InternationalBusiness

management
Unit 1: Introduction
Contents
International business – Definition
Internationalizing business – Advantages Factors causing

globalization of business International business

environment Country attractiveness

Political, economic and cultural environment

Protection Vs Liberalization of global business environment

World as market place
International Business
International consists
business transactions of devised
that areout across national
carried andborders to
satisfy the objectives of individuals,
companies, and organizations.
 Internationalizing Business
Internationalization
of capital

Internationalization
of corporate mind set

Internationalization Internationalization
of supply chain of market presence
Need for International Business
International business: causes the flow of ideas, services,
and capital across the world

offers consumers new choices

Permits the acquisition of a wider variety of products

Facilitates the mobility of labor, capital, and technology

Provides challenging employment opportunities

Reallocates resources, makes preferential choices, and shifts

activities to a global level
 Why should we study Intl. Business ?

EXTERNAL INFLUENCES OPERATIONS

OBJECTIVES
PHYSICAL AND SOCIETAL FACTORS
• Sales Expansion
• Political policies and legal practices
• Resource acquisition
• Cultural factors
• Risk minimization
• Economic forces
• Geographical influences STRATEGY
• Technology expansion

MODES FUNCTIONS
• Importing and • Marketing
COMPETITIVE ENVIRONMENT exporting • Global Mfg and SCM
• Major advantage in price, mktg, • Tourism and • Accounting
innovation etc transportation • Finance
• Licensing and • Human Resources
• No. and comparative capabilities of
franchising
competitors • Turnkey operations OVERLAYING ALTERNATIVES
• Competitive differences by country • Mgmt contracts • Choice of countries
• Direct and portfolio • Organization and control
investment mechanisms
 Patterns of Internationalization
Internal Vs External
Impetus for IB HIGH handling of Foreign
operations

MEDIUM
Active search for Company
opportunities handles its own
LOW foreign
Other firms operations
handle
Passive external
response to contracts
proposals
DOMESTIC
BUSINESS Limited
foreign
Quite Similar functions,
Moderately usually E/I
similar One
Limited foreign
prodn and
multiple Extensive
Very dissimilar Several functions
Prodn abroad
with FDI and
all functions

Degree of similarity Man

between F and D y Mode of
countries operations
No. of foreign countries in which a firm is doing business
 Case Snippet 1
Managing Diversity – The Boeing Way
• A geocentric approach helped Boeing save its 737 airplane.
When sales began to slow down in the early 1970s, a group
of Boeing engineers began to recognize that they had not
given enough attention to a major potential market, the
developing countries of the world. Through visits abroad, the
engineers found that runways in developing countries were
generally too short for the 737 and were mainly asphalt, a
softer material than concrete. Consequently they redesigned
the wings to allow shorter landings on soft pavement and
changed the engine so that take-offs would be quicker….
Boeing soon began to get small orders for the 737 from a no.
of developing countries, which later bought larger Boeing
planes because of their satisfaction with the 737 . . .
 Strategies of going International

• Deciding whether to go global ????

• Deciding which markets to enter

• Deciding when to enter

• Deciding how to enter the chosen market

 Deciding which markets to enter
• Volume of foreign sales

• Number of countries to enter

• The type of countries to make a foray into
–Depends on
•the nature of the product
•political environment
•economic conditions
•geographic and demographic factors
•cultural factors etc
 Timing of entry
• FMA, early mover, late mover
• Pioneer investors encounter greater business
environment uncertainties and operational risks
• Business environment uncertainties
–Non–existent or poorly defined laws relating to FDI
–Foreign government’s lack of experience in dealing with
MNC’s
–Infant or embryonic stages of the industry or market in the
foreign country
 Contd…

• Operational risks
–Shortage of qualified supply sources and other production
inputs such as talented managers and R&D scientists
–Under developed support services like local financing,
foreign exchange arbitration, consulting and marketing
–Poor infrastructure
–Unstable market structure
 Deciding how to enter
• Trade related modes
•Exporting
•International sub contracting
•Counter trade
•Management contract

• Transfer related modes

•International leasing
•International licensing
•International franchising
•Build-operate-transfer
 MANAGEMENT ORIENTATIONS

•The form and substance of a company's response to global

markets opportunities depend greatly on management’s
assumption and beliefs (both conscious and unconscious)
about the nature of the world. The worldview of a company’s
personnel can be described as :

ETHNOCENTRIC
POLYCENTRIC
REGIOCENTRIC
GEOCENTRIC
 Ethnocentric
•Management orientation – Home country orientation

•Perception about market –

Domestic market is superior
Focuses on similarities between home and foreign market
Considers foreign market secondary to an extension of
domestic market

•Marketing strategy – Extension of domestic strategy to

foreign market
•Companies basic objective – Profitability
•Type of governance – Top-down

•Culture - Home country

• Technology - Mass production

•HRM practices – Overseas operations are managed by people from home

country

•Managerial predisposition - Manager/MNC rely on values &interests of

parent company in formulating and implementing strategic plan
 Ethnocentric …cont.

Characteristics –
Overseas operations viewed as secondary & primary means of disposing the
surplus production
Domestic techniques &personnel superior to foreign
& most effective in overseas market
Domestic marketing mix is employed without major modifications in overseas
market
All foreign marketing operations are planned &
carried out from home base & overseas marketing administered by export
department
 Polycentric

Management orientation – Host country orientation

Perception about market –

Each national market is distinctive
Focuses on differences between home country &
foreign country

Marketing strategy – Localization / adaptation

Companies basic objective – Public acceptance

•Type of governance – Each local unit sets objectives (bottom up)

•Culture - Host country

•Technology - Batch production

•HRM practices – Local nationals are used in key management positions

•Managerial predisposition - MNC tailor strategic plan to meet the need of

local culture
Characteristics –
Recognize importance of inherent differences in overseas
markets
Subsidiaries are established in overseas market &
each is independent with own marketing objectives & plans
Local techniques & personnel best suited to deal
with local market conditions
International marketing organized on country to country
basis with separate marketing strategy for all
 Regiocentric

Management orientation – Regional orientation

Perception about market – Markets can be differentiated on

the basis of common regional characteristics

Marketing strategy – Trade- off between standardization &

localization

Companies basic objective – Both profitability & public

acceptance
•Type of governance – Mutually negotiated between region & its
subsidiaries

•Culture-Regional

•Technology - Flexible manufacturing

•HRM practices – Regional people are developed for key managerial

positions anywhere in region

•Managerial predisposition - MNC use a strategy that addresses both local

& regional needs
 Geocentric

Management orientation – Global orientation

Perception about market – Entire world is a single market that can be

effectively tapped by standardized marketing strategy

Marketing strategy – Global standardization

Companies basic objective –Both profitability & public acceptance

Type of governance – Mutually negotiated at all level of organization

•Culture- Global

•Technology - Flexible manufacturing

•HRM practices – Best people anywhere in the world are

developed for key managerial positions everywhere in the
world

•Managerial predisposition - MNC constructs its strategic plan

with a global view of operations
⦿ In the 1600 and 1700 centuries, mercantilism stressed that countries
should simultaneously encourage exports and discourage imports.

⦿ Although mercantilism is an old theory it echoes (repeat) in modern

politics and trade policies of many countries

⦿ The neoclassical economist Adam Smith, who developed the theory of

absolute advantage, was the first to explain why unrestricted free trade is
beneficial to a country.
• According to Wild, 2000, the trade theory that states
that nations should accumulate financial wealth,
usually in the form of gold, by encouraging exports
and discouraging imports is called mercantilism
⦿ The Scottish economist Adam Smith developed the trade
theory of absolute advantage in 1776
⦿ A country that has an absolute advantage produces greater
output of a good or service than other countries using the
same amount of resources.
⦿ Smith stated that tariffs and quotas should not restrict international trade

⦿ Contrary to mercantilism Smith argued that a country should concentrate

on production of goods in which it holds an absolute advantage.
⦿ No country would then need to produce all the goods it consumed
• Trade is between two countries

• Only two commodities are traded

• Free trade exists between the countries

• They only element of cost of production is labour.
⦿ According to the absolute advantage theory,
international trade is a positive- sum game, because
there are gains for both countries to an exchange.

⦿ Unlike mercantilism this theory measures the

nation's wealth by the living standards of its people
and not by gold and silver.
⦿ If there is one country that does not have an absolute
advantage in the production of any product, will
there still be benefit to trade, and will trade even
occur?
⦿ The most basic concept in the whole of international trade theory is the
principle of comparative advantage, first introduced by David Ricardo in
1817.
⦿ The principle of comparative advantage states that a country should
specialize in producing and exporting those products in which is has a
comparative, or relative cost, advantage compared with other countries
and should import those goods in which it has a comparative
disadvantage.
• law of comparative advantage refers to the ability
of a country to produce a particular good or service
at a lower opportunity cost than another party.
⦿ The countries differ with respect to the availability of the factors of
production.

⦿ They differ if one country, for example, has many machines (capital) but few
workers, while another country has a lot of workers but few machines.

⦿ According to the Heckscher-Ohlin theory, a country specializes in the

production of goods that it is particularly suited to produce

⦿ Countries in which capital is abundant and workers are few production of

goods in particular, require capital.
 PORTER'S DIAMOND OF NATIONAL ADVANTAGE

• The Diamond Model of Michael Porter for the competitive advantage of

Nations offers a model that can help understand the comparative position
of a nation in global competition.

• Traditionally, economic theory mentions the following factors for

comparative advantage for regions or countries:
1. Land
2. Location
3. Natural resources (minerals, energy)
4. Labor, and
5. Local population size.

Because these 5 factors can hardly influence…..

 Managing International Business
• In additional to domestic business management skills,
international business management requires
–Social science understanding
–Political science appreciation
–Legal awareness
–And an innate ability in:
•Anthropology – study of mankind (origins/belief/customs)
•Sociology – development and behavior of society
•Psychology – study of mind
•Economics
•Geography
 Managing in the Global Marketplace
• Managing an international business is different from
managing a purely domestic business in four areas:
–Countries are different
–Range of problems confronted by a manager in an international
business is wider and the problems themselves are more complex
than those confronted by a manager in a domestic business
–An international business must find ways to work within the limits
imposed by government intervention in the international trade and
investment system
– International transactions involve converting money into different
currencies
 Drivers of International Business
1. Developing markets have huge opportunities to
increase their profits and sales

2. Many MNC’s are locating their subsidiaries in low wage

countries to take advantage of low cost production

3. Trading blocks seek to promote International business

by removing trade and Investment barriers

4. Changing demographics also adds to increasing

globalization
Contd…
5. Declining investment and trade barriers have vastly
contributed to cross-border business
6. The most powerful instrument that triggered
internationalization is Technology
7. Resource seeking is another motive for firms going
international
8. Internationalization is triggered by world bodies and
institutions e.g.. WTO World trade organizations
Advantages of International Business
Product flexibility – offer a much wide range of
product globally

Less competition
Increased investment opportunity
Diversification of risk

Protection from national trends and events

Learning new methods

Trade related entry modes
Exporting– exporting goods directly to foreign
customers
International sub-contracting – When a firm in host
country has surplus manufacturing capacity
Countertrade – countries exchange goods for goods
and like
Management contract–enforceable agreements on
trade related activities
Transfer related entry modes
International leasing
International licensing

International franchising

Build – operate – transfer (BOT) –

Trunkey operations
FDI related entry modes
Branch office
Co-operative joint venture

Equity joint-venture

Wholly owned subsidiary

Terminologies
1. Transnational Corporation (TNC): Companies“Transcend”
or operate across national borders.

2. Multinational Corporation (MNC): Companiesoperate in

multiple companies.
3. Multinational Enterprise (MNE): International giants are
state-owned enterprises, rather than corporations

4. Global corporation: small number of companies whose

business presence more than 100 nations
 Managing across the cultures
Cultural predispositions
1.Ethnocentrism – is the tendency of people to
evaluate a foreigner’s behavior by the standards of
their own culture and to believe their own culture is
superior to others
2.Polycentrism – if ethnocentrism exhibits intolerance
to other cultures, polycentrism advocates tolerance
to beliefs and values of other societies
 Contd…
3. Regio centrism – The formation of
regional trade blocks has increased the
popularity of regional headquarters
4. Geo centrism – in geocentric orientation,
subsidiary operations are managed by the
best qualified individuals, regardless of
their nationalities
 5. International trade: Export of goods and services by a firm to a foreign buyer
(importer)

6. International marketing: Firm level marketing across the border, including

market identification and targeting, entry mode selection and etc.,

7. International investment: Cross-border transfer of resources to carry out

business activities

8. International management: Application of management concepts and

techniques in a cross-country environment

9. International business: Cross-border transaction of goods, servicesand

resources between two or more nations

10. Global business: Conduct of business activities in several countries using

highly co-ordinate and single strategy
Globalization
Globalization refers to the opening of
local and nationalistic perspectives to a
broader outlook of interconnected and
interdependent world with free transfer
of capital, goods and services across
the national frontiers.
 Globalization has several facets, including globalization
of markets and globalization of production:
1.Globalization of market: refers to the merging of
historically distinct and separate national markets into
one huge global marketplace.
2.Globalization of production: refers to the sourcing of
goods and services from locations around the globe
to take advantage of national difference in the cost
and quality of factors of production.
Emergence of global institutions
GATT (General Agreement in trade and tariff) and its successor
WTO (World trade organization)
International monetary fund(IMF), World bank, United nations
(UN)
1. WTO(World trade organization) is primarily responsible for
policing the world trading system and make sure nation-states
adhere to the rules laid down in trade treaties

As of May 2005,148 nations that collectively amount to 97 percent

of trade were WTO members
International monetary fund (IMF) and world bank created in 1944
by 44 nations that met at Bretton woods, new Hampshire.

The task of IMF was to maintain order in the international

monetary system, and that of the world bank to promote
economic development.

World bank – focus on making low interest loans to cash-

strapped governments in poor nations, to develop their
infrastructure

IMF – lender of last resort to nation-states whose economies in

turmoil and currencies are losing value against those of other
nations
The United nations – Established in Oct 24, 1945, by 51
countries committed to preserving peace through
international co-operation and collective security.
Today every nation in the world nearly 191 countries of
total in members with UN.
 Drivers of globalization
• Declining trade and investment barriers

• The role of technological change

- The internet and World wide web
- Transportation technology
• The changing demographics of global economy

• The changing world output and world trade picture

• The changing FDI picture

• The changing nature of MNE picture

• The changing world order

Effects of globalization
Globalization and management
Globalization and jobs
Globalization and wages
Globalization and child labor
Globalization and women
Globalization and developing countries
Inequalities
The globalization debate
Is the shift toward a more integrated and
interdependent global economy a good
thing?

Demonstrators at the WTO meeting in Seattle

in December 1999
International business
Vs Domestic business
Country Attractiveness
Multiple factors determininghost country
attractiveness in the eyes of large FDI investors.
A countryattractiveness assessment is based on
two dimensions:

1.Market and industry opportunities

2.Country risks (Economic/social/political factors)
Country attractiveness analysis
Market opportunities:
Potential demand in country
Market size

Growth
Quality of demand
Industry opportunities:

Profitability potential
Competitiveness of firm
Resource availability
Political risks: disruptions owing to internal or
external events or regulations as a result of
government

Economic risks: Exposes the business performance

Competitive risks: assessment on competition
prevailing in a country
Operations risks: risk of infrastructure, taxation
policies, availability of raw material
 International Business
Environment
The environment of international business is
regarded as the sum total of all external forces
working upon the firm as it goes about its
affairs in foreign and domestic markets
The environment can be classified in terms of
domestic, foreign and international spheres of
impact
 The international environment is conceived as the
interaction between domestic and foreign factors,
they cover a wide spectrum of forces:

1.Political environment
2.Legal environment
3.Cultural environment
4.Technological environment
5.Economic environment
Political and legal environment
Political environment refers to the influence of
the system of government and judiciary in a
nation on international business
Democracy – Supreme power is vested with
citizens
Totalitarianism – Individual freedom is
completely subordinated to the power of the
authority of state.
Types of Totalitarianism
Theocratic – country’s religious leader are also its political leader
(e.g) Afghanistan and Iran

Secular – Political leaders are guided by military and

bureaucratic powers (e.g) Pakistan; until 1980s several Asian
countries like south Korea, Taiwan and Singapore

Tribal – (e.g) Zimbabwe, Tanzania, Uganda and Kenya

Right-wing Totalitarianism – China is a classic example of polity

through communist by definition, following right wing policies
Types of political risks
Macro risks

1.Expropriation of corporate assets

2.loss of technology or other intellectual properties
3.Mandatory labor laws
4.Protectionist measures

5.Civil wars and wars between countries

6.Inflation, recession, currency devaluation

7.Natural calamities

8.poverty
Micro risks
Kidnappings, ransom, terrorism
Official dishonesty Increased

taxation Caps on FDI

 Classification of risks
Firm- Specific Country- Specific Global- Specific
risks risks risks

Cultural and •Terrorism and

•Business risk Transfer risks Institutional risks
war
•Foreign
•Environmental
exchange
concerns
risk
•Ownership •Anti-
•Governance Blocked
structure globalization
risk
•Religious heritage •Cyber attacks
•IPR
•Protectionism
Managing political risks
Avoiding investment
Adaptation Threat

Lobbying

Terrorism consultants
Legal environment
Refers to the legal system obtaining in a country

Four basic legal systems prevailing around the world

1.Islamic law

2.Common law (derived from English law)

3.Civil or code law (derived from Roman law)

4.Marxist legal system)

Industrial disputes resolution
Conciliation

Arbitration

Litigation
 MNC and legal environment
Protection Advertising
of IPRS and
sales promotion

Product
Liability and M Contracts
safety
N
Shipping
Competition
laws
C of goods

Bribery and
corruption Labor
laws

Environmental
laws
Cultural environment
Elbert W steward and James A Glynn writes
“Culture consists of the thought and
behavioral pattern that members of society
learn through language and other forms of
symbolic interaction – their customs, habits,
beliefs and values, the common view points
that bind them together as a social entity.
Cultural dimensions
National culture

Business Culture
Occupational Culture

Organizational culture
Occupational and organizational
culture
Mechanistic ad organic cultures
Authoritarian and participative cultures

Dominant and sub-cultures

Strong, weak and unhealthy cultures

Elements of culture
Language and culture
Supernatural benefits
Education and culture
Religion

Aesthetics Attitudes

Customs and manners

 Points to discuss
*Multi-cultural diversity

*Diversity – advantages and

disadvantages
 Managing across the cultures
Cultural predispositions
1.Ethnocentrism – is the tendency of people to
evaluate a foreigner’s behavior by the standards of
their own culture and to believe their own culture is
superior to others
2.Polycentrism – if ethnocentrism exhibits intolerance
to other cultures, polycentrism advocates tolerance
to beliefs and values of other societies
 Contd…
3. Regio centrism – The formation of
regional trade blocks has increased the
popularity of regional headquarters
4. Geo centrism – in geocentric orientation,
subsidiary operations are managed by the
best qualified individuals, regardless of
their nationalities
Technological Environment
J.K. Galbraith defines technology as a
‘systematic application of scientific or
other organized knowledge to practical
tasks’
Classification of Technology
State of the art technologies
Proprietary technologies

Known technologies Core

technologies Leveraging

technologies Supporting

technologies Pacing

technologies Emerging

technologies Scouting

technologies

Idealized unknown technologies

The Technology cycle
Awareness phase
Acquisition phase

Adaption phase

Advancement phase

Abandonment phase
Impact of technology
Social implications

Economic implications

Plant level change

Social implications
High expectations of consumers
System complexity Social

changes Social systems

Economic implications
Increased productivity Need to spend on R&D
Jobs become intellectual
Problems of techno – structure Increased
regulation and stiff opposition
Rise and decline of products and organizations

Boundaries redefined

Training of scientists and engineers

Plant level changes
Organizational structure
Resistance to change
Fear of risk

E-commerce
Patenting
Transportation Markets
Technology transfers
Production
Economic Environment
Classification of countries on the basis of income

Region-wise classification countries

Economies in transition Economic scenario

Economic systems Financial system Economic

policies Structural adjustments

Merits and demerits of market,
command and mixed economy
Command economy:
Denial of individual freedom
Commitment to work
Rate of economic growth
Equality
Luxurious lifestyles Lack of

flexibility
Protectionism
Protectionism means by which trade
between country is restricted in some way –
normally through measures to reduce the
number of imports coming into a country

1.Tariff barriers
2.Quotas
3.Non tariff barriers
Trade liberalization
The removal of or reduction in the trade
practices that thwart free flow of goods and
services from one nation to another. It includes
dismantling of tariff (such as duties, surcharges
and export subsides) as well as non-tariff
barriers ( such as licensing regulations, quotas
and arbitrary standards).
Exam point of view (Part-A)
Define the concept of trade. Differentiate
export with import What is polycentrism?
Define the term international business
Name some forms of international business
What is international trade?
What is international business? Compare
globalization of market with globalization
of production.
Explain the nature of international business.
What is international business environment? Define
globalization
What is geo centrism?
Define LPG and benefits of globalization What is
MNE?
What is political environment?
What are the challenges of globalization? What are
the different stages of globalization? List out the
disadvantages in globalization Define MNEs and state
any five Indian MNEs What is international trade?
Define ‘Cross National agreements’? Transnational
company
Differentiate between Ethnocentrism and Polycentrism
in the context of international business
What are the factors causing globalization of business?
Part-B
Discuss the forms of international business.
Discuss the history and process of globalization and
state its merits and demerits in the Indian context.
How does political environment influence international
business? Explain in detail
Elucidate the political, economic and cultural
environment of international business with real world
example
Discuss the factors favouring globalization of Indian
business
How does cultural environment influence international
business?
Analyse the steps taken by Indian government to
globalise the economy.
Discuss the differences in culture in different countries
and state the need to understand cultural differences
from international trade point of view.
Explain the advantages of MNEs
Explain the role of MNCs in Indian economy. Why do
MNCs like to Indianise their operation? Give reasons.
What are the available modes of entry into foreign
markets? Explain each one of them shortly
Elucidate the success and failure of international
business with any two examples.
Examine the dimensions of international business
environment.
Explain the steps needed to upgrade domestic
business into international business