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International BusinessInternational BusinessPaper Code: 2208/50808
- By Amit Seth- By Amit Seth
International BusinessInternational BusinessPaper Code: 2208/50808
- By Amit Seth- By Amit Seth
Meaning of International Marketing
Definition adopted by AMA (American Marketing Association) “International marketing is the multifunctional process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational objectives.”
Examples:• Two businessmen of small village• Korean Country example• Example of Arvind Mills
Marketing of• Concept
Birth ControlPolio EradicationSwan Flue EradicationReligion
• Product should be in accordance to local needs
Scope of International Business
• Example of TV industry, Inspite of 30% growth, how LG & Samsung grown
• Same with Refrigerators – Kelvinator lost the business, Voltas an Godrej are also on loosing grounds.
• Six out of the 100 largest US MNC’s made more than 100% of the total profits from outside the U.S. 40 of them earned more than half of the total profits from the foreign markets.
• Economic barriers are either withdrawn or relaxed.
• Welcome to foreign investments.• Transfer of technologies are allowed.Infosys Chairman-Mr. Narayan Murthy says
“Marketing is nothing but to manufacture goods/services where the cost is low and sell/trade it to the place/countries where you get the better realization.”
Examples of• Multinational Corporations (MNC’s)-Nokia,
Sony, L.G. Samsung, General Electric, General Motors, KFC’s Macdonald,
• Indian MNC’s- TATA, Hero, ICICI, Aditya Birla Group, Infosys, Wipro & Ranbaxy
Benefits of International Business
Survival
• Collaborate, trade with others where you are weak.
Growth of Overseas markets
• Even American markets can not ignore the vast potential of international markets, The world market is more than four times larger than U.S. market.
Sales & Profits
• IBM and Compaq sell more computers abroad that at U.S.
• Coca Cola, International sales account 80% of the firm operating profits.
Diversification
• Demand for the most products affected by cyclical factors, seasonal / climatic factors. Foreign markets are solution for variable Markets
Employment
Foreign ownership can provide benefits, more investments, more employment, profits are redeployed.
Inflation & Price Moderation
• Lack of imported products forces consumer to pay more.
• Trade restrictions depress, price competition in the short run; but they can adversly affect demand for years to come
MNC’s are big by
• Sizes• Structure (Singer selling Machines in 181 countries)
• Performance (Parker pen 80% sales from overseas)
• Behavior (Example of Bridge Stone Tyres)
Recent global trends in International trade &
Finances• Moving from protected economy to cross-border
trade and investment; by distance, time zones, and language; and by national differences in Government regulation, culture and business system.
• Present purchasing/consumption trends of any individual.
• It is a world where more than $1.2 billion in foreign exchange transactions are made every day, where $ 8.88 trillion of goods and $ 2.10 trillion of services were sold across national borders in 2004.
• Regulatory and administrative barriers to doing business in foreign nations have come down.
• Globalization has created new threats for businesses accustomed to dominating their domestic markets. Foreign companies have entered many formerly protected industries in developing nations, increasing competition and driving down prices.
• The emergence of global institutions like GATT, WTO, IMF
• Declining trade and investment barriers• The role of technological change-Microprocessors
& telecommunication, The internet and worldwide web
• Transportation Technology• Implications for the globalization of production
Country Share of world output 1963
Share of World Output 2004
Share of World Exports 2004
United States 40.3% 20.9% 10.4%
Germany 9.7% 4.3% 9.5%
France 6.3% 3.1% 4.8%
United Kingdom
6.5% 3.1% 4.8%
Japan 5.5% 6.9% 5.7%
Italy 3.4% 2.9% 3.8%
Canada 3.0% 3.5% 3.4%
China NA 13.2% 5.9%
The changing pattern of World Output & Trade
• Changing trends of investment:– U.S. firms accounted for 66.3% of worldwide
foreign direct investment flows in the 1960’s. British firms were second, accounting for 10.5%, while Japanese firms were a distant eighth , with only 2%
– Beginning in the 1970’s, European and Japanese firms began to shift labor-intensive manufacturing operations from their home markets to developing nations where labor costs were lower.
– The total investment accounted for by U.S. firms declined from about 38% in 1980 to 30% in 2003.
• The average yearly outflow of FDI increased from $25 billion in 1975 to a record $1.2 trillion in 2000, before falling back to an estimated $620 billion in 2004.
• The most notable decline was in the levels of cross-border mergers and acquisitions, which have been major drivers of global FDI flows since the 1980’s.
• The slowdown in FDI flows observed in 2001-2004 probably will be temporary. It appears to reflect three developments:
1. The general slowdown in the growth rate of the world economy.
2. The heightened geographical uncertainty following Sep 11, 2001 attack on U.S.
3. The bursting of the Stock Market bubble in U.S., which limited the ability of many companies to raise additional capital to finance aggressive FDI activity, particularly mergers and acquisitions
Global IntegrationRestraining Forces
• Culture• Market Differences• Costs• National Controls• Nationalism• War• Management Myopia• Organization History• Domestic Forces
Driving Forces
• Technology• Culture• Market Needs• Cost• Free Markets• Economic Integration• Peace• Management Vision• Strategic Intent• Global Strategy & Action
Dimensions and modes of IB
• There are three major objectives that induces any company for International business:– To expand sales– To acquire resources– To minimize risk
• Globalization an attitude of mind-it is a mind-set which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment.
• Globalization encompasses the following:– Doing or Planning to expand business globally– Giving up the distinction between the domestic
market and foreign market and developing a global outlook of the business.
– Locating the production and other physical facilities on a consideration of the global business dynamics.
– Product development and production planning on the global market considerations.
– Global sourcing i.e. raw materials, components, machinery, technology, finance etc. are obtained from the best source anywhere in the world.
– Global orientation of organizational structure and management culture.
• Example: Global vision of Arvind Mills-
– Source Raw materials wherever they are cheapest.
– Manufacture wherever in the world is most cost effective
– Sell in those global markets where prices are highest
– Raise finances globally.– Forge international strategic alliances.– To manage all these, take on the best
talent from all over the world.
• Modes of International Business1. Trading2. Manufacturing and Marketing3. Sourcing and Marketing4. Global sourcing for production5. Services6. Investments
Structure of IB environment
Corruption
Technological Pirating
Language, Caste, Religion, Culture, Literacy level
Govt rules, laws and taxation
International Code of Conduct (WTO)
International Economic Environment
• Hundreds of cases of market failures emanating from the failure to properly understand the market characteristics and their implications for marketing and the resultant ill conceived marketing efforts.
• The outstanding marketer is keenly aware of the variations from one market to another. He never thinks solely in terms of ‘The common market’, he knows that countries, and even sections of countries, differ enormously in almost every factor critical to his market planning .
• P&G stormed into Japanese Market with American sales methods and promotion strategies.. The result was disastrous until company learned how to adapt products and marketing style to japanese culture. Entered in Japan in 1973 lost money untill 1987 but by 1991 Japan became its second largest foreign market.
• American Company Texas Instruments which started making semi-conductors in Japan in 1961 took an American approach to hiring , pay and benefits, dismissing the japanese system of offering bonuses two times a year as impractical. Workers disagreed. Morale crumbled and the company had trouble recruiting employees. Later when the company adopted the Japanese methods of recruiting and reward including bonuses and a promotion system based on seniority, the satisfaction vastly changed and in 1985 vit won Deming prize for quality control, in Japan.
• ‘The Borderless World’ Keichi Ohmae- “When global success rests on market-by-market functional strength, you have to play a series of domestic games against well defined competitors. You have to become true insider in the market. If the market requires a first class sales force, you have to have one. If competition turns on dealer support programs, that’s where you have to excel. Some occasions do exist when doing more better is the right, the necessary course to follow, still there are usually opportunities to redefine these domestic games to your own advantage.”
Economic System• Market Allocation
– Relies on consumers to allocate resources– Market system is an economic democracy– The role of the state in a market economy is to
promote competition and ensure consumer protection.– Delivering the goods and services that people need
and want.
• Command Allocation– The state has broad powers to serve the public
interest.– Consumers are free to spend their money on what is
available, but decisions about what is produced ,what is available are made by state planners
• Demand exceeds supply, the elements of marketing mix are not used as strategic variables
Mixed System• In Sweden 64% of all expenditures are
controlled by government, the economic system is more ‘command’ than ‘market’. The reverse is true in the united states. Similarly, farmers in most socialist countries were traditionally permitted to offer part of their production in a free market. China has given considerable freedom to business and individuals. Still, China’s private sector constitutes only 1 to 2% of national output.
Economic Environment• More than three-forth of the total number of over 200
nations of the world are developing countries, inhabited by about 80% of the world population.
• Of the 211 economies listed by the World Development Report, 1999/2000, 54 were high income economies and all the remaining were developing countries.
• Developing countries fall into two categories, low income countries and middle income countries. The developed countries are high income countries.
• Within the group of the low income economies, the United Nations has identified a special category, namely least developed countries, most of whom suffer from one or more constraints, whereby there is low per capita income, land locked, remote insularity, desertification and exposure to natural disasters
• Low cost models without the frills may be appropriate for markets with low income; but high value item has significant market also as the quantity of high income countries are higher even than the total combined sales of developed countries.
Social EnvironmentEncompassing• Religious aspects• Language• Customs• Traditions• Beliefs• Tastes• Preferences
• Social Satisfaction• Social Institutions• Buying habits
• Failure of number of companies in foreign markets is their failure to understand the cultural environment of these markets and to suitably formulate their business strategy.
• Companies modify their products & strategies to suit the tastes and preferences or other
• In Thailand, Helene Curtis switched to black shampoo because Thai woman felt that it made their hair look glossier.
• Nestle today brews a large number of varieties of instant coffee to satisfy different national tastes.
• Even when people of different cultures use the same basic product, the mode of consumption, conditions of use or the perceptions of the product attributes may vary so much so that the product attributes method of presentation, positioning, or method of promoting the product may have to be varied to suit the characteristics of different markets
• Language problem sometimes necessitating a change in the brand name. Chevrolet’s brand name Nova in Spanish means ‘’ It does not go”. In Japanese 3M’s slogan “Sticks like crazy” translates as “sticks foolishly”. In some languages, Pepsi-Cola’s slogan “Come Alive” translates as “Come out of grave”
• The values and beliefs associated with colour vary significantly between different cultures. Blue, considered feminine and warm in Holland, is regarded as masculine and cold in Sweden. Green is a favourite colour in the Muslim world; but in Malaysia, it is associated with illness. White indicates death and mourning in China, Korea and In India; but in some countries it express happiness and is the colour of the bridal dress.
• Social inertia and associated factors come in the way of the promotion of certain products, services or ideas. We come across such social stigmas in the marketing of family planning ideas, use of bio-gas for cooking etc.
• Number of other demographic factors, such as the age and sex composition of population, family size, habitat, religion, etc. which influence the business.
• Societal responsibilities are getting different.• Literacy level makes a difference.• Proportion of working woman makes difference. The
rise in the number of double income households increases the demand for a number of products like house hold appliances, electronic gadgets, packaged food products etc.
Demographic Environment• Demographic factors which have very
significant implications in any business– Size of the population– Population growth rates– Age composition– Family size– Nature of the family– Income level etc
• According to the World Development Report 1996, there were 58 countries with a a population of less than million while India has several multi-million cities.
• Advance countries with large population are attractive & potential markets; but competition is also strong in them.
• High income nations, poses threats to some business. Decline in the birth rates, prompted some companies to reposition their products.
• However declining birth rate has been boon to certain industries such as hotels, airlines and restaurants as couples have more time and income for travel and dining out.
• When the population is very large, even if the country is generally poor, there could be a sizable market even for those goods and services which are regarded luxuries in these countries.
• High Population implies:– Enormous increase in the labour supply, availability of
cheap labour encouraged many MNCs to invest and relocate their plants in developing countries.
• If the labour is highly heterogeneous in respect of language, religion and caste,
• personnel management is likely to become more complex task.
Political & Govt. Environment• Political environment includes:
– The characteristics and policies of the political parties, – the nature of the constitution and government system– Government environment encompassing the
economic and business policies and regulations are among the factors of utmost importance in the market selection and business strategy formulation.
– Several countries which are making rapid economic progress and having liberal policies toward foreign capital and technology, is not very democratic. Procedures are simpler and decisions are quicker.
• Public sector played significant role in many non-communist, particularly the developing countries, In India too before 1991, 17 of the most important industries were exclusively reserved for the public sector.
• The industrial policy of India which wanted the Public Sector to gain control over the commanding heights of the economy limited the scope of the private enterprise, both domestic and foreign.
• Even after the policy liberalization in India the foreign equity participation is restricted to 51%
• More than 8500 state owned enterprise in over 80 countries were privatized in the 12 years
• Hostilities between some countries affect business of firms.
• Some countries also demand a certificate of origin of the imports to the country.
• Many governments specify standards for products to be marketed in the country. Marketing of certain products are even banned in some countries. Policy or regulations regarding quality control and inspection vary considerably between the nations.
• In most of the countries, product promotion is subject to various types of control.
Technological Environment
• In a fast changing environment, Adoption of new technologies provide basis for product/services with better features.
• Labour abundant countries have a preference for labour intensive technology.
• The time lags in the introduction of technologies may even result in some products not being able to reap the market.
• Many companies in advanced countries have considered the developing countries as a market for their obsolete technology. Several developing countries even import second hand plant and machinery.
• The concept of appropriate technology became popular in the developing world. Intermediate technology, which often means a technology which combines elements of traditional technology, gained importance in the developing countries.
• The sophisticated capital intensive technologies in use in the developed countries are not acceptable in some sectors in the several developing countries
Risk in IB• Culture• Market Differences• Costs• National Controls• Nationalism• War• Management Myopia• Organization History• Domestic Forces
Motives of International Business
• Market-Seeking Motives– Marketing opportunities due to life
cycles– Uniqueness of product or services
• Economic Motives– Profitability– Achieving economies of scale– Spreading R&D costs
• Strategic Motives– Growth– Risk Spread
Organizational Structure
• Organizational Structure can be thought of in terms of three dimensions
1. Vertical Differentiation2. Horizontal Differentiation3. Integrating Mechanism
Organization of Export Department• Organizational structure is determined by factors
– Extent of the commitment– Nature of its international business– Size of International business & Expansion plans
Small Business House
Separate Export Department
PRISIDENTCentral cell
International DivisionVice President
DomesticVice President
Planning and Finance Staff
ForeignSubsidiary2President
ForeignSubsidiary 3President
ForeignSubsidiary 1President
International DivisionStructure
Global Product Structure President
Central Staff
President Product Group 1
President Product Group 2
President Product Group 3
DomesticPresident
Foreign Subsidiary 1President
Foreign Subsidiary 2President
Foreign Subsidiary 3President
Global Geographic Structure President
Central Staff
Area 1 President
Area 2 President
Area 3 President
World Trading System• Two objective
1. To review a number of theories that explain why it is beneficial for a country to engage in International Trade.
2. The pattern of International trade that we observe in world economy, with regard to pattern of trade, primarily exports and imports of goods and services between countries.
• INTERNATIONAL TRADE THEORY: Why do countries export and import the sort of
products they do and at what relative prices or terms of trade?
How are these trade flows related to the characteristics of a country and how do they effect domestic factor prices?
What are the gains from trade and how they divided among trading countries?
The basis of trade Difference in prices are the basic cause of trade and
reflect international differences in costs. Some things must be cheaper to produce at home and
will be exported to other countries, some things must be cheaper to produce abroad and will be imported from other countries.
• Comparative Advantage Natural-Nature plays significant differences between
countries. Some of them are rich in minerals, others are in petroleum; some have huge waterfalls, others have futile plains.
Some countries have populations large enough to man and support great complex industries, but others are so very under populated that their land can not even be cultivated or ores can be extracted.
Skills- Some nations have large numbers of factory workers adept at handling modern machinery. Others have abundance of engineers and scientists and specialize new, research laden products.
Infrastructure-Natural resources, labour force and skill manpower can be advantage for any nation; but at the same time you can not ignore the importance of infrastructure one country has. Like-Roads, airports, harbors, dams, transports, power etc.
• Mercantilism:– The first theory of international trade emerged in
England in the mid-16th century. Referred to as mercantilism.
– Its principal assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time, gold and silver were the currency of trade between countries; a country could earn gold and silver by exporting goods. By the same time, importing goods from other countries would result in outflow of gold and silver to those countries. The main tenet of mercantilism was that it was in country’s best interest to maintain a trade surplus, to export more than it imported.
• Absolute Advantage: In 1976, Adam Smith in his book The Wealth
of Nations , attacked the mercantilist assumption that trade is a zero-sum game. Smith argued that countries differ in their ability to produce goods efficiently in his time.
According to Smith, countries should specialize in the production of goods for which they have an absolute advantage, and than trade these for goods produced by other countries. In Smith’s time, this suggested that the English should specialize in the production of textiles while the French should specialize in the production of wine.
• Inventions & Innovations
• Automation
• Out sourcing
• Cost Reduction
• Mass Production
• Comparative Advantage: David Recardo in his 1817 book Principles of
Political Economy, showed that Comparative Advantage makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it could produce more efficiently & has a comparative advantage in cost.
• Product Life-Cycle Theory: Vernon’s theory (mid-1960s) was based on the
observation that for most of the 20th century a very large proportion of the world,s new products had been developed by U.S. firms and sold first in the U.S market.
• Just because a new product is developed by a U.s. firm and first sold in the U.S. market, it does not follow that the product must be produced in the United States. It could be produced abroad at some low-cost location and then exported back into the United States.
• New Trade Theory Emerged in 1970s, theory suggests that Trade
allows a nation to specialize in the production of certain products, attaining scale economies and lowering the costs of producing these products, while buying products that it does not produce from other nations that specialize in the production of other products.
First-mover has an advantage of garnering higher volumes thus resulting in economies of scale.
National Competitive Advantage: In 1990 Michael Porter of the Harvard
Business School through his research paper attempted to determine why some nations succeed and others fail in international competition .
Why does Japan do so well in the automobile industry? Why does Switzerland excel in in the production and export of precision instruments and pharmaceuticals?
• Porter theorizes that four broad attributes of a nation shape the environment in which local firms, compete, and these attributes promote or impede the creation of competitive advantage– Factor Endowments-A nation’s position in
factors of production such as skilled labour or the infrastructure necessary to compete in a given industry.
– Demand conditions- the nature of home demand for the industry’s product or service.
Firm Strategy, Structure and Rivalry
Factor Endowments
Demand Conditions
Related & Supporting Industries
• Relating and supporting industries- the presence or absence of supplier industries and related industries that are internationally competitive.
• Firm strategy, structure and rivalry- the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry
GATT/WTO and Trade Liberalization
• The desire of the nations to liberalize trade resulted in the establishment of the General Agreement on Tariffs and Trade (GATT)
• GATT was formed in 1948• It may be noted that as a result of the
Uruguay Round the GATT was transformed into a World Trade Organization (WTO) with effect from Jan 1995.
• WTO have enlarged role than the GATT.
• India is one of the founder members of the IMF, World Bank, GATT, and the WTO
• The primary objective of GATT was to expand international trade by liberalizing trade so as to bring about all-round economic prosperity. Important objective:1. Raising Standard of living2. Ensuring full employment, and a large and
steadily growing volume of real income and effective demand.
3. Developing full use of the resources of the world
4. Expansion of production and international trade.
• The rules or conventions of GATT required that:1. Any proposed change in the tariff, or other
type of commercial policy of a member country should not be undertaken without consultation of other parties to the agreement, and
2. That the countries that adhere to the GATT should work towards the reduction of tariffs and other barriers to international trade, which should be negotiated within the framework of GATT.
• For the realization of its objectives, GATT adopted the following principles:1. Non-discrimination2. Prohibition of Quantitative Restrictions3. Consultation
• When the GATT was signed in 1947 only 23 nations were party to it. It increased to 99 by the time of the Seventh Round and 117 countries participated in the next i.e. the Uruguay Round in July 1995 there were 128 signatories.
• Period 1950-73 is conspicuous by the splendid results. This period witnessed the highest average annual growth.
• The progressive liberalization of trade, suffered a setback since 1974, Although the elimination of tariff barriers continued, even the developed countries substantially increased non-tariff since then.
• The growing NTBs have been severely effecting the exports of developing countries. Ironically , the developed countries are increasing the protectionism when the developing countries are liberalizing. This is indeed a sad commentary on the GATT.
The Uruguay Round• GATT conducted multilateral trade negotiations (8th
round), known as Uruguay Round, in Sept 1986.• Because of the complexities of issues, conflict of
interests among the participating countries, the Uruguay round could not be concluded in Dec 1990
• Redefined Act embodying the result of last Uruguay round, popularly known as the Dunkel draft, was passed by the member countries of the GATT on 15th Dec1993. This final Act was signed by ministers of
• 125 governments on 15th April1994.
WTO• Following the UR Agreement, GATT was
converted from a provisional agreement into formal international organization called World Trade Organization (WTO) with effect from Jan 1995
• Ministerial conference was scheduled one in two years and its regular business will be overseen by a General Council.
• As per old GATT , Even if any country violates the norms, they may continue with their domestic legislation. WTO ruled our this provision of GATT.
Difference between GATT & WTOGATT
• GATT is Ad hoc & provisional
• GATT had contracting parties
• GATT system allowed existing domestic legislation to continue even if it violated
• Under GATT, dispute settlement system was slow and less efficient
WTO
• WTO and its agreements are permanent
• WTO has members
• WTO does not permit this
• WTO is more powerful than GATT, Dispute settlement mechanism is faster and more efficient, very difficult to block the rulings
• The WTO has the following five specific functions1. The WTO shall facilitate the implementation,
administration and operation and further the objectives of the multilateral Trade Agreements.
2. Provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the Agreements.
3. The WTO shall administer the ‘Understanding of rules and procedures governing the settlement of disputes.
4. The WTO shall administer the ‘Trade Review Mechanism’
5. With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate, as appropriate, with the IMF and WB and its affiliated agencies.
• The General Council will serve four main functions:
1. To supervise on a regular basis the operations of the revised agreements and ministerial declarations relating to (a) goods, (b) services and (c) TRIPs
2. To act as Dispute Settlement Body3. To serve as a Trade Review Mechanism; and 4. To establish Goods Council, Services Council
and TRIPs Council, as a subsidiary bodies.
TRIMS• Trade related Investment measures (TRIMS) refers to
certain conditions imposed by Govts. In respect of foreign investment in the country. TRIMs were widely employed by developing countries .
1. Local content requirement (i.e. a certain amount of local inputs be used in products)
2. Trade balancing requirement (import shall not exceed a certain proportion of exports)
3. Trade and foreign exchange balancing requirements4. Domestic sales requirements (a company shall sell a certain
proportion of its output locally)
The Agreements requires a notification of all WTO-inconsistent TRIMs and their phasing out within two, five and seven years by industrial, developing and least developed countries respectively.
TRIPS• One of the most controversial outcomes of the
UR is the Agreement on Trade Related Aspects of Intellectual Property Rights including Trade in Counterfeit Goods (TRIPS). Intellectual Property Rights may be defined as “ information with a commercial value”
1. Copyright and related rights2. Trade mark3. Geographical indications4. Industrial designs5. Patents6. Layout designs of integrated circuits7. Undisclosed information
The WTO Impact
GATT/GATS TRIMS TRIPS
Liberalization of trade in goods & services
Liberalization of international investments
Provides monopoly power to owners of intellectual property
Increase competition from foreign goods/services
Facilities global sourcing
Opportunity for Indian firms to export
Increase foreign investment and competition from foreign firms
Facilities joint ventures and technology acquisition
Facilities foreign investment by Indian firms
Threat to domestic firms
Benefits consumer
Increase competitiveness of domestic firms
Threat to domestic firms
Benefits the company
Benefits domestic firms
Encourages globalization of Indian Firms
Exchange Rate System• The foreign exchange market is a market
for converting the currency of one country into that of another country. An exchange rate is simply the rate at which one currency is converted into another.
• Functions of the Foreign Exchange Market:– Currency conversion & speculation– Insuring against Foreign Exchange Risk
• The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.
• A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Exchange rates governing such future transactions are referred to as forward exchange rates.
– Currency Swaps- A Currency Swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. Swaps are transacted between international businesses and their banks between banks and between Governments when it is desirable to move of one currency into another for a limited period without incurring foreign exchange risk.
• The nature of the foreign Exchange market– The foreign exchange market is not located in any
one place, it is global network of banks, brokers, and foreign exchange dealers connected by electronic communication systems. When companies wish to convert currencies, they typically go through their own banks rather than entering the market directly.
– London’s dominate in the foreign exchange market is due to both history and geography. As the world’s first major industrial trading nation. London had became the world’s largest center for international banking by the end of the 19th century, a position it has retained
• Two feature of the foreign exchange market are of particular note:
1. That the market never sleeps. Tokyo, London and New York are all shut for only 3 hours out of every 24. During these three hours, trading continues in a number of minor centers, particularly San Francisco and Sydney, Australia.
2. The integration of the various trading centers. High-speed computer linkages between trading centers around the globe have efficiently created a single market. The integration of financial centers implies there can be no significant differences in exchange rates quoted in the trading centers.
• Important role played by the U.S dollar, the dollar is a currency vehicle. In 2004, 89 percent of all foreign exchange transactions involved dollars. After the dollar, the most important currency is Euro and then Japanese Yen.
• Exchange Rate Determination– Exchange rates are determined by the demand and
supply of one currency relative to the demand and supply of another.
– The forces that determine exchange rates are complex, and no theoretical consensus exists, even among academic economists who study the phenomenon every day.
– Price and Exchange Rates• The Law of one price states that in competitive
markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.
– The purchasing power parity (PPP) exchange rate could be found from any individual set of prices. By comparing the prices of identical products in different currencies.
• Money Supply and Price Inflation: A country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. If we can predict what a country’s future inflation rate is likely to be, we can predict how the value of its currency relative to other currencies-its exchange rate-is likely to change.
• Interest Rates and Exchange Rates: Economic Theory tells us that interest rates reflect expectations about likely future inflation rates. In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money.
Global Financial System• Foreign Direct Investment• Offshore Banking• Essentials of Trade FinancesForeign Direct Investment:• Financial Resources are crucial, time bound
and critical. If they are not available at the rite time from anywhere, the probable results are bankruptcy and a decline or loss of status, whether it is nation, a company or an individual.
• When a firm invests directly in facilities in a foreign country, it is considered FDI
• Factors influencing FDI are related to increasing business opportunities across national borders and their involvement could be in the following functional areas:– Production– Marketing/services– Research & Development– Raw materials or other resources
Characteristics of FDI: FDI is an activity by which an investor, who is a resident in one country, obtains a lasting interest in and is a significant influence on, the management of an entity in another country. This may involve:
• Either creating an entirely new enterprise-Greenfield investment or
• Changing the ownership of existing enterprises via mergers and acquisitions
• Other financial transactions like reinvesting the earnings of the FDI, Capital transfers etc
Investment Patterns• Follow Competitors• International Product Life Cycle• Location• Contract manufactures• Assured return on investment
Benefits & Costs of FDI• Capital• Technology• Market Access• Increase in domestic investment• Export promotion• Generating Employment• Infrastructure• Social Effects• Formation of clusters• Spin offs
• More than two thousand multinationals from USA and Europe have invested in China EPZ & EPZ.
• Indonesia, Thailand, the Philippines and Malaysia have now become attractive destinations
• The reputation of such destination depends on their ability to attract investments through their policies and hassle-free industrial climates.
• Strategies for Foreign Investors to invest in India
1. A foreign investor may directly set up operations in India through a branch office, a representative office, a liaison office, or a project office to carry out business.
2. A foreign investor may set up its operation through an Indian arm.
3. A foreign investor may invest in business units in Special Economic Zones (SEZs) and Export Oriented Units (EOUs).
• Strategies for Indian companies to raise funds1. Foreign Investment through
• GDRs (Global Depository Receipts)• ADRs ( American Depository Receipts)• FCCBs (Foreign Currency Convertible bonds)
• Offshore Banking: The purpose of off-shore banking is to provide international business firms funds at a cheaper cost, at the right place, and at the right time.
• All over the world, the business community is in search of locations where their investments are safe, and from which the funds can be taken out without any restrictions and invested comfortably for any ventures in any part of the world.
• Since 2003, the Govt. of India has permitted banks to set up offshore banking operations in Special Economic Zones. Hence, the system of offshore banking has become an integral part of international business.
• Establishment of offshore Banking Units: The origins of offshore banking units can be traced to the growth of financial activity in “tax haven” is a place where non-residents can receive income or own assets without paying high taxes. Some such places include the Bahamas, Bermuda, Honk Kong, the Netherlands, Panama and Switzerland.
• Some Features of these tax heavens:1. Low rate or complete absence of income tax.2. High degree of economical and political stability.3. Strict and well-enforced rules of banking secrecy4. Absence of exchange control5. Availability of efficient communication and
transportation network6. Well developed legal system & professional accounting
expertise7. Confidence of investors due to past credentials.8. No incidence of violence or criminal activities.
• Essentials of Trade Finance • Types of Exchange Rates:
– Ready to Cash: Refers to the transaction to be settled on the same day.
– Tom: Refers to the transaction where the delivery of foreign currency is to be done on the next day.
– Spot: Refers to a transaction where the delivery of foreign currency is to be done on the second working day (day after tomorrow) from the date of contract
– Forward: Refers to a transaction where the delivery of foreign currency is to take place on a date than the spot date
– Cross Rates: If the quotation for a particular currency is not available, we can obtain through the rate of that currency, which is available.
– Value Date: The date on which payment, delivery of funds, or entry into an account becomes effective.
• Some Terminologies:– NRI-Non Resident Indians– PIO Persons of Indian Origin– Corresponding Banking
• Nostro Account: “Our account with you”• Vostro Account: “Your account with us”• Mirror Account: These are dummy accounts
maintained by banks to know the actual position of their accounts with foreign correspondent banks.
• Escrow account: These accounts are maintained by citizens outside of the country, or by citizens residing outside the country whose accounts are maintained in the parent country.
• Letter of Credit: is an undertaking by a bank to make a payment to a named beneficiary within specified time against the presentation of documents that comply strictly with the terms of letter of credit.
• Its main advantage is that it provides security to both exporter and the importer. The security offered, however, comes at a price and must be weighted against the additional costs resulting from the bank.
Issuing Bank
Importer (Applicant)
Advising/ Confirming Bank
Exporter (Beneficiary)
Underlying Contract
• Types of Letter of Credit– Recoverable– Unrecoverable– Unconfirmed– Confirmed– Standby letter of credit– Revolving letter of credit– Transferable letter of credit
• Checklist for preparing documents:– Amount payable/Credit defined– Shipment– Draft– Bill of Lading– Insurance Document Invoices– Certificate of origin– Airway bill or Air Consignment note– Forwarding Agent’s receipt.
Barriers to IB• A trade barrier is defined as “any hurdle or
impediment or road block that hampers the smooth flow of goods, services, and payments from one destination to another.”
• They arise from the rules and regulations governing trade, either from the home country or the host country, or intermediary.
• Trade barriers are mandate obstacles to the free movement of goods between different countries.
• The contribution of the GATT in removing such trade barriers has not been satisfactory.
• Objective of Trade Barriers:1. To protect domestic industries from foreign
goods.2. To promote new industries and research and
development activities by providing a home market for domestic industries.
3. To maintain a favourable balance of payment, by restricting imports from foreign countries.
4. To conserve the foreign exchange reserve of the country by restricting imports from foreign countries.
5. T protect the national economy from dumping by other countries with surplus production.
6. To mobilize additional revenues by imposing heavy duties on imports.
7. To counteract trade barriers imposed by other countries.
• Types of Trade Barriers:1. Tariff Barriers2. Non-tariff barriers
Tariff Barriers: The term tariff refers to the duties imposed on internationally traded commodities when they cross national boundaries and may be in the form of heavy taxes or custom duties on imports, so as to discourage their entry into the home country.
– Tariff rates are generally high in the developing countries. With the recent economic liberalization across the world, many developing countries have reduced the tariff rates and NTBs as part of their trade liberalization.
– India has had one of the highest tariff walls in the world, the govt. following the recommendation of the Tax Reforms Committee (Chellaiah Committee) steadily reduced the peak level of tariff structure in line with those of other developing countries.
• Non-tariff Barriers: Non tariff barriers (NTBs) are described as new protectionism measures (as against tariffs which are regarded as traditional barriers) . The export growth of many developing countries has been seriously affected by the NTBs.– Types of NTBs : The NTBs are of two categories
1. These are mostly traditional NTB such as import licensing, import quotas, foreign exchange regulations and cancellation of exports. These are generally used by developing countries to prevent foreign exchange outflows.
2. One of the most important new protectionism measures under this category is the voluntary export restraint (VER). Mostly used by developed economies to protect domestic industries which have lost international competitiveness.
• Hardcore NTBs– Import prohibitions– Quantitative restrictions– Voluntary export restrains (VERs)– Variable levies– Multi fiber arrangement (MFA) restriction– Technical barriers ( including health and safety
restrictions and standards)
– Minimum pricing regulations (for example, for
countervailing and antidumping purposes) and price surveillance
• Important NTBs are:– Quotas
– Licensing: Possession of import license is necessary to obtain the foreign exchange to pay for the imports. Exports of certain products may also be regulated by licensing.
– Voluntary Export Restrains:• Are bilateral arrangements instituted to restrain
the rapid growth of exports of specific manufactured goods
Tariff Quota
Unilateral Quota
Bilateral Quota
Mixing Quota
• Under the VERs, the exporting country voluntarily restrains the export of the specified product in order to either help the country to reduce its trade deficit or to protect domestic industry (of the importing country). VERs are adopted under pressure from the importing country.
• Administered Protection:– Safeguards– Health Standards– Customs procedure– Consular formalities– Government Procurement– Monetary controls– State Trading– Environmental Protection law
• Impact of NTBs– NTBs are not confined to the labour intensive
products where the developing countries have an advantage but also cover sophisticated products.
– Developing countries like Japan, S. Korea exports are also significantly affected . The NTBs tend to offset favourable effects of the GATT/WTO negotiations on trade liberalizations like the reductions in the average levels of tariffs.
– NTBs also cause diversion of production and exports. For example, some Indians textile and apparel firms decided to set up manufacturing facilities in Nepal in order to circumvent MFA quota controls on their exports from India
International business information and Communication
• International Business Information• Market Segmentation
– Refers to identifying distinct groups of consumers whose purchasing behaviour differs from others in important ways, market can be segmented in important ways:
• Geographically• Demographically (Sex, Age, Income, Caste , Education)• Social Cultural factors (Social Class, values, life style)• Psychological factors
• Product Attributes
• Cultural Differences• Economic Development• Product & Technical Standards• Distribution Strategy
• Communication 1. Direct Selling2. Sales Promotion3. Advertising4. Public Relations5. Direct Marketing
• Barriers to International Communication– Cultural Barriers Due to cultural differences, a message that means
one thing in one country may mean something quite different in another. Example: when Proctor & Gamble promoted its Camay Soap in Japan in the n
Foreign Market Entry Strategies
• Basic Entry Decisions: There are three basic decisions that a firm contemplating foreign expansion must make:
1. Which markets to enter?– Profit potential– Economic & political factor– Balancing the benefits, costs and risk
associated– Size of the market– Purchasing power of consumers in that market– Economic growth rate– Product suitability/value offering
2. When to enter those markets3. And on what scale?
First mover advantage
Timing of EntryImplication
sResources
Scale Economies
Market Entry Strategies• Mode of entering the foreign market
1. Company may do the complete manufacturing of the product domestically and export it to the foreign market.
2. Complete manufacturing of the product to be marketed in the foreign market there itself.
• Govt policies makes difference in decision making :– Some Govt may not be interested for foreign
investment.– Several Govt have a definite preference for joint
ventures over complete foreign ownership– Govt may prefer foreign investment leading to
import substitution to perpetual import of product
• Licensing & Franchising• Involve minimal commitment of resources and effort
on the part of the international marketer.
– Licensing- Under international licensing, a firm in one country (the licensor) permits a firm in another country (the licensee) to use its intellectual property (such as patents, trade marks, copyrights, technology, technical know-how, marketing skill or some other specific skill)
– The monetary benefits to the licensor is the royalty or fees, royalties are regulated by the government; it does not exceed five percent of the sales in many developing countries
• Franchising is “A form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner.– Using the name– Production and marketing technique– General business approach– Supplying an important ingredient/composition mix– Major forms
• Manufacturer –retailer systems (such as automobile dealership)• Manufacturer-wholesaler systems (such as soft drink companies)• Service firm-retailer system (such as lodging services and fast food
outlets)
– Examples-IFB Washing Machine-Bosch of Germany ,GE to a small scale unit in India for the manufacture of high intensity discharge (HID)
– NIKE License to Sierra Industrial Enterprise
• Benefits of Licensing/Franchising– It requires neither capital investment nor knowledge
and marketing strength in the foreign markets.– Royalty income, it provides an opportunity to exploit
research and development– Licensing will help to avoid host country regulations
that are more prevalent in equity venture– Employed as a preemptive strategy against
competitors by combing the foreign markets before the competitors could enter
– Great advantage of entering the market with a proven product /technology or marketing intangible without having to run the risk of R&D failures.
• Important risk of licensing– The licensee would become a competitor after the
expiry of the licensing agreement
• Exporting• Exporting is the appropriate strategy when one or
more of the following conditions prevail:1. The volume of business is not large enough to justify
production in the foreign market.2. Cost of production in the foreign market is high3. Whenever there is production bottlenecks like infrastructural
problems, material supplies in the foreign markets.4. There are political or other risks of investment in the foreign
country.5. There is no guarantee of the market available for a long
period6. Foreign investment is not favoured by the foreign country
concerned.7. Licensing or contract manufacturing is not a better
alternative.
• Contract Manufacturing• Under the Contract Manufacturing, a company
doing international marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product.
• Contract Manufacturing has the following advantages:1. The company does not have to commit resources for
setting up production facilities.2. It frees the company from the risks of investing in
foreign countries.3. To utilize the idle capacity lying in foreign countries.4. Cost of the product obtained by contract manufacturing
is lower.
5. If the business does not pick up sufficiently, dropping is easy: but if the company had established its own production facilities , the exit would be difficult.
6. Enable the international firm to enlist national support.
• Disadvantages 1. Loss of potential profits from manufacturing2. Less control of manufacturing process.3. Risk of developing potential competitors.4. Not be suitable for high-tech products.
• Management Contracting• In a management contract the supplier brings
together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership.
• Management contracting is a low-risk method of getting into foreign market
• Additional benefits for the managing company. It may obtain the business of exporting or selling otherwise of the products of the managed company.
• Enables a firm to commercialize existing know-how that has been built up with significant investments
– They can provide organizational skills not available locally, expertise that is immediately available rather than built up.
• Disadvantages– The arrangement is not sensible if the company can
put its scarce management talent to better use, or if there are greater profits to be made by undertaking whole venture.
– Risk from the point of view of the client is over-dependence and loss of control
• Turnkey Contracts• A turnkey operation is an agreement by the
seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller. The term is sometimes used in fast-food franchising when a franchiser agrees to select a store site, build the store, equip it, train the franchisee and employees and sometimes arrange for the financing.
• Fully Owned Manufacturing Facilities
– It is simply not possible to maintain substantial market standing in an important area unless one has a physical presence as a producer.
– Wholly owned manufacturing facility has several disadvantages too
• Cost of production is very high• Restrictions regarding the types of technology• Non-availability of skilled labour• Production bottlenecks due to infrastructural
problems• Separate production unit may be economical
• Assembly Operations• To establish overseas assembly
facilities in selected markets, In a sense the establishment of an assembly operation represents a cross between exporting and overseas manufacturing.
• Very ideal when there are economies of scale in the manufacture of parts and components and when assembly operations are labour intensive and labour is cheap in the foreign country.
• Joint Ventures• There are many diverse types of joint overseas
operations:1. Sharing of ownership and management in an enterprise
2. Licensing / Franchising agreements
3. Contract Manufacturing
4. Management Contracts
• The essential feature of a joint ownership venture is that the ownership and management are shared between a foreign firm and a local firm.
• In countries where fully foreign owned firms are not allowed or favoured, joint venture is the alternative if the international marketer is interested in establishing an enterprise in the foreign market.
• Permits a firm with limited resources to enter more foreign markets than might be possible under a policy of forming wholly owned subsidiaries.
• It is also possible to swap know-how (such as patent rights for equity)
• The local partner would be in a better position to deal with the government and the publics. Further, there would not be much public hostility when there is a local partner.
• Partner can serve as a cultural bridge between the manufacturer and the market.
• Since the liberalization of 1991, more than four thousand joint ventures were entered into between Indian companies and transnational.
• Disadvantage: Some joint ventures are very successful, some face problems from the very beginning and in case of some others problems develop after a period of mutual benefit and success.
• A Mckinsey world wide study of more than 200 alliances has shown that the median life span of them is so only seven years and in more than 80 percent of the cases , it ends in one partner selling out to the other.
Third Country Location• Third country location is some times as an entry
strategy. When there is no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base.
• Taiwanese entered China through South Korea
Merger and Acquisitions
• It provides instant access to markets and distribution network.
• The General Electric, (GE), USA, took over Hungary’s light bulb maker Tungsram. Instead of starting a ‘greenfield’ operations in Hungary by building a new factory and hiring the people needed. Tungsram gave GE entry to the East European light bulb market, from which it had been virtually excluded by Philips and Osram.
• Another important objective of M& A is to obtain access to new technology or a patent right.
• Disadvantages- Sometimes the cost of acquisition may be unrealistically high.
• It has also been observed that the takeover spree lands several companies in trouble.
Strategic Alliance• The goals are to leverage critical capabilities,
Increase the flow of innovation and increase flexibility in responding to market and technological changes.
• Strategic Alliance is also sometimes used as a market entry strategy. Strategic alliances which enable companies to increase resource productivity and profitability by avoiding unnecessary fragmentation of resources and duplication of investment and effort are growing in popularity.
• Example: Tata with Zaguar, Izusu motor with Fuji Heavy Industries. Tata Tea with Tetly
Country Evaluation and Selection
• The global market made up of well over 200 independent nations with their own distinctive characteristics.
• Points for consideration– Barriers– Profitability– Political climate– Resources availability– Market Potential– Management Vision
Determine International Marketing Objectives
Determine parameters for market selection
Preliminary Screening
Detail investigation & short listing
Evaluation & Selection
Selection Procedure
• Parameters for screening– May vary from product to product– Size of Population– Per Capita income– Structure of the Economy– Infrastructural factors– Political conditions– Market surveys– Statistical information
• Short listing of Markets– Distill out number of markets which are likely to
satisfy the company’s criteria – Detailed analysis– Ranking them– Final Selection
Determinants of Market Selection1. Firm-related factors
• To sell out marginal extra surplus• Or wants to export a very large quantity• Growth Objective• International business expansion through making
other country as a hub• Company resources comprising financial, human,
technological and managerial factors• The dynamism and philosophy of the top
management• Company’s influence and power relations
2. Market related Factors• Economic Factors; Economic Stability, GDP growth
trends, income distribution, per capita income, sectoral distribution, nature and trends in foreign trade and Bop, indebtness
– Economic Policy: industrial policy, foreign investment policy, commercial policy, monetary policy, fiscal policy and other economic policies.
– Business Regulations: Regulations of business like industrial licensing; restriction on growths, takeovers, mergers etc, restrictions on foreign remittances, tax laws, import restrictions, export obligations
– Currency Stability– Political Factors– Ethnic Factors– Infrastructure– Bureaucracy and Procedures– Market Hub
Factors affecting foreign investment decisions
Foreign Investment
Foreign Direct Investment
Portfolio Investment
Wholly owned
subsidiary
Joint Venture
Acquisition
Investment by FII
Investment in GDRs,
ADRs, FCCBs etc
• For analytical convenience, foreign investment are categorized into three clusters, each of them reflecting the principal motivations of investing in foreign countries:
1.Resources: – Exploitation of natural resources
• Low cost/skilled manpower• Raw materials• Infrastructure
2.Markets– Market access– Import Substitutions– The lion’s share of FDI flow to the developing
countries goes to the larger markets with comparatively good infrastructure and political stability in general
• The growing importance of the service sector has also been resulting in increasing FDI because of the fact that most services are not tradable. However the highly regulated nature of the service sector has been a deterrent to the FDI flow in its full potential.
3. Efficiency: – Low cost of production– Cheap labour– Export Processing zone
• Other factors– Political environment– Government policies– Bureaucratic culture– Social climate
• Recent declining trend/factors– Stock market sentiments– Terrorist attacks– Slow down in the world economy, more
than a dozen countries-including the world’s three largest economies fell into recession
Impact of FDI on home and host countries
• The impact of FDI on Home:
Benefits for Home Country1. Inward flow of earnings on a long term basis.2. High Salaries for employees.3. Exposure to the foreign market.
Cost for the Home Country1. Balance of Payment
• The capital account of the balance of payments suffers from the initial capital outflow required to finance the FDI.
• If the purpose of the foreign investment is to serve the home market from low-cost production location.
• If the FDI is a substitute for direct exports. 1.Employment effects
– The most serious concerns arise when FDI is seen as a substitute for domestic production.
• Initial Capital outflow is extremely large.• Exports may decrease.• Imports may increase if FDI is intend to serve the
home country.• Profits are repatriated abroad. They may not stay
in the country for reinvestment.• Major tax havens will enjoy the money at the cost
of home country.
• Impact of the Host CountryThe benefits of FDI
– Resource Transfer• Capital• Technology• Management Resources
– Market Access– Export Promotion– Employment Generation
Costs for the Host Country– The investing companies may not serve the host
country’s interests.– There is an outflow of earnings as they are
repatriated to their home country.– There is an import of substantial inputs from the
investor’s country
– Companies will hire expatriate managers for management positions
– The investing country has controlling technologies, for which it charges a huge technology fee.
– FDI may even wipe out local firms, Infant industries and other home industries may suffer if they cannot compete. Home-country producers do not have money power or the technology to withstand on the onslaught of investors.
Assignment-PresentationsGroup
Leader Topic
1. Anchal Love Thy Neighbor- Will it work with China? Date 10th Feb
2. Sachin Offshore business- The LG miracle Date: 9th Feb
3. Himani Khatri
World Steel King LNM by Acquisition Date 8th Feb
4. Paras India-Pakistan: What can we do? Date: 6th Feb
5. Vandana Can we regain the glory of being called as ‘Golden-bird’? Date: 9th Feb
6. Ridhima Making India a world Leader Date: 8th Feb 2010
Types and Motives for foreign Collaboration
External Influences
• Physical and Societal Factors
• Competitive Environment
Operations
• Objectives
• Strategy• MEANS
1. MODES
2. FUCTIONS
3. OVERLAYING ALTERNATIVES
Production Ownership
ProductionHome Country
LocationForeign Country
Equity Arrangement
Exporting 1. Wholly Owned Operations
2. Partially owned3. Joint Ventures4. Equity Alliance
Non-equity Arrangement
1. Licensing2. Franchising3. Management
Contracts4. Turnkey
Operations
Objectives of International Business
• Sales Expansion
• Resource Acquisition
• Risk Management
Motives for Collaborative Arrangements
General
• Spread and reduce cost
• Specialize in competencies
• Avoid or counter competition
•Secure vertical & Horizontal Links
• Learn from other companies
Motives for Collaborative Arrangements
Specific to I.B.
•Gain location-specific assets
•Overcome legal constraints
•Diversify geographically
•Minimize exposure in risky environments
Types of Collaborative Arrangements
• The forms of foreign operations differ in the amount of resources a company commits to foreign operations and the proportion of the resources located at home rather than abroad.
• Decision to take on ownership stake in foreign production-Licensing, learning about environment will be slow, delaying (perhaps permanently) your reaping the full profits about producing and selling your product abroad.
• When company find difficult to duplicate resources, technology, low-production viability, squeezed or saturated market and compete it is better to go for collaborative arrangements
• Some consideration in collaborative arrangements:
1. Control: The more a company depends on collaborative arrangements, the more likely it is to lose control over decisions regarding
• Quality• New Products• Directions• Expand outputOther risk• Profit sharing• Information pilferage• Loss of control over flexibility• Policy decisions
• Expansion of both the company may get restricted
Types of collaboration:1. Licensing2. Franchising3. Management Contract4. Turnkey operations5. Joint ventures6. Strategic Alliance7. Merger & Acquisition8. Assembling Operations9. Third Location10. Exports11. Owned Manufacturing unit
Problems of Collaborative Arrangements
• The major strains on collaborative arrangements are due to five factors:
1. Collaboration’s Importance to Partners2. Differing Objectives3. Control Problems4. Partners’ Contributions and Appropriations5. Differences in culture
•America
•Profit
•Market Share
•Financial benefits
•Japan
•Strategic Position
•Improving its skills
•European
•Balance between profitability and achieving Social objectives
• Managing Foreign Arrangements:– Dynamics of Collaborative Arrangements
• Opportunity to learn from the local partner enable a company to enter another market at higher level of commitment
• A team approach to evaluate critical decisions and performances are concerned.
• To get better synergies as link between their partners and their own operations.
• Finding Compatible Partners• Negotiating Process• Contractual Provisions• Performance Assessment
Assignments-PresentationsGroup
Leader Topic
1. Ankit India’s affordability of tie-ups in Service Sector? Dt.11th Feb 2010
2. Pooja ‘FDI & Collaborations’, Is it bane or boon for Indian Economy? Dt. 15th Feb 2010
3. Chanchal Crumbling Collaborations and its safeguards ?
Control Mechanism in IB
• Various factors influence how much control a company needs at different stages of internationalization.
• Level of Importance– The organization structure or its reporting system
should change over time as the company’s increased involvement in foreign activities.
– The more important the foreign operations, the higher in the organizational structure they report.
• Changes in Competencies– The larger the total foreign operations, the more
likely that head-quarters has specialized staff with international expertise. The larger the operations in a given country, the more likely that country unit has specialized staff.
• Changes in Operating Forms– The use of multiple operating forms such as
exporting, licensing, and joint ventures, and the move from one to another may create the need to change areas of responsibility in the organization.
– A further consideration is how important the non equity operation is to the company’s overall operations.
Control Mechanism• Corporate Culture
– People trained at headquarters are more likely to think like headquarter personnel.
– Need to transfer employees from operations in one country to operations in another to gain competitive advantage.
• Coordinating Methods– Rather than changing overall structure, many
companies are finding mechanisms to pull product, function, and area together.
– Some of the mechanism:• Developing teams with members from different
countries• Strengthening corporate staffs• Using more management rotations• Keeping international and domestic personnel in closer
proximity to each other• Establishing liaisons among subsidiaries.• Team participation comprising members of other
countries to work on special projects of cross-national issues.
• Credit for co-operative efforts and helping other subsidiaries.
• Participation through competitive feelings & reward system
• Reports – Essential for overseas operations– Timely– Responsive attitude
Types of Report:– Should be similar to that of applicable in domestic
so as to ensure• To be more effective and useful• Serve economies as duplicate mechanism of reporting
is eliminated• Reports with similar formats are easier to be
compared.
• Visits to subsidiaries – May alleviate misunderstandings– Offers advice, information and mind boggling
sessions
• Management Performance Evaluation– Basis of evaluating overseas manager performance
should have different criteria than the one applicable for domestic manager.
– Pre-defined budgets and targets are better criteria for evaluation.
• Cost and Accounting Comparability– Needs to use considerable discretion in interpreting
the data related to cost & accounting.
• Evaluating Measurement– Since conditions and circumstances vary between
countries and hence evaluation should be on number of indicators rather relying too heavily on one, such as
• Budget compared with profit• Target compared with the sales value achieved• Market share increase & Quality control• Employee relationship & Liaison with Government
• Information System– Management may require certain information to
plan, take action, and share to improve performance. This might include:
• Cash balance & needs• External conditions-like political and economic
conditions.• R&D initiatives and breakthrough• Information which is of mutual benefit and learning• Regarding stakeholders and tax authorities.
• Control in Special Situation– Acquisition– Shared Ownership– Change in Strategies
Western Europe• Western Europe, which is physically less than
the size of Australia.• Prominent Countries: Switzerland, Channel
Iceland, Germany, Gibraltar, etc.• Generated nearly 32% of Global Income in 2000.• This region has 23 countries.• Total Population approaching 460 millions• Most prosperous in the world, Average per
capita annual income in Portugal $10,797, which is 30% that of Switzerland that is $36,479 income is unevenly distributed in the region.
• Proportion of women between ages 26 and 34 in the labour force has doubled in past 30 to 40 years.
• European Currency unit (ECU)= “Euro”• The marketing Challenge is to develop
strategies to take advantage of opportunities in one of the largest most stable and wealthiest markets in the world.
Eastern & Central Europe • Eastern and Central Europe include the Balkan
Countries ( Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania, Slovenia and Yugoslavia), the Baltic Countries (Estonia, Latvia, and Lithuania), the Commonwealth of Independent States (The former USSR), the Czech and Slovak Republics, Hungary and Poland. In the early 1990s, extraordinary political and economic reforms swept the region and focused attention on more open markets with over 338 million persons.
• Represent attractive locations for low cost manufacturing and given their increasing wealth are important developing markets.
• Poland ($3,397 per capita GNP), Hungary ($4,429) Czech Republic ($4,957) and the Slovak Republic ($3,593), each adopted radical economic policies, which appear to have been quite successful, The per capita income of each of these four countries places them in the upper-middle income category.
• All former republics of the Soviet Union are still low-income countries.
• The Russian Federation accounted for only 1% of world GNP in 2000
• Marketing is undoubtedly a key to achieving the economic development of countries in Central and Eastern Europe
North America • North America includes The United States,
Canada and Mexico• The combined population of 407 million people
and GNP surpassing $9254 billion in this region are similar to that of EU.
• The U.S. market offers the combination of high per capita income, large population, vast space, and plentiful natural resources.
• American companies are the dominant producers in the beverage, computer, software, aerospace, entertainment, medical equipment and specialty retailing industries.
• In US there is close partnerships between Govt. and business which often hampers the marketing efforts of foreign suppliers.
• Export represent approximately over 30 percent of Canada’s GNP, more than those of any major industrial country..
• Canada takes about 22% of American exports and the United States buys nearly 80% of Canada’s export.
• Mexico is part of North America. Economically, Mexico is rapidly changing, Since the mid-1980s more than three quarters of Mexico’s state-owned companies have been privatized.
• The official languages of the region are English, Spanish and French. After English, the second language in the United States is Spanish and Canada it is French.
Asia- Pacific• Asia-Pacific region consists of all the countries of
Asia except of Middle East, Australia and New Zeeland. Asia Pacific consists of about 30 countries, with approximately 52 percent of the world’s population. However the region accounted for only 25% of Global Income in 2000.
• 58% of the region’s income was concentrated in Japan, which has only 5% of the region’s population. The four Economic Tigers of East Asia- South Korea, Taiwan , Singapore and Honk Kong-have forged the fastest industrial revolutions of the world has ever seen and now rank among the high-income nations of the world.
• Behind them are another four countries-Thailand, Malaysia, Indonesia and China
Question for case StudyQ1. WHICH KOREAN COMPANY THINKS THAT INDIA
AS A BETTER DESTINATION THAN CHINA?Q2. WHY INDIA IS BETTER DESTINATION:IT IS BIGGER MARKET FOR AUTOMOBILE THAN
CHINAINDIA PROVIDE MANUFACTURING AND SERVICE-LED
GROWTHCOMPUTERIZATION MAKES INDIA PREFERRED
DESTINATION. ALL THE ABOVE REASONS 1,2 & 3ONLY 2 & 3RDQ3. WHICH TWO AMERICAN BANKS ARE EARNING
MORE PROFITS IN INDIA THAN THEIR GLOBAL AVERAGE?
Q4. WHICH OF THE FOOD & BEVERAGE COMPANY IDENTIFIED, INDIA AS MOST PROFITABLE DESTINATION?
Q4. WHICH MOBILE COMPANY SURGING GROWTH IN SALES MADE INDIA THE THIRD BIGGEST MARKET FOR THEM.
Q5. BETWEEN 2000 AND 2005, ABOUT 58% OF FDI FROM ___________ FLOWED INTO AUTOMOBILE SECTOR IN INDIA.
Q6. ACCORDING TO ________ CHAMBER OF COMMERCE IN INDIA, THE MAJORITY OF ______ FIRMS IN INDIA REPORTED DOUBLE DIGIT GROWTH, YEAR TO YEAR.
Q7. INDIA’ VAST ___________ AND THE LARGE POOL _________________ WERE THE KEY ATTRACTION FOR FOREIGN INVESTORS.
Q8. IN SERVICE SECTORS WHICH WERE THE THREE LEAD PLAYERS BETWEEN 2000 AND 2006.
