COMPLETE STUDY NOTES

International Business & Globalization

Chapters 1, 2 & 3 | Easy-to-Understand | Exam Ready
CHAPTER 1: GLOBALIZATION

1. What is Globalization?
Globalization means the world is becoming more connected. It is a process where people,
companies, money, and information can move freely to different parts of the world.
• Simple definition: Events in one country affect people and societies in other countries.
• Example: When a company in the US fires workers, it may also affect workers in India
who do jobs for that company.
• It leads to sameness or homogeneity (people in different countries having similar tastes
and preferences).
• Real-life example: People across the world wear jeans, drink cola, and eat burgers --
this is globalization at work.

The Wimbledon Tennis Ball Example (Supply Chain)

• The rubber inside the tennis ball comes from Malaysia.
• The wool felt on the outside comes from New Zealand, Czech Republic, and UK.
• Clay and chalk come from France and UK.
• Glue comes from Philippines and Indonesia.
• Finally, the ball is packed in tins and sent to Wimbledon.
• Key lesson: Modern production uses materials from MANY countries to minimize cost.
This is called a global supply chain.

2. Two Viewpoints on Globalization

A) Hyperglobalists
• They believe globalization is reducing the power of individual nation-states (countries).
• National cultures are declining and a single global corporate culture is taking over.
• They see decline of national identity as the main feature.

B) Transformationalists
• They believe globalization creates UNEVEN changes -- it does not affect everyone the
same way.
• It is a changing global order with deeper integration AND fragmentation happening at the
same time.
• This view recognizes local differences -- deep social and cultural roots still matter.
• This is considered the MORE VALID view than hyperglobalization.

3. Phases of Globalization
Modern globalization evolved through 5 clear phases:
 • Phase 1 (1870-1914): First phase. Steam ships and other advances allowed goods to
move cheaply. Economic integration increased.
• Phase 2 (1914-1945): REVERSAL of globalization. World Wars I & II, Spanish flu,
Russian Revolution, Great Depression -- all slowed down global trade. Protectionism
grew.
• Phase 3 (Post-WWII - 1980s): Resurgence. New organizations like GATT, IMF, World
Bank helped. But was limited mainly to USA, Western Europe, Japan. Rest of world
(communist/socialist countries) was cut off.
• Phase 4 (1980s - 2008): Unprecedented globalization. Developing countries (India,
China) opened up. German reunification (1989), Soviet Union collapse (1991) were
landmark events. Poverty declined, growth increased.
• Phase 5 (Current - 'Slowbalization'): Globalization has PEAKED. Slowing world trade,
rising protectionism, cyber physical systems. The current era is called
SLOWBALIZATION or DE-GLOBALIZATION.

4. Elements of Globalization
Globalization has THREE main elements:

A) Economic Globalization
• Definition: Increased global flows of international trade and investment.
• Main agents: companies, investors, banks, financial institutions, private-sector
industries, nation states, international institutions.
• Led to growth of global business corporations called MNCs (Multinational Corporations)
and TNCs (Transnational Corporations).
• Simple definition of TNC: A business that has operations in multiple countries.

B) Cultural Globalization
• Definition: Process of cultural homogeneity -- people all over the world having similar
tastes.
• Example: McDonald's burgers, Nike shoes, iPods, BlackBerrys are symbols of global
similarity.
• Glocalization: Combining global + local. Global products are adapted to local taste.
• Example of glocalization: McDonald's in India replaced beef patty with chicken filling
(due to religious beliefs). Dominos in India offers 'chicken tikka' pizza.
• Cultural hybridization: Adapting global products to local tastes and preferences.
• Interesting fact: 'Chicken Tikka Masala' has become Britain's national dish. 'Turmeric
Latte' (haldi doodh) is popular in UK -- a drink originally from India.

C) Political Globalization
• Definition: Changes in the rules and structures of global governance.
• Includes rise and fall of socialism, emergence of global institutions like IMF, World Bank,
WTO.
• Rise of regional trading blocs like EU and NAFTA.
5. Impact of Globalization
Arguments IN FAVOUR of Globalization

• 1. Globalization Benefits Everyone (Rising Tide): Free trade and investment benefit
all countries. Based on Adam Smith's concept of 'invisible hand' -- individual self-interest
leads to social good.

• 2. Trade, Investment, Employment & Growth: Past two decades saw enormous tech
changes. Millions of jobs created worldwide. FDI (Foreign Direct Investment) increased
in Africa, Asia, etc.
• India in Africa: India invested in Presidential office (Ghana), Kosti Thermal Power Plant
(Sudan), IT Parks (Kenya), sugar factories (Ethiopia). Indian FDI to Africa generated
jobs and improved skills.

• 3. Global Value Chain & Dispersal of Production: Production is now globally

dispersed. Companies find the most economical locations.
• Example -- Dell: Manufactures laptops keeping only 3 days of inventory. Uses internet
to receive orders and transmit them to suppliers worldwide.

• 4. Creation of Global Marketplace: Globalization created a customer base with similar

preferences. Netflix, iPhone, McDonald's, Starbucks are demanded worldwide.
• Example: Bollywood is a global industry. Indian music finds audiences worldwide
through YouTube.

Arguments AGAINST Globalization

• 1. Globalization is an Excluding Process: Does not benefit all sections equally. Gap
between rich and poor has INCREASED since Industrial Revolution.

• 2. Adverse impact on jobs in developed countries: Shifting manufacturing to

India/Bangladesh reduces jobs in developed countries. In the long run, reduced costs
increase demand globally, which helps production and jobs.

• 3. Loss of national sovereignty: Big TNCs like Walmart have revenues exceeding
GDPs of small countries. They can influence governments through lobbying and
campaign contributions.
• Countries need strong regulatory structures to ensure business runs on market
principles, not political processes.

• 4. Exploitative work practices: TNCs use child labour, pay low wages, demand long
working hours, ignore safety rules in developing countries.
• Bhopal Gas Tragedy example: US TNC Union Carbide's gas leak in India killed
thousands. The company got away because India has weaker legal systems.

• 5. Environmental degradation: Large scale production depletes resources. Example --

Coke depleted water levels in Kerala, India.
• Ford, General Motors (Mexico), Benetton (Italy), Kirin (Japan) faced action for
environmental damage.
 • 6. Globalization and National Culture: TNCs must adapt to national culture. Big Mac
had to use chicken instead of beef in India. Dominos adds 'chicken tikka'.

6. 'Slowbalization' -- The New Face of Globalization

• Slowbalization: The slowing down of globalization. Also called de-globalization.
• Marked by: slowing world trade to GDP ratio, rising protectionism, emergence of cyber
physical systems.
• Key driver: Rising wave of protectionism (USA led) -- belief that free trade collapsed
American manufacturing, caused job losses, depressed wages.
• USA withdrew from Trans-Pacific Partnership (TPP) and renegotiated NAFTA as
USMCA.
• Brexit: UK's exit from the European Union -- another form of nationalism/protectionism.
• China's response: Adopted inward-looking policy. Exports as share of GDP fell from
31% (2008) to 17% (2019). Pushing Belt and Road Initiative (BRI) -- attracted 100+
countries.
• COVID-19's impact: Became the 'last nail in the coffin' of globalization. Cross-border
investment, trade, bank loans, supply chains all shrank. Global output declined 4.9% in
2020.
• Countries are now focusing on 'resilience', 'reliability', 'ease of doing business' instead of
just 'costs' and 'efficiency'.
• Vietnam emerging: As companies move away from China, Vietnam is emerging as an
alternative production destination.
• Overall verdict: Globalization lifted 1.2 billion out of extreme poverty since 1990, but
slowbalization is just a TEMPORARY setback, not the end.

CHAPTER 1 SUMMARY
Globalization = increasing interconnectedness of the global economy.
Result of convergence -- tendency for people in different countries to have similar tastes.
THREE elements: Economic, Political, and Cultural Globalization.
Economic globalization = increased global flows of international trade and investment.
Cultural globalization = cultural homogeneity (similar tastes globally).
Political globalization = changes in rules and structures of global governance.
Globalization went through 5 phases: from growth (1870-1914) to slowbalization (current).
Supports: job creation, poverty reduction, global marketplace, value chains.
Against: inequality, job losses in developed countries, exploitation, environmental damage.
Current phase = 'Slowbalization' due to protectionism, COVID, and nationalism.
CHAPTER 2: INTERNATIONAL BUSINESS

1. What is International Business?

International Business = any business activity that involves the transfer of resources, goods,
services, knowledge, skills or information across national boundaries.
• Includes banking, finance, insurance, education, construction, tourism.
• International trade: Buying and selling goods/services between nations (exports and
imports).
• International investment: Investing resources in business outside the home country.
• Joint ventures: Business arrangement between firms in different countries.

2. Transnational Corporation (TNC)

• TNC = A business enterprise with trade or investment operations in multiple global
locations.
• TNC is the face of international business. Also called MNC (Multinational Corporation).
• Earliest TNCs originated in developed world -- huge organizations with resources in
100+ countries.
• World's largest TNCs by assets (non-financial): Toyota Motor (Japan), Shell PLC
(UK), Total Energies (France), Deutsche Telekom (Germany), Volkswagen (Germany).
• Largest TNCs from developing/transition economies: CK Hutchison Holdings (HK,
China), China National Petroleum Corp, Hon Hai Precision (Taiwan), Sinochem
Holdings, Huawei Investment (China).

Characteristics of a TNC
• Can coordinate and control various stages of production chains within and between
different countries.
• Takes advantage of geographical differences in factors of production (resources, capital,
labour) and state policies.
• Has geographical flexibility -- can switch and re-switch resources and operations
between countries.

Transnationality Index (TNI)

• TNI = Measure of the degree of internationalization of a business enterprise.
• Compiled by UNCTAD since 1990.
• Calculated from average of three ratios: Foreign assets/Total assets, Foreign sales/Total
sales, Foreign employment/Total employment.
• Highest TNI (non-financial, developed): Rio Tinto PLC (UK), Medtronic PLC (Ireland),
Linde PLC (UK), Anglo American PLC (UK), Roche Group (Switzerland).
• Highest TNI (developing/transition): Mediclinic International (S. Africa), Guangdong
Investment Ltd (HK), Banpu Public Co (Thailand), Galaxy Entertainment (HK), CK
Hutchison (HK).
3. Types/Classification of TNCs
A) Traditional TNCs
• Originated in developed world. Vast resources in 100+ countries.
• Multiple sites: R&D, production, logistics, marketing, customer support.
• Examples: General Electric, Ford, General Motors, AT&T (all USA).
• Notable: Singer Sewing Machine -- first US company to go foreign. Built factory in
Scotland (1868). By 1880, was a global organization with global sales network.

B) Dragon TNCs (Latecomer TNCs)

• Originated from peripheral/developing regions. Emerged as challengers to traditional
TNCs.
• Examples: Cemex (Mexico), Petronas (Malaysia), Samsung Electronics (Korea), LG
(Korea), Lenovo (China).

C) Born Global Firms

• Start as global players from day one. Serve customers wherever they are.
• Examples: Logitech, Skype.

D) Micro TNCs
• Internationalized SMEs (Small and Medium Enterprises). Control value-adding activities
in more than one country. Use advanced market servicing modes.
• Examples: Dutch animal nutrition and fish feed firm Nutreco, German renal dialysis
machines firm turned global health services provider Fresenius.

E) State-owned TNCs
• Parent enterprises where government has controlling interest.
• Example: ONGC (India).

4. Growth of International Business -- Drivers

A) Economic Forces
• Economic Systems: Post WWII, socialism rose and fell. 1980s onwards -- countries
moved towards free market principles.
• China: Market orientation since 1978, creating huge trade and investment opportunities.
• India: Market-oriented reform since 1991, opened up to global capital flows.
• BRICS countries: Brazil, Russia, India, China, South Africa are now among the largest
markets.

• Economic Liberalization in Developing Nations: Large parts of developing world

moved to market-based system. Latin American nations also adopted market reforms
after decades of totalitarian rule.
 • Globalization of Supply Chains: Sourcing goods/services from different parts of the
world. Manufacturing firms outsource to low-cost destinations for better quality and lower
costs.
• Outsourced functions range from simple back-office (payroll, accounting, call centres) to
specialized (legal document processing, medical/hospital functions).

• Globalization of Demand: Growing demand for global brands (McDonald's, Nike, Coca-
Cola, Apple) is a sign of growing global markets and a driver of international business.

• Emergence of Regional Trading Blocs: Progressive reduction of tariff and non-tariff

barriers. EU and NAFTA created huge markets with increased trade opportunities.

B) Political Forces
• Rise and fall of socialism since WWII. 1980s -- followers of socialism moved towards
free market.
• 15 independent countries came out of erstwhile Soviet Union.
• Czechoslovakia split into two; Yugoslavia divided into 5 successor states after civil war.

C) Technological Forces
• Discovery of Microchip: Most important innovation of 20th century. Enabled
information revolution. Basis for satellites, optical fibre, wireless tech, internet, WWW.
• Internet and satellite TV connects small businesses globally. Global communication
networks allow manufacturing processes to be coordinated at different physical
locations.

• Developments in Transportation: Commercial jet travel and super-freighters shrunk

the globe. Containerization in 1970s-80s = four-fold growth of world container fleet.
• Modern container industry born from a war surplus oil tanker moving from New Jersey to
Houston with aluminium containers.

• Biotechnology: Application of scientific and engineering principles to the processing of

materials by biological agents. GM bacteria producing human insulin approved in 1986.
Vaccines critical -- shown in COVID-19.

• Artificial Intelligence (AI): Simulation of human intelligence in machines programmed

to think and act like humans.
• Machine Learning (ML): Part of AI. Study of computer algorithms that improve
automatically through experience and data.
• AI can automate tasks, reduce costs, increase efficiency, and increase productivity --
leading to bigger profits. But it can also create unemployment.

• Emergence of Global Governance: Growth of international business led to need for

global institutions. WTO (and GATT before it), IMF, World Bank, UN.

5. International vs Domestic Business

• Key difference: International business is more complex due to diverse environments,
enhanced risk and uncertainty, and operational complexities.
 • Diverse Business Environments: Different currency, inflation, interest rates, economic
regulations, political systems, social customs, laws, government rules.
• Example -- McDonald's: Present in almost all countries. In India, replaced beef with
chicken. In Middle East, no pork products.

• Enhanced Risk and Uncertainty: Unpredictability of operational and financial

outcomes. Firms operate in multiple work environments, receive payments in different
currencies.

• Operational Complexities: Local employees and expatriates (foreign employees) may

have trouble due to cultural and language differences. Organizational principles differ
widely across nations.

6. Motives for Firm Internationalization

Pull factors: Offensive motives that pull firms to foreign markets.
Push factors: Defensive motives that force firms to move internationally.

• Increased Profits: Basic objective of any business. Access to lower labour costs,
resources, regulatory advantages (e.g., lower taxes). Outsourcing to
India/Ireland/Philippines for skilled low-cost labour.

• Growth: When domestic market is saturated/overcrowded, go international to grow.

• Competition: Domestic competition forces firms abroad. Example -- India's 1991

liberalization gave foreign firms opportunity, forcing Indian firms to look overseas too.

• Strategic Motives: A firm's own capabilities give it edge over rivals. First mover
advantage in foreign market. Tech leadership, brand image, competitive positioning.

• Optimum Capacity Utilization: Maximize profits by minimizing costs through large-

scale production. When domestic market is constrained, tap foreign markets.

• Market Motives: Protect market power against domestic rivals or new entrants.
Example -- Dell invested in Europe/Asia/Latin America due to US competition.

7. International Orientations (EPRG Framework)

The EPRG framework (Wind, Douglas, Perlmutter, 1973) identifies 4 types of attitudes:

A) Ethnocentric Orientation
• Definition: Belief that home-country culture is superior to any other.
• Domestic operations are primary. Overseas operations are secondary.
• International operations = export department. Managed by domestic personnel.
• Domestic product mix is used in foreign markets too.
• Example -- Nissan in USA: Did not factor in weather differences. US customers wanted
cars customized for weather. Nissan had to switch from ethnocentric to polycentric.
 • Appropriate for small companies with minimal international commitment.

B) Polycentric Orientation
• Definition: Recognizes inherent differences in various markets. Decentralizes control
and grants autonomy to overseas units.
• Local laws, customs, cultures are respected. Foreign operations through independent
subsidiaries.
• Maximum geographic decentralization. Local managers recognized as psychologically
close to markets.
• Motto: 'When in Rome, do as the Romans do.'
• Opposite of ethnocentrism.

C) Regiocentric Orientation
• Definition: Views different regions as different markets. Regions with similar
characteristics treated as single market.
• Strategy integration and organizational approach at regional level.
• Example: General Motors has significantly different strategies in Europe, Americas, and
Asia. McDonald's adopted regiocentric approach -- global markets clubbed by broad
regional features.

D) Geocentric Orientation
• Definition: Views the ENTIRE WORLD as a single market. Develops standardized
marketing mix.
• Projects uniform image of company and products for global market.
• Characterized by sufficiently distinctive national markets where ethnocentric and
polycentric approaches don't work.
• 'Born Global' firms have geocentric orientation from the very beginning.
• High cost of collecting information. National differences may make global approach
impractical.

8. Modes of Entry into International Markets

Entry modes fall into THREE categories:

A) Trade-Related Entry Modes

I. Exports and Imports
• Export: Most basic level of international business. Firm has domestic production and
sells abroad.
• Goods = visible exports/imports. Services = invisible exports/imports (banking,
insurance, travel, tourism).
• Advantages of exporting:
○ Gain first-hand knowledge and expertise about foreign market.
○ Requires less financial and managerial resources than advanced modes.
○ Generally type of international entry open to any size or kind of firm.

II. Countertrade
 • Definition: Trade in which seller and buyer from different countries exchange goods
with little or no cash.
• Types of countertrade:
○ Barter: Direct and simultaneous exchange of goods between two parties without
cash. Example -- France shipped 138,067 tons of soft wheat to Cuba, half was
through wheat-for-sugar barter.
○ Counter Purchase: Reciprocal buying agreement. Firm sells products to another
country and is compensated in form of the other's products at a future time.
○ Offset: One party agrees to purchase goods/services with specified percentage of
proceeds from original sale. Example -- Shanghai Aircraft Manufacturing Corp
(China) may buy jets from Boeing using proceeds from manufacturing Boeing jet tail
sections.
○ Buyback (Compensation): Local company provides inputs for manufacturing
products and agrees to take percentage of output produced by the local firm as
partial payment.

B) Contractual/Transfer-Related Entry Modes

I. International Leasing
• Definition: Foreign firm (lessor) leases its new or used machines or equipment to local
company (lessee) in a developing country. Local firm does not have capital to buy.
• Foreign lessor retains ownership throughout the lease period. Local user pays leasing
fee.
• Advantages for TNC: Quick access to target market, accumulates experience.
Reduces operational/investment risks.
• Example: In late 1970s, Japan's Mitsubishi leased 100 new and used heavy trucks to
Chinese companies in mining, conduction, transportation.

II. International Licensing

• Definition: Entry mode where a firm transfers its intangible property (expertise, know-
how, blueprints, technology, manufacturing design) to another firm for a royalty fee.
• Licensor: Firm transferring technology. Licensee: Firm to which technology is
transferred.
• Allows licensee to produce and market product similar to what licensor already
produces.
• Advantages:
○ Reap benefits of innovative technology abroad without additional investment.
○ Lower risk -- even if market worsens, maximum loss is the technical fee.
○ Licensee improves technical capability and competitiveness.
• Disadvantages:
○ Loss of quality control -- difficult to maintain satisfactory control over licensee's
manufacturing.
○ Example: RCA licensed colour TV tech to Matsushita and Sony (Japan) in 1960s.
Sony quickly assimilated tech and entered US market competing against RCA.
Today, RCA is a minor player while Matsushita and Sony are much bigger.
○ Local licensee may use improvements in technology to enter MNE's home market.

III. International Franchising

• Definition: Entry mode where foreign franchisor grants specified intangible property
rights (trademark or brand name) to local franchisee who must follow strict and detailed
rules.
 • Franchisee pays royalty as percentage of franchisee's revenue.
• More commitment than licensing. Broader package of rights and resources.
• Example: KFC, McDonald's, Burger King use franchising. Franchisor insists on
company cooking equipment, burger patties, and company-branded products.
• Advantages:
○ Franchisor maintains consistency of products in different markets.
○ Low risk and low cost mode of entry. Quick global presence.
○ Leverages assets like trademark/brand names. McDonald's built global presence
quickly.
• Disadvantages:
○ Franchisee may harm franchisor's image by not upholding standards.
○ Even if franchisor terminates agreement, some franchisees may stay in business
using franchisor's brand name.

Differences Between Licensing and Franchising:

• Franchising = transfer of total business function. Licensing = transfer of just a part
(single product or process).
• Franchising gives greater control over SALE of the product in target market.
• Licensing is common in manufacturing; franchising is common in SERVICE industries.

IV. Turnkey Projects (Build-Operate-Transfer - BOT)

• Definition: Investment where a foreign investor assumes responsibility for design and
construction of an entire operation, and upon completion, turns the project over to the
purchaser.
• Investor receives periodic payments that are normally guaranteed.
• Suitable for: Very large-scale, long-term infrastructure projects -- power generation,
airports, dams, expressways, chemical plants, steel mills.
• Example: Large construction firms like Bechtel (USA), Hyundai (Korea), Friedrich Krupp
(Germany) manage such projects. Large companies sometimes form consortium for
large BOT.

C) Investment-Related Entry Modes

I. Foreign Direct Investment (FDI)
• Definition: Investment in assets of a company for purpose of control of overseas
operations and economic activities.
• Home country: Country making the FDI. Host country: Country receiving the FDI.
• FDI-related entry modes involve higher risk and greater financial commitment than
trade/transfer modes.

II. Foreign Portfolio Investment (FPI)

• Definition: Investment in financial instruments (stocks and bonds) through stock
exchange and other financial markets to earn a return.
• Differences between FDI and FPI:
○ FDI = gain controlling interest or ownership in foreign company. FPI = only targeted
at earning returns.
○ FDI = more stable form of investment (long term commitment). FPI = more volatile,
can exit easily.
○ FDI brings spillover effects of technology and managerial expertise.
○ FDI = done through Greenfield investment, mergers, acquisitions, brownfield
investment. FPI = through international capital market (shares and debentures).
Case Study: Harley-Davidson in India
• Harley entered India but failed to understand typical Indian consumer -- prefers cars over
motorcycles for family and social mobility.
• Problems: faulty brakes, burnt clutch plates (expensive to repair/replace). Did not partner
locally (unlike in China with Geely Motors subsidiary Qianjiang).
• COVID-19 added to problems. Contemplated exit as part of global 'Rewire' strategy.
• Resolution: Joint venture with Hero MotoCorp. Hero entrusted with sales, service,
parts, accessories, general merchandise, riding gear, apparel. Network of Harley-
Davidson dealers in India.
• Hero MotoCorp also authorized to develop and sell new premium motorcycles under
Harley-Davidson banner. New X440 is the first product.

CHAPTER 2 SUMMARY
International business = any business activity involving transfer of
resources/goods/services/knowledge across national boundaries.
TNC = business enterprise with trade/investment operations in multiple global locations.
TNI = measure of degree of internationalization of a business enterprise.
Growth of international business driven by: economic, political, and technological forces.
Key differences from domestic: diverse environments, enhanced risk, operational
complexities.
Motives for internationalization: profits, growth, competition, strategic factors.
EPRG framework: Ethnocentric, Polycentric, Regiocentric, Geocentric orientations.
Entry modes: Trade-related (exports, countertrade), Contractual (leasing, licensing,
franchising, BOT), Investment-related (FDI, FPI).
FDI = long-term, stable, involves control. FPI = short-term, volatile, only for returns.
Franchising = more common in services; Licensing = more common in manufacturing.
CHAPTER 3: ECONOMIC AND POLITICAL
ENVIRONMENT

Opening Case: The Sharing Economy

• Sharing Economy: A new disruptive model that supplanted traditional models. Focuses
on collective use of underutilized assets to improve efficiency and sustainability.
• Core idea: Utilize idle resources and get producers to produce fewer, more efficient
products. Value ACCESS over OWNERSHIP.
• Example -- Uber: Vehicles remain idle for long periods. Uber's app puts each vehicle to
maximum use. This puts pressure on automobile industry to produce fewer, better-
made, more durable vehicles.
• Examples of sharing economy companies: Uber, Lyft (transport), Airbnb
(accommodation), eBay, Etsy (goods), Lending Club, Prosper, Funding Circle (financial
services), TaskRabbit (tasks), BlaBlaCar (France), Didi Kuaidi (China), Ola (India).
• Based on: Frugality and social responsibility. Model emerged after the global downturn.
• Drawback: Can erode community and overuse resources. Example -- Airbnb in
Barcelona, short-term renting pushes rents up and pushes out young residents.
Amsterdam put restrictions on short-term renting.

1. Business Environment
• Business environment: All factors and forces that influence the life and development of
a firm.
• Internal factors: Generally controllable by the firm.
• External factors: Largely uncontrollable.
• International business environment is more complex due to expanding and deepening
ties between nations.
• International business environment is broadly classified into: Economic, Political-Legal,
and Cultural environment.

2. Economic Environment
Economic environment = economic systems of home and host country + various economic
variables such as level of economic growth, development, inflation, and fiscal and monetary
policy.

Economic Systems
• Economic system: Basic rules regarding ownership and control of productive resources
in an economy.
• Specifies basic rules regarding use of economic resources in activities of production and
distribution of goods and services.
• THREE types of economic systems:
I. Capitalist / Free Market System
• Also called: Pure market economy.
• Market determines use of productive resources for production and distribution.
• Key principles:
○ Pursuit of self-interest: Adam Smith's 'invisible hand' -- individual pursuit of profit
leads to greater social good.
○ Freedom of enterprise: Right of all individuals to pursue economic activity in any
form they desire.
○ Private ownership of means of production: Forces of market determine what,
how, and for whom to produce.
○ Competition: Essence of market economy. Consumer sovereignty -- consumers
decide what to produce.
• Examples: USA, UK (pure capitalism). Hong Kong and US are at the market end of the
spectrum.

II. Command Economy (Centrally Planned Economy)

• Also known as: Socialist or communist economy.
• Based on socialist principles of collectivism propagated by Karl Marx.
• All economic activity -- including pricing and production decisions -- determined by
central government plan.
• Government owns and controls all productive resources. All production done in state-
owned factories. Labour unions also controlled by government.
• Examples: Erstwhile USSR and China.
• Drawback: Lack of incentives for producers leads to overproduction, inefficiencies, and
inflexibility.

III. Mixed Economy

• Exists between market and command systems.
• Private enterprise in some sectors + significant state ownership and government
planning in others.
• Originated in US after the Great Depression.
• Countries following mixed economy: UK, France, Sweden, India, Brazil.
• Market socialism: State owns significant resources. Allocation from market-price
mechanism. Dimension of social justice added to capitalism. Extensive social welfare
programmes. France is example of market socialism.
• Sweden: Social market model. Market determines prices. But government controls
economic activity through fiscal policies.
• North Korea: At command end of spectrum. Government owns and controls most
aspects of economic activity.
• China: Communist country that made transition from command to market economy with
strong role for state.

IV. Transition Economy

• Definition: Making the shift from one economic system to another.
• Late 1980s and early 1990s saw many countries moving away from centrally planned
economies.
• Examples: 30+ countries in Eastern Europe, Asian states like China and Vietnam,
African countries like Angola, Ethiopia, Mozambique.
• Process of transition = deregulation, privatization, creation of legal systems to safeguard
property rights.
3. Economic Indicators
A) Gross Domestic Product (GDP)
• GDP = Total market value of all final goods and services produced within a country in a
given period of time (usually a calendar year).
• Nominal GDP: Current market value of final output.
• Real GDP: Nominal GDP adjusted for price change by dividing by price index or GDP
deflator.
• GDP is a useful indicator of productivity and domestic market potential.

B) Gross National Income (GNI)

• GNI = Market value of final goods and services newly produced by a national economy,
including income earned by national residents from overseas. Broadest measure of
economic activity.
• Includes GDP + economic activity within geographical boundaries of country (by
domestic and foreign residents).
• Per capita GNI: GNI divided by total population.
• High population + high per capita GNI = most desirable for market potential.
• Why GNI matters: A firm wanting to do business abroad must evaluate income level to
estimate demand for its products.

C) Economic Growth
• Definition: Change in GDP from one year to the next.
• Measured by changes in GDP between two time periods.

D) Economic Development
• Definition: Broader concept than economic growth. Includes qualitative factors like
literacy rates, level of healthcare, quality of housing, and levels of health standards.

E) Human Development Index (HDI)

• Definition: Ranking tool based on factors OTHER than just economic/monetary
measures.
• Index combining normalized measures of: Life expectancy, Literacy, Educational
attainment, GDP per capita.

F) Business Cycles
• Definition: Phases of fluctuation in output, income and employment in an economy.
• May range from 2 to 10 years. Consists of 4 interconnected phases: Prosperity,
Recession, Depression, Recovery.
• Healthiest phase = Prosperity (high income, high output, low unemployment).
• Worst phase = Depression (lowest output, employment, confidence).
G) Inflation
• Definition: Increase in cost of living over a period (usually one year). Period of
continuously rising prices.
• Directly affects operations of business through impact on raw materials, wages, finished
goods prices, inventory cost.
• CPI (Consumer Price Index): Most commonly used measure. Compares prices of a
fixed basket of goods and services between different periods.

H) Balance of Payments
• Definition: Record of a country's transactions with the rest of the world on account of
both trade and investment.
• Surpluses indicate excess foreign exchange inflow.
• Deficits = foreign exchange scarcity, matter of concern.

I) External Debt
• Definition: Measure of a country's borrowings. Total amount of debt and debt as
percentage of GDP.
• Increasing debt levels = increasing instability and slow down economic growth.

J) Exchange Rate
• Definition: Price of the domestic currency in terms of any foreign currency.
• Example: If INR/USD = 55, Indian exporter earns Rs. 55 for every dollar of goods sold.
If rate goes from 55 to 60, payment burden increases for importer but exporter earns
more.

4. Demographic Environment
• Demography: Study of human populations in terms of size, density, location, age,
gender, race, occupation.
• Demographic characteristics include: size, growth rate, age and sex composition, life
expectancy, work participation, rural-urban divide, education, caste, ethnicity, language,
religion.

A) Population Size
• Size and growth rate of population determines nature of demand.
• India: Growing middle-class economy. All categories of consumer durables seeing
growing demand (mobiles to refrigerators to washing machines). Different income levels
have different patterns of demand.
• Bottom of pyramid: cheap mobiles. Top: Apple iPhones, luxury goods.

B) Age Distribution
• Developing countries with high birth rates = potential markets for FMCGs (Fast Moving
Consumer Goods), housing, infrastructure -- all benefit from younger population.
• Older segment: declining income levels, increasing medical expenses.
C) Demographic Dividend
• Definition: When majority of population is in working age group, added productivity can
cause a rise in rate of economic growth.
• East Asian nations were at forefront of this transition in 1960s-70s. Latin America
followed later.
• Opposite concern in developed countries: People choose not to get married or have
children very late -- declining birth rates. Japan has twice as many old people as
children.
• Japan's working age population is very low -- decline in workforce and increased burden
of pension payments and medical care.

D) Rural-Urban Distribution
• Changing rural-urban ratio as more people move to urban areas for better employment
and higher wages.
• Leads to increase in size of market economy in urban areas with commensurate
increase in demand and economic growth.

5. Technological Environment
• Technology: Methodical application of scientific knowledge to practical purpose.
• Technology is a key driver of world economy and permeates every aspect of business.
• Invention: New product that makes considerable qualitative leap from existing
knowledge. Patent grants legal protection -- awards inventor right of ownership for
exploitation.
• Innovation: Broader scope -- covers range of technical improvements to
products/processes that are commercially exploitable. Matching of new technology to a
market, or first commercial application of production of a new process or product.
• Innovation is key to economic progress: First mentioned in Adam Smith's Wealth of
Nations (improvements in machines as a contributor to growth).
• USA's role: Edison -- electric bulb and General Electric. Henry Ford -- Model T and
moving assembly line. Steve Jobs & Steve Wozniak -- Apple (computers, cell phones,
tablets). All were breakthrough innovations.
• National Innovation System (NIS): Structures and institutions that help encourage and
facilitate innovative activities of a nation.
• Industry 4.0: Integration of IoT, Blockchain, Big Data, Augmented Reality in global
business.
• Generative AI: Creates original content by learning from existing data. Can revolutionize
industries, automate tasks, reduce costs, increase efficiency, open further opportunities.
Firms that effectively leverage AI will gain significant competitive advantage.

6. Political Environment
Political Ideologies and Systems
• Political ideology: Set of integrated beliefs, theories, and doctrines. Forms the basis of
a political system.
• Two broad classifications: Collectivism and Individualism.
 • Two important concepts: Democracy and Totalitarianism.

I. Collectivism
• Based on philosophy of Greek thinker Plato. Emphasizes supremacy of needs of
SOCIETY as a whole over needs of the individual.
• In modern context, translated into teachings of Karl Marx -- basis for socialism.
• Communism: Violent overthrow of existing social order. Soviet Union, China, Cuba,
North Korea, etc.
• Social Democracy: Softer version. Socialist goals through EXISTING ELECTORAL
system. Countries -- France, Germany, Sweden, UK, Australia, Norway, Spain
(Western), India, Brazil.
• Social capitalism -- kept strategic industries (power, coal, telecom, railways) under state
supervision while allowing free market in other sectors.

II. Individualism
• Based on well-being of INDIVIDUAL as path to well-being of society at large.
• Interests of individual should take precedence over interests of state.
• Based on teachings of Aristotle. Redefined by David Hume, Adam Smith, J.S. Mill.
Recently -- Milton Friedman, Friedrich von Hayek, James Buchanan.
• Two fundamental beliefs:
○ Guarantee of individual freedom and self-expression as absolute right.
○ Belief in pursuit of individual self-interest leading to welfare of society.
• Ideological conflict between individualism and collectivism was the basis of the Cold War
(USA vs USSR).

III. Democracy
• Definition: System of government where people decide rules of governance -- either
directly or through elected representatives.
• Features of democracy:
○ Election of representatives for fixed period of time.
○ Independent judiciary to protect individual property and rights.
○ Separation of legislature from executive arm of government.
○ Right to express opinions freely.
○ Non-political bureaucracy and defence infrastructure.
○ Accessibility to decision-making process.
• Examples: USA, Canada, UK, Australia, India.

IV. Totalitarianism
• Definition: System of government where one individual or political party has
COMPLETE CONTROL by virtue of religious belief, tribal power, or ideology.
• Refuses to recognize other parties and completely suppresses them.
• Types of totalitarianism:
○ Communism: Government owns all property, takes all decisions. Examples: former
USSR, China, Laos, Vietnam (still totalitarian in denying basic civil rights).
○ Theocratic totalitarianism: Religious group exercises total power. Afghanistan,
Iran, Saudi Arabia limit freedom of political and religious expression.
○ Tribal totalitarianism: Monopolization of power by a tribe. African states like
Zimbabwe, Tanzania, Uganda, Kenya.
○ Right-wing totalitarianism: Fascist regimes in Germany and Italy in 1930s-40s.
Right-wing dictatorships in Latin America in 1980s. South Korea, Taiwan, Singapore,
Philippines.
7. Political Risk
• Political risk: A change in political climate leading to deterioration of operating position
of the business.
• Political risk is concerned with: political stability, economic and regulatory climate, policy
continuity.

Causes of Political Risk

• Civil disorder: Unrest due to sudden change in economic conditions, human rights
violations.
• External relations: Differences between host country and foreign investor's home
country.
• Change in political leadership: Frequent changes in political leadership cause
changes in operating regulations, may lead to breach of existing contracts or takeover of
investor's property.

Types of Political Risk

• Ownership risk: Likely change in current ownership or governance structure of TNC.
Nationalization, transfer of ownership. Example -- India in early 1970s forced TNCs to
reduce stake through strategic sharing with local firms. Walmart acquired Flipkart
through purchase of 77% shares, changing operating environment for Indian TNC.

• Operational risk: Change in 'rules of the game' under which foreign firm operates.
Example -- India allows 100% FDI in e-commerce marketplace model but disallows FDI
in inventory-based model. Amazon and Flipkart affected.

• Transfer risk: Restrictions on free movement of factors of production. Changes in visa

rules. Example -- Trump's 'Buy American, Hire American' policy strengthened US visa
regime. Reduced H1B visas issued to workers in Indian technology industry.

8. International Business Negotiation

• Business negotiation: Tool used by TNC to conduct business operations at different
levels in its operating environment with different sets of people.
• Process of international business negotiation occurs at three different levels:
○ Government-Government: Deal with issues of loans, investment guarantees,
trading and investment terms and overall economic/political issues.
○ Government-TNC: TNCs negotiate with governments of home AND host countries
-- monetary/tax policies, price controls, tech transfer, approval to borrow funds.
○ TNC-Subsidiary/Affiliate: Deal with local affiliate in completely different cultural and
economic environment. Includes long term policy issues and day-to-day operational
problems.
TNC's Bargaining Power
• Ownership of technology: Possession of superior technology is invaluable. IBM
demanded 100% ownership in local operations.
• Global brands: Coca-Cola, McDonald's, Chevrolet have huge bargaining strength.
McDonald's got permission to operate in Kerala (India) only in 2013.
• Product diversity: Wide range of local products preferred since they help save imports.
• Export potential: TNC's ability to build host country's export capabilities and earn
foreign exchange increases bargaining strength.
• Investment offered: Amount of capital investment being brought into host country.
Investment carries attendant benefits of skill, technology, employment generation.

CHAPTER 3 SUMMARY
Economic environment = economic systems of home/host country + economic variables
(growth, inflation, fiscal/monetary policy).
THREE economic systems: Free market (capitalism), Command (communism), Mixed
economy.
Key indicators: GDP, GNI, HDI, Business Cycles, Inflation, Balance of Payments, External
Debt, Exchange Rate.
Transition economy = shifting from one economic system to another.
Political systems based on ideology: collectivism (socialism/communism) or individualism
(capitalism).
Political methods of governance: Democracy or Totalitarianism.
Political risk = probability of disruption to TNC operations from ownership, operational, or
transfer risks.
International business negotiation occurs at 3 levels: Government-Government, Government-
TNC, TNC-Subsidiary.
TNC's bargaining power comes from: technology, global brands, product diversity, export
potential, investment offered.
Sharing economy (Uber, Airbnb) = new disruptive model based on underutilized assets and
value of access over ownership.
QUESTIONS & ANSWERS
All questions from the PDF answered in simple, exam-ready language.

CHAPTER 1: GLOBALIZATION -- Q&A

Q1. What is globalization?

Globalization is the process of increasing interconnectedness in the global economy, such that
events in one part of the world affect people and societies in various other corners of the globe.
It is a shorthand expression for a variety of processes encompassing worldwide integration of
financial systems, trade liberalization, deregulation and market opening. It is also the result of
the phenomenon of convergence, which is the tendency for the tastes and preferences of
people in different countries to become similar -- leading to sameness or homogeneity.

Q2. What are the main elements of globalization?

There are three main elements of globalization:
• Economic Globalization: Characterized by the emergence of increased global flows of
international trade and investment. Its main agents are companies, investors, banks,
financial institutions, nation states, and international institutions.
• Cultural Globalization: A process of cultural homogeneity or having similar tastes all
over the global economy. Visible in the form of common preference for things like
McDonald's burgers, Nike shoes, iPods.
• Political Globalization: Refers to processes of changes in the rules and structures of
global governance, including rise of global institutions like IMF, World Bank, WTO, and
regional blocs like EU and NAFTA.

Q3. What are the arguments in favour of and against globalization?

Arguments IN FAVOUR:
• Benefits Everyone: Rising tide raises all boats -- free trade benefits all countries.
• Trade, Investment, Employment and Growth: Millions of jobs created. FDI increased
in Africa, Asia, Latin America. India's investment in African infrastructure is a prime
example.
• Global Value Chain: Production dispersed globally for most economical locations. Dell
manufactures laptops with only 3 days inventory.
• Global Marketplace: Bollywood, iPhone, McDonald's, Starbucks are demanded
worldwide.

Arguments AGAINST:
• Excluding Process: Gap between rich and poor has increased since Industrial
Revolution.
• Adverse Impact on Developed Country Jobs: Manufacturing shifts to
India/Bangladesh, reducing jobs in developed countries.
• Loss of National Sovereignty: Large TNCs have revenues exceeding GDPs of small
nations. Can influence governments.
 • Exploitative Work Practices: Child labour, low wages, unsafe conditions. Bhopal Gas
Tragedy is a stark example.
• Environmental Degradation: Depletion of water levels, climate change, pollution.

Q4. What is 'Slowbalization'? Discuss factors responsible for changing face of

globalization.
Slowbalization or de-globalization refers to the slowing down of the process of globalization.
Globalization is in the midst of a profound change as basic tenets are pressured by rising
protectionism and diverging growth paths of emerging markets.

Factors responsible:
• Rising Protectionism: USA led protectionist sentiment -- free-trade policies blamed for
collapse of American manufacturing industry, job losses, and depressed wages. US
withdrew from TPP and renegotiated NAFTA as USMCA.
• Nationalism: Brexit in European Union, right-wing governments worldwide raising
concerns about job losses and immigration.
• COVID-19 Pandemic: Became the last nail in the coffin. Cross-border investment, trade,
bank loans, supply chains all shrank. Global output declined 4.9% in 2020. Contact-
intensive sectors (retail, hospitality, travel, tourism) severely affected.
• China's Inward-Looking Policy: China adopted more inward-looking stance. Exports
as share of GDP fell from 31% to 17%. Pushing BRI and RCEP as alternatives.
• Supply Chain Concerns: National sovereignty and trade dependence concerns forced
countries (especially Japan) to re-examine supply chains. ASEAN (especially Vietnam)
emerging as alternative production destination.
• Cyber Physical Systems: Emergence of AI, IoT, robotics changing nature of global
business.

Examination Question: What is globalization? What are the driving forces of

globalization? (4,4)
Globalization (4 marks): Globalization is the process of increasing interconnectedness in the
global economy, such that events in one part of the world affect people and societies in various
other corners of the globe. It is characterized by: (a) changes in economic systems (b) cultural
homogeneity (c) worldwide changes in political systems. It results in sameness or homogeneity
-- a tendency for tastes of people in different countries to become similar. It is the result of the
phenomenon of convergence.

Driving forces (4 marks):

• Advances in communication and transportation: Led to a 'global village' of
interdependent people. Goods, services, people travel between continents easily.
• Trade liberalization: GATT, WTO reduced barriers to trade. Regional trading blocs (EU,
NAFTA) created huge markets.
• Technology: Internet, microchip, satellite TV, containerization all accelerated
globalization.
• Economic liberalization: Developing countries (India, China) opened up their
economies to foreign trade and investment.
CHAPTER 2: INTERNATIONAL BUSINESS -- Q&A

Q1. What is international business?

International business refers to any business activity which involves the transfer of resources,
goods, services, knowledge, skills or information across national boundaries. These activities
may pertain to the production of physical goods or to the provision of services such as banking,
finance, insurance, education, construction, etc. The activities that comprise international
business are referred to as international transactions and take the form of international trade,
international investment, joint ventures, and strategic alliances.

Q2. What is a TNC? Explain its main characteristic features.

TNC (Transnational Corporation): A business enterprise with trade or investment operations
in multiple global locations. The simplest description is that it is a business enterprise which has
business activities beyond its national boundaries through ownership or control of production or
service facilities.
Main characteristics:
• It has the ability to coordinate and control various stages of individual production chains
within and between different countries.
• It has the ability to take advantage of geographical differences in the distribution of
factors of production (natural resources, capital, labour) and state policies (taxes, trade
barriers, subsidies).
• It also has the geographical flexibility to be able to switch and re-switch resources and
operations between locations at an international level.

Q3. Distinguish between Trade and Investment-related modes of entry.

Trade-related modes: Include exports, imports, and countertrade. The entry mode is purely
through buying and selling goods and services internationally. No ownership of assets in foreign
country. Least commitment, least risk. Example: Exporting goods to USA from India.

Investment-related modes: Involve ownership of property, assets, projects, and businesses in

a host country. Takes two forms -- FDI (Foreign Direct Investment) and FPI (Foreign Portfolio
Investment). Involves higher risk and greater financial commitment. FDI = long-term, stable,
involves control. FPI = short-term, volatile, only for returns.

Q4. Distinguish between FDI and FPI.

• Purpose: FDI = to gain controlling interest or ownership in a foreign company. FPI = to
earn returns from investment.
• Stability: FDI = more stable (long-term commitment). FPI = more volatile (can exit easily
through financial markets).
• Spillover effects: FDI brings technology and managerial expertise spillovers. FPI = no
such spillovers.
• Route: FDI done through Greenfield investment, mergers, acquisitions, brownfield
investment. FPI through international capital market in shares and debentures.
• Width and depth: FDI increases both width and depth of host country financial markets.
FPI contributes to financial development in the economy.
Q5. Enumerate factors that contributed to growth of international business in last
few decades.
• Economic systems: Rise and fall of socialism, liberalization of economies in developing
nations.
• Globalization of supply chains: Firms in manufacturing sector outsourced non-core
business operations to low-cost destinations.
• Globalization of demand: Growing demand for global brands like McDonald's, Nike,
Coca-Cola, Apple.
• Regional trading blocs: EU and NAFTA created huge markets with increased trade
and investment opportunities.
• Technology: Microchip, internet, satellite TV, containerization, biotechnology, AI.
• Political changes: Rise and fall of socialism, opening of communist countries to free
market.
• Global governance: WTO, IMF, World Bank facilitated international trade and
investment.

Q6. Write short notes on: International Leasing, Licensing, Franchising, Turnkey
Projects
International Leasing: Entry mode where foreign firm (lessor) leases new/used machines or
equipment to local company (lessee) in developing country. Lessor retains ownership. Lessee
pays leasing fee. Benefits TNC by giving quick access to target market and accumulates
experience. Benefits local company by reducing cost of using foreign machinery. Example:
Japan's Mitsubishi leased trucks to Chinese companies in mining and transportation.

International Licensing: Entry mode where firm transfers intangible property (expertise, know-
how, blueprints, technology, manufacturing design) to another firm for a royalty fee. Licensor =
firm transferring technology. Licensee = firm receiving technology. Advantage: Reap benefits
abroad without investment. Disadvantage: Loss of quality control; licensee may become
competitor. Example: RCA licensed colour TV tech to Sony/Matsushita -- they became bigger
than RCA.

International Franchising: Entry mode where foreign franchisor grants specified intangible
property rights (trademark/brand name) to local franchisee who must follow strict rules.
Franchisee pays royalty as percentage of revenue. Involves broader package of rights and
resources than licensing. Advantage: Consistency, low risk, quick global presence. Example:
McDonald's, KFC, Burger King.

Turnkey Projects (BOT): Investment where foreign investor assumes responsibility for design
and construction of an entire operation, and upon completion turns the project over to the
purchaser. Investor receives guaranteed periodic payments. Used for very large-scale long-term
infrastructure projects -- power generation, airports, dams, expressways, chemical plants, steel
mills. Examples: Bechtel (USA), Hyundai (Korea), Friedrich Krupp (Germany).

CHAPTER 3: ECONOMIC AND POLITICAL ENVIRONMENT -- Q&A

Q1. What are the different parameters of measuring the economic environment of
an international business?
The economic environment of an international business is measured through several
parameters:
• GDP (Gross Domestic Product): Total market value of all final goods and services
produced within a country in a given period. Measures productivity and domestic market
potential.
• GNI (Gross National Income): Market value of final goods/services newly produced by
a national economy, including income earned by nationals abroad. Broadest measure of
economic activity.
• Economic Growth: Change in GDP from one year to the next.
• Economic Development: Broader concept including literacy rates, healthcare, housing
quality, health standards.
• HDI (Human Development Index): Ranking tool combining life expectancy, literacy,
educational attainment, GDP per capita.
• Business Cycles: Phases of fluctuation -- prosperity, recession, depression, recovery.
• Inflation: Increase in cost of living. Measured by CPI (Consumer Price Index).
• Balance of Payments: Record of country's transactions with rest of world.
• External Debt: Measure of country's borrowings.
• Exchange Rate: Price of domestic currency in terms of foreign currency.

Q2. 'Free market systems lead to growth whereas socialist market systems stifle
growth.' Elaborate with examples.
Free market systems lead to growth because:
• They are based on pursuit of self-interest (Adam Smith's invisible hand) -- individual
profit-seeking leads to greater social good.
• Freedom of enterprise allows people to pursue any economic activity, encouraging
innovation.
• Competition drives efficiency, quality improvement, and price reduction.
• Example: USA and UK (capitalist economies) have been among the world's largest and
most innovative economies.
• Hong Kong: At market end of spectrum -- very small government role -- has been a
massive trading and financial hub.

Socialist market systems stifle growth because:

• Lack of incentives for producers leads to overproduction, inefficiencies, and inflexibility.
• Founders of socialism visualized an ideal society where all would be equal -- but in
reality, stark inequalities arose. Focus was on military production rather than consumer
goods.
• Example: The erstwhile USSR and China (before 1978 reforms) had severe shortages
of consumer goods and poor quality products.
• However, in the modern world, NO economy is purely free market or purely command.
Most market economies have some government control, and most command economies
are moving towards market orientation.

Q3. What are the dominant political philosophies of the global economy?
The dominant political philosophies are:
 • Collectivism: Based on Plato's philosophy. Supremacy of society's needs over
individual needs. In modern context -- socialism (Karl Marx). Includes communism
(violent overthrow, state ownership) and social democracy (democratic means, welfare
state).
• Individualism: Based on well-being of individual. Individual interests take precedence
over state. Basis of capitalism. Associated with Adam Smith, David Hume, J.S. Mill,
Milton Friedman. Two beliefs: guarantee of individual freedom and belief in self-interest
leading to social welfare.

Political systems based on these philosophies:

• Democracy: People decide rules of governance. Features: elected representatives,
independent judiciary, separation of legislature and executive, right to express opinions,
accessible decision-making. Examples: USA, UK, India.
• Totalitarianism: One individual or party has complete control. Types: Communism
(former USSR), Theocratic (Iran, Saudi Arabia), Tribal (Zimbabwe), Right-wing (Nazi
Germany, fascist Italy).

Q4. What are the defining features of democracy? Discuss how democratic
system is more conducive to global business than totalitarianism.
Features of Democracy:
• Election of representatives for a fixed period of time.
• Independent judiciary to protect individual property and rights.
• Separation of the legislature from the executive arm of the government.
• Right to express opinions freely.
• A non-political bureaucracy and defence infrastructure.
• An accessibility to the decision-making process.

Why Democracy is better for global business than Totalitarianism:

• Democracies have stable, predictable rule of law -- essential for long-term business
contracts and investments.
• Property rights are protected -- businesses can invest without fear of nationalization.
• Independent judiciary ensures fair disputes resolution.
• Freedom of press and speech prevents corruption from being hidden.
• Democratic countries tend to be more open to trade and foreign investment.
• In contrast, totalitarian systems have: unpredictable policies, arbitrary decisions,
corruption, risk of sudden nationalization, poor rule of law -- all of which are hostile to
business.
• Example: The political risk in totalitarian regimes is much higher -- companies in such
countries face ownership risk, operational risk, and transfer risk frequently.

Q5. What is international business negotiation?

International business negotiation is the tool used by a TNC to conduct its business operations
at different levels in its operating environment with different sets of people. A TNC operates at
various levels in both the home and host country.
The process of international business negotiation may occur at three different levels:
• Government-Government: Governments of home and host countries deal with issues
of loans, investment guarantees, trading and investment terms and overall economic
and political issues.
 • Government-TNC: TNCs are global corporations which wield a lot of power. They
negotiate with governments of both home and host countries regarding a range of issues
from monetary and tax policies, price controls, technology transfer and approval to
borrow funds.
• TNC-Subsidiary/Affiliate: TNC deals with its local affiliate/subsidiary which may be part
of a completely different cultural and economic environment. Includes both long term
policy issues and day-to-day operational problems.

Q6. A global business firm operates in an environment which is complex and

multidimensional. Explain.
A global business firm operates in an environment which is complex and multidimensional
because:
• Economic Environment: Firm must deal with different economic systems (capitalist,
socialist, mixed) in different countries. Must evaluate GDP, inflation, exchange rates,
business cycles, balance of payments.
• Political-Legal Environment: Different political ideologies (democracy vs
totalitarianism) create different operating conditions. Political risk (ownership risk,
operational risk, transfer risk) varies across countries.
• Cultural Environment: Differences in language, customs, religion, values affect how
business is conducted.
• Technological Environment: Rapidly changing technology (AI, IoT, blockchain)
requires constant adaptation.
• Diverse Business Environments: Different currencies, inflation, interest rates,
economic regulations, political systems, social customs, laws.
• Enhanced Risk: Unpredictability of operational and financial outcomes. International
firms operate in multiple work environments, receive payments in different currencies.
• Operational Complexities: Cultural/language differences between local employees and
expatriates. Organizational principles differ widely across nations. Complexity of
operation and management increases.
• Example -- McDonald's: Has a presence in almost all countries of the world, adapts its
menu to local taste and religious leanings. In India, replaced beef with chicken. In Middle
East, no pork products.

-- END OF NOTES --