International Business

Session: 2021-2024
[Link](Hons.), SEM- VI

SUBMITTED TO- Dr. Navneet Kaur

Bhatia

SUBMITTED BY- Suhani Narang

(IB-2K21-59)
 DECLARATION

I Suhani Narang, a sixth-semester [Link]. (hons) student at the

International Institute of Professional Studies (IIPS), hereby
certifies that she completed the entire project on her own
initiative, focusing on analysing one case study and the trends
in foreign direct investment over the previous ten years, as
assigned by our faculty teacher.
 ACKNOWLEDGEMENT

I want to sincerely thank everyone who provided assistance to

me in finishing my assignment.
I want to start by expressing my gratitude to Dr. Navneet Bhatia
Ma'am, my international business instructor, who helped me
with every step of this project.
In conclusion, I would want to express my gratitude to my
family for providing me with motivation during times of stress
and to all the department faculty members who have
consistently supported me.
LITERATURE REVIEW:

FDI has been seen as a growth and development engine in the last ten years.
Prominent economists such as Dunning and Vernon provided the main
explanations supporting foreign direct investment. A greater variety of
hypotheses on foreign direct investment were put out after World War II. The
capital markets hypothesis, which was the first FDI theory to be presented in the
1960s, was based on interest rates. The timing of foreign direct investment (FDI)
is dependent on changes in the macroeconomic environment, according to a
different hypothesis called the hysteresis effect. According to the gravity theory
to FDI, nations that are closer together geographically would see more FDI
flows. Vernon claimed in 1966 that FDI inflows are significantly influenced by the
product life cycle. It has been found theoretically that FDI inflows occur
throughout the product's maturity and decline phases.

Terumoto Ozawa examined the connection between foreign direct investment

(FDI) and growth using Michael Porter's theory in the 1970s. FDI inflows into
developing nations are mostly caused by the host nation's unrealized potential,
such as its abundance of natural resources and cheap labour. Growing domestic
markets and growing living standards cause FDI to be drawn in during the second
boom period. Thanks to advancements, the third boom phase makes FDI inflows
easier. Dunning's hypothesis is comparable to this. Dunning's OLI6 paradigm
model identifies four categories of foreign direct investment (FDI): resource,
market, efficiency, and strategic asset searching. Upon reviewing the body of
research, it is discovered that several scenarios have been used in empirical
analysis to evaluate the connection between FDI and growth. These studies have
evaluated the impact of foreign direct investment (FDI) on growth and vice versa
for specific economies, sectors, and cross sections of developed and developing
nations.

Yet, relatively little research has been done on the relationship between FDI and
growth on a sectoral level. While Jayachandran and Seilan (2010) demonstrate
unidirectional causation from exports to growth rate and FDI to growth rate but
no causality between FDI to exports and FDI to growth rates, Chakraborty and
Basu (2002) find substantial evidence of GDP Granger triggering FDI flows to
India. India's economic development is influenced by FDI and exports, not the
other way around. Chakraborty and Nunnenkamp (2008) conducted a sector-
specific research in the context of India and found that there is long-term
cointegration between FDI stocks and production. After analysing the growth
rates per sector, it is shown that the manufacturing sector benefits from increase
in foreign direct investment (FDI), with no correlation observed between FDI and
primary sector growth. When it comes to the service sector, growth and FDI are
causally related, and their combined effects are negligible. As a result, neither FDI
nor sector growth are caused by one another. Additionally, there is a pressing
need to loosen restrictions and allow foreign direct investment into more Indian
businesses. To draw in more foreign direct investment (FDI), trade liberalisation
and banking sector growth are also required in India.

Using the model provided by Sahoo et al. (2002) and Sahoo and Mathiyazhagan,
Mathiyazhagan (2005) investigates the link between FDI, output, export, and
labour productivity for the Indian economy over the time period from 1990-
1991 to 2000-2001. (2003). It is discovered that, albeit not very significantly, FDI
has increased production, labour productivity, and export in a few areas.

INFLOWS IN INDIA-

Financial year (April-March) Total FDI inflow (US $) % of GDP

2013 28.19B 1.52%
Financial year (April-March) Total FDI inflow (US $) % of GDP
2014 34.58B 1.70%
2015 44.06B 2.09%
2016 44.48B 1.94%
2017 39.90B 1.51%
2018 42.15B 1.56%
2019 50.55B 1.78%
2020 64.07B 2.41%
2021 44.73B 1.42%
2022 49.35B 1.47%
Analyzing the Foreign Direct Investment (FDI) trends in India over the past decade
would require looking at various factors such as the sectors attracting FDI, the
countries investing, policy changes, economic conditions, and global trends.

Overall Growth:

India has seen significant growth in FDI inflows over the past decade. According to
data from the Department for Promotion of Industry and Internal Trade (DPIIT)
and Reserve Bank of India (RBI), FDI inflows have been increasing steadily.

Sector-wise Analysis:

FDI inflows have been particularly strong in sectors such as services,

telecommunications, computer software and hardware, trading, and construction
development. These sectors have consistently attracted substantial FDI due to
favorable policies, growing domestic markets, and skilled labor.

Country-wise Analysis:

Traditionally, countries like the United States, Singapore, Mauritius, Japan, and
the Netherlands have been among the top investors in India. However, in recent
years, there has been increasing investment from countries like China and the
United Arab Emirates as well.

Policy Changes:

India has continuously been reforming its FDI policies to attract more investment.
The government has relaxed FDI norms in various sectors, including defense,
insurance, retail, and e-commerce, to encourage more foreign participation.

Economic Conditions:

India's economic growth and stability play a crucial role in attracting FDI. Despite
occasional fluctuations, India's GDP growth has remained relatively robust,
making it an attractive destination for foreign investors seeking high returns.

Global Trends:

Global economic conditions, geopolitical factors, and trade agreements also

influence FDI inflows into India. Changes in global trade patterns, geopolitical
tensions, and the emergence of new markets can impact investor sentiment
towards India.

The above table represents the foreign direct inflows into India in past 10 years
and these have been taken from the authentic website. The inflow trends clearly
depicts“INDIA AS A FAVOURED DESTINATION IN THE EYES OF GLOBAL
INVESTORS” as the inflows have been consistently increasing.
But if we look forward towards the detailed analysis, we need to understand the
sector wise inflows that which sectors had noticed the highest inflows through
foreign investments.

%age of
[Link] Sector Amount of FDI Inflows Total
Inflows
(In Rs (In US$
crore) million)
SERVICES SECTOR
(Fin.,Banking,Insurance,Non
1 462,114.07 80,670.79 17.66
Fin/Business,Outsourcing,R&D,Courier,Tech.
Testing and Analysis, Other)
2 COMPUTER SOFTWARE & HARDWARE 266,385.18 43,586.95 9.54
3 TELECOMMUNICATIONS 218,047.28 37,116.34 8.13
4 TRADING 168,426.20 26,541.60 5.81
 %age of
[Link] Sector Amount of FDI Inflows Total
Inflows
(In Rs (In US$
crore) million)
CONSTRUCTION DEVELOPMENT:
5 Townships, housing, built-up infrastructure 121,888.63 25,371.47 5.55
and construction-development projects
6 AUTOMOBILE INDUSTRY 141,436.94 23,892.81 5.23
CHEMICALS (OTHER THAN
7 97,134.96 17,441.95 3.82
FERTILIZERS)
8 DRUGS & PHARMACEUTICALS 87,066.62 16,396.56 3.59
CONSTRUCTION (INFRASTRUCTURE)
9 103,388.96 16,156.21 3.54
ACTIVITIES
10 POWER 80,257.38 14,652.96 3.21
11 HOTEL & TOURISM 85,388.44 14,426.19 3.16
12 MISCELLANEOUS INDUSTRIES 60,260.44 11,618.93 2.54

The above table includes the inflows through FDI in India in past ten years in
different sectors.

• The most prior sector is the SERVICE SECTOR which has always recorded
the minimum share of 10% of total FDI’s entering India every year. There
were two years (2013-14 and 2014-15) which slowed down the FDI in
service sector but just after the leanness in these two years, the FDI went
up by 181% in the next four years.
• The service sector in India has been a major recipient of foreign direct
investment (FDI) due to several factors. India has a rapidly growing
domestic market with a large and diverse consumer base. The service
sector, which includes financial services, telecommunications, retail,
healthcare, education, and hospitality, among others, benefits from the
expanding middle class and increasing consumer spending power. Foreign
companies see India as a lucrative market to provide services and tap into
the growing demand. The Indian government has implemented various
policies and reforms to attract FDI in the service sector. Measures such as
liberalizing FDI norms, simplifying regulations, and promoting ease of
doing business have contributed to creating a favorable investment
[Link], a new point that may go undetected beneath the
benefits of the service sector is that, in fiscal year 2023, the computer
hardware and software industry in India obtained the largest proportion of
foreign direct investments (FDIs), totaling more than nine billion dollars. (all
current fashion). The services industry, with a value of more than $8 billion,
came in second.

Services sector in limelight

Overall, it seemed that the nation's business services industry was doing
very well in terms of drawing interest from overseas investors. This might
be due, in part, to the fact that this industry accounted for over 65% of all
foreign firms established in India. The majority of these firms were
incorporated in Delhi, with Maharashtra following behind, suggesting a
promising commercial trajectory.
• The relatively low inflow of FDI in the Indian chemical industry can be
attributed to several factors. The chemical industry is subject to stringent
regulations and compliance requirements related to safety,
environmental impact, and hazardous materials. These regulations can
increase operational costs and create barriers to entry for foreign investors,
leading to a comparatively lower inflow of FDI. The chemical industry often
requires significant investments in infrastructure, research and
development, and specialized equipment. The capital-intensive nature of
the industry may deter foreign investors who are seeking sectors with
lower capital requirements or faster returns on investment. The chemical
industry is associated with potential environmental risks and concerns
related to pollution and waste management. Foreign investors may be
cautious about investing in sectors that have higher environmental impact
or face public scrutiny due to environmental concerns. The global chemical
industry is highly competitive, with established players from various
countries. Indian chemical companies may face strong competition from
international counterparts, making it challenging to attract significant FDI
inflows.
• The Indian government has already been moved to allowance of 100% FDI
in hotel and tourism sector as it is major source of revenue for the country.
Organizations that establish hotels, resorts, and conference centres in
designated locations are eligible for a five-year tax break, provided that all
agreed-upon requirements are met. Major venture plans for India have
already been revealed by a few multinational hospitality firms, including
Hilton, Accor, Marriott International, Berggruen Hotels, Cabana Hotels,
Premier Travel Inn (PTI), and Inter Continental Hotels group.
• As per the reports, India’s pharmaceutical industry is currently ranked third
globally for pharmaceutical production by volume and 14th by value.
Greenfield pharmaceutical undertakings in India are allowed 100 percent
foreign direct investment (FDI) through the automatic route. For
brownfield pharmaceutical investments, 100 percent FDI is permitted but
with 74 percent under the automatic route and the remainder requiring
 approval from the Indian [Link], Dr. Reddy's, GSK,
Divi's, Zydus, Novartis, Pfizer, Sun Pharma, Teva, Mylon, and Johnson &
Johnson are some of the major investors in the pharmaceutical sector in
India. .
• Every facet of the automobile sector has seen a remarkable surge in
growth. The Indian automobile industry had a robust rise in both domestic
and international sales as well as manufacturing. FDI equity inflows into the
automotive industry, which increase production levels across a broad
variety of vehicle types, contribute to the economic prosperity of our
nation. Putting it among the biggest producers and distributors in the globe
. Additionally, it generated several job listings in the same business or a
different industry, both directly and indirectly. It improved transportation,
currency rates, market size, and infrastructure. Manufacturers expect to
grow production and export their vehicles in the future years.

DEFENCE SECTOR:

The Indian government has made

many attempts to increase
defence equipment manufacture
and production. Initiatives like
"MADE IN INDIA" were very
helpful in luring in foreign
investment.

✓ LIMIT OF FDI BY GOVERNMENT:

Only 74% through automatic route and 100% through Government route.

✓ GOVERNEMENT INITIATIVE IN DEFENCE SECTOR:

The government has improved the nation's defence industry in a number of ways.
India has introduced AGNIPATH programmes, which allow young people to
volunteer for the country.
By 2025, the government hopes to have produced 1.75 crores worth of defence
equipment.

In this interim budget, India has also raised the funding allocated to the defence
industry.

The government of Odisha recently conducted an AGNI V missile test, further

solidifying India's defence industry independence from foreign countries.

Also, the Philippines has been given the order to import Indian Brahmos missiles.
Other nations have also shown interest in the Indian-made defence equipment.

✓ FDI IN DEFENCE SECTOR:

Since the notification of revised FDI policy, the total FDI inflow reported till May,
2022 is approximately Rs. 494 crores.

MANUFACTURING SECTOR:

The goal of the Made in India Initiative,

which was introduced on September
25, 2014, is to enhance domestic
product manufacture in India as
opposed to imports. Since its
inception, the Made in India campaign
has gained traction, strengthening
India's position as a major manufacturing force. At the moment, 27 Indian
economic sectors are the focus of Made in India 2.0.

In addition to constructing India's industrial infrastructure, the government has

worked to boost foreign direct investment in the industry. initiatives such as the
corporation tax decrease, service tax introduction, and GST introduction, etc.
A 1.97 lakh crore investment was made in Production Linked Incentive Schemes
to increase India's manufacturing and skill development capabilities. PLI Schemes
have a focus on 14 industries, and the expansion of Indian manufacturing was
anticipated over the next five years after the introduction of PLI Schemes. At now,
733 applications have been accepted, including 14 Indian industries.

✓ FDI IN MANUFACTURING SECTOR OVER 10 YEARS:

Due to various schemes launched by Government of India, the FDI inflow in the
manufacturing sector between 2014-2022 has been increased by 57%.

HEALTHCARE AND HOSPITAL

SECTOR:

As with all of us, there were difficulties

during CORONA in 2020–21. This
phase has made us realise that we
need to improve India's healthcare
system since a lot of people in the
pandemic have perished as a result of hospital facilities that are either subpar or
lack oxygen.

The government has also started a number of initiatives to enhance the nation's
healthcare industry. The missions like as Ayushman Bharat, the National Digital
Health Mission, etc. Today, both the local and foreign markets recognise the
hospital business. By 2025, the Indian government intends to have increased
funding for the healthcare sector to 2.5 percent of GDP.

✓ FDI LIMIT BY GOVERNEMNT IN HOSPITAL SECTOR

The government has set a cap on foreign direct investment (FDI) into the nation's
healthcare industry.
FDI is allowed in the production of medicinal devices and via automated routes up
to 100%.

Under greenfield FDI, up to 100% of FDI is allowed in the pharmaceutical industry.

It is allowed under brownfield FDI up to 74%. The FOREIGN INVESTMENT
PROMOTION BOARD must provide approval for FDI over 74 percent.

(The detailed chart of limit of government has shown in Excel sheet).

✓ FDI IN HOSPITAL SECTOR:

FDI in hospital sector from April 2000 to June 2020, was USD 6.8 Billion.

FDI IN HOSPITAL SECTOR

FROM 2000-2020 (in crores)
FDI IN HOSPITAL SECTOR

16501

6727 2130

DRUGS AND HOSPITALS AND MEDICAL AND

PHARMACEUTICALS DIAGNOSTIC SECTOR SURGICAL APPLIANCES
SUB SECTOR
FIGURE 2:

ANALYSIS OF FDI IN BANKING

SECTOR
The proportion of foreign direct investment (FDI) in the banking industry
relative to other services provided in India is shown in a graph and table in
the analysis of FDI in the banking sector.
Banking is the sub sector of Service Sector, so this analysis will be based on
the percentage of FDI got by Banking services.

Following is the chart which shows the amount of FDI in banking services.

‘As shown in this table, the amount of 17,174.96 crores has been invested into
the banking services in India.
AMOUNT OF FDI INFLOWS IN SERVICE SECTOR:
FIGURE 3:

TOTAL FDI INFLOW IN SERVICE SECTOR

Rs Crores % of total inflow
92,053.43

71264.15
21260.33

20014.04
17,174.96

9211.37

3775.12

2810.14

1855.44
1241.47
6.54

4.86
1.31

1.47

0.63

0.25

0.08

0.16

1.44
0.2

SUB SECTOR IN SERVICE SECTOR

Percentage of FDI in Banking service in Service sector of India:

= 17174/240660*100
=7.1%

The contribution of banking sector in service sector is the fourth largest

contribution after financial services, Insurance and Nonfinancial services.

✓ The contribution of banking service is also shown in following pie chart:

As you can see in this pie chart, the contribution of banking service is 7.1%
in whole service sector. This is also shown in the following graph:
• The highest share in Service Sector is of financial service that is 38%.
• The second highest contribution in the Service Sector is of 29%.
• The third highest share is of Nonfinancial service that is of 8.8%.
SAME AS FIGURE 3:

Sub sector percentage of FDI in service

sector
FDI IN PERCENTAGE

38

29

8.8 7 3.8

FINANCIAL INSURANCE NON-FINANCIAL BANKING SERVICES OUTSOURCING

SERVICES SERVICES
SUB SECTOR OF SERVICE SECTOR

FOREIGN INVESTMENT IN BANKS OF INDIA

Graph of FDI in public sector banks
 FDI IN PUBLIC BANKS IN 2004-05 AND 2016-17 2004-05 2016-17
25

20

15

10

FIGURE 4:
Graph of FDI in private sector bank

FIGURE 5:

FDI INLOW IN PRIVATE BANK IN 2004-05 AND 2016-17

80
60
40
20
0

2004-05 2016-17

FINDINGS OF THE STUDY

The graph of public sector banks shows that, compared to 2005, the shares of
State Bank of India, Bank of Baroda, and Punjab National Bank are greater in
2017.

However, in 2017, institutions such as the Bank of Maharashtra, the Central Bank
of India, and the United Bank of India did not receive any foreign direct
investment. This demonstrates that there was no FDI in public sector banks
between 2005 and 2017.

Regarding private sector banks, there has been a rise in foreign direct investment
(FDI) as seen by the high FDI in 2017 compared to 2005 for banks such as
Industrial Bank, City Union Bank, Dhan-Lakshmi Bank, Federal Bank Ltd., and
South Indian Bank.

Private banks such as Catholic Syrian, City Union Bank, and Karnataka Bank did
not have foreign direct investment (FDI) in 2005; nevertheless, in 2017, FDI
increased.

In the last:

PRIVATE SECTOR BANKS: In the case of private sector bank, here has been
increase in FDI in mostly all private sector bank (Axis bank, Kotak bank, City Union
bank, Federal Bank, etc).

EXAMPLE:Federal bank:
FDI in 2004: 7.89%

FDI in 2017: 41.61%

Total increment in FDI: 41.61 – 7.89 = +33.72%

So, in the case of Federal bank, the FDI was increased by 33.72%.

PUBLIC SECTOR BANK:

 ✓ Increase in FDI:In the case of public sector bank, some bank got the FDI in
2017 that mean, there has been increase in FDI. The banks like Andhra
bank, Bank of India, Bank of Baroda, etc.

EXAMPLE: Indian overseas bank:

FDI in 2004: 1.31%

FDI in 2017: 10.06%

Total increment in FDI:+8.75%

✓ Decrease in FDI: There are also some banks whose FDI in 2004 was more
than the FDI in 2017, that mean FDI was decreased in some banks. The
banks like Allahabad bank, Central bank of India, Indian bank, Punjabsind
bank, Syndicate bank, UCO Bank, United bank of India.

EXAMPLE:Allahabad bank:
FDI in 2004: 3.96%

FDI in 2017: 0.84%

Total increment in FDI:-3.12%

"IMPACT OF DIRECT INVESTMENT FROM OUTSIDE THE COUNTRY ON

EMPLOYMENT"
Because foreign direct investment (FDI) stimulates economic activity, it directly
links employment creation to economic growth and development. Reducing the
unemployment rate in emerging nations may address a number of socioeconomic
problems.

India's openness to the global scene after the New Economic Reform of 1991 is
mostly noteworthy due to its adoption of the liberalisation, privatisation, and
globalisation regimes. India is now more competitive than it was in the
international market. Integration of the domestic economy with the global
economy is necessary for this level of openness. It causes FDI, or foreign direct
investment, to enter the economy in the form of physical and intangible products
and services, technical know-how, skills, capital inclusion, etc. Therefore, it is
thought that FDI inflows help India create jobs and open the door to addressing
its capital deficit. However, the situation is more complicated than it seems.

The effect of FDI on employment is both clear-cut and opaque. Among the several
ways that FDI affects the basic implications of employment are:

Job Creation: In this instance, foreign direct investment (FDI) generates new job
prospects and production tactics that boost economic development. Crowding
out effect: In this instance, the host nation and the FDI-supplying country are
engaged in fierce rivalry. The host country increases its production capacity by
laying off workers from its businesses in order to demonstrate its ability to
compete. Employee Transfer: Workers in this category are moved from one
company to another. Workers are transferred from one firm to joint new ventures
and new employment are generated via international cooperation and joint
ventures of domestic and foreign companies. Employment Loss: Foreign Direct
Investment (FDI) both boosts and diminishes employment possibilities. Foreign
businesses often develop their own manufacturing techniques when granted
permission to establish themselves in the host nation. As a result, individuals in
the host nation who meet their production standards in terms of expertise and
efficiency are employed, while others are compelled to forfeit their positions.

Positive influence: As there is inward FDI in the country, it leads to increase in

output by increasing production activities and hence increases demand for labour.

Negative effects: As labor-saving technologies were used more often, labour

capacity was reduced, which reduced the need for unskilled labour while
maintaining the need for expert labour. The ownership structure of corporate
companies gained the necessary importance with the functioning of MNCs and
FDI inflows into the country, and the issues of industry level employment
generation on the basis of technological change were rendered irrelevant as
technical resolutions are made at the corporate stages.
 CONCLUSION:

In the last, FDI is the major driving

force of every sector in any
developing country. FDI brings
technology and techniques into the
developing countries which helps them to improve various sectors and programs
of the country.

There are many ways through which foreign tycoons or international institutions
can invest their money in any country of the world. FDI of any country is also
depend on the environment of that country. If the environment will not stable
then no foreign individual will trust the county growth.

EXAMPLE: The biggest example of instability is Pakistan, where no government

will be in power for its full term so that creates instability in the markets of
Pakistan.

There are also many factors that affect the inflow of FDI in any country like:

• Government policies
• Attitude of nationals towards the foreign people
• Working environment of the country
• Culture of the country
As the Banking sector of India is the biggest sector that helps to control the
money supply and the check the inflation rate in the country which is very
important to normalize the growth rate of the country. So, FDI is very important
for every country to foster the growth in the economy.

CASE STUDY-
Asterik corporation-expectations vs reality
Manufacturer of electrical equipmentsAsterik Corporation went for international
expansion in 1988. The company headquarter is located in the United States. This
was the time when the communist regimes were disintegrating in the eastern
Europe. The company took a strategic decision to move to a location that could
provide cheap labour and it could further expand its business in eastern Europe.
As part of this strategy, Asterik initiated a major expansion drive in Hungary with
the acquisition of 51 percent interest in Telnet, a manufacturer of electrical
products in Hungary. Wage rates in Hungary were low and the country was
shifting from totalitarian communist country with state owned and planned
economic system to a politically democratic country with the free markets.
Asterik corporation believed that this change towards free market system would
create business opportunities in the long run.

The company wanted to exploit these opportunities and transfer its best human
resources to hungary. However due to political conditions, the expectations didn’t
meet the returns. Results were slow and with passage of time, losses mounted
up.

Eventually, the company realized that there are vast cultural differences between
America and Hungary. There was significant difference in the attitudes, beliefs,
customers, quality and working culture between American managers and
Hungarians.

The Americans insisted on strong sales and marketing functions that would
pamper customers while Hungarians didn’t want these strategies. The Hungarians
expected western style wages but Asterikcameto Hungary to get the advantage of
cheap labour. Later, the company management admitted that their decision was
somewhere not worth it and human engineering is much more difficult than
product engineering.

OVERVIEW-
 This case study is based on the influence of Political and Cultural Environment of
the particular country on the business whether it is domestic or foreign.

Asterik corporation wanted to expand its business operation on the global level
and they thought, Hungary would be the best start but reality was different. The
political and cultural environment of Hungary adversely affected the business
management of the US corporation. The attitude, political changes, way of
thinking of Hungarian people was totally different from the point of view of
American people, that were main causes of failure of Asterik in Hungary.

QUESTIONS-
Q.1) What were the expectations and attractions of Asterik Corporation when it
moved to Hungary?

Expectations and attractions

OPTIMUM TO MAXIMISE
CHEAPLABOUR
UTILIZATION PROFIT

TO EXPAND BUSINESS
BUSINESS OPPORTUNITIES

• Exploitation of Cheap Labor:

Asterik Corporation sought to capitalize on the low wage rates in Hungary,
aiming to reduce manufacturing costs.
 • Access to New Market Opportunities:
The company anticipated that the transition from a totalitarian communist
regime to a politically democratic country with free markets would create
business opportunities for expansion in Eastern Europe.
• Strategic Geographic Location:
Hungary's location in Eastern Europe provided Asterik with a foothold to
access and penetrate emerging markets in the region.
• Acquisition of Telnet:
By acquiring a majority interest in Telnet, a Hungarian manufacturer of
electrical products, Asterik aimed to establish a local presence and
leverage existing infrastructure and resources.

Q.2) What were the basic problems that the company faced in Hungary?

• Cultural Differences:
Significant disparities in attitudes, beliefs, work ethic, and customer
expectations existed between American and Hungarian employees, leading
to communication barriers and misunderstandings.
• Mismatched Strategies:
Divergent approaches to sales, marketing, and compensation between
American managers and Hungarian employees resulted in conflicting
business strategies and objectives.
• Underestimation of Cultural Challenges:
The company underestimated the complexity of managing human
resources in a foreign cultural context, focusing more on product
engineering than understanding and adapting to local cultural norms.
• Financial Losses:
Slow business growth and mounting losses due to ineffective strategies,
cultural clashes, and underestimated challenges in the Hungarian market.
• Wages Problem:
As the wages in Hungary was decline because of the political stability in
Eastern Europe. American company was also thinking that they would get
 the cheap labour there but the Hungarian workers expecting that they
would get the high wages as the dollar was appreciating that time.
But company was offering the high wages so that was the main problem
faced by Asterik there.
• Marketing Problem:
As Americans wanted to do strong sales and marketing so that they can
attract as many customers they want but the Hungarian was not keep
the same eye on this, they were not supporting this strategy.

Q.3)As a manager of AsterikCoporation in hungary, what will be your strategy?

• Cultural Sensitivity and Training: Implement comprehensive cultural

sensitivity training programs for both American expatriate managers and
Hungarian employees to bridge the gap in attitudes, beliefs, and working
cultures.
• Adaptation of Business Strategies: Tailor sales, marketing, and
compensation strategies to align with Hungarian market preferences and
expectations, balancing Western business practices with local cultural
sensitivities.
• Collaborative Decision-Making: Foster a collaborative approach to
decision-making that incorporates input from both American and
Hungarian employees, leveraging diverse perspectives to develop effective
business strategies.
• Talent Localization: Invest in talent development and localization by
empowering and promoting Hungarian employees to leadership positions,
thereby fostering a sense of ownership and commitment to the company's
objectives.
• Continuous Evaluation and Adjustment: Regularly assess and adjust
business strategies based on feedback, market dynamics, and cultural
nuances to remain agile and responsive to the evolving Hungarian business
landscape.
“A brief overview of what strategy can be adopted as a manager”

CONSIDER THE POINT OF VIEW OF

HUNGARIAN WORKERS

PROVIDE FAVOURABLE WORKPLACE

PREPARE THE STRATEGY THAT

BENEFITS

MOTIVATE THE WORKERS TO WORK

BOTH
WITHPARTIES
UNITY