFOLIO INVESTMENT 229-236

Concept, Portfolio Investment Scheme, Advantages andDisadvantages, Portfolio Investment Process, FDI and FPI, References,Short and Long Questions.

Chapter - 15 FUTURE TRENDS IN INTERNATIONAL BUSINESS 237-241

Expected Scenario, Other Future Trends, References, Long Questions.

1

INTERNATIONAL BUSINESS: CONCEPT

When the businesses go global i.e. across the national boundaries itbecomes International Business. It involves all commercial transactions privateand governmental between two or more countries. The term InternationalBusiness involve the exchange of goods, raw materials, services etc acrossthe national boundaries of two or more regions or countries.

“Exchange of goods and services across the national boundary of a countryis called INTERNATIONAL BUSINESS”.

No country whether developed or developing, produces all commoditiesto meet its requirement. It needs to import items that are not produceddomestically. At the same time, it tries to export all items that are producedover and above its domestic requirement.

The tea we drink is prepared from the tea leaves in Sri Lanka, the perfumewe use might have been produced in France. The electronic appliances weuse are of Japanese technology. We get all these even without visiting orknowing the country of the company where they are produced is just becauseof trade across the boundaries of nations.

2 Introduction to International Business

In the words of Peter F. Drucker and Mitchell “Globalisation for better or worse, has changedthe way the world does business. Though still in its early stages, it is all but unstoppable. Thechallenge that individual and business face is learning how to live with it, manage it and takeadvantage of the benefit it offers. Therefore, in all situations global competitiveness should bemade a strategic goal. No institution whether business, a university or a hospital can hope tosurvive, let alone succeed, unless it matches up to the standards set by the leaders in the fieldat any place in the world.”

The term International Business is the outcome of Globalisation and Liberalisation. The periodbefore 1980’s witnessed the individual economies with limited interaction among them. Theinteraction was limited to the extent of export and import of goods and services. But whencame the concept of Globalisation and liberalization, global economy changed from the mere exportand import of goods to investment across the boundaries of a nation, capital deployment, globaldepository receipts (GDR), technology transfer, cultural transformation, free movement of labourand capital, intellectual property right (IPR), e-business, expansion of marketing operations,generation of foreign direct investments, etc.

This transformation is the result of the opening of National Political Boundaries for the purposeof business expansion. Thus, International Business can be summarized as the Process ofconcentrating on limited resources of the world and objectives of the business houses on globalbusiness opportunities and threats.

Evolution/Historical View Point of International BusinessThe business across the borders of the countries had been carried out since a number

of decades. The origin of international business goes back to human civilization. Every countryis abundant in different types of natural resources and is specialized in making goods whichare based on those resources at a cheaper price. Example – Brazil is specialized in productionof coffee. India is specialized in producing jute products, cotton textile, etc.

Every country is not self-sufficient. It needs trade with other country for getting raw materialor market for their finished goods. The main reason of Britishers coming to our country wasnot ruling over us. It was international trade. India was rich in natural resources. So, Britishersset up their colonies in India to get raw material from India and a market for their finishedgoods. Traders used to transport silk and spice through the sea route in the 14th and 15th century.In 1700s, fast sailing ships called clippers with special crew used to transport tea from Chinaand spices from Dutch East Indies to different European countries.

But, the business at that time was restricted to international trade which included exportand import of goods and services between countries. The post-world War-II era gave birth tothe concept of multinational companies wherein apart from export and import, many other activitiesare carried out between nations like strategic alliances, commodity trading, currency trading,international financial market etc. The post 1990s period has given greater fillip to internationalbusiness.

The term international business in real sense came into existence two decades ago. Moreover,the term international business has originated from the word International Marketing, which inturn, has been originated from the term ‘Export Marketing’.

Introduction 3

The transition from International Trade to International Business took place when themultinational companies started setting up their plants and other manufacturing infrastructurefacilities in foreign/host countries after 1980s. Later on, they started producing or manufacturingin one country where manufacturing facilities and resources were available and marketing in otherforeign countries.

Example: Unilever established its subsidiary company in India i.e. Hindustan Lever Limited(HLL). It produces its products in India and markets them in the nearby neighbouring countrieslike Bangladesh, Sri Lanka, and Nepal etc. A numbers of United States based companieshave established their plants in China, South Korea, Bangkok etc. thus serving the domestic andinternational requirements.

Thus, IB is the process of focusing on the resources of the globe and objectives of theorganization on global business opportunities and threats in order to produce, buy, sell or exchangegoods and services world-wide.

International Business not only includes exchange of goods and services but also investments(foreign direct investment).

Features of International BusinessInternational Business are those activities that involve the transfer of resources, goods,

services, knowledge, skills or information across international boundaries. The main features ofInternational Business are as follows:

• Flow of Capital Across Countries: International Business is shaped by the flow of capitalacross borders rather than by the flow of goods and services. The trends in the internationalmoney market and capital market construct the financial statement of the country like balanceof payment and contribute in shaping the fiscal and monetary policies of the government.The government, in turn, modifies its policies which in turn determine the flow of capitalacross the countries.

• Accurate and timely information required: Huge investment is done while entering intoan international market, even lot many surveys and researches are done which involve timeand money both. Therefore, international business needs accurate and timely informationin order to make effective, appropriate and quick decisions.

Example: Europe is considered the most opportunistic leather market and based on thisinformation BATA could enter into various European markets, India was known first fortapping the European market.

• Market Expansion: The goal or objective of international business is market expansion ratherthan profit maximization. Deeper penetration in different markets is the major objectiveof international business. Efforts should be made for having a foothold in the market sothat the process of expansion becomes easy.

• Size of International Business: Availability of capital should not be the limitation forinternational business as it will lead to compromises. The size of international business shouldbe large so as to make a deeper presence in the foreign or international market. Largerthe size of business of a multinational company, deeper is its impact in International Market,as its operations are expanded all over the globe.

4 Introduction to International Business

• Wider scope: The whole world is to be considered as a market for business. Boundariesof nations are not the limitations. International Business has a wider scope as comparedto the international trade or International Marketing. In fact, International Business includesInternational Marketing, International Investment, technology exchange, management of foreignexchange, International Finance, management of International cultural exchange, managementof International Human Resource, International Marketing, Production and Logistics Managementetc. Hence, its scope is wide and covers all aspects of the system.

• More Potential than Domestic Markets: International markets possess more potential ascompared to the domestic market. This is due to the fact that International Business hasits presence across the globe which widens it horizons, scope, customer base etc.

Example: IBM’s sale is more in foreign countries than in U.S.A., high quality fruits likeapple and mangoes are exported from India as Indian market has less potential with respectto high price goods.

• Market Segmentation: A firm working at international level should always do marketsegmentation before entering in any country. It may be geographical or development of marketsegmentation. International Business has to segment its market in order to carve its presencein any prospective market. Market segmentation refers to the process of dividing the marketinto smaller segments based on various factors like geographic factors, demographic factors,social factors, cultural factors etc. Generally, International Business segments its market ongeographic factors.

Example: Hilton Hotels customize rooms and lobbies according to their locations. NorthEastern hotels are more cosmopolitan whereas, South Western hotels are more rustic. Nescafecoffee has many flavours depending upon taste and liking of the people of different countriespeople.

• Inter-Country Comparison: International Business studies the business opportunities, threats,consumer tastes, preferences, behaviour, cultures of societies, human resources, technologicaladvancements and management styles of various countries. This helps in making a comparativestudy between various components of two countries which leads to an assessment of inter-country similarities and differences. The inter-country comparisons also help in analyzingthe market potentials of various countries.

• To increase sales and acquire scarce resources.• To diversify sources of sales and supply.• Growth opportunities in other countries.• Potentially untapped markets.• Limited domestic Market.• To increase market size.• To increase profit.• To reduce cost of transportation.• Encourage cultural transformation.

FACTORS ENCOURAGINGINTERNATIONAL BUSINESS

Introduction 5

MODES OF INTERNATIONAL BUSINESS

1. Import and Export of goods and services.2. Investment in foreign countries.

Difference between Domestic and International Business

Basis Domestic International Business

Meaning Domestic company formulates IB enters foreign market bystrategy, product design etc. establishing foreign subsidiary. Theytowards the national markets, treat the entire world as a singlecustomers and competitors. market for production, marketing,

investment and drawing variousinputs.

Environment Domestic Environmental Scanning Analysis and scanning ofi.e. detailed analysis of domestic International Business environmentbusiness environment and its factors. and its factors.

Tariffs The tariff rates of various countries The tariff rates of various countriesdo not directly and significantly has direct impact on internationalinfluence the domestic business. trade.

Foreign FER and their fluctuation do not It directly affects the business asExchange directly affect the domestic business the conversion rates are affectedRates

Culture Mostly domestic culture of the Mostly culture of various countriescountry affects the business affects the business operationsoperations including product design. including products design of

International Business.

Scope It involves inter – firm transaction It involves intra firm transactioni.e. within a firm and firms of between parent and subsidiaries insame industry of a country. different countries.

Advantages of Domestic Trade1. Strong Customer Base: As firms in the domestic market are well aware about the likings

and disliking of the citizens of the nation, it helps them to cater to the exact needs andrequirement of the market. The makes the market to be loyal to the domestic firms asthey have been fulfilling these needs since long and hence, they develop a strong customerbase.

2. Easy Market Analysis: The international firms may be spending huge amount of moneyvarious techniques to forecast demand of the market, but this expenditure need not be incuredby domestic firms as they are well aware about the culture and taste of their market.

3. Better Customer Service: The most important requirement for the company to surviveand stay in the competition is the efficiency with which the after sales service are provided.

6 Introduction to International Business

Domestic firms, due to better knowledge and understanding of their customer base, areable to provide better customer service.

4. Easy Prediction of Cyclical Changes: Economic upturns and downturns are common innature. Domestic organizations are always in a better position to understand such cyclicalchanges in their domestic boundaries. These firms are in better situation to cope up withsuch economic cycles and can develop strategies to overcome any negative circumstancein the future.

5. Easy to Communicate: Interacting and communicating with the people within the domesticboundaries becomes eases for indigenous firms. This is possible because the domestic firmsare aware about the language, type of media, presentation, choice of words, etc., aboutthe customers. They can better place and position their products than international firms.

6. Enhances Standard of Living: By catering to the needs of people of the country, by knowingtheir taste, preferences, spending ability, buying behaviour etc., the domestic businessesproduces and offers such variety of goods and services, which betters the quality of lifeof the people and raises their living standards.

7. Generates Employment: The most pertinent role played by the domestic firms are thatthey are the ones responsible for generating a huge number of employment opportunities.By opening up new businesses and expansion of businesses, the people of the nation geta lot of jobs as per their capabilities and skills. This also motivates people to be educatedand skilled to avail these jobs.

8. Growth of Industries within Nation: The firms which work within the domestic, legaland regulatory environment. Generally, the government in power provides various incentives,reliefs, facilities like tax holidays, subsidies etc., to promote the sitting up of industries inthe rural and backward areas in order to have a balanced regional development.

9. Money remains within domestic boundaries: The best part of domestic organisations arethat whatever profits they earn, they remain within the domestic boundaries. The overallprofitability of the industry increases and these earned profits can be reinvested by the firmsto expand their production capacities, thereby leading to earning of more profits.

10. Development of Infrastructure: When more and more organisations are set up within thenational boundaries, then some degree of competition exits. In order to support such milddegree of competition, it necessitates the government to provide better infrastructural facilitieslike roads, transportation, financial institutions, electricity etc.

11. Tax Benefits: Every nation wants to build a strong industrial base, if it wishes to growin future. For this purpose, the government of the nation thrives to promoted developmentand setting up of more and more industries by providing various types of rebates, tax-holiday, subsidies etc. New businesses get a lot of tax-benefits and can enjoy the benefitsattached with the tax system of the nation.

12. Lesser Financial Requirements: Setting up of businesses abroad requires a lot of formalitiesto be done on part of the businessman and thereby, a lot of expenditure as well. But, thisis not so in case of domestic businesses. Such businesses can be started with lesser financial

Introduction 7

and other resources requirement as the formalities to be done are quite less. Thus, loansare easily available if the business plan is promising enough.

Disadvantages of Domestic Trade1. Limited Market Size: The domestic trade has the biggest disadvantage of limited expansion

of its customer base. Even if a firm wishes to expand, branching out can be done to alimited extent. This restricts the profitability of the firms and sooner or later, they becomeincompetent and their survival it difficult.

2. Limited access to Raw materials: Another major short coming of domestic trade is thatit has limited access to the raw materials. It can be dependent either on domestic availabilityor have to pay higher prices for acquiring such raw materials. This problem is overcomein case of international trade.

3. Huge Financial Requirements: Lack of financial resources is another setback for thedomestic firms. These firms have limited access to finance because of which they haveof face a lot of hardships, due to this, they are unable to invest in R&D, product development,advertising, PR etc. Similarly, newer technologies cannot be used for betterment of production.

4. Restricted Growth: The international firms may after exploring the domestic market, moveto international markets. But this is not possible for domestic firms. They have the abilityof exploring only the markets within their national boundaries. Once that market reachessaturation, these firms have no choice but to clip their wings, In other words, they cannotexpand their production and sales beyond a specific limit. Thus, their growth becomesrestricted.

5. Poor Infrastructural Base: As the domestic economy may not have proper basic keyindustries and other infrastructural facilities like telecommunication, power, banking,transportation etc., development of domestic businesses becomes quite restricted. Due tothis, the firms cannot open their new units at all the places, where the basic infrastructureis lacking.

6. Limited Technological Upgradation: Shortage of funds and limited access to outsidetechnologies, the domestic firms have to be highly dependent on the traditional and indigenoustechnologies. They are unable to spend on the research and development activities becauseof which they stay behind their international competitors and cannot enjoy economies ofscale.

7. Impact of Unstable Political and Legal Environment: The domestic firms have been wellaware about the legal environment in which they operate. If the legal rules and regulationare too stringent for opening up new units, expanding production capacity, ceilings on profitsetc. the domestic firms may not be able to survive in long-run. Similarly, if the politicalenvironment is unstable. Then also a lot of changes have to be done by the firms to meetthe requirements of the party in power.

8. Lesser Choice or Offerings: Due to limited funds and restricted access to better and newtechnology, the domestic firms may not be able to offer a wide range of goods and servicesto meet the customer requirements. They may not enjoy the benefits related to bulk productionand marketing also.

8 Introduction to International Business

9. Professional Management: Professional management of business may not be enjoyed dueto lack of funds. Professional trainers do not provide their services free of cost. Similarly,professional managers will also contribute only when their skills and knowledge can beacquired at a certain price.

10. Poor access to cheap labour: An international firm may easily procure cheap labour anduse them for producing cost effective products. The wages provided by such firms arequite good as compared to domestic firms, which makes easy and cheap availability oflabour resources for such organisations. On the other hand, the human resources availablewithin the domestic boundaries have to adhere to stricter regulations regarding wage payments.This limits their access to good quality labour.

11. More Exposure to Risks: The domestic firms are more prone to risks than internationalfirms. This is so because the operations of foreign firms are spread all over the worldand they are not dependent on a single nation for their survival. They have the advantageof spreading business risk and thereby offsetting the losses from one area with the profitsfrom another area. But the domestic firms have no option to spread the risk than to absorbit all by itself only.

SCOPE OF INTERNATIONAL BUSINESS IN INDIA

• The scope of International Business in India is more than 7% annually.

• As India is a developing country and it is developing at a great pace there is a huge scopeof International Business in India

• Due to diverse cultural differences in different regions of the country, a company cannotformulate a single strategy for India.

• Different parts of the country are well known for its different traits. The Eastern part ofIndia is known as “hand of intellectuals”, whereas Southern part is known for its “technologyacumen”. The Western part is known as “commercial capital of the country” whereasNorthern part is “hub of political power”.

Sectors having potential for International Business in IndiaInformation Technology and Electronic hardware.Telecommunication.Pharmaceuticals and Biotechnology.Research and Development (R&D).Banking Financial institutions.Capital market.Chemical and Hydrocarbons.Infrastructure.Agriculture and food processing.Retailing.Manufacturing.

Power and Non-Conventional energy.

Introduction 9

• Geographic Expansion: Companies after exploring their domestic market may think ofexpanding their business beyond the domestic boundaries as well. If the company’s productsor services are able to fulfil the requirements of foreign customers, then the domestic firmsmay move beyond their home for the purpose of growth. For example, Arvind Mills expandedtheir business by opening up new units or setting up warehouses abroad. In the same wayRanbaxy, Cipla, Dr. Reddy’s growth are mainly attributed to geographical expansion.

• Technological Advantages: Some countries enjoy technological advantage over other nationswhich make them to explore and fulfil the needs of new market and thus, it becomes importantfor such companies to find new countries where their technological advantage can beencashed. For example, companies like Biocon, Infosys are known for their core competenciesin biotechnology and IT respectively. Similarly, Honda, Hyundai, Volvo etc. have marchedahead in different nations due to their technological advantage only.

• Labour Advantage: Many companies have highly competitive and productive labour force.Their unique skills are nurtured by the organisations as they may not be available all overthe world. Companies are attracted towards such nations having rich source of skilled andspecialized labour and thus move beyond their domestic boundaries. For example, in Indiaskilled artisans work in diamond industry, handicrafts, wood work, carpet weaving industriesand other nations are attracted towards India to utilize such skills.

• Declining Trade Barriers: Government imposes trade barriers on international trade in orderto protect domestic businesses from excessive competition. Reduction in trade barriers isanother significant driver of globalisation. After Uruguay round of GATT, all its member

From Organisation View• Geographic Expansion.

• Technological Advantage.

• Labour Advantage.

• New Business Opportunities.

• Multiple Incentives

• Develop corporate image

• Economies of Scale

• Innovative Learning

• Competitive Advantage

• Long-term Security

• Increased Turnover and Sales

• Management of PLC

• Job creation

• Saturation of Domestic Market

REASONS FORENTERING INTOINTERNATIONAL

BUSINESS

R

E

S

U

L

T

S

From Government View

• Interdependency ofnation

• Forex earningsenhanced

• Diplomatic relation

• Better trade terms

• Increased growth rate

10 Introduction to International Business

countries had to reduce trade barrier to promote free flow of goods and services acrossthe countries.

• Declining Investment Barriers: Now a days, governments of various countries arepromoting foreign direct investment which will help to increase the level of production inthe country and also to raise the level of employment in the host country. It will helpin improving the living standards of the people of the country.

• Regional Integration: The regional integration of the countries increases the size of themarket, quality of production, aggregate demand for foreign production and services,employment. So, ultimately it increases the economic activity of the region. The significantregional integration includes European Union, NAFTA, SAARC, ASEAN, APEC etc.

• Generation of Increased Profits: The basic objective of any business is to earn or maximizeprofits. Similarly, when domestic markets are unable to promise higher rates of profits dueto weak economic position of the country or less purchasing power of the people, thebusiness houses are not able to meet their expected demand and profits. Therefore, thebusiness firm searches for a foreign market where it can earn higher rate of profits andhence international business becomes significant in such a situation.

• Utilization of Production Capabilities: Generally, the engineering set up has high productioncapacity but if the demand in the country is less than the produced capacity then the businesshouses will not be able to reach their break-even point. Thus they have to cross nationalboundaries for utilizing their produced goods. International business is significant as it expandsthe production capacities of the domestic companies beyond the demand for the productsin the domestic market. The production capacities of the countries are moulded to caterto the needs of its international consumers, like electrical goods of Japan and China arehaving wider market in foreign countries.

• Utilization of Technologies and Managerial Capabilities: International business is neededto use the best and the latest technology across nations. International business firm hasan option to maximize its returns using the appropriate technology and managerial competenceof other countries. Availability of advanced technology and managerial competence insomecountries act as pulling or attracting factors for business firms from home country.

Example: Many countries like USA, India etc. depends on Japan for advanced technologicaland managerial expertise.

• To Avoid Tariffs and Import Duties: Protective policies of the government also hinderin international trade. Before globalisation, the government used to levy tariffs or importduties on the goods to protect the domestic companies from exploitation. But with the adventof globalisation and International Business, the business firms try to avoid tariff’s and importduties and prefer direct investment to go global.

Example: Companies like Honda, Toyota, Sony, and Coca-Cola have gone for directinvestment in various countries by opening their branches or entering into joint ventures.By doing so, these firms go global and also avoid the tariff and import duties.

• Availability and Nearness to Raw Materials: If the basic raw material is not availablein the local market then automatically it will make the goods costly in the hands of consumers.Thus, nearness to raw material is another factor which gives birth to the need of International

Introduction 11

Business. The source of highly qualitative raw material and bulk raw material serves asa major factor for attracting companies from various foreign countries.

• New Business Opportunities: The international market offers every size and nature oforganization to explore the untapped market. There still exist many countries having a goodnumber of customers who have the capacity and ability to pay but there is no supply orlimited supply of some goods. Therefore, these markets always welcome companies to set-up their units in their countries so as to serve the markets and fulfil their needs. For example,Latin America, Sub Saharan, Africa etc.

• Multiple Incentives: When the companies are involved in international business, they enjoya wide variety of incentives fiscal, physical, or infrastructural. The host country will provideevery possible kind of facilities and amenities so that new units open up and serve theirmarkets. Incentives provided may be like competitive pricing, access to import materials,tax benefits on earnings, economies of scale etc. For example, Aditya Birla Group enjoyedsuch benefits in Thailand and Indonesia.

• Develop Corporate Image: Building good corporate image is of prime importance for thecompanies nowadays if they wish to enter new markets and are new in the industry. Oncethey are accepted in the new markets, profits flow smoothly and the image built makesthem easy to enter into other countries as well. For example, companies like Xiaomi, Samsung,LG built their image in India first and then penetrated to different nations as well.

• Economies of Scale: When the companies seek to exploit a unique differentiating advantagelike brand patented product etc., they find it easier to expand beyond the local markets,with minimal adjustments. This makes the businesses to offer the products which are mostwidely acceptable around the world and by increasing the production and sales, thesecompanies enjoy economies of large-scale production.

• Competitive Advantage: Market entry at international level may be a competitive moveas well. Many organisations enter the foreign market as a strategy to overcome thecompetitor’s move and explore the advantages of another market. This may also take aform of following the competitors move wherein one company follows the others in anothermarket so as to not let the other gain any significant advantage alone, thereby intensifyingthe competition and making resource allocation much more effective and efficient.

• Long term Security: Businesses would be less vulnerable to cyclical fluctuations in business.If one market is unable to give the desired return due to poor demand, the other marketmay offset such loss, with a heavier demand. Thus moving towards International Businesshelps in diversifying the risk of loss. The markets which are more prone to fluctuationsand intense competition may not pose a great threat for the companies which have expandedtheir business to other nations – it provides security from losses.

• Innovative Learning: The companies going global try to understand the creative andinnovative practices of the other countries also. With this new and innovative thinking theymay develop better strategies for new product development, new ways of working, branding,marketing, product designing, financial structuring etc. Thus, the company develops as aglobal player.

12 Introduction to International Business

• Increased Turnover and Sales: After satisfying the needs of the domestics markets,companies try to become international by understanding the culture and needs of foreignmarkets and thereby, bringing the modifications in their basic product to suit the requirementsof the other nations. This increases the acceptability of the company’s product in foreignmarket, thereby increasing the sales and consequently the profits.

• Management of PLC: Every product of the company passes through different stages oftheir lifecycle starting from introduction to decline. At the decline stage, it becomes importanton the part of the company to analyse how to encash on the product at declining stage.Here the companies may think of entering into another market for which the product isnew. For e.g. Enfield India reached declining stage in India for 350cc motorcycle, but enteredin Kenya, West Indies, Mauritius etc. where same bikes became popular.

• Job Creation: The most important reason for internationalisation of the firms is the ideaof employment generation. With the setting up or opening up of new units or businessesin other nations, a lot of employment opportunity is generated for the host country. Newfactories and offices require human resources with required skills and knowledge to performvarious tasks and activities.

• Saturation of Domestic Market: Survival of any firm depends upon the demand for itsproducts and satisfaction of its customers. There may be a time when the market reachesthe saturation level wherein the company finds it difficult to increase or push the salesin the same market. So, moving out of the domestic boundaries seems as a feasible solutionfor the survival of the firm. Thus many firms adopt this as a strategy to remain in thecompetition and ultimately, keep going.

• Interdependence of Nations: Nations have been dependent on each other since timeimmemorial. No country is self-sufficient and is not endowed with all the resources to survive.Therefore, the countries are dependent on each other. This interdependency takes the formof internationalisation of firms. For e.g. India depends on Gulf countries for crude oil andGulf nations depend on India for tea, rice, etc. Thus, nations depend on each other forprimary or value added finished products.

• Enhanced Forex Exchange: Foreign exchange is a necessary requirement for maintenanceof BOP equilibrium. When companies open up branches or units in other nation, the profitor the revenue earned is in the currency of that nation. The firms transfer their earningsfrom host country to home country thereby transferring foreign exchange and increasingthe reserves of the home country.

• Better Trade Terms: As the countries are inter-dependent on each other for some resourceor the other, this necessitates on the part of the nations to have better and fair trade termswith each other. Unnecessary entry and exit barriers, restrictions on transfers, immobilityof capital and human resources, unfair trade practices are not followed. This makes thefirm to expand their operations internationally.

• Increased Growth Rate: When the companies become international, there is an increasein profits, better sales, more employment, better wages, increased production, effectiveutilisation of resources, increased forex reserve, increased living standard, wide choice ofgoods etc. All these lead to better economic growth.

Introduction 13

Advantages of International Business

“Nations trade with each other because they benefit from it. Other motives may beinvolved, of course, but the basic motivation for international trade is that of gain. Thegain from international trade, like the gain from all trades, exists because specialization

increases productivity”.

– James C. Ingram

The Competitive Advantages of International Business• Higher standard of living: Based on the comparative cost theory, International Business

possesses the advantage of increasing the standard of living of the people. The comparativecost theory indicates that the countries which have advantage over the availability of variousresources are able to produce the products at low cost and of high quality. With this advantageof comparative cost people from various countries can purchase more products with sameamount of money. This enhances their purchasing power and in turn helps in increasingtheir standard of living.

• Free Flow of Capital: International business leads to free flow of capital from one countryto another. This helps the investors to get a fair interest rate or dividend and also helpsthe global companies to acquire finance at lower cost of capital. Further, IB enables theflow of capital to needy countries from surplus countries, which in turn increases globalinvestment.

• Increased Consumer Income: Multinational companies pay higher wages or they haveincreased the average wage level of employees. Employment opportunities are created inthe international market due to MNC’s which increases the purchasing power of consumerbecause of increase in their income and it ultimately increases the national income of thecountry and boosts its economy.

Countries with open economy grow at faster rate than closeeconomy.

Example: Communist Russia.

• Advantages Due to Product Life-Cycle: It might be possible that a product which isin matured phase or declining in one country might be at introductory phase in anothercountry. So, in that case manufacturer of that product might take advantage of productlife cycle in another country.

Example: Most of the technological products which are launched in India had passed throughmatured/declining phase in USA.

• Advantage Due to Economies of Scale or Comparative Advantage: As per the comparativecost advantage theory of trade, a country will produce that product in which it hascomparative advantage due to skilled labour, cheap raw material, latest technology etc.Itwill help in gaining advantage due to economies of scale when it produces products atlarge scale. It also creates division of labour and specialisation.

Example: Brazil produces coffee, Kenya produces tea, Japan is specialized in automobileand electronics.

14 Introduction to International Business

• Optimum and Proper Utilization of World Resources: International trade helps in freemovement of factors of production. When countries produce products through comparativeadvantage, wasteful duplication of resources is prevented. Resources will move from thecountries where they are in excess to those where they are in short supply.

• Deficiency in Production to Remain Competitive: Companies when works at internationallevel try to produce products of high quality at cheaper price. To fight with this competition,domestic company will also produce good quality product to gain a larger share in themarket. Hence, consumer will have good quality product to consume.

• Free Flow of Technology: International business provides a pool of innovations andopportunities to the developing countries to use the new and latest technology and be withthe advancement of technology.

Example: India uses various imported defence machinery; aircrafts and other importedtechnology.

• Reduction in Effects of Business Cycles: International business helps in reducing the effectsof business cycle. Different countries have variation in business atmosphere. Thus, internationalcompanies shift their business from the country experiencing recession to the country havingboom and hence, IB firms reduces the impact of recessionary conditions.

• Spread of Production Facilities throughout the Globe: To avail the locational benefits,the international companies establish their manufacturing units throughout the globe.

• Reduced Risk: When a company is operating in more than one country, both commercialand political risks are reduced to a certain extent and this is due to the diversification ofbusiness in different countries. It is just the method of not keeping all your eggs in onebasket.

• Identifying Potential Untapped Market: There are various markets which are unexploredwhich means demand exist but no firm is able to satisfy the needs and requirement ofthat market. IB provides the opportunity for identifying such markets. Such incipient marketsprovide opportunities to sell the products at higher price as compared to domestic market.

• Division of Labour and Specialization: International business results in division of labourand specialization, efficient use of resources, maximization of output and lead to innovation.Each region will produce those goods for which its factor endowment are richly available;and exchange them for goods from those regions which could produce them cheaper, likefor example India is known for IT and engineering goods, Brazil for coffee, Japan andChina for electrical goods.

• Challenge to the Domestic Business: International business provides opportunities, challengesand acts as motivational factor to the domestic business. The opportunities include technology,management expertise, skilled human resource, etc. and the challenges include increasedcompetition, low cost and quality products etc. But these opportunities and challenges helpthe domestic firms to develop.

• Cultural Exchange and Demand for Variety of Products: International Business reducesthe physical distance among nations and enables people from different countries to acquireculture of other countries. It can be called as cultural transformation where exchange and

Introduction 15

adaption of culture will take place. It changes living style and consumption habits. Dueto the cultural exchange the demand for variety of products is generated.

Example: Noodles, pizzas and various other food items like KFC and the fast food chainof McDonald etc.

• Social Development: International Business enhances the consumption level and economicwelfare of the people of the trading country. International Business will make the availabilityof all goods and services at all places of the world which automatically enhance and changethe society conceptualisation. As stated earlier, IB helps in increasing the standard of livingof people and creates social development.

• Employment Generation: With the coming of business, employment is also generated. AsIB increases the market area, therefore, employment is generated which helps in satisfyingthe demands of the market. International Business results in shift of manufacturing facilitiesin low-wage developing countries. It creates job opportunities for the developing countries.However, the developed countries can enhance employment generation by specializing in hightechnology products.

• Balanced Development of World Economy: With the free flow of capital, technology, humanresources and locating manufacturing facilities in developing countries, the whole world isgetting developed. Developing countries are getting access to new technology which ischanging the social atmosphere whereas developed countries are getting cheap labour forfulfilling their requirements of sophisticated goods, all this helps in balanced developmentof the world economy.

Disadvantages of International Business

Along with various advantages, international business is also bringing some disadvantages. Fewhave been discussed below:

• International Business Kills Domestic Business: If a company is trying to enter intointernational market then it certainly means that its cost of entering is less than cost ofsame goods produced in the target country. The international companies from the developedcountries utilize the emerging opportunities of the developing countries, use the advantagesof technology and skilled human resource and leave behind the domestic companies orbusinesses at their mercy. The domestic business houses of the developing countries failto compete with the advanced technologies of multinational companies of the developedcountries and ultimately face losses.

Example: Dumping of goods from China, South Korea, and USA has lead to closing downof many small industries in India.

• High cost: A firm when it wants to enter into foreign market has to curtail certain increasedcosts like establishment of facilities abroad, hiring of additional staff, maintaining qualityof the product as per that country’s quality norms, transportation cost etc.

• Foreign Regulation and Standards: A firm has to work according to the regulation andstandards of that country.

Example: Quality standard of product, packaging and labelling norms, etc.

16 Introduction to International Business

• Delays in payment: International trade may cause delays in payment, which adversely affectsthe firm’s cash flow.

• Complex Organizational Structure: International business usually requires changes to thefirm’s operating structure. Training/retraining of management may be needed to facilitaterestructuring.

• Unemployment and Underemployment: Certain times, the MNCs produce the goods intheir home countries or in those countries where production is economical and targetthe products in the developing countries. This leads to reduction of manufacturingoperations in domestic industries thereby reducing employment opportunities in the domesticmarket.

• Huge Foreign Indebtness: The developing economies are trapped into the circle of hugeforeign indebtness by the multinationals. The developing economics with less purchasingpower have to establish infrastructural facilities for multinationals to operate which increasetheir indebtness for host countries.

• Political Instability: International Business contributes in the development of nationaleconomies. Condition of political unrest or instability has negative impact on InternationalTrade. Example: Civil wars in Fiji, Malaysia and Sri Lanka, Iran, Iraq war etc. has leadto tremendous changes in government policies which also affect international trade. Facilitatingthese companies is solely in the hand of ruling government. Therefore, their entry andexist not only affect the national economy but also adversely affect the stability of thegovernment.

• Exchange Instability: Due to different status of balance of payment of different countriesat different time periods, its currency might be unstable in the market.It may lead to instabilityin terms of foreign currencies.

Example: Zambia, India and Pakistan had depreciated their currency several times. Itdiscourages International trade.

• Tariffs, Quotas and Trade Barriers: A country can restrict international trade through importtariffs, quotas, embargoes and exchange control.

Example: Before 1998, China, Pakistan and USA imposed tariff, Quotas and barriers onimports from India.

• Drain of Natural Resources: The multinational firms and businesses exploit the naturalresources of the host company to facilitate manufacturing facilities and sell the final productsto other countries. This leads to a drain of natural resources of the host country.

• Technological Pirating: Imitation of the product and its technology is a great threat tointernational trade.

Example: Business of pirated CDs is at boom in India which is discouraging the businessof CDs.

• Cultural and social Barriers: Culture of a country is a general concept of values. Sellingof product becomes different when culture of one country differs significantly from anothercountry.

Introduction 17

Example: McDonald has met with protest in Rome due to objection of people to the smellof hamburger’s frying and hence they changed the exhaust system of the restaurant. Socialfactors include family, education, religion and customs.

Example: Change in the appearance of Barbie to launch it in India so that Indian childrencould connect to it.

International Business ApproachesDouglas Wind and Pelmutter advocated four approaches of International Business:

• Ethnocentric Approaches: Under this approach, the domestic company does not formulateany different marketing strategy for the foreign market. It views foreign markets as anextension to its domestic market just like a new region.

This approach can be used by a small company or a company which is new in the fieldof international business but it may be harmful in a long run because here the same productis marketed to foreign country without any modification.

• Polycentric Approach: In this, the company adapts an altogether different approach forforeign markets. They formulate strategies according to the environment of foreign country/host country. Companies establish foreign subsidiaries and empower its executives there whichformulate marketing strategies.

• Regiocentric Approach: After working successfully in a foreign country, the firm now wantsto enter into neighboring countries in that region. In a company with a regiocentric orientation,management views regions as unique and seek to develop an integrated regional strategy.It markets more or less the same product to different countries but adapts different marketingstrategies too.

• Geocentric Approaches: A company with geocentric approach views the entire world asa potential market and tries to develop integrated world market strategies. The companyopens different subsidiaries in different countries and each subsidiary works as an independentcompany. It formulates strategies, policies and designs the product as per the environmentof that country.

Operations and Influences of International BusinessBorderless global economy enlarges international business: The period of globalization,

liberalization and privatization has brought several developments in the world trade throughInternational Business. The knitting of world into a small village has removed national boundariesand reduced the restrictions for movement of goods and services across the boundaries. Thishas improved the efficiency of resources to become more effective and efficient.

A firm having objective such as expansion, diversification, high profit, resource mobilisationetc., has to establish itself in the international market through international operations that maybe different from those used domestically. While approaching toward international business, thefirm has to be very much acquainted with international environmental factors because if theyare not taken due care of then effort will not be beneficial. As the taste of water changes frommile to mile, in the same way the environmental factors are also very dynamic, which changes

18 Introduction to International Business

as the trade moves from country to country. The change factors will have direct impact onall functional areas of the business.

Therefore, there is direct relationship between environmental factors and the various functionalareas of a business firm. A figure below shows the interrelationship among the operations andinfluences of International Business.

Source: International Business Environment and Operations by John D Daniels andLee H Radebaugh.

ConclusionLike every other thing, international business has also its pros. and cons. But advantages

of International business outweigh its limitations. A country cannot survive alone because oflack of resources. It has to do trade with other countries because without international trade,economy of a country cannot grow at a faster pace. It depends on the stage of developmentof the country that when it attains amount of development, its domestic manufacturers to haveestablished themselves than it can allow foreign competitors to enter into their market.

The comparison between domestic and international business helps us to understand whyfirms expand internationally. However, the analysis may prove wrong in case where no feasible

Objective

• Sales Expansion

• Resource Acquisition

• High Profit

• Diversification

• Utilise inherent Capacities

Operational Means

• Import

• Export

• Transport

• Licensing

• Franchising

• Turnkey

• Management Contract

• Direct Investment

• Portfolio Investment

External Environment

• Geographic

• Historical

• Political

• Legal and Judicial

• Economic

• Cultural

• Demographic

Competitive Environment

• Speed of product changes

• Optimum product size

• Number of customers

• Amount bought byeach customer

• Homogeneity of customers

• Local vs. InternationalCompetitors

• Cost of Moving Products

• Unique capabilities ofCompetitors

OPERATIONS ANDINFLUENCINGFACTORS OF

INTERNATIONALBUSINESS

Introduction 19

foreign opportunities for firms are available or when foreign projects are riskier than domesticfirms resulting in higher cost of capital.

References1. International Business – S. Shajahan First edition.

2. International Economics–H.L Bhatia - first edition 200 .

. International Business – P SubhaRao , First edition.

4. The International Economy – Ellsworth, Fourth edition.

5. International Business Management – N. Venkateshwar first edition 2009.

. Global Business Management – ManabAdikary.

7. International Business – Ebrahim Bahman.

Short Answers1. Name the modes of international business.

2. List the factors encouraging international business.

3. Differentiate between domestic and international business.

4. List the reasons for entering into international business.

Long Answers1. What do you understand by concept and features of international business?

2. Discuss the evolution/Historical viewpoint of international business.

3. Analyze the advantages and disadvantages of the domestic markets.

4. Elucidate the scope of international business in India.

5. Elaborate on the advantages and disadvantages of international business.

6. Discuss the various approaches to international business.

7. Write down the influencing factors of international business.