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ii) To acquire resources Some companies enter international business to acquire resources which are readily not
available in their home country. Acquiring resources from abroad may enable a company to improve its product quality
and gain an edge over their competitors.
iii) To minimize risk Companies enter foreign markets to minimize risk and take advantage of business cycles-recession
and expansion. All the countries of the world may not face recession at the same time. Seasons also vary in different
countries at different times.
Difficulties in International Business
International business and domestic business have some similarities as well as some differences. It is because of
differences that international business faces difficulties which are not there in case of domestic business. The special
problems faced in international business are discussed below:
i) Differences in currency Every country has its own currency and currency of one country may not be acceptable in
another country. Exchange rate fluctuations also enhance the risk. These may sometime become a serious problem.
ii) Differences in the language Every country has its own language and different dialects. Even same words in a
language may have different meanings in different countries. In anyway, language hardly creates a serious problem in
international trade as English language has virtually become business language across the world.
iii) Cultural differences Differences in culture become a serious difficulty in marketing. Cultural differences sometimes
become hindrances even in domestic business. International managers need to be aware of these differences.
iv) Political and legal differences The political and legal environment in foreign markets may be different from the home
market. All these differences can and do have major implications on international business. In international business a
firm has to change its strategies depending upon political and legal set up of the country of its operations.
v) Trade Restrictions International business may face the problem of import control and licensing in certain countries.
Q2. What is the impact of Globalization on world economy? What are the devices of globalization?
(Impact-5 marks, devices-5 marks)10 marks
Answer.
Impact of Globalization on The World Economy
There has been an explosive growth of global firms all over the world. The globalization has led to fast economic growth
of the economy of nations across the world. The impact can be seen in following:
i) The volume of world trade has increased massively.
ii) Global economy has become more integrated.
iii) The barriers to trade in goods and service have disappeared. Many countries are following the policies of liberalization
in their foreign trade policies.
iv) The mobility of labor and capital has been facilitated.
v) Multinational corporations have appeared on the horizons of international trade.
vi) Innovations are taking place in goods, services and technology.
Devices of Globalization
A number of devices may be used by firm for globalizing their operations. Some of which are discussed below:
1. Export-Import Trade
The most common form of internationalization of business of a firm is to enter into export-import trade. This method
involves the firms to source the requirements of their inputs and capital goods across the world and find buyers for their
goods globally.
Under this method, one person is made responsible for handling the export-import business of the firm. Separate exportimport department may be set up.
2. Subsidiaries
After having achieved some experience in international trade, a firm may decide to set up its own subsidiaries in foreign
countries. Many multinational companies follow this method to go global.
3. Joint Ventures
A firm may have joint ventures with other firms to get entry in the global market. Joint Ventures may take the form of:
i) Joint venture with the local firms in a foreign country
ii) Joint venture between two multinational companies to do business in a third market
iii) Joint venture between a firm with the government in another country
4. Franchises
Internationalization of a firm is possible by giving right to a firm in foreign countries to produce or sell goods. Franchising
permits the franchisee to sell products or services under a highly publicized brand name, eg., Nokia, Coca-Cola etc. This
type of globalization device is very popular in hotel industry Hilton Group, soft drinks Coca-Cola, automotive
products Midas.
Q3. What do you understand by multinational corporations? Analyze the types of MNCs.
(Meaning-4 marks, types-6 marks) 10 marks
Answer.
Multinational corporations
There is no single definition of the term Multinational Company or Corporation. The concept of multi-nationality has a
number of dimensions. For some the criterion may be ownership of the organization whereas for others it may be
nationalities of the senior management. Some may decide on the basis of multi-country organization structure and
operations. Some of the criteria which are used to define multinational corporation are:i) Have a worldwide presence in certain minimum number of countries
ii) Produce abroad as well as in headquarters country
iii) Drive income from foreign operations
iv) Possess management team of different nationalities
v) Standardize operations worldwide
Considering the above criteria one can say that Multinational Corporation isone that owns production, distribution, service
and other units in many nations and utilizes its resources on the global scale. An MNC aims to maximize its revenues at
the global rather than national level. An MNC is also called by different names such as a Multinational Enterprise,
Transnational Corporation or Multinational Organization.
Types of MNCS
i) Equity based MNCs when a firm takes equity stake in some foreign based business entity, it acquires managerial
control. Such MNCs may fall into following types:
a) Public Utility MNCs
b) Resource based MNCs
c) Manufacturing MNCs
d) Service Industry MNCs
ii) Technology based MNCs In such MNCs the source of multinational managerial control is technology including
management expertise. These types of MNCs are found in hotel, mining and construction industries. They are also called
no-equity MNCs. Technology based MNCs may be formed through:
a) Management Contracts: When the owners of certain entities lets the MNC take over possession and management of
its business and profits are shared on agreed basis, e.g., in case of hotel industry.
b) Production Sharing Arrangements: When the outputs are shared instead of profit in case of resource based industries.
This type of arrangement may have additional obligations like training the local nationals and technology transfer.
c) Industrial Lease Agreements: When the owner leases a complete industry facility to an MNC for a fixed period. The
rent may be a fixed amount or fixed amount plus amount depending on output.
d) Technology Transfer Agreements: In high technology industries, the host countries may enter into a joint venture with
the MNC who is responsible for providing technology and other facilities are provided by host country companies. These
types of agreement are quite common in case of aircrafts, computers, bio-chemicals and electronics industries.
Q4. Enumerate the factors which affect the organizational structure of an international firm. Explain the merits
and drawbacks of matrix structure.
(Factors-4 marks, Merits and drawbacks-6 marks) 10 marks
Answer.
Factors affecting Organizational Structure of an International Firm
The managements decision, to select a structure, is influenced by a
number of factors such as:i) Managerial preference
ii) Size of the business
iii) Extent of companys foreign operations
Economic Exposure - Economic exposure arises because the present value of a stream of the expected future operating
cash flows denominated in the home currency or in a foreign currency may vary due to changed exchange rate. Economic
exposure arises from the pricing of products, the sourcing and cost of inputs, and the location of investments.
Benefits/drawback
MNCs engage in technology transfers because of a number of reasons. Important among them are discussed below from
the sellers point of view:
i) Sale of technology may increase its overall profitability.
ii) Seller may gain a competitive edge in the foreign markets.
iii) He may obtain grants and subsidies from the foreign governments.
iv) It may help the transferor to overcome capacity limitations in the home country.
v) It may be resorted to enhance the competence and potentials of foreign subsidiaries, affiliates and joint venture
partners.
Key Issues and Controversies in Technology Transfer
Presently many countries all over the world realize the importance and utility of technology transfer by MNCs. There are
still a number of issues and controversies that need to be addressed. These are:
Interest of MNCs and that of host countries conflict with each other. Host countries accuse MNCs of depletion of
in the management.
MNCs at times resort to restrictive trade practices in order to protect their interest.
MNCs are accused for non transfer of technology or for transfer of old technology at very high price.
Home countries are also critical of MNCs on the grounds of diverting resources from home country and reducing
b) Licensing
Licensing is an arrangement whereby a licensor grants the rights to use intangible property, to another firm for a specified
period and in return receives royalty or lump sum. The intangible property may be trade mark, patents, designs,
copyrights, etc. Licensing can take several forms. In case of licensing by way of assignment, a firm hands over all the
intellectual property rights to the licensee. Under sole licensing, no further licenses are issued to anyone other than a
single licensee during the period of agreement.
Licensing has following advantages:
i) Does not require capital investment on the part of licensor.
ii) The licensor retains the legal control over the intellectual property right.
iii) It helps in building up quick international alliances.
iv) Manufacturing facilities can be started in foreign countries and global entry can be gained by the licensor.
Licensing, however, has following disadvantages:
i) The fear of acquisition by the licensee of the licensors technical knowhow.
ii) Possible disputes on account of ambiguities and interpretation difficulties in the agreement.
iii) Possible failure of the licensee to fully exploit the local market.