Definitions of Financial terms

8/14/2019 Definitions of Financial terms

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Definitions, Scopes, Objective and Importance of international business?

Ans

Definition - International business is define as any commercial transaction taking place

across the boundary lines of a sovereign entity. It may take place either between twocountries or companies or both. These transactions includes investments, the physicalmovement of goods and services, transfer of technology and manufacturing.

1) Introduction to International Business

It is the process of:

- Focusing on the resources of the globe.

- Objectives of the organizations on global business opportunities andthreats.

This process gives you the opportunity of transacting in the international

business.

Even without visiting or knowing the country of the company we can get the

products from different countries at our door steps.

It is a Business term used to collectively describe all commercial transactions(private and governmental, sales, investments, logistics, and transportation)

that take place between two or more nations. Thus, International Business is the Business transactions crossing national

borders at any stage of the transaction .

2) Scope of International Business

International business seeks to identify, classify and interpret the similarities and

dissimilarities among the systems used to anticipate demand and market

products. The system presents inter country comparison and intercontinental


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comparison/comparative analysis helps the management to evaluate the

markets, finances, human resources, consumers etc. of various countries. The

comparative study also helps the management to evaluate the market potentials

of various countries. The study also indicates the degree of consumer

acceptance of the product, product changes and developments in different

countries. Managements of international business houses can

group the countries with similar features and design the same products, fix

similar price and formulate the same marketing strategies. For example, Prentice

Hall grouped India, Nepal, Pakistan Bangladesh, Sri Lanka etc. into one category

based on the customers ability to pay and designed the same quality product

and sell them at the same price in all these countries. Similarly, Dr. Reddys Lab

does the same for its products to selling the African countries.

3) Objectives

To understand the impact of International business on the Economy as the

whole. To know the meaning of international business.

To know Indias position with respect of International business. To find the future prospects for the Indian market in International business.

To appreciate the opportunities and challenges offered by international

business.

Importance Of International business :-1. Interdependence

2. Development of country

3. Global capital flow

4. Earn foreign- exchange


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5. Generate Employment

6. Optimum utilization of resources

7. Development of service sector

8. Development of Ancillary industry

9. Research and Development

10.Incentives

11. Increase in standard of living

Q. 2) fundamental difference between Domestic Business and International Business

Dimension Domestic Business International Business

1. Environment The economic, political, legal,socio-cultural, competitive &technology environment areknown hence one can take thenecessary precautions.

The environment is not fullyknown innumerable hiddenfactors which may emerge at anytime to pose problems.

2. Plan &Strategy

Plan & Strategies can beworked out for short terms &carried forward to long term.

Only long term planning &strategy will work. Strategic inputsare required in multiples.

3. Competition The maximum domesticcompetitive forces operate &one can understand their movement.

International competitive forcesplay vital role & it is very difficultto understand their motive &movement.

4. Currency Local currency is used for transactions. Costing, pricing ,revenue &margins arecomputed in a single currency.Volatility may have a minimumimpact in business in shortterm.

Transactions are carried out invarious currencies. Fluctuationsin cross currency movement &associated risks are commoncurrency fluctuation influencespricing & costing & investmentdecisions.


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5. Businessrisks

Comparatively one can predictfuture risks & shocks & they willnot have a major impact on the

business houses.

Very difficult to predict & risksmay crop up at any time, due tothe political situation, the society

itself or other unknown factors.

6. Research It is reasonable & easy toconduct business research,demand analysis & customer survey. It is also reliable for business ventures.

Very expensive & difficult toconduct. Reliability criteriadepends on individual countries &there is no uniformity in theoutput.

7 . Human

Resource

Due to past laurels &

established systems corporatecan succeed even if the humanresources have minimum skills&knowledge.

Multilingual, multi-strategic

&multi-cultural human resourcesare necessary &they should beable to withstand large risks.

8.Organisationalvision &Objective

Narrowed down to work in asingle country with a steadygrowth objective. Each one willunderstand the vision &objective very quickly.

Broadened to cover manycountries & geographic & culturaldiversity may influence the vision& objective.

9. Productdevelopment

Adapted to the localenvironment, as per therequirement of domesticcustomers affordability, beliefs,values & cultural elements .

Varies from country to countrysubject to the regulations of thehost country. This is especiallytrue for consumer medicinalitems.

10. Legalaspects

Only local regulations are fullyapplicable to conduct business

.there is minimum adherence tointernational regulation relatedto IPR.

International regulations &hostcountry regulations are applicable

. Advanced countries imposestrict regulation compared toLDCs.

11.Investment Depending on the size of thebusiness one can start with aminimum investment.

All overseas operations expectexports, call for huge investmentsto set up & expand the business


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Involvement of regulatorybodies is minimal.

in many countries. Specialregulatory bodies are involved inthe process since foreigncurrency is transacted

12. Pricing

A majority of companies usecost plus margin pricing or competitive pricing.

Companies use marginal costpricing or transfer pricing or transfer pricing or competitivepricing to succeed.

13. Distribution the business house can use its

discretion to select any channelto reach the customer

The Distribution channel is

governed by the government or market practice. Cash & carry ,shopping malls & mail order services are becoming popular ininternational business

14. Promotion Advertising , personal selling &other promotional method arenot restricted through strict legalframe work if they are notsocially objectionable

Different countries have differentrestrictions . For e.g..Advertisement for liquor &cigarettes are not permitted insome countries & campaigns

using female models are bannedin others

15. Logistics Domestic players are involvedin all the activities.

International players withadvanced technology & systemare involved


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Reasons for international business :- Reasons to enter in international business may

differ from individual companys prospective and the government prospectiveFrom an individual companys :-

1. Geographical Expansion :- as a growth strategy all companies do their geographical expansion but even if companies expand their business at home (i.e.Domestic business) they may look overseas for new markets. Also due to liberalization,privatization and globalization almost all the countries are having open door policies toglobal competitors so there are every chance of many global players will enter indomestic market. So there is a possibility of losing domestic market share so they try togo global.

2. Managing product life cycle :- All companies have products that passes throughdifferent stages of their life cycles. After product reaches its decline stage the companyhas to look for untapped market for the managing its PLC. So its important for thecompanies to identify other countries where whole life cycle of the product can berepeated.

3. corporate ambitions :- each and every company has his own ambitions aboutmarket share, sales turnover, gross and net profit. To fulfillment of those ambitionscompanies look to expand their market by going global.

4. building a corporate image :- Building a corporate image is fist objectives of manycompanies, many companies prefer to create a image as a multinational company andfor creating this image they go global.

5. Labor advantages : - availability of manpower is one of the reasons to establish their business in other countries. The labor available may be chip labor or skilled labor or


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highly productive labor, according to the need of company they identify their desirecountries and expand their business in that country.

6. Cost advantage : - some countries are having low manufacturing cost advantages,due to various reasons as availability of raw materials, low cost labor, cheap land,

government policies such as SEZs, AEZs and others.

7. new business opportunities :- many companies enters in a new country after seeing new business opportunities .

8. Technological advantage : - some companies have a technological advantage astheir core competencies; there is a need for such technology all over the world,exploding this they have enters in a market in other countries.

Form a government perspective:

1. Earning valuable foreign exchange: Foreign exchange is necessary to balance thepayments for imports crude oil, defense equipment, essential raw material, and medicalequipment, the payment for which must be made in foreign exchange. If the export ishigh and import is low this indicates a surplus balance of payment. On the other hand, if import is high and export is low, this indicates an adverse balance of payment, which alleconomies would want to avoid. A vast majority of the nations in the world are facing anadverse balance of payment.

2. Independency of Nations : From time immemorial, nations have depended on eachother . Even during the era of Indus valley civiliasation , Egypt and the Indus valleydependent on each other for various items. Today, India depends on the gulf region for crude oil and in turn ,the gulf region depends on India for tea , rice and other suchcommodities . Developed countries depends on developing countries for value addedfinished products. No single country is endowed with all the resources to survive on it.

3. Trade theories and their impact : The theories of absolute advantage, comparativeadvantage, and competitive advantage, which have been propounded by classicaleconomist, indicate that the few nation have certain advantages with respect toresources. The resources may be in the form of labour, infrastructure, technology andeven a proactive government policy .

4. Diplomatic relations : Diplomacy and trade always go hand in hand. Many sovereignnations send their diplomatic representative to the other countries with the intent topromote trade in addition to maintaining cordial relations. Indian enbasies and highcommission in all countries around the world play a catalytic role of promoting trade andinvestment.


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5. Core competency of nations : many countries are endowed with resources , whichare produced at an optimal level . such countries can compete anywhere in the world.Rubber product from Malaysia , rice from Thailand etc. Compete with a focusedcompetency in any major resources or technology gives core competency status.

6. Investment for infrastructure : Over the years , all countries invested huge amountof money on infrastructure by building airports , seaports, economic zones and inlandcontainer terminals. If the trade activity do not increase, the country can recover theamount invested . Hence government fixes targets for every infrastructure unit,as wellas a time frame to achieve it.

7. National image : A new era emerged from conquering countries by sword to winningthem by trade. A businessman gives priority to the image of the countries he belongsto.We come across products with labels such as Made in India etc.

8. Foreign trade policy and targets : All developing countries announce their tradepolicies. A clear road map is drafted and given to promotional bodies so that timelyimplication is possible. All the trade policies had a threefold set of objectives their agenda: production, promotion and competitiveness.

9. National targets: By the year 2010, India aims to have a 2% share of global marketfrom the current level of 1%. By the year 2009-2010, our trade status should have cross$500billion.

Q 4. Different modes of entryAns:-

1. Exports :- exports deals with the physical movement of goods and services fromone place to another through a customs ports, following the rules of both thecountry of origin and the destination country.

2. Franchising :- Franchising is a form of licensing where in the franchisor exercise

more control over the franchisee. The franchisor supplies the main part of product, and provides following services to the franchisee:

1. Trademarks

2. Operating systems


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3. Product

4. Brand name

Company support systems such as advertising, training employees, and quality

assurance are also involved in franchising. McDonalds, Dairy Queen, Dominospizza and KFC are well known franchisee brands. NIIT and Aptech haveappointed franchisees in Africa, southeast Asia, Gulf countries and China.

3. International Licencing: International licencing is an agreement between thelicencor and the lincensee over a period of time for use of the brand name,marketing, know how, copyright, work method, and trademark by paying alicense fee. For Example, The British American tobacco Company(BATS) hasgiven license in many countries for manufacture of their brand of cigarettes 555In India ITC is licensed producer of 555 Pepsi cola provided a license to

Heinken of Netherlands giving them the exclusive rights to produce and sellPepsi cola in Netherlands.

4. Contract manufacturing: Many companies outsource their products andconcentrate mainly on marketing operations. Contract manufacturing is thestrategy of identifying a manufacturing unit to produce items at a competitiveprice in any part of the world. Nike is procuring its athletic footware in a no of factories in south east Asia. Mega toys is sourcing from china . Hundreads of international companies with their origin in European countries have selectedmanufacturing centers in India.

5. Contract Marketing: Not all of the companies that are in production have equalmarketing strengths. However, they may be comfortable dealing with marketingoutlets around the world, such as TESCO, Macys, K Mart, Wal Mart, andspinneys. Such manufacturing units enter into a marketing agreement andconcentrate on production on lower costs. Thermax, ION exchange, andsupreme Industries have selected marketing firm in other countries that have agood background in technological support.

6. Management Contracts: Companies with lowlevel of technology and managerialexpertise may seek the assistance of foreign countries. A management contractis an agreement between two companies whereby one company providesmanagerial & technical assistance for which proper monetary compensation isgiven, either as a flat lump sum fee, a percentage of sale, or a share in profits.EX. Delta airlines, Air France, and KLM offer such services in developingcountries.


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7. Collaboration: While a joint venture deals with the complete project in financialterms and with proportionate partnership commitments, a collaboration dealsonly with some of functions. For example Bajaj Auto has technologicalcollaboration with Kawasaki of Japan, who offers the technology of two wheelers.Other well known technological collaborations are Ind-Suzuki, Kinetic-Honda andHero- Honda.

8. Forign Direct Investment: Foreign direct investment (FDI) is the direct ownershipof facilities in the target country. It involves the transfer of resources includingcapital, technology, and personnel. Direct foreign investment may be madethrough the acquisition of an existing entity or the establishment of a newenterprise. Direct ownership provides a high degree of control in the operationsand the ability to better know the consumers and competitive environment.However, it requires a high level of resources and a high degree of commitment.China, Taiwan, India, Brazil, Argentina and other developing countries havestarted attracting huge foreign investment.

9. Mergers and Acquisition: In this case, the company in the host country selects aforeign company and merges itself with it. The foreign country acquires control of ownership. This mode of entry provides an outstanding competitive advantageover others. Such companies strengthen their international manufacturingfacilities and marketing networks. EX. Proctor & gamble entered Mexico andbecame a leader in five year s by acquiring Loreto.

1.It is complex task involving Banks, lawyers, Bureaucrats, and politicians.

2. The host countries may impose restrictions on acquisition.

3.The labour problem is big challenge to acquisition, especially in developingcountries where unemployment is a critical issue.

The global steel king L.N. Mittal was successful right from the first acquisition of steel mill in Indonasia.

10.Take Overs: This is a strategy whereby a company identifies a healthy unit with astrong brand name and network and brigs it under the management of another unit in order to become a leader in the field and guarantee success. Since theymay be many parties wanting to take over a well known company, competition

becomes inevitable. It is obviously one has to win and other has to withstandhostilities. Therefore process is called hostile takeover & winner is calledtakeover tycoon. Well known examples are Hindujas who took over AshokLeyland & Unilever who took over Brook Bond & Lipton.

11. Joint Ventures: Joint ventures involve shared ownership in a subsidiary company.A joint venture allows a firm to take an investment position in a foreign locationwithout taking on the complete responsibility for the foreign investment. Joint


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ventures can take many forms. For example, there can be two partners or more,partners can share equally or have varying stakes, partners can come from theprivate sector or the public, partners can be silent or active, partners can be localor international. The decisions on what to share, how much to share, with whomto share, and how long to share are all important to the success of a joint

venture. Many joint ventures fail because partners have not agreed on their objectives and find it difficult to work out conflicts. Joint ventures provide aneffective international entry when partners are complementary, but firms need tobe thorough in their preparation for a joint venture. There are five commonobjectives in a joint venture: market entry, risk/reward sharing, technologysharing and joint product development, and conforming to governmentregulations. Other benefits include political connections and distribution channelaccess that may depend on relationships. Ex. Hence a joint venture is nothingbut marriage between two partners from different background withunderstanding, commitment, and mutuality rewarding experience to worktogether. Ex. M&M merged with Renault.

12. turnkey Projects :- A turnkey projects is a contract under which company is fullyinvolved from concept to completion. It covers every thin from supply of manpower andcapital , the erection of plant to completion as well as installation and commissioning, totrial operations of projects. And then they handover the keys of projects to other

company.13. counter Trade :- Counter Trade can be classified as

1. Pure Barter product to product

2. Buy Back end product from host partner

3. Counter Purchase exchange of goods in various countries


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Definitions of Financial terms