International business - Manu Melwin Joy

International Business

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – [email protected]

Definition

“ All institutions have to make global competitiveness a strategic goal. No institution, whether a business, a university or a hospital, can hope to survive, let alone to succeed unless it measures up to the standards set by the leaders in its fields, any place in the world.” -Management challenges of 21st century by Peter drucker.

Definition

Although its market is confined almost entirely to India, the competition which Nirma encounters is indeed global. Its major competitor include MNCs such as Unilever, P&G, Colgate, Palmolive and Henkel.

Definition

International business relates to any situation where the production or distribution of goods or services crosses country borders.

Why go international?

Why go international?

• Survival.• Growth Opportunities.• Sales and profit.• Diversification.• Domestic Market constraints. • Inflation and price moderation.• Employment.• Standard of living.• Competition.

SURVIVAL

• Because most of the countries are not as fortunate as the United States in terms of market size, resources, and opportunities, they must trade with others to survive; Hong Kong, has historically underscored this point well, for without food and water from china proper, the British colony would not have survived along. The countries of Europe have had similar experience, since most European nations are relatively small in size. Without foreign markets,

GROWTH OPPORTUNTIESAn important reason for going international is to take advantage of the opportunities in other countries. MNCs are getting increasingly interested in a number of developing countries as the income and population are rapidly rising in these countries.

GROWTH OPPORTUNTIESDeveloping countries, in spite of economic and marketing problems, are excellent markets. According to a report prepared for the U.S. CONGRESS by the U.S. trade representative, Latin America and Asia/Pacific are experiencing the strongest economic growth. American markets cannot ignore the vast potential of international markets. The world is more than four times larger than the U.S. market. In the case of Amway corps. a privately held U.S. manufacturer of cosmetics, soaps and vitamins, Japan represents a larger market than the United States.

ExampleIn recent years, a number of Indian pharmaceutical companies have achieved a much faster growth of their foreign business than the domestic. The US market alone is expected to contribute as much as half of the total sales of Ranbaxy shortly.

SALES AND PROFITForeign markets constitute a larger share of the total business of many firms that have wisely cultivated markets aboard. Many large U.S. companies have done well because of their overseas customers. IBM and Compaq, foe ex, sell more computers aboard than at home. According to the US dept. of commerce, foreign profits of American firms rose at a compound annual rate of 10% between 1982 and 1991, almost twice as fast as domestic profits of the same companies.

SALES AND PROFITThe important incentive of international business is the profit advantage. There are cases of companies which earned more than 100 % of the total profit from foreign market.

ExampleMNCs are lured to china by cheap labor. Philips now has 23 factories in China and exports $ 5 billion in goods produced every year. Chine is making more than 50 % of cameras, 30 % of AC and TVs, 25 % of washing machines sold world wide.

DIVERSIFICATION• Demand for mast products is

affected by such cyclical factors as recession and such seasonal factors as climate. The unfortunate consequence of these variables is sales fluctuation, which can frequently be substantial enough to cause layoffs of personnel. One way to diversify a companies’ risk is to consider foreign markets as a solution for variable demand. Such markets, even out fluctuations by providing outlets for excess production capacity.

DIVERSIFICATION• Cold weather, for instance may

depress soft drink consumption. Yet not all countries enter the winter season at the same time, and some countries are relatively warm year round. Bird, USA, inc., a Nebraska manufacturer of go carts, and mini cars, for promotional purposes has found that global selling has enabled the company to have year round production. It may be winter in Nebraska but its summer in the southern hemisphere-somewhere there is a demand and that stabilizes the business.

Domestic Market constraintsThe market for a number of products tend to saturate or decline in advanced countries. In US, the stock of several consumer durables like cars, TV sets etc exceeds the total number of households.

INFLATION AND PRICE MODERATION• The benefits of export are readily

self-evident. Imports can also be highly beneficial to a country because they constitute reserve capacity for the local economy. Without imports, there is no incentive for domestic firms to moderate their prices. The lack of imported product alternatives forces consumers to pay more, resulting in inflation and excessive profits for local firms. This development usually acts as prelude to workers demand for higher wages, further exacerbating the problem of inflation.

INFLATION AND PRICE MODERATION• Import quotas imposed on Japanese

automobiles in the 1980’s saved 46200 US production jobs but at a cost of $160,000 per job per year. This cost was a result of the addition of $400 to the prices of US cars, and $1000 to the prices of Japanese imports. This windfall for Detroit resulted in record high profits for US automakers. Not only do trade restrictions depress price competition in the short run, but they also can adversely affect demand for year to come

EMPLOYMENTTrade restrictions, such as high tariffs caused by the 1930’s smoot-hawley bill, which forced the average tariff rates across the board to climb above 60%, contributed significantly to the great depression and have the potential to cause wide spread unemployment again. Unrestricted trade on the other hand improves the world’s GNP and enhances employment generally for all nations. Importing products and foreign ownership can provide benefits to a nation. According to the institute for international Economics-a private, non- profit research institute – the growth of foreign ownership has not resulted in a loss of jobs for Americans; and foreign firms have paid their American workers the same, as have domestic firms.

STANDARDS OF LIVINGTrade affords countries and their citizen’s higher standards of living than other wise possible. Without trade, product shortages force people to pay more for less, products taken for granted, such as coffee and bananas may become unavailable overnight. Life in most countries would be much more difficult were it not for the many strategic metals that must be imported. Trade also makes it easier for industries to specialize and gain access to raw materials, while at the same time fostering competition and efficiency. A diffusion of innovations across national boundaries is useful by-products of international trade. A lack of such trade would inhibit the flow innovative ideas.

CompetitionCompetition become a driving force behind internationalization. The economic liberalization ushered in India since 1991, which has increased competition from foreign firms as well as from those within the country.

Economic Environment

Important factors of economic environment

Structure and nature of economy

Economic conditions

Economic policies Global linkage

• Levels of development of the economy.

• Sectoral composition of output.

• Inter – sectoral linkage.

• Income levels.• Distribution of

income.• GDP Trends.• Demand and

supply trends.• Price trends.• Trade and BPO

trends.

1. Industrial policy.

2. Trade policy.3. Foreign

exchange policy.

4. Foreign investment and technology policy.

5. Fiscal policy.6. Monetary

Policy.

• Magnitude and nature of cross border.

• Trade flows.• Financial flows.• Membership of

WTO, IMF, World Bank, trade blocs etc

Economic Environment

• Economic conditions, economic policies and the economic system are the important external factors that constitute the economic environment of a business. The economic conditions of a country-for example, the nature of the economy, the stage of development of the economy, economic resources, and the level of income, the distribution of income and assets, etc- are among the very important determinants of business strategies.

Nature of economy

• Low income economies- Very low level of per capita income.

• High income economies – Very rich income per capita.

• Middle income economies – Per capita income lies between that of low income and high income economies.

Nature of economy

• Developing economies – This include Low income and middle income are economies.

• Developed economies – High income economies.

Economic EnvironmentIn a developing country, the low income may be the reason for the very low demand for a product. The sale of a product for which the demand is income elastic naturally increases with an increase in income. But a firm is unable to increase the purchasing power of the people to generate a higher demand for its product. Hence, it may have to reduce the price of the product to increase the sales. The reduction in the cost of production may have to be effected to facilitate price reduction. It may even be necessary to invent or develop a new low-cost product to suit the low-income market

Economic EnvironmentColgate designed a simple, hand-driven, inexpensive ($10) washing machine for low-income buyers in less developed countries. Similarly, the National Cash Register Company took an innovative step backward by developing a crank-operated cash register that would sell at half the cost of a modern cash register and this was well received in a number of developing countries.

Economic EnvironmentIn countries where investment and income are steadily and rapidly rising, business prospects are generally bright, and further investments are encouraged. There are a number of economists and businessmen who feel that the developed countries are no longer worthwhile propositions for investment because these economies have reached more or less saturation levels in certain respects. In developed economies, replacement demand accounts for a considerable part of the total demand for many consumer durables whereas the replacement demand is negligible in the developing economies.

Economic EnvironmentThe economic policy of the government, needless to say, has a very great impact on business. Some types or categories of business are favourably affected by government policy, some adversely affected, while it is neutral in respect of others. For example, a restrictive import policy, or a policy of protecting the home industries, may greatly help the import-competing industries.

Political EnvironmentInternational Business

Political EnvironmentA political system is basically the system of politics and government in a country. It governs a complete set of rules, regulations, institutions, and attitudes. A main differentiator of political systems is each system’s philosophy on the rights of the individual and the group as well as the role of government. Each political system’s philosophy impacts the policies that govern the local economy and business environment.

Political EnvironmentAuthoritarian governments centralize all control in the hands of one strong leader or a small group of leaders, who have full authority. These leaders are not democratically elected and are not politically, economically, or socially accountable to the people in the country. Totalitarianism, a more extreme form of authoritarianism, occurs when an authoritarian leadership is motivated by a distinct ideology, such as communism. In totalitarianism, the ideology influences or controls the people, not just a person or party. Authoritarian leaders tend not to have a guiding philosophy and use more fear and corruption to maintain control.

Political EnvironmentFor example, the communist countries had a centrally planned economic system. In most countries, apart from those laws that control investment and related matters, there are a number of laws that regulate the conduct of the business. These laws cover such matters as standards of products, packaging, promotion etc.

Political EnvironmentDemocracy is the most common form of government around the world today. Democratic governments derive their power from the people of the country, either by direct referendum (called a direct democracy) or by means of elected representatives of the people (a representative democracy). Half of the world’s population lives in a democracy of some sort, although only some 14 percent reside in full democracies.

Political EnvironmentWhat businesses must focus on is how a country’s political system impacts the economy as well as the particular firm and industry. Firms need to assess the balance to determine how local policies, rules, and regulations will affect their business. Depending on how long a company expects to operate in a country and how easy it is for it to enter and exit, a firm may also assess the country’s political risk and stability. A company may ask several questions regarding a prospective country’s government to assess possible risks.

Political Environment1. How stable is the government?2. Is it a democracy or a dictatorship?3. If a new party comes into power, will

the rules of business change dramatically?

4. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national legal document?

5. How involved is the government in the private sector?

6. Is there a well-established legal environment both to enforce policies and rules as well as to challenge them?

7. How transparent is the government’s political, legal, and economic decision-making process?

ExampleChina is one of the more visible examples, with its strong government and limited individual rights. Chinese government control on the Internet, for example, has helped propel homegrown, Baidu, a Chinese search engine, which earns more than 73 percent of the Chinese search-engine revenues. Baidu self-censors and, as a result, has seen its revenues soar after Google limited its operations in the country

Demographic EnvironmentInternational Business

Demographic Environment

• Age structure.• Gender.• Income distribution.• Family size.• Family life cycle.• Occupation.• Education.• Social class.

Demographic Environment

Demographic factors such as size of the population, population growth rate, age composition, life expectancy, family size, spatial dispersal, occupational status, employment pattern etc, affect the demand for goods and services.

Demographic EnvironmentMarkets with growing population and income are growth markets. But the decline in the birth rates in countries like the United States have affected the demand for baby products. Johnson and Johnson have overcome this problem by repositioning their products like baby shampoo and baby soap, promoting them also to the adult segment, particularly to the females.

Demographic EnvironmentThe occupational and spatial mobilities of population have implications for business. If labour is easily mobile between different occupations and regions, its supply will be relatively smooth, and this will affect the wage rate. If labour is highly heterogeneous in respect of language, caste and religion, ethnicity, etc., personnel management is likely to become a more complex task. The heterogeneous population with its varied tastes, preferences, beliefs, temperaments, etc. gives rise to differing demand patterns and calls for different marketing strategies.

Social and cultural EnvironmentInternational Business

Social and cultural Environment

• The socio-cultural fabric is an important environmental factor that should be analysed while formulating business strategies. The cost of ignoring the customs, traditions, taboos, tastes and preferences, etc., of people could be very high.

Elements of culture

• Culture is the sum total

of the societal behavior.

It is simply the totally

life way of people.

Culture Definition

• Knowledge and beliefs - It refers to

a people’s prevailing notions of

reality.

• Ideals – It refer to the societal

norms which define what is

expected.

• Preferences – It refer to society’s

definitions of those things in life

which are attractive or unattractive

as objects of desire.


• The buying and consumption habits of the people, their language, beliefs and values, customs and traditions, tastes and preferences, education are all factors that affect business.


In Thailand, Helene Curtis switched to black shampoo because Thai women felt that it made their hair look glossier. Nestle, a Swiss multinational company, today brews more than forty varieties of instant coffee to satisfy different national tastes.


Even when people of different cultures use the same basic product, the mode of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes method of presentation, positioning, or method of promoting the product may have to be varied to suit the characteristics of different markets.

Social and cultural EnvironmentFor example, the two most important foreign markets for Indian shrimp are the U.S and Japan. The product attributes for the success of the product in these two markets differ. In the U.S. market, correct weight and bacteriological factors are more important rather than eye appeal, colour, uniformity of size and arrangement of the shrimp which are very important in Japan. Similarly, the mode of consumption of tuna, another seafood export from India, differs between the U.S. and European countries.


The values and beliefs associated with colour vary significantly between different cultures. Blue, considered feminine and warm in Holland is regarded as masculine and cold in Sweden. Green is a favourite colour in the Muslim world; but in Malaysia, it is associated with illness.


White indicates death and mourning in China and Korea; but in some countries, it expresses happiness and is the colour of the wedding dress of the bride. Red is a popular colour in the communist countries; but many African countries have a national distaste for red colour.

Hofstede’s Research on National Culture

• Individualism versus collectivism

• Power distance• Uncertainty avoidance• Masculinity versus

femininity• long-term versus short-

term orientation


Individualism versus collectivism refers to whether a person functions primarily as an individual or within a group. In individualistic societies, ties among people are relatively loose, and each person tends to focus on his or her own self-interest. These societies prefer individualism over group conformity.


Power distance describes how a society deals with the inequalities in power that exist among people. Societies characterized by high power distance are relatively indifferent to inequalities and allow them to grow over time. There are substantial gaps between the powerful and the weak.


Uncertainty avoidance refers to the extent to which people can tolerate risk and uncertainty in their lives. People in societies with high uncertainty avoidance create institutions that minimize risk and ensure financial security.


Masculinity versus femininity refers to a society’s orientation, based on traditional male and female values. Masculine cultures tend to value competitiveness, assertiveness, ambition, and the accumulation of wealth. They are characterized by men and women who are assertive, focused on career and earning money, and may care little for others.


long-term versus short-term orientation . This dimension denotes the degree to which people and organizations defer gratification to achieve long-term success. That is, firms and people in cultures with a long-term orientation tend to take the long view to planning and living. They focus on years and decades.

High-Context Cultures• Infer information from

message context, rather than from content.

• Prefer indirectness, politeness & ambiguity.

• Convey little information explicitly.

• Rely heavily on nonverbal signs.

• Asian• Latin American• Middle Eastern

Low-Context Cultures• Rely more on content rather than on context.• Explicitly spell out

information.• Value directness.• See indirectness as

manipulative.• Value written word more than

oral statements.

• European• Scandinavian• North American

Some Cultural Scenarios

Japan China

India Mexico

JAPANTo help her American Company establish a presence in Japan, Mrs. Torres wants to hire a local interpreter who can advise her on business customs. Ms. Tomari has superb qualifications on paper, but when Mrs. Torres tries to probe about her experience, Ms. Tomari just says, “I will do my best. I will try very hard.” She never gives details about any of the previous positions she has held. Mrs. Torres begins to wonder if Ms. Tamari's résumé is inflated.

CHINAStan Williams wants to negotiate a joint venture between his American firm and a Beijing-based company. He asks Tung-Sen Lee if the Chinese people have enough discretionary income to afford his product. Mr. Lee is silent for a time, and then says, “Your product is good. People in the West must like it.” Stan smiles, pleased that Mr. Lee recognizes the quality of his product, and he leaves a contract for Mr. Lee to sign. Weeks later, Stan still hasn’t heard anything. If China is going to be so inefficient, he wonders if his company should try to do business there.

INDIAGloria Johnson is proud of her participatory management style. Assigned in Bombay on behalf of her U.S.-based company, she is careful not to give orders but to ask for suggestions. But the employees rarely suggest anything. Even a formal suggestion system she established does not work. Worse still, she doesn’t sense the respect and camaraderie that she felt at the plant she managed in Texas. Perhaps the people in India just are not ready for a woman boss.

MEXICOAlan Caldwell is a U.S. sales representative in Mexico City. He makes appointments with Senõr Lopez and is careful to be on time, but his host is frequently late. To save time, Alan tries to get right to business, his host wants to talk about sightseeing and about Alan’s family. Even worse, the meetings are interrupted constantly with phone calls, long conversations with other people, and even customers’ children who come into the office. Alan’s first report to his home office is very negative. He hasn’t yet made a sale. Perhaps Mexico just isn’t the right place to do business.

Religion

• The cost of ignoring certain religious aspects could be very high, sometimes fatal, in international business.

• When Mac Donalds was planning to enter India, one political party stated that it would oppose the marketing of beef products in the country by MNC.

Language

• Differences in the language are a very important problem area in business.,

• Non verbal communications create equally difficult problems.

Etiquette

• The ways of meeting and greeting people, expression of appreciation or disapproval, methods of showing respect etc vary quite widely between cultures.

• Handshake.

In Japan, bowing is the norm in both business and personal settings. Here, Japanese Foreign Minister Yoriko Kawaguchi and a U.S. Trade representative (left) bow to each other before a 2004 meeting

• There are even differences in one country and some may consider certain regions more hospitable and polite; it is often just a matter of understanding their traditions.

For example, friends can give three kisses in certain countries if they meet each other; others will give one, two and there are even consider kissing between friends as insulted. There is no difference between the hospitality and politeness between these countries; they have just different etiquettes.

• Most everyone knows the traditional Thai Greeting (the Wang). Thai people put both hands in a prayer position and bow their head a little bit to their hands. They always smile and only use this “Way greeting” to foreigners or elderly persons. This kind of greeting is also used in some other countries in Asia, for example India, the Philippines, Myanmar, China and many others.

• Kissing and shaking hands are the most common greeting gestures between different countries and cultures. Shaking hands is a traditional way of greeting when American people meet someone for the first time.

• American people are friendly people and say “hi” to everyone they meet, even if they don’t know them. It is more a form of politeness and they expect you return the same greeting. No return of greeting is considered to be a form of rudeness. It is unusual to kiss foreigners and even friends. Cheek kissing is acceptable but unusual in Northern America.

Cheek kissing is more common in Europe and Latin America. There are either differences between the countries in these

continents.• For example in France, Spain, Portugal, Switzerland, Belgium they

usually give one on each cheek

• there are either parts of Belgium, France and Switzerland where they gave three or even four kisses.

• Cheek kissing is uncommon in Asia, they greet mostly with a bow or they shake hands. Shaking hands is also the most common form of greeting in Africa.

• People in Turkey are talkative and welcome almost all visitors of their country. They invite you at home for a drink or to spend some time with the family. People of this country are proud of their country and want to show all the beauties to every tourist.

• Life in Asia is not easy and they treat every tourist with respect. It is a part of their culture. You may find some countries impolite at first sight because you don’t know the meaning of their traditions.

• For example; Chinese people are noisy when they eat and they

even slurp when they eat noodles.

• People of Europe, America and many other countries of the world may consider this as impolite but according theChinese culture, it is a sign they enjoyed the meal. There is no reason to consider their behavior as less polite than western culture; it

is just different.

• It is more a matter of accepting these differences and you will find hospitable and polite people in every country and culture of the world. Discovering the differences in traditions between countries and cultures is really a wonderful experience and

may help you to see the positive things in every culture.

Legal EnvironmentInternational Business

Legal EnvironmentManagers must be aware of the legal systems in the countries in which their firms operate, the basic nature of the legal profession (both domestic and international) and the legal relationships that exist between and among countries. Legal systems differ both in terms of the nature of the system and the degree of independence of the judiciary from the political process.

Kinds of Legal Systems

Common law originated in

the United Kingdom and is

based upon tradition,

precedent, custom and

usage; therefore, courts

play an important role in

interpreting the law.

Kinds of Legal SystemsCivil law, also known as codified law, originated with the Romans and is based upon a detailed set of laws that make up a detailed code that includes rules for conducting business; courts play an important role in applying the law.

Kinds of Legal SystemsTheocratic law is based upon religious precepts. The best example is Islamic law, or Shair’a. The key for businesses is to adhere to the constraints of ancient Islamic laws while maintaining sufficient flexibility to operate in a modern global economy.

Consumer Safeguards Different legal systems provide varying safeguards with respect to product liability and other legal issues. For example, access to and assistance from the legal community, legal fees and the ability to use foreign lawyers all differ across countries.

The Legal Profession Although lawyers and law firms vary in terms of how they practice law and service clients, MNEs must use lawyers for a variety of services, such as negotiating contracts, formalizing agent-distributor relationships and protecting intellectual property. The key for managers doing business overseas is to choose a law firm with the needed expertise and overseas connections, whether through the company’s own offices, a merger, or correspondent relationships.

Legal Issues in International BusinessNational laws may affect the business climate both within and beyond a country’s borders and pertain to both domestic and foreign firms. Areas addressed include health and safety standards, employment practices, antitrust prohibitions, contractual relationships, environmental practices, intellectual property, cross-border investment flows, tariffs and non-tariff barriers, to name but a few. In addition, international treaties among nations may also affect the nature and extent of business operations.

Technological EnvironmentInternational Business

Technological EnvironmentTechnological change can have impact on the decisions taken by international business. Technological change can involve:– New process of production: new ways

of doing things which rises productivity of factor inputs, as with use of robotics in car assembly techniques which has dramatically raised output per assembly line worker. For example around 80% of technological change has been process innovation.

– New products: For example, online banking and many new financial services are direct result of advances in micro processor based technologies.

Technological EnvironmentTechnological factors sometimes pose problems. A firm, which is unable to cope with the technological changes, may not survive. Further, the differing technological environment of different markets or countires may call for product modifications.

Technological Environment

For example, many

appliances and instruments

in the U.S.A. are designed

for 110 volts but this needs

to be converted into 240

volts in countries which

have that power system.


Technological developments may

increase the demand for some existing

products. For example, voltage stabilisers

help increase the sale of electrical

appliances in markets characterised by

frequent voltage fluctuations I power

supply. However, the introduction of

TV’s, Fridges etc, with in built voltage

stabilizer adversely affects the demand

for voltage stabilizers.


Advances in the technologies of

food processing and

preservation, packaging etc.,

have facilitated product

improvements and introduction

of new products and have

considerably improved the

marketability of products.

Technology and employmentNew technologies can both create and destroy jobs. For example, the US Internet banking company has introduced ‘smart’ technologies into every aspect of its operations, so that its $2.4bn of deposits are now managed by just 180 people, compared to the 2,000 people required to manage deposits of this size in less technologically advanced banks.

Technology and competitive advantageTechnological change provides national and international business with both opportunities and threats. For example, five new broadband wavelengths were auctioned in the UK in early 2000. Access to such wavelengths has been regarded as vital for the new generation of wireless application Protocol (WAP) products, making possible the internet, television and other interactive application on the third-generation of mobile phones.

Transfer of TechnologyTechnology transfer is the process by which commercial technology is disseminated. Two forms are– Internalized TT – Refers to

investment associated with TT, where control resides with the technology transferor.

– Externalized TT – refers to all other forms, such as joint ventures with local control, licensing, strategic alliances and internal subcontracting.

Entry StrategiesInternational Business

Entry Strategies

• Market entry strategy is influenced by the firm and product characteristics and the domestic and international market characteristics.

Foreign Market Entry and Operations Strategies

Exporting

• Direct Exporting.

• Indirect Exporting.

Contractual Agreement

• Licensing & Franchising.

• Strategic Alliance.

• Contract Manufacturing.

Production facility in foreign

market.• Assembly Operations.• Wholly owned

manufacturing facility.• Joint Ventures.

Mergers and Acquisitions

Direct exporting

In direct exporting, the firm becomes directly involved in marketing its products in foreign markets, because the firm itself performs the export task (rather than delegating it to others).

Direct exportingTo implement a direct exporting strategy, the firm must have representation in the foreign markets. This can be achieved in a number of ways: – Sending international sales

representatives into the foreign market. – Selecting local representatives or agents

to prospect the market. – Using independent local distributors who

will buy the products to resell them in the local market.

– Creating a fully owned commercial subsidiary to have a greater control over foreign operations.

Indirect exporting

The market-entry technique that offers the lowest level of risk and the least market control is indirect export, in which products are carried abroad by others. The firm is not engaging in international marketing and no special activity is carried on within the firm; the sale is handled like domestic sales

Indirect exportingThere are several different methods of indirect exporting: – The simplest method is to deal

with foreign sales through the domestic sales organisation.

– A second form of indirect exporting is the use of international trading companies with local offices all over the world.

– A third form of indirect exporting is the export management company located in the same country as the producing firm and which plays the role of an export department.

ExampleThe mumbai based American Dry Fruits (ADF) which began selling a range of packaged foods liked Chutneys, Spices, Canned vegetables, ready to eat dals, etc under different brand names later moved to other countries with large Indian population.

Licensing & FranchisingLicensing is another way to enter a foreign market with a limited degree of risk. Under international Licensing, a firm in one country permits a firm in another country to use its intellectual property( Patents, trade marks etc).

Licensing & FranchisingFranchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement.

Licensing & FranchisingLicensing is similar to franchising except that the franchising organisation tends to be more directly involved in the development and control of the marketing programme.

Licensing & Franchising The major drawback of

licensing is the problem of controlling the licensee due to the absence of direct commitment from the international firm granting the licence. After few years, once the know-how is transferred, there is a risk that the foreign firm may begin to act on its own and the international firm may therefore lose that market.

ExampleITC Hotels and ITT Sheraton corporation had an agreement under which ITC Hotel’s Welcom group franchised two of its hotels in Bangkok and Hong kong to ITT Sheraton holding, in exchange, the franchise for Sheraton in India. Later, partners decided to set up a joint venture with Sheraton having major stake to manage all new ITC hotel projects in India.

Strategic AllianceIt is an arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less permanent than a joint venture, in which two companies typically pool resources to create a separate business entity.

Strategic AllianceIn a strategic alliance, each company maintains its autonomy while gaining a new opportunity. A strategic alliance could help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.

ExampleAn oil and natural gas company might form a strategic alliance with a research laboratory to develop more commercially viable recovery processes. A clothing retailer might form a strategic alliance with a single clothing manufacturer to ensure consistent quality and sizing. A major website could form a strategic alliance with an analytics company to improve its marketing efforts.

Contract ManufacturingIn contract manufacturing, the firm’s product is produced in the foreign market by local producer under contract with the firm. Because the contract covers only manufacturing, marketing is handled by a sales subsidiary of the firm which keeps the market control.

Contract ManufacturingContract manufacturing obviates the need for plant investment, transportation costs and custom tariffs and the firm gets the advantage of advertising its product as locally made. Contract manufacturing also enables the firm to avoid labour and other problems that may arise from its lack of familiarity with the local economy and culture.

ExampleBalsara’s private label manufacturing activity is focused on the supply of children’s toothpaste formulations. Balsara’s empahsis on Private lable products and contract manufacturing has resulted in increased business from North American and European Markets.

Assembly OperationsAssembling is a compromise between exporting and foreign manufacturing. The firm produces domestically all or most of the components or ingredients of its product and ships them to foreign markets to be put together as a finished product.

Assembly OperationsBy shipping CKD (completely knocked down), the firm is saving on transportation costs and also on custom tariffs which are generally lower on unassembled equipment than on finished products. Another benefit is the use of local employment which facilitates the integration of the firm in the foreign market.

ExampleNotable examples of foreign

assembly are the

automobile and farm

equipment industries. In

similar fashion, Coca-Cola

ships its syrup to foreign

markets where local bottle

plants add the water and

the container.

Wholly owned manufacturing facility.Companies with long term and substantial interest in the foreign market normally establish wholly owned manufacturing facilities there. A number of factors like trade barriers, difference in the production and other costs encourage the establishment of production facilities in the foreign markets.

Joint VenturesForeign joint ventures have much in common with licensing. The major difference is that in joint ventures, the international firm has an equity position and a management voice in the foreign firm. A partnership between host- and home-country firms is formed, usually resulting in the creation of a third firm.

Mergers and AcquisitionsFrom a legal point of view, a merger is a legal consolidation of two companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner

GlobalizationInternational Business

Global World• Each day, an average person

makes use of goods and services of multiple origins—for instance, the Finnish mobile Nokia and the US toy-maker’s Barbie doll made in China but used across the world; a software from the US-based Microsoft, developed by an Indian software engineer based in Singapore, used in Japan; the Thailand-manufactured US sports shoe Nike used by a Saudi consumer.

Definition

The IMF defines globalization as “ the growing economic and interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flow and also through the more rapid and widespread diffusion of technology”.

Factors affecting Globalization

Mover and restraining factors of globalization

Movers of Globalization

Movers of Globalization

1. Economic liberalization.2. Technological breakthroughs .3. Multilateral institutions.4. International Economic Integrations.5. Move towards free marketing system . 6. Rising R&D cost. 7. Advents in Logistics Management. 8. Emergence of global customer segment.

Economic Liberalization

• Economic liberalization, both in terms of regulations and tariff structure, has greatly contributed to the globalization of trade and investment. The emergence of the multilateral trade regime under the WTO has facilitated the reduction of tariffs and non-tariff trade barriers. In the coming years, the tariffs are expected to decline considerably further.

Technological breakthroughs

• The breakthroughs in science and technology have transformed the world virtually into a global village, especially manufacturing, transportation, and information and communication technologies.

Multilateral institutions • A number of multilateral institutions

under the UN framework, set up during the post-World War II era, have facilitated exchanges among countries and became prominent forces in present-day globalization. Multilateral organizations such as the GATT and WTO contributed to the process of globalization and the opening up of markets by consistently reducing tariffs and increasing market access through various rounds of multilateral trade negotiations.

International Economic Integrations • Consequent to World War II, a

number of countries across the world collaborated to form economic groupings so as to promote trade and investment among the members. The Treaty of Rome in 1957 led to the creation of the European Economic Community (EEC) that graduated to the European Union (EU) so as to form a stronger Economic Union. The US, Canada, and Mexico collaborated to form the North American Free Trade Agreement (NAFTA) in 1994.

Move towards free marketing system • The demise of centrally planned

economies in Eastern Europe, the former USSR, and China has also contributed to the process of globalization as these countries gradually integrated themselves with the world economy. The Commonwealth of Independent States (CIS) countries—all former Soviet Republics—and China have opened up and are moving towards market-driven economic systems at fast pace.

Rising R&D cost • The rapid growth in market

competition and the ever-increasing insatiable consumer demand for newer and increasingly sophisticated goods and services compel businesses to invest huge amounts on research and development (R&D). In order to recover the costs of massive investments in R&D and achieve economic viability, it becomes necessary to globalize the business operations.

Example• For instance, software

companies such as Microsoft, Novel, and Oracle, commercial aircraft manufacturers like Boeing and Airbus, pharmaceutical giants such as Pfizer, Glaxo SmithKline, Johnson & Johnson, Merck, and Novartis, etc., can hardly be commercially viable unless global scale of operations are adopted.

Advents in Logistics Management• Besides these, the greater

availability of speedier and increasingly cost-effective means of transport, breakthroughs in logistics management such as multimodal transport technology, and third-party logistics management contributed to the faster and efficient movement of goods internationally.

Emergence of global customer segment • Customers around the world are

fast exhibiting convergence of tastes and preferences in terms of their product likings and buying habits. Automobiles, fast-food outlets, music systems, and even fashion goods are becoming amazingly similar across countries. The proliferation of transnational satellite television and telecommunication has accelerated the process of cultural convergence.

Factors restraining of globalization

Factors restraining of globalization

1. Regulatory controls .2. Emerging trade barriers.3. Cultural Factors.4. Nationalism.5. War and civil disturbances.6. Management Myopia .

Regulatory controls• The restrictions imposed by

national governments by way of regulatory measures in their trade, industrial, monetary, and fiscal policies restrain companies from global expansion. Restrictions on portfolio and foreign direct investment considerably influence monetary and capital flows across borders. The high incidence of import duties makes imported goods uncompetitive and deters them from entering domestic markets.

Emerging trade barriers • The integration of national economies

under the WTO framework has restrained countries from increasing tariffs and imposing explicit non-tariff trade barriers. However, countries are consistently evolving innovative marketing barriers that are WTO compatible. Such barriers include quality and technical specifications, environmental issues, regulations related to human exploitation, such as child labour, etc. Innovative technical jargons and justifications are often evolved by developed countries to impose such restrictions over goods from developing countries, who find it very hard to defend against such measures.

Cultural Factors

• Cultural factors can restrain the benefits of globalization. For instance, France’s collective nationalism favours home-grown agriculture and the US fear of terrorism has made foreign management of its ports difficult and restrained the entry of the Dubai Port World.

Nationalism• The feeling of nationalism often

aroused by local trade and industry, trade unions, political parties, and other nationalistic interest groups exerts considerable pressure against globalization. The increased availability of quality goods at comparatively lower prices generally benefits the mass consumers in the importing country but hurts the interests of the domestic industry.

War and civil disturbances • The inability to maintain

conducive business environment with sufficient freedom of operations restricts foreign companies from investing. Companies often prefer to expand their business operations in countries that offer peace and security. Countries engaged in prolonged war and civil disturbances are generally avoided for international trade and investment.

Management Myopia • A number of well-established

business enterprises operating indigenously exhibit little interest in expanding their business overseas. Besides, several other factors such as resource availability, risks, and the attitude of top management play a significant role in the internationalization of business activities.

Globalization of Indian businessInternational Business

India – An emerging market

• India is one of the largest and fastest growing markets in the world.

• India is the second most populous nation in the world.

• Although the per capita income of India is low, the size of GNI is large.

• 1n 2006, India was the 10th largest economy in the world.

India – An emerging market

• In Purchase Power Parity terms, India is the fourth largest economy in the world and it is estimated that by 2030, it will be the third largest after china and USA.

Growth of outsourced IT and business process outsourcing (BPO) services

• One of the major forces of globalization in India has been in the growth of outsourced IT and business process outsourcing (BPO) services. The last few years have seen an increase in the number of skilled professionals in India employed by both local and foreign companies to service customers in the US and Europe in particular. Taking advantage of India’s lower cost but educated and English-speaking work force, and utilizing global communications technologies such as voice-over IP (VOIP), email and the internet, international enterprises have been able to lower their cost base by establishing outsourced knowledge-worker operations in India.

Indian companies

• Indian companies are rapidly gaining confidence and are themselves now major players in globalization through international expansion. From steel to Bollywood, from cars to IT, Indian companies are setting themselves up as powerhouses of tomorrow’s global economy.

LPG model• Indian economy had experienced

major policy changes in early 1990s. The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive. The series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at making the economy more efficient.

LPG model

• With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.

Foreign Direct Investment (FDI)• Now that India is in the process of

restructuring her economy, with aspirations of elevating herself from her present desolate position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbors to the east and is trying to sell herself as a safe and profitable destination for FDI.

Example

• Notable examples of international companies that have done well in India in the recent years include Pepsi, Coca-Cola, McDonald’s, and Kentucky Fried Chicken, whose products have been well accepted by Indians at large.

World Trade OrganizationInternational Business

Introduction

• The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

Introduction

• The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade . The organization officially commenced on 1 January 1995 under the Marrakech agreement , replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.

Introduction

• The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participant's adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments.

Green - Members Blue - Members, dually represented by the EU

Yellow - Observers Red - Non-members

WTO - Facts

• Location: Geneva, Switzerland• Established:1 January 1995• Created by: Uruguay Round negotiations (1986-

94).• Membership : 159 countries on 2 March 2013.• Budget : 197 million Swiss francs for 2013.• Secretariat staff: 640.• Head: Roberto Azevêdo (Director-General)

Functions

1. Administering WTO trade agreements2. Forum for trade negotiations3. Handling trade disputes4. Monitoring national trade policies5. Technical assistance and training for

developing countries6. Cooperation with other international

organizations

Principles of the trading system

• Non-discrimination.

• Reciprocity.

• Binding and enforceable commitments.

• Transparency.

• Safety valves.

Non-discrimination• It has two major components:

the most favored nation (MFN) rule, and the national treatment policy. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members. National treatment means that imported goods should be treated no less favorably than domestically produced goods.

Reciprocity

• It reflects both a desire to limit the scope of free- riding that may arise because of the MFN rule, and a desire to obtain better access to foreign markets.

Binding and enforceable commitments

• The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions. These schedules establish "ceiling bindings": a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade.

Transparency

• The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO.

Safety valves

• In specific circumstances, governments are able to restrict trade. The WTO's agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health.

Organizational structure

• The General Council has the following subsidiary bodies which oversee committees in different areas:– Council for Trade in Goods.– Council for Trade-Related Aspects of Intellectual

Property Rights. – Council for Trade in Services. – Trade Negotiations Committee.

Council for Trade in Goods

• There are 11 committees under the jurisdiction of the Goods Council each with a specific task. All members of the WTO participate in the committees. The Textiles Monitoring Body is separate from the other committees but still under the jurisdiction of Goods Council. The body has its own chairman and only 10 members. The body also has several groups relating to textiles.

Council for Trade-Related Aspects of Intellectual Property Rights

• Information on intellectual property in the WTO, news and official records of the activities of the TRIPS Council, and details of the WTO's work with other international organizations in the field.

Council for Trade in Services

• The Council for Trade in Services operates under the guidance of the General Council and is responsible for overseeing the functioning of the General Agreement on the Trade in Services (GATS). It is open to all WTO members, and can create subsidiary bodies as required.

Trade Negotiations Committee

• The Trade Negotiations Committee (TNC) is the committee that deals with the current trade talks round. The chair is WTO's director-general. As of June 2012 the committee was tasked with the Doha Development Round.

Regional BlocksInternational Business

ASEAN Association of Southeast Asian Nations

Introduction

• The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand.

Introduction

AIMS AND PURPOSES• To accelerate the economic growth, social

progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian Nations.

• To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries of the region and adherence to the principles of the United Nations Charter.

• To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific and administrative fields.

• To provide assistance to each other in the form of training and research facilities in the educational, professional, technical and administrative spheres.

AIMS AND PURPOSES

• To collaborate more effectively for the greater utilisation of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples;

• To promote Southeast Asian studies. • To maintain close and beneficial

cooperation with existing international and regional organisations with similar aims and purposes, and explore all avenues for even closer cooperation among themselves.

FUNDAMENTAL PRINCIPLES

• Mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations.

• The right of every State to lead its national existence free from external interference, subversion or coercion.

• Non-interference in the internal affairs of one another

• Settlement of differences or disputes by peaceful manner.

• Renunciation of the threat or use of force.

• Effective cooperation among themselves.

EU European Union

Introduction

• The EU is a unique

economic and political

partnership between 28

European countries that

together cover much of

the continent.

Introduction

• The EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries who trade with one another become economically interdependent and so more likely to avoid conflict.

Introduction

• The result was the European Economic Community (EEC), created in 1958, and initially increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Since then, a huge single market has been created and continues to develop towards its full potential.

EU Institutions

Functions• The overall function of the

European Union is to create and implement laws and regulations that integrate the member states of the EU. The countries of the EU are supposed to have uniform laws and policies concerning a variety of things (like immigration, labor, weights and measures -- all sorts of things). The function of the EU government is to decide how this integration should be done and to carry it out.

Functions

• For example, 16 members of the EU use the Euro as their Currency. One of the functions of a part of the EU government was to devise the currency -- to decide what it would be called, what it would look like, etc. Another part of the EU government tries to get countries using the Euro to enact fiscal policies that will keep the Euro stable. They try, in other words, to prevent fiascos like what happened in Greece this past year and they try to remedy them if they happen.

South Asian Association for Regional Cooperation

Introduction

• The South Asian Association for Regional Cooperation (SAARC) is an economic and geopolitical union of eight member nations that are primarily located in South asia contingent. Its secretariat is headquartered in Kathmandu, Nepal.

Introduction

• The idea of regional political and economic cooperation in south asia was first coined in 1980 and the first summit held in Dhaka on 8 December in 1985 led to its official establishment by the governments of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Srilanka.

Objectives• To promote the welfare of the people of

South Asia and to improve their quality of life.

• To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realise their full potential.

• To promote and strengthen selective self-reliance among the countries of South Asia.

• To contribute to mutual trust, understanding and appreciation of one another's problems.

Objectives• To promote active collaboration and

mutual assistance in the economic, social, cultural, technical and scientific fields.

• To strengthen co-operation with other developing countries.

• To strengthen co-operation among themselves in international forums on matters of common interest.

• To co-operate with international and regional organisations with similar aims and purposes.

• To maintain peace in the region.

Members

Apex and Recognized Bodies

• SAARC has six Apex Bodies namely,– SCCI - SAARC Chamber of Commerce & Industry– SAARCLAW - South Asian Association For Regional

Cooperation In Law– SAFA - South Asian Federation of Accountants – SAF - South Asia Foundation – SAIEVAC - South Asia Initiative to End Violence

Against Children – FOSWAL - Foundation of SAARC Writers and

Literature.

SAARC summits

Organization of the Petroleum Exporting Countries

Introduction

• OPEC (Organization of the Petroleum Exporting Countries) is an oil cartel whose mission is to coordinate the policies of the oil-producing countries. The goal is to secure a steady income to the member states and to secure supply of oil to the consumers.

History• OPEC was formed at a time when the

international oil market was largely separate from centrally planned economies, and was dominated by multinational companies. OPEC's ‘Policy Statement' states that there is a right of all countries to exercise sovereignty over their natural resources. Because OPEC is an organisation of countries (not oil companies), individual members have sovereign immunity for their actions, meaning that OPEC is not regarded as being subject to "Antitrust" or Competition Law in the normal way.

Growth

• In the 1970s, OPEC began to gain influence and steeply raised oil prices during the 1973 oil crisis in response to US aid to Israel during the Yom Kippur War. It lasted until March 1974. OPEC added to its goals the selling of oil for socio-economic growth of the poorer member nations, and membership grew to 13 by 1975.

Growth• In the 1980s, the price of oil was

allowed to rise before the adverse effects of higher prices caused demand and price to fall. The OPEC nations, which depended on revenue from oil sales, experienced severe economic hardship from the lower demand for oil and consequently cut production in order to boost the price of oil. During this time, environmental issues began to emerge on the international energy agenda. Lower demand for oil saw the price of oil fall back to 1986 levels by 1998–99.

Growth• In the 2000s, a combination of

factors pushed up oil prices even as supply remained high. Prices rose to then record-high levels in mid-2008 before falling in response to the 2007 financial crisis . OPEC's summits in Caracas and Riyadh in 2000 and 2007 had guiding themes of stable energy markets, sustainable oil production, and environmental sustainability.

Objectives

• OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

North American Free Trade Agreement

History• In 1994, the North American

Free Trade Agreement (NAFTA), a state-of-the-art market-opening agreement, came into force. Since then, NAFTA has systematically eliminated most tariff and non-tariff barriers to trade and investment between Canada, the United States, and Mexico.

Chronology of Events

• June 10, 1990: Canada, the U.S., and Mexico agree to pursue a free trade agreement

• February 5, 1991: NAFTA negotiations begin.

• December 17, 1992: NAFTA is signed by leaders from Canada, the U.S., and Mexico.

• August 1993: Additional side agreements on labor and the environment are negotiated.

• January 1, 1994: NAFTA enters into force

History

• Negotiations toward a free trade agreement between the United States and Canada began in 1985. Sixteen months later, the two nations came together and agreed to the Canada-U.S. Free Trade Agreement (FTA). It was a historic agreement that placed Canada and the United States at the forefront of trade liberalization.

Key elements of the Agreement• Key elements of the Agreement

included the elimination of tariffs and the reduction of many non-tariff barriers to trade. The FTA was also among the first trade agreements to address trade in services. It also included a dispute settlement mechanism for the fair and expeditious resolution of trade disagreements, and established a ground-breaking system for the binational review of trade remedy determinations, thereby providing an alternative to domestic judicial review.

Example

• In practical terms, Canada and the United States agreed to remove bilateral border measures on traded goods, which included the removal of tariffs on goods such as meat products, fruits and vegetables, beverages, processed foods, live animals, wine, clothing and textiles, fuels, electrical goods and machinery.

Global Supply Chain and logistics ManagementInternational Business

Global logistics

• The design and management of a system that controls the flow of materials into, through and out of the international corporation.

Global Supply Chain Management

• Covers both logistics and operations

• Includes activities such as sourcing, procurement, order processing, manufacturing, warehousing, inventory control, servicing and warranty, customs clearing, wholesaling and distribution

Global Supply Chain Management

• The activities involved in Supply chain are

• Purchasing• Manufacturing• Logistics• Distribution• Transportation and • Marketing

Areas to be considered while moving from domestic to International supply chain

• Substantial geographical distances

• Forecasting problems/difficulties in foreign markets

• Fluctuations in exchange rates for different currencies

• Demand for great variety of products

• Inadequate infrastructures such as labor skills, availability of supply etc

International Logistics & SCM

• Scheduling the arrival of materials and other inputs

• Warehousing and inventory control

• Strategic choice of international warehousing facilities

• Scheduling production• Packaging, transportation

and final delivery• Analysis of transportation

costs

Investment environmentInternational Business

Classification of investment environment

• Narrow and broad.

• Macro and micro .

• Hard and soft.

Narrow and broad investment environment

• Narrow investment environment means the economic environment, including a country's level of economic development, economic development strategy, economic system, infrastructure, market sophistication, industrial structure, foreign exchange control and economic price stability and so on.

• Broad investment environment includes political, legal, social and cultural impact on the investment potential of all the external factors.

Macro and micro Investment environment

• Macroeconomic environment for investment is the environment in the country, the factors of which affect the sum total of the investment.

• Microeconomic environment for investment is the environment in the country which works within the factors affecting the total investment.

Hard and soft investment environment

• Hard investment environment includes external material conditions, such as energy supply, transportation, telecommunications, natural resources and social life of service facilities.

• Soft investment environment includes a variety of non-material form factors, such as policies, regulations, administrative efficiency, the level of government and religious belief.

Elements of Investment environment

Natural resources 1. Geographic.2. Demographic3. Climatic.

Economic Status• Level of

Development.• Infrastructure

conditions.• Economic and

price stability.• Economic

Policy.

Social and

cultural status.• Language and

cultural traditions.

• Educational status.

• Social psychology.

• Religious beliefs.

Political and legal

Status• Political

stability.• Government’s

foreign relations.

• Political system.• Legal integrity

of system.

Natural resources

• Geographical factors

• Demographic factors.

• The climatic factors.

Geographical factors

Geographical factors, including geographical location, size, topography, mineral resources, water resources, forest resources. For example, investors ready to invest in precision instruments industry, we must study the host country whether the terrain conditions affect the degree of precision.

Demographic factors

Population constitute one of the conditions essential to the market. For example, high levels of education in densely populated areas affect demand on the books, music and movies which are quite different for that of rural areas.

Climatic factors

The climatic factors include

temperature, sunlight,

rainfall, storms and

typhoons. Many different

aspects of climate factors will

affect the investment

industry.

Economic Status

• Level of economic

development.

• Infrastructure conditions.

• Economic and price

stability.

• Economic Policy.

Level of economic development

A higher level of economic development of the country means that the state-owns large market, more opportunities and better business conditions and greater appeal for foreign investors will have greater appeal.

Infrastructure conditions

Infrastructure conditions include two aspects: First one is the industrial infrastructure which is needed to attract foreign investors. This contains energy, transportation, communication facilities, raw materials supply system etc.

Economic and price stability

In this, the factors considered are rate of sustainable growth, level of inflation and size of national debt. If the economic and price stability is not favourable, if is very difficult to make profit.

Economic Policy

Trade and tariff policy, economic development policy and foreign exchange policy constitute the economic policy component.

Political and legal status

• Political stability

• The Government's foreign

relations.

• Political system

• legal integrity of the system

Political stability

This includes the government's stability and policy continuity. Government should have the resilience to deal with all conflicts, if there is instability. The greater a country's policy of continuity, higher the country's political stability and the more attractive to foreign investors.

The Government's foreign relations

Government's external

relations, including

relations with major

trading partner’s plays a

crucial role in investment

environment.

Political system

This include the country's

form of management,

structure and electoral

system and citizens power

to exercise their political

rights system.

legal integrity of the system

Health of the legal

system, mainly referring

to a sound legal system

and the implementation

of codes.

Social and cultural status

• Language and

cultural traditions

• Educational status

• Social Psychology

• Religious beliefs

Language and cultural traditions

Diverse cultural traditions caused by the different social attitudes, consumer habits, living standards, ways of thinking, etc., will produce different levels of international investment

Educational status

High levels of education ensures that labour force is quality bound. This results in high production efficiency and economic benefits which are attractive to foreign investors.

Social Psychology

This includes the attitude of the matter distribution, the general view of industry and commerce, attitude of superior-subordinate relationship and the existing inter-relationships, national psychology and national consciousness.

Religious beliefs

Different religious beliefs affects people's values, attitudes and consumption patterns. For example, from the traditional point of view, the Christian advocates to work, thrift, savings; Buddhism and Hinduism emphasizes spiritual values, degrading material desires; Islam forbids eating pork, drinking, etc.

International commodity AgreementInternational Business

Introduction

• After the establishment of UN and its specialized agencies certain other financial institutions like IMF, IBRD and GATT were also set up. Along with them, the_ FAO, WHO and UNICEF were also established. In addition to these, certain other agreements also took place regarding exports of developing countries. Such agreements are given the name of International Commodity Agreements

Introduction

• Such agreements regarding five main items like wheat, sugar, coffee, tin and olive oil took place. These agreements are given the name of Agreements between Consumers and Producers. Out of these international Commodity Agreements, the agreements of exports and imports of wheat and tin got much more importance.

Objectives

• The main objective behind world commodity agreement is to restrict the quantities of exports, particularly the primary goods. The purpose behind is to increase export incomes or stabilize them.

• These agreements will lead to economic. Stabilization as the fluctuations regarding their prices and quantities will come down in their producing countries.

Objectives

• The demand and supply of so many primary exports and imports are less elastic. As a result, dis-equilibrium rises in their consumption and production. This gives rise to so many negative effects. Hence, these agreements will help to remove these disequilibria and distortions.

Objectives

• So many countries follow protectionist policies or adopt preferential treatment with other countries. As a result, the markets of primary goods shrink. But if such agreements are made such like circumstances will not rise.

Major Agreements

• In connection with international agreements regarding commodities, we discuss three main agreements out of them.– Multi-lateral Contract Agreement– International Buffer Stocks– Export Restriction Agreement

Multi-lateral Contract Agreement

• Under such agreements it is made compulsory between exporters and importers that they will sell or purchase specific quantities of goods. Again, such quantities are attached with some maximum or minimum price.

Multi-lateral Contract Agreement

• Amongst these agreements, the most important and the sole agreement is ‘International Wheat Agreement’. This agreement took place in 1949 where two-third of the world trade of wheat was included. Under this agreement, the maximum price of wheat was set at $1.80 per bushel and the minimum price for the first year would be $1.50 per bushel, while for the fourth and the last year such minimum price would be $1.20 per bushel.

International Buffer Stocks

• International buffer stock agreements seek to stabilize commodity prices by maintaining the demand supply balance.

• Buffer stock agreements stabilize the price by increasing the market supply by the sale of the commodity when the price tends to rise and by absorbing the excess supply to prevent fall in the price.

International Buffer Stocks

• Buffer stock Plan requires an international agency to set a range of prices and to buy the commodity at the minimum and sell at the maximum. Buffer pool method was tried in case of tin, cocoa and sugar and commodities like tea, rubber and copper have been suggested as prospective candidates for new agreements.

Export Restriction Agreement• Under this agreement, the

member countries will have the right to restrict the quantities of their exports. They could do so as long as the prices of exports are not stabilized to some extent. Apparently, this scheme may be like the scheme of an individual producer who wants to restrict his output, and it may not be a ‘joint programme on the part of all the producers or exporters

Export Restriction Agreement

• Moreover, if it becomes a joint programme of all the exporters, it cannot succeed till the importers join it. Moreover, it is not necessary that the costs of all the producers are same. Those producers and exporters whose costs are lower will be prepared to sell at some lower price. While the higher costs exporters may ask for some higher price.


Introduction

• International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.

International Trade Theories

Classical country based theories

Modern Firm based theories

1. Factor proportion.2. Country similarity.3. Product life cycle.4. Global Strategic Rivalry theory.

1. Mercantilism.2. Absolute Advantage.3. Comparative Advantage.

Mercantilism

• Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports.

Absolute Advantage

• In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations Smith offered a new trade theory called absolute advantage, which focused on the ability of a country to produce a good more efficiently than another nation.

Comparative Advantage• David Ricardo, an English

economist, introduced the theory of comparative advantage in 1817. Comparative Advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity.

Factor Proportions Theory• In the early 1900s, two Swedish

economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Their theory is based on a country’s production factors—land, labor, and capital, which provide the funds for investment in plants and equipment.

Country Similarity Theory• Swedish economist Steffan

Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences.

Product Life Cycle Theory• Raymond Vernon, a Harvard

Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation.

Global Strategic Rivalry Theory• Global strategic rivalry theory

emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages.

International Monetary Fund (IMF)International Business

Introduction

• The International Monetary Fund (IMF) is an international organization that was initiated in 1944 at the Bretton Wodds Conference and formally created in 1945 by 29 member countries.

Introduction

• The IMF is a self-described "organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

Official Goal

• The IMF's stated goal was to assist in the reconstruction of the world's International payment system post–World War II. Countries contribute funds to a pool through a quota system from which countries with payment imbalances temporarily can borrow money and other resources.

Official goal

• As of the 14th General Review of Quotas in late 2010 the fund stood at SDR476.8bn, or about US$755.7bn at then-current exchange rates. Through this fund, and other activities such as surveillance of its members economies and the demand for self-correcting policies, the IMF works to improve the economies of its member countries.

The IMF’s responsibilities

• The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.

The IMF’s responsibilities• Surveillance: To maintain stability

and prevent crises in the international monetary system, the IMF reviews country policies and national, regional, and global economic and financial developments through a formal system known as surveillance. The IMF advises its 188 member countries, encouraging policies that foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards.


• Financial Assistance: IMF financing provides member countries the breathing room they need to correct balance of payments problems. A policy program supported by IMF financing is designed by the national authorities in close cooperation with the IMF, and continued financial support is conditioned on effective implementation of this program.


• Technical Assistance: The IMF provides technical assistance and training to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is offered in several areas, including tax policy and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks, and statistics.

Resources

• The primary source of the IMF's financial resources is its members’ quotas, which broadly reflect members’ relative position in the world economy. Currently, total quota resources amount to about SDR 238 billion (about $368 billion). In addition, the IMF can borrow temporarily to supplement its quota resources.

Governance and organization

• The IMF is accountable to the governments of its member countries. At the top of its organizational structure is the Board of Governors, which consists of one Governor and one Alternate Governor from each member country. The Board of Governors meets once each year at the IMF – World Bank Annual Meetings. Twenty-four of the Governors sit on the International Monetary and Financial Committee (IMFC) and normally meet twice each year.

Governance and organization

• The day-to-day work of the IMF is overseen by its 24-member executive board, which represents the entire membership; this work is guided by the IMFC and supported by the IMF staff. A proposed Amendment of the IMF’s Articles of Agreement will introduce for the first time an Executive Board whose members are all elected. The Managing Director is the head of the IMF Staff and Chairman of the Executive Board and is assisted by four Deputy Managing Directors.


History

• The World Bank was created at the 1944 Bretton Woods Conference, along with three other institutions, including the International Monetary Fund (IMF). The World Bank and the IMF are both based in Washington D C, and work closely with each other.

Leadership

• The President of the Bank is the president of the entire World Bank Group. The vice presidents of the Bank are its principal managers, in charge of regions, sectors, networks and functions. There are two Executive Vice Presidents, three Senior Vice Presidents, and 24 Vice Presidents. The Boards of Directors consist of the World Bank Group President and 25 Executive Directors.

History

• The World Bank is a United Nations international financial institution that provides loans to developing countries for Capital programs. The World Bank is a component of the World Bank Group, and a member of the United Nations Development Group.

Official Goal

• The World Bank's official goal is the reduction of poverty. According to its Articles of Agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and international trade and to the facilitation of capital investment.

Objectives1. To provide long-run capital to member countries

for economic reconstruction and development.

2. To induce long-run capital investment for assuring Balance of Payments (BoP) equilibrium and balanced development of international trade.

3. To provide guarantee for loans granted to small and large units and other projects of member countries.

4. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy.

5. To promote capital investment in member countries by the following ways;

– (a) To provide guarantee on private loans or capital investment.

– (b) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities on considerate conditions.

Functions1. World Bank provides various technical services to

the member countries. For this purpose, the Bank has established “The Economic Development Institute” and a Staff College in Washington.

2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.

3. The quantities of loans, interest rate and terms and conditions are determined by the Bank itself.

4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member country.

5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.

6. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those counties where this amount will be collected.

The United Nations Conference on Trade and Development (UNCTAD) International Business

Introduction

• The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a permanent intergovernmental body. UNCTAD is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues.

Main Goals

• The organization's goals are to: "maximize the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis."

Primary objective

• The primary objective of UNCTAD is to formulate policies relating to all aspects of development including trade, aid, transport, finance and technology. The conference ordinarily meets once in four years; the permanent secretariat is in Geneva.

Achievements

• One of the principal achievements of UNCTAD has been to conceive and implement the Generalized System of Preferences (GSP). It was argued in UNCTAD that to promote exports of manufactured goods from developing countries, it would be necessary to offer special tariff concessions to such exports.

Achievements

• Accepting this argument, the developed countries formulated the GSP scheme under which manufacturers' exports and some agricultural goods from the developing countries enter duty-free or at reduced rates in the developed countries. Since imports of such items from other developed countries are subject to the normal rates of duties, imports of the same items from developing countries would enjoy a competitive advantage.

United Nations Industrial Development Organization (UNIDO) International Business

Introduction

• The United Nations Industrial Development Organization (UNIDO) is a specialized agency in the United Nations system, headquartered in Viena , Austria.

Primary Objective

• The Organization's primary objective is the promotion and acceleration of industrial development in developing countries and countries with economies in transition and the promotion of international industrial cooperation.

Current status

• As of 1 January 2014, 171 states are members of UNIDO. The organization employs some 670 staff at Headquarters and in field representations in about 80 countries, and draws on the services of some 2,800 international and national experts (approx. 50% from developing countries) annually, who work in project assignments throughout the world.

• The estimated total volume of UNIDO operations for the biennium 2012–2013 is €460 million, the value of technical cooperation delivery in 2012 amounted to $189.2 million.

Primary Objective

• The Organization works towards improving the quality of life of the world's poor by drawing on its combined global resources and expertise in the following three interrelated thematic areas:– Poverty reduction through productive activities;– Trade capacity-building; and– Energy and environment.

Poverty reduction through productive activities

• UNIDO's services therefore focus on encouraging the creation of decent employment and income to overcome poverty. Now,These services are customized for developing countries and range from industrial policy advice to entrepreneurship and SME development, and from investment and technology promotion to the provision of rural energy for productive uses.

Trade capacity-building

• UNIDO is one of the largest providers of trade-related development services, offering focused and neutral advice and technical cooperation in the areas of competitiveness, industrial modernization and upgrading, compliance with international trade standards, testing methods and metrology.

Energy and environment

• UNIDO promotes sustainable patterns of industrial consumption and production to de-link the processes of economic growth and environmental degradation. UNIDO is a leading provider of services for improved industrial energy efficiency and the promotion of renewable sources of energy.


Introduction

• The Asian Development Bank (ADB) is a regional development bank established on 22 August 1966 which is headquartered in Metro Manila, Philippines to facilitate economic development of countries in Asia. The bank employs 3,051 people, of which 1,463 (48%) are from the Philippines.[

http://en.wikipedia.org/wiki/Asian_Development_Bank

Introduction

• The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly known as the United Nations Economic Commission for Asia and the Far East) and non-regional developed countries.

Introduction

• From 31 members at its establishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 outside. ADB was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with member's capital subscriptions.

Stated Goals

1. Promoting economic growth

2. Reducing poverty

3. Developing human resources

4. Improving the status of women

5. Protecting the environment.

Organization

• The highest policy-making body of the bank is the Board of Governors composed of one representative from each member state. The Board of Governors, in turn, elect among themselves the 12 members of the Board of Directors and their deputy. Eight of the 12 members come from regional (Asia-Pacific) members while the others come from non-regional members.

International Trade centreInternational Business

Introduction

• The International Trade Centre (ITC) is a subsidiary organization of the World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD) and provides trade-related technical assistance. ITC has its headquarters in Geneva and one field office in Mexico City.

Introduction

• Whereas the WTO mainly deals with the rules of international trade and UNCTAD with research and advocacy, ITC's mandate is far more narrow as it is solely concerned with helping (so-called)developing and transition economies to promote their exports.

Introduction

• ITC is the successor of the International Trade Information Centre, which the General Agreement on Tariffs and Trade (GATT) established in 1964 “for the purpose of assisting the export promotion efforts of the developing countries” by providing them “with information on export markets and marketing, and to help them develop their export promotion services and train the personnel needed for these services.

History• In an effort to streamline the United

Nation's export promotion efforts, an agreement was reached between the GATT, which at that time and in contrast to its successor, the WTO, was part of the United Nations system, and the newly established UNCTAD, to merge the activities of the two organizations by creating a joint subsidiary. The agreement was reached in 1967 and the International Trade Centre (the explicit reference to "information" was dropped) was officially established on 1 January 1968.

Mission and objectives

• ITC's mission is to foster sustainable economic development and contribute to achieving the Millennium Development Goals in developing countries and countries with economies in transition through trade and international business development.

ITC’s strategic objectives

• Building Awareness and improving the availability and use of trade intelligence

• Strengthening TSIs • Enhancing policies for the benefit of exporting

enterprises.• Building the export capacity of enterprises to

respond to market opportunities • Mainstream inclusiveness and sustainability into

trade promotion and export development policies.

ITC at a glance

Foreign exchange market mechanismInternational Business

Introduction

• The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks.

Introduction

• Financial centres around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

Introduction• The foreign exchange market assists

international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states, especially Eurozon members, and pay euros, even though its income is in Unites States dollars. It also supports direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

Introduction

• The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing.

Introduction• The foreign exchange (FX or FOREX)

market is the market where exchange rates are determined. Exchange rates are the mechanisms by which world currencies are tied together in the global marketplace, providing the price of one currency in terms of another. An exchange rate is a price, specifically the relative price of two currencies For example, the U.S. dollar/Mexican peso exchange rate is the price of a peso expressed in U.S. dollars. On January 4, 2010, this exchange rate was USD 1.4422 per EUR, or, in market notation, 1.4422 USD/EUR.

Functions of the Foreign Exchange Market

• The foreign exchange market is the mechanism by which a person of firm transfers purchasing power form one country to another, obtains or provides credit for international trade transactions, and minimizes exposure to foreign exchange risk.


• Transfer of purchasing power is necessary because international transactions normally involve parties in countries with different national currencies. Each party usually wants to deal in its own currency, but the transaction can be invoiced in only one currency.


• Provision of Credit: Because the movement of goods between countries takes time, inventory in transit must be financed.


• Minimizing Foreign Exchange Risk: The foreign exchange market provides "hedging" facilities for transferring foreign exchange risk to someone else.

Determinants of exchange rates International Business

Determinants of exchange rates

• The following theories explain the fluctuations in exchange rates in a floating exchange rate regime

International parity conditions

• International parity conditions: Relative purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.

Balance of payment model

• This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during the 1980s and most part of the 1990s in face of soaring US current account deficit.

Asset market model• This model views currencies as an

important asset class for constructing investment portfolios. Assets prices are influenced mostly by people's willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”

Economic factors• Economic policy comprises

government fiscal policy and monetary policy.

• Government budget deficits.• Balance of trade levels and

trends.• Inflation levels and trends.• Economic growth and health.• Productivity of an economy.

Political conditions

• Internal, regional, and international political conditions and events can have a profound effect on currency markets. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition government in Pakistan and Thailand can negatively affect the value of their currencies.

Market psychology

• Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:– Flights to quality– Long-term trends– "Buy the rumor, sell the fact– Economic numbers– Technical Trading

considerations

Financial instruments

• A Spot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract, and interest is not included in the agreed-upon transaction. Spot trading is one of the most common types of Forex Trading.


• One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then.


• The most common type of forward transaction is the foreign exchange swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.


• Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.


• A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The options market is the deepest, largest and most liquid market for options of any kind in the world.


Introduction

• Importing is the flipside of exporting. Importing refers to buying goods and services from foreign sources and bringing them back into the home country.

Introduction

• An import of a good occurs when there is a change of ownership from a non-resident to a resident.

• Imports of services consist of all services rendered by non-residents to residents.

Types of import

• There are two basic

types of import:

– Industrial and

consumer goods

– Intermediate goods

and services

Types of import• Companies import goods and

services to supply to the

domestic market at a cheaper

price and better quality than

competing goods

manufactured in the

domestic market. Companies

import products that are not

available in the local market.

Import Procedure

1. Bill of Entry – Cargo Declaration.2. Assessment.3. EDI Assessment.4. Examination of Goods.5. Green Channel facility.6. Execution of Bonds.7. Payment of Duty.8. Amendment of Bill of Entry.9. Prior Entry for Bill of Entry.10. Mother Vessel/Feeder vessel.11. Specialized Schemes.12. Bill of Entry for Bond/Warehousing.


Introduction

• Exporting is defined as the sale of products and services in foreign countries that are sourced or made in the home country.

Introduction

• Exporting is an effective entry strategy for companies that are just beginning to enter a new foreign market. It’s a low-cost, low-risk option compared to the other strategies. These same reasons make exporting a good strategy for small and midsize companies that can’t or won’t make significant financial investment in the international market.

Why Do Companies Export?

• Companies export because it’s the easiest way to participate in global trade, it’s a less costly investment than the other entry strategies, and it’s much easier to simply stop exporting than it is to extricate oneself from the other entry modes.

Benefits of Exporting

• Market -The company has access to a new market, which has brought added revenues.

• Money - Not only will company earned more revenue, but it has also gain access to foreign currency, which benefits companies located in certain regions of the world.

Benefits of Exporting

• Manufacturing - The cost to manufacture a given unit decreased because company can manufacture products at higher volumes and buy source materials in higher volumes, thus benefitting from volume discounts.

Specialized Entry Modes: Contractual

• Two main contractual entry modes– Licensing – Franchising.

Specialized Entry Modes: Investment • Beyond contractual

relationships, firms can also enter a foreign market through one of two investment strategies: – Joint venture– Wholly owned subsidiary.

Various forms of documentation • The bill of lading is the

contract between the exporter and the carrier (e.g., UPS or FedEx), authorizing the carrier to transport the goods to the buyer’s destination. The bill of lading acts as proof that the shipment was made and that the goods have been received.

Various forms of documentation • A commercial or customs

invoice is the bill for the goods shipped from the exporter to the importer or buyer. Exporters send invoices to receive payment, and governments use these invoices to determine the value of the goods for customs-valuation purposes.

Various forms of documentation • The letter of credit is a

legal document issued by a bank at the importer’s (or buyer’s) request. The importer promises to pay a specified amount of money when the bank receives documents about the shipment.

Export Procedure

1. Registration.2. Processing of Shipping Bill.3. Quota Allocation and Other certification for Export Goods.4. Arrival of Goods at Docks.5. System Appraisal of Shipping Bills.6. Status of Shipping Bill.7. Customs Examination of Export Cargo.8. Variation Between the Declaration & Physical Examination.9. Stuffing / Loading of Goods in Containers.10. Drawal of Samples.11. Generation of Shipping Bills.12. Export General Manifest.


LicensingLicensing is another way to enter a foreign market with a limited degree of risk. Under international Licensing, a firm in one country permits a firm in another country to use its intellectual property( Patents, trade marks etc).

Licensing The major drawback of

licensing is the problem of controlling the licensee due to the absence of direct commitment from the international firm granting the licence. After few years, once the know-how is transferred, there is a risk that the foreign firm may begin to act on its own and the international firm may therefore lose that market.

Advantages of LicensingA license allows the licensee to use, make and sell an idea, design, name or logo for a fee. They are advantageous for licensors because they allow them to expand their business’ reach without having to invest in new locations and distribution networks.

FranchisingFranchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement.

Advantages of FranchisingOwning a franchise allows an individual to be self-employed while also investing in a proven system with training and support. It brings a ready-made customer base and often comes with client listings. There is a reduced risk of failure, on-going research and develop, and a semi- Monopoly in a certain territory.

Licensing & FranchisingLicensing is similar to franchising except that the franchising organisation tends to be more directly involved in the development and control of the marketing programme.

ExampleITC Hotels and ITT Sheraton corporation had an agreement under which ITC Hotel’s Welcom group franchised two of its hotels in Bangkok and Hong kong to ITT Sheraton holding, in exchange, the franchise for Sheraton in India. Later, partners decided to set up a joint venture with Sheraton having major stake to manage all new ITC hotel projects in India.

Example• Examples of franchises

include McDonalds, Subway, 7-11 and Dunkin Donuts.

• Examples of licenses include a company using the design of a popular character, e.g. Mickey Mouse, on their products.

Joint VenturesInternational Business

Joint VenturesAn equity joint venture is a contractual, strategic partnership between two or more separate business entities to pursue a business opportunity together. The partners in an equity joint venture each contribute capital and resources in exchange for an equity stake and share in any resulting profits.

Joint Ventures• Mounir Fakhry Abdel Nour

founded his jam company to take advantage of Egypt’s surplus fruit products. Abdel Nour initially approached the French jam company, Vitrac, to enter into a joint venture with his newly founded company, VitracEgypt. Abdel Nour supplied the fruit and the markets, while his French partner supplied the technology and know-how for producing jams.

Joint VenturesForeign joint ventures have much in common with licensing. The major difference is that in joint ventures, the international firm has an equity position and a management voice in the foreign firm. A partnership between host- and home-country firms is formed, usually resulting in the creation of a third firm.

Risk of Joint Ventures

First and foremost is the

challenge of finding the

right partner—not just in

terms of business focus

but also in terms of

compatible cultural

perspectives and

management practices.

Risk of Joint VenturesSecond, the local partner may

gain the know-how to produce

its own competitive product or

service to rival the

multinational firm. To

manufacture cars in China,

non-Chinese companies must

set up joint ventures with

Chinese automakers and share

technology with them.

Preparation• Formulating the JV is a series

of steps, which needs a lot of

work and precision. They are

• The objectives, structure and

projected form of the joint

venture, including the

amount of investment and

financing arrangements and

debt

Partner selection• The ideal process of selecting a

JV partner emerges from:– screening of prospective

partners– short listing a set of prospective

partners and some sort of ranking

– Due Diligence– checking the credentials of the other party

– availability of appreciated or depreciated property contributed to the joint venture

– the most appropriate structure and invitation/bid

– foreign investor buying an interest in a local company

Company incorporation• A JV can be brought about

in the following major ways:– Foreign investor buying an

interest in a local company– Local firm acquiring an

interest in an existing foreign firm

– Both the foreign and local entrepreneurs jointly forming a new enterprise

– Together with public capital and/or bank debt

Dissolution• The JV is not a permanent

structure. It can be dissolved when:– Aims of original venture met– Aims of original venture not met– Either or both parties develop new

goals– Either or both parties no longer

agree with joint venture aims– Time agreed for joint venture has

expired– Legal or financial issues– Evolving market conditions mean

that joint venture is no longer appropriate or relevant

– One party acquires the other


International Investment

• There are two main categories

of international investment—

portfolio investment and

foreign direct investment.

International Investment

Direct Investment Portfolio Investment

Wholly Owned

Subsidiary

Joint Venture Acquisition Investment in

GDR, ADR etc

Investment in

FII

Portfolio investment• Portfolio investment refers to the

investment in a company’s stocks,

bonds, or assets, but not for the

purpose of controlling or directing the

firm’s operations or management.

Typically, investors in this category are

looking for a financial rate of return as

well as diversifying investment risk

through multiple markets.

Foreign direct investment (FDI)• Foreign direct investment (FDI) refers to an

investment in or the acquisition of foreign

assets with the intent to control and

manage them. Companies can make an FDI

in several ways, including purchasing the

assets of a foreign company; investing in

the company or in new property, plants, or

equipment; or participating in a joint

venture with a foreign company, which

typically involves an investment of capital

or know-how. FDI is primarily a long-term

strategy.

Factors affecting International Investment

• Cost - Is it cheaper to produce in the local market than elsewhere?

• Logistics - Is it cheaper to produce locally if the transportation costs are significant?

• Market - Has the company identified a significant local market?

• Natural resources - Is the company interested in obtaining access to local resources or commodities?

Factors affecting International Investment• Know-how - Does the company want

access to local technology or business process knowledge?

• Customers and competitors - Does the company’s clients or competitors operate in the country?

• Policy - Are there local incentives (cash and noncash) for investing in one country versus another?

• Ease - Is it relatively straightforward to invest and/or set up operations in the country, or is there another country in which setup might be easier?

Factors affecting International Investment

• Culture - Is the workforce or labor pool already skilled for the company’s needs or will extensive training be required?

• Impact - How will this investment impact the company’s revenue and profitability?

• Expatriation of funds - Can the company easily take profits out of the country, or are there local restrictions?

• Exit - Can the company easily and orderly exit from a local investment, or are local laws and regulations cumbersome and expensive.

Theories of international Investment

1. Theory of capital movement.2. Market Imperfections theory.3. Internalization theory.4. Appropriability theory.5. Location specific advantage theory.6. International product life cycle theory.7. Eclectic Theory.

Theory of capital movement

The earliest theoricians, who assumed, in the classical tradition, the existence of a perfectly competitive market, considering foreign investments as a form of factor movement to take advantage of differential profit.

Market Imperfections theory

According to this theory, FDI occurs largely in oligopolistic industries rather than in industries operating under near perfect competition.

Internalization theory

According to this theory, FDI results from the decision of a firm to internalize a superior knowledge.

Appropriability theory

According to this theory, a firm should be able to appropriate the benefits resulting from a technology it has generated.

Location specific advantage theory

According to this theory, a the FDI is pulled by certain location specific advantages. (Labor costs, Govt Policy etc)

International product life cycle theory

According to this theory, a production of a product shifts to different categories of countries through the different stages of the product life cycle.


Introduction

• FDI refers to investment in a foreign country where the investor retains control over the investment. FDI has three components.– Equity capital.– Reinvestment earnings.– Intra Company loans.

Introduction

• There are different kinds of FDI, two of which—greenfield and brownfield—are increasingly applicable to global firms .

Greenfield FDI

• Greenfield FDIs occur when multinational corporations enter into developing countries to build new factories or stores. These new facilities are built from scratch—usually in an area where no previous facilities existed. The name originates from the idea of building a facility on a green field, such as farmland or a forested area.

Brownfield FDI

• A brownfield FDI is when a company or government entity purchases or leases existing production facilities to launch a new production activity. One application of this strategy is where a commercial site used for an “unclean” business purpose, such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercial office space or a residential area.

Why Governments Encourage FDI

• Financial incentives.• Infrastructure.• Administrative

processes and regulatory environment.

• Invest in education.• Political, economic,

and legal stability.

Why Governments Encourage FDI

• Many governments encourage FDI in their countries as a way to create jobs, expand local technical knowledge, and increase their overall economic standards.

How Governments Encourage FDI

• Financial incentives. Host countries offer businesses a combination of tax incentives and loans to invest. Home-country governments may also offer a combination of insurance, loans, and tax breaks in an effort to promote their companies’ overseas investments.


• Infrastructure. Host governments improve or enhance local infrastructure—in energy, transportation, and communications—to encourage specific industries to invest. This also serves to improve the local conditions for domestic firms.


• Administrative processes and regulatory environment. Host-country governments streamline the process of establishing offices or production in their countries. By reducing bureaucracy and regulatory environments, these countries appear more attractive to foreign firms.


• Invest in education. Countries seek to improve their workforce through education and job training. An educated and skilled workforce is an important investment criterion for many global businesses.


• Political, economic, and legal stability. Host-country governments seek to reassure businesses that the local operating conditions are stable, transparent (i.e., policies are clearly stated and in the public domain), and unlikely to change.

Example

• Countries like Hong Kong and Singapore long ago realized that both global trade and FDI would help them grow exponentially and improve the standard of living for their citizens. As a result, Hong Kong (before its return to China) was one of the easiest places to set up a new company.

How Governments Discourage or Restrict FDI

• Ownership restrictions.

• Tax rates and sanctions.


• Ownership restrictions. Host governments can specify ownership restrictions if they want to keep the control of local markets or industries in their citizens’ hands. Some countries, such as Malaysia, go even further and encourage that ownership be maintained by a person of Malay origin, known locally as bumiputra.


• Tax rates and sanctions. A company’s home government usually imposes these restrictions in an effort to persuade companies to invest in the domestic market rather than a foreign one.

Example

• For decades, many other countries in Asia (e.g., India, China, Pakistan, the Philippines, and Indonesia) restricted or controlled FDI in their countries by requiring extensive paperwork and bureaucratic approvals as well as local partners for any new foreign business.

FDI in IndiaInternational Business

Why India is the favourite destination for Investment?

• World's largest democracy with 1.2 billion people.

• Stable political environment and responsive administrative set up.

• Well established judiciary to enforce rule of law.

• Land of abundant natural resources and diverse climatic conditions.

• Rapid economic growth: GDP to grow by 8.5% in 2010-11* and 9.0% in 2011-12.

• India's growth will start to outpace China’s within three to five years and hence will become the fastest large economy with 9-10% growth over the next 20-25 years.


• Investor friendly policies and incentive based schemes.

• Healthy macro-economic fundamentals-Investment rate is expected to be 37% in 2010-11 and 38.4% in 2011-12 while Domestic Savings rate is expected to be 34% in 2010-11 and 36% in 2011-12.

• Cost competitiveness - low labour costs and total labour force of nearly 530 million.


• Large pool of skilled manpower - strong knowledge base with significant English speaking population.

• Young country with a median age of 30 years by 2025: India's economy will benefit from this "demographic dividend".

• The proportion of population in the working age group (15-59 years) is likely to increase from approximately 58% in 2001 to more than 64% by 2021.

• Huge untapped market potential.


• The urban population of India will double from the 2001 census figure of 290m to approximately 590m by 2030 (McKinsey).

• Progressive simplification and rationalization of direct and indirect tax structures.

• Reduction in import tariffs. • Full current account

convertibility. • Compliance with WTO norms. • Robust banking and financial

institutions.

Foreign Investment in India

• India has been ranked at the second place in global foreign direct investments in 2010 and will continue to remain among the top five attractive destinations for international investors during 2010-12 period, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2012'.


• A report released in February 2010 by Leeds University Business School, commissioned by UK Trade & Investment (UKTI), ranks India among the top three countries where British companies can do better business during 2012-14.


• India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion, according to the data released by the Department of Industrial Policy and Promotion (DIPP).

What are the forms in which business can be conducted by a foreign company in India?

• A foreign company planning to set up business operations in India may:– Incorporate a company under the Companies Act,

1956, as a Joint Venture or a Wholly Owned Subsidiary.

– Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

What is the procedure for receiving Foreign Direct Investment in an Indian company?

• An Indian company may receive Foreign Direct Investment under the two routes as given under:– Automatic Route -FDI is allowed

under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

What is the procedure for receiving Foreign Direct Investment in an Indian company?

• Government Route - FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

What are the instruments for receiving Foreign Direct Investment in an Indian company?

• Foreign investment is reckoned as FDI only if the investment is made in equity shares, fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront.

Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

• FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:– Atomic Energy– Lottery Business– Gambling and Betting– Business of Chit Fund– Nidhi Company– Agricultural– Housing and Real Estate business

Currency exchange and risk managementInternational Business

Types of foreign exchange risks

• Transaction risk - This type of risk is primarily associated with imports and exports. If a company exports goods on credit then it has a figure for debtors in its accounts. The amount it will finally receive depends on the foreign exchange movement from the transaction date to the settlement date.


• Economic risk -There are two ways in which a company is exposed to economic risk.– Directly– Indirectly


• Translation risk -The financial statements of overseas subsidiaries are usually translated into the home currency in order that they can be consolidated into the group's financial statements. Note that this is purely a paper-based exercise - it is the translation not the conversion of real money from one currency to another.

Hedging Transaction risks – Internal techniques

• Invoice in home currency -One easy way is to insist that all foreign customers pay in your home currency and that your company pays for all imports in your home currency. However the exchange-rate risk has not gone away, it has just been passed onto the customer. Your customer may not be too happy with your strategy and simply look for an alternative supplier.


• Leading and lagging -If an importer (payment) expects that the currency it is due to pay will depreciate, it may attempt to delay payment. This may be achieved by agreement or by exceeding credit terms. If an exporter (receipt) expects that the currency it is due to receive will depreciate over the next three months it may try to obtain payment immediately.


• Matching -When a company has receipts and payments in the same foreign currency due at the same time, it can simply match them against each other. It is then only necessary to deal on the forex markets for the unmatched portion of the total transactions. An extension of the matching idea is setting up a foreign currency bank account.


• Decide to do nothing -The company would "win some, lose some". Theory suggests that, in the long run, gains and losses net off to leave a similar result to that if hedged. In the short run, however, losses may be significant. One additional advantage of this policy is the savings in transaction costs.

Hedging Transaction risks – External techniques

• Forward contracts -The forward market is where you can buy and sell a currency, at a fixed future date for a predetermined rate, i.e. the forward rate of exchange. This effectively fixes the future rate.


• Money market hedges -The basic idea is to avoid future exchange rate uncertainty by making the exchange at today's spot rate instead. This is achieved by depositing/borrowing the foreign currency until the actual commercial transaction cash flows occur. This effectively fixes the future rate.


• Futures contracts -Futures contracts are standard sized, traded hedging instruments. The aim of a currency futures contract is to fix an exchange rate at some future date, subject to basis risk.


• Options -A currency option is a right, but not an obligation, to buy or sell a currency at an exercise price on a future date. If there is a favourable movement in rates the company will allow the option to lapse, to take advantage of the favourable movement. The right will only be exercised to protect against an adverse movement, i.e. the worst-case scenario.

http://kfknowledgebank.kaplan.co.uk/ACCAPEDIA/Wiki%20Pages/Introduction%20to%20Derivatives.aspx?mode=none


• Forex swaps -In a forex swap, the parties agree to swap equivalent amounts of currency for a period and then re-swap them at the end of the period at an agreed swap rate. The swap rate and amount of currency is agreed between the parties in advance.


• Currency swaps -A currency swap allows the two counter parties to swap interest rate commitments on borrowings in different currencies. In effect a currency swap has two elements: An exchange of principal in different currencies, which are swapped back at the original spot rate - just like a forex swap.

Country Evaluation and selection International Business

Introduction

• Because companies lack the resources to take advantage of all international opportunities they identify, they must determine both the order of country entry as well as the rates of resource allocation across countries.

Steps Involved• Choosing marketing and

production sites and geographic strategy.

• Scanning for alternative locations.

• Choosing and weighing variables.

• Collecting and analyzing data. • Country Comparison tool.• Making final country selection.

Choosing marketing and production sites and geographic strategy

• Developing a site location strategy that helps a firm maximize its resources and competitive position is very challenging, given that many estimates and assumptions about factors such as future costs and prices and competitors’ reactions must be made.

Scanning for alternative locations

• Scanning is useful insofar as a company might otherwise consider either too few or too many possibilities. Through the use of scanning, decision makers can perform a detailed analysis of a manageable number of geographic locations.

Choosing and weighing variables

• To evaluate and compare countries, scanning techniques based on broad environmental variables that identify both opportunities and risks should be used. Ultimately, variables must be weighed against each other to effectively evaluate the potential success of a particular venture and to compare various ventures.

Choosing and weighing variablesOpportunities

• Market Size.

• Ease and Compatibility of

Operations.

• Costs and Resource

Availability.

• Red Tape.

Choosing and weighing variablesRisks

• Risk and Uncertainty.

• Competitive Risk.

• Monetary Risk.

• Political Risk.

Collecting and analyzing data

• Firms perform research to reduce uncertainties in their decision processes, to expand or narrow the alternatives they consider and to assess the merits of their existing programs. The costs of data collection should always be weighed against the probable payoffs in terms of revenue gains or cost savings.

Country Comparison tool

• Two common tools for

analyzing information

collected via scanning are

grids and matrices

Country Comparison tool

• Opportunity-Risk Matrix.

• Country Attractiveness-

Company Strength Matrix.

Making final country selection• At some point, firms must make

resource allocation decisions. For new investments they will need to develop detailed estimates of all costs and expenses and consider whether to enter a particular venture alone or with a partner. For acquisitions, firms will need to examine financial statements in great detail. For expansion within countries where they are already operating, country managers will most likely submit capital budget requests that include details of expected returns. To maximize expected gains, decisions must be made in a timely fashion.

Triple bottom line approach in achieving responsible growth : A case study of ITC


Triple bottom line

Green building movement

Grand Chola Luxury hotel at Chennai

Water conservation

Zero effluent discharge

Water positive foot print

Resource conservation

Segregation at source

Towards 100 % recycling

Creating a positive environmental foot print

Ozone depleting substances

Responsible management of chemicals, oils and fuels

Agro-forestry Model

Forest stewardship council certification

Stake holder engagement

Occupational health and safety

ITC e-CHOUPAL

Wasteland Development through Social Forestry

Soil & Moisture Conservation Programmes

Animal husbandry and diary development

Women Empowerment

Primary Education

Primary Education

Health and sanitation

• Dividend payout

• Contribution to national exchequer

• Assets deployed and returns

Foreign Trade policy International Business

Introduction

• Foreign trade is the exchange of goods and services between nations. Goods can be defined as finished products, as intermediate goods used in producing other goods, or as agricultural products and foodstuffs.

Development of Foreign trade policy

• In 1992, the govt.

enacted foreign trade

(Development &

Regulation ) Act to

facilitate import and

enhancing exports from

India.

Objectives of Foreign trade policy

• To double the percentage share of global merchandise trade within the next five years.

• To act as an effective instrument of economic growth by giving a thrust to employment generation

Export Processing Zones

• Export Processing Zones (EPZs) can be broadly defined as an area enjoying special government of India support with respect to fiscal incentives, tax rebates and other exclusive benefits for the growth of export.

Objectives of Export Processing Zones

• Encourage and generate the economic development

• Encourage Foreign Direct Investments (FDI)

• To earn foreign exchange• To generate employment

opportunities • Upgrade labor and

management skills • Ensure world class quality of

products .

Export-oriented units (EOUs)

• EOU refers to an industrial

unit which offers for

exports its entire

production ,excluding

permitted levels of reject.

Special economic zone (SEZ)

• Special economic zone is a particular

area inside a state which acts as

foreign territory for tariff and trade

operations. Govt. provides tax

exemption (IT, Excise, customs, sales

etc.), subsidised water and electricity

etc.

Trading Houses (TH)

• Trading Houses (TH) are independent companies staffed by international trade experts. They are business intermediaries between foreign manufacturers and foreign buyers or consumers of goods and services. Trading Houses export, import, and engage in third country trading of goods and services produced by other companies.

Impact of FDP• After the implementation

foreign trade policy, the import and export among foreign countries have increased and have become more secured.

• Setting up of EPZ and SEZ have also increased foreign investors .

• Trading Housing have given a platform to both manufacturers and consumers to freely and easily trade between different countries.

Social Responsibility of Business International Business

Why should business be socially responsible?

• Public Image.

• Government Regulation.

• Survival and Growth.

• Employee Satisfaction.

• Consumer Awareness.

Corporate social responsibility

• CSR aims to embrace responsibility for corporate actions and to encourage a positive impact on the environment and stakeholders including consumers, employees, investors, communities, and others.

Triple Bottom line