business.docx · Web viewINTRODUCTION TO INTERNATIONAL BUSINESS. ... prices which help them to capture and dominate the world market. ... in economic development of the

CHAPTER - 1

INTRODUCTION TO INTERNATIONAL BUSINESS

Meaning:

It refers to an organisation that buys and sells goods and services access two or more national boundaries even if the management is located in single country.

Definition:

According to” International Business Journal”

International Business is a commercial enterprise total performance economical activity beyond that bonus of its location having two or more branches in foreign countries and make use of economic culture political legal and other difference between countries.

Objectives of international Business:

1. To achieve higher rate of profits. 2. To enhance the Market shares 3. To expand Production capacities beyond the domestic market and

fight against the severe competition in the home country. 4. To enter into other market as Limited scope in home country. 5. Due to Political in stability in the home market in helps in entering

other markets. 6. To maximize the advantage of Advance of technology &human

resources 7. To take Opportunities of Liberalization and globalization

Features or characteristics of international Business:

1. Large scale operation: In International marketing all operations like production and marketing activities is conducted on a large scale, i.e. on a wholesale basis and not on a retail basis, where it first sells its goods in the local market. Then the surplus goods are exported.

2. Integration of economy: International business combines the economies of many countries. This is because it uses finance from

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one country, labour from another country, and infrastructure from another country. It designs the product in one country, produces its parts in many different countries and assembles the product in another country. It sells the product in many countries, i.e. in the international market.

3. Dominated by developed countries and MNCs: MNCs conduct business more efficiently and economically this is because they have large financial, best technology and research and development (R & D). And they also have highly skilled employees and managers because they give high salaries and other benefits. Therefore, they produce good qualitative products and services at low prices which help them to capture and dominate the world market.

4. Benefits to participating countries: International business gives benefits to all participating countries however; it helps in having smooth and good relations between countries and thereby ensures world peace. Both the developed countries and developing countries get benefits. They get foreign capital and technology, rapid industrial development, more employment opportunities. All this results in economic development of the developing countries.

5. Keen competition: International business has to face keen competition in the world market. Developed countries have many contacts in the world market and are in a favourable position because they produce good quality goods and services at very low prices. So, developing countries find it very difficult to face competition from developed countries. And also suppliers have to face competition from the other suppliers of the exporter’s country and local producers.

6. Special role science and technology: International marketing is very dynamic and competitive. Science and Technology (S & T) help the business to have large-scale production. Thus, an organization must be able to sell goods of the best quality, at competitive prices. Developed countries like USA, Germany etc use high technologies. Therefore, they dominate global business.

7. International restriction: International marketing is influenced by the presence of trading blocs. However it faces many restrictions on the inflow and outflow of capital, technology and goods. Many


governments do not allow international businesses to enter their countries. The most powerful trading blocs are NAFTA (North American Free Trade Area) and EU (European Union).

8. Sensitive nature: The international business is very sensitive in nature. Due to changes in the economic policies, technology, political environment, etc. has a huge impact on its products. Sometimes the business may also be affected by competitors. Therefore, they must adjust their business activities and adapt accordingly to survive changes.

9. International Marketing Research: In international business, the marketing research is very much necessary because it is required to know about customers, dealers and competitors and also must due to different social, cultural, economic and political environment of far off markets.

Needs or Reasons for international business:

a) It leads to the flow of ideas, services and capital across the world.b) International Business offers Consumer new choice. c) It permits the acquisition of a wide variety of products. d) It facilitates the mobility of labour, capital, and technology. e) It helps in providing employment opportunity.f) It re allocate sources for preferential choice and shift activities to a

global level.g) It leads to enhance profitability h) International Business minimizing of cost i) International Business leads to minimization and diversification of

risk.j) International Business increases market share.

Factors that influenced the growth in globalization of international business

There has been growth in globalization in recent decades due to (at least) the following eight factors:

1. Technology is expanding, especially in transportation and communications.


2. Governments are removing international business restrictions.3. Institutions provide services to ease the conduct of international

business.4. Consumers want to know about foreign goods and services.5. Competition has become more global.6. Political relationships have improved among some major economic

powers.7. Countries cooperate more on transnational issues.8. Cross-national cooperation and agreements.

Importance of international Business

Earn foreign exchange: International business exports and imports goods and services all over the world which helps in flow of valuable foreign exchange. Foreign exchange helps to make the business more profitable and to strengthen the economy of its country.

Optimum utilisation of resources: It makes optimum utilisation of natural resources as; it produces goods on a very large scale for the international market. International business utilises resources from all over the world. It uses the finance and technology of rich countries and the raw materials and labour of the poor countries.

Earn huge profits: The main objective of an international business is to earn high profits. International business achieves its objectives easily and quickly this is because it uses the best technology and has the best employees and managers. It produces high-quality goods and sells these goods all over the world at a competitive price, results in high profits.

Spread of business risks: International business spreads its business risk because it does business all over the world. So, a loss in one country can be balanced by a profit in another country. The surplus goods in one country can be exported to another country. The surplus resources can also be transferred to other countries. All this helps to minimise the business risks.

Improved organisational efficiency: Without efficiency, international business will not be able to face the competition in the international market. So, they use all the modern management techniques to improve their efficiency. They hire the most qualified and experienced employees and managers. These people are trained regularly and motivated with very high salaries and other benefits such as international transfers, promotions, etc.


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Benefits from government: As international business brings a lot of foreign exchange for the country, it gets many benefits, facilities and concessions from the government. And also gets many financial and tax benefits from the government.

Expansion and diversification: International business earns very high profits and also gets financial help from the government it can maximize and diversify its activities.

Increase competitive capacity: International business can fight competition from foreign companies because they produce high-quality goods at low cost and spend a lot of money on advertising all over the world. It uses superior technology, management techniques, marketing techniques, etc.

International business helps in standard of living of the people, also increases national income and enhances rapid economic growth.

Advantages of international Business:

Faster growth: Specialization, division of labour, enhancement of productivity, posing challenges, innovations and creations meet the competition lead to overall economic growth of the world nations.

New technology: As international business is an open economy we can bring new technology as it happens rather than trying to develop it internally.

Spur of foreign computation: Foreign competition encourages domestic producers to increase efficiency. Exchange of technological know-how enables underdeveloped and developing countries to establish new industries with the assistance of foreign aid.

Increase wages level: MNCs will bring up average wage levels because if the multinationals were not there the domestic companies would pay less.

Access to a larger talent pool: When business is expanded internationally you will have access to greater numbers of highly educated professionals, skilled workers and highly talented managers.

Maximum utilisation of resources: International business reduces waste of national resources. It helps each country to make optimum


use of its natural resources. Every country produces those goods for which it has maximum advantage.

More profit: International business not only leads to potential customers but also leads to higher margins. Increased efficiency of the business helps in lower cost and higher profit.

Ensure peace among nation: International business removes rivalry between different countries and promotes international peace and harmony. It creates dependence on each other, improves mutual confidence and good faith.

Economics of large scale production: International business leads to production on a large scale because of extensive demand. All the countries of the world can obtain the advantages of large-scale production. It allows higher sales volume and lower price offerings.

Creating employment opportunities: International business boosts employment opportunities in an export-oriented market. It raises the standard of living of the countries dealing international business.

Cultural development: International business fosters exchange of culture and ideas between countries having greater diversities. A better way of life, dress, food, etc. can be adopted from other countries.

Enhance prestige: International business widens the market for products all over the world. With the increase in the scale of operation, the profit of the business increases. The improved negotiating power among creditors, suppliers, distributors and other important groups

Disadvantages of International Business:

Political and legal restriction: Varied laws regulations and customs formalities followed different countries, have a direct bearing on their export and import trade.

Culture differences & Economic differences: Cultural values and heritages are not identical in all the countries. There are many aspects, which may not be suitable for our atmosphere, culture, tradition, etc. This indecency is often found to be created in the name of cultural exchange.


Differences in currency unit: The currency unit varies from nation to nation. This may sometimes cause problems of currency convertibility. The monetary system and regulations may also vary.

Differences in the language: Different language in different countries creates barriers to establish trade relations between various countries.

Differences in marketing infrastructure: the availability and nature of the marketing facilities available in different countries may vary widely.

Trade restriction: A trade restriction, particularly import controls, is a very important problem, which an international marketer faces.

High costs of distance: When the markets are far the transportation cost becomes high and requires longer time to deliver goods.

Differences in trade practices customs and practices may differ. International business leads to import of harm full goods cigarettes,

drugs etc Dumping policy: Developed countries often sell their products to

developing countries below the cost of production. As a result, industries in developing countries of the close down.

Shortage of goods in the exporting country: Sometimes, traders prefer to sell their goods to other countries instead of in their own country in order to earn more profits. This results in the shortage of goods within the home country.

Exploitation: International business leads to exploitation of developing countries the developed countries. The prosperous and dominant countries regulate the economy poor nations.

Factors effecting the selection of international market:

Internal factor External factor

External factor:

Market size and growth: Market size and growth are important host country parameters affecting the entry mode choice. The larger the size of the market, the greater is the potential for growth and the


higher will be the inclination of the firm to commit greater resources for its development.

Govt regulation: Excessive restrictions on foreign ownership by host country governments will push the firm to go for non-equity entry modes.

Level of computation: Presence of competitors and their level of involvement in an overseas market is another crucial factor in deciding on an entry mode so as to effectively respond to competitive market forces.

Physical infrastructure: The level of development of physical infrastructure such as roads, railways, telecommunications, financial institutions, and marketing channels is a pre-condition for a company to commit more resources to an overseas market.

Level of risk: Country risk emanates from political and economic factors both of which can significantly influence the potential attractiveness of a country. Unstable and unpredictable political and economic environment increases the risk of doing business in a particular country and discourages the firm to adopt the entry mode which requires greater resource commitment.

Production and Shipping Costs: Markets with substantial cost of shipping as in the case of low-value high-volume goods may increase the logistics cost.

Lower Cost of Production: It may also be one of the key factors in firms deciding to establish manufacturing operations in foreign countries.

Internal Factor:

Company objectives: companies operating in domestic markets with limited aspirations generally enter foreign markets as a result of a reactive approach to international marketing opportunities. In such cases, companies receive unsolicited orders from acquaintances, firms, and relatives based abroad, and they attempt to full fill these export orders.

Availability of company resources: Venturing into international markets needs substantial commitment of financial and human


resources and therefore choice of an entry mode depends upon the financial strength of a firm

Level of commitment: In view of the market potential, the willingness of the company to commit resources in a particular market also determines the entry mode choice. The commitment of resources in a particular market also depends upon the way the company is willing to perceive and respond to competitive forces.

International experience: As a firm ventures into foreign markets, it gains the knowledge of dealing with local economic and environmental conditions. As the experience increases it becomes more confident of their ability to manage foreign operations and consequently is willing to greater resources.

Flexibility: Due to changes in the political and legal structure, changes in the customer preferences, emergence of new market segments, or changes in the competitive intensity of the market. Companies should also keep in mind exit barriers when entering international markets.

Approaches to international Business:

1. Ethnocentric Approach: Under this approach target market is own country and surplus goods are exported to other countries.Its features are:

a. Extending or stretching strategy is used for international marketing.

b. Plans are made in home country business are operated through agents.

c. Export means disposing of excess goods.d. Believes home country practices to be superior to any other

country.e. Only sees similarities in the market.f. Does not contain any systematic international market research.

2. Polycentric Approach: Under this approach, the companies customise the marketing mix to meet the taste and performance and needs of the customers of each individual market.


Its featuresa) Polycentric approach is opposite to ethnocentrism it assumes

each country is unique.b) Since each country is unique, complete control should be given

to local mangers since they obviously know what is best for the company in that country.

c) As long as these subsidiaries are profitable, headquarters is apt to leave them alone.

d) Only sees dissimilarities.e) Each subsidiary develops its own unique business and

marketing strategies.f) Focus is only on local conditions.g) Adaption strategy is followed in marketing.h) These are called MNCs/ MDCs/ locally responsive companies.

3. Regiocentric approach: Under the company operating successfully in the foreign country thinks of exporting other neighbouring countries of the host country. Its features:

a) It is a hybrid approach. It views the entire world/global market to be a single market but sees both similarities and dissimilarities within it.

b) Pursues both extension and adaption strategies in global markets.

c) It adopts a policy of blending of cultures.d) “Thinks globally, acts locally” these are called MNE/

Transnational companies.e) It adds value for the adaption made.

4. Geocentric approach: Under this approach companies view the entire world as a single market. Its features:

a) Companies view entire world as a single country.b) Geocentric believes that the entire world is a potential market

and strives to develop strategies that will work in every market.


c) They select employees from the entire globe and operate with number of subsidiaries.

d) The head quarters co ordinate the activities of the subsidiaries.e) Each subsidiary functions like an independent and autonomous

company in formulating policies strategies, product design, human resource policies, operations etc.

f) A view of superiority is not based on nationality.

Nature of International Business:

Accurate information: Gathering accurate information is very important as the business transactions are conducted all over the world which includes technology changes, implementation of various modern and latest technologies, changes of taste and preferences and capital investment etc.

Large scale operation: In international business, all the operations are conducted on a massive scale to supply goods into all remote areas of the world within a short period of time.

Border market is available: Unlike domestic marketing the market is not restricted to national population. Population of the other countries can also be targeted in international business.

Requires border competence: Special management skills and broader competence is required in international marketing/business.

Computation is incentive: An international marketing organisation has to compete with both the domestic competitors and international competitors. Hence the competition is intense (stressful) in international marketing.

Involves high risk and challenges: international business is proved to various kinds of risk and challenges like political risk, cultural difference, changes in fashion and style, changes in rules and regulations of government.

International business include import and export goods are commodities is physical form

It includes import and export or services and also investment or delaying internal capital


Establishing manufacturing and Services Company and investment of capital in differences part of slow.

Import and export of finance and also with financial services.

Forms of International Business:

Export and import trade: Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Importing is bringing goods, services and capital into the home country from abroad.

Leasing: licensing is an arrangement between companies of different countries, a company (licensor) allows another company (licensee) to use its brand name, copyright, patent, technology, trademark or other assets in exchange for an amount (royalty) based on sales.

Franchising: franchising is an agreement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications.

Joint venture: A joint venture (JV) is a business agreement in which parties agrees to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.

Foreign direct investment: FDI refers to the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).

Theories of International trade:

1. Mercantilism theory:

Mercantilism, also called “commercialism” is a system in which a country attempts to a mass wealth through trade with other countries, exporting more than it imports and increasing stores of gold and precious metals.


http://en.wikipedia.org/wiki/Business

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http://en.wikipedia.org/wiki/Assets

This theory holds that nations should accumulate financial wealth, usually in the form of gold by encouraging exports and discouraging imports.

VIEWPOINTS OF MERCANTILISM THEORY:

In their view, a country becomes rich if it exports more than it imports.

It says nation wealth depends on accumulated treasure. The more precious metals mean a richer and powerful nation. Countries have to do their best to increase exports and decrease

imports. It says a nation should have trade surplus. Wealth of nations was measured by the stock of metals they possess. Minimize imports tariffs and quotas.

PRINCIPLES OF MERCANTILISM:

Precious metals, such as gold and silver, were deemed indispensable to a nation’s wealth.

It was believed that trade balances must be “favourable”, meaning an excess of exports over imports.

CRITICISMS:

Mercantilists failed to understand the notions of absolute advantage and comparative advantage and the benefits of trade.

Impossibility to maintain trade balance More importance given to bullion The critique that mercantilism was a form of Rent-seeking has also

seen as criticism.

2. Absolute advantage theory / Economic theory:Absolute advantage is the ability of a country, individual,

company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.


This can be illustrated through the following example –

Bread ClothIndia 100 50England 50 100

The above table shows units of labour required to produce Cloth and Bread in 2 countries – India and England.

India can produce bread with 100 units of labour while England can produce the same quantity of bread with 50 units of labour. Clearly England can produce bread in a more efficient manner than India. India would therefore import bread from England.

VIEWPOINTS OF ABSOLUTE ADVANTAGE THEORY:

Absolute advantage and the division of labour theory first introduced by Adam Smith in 1776.

Absolute advantage means producing a product using the fewest labour hours

The concept of division of labour is followed. Applied to countries based on their product specialization and

ability to produce more for less. By this process, resources are efficiently utilizes and the output of

both commodities will rise. As little interference with the economic system as possible. Free trade would lead to efficient use of resources and would

maximize world welfare.

CRITICISM:

This theory is not able to justify all aspects of international business. This theory leaves no scope of international business for those

countries that are having absolute advantage in all fields or for those countries that are having no absolute advantage in any field.


3. Comparative advantage theory / Ricardo’s theory of comparative advantage: Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries

The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare.

ASSUMPTIONS:

There are two commodities and two countries. There is a perfect competition both in commodity and factor

market. Labour is homogeneous. There is free trade. There is no technical change. Full employment exists in both countries. Transportation costs are ignored. Constant return on sale.

CRITICISMS: It is restricted to two countries and two commodities.

(Restrictive model). Value of goods is expressed in terms of labour content. (Labour

theory of value). Assumption of full employment. Transport costs are not considered in determining comparative

cost difference. (Ignored transport cost). The Ricardian theory concentrates on supply. (Demand is

ignored). Theory assumes mobility of factor of production is easy. Theory assumes free trade, which is unrealistic.

4. Product life cycle: Product life cycle theory divides the marketing of a

product into four stages: introduction, growth, maturity and decline.


When product life cycle is based on sales volume, introduction and growth often become one stage.

There are five stages in a product's life cycle:

Introduction Growths Maturity Saturation Decline

The location of production depends on the stage of the cycle.

Stage 1: Introduction

New products are introduced to meet local (i.e., national) needs, and new products are first exported to similar countries, countries with similar needs, preferences, and incomes. If we also presume similar evolutionary patterns for all countries, then products are introduced in the most advanced nations. (E.g., the IBM PCs were produced in the US and spread quickly throughout the industrialized countries.)

Stage 2: Growth

A copy product is produced elsewhere and introduced in the home country (and elsewhere) to capture growth in the home market. This moves production to other countries, usually on the basis of cost of production. (E.g., the clones of the early IBM PCs were not produced in the US.) The Period till the Maturity Stage is known as the Saturation Period.

Stage 3: Maturity

The industry contracts and concentrates—the lowest cost producer wins here. (E.g., the many clones of the PC are made almost entirely in lowest cost locations.)

Stage 4: Saturation

This is a period of stability. The sales of the product reach the peak and there is no further possibility to increase it. This stage is characterised by:

Saturation of sales (at the early part of this stage sales remain stable then it starts falling).


It continues till substitutes enter into the market. Marketer must try to develop new and alternative uses of product.

Stage 5: Decline

Poor countries constitute the only markets for the product. Therefore almost all declining products are produced in developing countries. (E.g., PCs are a very poor example here, mainly because there is weak demand for computers in developing countries. A better example is textiles.)

CRITICISM: Difficult to determine the phase. He used the product side of the product life cycle, not the

consumer side.

5. National competitive advantage:

Factor Conditions

A country creates its own important factors such as skilled resources and technological base.

The stock of factors at a given time is less important than the extent that they are upgraded and deployed.

Local disadvantages in factors of production force innovation. Adverse conditions such as labour shortages or scarce raw materials


http://en.wikipedia.org/wiki/Developing_countries

force firms to develop new methods, and this innovation often leads to a national comparative advantage.

Porter's Diamond of National Advantage

Firm Strategy,Structure,

and Rivalry

FactorConditions

DemandConditions

Related andSupportingIndustries

Demand Conditions


When the market for a particular product is larger locally than in foreign markets, the local firms devote more attention to that product than do foreign firms, leading to a competitive advantage when the local firms begin exporting the product.

A more demanding local market leads to national advantage.

A strong, trend-setting local market helps local firms anticipate global trends.

Related and Supporting Industries

When local supporting industries are competitive, firms enjoy more cost effective and innovative inputs.

This effect is strengthened when the suppliers themselves are strong global competitors.

Firm Strategy, Structure, and Rivalry

Local conditions affect firm strategy. For example, German companies tend to be hierarchical. Italian companies tend to be smaller and are run more like extended families. Such strategy and structure helps to determine in which types of industries a nation's firms will excel.

In Porter's Five Forces model, low rivalry made an industry attractive. While at a single point in time a firm prefers less rivalry, over the long run more local rivalry is better since it puts pressure on firms to innovate and improve. In fact, high local rivalry results in less global rivalry.

Local rivalry forces firms to move beyond basic advantages that the home country may enjoy, such as low factor costs.

6. Factor proportion theory: (HO Model):According to Heckscher and Ogling theory a country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance.

ASSUMPTIONS:


http://www.quickmba.com/strategy/porter.shtml

Both countries have identical production technology. Production output is assumed to exhibit constant returns to scale. The technologies used to produce the two commodities differ. There is free trade. Full employment exists in both countries. Transportation costs are ignored. Constant return on sale. All production functions are homogenous. Two countries differ in factors intensity.

CRITISISMS: Two countries, two commodities no transport cost etc all these

assumptions makes theory unrealistic. Ohlin’s theory is not free from constraints. (Restrictive). Supply plays a significant role than demand. (One-sided theory). The theory is static in nature. The theory has ignored the consumers demand. Other factors like technology, technique, of production, natural

factors etc has been ignored.

REFERENCE:1. GHOUSIA KHATOON, SANTHOSH KUMAR A. V,S.K.

POODER VISION BOOK HOUSE PUBLISHERS2. SOME CONCEPTS FROM INTERNET AND MY OWN

KNOWLEDGE


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business.docx · Web viewINTRODUCTION TO INTERNATIONAL BUSINESS. ... prices which help them to capture and dominate the world market. ... in economic development of the