International Business

INTERNATIONAL

BUSINESS

Author

Prof. Pulapa Subba Rao

Professor of Business Administration

University of Papua New Guinea

Publisher:

Himalaya Publishing House Pvt. Ltd., Mumbai,India

Teachers’ Manual

Himalaya Publishing HouseInternational Business

P. Subba Rao

Chapter 1

International Business: An

Overview

CHAPTER-1

INTERNATIONAL

BUSINESS:

AN OVERVIEW


P. Subba Rao

Chapter 1


Overview

Evolution of International Business

Why International Business?

International Business Before World War-I

International Business Between World Wars

International Business After World Wars

Emergence of International Institutions: like IMF, IBRD, GATT and WTO


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Chapter 1


Overview

Different Concepts

International Trade

International Marketing

International Manufacturing

International Business

International Trade vs. Marketing

International Marketing vs. Business


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Chapter 1


Overview

Drivers of International Business

Establishment of International Institutions like IMF, IBRD, IDA, IFC, andWTO

Emergence of Trade blocks like European Union, NAFTA, ASEAN andSAARC

Foreign Direct Investment

International manufacturing Centers

Strides in Information Technology

Liberalization of Economies


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Chapter 1


Overview

Stages of International Business

Domestic Company

International Company

Multinational Company

Global Company

Transnational Company


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Chapter 1


Overview

Special Issues of International Business

Modes of International Business

Goals of International Business

Advantages of International Business

Problems of International Business

Strategies of International Business


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Chapter 2

Theories of International Trade

CHAPTER-2

THEORIES OF

INTERNATIONAL

TRADE


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Chapter 2


Why and How International Trade?

Mutual Benefits to Two countries

Differences in Opportunity Costs

Comparative Advantage


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Chapter 2


Mercantilism

Countries should Export more than they Import and Receive the

Difference in Gold.

Governments Imposed Restrictions on Imports and Encouraged

Exports

Benefited Colonial Powers and Caused Discontent in the Colonies

Decay of Gold Standard Reduced the Validity


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Adam Smith’s Theory of Comparative Cost Advantage

Comparative Cost Advantage Theory

Comparative Advantage With Money

Concept

Implications

Criticisms


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Chapter 2


Other Theories

Relative Factor Endowments Theory

Country Similarity Theory

Product Life Cycle Theory

Global Strategic Rivalry

Porter’s National Competitive Advantage Theory


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Chapter 2


CHAPTER-3

INTERNATIONAL BUSINESS

ENVIRONMENT


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Chapter 2


International Business Environment Factors

Meaning of Business Environment

Environmental Factors: (STEPIN)

Social and Cultural

Technological

Economic

Political

International

Natural


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Cultural Environment

• Meaning

• Characteristics

• Cultural Attitude and International Business

• Cross-Cultural Communication

• Cultural Universals


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Social Environment

• Social Environment

• Behavioural Factors Affecting Business

• Power Distance

• Individualism Vs. Collectivism

• Risk-Taking Behaviour

• Masculinity


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Social and Cultural Environment

• Strategies for dealing with Differences: Making

Adjustments, Communication

• Competitive Advantage

• Culture and Business Ethics

• Culture and Consumer Behaviour


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Chapter 2


Religions and Economic Implications

• Christianity

• Islam

• Hinduism

• Buddhism

• Confucianism


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Technological Environment

• Meaning of

• Influence of and Investment in

• Economic Development and

• International Cooperation and

• Technology Transfer

• Plant Location and

• Appropriate Technology

• Globalization and Technology


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Economic Environment

• Economic Systems

• Income Levels of Countries: Characteristics

• Basket cases, Location of Income

• Business and Economic Development

• Macro-Economic Issues and Business

• Economic Transition

• Opportunity to MNCs


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Political Environment

• Political Ideologies

• Political Rights and Civil Liberties

• Totalitarianism

• Political Relations and Business

• TYPES OF Political Systems

• Political Stability and Economic Development

• Political Risks


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Legal Environment

• Kinds of Legal Systems

• Theoretical Law

• Property Rights

• Protection of Intellectual Property

• Product Safety and Product Liability

• Labour Laws


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Chapter 2


CHAPTER-4

MODES OF ENTERING


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Chapter 2


Modes of Entering Introduction

Analysis of Alternative Foreign Markets

Level of Competition

Environmental Scanning

Assessing Costs, benefits and Risks

Decision Factors: Ownership Advantages, Location

Advantages, Internationalisation Advantages


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Chapter 2


Modes of EntryI. EXPORTING

1. Indirect Exports

2. Direct Exports

3. Intra-corporate Transfers

II. LICENSING

4. International Licensing

III. FRANCHISING

5. International Franchising

IV. SPECAL MODES

6. Contract Manufacturing

7. Business Process Outsourcing

8. Management Contracts

9. Turnkey Projects

V. FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES

10. Green Field Strategy

VI. FOREIGN DIRECT INVESTMENT WITH ALLIANCES

11. Mergers and Acquisitions

12. Joint Ventures


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CHAPTER-5

FOREIGN DIRECT INVESTMENT


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Foreign Direct Investment- Introduction

Meaning

Forms of FDI: Purchase the Existing, new Investment in

Property, participation in a Joint Venture, Transfer of Assets,

Export of Goods for Equity, Trading in Equity


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International Investment Theories

Ownership Advantage Theory

Internationalization Theory

Dunning's Eclectic Theory

Factor Mobility Theory

Product Life Cycle Theory


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Factors Influencing FDI

Supply Factors: Production costs, Logistics, Resource

availability, Access to technology, Availability of Human

resources

Demand Factors: Customer access, Marketing advantages,

Exploitation of competitive advantages, Customer mobility

Political Factors: Avoidance of trade barriers, Economic

development incentives.


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Why FDI?

To Increase Sales and Profits

To Enter fast growing Markets

To Reduce Costs

To Consolidate Trade Blocs

To protect Domestic and Foreign Markets

To Acquire Technological and Managerial Know-How


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Chapter 2


FDI In India

Government Policy since 1991

Liberalisation in the FDI sector and Ceilings on Foreign

investment

Direct Investment Inflows

FDI in select Asian Countries


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CHAPTER-6

GLOBALIZATION


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Globalization-What is It?

Globalization is the shift towards a More Integrated and

Interdependent World Economy

Globally Mobile Capital, Property knowledge and technology

sweep away regulations

Interdependency and Integration of various countries of the

World


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Features of Globalization

Operation throughout the World

Erasing Differences among markets

Establishing manufacturing centers throughout the world

Operation in international Financial Markets

Allow the free flow of Human Resources

Spread the markets in all countries

Establish various services of the business in all countries


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Globalization Process

Stage-I: Export to Foreign Countries Through Intermediaries

Stage-II: Export to Foreign Countries Directly

Stage-III: Establishes Production and Marketing facilities in

Foreign Countries

Stage-IV: Makes foreign subsidiary full-fledged

Stage-V: Serves the foreign customers like a domestic

company


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Drivers of Globalization

Establishment of WTO

Regional Integration/Trade Blocks

Declining Trade Barriers

Declining Investment Barriers

Growth of FDI

Strides in Technology

Growth in MNCs


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Chapter 2


CHAPTER-7

WORLD TRADE

ORGANIZATION (WTO)


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World Trade Organization-Introduction

The Emergence of General Agreement on Tariffs and Trade

(GATT)

Objectives of GATT

Uruguay Round and Dunkel Proposals

World Trade Organisation (WTO) was established in 1995 to

implement the final act of Uruguay Round agreement of GATT

GATT Vs. WTO


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WTO and WORLD TRADE WITHOUT

DISCRIMINATION

Promotes trade without any discrimination

MFN Clause: Member countries should give equal treatment to

the products imported from any other member countries

National Treatment Clause: Member country should treat the

foreign products once they enter their country exactly equal to

those of similar domestic products


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Chapter 2


URUGUAY ROUND PACKAGE

To reduce the subsidy on Inputs and eliminate

administered pricing in agricultural sector.

WTO members abolished quotas on trade in textiles and

clothing on 1 January 2005.

Challenges and Strategies to Compete

Trade Related Intellectual Property Rights

Patents Regime Kicks In

NO Foreign Capital Discrimination

Trade in Services


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Chapter 2


Ministerial Meetings of WTO

First meeting: Held on 9th December1996 at Singapore

Second meeting :Held during 18-20, May 1998 at Geneva

Third meeting: Held on December 3, 1999 at Seattle

Fourth meeting: Held at Doha, Qatar during 9-13, November 2001.

Fifth meeting: Held during 10-14, September 2003 at Cancun, Mexico.

Sixth Meeting: Held in Hong Kong, China from 13-18 December 2005.


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WTO and India

Founder Member

Benefits in India

Impact of Abolition of Textile Quota System

Adoption of Product Patent

Disadvantages

India and Dumping


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Chapter 8

Multinational Companies

(MNCs)

CHAPTER-8

MULTINATIONAL COMPANIES (MNCs)


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Chapter 8


(MNCs)

Multinational Companies (MNCs)-

Introduction

MNC does business in more than one country.

Why Domestic Companies become MNCs?

Operating Characteristics of MNCs (Protection, Tap global

markets, Increase market share, Reduce cost, Overcome

tariffs)

Factors Contributed for the Growth of MNCs (Expansions of

market territory, Market superiority, Financial superiority,

Technological superiority Product innovations)


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Chapter 8


(MNCs)

Advantages& Disadvantages of MNCs

Advantages to Host Country

Advantages to Home Country

Disadvantages to Host Country

Disadvantages to Home Country


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(MNCs)

Organization Structure of MNCs

Design Organization Structure

Vertical/ Tall Organization

Horizontal/ Flat Structure

Product Structure

Functions-Based Structure

Matrix Structure

Team Structure

Geographical Structure

Decentralised Business structure

Strategic Business Unit Structure

Virtual Structure


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Chapter 8


(MNCs)

Role of MNCs in India

• Profit Maximisation

• International networking of Markets

• Diversification Policy

• Concentration in Consumer goods

• Location of Central control Offices

• Public Accountability

• Technology

• Social Justice

• Cultural Erosion

• Indianise a Global company


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Chapter 9

Conflicts and Negotiations in


CHAPTER-9

CONFLICTS AND NEGOTIATIONS IN



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Chapter 9



Conflicts and Negotiations in International

Business

Conflicts between/ Among Companies

Varying Goals Result in Conflicts

Areas of Conflicts: Macro economic Areas, Production Areas,

Marketing Areas, Finance Areas, Human Resource Areas,

Social and Ethical Areas, Environmental Issues, and

Competing Areas.


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Chapter 9



Conflict Resolutions

Negotiation strengths

Bargaining process

Behavioural Aspects in Negotiations

Bilateral and Multilateral Agreements

Corporate Citizenship


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Chapter 9



CHAPTER-10

INTERNATIONAL TRADE POLICIES AND RELATIONS


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International Trade Policies and Relations-

Introduction

Protect Domestic Industry from Competition

Tariffs

Subsidies

Import Quotas

Voluntary Export Restraints

Local Content Requirements and

Administrative Policies


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Chapter 9



International Law and Business Firms

Material Sources of International Law

International Disputes

Private international Law

International Court of Justice

International Chamber of Commerce

Country Groups


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CHAPTER-11

TRADE BLOCKS AND

BUSINESS CENTRES


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Trade Blocks-Introduction

Trade Blocks Vs. Economic Integrations

Types of Trade Blocks:Free Trade Area, Customs Union,

Common Market, Economic Union

Regional Approach

Advantages of Integration


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Chapter 9



European Union (EU)

European Common Market formed in 1957, wit 6 members

turned into European Union with 25 members

Objective:“The community shall have its task, by setting up

a common market, to promote throughout the community a

harmonious development by economic activities, a

continuous and balanced expansion, an increase in stability

and accelerated raising of the standard of living and closer

relations between the Member States belonging to it.”


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Functioning of the EU

Common Agricultural Policy (CAP)

Common Fisheries Policy

European Monetary Union

THE EUROPEAN SYSTEM OF CENTRAL BANK

Common Transport Policy

EURO CURRENCY

THE EURO SYSTEM

Enlarged EU mulls future challenge


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North American Free Trade Agreement

(NAFTA)

Formation: 1st January,1994

Objectives: To create new business opportunities particularly inMexico, To enhance the competitive advantage of the companiesoperating in the USA, Canada and Mexico in wider internationalmarkets, To reduce the prices of the products and services byenhancing the competition.

Measures

Critical Appraisal


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The Association of South-East Asian Nations

(ASEAN)

Established: 1992

To develop free trade area

ASEAN Free Trade Area (AFTA): Objectives:

To Encourage inflow of Foreign Investment

To establish Free Trade Area

To reduce Tariffs

AFTA and India


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South Asian Association for Regional

Cooperation (SAARC)

Established in December 1985

Objectives: to improve the quality of life

to develop the region in all Aspects.

to provide the opportunity to the people

to enhance the self-reliance.

to provide climate for creating mutual trust.

to enhance the mutual assistance

to enhance the co-operation

to have unity among the member countries

to extend co-operation to other trade blocks.


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Facilitates Economic Growth, Cooperation, Trade and

Investment

To reduce Tariffs and trade Barriers

Bogor Goals

Safe and Efficient movement of Goods

Economic Growth

Achievement and Benefits

Asia Pacific Economic Cooperation


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Chapter 9



Other Trade Blocks

MERCOSUR

ANDEAN:

Trade in Goods

Customs Union

Free Trade Area

Common Market

Free Movement of Capital


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Chapter 12

International Business: Size

and Groeth

CHAPTER-12

INTERNATIONAL

BUSINESS: SIZE AND

GROETH


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World Merchandise Export Trade

The world merchandise exports (US$8880 billion in 2004) recorded a

positive growth

North America experienced negative growth rates in 2001 and 2002

Europe alone accounted for nearly 50% of the global merchandise

exports in 2004

Next to Europe, Asia’s exports were largest in 2004


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World Merchandise Import Trade

Recorded a positive growth (US$ 9215 billion in 2004)

North America experienced negative growth rates in 2001

Europe in 2004 accounts for (44.85 percent of the total global

merchandise imports).

European Union’s(25 Countries) share in 2004 was as high as

41.06 percent.

Next to Europe, Asia’s imports were largest in 2004 (US$2214

billion in money value and 24.02 percent


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World Trade in Commercial Services (Exports)

The (US$2100 billion in 2004) recorded a positive growth

North America experienced negative growth rate in 2001

Thus Europe accounted for more than half.

European Union’s share was as high as 47.86 percent

Next to Europe, Asia’s exports were largest


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World Trade in Commercial Services (Imports)

Recorded a positive growth (US$ 9215 billion in 2004)

North America experienced negative growth rate in 2001

South and Central America also experienced negative growth in

2002 and zero growth in 2001

European Union’s share in 2004 was as high as 45.56 percent

Next to Europe, Asia’s imports were largest in 2004


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CHAPTER-13

GLOBAL STRATEGIC

MANAGEMENT


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Global Strategic Management

Vision: What We want to Create

Mission: An enduring statement of purpose that

distinguishes one organisation from other similar

organisations.

Strategy: Unified, comprehensive and integrated plan that

relates to the strategic advantages of the firm to the

challenges of the environment

strategic Management: Continuous, iterative cross

functional process aimed at keeping an organisation as a

whole appropriately matched to its environment


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Peculiarities of Global Strategic Management

Integrated strategic management of a global company

Mostly action-oriented

Scans the environment of all the countries

Operate in home country and in foreign countries

Depends upon the cultural differences among the countries


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Ethics in Global Business

Meaning

Ethical Values in Global Business: Utilisation of the natural resources of the host country appropriately and in an optimum way.

Utilisation of the natural resources for the production ofgoods for the consumption in the domestic country. Ifthese goods are exported, the benefit of foreign exchangeshould be provided to the host country.

Do not use the ingredients in the production which harm the basic health of the customers of the host country

Corruption


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CHAPTER-14

INTERNATIONAL

ACCOUNTING


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International Accounting-Introduction

Accounting system provides financial information to various stakeholders of the company

The accounting function in international firms is morecomplicated due to:

8 varying exchange rates

8 varying inflation rates

8 differing currency controls

8 varying expropriation risks

8 differing custom duties

8 differing levels of sophistication

8 changing national requirements


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Country Differences in Accounting

A research on differences in accounting standards in 22 advanced

countries found that there were

· 76 differences in the approach of cost of goods sold

65 differences in the assessment on return on assets

54 differences in the measurement of R & D expenses

20 differences in the calculation of net profit margin.


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CHAPTER-15

INTERNATIONAL FINANCE AND FOREIGN EXCHANG


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International Finance-Introduction

Additional Issues to be Considered in International Business:

8 Currency to be used in the international businesstransactions.

8 Creditworthiness of the importer.

8 Acceptable methods of payment.

8 Arranging Finance.


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Methods of Payment

Payment in advance

Open account

Documentary collection

Letters of credit

Credit cards

Counter trade


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International Risk Management-Types of

Risks

Political Risks

Commercial Risks

Exchange Control Restrictions on Remittances

Differing Tax Systems

Sources of Funds

Exchange Rate Fluctuations,

Different Stages and Rates of Inflation

Risks of Non-payment


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CHAPTER-16

BALANCE OF

PAYMENTS


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Balance of Payments Statements

Balance of Payments Statement presents a classified record of:

8 all receipts on account of goods exported

8 services rendered

8 capital received by residents

8 payments made by the residents due to goods importedand services received from

8 capital transferred to non-residents / foreigners.


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Balance of Payments-Items

Items can be classified as hereunder:

Current Account

Capital Account

Unilateral Payments Accounts

Official Settlement Account.


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CHAPTER-17

INTERNATIONAL FINANCIAL INSTITUTIONS AND LIQUIDITY


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International Financial Institutions

International Monetary Fund

International Bank for Reconstruction and Development( IBRD)/ World Bank

International Development Agency

International Finance Corporation

United nations Conference on Trade and Development

Multinational Investment Guarantee Agency


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International Monetary Fund (IMF)

IMF came into being to promote economic and financial co-

operation among the member countries with a view to facilitate

the expansion and balanced growth of world trade with effect

from March 1, 1947


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Quotas in IMF

Country Quota (% of SDRs)

U.S.A. 37.10

U.K. 10.74

Germany 13.01

France 10.74

Japan 13.31

Canada 6.37

Italy 7.05

India 4.16


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International Bank for Reconstruction and

Development (IBRD)/ World Bank

Established on 5th December 1944

An inter-governmental institution, corporate in form.

Established to provide long term assistance for the reconstruction and

development of the economies of the member countries


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Functions of IBRD

To assist in the reconstruction and development.

To promote private foreign investment by means of guarantees.

To promote the long-range balanced growth of internationaltrade.

To arrange the loans or guarantees by it in relation tointernational loans


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International Development Association Established in 1960 as an affiliate of the World Bank.

Provide finance to less developed member countries on a ‘soft’ loan basis.

Called the soft loan window of the IBRD

Objectives

8 Development finance on easy terms to the less developedmember countries.

8assistance for poverty alleviation

8 To provide finance at concessional interest rates


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International Finance Corporation (IFC)

Established in July 1956 in order to provide finance to private sector indeveloping countries. An affiliate of the World Bank

Objectives (i) assist in financing the establishment, improvement andexpansion of productive private enterprise (ii) Seeking to bring togetherinvestment (iii) Seek to stimulate, and to help create conditionsconductive to the flow of private capital, domestic and foreign, intoproductive investment in member countries.


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CHAPTER-18

INTERNATIONAL

MARKETING


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International Marketing

International Marketing: Extension of marketing activities across the globe

Standardization Vs. Customization

Options in Trade Off in International Marketing: Ethnocentric Approach, Polycentric Approach, Geocentric Approach


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International Marketing Mix

Product

Price

Place

Promotion


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International Marketing Information System

Automated System

System Design

IMIS Subsystems

Marketing Information System

Marketing Research: Research Design, Data Collection, Tabulation, Statistical tools, Data Analysis, Report writing, Report presentation-Use of Research findings


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CHAPTER-19

FOREIGN TRADE PROCEDURES


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Export Trade Procedures

(i) Preliminaries

(ii) Offer and receipt of confirmed orders

(iii) Production and clearance of the products for exports

(iv) Shipment

(v) Negotiation of Documents and realisation of export proceeds, and

(vi) Obtaining various export incentives.


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Export– Production& Procurement of goods

and Shipment

Packing and Marking

Quality Control and Pre-Shipment Inspection

Excise Duty Rebates

Shipment: Customs Clearance, GR-I Form, Shipping Bill, Export

License, Carting Order, Customs Examination of Cargo at

Docks, Let Ship , Mate’s Receipt , Port Trust Dues , Bill of

Lading, Shipping by Other Modes of Transport


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CHAPTER-20

INTERNATIONAL PRODUCTION

AND LOGISTICS MANAGEMENT


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Key Decisional Areas in Production

Management

Process

Capacity

Inventory

Human Resource

Quality


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Acquisition of Resources

Vertical Integration

Make Option

Buy Option

Make and Buy Option

National Origin

Time Issues


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CHAPTER-21

INTERNATIONAL HUMAN

RESOURCE MANAGEMENT


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International Human Resource

Management-Activities Recruitment

Selection Process

Expatriates

Performance Management

Training and Development

Compensation

Women in International Business

Dual Career Groups

International Industrial Relations

Quality Circles

Participative Management


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Expatriates

Expatriates: Living or working in a foreign country. The parent country nationals working in foreign subsidiary and third country nationals are expatriates.

International Adjustment Stages: Honey-Moon, Cultural Shock, Adjustment, Mastery

Dimensions of Adjustment:Individual, Self-Efficacy,Relational Skills,Perception Skills, Non-Work, Job, Organizational Culture


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Cross Cultural Training

Information and Fact Finding Training

Attribution Training

Culture-Awareness Training

Cognitive-Behaviour Modification Training

Experimental Training

Rigorous Training

Job Novelty Training

Interaction with Host Nationals

BLUNDERS IN CROSS-CULTURAL TRAINING


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Specific Issues in Global HRM

Women in International Business

Dual Career groups

Industrial Relations

Quality Circles

Participative Management


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CHAPTER-22

CONTROLLING AND

EVALUATION OF

INTERNATIONAL

BUSINESS


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Controlling and Evaluation of International

Business

• Need for Controlling

• Problems in Controlling

• Role of Information Systems

• Organization Structure

• Areas to be controlled


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Control Mechanisms

Corporate Culture

Reports

Visits to Subsidiaries

Management Performance Evaluation

Cost and Accounting Comparability

Evaluative Measure

Control in Special Situations

Changes in Strategies

Legal Structures and Control


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CHAPTER-23

E-BUSINESS VIS-À-VIS



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New Information Technologies

Neural Networks

Business Process Re-engineering,

Enterprise Resource Planning and

Supply Chain Management


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Re-engineer the International Business

Process

Management of Ongoing Business Processes

Improvements of Business Processes

Re-engineering of Business Processes

Management of International Business Process


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CHAPTER-24

FUTURE OF INTERNATIONAL

BUSINESS


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Future of International Business

Virtual International Business

Front-End Stage

Back-End Stage

Recession in Global Markets

Crisis in East Asia

China: Threat or Opportunity


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Future of Global Business--Stages

1. Heavy flow of goods into the developing Countries

2. Dumping of goods mostly in developing Countries.

3. Recession in both developing and developed countries.

4. Recovery : Initially advanced countries and later the developingcountries recover.

5. Stabilisation : All the economies stabilise their production,employment and income levels.

6. Growth with stability : World economies grow with the stability inproduction, employment and income. This stage results inmultidirectional international business.


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Prof. Pulapa Subba Rao

[email protected]