IB - University of Mumbai - 1

INTERNATIONAL BUSINESS
The Dimensions of International Business
Lecture Overview
What is International Business Relevance of the Study of International Business Evolution of International Business Nature of International Business Reasons for going international Stages of Internationalization International Business Approaches Advantages & Problems of International Business Major Decisions in International Business
Copyright 1999 by Harcourt Brace & Company All rights reserved
Text
International
Business Text & Cases
Francis Cherunilam
International
Dr.
Business Text & Cases
Rakesh Mohan Joshi
Charles Hill R. Chandran

What is International Business?
International Business consists of transactions taking
place across national borders for the purpose of satisfying the objectives of individuals and organizations.
International transactions export-import trade, licensing, franchising, contract manufacturing, management contracts, turnkey projects, foreign direct investments, joint-ventures, Alliances. International Business also includes a growing service industry in areas such as Information technology, transportation, tourism, advertising, construction, retailing, wholesaling, and mass communication.
The Need to study International Business?
Evolution of International Business
Cross-country trade has been taking place since prehistoric times.
Post world war-II, the growth of international & multinational companies took place
International trade to International marketing International marketing to International Business TT to SWIFT settlement system Movement of Capital overtaken Trade
Nature of International Business

Variations in political, social, cultural and economic factors in countries Accurate and timely information requirement Larger size of Business Geographical market segmentation Increased potential for business because of broader market perspective. Wider scope for business activities Inter-country comparative study
Reasons for Going International

Profit Advantage Growth opportunities Domestic market constraints Competition Government policies & regulations Political stability vs. Instability Availability of technology & Managerial Competence High cost of transportation Nearness to raw material Availability of Quality Human resource at low cost Liberalization & Globalization Increasing market share
Stages of Internationalization
Stage-1 Stage
2 Stage 3 Stage 4 Stage 5
: : : : :
Domestic Company International Company Multinational Company Global Company Transnational Company
International Business Approaches
Ethnocentric approach
Sales of domestic products in int. markets. Domestic orientation International Market secondary Firm seeks markets similar to domestic. Little adaptation of product or marketing mix. Usually produced domestically
Polycentric approach
Recognition of difference in overseas markets Decentralization of operations Country by country basis Local marketing input and control
International Business Approaches
Regiocentric approach
Different regions as different markets Strategies formulated for a region
Geocentric approach
Develop product and marketing strategies for world markets. Standardize as far as possible, adapt where necessary. Economies of scale transfer of knowledge and technology, global image, and better competitive position. The world is viewed as the market
Stages of domestic to global evolution

Management emphasis Stage one Domestic Stage two International Stage three Multinational Stage four Global
Focus
Marketing strategy Management style Manufacturing stance Investment policy Performance evaluation
Domestic
Domestic Domestic Mainly domestic Domestic Domestic market share
Ethnocentric
Extension Centralized top down Mainly domestic Domestic used worldwide Against home country market share
Polycentric
Adaptation Decentralized bottom up Host country Mainly in each host country Each host country market share
Geocentric
Extension Integrated Lowest cost worldwide Cross subsidization Worldwide
Advantages

Higher living standards Increased socio-economic welfare Wider market Reduced effects of business cycles Reduced risks Large scale economies Potential untapped markets Provides opportunities for challenges to domestic market Division of labor and specialization Economic growth of the world Optimum and proper utilization of World resources Cultural transformations Knitting the world into a closely interactive traditional villages
Problems
Political factors Huge foreign indebtedness Exchange instability Entry requirements Tariff, quotas and trade barriers Corruption Bureaucratic practices of government Technological pirating High cost Cultural sensitivities
Major decisions in International Business

Deciding Whether to Go Global Deciding Which Markets to Enter

Before going abroad, the company should try to define its international marketing objectives and policies.

What volume of foreign sales is desired? How many countries to market in? What types of countries to enter?
Choose possible countries and rank based on market size, market growth, cost of doing business, competitive advantage, and risk level
How to enter (Market entry Strategies)

Exporting Indirect, Direct Joint Venturing
Licensing, Franchising, Management contracting, contract manufacturing, joint ownership, collaboration
Foreign direct investment Representative Office, Branch, Creating a Subsidiary, Merger & Acquisition Foreign Institutional Investments Yen now $ Carry Trade, Portfolio investments, ECBs, ADRs, GDRs, FCCB, FCEB etc
Major decisions in International Business
Deciding on the Global Marketing Mix

Standardized Marketing Mix:
Selling largely the same products and using the same marketing approaches worldwide. Producer adjusts the marketing mix elements to each target market, bearing more costs but hoping for a larger market share and return.
Adapted Marketing Mix:
Deciding on the Global Marketing Organization

Organize an export department Create international divisions

Geographical organizations World product groups International subsidiaries Become a global organization
Direction of World Trade

Worlds Merchandise Exports/Imports Worlds Commercial Services Exports/Imports Indias Foreign Trade Exports/Imports-Services Balance of Trade Balance of Payment Constraints in Indias Foreign Trade Terms of Trade Incoterms/Payment terms Concept of Nostro/Vostro Accounts
Composition of World Trade

Commercial Services 19.4%
M erchandise 80.6%
Copyright @ Oxford University Press International Business
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Important Trade Items

Exports Engineering Goods Petrolieum procuts Gems & Jewellery Ready/Man Made Garments.
Share(%) 20.91 15.64 12.36 13.63
Electronics
11.38 Pharma & fine chemical 8.43 Plastics, Coal & Minerals 10.00
Important Trade Items

Imports
Share (%) Petroleum products 31.20 Gold/Silver/Prec Stone 21.50 Machinery 19.70 Electronic Goods 8.08 Iron & Steel, Coal etc 7.00 Transport & Org. Chem 6.00
Major Trading Partners

Exports US UAE China Spore & UK Imports China Saudi Arabia UAE US Iran
Share (%) 13.02 9.66 6.78 8.50 11.3 8.1 5.62 5.51 4.58
Chapter 1
GLOBALIZATION AND INTERNATIONAL

BUSINESS
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Learning Objectives
To explain the concept of globalization
To elucidate factors influencing globalization

To discuss global business expansion strategy for emerging market companies To explicate the concept of international business To delineate motives for international business expansion To expound the strategy for managing business in the globalization era
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Globalization of Business: A Historical Perspective

In the initial years of human history, there were hardly any formal barriers, such as tariffs or non-tariff
restrictions, for the movement of goods or visa

requirements for the people. The concept of globalization can be traced back to the phenomenon of a
nation-state.
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Concept of Globalization
The process of integration and convergence of economic, financial, cultural and political systems across the world.
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Globalization: A Holistic Approach

Economic
Globalization
The increasing integration of national economic systems through

growth in international trade, investment and capital flows.
Financial
Globalization
The liberalization of capital movements and deregulations, especially of financial services that led to a spurt in cross-border capital flows.
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Cultural Globalization
Convergence of cultures across the world.
Political Globalization
Convergence of political systems and processes around
the world.
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Dimensions of Economic Globalization
Globalization of production
Globalization of markets Globalization of competition Globalization of technology Globalization of corporations and industries
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Factors Influencing Globalization
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Movers of Globalization

Economic liberalization Technological breakthrough
Multilateral institutions
International economic integrations Move towards free marketing systems Rising research & development costs Global expansion of business operations
Advents in logistics management

Emergence of the global customer segment
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Factors Restraining Globalization
Regulatory controls
Emerging trade barriers

Cultural factors
Nationalism
War and civil disturbances
Management myopia
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Reasons for Support of Globalization

Maximization of Economic Efficiencies Enhancing Trade Increased Cross-border Capital Movement Improves Efficiency of Local Firms Increases Consumer Welfare
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Criticism of Globalization
Developed versus Developing Countries: Unequal Players in Globalization: Widening Gap between the Rich and the Poor Wipes out Domestic Industry Leads to Unemployment and Mass Lay-offs Brings in Balance of Payments Problems Increased Volatility of Markets Diminishing Power of Nation States Loss of Cultural Identity Shift of Power to Multinationals
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Response Strategies to Globalization Forces for Emerging Market Companies
Defender Extender Dodger (dishonest person) Contender
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Concept of International Business
International Trade: Exports of goods and services by a firm to a foreign-based buyer (importer)
International Marketing: It focuses on the firm-level marketing practices across the border, including market identification and targeting, entry mode selection, and marketing mix and strategic decisions to compete in international markets.
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International
Investments:
Cross-border
transfer
of
resources to carry out business activities.
International Management: Application of management
concepts and techniques in a cross-country environment and

adaptation to different social-cultural, economic, legal, political and technological environments.
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International Business: All those business activities which involves cross border transactions of goods, services, and
resources between two or more nations
Global Business: Conduct of business activities in several

countries using a highly co-ordinated and single strategy
across the world.
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Reasons for International Business Expansion
Market-Seeking Motives
Marketing opportunities due to life cycles Uniqueness of product or service
Economic Motives
Profitability Achieving economies of scale Spreading R&D costs
Strategic Motives
Growth Risk spread
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Differences Between Domestic and International Business

Economic Environment Socio-Cultural Environment
Legal Environment
Political Environment Competition
Infrastructure
Technology
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Managing Business in the Globalization Era

Global strategies adopted by business enterprises may include:
Global conception of markets Multi-regional integration strategy Changes in external organisation of multinational firms
Changes in internal organisation
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Foreign Direct
Investment
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Learning Objectives
To explain the concept investment (FDI)
of
foreign
direct
To discuss various types of FDI

To develop a conceptual understanding of the theories of international investment To understand policy framework to promote FDI To discuss patterns of FDI
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Significance of FDI
International trade and foreign direct investment (FDI) are the two most important international economic activities integrating the world economy. With the increase in mobility of factors of production across countries, FDI has become an integral part of firms strategy to expand international business.
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Concept of FDI
In simple terms, FDI means acquiring ownership in an overseas business entity. Foreign direct investment occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage it.
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Foreign Portfolio Investment (FPI)

An investment by individuals, firms, or a public body in foreign financial instruments, such as foreign stocks, government bonds, etc. In FPI, the equity stake in the foreign business entity is not significant enough to exert any management control.
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Raison detre for FDI

Cost of transportation Liability of foreignness
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Benefits of FDI to Host Countries

Access to superior technology Increased competition Increase in domestic investment Bridging host countries foreign exchange gaps
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Negative Impacts of FDI

Market Monopoly Crowding-out and unemployment effects Technology dependence Profit outflow Corruption National security
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Factors Affecting Selection of FDI Destinations

Cost of capital input Wage rate Taxation regime Cost of inputs Cost of logistics Market demand
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Types of FDI
On the Basis of Direction of Investment
Inward FDI: Foreign firms taking control over domestic
assets.
Outward FDI: Domestic firms investing overseas and

taking control over foreign assets.
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On the Basis of Types of Activity

Horizontal FDI: Overseas investment in a similar activity as carried out in the home country. Vertical FDI: Overseas investment so as either to provide inputs for the firms domestic operations or sell its domestic output abroad.
Backward Vertical FDI: Direct investment aimed at providing inputs for a firms production processes. Forward Vertical FDI: Direct investment overseas aimed to sell the output of a firms domestic production processes.
Conglomerate FDI: Direct investment overseas aimed at manufacturing
products not manufactured by the firm in the home country.
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On the Basis of Investment Objectives Resource-seeking FDI: Direct investment overseas so as to gain privileged access to resources vis--vis competitor Market-seeking FDI: Direct investment overseas with sizeable market and growth in order to protect existing markets, counteract competitors, and to preclude rivals from gaining new markets Efficiency-seeking FDI: Direct investment overseas so as to improve efficiency and or seek advantages of process specialization or product rationalization
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On the Basis of Entry Modes

Greenfield Investments: facilities Merger & Acquisitions (M&As): Transfer of existing assets of a domestic firm to a foreign firm that leads to mergers and acquisitions. Overseas investment to
create new facilities or expansion of existing
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On the Basis of Sector
Industrial FDI: Investment by a foreign firm in the

manufacturing sector.
Non-industrial FDI: Investment by a foreign firm in

services sector.
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On the Basis of Strategic Modes

Export replacement
FDI is made as a substitute for exports in response to

trade barriers of the host country, such as import restrictions and prohibitive tariff structure.
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Export Platforms In order to minimize a firms cost of production and
distribution, FDI is made so as to utilize the target

country to serve the global markets.
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Domestic Substitution FDI aimed to obtain cheap inputs to support home
production.
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Theories of International Investment
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Capital Arbitrage Theory
FDI takes place due to differences in the rates of
return on capital across countries.
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Market Imperfection Theory
To access countries with market imperfections, such as government policies, including import restrictions and quotas, incentives on exports, tax regimes, and governments participation in trade etc, FDI is often employed as a strategic tool for international business expansion.
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Internalization Theory
When the know-how, technology, skills, or trade secrets available with a firm are crucial to the firms competitive advantage, it needs to protect such
knowledge base within the organization. Therefore, it

expands internationally by way of FDI.
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Monopolistic Advantage Theory

An MNE is believed to possess monopolistic advantage,
which enables it to operate overseas more profitably and
compete with local firms.
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International Product Life Cycle Theory

The theory provides an explanation as to why the
production locations are shifted across countries and

suggests that an MNE prefers those countries for
investment as manufacturing locations that have market

size large enough to support local production.
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Eclectic Theory (OLI Paradigm)
It is a blend of macro-economic theory of
international trade (L) and micro-economic

theories of the firm (O&I).
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The Ownership (O) Factor Specific advantages possessed by a firm enabling it to reap profits from overseas investments.
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The Location (L) Factor
Country specific advantage contributing to relative
attractiveness of an investment destination
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The Internalization (I) Factor
Retaining firms know-how within the organization
rather than transferring it to an unrelated firm
overseas.
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Policy Framework to Promote FDI

Attracting FDI has become a key part of national development strategies for most countries. Such investments are often viewed to augment domestic capital, employment, and productivity, leading to economic growth.
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Major Regulatory Measures & Incentives to Promote FDI

Screening, admission, and establishment Fiscal incentives Financial incentives Other incentives, such as subsidized service fees,
subsidized designated infrastructure
Performance requirements
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Promotion of FDI in India

Institutional framework The Department of Industrial Policy and Promotion plays an active role in investment promotion through dissemination of information on investment climate and opportunities in India. It also advises potential investors about investment policies, procedures, and opportunities and helps resolve problems faced by foreign investors.
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Policy Framework
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FDI Prohibited

Retail trading (Except single brand product retailing) Atomic energy Lottery business Gambling and betting sector Business of chit fund and nidhi company Plantation except tea Trading in Transferable Development Rights (TDR) Activity/ sector not opened to private sector investment
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FDI up to 24 per cent allowed
Manufacture of items reserved for small sector upto 24 per cent
FM broadcasting Up-linking a news and current affairs TV channels Defence production Insurance Publishing of news papers and periodicals
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FDI upto 49 per cent allowed

Broadcasting Setting up hardware facilities Cable network: Direct to Home (DTH): Scheduled Air transport services Commodity exchanges Credit information companies Refining in case of PSUs Asset reconstruction companies Aviations

Single brand product retailing
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ISP with gateways, radio-paging, and end-toend bandwidth Establishment and operation of satellites Private sector banking Telecommunications services Non-scheduled Air transport services, ground handling services
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Foreign
direct investment up to 100 per cent allowed with prior government approval subject to conditions: Trading: Courier services Tea sector, including tea plantation: ISP without gateway, infrastructure provider, electronic mail, and voice mail: Mining and mineral separation of titanium bearing minerals and ores, its value addition Cigars and cigarettes manufacture Airports- existing projects with prior government approval beyond 74 per cent Up-linking of a non-news and current affairs TV channels Investing companies in infrastructure/ services sector (except telecom sector) Publishing of scientific magazines, specialty journals and periodicals
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Foreign Direct Investment allowed up to 100 per cent under automatic route Agriculture sector Industrial sectors
Mining Manufacturing activities Petroleum sector Power Special Economic Zones and Free Trade Warehousing Zones Industrial Parks Construction development projects
Services
Civil aviation Non banking finance companies Trading
In sectors/ activities not listed above, FDI is permitted upto 100 per cent through automatic route
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Patterns of FDI
Flow of FDI: The amount of FDI undertaken over a given time period (for example, a year). If the investment is made by a foreign firm in a country, known as inflow of FDI whereas investment made overseas is termed as outflow of FDI. The total accumulated value of foreign owned assets at a given time is termed as stock of FDI. FDI comprises of equity capital and re-invested earnings as per IMF norms. Besides, capacity expansion financed by firms of foreign origin as well as short-term or long-term loans that form part of original packages are also treated as FDI.
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Components of FDI Flows

FDI is mainly financed by TNCs through
Equity
capital
Intra-company loans earnings
Reinvested
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FDI Performance Indices
For carrying out cross-country comparison of FDI performance and FDI potential, the UNCTADs FDI performance and potential indices serve as useful
tools
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Inward FDI Performance Index: Measure of the extent to which a host economy receives inward FDI relative to its economy size. Outward FDI performance index: The ratio of a countrys share in global FDI outflows to its share in the world GDP.
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FDI Trends in India
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Sector-wise Composition of FDI Inflows

Figure : Sectorwise Composition of FDI Inflows*
S e rvic e s S e c to r 22.0% o the rs 30.6% C o m pute r S o ftwa re & Ha rdwa re 11.5% C he m ic a ls 2.3%
P e tro le um & Na tura l Ga s 3.1% P o we r 4.1% Auto m o bile Indus try 4.0%
M e ta llurgic a l Indus trie s 3.7%
Ho us ing & R e a l Es ta te Te le c o m m unic a tio ns 6.3% 5.8%
C o ns truc tio n Ac tivitie s 6.7%
*Figures for April 2000 to May 2008

Source: Fact sheet on FDI, Department of Industrial Policy and Promotion, Government of India, New Delhi, 2008
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Country wise FDI Inflows

Figure: Country-wise Composition of FDI Inflows*
others 24.6%
Mauritius 40.6%
UAE 1% .1
France 1 .4% Cyprus 1 .7% Germany 2.3% J apan 3.1 % Netherlands 4.0%
UK 6.5%
Singapore 7.1 %
USA 7.6%
*Figures for April 2000 to May 2008 Source: Fact sheet on FDI, Department of Industrial Policy and Promotion, Government of India, New Delhi, 2008
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Foreign Direct Investment in Retail Sector

India is the second largest market in the world after China and it fascinates global retailers to invest. It has opened up FDI upto 51% in retail trade to single brand products from Feb, 2006.
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POLITICAL AND LEGAL ENVIRONMENT
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To explain the significance of the political and legal environment in international business
LEARNING OBJECTIVES
To discuss various forms of political systems

To explicate different types of legal systems To elaborate principles of international law To elucidate risks in international business To explain methods of measuring and managing risks
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Significance of understanding International Political & Legal Environment

An international firm needs to operate in countries having
diverse political and legal frameworks that, at times, conflict

with its home country. Value judgments made from the perspective of the home country considerably hinders objective decision-making in the diverse international scenario. Therefore, a thorough conceptual understanding of political and legal environments affecting international business operations is needed.
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INTERNATIONAL POLITICAL ENVIRONMENT

The political environment of the country of operation
becomes increasingly important for an internationalizing firm

as it moves from exports to foreign direct investment (FDI). Cordial political relations between the firms home country
and the host countries have a direct favourable impact on its

foreign operations. As a firm expands internationally and begins to operate in multiple countries, the political and legal
issues become increasingly complex.
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Political System
It comprise of various stakeholders, such as the government, political parties with different ideologies, labour unions, religious organizations, environmental activists, and various NGOs.
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Political Ideology
A set of ideas or beliefs that people hold about their
political regime and its institutions about their
position and role in it.
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Types of government: economic systems

Communism: Form of government based on the concept of a classless
society where all the major factors of production are owned by the government and shared by all the people rather than profit-seeking enterprises, for the benefit of the society.
Socialism: A form of government where basic and heavy industries are

operated by the government so as to ensure social welfare objectives wherein small businesses may be privately owned.
Capitalism: An economic system which provides complete freedom of

private ownership of productive resources and industries.
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Types of government: political systems

Democracy: Government by the people where citizens are directly involved in decision making. Totalitarianism: Dictatorial form of centralized government, usually in the hands of a dictator who regulates every aspect of the state. Various forms of totalitarianism include:
Secular totalitarianism Fascist totalitarianism Authoritarian totalitarianism Communist totalitarianism Theocratic totalitarianism
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Types of government: structure
Parliamentary: The government consults its citizens from time to time and the parliament has power to formulate and execute laws. Commonwealth Countries: Countries representing constitutional monarchies which recognize Queen Elizabeth II as head of the sate over an independent government.
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Monarchies:
heads of
Countries that have monarchs as the

There may be either
government.
constitutional or absolute monarchies.

Theocracy: The rule of god where the civil leader is believed to have a direct personal connection with god.
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Trade Embargos: Prohibiting trade completely with a country so as to economically isolate it and apply political pressure on its government. Trade Sanctions: Imposing selective coercive
measures to restrict trade from a country .
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Bureaucracy: Form of administration based on hierarchical structure governed by a set of written rules and established procedures. The term is often used to
describe inefficient and obstructive administrative

process and red-tapism.
Terrorism: Systematic use of violence to create fear in

general public with an objective to achieve a political goal or convey a political message.
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INTERNATIONAL LEGAL ENVIRONMENT

Firms operating internationally face major challenges in
conforming to different laws, regulations, and legal systems in different countries. International mangers need to
understand the types of legal systems followed in the

countries of their operations before entering into legal contracts.
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Judicial Independence and Efficiency
A fair judicial system also reduces political risks

in overseas markets. The level of judicial independence and efficiency differs widely among countries.
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International Legal Systems
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Common Law: Law based on traditions, past practices,

and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. It depends less on written statutes and codes.
Common law originated from England and it is followed in most of the former British colonies, such as India, United Kingdom, the United States, Canada, Australia, and New Zealand.
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Civil Law: Law based on a comprehensive set of written statutes. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America.
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Socialistic Law: Socialist law traditionally advocates

ownership of most property by the state or state-owned public enterprises, prohibiting free entry to foreign firms.
This law is derived from the Marxist socialist system and
continues to influence legal framework in former communist

countries, such as the CIS, China, North Korea, Vietnam, and Cuba.
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Theocratic Law: The legal system based on religious doctrine, precepts, and beliefs. For instance, the
Hebrew law and the Islamic law are derived from religious doctrines and their scholarly
interpretations.
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Principles of International Law

International law is less coherent compared to domestic law since it embodies a multiplicity of
treaties and conventions besides the laws of

individual countries.
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Principles of International Law

Principle of Sovereignty International Jurisdiction

Nationality Principle Territoriality Principle Protective Principle
Doctrine of Comity Act of State Doctrine Treatment and Right of Aliens Forum for Hearing and Setting Disputes
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United Nations Commission on International Trade Law (UNCITRAL)

Established in 1966, UNCITRAL aims to reduce and harmonize and unify the laws of international trade.
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RISKS IN INTERNATIONAL BUSINESS
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Commercial Risks: Risks such as non-acceptance of goods, nonpayment or insolvency of the importer.
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Economic Risks:
Restrictions imposed on business activities on the

grounds of national security, conserving human
and
natural
resources,
scarcity
of
foreign
exchange, to curb unfair trade practices and to
provide protection to domestic industries.
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Political Risks: Possibility of political decisions, events, or conditions in an overseas market or country that adversely affect the international
business
that
include
confiscation,
and
expropriation,
nationalisation,
domestication.
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BERI Index
It provides risk forecasts for about 50 countries throughout the world and a broad assessment of the countrys business climate on 15 economic, political, and financial factors on a scale from zero to four.
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EIUs Risk Indices

It monitors operational risks for 150 countries on a scale of 0
to 100. The overall score includes an aggregate of ten categories of risks, such as security, political stability, government effectiveness, legal and regulatory, macroeconomic, foreign trade and payments, financial, tax policy, labour markets, and infrastructure.
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Global Political Risk Index (GPRI)
GPRI is a comparative index to monitor political risks in 24 emerging markets, including India, China, Brazil, Russia, and South Africa. It serves as an early warning system to anticipate critical trends and provides a measure for the countrys capacity to withstand political, economic, security-related, and social shocks.
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Failed States Index

The Failed States Index is a useful tool to carry out the crosscountry comparison of the worlds weakest states. It uses 12 social, economic, political, and military indicators and ranks on a scale of 0120 to assess about 177 states in order of their vulnerability to violent internal conflict and societal
deterioration.
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Managing Risks in International Business
Strategic Management of Political Risks

Employing locals Sharing ownership Increasing perceived economic benefits to the host country Follow political neutrality Assuring social responsibility Adapting to local environment
Insurance and Guarantees

Export Credit Guarantee Corporation MIGAs guarantees against non-commercial (political) risks
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C7
INTERNATIONAL CULTURAL ENVIRONMENT
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Learning Objectives
To understand the significance of culture in international business decisions To elucidate the concept of culture and its constituents To explain comparisons of cross-cultural behaviour
To discuss cultural orientation in international business

To appreciate emic versus etic dilemma and its operationalization
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Significance of Culture
A firm operating internationally comes across a wide range of diverse cultural environments, which significantly to appreciate influence the international among business cultural decisions. Managers operating internationally need differences behaviours of their business partners and consumers across various countries.
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Self Reference Criterion (SRC)

An unconscious reference to ones own cultural values, experiences, and knowledge as a basis for decision-making. SRC significantly influences ability of international managers to objectively evaluate environmental factors and make business decision.
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Approach to Eliminate SRC

Step 1:Define the business problem or goal in home-country traits, habits, or norms. Step 2:Define the business problem or goal in foreign country cultural traits, habits, or norms. Make no value judgments. Step 3:Isolate the SRC influence in the problem and examine it carefully to see how it complicates the problem. Step 4:Redefine the problem without the SRC influence and solve for the optimum business goal situation.
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The Concept of Culture

Culture is the way of life of people, including their attitudes, values, beliefs, arts, sciences, modes of perception, and habits of thought and activity. Cultiral differences across the countries significantly influence business decisions.
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Constituents of Culture
A variety of learned traits that influence human behaviour can
contribute to the culture of a social group, the major

constituents, include: value system
norms
aesthetics customs and traditions language religion
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Value System
Shared assumptions of a group about how things ought to be or abstract ideas about what a group
believes to be good, desirable, or right.
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Norms
Guidelines or social rules that prescribe
appropriate behaviour in a given situation.
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Aesthetics
Ideas and perceptions that a cultural group upholds in terms of beauty and good taste. It includes areas related to music, dance, painting, drama,
architecture, etc.
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Traditions and Customs
Traditions: The elements of culture passed down

from generation to generation.
Customs: An established pattern of behaviour within

a society.
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Language
A systematic means of communicating ideas or feelings by the use of conventionalized signs, gestures, marks, or especially articulate vocal sounds.
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Religion
Religious beliefs significantly influence business decision making. Religion encompasses three distinct elements:
Explanation: God seen as a first cause behind the creation of the universe A standard organization: Consisting of places of worships and rituals Moral rules of good behaviour
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Comparison of Cross Cultural Behavior

An appreciation of cultural differences facilitates international managers to conceptualize and implement
business strategies in view of cultural sensitivities in

various countries.
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Hofstedes Cultural Classification

Power distance
The extent to which less powerful members of an institution accept that power is distributed unequally.
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High Power Distance Countries

High social inequalities tolerated with differences in power and income distribution Organizational structures are hierarchical based an inequality among superiors and subordinates Decision making is centralized Juniors blindly follow the orders of their superiors For instance, Malaysia, Mexico, Arab countries, India etc.
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Low Power Distance Countries
Superiors and subordinates consider each other equal Organizations are relatively flatter Decision making is decentralized
For instance, Austria, Sweden, Great Britain, the US etc.
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Individualism vs. Collectivism

Individualism:
The tendency of people to look after themselves and their
immediate family.
Strong work ethics
Promotions based on merit

Involvement of employees is calculative
Countries with high individualism include, the US, Great Britain, France, South Africa etc
137
Collectivisms:
The tendency of people to belong to groups and to

look after each other in exchange for loyalty. In such cultures, interest of groups have precedence over individual interest For instance, Guatemala, Pakistan, Singapore,
Malaysia etc.
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Masculinity vs. femininity

In masculine societies, the dominant values emphasize on work goals, such as earnings, advancement, success, and material belongings. e.g. Japan, Switzerland, Great Britain, the US etc. In feminine societies the dominant values are achievement of personal goals, such as quality of life, caring for others, friendly atmosphere, getting along with boss and others. e.g. Sweden, Norway, Denmark, Thailand etc.
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Uncertainty avoidance
The extent to which people feel threatened by ambiguous situations. In high uncertainty avoidance societies there is lack of tolerance for ambiguity and the need for formal rules.
For instance, Greece, Portugal, Japan, France etc.

Low uncertainty avoidance countries include Singapore, Denmark, India, the US etc.
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140
Trompenaars Cultural Classification
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141
Universalism vs. Particularism
Universalism: The belief that ideas and practices can be defined and applied everywhere without modification
e.g. the US, Australia, Germany, Sweden etc.
Particularism: The belief that unique circumstances and relationships, rather than abstract rules are more important considerations that determine how ideas and practices should be applied e.g. Venezuela, the US, Indonesia, China etc.
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Individualism vs. Communitarianism

Individualism: people regarding themselves as individuals.
For instance
the US, Czechoslovakia, Argentina, the CIS,
Mexico, and the UK . Communitarianism: people regarding themselves as part of a group. For instance, Singapore, Thailand, Japan, and Indonesia.
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143
Neutral vs. Affective

Neutral Cultures: Cultures in which people tend to hold back their emotions and try not to exhibit their feelings.
For instance, Japan, the UK, Singapore, Australia, etc.

Affective Cultures: Cultures where emotions are expressed openly. For instance, Mexico, Netherlands, Switzerland, China, Brazil, etc.
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144
Specific vs. Diffused

Specific Cultures: Cultures in which individuals tend to have a large public space which is readily shared, and a smaller private space. For instance, Australia, the UK, the USA and Switzerland. Diffused Cultures: Culture in which public and private space are more or less similar and public space is guarded more carefully. For instance, Venezuela, China and Spain
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145
Achievement vs. Ascription

Achievement Cultures: Culture in which status is accorded to
high achievers and high performers. For instance Austria, the USA, Switzerland, the UK, Sweden and Mexico etc. Ascription Cultures: Culture in which status is accorded to
those who naturally evoke admiration from others such as

elderly, seniors, highly qualified and skilled people. For instance, Singapore etc. Venezuela, Indonesia, China, the CIS, and
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Other Cross-Cultural Classifications
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147
High Context vs. Low Context

High Context Cultures: Culture in which high significance is given to implicit communications, such as non-verbal and subtle situational cues. For instance, China, Korea, Japan and Arab countries.
Low Context Cultures: Cultures in which communication is more explicit with heavy reliance on words to convey the meanings. For instance, Germany, Switzerland, Scandinavia, North America and Britain.
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Homophilous vs. Heterophilous

Homophilous Cultures: Cultures where people share beliefs, speak the same language, and practice the same
religion.
For instance, Japan, Korea and Scandinavian countries. Heterophilous Cultures: Countries that have a fair amount of differentiation in languages, beliefs, and religions followed. For instance, India and China.
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Relationship vs. Deal-focused

Relationship-focused Cultures: Cultures in which strong orientation towards building relationships and developing mutual trust. For instance, India, Japan, China, Singapore, Saudi Arabia, United Arab Emirates, Egypt, Brazil, Mexico, and Russia. Deal-focused Cultures: Task-oriented cultures with openness to hold direct business talks with strangers.
For instance, Britain, USA, Germany, Denmark, Australia, Canada, Finland etc.
150
Formal vs. informal cultures

Formal Cultures: Status differences are large and valued and formality is used to show respect. For instance, India, UAE, Egypt, Brazil, Russia, Poland, Japan, China,, Singapore, France, Belgium, Britain, Germany, Denmark,
Finland etc.
Informal Cultures: Status differences are not valued and
Informal behaviour is not considered disrespectful. For instance, the USA, Canada, and Australia etc.
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Polychronic vs. Monochronic

Polychronic Cultures: Cultures in which time schedules and deadlines are flexible and relationships take precedence. For
instance, India, Thailand, Philippines, UAE, Egypt, Brazil, Russia

etc. Monochronic Cultures: Cultures with rigid time schedules and deadlines with high emphasis on punctuality. For instance, Japan, China, Singapore, Britain, USA, Canada, Australia, Germany, Denmark etc.
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Expressive vs. Reserved Cultures

Expressive cultures: people are more expressive with direct eye contact. For instance, Russia, Poland, Romania, USA, Australia, and Canada
Reserved cultures : people restrain their facial expression and gesturing.

For instance, India, Japan, China, Singapore, Britain, Germany, Denmark, Finland etc.
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Parochialism vs. Simplification

Parochialism: Belief that views the rest of the world from ones own cultural perspective. Simplification: Exhibiting same cultural orientation towards different cultural groups.
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EPRG Approach
Ethnocentric orientation
The belief which considers ones own culture as superior to others. The belief that the business strategy which has worked in the home country would also be suitable in alien cultures.
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Polycentric orientation
It is based on the belief that substantial differences exist among various countries. Therefore, a single business strategy cannot be effective across the world and customized business strategies need to be adapted in different countries.
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Regiocentric orientation
A firm treats the region as a uniform cultural
segment and adopts a similar business strategy within the region but not across the region.
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Geocentric orientation
The approach considers the whole world a single market and
attempts to formulate integrated business strategies. A
geocentric firm attempts to identify cultural similarities across

countries and formulates a globally uniform business strategy.
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Emic vs. Etic Dilemma
The Emic school holds that attitudes, interests, and behaviour are unique to a culture and best understood in their own terms. It emphasizes studying the business research problem in each countrys specific context and identifying and understanding its unique facets. The Etic school emphasizes identifying and assessing universal attitudinal and behavioural concepts and developing pan-cultural measures. Thus, etic is basically concerned with measuring universal behavioural and attitudinal traits.
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Operationalisation of Emic and Etic
Emphasis is often placed an identifying and developing constructs that are feasible across
countries and cultures, while conducting cross

country research.
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INTERNATIONAL BUSINESS

The Dimensions of International Business

Copyright 1999 by Harcourt Brace & Company All rights reserved

Business Text & Cases

Business Text & Cases

Rakesh Mohan Joshi

Charles Hill R. Chandran

What is International Business?

International Business consists of transactions taking

Copyright 1999 by Harcourt Brace & Company All rights reserved

The Need to study International Business?

Copyright 1999 by Harcourt Brace & Company All rights reserved

Evolution of International Business

Cross-country trade has been taking place since prehistoric times.

Nature of International Business

Copyright 1999 by Harcourt Brace & Company All rights reserved

Reasons for Going International

Copyright 1999 by Harcourt Brace & Company All rights reserved

2 Stage 3 Stage 4 Stage 5

Copyright 1999 by Harcourt Brace & Company All rights reserved

International Business Approaches

Copyright 1999 by Harcourt Brace & Company All rights reserved

International Business Approaches

Copyright 1999 by Harcourt Brace & Company All rights reserved

Stages of domestic to global evolution

Copyright 1999 by Harcourt Brace & Company All rights reserved

Copyright 1999 by Harcourt Brace & Company All rights reserved

Copyright 1999 by Harcourt Brace & Company All rights reserved

Major decisions in International Business

Deciding Whether to Go Global Deciding Which Markets to Enter

How to enter (Market entry Strategies)

Licensing, Franchising, Management contracting, contract manufacturing, joint ownership, collaboration

Copyright 1999 by Harcourt Brace & Company All rights reserved

Major decisions in International Business

Deciding on the Global Marketing Mix

Adapted Marketing Mix:

Deciding on the Global Marketing Organization

Copyright 1999 by Harcourt Brace & Company All rights reserved

Direction of World Trade

Copyright 1999 by Harcourt Brace & Company All rights reserved

Composition of World Trade

Copyright @ Oxford University Press International Business

Important Trade Items

Share(%) 20.91 15.64 12.36 13.63

Important Trade Items

Major Trading Partners

Copyright 1999 by Harcourt Brace & Company All rights reserved

Copyright 1999 by Harcourt Brace & Company All rights reserved

Copyright 1999 by Harcourt Brace & Company All rights reserved

GLOBALIZATION AND INTERNATIONAL

To explain the concept of globalization

To elucidate factors influencing globalization

Copyright @ Oxford University Press International Business

Globalization of Business: A Historical Perspective

restrictions, for the movement of goods or visa

Copyright @ Oxford University Press International Business

Copyright @ Oxford University Press International Business

Globalization: A Holistic Approach

The increasing integration of national economic systems through

Copyright @ Oxford University Press International Business

Copyright @ Oxford University Press International Business

Dimensions of Economic Globalization