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MBA 3.3 INTERNATIONAL BUSINESS

MODULE ­1

MBA 3.3 INTERNATIONAL BUSINESS MODULE ­1

International Trade Theory

International Trade Theory

1.1 GLOBALIZATION

1.1.1 Meaning of Globalization:

Globalization is the integration of international markets for goods and services, technology, finance and to some extent labour. It is the integration of the country with the world economy. It impels to the linkage of a nation's market with the global market.

Globalization encourages the following:

1. Foreign Direct Investment (FDI) ­The Foreign Direct Investment not only augments the domestic investible resources but also stimulates exports.

2. Foreign Institutional Investors ­(FII)­ Foreign Institutional Investors means an

institution established or incorporated outside India which proposes to make investment in India in securities. The following global bodies are considered as the agents to the globalization process:

1. IMF

2. WTO

3. World Bank

4. United Nations (UN)

The following are considered as the catalyst for increasing globalization activities

1.

Free Trade Agreements

G.A.T.T

N.A.F.T.A

1.1.2

Definition:

Stephen Gill: defines globalisation as the reduction of transaction cost of transborder movements of capital and goods thus of factors of production and goods.

Guy Brainbant: says that the process of globalisation not only includes opening up of world trade, development of advanced means of communication, internationalisation of financial markets, growing importance of MNC's, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution

1.1.3 Advantages of Globalization:

1. Increase of competitiveness: The competitiveness has increased the development of technology, training methods, employee participation etc., to meet the global market with the help of global brands

2. TQM: trends towards the Total quality Management (TQM) is insisted in the international market at competitive prices by reducing at least possible cost at abetter quality

4.

Global strategic partnership has been formed with one or more foreign companies to tap the business opportunities.

5. Sharing of Facilities: It has also increased the joint venture with other countries to share cost of production and research facilities in the foreign countries

6. Development of Information Technology: The rapid development and increasing use of technology have enhanced the business value of information. Electronic Mail, Internet, Mobile Phone, Computer for business works, Consumer information through Direct To Home (DTH) services, Shopping through Television etc., have been providing valuable business information. The globe has become almost like a village due to the best means of communication.

7. Global Scope: Scope of this kind of marketing is so large that it becomes a unique experience.

8. Brand image Consistency: Global marketing allows you to have a consistent image in every region that you choose to market.

9. Quick and Efficient Use of Ideas: A global entity is able to use a marketing idea and mould it into a strategy to implement on a global scale.

10. Lower Marketing Costs: If you are to consider lump­some cost then, yes, it is high, but the same cost even goes even higher if the company has to market a product differently in every country that it is selling.

11. Uniformity in Marketing Practices: A global entity can keep some degree of uniformity in marketing through out the world. It has also increased the use of right to market the branded goods or use of patented processes or copyrighted materials by means of Licensing Agreement

12. GDP Increase: If the statistics are any indication, GDP of the developing countries have increased twice as much as before.

13. Per capita Income Increase: The wealth has had a trickling effect on the poor. The average income has increased to thrice as much.

14. Unemployment is Reduced: This fact is quite evident when you look at countries like India and China.

15. Education has Increased: Globalization has been a catalyst to the jobs that require higher skill set. This demand allowed people to gain higher education.

16. Competition on Even Platform: The companies all around the world are competing on a single global platform. This allows better options to consumers.

1.1.4 Disadvantages of Globalization:

1. Inconsistency in Consumer Needs: American consumer will be different from the South African. Global marketing should be able to address that.

3.

Country Specific Brand and Product: A Japanese might like a product to have a traditional touch, where as an American might like to add a retro modern look to it. In this case, a global strategy is difficult to device.

4. Dumping Issues: The Multinational Companies bring second hand technologies that are outdated in their country

5. Devaluation of Currencies: In order to encourage exports very often currencies may be devalued

6. The Laws of the Land Have to be Considered: Original company policies may be according to the laws of home countries. The overseas laws may be conflicting in these policies.

7. Infrastructural Differences: Infrastructure may be hampering the process in one country and accelerating in another. Global strategy cannot be consistent in such a scenario.

8. Uneven Distribution of Wealth: Wealth is still concentrated in the hands of a few individuals and a common man in a developing country is yet to see any major benefits of globalization.

9. Income Gap Between Developed and Developing Countries: Wealth of developed countries continues to grow twice as much as the developing world.

10. Different Wage Standards for Developing Countries: A technology worker may get more value for his work in a developed country than a worker in a developing country.

11. Reversal of Globalization: In future, factors such as war may demand the reversal of the globalization (as evident in inter world war years), current process of globalization may just be impossible to reverse.

1.1.5 The impact of Globalization on India:

The foreign exchange crunch in the early nineties dragged Indian economy close to defaulting on loans. This issue was addressed through the domestic and external sector policy measures which was partly prompted by the immediate needs and partly by the demand of the multilateral organisations. The major measures initiated as a part of the liberalisation and globalisation strategy in the early nineties included the following:

1. Scrapping of the industrial licensing regime,

2. Reduction in the number of areas reserved for the public sector

3. Amendment of the monopolies and the restrictive trade practices act,

4. Start of the privatisation programme,

5. Reduction in tariff rates and change over to market determined exchange rates.

entry of foreign investors in Telecom, roads, ports, airports, insurance and other major sectors.

7.

The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5% in 1991­92 to 24.6 in 1996­97.

8.

The liberalisation of the domestic economy and the increasing integration of India with the global economy have helped step up GDP growth rates, which picked up from 5.6% in 1990­91 to a peak level of 77.8% in 1996­97.

1.1.6

The consequence of India's global integration :

The implications of globalisation for a national economy are many. Globalisation has intensified interdependence and competition between economies in the world market. This is reflected in Interdependence in regard to trading in goods and services and in movement of capital. As a result domestic economic developments are not determined entirely by domestic policies and market conditions. Rather, they are influenced by both domestic and international policies and economic conditions. It is thus clear that a

globalisation economy, while formulating and evaluating its domestic policy cannot afford

to ignore the possible actions and reactions of policies and developments in the rest of the

world. This constrained the policy option available to the government which implies loss

of policy autonomy to some extent, in decision­making at the national level.

1.2

MULTINATIONAL COMPANY (MNC)

1.2.1

Meaning

A Multinational company is one whose ownership is accommodated in more than one

country. Products are manufactures in many countries and sold in many countries.

Examples: Toyota of Japan, General Motors of U.S.A, and Indian Oil Corporation of India are multinational companies.

1.2.2 MNC as a company is expected to meet the following criteria:

1. It operates in many countries at different levels of economic development

2. Multinationals manage its local subsidiaries

3. It maintains complete industrial organizations, including Research and Development and manufacturing facilities in several countries

4. It has multinational central management

5. It has Multinational stock ownership

Three broad groups of MNC

Horizontally integrated MNC

Vertically integrated MNC

Diversified integrated MNC

Characteristics of MNC

MNC is centralized ownership

MNC draw on a common pool

of resources including money, credit,

patents, trademark, information & HR

Use of global, integrated strategy

A large part of capital asset of the parent company is owned by the citizens of the companies home country

The absolute majority of the members of Board of Directors are citizens of the home country.

Decisions on new investment & local objective parent company.

MNC are predominantly large sized & exercise a great degree of economic dominance .

are taken by

the

1.2.3 Advantages of MNC's

1. They increase the investment level and increase the income and emoployment in the

host country.

management

techniques

3. They support the domestic enterprise operations and assist the domestic suppliers

4. They help in increasing the competition and remove domestic monopolies

5. They try to equalize the cost of factors of production around the world

6. They conduct efficient research and development and contribute the invention and

innovation

7. They enable the host country to increase their exports and decrease their import

requirements

2. They

increase

the

managerial

skills

by

employing

sophisticated

1.2.4 Disadvantages of MNC

1. They may retard growth of employment in the home country

2. They may destroy competition and acquire monopoly powers

3. MNC's technology is designed for worldwide profit maximisation and is not for the development of needs of poor countries

4. MNC's avoid taxes by manipulating the transfer price

5. MNC's through their power and flexibility may under control and mine the national economies autonomy that is detrimental to the national interest of the countries

6. Drain of resources for profit maximization

7. Influence of culture

8. Evasion of taxes

9. Strain of scare Foreign Exchange Reserve

10. Minimum transfer of technology.

11. Economic threat

12. Unfavorable effect on BOP of the host country

Foreign direct investment (FDI) or foreign investment refers to long term participation by country A into country B. It usually involves participation in management, joint­venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.

(FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non­industrialized countries are increasing sharply.

Types

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:

an individual;

a group of related individuals;

an incorporated or unincorporated entity;

a public company or private company;

a group of related enterprises;

a government body;

an estate (law), trust or other societal organization; or

any combination of the above.

Methods

The 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

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 enterprise

Foreign direct investment incentives may take the following forms:

low corporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ ­ Export Processing Zones

Bonded Warehouses

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects) Factors Affecting FDI

Financial incentives (Funds from local Government)

Fiscal incentives (Exemption from import duties)

Indirect incentives (Provides land and

Political stability

Market potential & accessibility

Large economy

Market size

Why India is preferred for FDI?

Liberal, largest democracy, Political Stability

Second largest emerging market (US$ 2.4 trillion)

Skilled and competitive labors force

highest rates of return on investment

one hundred of the Fortune 500 have R & D facilities in India

Second largest group of software developers after the U.S.

lists 6,500 companies on the Bombay Stock Exchange (only the NYSE has more)

World's fourth largest economy & second largest pharmaceutical industry

growth over the past few years averaging 8%

has a middle class estimated at 300 million out of a total population of 1 billion

Destination for business process outsourcing, Knowledge processing etc.

Second largest English­speaking, scientific, technical and executive manpower

Low costs & Tax exemptions in SEZ

Tax incentives for IT , business process outsourcing and KPO companies

Government policies

Automatic Route

Prior Permission (FIPB)

Foreign direct investment in India

A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010­2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. FDI for 2009­10 at USD 25.88 billion was lower by five per cent from USD 27.33 billion in the previous fiscal. Foreign direct investment in August dipped by about 60 per cent to USD 1.33 billion, the lowest in 2010 fiscal, industry department data released showed.

Investing in India – Entry Routes FDI Investment Sectors

Prohibited activities

Atomic energy

Arms and ammunition

Lottery business

Betting and Gambling

Aircraft and warships

Coal lignite

FOREIGN INSTITUTIONAL INVESTORS

An institution established outside India, which invests in securities traded on the markets in India e.g.

Pension Funds

Mutual Funds

Investment Trust

Insurance companies

Endowment Funds

University Funds

Foundations or Charitable Trusts

Asset Management Companies

Power of Attorney Holders

Bank

FII Vs FDI

FII is Foreign Institutional Investment: It is investment made by foreign Mutual Funds in the Indian Market. FDI is Foreign Direct Investment: It is the investment made by Foreign Multinational comapnies in India.

Foreign Institutional Investors (FII)

Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange

Makes investments on behalf of foreign investors, referred to as “sub­ accounts”

Foreign Institutional Investors (FII)

FIIs may invest in:

securities in the primary and secondary markets (shares, debentures, warrants of listed and unlisted companies)

units issued by domestic mutual funds

dated Government securities

derivatives traded on a recognized stock exchange

commercial paper

debt instruments – provided a 70/30 equity/debt ratio is maintained

Limits on the type and amount of

no more than 10% of the equity in any one company

no more than 10% in the equity in any one company on behalf of a fund sub­ account

no more than 5% in the equity in any one company on behalf of a corporate/individual sub­account

investments apply to FIIs

no more than 24% in the aggregate of the total issued capital of a company to be held by FIIs FOREIGN INATITUTIONAL INVESTORS

Introduction to Foreign Institutional Investors (FII’s)

Since 1990­91, the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. As a part of the reforms process, the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. While recommending their entry, the Committee, however did not elaborate on the objectives of the suggested policy. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments. From September 14, 1992 with suitable restrictions, Foreign Institutional Investors were permitted to invest in all the securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the Budget for 1992­ 93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow

reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market.

Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in India in securities. A Working Group for Streamlining of the Procedures relating to Foriegn Institutional Investors, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:

As FII: Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or with no single investor holding more than 10 per cent of the shares or units of the fund.

As Sub­accounts: The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are eligible to be registered as sub­accounts, viz. partnership firms, private company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

Regular FIIs­ those who are required to invest not less than 70 % of their investment in equity­related instruments and 30 % in non­equity instruments.

100 % debt­fund FIIs­ those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter­alia, entities such as asset management companies, nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary and non­ discretionary portfolio management services) to be registered as Foreign Institutional Investors. While the guidelines did not have a specific provision regarding clients, in the application form the details of clients on whose behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making investments in the names of such clients. Asset management companies/portfolio managers are basically in the business of managing funds and investing them on behalf of their funds/clients. Hence, the intention of the guidelines was to allow these categories of investors to invest funds in India on behalf of their ‘clients’. These ‘clients’ later came to be known as sub­accounts. The broad strategy consisted of having a wide variety of clients, including individuals, intermediated through institutional investors, who would be registered as FIIs in India. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme.

Prohibitions on Investments:

Foreign Institutional Investors are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities:

Business of chit fund

Nidhi Company

Agricultural or plantation activities

Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges).

Trading in Transferable Development Rights (TDRs).

Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only Non­Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India.

Advantages

Enhanced flows of equity capital

FIIs have a greater appetite for equity than debt in their asset structure. The opening up the economy to FIIs has been in line with the accepted preference for non­debt creating foreign inflows over foreign debt. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap.

Managing uncertainty and controlling risks.

FII inflows help in financial innovation and development of hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals.

Improving capital markets.

FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets.

Equity market development aids economic development.

By increasing the availability of riskier long term capital for projects, and increasing firms’ incentives to provide more information about their operations, FIIs can help in the process of economic development.

Improved corporate governance.

FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms’ operations, improve corporate governance. Bad corporate governance makes equity finance a costly option. Also, institutionalization increases dividend payouts, and enhances productivity growth.

Disadvantages

Problems of Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created.

Problems for small investor: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the country’s stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs.

Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee.

Hot Money: “Hot money” refers to funds that are controlled by investors who actively seek short­term returns. These investors scan the market for short­term, high interest rate investment opportunities. “Hot money” can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

1.3 WORLD TRADE ORGANISATION

1.3.1 Meaning:

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business

1.3.3 Functions of WTO

1. The system helps promote peace

2. Disputes are handled constructively

3. Rules make life easier for all

4. Freer trade cuts the costs of living

5. It provides more choice of products and qualities

6. Trade raises incomes

8. The basic principles make life more efficient 9. Governments are shielded from lobbying 10. The system encourages good government

IMPACT OF WTO ON INDIA World Trade Organisation: India is one of the (out of 104) founder members of the WTO. The GATT was not an organization but it was only a legal agreement. On the other hand WTO is designed to play the role of watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights etc. There was much heated discussion and arguments for and against regarding India becoming a member of the WTO. India was one of the 76 Governments that became members of the WTO on the first day of the formation of WTO. Thus, India was one of the founder members of the WTO

BENEFITS TO INDIA The reduction in agricultural subsidies and barriers to export of agricultural products, agricultural exports from India will increase. The multilateral rules and disciplines relating to anti­dumping, subsidies and countervailing measures, safeguards and disputes settlement machinery will ensure greater security and predictability of international trade. This would be favorable environment for India's international business. India along with other developing countries has the market access to a number of advanced countries due to the imposition of the clauses concerning to trade without discrimination.

DISADVANTAGE TO INDIA

Despite the benefits of WTO to India, many economists and sociologists argue that, India would be in a disadvantageous position by becoming a member of WTO. Their argument include:

Trade Related Intellectual Property Rights (TRIPs) : Protection of intellectual property rights (patents, copyrights, trademarks etc.) has been made stringent. It is argued that the TRIPs agreement goes against the Indian Patents Act, 1970. Only process patents can be granted in food, chemicals and medicines under the Indian Patents Act. TRIPs agreement provides for granting product patents also. Under TRIPs patents can be granted to methods of agriculture and horticulture, bio­technological process including living organism like plants and animals. The duration of patents under TRIPs is 20 years Introduction of product patents in India will lead to hike in drug prices by the MNCs who

have the product patent. This will hit the poor people who will not have the generic option .

open The extension of intellectual property right to agriculture has negative effects on India. Presently, plant breeding and seed production are largely, in the public domain. Indian scientists have undertaken plant breeding and multiplication is in the hands of National and State Seed Corporations. Government, through this machinery, provides seed to

Indian farmers at very low prices. Indian scientists, in future will find it extremely difficult to breed new varieties and Indian research institutions will be unable to compete financially with MNCs and will be denied access to patented genetic material. MNCs will get the control over our genetic resources and as such the control over food production would be jeopardised

Patenting has also been extended to a large area of micro­organisms Application of TRIMs agreement undermines any plan or strategy of self­reliant growth based on local technology and resources

Services : Service sector like insurance, banking, telecommunications, transportation is backward in India compared to that of developed countries. Therefore, inclusion of trade in services is detrimental to the interest of India. Liberalisation of service sector would be under tremendous pressure.

1.4 THE EVOLUTION OF GLOBAL BUSINESS

1.4.1 Local Business

A local business are aimed toward a single market. A local business is also referred to as local trading. In local trading, a firm faces only one set of competitive, economic, and market issues and essentially must deal with only one set of customers, although the company may have several segments in a market. In a local business the market size and growth are limited. This single market is the firm’s local market. The firm faces only one set of competitive, economic and market issues.

1.4.2 National Business

National Business covers activities that are involved when a firm sells its products outside its regional business base of operation and when products are physically moved from one region to another with in the same country. A nation's internal market representing the mechanisms for issuing and trading securities of entities domiciled within that nation. The long term investment goals might not exist in the domestic business

1.4.3 International Business

International Business covers activities that are involved when a firm sells its products outside its National business base of operation that is when it crosses the boundaries of that country and when products are physically moved from one country to another. International Business calls for direct involvement in the local marketing environment within a given country. Understanding different cultural, economic and political environments becomes necessary for success in international business

1.4.4 Multinational Business

The focus on multinational marketing came as a result of the development of the

multinational corporation (MNC). These companies, characterized by extensive investments in assets abroad, operate in a number of foreign countries as though they were local companies. Multinationals traditionally pursue a multi domestic strategy, wherein the multinational firm competes by applying many different strategies, each one tailored to a particular local market. Often, multinational corporations attempt to appear “local” wherever they compete. The major challenge confronting the multinational businessmen is to find the best possible adaptation of a complete marketing strategy to each individual country. This approach leads to a maximum amount of localization and to a large variety of marketing strategies.

1.4.5 Global Business A global business strategy involves the creation of a single strategy for a product, service, or company for the entire global market. Rather than tailoring a strategy perfectly to any individual market, a firm that pursues global marketing settles on a basic strategy that can be applied throughout the world market, all while maintaining some flexibility to adapt to local market requirements where necessary. Such strategies are inspired by the fact that many markets appear increasingly similar in environment and customer requirements. Firms that pursue global strategies must still be adept at international marketing because designing one global strategy requires a sound understanding of the cultural, economic, and political environments of many countries.

Motives of Internationalization of Firms

The factors which motivate or provoke firms to go international may be broadly divided into two groups :

(1)

Pull factors

(2)

Push factors

(1)

Pull Factors:

Those factors or forces which attract the foreign firms to do business in Foreign market are come under this categories. Such attraction include, broadly, the relative profitability & growth prospects. These are also called Proactive reasons.

The followings are important Pull Factors :

(a) Profit Advantage : IB could be more profitable than the domestic. But if not profitable

than Total Profit would be increase & thus it become again profitable.

(b) Growth opportunities:

∙ To increase sales ∙ To increase market share of the firms

(2) Push Factors:

It refers to the compulsion of the domestic market such as saturation of the market, which prompt companies to internationalize. These reasons are also called Reactive reasons. The followings are important push factors:

(a) Competition: Increase competition in domestic market is one of the main cause &

consequences of globalization.

(b) Domestic market constraints:

∙ Surplus production in home market

∙ Decline the demand of the domestic product in the home market

∙ Small domestic market in size or limited home market

∙ To take the benefit of economies of scale by producing mass production

(c) Political Stability Vs. Political Instability

The global financial system (GFS)

1.5 MANAGEMENT ORIENTATION OF INTERNATIONAL BUSINESS

The form and substance of a company's response to global market opportunities depends greatly on management assumptions ad beliefs (both conscious and unconscious) about the nature of the world. The world view of the company's personnel can be described as

1.

Ethnocentric

2.

Polycentric

3.

Regiocentic

4.

Geocentric

1.5.1

Ethnocentric Orientation

Guided by domestic market extension concept:

Domestic strategies, techniques, and personnel are perceived as superior

International customers are considered as secondary

International markets are regarded primarily as outlets for surplus domestic production

International business plans are developed in­house by the international division

1.5.2 Polycentric Orientation

Guided by the multidomestic market concept:

Focuses on the importance and uniqueness of each international market

Likely to establish businesses in each target country

Fully decentralized, minimal coordination with headquarters

Marketing strategies are specific to each country

Result: No economies of scale, duplicated functions, higher final product costs

1.5.3

Regiocentric Orientation

Guided by the global marketing concept:

World regions that share economic, political, and/or cultural traits are perceived as distinct markets

Divisions are organized based on location

Regional offices coordinate marketing activities

1.5.4

Geocentric Orientation

Guided by the global marketing concept:

The world is perceived as a total market with identifiable, homogenous segments

Targeted marketing strategies aimed at market segments, rather than geographic locations

Achieve position as low­cost manufacturer and marketer of product line

Provides standardized product or service throughout the world

1.6 REASONS FOR INTERNATIONALIZATION OF BUSINESS

1. Faster growth: Firms that have operate internationally tend to develop at a much quicker pace than those operating locally

2. Access to cheaper inputs: Operating internationally may enable the firm to source raw materials or labor at lower prices

3. Increased quality and efficiency: Exposure to foreign competition will encourage increased efficiency. Doing business in the international market allows firms to improve the quality of their product in order to gain a competitive advantage.

4. New market opportunities: International business presents firms with new market opportunities. These new markets provide more opportunities for expansion, growth, and income. A bigger market means more customers, increased revenue, a larger profit margin, and allows the business to realize economies of scale.

1.7 KEY FACTORS INFLUENCING INTERNATIONAL BUSINESS

 

Political

Economic

Social

Technological

1.7.1

Political

1.

Political Change – regime change through coup, violence, etc. Change in government through democratic election can influence future business strategy.

 

e.g. the opportunities that are now available in Russia and Eastern Europe following the collapse of communism

2.

Political Uncertainty – in countries like Zimbabwe, Sudan, Venezuela. Political uncertainty can lead to a fall in investment by businesses and influence decisions on expansion and business ventures

3.

War/Terrorism – create uncertainty

4.

Political Doctrine – can affect the ease with which business is conducted

1.7.2

Economic

All these factors need to be considered in any global business venture:

1.

Tax Systems

2.

Investment Considerations and Allowances

3.

Sophistication of Financial Markets – ease with which capital can be moved and raised

4.

Commodity Prices – oil, energy, metals

5.

Monetary and Fiscal Policies – interest rates, tax regimes, government aid

6.

Internal Regulation and Bureaucracy – can be stifling!

7.

Exchange Rates

1.7.3

Social

1.

Religious Considerations – appropriateness of some business ventures – e.g. selling condoms in staunchly Catholic countries

2.

Impact on local communities of business development – availability of jobs, training, environmental impact for these communities

3.

Impact on the environment – can impact on the businesses image

5.

Cultural issues

1.7.4 Technological

Availability and developments in technology can have a powerful influence on global business strategy:

e.g.

1. Access to bandwidth

2. PC ownership

3. Technology and sales – processing payments and sales

4. Compatibility

of

technologies

in

Business

Management

systems, language differences, etc.

accounting

1.8 FACTORS RESTRICTING INTERNATIONAL BUSINESS

1. Increased costs: There are increased operating expenses including the establishment of facilities abroad, the hiring of additional staff, traveling of personnel, specialized transport networks, information and communication technology.

2. Foreign regulations and standards: The firm may need to conform to new standards. This may require changes such as in the production process, inputs and packaging, incurring additional costs.

3. Delays in payments: International trade may cause delays in payments, adversely affecting the firm's cash flow.

4. Complex organizational structure: International business usually requires changes to the firms operating structure. Training/retraining of management may be necessary to facilitate restructuring.

5. Increased free trade between nations Increased liquidity of capital allowing investors in developed nations to invest in developing nations