Shashank M Hiremath

7/17/2019 Shashank M Hiremath

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Shashank M Hiremath

[email protected]

InternationalInternational

BusinessBusiness



ReferencesReferences

International Business, 5th Edition

K Aswathappa

International Business, Competingin the Global Marketplace

Charles W L Hill & Arun K Jain

Shashank M Hiremath



Nature of International BusinessNature of International Business

We have nowhere to go except everywhere.

L i f e st y l e o f y o u t h :

Enjoy and pay for all that on their own.

In early 20’s, they earn between Rs.8k to Rs.25k. They like to party in the weekends.

Transportation & food is provided at nominal cost.

Excellent communication skills.

Enjoy talking to people of other countries. 99% of BPO employees own cell phones and credit cards.

Shashank M Hiremath

(Contd…)



L i f e st y l e o f y o u t h :

There is a sense of independence.

Going on outings with family, friends & colleagues.

Shopping in malls soon after getting salary. Some, of course, save money for parents & siblings.

Like to give & receive gifts.

They look forward to quarterly performance rewards and

incentives.

Shashank M Hiremath

Na t u r e o f I n t er n a t i o n a l B u si n ess… Na t u r e o f I n t er n a t i o n a l B u si n ess…



12 large companies have got India12 large companies have got India--born bornchief executiveschief executives

Google (Sundar Pichai),Microsoft (Satya Nadella), PepsiCo (Indra Nooyi), ArcelorMittal (Lakshmi Mittal),

Diageo (Ivan Menezes),Reckitt Benckiser (Rakesh Kapoor),MasterCard (Ajay Banga),DBS Group Holdings (Piyush Gupta), SanDisk (Sanjay Mehrotra),

Global Foundries (Sanjay Jha),Cognizant (Francisco Dsouza) and Adobe (Shantanu Narayen)

Shashank M Hiremath



Introduction to International BusinessIntroduction to International Business

All business enterprises, large and small, are inspiredto carry on business across the globe.

Lowering the barriers to facilitate easy movement of goods & services.

Many Indian companies have subsidiaries and joint

ventures in other nations- particularly in developingnations.

Shashank M Hiremath



IB involves crossing of national bordersIB involves crossing of national borders

Product presence in different markets of the world.

Production bases across the globe.

Human resource to contain high diversity.

Investment in international services.

Transactions involving intellectual properties.

Shashank M Hiremath



Four (4) dimensions of IBFour (4) dimensions of IB

First Dimension:

Internationalization of Market Presence.

Second Dimension:

Internationalization of Supply Chain.

Third Dimension:

Internationalization of Capital Base.

Fourth Dimension:

Internationalization of Corporate Mindset.

Shashank M Hiremath



Global business assessmentGlobal business assessment

Assessment of each nation’s globalpresence is done, based on four

variables:

Political engagement. Technological connectivity.

Personal contact.

Economic integration.

Shashank M Hiremath



Why study international business? Why study international business?

Subject is taught in MBA, M.Com and other relatedcourses.

IIMs have started a separate course on international business.

Bangalore University is offering Masters degree and

Diploma degree in international business.

Shashank M Hiremath

(Contd…)



Companies are sourcing their human resourcerequirement globally.

Most of the products we consume everyday are

supplied to us by global businesses.

Managers need to have knowledge about international business than anybody else.

Layman has a negative perception about the role of government.

Shashank M Hiremath

Why study international business?... Why study international business?...

(Contd…)



International business executives play a powerful rolein determining the relative competitiveness of variouscountries.

World is becoming a global village.

Global businesses are benefitted by following the best

human resource practices, inventory managementtechniques and operations management principles.

Shashank M Hiremath

Why study international business?... Why study international business?...



Drivers of International BusinessDrivers of International Business

First driver: Developing markets have huge markets.BRIC (Brazil, Russia, India and China) countriesgrowth rate is much higher than developed countries.

Second driver: MNCs are locating their subsidiariesin low wage countries to take advantage of low costproduction.

Third driver: Changing demographics also adds toincreasing globalization.

Shashank M Hiremath

(Contd…)



D r i v er s o f I n t er n a t i o n a l B u si n ess… D r i v er s o f I n t er n a t i o n a l B u si n ess…

Fourth driver: Regional trading blocks are adding tothe pace of globalization. WTO (World TradeOrganization), EU (European Union), NAFTA (North American Free Trade Agreement), EFTA (European

Free Trade Agreement), MERCOSUR (South Americantrading block, known as Mercosur in Spanish &Mercosul in Portuguese), etc. are major alliancesamong countries.

Fifth driver: Declining trade and investment barriershave vastly contributed to cross-border business.

Shashank M Hiremath

(Contd…)




Sixth driver: The most powerful instrument thattriggered internationalization is technology.

Seventh driver: Boston Consultancy Group (2005)

has identified five currents of internalization: Growth of Rapidly Developing Economies (RDEs).

China, India, Brazil, Mexico, South East Asia, Central and EasternEurope.

Continuing cost and capital advantage of RDEs.

Development of talent and capabilities in RDEs.

Migration of customers to RDEs.

Emergence of RDE-based global competitors.

Shashank M Hiremath

(Contd…)




Eighth driver: There is money in international business and no organization would wish to miss theopportunity.

Ninth driver: Resource seeking is another motivefor firms going international.

Tenth driver: Internationalization is triggered by world bodies and institutions. WTO promotes andregulates businesses across nations. WTO helps freetrade, negotiate opening of markets, and settles tradedisputes.

Shashank M Hiremath



International & Domestic BusinessInternational & Domestic Business

Buying and Selling.

Main motive is to make profit.

Currency.

Interest rates.

Inflation.

Taxation systems.

Government regulations.Language, cultural and economic barriers.

Shashank M Hiremath



Evolution of International BusinessEvolution of International Business

Thousands of years before Christ, a new professioncame into being in Mesopotamia, Southern Arabia, Egypt,Greece and Asia Minor.

19th Century : Broader concept of the integration of

economies and societies. 1870: Began first phase of Globalization.

1913: GDP 22.1 After 1913: Increased Trade Barriers to Protect Domestic Production.

1919: World War I: End of first phase of Globalization,Industrial revolution in UK, Germany and the USA. Sharpincrease in the trade with import and export by colonialempires.

Shashank M Hiremath

(Contd…)



Ev o l u t i o n o f I n t er n a t i o n a l B u si n ess… Ev o l u t i o n o f I n t er n a t i o n a l B u si n ess…

1930’s: Declined Trade Ratio, GDP 9.1 After 1930’s: World Nations felt the need for International Co-

operation in global trade and balance of payments affairs.

Establishment of IMF and IBRD (World Bank).

IMF: International Monetary Fund.

IBRD: International Bank for Reconstruction and Development.1947: 23 countries conducted negotiations in order to

prevent the protectionist policies and to revive theeconomies from recession aiming at establishment of World Trade organization.

1947: Establishment of GATT (General Agreement onTrade and Tariffs).

1980s: Efforts to convert GATT into WTO. Shashank M Hiremath

(Contd…)



Ev o l u t i o n o f I n t er n a t i o n a l B u si n ess… Ev o l u t i o n o f I n t er n a t i o n a l B u si n ess…

1995: GATT was replaced by WTO (World TradeOrganization) on Jan 1, 1995. Trade Liberalization.

1990 - 2000: The Term IB (International Business)has emerged from the term International Marketing. There are two Phases of the evolution of the term International

Business.

1) International Trade to International Marketing.

2) International Marketing to International Business.

After 1990: Rapid Internationalization andglobalization.

Today : Interpreting the PESTIN factors of International Trade environment more clearly.

Shashank M Hiremath



Global Trade

Theories



Global Trade & it’s TheoriesGlobal Trade & it’s Theories

Benefits of foreign trade.

Understanding the trade policies.

Understanding and evaluating several trade theoriesand their implications on international business.

Usefulness of trade theories to an international

manager.

Shashank M Hiremath



Benefits of foreign tradeBenefits of foreign trade

Natural resources of the earth are unevenly distributed.

One country possesses product ‘X’ in surplus and

lacks in product ‘Y’.

Countries go for developmental imports in theinitial stages at home.

To make full use of productive capacity, a country will go for ‘maintenance imports’.

Shashank M Hiremath

(Contd…)



Ben ef i t s o f f o r ei g n t r ad e...Ben ef i t s o f f o r ei g n t r ad e...

In nearly 5000 years since humans began to

exchange obsidian and clothes, the number of traders and variety of goods they ship across bordershave grown spectacularly.

Shashank M Hiremath



Foreign trade policiesForeign trade policies

Set of rules, procedures and regulations that govern acountry’s trade with other countries.

Purpose of a trade policy is to smoothen a country’strade.

Every country will have it’s own trade policy.

Trade policies can be: free trade, fair trade, inwardtrade or outward trade.

Fair trade corresponds with the inward trade policies.Free trade encourages outward trade policies.

Shashank M Hiremath

(Contd…)



O u t w a r d O u t w a r d - -o r i en t ed p o l i ci es o r i en t ed po l i c i es

Free trade promotes world trade.The economic interdependence among countries makes

countries engage less in conflicts.

Uneven distribution of resources makes trade inevitable.

World trade encourages efficient use of global resources.

Global competition forces companies to become moreefficient and innovative.

World trade has created awareness.

Exports create jobs.

Shashank M Hiremath

(Contd…)



I n w a r d I n w a r d - -o r i en t ed Po l i ci es o r i en t ed Po l i ci es

Sheltering domestic industries.

Raises the cost of foreign inputs used in their

production.

Costs of domestic inputs will increase throughinflation, as there will be restrictions imposed on

imports.

Shashank M Hiremath



Barriers to TradeBarriers to Trade

Tariff Barriers: Export tariff

Import tariff

Quotas

Non-tariff Barriers: Administrative barriers

Subsidies

Embargo & Boycotts

Corruption Technical standards

Environmental standards

Currency control

Product & testing standards

Shashank M Hiremath



Global Trade TheoriesGlobal Trade Theories

Mercantilism

Absolute advantage

Comparative advantage

Factor proportions / factor endowmentsProduct life cycle

New trade theory

National competitive advantage

Shashank M Hiremath



MercantilismMercantilism

First international trade theory , emerged inEngland in the mid 16th century .

During 17th century, gold and silver were thecurrency of trade between countries.

Colonising resource rich, less developed countries was another source of mercantalism.

In the name of trade with India, the east IndiaCompany virtually plundered the country.

It believes in a zero-sum game, i.e. gain of onecountry results in loss to another country)

Shashank M Hiremath



Theory of Absolute AdvantageTheory of Absolute Advantage

Adam Smith, also known as the father of economics,published a book ‘The Wealth of Nations’ in 1776 inLondon.

In his time, English were efficient at textile

manufacturing and French had world’s most efficient wine industry.

English had absolute advantage in the production of textiles, while French had absolute advantage in theproduction of wine.

According to Smith, countries should specialize in theproduction of goods for which they have an absoluteadvantage.

Shashank M Hiremath



Absolute Advantage... Absolute Advantage...

Spain has an absolute advantage in the production of olive oil (takes only 2 hours to produce one unit)

Italy has an absolute advantage in the production of shoes (it takes only 2 hours per unit)

Spain should export olive oil and import shoes fromItaly.

Country Olive Oil Shoes

Spain 2 4Italy 4 2

Shashank M Hiremath

(Contd…)



Absolute Advantage... Absolute Advantage...

Acquired advantage makes a country strong inmanufactured goods & services.

This theory has three implications: Potential for gains from trade.

Gains in national well-being.

Within one country the gains from trade are not evenly distributed by the competitive market.

Complication arises when one of the trading partnershas an absolute advantage in the production of boththe goods.

Shashank M Hiremath



Theory of Comparative AdvantageTheory of Comparative Advantage

David Ricardo, in his book, Principles of PoliticalEconomy (1817), mentioned about greatest relativeadvantage or comparative advantage.

Ricardo argued that it makes sense for a country tospecialize in the production of those goods that itproduces most efficiently and to buy the goods thatit produces less efficiently from other countries.

Shashank M Hiremath

A i & Li i i fA i & Li i i f



Assumptions & Limitations of Assumptions & Limitations ofEarlier Trade TheoriesEarlier Trade Theories

Do not take into account the cost of internationaltransportation.

Labour is the only factor of production.

Production and consumption of two goods only.Only two countries are engaged in production and

consumption of just two goods.

Today, countries can access needed low-cost

capital in global markets.Some services cannot be traded internationally.

Shashank M Hiremath

F E d /P i ThF E d /P i Th



Factor Endowments/Proportions Theory Factor Endowments/Proportions Theory (Heckscher(Heckscher--Ohlin theory)Ohlin theory)

Swedish economists Eli Heckscher (1919) &Bertil Ohlin (1933), argued that comparativeadvantage arises from difference in national factorendowments such as land, labour and capital.

Different nations have different endowments anddifferent factor endowments explain differences infactor costs.

Countries will export those goods that make

intensive use of those factors that are locally abundant, while importing goods that makeintensive use of factors that are locally scarce.

Shashank M Hiremath

(Contd…)



H eck sch er H eck sch er - -Oh l i n t h eo r y … Oh l i n t h eo r y …

Examples: China and labor

USA and pharmaceuticals

Canada and electric power

According to this theory, a capital-abundantcountry will export the capital-intensive goods,since the prices will be temporarily higher in theother country. Similarly, a labour-abundant

country will export the labour-intensivecountry.

Shashank M Hiremath

I i l P d Lif C lI i l P d Lif C l



International Product Life CycleInternational Product Life Cycle(IPLC) Theory (IPLC) Theory

Raymond Vernon of Harvard Business School in1960, introduced this theory.

Explained how a company will begin by exporting it’sproducts and eventually undertake foreign directinvestment, as the product moves through its life cycle.

The theory identifies three stages in the life of aproduct: 1) New product stage, 2) Maturing productstage, and 3) Standardized product stage.

Applicability to the contemporary global economy:

Today, the cycle from innovation to maturity is muchshorter making it harder for the innovator country tosustain its lead in a particular product.

Shashank M Hiremath



New Trade Theory New Trade Theory

Emerged during 1970’s and 1980’s.Gains from specialization & economies of scale.

First movers in market can create entry barriers toothers.

Governments assist home based firms.

This theory emphasises on productivity rather than acountry’s resources

It is in line with the comparative advantage as well asfactor endowment theory.

Shashank M Hiremath



Competitive AdvantageCompetitive Advantage

Michael Porter, Professor at Harvard, in 1990stated that classical trade theories on comparativeadvantage fail to explain adequately why trade takesplace across countries.

He studied 100 companies in 10 developed countriesto learn how firms can become competitive.

A firm’s competitive advantage stems from; 1) Factorconditions, 2) Demand conditions, 3) Strategy,

Structure & Rivalry, and 4) Related & Supportingindustries

Shashank M Hiremath

(Contd…)

Porter’s DiamondPorter’s Diamond



Porter s DiamondPorter s Diamond

Shashank M Hiremath



Limitations of Porter’s ModelLimitations of Porter’s Model

Focuses more on developed countries.Natural resources are too important.

Government has role in determiningcompetitiveness.

Chance factors (random events) play their role inpromoting or hampering competitive strength of firms.

Shashank M Hiremath



Environment of International BusinessEnvironment of International Business

Political Environment.

Legal Environment.

Technological Environment.

Cultural Environment.

Economic Environment.

Shashank M Hiremath



Political environmentPolitical environment

Democracy.

Totalitarianism:

Theocratic, Secular, Tribal, and Right-Wing.

Political risks.

Sources of political risks.

Political risk assessment.

Shashank M Hiremath

(Contd…)



Po l i t i ca l r i sk s Po l i t i ca l r i sk s

Micro.

Macro.

Firm-specific.

Country-specific.

Global-specific.

(Contd…)

Shashank M Hiremath



Sou r ces o f po l i t i ca l r i sk s Sou r ces o f po l i t i ca l r i sk s

Ideological.

Sociological.

Psychological.

Economic constraints.

Shashank M Hiremath



Legal environmentLegal environment

Systems of law.

International disputes resolution.

Principles of international law.

Legal concerns for MNC’s.

Shashank M Hiremath

(Contd…)



Sy st em s o f l aw Sy st em s o f l aw

Islamic / Theocratic law . Philippines, Arab nations, Islamic traditions.

Socialist / Marxist law . Russia, China, Vietnam, North Korea, and Cuba.

Common law . US, UK, India, Canada, Australia, Hong Kong, New Zealand,

Malaysia, and Norway.

Civil / Coded law .

Followed in more than 150 countries including all EuropeanUnion except UK, Brazil, Canada, China (except Hong Kong),Japan, Mexico, Switzerland, and Turkey.

Comparative law (emerging discipline) Shashank M Hiremath

(Contd…)



I n t er n a t i o n a l d i sp u t es r eso l u t i o n I n t er n a t i o n a l d i sp u t es r eso l u t i o n

Conciliation Asking a third party to mediate.

Arbitration When conciliation fails, arbitration, rather than

litigation is preferred method for resolving disputes.

Litigation

Seeking justice in the court.

Shashank M Hiremath

(Contd…)



L ega l con cer n s f o r M NC’s L ega l con cer n s f o r M NC’s

Intellectual property.Product liability & safety.

Competition among Businesses.

Bribes & Corrupt practices.

Advertising & Sales promotion.

Contracts.

Shipping or Carriage of goods.

Labour Laws Across the World.Environmental laws.

Shashank M Hiremath



Cultural environmentCultural environment

National culture.

Business culture.

Occupational & Organizational culture.

Shashank M Hiremath

(Contd…)



Cu l t u r a l Pr ed i sp o si t i o n s Cu l t u r a l Pr ed i sp o si t i o n s

Ethnocentricism Tendency of people to evaluate a foreigner’s behaviour by the

standards of their own culture, and to believe that their ownculture is superior to all others.

Polycentricism Tolerance to beliefs and values of other societies.

Regiocentricism Same as polycentricism but IHRM practices are adapted.

Geocentricism Subsidiary operations are managed by the best qualified

individuals.

Shashank M Hiremath



Technological environmentTechnological environment

Awareness phase.

Acquisition phase.

Adaption phase.

Advancement phase.

Abandonment phase.

Shashank M Hiremath



Economic environmentEconomic environment

Income-wise classification.

Economic systems.

Region-wise classification.

Economic scenario.Structural adjustments.

Financial systems.

Economic policies.

Economies in transition.

Shashank M Hiremath

(Contd…)



I n c om e I n c ome - -w i se cl a ssi f i ca t i on w i se cl a ssi f i ca t i on

Developing countries: Many nations in Africa, the Middle East, and poor

communist nations in Europe, Asia.

Developed countries: Australia, Canada, Japan, New Zealand, US, all Western

European nations and Greece.

Hong Kong, South Korea, Czech Republic, and Estonia are

recently declared by IMF as developed countries.

(Contd…)

Shashank M Hiremath



Cla ssi f i ed b y Econ om i c Sy st em Cla ssi f i ed b y Econ om i c Sy st em

Market economy: Also called capitalism.

Pure Market Economy and Pure Centrally Planned Economy.

US, Canada, UK, France, Brazil, India, China, Cuba, North Korea.

Command economy: Also called socialism.

What to produce? How to price?, etc are determined by centralgovernment.

Mixed economy: Midway between a market economy and command economy.

Largely followed in France, India, Italy, and Sweden.

(Contd…)

Shashank M Hiremath



Econ om i c scen a r i o Econ om i c scen a r i o

Rates of growth.

Inflation.

Savings.

Investment.

Fiscal stability.

Balance of payments. (Contd…)

Shashank M Hiremath



Econ om i c po l i c i es Econ om i c po l i c i es

Industrial policy.

Monetary policy.

Fiscal policy.

Trade policy.

(Contd…)

Shashank M Hiremath



Econ om i es i n t r a n si t i o n E co n om i es i n t r a n si t i o n

India

China

Vietnam

Russia

Poland

African countries

Latin America – Chile, Argentina, Brazil, and Peru.

Shashank M Hiremath



Thank You!!!Thank You!!!

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Shashank M Hiremath