International Business

Environment

Seema Singh
 Defining key terms
 International business (IB) – this term refers to
any form of commercial exchange of materials,
goods, services or any other resources that
involves transfer across national boundaries.
 Internationalization – in referring to the
internationalization of business and
organizations, we point to their expansion
beyond their home nation through establishing
relationships, transaction linkages or operations
in one or more other countries.
 Defining key terms
 Globalization – this term is subject to many
interpretations. For some, it represents a natural,
inevitable and largely unproblematic move towards a
‘borderless world’ and the end of the independent
nation state. However, others read it as the spread of
western social, economic and cultural values.
Intertwined with this process, we see the imperative of
multinational enterprises (MNEs) to configure and
develop their value chains at a global level in the aim of
making the most of their own efficiency and
effectiveness in order to maximize their shareholder
value.
Factors affecting Business Environment:

 Social – how consumers, households and communities

behave and their beliefs.
 Legal – the way in which legislation in society affects
the business.
 Economic – how the economy affects a business.
 Political – how changes in government policy might
affect the business.
 Technological – how the rapid pace of change in
production processes and product innovation affect a
business.
 Ethical – what is regarded as morally right or wrong for
a business to do.
 International – what changes are taking place in the
international environment.
Drivers of Globalization
 Two key factors seem to underline the trend towards the
increasing
globalization of markets and production:
The decline of barriers to trade and investment and
Technological change.
 The decline of barriers to trade and investment:
 Decline in Trade barriers:

Definition: International trade occurs when a firm exports goods or

services to consumers in another country.
 Decline in investment barriers:

Definition: The Foreign direct Investment: FDI occurs when a firm

 invests to international trade activities outside its home country.
The role of technological change:
 While lowering trade barriers has made the
globalization of markets and production a
possibility, technological changes have made
it a reality.
 “Telecommunications is creating a global
audience. Transport is creating a global
village.
 Microprocessor and telecommunications:
 growth of high power, low cost computing,
increasing the amount of information that can
be processed by individuals and firms.
developments in satellites, optical fiber, and
wireless technology, and internet and World
Wide Web.
 Transportation technology:
Improvements in transportation technology,
including jet transport, temperature controlled
containerized shipping, and coordinated ship-
rail-truck systems have made firms better
able to respond to international customer
demands.
A changing world Foreign Direct
Investment picture:
The source and destinations of FDI has also
dramatically changed over recent years, with
the US and industrialized countries becoming
less important (although still dominant) as
developing countries are becoming
increasingly considered as an attractive and
stable location for investment.
 The changing nature of the Multinational
Enterprise:
 Definition: A multinational enterprise is
any business that has productive
activities in two or more countries.
 The major trends in MNCs are the rise of
non-US MNCs particularly Japanese
Multinationals. The second is the growth mini
multinationals.
International Business
Environment
 To buy/sell goods and services worldwide
 To carry business across boundaries.

Objective
 To understand the various environmental
factors that affect a firms overseas business
operation.
 To focus on a particular problems and
opportunities that emerge in more than one
Country.
Evolution
 First phase of globalization began around
1870 and ended with world war I driven by
Industrial Revolution in the UK,GERMANY &
USA.
 The import of raw material and export of
finished goods results in sharp increase in
trade.
 Govt. initiated and imposed no. of trade
barriers to trade to protect their domestic
production.
Decline in international trade.
 World nations felt the need for international
cooperation.
 IMF (International Monetary Fund) and IBRD
(International Bank For Reconstruction And
Development) were formed.
 Efforts of IMF , World bank and WTO to
liberalize their economies led to globalization.
Different Terms

 International Trade to International Marketing

Producers Export Far off countries

e.g. India export raw materials, cotton jute, raw jute

and iron ore during 1900.
Massive industrialization enable us to export jute
products, cotton garments and steel during 1960.
Shift from exporting/importing
to international marketing.
 Marketing efforts
 Distribution channels

 Attractive packaging

 Product development

 Pricing etc.

It is for all developing and developed countries.

 International marketing to
International Business
 MNC :
Produce in home country
Market them in foreign country

 MNC sometimes
Plants in foreign country.
e.g. UNILEVER established HLL in India.
Produces in India and market them in Sri Lanka,
Bangladesh and Nepal.
Shift from

International trade

International marketing

International business
 International business stages
-I
 Domestic ( limits to national boundary)

 International (focus on domestic practices but

extend its wings to foreign countries)

 Multinational (different strategies for different

market) e.g. Toyota
 International business stages
-II

 Multinational (different strategies for different market) e.g.

Toyota

 Global (produce in single country and market it globally)

 Transnational (produces, markets, invests, operates across the

world)
International business approach
 Ethnocentric approach

Domestic company formulates their product design,

Their strategies
 Polycentric approach
 Establish a foreign subsidiary company

 Decentralise all its activities

 Decision making authority to its executives

Geocentric approach
 Entireworld is like a single country
 Selects the employees from the entire world

 Operates with no. of subsidiaries

Benefits of IB

Survival (sales and growth)

Low price
Variety of goods
High living standards
Economic growth
Employment opportunities
 Diversification
International business
environment
 Meaning
 Factors/activities that surrounds
 Factors that affect or influence
 Social and cultural factors (S)
 Technological factors (T)
 Economic factors (E)
 Political/govt. factors (P)
 International factors (I)
 Natural factors (N)
 STEPIN
Difficulties of IB
 Political and legal difference
 Cultural

 Economic

 Difference in language
 Trade restrictions

 High cost of distance

 Difference in marketing infrastructure

Goals of IB
 Market share
 High profit

 Risk avoidance

 Resource acquisition

 Expand business capacities

Types of env.factors
 Internal factors and External factors

 Internal factors influence/affect the business from inside

 Human resource mgt
 Trade unions
 Organisation structure
 Financial mgt
 Production mgt
 Marketing mgt
 Mgt/leadership style
External environment
 Micro Macro
 All stakeholders (STEPIN)
 Shareholders
 Creditors
 Bankers
 Competitors
 Suppliers
 Customers
 distributers
SWOT analysis
 (strength,weakness, opportunity, threat)
 Helps to formulate business strategies

 Helps to analyse both external and internal

environment
Social and cultural env.
 Attitude of people to work
 Attitude to wealth

 Family

 Religion

 Education

 Social responsibility

 Customs,values,beliefs,habits
Technological env.
 Technology is application of knowledge to a
particular tasks
 It changes at faster rate
 Investment in technology eg Japan
 Technology and economic development
 Technology and international competition(invention
and innovation)
 Technology transfer
 Information technology(internet,www sites,e-
mail,CAD,CAP)
Economic environment
 Key economic forces
 General economic framework of a
country(economic policies)
 Economic stability(Inflation rate)

 Existence and influence of capital markets

 Market size

 Availability of an economic infrastructure

 Economic factors
 Inputs of production process
(human,physical,knowledge and capital)

 Elements

GNI
GDP
 Economic features
measure of inflation
unemployment
debts(financial obligations) larger the
total debt –more unstable
Income distribution
Poverty
Balance of payment (deficit and surplus)
Types of economic systems
 Capitalist (market economy)
Individuals take decision
eg-USA, UK, Canada, Hongkong
 Communist (command economy)

Govt. takes decision

e.g.-China, Romania,Yugoslavia, Poland, Sweden
 Mixed economy (major factors of production are
controlled by govt and some by private)
e.g.-India, France, Holland
Political environment
 Itinfluence the business from multi angles
 Viz-deciding,promoting,encouraging,directing
and controlling the business.
 The success and growth of IB depends upon
stable,dynamic,honest,people
participative,secured political system in a
country.
Political system
 Stable political system---successful business
of a country operation
e.g. USA
 Instable political system—discourage
potential foreign investment, penalize
countries currently operating
e.g. Germany,Italy
Indicators of political
instability
 Corruption
 Social unrest-clashes between community
groups , religious groups
e.g. Christian-Muslim conflict in Lebanon
Hindu – Muslim conflict in India
White-Black conflict in USA
 Negative attitude of nationals-attitude
towards foreign business and foreigners
 Policies of host government
Types of political system
 Two-party system---existence of two major parties
e.g.-USA & UK
Republican party (represents the business
interests)
Democratic party (represents the Labour)

o Multi-party system--- many party but no party is

strong e.g. Germany, France, Israel, Poland and India
during 1996-2000.
 Single-party system-one dominating party
gets the control of government.
e.g.-Egypt and even in India Congress party
mostly ruled until 1997.
 One- party dominated system- there are
more than one party but dominating party rule
the government. E.g. Cuba, USSR , Libya.
 Individualism---it gives right and role to the
(open) individuals
political officials and agencies
have a limited role e.g. US
 Collectivism---it gives right and role to the
(closed) community
political officials and
agencies have extensive role
e.g. China, Japan
Role of political system
 To integrate the society e.g. China creates
the freedom for foreign
investors to enter the market,
design operations, manage
activity and earn profits
 To maintain political relationship among
countries- e.g. India and
Russia ,Pakistan and USA.
LEGAL ENVIRONMENT
 Describes how different laws affect business
 What type of a legal system prevail in that country
 How national laws and regulations affect managers plan and
companies activities.
 What are the different laws of different countries to regulate
crucial activities like investment of capital, customs duties
applied to imports, transfer of hazardous waste, payment of
dividends to foreign investors.
 How companies conduct business transactions
 What are the rights and obligations of those engaged in business
 Legal redressal system (arbitration , International Centre for
Settlement of Investment Disputes, mediators)3.
Kinds of legal systems
Common law It is based traditions, customs
precedents and usage court interpret
the law according to the situation
and incidents.

e.g.- USA , Hong Kong, England, New Zealand,

Australia
Kinds of legal systems
Civil law It is based on systematic and
extensive codification of laws. It is
based on how the law is applied to
facts. Judges rather than creating
law, apply existing legal and
procedural codes to resolve disputes.
More than 70 countries follow civil
laws.

e.g. France, Germany, Japan, India

 Contracts should be in detail where common law is
in practice.
 Contracts are in shorter form where civil laws are in
force.

Civil law

Common law
Kinds of legal systems
Theocratic It is based on religious principles
law like the Islamic law and Hindu law.
Islamic law is mostly found in Muslim
countries and is based on Holy Koran ,
The Sannah or sayings of Prophet
Mohammad.
Islamic law is more moral rather than a
commercial law.

e.g. Bank cannot charge interest but they can charge a

fee in the form of profit sharing with either the
depositors or borrowers as the case may be.
Impact of laws on IB
 National laws affect all local business
activities
 National laws affect cross border activities

 Legal regulations affect day to day operations

or long term competitiveness.
Impact of laws on IB
 Operational concerns include
1. starting a business e.g. easy to start a
business in Ireland, Sweden, New Zealand
Australia, Canada
Three registration procedures—a tax,
labour and administrative registration
whereas in Colombia it requires 20
procedures.
 Impact of laws on IB
2. Entering and enforcing contracts
Different countries have different laws for entering and enforcing
contracts between buyers and sellers.

e.g. United Nations Convention on contracts for International sale of

goods sets guidelines for the formulation and enforcement of
contracts among its signatories.

Australia, Norway and U.K. require fewest number of procedures to

enforce a contract, whereas Bolivia, Cameroon, Mexico,
Panama require more than 60 procedures.
Impact of laws on IB
Countries vary in span of time to enforce a
contract.
Fastest countries – New Zealand, Singapore,
Japan, Korea etc. take 50 to 75 days.
Slowest countries – Italy, Nigeria, Poland take
600 to 1500 days.
 Impact of laws on IB
3. Hiring and firing local workers
In practice, hiring is easy and firing is tough for
local worker.
e.g. China, Denmark, New Zealand, Sweden,
US have flexible labour regulations.
Angola, Belarus, Paraguay have most
restrictive policies.
 Impact of laws on IB
4. Closing down of Business
Ireland, Japan, Canada, Hong Kong are the
fastest and cheapest countries on this
count.
India, Philippines, Serbia, Panama are the
slowest and most expensive countries in
terms of closing down the business.
Impact of laws on IB
The countries that make it easy to start a
business impose fewer and simpler
regulations to hire and fire workers as well
as impose less regulations in their courts
and bankruptcy systems.
Different modes of entry to
international business
 Exporting
Advantages --(1) need limited finance
(2) less risk (A British company-
Chivers Hartley get a big order from Jusco, one of
Japan’s largest retailers. Chivers is a UK firm that makes a
variety of fruit preserves – jellies , jams etc. because its domestic
market has matured. Chivers sees exports as an important
growth opportunity.
(3) motivation for exporting – it may be
proactive and reactive
Forms of exporting
 Indirect exporting
 Direct exporting

 Intra-corporate transfers (selling of products

by a company to its affiliated company in host
country e.g. selling of products by Hindustan
Lever in India to Unilever in USA.)
licencing
 Domestic manufacturer leases the right to
use its intellectual property i.e. technology ,
work methods , patents, copy rights, brand
name , trade marks etc to a manufacturer in a
foreign country for a fee.
Pays royalty money

licensor licensee

Leases the right to use the

intellectual property
Franchising
 It is a form of licensing.
 An independent organisation called the franchisee
operates the business under the name of another
company called the franchisor.
 Franchisor can exercise more control over the
franchisee. E.g. McDonald , KFC ,Dairy Queen , Pizza
Hut , Domino’s have franchised restaurants worldwide.
NIIT has a franchised computer training centres
throughout India.
 Hotels like Hilton and Marriott have international
franchisees.
Special modes of entering IB
 Contract manufacturing
 Business Process Outsourcing
 Management contracts
 Turnkey Projects
 Foreign Direct Investment with strategic
alliance like mergers , acquisitions and joint
ventures. E.g. Xerox of USA and Fuji of
Japan collaborated to explore new markets in
Europe.
Foreign direct investment
without alliances
 Companies which enter the international markets through FDI
invest their money, establish manufacturing and marketing
facilities through ownership and control.
 The mode of FDI without alliances is Greenfield strategy.
It refers to starting of the operations of a company from scratch in
a foreign market.
The company conducts the market survey, selects the location,
buys or leases land, creates the new facilities, erects the new
machinery, transfers the human resources and starts the
operations and marketing activities.
E.g. Mercedes-Benz located its automobile assembly plant in
Alabama, Nissan located its factory in Sunderland, England.
Special modes
 Contract manufacturing
it means outsourcing entire or part of
manufacturing operations.
E.g. Nike has contracted with a number of factories
in south-east Asia o produce its athletic footwear
and it concentrates on marketing.
Bata also contracted with a number of cobblers
in India to produce its footwear and concentrate on
marketing.
Business process outsourcing
 BPO is a long term contracting out non- core
business processes to an outside provider to
help achieve increased shareholder value.
some forms of BPO may include both IT, Mgt
and business operations like turning over
functions such as payroll, accounting, billing,
or even real estate mgt to a third party.
Management contract
 Itis an agreement between two companies ,
whereby one company provides managerial
assistance, technical expertise and
specialised services to the second company
of the agreement for a certain agreed period
in return for monetary compensation.
E.g. Delta, Air France and KLM often provide
technical and managerial assistance to the
small airlines companies owned by the Govt.
Turnkey projects
 Itis a contract under which a firm agrees to
fully design, construct and equip a
manufacturing/business/service facility and
turn the project over to the purchaser hen it is
ready for operation for a remuneration.
International turnkey projects include
nuclear power plants, airports, oil refinery,
national highways, railway lines etc.
Recent approach to turnkey projects is Build,
Operate and Transfer (B-O-T).
International business contract
 Itis a tool for international business or
international cooperation under the rule of
law.
 A contract is an agreement between the
parties who are engaged in a business
dealings.
 Parties of the contract– principal, agent and a
distributor
Life cycle of a contract
 Birth-Entry of international contract
contract parties must understand
the legal culture of the contracting parties
legal terminology
economic implication of the terms and
conditions of the contract.
 Aging- contract performance & contract amendment
business world has been rapidly changing
changing environment creates unfairness or
unreasonableness in performing the business
contract.
one party gets benefits and other party suffers.
To avoid this contract should be amended or
adjusted keep in mind the benefits of both the
parties.
 Sickness-contract disputes
most contracts have dispute resolution clause.
Two types of dispute resolution mechanism-dispute
resolution by the judiciary and
dispute resolution by mediation or arbitration.
Arbitration is a non governmental system which
saves time and expenses.
Judicial system needs precise evidentiary rule.
 Death-contract termination
It may arise
1. When there is a successful performance of
the contract by the contractual parties, the
contract could be ended peacefully.
2. The contract ended its term of destiny.
Death of a contract does not mean.
3. A symbol of sad thing.
4. Failure of trust.
Ways of implementation of
contract
1. The negotiation party shall improve its technique of
negotiation to make the other side agree ‘YES’.
2. Preparation of negotiation packages- from the most
advantageous to the most disadvantageous.
3. Use of lawyers opinion.
4. A dispute resolution clause shall be discussed in
advance.
5. Understanding of the economic implications of
each term of the contract.
6. International lawyers before or after the legal
contract shall not be overlooked because they are
professionals in these fields.
International sales agreement
 When a manufacturer finds a suitable
intermediary a sales agreement is drawn up
The agreement should be short but due to
the differences in the different market
environment certain elements are essential to
cover under the agreement
Elements of a sales agreement
 Basic components
1. Parties to the agreement.
2. Statement that the contract supersedes all the previous
contracts.
3. Duration of the agreement.
4. Territory – Exclusive, Non-exclusive, Sole
5. Manufacturers right to sell direct at reduced or no commission to
local government and old customers.
6. Products covered.
7. Expression of intent to comply with government regulations
Clauses limiting sales forbidden by U.S Export Controls or
practices forbidden by the Foreign Corrupt Practices Act.
Agents rights and duties
1. Arbitration:
(a) if possible, in the manufacturer’s country
1. (b) if not, before international chamber of commerce or American
Arbitration Association
2. Selecting the arbitration panel
3. Assurance that award will be binding in the distributor’s country.
4. Termination conditions
5. Clarification of tax liabilities.
6. Payment and discount terms
7. Conditions of delivery of goods
8. limitations on manufacturer’s responsibility to provide information
9. Right to change prices, terms, and conditions at any time
10. Right to visit territory and inspect books
11. Right to repurchase stocks
12. Option to refuse or alter distributor’s order
13. Training of distributor’s personnel
Distributor’s rights and duties
1. No disclosure of confidential information.
2. Limitation of distributor’s right to assign contract.
3. Limitation of distributor’s position as legal agent of
manufacturer.
4. Penalty clause for late payment.
5. Responsibility for obtaining customs clearance.
6. Publicize as authorized representative in defined
area.
7. Remove all signs and evidence identifying
distributor with manufacturer if relationship ends.
Distributor’s rights and duties
8. Information to be supplied by the distributor:
A. sales report
B. names of active prospects
C. government regulations dealing with imports
D. competitive products and competitor’s activities
E. price at which goods are sold
F. complete data on other lines carried.
G. accounting method to be used.
H. duties concerning promotional efforts.
9. Responsibility to maintain suitable place of business
10. Requirement to maintain adequate stock, spare parts
11. Prohibition of manufacture or alteration of products
12. Requirement that inventory to be surrendered in event of a dispute
that is pending in court
13. Clarification of responsibility arising from claims and warranties
Unit 2. Global Trading
Environment
MEANING
The investment made by the company in new
manufacturing and marketing facilities in a foreign
country is FDI.
Companies invest in foreign countries in order to
gain control over the market and thereby increase
sales.
E.g. Enron in power plant in India, Bridgestone Tyre
co., a Japanese MNC in USA, Toyota cars in USA
Forms of FDI
 Purchase of existing assets in a foreign country.
 New investment in property, plant, equipment.
 Participation in a joint venture with a local partner.
 Transfer of many types of assets like human
resources, systems, technological know how in
exchange for equity in foreign companies
 Through trading in equity (purchase of equity shares
of foreign companies) e.g. KLM of Netherlands
acquired the equity of Northwest Airlines of USA.
 INTERNATIONAL
INVESTMENT THEORIES
 Ownership Advantage Theory
 Internalization Theory

 Dunning’s Electic Theory

 Factor Mobility Theory

 Product Life Cycle Theory

Ownership Advantage Theory
 Firms having competitive advantage
domestically derived from its valuable assets
like technology, brand name and large scale
economies extend their operations to foreign
country through FDI.
E.G. Caterpillar established its manufacturing
facilities in Europe, Asia, North America,
South Africa.
Dr. Reddy’s Lab started its operation in
Europe and South Africa.
Internalization Theory
 Domestic company enters the foreign market
through FDI when the cost of transaction is
high i.e., cost of negotiation,monitoring and
enforcing.
e.g. Toyota could not shift its manufacturing
technique as it involves high cost of
transportation so it internalised its US
operation through FDI.
DUNNING’S ELECTIC THEORY
 Companies locate their manufacturing
facilities when there is location advantage.
 According to John Dunning companies go for
FDI to get the competitive advantage by
consuming resources of host country and
unique strength of the internal firm like
technology, management, marketing
capability, technology know-how etc.
e.g. Electrolux establish its plant in china to
take advantage of low cost labour.
Factor Mobility Theory
 Capital normally flow from those countries
where return on capital is low to those
countries where the return on capital is high.
 Capital abundant-------- less return on capital

countries
capital scarcity --------- high return on capital
countries
Product Life Cycle Theory
 Firms originally developed the product to
establish manufacturing facilities to produce
the product in foreign countries.
e.g. Xerox originally introduce photocopier in
USA. It later spread the manufacturing
facilities in Japan (Fuji-Xerox), Great Britain
(Rank-Xerox) and India (Modi-Xerox).
Firms establish manufacturing facilities in
foreign countries when the product reaches
the maturity stage in the home country.
Factors influencing FDI
 Supply factors
production costs
logistics (cost of transportation)
availability of natural resources
availability of quality human resource at low
cost
access to key technology (use of existing
technology rather than developing)
 Demand factors
customer access
marketing advantages
exploitation of competitive advantages
customer mobility (ancillary industries in
parent companies location)