MODULE 1 INTRODUCTION TO INTERNATIONAL BUSINESS1.Explain the history of international businessIntroductionThe origin of international business goes back to human civilization.3000 years ago the civilization started trade with each other. Roman Empire had extensive trade route across the known world. During 15th and 16th century European travelers travel globe in search of new trade route. Colonial development started in 1600.The concept of international business become very strong during 19th century. The first phase of globalization can be traced back to 1870 and ended with World War 1 driven by industrial revolution in UK, USA and Germany. The import of raw material by colonial empires from their colonies and exporting finished goods to the overseas possession was the main reason of increase in international trade. Later various governments imposed a number of barriers to trade to protect their domestic production. Advanced countries experienced several set back due to trade barriers .Then the world nation felt the importance of international co operation for global trade. It resulted in the establishment of IMF (international monetary fund) and IBRD (International bank for reconstruction and development popularly called as World Bank. The prolonged recession before World War 2 made the countries to think about new policies in international business after world war 2.Then 23 countries conducted negotiation and formed GATT. Later GATT become WTO .The effort of IMF, GATT, WTO along with effort of individual countries lead to globalization of business.2. Define international business (june 2008)DEFENITION OF IBInternational business in simple term can be defined as any commercial transaction-taking place across the boundary lines of a sovereign entity. According to Francis Cherunilam in his book on International Business IB can be defined as business activity or transaction that transcends the national border can be called as international business(International Business) Page no:4According to Terpstra and Sarathy international business is finding out what customers want around the world and satisfying these wants better than other competitors both domestic and internationalAccording to Keegan international business is the process of focusing the resources and objective of an organization on the global market opportunities and threat.4. What are the major driving forces of IB?/explain the drivers of cross boarder business(June 2008)/what are drivers of IB .Indian entrepreneurs are emerging as good entrepreneur in international business.why?(July 2007 :5 marks)DRIVERS OF IBThere are number of forces which induce and propel globalization. The important driving forces of IB are1. liberalisation and globalization The important factor which helps in flourishing of international business is globalization and liberalization. With a lot of liberalization and with the help of WTO/GATT the world has become one single market. Moreover the changes made in many of the countries like china ,and other socialist countries due to liberalization is an important driving force of IB. 2. MNCsMultinational companies which use their resources with world market is an important force of IB. Taking advantage of liberalization they are growing very fast. According to World Invest Report 2000,there were about 44500 MNCs in the world.3. TechnologyTechnology is an important force .Technology is a universal factor that crosses national and cultural boundaries. There are no cultural boundaries limiting its applications. Once technology is introduced it will be spread to everywhere in the world. Technology monopoly encourages internationalism because firm can exploit the respective demands without any competition. for ex in medical and health sector a hospital in USA perform required diagnostics an X-ray and scan. In the next 3 minutes the radiologist in India receives and send the report4. Transport and communication revolutionTransport and communication helps in reducing the disadvantage s of natural barriers and thereby help in international business. IT revolution has made an enormous contribution to the emergence of global village. Over past 30 years global communication has been revolutionized by developments in satellite, optical fiber and wireless technology and now internet. All the modern facilities of transportation and communication is a major driving force of internationalism.5. Product development costs and effortsThe cost of new product development is huge in many of the industries like pharmaceutical industry. To recopy such cost a global market is required. Further because of huge investment and diverse skill requirements associated with new product development, cross border alliance in research and development are becoming more and more popular.6. Quality and costWhen a firm is in international business the quality will be better and some time the cost will be also less. So in order to maintain quality and to reduce the cost firms are compelled to do international business and thus these 2 are major drivers of IB7. Rising aspirations and wantsBecause of increasing level of education and exposure to media the aspiration of people around the world is rising. They aspire for everything which makes their life comfortable. If domestic firms are not able to meet their wants they will go internationally.8. CompetitionHeightened competition compels firms to explore new ways of increasing their efficiency, by shifting internationally at the earliest. It also results in international production taking new forms with new ownership and contractual agreement, and new activities in abroad.9. World economic trendsThere are some world economic trends which add momentum to globalization trend. One of the important trends is the difference in growth rate of economies. The comparatively slow growth rate of developed economic countries and the drastic growth of developing countries prompt the developed countries to find their market somewhere else. Liberalization characterized by deregulation and privatization is also one of the major change. Thirdly domestic economic growth and opportunities outside reduce the opposition to globalization. A classic example is China. China has benefited tremendously from foreign investment. At the same time it is using outside opportunities also.ie globalization should be mutual.10. Regional integrationSeveral regional integration like NAFTA,EU, create a borderless world between the members of such block, foster the globalistion some of the regional blocks also give a fill up to cross border investment and financial flows.11. LeverageA major factor helps in IB is opportunity a global company posses to develop leverage. The more the number of countries it operates in business sectors the more could be the scope for leverage. According to Keegan leverage is simply some type of advantage that a company enjoys by virtue of the fact that it conducts business in more that one country. Global company posses following 4 types of leverageQ3. Differentiate between Domestic and international Business. (June 2013)Domestic BusinessInternational Business

1.Single language and nationality1.Multilingual/multinational/multicultural factors

2.Relatively homogeneous market2.Fragmented and diverse markets

3.Data available, usually accurate and collection easy3.Data collection a large task requiring significantly higher budgets and personnel allocation

4.Political factors relatively unimportant4.Political factors frequently vital

5.Relative freedom from government interference5.Involvement in national economic plans; government influences business decisions

6.Individual corporation has little effect on environment6."Gravitational" distortion by large companies

7.Transaction time is less7.Transaction time is more .

8.Relatively stable business environment8.Multiple environments, many of which are highly unstable (but may be highly profitable)

9.Uniform financial climate9.Variety of financial climates ranging from over-conservative to wildly inflationary

10Single currency10.Currencies differing in stability and real value

11Business "rules of the game" mature and understood11.Rules diverse, changeable and unclear

12Management generally accustomed to sharing responsibilities and using financial controls12.Management frequently un autonomous and unfamiliar with budgets and controls

5. Q. Why companies go global? Discuss the motives of globalization of business (June 2011;8 marks)The factors behind why companies go international can be divided into2.one is pull factor and the other is push factor.Pull factor proactive factors, companies are motivated because of attractiveness of foreign market. Ex. profitability and growth prospectsPush factors-compulsion of domestic market ex. saturation of market.Reasons for companies go global1. Profit advantageProfit is the first motive of any company. In order to increase profit companies want to go international. Companies start their business in other countries, where cost of production is less .Many MNCS lured to China due to cheap labour. For ex .Philips has got 23 factories in China. In some cases international trade will increase profitability of domestic business2. Growth opportunities The most common reason for going global is the potential for growth. The safe course is always to start locally and grow from the foundation a company established at home. Taking the opportunities around world MNCs are interested in going global .now a days companies go to developing countries due to increase in population and income in those countries. Ex; Indias per capita income was rs 16,688 in 2000 and it drastically increased to 74,920 in 2014.3.Domestic market constrainThe demand for a good in some countries tends to decline some time. When supply exceeds demand in the country there will be excess production in the country. So in order to find new market for the product countries go international. For ex .1st quarter of 21st century, stock of certain consumer durables like tv car etc exceed total number of house hold. Certain companies like Samsung, LG whose origin is in South Korea etc increase their presence in India. Lower manufacturing cost and untapped market was the main reason for them to enter in India.4. CompetitionTill liberalization in 1991 Indian market was protected from other market. Economic liberalization cause increase competition from foreign firms. Strategy of counter competition is very common in which companies penetrate the home market of foreign competitors. For example IBM entered the Japanese market and become a great success. Then the 2 other computer industry Fugitsu and hitachi lost their business. So in order to counter the competition they entered US market which is the home country of IBM.But they couldnt be successful in the initial stage. Later they enter a joint venture in US and become successful.5.Government policy and regulationThere is negative and positive factors for government policy and regulations. Many government give incentive and positive support to domestic companies ,import development and foreign investment. Sometimes environmental law in developed countries compel countries to go international.6. Monopoly powerIn seeking of monopoly power countries spread internationally. But in long run competitors will follow.7. High cost of transportationInitially company enters through marketing operation. But the profit margin will be less for foreign country. This is mainly because of high transportation cost. Then the company try to set up a new branch in foreign country8. Raw material availabilityIn search of raw material at low cost companies go global. The raw material which is expensive in foreign country will be cheap in foreign country9. Tarrif and import quotasDue to imposition of import quotas and trade restriction of some countries foreign investors will start their business in the country in order to get rid from all these type of trade barriers.Q5.What do we mean by the Term Internationalisation?(JULY2012)The term internationalisation envelops all activities that a company undertakes with regards to its relations with foreign markets. Political and economic changes in the global terrain certainly influenced the term to a point where it now involves more activities than merely exporting goods to other countries. Thus, internationalisation can take many forms, such as investing in a foreign country (foreign direct investment), forming partnerships with foreign companies, subcontracting foreign experts, taking part in international networks, and many more. Q6.What do you mean by trade flow?Trade flows are the buying and selling of goods and services between countries.Trade flows measure the balance of trade (exports imports). This is the amount of goods that one country sells to other countries minus the amount of goods that a country buys from other countries. This calculation includes all international goods transactions and represents a country's trade balance.Net exporters run a trade surplus. This is due to the fact that they sell more goods to the international market than they purchase from the international market. Demand for that country's currency then increases because international clients must buy the countrys currency in order to buy these goods. This causes the value of the currency to rise.Countries that are net importers import more from international producers than they export to international clients.Net importers run a trade deficit. This is due to the fact that they purchase more foreign goods than they sell to the international market. In order to purchase these international goods, importers must sell their domestic currency and buy a foreign currency. This causes the value of the domestic currency to fall.As an example, let us look at Japan, which is an export-driven economy which usually runs a trade surplus. Japan exports more goods to international clients than they import from international producers. Japans trade surplus is the major reason why the JPY(Japanese Yen) has not depreciated sharply despite severe economic weakness..Q6 Explain Investment flow. What are the types, methods and importance of FDI?Investment flows is also referred to as relative economic strength forecasting: The focus is on investment flows, which follow strong economic growth trends that attract foreign investments, and thus, increase demand for the local currency.Capital flows represent investments by countries or companies in another country. The flow of money to a particular destination tends to increase demand for the target destination's currency. This increase in demand causes the currency to appreciate (increase in value).Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans". In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable.Types of FDI1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. 2. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it. FDI is building new facilities.Methods of FDIThe foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: by incorporating a wholly owned subsidiary or company anywhere by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterpriseImportance of FDI1. The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has been matched by more rapid increases in gross domestic product, and thus income per capita has increased in most countries around the world since 1950. Only war-torn and countries with other serious external problems, such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita. 2. An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country. Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. 3. Greater competition from new companies can lead to productivity gains and greater efficiency in the host country and it has been suggested that the application of a foreign entitys policies to a domestic subsidiary may improve corporate governance standards. 4. Foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources.5. The local population may be able to benefit from the employment opportunities created by new businesses. ChinaFDI in China, also known as RFDI (renminbi foreign direct investment), has increased considerably in the last decade, reaching $59.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment and topping the United States which had $57.4 billion of FDI. During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010. IndiaForeign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA). India disallowed overseas corporate bodies (OCB) to invest in India. Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year. United StatesBroadly speaking, the U.S. has a fundamentally 'open economy' and low barriers to foreign direct investment. U.S. FDI totaled $194 billion in 2010. 84% of FDI in the U.S. in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. 6.Q.what are the different approaches to IB? Explain with relevant examples?/ What are the different types of orientations in International business?According to the analysis made by Douglas, Wings, and Pelmutter there are 4 approaches to IB. They are1.Ethnocentric2.Poly centric3.Regiocentric4.Geocentric

The degree and nature of involvement in international business or the international orientation of companies is of four types

1.Ethnocentrism (home country orientation) It has home country orientation. In this approach the overseas operations are viewed as secondary to domestic operations. It primarily goes international to dispose of the surplus. The domestic market is superior. Plans are made in the home office and overseas marketing is commonly administered by an export home country nationals. Domestic product mix is implemented without many modifications. Foreign markets are extension of domestic markets. They consider new extended company as a new region. An export department will monitor all the transaction .it can be explained with a diagram

Managing director

Mng HR

Mng R&D

Mng finance

Mng production

Mng mrkting

Asst mng north india

Asst mngr South india

Asst mng export

Merits

1. No cost and efforts of localization2. An easy route when foreign markets have similar characteristics to domestic markets.

Demerits1. Limits the exploitation of international business opportunities.

2Polycentrism (host country orientation) In this stage the company establishes a foreign subsidiary company and decentralizes all operation and gives the decision making authority to its executives. The company appoints key person from country and others will be from home country. Subsidiaries established in overseas market operate independently of others and establish their own marketing strategies.

Managing director

CEO subsidiary

Mng HR

Mng finance

Mng production

Mng R&D

Mng mrkt

Merits

1. Adaptation to the market characteristics which helps better exploitation of the market potentials.Demerits 1.High cost of adaptation.2.Delays in adaptation.3.Regiocentrism (regional orientation) In this approach company view different region as different markets. A particular region with certain important common marketing characteristics is regarded as a single market. It has regional orientation. Markets are differentiated and delineated on the basis of common regional characteristics. Try to trade off between localization and standardization. It can be explained with a diagram

Managing director

CEO subsidiary south Africa

Mrkt namibia

Mrkt lesotho

Mrkt botswana

Mng HR

Mng finance

Mng production

Mng mrkt

Mng R&D

Merits 1. Some advantages of localization and standardization.

Demerits1. Neglect intraregional differences in the business environment.

4.Geocentrism (world orientation) It has global orientation. The entire world is a single market and can be effectively tapped by a standardized marketing strategy. The strategy appropriate would be global standardization. A number of subsidies will be operating across the world. All of them are independent and autonomous. It can be diagrammatically depicted as

Managing director(head quarters in India)

Subs in south Africa

Subs in Kenya

Subsidiary in US

Subsi in UK

Subsid in India

Merits1. Economies of scale2. Advantage of pace

Demerits

1. Standardization may not be successful in all the countries.

7. What are the stages of Internationalization? What are the stages of a company going global?STAGES OF INTERNATIONALISATIONThe stages of internationalization have been changing at a fast rate after 1990various factors like globalization, information technology revolution, high growth rate of transport technology, increase globalisatin of culture, increase in educational opportunities and career orientation among the people of developing country etc. The variation in the scenario is generally categorize STAGE 1DOMESTIC COMPANYDomestic companies limit its operation, mission, and vision, to the national political boundaries. These companies focus on domestic customers, domestic prices, domestic suppliers, domestic financial companies etc. The companies analyses national environment of company, formulate strategies to exploit opportunities offered by environment Domestic company never thinks globally. If it grows beyond its present capacity the company enter into new domestic market domestic company will never penetrate into international market. For domestic company in India total super markets, MTRSTAGE 2INTERNATIOANL COMPANYSome of the domestic companies which grow beyond their production think of growing company internationally. These companies remain domestic oriented. They believe the strategy they adopt in their home country will be superior and they adopt same in foreign market. They locate a branch in foreign countries and extend domestic operation in that branch. Most of the companies start internationalism in this stage only. Most of the companies follow this strategy due to lack of resources.STAGE 3MULTINATIONAL COMPANYInternational companies sometime realize that internationalism will not work properly. For ex; Toyota exports its car Toyopet in US market. But it was not accepted by the US market as they think that it is overly priced and looks like a tank. So Toyota shipped back all the cars to Japan. But later from their experience they make cars which are suitable for US market. International companies turn into multinational companies when they adapt to the local environment and make products according to needs of the foreign country.A multinational company is the one which has branches in many place and its strategies will be according to each country where it is operating. But the headquarters will be in home country .ex. TATA CONSULTANCY SERVICE, RANBAXYSTAGE 4GLOBAL COMPANYA Global company is the one which has either global marketing strategy or a global strategy. Global company either produces in home country or in a single country and focus on marketing these products globally, or produce the product globally and focus on marketing these products domestically.Ex: Dr Reddys lab design and produce drugs in India and markets globally.STAGE 5TRANSNATIONAL COMPANYTransnational company produces markets, invest and operate across world. It links global resources with global market at profit. ex: coco cola, pepsi