INTERNATIONAL BUSINESS

ENVIRONMENT
 International Business Environment
•International business environment
can be defined as various external
forces in foreign countries that
surround the firm and influence its
decisions and operations.
•It consist of both micro and macro
environmental factors
 International Business Environment
•Micro environment consist of foreign customers,
overseas suppliers, foreign intermediaries, foreign
competitors, global media etc.
•Macro environment consist of Geographical
Environment, Economic Environment, Socio-
Cultural Environment, Political Environment, Legal
Environment, Technological environment, and
Demographic environment.
 Need for International Business Environment Analysis

• A firm needs to examine the components of the environment for

each one of the foreign countries in which it operates.
• All the components-and elements of the foreign environment
might not be relevant to the business.
• For a small firm interested in exporting, analysis of the commercial
policy and the economic environment would be sufficient.
• But, A multinational company with subsidiaries in foreign
counties need to analyse all micro and macro environmental
forces in foreign countries that affects its business.
Macro Environmental Factors
 International Geographic/ Natural Environment
• Different climatic conditions (viz., rain, snowfall, wind,
temperature, humidity, etc.) in different countries give rise to
demand for different types of products.
• It is largely due to climatic differences that people differ in their
housing, clothing, food, medical and recreational needs.
• Climatic and/or topographic differences in different countries
demanded adaptation or modifications in products to suit local
conditions.
• For example: The car manufactures need to change the body and
specifications of cars to meet the road conditions of foreign
counties to which it is marketed.
 International Economic Environment
• The international economic environment refers to the global
economic factors that are outside of the control of individual
organizations but that can affect the way that businesses
operate.
• Economic environment consist of the economic conditions,
economic policies and economic systems of different countries.
• On the basis of economic conditions, countries are often divided
into developed, developing (emerging) and underdeveloped
economies. Separate business strategies may be required for
these countries.
 International Economic Environment .. Continuing..
• For example: Developed countries may have better
education, infrastructure, technology, healthcare
etc., while compared to other countries. Business
pans must be formulated in the light of these
conditions.
• The economic policies such as industrial policies,
export import policies, monetary policies, fiscal
policies etc., of foreign countries must be analysed
well to plan the activities of foreign business.
 International Socio-Cultural Environment
• Socio-cultural environment consist of family, education, values,
beliefs, life styles, language etc.
• Socio-cultural environment influences all aspects of human behavior
and is pervasive in all elements of business operations.
• Socio-cultural forces have considerable impact on
•products people consume
•designs, colors and symbols they like
•dresses they wear
•emphasis they place on religion, work, entertainment, family and other social
relations.
• Marketing mix decisions such as product, promotion, distribution etc., must be
taken by considering these social and cultural factors of the country in which the
business operates.
 International Political Environment
• Foreign business firm operates only as a guest and at the
convenience of the host country government.
• The government may fix ceiling on foreign investment,
manner of conducting business, taxation etc., as outcome
of political decisions.
• The global businessmen need to analyze the political
factors in the foreign country that affect their business
such as current form of government and political party
system, role of government in the economy, political
encouragement to foreign firms, political stability, and
political risks to business.
 International Legal Environment
• Global business firm operates within the jurisdiction of legal system of the
home and host countries.
• The laws that they face in their home countries might be different from
those encountered in the host countries.
• Firms operating internationally face major challenges in conforming to
different laws, regulations, and legal systems in different countries.
• The company must design its marketing mix elements and work in
accordance with various laws prevalent in host countries.
• For example: The legal framework to protect small and medium enterprises
(SMEs), mainly to achieve social objectives, adversely influences the
expansion of manufacturing capacities and achieving economies of scale in
certain countries.
 International Technological Environment
• Technological change can have impact on the decisions
taken by international business.
• The type of technology in use, the level of technological
developments, the speed with which new technologies
are adopted and diffused, the type of technologies that
are appropriate, the technology policy etc., of foreign
countries are important to companies doing
international business.
• A firm, which is unable to cope with the technological
changes of the host countries may not survive.
 International Demographic Environment
• Demographic factors such as size of the population,
population growth rate, age composition, life
expectancy, family size, occupational status, employment
pattern etc, of different countries affect the demand for
goods and services in these countries.
• For example: Markets 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. Increased life expectancy
may lead to the demand of healthcare products.
 Opportunities of Indian Companies in International Markets
• Growth of business
• Growth in market share
• Access to modern technology
• Optimum utilisation of available resources
• Increase in scale of operations ( and Economies of scale)
• Help in specialisation
• Access to low cost raw-material and labour
• Revenue enhancement
• Brand image: Image and reputation as international company
• Enhancement of competitive capacity etc.
 Threats of Indian Companies in International Markets
• Tariff barriers in host countries
• Non-tariff barriers in host countries
• International Political factors
• Legal restrictions of host countries
• Place constraints (Distance, geographic conditions, supply conditions etc.)
• Foreign exchange issues (differences in currencies)
• Social and cultural differences of host countries (Language, life style etc.)
• High labour cost/lack of mobility of labour
• Infrastructural hurdles
• Technological constraints.
• International Market risks.
• Tough competition
• Lack of support from home country
 What is Foreign Investment?
• Foreign investment refers to
the investment in domestic companies and
assets of another country by a foreign
investor.
• When a company or individual from one
nation invests in assets or ownership stakes
of a company in another nation, it is called
foreign investment.
 Foreign Investment in India
• According to RBI, Foreign Investment means any investment made by a
person resident outside India on a repatriable basis in capital instruments
of an Indian company or to the capital of an LLP.
• Foreign Investment in India is regulated in terms of clause (b) sub-section
3 of section 6 and section 47 of the Foreign Exchange Management Act,
1999 (FEMA) & the revised regulations of the act amended from time to
time.
•Here Capital instruments means equity shares, convertible debentures,
convertible preference shares and share warrants.
•Non convertible debentures & preference shares issued up to 2007 is
also considered as capital instruments
 Greenfield
FDI
Brownfield
Foreign
Investment
FII

FPI GDR/ADR

Offshore funds
 Foreign Direct Investment (FDI)
❑ It is the investment that gives the investor a
control over investment.
❑ Control need not be 100%
❑ It is the investment in physical or real assets of
business.
❑ Investors face market risk
❑ Examples: Purchase of a company abroad,
starting a subsidiary company abroad.
 How much investment lead to control?
• According to Organization for Economic Co-operation
and Development (OECD), foreign investment of 10% or
above in a firm is considered as FDI.
• So FPI ≥ 10% will be considered as FDI.
• According to RBI, For an FPI investment, once the
investment is classified as FDI (holding ≥ 10%) and the
FDI holding comes back to <10% later, the holdings will
not be classified as FPI again.
 Definition of RBI
•According to RBI, Foreign Direct Investment
(FDI) is the investment through capital
instruments by a person resident outside
India
•(a) in an unlisted Indian company; or
•(b) in 10 percent or more of the post issue
paid-up equity capital on a fully diluted basis
of a listed Indian company.
TYPES OF FDI
 FDI
Nature of Business Motive

Resource Market
Horizontal Vertical
seeking seeking
Asset Efficiency
Conglomerate Platform
seeking seeking

Asset

Greenfield Brownfield
FDI on the basis of Nature of business
• Establishing same type of business
Horizontal operations in foreign country

• Expand the national operations with

Vertical different but related activities

Conglomerate • Doing unrelated business in foreign country

• Output of foreign operations are exported to

Platform other countries.
 FDI on the basis of Motive
• Resource seeking: Looking for accessing and exploiting
resources (raw material and labour) at lower cost.
• Market Seeking: Motivating factors are the enhancement
of market share and sales growth
• Strategic Asset seeking: Seeks to acquire assets in foreign
countries that will enable a firm to attain long term
corporate objectives.
• Efficiency seeking: Seeking to benefit from factors in the
foreign county that enable the firm to achieve maximum
efficiency.
FDI on the basis of Asset

Greenfield Brownfield
Investment Investment
 Greenfield Investment
• Green-field investment is the investment by a
company in the form of a new venture by
constructing new facilities in a country outside
home.
• Company builds its own brand new facilities.
• Here, the company construct new manufacturing
plant, warehouses, office, sales units etc. in foreign
countries
• New facility offers the maximum design flexibility
and efficiency to meet the project's needs.
Advantages of Greenfield Investment
• Complete control on investment
• Design and construction in accordance with needs
• Company can control production and other aspects
better
• Benefit in the long run
Limitations of Greenfield Investment
• High cost of establishment
• Time consuming
• Difficulties to get licenses, permissions etc.
 Brownfield investment
•It is the investment made by purchasing an
existing business in host countries.
•The investing company can buy or lease the
existing facility
•The company may modify the facilities in
accordance with their needs.
•Brownfield investment may be through
mergers and acquisitions.
Benefits of Brownfield investment
• Low cost of establishment
• Save time
• No need of licenses and permissions
Limitations of Brownfield investment
• Existing facilities may not exactly suitable to the
business of the company
• Existing weaknesses of the business will continue
• Difference in corporate culture may affect its efficiency
FDI Inflow 2019 : Top 10 countries
Figures in Billion ($)

Source: [Link]
 Foreign Portfolio Investment (FPI)

✓It is the investment in financial assets of foreign

companies
✓Investing capital to get return
✓Investor has no control over investment
✓Investment in secondary market.
✓Examples: investment in securities & mutual funds,
deposits in commercial banks.
 Definition by RBI
•Foreign Portfolio Investment is any investment
made by a person resident outside India in
capital instruments where such investment is
• (a) less than 10 percent of the post issue paid-up
equity capital on a fully diluted basis of a listed
Indian company or
• (b) less than 10 percent of the paid up value of
each series of capital instruments of a listed
Indian company.
When does FPI becomes FDI?
• If the share holding through an FPI reaches 10% of
the total equity of a company, it will be a treated as
FDI.
• SEBI has said that, if the holding of an FPI is equal
to or exceeds 10 per cent of the total equity of a
company, an FPI has to cut the excess stake within
five working days, and failure to do so will lead to
the investment being classified as FDI.
 FII

FPI GDR/ADR

Offshore
Funds
Foreign Institutional Investment (FII)
• It is the portfolio investment made by foreign financial
institutions such as investment banks, mutual funds etc.
• In India, FII category does not exist now. A new class called
Foreign Portfolio Investor has created by merging FII, Sub-
accounts & QFI.
• More than 10,000 (10,343 in 13-05-2020) Foreign Portfolio
Investors registered with SEBI.
• In India, FII investment is permitted in primary (IPO) and
secondary markets.
 Global Depository Receipt
• Foreign institutional investors can buy securities in India
directly. But a foreign citizen cannot buy securities from
India directly.
• In the same manner, an Indian citizen cannot directly
purchase securities from foreign capital markets.
• Global Depository Receipt (GDR) & American Depository
Receipt (ADR) is the medium through which these
investments can be made.
 GDR/ADR/IDR
• A company can access the foreign securities market only
through Global Depository Receipt.
• Indian companies are allowed to raise capital in the
foreign market through ADR (In US) and GDR (Countries
other than US)
• A foreign company can access Indian securities market
for raising funds through Indian Depository Receipt (IDR)
• Companies get listed in foreign stock exchanges indirectly
by using these instruments
Global Depository Receipt - Definition

•Instruments used to list securities in

international stock exchanges and
thereby to raise capital from the foreign
market
•It is a physical certificate evidencing
ownership of foreign company’s shares
 How does GDR works?
• The company deposits its shares with a bank/Depository
located in the foreign country through a domestic bank.
• The foreign bank/Depository issues receipts (Depository
Receipts) against these shares, each receipt having a
fixed number of shares (say 1GDR=10 shares)
• These receipts are listed on the foreign stock exchanges
and thereby sold to the peoples of the foreign country.
HOW GDR WORKS?
INDIA OVERSEAS

Indian Depository Foreign

Agreement
Company Depository

Equity Shares GDR

1 GDR = 10 shares

Domestic Foreign
(Indian) Investors
Depository
 Offshore Funds
• These are international or global mutual funds
• These are mutual funds investing in international markets – in
equity, gold, fund of funds etc.
• There are country-specific, region-specific and thematic funds.
• It open the opportunities for Indians to invest in stocks that are not
listed in India.
• In addition to other risks, investors have to bear currency risk also.
• E.g. Kotak US equity fund, Nippon India Japan Equity fund, DSP
world gold fund etc.
 Distinction between FDI and FII
FDI FII (FPI)
1. It is long-term investment [Link] is short/medium-term
[Link] in physical assets investment
[Link] exercise some control over [Link] in financial assets
business [Link] have no control over business
[Link] is to increase enterprise 4. Aim is to get return on capital
capacity & growth invested.
5. Leads to technology transfer,
5. FII results in only capital flow
access to markets and management
inputs

43
43
 Distinction between FDI and FII
FDI FII (FPI)

6. FDI flows into the primary 6. FII flows into the Primary &
market secondary market
7. Entry and exit is relatively 7. Entry and exist is relatively easy
difficult
8. FII is eligible for dividend, interest or
8. FDI is eligible for profits of the capital gain from sale of securities.
company
9. Sometimes tends to be speculative
9. Does not tend to be speculative
10. No direct impact on employment of
10. Direct impact on employment labour and wages
of labour and wages

44
44
FDI in India
•FDI is the investment made by a foreigner or
foreign firm in India in which the investor has some
control
•FDI in India can be done through two routes:
• Automatic Route and
• Government route
Automatic route:
• In this, prior approval by the Government of India or
Reserve Bank of India is not required. (Regulation 16 of
FEMA 20 (R).
Government route:
• In this, prior approval by government is required.
• For getting government approval, the proposals
are to be submitted online on FIFP portal (Foreign
Investment Facilitation Portal), administered by
the Department of Industrial Policy & Promotion
(DIPP), Ministry of Commerce and Industry,
Government of India.
• Concerned ministry is the competent authority for
approval.
 FDI LIMIT IN
MAJOR SECTORS
100% Automatic
• Agriculture and Animal Husbandry • Wholesale trading
• Air Transport services (Non • Chemicals
scheduled) • Coal and lignite
• Airport • Construction
• Asset reconstruction companies • Credit information companies
• Automobile • Duty free shops
• Auto components • E-commerce
• Bio-Technology ( Greenfield) • Electronic System
• Capital goods • Healthcare (Greenfield )
(Brownfield 74%
Source: [Link] (18-05-2020)
100% Automatic
• Food processing • Pharmaceutical (Greenfield)
• Gems and jewellery making • (Brownfield 74%)
• Industrial parks • Railway infrastructure
• IT & BPM • Roads and highways
• Manufacturing • Single brand retailing
• Mining • Textile and garments
• Other Financial Services • Thermal power
• Petroleum and natural gas • tourism
exploration (refineries – 49%) • White label ATM
Source: [Link] (18-05-2020)
FDI Prohibited in
• Lottery business
• Chit fund
• Real estate business
• Manufacturing of Cigarette and tobacco
• Sectors not to open private sector (Atomic energy, railway
operations)
• Gambling and betting
• Nidhi companies
• Trading in transferable business rights.

Source: [Link] (18-05-2020)

 Automatic (up to 49%)
SECTOR FDI Limit Type of approval

Infrastructure Companies in securities 49% Automatic

market
Insurance 49% Automatic
Pension 49%
Petroleum Refining (PSU) 49% Automatic

Power Exchanges 49% Automatic

Source: [Link] (18-05-2020)
 Government Route
SECTOR FDI Limit Type of
approval
Banking Public sector 20% Govt
Core Investment Co. 100% Govt.
Digital Media 26% Govt
Food products retail 100% Govt.
Multi-brand retailing 51% Govt
Print media (news paper & periodicals with news & current 26% Govt.
affairs)
Print media (Publication, scientific journals etc.) 100% Govt
Source: [Link] (18-05-2020)
 Automatic + Government
SECTOR Automatic Govt route

Air Transport Services 49% Above 49%

(Scheduled & Regional)
Banking Private sector 49% Above 49%
Bio-technology (Brownfield) 74% Above 74%
Defence 49% Above 49%

Source: [Link] (18-05-2020)

FDI limit in the Defence sector under the automatic route
increased from 49% to 74% (Announced by Finance Minister
on 16-05-2020)
Automatic + Government
SECTOR Automatic Govt Route

Healthcare (Brownfield) 74% Above 74%

Pharmaceutical (Brownfield) 74% Above 74%

Private Security agencies 49% Above 49%

Telecom services 49% Above 49%

THEORIES OF FDI
 Theories of FDI
• The purpose of a theory is to explain or predict
the behaviour of a particular phenomena
• Theories of FDI explains the pattern that can be
observed in the flow of foreign direct
investment.
• The theoretical development of FDI begin in
1960s.
 International Product Life Cycle Theory
• Propounded by Raymond Vernon in 1960
• It tries to explain why trade take place and why investment
occurs
• This theory explains how a company begin to export its products
and eventually undertake foreign direct investment as the
product moves through its life cycle.
• Vernon suggests that a product goes through three stages: it
starts of as a new product, and then becomes a maturing
product and finally a standardized product.
• Vernon argued that firms undertake FDI at particular stages in
the lifecycle of a product.
• He argued that most new products were initially produced in the
U.S.
 Product Life Cycle Theory ….. Continuing….
•In the new product stage
•it is the innovation stage
•the product is invented by a country
•usually invented by advanced
countries with high-tech advantage
•more skilled labour is needed for
testing and developing.
 Product Life Cycle Theory ….. Continuing….
•In the maturing stage
•Advanced machineries used for
production
•mass production begins
•less skilled labour is needed and
•capital becomes more important.
•The product is marketed internationally
 Product Life Cycle Theory ….. Continuing….
•In the standardization stage
•factors such as production and location cost
are vital.
•the product is made in other countries and
imported to the original producing country.
•Gradually production and export from the
original country ceases and subsequently
production is shifted to less developed
countries (LDC's)
 Market Imperfections theory (Monopolistic
Advantage Theory)
• Introduced by Stephen Hymer in 1960.
• Market imperfections theory is a trade theory that arises from
international markets where perfect competition doesn't exist.
• Imperfection means at least one of the following assumptions
for perfect competition is violated
• Buyers and sellers are both price takers
• Companies sell virtually identical products
• Buyers and sellers have perfect information
• Multiple companies owns a small market share
• There is no barrier of entry or exit
 Market Imperfections theory ….. Continuing
• Market imperfections means anything that interface free
trade.
• Imperfectness motivates firms to make use of its
monopolistic or oligopolistic advantages.
• According to this theory, when there is an imperfection
in the market that makes transactions inefficient,
companies will undertake FDI to internalise the
transaction (create its own market) and thereby to
remove the imperfections.
• According to this theory, FDI occurs largely in
oligopolistic industries.
 The Eclectic Theory
• Developed by John Harry Dunning, a British economist in 1980
• According to theory, FDI will occur when the following three
conditions are uniquely combined.
• Ownership advantage – the firm has unique competitive advantage
such as a new production technique, technology, trademark etc.
• Location advantage – the firms enjoys the location advantage such
as availability of natural resources, low cost of material, low labour
cost etc.
• Internalisation advantages - The ability of the firm to produce and
market through its own subsidiaries rather than producing with
alliances.
 Eclectic Theory
Ownership Location Internalisation
advantge advantage advantage
Exporting YES

Licensing & YES YES

Franchisng
FDI YES YES YES
 Market Power Theory
•Market power describes a company's relative
ability to manipulate the price of an item by
manipulating the level of supply, demand, or both.
•According to this theory, a firm tries to establish
market power in an industry by undertaking FDI
•Market power is often achieved through vertical
integration – backward and forward vertical
integrations.
 Internalisation Theory
• Propounded by Buckley and Casson
• This theory tries to explain the growth of MNCs and TNCs and
their motivations for achieving foreign direct investment.
• Internalization is described as a transaction that is handled by a
business firm itself without the help or alliances of other firms.
• When external markets for production or distribution fails to
provide efficiency, companies may invest FDI to create their
own production or distribution system.
• By internalizing across national boundaries, a firm becomes
multinational.
• FDI is more likely to occur when transaction costs with a second
firm (to get alliances, franchising etc.) are high.
 Benefits of FDI to Home Countries
• Low material cost
• Low labour cost
• Increase foreign currency reserve (inward flow of
foreign earning)
• Increases export of machineries and equipment
• Benefit the consumer through lower prices
• High revenue in the form of taxes
• Contribute to economic development
 Costs of FDI to Home Countries
• Outflow of capital
• Transfer of technology
• Transfer of resources
• Affect balance of payment
• Negative effect on employment (Companies may
higher labour from those countries where wages are
low)
• Liberal FDI policy may attract more MNCs to the
country
 Benefits of FDI to Host Countries
• Provision of finance to industry and trade
• Access to new technology
• Availability of wide variety of products
• Generation of employment
• Increase in exports
• Balance of payment advantage when MNCs exports from host country
• Development of backward areas
• Creation of competitive market – improve competitiveness of domestic
industries
• Stimulation in economic development
 Costs of FDI to Host Countries
• Exploitation of natural resources
• Pollution and environmental issues
• Threat to domestic industries
• Negative effects on balance of payments (foreign companies
repatriate profits to their countries)
• Cultural erosion
• Inflation in the economy – MNC spent lot of money for promotion
at the cost of consumers.
• Threat to national sovereignty and autonomy
Problems and prospects of
foreign companies in India
PROBLEMS
• Infrastructure – selecting a place with infrastructure
• Recruitment of employees – lack of labours with
proper skill
• Diverse culture
• Price centric customers
• Legal challenges
• Lengthy formalities to start
• Politically driven trade unions
• Strike & Hartal
• High tax rates
Opportunities
• Huge and untapped population
• Abundant natural resources
• Liberal investment policy
• Liberal foreign trade policy
• Make in India
• Digital India
Opportunities of Indian Companies in
International market
• Increased global trade/growth
• Removal of barriers and restrictions
• Encouragement of govt
• Saturation of large companies
• Increase scale/Economies of scale
• Helps in specialisation
• Helps to learn new culture
• Revenue increase
• Increase reputation of business
• Diversification of business
Threats
• Small capital base
• Quality issues
• Difficult to get right partners
• Cultural impacts
• Poor operation control
• Competition from large firms
• Competition from foreign domestic firms
• Political and legal challenges
• Negative image of Indian made
• Terrorism
• Slow global economic growth
• Problems in hiring talented employees