INTERNATIONAL BUSINESS –

INTRODUCTION

The beverages you drink might be produced in India, but with the collaboration of a USA company.
The tea you drink is prepared from the tea powder produced in Srilanka. The television you watch
might have been produced with Japanese technology. Most of you have the experience of browsing
internet and visiting different websites, purchasing the goods and services without visiting those
manufacturing countries. All these activities have become a reality due to the operations and activities
of International Business. Thus, international business is the process of linking the global resources
with global people.

EVOLUTION:

The origin of International Business goes back to human civilization. Sindh civilization had many
traces of having a trade relationship with the Eastern civilization. Later the concept of International
Business – a broader concept of integration of economies goes back to 19th century.

The first phase was took with the end of first World War in 1919. the import of raw materials by
colonial countries emperor from colonies and exporting them finished goods again to the colonies.
There is an increase in the level of international business.

But after second world war in 1945, the most of the colonial governments refused to export the raw
materials and import finished goods for the purpose of protecting the domestic companies. There is a
decrease in international business.

The consequences of World War II had made the world countries to feel the need of international co-
operation of global trade which led to the formation of various organizations like International
Monetary Fund (IMF) and International Bank for Reconstruction and Development(IBRD), now
called AS World Bank.

NATURE:

Globalization – is an attitude of mind – it is a mindset which views the entire world as a single market
so that the corporate strategy is based on the dynamics of global business environment. The concept
of globalization has filled up the concept of International business. Infact, the term International
Business was not popular before 2 decades. International Business is come from the word
International marketing and International Marketing is come from the word International Trade.

International Trade – International Marketing: Originally, the producers used to export their products
to the nearby countries and gradually extended the export to far-off countries. Gradually the
companies extended the operations beyond trade.
International Marketing – International Business: The MNC’s which are producing in home country
band marketing them in foreign countries, now started locating their plants and other manufacturing
facilities in foreign/ host countries. Later they started producing in one country and marketing in other
foreign countries.

A true global companies views the entire world as a single market. There is a great renovision, given
by Arvindh Mills:

 Source raw material wherever they are cheapest.  Manufacture wherever in the world is
most cost effective.
 Sell in those markets where the prices are highest.  Raise finance globally.  ‘forge
international strategy alliance.
 To manage all these, take the best talent from all over the world. And you will have achieved
the stature of a true multinational.

MEANING:

International Business refers to the exchange of goods and services between two parties of different
countries. International Business may be understood as those business transactions involve crossing of
national boundaries. International Business is the process of focusing on the resources of the globe
and objectives of the organization on the global business opportunities and threats in order to
produce/buy/sell or exchange of goods and services worldwide.

FEATURES:

1. Large Scale Operations:

In International business, all the operations are conducted on a very huge scale. Production
and marketing activities are conducted on a very large scale. It first sell its goods in the local
market and then the surplus goods are exported.
2. Integration of Economies:
International Business integrates (combines) the economies of many countries. This is
because it uses finance from one country, labour from other country and infrastructure from
another country. It designs the product in one country, produces its parts in many different
countries and assembles in another country and sells in many countries.
3. Dominated by developed countries and MNC’s
International Business is dominated by developed countries and their multinational
companies. Europe and Japan dominate the foreign trade, this is because they have high
financial and other resources.
4. Benefits to Participating countries:
 International Business gives benefits to all participating countries. However, the developed
countries get the maximum benefits, the developing countries also get benefits. They get
foreign capital and technology. They get rapid industrial development. They get more
employment opportunities.
5. Keen Competition:
International Business has to face competition in the world market. The competition is
between unequal partners. In this situation, the developed countries are in favourable position
as they produce the superior quality goods and services, but developing countries find
difficulty to face competition.
6. Special role of science and technology:
International Business gives a lot of importance to science and technology. Science and
Technology helps the business to have a large scale production. Developed countries use high
technology. International business helps them to transfer top-end technology to the
developing countries.
7. International Restrictions:
International Business faces many restrictions on the inflow and outflow of capital,
technology and goods. Many government do not allow international business to enter their
countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All
this is harmful to international business.
8. Sensitive Nature:
The International Business is very sensitive in nature. Any changes in the economic policies,
technology, political environment has a huge impact. Therefore it must conduct marketing
research to find out and study these changes. They must adjust their business activities and
adopt accordingly to survive changes.

9. International Business need accurate information to make appropriate decision.

10. International Business house need not only accurate but also timely information.

11. International Business house segments their markets based on the geographic market segment.

REASONS FOR THE EMERGENCE OF INTERNATIONAL BUSINESS:

 To achieve higher rate of profits

The basic objective of the business firm is to earn profit. The domestic markets do not promise a
higher rate of profits. Business firms search for foreign market which hold promise for higher rate of
profits. Thus the objective of profits affects and motivates the business to expand its operations to
foreign countries.

 Expanding the production capacity

Domestic companies expanded their production capacities more than the demand for product in
domestic countries. In such cases, these companies are forced to sell their excessive production in
foreign developed market.

 Severe competition in home country

The countries oriented towards market economies since 1960’s, experience severe competition from
other business firm in the home country. The weak companies which could not meet the domestic
countries started entering the markets of developing countries.

 Limited home market

When the size of the home market is limited either due to the smaller size of the population or due to
lower purchasing power of the people or both, the companies internationalize their operations. 

 Political Stability v/s Political Instability

Business firms prefer to enter the politically stable countries and are restrained from locating their
business operations in politically instable countries. In fact, business firms shift the operations from
politically instable countries to the politically stable countries.

 Availability of Technology and Managerial Competency

Availability of advanced technology and competent human resource in some countries acts as pulling
factors for business firms from the home country. The developed countries due to these reasons attract
companies from developing world. In fact, American and European countries depend on Indian
Companies for software products and services through their BPO’s.

 High cost of transportation

Initially companies enter foreign countries trough their marketing operations. At this stage,
the companies realize the challenge from the domestic companies. Added to this, the home
companies enjoy higher rate of profit margins where as the foreign firms suffer from lower
profit margins. The major factor for this situation is the cost of transportation, Under such
conditions, the foreign companies are inclined to increase their profit margin by locating their
manufacturing unit in foreign countries where there is enough demand either in one country
or in a group of neighboring countries.
 Nearness to Raw materials
The source of highly qualitative raw materials and bulk raw materials is a major factor for
attracting the companies from the various foreign countries. Most of the US based companies
open their manufacturing unit in Middle East countries due to the availability of petroleum.
These companies, thus, reduces the cost of transportation.
 Availability of Quality HR at less cost
 This is the major factor, in recent times, for software, high technology and
telecommunication companies to locate their operations in India. India is a major source for
high quality and low cost human resources unlike USA and other developed countries.
 Liberalization and Globalization
Most of the countries in the globe liberalized their economies and opened their countries to
the rest of the globe. These changed policies attracted the multinational companies to extend
their operations to these countries.
 To increase market share
Some of the large-scale business firms would like to enhance their market share in the global
market by expanding and intensifying their operations in various foreign countries.
 To achieve higher rate of economic development
International Business helps the governments to achieve higher growth rate of the economy,
increases the total and per-capita income, GDP, industrial growth, employment and income
levels.

STAGES OF INTERNATIONALISATION:

Every company in the International Business will pass through the 5 different stages of
Internationalization. They are:

 Domestic Company

 International Company

 Multi-National Company

 Global Company

 Transnational Company

 Stage – 1: Domestic Company

Domestic Company limits its operations, mission and vision to the national boundaries. This
company focus its view on the domestic market opportunities, supplies and customers. These
companies analyze the national environment of the country, formulate the strategies to exploit the
opportunities offered by environment. They never think of growing globally. They believe in saying, “
if it is not happening in home country, it is not happening”.

 Stage – 2: International Company

Domestic companies which grows beyond their production capacities, think of internationalizing their
operation. Those companies which decide to exploit the opportunities outside the domestic country
are stage – 2 companies. These companies believe that the practices the people and products of
domestic business are superior to those of other countries. The focus of these companies is domestic
but extends the wings to the foreign countries. These companies select the strategy of locating a
branch in foreign markets and extend same domestic operations into foreign markets.

 Stage – 3: Multi-National Company

International companies turn into the Multi-National companies when they start responding to the
specific needs of different country market regarding product, price and promotion. This stage is also
referred as Multi-Domestic companies. These companies formulate different strategies for different
markets. They operate like a domestic market of country concerned in each of their market.

 Stage – 4: Global Company

A global company is the one, which has either global strategy. Global Company either produces in
home country or in a single country and focuses on marketing these products globally or produces
globally and focuses on marketing these products domestically.

 Stage – 5: Transnational Company

It produces, markets, invests and operates across the world. It is an integrated global enterprise that
links global resources with global markets at profits. There is no pure Transnational.

DIFFERENCES BETWEEN DOMESTIC AND INTERNATIONAL BUSINESS:

Basis Domestic Business International Business

Approach DB’s approach is Ethnocentric Approach. IB’s approach is either
Polycentric or Regiocentric
Approach.
Operating Db formulates the strategies, product IB formulates the strategies,
Activities design towards the national markets, product design towards the
customers and competitors. International markets,
customers and competitors.
Geographic DB’s geographic scope is within the IB’s geographic scope
scope national boundaries of the domestic country varies from the national
boundaries of 2 countries up
 to a maximum of the entire
globe.
Operating Operating style including production, Operating style can be
Style marketing is limited to the domestic spread to the entire globe.
country
Environment It analyses and scan the domestic It analyses and scan the
environment. relevant international
environment.
Quotas Quotas imposed by various countries on Quotas imposed by various
import and export not influence the countries on import and
domestic business. export significantly
influence the international
business.
Tariffs Tariff rates of various countries do not Tariff rates of various
affect the domestic business countries do affect the
international business.
Foreign Foreign exchange rates and their Foreign exchange rates and
Exchange fluctuations do not directly and their fluctuations directly
rates. significantly affect the domestic business. and significantly affect the
international business.
Culture Mostly domestic culture of the country Mostly cultures of the
affects the business operations various countries affect the
operations of the
international business
Export- Domestic business is not affected International business is
Import affected by the procedure of
procedure the various countries.
Human Domestic business normally employs the International business
Resources people from the same country normally employs the
people from various
countries.
Markets and Meets the needs of the domestic markets Meets the needs of the
customers and customers markets and customers of
the different countries.
Business transaction with in the country. Business transaction
between two different
 countries.

ADVANTAGES:

1. High Living Standard

Customers in various countries can buy more products with the same amount of money in
the International Markets. In turn, it can also enhance the living standard of the people
through enhanced purchasing power and by consuming high quality products.
2. Increased Socio-Economic Welfare
International business enhances the consumption level, and economic welfare of the
trading countries.
3. Wider Markets
International business widens the market and increases the market size. Therefore, the
companies need not depend on the demand for the product in one single country or
customer’s taste and preferences.
4. Reduced effects of Business Cycle

The stages of business cycle vary from country to country. Therefore, MNC’s shift from the
country experiencing a recession to the country experiencing the boom conditions. Thus,
international business firms can escape from the recessionary conditions

5. Reduced Risks

Both commercial and political risks are reduced for the companies engaged in international
business due to spread in different countries

6. Large Scale Economics

MNC due to the wider and larger markets produce larger quantities, which provide
the benefit of large-scale economies like reduced cost of production, availability of
expertise, etc.
7. Potential Untapped Markets
International business provides the chance of exploring and exploiting the potential
markets which are untapped so far. These markets provides the opportunity of selling
the product at a higher price than in domestic markets
8. Provides the opportunities for and challenge to domestic business
 International Business firms provides the opportunities to the domestic companies.
These opportunities include technology, management expertise, market intelligence,
etc,.
9. Division of Labour and Specialisation
International business leads to division of labour and specialization. Brazil
specializes in coffee, Kenya in tea, Japan in automobiles.
10. Economic Growth of the world
Specialisation, division of labour, enhancement of productivity, posing challenges,
development to meet them, innovations and creations to meet the competition lead to
overall economic growth of the world nations.
11. Optimum and proper utilization of world resources
International business provides for the flow of raw materials, natural resources and
human resources from the countries where they are in excess supply to those
countries which are in short supply or need most.
12. Cultural Transformation
International business benefits are not purely economical or commercial, they are
even social and cultural. There is a close cultural transformation and integration.
13. Knitting the world into a closely interactive
Traditional Village International business ultimately knits the global economies,
societies and countries into a closely interactive and traditional village where one is
for all and all are for one.

DISADVANTAGES:

1. Political Factors
Political instability is the major factor that discourages the spread of
international business.
2. Huge Foreign Indebtedness
The developing countries with less purchasing power are lured into a debt trap
due to the operations of MNCs in these countries.
3. Exchange Instability
Currencies of countries are depreciated due to imbalances in the balance of
payments, political instability and foreign indebtedness. This, in turn, leads to
instability in the exchange rates of domestic currencies in terms of foreign
currencies.
4. Entry Requirements
Domestic governments impose entry requirements to multinational.
 5. Tariff Quotas and Trade Barriers
Governments of various countries impose tariffs, import and export barriers in
order to protect the domestic business. Further these barriers are imposed based
on the political and diplomatic relations between or among various governments.
6. Corruption
Corruption has become an international phenomenon. The higher rate bribes and
kickbacks discourage the foreign investors to expand their operations.
7. Bureaucratic Practices of Government
Bureaucratic attitudes and practices of government delay sanctions, grants permission
and licenses to foreign companies.
8. Technological Pirating
Copying the original technology, producing imitative products, imitating other areas
of business operations were common in Japan . this practices invariably alarms the
foreign companies against expansion.
9. Quality maintenance
International business firms have to meticulously maintain quality of the products based on
quality norms of each country. The firms have to face severe consequences, if they fail to
conform to the country standards.
10. High Cost
Internationalizing the domestic business involves market survey, product improvement,
quality up gradation, managerial efficiency and the like. These activities need larger
investments and involve higher cost and risk. Hence, most of the business houses refrain
themselves from internationalizing their business.

INTERNATIONAL BUSINESS ENVIRONMENT

Introduction:

A global company has to formulate strategies based on its missions, objectives and goals.
Strategy formulation is a must for a global company to make decisions regarding the markets
to enter, product/service range to introduce in the foreign countries. The fundamental basis for
strategy formulation is the environmental analysis. Environment provides the opportunities to
the business to produce and sell a particular product. Environment sometimes poses threats
and challenges to business. Business should enhance its strengths in order to face the
challenges posed by the environment. Study of environment helps the business to formulate
strategies and run the business efficiently in the competitive global markets.
 Meaning of International Business Environment:

Environment means surrounding. International business environment means the

factors/activities those surround/encircle the international business. In other words, business
environment means factors that affect or influence the MNC’s and transnational companies.

Factors that affect International Business include Social and Cultural

factors (S), Technological Factors (T), Economic Factors (E), Political/Governmental factors
(P), International factors (I) and Natural factors (N). [STEPIN]
William F. Glueck defined the term environmental analysis as, ‘ the process
by which strategists monitor the economic, governmental/legal, market/competitive,
supplier/technological, geographic and social settings to determine opportunities and threats
to their firms”.

Factors of International Business Environment:

Business environmental factors are broadly divided into internal environmental factors and
external environmental factors. Internal environmental factors include human resource
management, trade unions, organization structure, financial management, marketing
management and production management management/leadership style, etc. External
environmental factors are further divided into micro and macro external environmental
factors. Micro environmental factors include competitors, customers, market intermediaries,
suppliers of raw materials, bankers and other suppliers of finance, shareholders and other
stakeholders of the business firm. External macro environmental factors include social and
cultural factors, technological factors, economic factors, political and governmental factors,
international factors and natural factors.
1. CULTURAL ENVIRONMENT:
Culture is, “ the thought and behaviour patterns that member of a society learns through
language and other forms of symbolic interaction – their customs, habits, beliefs and
values, the common view points which bind them together as a social entity…. Cultural
change gradually picking up new ideas and dropping old ones, but many of the cultures of
the past have been so persistent and self contained that the impact of such sudden change
has torn them apart, uprooting their people psychologically.”
Characteristics:
 Culture is derived form the climatic conditions of the geographical region and economic
conditions of the country.
 It is a set of traditional beliefs and values which are transmitted and shared in a given society.
 It is a total way of life and thinking patterns that are passed form generation to generation.
 It is norms, customs, art, values, etc.
 It prescribes the kind of behaviour considered acceptable in the society.
 It is based on social interaction and creation.
 Culture is acquires through learning but not inherited genetically.
 Culture is not immune to change. It goes on changing.

Factors influencing International Business:

1. Cultural attitude and International Business:
Dressing habits, living styles, eating habits and other consumption patterns, priority of
needs are influenced by culture. The eating habits vary widely. Similarly, dressing habits
also vary from country and county based on their culture
2. Cultural Universal
Irrespective of the religion, race, region, caste, etc, all of us have more or less the same
needs. These common needs are referred as “Cultural Universal”. The cultural Universal
enable the businessmen to market the products in many foreign countries with
modifications. Example: TV’s, cars, vedio games.
3. Communication with languages
Language is the basic medium of communication. There are more that 5000 spoken
languages in the world. The same words in the same language may mean different things
in the different regions of the country.
4. Time and Culture
Time has different meaning in different cultures. Asian di not need appointment to meet
someone and vice-versa. But Americans, Europeans and Africans need prior appointment
to meet someone and vice-versa. In Asian Countries, particularly in India, auspicious
time is most important for the business, admission in a college, travel, etc.
5. Space and Culture
Space between one person to another person plays a significant role in communication.
But, culture determines the pace/distance between one person and another person.
Americans need more distance from a third person for privacy. This is unimportant for
Indians.
6. Culture and Agreement
The USA is very legalistic society and Americans are very specific and explicit in their
terms of agreement. The opposite is true in case of Asian countries. Asians never pick up
face to face confrontation. They keep quiet in case of disagreement.
7. Culture and Friendship
Americans develop friendship even in short time. In fact, they don’t develop deep
personal ties. Sometimes, people in the US complete the business and then develop
 friendship. People in India, Japan and China firs develop friendship through several
means including eating together, presenting gifts and then transact business.
8. Culture and Negotiation
Americans are straightforward. Chinese negotiations are generally tough-minded and
well prepared and use various tactics to secure the best deal.
9. Culture and Superstition
Superstitious beliefs like fortune telling, palm reading, dream analysis, phases of the sun
and moon, vaastu are prominent in Asian Countries and also in some African Countries.
Americans knock on wood, cross their fingers and feel uneasy when a black cat crosses
their path. Even Indians feel uneasy when a cat crosses their path.
10. Culture and Gifts
Culture attitudes concerning the presentation of gifts vary widely across the world. In
Japan and India gifts are given first, but in Europe only after a personal relationship id
developed. The international businessmen should study the customs of the society in
offering gifts.

2. SOCIAL ENVIRONMENT

It consists of religious aspects, language, customs, traditions, tastes and preferences,

living habits, dressing habits, etc., It also influence level of consumption. Example: The
economic position of Germans and French people is more or less same, culturally
different. So study of social environment helps in deciding type of market, product, etc.

The various factors of social environment effect on international business are:

1. Religion:
Religion is one of the important social institution on influencing the business. The
religious play a vital role in normal and ethical standards in production and
marketing of goods and services. Most of the religion indicates in providing truthful
and honest information.
2. Family system:
In addition to religion, family system has impact on international business.
Example: Most of Islamic countries, women play less significant role in economy
and also in family with limited rights. But in Latin American countries, role of
women is better compared to that of Islamic countries. But women play a dominant
role in European and North American countries.
3. Behavioural factors affecting the business:
 Human behaviour affects the business include employee behaviour, consumer
behaviour and behaviour of stake holders (Holders of debentures, bonds, etc.
Cultural factors also influence the human behaviour cultural differences in various
countries results in variations in human behaviour from country to country. Business
should consider behaviour pattern of social groups in hiring, marketing and in
selecting supplier of inputs and market intermediaries.. Behaviour based on group
membership: Attitude towards female employment vary from country to country.
Example: Arabian countries discourage females from seeking employment. Family
membership is paramount rather than individual achievements in certain societies
like India, China, etc.,
4. Motivations and Achievements:
Economic development of a country depends on motivations of people to work hard
and desired of achievement. People rank the motivational needs differently from
country to country. People from poor countries are mostly motivated by
compensation while their counter parts in rich countries are motivated by the higher
order needs like more responsibility, recognitions and other esteem needs.
5. Power Distance:
Power distance denotes the relationship between superior and sub-ordinates. People
in low power distance prefer little consultations between superior an subordinates.
Subordinates in high power distance may prefer participating in decision making
among themselves excluding the superior.
6. Individualism V/s Collectivism:
Individualism and collectivism are consequences of the culture and affects the
formation of group, productivity and marketing practices.
7. Risk taking behaviour:
Employees in countries with the highest scores of the uncertainty avoidance prefer
a system and a methodological work based on rules that are not to be deviated.
Employees in countries with the low scores of uncertainty avoidance prefer flexible
organization and flexible work. Example: People in some countries like Norway
trust most of the people and people in some other countries like Brazil are very
cautious in dealing with other.

3. TECHNOLOGICAL ENVIRONMENT:

Technology is the application of knowledge. In other words, technology has a

systematic application of scientific or other organized knowledge to a particular
task.
 Features:
a) Technology brings changes in the society, economy and politics.
b) Technology effects on entire globe.
c) Technology makes more technology possible.

Impact of technology on international business:

1. Investments in technology:
Advanced countries spend considerable amount on research and development
for further advancement of technology. Example: German spends 50% of
research and development budget on product innovation and remaining 50% on
process innovation. But Japanese spend 70% on process innovation and 30% on
product innovation.
2. Technology and economic development:
Technology is one of the significant factor, determines the level of economic
development of a country. The differences between nation is mostly reflected by the
level of technology. Example: India has the vast natural resources. It remain
importing the products from other countries through exporting raw materials from
itself due to its low level of technology.

3 Technology and International competition:

A few companies invent but many companies adopt scientific

knowledge to generate wealth by application and communication. The
invention process and global competitiveness are the two determinants
of a national wealth. Example: Japan concentrates on innovation of
automobiles. But Italy concentrates on innovation of textiles and
leather.
4. Technology Transfer:
Technology and global business are interdependent. International business spread
technology from advanced countries to developing countries by establishing the
subsidiaries or establishing the subsidiaries joint ventures with the host countries and
arranging technological transfer to the company of developing countries through
technological alliances.
5. Technology and location of plants:
MNCs locate their manufacturing facilities based on the technology. In other
words, MNCs locate their plants with high technology in advanced countries
and establish the labour driven manufacturing facilities in developing countries
in order to get the advantages of cheap labour.
6. Scanning of Technological environment:
The level of technology is not same in all the countries. Advanced countries
enjoy the latest technology while the developing nations face the consequences
of outdated technology. Therefore, MNCs have to understand technology and
analyse it before entering foreign market
7. Appropriate technology:
The technology that suit one country may not be suitable for other countries. As
such the countries develop appropriate technologies which suit their climatic
conditions, social conditions, conditions of infrastructure etc., Ex: Japanese
automobile industry design different type of cars which suit the Indian roads.
8. Technology and globalization:
The industrial revolution resulted in large scale production and the recent
technological revolutions leads to the production of high quality products at
lower cost. These factor forced the domestic company to enter the foreign
countries in order to find market for their products. Thus technology is one
important cause for globalization.
9. Information technology and globalization:
The information technology redefined the global business through its
development like internet, www sites, e-mails, information super highways and
on-line transactions brought significant development to the global business.

Impact of technology on globalization:

 Technological advances have tremendously faster globalization. Technology
have been a very important facilitating factor of globalization.
 Several technological development becomes a compelling reason for
internationalization technology are substantially increasing the scale economies
and market scale required to break even.
 Global sourcing encouraged not only to trade liberalization but also by
technological developments which reduces transportation cost.
 Technology monopoly encourages internationalization because the firm can
exploit the respective demand without any competition.
 Development in telecommunication and information technologies have
reduced the barriers to time and place in doing a business. It is possible for
customers and suppliers to transact the business at any time and any part of the
globe.
4 ECONOMIC ENVIRONMENT

Economic environment refers to all those economic factors which have a bearing on
functioning of a business unit. Economic environment of various countries directly
influences the international business. In fact, international economic environment and
global business interact with each other.
The major changes include:
 Capital flow rather than trade or product flow across the globe.
 Establishment of production facilities in various countries.
 Technological revolution link the relations between the size of the production and level
of employment.
 The macro economic factors of individual nations independently donot significantly
control the global economies.

Economic system:

Economic system is one of the important factor of economic development that influences
the international business to the greater extent. Economic system is an organization of
institutions established to satisfy human needs or wants

There are three types of economic system viz.,

 Capitalistic Economic System
 Communistic Economic System
 Mixed Economic System

Capitalistic Economic System:

This system provides for economic democracy and customer choice for product or
service. This system emphasizes on the philosophy of individualism, believing in private
ownership of production and distribution facilities Ex: USA, Japan, UK.
Communistic Economic System:
Under this system private properties and property rights to income are abolished. The
State owns all the factors of production and distribution but the major limitation of this
system is to reduced the individual freedom of choice ;and failed to achieve significant
economic growth.
Mixed Economic System:
Under this system, major factors of production and distribution owned, managed and
controlled by the State. The purpose is to provide benefits to public more or less on
equality basis. This system, does not distribute the existing wealth equally among people,
but believes in full employment and suitable rewards for the workers efforts. Ex: India,
UK, France, Holand etc.,

Countries classified on the basis of income:

 Low income countries
 Lower middle income countries
 Upper middle income
 Higher Income countries

Low Income Countries:

This country is also known as third world countries or pre industrial countries. The
characteristics includes, high birth rate, low literacy rate, political instability an unrest,
technological backwardness, underutilization of natural resources, excessive
unemployment and underemployment, and excessive dependency on imports.

Lower Middle Income Countries:

These countries are known as less developed countries. The characteristics of these
countries include – early stage of industrialization, expansion of consumer market,
availability of cheap and motivated human resource, location for production of
standardized products or exporting, ex: clothing for exports.

Upper Middle Income Countries:

These countries are called industrializing countries. The characteristic of these countries
are – less dependency on agriculture, high exports, increase in literacy, formal education,
rapid economic development, occupation mobility of people from agriculture to industry
and increased wage rate.

High Income Countries:

These countries are known as advanced countries, industrialized, post industrialized or
first world countries. The characteristics include – development of information sector,
emphasize on future plan, development of intellectual technology over machine
technology and it aims at building information society.

Impact of economic environment on international business:

1. Economic growth:
Business helps for the identification of peoples’ needs, wants, production of goods
and services and supply to the people. Thus it creates for the conversion of inputs into
the outputs and enables for consumption. It leads to economic development. The high
economic growth rate of the countries providing an opportunity of expanding market
shares to international business firms, managers of the MNCs are interested in
knowing the future economic growth rate of various countries in order to select the
market either to enter or concentrate more resources to the market.
2. Inflation:
It is another important factor that affects the market share of the international
business firm. It affects the interest rate as the demand for money is high due to the
higher prices and it also affects the exchange rate of the domestic currency in terms of
various foreign currencies.
3. Balance of payments:
Balance of Payments position of a country is an outcome of international business
and also affects the future of the international business. Export and import trade in
goods and services affects the current accounts position and flow of capital affects
capital accounts position. The managers of MNCs should monitor the balance of
payment position of the countries.
4. Economic Transition:
The process of liberalization provided a significant opportunities to MNCs to enter
most of the countries of the world either by locating their manufacturing facilities or
expanding or both. Thus MNCs are immediate and greatest beneficiaries of L, P and
G of world economies.

5. POLITICAL ENVIRONMENT:
The influence of political environment on business is enormous. Political system
prevailing in a country promotes, decides, encourages, directs and control the
business activities of that country. PE includes factors such as characteristics and
policies of political parties, the nature of constitution and Government system and the
Government environment influencing the economic and business policies and
regulation.

Concepts:

1. Political ideology:
 Political ideology is the body of complex ideas, theories and objectives that
constitute a sociopolitical program. Political ideologies of the people in the same
country vary widely due to the variations in culture, ethic group, community
groups, religious and the economic groups. These variations influence the people
to form different political parties. The difference in political ideologies change
the national boundaries. The IB manager should understand these ideologies of
various in the countries in order to know the possible political tensions and
instabilities.
2. Democracy:
It refers to political arrangement in which the supreme power is vested in the
hand of people.
3. Political rights and Civil liberties:
It helps for evaluating the freedom of citizens. The major indicators of political
liberties include:
 conduct of elections fairly and competitively
 power and ability of the voters in casting their votes in the process of electing
 people ability in forming political parties and groups.

The major indicators of civil liberties include:

 Degree of freedom of the press,
 Equality for all individuals under the law,
 Freedom from extreme in difference of Govt. and corruption.

Totalitaranism:
It refers to an individual freedom is completely subordinated to the power of
authority of the state or concentrated in the hands of one person or in a small
groups.
Political Relations and International business:
Political friendly relationship results in the growth of bi-lateral or multi-lateral
trade. Ex: The friendly relationship between Indian companies but also the MNCs
operating in India to have a close business linkages with the USSR. Similarly the
friendly relationship between Pakistan and USA helped the Pakistan companies
to have a close business linkages with USA.
Types of Political System
Appraisal of political system help us in having a ideas of political system and
their impact on international business.
They are classified as:
Two party system:
Two parties takes turn of controlling the Government under two party system
Ex: USA and UK.
Multiparty system:
In a multiparty system, there are many parties and no party is strong to gain the
control of the Government: Ex: Germany, France and India.
Single party system:
In this system, only one dominant party gets the opportunity to control the
Government even through several parties exists Ex: Egypt.
One party Dominated system:
In this system, dominate party rules the Government even though there are more
than one party. Ex: USSR, Cuba.

Political Risk:
Political risk refers to risk of loss of assets earning power or managerial control,
due to the events or action that are politically motivated.

Political risk that affects the international business:

The international business firms face political risk as and when there are changes
in Government policies or changes in political parties in power. Risks are based
on host Government actions like:
Confiscation: The process of nationalization of property without compensation is
called confiscation.
Expropriation: It is the process of nationalization of a property with
compensation. Nationalisation: It is a process of shifting the ownership of private
property from private individuals to Government.
Domestication: In this, foreign business firm control and ownership in favour of
domestic investors either partly or fully.
General Instability risk: These risk are due to social, political, religious, unrest in
the host country.
Operation risk: These risk are due to imposition of controls on foreign business
operations by the host Government.
Political instability can be viewed from the corruption, social unrest, attitudes of
nationals and policies of host Government.

How to minimize the political risk?

 The risk that are involved in international business cannot be avoided but it can
be minimized. It can be minimized from the following:
Stimulation of the local economy: The foreign company can stimulate the
economic development of host country by investing in their priority area. The
foreign countries can stimulate the host country economy by being export
oriented.

Employment of nationals: MNCs can minimize political risk by employing,

developing and promoting the local people.
Sharing ownership: Foreign company should allow the domestic investors to
invest and share the ownership by converting the company into public limited
company and ownership can be shares through joint ventures.
De-civic minded: The MNCs in addition to doing business in foreign countries
should also be good corporate citizen. It may help the foreign countries in
different ways like constructing schools, hospitals, roads, etc.,
Political Neutrality: MNCs should not involved in political risk or disputes
among the local group of host countries from the point of view of long run
interest.

MODES OF ENTRY TO INTERNATIONAL BUSINESS

INTRODUCTION:
Companies desiring to enter the foreign markets, face the dilemma while deciding
the method of entry into a given overseas location. Companies can reduce the
dilemma by analyzing the decision factors.
Decision factors:
After deciding to go to foreign markets, the companies have to decide the mode of
entry.
This dilemma can be solved to some extent by considering the following factors:
 Ownership advantages
 Location advantages
 Internationalisation advantages
Ownership Advantages: Ownership advantages are those benefits designed by a
company by owing resources. These benefits provide competitive advantages to the
company over its competitors. These advantages are both tangible and intangible.

Location advantages: Certain locational factors grant benefit to the company when
the manufacturing facilities are located in the host country rather than in the home
country.
These locational factors include:
 Customer Ned, preferences and tastes
 Logistic requirements
 Cheap land acquisition cost
 Cheap labour
 Political stability
 Low cost raw materials
 Climatic conditions

Internationalisation advantages:
Internationalisation advantages are those benefits that a company gets by
manufacturing goods or rendering services in the host country by itself rather than
through contract arrangements with the companies in the host country

1. EXPORTING:
Exporting is the simplest and widely used mode of entering foreign markets.
The advantages of exporting include:
~ Need for limited finance: If the company selects a company in the host
country to distribute, the company can enter international market with no or less
financial resources. Alternatively, if the company chooses to distribute on its
own, it needs to invest financial resources, but this amount would be quit less
compared to that would be necessary under other mores.
~ Less risk: Exporting involves less risk as the company understands the
culture, customer and the market of the host country gradually. The company
can enter the host country on a full-scale, if the product is accepted by the host
country’s market. A British company selected this mode to export jams to
Japan.
~ Motivation for exporting: Motivations for export are proactive and reactive.
Proactive motivations are opportunities available in the host country.
Forms of Exporting:

Forms of exporting include: indirect exporting, direct exporting and intra-

corporate transfers.
1. Indirect exporting:
Indirect exporting is exporting the products either in their original form or
in the modified form to a foreign country through another domestic
company. Various publishers in India including Himalaya Publishing
House sell their products, i.e., books various exporters in India, which in
turn export these books to various foreign countries.
2. Director exporting:
Direct exporting is selling the products in a foreign country directly
through its distribution arrangements or through a host country’s company.
Baskin Robbins initially exported its ice-cream to Russia in 1990 and later
opened 74 outlets with Russian partners. Finally, in 1995 it established its
ice-cream plant in Mascow.
3. Intra-corporate Transfers:
Intra-corporate transfers are selling of products by a company to its
affiliated company in host country (another country). Selling of products by
Hindustan Lever in India to Unilever in the USA. This transaction is treated
as exports in India and imports in the USA.

Factors to be considered:
The company, while exporting, should consider the following factors:
 Government policies like export policies, import policies, export
financing, foreign exchange etc.,
 Marketing factors like image, distribution networks, responsiveness to the
customer, customer awareness and customer preferences.
 Logistical consideration: These factors include physical distribution
costs, warehousing costs, packaging, transporting, inventory carrying costs
etc.
 Distribution issues: These include own distribution networks, networks of
host country’s companies. Japanese companies like Sony, Minolta and
Hitachi rely on the distribution networks of their subsidiaries in the host
country.
Export Intermediaries:
 Export intermediaries perform a variety of functions and enable the small
companies to export their goods to foreign countries. Their functions
include: handling transportation, documentation, taking ownership of
foreign-bound goods, assuming total responsibility for exporting and
financing.
Types of export intermediaries include:
 Export Management: companies act as export department of the
exporting firm (its client). These companies act as commission agents for
exports or they take title to the goods.
 Co-operative society: The domestic companies desire to export the goods
form a cooperative society, which undertakes the exporting operations of
its members.
 International Trading Company: This company is engaged in directly
exporting and importing. It buys the goods from the domestic companies
and exports. Therefore, the companies can export their goods by selling
them to the international trading company.
 Manufacturers’ Agents: They work on a commission basis. They solicit
domestic orders for foreign manufacturers.
 Manufacturers’ export agents: These agents also work on a commission
basis. They sell the domestic manufacturers’ products in the foreign
markets and act as their foreign sales department.
 Export and Import Brokers: The bankers bridge the gap between
exporters and importers and bring these two parties together.
 Foreign forwarders: Foreign forwarders help the domestic manufacturers
in exporting their goods by performing various functions like physical
transportation of goods, arranging customs documents and arranging
transportation services.

2. INTERNATIONAL LICENSING:

In this mode of entry, the domestic manufacturers leases the right to use its
intellectual property, i.e., technology, work methods, patents, copy rights, band
names, trade marks etc. to a manufacturer in a foreign country for a fee. Here
the manufacturer in the domestic country is called ‘Licensor” and the
manufacturer in the foreign country is called “Licensee’. The process of the
licensing is as shown in the figure.
Licensing is a popular method of entering foreign markets. The cost of entering
foreign markets through this mode is less costly. The domestic company need
not invest any capital as it has already developed intellectual property. As such,
the domestic company earns revenue without additional investment. Hence,
most of the companies prefer this mode of foreign entry.

Licensor Licensor
Leases the right to use Receives Royalty Money
The intellectual property
Uses the Intellectual Pays royalty to the
Property to product Licensor for
Products for sale in his country Using intellectual property
Licensee Licensee

The domestic company can choose any international location and enjoy the
advantages without incurring any obligations and responsibilities of ownership,
managerial, investment, etc.
Basic issues in International Licensing:
Companies should consider various factors in deciding negations. Each
international licensing is unique and has to be decided separately. However,
there are certain common factors, which affect most of the international
licenses. They are: specifying the agreement’s boundaries, determining the
royalty, determining rights, privileges and constraints, defining resolution
methods, specifying the duration of the contract.
 Boundaries of the agreements:
The companies should clearly define the boundaries of agreements. They
determine which rights and privileges are being conveyed in the agreement.
 Determination of royalty:
The most important factor in deciding the licence is the amount of royalty. It is
needless to mention that the licensor expects high rate of royalty while the
licensee would be unwilling to pay much royalty. However, both the parties
negotiate for a fair royalty for both the sides in order to implement the contract
more successfully.
 Determining right, privileges and constraints:
Another important factor in granting license is determining clearly and
specifically the rights, privilege and constraints. For example, if the Indian
 licensee of Aiwa TV uses interior inputs in order to reduce price, boost up sales
and profits, the image of the Japanese licensor would be damaged.
 Dispute settlement mechanism:
The licensee and licensor should clearly mention the mechanism to settle he
disputes as disputes are bound to crop up. This is because, settlement of disputes
in courts is costly, time consuming and hinders business interests.
 Agreement duration:
The two parties of the agreement specify the duration of the agreement.
Licensing cannot be a short-term strategy. Hence, the duration of the licensing
should not be of the short-term. It would always be appropriate to have long
duration of the licensing. Tokyo Disneyland demanded on a 100 year licensing
agreement with the Walt Disney company.

Advantages:
 Licensing mode carries relatively low investment on the part of licensor.
 Licensing mode carries low financial risk o the licensor.
 Licensor can investigate the foreign market without much efforts on his part.
 Licensee gets benefits with less investment on research and development.
 Licensee escapes himself from the risk of product failure.

Disadvantages:
 Licensing agreements reduce the market opportunities for both the licensor
and licensee. Pepsi-cola cannot enter Netherlands and Heineken cannot sell
Coca-cola.
 Both the parties have responsibilities to maintain the product quality and
promoting the product. Therefore, one part can affect the other through their
improper acts.
 Costly and tedious litigation may crop up and hurt both the parties and the
market.
 There is scope for misunderstanding between the parties despite the
effectiveness of the agreement. The best example is Oleg Cassini and Jovan.
 There is a problem of leakage of the trade secrets of the licensor.
 The licensee may develop his reputation.
 The licensee may sell the product outside the agreed territory and after the
expiry of the contract.

3. INTERNATIONAL FRANCHISING:
Franchising is a form of licensing. The franchisor can exercise more control
over the franchised compared to that in licensing. International franchising is
growing at a fast rate.
Under franchising, an independent organization called the franchisee operates
the business under the name of another company called the franchisor. Under
this agreement the franchisee pays a fee to the franchisor. The franchisor
provides the following services to the franchisee:
 Trade mark
 Operating systems
 Product reputations
 Continuous support systems like advertising, employee training, reservation
services, quality assurance programs etc.

Basic issues in Franchising:

 The franchisor has been successful in his home country. McDonalds was
successful in the USA due to the popular menu and fast and efficient services.
 The factors for the success of the McDonald are later transferred to other
countries.
 The franchisor may have the experience in franchising in the home country
before going for international franchising.
 Foreign investors should come forward for introducing the product on
franchising basis.

Franchising Agreements:
The franchising agreement should contain important items as follows:
 Franchisee has to pay a fixed amount and royalty based on the sales to the
franchisor.
 Franchisee should agree to adhere to follow the franchisor’s requirements like
appearance, financial reporting, operating procedures, customer service etc.
 Franchisor helps the franchisee in establishing the manufacturing facilities,
services facilities, provides expertise, advertising, corporate image etc.
 Franchisor allows the franchisee some degree of flexibility in order to meet
the local tastes and preferences. McDonald restaurants in Germany sell beer also
and McDonald restaurants in France sell wine also.
 Advantages:
 Franchisor can enter global markets with low investment and low risks.
 Franchisor can get the information regarding the markets, culture, customs and
environment of the host country.
 Franchisor learns more lessons from the experiences of the franchisees, which
he could not experience from the home country’s market. McDonald benefited
from the worldwide learning phenomenon. McDonald is convinced to open a
restaurant in inner-city office building in Japan. This location has become a
more successful one. Based on this lesson, McDonald opened its restaurants in
downtown locations in various countries.
 Franchisee can also start a business with low risk as he selects an established
and proved product and operating system.
 Franchisee gets the benefits of R&D with low cost.
 Franchisee escapes from the risk of product failure.

Disadvantages:
 International franchising may be more complicated than domestic franchising.
McDonald taught the Russian farmers the methods of growing potatoes to meet
its standards.
 It is difficult to control the international franchisee. As one of the French
investors did not maintain the stores as per the standards, McDonald did revoke
the franchise.
 Franchising agents reduce the market opportunities for both the franchisor
and the franchisee.
 Both the parties have the responsibilities to maintain product quality and
product promotion.
 There is scope for misunderstanding between the parties.
 There is a problem of leakage of trade secrets.

4. CONTRACT MANUFACTURING:
Some companies outsource their part of or entire production and concentrate on
marketing operations. This practice is called the contract manufacturing or
outsourcing.

Advantages:
 International business can focus on the part of the value chain where it has
distinctive competence.
  It reduces the cost of production as the host country’s companies with their
relative cost advantage produce at low cost.
 Small and medium industrial units in the host country can also develop as
most of the production activities take in these units.
 The international company gets the locational advantages generated by the
host country’s production.

Disadvantages:
 Host country’s companies may take up the marketing activities also, hindering
the interest of the international company.
 Host country’s companies may not strictly adhere to the production design,
quality standards etc. These factors result in quality problems, design problem
and other surprises.
 The poor working conditions in the host country’s companies affect the
company’s image. For example, Nike has suffered a string of blows to its public
image because of reports of unsafe and harsh working conditions in Vietnamese
factories churning our Nike foot ware.

5. TURNKEY PROJECT
A turnkey project is a contract under which a firm aggress to fully design,
construct and equip a manufacturing/ business/ service facility and turn the
project over to the purchaser when it is ready for operation for a remuneration.
The forms of remuneration includes:
 A fixed price (firm plans to implement the project below the price)
 Payment on cost plus basis ( total cost incurred plus profit)

Indonesian Government during 1974 invited global tenders for construction of

a sugar factory in the country. Indonesian Government received the tenders
from the companies of the USA, the UK, France, Germany and Japan. One of
the Japanese company quoted highest price compared to all other companies.

So, Indonesian Government studied the quotation . this quotation includes:

development of the fields for growing sugarcane, development of seedling,
construction of sugar factory, roads, communication , connecting the factory,
train the local market, plans for the export of surplus sugar, etc. It also made
provision for the transfer of the factory along with the total package to the
 Indonesian Government and follow-up the activities after it is transferred to the
Indonesian Government.
Indonesian Government was very much satisfied with the total package and
invited the Japanese company to implement the project. The Japanese company
Indonesian Government entered an agreement for implementation of this project
by the Japanese company for a price. This project is called “Turnkey Project”.

International Turnkey Projects include:

 Nuclear Power Plants
 Air Ports
 Oil refinery
 National Highways
 Railway Lines

The companies normally approach the host country’s government or

International Finance Corporation, Export-Import Bank and the like for
financial assistance as the turnkey projects require huge finances.
The recent approach to turnkey projects is Build, Operate and Transfer
(B-O-T). the company builds the manufacturing/services facility, operates it for
some time and then transfers it to the host country’s government.

6. MERGERS AND ACQUISITIONS:

Domestic companies enter international business through mergers and

acquisitions. A domestic company selects a foreign company and merges itself
with the foreign company in order to enter international business.
Alternatively, the domestic company may purchase the foreign
company and acquires its ownership and control.
Domestic business selects this mode of entering international
business as it provides immediate access to international manufacturing
facilities and marketing network. Otherwise, the domestic company faces
serious problems in gaining access to international markets. For ex. Cocacola
entered Indian market instantly be acquiring the Parle and its bottling units. In
addition, the domestic company through this strategy of mergers and
acquisitions may also get access to new technology or a patent right.
Though mergers and acquisitions provide easy and instant entry to
global business, it would be very difficult to appraise the cases of acquisitions
 and mergers. Sometimes it would be cheaper for a domestic company to have a
greed field strategy than by acquisitions. Sometimes mergers and acquisitions
also result in purchasing the problems of a foreign company.
Companies adopt this strategy just as a means of entering foreign
markets. Procter and Gamble entered Mexican tissue products in 1997 by
purchasing Loreto Y. Pena Pobre’s manufacturing and marketing systems.

7. JOINT VENTURES:

Two or more firms join together to create a new business entity that is legally
separate and distinct from its parents. Joint ventures are established as
corporations and owned by the funding partners in the predetermined
proportions. American Motor Corporation entered into a joint venture with
Beijing Automotive Works called Beijing Jeep to enter Chinese market by
producing jeeps and other vehicles. Joint ventures involve shared ownership.
Joint ventures are common in international business. Various
environmental factors like social, technological, economic and political
encourage the formations of joint ventures. Joint ventures provide required
strengths in terms of required capital, latest technology, required human talent
etc., and enable the companies to share the risk in the foreign markets.
Joint ventures involve the local companies. This act improves the
local image in the host country and also satisfies the governmental requirements
regarding joint ventures. In fact, support of the host country’s Government is
essential for the success of the joint venture.
Advantages:
 Joint venture provides large capital funds.
 Joint ventures are suitable for major projects.
 Joint ventures spread the risk between or among partners.
 Different parties to the joint venture being different kinds of skills like
technical skill, technology, human skills, expertise, marketing skills or
marketing networks.  Joint ventures make large projects and turn key projects
feasible and possible.  Joint ventures provide synergy due to combined efforts
of varied parties.

Disadvantages:
 Joint ventures are also potential for conflicts. They result in disputes between
or among parties due to varied interest. For ex., the interest of a host country’s
company in developing countries would be to get the technology from its
partner while the interest of a partner of an advanced country would be to get
the marketing expertise from the host country’s company.
 The partners delay the decision-making once a dispute arises. Then the
operations become unresponsive and inefficient.
 Decision-making is normally slowed down in joint ventures due to the
involvement of a number of parties.
 Possibility of collapse of a joint venture is more due to entry of competitors,
changes in the business environment in the two countries, changes in the
partners’ strengths etc.
 Life cycle of a joint venture is hindered by many causes of collapse.

How to make Joint Ventures successful:

It is indicated that joint ventures mostly fail due to potential problems and
cultural variations. Harrigan suggests the following measures to make the joint
venture successful.
 Don’t accept a Joint venture agreement too-quickly, weigh the pros and cons.
 Get to know a partner by initially doing a limited project together, if a small
project is successful, bigger projects are more feasible.
 Small companies are vulnerable to having their expertise lost to larger joint
venture partners; small companies must structure such deals with great care and
guard against potential losses.
 Companies with similar cultures and relatively equal financial resources work
best together, keep this in mind when looking for an appropriate partner.
 Protect the company’s core business through legal means, such as
unassailable partners; if this is not possible, don’t let the partner learn your
methods.  Joint enterprise must fit the corporate strategy of both partners, if
this is not the case, there will inevitably be conflicts.
 Keep the mission of the joint enterprise small and well-defined, ensure that it
does not compete with the partners.
 Give the joint enterprise autonomy to function on its own and set up
mechanisms to monitor its results, it should be separate entity from both parents.
 Learn from the joint enterprise and use this in the parent organization.
 Limit the time frame of the joint enterprise and review its progress frequently.