International Finance

OVERVIEW OF INTERNATIONAL BUSINESS

International Finance

Learning Objectives

After completing this chapter, you should be able to understand:

What is International Business (IB)How Globalization impacts the economy on thebackdrop of IBInternational Bank for Reconstruction andDevelopment (IBRD) and its impactRole and Importance of World bankComponents of International BusinessContribution of International Finance


Structure

1.1 Introduction1.2 Introduction of International Business1.3 Growing Importance of International Business1.4 International Bank for Reconstruction and

Development (IBRD) and its impact1.5 Drivers of International Business1.6 Nature of International Finance1.7 Significance of International Finance1.8 Summary1.9 Self Assessment Questions


1.1 Introduction

One of the most significant trends in past two decadeshas been the rapid and sustained growth ofinternational business in the world;

markets have become truly global for- products,- services and- financial instruments

world trade has expanded at 6% p.a.markets are characterized by competitionmore companies are going international andtheir greater business is from overseas markets


1.1 Introduction


The opening of markets creates new geographical space for companiesto expand in and access tangible

and intangible resources. It also permits wider choice in the methods like trade, FDI, licensing,

sub-contracting, franchising and partneringto operate in different locations.

1.1 Introduction

Several companies from many countries are investingabroad through mergers and acquisitions (M&A), orthrough various forms of non-equity relationships.

The fragmentation and production processes acrossinternational borders are an important new trend fordeveloping economies. Global trade rules havefostered global production networks and anassociated rise in intra firm trade by progressivelylowering trade barriers.

Globalization


1.1 Introduction

Foreign capital has played a catalytic role in pushingpolicies in the right direction and controlling numberof resources to the development effort.

Globalization is praised for the new opportunities suchas

access to new marketstechnology transferincreased production andhigher living standards


1.1 Introduction


The success or failure of an organization is going to be more and more

dependent on

its ability to deal with dynamic global environment.

1.2 Introduction of International Business

International business is the process of focusing onthe resources of the world and objectives of theorganization on World business opportunities andthreats. The term emerged from what was earlierknown as export marketing.

A company that fails to go global is now in danger oflosing its domestic market to competitors with lowercosts, greater experience, better products, and in a nutshell more value to the customer.


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1.2 Introduction of International Business

International business can be defined as any businessactivity or transaction that transcends the nationalborder.But a firm importing a minor item not available locallyfor its manufacture of products for sale domesticallycan’t be said to be in international business.

Many seemingly domestic products are trulyinternational in the sense that several of the parts andcomponents which make up these products aremanufactured in different countries as a part of globalsourcing and production sharing.


1.3 Growing Importance of International Business

International Business derives its importance from:

Liberalization:

Universal economic policy liberalizations thatemerged after 1990s provided great impetus toborderless business world. GATT/WTO accountfor large share in international business, butsubstantial liberalization is occurring outsideGATT/WTO as well. (e.g. policy changes in China)The global trend can be best termed LPG –Liberalization, Privatization & Globalization.



Multinational Companies

These enterprises link their resources andobjectives with world market opportunities andhave been powerful force driving globalizationtargets.In 1997 there were 44500 MNCs and the figurewould be around 70K in 2007.

The MNCs leverage their strengths to link globalresources and opportunities and thereby strengthenthe globalization trend.



Technology Development

Technology has been a very important facilitatingfactor of globalization, with its raising costs andrisks, which makes it imperative for firms to tapworld markets and to share these costs andrisks. On the other hand falling transport andcommunications costs– the death of distance –have made it economical to integrate distantoperations and ship products and servicesacross the globe in search of efficiency.



Technology Development


Technology is a universal factor.

A hospital in the US performs the required diagnostics – an X-ray and assorted scans.

In the next three minutes a radiologist in Bengaluru, India receives the scanned images.

Immediatiately a report – teleradiology – is sent back to the hospital by the radiologist.

Total 20 minutes for the reportCost 30% lower in India than in the US


Transportation and Communication Revolution

The IT revolution has made an enormouscontribution to the emergence of the globalvillage. The microprocessor is responsible formany advances in telecommunicationstechnology. The development in satellite, opticalfiber, wireless technologies and internet andworld wide web (WWW) has been revolutionized.The power of microprocessors doubles and theircost is halved every 18 months. ( Moore’s Law)



Product Development Costs and Efforts

The cost of new product development is veryhuge in several industries such aspharmaceuticals. To recoup such high costs aninternational market is absolutely essential.Further, because of the huge investment anddiverse requirements of skill associated withnew product development, cross border alliancesin research and development are becomingmore and more popular.



Quality and Cost

The two most important determinants ofdemand are the quality and price of the offering.These are better achieved when thefirm/company is international in its operations.

Rising Aspirations and Wants

Due to increasing level of education andexposure to electronic media customers in eachnation wants a product that is world class.



Competition

Another factor for importance of internationalbusiness is increasing competition. Heightenedcompetition compels firms to explore new waysof increasing their efficiency, including byextending their international reach to newmarkets at an early stage, with new ownershipand contractual arrangements and new activitiesbeing located in new sites abroad.



World Economic Trends

One of the important trends is the difference inthe growth rates of the economies/markets. Thecomparative slow growth of the developedeconomies or the stagnation of some of theirmarkets and the fast growth of a number ofdeveloping countries, prompt firms of developedcountries to turn to the expanding markets,elsewhere.

The domestic economic growth and the outside opportunities reduce the opposition to international

business.



World Economic Trends



Regional Integration

The proliferation of regional integration schemes, likethe European Union (EC), North American Free TradeAgreement (NAFTA), SAARC, ASEAN, EEC, European FreeTrade Association (EFTA) etc. by creating a borderlessworld among the members of such trade blocs, fostersthe internationalization trend.

Many of these regional blocs also give a fillip to the crossborder investments and financial flows.

€ → ¥ → £ → $ → ` →

€ → ¥ → £ → $ → `OVERVIEW OF INTERNATIONAL BUSINESS


Development of Leverages

Leverage is simply some type of advantage thata company enjoys by virtue of the fact that itconducts business in more than one country.Any international company possesses fourimportant leverages

1. Experience transfer for expanding orstrengthening its international operations:

It can draw on management practices, strategies, products, advertising, appeals or sales or promotional ideas that have

been tested in actual markets and apply them in other comparable markets.




2. Scale economies:

The cost is one of the important determinants of success. Cost advantage, in many cases, derives out of scale

economies which can be procured by going after global market. Technological breakthroughs are substantially increasing the scale economies and the market scale

required to break even.

3. Resource utilization:International company can source resources internationally

with competence.




4. International strategy

A global strategy built on an information system that scans the world-business environment to identify

opportunities, trends, threats, and resources.

The international strategy is a design to create a winning offering on an international scale.



Achieve Higher Rate of Profit

When the domestic markets do not promise ahigher rate of profits, business firms search forforeign markets which promise higher rate ofreturns.

Expansion of Production

When companies find their production capacityexceeds domestic demand, they (Toyota Motors)are forced to sell in overseas markets and thusutilize the capacity.



Limited Home Market

When the domestic markets are small (due tosmall population or limited purchasing power)companies like Ciba-Geigy located in Switzerlandwith a population of six million or ITC selling highend cigarettes in India have to look for overseasmarkets to survive.

Ciba-Geigy had to concentrate on overseasmarkets and establish manufacturing facilities inforeign countries including India.



Political Stability

Political stability means both continuation of thesame party in power and continuation of thesame government policies for longer period.

Business community prefers to enter politicallystable countries for their business operationsand stay away from politically unstable countriesas much as possible.



Nearness to Raw Materials

The source of highly qualitative raw materials andbulk raw materials is a major factor for attractingthe companies from various foreign countries.

Most of the US based and Europe based companieslocated their manufacturing facilities in SaudiArabia, Qatar, Oman, Iran and other middle-eastcountries due to the availability of petroleum.



Quality of Human Resource Availability

Software, high technology and telecommunicationscompanies located their operations in India mainlybecause of availability of this resourceeconomically.

Imposition of Tariffs and Quotas

Tariffs and quotas are there in developing as well asdeveloped economies (for automobiles in the US).Companies therefore prefer to invest directly insuch countries through partnerships or Jointventures.


1.4 International Bank for Reconstruction and Development (IBRD)

The World Bank originated at Bretton WoodsConference in 1944. It consists of following fiveinstitutions that extended assistance to overdeveloping countries bringing a mix of finance andideas to improve living standards.

1. IBRD2. IDA (International Development Association)3. IFC (International Finance Corporation)4. MIGA(Multilateral Investment Guarantee Agency)5. ICSID (International Center for Settlement of

Investment disputes)



Mission and Role of World Bank

To fight poverty with passion and professionalismfor lasting results.To help people, help themselves and theirenvironment by providing resources, sharingknowledge, building capacity and forgingpartnerships in public and private sectors.To be excellent institution able to attract, excite,and nurture diverse and committed staff withexceptional skills who know how to listen and learn.



Mission and Role of World Bank – contd.

To assist in the reconstruction and development ofthe territories of the members, by facilitatinginvestment of capital for productive purposes,including the restoration of economies destroyed bywar, the reconversion of productive facilities topeace time needs and the encouragement of thedevelopment of the productive facilities andresources in less developed countries.




To promote private foreign investment by means ofguarantees or participation in loans and otherinvestments made by private parties, and whenprivate capital is not available on reasonable termsto supplement private investment by providing onsuitable conditions finance for productive purposesout of its own funds raised by it and otherresources.




To promote the long range balanced growth ofinternational trade and the maintenance ofequilibrium in the balance of payments byencouraging international investment of theproductive resources of the members, therebyassisting in raising productivity, the standards ofliving and conditions of labor in the territories.

To make sure of availability of funds in the market.




To provide funds to the borrowers at the possible

lowest cost through manipulating the currency mix

and opting the time when the interest rate in the

market is low.

To control volatility in net income and overall

charges of the loan.




To promote an appropriate degree of maturity

transformation between borrowings and lending.

It borrows in the international capital market both

on medium-term and long-term basis, on currency

swaps under the discount net programme.



Implications

Funds contribute directly to productive capacityprojects.

And indirectly promote local private enterprises.

Investments directly affect the well being of themasses of poor people of developing countries.



Implications- contd.

Energy development through oil and gas.

Contribution to a more sustainable balance ofpayments in the medium and long-term and to themaintenance of growth in the face of severeconstraints.

Support to high priority projects needed to restorecredit worthiness and growth.


1.5 Drivers of International Business

International business is not a new phenomenon.

But the volume of international trade and the numberof players in it have increased dramatically over thelast decade. Today every nation and an increasingnumber of companies buy and sell in the internationalmarketplace.

A number of developments around the world havehelped fuel this activity. Let us have look at importantkey drivers.



International Production & Operations Management

The globalization process with its borderless networkof operations has created a complex system ofmanufacturing and operations management that isindifferent to where goods are manufactured, whereservices are offered and where these goods andservices are distributed.

China today is the manufacturing center of the worldand India its information technology hub.



International Production & Operations Management

As international companies seek cost advantages tocompete successfully in the international marketplace,they constantly look for countries that have lower inputcosts.They have adopted lean manufacturing that improveproductivity through cost and time management.Opportunities are opened to small entrepreneurs inmany countries as they use modern management andoperations concepts as well as value chainmanagement.



International Marketing

International marketing includes the marketing ofgoods and services across national boundaries andthe marketing operations of an organization that sellsor produces within the country but happens to be apart of an enterprise that has presence in othercountries.

On the other hand, international marketing is simply anattitude of mind and approach with a truly globaloutlook.



International Human Resource Management

Managing a modern day international company with itsdynamic competitive environment requires a stronginternal governance process that starts with the peoplethat administer it.

As more and more companies embrace the resourcebased view (RBV) of strategy, the employees offer thecore competencies for sustainable competitiveadvantage.



International Human Resource Management



International Finance Management

When a company expands its business beyond itsnational borders, its finance manger has to deal withadditional variables such as exchange rates, tariffs,and regulatory, legal and cultural issues.

When a subsidiary is opened in other country, thefinance manger has to deal with issues related toborrowings, lending in local markets and interactingwith foreign government, agencies and institutions.


1.6 Nature of International FinanceThe term “foreign exchange” basically refers to buyingcurrency of one country while selling the currency ofanother country.

Initially Britain with its strong navy spread itscommercial interests far and wide. Hence its currency ,Pound Sterling became benchmark.

Today most currencies are compared with US Dollar,currently the most active and commercially strongtrading nation.


Many currencies are still pegged to US $ for their

exchange rate.

1.6 Nature of International Finance

A foreign exchange transaction is a shift of funds fromone country and currency to another by a trader, atourist or by an investor.

Foreign exchange or Forex transactions take place24/7 through a global network of banks, financialinstitutions and individuals.

Forex market is emerging as the world’s largestfinancial market where enormous amounts are tradedon a daily basis.


1.7 Significance of International Finance

International finance is an important input in thedecision making process of different entities. It affectsall aspects of economic activity.

The activity can be in the form ofindividuals making asset selection decisionfirms taking financial management decisionfund mangers deciding in which market to deployfunds and from where to exitcentral banks controlling forex reservescommercial banks making asset liability

decisionsor a financial crisis


1.8 Summary

International Business is the process of focusing onthe resources of the World and the objectives of theorganization on World business opportunities andthreats.The term International Business has emerged from theterm international marketing which in turn emergedfrom the term export marketing.A company that fails to go global is in danger of losingits domestic business to competitors with lower costs,greater experience, better products and in a nutshellmore value for the customer.


1.9 Self Assessment Questions

1. What do you mean by International Business?

2. Explain the growing importance of InternationalBusiness.

3. Write note on World bank and its objectives.

4. Explain the factors responsible for growth ofInternational business.

5. Explain the concept of International Finance withits significance in the economy.


THANKS

Documents

International Finance