International Business Management - Overview : International Business Management - Overview What is International Business?
International business is all commercial transactions (private/Governmental) between two countries.
Why should one study IB as a subject ?
Now a days in general, International business is a large portion of the total business. And the portion is rapidly growing due to ‘Globalization’.
Requirement of some specific knowledge is essential to conduct IB. International Business Management - Overview : International Business Management - Overview Why companies opt for IB?
To increase sales and profit
Economy of scale
Full capacity utilization may be difficult without foreign markets.
Possibility of identifying niche foreign market ( hence a scope of premium pricing)
Possibility of extending product life.
To acquire resources such as technologies, capital, manpower (skill/ talent) and information International Business Management - Overview : International Business Management - Overview To increase prestige of the product and the organisation.
To expand the base of sales and supplies to minimize the effect of trade-cycle or that of recession or inflation in the domestic market
Product development costs can be shared in a larger market.
To increase the competitive edge in the domestic market. (global players are likely to edge out others in the domestic market due to better quality and cost effectiveness). International Business Management - Overview : International Business Management - Overview What is ‘Economic Globalization’ ?
There is a growing economic interdependence among the countries.
This is reflected in increasing cross border flows of
Goods and services. 2. Capital 3. Know how
There is Globalisation in the field of marketing as in the field of production/ operation.
Globalisation is growing International trade in GDP is now 30% of world GDP. It was only 10% 30 years ago. FDI has grown from 5% of GDP to 12% in 20 years. Cross border acquisition and merger is increasing. International Business Management - Overview : International Business Management - Overview What are the major drivers of globalization?
Expansion of technology . Technology is truly ‘stateless’. It crosses national or cultural boundaries.
Transportation and communication improvements – in speed , reliability, cost factors etc.
World economic trend:- Liberalization of cross border movement, Deregulation, reduction in tariffs. Trend towards privatization and market allocation economy. - WTO initiatives.
Common market needs promotes globalization.
Leverages / advantages possessed by global companies such as economy of scale, experience transfer, improved resource utilization etc. International Business Management - Overview : International Business Management - Overview What are the restraining forces of globalization?
Management shortsightedness, ethnocentric style and fear of the unknown in many organisation.
Government policies, controls and barriers.
- Government tends to support the local players and frames rules to protect them.
What are the different types of international business?
Exports and imports of goods – ‘merchandise’.
Exports and imports of services - Tourism and transportation, Banking, insurance; use of assets such as trademark, patent, copyright etc.
Investment – direct and indirect. International Business Management - Overview : International Business Management - Overview What are the different types management orientation that companies adopt towards International business?
Its characteristics are -
Extension strategy is adopted for international marketing.
Plans are made in home country and by its personnel and generally operate through agents.
Export is viewed as a means of disposing the surplus in the domestic market. International Business Management - Overview : International Business Management - Overview Believes home country practices to be superior and so can be successful everywhere.
Only sees the similarities in the markets.
Does not conduct any systematic International market research
The approach does not allow a company to be a major player in International Business.
Many call these types of companies ‘ International companies’
Its characteristics are
Opposite of Ethnocentrism – assumes each country is unique. Only sees dissimilarities. International Business Management - Overview : International Business Management - Overview Each subsidiary develops its own unique business and marketing strategies (– that is decentralized)
Focus is on local conditions, laws, culture etc.
Adaptation strategy is followed in marketing.
These are called ‘ Multinational companies/ Multi-domestic companies / Locally responsive companies.
3. Regioncentric and Geocentric
Its characteristics are:
Pursues both extension and adaptation strategies in global markets. International Business Management - Overview : International Business Management - Overview Lies between the extremes of polycentrism and ethnocentrism – it is a hybrid approach.
Views the entire world/global market to be a single market but sees both similarities and dissimilarities within it.
Adopts a policy of blending of cultures.
Integration strategy adopted at region/global level
However it does not adapt just for the sake of adapting – only does when it adds value.
“Thinks globally, acts locally”.
These are called Transnational Companies ( TNC) or Multinational Enterprises (MNE). Economic Environment : Economic Environment How important is the study of economic environment and what are to be studied?
It is perhaps the most important among the environmental factors to be studied before deciding on whether to do business with a country or not – because the purchasing power of the consumers of the target (or host) country is the foremost requisite of profitable business.
For marketing the products in a host country, the demand conditions ( quantity and quality ) in the country with respect to the products and related industry, need to be studied.
For production of goods in a foreign country, its factor conditions (such availability of raw material, human capital/ knowledge, land, infrastructure etc,) need to be studied.
Other major economic aspects that need examination are:
Economic size and economic data of the country
Economic system prevailing in the country.
Key macroeconomic indicators such as GNP, growth rate, inflation, surpluses/ deficits etc of the target country. Economic Environment : Economic Environment The relevant data regarding the target country that needs to be studied, are:
National accounts data such as GNP, GDP, Consumption, Investment, Government expenditures, Price levels etc.
Demographic data such as number of people, population growth, educational levels etc.
Other statistical data and information– sector wise production, consumption, internal and external trade, level of infrastructure, use of E-commerce etc. Economic Environment : Economic Environment What are the different economic systems?
There are three types of economic systems
Capitalist (Market allocation of resources) system
Socialist ( Command allocation of resources) system
Consumer allocates the resources. Consumer with his monetary strength decides the goods/services that he wants.
Product , technology is decided by the state.
Generally demand exceeds supply so market mix is relevant
Countries relying on this system are generally shifting towards market allocation system
Mixed system : In reality all market allocation systems are mixed because Government spending is a command allocation. Economic Environment : Economic Environment How are the countries classified by income and how is the classification related to stages of market development?
GNP per capita is a rational parameter for grouping countries to determine the stages of market development . The classification has been done as follows:
Low income countries ( GNP less than $ 786/capita). These cover 37% of world population but contribute only 3% to world GNP. These are characterized by
High birth rate.
Low literacy rates.
Low-middle income countries ( GNP per capita – $ 786 to 3125). These cover 39% of world population but contribute 10% to world GNP. These are characterized by:
Generally early stages of industrialisation
Producers of standardized labour intensive products. Economic Environment : Economic Environment Upper- middle income countries ( GNP per capita - 3126 to 9655). These cover 7% of world population and contribute 7% to world GNP. These are characterized by:
Rapid industrialisation, high degree of urbanization
Rising wages, High degree of literacy.
Rapid export driven economic growth.
High income group countries. ( GNP per capita – above $ 9655). These cover 16% of world population but contribute 80% to world GNP. These are characterized by:
Post industrialized countries
orientation towards service sectors, information processing and exchange.
Focuses on new products and innovations.
Have economic social and political problems
Abject poverty, Reducing income level
Avoided by global marketers. Economic Environment : Economic Environment What is GDP of a country?
The GDP or Gross domestic product of a country is the value of production ( of tangible goods and intangible services) that accrues within the geographical boundaries of a country in a year.
It does not matter whether the production has been done by a domestic or a foreign company.
What is GNI of a country?
Gross national income (GNI) also called GNP is the market value of the production done by domestically owned companies or individuals of the country. Economic Environment : Economic Environment What is purchasing power parity (PPP)?
Conversion of dollar rates are misleading to assess the purchasing power. Exchange rates is for trading purpose and often bears no relationship with the price of products sold in the domestic market. So the World Bank has come up with GNI per capita in international dollars converted at PPP rates.
“PPP is the number of units of a country’s currency required to buy the same amounts of goods and services in the domestic market that 1$ would buy in United states”. Economic Environment : Economic Environment What is inflation? How is it measured? Why is it a serious concern for a global player?
The term ‘Inflation’ implies that prices are increasing. Hence a unit of money is able to buy less
‘Consumer price index’ is used to measure inflation. The change in the price of a rationally determined mix (or basket) of goods over a period is determined. Rise in the index results in inflation.
Inflation rate’ is the percentage increase in the change in prices from one period to the next ( usually a year)
High inflation rate affects interest rates, exchange rates, cost of living and general confidence on a country’s political and economic system.
Interest rates are set higher than inflation rates to attract savings. The lending rates go up when inflation are high. This causes economic slowdown
During the times of high and erratic inflationary trends price comparisons become difficult . Pricing becomes difficult. Economic Environment : Economic Environment What is balance of payment? What are external debts and internal debts?
Balance of payment is a record of economic transaction between residents of a country and the rest of the world. It has two components :
Current accounts which records transaction related to merchandise, service trade and income from assets abroad.
Capital accounts which records long term direct investment, portfolio investment and other capital flows.
Balance of payment of a country indicates the stability of the country’s currency.
Merchandise trade balance is the difference between exports and imports of merchandise.
External debt is the money borrowed from foreign banks.
Internal debt is the amount spent by the Government over the tax receipts. Political Environment : Political Environment Why must MNEs study political environment of a target country?
It is important foe MNEs to study political environment in order to be successful in a foreign land – it must see whether it’s corporate policy suits the political and legal environment of the country or not. Moreover the political and the legal environment varies from country to country – the risk assessment is crucial.Political and legal factors are a part of the external environment that influences managerial decisions. Political Environment : Political Environment How are political policies developed and implemented? ( in other words, how is the political environment created?)
It is basically through a political system. The main purpose of a political system is to integrate the diverse groups of the society to function as a composite unit. Polices evolve as shown below:- Political Environment : Political Environment What are the two political systems that lie on the two extremes of the political spectrum?
1. Democratic system 2. Totalitarian system Political Environment : Political Environment Totalitarianism also manifests itself in other forms like Fascism, Authoritarianism and Communism. Under fascist rule the state becomes all powerful and dictates all aspects of lives of the people. It tries to convert all the people to its own philosophy. Authoritarianism tries to totally rule the people. Communist governments totally control the economic systems politically. They are however secular. Political Environment : What are the issues a foreign company should study carefully in a target country’s political environment?
Following issues arising from the political environment needs to be studied by foreign companies:-
1. Government’s attitude towards sovereignty – sovereignty is the independence of a state to conduct it’s affairs without the interference of any other country or outside forces.
The process of integration in the global market in a way is eroding national economic sovereignty. Eg:- EU countries are giving up individual rights to set their own product standard to gain access to the common market. Political Environment Political Environment : Political Environment 2. Political risks involved –- Risk of government policies getting changed is a serious issue to be considered by a foreign company.
- Lower risks attract investments
- It has also been seen that generally the lower the stage of development the higher is the political risk.
- Causes of political risks could be due to 1. Party in power being changed or change in opinions of leaders. 2. Political/ civil unrest 3. Animosity or war between the investor country and the host country. Political Environment : Political Environment 3. Risk of Expropriation –
- Companies should evaluate the risk of confiscation/ expropriation / creeping expropriation in a target country.
- Confiscation means - host government taking ownership of the property without giving any compensation.
- Expropriation is in the form compelling a foreign company to sell its operation
- After confiscation/ expropriation it can be either nationalised or domesticated. Nationalisation involves Government taking over the company. Domestication means foreign company relinquishing the control to private nationals. Political Environment : Political Environment - Creeping expropriation is when severe restrictions are imposed by the host country on economic activities such as repatriation of profits , dividends and royalties. It also can be in the form of weak patent laws, laws related to recruitment of nationals, price controls etc.
- For these companies can approach the World Bank Investment Dispute Settlement Centre. Or it can get itself covered by ‘Expropriation Insurance’.
3. Taxes and Taxation policies –
- Foreign companies are taxed by host countries as per their laws.
- Till now common or universal tax laws do not exist. Though there are bilateral tax treaties between certain countries. Political Environment : Political Environment 4. Dilution of Equity –
- Governments of host countries attempt to control ownership of foreign companies by regulations. Eg:- FERA act in India.
- Some companies have joint ventures to reduce the threat to equity dilution – but this might cause problems related to patents, trade mark. technology transfer etc.
What are the types of strategy a foreign company follows in dealing with the factors in the political environment?
- To formulate a political strategy is often avery difficult operation for a company. The company at first, should identify the specific issues affecting the firm ( example: Is it labour issues? Is it a regulatory issue? Is it a social issue?) It should also know the govt’s view or stand point related to the issue. Political Environment : Political Environment - Companies often engage lobbyists to influence democratic governments, to look at things from their point of view. Companies can also take the support of the consumers to influence the government policies regarding the contentious issues.
- At times it is easier to deal with totalitarian government than democratic form of government, but at the same time it is risky due to chances of the toppling of the government. Legal Environment : Legal Environment What are the different types of legal systems existent?
Basically there are three types of laws:
Common laws : these are based on culture of the nation, precedents, traditions etc.
Civil laws : These are typically codified legal system. They tend to be precise unlike the common laws which are more open to interpretations.
Theocratic (or religious) laws : These are religious laws . Eg:- Islamic laws. Legal Environment : Legal Environment What are the types of business issues that can create conflicts in International business?
The global legal environment is very dynamic and complex in nature. So it is imperative to obtain legal help to resolve conflicts. However it is wise to prevent conflicts from arising at the first place.
The issues that can give rise to conflicts are –1. Establishment of trade : - Trade can be established only when conditions are suitable for its growth, in a target country. It can survive and grow if there is an assurance that foreigners will be treated fairly. In order to ensure this treaties are signed between countries regarding commerce and navigation. Companies are guided both by the laws of the host country and the home country. ( Eg: Bribery laws of the US is applicable to all the US MNCs operating in other countries) Legal Environment : Legal Environment 2. Jurisdiction:
- The company should clearly understand the extent to which it is subject to the jurisdiction of host country courts. Normally, all the economic activity within a nation in governed by the nation’s laws. But which nation’s laws apply when a transaction crosses boundaries/ The parties involved must clarify such points at the point of making the deal. The contract must specify these points, to take care of any conflict of laws arising later.
3. Intellectual property rights :
Various types of disputes can arise over issues related to trade marks and patents like –
- Counterfeiting is unauthorised copying and production of a product.
- Associative counterfeit is an imitation with slight variation in the product name (a well known brand name) to dupe the customer.
- Piracy is unauthorised publication of a copy right (particularly software and entertainment industries) Legal Environment : Legal Environment 4. Antitrust :
Antitrust laws are intended to promote free competition. But at times the laws in the host country may go contrary to the basic principle of ‘Antitrust’, with an objective to provide protection to local manufactures.
5. Licensing and Trade secrets:
Licensing is a contract that allows a licensee to use patents, trademarks, trade secrets, technology against royalty payments. In certain countries the permissible amount of royalties is governed by the government.
Disputes arise if the license agreement not clearly specify the scope ( to make/ use/ sell) of the license, the method of pricing the assets, the rights to sublicense etc. Disputes also arise due to misinterpretation of the agreement. Social and cultural Environment : Social and cultural Environment What is culture?
Culture is a way of living. In context of consumer behaviour “culture is the sum total of learned beliefs, values and customs that serve to regulate the consumer behaviour of members of a particular society”
Belief and value components of the definitions refer to the accumulated feelings and priorities that individuals have regarding ‘things and possessions’.
“Beliefs contain a very large number of mental and verbal statements”.
“Values are those beliefs which are enduring and widely accepted by members and society”.
“Customs are behaviours that are culturally approved or acceptable ways of behaving in specific situations”. Social and cultural Environment : Social and cultural Environment Why is cultural awareness important for companies to be successful in International Business?
People of one culture may not like what people of another culture like.
Same product may be consumed differently by people of different cultures.
Eg:- Shrimps are consumed differently in Spain, USA and Japan.
Difference in language (and expressions) poses problems. At times translations can be ludicrous .
Eg:- Names of brands can have different meanings - ‘Nova’ (a Chevrolet car) in Spanish means ‘does not go
Colours have different significance in different countries.
Eg:- White in China is associated with death and sorrow while it is bridal attire (associated with happiness) in many countries in the west.
Social stigmas are attached with many products (Eg:- beef)
Working styles are different (like in ‘High context culture’ and ‘Low context culture’).
Subcultures exist within in many countries, which also are of significance in International Business. Social and cultural Environment : Social and cultural Environment What are ‘High Context culture’ and ‘Low context culture’?
In high context culture getting to know the person and building a relationship over a time is of utmost importance. A person’s words are his ‘bonds’. Negotiations in countries of this culture, take a long time because parties spend a lot of time to know each other, in order to find out whether the other can be trusted or not. People of this culture fear social ostracism Litigations are not many. Competitive bidding is infrequent.
In Japan, China, Middle east etc High context culture exists.
In low Context culture messages / communications are mostly explicit ( verbal / Written). In low context culture fear of law generally makes a person abide by the negotiated terms. People in the low context culture resent intrusion into their private space. Negotiations proceed relatively quickly. But many cases of litigations are found.
In USA, Northern Europe this type of culture exists. Social and cultural Environment : Social and cultural Environment Why countries are useful but not perfect cultural references?
Countries are useful cultural references because people in a country tend to be similar because - (1) of common national identity (2) because they abide by same laws/ rules.
But in spite of above reasons for similarity people within the same country differ because - (1) people of different origin (or nationality) stay in a country (2) because there are subcultures within a country.
Do cultures undergo changes?
There is a set of basic value systems ( usually transmitted by parents), which get formed by the age of ten. These do not change easily
Individual/ societal values get formed gradually. These change over time – either by choice or by force. ( Change by force/imposition is called cultural imperialism.)
What are the two strong cultural stabilisers?
1. Language 2. Stabilisers. Social and cultural Environment : Social and cultural Environment Which are the different behavioural practices / socio economic factors that influence business practices? Social and cultural Environment : Social and cultural Environment What are the strategies that a company can adopt to bring about cultural changes to transfer new products from one country to another?
It is very difficult to change the basic value system. So it is wiser to avoid interfering with them.
Certain adjustments required for adaptations are costly while some are not. Cost benefit analysis for making the adjustments should be considered by the company.
Large number of changes introduced increases the resistance to change. It should be avoided.
Employees should be involved in decision making process.
Opinion leaders should be spotted to influence others.
Timing the change correctly is vital. Social and cultural Environment : Social and cultural Environment What are cultural universals / commonalities?
Athletics ,sports, dancing, family feasting, cooking, music are examples of activities carried out universally – only they are done differently. – “what is seemingly different is nothing but different ways of doing the same thing”. One has to recognise the difference.
A global player searches for such cultural universals. This helps him to standardise elements of marketing mix.
Recent cross-cultural convergence due to increased increased travel and improved communication is aiding the cause of global player. International Trade Theories : International Trade Theories How does the study of trade theories help?
The theories help the Govt of the country and the companies to determine:
What and how much should be produced within the country and exported to which country?
What and how much should be imported and from where?
The theories also guide the government to decide where and how much it should interfere with the free flows keeping the national objectives in mind. International Trade Theories : International Trade Theories Which are the major theories? How do they explain natural trade between nations and what do they prescribe for trade relations?
1. Mercantilisms theory
The foundation of the theory dates back to nearly 500 years ago
The theory focused on increasing trade surplus – which meant increasing treasure (normally in form of gold)
During colonial rule the theory was used to benefit colonial power. Colonies were forced to import costly finished /manufactured goods from the ruling country and export the raw material at cheap price.
Now instead of treasure (gold ) the country with the trade surplus holds the currency of the country with the trade deficit (- or investments in the currency). In other words it grants credit to the country with deficit trade – this of advantage only if it can effectively buy sufficient goods/services with the credit. International Trade Theories : International Trade Theories Neo-mercantilism seeks to achieve social and political objectives by trade surplus.
2. Absolute advantagism
Adam Smith proposed that consumer in a country will benefit by buying foreign products if they are cheaper than domestic ones.
What the theory implies is – every country will specialise in producing those items that give it competitive advantage.
The specialisation will make the labour more efficient in producing those items. Economy of scale will also help them in producing those items at lower cost.
The competitive advantage is either – natural or acquired. International Trade Theories : International Trade Theories 3. Natural advantagism theory
Natural advantage can be due to
- natural resources available. Eg:- availability of petroleum in middle eastern countries.
- climate. Eg:- climate helps in the production of tea in north east india.
- land fertility and suitability. Eg:- jute in Bangladesh.
Companies can gain by processing the raw agricultural product and convert it to a form that is more efficiently and economically transported – thus save transportation cost.
4. Acquired advantage theory
Certain countries have acquired the skill and technology to produce certain items better than others . Eg:- Japanese in producing steel and electronic goods. International Trade Theories : International Trade Theories 5. Comparative advantage theory:
A country must choose to produce the items it produces best and import the rest even if it has absolute advantage in all the products – this is justifiable due to allocation of limited resources.
Limitations of the theory lies in its assumption of full utilisation of its resources. Eg:- Full employment may not be a valid assumption
- Another reason why the strategy advocated by this theory may not be totally satisfactory – for the risk associated with over specialisation in certain items and overdependence on imports of certain items.
- The other limitations of the theories of specialisation are: sharing of gains between the countries may be a point of dispute.
- Transort cost may offset the benefits of specialisation.
- Resources are not as mobile as the assumes. International Trade Theories : International Trade Theories 6. Theory of country size
Larger countries ( in terms of land) are likely to have more variety of resources than smaller ones. So they are more self sufficient hence trade less.
The transportation cost of procuring items from neighbouring countries is higher than processing it from a domestic source within the country.
Domestic demand is often large enough for an economic scale of production.
7. Factor Proportion theory
According to this theory the factors ( of production) which are more in existence are cheaper while the scarcer factors are costlier.
- The production factors are – labour land and capital.
Countries produce items requiring the factors available with them (- how ever technology also decides the amount of the factors required for a given output). International Trade Theories : International Trade Theories 8. Product life cycle theory of trade
Phases of ‘Product life cycle’ are 1. Introduction 2. Growth 3. Maturity 4. Decline.
The production starts in the country where the product was first researched and developed. These countries are always industrialised and advanced.
Then the product shifts to other countries ( developing countries) as the product reaches the stage of maturity in the country where it originated.
Some exception to the PLC theory of trade are –
(a) When products have very short cycles because of rapid innovation.
(b) Products where the cost is of little concern to the customer
(c) Products requiring specially skilled labour – which takes time to develop. International Trade Theories : International Trade Theories 9. Country Similarity theory
Trade takes place among dissimilar countries by the other theories.
But this theory points out why trade today is mostly between countries similar in – climate, factor endowment and innovative capability.
Trade is influenced by :
- Economic power of the consumers in industrialised countries
- Distance between countries (– transportation costs being less).
- Similarity in culture
- relationship between the countries.