Introduction to International Business
International Business Overview
What is International Business?
Business is understood as a simple commercial activity driven by a profit motive
When this activity is conducted within a nation's boundaries, it's called domestic trade or domestic business
When it goes across nations or across boundaries, it is called international business
One definition states that international business can be defined as the expansion of business functions from domestic to any foreign country. The objective of this expansion is to fulfill the needs and wants of international customers
Another definition describes international business as the exchange of goods and services, resources, knowledge, and skills among individuals and businesses in two or more countries
What are the reasons for Complexity in International Business?
The Complications arise because countries difffer significantly in serveral Aspects:
Culture
Political Situation
Bilateral Relationships
Knowhow
Infrastructural Developments
International business is subject to numerous rules, regulations, and laws
Key Concepts in International Business Evolution
Glocal (Globalization + Localization): This refers to international business being conducted in a localized manner. Companies need to cater to local tastes and demands to succeed.
Example: McDonald's in India adapted to local taste and demand and did well. Counter-example: Some companies like Siemens and Kellogg's initially failed because they didn't understand this need for localization.
Companies realized the importance of being more local and addressing local problems, even while being global in nature, which was crucial for success, especially in diverse countries like India.
Rise of Emerging Markets: Countries like BRICS (Brazil, Russia, India, China, and South Africa) are called emerging markets because they possess the potential to serve the world market. They have immense potential in terms of consumer population size, resources, and more
Factors Contributing to the Rapid Growth of International Business
Increase and Expansion of Technology:
Liberalization of Cross-Border Trade and Resource Movements
Development of Services That Support International Business
Growing Consumer Pressures
Increased Global Competition and Saturation in Home Markets
Change in Political Situations
Expanded Cross-National Cooperation
Stagnation of Home Markets:
Types of External Trade
Import
Export
Re-Export (or Entrepot)
Importance of International Trade
Earning Foreign Exchange:
International business, particularly through the exports of goods and services globally, helps to earn valuable foreign exchange.
The sources state that without sufficient foreign exchange, even importing or exporting, or doing any business at all, becomes a very challenging task.
Countries accumulate foreign exchange reserves, which they can then use for other benefits
Governmental Support and Benefits:
Companies engaging in international business can receive support and benefits from governments aiming to attract investment
LIke Hyundai received tax relaxations, tax brackets, and other benefits from the government to set up its plant, including provision of easy land rebates
Optimum Utilization of Resources:
International expansion allows companies to utilize their production capacity fully, especially when domestic markets become saturated
Increase Market Share:
Companies look to international markets to increase their customer base and sales
Increase Competitive Capacity: International business encourages companies to produce high-quality goods at low costs by employing superior technology, new management techniques, and marketing techniques
Spread Business Risk:
Operating in multiple countries helps companies mitigate risk by balancing losses in one market with profits in another
Nature of International Business
Involvement of Commercial Activity:
It encompasses a wide range of economic and monetary activities including
trade,
transportation
insurance
warehousing
banking and finance
advertising
publicity.
A lack of understanding of these aspects can have adverse effects
Exposure to Political Risk & Trade Barriers:
Sanctions and trade barriers between countries (e.g., US and Iran).
Taxes imposed to protect domestic players (e.g., India imposing heavy taxes on vehicles from Japan and China).
Political instability and issues like double taxation avoidance agreements (e.g., India and China) or national emergencies (e.g., India in the 70s and 80s).
Trade wars between major economic powers (e.g., US and China), impacting global stock markets. Political risk is inherent in international dealings
Large Scale Operations:
Typically involves large-scale production, which helps decrease the cost per unit of output
Sensitive Nature:
International business is highly sensitive to changes PESTEL analysis
Political
Economic Policy
Social
Technological
Environmental
Legal
Scope of International Business
International Marketing:
This involves applying marketing principles across national borders to satisfy the diverse needs and wants of people in different countries.
It requires identifying specific needs and wants of customers in foreign markets.
Examples illustrating the need to adapt marketing include KFC offering both vegetarian and non-vegetarian meals in India
International Finance and Investment:
This area of financial economics deals with monetary interactions occurring between two or more countries.
Organizations like the IMF and IBRD are involved.
It covers monetary interactions, policies, and guidelines
Earning of Foreign Exchange:
As mentioned earlier, this is a fundamental scope, involving the trading of one currency for another.
The constant exchange of currencies by buyers and sellers for their benefit across the world is a key aspect.
The market for currency exchange (Boolean market, currency market) is highly active.
Global Human Resources (HR):
This umbrella term includes all aspects of an organization's HR, payroll, and talent management processes operating on a global scale.
The failure of the Daimler and Chrysler merger is presented as a case where the primary reason was the cultural differences between the German and American employees, preventing effective collaboration.
This emphasizes the importance of dealing with global HR conditions and policies.
Sensitive areas include salaries, compensation, training, development, and employee/labor relations.
What might be casual in one country can be a serious factor in another, significantly impacting a company's success
Modes of Entry
The modes of entry, which can be broadly categorized as trade related, contractual, and investment entry
The specific modes discussed are:
Exporting: Selling products produced in the home market to customers overseas.
Direct Export: The organization sells directly to importers overseas.
Advantages:
Good control over foreign markets
direct information from the target market,
better protection of intellectual property (trademarks, patents, goodwill),
potentially greater sales.
Disadvantages:
High initial setup and startup cost,
requires significant information gathering (PESTEL, SWOT analysis),
highly time-consuming.
Accuracy in planning is critical
Indirect Export:
Selling products to a third party (like an Export Management Company or a subsidiary of the importer) who then sells them overseas on the organization's behalf.
Advantages:
Fast Market Access (leveraging the third party's expertise),
flexibility,
less time investment,
ability to concentrate resources on production,
very little financial commitment,
avoids handling complex documentation
non-tariff barriers.
Disadvantages:
Higher Risk (if the agency is not committed),
Little or No Control over distribution, sales, and marketing, resulting in a lack of ground-level information needed for product adaptation.
Inability to operate overseas directly means missing potential benefits
Counter Trade: Exchanging goods or services that are paid for, wholly or partly, with other goods or services. An example is Russia exchanging goods like butter. Mechanisms include barter, switch trading, counter purchase, buyback, offset, and compensation trade
Piggybacking:
A form of strategic partnering where two firms tie up to serve foreign markets, especially those with high entry barriers. One firm (the "carrier") uses its foreign market knowledge or distribution channels to sell the products of another firm (the "rider").
Requirements: The rider must produce quality goods and find firms to carry them.
This is a viable alternative for firms with limited exporting activities, resources, or foreign market knowledge.
An example is a car company tying up with a tire company. The term means riding on someone else's back to get somewhere
Licensing:
An agreement where a licenser grants a licensee the right to use its brand name, marketing know-how, copyright, work method, or trademark over a period of time, in exchange for a license fee. It is a significant mode of entry.
An arrangement where a company (licensor) sells the right to use intellectual property or produce its product to a licensee. In return, the licensor receives a royalty or fee
The licensor gives permission and support to set up the business, produce, and sell products
However, the licensor does NOT give significant support; the licensee is responsible for building all the infrastructure like plants and facilities and running the business
Example: BAT giving licenses in many countries, including to ITC in India for a specific cigarette brand (555).
Advantages:
Allows obtaining extra income from technical know-how,
reaching markets that were previously inaccessible,
quickly expanding without significant risk or large capital investment.
Can pave the way for future direct investments by helping the company understand attractive sectors.
Disadvantages:
Increases opportunities for intellectual property and product theft (licensee potentially stealing technology/know-how).
Inconsistent product quality from the licensee can negatively affect the brand image.
Firms can lose control of their competitive advantage
Franchising:
An arrangement where a franchisor grants a franchisee the right to use its trademark/trade name, business systems, and processes to produce and market a good or service according to specific guidelines.
An agreement where a franchisor permits a franchisee to use its business model or brand name for a fee.
A key difference is that the franchisor provides extensive support to the franchisee, unlike licensing. The franchisor exerts considerable control over the franchisee's business and processes, often supporting with infrastructure, trademarks, and other necessary elements. Franchising requires ongoing assistance from the franchisor
McDonald's is a popular example of using franchising for international expansion.
Advantages:
Low political risk,
well-selected partners bring financial investment and manageable capabilities.
Disadvantages:
Similar to licensing, franchises may turn into future competitors.
A wrong franchisee can ruin the company's name and reputation in the market
Licensing is often about transferring rights to produce something with less ongoing involvement, while Franchising is about transferring a complete business system with significant ongoing support and control.
Contract Manufacturing:
Identifying and contracting with manufacturing units, often in offshore markets, to produce items at a competitive price.
This concept is closely related to outsourcing
Process: It involves international subcontracting arrangements. The originating firm may supply inputs like raw materials, semi-finished goods, components, and technical know-how to a local manufacturer in the foreign country, and this local manufacturer handles the entire production process
Examples:
Nike procuring 100% of its products from factories in Southeast Asia and India; Mega toys sourcing from China.
The Indian pharmaceutical industry acts as contract manufacturers for large foreign pharmaceutical firms like Eli Lilly and Cynamid (e.g., Ranbaxy and Lupin industries)
This strategy is also relevant in the service sector, leading to opportunities for Indian companies in BPO and KPO, with developed nations outsourcing services to developing ones
Management Contracts:
Definition: A firm with technical skill or management know-how expands overseas by providing its managerial and technical expertise on a contractual basis for a specific time period.
Purpose: It's widely accepted in industries and countries that lack the necessary skills or expertise to manage their own projects. A company from a developed country or with specific expertise can support a country or firm that needs guidance.
Common Industries: Management contracts are common in the hotel industry for advantages like economies of scale, brand equity, and reservation systems
Examples:
Engineers India Limited (EIL) received a project management contract for the revamp and upgradation of the Skikda Refinery in Algeria (2005) and a tank farm area in Abu Dhabi (August 2005), leveraging EIL's expertise.
India's Taj Hotels used management contracts for international expansion. Examples include a 10-year contract with a Dubai developer for the Taj Exotica Resort and Spa, and a 30-year contract to operate The Piere in New York.
Advantage: Management contracts facilitate rapid international expansion without any equity commitment. The firm uses its existing expertise to run another firm that requires it
Turnkey Projects
Definition: A contract where a firm agrees to fully design, construct, and equip a facility (manufacturing, business, service) and hand it over to the purchaser when it is ready for operation, in exchange for a fee or remuneration.
Concept: It's a way for a foreign company to export its process and technology by building a complete plant or facility in another country. It's called "turnkey" because the client receives the project complete in all respects and ready to use just by "turning the key".
Involves: Planning, procurement, engineering, construction, testing, and commissioning.
Process: Involves tendering for the project, selection of the eligible contractor, execution, and final delivery/handover.
Advantages: It's a way for a company to establish a plant and earn profits in a foreign country, especially where foreign direct investment opportunities are limited or where there is a lack of expertise in a specific area.
Examples:
Large infrastructure projects like the Delhi Metro and bullet trains in India.
Companies like L&T (Larsen & Toubro) act as turnkey operators for setting up various plants (e.g., textile, plastic) in countries lacking the know-how, in exchange for remuneration
Strategic Alliance
Definition: A cooperative agreement between two or more companies to work together and share resources to achieve a common business objective.
Rationale: Firms use strategic alliances because resources (natural, raw material, local market knowledge, skill, knowledge) are often limited, and companies cannot possess all of them. By joining hands, firms can utilize each other's resources for mutual success.
Examples:
ICICI Bank (financial) and Vodafone (telecom) in India formed a strategic alliance to launch the mobile money transfer service m-pesa, benefiting both firms.
Philips has numerous global strategic alliances for various products/industries, partnering with companies like AT&T (advanced ATS), Sony (compact disc), Intel/Siemens (semiconductors), and Grundig/Victor Company (video recorders) across many countries.
Advantages: Technology exchange, better performance in global competition, adapting to industry convergence (e.g., finance and telecom), and risk reduction through economies of scale.
Disadvantages: Potential issues include clashing cultures (different company cultures and management styles can lead to failure), legal entanglements when alliances fail, and damage to the reputation of the involved firms.
Steps (General Process): Develop a business partner strategy and plan; pursue targeted partner agreements; lead partner enablement and development; lead generation processes; deliver incremental sales; measure outcomes and optimize
Overseas Assembly
Definition: A firm produces all or most components domestically and then ships them to foreign markets to be put together as a finished product. This is facilitated by modern technology and modular design, making it easier to send parts rather than complete, bulky packages.
Positioning: It is described as a compromise between exporting and foreign manufacturing.
Benefits: Cost Savings: Shipping completely knocked-down parts (unassembled) saves on transportation costs and custom tariffs, which are typically lower on unassembled parts than on finished products.
Integration: Using local employment for assembly helps the firm integrate into the foreign market.
Examples:
Common in the automobile and farm equipment industries.
Coca-Cola ships its syrup (the core formula) to foreign markets where local bottling plants add water and containerize the product. Coca-Cola famously keeps its formula secret.
In the food and pharmaceutical industry, a similar concept is called mixing, where imported ingredients are used at the firm's overseas facilities
Foreign Direct Investment (FDI)
Definition: An investment in the form of controlling ownership in a business in one country by an entity based in another country.
Importance: FDI is considered an index for a country's growth and governments often feel pressure to attract it. It means inviting foreigners to set up operations, which can create employment and generate revenue.
Forms of FDI (Ways to invest directly in foreign markets):
Greenfield Investment:
Building entirely new production facilities or business structures from scratch in a foreign country where no previous facility existed.
Examples: McDonald's and Starbucks starting operations and building facilities from scratch in India.
Brownfield Investment:
Purchasing or leasing existing production facilities to launch a new production activity. It involves investing capital to improve or operate an existing infrastructure.
This is the opposite of Greenfield investment.
Example: Tata Motors acquiring Jaguar, using Jaguar's existing factories in the UK instead of building new ones.
Merger and Acquisition (M&A):
Transactions where the ownership of companies or their operating units is transferred or combined.
Merger:
A legal consolidation of two entities into one, resulting in either a new company or one of the original companies absorbing the other.
Acquisition:
One entity takes ownership of another entity's stock.
Reverse merger:
occurs where a smaller firm takes over or joins hands with a larger firm.
Examples: Compaq and HP (merger); Reliance Communication merging with Maxis; Sony Pictures (SPIN) acquiring Zee Entertainment and its subsidiaries.
Joint Venture (JV):
Investment in a joint venture located in a foreign market.
The term "venture" comes from "adventure," suggesting a new market, technology, or environment. It involves exploring something new that the firm is not fully aware of.
Definition: A binding contract between two venture partners to set up a project either in the home, host, or a third country.
Key Characteristic: Both parties are committed to joint risk-taking and joint profit sharing. The element of risk is shared.
Suitability: Often used when huge investments are required, such as in petrochemical or oil refinery industries. It is safer in such conditions to go for a joint venture as a firm might not be able to bear the risk alone (e.g., drilling and not finding oil).
Examples:
Volvo and Uber formed a joint venture to produce self-driving cars.
Mahindra and Mahindra entered a joint venture with Renault to manufacture cars.
Joint ventures are generally done in capital-intensive industries
Wholly Owned Subsidiary (WOS):
Definition: A company that is completely owned by another company. The owning company is called the parent company or holding company.
The parent company holds all of the subsidiary's common stock.
Holding Company: A company that owns assets (like stock in subsidiaries) but does not have its own operations, activities, or active business.
Examples:
Volkswagen AG wholly owns the Volkswagen group of America and brands like Audi, Bentley, Bugatti, Lamborghini, and Volkswagen.
Marvel Entertainment and EDL Holding Company LLC are wholly owned subsidiaries of The Walt Disney Company.
Starbucks Japan is a wholly owned subsidiary of Starbucks Corporation.
Johnson and Johnson is a holding company; its subsidiaries include JANSSEN PHARMACEUTICA, Depuy synthes, LIFESCAN, ACTELION, Neutrogena, and ETHICON.
Advantages:
The parent organization can exert full control over its operations in a foreign nation. Policies are made and controlled by the parent.
The parent organization does not need to reveal its technology to others, as it oversees all the subsidiary's activities alone.
Cost synergy can be achieved through common financial systems, shared administrative services, and joint marketing programs between the parent and subsidiaries.
Disadvantages:
Establishing a subsidiary is an expensive undertaking. The parent must make a 100 percent equity investment.
The parent company bears all the risk of its subsidiary. If a subsidiary does not perform well, the risk falls on the holding/parent company.
Profitability: If the subsidiary does well, the profit also comes entirely to the holding/parent company
Pros of FDI:
Diversifies the investor's portfolios;
promotes stable,
long-term lending;
provides financing to developing countries and helps them find new markets;
provides technology to developing countries, aiding their development while earning revenue.
Cons of FDI:
May not be suitable for strategically important industries where certain things cannot be shared;
investors may have less moral attachment,
potentially leading to issues like pollution;
possibility of unethical access to local markets, exploiting them
FDI Routes in India:
FDI typically enters India through two main routes. The choice of route depends on the type of industry and its potential local impact on the host country.
Automatic Route:
No prior approval from the government or any authority is required for the foreign investor; they can invest directly.
Government Route:
Investment requires prior approval from the Government of India.
Examples of limits and routes in India:
Agriculture & animal husbandry (100% automatic), Plantation (100% automatic), Multi brand retailing (51% limit, government route), Petroleum and natural gas (49% automatic), Broadcasting and content services (49% government), Banking-Public Sector (20% government), Civil aviation (100% automatic).
Sectors Prohibited for FDI in India:
Certain sectors are strictly prohibited from receiving FDI. These include:
gambling and betting, lottery business (government, private, online), activities not open to the private sector (e.g., atomic energy, railways), retail branding except single-brand product retailing, chit fund business, real estate business, construction of farmhouses, trading in transferable development rights, manufacturing of tobacco/cigar/sin products, and agriculture
Challenges In International Trade
International Company Structure:
The structure and location of an organization are crucial considerations for global competitiveness.
A company can have a centralized or decentralized system.
Centralized System:
Power is concentrated at one point, typically the parent headquarters. Policies are decided at the parent headquarters and dictated to units in different countries.
In a centralized structure, retention of powers and authority regarding planning and decision-making lies with top management at the parent headquarters.
Examples provided include Coca-Cola, Burger King, and McDonald's.
Coca-Cola is organized into continental groups overseen by presidents, who manage regional presidents. Despite a diverse global presence, the brand and product are controlled centrally and consistently worldwide.
Decentralized System:
Power is disseminated or given to subsidiaries or local units in different locations. The power lies within the specific location where they are operating.
Authority, responsibility, and accountability are distributed to various management levels in the organization at different locations.
Examples provided include Johnson and Johnson and TESCO.
Foreign Laws and Regulations:
The complexity of international business leads to numerous regulations, which can be challenging for foreign firms.
Navigating legal requirements is a central function for successful international businesses
International Accounting Standards:
Different tax systems, rates, and compliance requirements make international accounting challenging
Accounting strategy is key to maximizing revenue, and the location where a business is registered can impact tax liability
Some companies register in places like Singapore or Hong Kong due to more friendly tax policies and ease of starting a business
Cost Calculation and Global Pricing Strategy:
Companies must consider costs to remain competitive while ensuring profit.
Researching local competitors' prices provides a benchmark
Example: IKEA initially struggled in China due to local competitors' low labor and production costs. By relocating production to China, IKEA was able to cut prices and compete successfully
Paying Methods:
Determining acceptable payment methods and ensuring secure processing is a central consideration
In countries moving towards cashless societies, companies need the technology and systems to adapt, or they might face issues
Currency Fluctuations:
Currencies fluctuate rapidly, making forecasting and managing them difficult.
Currency changes can directly impact costs, such as fuel costs for shipping
Communication Difficulties and Cultural Differences:
Understanding religious and cultural traditions and emotions is necessary to navigate potential communication problems.
Translation issues: Literal translation of slogans can lead to highly embarrassing or inappropriate meanings in different languages
Examples:
Parker Pen slogan in Latin America translated to "Use our Parker Pen, avoid pregnancy".
Pepsi's "Come alive with Pepsi" translated to "Come out of the grave with Pepsi" in Germany and "Pepsi brings your ancestors back from the dead" in China.
Fisher Body's "Body by Fisher" translated to "Corpse by Fisher" in Belgium.
Salem cigarettes' "Salem-feeling free" translated to "Smoking Salem makes your mind feel free and empty" in Japan
Differences in Gestures: Simple hand gestures can have vastly different meanings across cultures (e.g., the 'OK' sign means 'OK'/'fine' in the USA/UK, 'money' in Japan, an 'insult' in Brazil, and 'zero' in Russia)
Political Risk:
Political uncertainty and instability in a country are significant factors
A risk assessment of the economic and political landscape is critical before expanding into a new market
Environmental Issues:
International firms face scrutiny regarding their production methods and environmental impact.
Issues include pollution, global warming, ozone depletion, acid rain, waste disposal, and loss of biodiversity.
Companies are expected to address issues like child labor and environmental pollution
Approaches to International Business: The EPRG Framework
The EPRG(Ethnocentric, Polycentric, Regiocentric, Geocentric orientation) framework describes four different orientations or approaches a firm can take in international business
Ethnocentric Orientation (E):
This approach has a home country orientation.
The firm believes that products, marketing strategies, and techniques successful in the home market will be equally applicable and workable in overseas markets.
Example: Patanjali Ayurveda and food products initially focus on the domestic (Indian) market and then try to extend what they do to other markets without much change
Polycentric Orientation (P):
This approach has a host country orientation.
Companies customize the marketing mix (product, price, place, promotion) to meet the tastes, performance, and needs of customers in each international market.
Products are changed according to the requirements of the host market.
Examples: McDonald's localized its products (e.g., avoiding beef) according to the Indian market's preferences.
This approach is often essential due to significant differences in taste and preferences between home and host markets
Regiocentric Orientation (R):
This approach has a regional orientation.
A company identifies economic, cultural, or political similarities among a group of countries (a region) to satisfy similar needs of potential consumers within that region.
Example: Countries like Pakistan, India, and Bangladesh possess a strong regional identity and similarities.
The approach targets this particular region. Employees might be selected from within the region that closely resembles the host country within that region
Geocentric Orientation (G):
This approach has a world orientation.
The company analyzes customer tastes, preferences, and needs across all foreign markets and adopts a standardized marketing mix.
Achieving a completely standardized approach is difficult, but some products are largely standardized.
Example: Coca-Cola adopts this strategy by selling its product with the same content, packaging, branding, and advertising themes worldwide.
Standardization can allow for greater control over price due to economies of scale
Stages of Internationalization
Internationalization is the process by which a firm increases its international activity. Firms typically progress through different stages:
1. Domestic Company:
Limits operations, mission, and vision to the national political boundaries.
Focuses on domestic market opportunities, suppliers, and financial companies.
This is feasible when the country has a large domestic market potential (e.g., India)
2. International Company:
An enterprise existing in one country but selling products in more than one country.
Holds the marketing mix constant and extends operations to newer markets. The product, price, place, and promotion are kept as constant as possible.
Typically has less or hardly any Foreign Direct Investment (FDI) and makes products or services only in the home country, then sells them outside.
Primarily exporters and importers, mostly exporters of items
3. Multinational Corporation (MNC):
An enterprise operating in several countries but managed from one country (the parent).
Has investment in other countries but doesn't necessarily have coordinated product offerings in each country.
More focused on adapting products and services to each individual local market.
Firms become full-fledged MNCs with production facilities assembled in several countries or regions
Models of MNC:
Centralized Model:
The company has an executive headquarter in its home country and builds manufacturing plants and facilities in other countries. An advantage is avoiding tariffs and import quotas and taking advantage of lower production costs
Regional Model:
The headquarter is in one country and supervises a collection of offices in various other countries. Subsidiaries and affiliates report to the headquarter
Multinational Model
A parent company in the home country puts up subsidiaries in different countries. The key difference from the regional model is that subsidiaries and affiliates are more independent
4. Global Company
Produces in the home country and focuses on marketing globally, OR produces globally and focuses on marketing domestically.
Pursues a unified strategy to coordinate various international operations
These companies have a two-way movement, either producing domestically and focusing abroad, or collecting from outside and focusing domestically
5. Transnational Company:
Essentially sheds its home national identity and acts as stateless; it does not identify with one national home like an MNC.
Much more complex organizations.
Invests foreign operations, R&D, and marketing powers in each individual foreign market.
An integrated global enterprise linking global markets for profit
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