INTERNATIONAL BUSINESS

BA4302

UNIT I AN OVERVIEW OF INTERNATIONAL BUSINESS

Definition and drivers of International Business- Changing Environment of International

Business-Country attractiveness- Trends in Globalization- Effect and Benefit of
Globalization -International Institution: UNCTAD Basic Principles and Major
Achievements, Role of IMF, Features of IBRD, Role and Advantage of WTO.

International Business Environment

International business refers to trading services and goods in a worldwide market. It can also be
recognized as the globalization of trade. An International Business Environment (IBE) refers to
the surroundings in which international companies carry on their businesses. It plays a critical
role in the development and growth of a country.

An International Business Environment (IBE) involves different aspects like political risks,
cultural differences, exchange risks, and legal and taxation issues. Thus, it is mandatory for the
people at the managerial levels to work on factors comprising the international business
environment as it is crucial for a country’s economy.

Forms of International Business Environment

● Cross border trading (Import and export)

● Franchising
● Licensing
● Joint venture
● Foreign Direct Investment (FDI)

Types of International Business Environment

The various types or aspects of the international business environment are provided below.
Political Environment in International Business

The political environment means the political risk, the government’s relationship with a business,
and the type of government in the country. Conducting business internationally implies dealing
with different kinds of governments, levels of risk and relationships.
There are different types of political systems, such as one-party states, multi-party democracies,
dictatorships (military and non-military) and constitutional monarchies. Thus, an organisation
needs to take into account the following aspects while planning a business plan for the overseas
location:

● Political system of the business

● Approach of the government towards business, i.e. facilitating or restrictive
● Incentives and facilities offered by the government
● Legal restrictions for licensing requirements and reservations to a specific sector like the
private, public or small-scale sector
● Restrictions on importing capital goods, technical know-how and raw materials
● Restrictions on exporting services and products
● Restrictions on distribution and pricing of goods
● Required procedural formalities in setting the business

Economic Environment in International Business

The economic environment refers to the factors contributing to the country’s attractiveness to
foreign businesses. It can differ from one nation to another. Better infrastructure, education,
healthcare, technology, etc., are also often associated with high levels of economic development.
The levels of economic activities combined with infrastructure, education, and the degree of
government control affect the facets of doing a business.

Usually, countries are divided into three main economic categories, i.e. more industrialized or
developed, less developed or third world, and the newly emerging or industrializing economies.
There are significant variations within each economic category. Overall, the more developed
countries are rich, the less developed are poor, and the newly industrializing are those moving
from poor to rich. These distinctions are made based on the Gross Domestic Product per capita
(GDP/capita).

A business needs to recognize the economic environment to operate in international markets

successfully. While analyzing the economic environment, an organization intending to work in a
particular business sector should consider the following aspects:
 ● Economic system to enter the business sector
● Stage and pace of economic growth
● Level of national GDP and per capita income
● Incidents of taxes, direct and indirect tax
● Available infrastructure facilities and the difficulties
● Availability of components, raw materials and their cost
● Sources of financial resources and their costs
● Availability of workforce, managerial and technical workers, their salary and wage
structures

Technological Environment in International Business

The technological environment includes factors related to the machines and materials used in
manufacturing services and goods. As organisations do not have control over the external
environment, their success depends on how they will adapt to the external environment. A
significant aspect of the international business environment is the level and acceptance of
technological innovation in countries.

The last decade of the twentieth century saw significant advances in technology, and it is also
continuing in the twenty-first century. Technology often gives organisations a competitive
advantage. Hence, organisations compete to access the latest technology, and international
organisations transfer technology to be globally competitive.

Due to the internet, it is easier even for a small business plan to have a global presence, which
grows its exposure, market, and potential customer base. For political, economic and cultural
reasons, some countries are more accepting of technological innovations, while others are less
accepting. In analysing the technological environment, the organisations should consider the
following aspects:

● Level of technological developments in the country as a whole and specific business

sector
● Pace of technological changes and obsolescence
● Sources of technology
 ● Facilities and restrictions for technology transfer
● Time taken for the absorption of technology

Cultural Environment in International Business

The cultural environment is one of the crucial components of the international business
environment. It is the most difficult to understand as the cultural environment is unseen. It has
been described as a commonly held and shared body of general values and beliefs that determine
what is right for one group, according to Kluckhohn and Strodtbeck.

National culture is defined as the body of general values and beliefs shared by a nation. Beliefs
and values are usually formed by factors such as language, history, geographic location, religion,
education and government. Thus, organisations begin a cultural analysis by understanding these
factors. The well-known model is the one developed by Hofstede in 1980.

The model by Hofstede proposes four dimensions of cultural values, which are as follows:

● Individualism – It is the degree to which a nation encourages and values individual

decision making and action
● Uncertainty avoidance – It is the degree to which a nation is willing to deal with and
accept uncertainty
● Power distance – It is the degree to which a nation sanctions and accepts differences in
power
● Masculinity – It is the degree of the gender gap in a society

Hofstede’s model of cultural values has been extensively used as it provides data for a wide array
of countries. Many managers and academics found this model helpful in exploring management
approaches appropriate in different cultures.

For example, in a country that is high on individualism, one expects individual tasks, goals and
individual reward systems to be effective, while the reverse would be the case in a country that is
low on individualism. While analysing cultural factors, the organisation should consider the
following aspects:
 ● Approaches to society towards business in specific and general areas
● Influence of cultural, social, and religious factors on the acceptability of the product
● Lifestyle of people and the products used by them
● Level of acceptance and resistance to change
● Demand for a specific product for a specific occasion
● Values attached to particular products, i.e. possessive or the functional value of products
● Consumption pattern of the buyers

Competitive Environment

The competitive environment differs from country to country. The political, economic, and
cultural environmental factors help determine the degree and type of competition that exists in a
country. The most likely sources of competition can be well understood for a domestic
organisation, but it isn’t the case when an organisation moves to compete in a new environment.

Competition can come from various sources, such as it can come from the private or public
sector, large or small organisations, domestic or global organisations and traditional or new
competitors.

Benefits of the International Business Environment

● It unites and brings countries together, making the world a big global village
● It increases employment opportunities as it results in the exchange of information, ideas,
capital across borders and services
● There is equal growth in wealth, availability of goods and services and price stability
● It brings a new environment of development, alliance, affluence, stability, modernisation,
and technology across the globe

What do you mean by drivers of international trade?

Companies follow their domestic competitors abroad to maintain their world-wide market
share. Companies retaliate against foreign competitors entering their home market by going to
these competitors' home markets. Companies counter a competitor's new product entry by
offering a similar product, often produced abroad.
The International business means the buying & selling of the goods & services across the border.
These business activities may be government or private enterprises. Here national border is
crossed by the enterprises to expand their own business activities such as the manufacturing,
mining, construction, agriculture, banking, insurance, health, education, transportation,
communication & so on. The business enterprise who goes for the international business has to
take a very wide & long view before making any decision, it has to refer to the social, political,
historical, cultural, geographical, physical, ecological & economic aspects of another country
where it had to business. International business by its nature is the primary determinant of
international trade, 1 of the results of the increasing success of international business ventures is
globalization. International Business is the process of focusing on the resources of the globe &
objectives of organizations on global business opportunities & threats. The International business
is defined as the global trade of goods/services or investment.
Higher Rate of Profits: The basic objective of the business is to achieve profits. When the
domestic markets don’t promise a higher rate of profits, business firms search for foreign
markets where there is a scope for a higher rate of the profits. Therefore the objective of profit
affects & motivates the business to expand operations to the foreign countries. For example,
Hewlett Packard in the USA earns more than half of its profits from the foreign markets as
compared to that of domestic markets.

Expanding the Production Capacities beyond the Demand of Domestic Country: Some of
the domestic companies expand their production capacities more than the demand for the product
in the domestic countries. In such cases, these companies are forced to sell their extra production
in foreign developed countries. Toyota of Japan is an example.

Limited Home Market: When a size of the home market is limited either due to the smaller size
of the population or due to the lower purchasing power of all people or both, the companies
internationalize their operations. For example, most of the Japanese automobiles & electronics
firms entered the USA, Europe & even African markets due to the smaller size of the home
market. ITC entered the European market due to the lower purchasing power of the Indians with
regard to high-quality cigarettes.

Political Stability vs. Political Instability: The Political stability doesn’t simply mean that the
continuation of the same party in power, but it means that continuation of the same policies of
the Government for a quite long period. It is viewed that the USA is a politically stable country;
countries like the UK, France, Germany, Italy & Japan are also politically stable. Most of the
African countries & some of the Asian countries are politically unstable countries. Business
firms prefer to enter the politically stable countries & are restrained from locating their own
business operations in politically unstable countries. In fact, business firms shift their operations
from politically unstable countries to politically stable countries.

Availability of Technology & Competent Human Resources: The Availability of advanced

technology & competent human resources in some countries act like pulling factors for business
firms from other countries. For example, American & European companies, in recent years,
have been depended on Indian companies for the software products & the services through their
business process outsourcing (BPO). This is due to the cost of human resources in India is
almost/approximately 10 to 15 times less compared to the US & European labor markets.

High Cost of Transportation: Initially the companies enter foreign countries for their marketing
operations. But the home companies in any country enjoy their higher profit margins as
compared to the foreign firms on account of the cost of transportation of the products. Under
such conditions, the foreign companies are inclined to increase their profit margin by locating
their manufacturing facilities in foreign countries through Foreign Direct Investment (FDI) route
to satisfy the demand of either one of the countries or the group of neighboring countries. For
example, Mobil which was supplying petroleum products to Ethiopia, Kenya, Eritrea, Sudan
etc., from its refineries in Saudi Arabia, established its refinery facilities in Eritrea in order to
reduce the cost of transportation.

Availability of Raw Materials: The source of highly qualitative raw materials & bulk raw
materials is a major factor in attracting companies from various foreign countries. For example,
Vedanta Resources is a London Stock Exchange (LSE) listed UK based company operating
principally in India due to the availability of raw materials such as iron ore, copper, zinc & lead.

Liberalization & Globalization: Most of the countries around the globe liberalized their
economies &opened their countries to the rest of the globe. These change in the policies attracted
multinational companies to the extent their operations to these countries.

Growth in Market Share: Some of the large-scale business firms would like to enhance their
market share in the global market by expanding & intensifying their operations in various foreign
countries. The Smaller companies expand internationally for survival while the larger companies
expand to increase their market share. For example Ball Corporation, the 3rd largest beverage
can manufacturer in the USA, bought the European packaging operations of Continental Can
Company.

High Living Standards: Comparative cost theory indicates that the countries which have the
advantages of raw materials, human resources, natural resources & climatic conditions in
producing particular goods can produce the products at low-cost & also of high quality.
Customers in various countries can buy more products with the same amount of money. In turn,
it can also enhance the living standards of the people through enhanced purchasing power & by
consuming high-quality products.

Increased Socio-Economic Welfare: International business enhances consumption level, the

economic welfare of the people of the trading countries. For example, the people of China are
now enjoying a variety of products from various countries like Coca-Cola, McDonald’s range of
products, electronic products of Japan & coffee from Brazil. Thus the Chinese consumption
levels & socio-economic welfare has enhanced.

Wider Market: International business widens the market &increases the market size. Therefore,
the companies need not depend on the demand for the product in a single country or customer’s
tastes & the preferences of a single country. Due to the enhanced market Air France now mostly
depends on the demand for air travel of the customers from the countries other than France. This
is factual in case of most of the MNCs like Toyota, Honda, Xerox & Coca-Cola.

Reduced Effects of Business Cycles: The stages of the business cycles vary from country to
country. Therefore, MNCs shift from the country experiencing a recession to the country
experiencing ‘boom’ conditions. This enables international firms to escape recessionary
conditions.

Reduced Risks: Both commercial & political risks are reduced for the companies engaged in the
international business due to spread in the different countries. Multinationals which were
operating in erstwhile USSR were affected only partly due to their safer operations in other
countries. But the domestic companies of the then USSR collapsed entirely.

Large-scale Economies: Multinational companies due to wider &larger markets produce larger
quantities, which provide the benefits of large-scale economies like reduced cost of production,
availability of expertise, quality etc.

Potential Untapped Markets: International business provides the chance of exploring &
exploiting the potential markets which are untapped so far. These markets provide an opportunity
for selling the product at a higher price than in the domestic markets. For example, Bata sells
shoes in the UK at £ 100 (approx. Rs. 8000) whose price is around Rs. 1200 in India.

Provides the Opportunity to Domestic Business: International Business firms provide

opportunities for domestic companies. These opportunities comprise technology, management
expertise, market intelligence, product developments, etc. For example, Japanese firms like
Honda, Yamaha, and Suzuki & Kawasaki have a combined to form Joint Ventures with Indian
companies to form a Hero Honda, Birla Yamaha, Maruti Suzuki & Kawasaki Bajaj to share the
technology & the product development expertise.

Division of Labour & Specialization: International business leads to division of labor

&specialization. For example, Brazil specializes in coffee, Kenya in tea, Japan in automobiles &
electronics, India in textile garments etc

conomic Growth of the World at large: Specialization, a division of labor, enhancement of

productivity, posing challenges, development to meet them, innovations & creations to meet the
competition leads to the overall economic growth of the world nations. The International
business particularly helped the Asian countries like Japan, Taiwan, Korea, Philippines,
Singapore, Malaysia & the United Arab Emirates.

Optimum & Proper Utilization of World Resources: the international business provides for
the flow of the raw materials, natural resources & human resources from the countries where
they are in excess supply to those countries where they are in short supply or need most. For
example the flow of human resources from India, consumer goods from the UK, France, Italy &
Germany to developing countries. This, in turn, helps in the optimum & proper utilization of
world resources.

Cultural Transformation: International business benefits are not purely economic or

commercial; they are even social &cultural. These days, we observe that the West is slowly
tending towards the East & vice versa. It does mean that the good cultural factors & values of the
East are acquired by the West & vice versa. Therefore there is a close cultural transformation &
integration.
Changing Environment of International Business

Growing Emerging Markets

Developing countries will see the highest economic growth as they come closer to the standards
of living of the developed world. If you want your business to grow rapidly, consider selling into
one of these emerging markets. Language, financial stability, economic system and local cultural
factors can influence which markets you should favor.

Population and Demographic Shifts

The population of the industrialized world is aging while many developing countries still have
very youthful populations. Businesses catering to well-off pensioners can profit from a focus on
developed countries, while those targeting young families, mothers and children can look in
Latin America, Africa and the Far East for growth.

Speed of Innovation

The pace of innovation is increasing as many new companies develop new products and
improved versions of traditional items. Western companies no longer can expect to be
automatically at the forefront of technical development, and this trend will intensify as more
businesses in developing countries acquire the expertise to innovate successfully.

More Informed Buyers

More intense and more rapid communications allow customers everywhere to purchase products
made anywhere around the globe and to access information about what to buy. As pricing and
quality information become available across all markets, businesses will lose pricing power,
especially the power to set different prices in different markets.

Increased Business Competition

As more businesses enter international markets, Western companies will see increased
competition. Because companies based in developing markets often have lower labor costs, the
challenge for Western firms is to keep ahead with faster and more effective innovation as well as
a high degree of automation.

Slower Economic Growth

The motor of rapid growth has been the Western economies and the largest of the emerging
markets, such as China and Brazil. Western economies are stagnating, and emerging market
growth has slowed, so economic growth over the next several years will be slower. International
businesses must plan for profitability in the face of more slowly growing demand.

Emergence of Clean Technology

Environmental factors are already a major influence in the West and will become more so
worldwide. Businesses must take into account the environmental impact of their normal
operations. They can try to market environmentally friendly technologies internationally. The
advantage of this market is that it is expected to grow more rapidly than the overall economy.

COUNTRY ATTRACTIVENESS

The International business environment includes various factors like social, political, regulatory,
cultural, legal and technological factors that surround a business entity in various sovereign
nations. There are exogenous factors relative to the home environment of the organization in the
international environment. These factors influence the decision-making process on the use of
resources and capabilities. They also make a nation either more or less attractive to an
international business firm.

We will take up the most important factors and see how they affect the operational process of a
business.

Adapting to Changing Needs

Firms do not have any control over the external business environment. Therefore, the success of
an international company depends upon its ability to adapt to the overall environment.
Its success also depends on the ability to adjust and manage the company’s internal variables to
leverage on the opportunities of the external environment. Moreover, the company’s capability to
control various threats produced by the same environment, also determines its success.

A term called ‘country attractiveness’ is often discussed in the international business fraternity. It
is important to consider attractiveness before we move on to discuss environmental factors.

Country Attractiveness

Country attractiveness is a measure of a country’s attractiveness to the international investors. In

international business, investment in foreign countries is the most important aspect and hence
firms want to determine how suitable a country is in terms of its external business environments.

International business firms judge the risks and profitability of doing business in a particular
country before investing and starting a business there. This judgment includes studying the
environmental factors to arrive at a decision.

It is pretty clear that businesses prefer a country that is less costly, more profitable, and has fewer
risks. Cost considerations are related with investment. Profitability is dependent on resources.
Risks are associated with the environment and hence it is of prime concern.

Risks may be of various types. However, the general consensus is that a country that is more
stable in terms of political, social, legal, and economic conditions is more attractive for starting a
business.

Business Environments

There are numerous types of business environments; however the political, the cultural, and the
economic environments are the prime ones. These factors influence the decision-making process
of an international business firm. It is important to note that the types of environments we
discuss here are interlinked; meaning one’s state affects the others in varying dimensions.
The Political Factors

The political environment of a nation affects the legal aspects and government rules which a
foreign firm has to experience and follow while doing business in that nation. There are definite
legal rules and governance terms in every country in the world. A foreign company that operates
within a particular country has to abide by the country’s laws for the duration it operates there.

Political environment can affect other environmental factors −

● Political decisions regarding economy can affect economic environment.

● Political decisions may affect the socio-cultural environment of a nation.
● Politicians may affect the rate of emergence of new technologies.
● Politicians can exert influence in the acceptance of emerging technologies.

There are four major effects of political environment on business organizations −

● Impact on Economy − The political conditions of a nation have a bearing on its

economic status. For example, Democratic and Republican policies in the US are
different and it influences various norms, such as taxes and government spending.
● Changes in Regulation − Governments often alter their decisions related to business
control. For example, accounting scandals in the beginning of the 21st century prompted
the US SEC turn more mindful on the issues of corporate compliance. Sarbanes-Oxley
compliance regulations (2002) were social reactions. The social environment demanded
the public companies to be more responsible.
● Political Stability − Political stability effects business operations of international
companies. An aggressive takeover overthrowing the government could lead to a
disordered environment, disrupting business operations. For example, Sri Lanka’s civil
war and Egypt and Syria disturbances were overwhelming for businesses operating there.
● Mitigation of Risk − There are political risk insurance policies that can mitigate risk.
Companies with international operations leverage such insurances to reduce their risk
exposure.
The Economic Factors

Economic factors exert a huge impact on international business firms. The economic
environment includes the factors that influence a country's attractiveness for international
business firms.

● Business firms seek predictable, risk-free, and stable mechanisms. Monetary systems
that acknowledge the relative dependence of countries and their economies are good for a
firm. If an economy fosters growth, stability, and fairness for prosperity, it has a positive
effect on the growth of companies.
● Inflation contributes hugely to a country's attractiveness. High rate of inflation increases
the cost of borrowing and makes the revenue contract in domestic currency. It exposes
the international firms to foreign-exchange risks.
● Absolute purchasing power parity is also an important consideration. The ratio of
exchange rate between two particular countries is identical to the ratio of the price levels.
The law of one price states that the real price of a product is same across all nations.
● Relative purchasing power parity (PPP) is valuable for foreign firms. It asks how much
money is needed to buy the same goods and services in two particular countries. PPP
rates prompt international comparisons of income.

The Cultural Factors

Cultural environments include educational, religious, family, and social systems within the
marketing system. Knowledge of foreign culture is important for international firms. Marketers
who ignore cultural differences risk failure.

● Language − There are nearly 3,000 languages in the world. Language differences are
important in designing advertising campaigns and product labels. If a country has several
languages, it may be problematic.
● Colors − It is important to know how people associate with colors. For example, purple
is unacceptable in Hispanic nations because it is associated with death.
● Customs and Taboos − It is important for marketers to know the customs and taboos to
learn what is acceptable and what is not for the marketing programs.
 ● Values − Values stem from moral or religious beliefs and are acquired through
experiences. For example, in India, the Hindus don’t consume beef, and fast-food
restaurants such as McDonald's and Burger King need to modify the offerings.
● Aesthetics − There are differences in aesthetics in different cultures. Americans like
suntans, the Japanese do not.
● Time − Punctuality and deadlines are routine business practices in the U.S. However,
Middle East and Latin American people are far less bound by time constraints.
● Religious Beliefs − Religion can affect a product’s labelling, designs, and items
purchased. It also affects the consumers' values.

Cultural Differences

● Ireland’s evening meal is called tea, not dinner.

● If you nod in Bulgaria, it means "no" and moving the head from one side to the other
means "yes".
● Pepsodent toothpaste did not sell well in Southeast Asia, as it promised white teeth. Black
or yellow teeth are symbols of prestige there.

Trends in Globalization

The United Nations identified three mega-trends related to globalization:

● Shifts in production and labor markets,

● Rapid advances in technology, and
● Climate change

What is globalization?

Globalization is the integration of a national economy and culture with that of the global
economy. Metaphorically, a country throws open its gates, welcoming in communication,
international trade, capital, technology and cultural practices from foreign countries.
Globalism increases international economic interdependence due to the increasing scale of
cross-border trade of capital, commodities, services and technologies. In doing so, this
incentivizes foreign businesses to invest and expand globally into the newly opened country.

The impacts of globalization on India’s economy

Globalization has had a significant and nearly instantaneous impact on India as a whole.

The reduction of export subsidies and import barriers enabled free trade that made the untapped
Indian market incredibly attractive to the international community. And nowhere were these
reforms more consequential than the significant changes made to its industrial, financial and
agricultural sectors:

● Industrial – There has been a massive influx of both foreign capital investment and
companies expanding to and offshoring in India, particularly in the pharmaceutical
manufacturing, chemical and petroleum industries. They brought with them advanced
technologies and processes that have helped modernize the Indian industrial sector.
● Financial – Prior to globalization and privatization, India’s financial sector had been
mismanaged by a combination of corrupt and inept government officials—many of
whom were risk-averse and reluctant to embrace change. By taking control of the
financial sector out of the hands of the bureaucracy, market competition spurred on
innovation, creating a much more dynamic financial services sector.
● Agricultural – India used to be a largely an agrarian society, with a significant majority
of the country’s population depending on this sector either directly or indirectly for their
livelihood. Thanks to India opening its doors, the technological capabilities of farmers
have increased—helping drive global exports of Indian products such as tea, coffee and
sugar.

The byproduct of these sectors has brought about an increase in national income, employment,
exports and GDP growth.
The advantages of globalization for foreign entities and investors

For international companies, the globalization of India presented an unprecedented opportunity

for growth and expansion. Suddenly, the world’s second-most populous country was open for
business. And this development still has advantageous ripple effects to this day, including:

1. Access to untapped markets

The increasing globalization of India has opened up the country to eager foreign companies
seeking to invest and operate within the massive Indian market.

● For the country and its citizenry, this boosted foreign capital inflows both from portfolio
investment and foreign direct investment. As a result, the import-export sector
experienced explosive growth.
● For international companies, it expanded their capabilities and market share—they gained
instant access to hundreds of millions of new consumers and potential workers.

Thanks to globalization, now is a great time to expand your business to India. You can not only
grow your potential market share but can also increase your economies of scale and
specialization, thus lowering your unit cost per production.

2. A surplus of employment opportunities

The revitalization and expansion of the Indian economy helped lift hundreds of millions out of
extreme poverty, while also improving the employee benefits offered. This was due to two
primary factors:

● Export growth thanks to comparative cost advantage created countless new jobs across
the country.
● The lifting of restrictions on capital inflows and outflows increased employment
opportunities.

Initially, globalization gave foreigners access to an inexpensive, robust labor force. And, as the
country has progressed, that labor force has grown more skilled and educated over time. Along
these lines, India has the largest diaspora living abroad.
These expatriates work and attend school in foreign countries. This helps facilitate the transfer of
skills, knowledge and technology back to the Indian economy, seeing as a significant minority of
Indians living abroad eventually return home.

For product-based businesses and multinational corporations, labor costs are often the largest
expenditure. Offshoring in and outsourcing to a place like India enables companies to reduce
their labor costs. This results in a freeing up of capital for strategic reinvestment while also
driving specialization.

However, businesses can’t seize on the hiring opportunities in India without a legal entity, which
can be a costly and timely process. However, an employer of record like Global Employment
Outsourcing (GEO) enables businesses to hire employees in India quickly and compliantly
without the need for an entity.

3. Reduced risk profile

For companies considering global expansion to the Indian market, especially for manufacturing
purposes, doing so can help reduce your overall risk profile. Having multiple locations around
the globe helps prevent supply chain issues. If one location is held up, it won’t negatively impact
the entire supply chain.

And for foreign investors considering the economy as a whole, India offers a well-diversified
export basket. According to OECD’s 2019 Economic Survey of India:

“India has succeeded in increasing the number of goods exported and in serving new
markets/countries. Its export basket is highly diversified and exports to emerging markets
are growing fast. Such a diversification reveals the high potential of the Indian economy
to adjust to new demands. It also reduces exposure to risks such as lower demand in one
country or for one specific product.”

International Economic Institutions

Almost every country exports and imports products to benefit from the growing international
trade.
The growth of international trade can be increased, if the countries follow a common set of rules,
regulations, and standards related to import and export.

These common rules and regulations are set by various international economic institutions.
These institutions aim to provide a level playing field for all the countries and develop economic
cooperation.

These institutions also help in solving the currency issues among countries related to stabilizing
the exchange rates. There are three major international economic institutions, namely, WTO,
IMF, and UNCTAD.

World Trade Organization:

WTO was formed in 1995 to replace the General Agreement on Tariffs and Trade (GATT),
which was started in 1948. GATT was replaced by WTO because GATT was biased in favor of
developed countries. WTO was formed as a global international organization dealing with the
rules of international trade among countries.

The main objective of WTO is to help the global organizations to conduct their businesses.
WTO, headquartered at Geneva, Switzerland, consists of 164 members and represents more than
97% of world’s trade.

The main objectives of WTO are as follows:

a. Raising the standard of living of people, promoting full employment, expanding production
and trade, and utilizing the world’s resources optimally

b. Ensuring that developing and less developed countries have better share of growth in the
world trade

c. Introducing sustainable development in which balanced growth of trade and environment goes
together

The main functions of WTO are as follows:

a. Setting the framework for trade policies

b. Reviewing the trade policies of different countries

c. Providing technical cooperation to less developed and developing countries

d. Setting a forum for addressing trade-related disputes among different countries

e. Reducing the barriers to international trade

f. Facilitating the implementation, administration, and operation of agreements

g. Setting a negotiation forum for multilateral trade agreements

h. Cooperating with the international institutions, such as IMF and World Bank for making
global economic policies

i. Ensuring the transparency of trade policies

j. Conducting economic research and analysis
WTO has the following advantages:
(a) Promoting peace within nations:
Leads to less trade disputes. WTO helps in creating international cooperation, peace, and
prosperity among nations.
(b) Handling the disputes constructively:
Helps in lesser trade conflicts. When the international trade expands, the chances of disputes also
increase. WTO helps in reducing these trade disputes and tensions among nations.
(c) Helping consumers by providing choices:
Implies that by promoting international trade, WTO helps consumers in gaining access to a large
number of products.

(d) Encouraging good governance:

Accelerates the growth of a country. The rules formulated by WTO encourage good governance
and discourage the unwise policies that lead to corruption in a country.
(e) Stimulating economic growth:
Leads to more jobs and increase in income. The policies of WTO focus on reducing trade
barriers among nations to increase the quantum of import and export.
International Monetary Fund:

The International Bank for Reconstruction and Development (IBRD), commonly referred to as
the World Bank, is an international financial institution whose purposes include assisting the
development of its member nation’s territories, promoting and supplementing private foreign
investment and promoting long-range balance growth in international trade.

IMF, established in 1945, consists of 191 member countries. It works to secure financial stability,
develop global monetary cooperation, facilitate international trade, and reduce poverty and
maintain sustainable economic growth around the world. Its headquarters are in Washington,
D.C., United States.

The objectives of IMF are as follows:

a. Helping in increasing employment and real income of people
b. Solving the international monetary problems that distort the economic development of
different nations
c. Maintaining stability in the international exchange rates
d. Strengthening the economic integrity of the nations
e. Providing funds to the member nations as and when required
f. Monitoring the financial and economic policies of member nations
g. Assisting low developed countries in effectively managing their economies
WTO and IMF have total 150 common members. Thus, they both work together where the
central focus of WTO is on the international trade and of IMF is on the international monetary
and financial system. These organizations together ensure a sound system of global trade and
financial stability in the world.

Member countries repay the share amount to the World Bank in the following ways:
1. 2% of allotted share are repaid in gold, US dollar or Special Drawing Rights (SDR).
2. Every member country is free to repay 18% of its capital share in its own currency.
3. The remaining 80% share deposited by the member country only on demand by the World
Bank.

United Nations Conference on Trade and Development:

UNCTAD, established in 1964, is the principal organ of United Nations General Assembly. It
provides a forum where the developing countries can discuss the problems related to economic
development. UNCTAD is headquartered in Geneva, Switzerland and has 193 member countries.

The conference of these member countries is held after every four years. UNCTAD was created
because the existing institutions, such as GATT, IMF, and World Bank were not concerned with
the problem of developing countries. UNCTAD’s main objective is to formulate the policies
related to areas of development, such as trade, finance, transport, and technology.

The main objectives of UNCTAD are as follows:

a. Eliminating trade barriers that act as constraints for developing countries

b. Promoting international trade for speeding up the economic development

c. Formulating principles and policies related to international trade

d. Negotiating the multinational trade agreements

e. Providing technical assistance to developing countries specially low developed countries

It is important to note that UNCTAD is a strategic partner of WTO. Both the organizations
ensure that international trade helps the low developed and developing countries in accelerating
their pace of growth. On 16th April, 2003, WTO and UNCTAD also signed a Memorandum of
Understanding (MoU), which identifies the fields for cooperation to facilitate the joint activities
between them.

Regional Economic Integration:

Economic institutions, such as WTO, IMF, and UNCTAD aim at promoting economic
cooperation worldwide. A similar effort is made regionally through regional economic
integration that is an agreement between the countries to
expand trade with mutual benefits. Regional economic integration involves removing trade
barriers and coordinating the trade policies of the countries.

It occurs because of various reasons, which are mentioned as follows:

(a) Shared culture:

Involves similarity in language, religion, norms, and traditions of the countries that prompt them
to trade with each other. This commonality facilitates the smooth flow of communication among
countries. Same language of the countries helps the organizations to understand the complexities
of the targeted markets.

(b) History of political and economic dominance:

Affects the integration among the countries. For instance, the rule of Britishers has introduced
the English language in India that later became a widely used language. Thus, former colonial
power facilitates the shared culture and language. It is easy for organizations to target the
markets, if culture and language is similar.

(c) Regional closeness:

Helps in maintaining strong economic relationships among the countries. The countries with
same border have access to effective and direct transportation that increases the probability of
trade between them.

Regional economic integration is done through various agreements.

e. Providing technical assistance to developing countries specially low developed countries

It is important to note that UNCTAD is a strategic partner of WTO. Both the organizations
ensure that international trade helps the low developed and developing countries in accelerating
their pace of growth. On 16th April, 2003, WTO and UNCTAD also signed a Memorandum of
Understanding (MoU), which identifies the fields for cooperation to facilitate the joint activities
between them.

Regional Economic Integration:

Economic institutions, such as WTO, IMF, and UNCTAD aim at promoting economic
cooperation worldwide. A similar effort is made regionally through regional economic
integration that is an agreement between the countries to
expand trade with mutual benefits. Regional economic integration involves removing trade
barriers and coordinating the trade policies of the countries.

It occurs because of various reasons, which are mentioned as follows:

(a) Shared culture:

Involves similarity in language, religion, norms, and traditions of the countries that prompt them
to trade with each other. This commonality facilitates the smooth flow of communication among
countries. Same language of the countries helps the organizations to understand the complexities
of the targeted markets.

(b) History of political and economic dominance:

Affects the integration among the countries. For instance, the rule of Britishers has introduced
the English language in India that later became a widely used language. Thus, former colonial
power facilitates the shared culture and language. It is easy for organizations to target the
markets, if culture and language is similar.

(c) Regional closeness:

Helps in maintaining strong economic relationships among the countries. The countries with
same border have access to effective and direct transportation that increases the probability of
trade between them.

Regional economic integration is done through various agreements.

1. Free Trade Area

A Free Trade Agreement (FTA) is an agreement between two or more nations where the
countries agree on certain design elements to reduce or eliminate certain barriers to
importing and exporting for trade and investment. India has negotiated and entered into 15
free trade agreements like ASEAN, SAFTA, ISLFTA, IMCECA, etc.

In recent months, India has decided not to join RCEP (Regional Comprehensive Economic
Partnership). India has a trade deal with 15 nations, of which 10 are ASEAN countries (Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and
Vietnam). The remaining 6 countries are India, Australia, New Zealand, China, South Korea,
and Japan, but India decided not to join RECP. Currently, 15 countries are negotiating under
RECP.

At present, accounting for 90% of the total regional trade arrangements are FTAs.

2. Preferential Trade Agreement

Preferential trade agreements, or partial scope agreements, are tariff negotiations for the member
nations by unilateral, bilateral, or multilateral means. The member nation under this agreement
benefits by getting partial tariff reduction support for the trade diversion, which can expand
opportunities for exporting products and lead to employment growth.

3. Customs Union
It not only eliminates all tariffs on trade among members but also adopts uniform commercial
trade policies against non-member nations. It generates trade creation for efficient members to
sell at uniform trade practices for better resource allocation. Union reduces the trade diversion
from the efficient non-member countries by having them sell fewer goods to member countries
with a common tariff, which leads to increased economic welfare among the member nations.

4. Common Market
The Common Market creates an economically integrated market between member countries.
Trade barriers are removed, allowing unrestricted movement of all factors of production,
including labour, between the member countries. It facilitates efficiency among the member
nations and results in strong economic growth.

5. Economic Union
The Economic Union is the highest form of economic cooperation and is an agreement between
two or more nations to allow goods, services, money, and workers to move over borders freely.
All members of the European Union adopt a uniform set of trade policies, common currency,
common fiscal and monetary policies, and exchange rate policies among member nations.

The European Union (EU) is the largest trading bloc. The EU is the world’s largest importer of
goods and services from more than 100 countries and one of the largest exporters in the world by
adopting a common currency, the Euro.

6. Comprehensive Economic Cooperation Agreement

The Comprehensive Economic Cooperation Agreement involves only the reduction or
elimination of tariffs on all listed items except the items listed in the negative list. Usually,
CECA is first signed with the countries, and after that, the countries initiate CEPA.
.
7. Comprehensive Economic Partnership Agreement
A Comprehensive Economic Partnership Agreement (CEPA) is a free trade agreement between
two countries that would cover trade in goods and services, rules of origin, and sanitary and
phytosanitary measures.

UNIT II THEORIES OF INTERNATIONAL TRADE AND INVESTM ENT

Theories of International Trade: Mercantilism, Absolute Advantage Theory, Comparative

Cost Theory, Hecksher-Ohlin Theory-Theories of Foreign Direct Investment : Product Life
Cycle, Eclectic, Market Power, Internationalisation- Instruments of Trade Policy :
Voluntary Export Restraints, Administrative Policy, Anti-dumping Policy, Balance of
Payment.

Theories of International Trade

What Is International Trade?

International trade theories are simply different theories to explain international trade. Trade is
the concept of exchanging goods and services between two people or entities. International trade
is then the concept of this exchange between people or entities in two different countries.

People or entities trade because they believe that they benefit from the exchange. They may need
or want the goods or services. While at the surface, this many sound very simple, there is a great
deal of theory, policy, and business strategy that constitutes international trade.

1. Mercantilism

This theory was popular in the 16th and 18th Century. During that time the wealth of the nation
only consisted of gold or other kinds of precious metals so the theorists suggested that the
countries should start accumulating gold and other kinds of metals more and more. The
European Nations started doing so. Mercantilists, during this period stated that all these precious
stones denoted the wealth of a nation, they believed that a country will strengthen only if the
nation imports less and exports more. They said that this is the favorable balance of trade
and that this will help a nation to progress more.
Mercantilism thrived during the 1500's because there was a rise in new nation-states and the
rulers of these states wanted to strengthen their nations. The only way to do so was by
increasing exports and trade, because of which these rulers were able to collect more
capital for their nations. These rulers encouraged exports by putting limitations on
imports. This approach is called protectionism and it is still used today.

Though, Mercantilism is one the most old-fashioned theory, it still remains a part of
contemporary thinking. Countries like China, Taiwan, Japan, etc.. still favor Protectionism.
Almost every country, has implemented protectionist policy in one way or another, to protect
their economy. Countries that are export oriented prefer protectionist policies as it favors them.
Import restrictions lead to higher prices of good and services. Free-trade benefits everyone,
whereas, mercantilism's protectionist policies only.

Absolute Advantage

Adam Smith questioned the leading mercantile theory of the time in The Wealth of
Nations. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London:
W. Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists.
Smith offered a new trade theory called absolute advantage, which focused on the ability of
a country to produce a good more efficiently than another nation. Smith reasoned that trade
between countries shouldn’t be regulated or restricted by government policy or intervention. He
stated that trade should flow naturally according to market forces. In a hypothetical
two-country world, if Country A could produce a good cheaper or faster (or both) than
Country B, then Country A had the advantage and could focus on specializing on
producing that good. Similarly, if Country B was better at producing another good, it could
focus on specialization as well. By specialization, countries would generate efficiencies,
because their labor force would become more skilled by doing the same tasks. Production
would also become more efficient, because there would be an incentive to create faster and
better production methods to increase the specialization.
Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit
and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by
how much gold and silver it had but rather by the living standards of its people.

Comparative Advantage

The challenge to the absolute advantage theory was that some countries may be better at
producing both goods and, therefore, have an advantage in many areas. In contrast, another
country may not have any useful absolute advantages. To answer this challenge, David Ricardo,
an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned
that even if Country A had the absolute advantage in the production of both products,
specialization and trade could still occur between two countries.

Comparative advantage occurs when a country cannot produce a product more

efficiently than the other country; however, it can produce that product better and more
efficiently than it does other goods. The difference between these two theories is subtle.
Comparative advantage focuses on the relative productivity differences, whereas absolute
advantage looks at the absolute productivity.

Let’s look at a simplified hypothetical example to illustrate the subtle difference between these
principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It
turns out that Miranda can also type faster than the administrative assistants in her office, who
are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets,
should she do both jobs? No. For every hour Miranda decides to type instead of do legal work,
she would be giving up $460 in income. Her productivity and income will be highest if she
specializes in the higher-paid legal services and hires the most qualified administrative assistant,
who can type fast, although a little slower than Miranda. By having both Miranda and her
assistant concentrate on their respective tasks, their overall productivity as a team is higher. This
is comparative advantage. A person or a country will specialize in doing what they do relatively
better. In reality, the world economy is more complex and consists of more than two countries
and products. Barriers to trade may exist, and goods must be transported, stored, and distributed.
However, this simplistic example demonstrates the basis of the comparative advantage theory.
Heckscher-Ohlin Theory (Factor Proportions Theory)

The theories of Smith and Ricardo didn’t help countries determine which products would give a
country an advantage. Both theories assumed that free and open markets would lead countries
and producers to determine which goods they could produce more efficiently. In the early 1900s,
two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a
country could gain comparative advantage by producing products that utilized factors that
were in abundance in the country. Their theory is based on a country’s production
factors—land, labor, and capital, which provide the funds for investment in plants and
equipment. They determined that the cost of any factor or resource was a function of supply and
demand. Factors that were in great supply relative to demand would be cheaper; factors in great
demand relative to supply would be more expensive. Their theory, also called the factor
proportions theory, stated that countries would produce and export goods that required resources
or factors that were in great supply and, therefore, cheaper production factors. In contrast,
countries would import goods that required resources that were in short supply, but higher
demand.

For example, China and India are home to cheap, large pools of labor. Hence these countries
have become the optimal locations for labor-intensive industries like textiles and garments.

Theories of Foreign Direct Investment

Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle
theory in the 1960s. The theory, originating in the field of marketing, stated that a product life
cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized
product. The theory assumed that production of the new product will occur completely in the
home country of its innovation. In the 1960s this was a useful theory to explain the
manufacturing success of the United States. US manufacturing was the globally dominant
producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its product cycle.
The PC was a new product in the 1970s and developed into a mature product during the 1980s
and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing
and production process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where
innovation and manufacturing occur around the world. For example, global companies even
conduct research and development in developing markets where highly skilled labor and
facilities are usually cheaper. Even though research and development is typically associated with
the first or new product stage and therefore completed in the home country, these developing or
emerging-market countries, such as India and China, offer both highly skilled labor and new
research facilities at a substantial cost advantage for global firms.

Eclectic paradigm
An eclectic paradigm, also known as the ownership, location, internalization (OLI)
model or OLI framework, is a three-tiered evaluation framework that companies can follow
when attempting to determine if it is beneficial to pursue foreign direct investment (FDI). This
paradigm assumes that institutions will avoid transactions in the open market if the cost of
completing the same actions internally, or in-house, carries a lower price. It is based on
internalization theory and was first expounded upon in 1979 by the scholar John H. Dunning.
Understanding Eclectic Paradigms

The eclectic paradigm takes a holistic approach to examining entire relationships and interactions
of the various components of a business. The paradigm provides a strategy for operation
expansion through FDI. The goal is to determine if a particular approach provides
greater overall value than other available national or international choices for the
production of goods or services.

Since businesses seek the most cost-effective options while still maintaining quality, they may
use the eclectic paradigm to evaluate any scenario which exhibits potential.

Three Key Factors of the Eclectic Paradigm

For FDI to be beneficial, the following advantages must be evident:

Ownership advantages, include proprietary information and various ownership rights of a

company. These may consist of branding, copyright, trademark or patent rights, plus the use and
management of internally-available skills. Ownership advantages are typically considered to be
intangible. They include that which gives a competitive advantage, such as a reputation for
reliability.

Location advantage is the second necessary good. Companies must assess whether there is a
comparative advantage to performing specific functions within a particular nation. Often fixed in
nature, these considerations apply to the availability and costs of resources, when functioning in
one location compared to another. Location advantage can refer to natural or created resources,
but either way, they are generally immobile, requiring a partnership with a foreign investor in
that location to be utilized to full advantage.

Internalization advantages, signal when it is better for an organization to produce a particular

product in-house, versus contracting with a third-party. At times, it may be more cost-effective
for an organization to operate from a different market location while they keep doing the work
in-house. If the business decides to outsource the production, it may require negotiating
partnerships with local producers. However, taking an outsourcing route only makes financial
sense if the contracting company can meet the organization’s needs and quality standards at a
lower cost. Perhaps the foreign company can also offer a greater degree of local market
knowledge, or even more skilled employees who can make a better product.

Market Power
Market power refers to the ability of a firm (or group of firms) to raise and maintain
price above the level that would prevail under competition is referred to as market or
monopoly power. The exercise of market power leads to reduced output and loss of economic
welfare.

Factors influencing Market Power

1. Number of competitors in a market

For a company to hold extensive market power in the industry in which it operates, the industry
must not be heavily populated with competition. Market power is inversely related to the number
of companies present in the market. Fewer companies mean greater market power is available to
each player.

2. Elasticity of demand

For a company to exert market power, there must be inelastic demand for its products. This
means that regardless of the price of the product, there is a persistent need for the product.
Companies can achieve an inelastic demand curve by providing unique products and services
that create value for the customer.

3. Product differentiation

If a company offers differentiated products and services or holds an extensive market share, it
can, to some extent, dictate the pricing of its products and meet the inelastic demand from
customers. A high degree of pricing power helps a company achieve market power.

4. Ability of companies to make above “normal profit”

In a perfectly competitive market, where buyers and sellers are both price takers, it is not
possible to make above-normal profits in the long run. If there is a scenario where companies can
make profits above the normal profit range, more companies will join the industry seeking the
same, and this will dilute the position of each player and bring down the profits to normal. A
company with great market power will be able to make profits above “normal profit.”

5. Pricing power

If a company offers distinguished products and services or holds extensive market share, it can,
to some extent, dictate the pricing of its products and meet the inelastic demand from customers.
A high degree of pricing power helps a company achieve market power.

6. Perfect information

If an industry enjoys a perfect flow of information and there is no mismatch between facts and
information available to sellers, players will not achieve market power.

7. Barriers to entry or exit

If an industry has high barriers to entry, the players typically hold market power. High barriers to
entry mean the existing players are protected because new players cannot easily enter to disrupt
the marketplace.

8. Factor mobility

If an industry provides equal ease of access to inputs of its products or services, the market
power of individual firms will not be better off.

Market Power in Different Market Concentrations

1. Perfect competition

In a perfectly competitive market, multiple sellers sell a standardized product to multiple buyers.
There are many sellers in a homogeneous market that can freely exit or enter the market. Barriers
to entry do not exist, and companies cannot make above “normal profits” in the long run.
Buyers in a perfectly competitive market will enjoy perfect information regarding the product or
service. Since all products in the market are substitutes for one another, the demand for products
is extremely elastic. All companies are price takers and hold zero market power.

2. Monopolistic competition

Monopolistic competition is a form of imperfect competition wherein a few sellers control the
market by differentiating their products through branding or customization. Because of such
traits, the products in the market are not perfect substitutes for each other, and sellers can
determine prices.

In the long run, however, the demand becomes elastic as companies eventually modify their
products to suit the market’s needs. Barriers to entry do exist, but they may be low. Perfect
information is not available to the buyers and sellers; there is an ambiguity to be exploited by a
more knowledgeable player. Sellers in a monopolistic market are price setters and hold market
power.

3. Monopoly

In a monopoly, a single company is the sole seller of a distinct type of product or service. The
products are not merely customized by a different specialized category in their sphere. Due to the
unique nature of the product, the demand remains inelastic, and the company can exercise
extensive pricing power and make profits that are above “normal profits.”

The industry is characterized by extremely high barriers to entry, as the existing company may be
protected by patents, and the factor mobility does not exist. Buyers are unable to access perfect
information, and, in some cases, the sole seller can exploit the market by indulging in price
discrimination. A monopolistic firm enjoys extremely high, if not absolute, market power.
Instruments of Trade Policy

Voluntary Export Restraint (VER)

A self-imposed trade restriction that limits the amount of a certain good or category of goods that
are allowed to be exported to a different country

What is a Voluntary Export Restraint (VER)?

A voluntary export restraint (VER) is a self-imposed trade restriction where the government of a
country limits the amount of a certain good or category of goods that are allowed to be exported
to a different country. The restraint could be a preset limit, a reduction in the exported amount, or
a complete restriction.

Except for the fact that it is imposed by the exporting country rather than the importing one, a
VER essentially functions as an import quota or an import tariff.

Motivations behind Voluntary Export Restraints

Typically, a country imposes a voluntary export restraint at the request of an importing

country that seeks protection for its domestic producers. The exporting country establishes a
VER to avoid facing trade restrictions from the importing country.

Through the use of a voluntary export restraint, the exporting country is able to exercise some
degree of control over the restriction, which would otherwise be lost if it faced trade restrictions
from the importing country. Hence, despite what the name suggests, VERs are rarely voluntary.

History of VERs

Voluntary export restraints have been historically used on a wide variety of traded
products and have been used since the 1930s. The popularity of this particular trade restraint
increased in the 1980s since it abided by the terms agreed to under the GATT (General
Agreement on Trades and Tariffs). However, members of the WTO in 1994 agreed not to impose
any new voluntary export restraints (VERs) and gradually ended the use of any existing ones.
Effectiveness of VERs

Studies conducted on the effectiveness of VERs suggest that they are not effective over a longer
term. An example is the voluntary export restraint imposed by Japan on the export of Japanese
manufactured cars into the U.S. The US government wanted to protect its automobile
manufacturers since the domestic industry was threatened by the cheaper and more fuel-efficient
Japanese automobiles.

The restraint proved to be ineffective since Japanese automotive producers established

manufacturing plant facilities in the US. Additionally, the Japanese car manufacturers started
exporting more luxurious cars in order to generate adequate funds while still adhering to the
export limitation set by its government.

VERs on Textiles

US-based producers of textiles faced increasing competition from Southeast Asian countries in
the 1950s and the 1960s. The US government requested VERs to be established by many of the
Southeast Asian countries and was successful in doing so. Textile producers in Europe faced
similarly stiff competition as their US counterparts, and as a result, negotiated voluntary export
restraints as well.

Eventually, an agreement was reached between the exporting and importing parties within the
textile industry that led to the formation of the Multi-Fiber Agreement in the 1970s. The
agreement was essentially an arrangement of multilateral voluntary export restraints. The
agreement is no longer in effect and was terminated in 2005 after the expiry of a ten-year
transition period since the 1994 GATT.

Voluntary Export Restraints vs. Voluntary Import Expansion

A voluntary import expansion occurs when a country agrees to increase the number of imports
into its country. It is implemented by reducing restrictions such as import tariffs. A voluntary
import expansion, much like a VER, is enacted voluntarily at the request of another country and
negatively affects the trade balance of the country that volunteers to set up the arrangement.
Administrative Policy

Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary
export restraints, local content requirements, administrative policies and antidumping duties.

A tariff is a tax levied on imports or exports. They are divided in two categories:

1. Specific tariffs: are levied as a fixed charge for each unit of a good imported.
2. Ad valorem tariffs: are levied as a proportion of the value of the imported good
In most cases, tariffs are placed on imports to protect domestic producers; tariffs increases
government revenues.

A subsidy is a government payment to a domestic producer. They take many forms like, cash
grants, low-interest loans, tax breaks and government equity participation in domestic firms.
Subsidies help domestic producers in two ways: (1) competing against foreign imports and (2)
gaining export markets.

An import quota is a direct restriction on the quantity of some good that maybe imported into a
country. The restriction is usually enforced by issuing import licenses to a group of individuals or
firms

A voluntary export restraint is a quota on trade imposed by the exporting country, typically at
the request of the importing country’s government.

A local content requirement is a requirement that some specific fraction of a good needs to be
produced domestically.

Administrative trade policies are bureaucratic rules designed to make it difficult for imports to
enter a country.

Anti-Dumping Duty

The government imposes anti-dumping duty on foreign imports when it believes that the
goods are being “dumped” – through the low pricing – in the domestic market.
Anti-dumping duty is imposed to protect local businesses and markets from unfair competition
by foreign imports

Role of the WTO in Regulating Anti-Dumping Measures

The World Trade Organization (WTO) plays a critical role in the regulation of anti-dumping
measures. As an international organization, the WTO does not regulate firms accused of
engaging in dumping activities, but it possesses the power to regulate how governments react to
dumping activities in their territories.

Some government sometimes react harshly to foreign companies engaging in dumping activities
by introducing punitive anti-dumping duties on foreign imports, and the WTO may come in to
determine if the actions are genuine, or if they go against the WTO free-market principle.

According to the WTO Anti-Dumping Agreement, dumping is legal unless it threatens to cause
material injury in the importing country domestic market. Also, the organization prohibits
dumping when the action causes material retardation in the domestic market.

Where dumping occurs, the WTO allows the government of the affected country to take legal
action against the dumping country as long as there is evidence of genuine material injury to
industries in the domestic market. The government must show that dumping took place, the
extent of the dumping in terms of costs, and the injury or threat to cause injury to the domestic
market.

Calculating the Anti-Dumping Duty

The WTO Anti-Dumping Agreement allows governments to act in a way that does not
discriminate between trading partners and honors the DATT 1994 principle when calculating the
duty. The GATT 1994 principle provides a number of guidelines to govern trade between
members of the WTO. It requires that imported goods not to be subjected to internal taxes in
excess of the costs imposed on domestic goods.

Also, it requires that imported goods be treated the same way as domestic goods under domestic
laws and regulations. However, it allows the government to impose a duty on foreign imports if
they exceed the bound rates and threaten to cause injury to the domestic market.
There are several ways of determining whether an imported product has been dumped lightly or
heavily, and the amount of duty to be applied. The first method is to calculate the anti-dumping
duty based on the normal price of the product.

The second alternative is to use the price charged on the same product but in a different country.
The last alternative is to calculate the duty based on the total product costs, expenses, and the
manufacturer’s profit margins.

Types of Dumping

Below are the four types of dumping in international trade:

1. Sporadic dumping

Companies dump excess unsold inventories to avoid price wars in the home market and preserve
their competitive position. They can either dump by destroying excess supplies or export them to
a foreign market where the products are not sold.

2. Predatory dumping

Unlike sporadic dumping, which is occasional, predatory dumping is permanent. It involves the
sale of goods in a foreign market at a price lower than the home market. Predatory dumping is
done to gain access to the foreign market and eliminate competition. It creates a monopoly in the
market.

3. Persistent dumping

When a country consistently sells products at a lower price in the foreign market than the local
prices, it is called persistent dumping. It happens when there is a constant demand for the product
in the foreign market.
4. Reverse dumping

Reverse dumping happens when the demand for the product in the foreign market is less elastic.
It means that price changes do not impact demand. Therefore, the company can charge a higher
price in the foreign market and a lower price in the local market.

Balance of Payments (BOP)

The balance of payments (BoP) records all economic transactions in goods, services,
and assets of the country with the rest of the world for a specified time period, usually a
year. In simple terms, it is a systematic accounting balance sheet of the country and includes
both debit and credit transactions.

The balance of payments (BOP) transactions consist of imports and exports of goods, services,
and capital, as well as transfer payments, such as foreign aid and remittances. A
country's balance of payments and its net international investment position together constitute its
international accounts.

The balance of payments divides transactions into two accounts: the current account and the
capital account. Sometimes the capital account is called the financial account, with a separate,
usually very small, capital account listed separately. The current account includes transactions in
goods, services, investment income, and current transfers.

Types of Balance of Payment

The balance of payment is divided into three types:

Current account: This account scans all the incoming and outgoing of goods and services
between countries. All the payments made for raw materials and constructed goods are covered
under this account. Few other deliveries that are included in this category are from tourism,
engineering, stocks, business services, transportation, and royalties from licenses and copyrights.
All these combine together to make a BOP of a country.

Capital account: Capital transactions like purchase and sale of assets (non-financial) like lands
and properties are monitored under this account. This account also records the flow of taxes,
acquisition, and sale of fixed assets by immigrants moving into the different country. The
shortage or excess in the current account is governed by the finance from the capital account and
vice versa.

Finance account: The funds that flow to and from the other countries through investments like
real estate, foreign direct investments, business enterprises, etc., is recorded in this account. This
account calculates the foreign proprietor of domestic assets and domestic proprietor of foreign
assets, and analyses if it is acquiring or selling more assets like stocks, gold, equity, etc.

Importance of Balance of Payment

A balance of payment is an essential document or transaction in the finance department as it

gives the status of a country and its economy. The importance of the balance of payment can be
calculated from the following points:

● It examines the transaction of all the exports and imports of goods and services for a
given period.
● It helps the government to analyse the potential of a particular industry export growth
and formulate policy to support that growth.
● It gives the government a broad perspective on a different range of import and export
tariffs. The government then takes measures to increase and decrease the tax to
discourage import and encourage export, respectively, and be self-sufficient.
● If the economy urges support in the mode of import, the government plans according
to the BOP, and divert the cash flow and technology to the unfavourable sector of the
economy, and seek future growth.
● The balance of payment also indicates the government to detect the state of the
economy, and plan expansion. Monetary and fiscal policies are established on the basis of
balance of payment status of the country.
UNIT III GLOBAL ENTRY
Strategic compulsions-– Strategic options – Global portfolio management- Global entry
strategy, different forms of international business, advantages - Organizational issues of
international business – Organizational structures – Controlling of international business,
approaches to control – Performance of global business, performance evaluation system.

Strategic Compulsions
Strategic management includes strategic planning, implementation, and review/control of the
strategy of an organization. The companies want survive in the today’s business competition,
they must sell their products in the global market and enlarge their market. The companies face
the compulsion to be global if they want to gain the global market and more values. Ex: Sony,
Pepsi, Microsoft…
International/global strategic management
Strategic management is the process of systematically analyzing various opportunities and
threats vis-à-vis organizational strengths and weaknesses, formulating and arriving at strategic
choices through critical evaluation of alternatives and implementing them to meet the set
objectives of the organization.
Area of strategic compulsions
1. Orientation for globalization
2. Emerging E-commerce and Internet culture
3. Cut-throat competition
4. Diversification
5. Active pressure groups
6. Motive for corporate social responsibility (CSR) and ethics.

Three Types of Strategy

Within the domain of well-defined strategy there are uniquely different strategy types, here are
three:

1. Business strategy
2. Operational strategy
3. Transformational strategy
 1.Business Strategy

The first of the three types of strategy is Business. It is primarily concerned with how a
company will approach the marketplace - where to play and how to win. Where to play
answers questions like, which customer segments will we target, which geographies will
we cover, and what products and services will we bring to market.

How to win answers questions like, how will we position ourselves against our
competitors, what capabilities we will employ to differentiate us from the competition,
and what unique approaches will we apply to create new markets.

Senior managers typically create business strategy. After it is created, business architects
play an important role in clarifying the strategy, creating tighter alignment among
different strategies, and communicating the business strategy across and down the
organization in a clear and consistent fashion.

Executives are just beginning to bring advanced, highly credible business architecture
practices into the strategy discussions early to provide tools, models, and facilitation that
enable better strategy development.
2. Operational Strategy

The second of the three types of strategy is Operational. It is primarily concerned with accurately
translating the business strategy into a cohesive and actionable implementation plan. Operational
Strategy answers the questions:

● Which capabilities need to be created or enhanced?

● What technologies do we need?
● Which processes need improvement?
● Do we have the people we need?

The vast majority of business architects are currently working in the operational strategy domain
reaching up into the business strategy domain for direction.
They work from the middle out to bring clarity and cohesiveness to the organization’s operating
model typically working vertically within a single business unit while resolving issues at the
business unit boundaries. More mature business architecture practices work in multiple verticals
or move from one vertical to another creating common business architecture patterns.

3. Transformational Strategy

The third of the three types of strategy is Transformational. It is seen less often as it represents
the wholesale transformation of an entire business or organization. This type of strategy goes
beyond typical business strategy in that it requires radical and highly disruptive changes in
people, process, and technology. Few organizations go down this path willingly.
Transformational strategy is generally the domain of Human Resources, organizational
development, and consultants. These efforts are incredibly complex and can experience
significant benefit from applying business architecture discipline though it is rare to see business
architects playing a significant role here.

Areas of Strategic Compulsions

Here is a list of some compulsions that a global business might have to face −

● E-commerce and Internet Culture − Expansion of internet and information technology

made the business move towards e-commerce. Online shopping /Selling and Advertising
are important issues. These factors compel the businesses to go modern.

● Hyperactive Competition − Businesses now are hyper-competitive which compel them

to draw a competitive strategy that includes general competitive intelligence to win the
market share.

● Diversification − Uncertainty and operational risks have increased in the current global
markets. Companies now need to protect themselves by diversifying their products and
operations. Businesses now are compelled to focus on more than one business, or get
specialized in one business.

● Active Pressure Groups − Contemporary pressure groups direct businesses to be more

ethical in their operations. Most of the multinationals are now spending a good deal to
address their Corporate Social Responsibility (CSR).
Standardization Vs Differentiation

According to Levitt, represents local marketing versus global marketing and focus on the central
question of whether a standardized (global) or a differentiated (local), country-specific marketing
approach.

Standardizations might be beneficial for international operations because it offers the potential to
standardize global operations: “The global corporation operates with resolute constancy – at low
relative cost – as if the entire world (or major regions of it) were a single entity; it sells the same
things in the same way everywhere”. With standardization, producers obtain global economies
of scale and experience curve benefits in production, distribution, marketing and management.
Also there are cross border segments of consumers. These are consumers with homogeneous
consumption patterns across cultures. Typically, these cross-border segments are younger, richer
and more urban than the rest of the population.

Standardizations and adaptation of the marketing strategy are two extremes of a continuum, i.e.,
as adaptation increases standardization decreases and vice versa. The discussion of
standardization versus local adaptation on a strategic level can affect diverse aspects of the
marketing strategy

Perspectives on standardization versus Differentiation:

1) Regional perspective
2) Marketing process prospective
3) Marketing components/marketing mix perspective.

Regional perspective: Full standardization in this context relates to a global marketing strategy,
in which the same marketing strategy is applied to all markets served by the company. In
contrast, in a multinational marketing strategy, individual marketing strategies are developed for
each local market; thus, each country market is considered separately. A mixture of
standardization and adaptation is represented by the multi-regional marketing strategy. This
strategy distinguishes several homogeneous regions and develops specific marketing strategies
for each one (e.g. European Marketing, North American Marketing).
Marketing process perspective: A standardization of marketing processes relates to standardized
decision-making processes for cross-country or multi-regional marketing planning.
Standardisation in this context relates to, for example, the standardized launch of new products
or standardised marketing controlling activities, and seeks to rationalize the general marketing
process.

Marketing components/marketing mix perspective: From the marketing components

perspective, standardisation or differentiation affect the degree to which the individual elements
of the marketing mix are unified into a common approach. A fully standardised approach consists
of standardisation across all marketing components. On the other hand, a fully differentiated
approach implies the adaptation of all marketing mix elements to local requirements. A mixed
strategy implies that some components are standardised or adapted to one degree, others to a
different degree.

Factors Favoring Standardization:

⮚ Economies of scale, e.g. In R&D, production and marketing (experience curve effects)
⮚ Global competition
⮚ Convergence of tastes and consumer needs (consumer preferences are homogeneous)
⮚ Centralised management of international operations (possible to transfer experience
across borders)
⮚ A standardised concept is used by competitors
⮚ High degree of transferability of competitive advantages from market to market
⮚ Easier communication, planning and control (e.g. Through Internet and mobile
technology)
⮚ Stock cost reduction

Factors Favoring Differentiation

⮚ Local environment-induced adaptation, e.g. Government and regulatory influences,
legal issues, differences in technical standards (no experience curve effects)
⮚ Local competition
⮚ Variation in consumer needs (consumer needs are heterogeneous, e.g. Because of
cultural differences)
 ⮚ Fragmented and decentralized management with independent country subsidiaries
⮚ An adapted concept is used by competitors
⮚ Low degree of transferability of competitive advantages from market to market

Difference between Standardization Vs Differentiation

Basic of Difference Standardization Differentiation
Application in marketing Companies should apply 4 Ps It is supported by strong
means in the Same way in World market variety by Market
wide. individualism and uniqueness.
Reason for Application Integration Access Regional or local Conditions
Product Offered Complete standardization Altering relevant feature
according to individual or
geographic
Characteristics Doesn’t have special Product is differential from
Characters competitors product.
Approach Increasing Commonality of Detailing the differentiation
product that exists between products
and services
Economics of scale Higher productivity and Increasing cost of production
lowers the total cost and lower productivity
Need Satisfy the heterogeneous Satisfy a particular need of
needs of the buyer buyer
End Result Benefits buyer by lowering Show sense of value to the
price buyer

Strategic Options
I. International strategy.
II. Multidomestic strategy.
III. Global strategy.
IV. Transnational strategy.
I. International strategy
● Go where locals don’t have your skills.
● Little adaptation. Products developed at home (centralization).
● Manufacturing and marketing in each location.
● Makes sense where low skills, competition, and costs exist.
Examples:
OPEL- Europe, Middle East Asia
GMC- North America, Middle East, Europe
SATURN- North America

2. Multi-domestic Strategy
● Maximize local responsiveness.
● Customize the product and marketing strategy to national demands.
● Skill and product transfer.
● Decentralized control - local decision making
● Effective when large differences exist between countries
● Transfer all value-creation activities, no experience curve rewards.
● Good for high local responsiveness and low cost reduction pressures.
● Advantages: product differentiation, local responsiveness, minimized political
risk, minimized
● exchange rate risk
● Prominent strategy among European firms due to broad variety of cultures and
markets in Europe

Example: McDonald’s.
In 1955, McDonald's opened its first restaurant in Des Plaines, Illinois. Today, 2008, it
operates over 31,000 restaurants worldwide, in 119 countries, on six continents,
employing more than 1.5 million people all over the world. I consider McDonald’s a
multidomestic company because they adjust to the cultures of their host countries.

Philips is a good example of a company that followed a multi domestic strategy

3. Global Strategy
● Best use of the experience curve and location economies.
● This is the low cost strategy.
● Utilize product standardization.
● Not good where local responsiveness demand is high.
● Product is the same in all countries.
● Centralized control - little decision-making authority on the local level
● Effective when differences between countries are small
● Advantages: cost, coordinated activities, faster product development

Examples: Chevrolet, General Motors, SAAB, Hummer, Matsushita,

Semiconductor industry

4. Transnational Strategy
Seeks to achieve both global efficiency and local responsiveness
 A transnational strategy allows for the attainment of benefits inherent in both global and
multidomestic strategies. The overseas components are integrated into the overall corporate
structure across several dimensions, and each of the components is empowered to become a
source of specialized innovation.

The key philosophy of a transnational organization is adaptation to all environmental

situations and achieving flexibility by capitalizing on knowledge flows (which take the form
of decisions and value-added information) and two-way communication throughout the
organization. The principal characteristic of a transnational strategy is the differentiated
contributions by all its units to integrated worldwide operations.

Example: Nokia, Caterpillar

Nokia is currently the number one manufacturer of mobile devices in the world. With a
market share of about 38% in 2007 and with net sales of up to 51.1 billion Euros, there’s no
doubt about the company’s significance and success. From Africa to the Asia Pacific to
Europe, Latin America, Middle East and North America, Nokia provides us with cellular
phones that are both stylish and functional.

The five implementation tactics (Vitalari and Wetherbe, 1996) used for implementing the
transnational model are:
● Mass customization-synergies through global research and development (e.g.,
american express, Time warner, frito-lay, mci)
● Global sourcing and logistics (e.g., benetton, citicorp)
● Global intelligence and information resources (e.g., andersen consulting, mckinsey
consulting)
● Global customer service (e.g., american express)
● Global alliances (e.g., british airways and us air; klm and northwest)
Core competencies can develop in any of the firm’s worldwide operations. Flow of skills and
product offerings occurs throughout the firm - not only from home firm to foreign
subsidiary (global learning).
 Makes sense where there is pressure for both cost reduction and local responsiveness.

Factors that Affect Strategic Options

There are many factors that need to be taken care of while choosing the best possible strategic
options. The most influential ones are the following −

● External Constraints − The survival and prosperity of a business firm is fully dependent
on interaction and communication with the elements that are intrinsic to the business. It
includes the owners, customers, suppliers, competitors, government, and the stakeholders
of the community.
● Intra-organizational Forces − The big decisions of a company are often influenced by
the power-play among various interest groups. The strategic decision-making processes
are no exception. It depends on the strategic choices made by the lower Management and
top notch strategic management people.
● Values and Preferences towards Risk − Values play a very important role, It has been
observed hat the successful managers have a more pragmatic, interactive and dynamic
progressive and achievement seeking values. The risk takers in the high-growth
less-stable markets prefer to be the pioneers or innovators. They seek an early entry into
new, untapped markets.
● Impact of Past Strategies − A strategy made earlier may affect the current strategy too.
Past strategies are the starting point of building up a new strategies
● Time Constraints − There may be deadlines to be met. There may be a period of
commitment, which would require a company to take immediate action.
● Information Constraints − The choice of a strategy depends heavily on the availability
of information. A company can deal with uncertainty and risks depending on the
availability of information at its disposal. Lesser the amount of information, greater the
probability of risks.
● Competitor’s Risk − It is important to weigh the strategic choices the competitors may
have. A competitor who adopts a counter-strategy must be taken into account by the
management. The likelihood of a competitor’s strength to react and its probable impact
will influence the strategic choices.
GLOBAL PORTFOLIO MANAGEMENT:

Global portfolio investment means the purchase of stocks, bonds, and money market
instruments by foreigners for the purpose of realizing a financial return which does not result in
foreign management, ownership, or control. Portfolio investment is part of the capital account
on the balance of payments statistics. An international portfolio is designed to give the investor
exposure to growth in emerging and international markets and provide diversification.

Factors affecting global portfolio investment:

1) Tax rates on interest or dividends
2) Interest rates
3) Exchange rates

Problems of global portfolio investment:

1. Unfavorable exchange rate movement
2. Frictions in international financial market
3. Manipulation of security prices
4. Unequal access to information

Global Entry Strategy

1. Importing and exporting,
2. Licensing and franchising,
3. Turnkey operations,
4. Management contracts,
5. Green field strategy
6. Mergers and acquisitions
7. Joint ventures
8. Direct investment and portfolio investment.
9. Tourism and transportation
Importing and exporting
It means the sale abroad of an item produced, stored or processed in the supplying firm’s
home country. It is a convenient method to increase the sales. Passive exporting occurs when
 a firm receives canvassed item. Active exporting conversely results from a strategic decision
to establish proper systems for organizing the export functions and for procuring foreign
sales.
In most countries, it represents a significant share of gross domestic product (GDP).
Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system.

Types of exports
a. Indirect exports
b. Direct exports
c. Intra – corporate transfers: a company transfers an employee to work temporarily in a
different office, often in another country.

E.g. HLL and Unilever of UK

Licensing

A shorthand definition of a license is "an authorization (by the licensor) to use the licensed
material (by the licensee)." In this mode of entry the domestic manufacturer leases the right to
use his intellectual property, copyrights, brand name to a manufacturer in a foreign country for
a fee. Here the manufacturer in the domestic country is called licensor and the manufacturer in
the foreign country is called licensee.

The cost of entering market through this mode is less costly. The domestic company can
choose any international location and enjoy the advantages without incurring any obligations
of ownership, managerial, investment etc.

Term: many licenses are valid for a particular length of time. This protects the licensor should
the value of the license increase, or market conditions change. It also preserves enforceability
by ensuring that no
license extends beyond the term of IP ownership.
Territory: a license may stipulate what territory the rights pertain to. For example, a license
with a territory limited to "North America" (United States/Canada) would not permit a licensee
any protection from actions for use in Japan.

Franchising

Franchising is the practice of using another firm's successful business model. For the
franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid
investment and liability
over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to
have a greater incentive than a direct employee because he or she has a direct stake in the
business. Various tangibles and intangibles such as national or international advertising,
training, and other support services are commonly made available by the franchisor.

Examples: CSC Computer education, KFC, Mc Donalds.

The franchiser provides following services to the franchisee

a. Trade marks
b. Operating system
c. Product reputations
d. Continuous support system like advertising, employee training, quality assurance etc.

Turnkey operations
A turnkey project is a contract under which a firm agrees to fully design, construct and equip a
manufacturing/ business /services facility and turn the project over to the purchase when it is
ready for operation for a remuneration like a fixed price e.g. Nuclear power generation
projects.

Turn-key refers to something that is ready for immediate use, generally used in the sale or
supply of goods or services. Turnkey is often used to describe a home built ready for the
customer to move in. If a contractor builds a "turnkey home" they frame the structure and
finish the interior. "Turnkey" is commonly used in the construction industry; 'Turnkey' is also
commonly used in motorsports to describe a car being sold with drivetrain (engine,
transmission, etc.) to contrast with a vehicle sold without one so that other components may be
re-used.

"A product or service which can be implemented or utilized with no additional work required
by the buyer (just by 'turning the key')"
A turnkey project could involve the following elements depending on its complexity:
• Project Administration
• Licensing-In Of Process
• Design and Engineering Services
• Subcontracting
• Management Control
• Procurement and Expediting Of Equipment;
• Materials Control
• Inspection of Equipment Prior To Delivery
• Shipment, Transportation
• Control of Schedule and Quality
• Pre-Commissioning and Completion
• Performance-Guarantee Testing
• Inventorying Spare-Parts
• Training of Owner's/Plant Sub-System Operating And Maintenance Personnel

PRITI INTERNATIONAL a Kolkata, India based company, caters their Turnkey project
solutions for Mineral Water Plant, Packaged Drinking Water Plant, DM Plant, Effluent
Treatment Plant, Sewage Treatment Plant, Water Softening Plant, Soda Water Plant, Fruit Juice
Plant, Confectionary & Bakery Plants, Candy & Chocolate Plant, Flour Mill and Cattle Feed
Meal Plant etc.
Foreign Direct Investment

Foreign direct investment (FDI) refers to long term participation by country A into
country B. It usually involves participation in management, joint-venture, transfer of
technology and expertise. By investing in a foreign company, the investor takes ownership in a
foreign property for a financial return. When two or more companies share in an FDI, it is
known as a joint venture. When a government joins a company in an FDI, it becomes a mixed
venture. Conversely, a portfolio investment is a no controlling interest in a company that
usually involves either taking stock in a company or making loans to a company in the form of
bonds, bills, or notes that the investor purchases. Portfolio investments are particularly popular
with multinational enterprises as they offer a safe means towards short-term financial gain.

Reasons / Motives For direct foreign investment

1. High transport costs associated with exporting.
2. Problems with licenses and the need to protect intellectual property.
3. Availability of investment grants from foreign governments.
4. Lower operating costs.
5. Faster access to the local market.
6. under capacity at home.
7. A desire to protect supplies of new materials and components in particular countries.
8. Local content requirements
9. Especially favorable economic conditions in particular countries.
10. Wanting to spread the risk of downturns in particular markets.
11. Acquisition of know – how and technical skills only available locally.
12. Desires to minimize worldwide tax burdens.
13. The need to engage in local assembly or part – manufacture.
14. The increase in world trade and the opening up of new markets that have occurred in recent
decades.
15. The development of new technologies that can be transplanted between countries.
16. Liberalization of the economies of nations throughout the globe including removal of
exchange Controls and controls on the repatriation of profits.
17. Establishments of common markets and other regional blocs with common external tariffs.
Acquisitions & Mergers:
A merger is a voluntary and permanent combination of business whereby one or more firms
integrate their operations and identities with those of another and henceforth work under a
common name and in the interests of the newly formed amalgamations.
Motives for acquisitions:
1. Removal of competitor
2. Reduction of the Co failure through spreading risk over a wider range of activities.
3. The desire to acquire business already trading in certain markets & possessing certain
specialist employees & equipments.
4. Obtaining patents, license & intellectual property.
5. Economies of scale possibly made through more extensive operations.
6. Acquisition of land, building & other fixed asset that can be profitably sold off.
7. The ability to control supplies of raw materials.
8. Expert use of resources.
9. Tax consideration.
10. Desire to become involved with new technologies & management method particularly in
high risk industries.

New startups
An entirely new business can be set up to satisfy precisely the owner’s specific needs & all the
problems & pit falls of mergers & acquisitions are avoided. Selection of a location for a fresh
startup is a major strategic decision.
Factor relevant to this include:
1. Finance: Availability of long term funds, govt grants, subsidiaries & tax relieves in various
regions.
2. Labour: Amount of skilled labour in the area, local wage level, training facilities etc.
3. Ancillary services: Extent of local service industries, consultant, distributions etc.
4. Operational factors: Assess to raw material, adequacy of energy supplies, water, road & rail
network etc.

Once the location decision has been taken the firm committees itself to major capital
expenditure. The establishment cannot be relocated in the short term.

Joint ventures:
A large amount of the recent foreign investment in most countries is associated with joint
venturing with local entrepreneur.
Major types of joint ventures:
1. Joint venture by adoption i.e acquisition of a part of the equity in a small entrepreneur
company.
2. By rebirth which occur when a foreign partner transfer technology to an alien domestic
business & takes an equity stack in a rejuvenated business.
3. By procreation in which a truly new venture is born out of a marriage between the technical
& market know how of the partners.
4. Joint venture through family ties which occur when suppliers join together with each other
or when a manufacturer takes in a equity portion in a supplier business.

Management Contract

The companies with low level technology and managerial expertise may seek the
assistance of a foreign company. Then the foreign company may agree to provide technical
assistance and managerial expertise.
This agreement between these two companies is called management contract. For the
assistance and expertise provided by the foreign company it may charge a fee.
A Management contracts involve not just selling a method of doing things (as with franchising
or licensing) but involves actually doing them. A management contract can involve a wide
range of functions, such as technical operation of a production facility, management of
personnel, accounting, marketing services and training.
In Asia, many hotels operate under management contract arrangements, as they can more
easily obtain economies of scale, a global reservation systems, brand recognition etc. The
Marriott International Corporation operates solely on management contracts.

Management contracts have been used to a wide extent in the airline industry, and when
foreign government action restricts other entry methods. Management contracts are often
formed where there is a lack of local skills to run a project. It is an alternative to foreign direct
investment as it does not involve as high risk and can yield higher returns for the company.

Advantages
1. Foreign company earns additional income without any additional investment, risks etc.
2. This agreement and additional income allows the company to enhance its image among the
investors and mobilise funds for expansion
3. It helps the companies to enter other business areas in the host country.
4. The companies act as dealer for the business of the host country business in the home
country.

Green field strategy

It is starting of a company from the scratch in the foreign market. It involves market
survey, selection of location, make or buy decision, eructing of the organisation, recruitment of
human resource and starts the operations and marketing activities.

Advantages
1. The company selects the best location from all view points
2. The company can avail the latest models of the building, machinery and equipment
technology
3. The company can also have its own policies and styles of HRM
4. It can avoid the cultural shock

Mergers and acquisitions

A domestic company selects a foreign company and merge itself with the foreign company in
order to enter international business. Alternatively the domestic company may purchase the
foreign company and acquires the ownership and control it. It provides immediate
manufacturing facilities and marketing network.

Advantages
1. The company immediately gets the ownership and control over the acquired firm.
2. The company can formulate international strategy and generate more revenues
3. If the industry already reached the stage of optimum capacity level or overcapacity level in
the host country. This strategy helps the host country.

Joint ventures
 Two or more firm join together to create a new business entity that is legally separate and
distinct from the partners. It involves sharing of ownership, various environmental factors like
socio-cultural, political, technical and cultural aspects e.g. Hero – Honda, Maruti – Suzuki,
TVS – Suzuki.

Advantages
1. Large capital and other resources
2. Risk being spread among all partners
3. Provides skills and knowledge development
4. It makes large projects and turnkey projects feasible and possible
5. Synergy advantage]

Tourism and transportation

Tourism is travel for recreational, leisure or business purposes. As a result of the

late-2000s recession, international travel demand suffered a strong slowdown beginning in
June 2008, with growth in international tourism arrivals worldwide falling to 2% during the
boreal summer months. Tourism is vital for many countries due to the large intake of money
for businesses with their goods and services and the opportunity for employment in the service
industries associated with tourism. These service industries include transportation services,
such as airlines, cruise ships and taxicabs, hospitality services, such as accommodations,
including hotels and resorts, and entertainment venues, such as amusement parks,
casinos, shopping malls, music venues and theatres.
In 2009, Malaysia made it into the top 10 most visited countries' list. France, US, Spain, China,
Italy, UK, Turkey, Germany, Malaysia, Mexico
Organizational issues of international business

1. Language Barriers

When engaging in international business, it’s important to consider the languages spoken
in the countries to which you’re looking to expand. Does your product messaging translate well
into another language? Consider hiring an interpreter and consulting a native speaker and
resident of each country.
One example of a product “lost in translation” comes from luxury car brand
Mercedes-Benz. When entering the Chinese market, the company chose a Mandarin Chinese
name that sounded similar to “Benz”: Bēnsǐ. The name translates to “rush to death” in Mandarin
Chinese, which wasn’t the impression Mercedes-Benz wanted to make with its new audience.
The company quickly adapted, changing its Chinese name to Bēnchí, which translates to “run
quickly, speed, or gallop.”
It’s also critical to consider the languages spoken by your company’s team members
based in international offices. Once again, investing in interpreters can help ensure your business
continues to operate smoothly.

2. Cultural Differences

Just as each country has its own makeup of languages, each also has its own specific
culture or blend of cultures. Culture consists of the holidays, arts, traditions, foods, and social
norms followed by a specific group of people. It’s important and enriching to learn about the
cultures of countries where you’ll be doing business.
When managing teams in offices abroad, selling products to an international retailer or
potential client, or running an overseas production facility, demonstrating that you’ve taken the
time to understand their cultures can project the respect and emotional intelligence necessary to
conduct business successfully.
One example of a cultural difference between the United States and Spain is the hours of
a typical workday. In the United States, working hours are 9 a.m. to 5 p.m., often extending
earlier or later. In Spain, however, working hours are typically 9 a.m. to 1:30 p.m. and 4:30 to 8
p.m. The break in the middle of the workday allows for a siesta, which is a rest taken after lunch
in many Mediterranean and European countries.

3. Managing Global Teams

Another challenge of international business is managing employees who live all over the
world. When trying to function as a team, it can be difficult to account for language barriers,
cultural differences, time zones, and varying levels of technology access and reliance. To build
and maintain a strong working relationship with your global team, facilitate regular check-ins,
preferably using a video conferencing platform so you can interact in real time.
Research by Gallup shows that employees who have regular check-ins with their
managers are three times more likely to be engaged at work than employees who don’t. When
distance divides teams, as it has for many during the corona virus (COVID-19) pandemic,
communication is key to ensuring everyone feels valued and engaged.

4. Currency Exchange and Inflation Rates

The value of a dollar in your country won’t always equal the same amount in other
countries’ currency, nor will the value of currency consistently be worth the same amount of
goods and services.
Familiarize yourself with currency exchange rates between your country and those where
you plan to do business. The exchange rate is the relative value between two nation’s currencies.
For instance, the current exchange rate from the Canadian dollar to the US dollar is 0.77,
meaning one Canadian dollar is equal to 77 cents in US currency. Make it a point to watch
exchange rates closely, as they can fluctuate.
It’s also important to monitor inflation rates, which are the rates that general price levels
in an economy increase year over year, expressed as a percentage. Inflation rates vary across
countries and can impact materials and labor costs, as well as product pricing. Understanding and
closely following these two rates can provide important information about the value of your
company’s product in various locations over time.

5. Nuances of Foreign Politics, Policy, and Relations

Business doesn’t exist in a vacuum—it’s influenced by politics, policies, laws, and

relationships between countries. Because those relationships can be extremely nuanced, it’s
important that you closely follow news related to countries where you do business.
The decisions made by political leaders can impact taxes, labor laws, raw material costs,
transportation infrastructure, educational systems, and more.
 One hypothetical example Reinhardt presents in Global Business is that if the Chinese
government decided to subsidize Chinese dairy farms, it would impact dairy farmers in all
surrounding countries. This is because, with extra funding, Chinese dairy farms may produce a
surplus of dairy products, causing them to expand their markets to neighboring countries.
It’s both exciting and intimidating that the nuances of international politics, policies, and
relations can impact your business. Stay informed and makes strategic decisions as new
information arises.

ORGANISATION STRUCTURE IN MNE

The fundamental purpose of organizational design and structure is to facilitate organizational

survival and prosperity. To survive and prosper, MNE need to:

1. Acquire necessary resources.

2. Transform products and services efficiently.
3. Produce valued outputs.
4. Effectively co-ordinate activities.
5. Adapt to changing conditions.
6. Satisfy multiple constituencies, including employees, investors, customers and government
and regulatory agencies.

The organizational designing for international environment facilitates the accomplishment of

these requirements through two basic processes.

1. Differentiation:-Divided various tasks into subtasks which then are performed by individual
with specialized skills.

2. Integration:-Integrates these subtotals around the completion of organizational goals.

Formal Vs Informal Structure

Formal systems specify clear lines of authority within an organization. MNE’s with strong
formalization rely on the chain of command for decision-making, communication or control.
Informal structure of decision making, communication and control are often not represent able
in objective description of the organization such as organizational charts.

Centralized Vs. Decentralized Structure

Centralization and decentralization refer to the extent to which decisions are made at the top
of the organization or pushed down into lower levels.

Organizational Structure

As firms expand across border, they adopt a variety of organizational structures in order to meet
the demand of the international business environment. Organization structures of MNC’s need to
integrate their worldwide operations within a single administrative system that optimizes the use
of the company resources and enable the firm to take full advantage of opportunities wherever
they arise.

I. International Division Structure

Many firms make their initial entry international markets by setting up a subsidiary or by
exporting locally produced goods or services. A subsidiary is a common organizational
arrangement for handling finance related business or other operations that require an onsite
presence from the start. If international operation continues to grow, subsidiaries commonly are
grouped into an international division structure, which handles all international operations out of
a division that is created for this purpose. The production activities are not part of the
international division products are produced within the normal “domestic” organizational
structure and modified a simply turned over “as is “to the international business.

A good example is the recent General Motors Joint venture in China. Establishing foreign
manufacturing subsidiaries can help the MNC to deal with both local government pressures and
competition.

Strengths:-

1. It is an efficiently means of dealing with the international market when an MNE has limited
experience with the international environment.
2. It focuses on international activities and issues within the division can foster a strong
professional identity and career path among its members.

3. It also allows for specialization and training in international activities.

4. The focus on international markets, competitors and environments can also facilitate the
development of a more focuses international strategy.

5. The International issue can receive high level corporate consideration and support.

II. Global Structural Arrangement

MNC’s typically turn to good structural arrangement when they begin acquiring and allocating
their resources based on international opportunities and threats.

a. Global Product Division: -

It is a structural arrangement which domestic division are given worldwide responsibility for
product groups. Business that supply several unrelated types of product or which have products
that require significant modifications for that various markets might decide to organize around
product divisions. Each division contrasts all activities, associated with the product, including
purchase of raw material, processing, administration and the sale and distribution of the final
output. It is suitable for high technology items and for multiple product, multiple market
situations.
Strengths:
1. Facilitate areas functional co-ordination for a given product.
2. Facilitate ability to capture global scale economies of product.
3. Firm uses a product division structure when a product has reached the maturity stage in the
home country.
4. It faciliate to cater to local needs
5. When the firm is diverse the specific demands of the buyer becomes important this
arrangement help to manage this activity.

b. Global Functional Structure:-

It organizes worldwide operations based primarily on function and secondarily on product . Each
functional area like accounting, finance, marketing, operations etc has worldwide
responsibilities.
This structure is more common when the technology and products that the MNE produces are
similar throughout the world.
Strengths:-
1. Higher International Orientations of all managers.
2. Facilitates global co-ordination within function.
3. Effective when international market demand is similar.
4. An emphasis on functional expertise.
5. High centralized control.
6. A relatively lean managerial staff.
7. It reduces potential headquarters subsidiary conflicts because of operation.

c. Global Area Structure:-

In this structure global operations are organized on a geographic rather than a product
basis. Under this arrangement, global division managers are responsible for all business
operation in their designated geographic area. The chief executive officer and other members of
top management are charged with formulating strategy that ensures that the global divisions all
work in harmony. This is suitable when product lines often are differentiated based on
geographic area.

Strengths:-
1. Facilitates local responsiveness
2. Develops in-depth knowledge of specific regions / countries.
3. Accountability by region.
4. Facilitates cross-functional coordination within regions.

d. Global Functional Structure

e. Global Mixed/ Organizational Structure:-

A structure that is a combination of a global product, area or functional arrangement. If a

company uses a global area approach, committees of functional managers may provide
assistance and support to the various geographic divisions. Conversely if the firm uses a global
functional approach product committee may be responsible for co-coordinating transactions that
cut across functional lines. The general intent of these mixed or hybrid organizational structure is
to gain the advantage associated with one structure and reduces the disadvantage by
incorporating the strength of a different form.

f. Global Matrix Structure:-

 It consists of two organization structure superimposed on each other. As a consequence
there are dual reporting relationships. These two structures can be a combination of the general
forms.
Matrix structure is useful for
• Managing complex projects where immediate access to several highly specialized professional
skills is required.
• Managing strategic business units often SBU do not correspond to existing divisions or
departments so that it becomes necessary to establish a team representing each aspect of the
work of the unit to oversee its activities.

Strengths:-

1. There is a much face to face communication between managers with interest in the same
project.
2. Project teams can be immediately disbanded following a project’s competitor.
3. Departmental boundaries do not interfere with the completion of projects.
4. Specialized professional knowledge relevant to a project or function is instantly available.
5. Interdisciplinary co-operation is facilitated
6. Flexible attitudes are encouraged.
7. Top management is left free to concentrate on strategic planning.
8. Team leaders become focal points for all matters pertaining to particular projects or functions.
g. Global customer structure:-

This structure is organized around categories of customer. This structure is utilized when
different categories of customer have separated but broad needs.
Strengths:-
1. It facilitates in-depth understanding of specific customer segments.
2. The focus on the customer segment can facilitate adaptations in design, manufacturing,
advertising and so forth.

Controlling of international business

There are three main levels at which control can be implemented and managed in an
international business. These three key levels of control are as follows:

Strategic

Organizational

Operational

Strategic Control:

Strategic control in intended both how well an international business formulates strategy
and how well it goes about implementing it. Thus strategic control focuses on how well the firm
defines and maintains its desired strategic alignment with its environment and how effectively it
is setting and achieving its strategic goals.

Strategic control also play a major role in the decisions firms make about foreign-market
entry and expansion and most critical aspect of strategic control is control of an international
firm’s financial resources.

Organizational Control:

Organizational control focuses on the design of the organization itself. There are many
different forms of organizational design an international firm can use. But selecting and
implementing a particular design does not necessarily end the organization design process.

International firm generally use one or more of three types of organizational control systems:
Responsibility Centre Control:

The most common type of organizational control system is a decentralized one called
responsibility centre control. Using this system, a firm first identifies fundamentals responsibility
centers within the organization. Strategic business units are frequently defined as responsibility
centers, as are geographical regions or product groups.

Generic Organizational Control:

A firm may prefer to use generic organizational across its entire organization; that is, the
control systems used are the same for each unit or operation, and the locus of authority generally
resides at the firm’s headquarters.

Planning Process Control:

A third type of organizational control, which could be used in combination with either
responsibility center control or generic organizational control, focuses on the strategic planning
process itself rather than on outcomes. Planning process control calls for a firm to concentrate its
organizational control system on the actual mechanics and processes its uses to develop strategic
plans.

Operations Control:

The third level of control in an international firm is operations control. Operations control
focuses specifically on operating processes and systems within both the firm and its subsidiaries
and operating units. Thus a firm needs an operation control system within each business unit and
within each country or market in which it operates.

Establishing International Control Systems

Control systems in international business are established through four basic steps:

⮚ Set Control standards for performance

⮚ Measure actual performance
⮚ Compare performance against standards
⮚ Respond to deviations
Set Control Standards for Performance

The first step in establishing an international control system is to define relevant control
standards. A control standards in this context is a target, a desired level of performance
component the firm is attempting control.

Control standards need to be objective and consistent with firm’s goals. Suppose a firm is about
to open its first manufacturing facility in Thailand. It might set the following three control
standards for the plant:

Productivity and quality in the new plant will exceed the levels in the firm’s existing plants.

After an initial break-in period, 90% of all key management positions in the plant will be filled
by local managers. The plant will obtain at least 89% of its resources from local suppliers.

Measure Actual Performance

The second step in creating an international control system is to develop a valid measure of the
performance component being controlled. For the firm introducing a new product in a foreign
market, performance is based on the actual number of units sold. For the new plant in Thailand
used as an example earlier, performance would be assessed in terms of productivity, quality, and
hiring and purchasing practice.

Compare Performance against Standards

The next step in establishing an international control system is to compare measured

performance against the original control standards. Again, when control standards are
straightforward and objective and performance is relatively easy to asses, this comparison is
easy. But when control standards and performance measures are less concrete, comparing one
against the other is considerably more complicated.

Responding to Deviations

The final step in establishing an international control system is responding to deviations

observed in step 3. Three different outcomes can result when comparing a control standard and
actual performance:

The control standard has been met.

It has not been met.

It has been exceeded.

Depending on the circumstances, managers have many alternative responses to these outcomes.
If a standard has not been met and the manager believes it is because of performance deficiencies
on the part of employees accountable for the performance, the manger may mandate higher
performance, increase incentives to perform at a higher level, or discipline or even terminate
those employees.

Essential Controlling Techniques

Because of the complexities of both the international environment and international firms
themselves, those firms rely on a wide variety of different control techniques. We do not describe
them all here but introduce a few of the most important ones.

Accounting Systems:

Accounting is a comprehensive for collecting, analyzing, and communicating data about firm’s
financial resources. Accounting procedures are heavily regulated and must follow prescribed
methods dictated by national government. Because of these regulations and systems accounting
process can be good controlling techniques.

Procedures:

Firms also use various procedures to maintain effective control. Policies, standard operating
procedures, rules, and regulations all help managers carry out the control function.

Performance Ratio:

International firms also use various performance rations to maintain control. A performance
ratio is a numerical index of performance that the firm wants to maintain. A common
performance ration used by many firms is inventory turnover. Holding excessive inventory is
dysfunctional because the inventory ties up resources that could otherwise be used for different
purposes and because the longer materials sit in inventory, the more prone they are to damage
and loss.

Controlling Quality in International Business

Control also helps firms maintain and enhance the quality has become such a significant
competitive issue in most industries that control strategies invariably have quality as a central
focus.

o Quality is a vital importance for several reasons.

o Many firms today compete on the basis of quality.
o Quality is important because it is directly linked with productivity.
o Higher quality helps firms to develop and maintain customer loyalty.

Factors influencing control:

Control should not be constructed as a code of law and allow eventually to stifle local
initiative. There are number of factors, the management should keep in mind while deciding
about the degree of control that the head office should have over it’s off shore operation in order
to achieve the objectives.

I. Internal factors:

a. Corporate philosophy:

It is a most crucial factor of a MNE which dictate the degree of control. When the MNE
philosophy is the integration of global activities so as to increase overall efficiency of the firm
and improve its international competitiveness, tighter control will be recovered. When a firm is
pursuing a national responsiveness strategy will allow more leeway to foreign affiliate so that
they may quickly react to the local environments.

b. Mode of operation:

It is another determinant of the extent of control over off shore operations. For instance,
licensing or industrial co-operation agreement requires some quality control or control over
marketing channels. This would be less when compared with fully owned subsidiaries.

c. Nature of firm’s foreign business:

Where a MNE relies heavily on overseas suppliers for sourcing the components or raw
materials, the head office will exercise tighter control over its foreign operations. Further where
the firm is dealing in product which is complicated in terms of process end-use market and
channel of distribution, it will need tighter control to alleviate potential problems in these areas.
d. Location of the foreign operation:

The firm having its subsidiaries branches nearer to the head office can effectively monitor
its foreign operative, with relatively greater degree of de-centralization.

e. Nature of technology:

Extend of head office control over the overseas branches and subsidiaries also depend on
the nature of technology the firm is using. Firms competing in overseas market on the basis of
product technology will have to exercise tighter control than those competing on the basis of
process technology.

f. Nature of functions:

The different functions require varying degree of corporate control. For instance, strategic
planning and financial operations are typically, highly centralized because of their repercussions
on the overall success of the firm. R&D, sourcing of material, quality, need dose monitor. But
marketing, production must be allocated between the parent and the subsidiaries.

g. Size and maturity of firms:

It is another determinant of the level of corporate control to be exercised over the

overseas operations. The larger corporations with a pool of exclusive with high amount of
expertise and experience in handling will prefer to have central control. But a younger firm with
smaller degree of involvement in foreign business would grant great degree of autonomy to the
subsidiaries.

II. External factors:

a. Nature of economical environment:

The host country environment within which an overseas firm is operating is an important
factor. When the environment is fussy and uncertain, involving high degree of economic risks,
the firm will de-centralize decision making power so that subsidiary manager is in a position to
react to the environment development quickly.

b. Political environment:
 Nature of political environment of the host country and sensitivity of local community to
the firm’s operations also determines the degree of corporate control over the off shore
subsidiaries. The degree of centralized control may be relatively less in the host country where
there is political stability.

Performance of global business - performance evaluation system

Performance measurement and evaluation is crucial for the success of any business.
Performance of the employee as well as business performance has to be measured and evaluated.
This chapter concentrates on the performance measurement and evaluation of the business. A
standard process is being developed for measuring the performance of the global business. The
process is depicted below

Establish Standard of Performance

Performance standards are applicable to some of the elements such as customer service,
cost, and quality. The manufacturing performance of different units determines the performance
standards. The performance of the manufacturing units includes aspects such as quality of the
product, process yields, the spending levels of the business etc.
Measure Actual Performance

The actual performance is measured by collecting the information. In order to facilitate

with accurate data collection, some of the automated data collection systems are provided. The
performance can be measured in terms of working hours which includes man-hours,
machine-hours and material usage.

Analyze the Performance and Compare it with standards

Once the data and information is collected, the actual performance is compared with the
standard performance levels and is analyzed for the deviations. The standard set for comparison
should be achievable and realistic. The performance is analyzed such that the rules can be
modified further.

Construct and Implement an Action Plan

Once the performance is analyzed, in accordance with deviations further course of action
is constructed and implemented. The problem areas can be identified by using variance analysis.
This analysis enables to identify the root cause and the source of the problem and accordingly
determine the ways in which the situation can be useful. Again the effectiveness of the variance
analysis depends on the correctness of the information.

Review and Revise Standards

Finally the standards are being reviewed and revised. The standards are adjusted
according if the variances are significant an in accordance with the overall strategy the
performance measurement is effectively integrated.

What is Effective Performance Measurement System?

Effective performance measurement system can be obtained by -

● Throughout the business organization, own and support the measurement objectives.
● In order to obtain the maximum benefits, top-down process has to be applied.
● The system of reporting and measurement should be simple, clear and recognizable.
 ● The main focus should be on the key performance indicators

What is Performance Evaluation System?

In order to achieve the objectives of the business organization, the operations of the
business has to be reviewed periodically, which is known as performance evaluation system. The
costs and profitability of the domestic and foreign operations have to be evaluated by accurate
accounting information.

Evaluating the performance of an individual, a subsidiary or a company as a whole is not an easy

task. Some of the main objectives behind performance evaluation are as follows -

● To determine the economic performance of the organization

● To analyze the management performance of each of the unit
● To monitor the achievement of objectives and goals
● To assist in the allocation of resources

What are the financial and Non-Financial Measures of Evaluation?

Some of the financial and Non-financial measures that are being used for evaluation are as
follows -

ROI (Return on Investment)

The performance of the international firm can be evaluated by this Return on Investment
method. The relationship between the capital invested and profit is estimated by this method. The
good sign for the business is that the ROI should be improving.

Budget as Success Indicator

The operations of the business are measured and controlled by budget. Added to this, in
order to forecast the future operations, budget can be used. The performance standards of the
individuals are set by the managers by using the set of objectives defined in the budget. Budget
also enables to facilitate smooth functioning of the strategic planning process.
Non-Financial Measures

Market Share, Exchange Variations, Quality Control, Productivity Improvement, and

Percentage of Sales are some of the non-financial measures that are being used for performance
evaluation.

What are the different types of Performance Evaluation Systems?

The performance can be evaluated in different ways. The following are some of the types for
evaluating the performance. They are as follows -

● Budget Programming – In order to evaluate the performance with respect to financial

and operational aspects, budget programming is used. By budget programming, the
current performance is measured with respect to some of the past performance metrics.
● Management Audit – With respect to the financial operations, the quality of the
management decisions are monitored by an extended financial audit system known as
management audit. The management is audited and the performance appraisal is done by
management audit.
● Programme Evaluation Review Technique (PERT) – A particular program or project
is being divided into activities and sub-activities. The main aim of PERT is to optimize
the time of the manager. The actual time along with the cost and the scheduled time along
with the cost are used for measuring the performance.
● Management Information System (MIS) – In order to redirect the management towards
the pre-defined goals and targets, the system is designed which is meant to plan, monitor,
and control and appraise the management. All the financial, budgeting, audit and control
system of PERT are encompassed by MIS.

UNIT IV PRODUCTION, M ARKETING, FINANCIALS OF GLOBAL BUSINESS

Global production: Location, scale of operations- cost of production- Standardization Vs

Differentiation-Make or Buy decisions- global supply chain issues- Quality considerations.
Globalization of markets: Marketing strategy- Challenges in product development-
pricing- production and channel management. Foreign Exchange Determination Systems:
Basic Concepts-types of Exchange Rate Regimes - Factors Affecting Exchange Rates.

GLOBAL STANDATDIZATION STRATEGY

 A global standardization strategy is when ‘sameness’ is seen and felt everywhere the
service, product, or brand is found, creating a familiar and trusted relationship between
user/consumer and brand.

Think about the world’s biggest international brands, such as Nike and McDonald’s. They use
the same core branding and advertising methods across all countries in which they operate, but
alter the messages to appeal to local consumers.

McDonald’s brand is synonymous with the consistency of service. A customer purchasing from
the fast-food chain anywhere in the world can have the same service delivery expectations.
Highly organized control over the consistency in products and methods of delivery are the keys
to their success.

Benefits of a Global Standardization Strategy

The first and most obvious benefit is the time and cost savings. Brand recognition and
trust is another big benefit. Consumers will see and recognize a familiar brand and they’ll
remember that brand as ‘safe’ when traveling in unfamiliar places. That’s very powerful when
building a brand and inspiring trust.

What is Transnational Strategy?

A transnational strategy is simply a plan of action whereby a business decides to conduct

its activities across international borders. This strategy is invested in overseas operations and
assets, connecting them to every nation in which the company operates.

This strategy presents the centralization benefits that are given by a global strategy.
Transnational business strategy is, however, distinct from multinational, international, and
global business strategies.

Transnational Strategy Examples

A transnational strategy, however, aims at ranking high in both local responsiveness and
global integration. This strategy looks at scooping the benefits that come with operating in
multiple countries.
Transnational companies as we know, aim at expanding their sales, lowering their production
costs, and also attain economies of scale. These companies have headquarters and organizational
structures that are decentralized in the nations they operate in.

The size and complexity of how the different sites relate depend on the business model that the
company chose. The level of influence by the central office is also different in transnational
companies. I want you to note that uniform business technologies and policies are lucrative for
the transnational business strategy, but again you have to give the other branches sufficient
capacity and space to accommodate the business policies in a foreign operation.

Unilever makes a good example of a transnational business model. Its subsidiaries are given
strategic roles to play by the parent company and help determine the customer wants. These
subsidiaries also function as centers of excellence for the company.

What is the transnational model?

From the transnational definition, you are aware by now that it is a company looking to
dig deep into other countries' markets and achieve economies of scale from the same. Unlike a
global strategy, the transnational business strategy has two main functions as I had stated
earlier, and they include:
 ● High local responsiveness
● High global integration

On the basis of these two parameters of any international strategy, I have mapped each of the
four strategies, as shown below.

Two striking features of this arrangement are that; (i) the transnational strategy is high in both the
parameters and, (ii) an international strategy would be considered higher in global integration
than the global strategy as having a setup in just one country unifies the experience.

High Local Responsiveness

Transnational companies look into details of everything about the local markets in which they
operate. They assess the needs of the local customers and their demands and attend to them
accordingly.

Consider a good example here; an organization could be supplying one global service or product
that they offer in all their branches. Still, they create additional services and products that are
specific to the market they operate in. That is what happens with a transnational strategy for
business.
The other issue you ought to comprehend is that in as much as these companies have a global
marketing strategy and branding, the company will tailor its messaging, communication and
campaigns depending on the area of operation.

In the multi-domestic strategy, when creating the marketing content, full autonomy is given to
the regional managers. The case is different in transnational corporations where the local
branches are given the liberty to translate the organization's global message to the locally used
language having the consumer preferences and cultural norms in mind.

In short as things stand, transnational business strategy balances efficiency and global
standardization, having the ability to tailor the marketing, services, and products according to the
local markets.

High Global Integration

Companies employing this strategy typically have a head office and a centralized management
staff that oversees all the international operations. With a multi-domestic strategy, the
subsidiaries are almost totally independent in every region. However, with a transnational
strategy, all the subsidiaries are dependent on one central office.

Some organizations give more autonomy to some local subsidiaries than others, but the general
feeling is to have high integration across every branch worldwide.

I must mention that, just like the global strategy, these transnational companies remain
standardized all through the regions it operates to maintain lower costs and efficiency. Every
branch of the transnational strategy typically follows a laid-out marketing strategy from the
central office, and it runs on guidelines set by the central managerial team.

Decision Concerning Global Production

Decision Concerning Global Production

1. Location decision
2. Scale of Operation
3. Cost of Production
 4. Make or Buy Decision

Location –scale of operations

Choices of Location

Companies need to identify a place where they should locate their operation facilities. In other
words locating a manufacturing/ service facility is a major strategic operation, decision. Facility
location problem is faced by both new and existing businesses, and its solution is critical to a
firm’s eventual success. For a firm contemplating to locate in foreign countries, several sets of
factors must be considered.

An MNC must balance the lower costs available in some countries against the possible need to
transport goods over long distances and perhaps lack of skill among workers in low-cost nations.
Other factors affecting the location decision include:

⮚ Country Factors
● Differences in political economy
● Differences in culture
● Difference in factor costs
● Trade Barriers
● Location externalities
● Exchange rates

⮚ Technology Factors
● Fixed Cost
● Minimum efficient scale
● Flexible manufacturing technology

⮚ Product Factors
● Value to weight ratio
● Serves universal needs

⮚ Government policies and

 ⮚ Organizational issues

SCALE OF OPERATIONS

The term scale of production refers to the quantity or number of a product made. The
quantities of products will depend upon the needs of the customers. The company making the
products will choose the appropriate manufacturing process.

Its decision will be influenced by the

⮚ Volume or quantities of products required
⮚ Types of materials used to make the products
⮚ Type of product being manufactured.

The scale of production may be:

1. Continuous production or mass production: This method is a large scale
production. This type of production requires specially planned layout. In this type, production
is on continuous basis. This type is commonly used when there is continuous demand for the
product. E.g. Soft drinks.
2. Batch Production: In this type, the product is produced in small batches. It is adopted
in medium size enterprises. E.g. Furniture Manufacturing.

3. Single Item Production or Unit Production: This is the oldest method of production on
a very small scale. With this the individual requirements are met. Each job order stand alone
and is not likely to repeat.
The layout of such unit is made flexible. E.g. Ship building, Dam construction.
COSTS OF PRODUCTION
There are two types of costs in production, namely,
1. Fixed costs and
2. Variable costs

Fixed costs: are the costs which remain fixed irrespective of the level of production, like
investment in land, building, and plant and machinery. Besides these, there may be some other
types of fixed costs. For example, even if there is no production, some people may have to be
employed to look after the factory
and premises and there may be some minimum fixed expenses like electricity costs, etc.

Variable costs: are the costs which vary with the variation in the level of output and includes
cost of factors like labour, material, etc. Although the average variable cost per unit may remain
same for different levels of output, the total variable cost (TVC) will vary with the level of
production.
Fixed cost , variable cost and total cost

MAKE OR BUY DECISIONS

The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). The buy side of the
decision also is referred
to as outsourcing.

Large multinational companies have the choice of making their own component inputs or
buying them from other firms. Factors influencing make/buy decision include:

⮚ Currency exchange rates between various nations

⮚ Production costs in different locations.
⮚ Quality levels of alternative suppliers
⮚ How quickly inputs need to be delivered.
 ⮚ Comparisons of foreign and local firms prices, product features, technical support etc.
⮚ The extent to which a particular input is crucial for the firm’s survival.
⮚ Local content requirements.
⮚ Whether internal economies of scale in the production of inputs are possible.
⮚ The number of external supplier of the input.
⮚ The number of buyers of the item relative to the number of sellers.
⮚ Set-up costs for each production run.
⮚ The need to protect intellectual property.
⮚ Whether management wishes to maintain continuity of employment for the firms’
workers.
⮚ Investments grants, subsidies and tax allowances possibly available from national
Governments.

Make-or-Buy decision situation:

The make-or-buy decision is the act of making a strategic choice between producing an item
internally or buying it externally. The buy side of the decision also is referred to as outsourcing.
Make-or-buy decisions usually arise when a firm that has developed a product or part or
significantly modified a product or part is having trouble with current suppliers, or has
diminishing capacity or changing demand.

Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the
strategic level is the more long-range of the two. Variables considered at the strategic level
include analysis of the future, as well as the current environment. Issues like government
regulation, competing firms, and market trends all have a strategic impact on the make-or-buy
decision. Of course, firms should make items that reinforce or are in-line with their core
competencies. These are areas in which the firm is strongest and which give the firm a
competitive advantage.
The increased existence of firms that utilize the concept of lean manufacturing has prompted
an increase in outsourcing. Manufacturers are tending to purchase subassemblies rather than
piece parts, and are outsourcing activities ranging from logistics to administrative services.
It prescribes that a firm outsource all items that do not fit one of the following three categories:
(1) The item is critical to the success of the product, including customer perception of
important product attributes
(2) The item requires specialized design and manufacturing skills or equipment, and the
number of capable and reliable suppliers is extremely limited
(3) The item fits well within the firm's core competencies, or within those the firm must
develop to fulfill future plans. Items that fit less than one of these three categories are
considered strategic in nature and should be produced internally if at all possible.

Make-or-buy decisions also occur at the operational level. Analysis in separate texts by Cost
considerations (less expensive to make the part)
Desire to integrate plant operations
⮚ Productive use of excess plant capacity to help absorb fixed overhead (using existing
idle capacity)
⮚ Need to exert direct control over production and/or quality
⮚ Better quality control
⮚ Design secrecy is required to protect proprietary technology
⮚ Unreliable suppliers
⮚ No competent suppliers
⮚ Desire to maintain a stable workforce (in periods of declining sales)
⮚ Quantity too small to interest a supplier
⮚ Control of lead time, transportation, and warehousing costs
⮚ Greater assurance of continual supply
⮚ Provision of a second source
⮚ Political, social or environmental reasons (union pressure)
⮚ Emotion (e.g., pride)
⮚ Factors that may influence firms to buy a part externally include:
⮚ Lack of expertise
⮚ Suppliers' research and specialized know-how exceeds that of the buyer
⮚ cost considerations (less expensive to buy the item)
⮚ Small-volume requirements
⮚ Limited production facilities or insufficient capacity
 ⮚ Desire to maintain a multiple-source policy
⮚ Indirect managerial control considerations
⮚ Procurement and inventory considerations
⮚ Brand preference
⮚ Item not essential to the firm's strategy

The two most important factors to consider in a make-or-buy decision are cost and the
availability of production capacity. Burt, Dobler, and Starling warn that "no other factor is
subject to more varied interpretation and to greater misunderstanding" Cost considerations
should include all relevant costs and be long-term in nature. Obviously, the buying firm will
compare production and purchase costs. Burt, Dobler, and Starling provide the major elements
included in this comparison. Elements of the "make" analysis include:
⮚ Incremental inventory-carrying costs
⮚ Direct labor costs
⮚ Incremental factory overhead costs
⮚ Delivered purchased material costs
⮚ Incremental managerial costs
⮚ Any follow-on costs stemming from quality and related problems
⮚ Incremental purchasing costs
⮚ Incremental capital costs
Cost considerations for the "buy" analysis include:
Purchase price of the part
⮚ Transportation costs
⮚ Receiving and inspection costs
⮚ Incremental purchasing costs
⮚ Any follow-on costs related to quality or service
One will note that six of the costs to consider are incremental. By definition, incremental costs
would not be incurred if the part were purchased from an outside source. If a firm does not
currently have the capacity to make the part, incremental costs will include variable costs plus
the full portion of fixed overhead allocable to the part's manufacture.
 If the firm has excess capacity that can be used to produce the part in question, only the
variable overhead caused by production of the parts are considered incremental. That is, fixed
costs, under conditions of sufficient idle capacity, are not incremental and should not be
considered as part of the cost to make the part.

While cost is seldom the only criterion used in a make-or-buy decision, simple break-even
analysis can be an effective way to quickly surmise the cost implications within a decision.

Suppose that a firm can purchase equipment for in-house use for $250,000 and produce the
needed parts for $10 each. Alternatively, a supplier could produce and ship the part for $15
each.

Ignoring the cost of negotiating a contract with the supplier, the simple break-even point could
easily be computed:
$250,000 + $10Q = $15Q
$250,000 = $15Q − $10Q
$250,000 = $5Q
50,000 = Q

Therefore, it would be more cost effective for a firm to buy the part if demand is less than
50,000 units, and make the part if demand exceeds 50,000 units. However, if the firm had
enough idle capacity to produce the parts, the fixed cost of $250,000 would not be incurred
(meaning it is not an incremental cost), making the prospect of making the part too cost efficient
to ignore.
Situation of Make-or-Buy Decisions:

International businesses frequently face sourcing decisions, decisions about whether they
should make or buy the component parts that go into their final product. Should the firm
vertically integrate to manufacture its own component parts or should it outsource them, or buy
them from independent suppliers? Make-or-buy decisions are important factors of many firms'
manufacturing strategies.
 In the automobile industry, for example, the typical car contains more than 10,000
components, so automobile firms constantly face make-or-buy decisions. Ford of Europe, for
example, produces only about 45 percent of the value of the Fiesta in its own plants. The
remaining 55 percent, mainly accounted for by component parts, come from independent
suppliers. In the athletic shoe industry, the make-or-buy issue has been taken to an extreme with
companies such as Nike and Reebok having no involvement in manufacturing; all production
has been outsourced, primarily to manufacturers based in low-wage countries.

Make-or-buy decisions pose plenty of problems for purely domestic businesses but even
more problems for international businesses. These decisions in the international arena are
complicated by the volatility of countries' political economies, exchange rate movements,
changes in relative factor costs, and the like. In this section, we examine the arguments for
making components and for buying them, and we consider the trade - offs involved in these

Advantages and Disadvantages of Make and Buy

Advantages

Make Buy
1. Control over cost Wide Choice
2. Control over supply Release of capital, managerial
and other resources
3. Control over quality Benefit of concentration on core
activities.
4. Control over technology Scope for bargaining
5. R&D initiatives. Benefits of technological and product
development outside the firm.
Lower impact of recession
Ease of exit
GLOBAL SUPPLY CHAIN ISSUES
What is the global supply chain?

A global supply chain is an international system that businesses use to produce and distribute
goods and services. This network starts with raw materials and ends when the final product or
service is delivered to customers.

Many different entities make up a global supply chain, including suppliers, manufacturers,
freight forwarders, warehouses, distributors, and retailers. These entities facilitate the movement
of information and resources around the world.

Most global supply chains span across multiple continents and countries, taking advantage of
relatively low materials, labour, and manufacturing costs.

Global supply chain management

Global supply-chain management (also known as global SCM) is the process of administering
and directing a network of entities to produce and distribute goods and services internationally.
The core aims of global supply chain management are to maximise profit, reduce inefficiencies,
and deliver goods and services timely.

1. The rising cost of living

Skyrocketing inflation has seen households hit hard by rising food costs. Expectations that
consumers will have to severely cut back on expenditure this winter has plunged demand for
goods and services into uncertainty.

This makes it difficult for supply chain planners to accurately estimate in advance the amounts
and types of goods likely to be needed by consumers. The pandemic has already changed this
picture considerably, but predicting demand has become even more difficult in 2022.

Stock for the Christmas shopping period is made and shipped month’s in advance so current
uncertainty is likely to feed into incorrect forecasts. This could lead to disappointment this
Christmas if certain products are difficult to find or more expensive to buy as tighter supply
pushes up prices.

2. Labour unrest

The rise in the cost of living has also seen workers demand wage increases to counteract the
impact of inflation on their pay packets.

Industrial action ups the pressure on supply chains. Striking truckers in South Korea have
already disrupted computer supply chains this summer, while UK railway strikes have affected
deliveries of construction materials.

Dock workers have been on strike in Germany and the UK, while freight hubs in Ireland are
expected to clog up due to strikes at the Port of Liverpool across the Irish Sea. Some UK unions
have floated the idea of coordinated strike action in coming months, which could cause further
disruption to supply chains.

In addition, truck driver shortages seen in 2021 have continued this year. In fact, labour shortages
have spread to other sectors that support supply chains, including ports and warehouses.

Coupled with increased e-commerce demand since the start of the pandemic, operations are
becoming increasingly strained for many businesses.

3. Energy shortages

Inflation has not only been a problem for food prices, but also energy costs. Rising gas prices
and reduced supply from Russia are forcing European companies to look to alternative energy
sources like coal, while research from Germany’s Chambers of Industry and Commerce shows
16% of its companies expect to either scale back production or partially discontinue business
operations.

Germany is Europe’s largest economy and it is heavily dependent on exports. If it is expecting a

recession, the impact on manufacturing supply chains globally could be significant.
But even countries that are less reliant on Russian gas are experiencing energy price rises with
serious consequences for businesses. Pakistan has shortened its work week to lower energy
demand. In Norway, fertiliser production has been slashed, affecting food supply chains.

US retailers are cutting their sales forecasts and UK car makers are worried about their output. In
southwestern China, car assembly plants and electronics factories have already started to close
due to a lack of power. All of these disruptions will cause ripples along global supply chains.

4. Geopolitical uncertainty

The invasion of Ukraine is the root cause for much of the energy and food price inflation
countries are experiencing at the moment. It has thrown supply chains into disarray this year,
fuelling a global food crisis.

A fertiliser shortage is also limiting agricultural output in many countries. While some grain
ships have now left Ukraine, unlocking important supplies that will address famine in countries
like Yemen, this will not solve the global food supply crisis.

In other parts of the world, tensions between China and the US that were already playing out
pre-pandemic have continued. Recent Chinese military exercises in the Taiwan Strait following a
visit to Taiwan by US House Speaker Nancy Pelosi disrupted one of the world’s busiest shipping
zones in August.

Any further escalation of tensions could disrupt, for example, supply chains that deliver
semi-conductors used in computers to manufacturers around the world.

5. Extreme weather

Climate change is a much more long-running problem for supply chains. This year, drought has
caused water levels to drop around the world, impacting major shipping supply routes.

Low water means ships can only carry a fraction of their usual freight to minimise the risk of
running aground. While freight can be diverted to other types of transport, a single ship might
require more than 500 trucks to move its cargo.
In recent months, parts of China’s Yangtze river, which is responsible for 45% of the country’s
economic output, have been closed to ships because water levels are more than 50% below
normal. Two thirds of Europe is also experiencing drought conditions, which are only expected
to worsen.

The images below show the impact of drought on the Rhine river, a major trade artery in central
Europe that connects German manufacturers to the sea.

QUALITY CONSIDERATIONS IN INTERNATIONAL BUSINESS:

Outsourcing is a strategic management option rather than just another way to cut costs.
The decision to outsource is often made in the interests of lowering costs, redirecting or
conserving energy directed at the competencies of a particular business, or to make more
efficient use of labor, capital, technology and resources. Its aim is to help companies achieve
their business objectives through operational excellence.

One aspect of this is QA(Quality Assurance) and testing. This can provide many benefits
to companies, who are seeking to improve the quality of their production applications, reduce
business risk through rigorous testing and augment and improve upon the incumbent testing
teams and processes. Given the increase in global IT outsourcing agreements, many companies
will be looking at outsourcing QA and testing as an independent validation and acceptance
phase in order to ensure high quality deliverables and gain competitive advantages.

To achieve these benefits, organizations select an outsourcing partner who will typically
have local and offshore test centers and capabilities as well as a strong onsite consultancy
presence.
Some of the critical success factors for outsourcing QA and testing engagements include:
● Ensuring that the business objectives agreed at the outset of the contract or business case
are managed through to successful completion
● Ensuring that transition from the "testing today" to "tomorrow’s testing" is seamless in
terms of business impact and employee satisfaction
 ● Noticeable and continuous improvements in the approach and methods used within your
IT organization (not just testing)

When taking on the challenge of outsourcing your testing, there are many things that should be
considered and accounted for before any contract is signed. This paper outlines 10 key
considerations that organizations should consider when outsourcing QA and testing services.

Incremental Outsourcing
Organizations can mitigate their risks of outsourcing by dividing the work into small,
more manageable projects that they outsource to service providers. Managers at the client
organization therefore have well defined deliverables, programs that work under an umbrella
contract with associated schedules. The location of the work is determined on a project by
project basis.

Total Outsourcing - Onsite/Offshore

In this model, multiple projects and programs at the client organizations are outsourced to
a service provider, which also takes on the end-to-end program management and delivery on
behalf of the client. The service provider takes on the project, module or program from a client
organization, deploys a small team onsite that works with the client managers and teams and
coordinates work with the offshore team that does the bulk of the work. Typical models range
from 20-30% onsite to 70-80% offsite.

1. Engagement Models
Selecting an engagement model is a crucial aspect of developing the outsourcing plan.
The process involves several factors, including aspects of international business strategy,
selecting the geographical location, understanding the landscape and deciding on the
outsourcing strategy. Some of the engagement models are:

2. Service Level Agreements (SLAs)

The SLAs should detail the minimum level of service to be provided by the outsourcing
vendor. They should be objective and measurable and have no ambiguity. This helps both
parties in the long term. Some good examples of the type of SLAs that should be considered
are:

● On time delivery- dates must be agreed from the outset on all major deliverables with all
efforts to ensure they are met. Use change control processes if these dates need to be
moved.
● Client Satisfaction- periodic surveys should be conducted to make sure that the service
provided by the outsourcing company is satisfactory to customers.
● Effectiveness- effectiveness metrics focus on lowering costs, improving profit, and
adjusting business transactions
● Volume of Work- the volume of work sometimes is difficult to define. For example,
projects that are billed on a time-and-material basis may discuss volume in terms of
number of resources, while a fixed-price project usually specifies number of
deliverables.

This metric is an important part of the SLA.

● Sensitivity- sensitivity metrics measure the amount of time required for an
outsource company to handle a request.
● System Downtime and Availability- in outsourcing, guaranteeing 100%
availability of services costs significantly more than guaranteeing 99% or 98% and not
every company or every application needs 100% reliability. The SLA should request
service availability to meet specific business needs.

It is also good to ensure that SLAs are tied into the contract, sometimes on a risk/reward basis to
ensure that there is mutual interest in meeting them.

3. Mobilization
Once the contract is signed there will be a period of mobilization for both parties. This
phase generally includes setting up communication protocol with the client, defining work
breakdown structure, sharing standard templates (used for authoring test cases, reporting project
status, presenting the key metrics etc.) with the client, building test strategy etc. Some of the key
elements of this can be seen below:
People
The outsourcing providers maintain a pool of highly qualified and dedicated
professionals including QA engineers, QA leads, project managers and technical specialists.
Many outsourcing providers have unique centers of excellence to train their interns and
employees on various testing methodologies and tools that are required for seamless execution
of the engagement. Ensuring the most appropriate resources for your requirements are in place
is critical for the success of the engagement.

Knowledge Acquisition
Outsourcing providers follow various approaches to obtain adequate knowledge for the
test engineers to understand the core business requirements and also the critical functionality to
be tested. Test leads or managers will be sent onsite long/short term to meet various
stakeholders in the client organization to understand the product/system and its features. They
will assume the responsibility of training the offshore team on the product/system to be tested
and all the features of it that the client and the outsourcing vendor have agreed to be tested.

Infrastructure
Some applications require extensive compatibility testing in different environments and
back-end database systems. Other applications need to be tested in production-sized
environments that closely resemble the final production environment. Outsourcing providers,
with their extensive test labs, should stimulate the production environment for performing such
complex levels of testing. The cost for setting up this environment offshore would be negotiated
with customers with a cost effective solution being drawn in favor of both parties.

Processes
Outsourcing providers in this competitive industry are continuously working on raising
their standards with respect to adhering to CMMi Level 5 and other standard ISO processes to
ensure tangible benefits for their customers. These include low project risk, on time/on budget
deliveries, minimal error rate, high process visibility and enhanced customer satisfaction.
Process implementation not only suggests complying to standard guidelines and procedures but
also gives greater visibility to customers by delivering metrics (such as schedule/effort variance,
productivity etc.) that measure the quality of the product/system which is the ultimate aim for
any outsourcing provider.

4. Integration with other third party service providers

Independent QA and testing is becoming more and more common. One of the reasons for
this is that it provides objective rigor and thoroughness that might not be provided by a single
vendor. However, in this scenario, it is important that all the parties (client, testing vendor and
development vendor) work harmoniously to achieve the right result.
The testing provider should have a good understanding of the challenges involved in working
with multiple vendors spread across geographies and develop appropriate interfaces and best
practices in communication to ensure successful completion of engagements. Understanding
other SDLC methods is also imperative.
A clearly defined defect management and resolution process should be established as a high
priority and ensuring consistent reporting styles on progress will make it easier on all parties to
assess the readiness of any application throughout its lifecycle.

5. Communication:
Outsourcing providers facilitate seamless communication between the client and their
stakeholders. As communication is considered a key obstacle in outsourcing, providers maintain
effective channels and points of contact (POC) open to clients.
An effective model and plan (including methods) should be tailored to the needs of the client
and would help both parties in identifying and resolving issues promptly.

Escalation and Issue Resolution

There needs to be a clear and objective escalation and issue resolution process agreed from the
outset. Early identification should be built into the standard project risks and issues logs as well
as action plans for mitigation. Successful processes work best when there is a trusting
relationship between the vendor and the client.

Reporting
It is important that formal reporting is put in place and communicated by a regular set of reports
and deliverables updating the client on the engagement (at project/IT organization level). These
reports will be sent to the client on a daily, weekly, bi-weekly or on a monthly basis based on
the nature of the reports and the agreed plan. This should be in addition to the less formal
reporting that will become apparent through the personal relationships formed.

6. Flexibility and Scalability

QA and testing outsourcing agreements demand a degree of flexibility and scalability to help
ensure fluctuations in scope and timescales can be met. Some of the scenarios where flexibility
is required are:
● New or enhanced systems require revised testing commitments
● More releases require more testing phases
● Increased levels of system or data integration require wider scope and coverage in
testing
● Regression test demands will grow as systems are developed
● Performance and load test and other special tests may place demands on the service The
outsourcing provider must have an organization with infrastructure and resources
sufficiently sized so that the client demands are met. The correct scope and planning
helps prevent this but some eventualities are unavoidable. It is therefore important that
clients have an
expectation that should the nature of the requirements change, there will be provision
made within the contract or through good change management processes.

7. Quality Improvement
The key objective of the client is often to gain a significant improvement in quality and this
can be achieved through outsourcing. In order to do this, there are some fundamental steps
that need to be taken.

The outsourcing provider needs to assess and map the client.s testing capability to understand
how the engagement is going to work. Identifying the "major gaps" in test processes from the
outset and implementing positive changes to address these will result in quality
improvements. As the relationship matures between the two parties, there should be a
willingness to continually improve process and working methods etc. This should not
necessarily be restricted to just testing, but the whole lifecycle if it improves the end product.
8. Configuration and Change Management
Many businesses have frequently changing requirements which if handled badly can have a
significant impact on time, quality and cost. To help clients overcome this, QA and testing
outsourcing organizations maintain a comprehensive change and configuration management
system.

A typical scenario would be that a Change Request is raised by a client and sent to the vendor.
The team then consolidates all Change Requests and performs an impact analysis on the
Project Schedule, resources, costs and assesses the technical feasibility of the changes. These
are all taken into account before the assessment is discussed with the client. Upon approval, an
updated Project Schedule will be laid out to execute that change request.

9. Intellectual Property Protection

Intellectual Property (IP) protection is one of the important considerations for customers when
outsourcing services. QA and testing outsourcing providers have to protect all Personally
Identifiable Information (PII) given by clients or otherwise obtained in the course of
outsourcing engagements and treat it as proprietary and/or trade secrets. Unauthorized use or
disclosure by the QA and testing services provider of any PII will be detrimental to the client
ompetitive position and on-going business operations. The QA and outsourcing providers staff
should not duplicate, distribute, disclose, convey or in any other manner make available to
third parties any PII.

Most of the outsourcing providers have well established security standards and measures in
place to prevent unauthorized access to and misuse of PII. The IP protection policies of most of
the
outsourcing service providers have the following:

● Non-disclosure agreements signed with the client

● Project related IP protection
● Employee Confidentiality contract
 10. Security
All the major outsourcing providers have Information Security Policies, Information Security
Standards and Business Continuity Management policies in place, primarily to protect data.

The facilities of the outsourcing providers will have the controls and capability to prevent loss
or accidental release of data or proprietary functionality. In the event of a disaster they should
have the capacity to subsequently restore a service relevant to this.The testing facilities of most
of the outsourcing providers are assessed for BS7799 security management standards. Security
measures are implemented at various levels at the facilities of the outsourcing provider that
include physical security, infrastructure, network security and other ad hoc security measures
based on specific case/project.

Some of the physical security measures provided by outsourcing vendors include

measures to restrict the entry and exit of personnel, equipment and media from a designated
area. These controls address not only the area containing system hardware but also the
locations of wiring, supporting services, backup media and other elements required for the
system’s operation.

The International Organization for Standardization (ISO)

ISO was founded on 23 February 1947, and (as of November 2022) it has published over 24,500
international standards covering almost all aspects of technology and manufacturing. It has 809
Technical committees and sub committees to take care of standards development. The
organization develops and publishes standardization in all technical and nontechnical fields other
than electrical and electronic engineering. It is headquartered in Geneva, Switzerland, and works
in 167 countries as of 2022.

S.N. Certificate Name Field

1. ISO 9001 Quality Management
2. ISO 14001 Environmental Management
3. ISO 22000 Food Safety Management
4. ISO 13485 Medical Devices
5. ISO 20121 Sustainable Events
6. ISO 639 Language Codes
7. ISO 45001 Occupational Health and Safety
8. ISO 4217 Currency Codes
9. ISO 37001 Anti-Bribery Management Systems
10. ISO/IEC 17025 Testing and Calibration Laboratories
11. ISO 26000 Social Responsibility
12. ISO 8601 Date and Time Format
13. ISO 31000 Risk Management
14. ISO 3166 Country Codes
15. ISO 50001 Energy Management
16. ISO/IEC 27001 Information Security Management

MARKETING STRATEGY

What is a global marketing strategy?

A global marketing strategy creates a consolidated brand vision for your company across
multiple countries. It includes your messaging, PR, social media, and events and determines how
you position your brand in foreign markets versus what stays true to your brand overall.

Your strategy will change based on your overall go-to-market strategy in each local market.
Companies typically choose from four main international business strategies:

● International: Exporting and importing goods and services while maintaining a home
office. Your global marketing strategy with this operating model requires promoting the
various products and services in other countries, plus coordinating other benefits like
support and shipping internationally.
● Transnational: Operating with a central office in one country that coordinates
subsidiaries in international markets. This requires a global marketing strategy with a
series of local marketing teams rolling up to a larger corporate brand.
● Multi-domestic: Coordinating a set of smaller, country-specific brands (sometimes with
completely different brand names) tailored to local tastes and customers. This might not
even have a global marketing strategy but may include a set of dedicated local marketing
strategies in different countries that all look different.
● Global: Building one overarching brand with little to no changes for local markets. Your
global marketing strategy is your marketing strategy.
Global marketing strategies aren’t too different from traditional marketing strategies. What
changes is the degree of localization or globalization you choose and what that looks like across
your various marketing tactics to increase awareness and demand for your products and services.

5 tips for your global marketing strategy

A thriving global marketing strategy gives your team the playbook they need to drive more
traffic, leads, and sales regardless of where they are in the world. Whether you’ve set up your
marketing organization to work with many smaller local experts or have one overarching global
marketing team for your marketing efforts, here’s what you need to know to build a solid global
marketing strategy:

1. Know your global audience

Marketing doesn’t need to be complicated, but you need to know why your products or services
matter to your customers and what will resonate with them. You can’t be everything to everyone.
Even as you expand into multiple international markets, you should know exactly who is
purchasing from you and why you would matter to them through extensive market research.

You need to know:

● Demographics: Location, age, gender, relationship status, job title, and language are just
the basic information to have as you think about your audience. It’s vital to know the
nuances between countries, even if the basic demographics are the same.
● Interests: What do they like? What do they dislike? What hobbies do you have? Even if
you’re a B2B company, you should know what your audience likes to do outside of work.
● Job to Be Done: Your product or service should solve a problem for your customer. It
can be a complicated solution like building a complete localization workflow (hi!) or a
simple one like giving customers an easy, delicious meal. Either way, you should know
your customers’ problems, how you solve them, and how different the pain points are in
different markets.
The more you know, the easier it will be to define your marketing approach for each new market.
As you answer these questions, you should find a maximum of 3-5 clusters or groups of people
you serve. Otherwise, you’ll spread yourself too thin, especially as you expand.

2. Think local, act global

A major piece of any global marketing strategy is your localization strategy. The classic adage,
“Think local, act global,” applies here, too. Your localization strategy is your plan to translate
content on your website, application, or throughout your marketing materials from one language
to another.

According to a NewsCred Insights poll:

● 72.1% of consumers visit websites in their local language.

● 72.4% said they would visit websites with local translation.
● 56.2% of those surveyed said they might pay more to receive translated information
about a product or service.

But localization goes beyond the act of translation. It makes your content feel like it was made
for your local audience rather than in some corporate office far away. Understanding the nuances
of each market (see #1) is just the beginning. Global marketing may seem complicated, but it’s a
question of repeating your local strategy across multiple markets while adapting along the way
for their demographics, interests, and pain points.

3. Messaging that matters

Can you explain what you do in one sentence? Three words? One word?

How about in multiple languages?

Creating a solid brand is a considerable part of any marketing strategy, and that requires clarity
of purpose — why does your business exist, and who do you serve? Consolidating multiple
product lines, services, and audiences into one tagline may seem impossible, but it’s essential as
you expand globally to distill your value down to a single universal idea.
People don’t buy what you do. They buy why you do it. From your local event managers to your
email marketers, your entire marketing team should know why your business matters and the key
messaging that resonates with your audience, whether it’s in English, Spanish, or Korean.

4. Design with translation in mind

A marketing campaign often has several moving parts, from nurture emails to TikTok and
Instagram videos to blog posts and webinars. Your marketing mix may stay the same for each
campaign you execute while tailoring your brand assets for the local market.

As your designers work on these campaigns, think about how images and colors look and feel
different in your target market. Your global brand needs to include this, too — for example,
avoiding symbols like a thumb’s up, which means “Great job!” or “Doing great!” in the U.S. but
means something much less positive in countries like Greece or Italy.

A typical design process starts with the design brief, moves to the copywriter, and then gets
handed off to development for final publishing. With translation, though, you want to get ahead
of any localization challenges, like text expansion messing up the layout or right-to-left
languages throwing off symmetry.

Keep your global marketing team running smoothly by incorporating translations directly into
the design process, either through technology integrations with design tools through Smartling or
engaging in pseudo-translation to understand how your translations will change your overall
design.

5. Automate, automate, automate

The only way to achieve that scale is through standardization and automation, especially with
multiple markets that have different localization requirements, personas, channels, or messaging.
Investing in translation technology can give global marketers an ROI of up to 252%.

Don’t get stuck in spreadsheets for translating every blog post or email. Instead, automate the
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5 examples of global marketing strategies

No global marketing strategy looks the same. But the most successful global marketing strategies
strike a balance between building a consistent, well-recognized brand and creating local
experiences that resonate with each market.

Take these five successful global marketing strategies:

1. Coca-Cola: You can order a “Coke,” “Cola,” “Pop,” or “Coca” in over 200 countries,
making Coca-Cola one of the most successful global marketing strategies ever created.
Despite growing into a massive global industry with innumerable products, Coca-Cola
has never strayed from its timeless and fundamental ideals of “selling happiness.” Each
country’s offerings and pricing are customized to its local culture and language, including
flavors and marketing campaigns like the “Share a Coke,” which featured popular names
from every country printed on the bottle.
2. Nike: One of the most popular apparel brands globally, Nike offers shoes and apparel in
over 170 countries. Their celebrity endorsement model is now the standard across the
industry, with an emphasis on local sports champions like tennis star Rafael Nadal
(Spain), soccer phenom Christiano Ronaldo (Portugal), and the G.O.A.T gymnast Simone
Biles (U.S.).
3. Airbnb: The core of Airbnb’s product is about traveling, so it’s no surprise their global
marketing strategy focuses on the one-of-a-kind local experiences their platform enables.
Airbnb defines localization as “deliberately creating products and services that are
culturally appropriate, locally relevant, and globally consistent at scale.” Operating in 191
countries, that’s exactly what you’ll find across their websites and marketing messaging,
whether you log on in Bali or Bermuda.
4. Starbucks: Starbucks, like international fan-favorite McDonald’s, changes their menu to
adapt to local taste preferences of every country they enter. They partner with local coffee
companies, so each blend truly does match what the local market expects. Take Japan, for
example — a country not known for its coffee drinking. They hired local designers and
employed traditional craftsmanship to build a store that fits the local culture, offering
Japanese customers a chance to try the famous coffee chain their way. In 2019, their latest
 store opening in Meguro was so popular Starbucks had to create a lottery system for
admission.
5. Red Bull: Most Americans don’t even realize that Red Bull is an Austrian brand because
of the company’s international marketing strategy. They pioneered an influencer-style
marketing model that gave out free samples to well-known adrenaline junkies on the
extreme sports circuit in the late ‘80s and early ‘90s. Now, the leading energy drink
generates more than $2 billion in sales every year.

CHALLENGES IN PRODUCT DEVELOPMENT:

What is product development?

Product development -- also called new product management -- is a series of steps that includes
the conceptualization, design, development and marketing of newly created or newly rebranded
goods or services. Product development includes a product's entire journey -- from the initial
idea to after its market release.

The objective of product development from a business standpoint is to cultivate, maintain and
increase a company's market share by satisfying consumer demand. From a customer standpoint,
it's to ensure value in the product as a quality good or service. Not every product will appeal to
every customer or client base, so defining the target market for a product is a critical step that
must take place early in the product development process. Organizations should conduct
quantitative market research at all phases of the design process, including before the product or
service is conceived, while the product is being designed and after the product has been
launched.

Some organizations have product development centers that make products. For example,
Alphabet Inc., Google's parent company, launched a product development center in Kenya,
Nairobi -- as Alphabet is positioning itself to serve a growing base of internet users.
Product development frameworks

Although product development is creative, it requires a systematic approach to guide the

processes required to get new products to market. Organizations such as the Product
Development and Management Association (PDMA) and the Product Development Institute
(PDI) help organizations select the best development framework for a new product or service.
This framework helps structure the actual product development.

Some frameworks, such as the fuzzy front end (FFE) approach, define the steps that should be
followed early in the development process, but leave it up to the product development team to
decide in which order the steps make the most sense for the specific product that's being
developed. The five elements of FFE product development are as follows:

● Identification of design criteria entails brainstorming possible new products. Once an

idea has been identified as a prospective product, a more formal product development
strategy can be applied.
● Idea analysis requires a closer evaluation of the product concept. Market research and
concept studies are conducted to determine if the idea is feasible or within a relevant
business context to the company or to the consumer.
● Concept genesis involves turning an identified product opportunity into a tangible
concept.
● Prototyping includes creating a rapid prototype for a product concept that has been
determined to have business relevance and value.
 ● Product development requires ensuring the concept is viable and has been determined to
make business sense and have business value.

Other frameworks, like design thinking, have iterative steps that are designed to be followed in a
particular order to promote creativity and collaboration. The five components of design thinking
are as follows:

1. Empathize. Learn more about the problem from multiple perspectives.

2. Define. Identify the scope and true nature of the problem.
3. Ideate. Brainstorm solutions to the problem.
4. Prototype. Weed out unworkable or impractical solutions.
5. Test. Solicit feedback.

How to create a product development plan

The product development plan may change, depending on the organization creating it. However,
a general plan should include the following steps:

1. Identify a product need and business case. Using practices like test marketing and
surveys, organizations can gauge interest in a product. This helps ensure the product has a
strong reason to be created.
2. Create a product vision. This includes coming up with the project's scope, purpose for
the product, what it does, who it's for and the product design, while also crafting guiding
principles for the upcoming work.
3. Create a roadmap. Assess the project as a concept first to ensure good design work, then
begin crafting the roadmap. The roadmap aids in identifying what goals should be
developed first. Implementation teams create schedules, break down significant portions
of the project into sprints and generate iterations of the product.
4. Begin implementing the roadmap. Teams can then start implementing the project,
following the roadmap. Iterations of the product can be made, reviewed and improved
upon. This helps identify weak areas of the product and enables development teams to fix
and improve the product.
 5. Continue with development and assessments. Development teams can work on
enhancements and changes to the product. In this step, feedback can be gathered from
customers to change the product based on customer needs.

PRICING

Pricing is one of the most relevant elements of the marketing mix. Price is defined as the amount
of money required for a product or service. Generally, this should reflect the cost of producing
the product, the cost of providing any necessary or ancillary services, a return for the firm, as
well as the quality of the product.

Different pricing strategies

According to a firm’s objective, the following pricing strategies can be considered:

● Competition pricing. When a company tries to differentiate itself from its competition, it
can change the price, making it higher or lower, to achieve the planned result.
● Skimming pricing. This is a strategy where the price is set high from the start. It is very
popular in electronic and tech companies, where the initial price slowly decreases over
time, after the release date. It gives a possibility of introducing the product in steps to
different layers of the market.
● Penetration pricing. This is something opposite to a skimming strategy. It starts with a
low price to penetrate the market, usually with a product that already exists in the market.
It helps to gain sales and market share. In the future, the price may be raised.
● Product Line pricing. This strategy is linked to the kind of features of the product. E.g.,
a phone might have a different price whether it has a 4k camera build in or not.
● Psychological pricing. We can see this strategy applied every day in shops and
supermarkets. It is a method of changing the price to simulate it is smaller than it is. For
example, when the product should cost €100, it will be changed to €99 to simulate it is
cheaper.
● Cost Plus pricing. This strategy is applied when, in order to determine the final price, a
percentage is added to the costs as a profit margin.
 ● Optional pricing. This technique works when a product is being sold with an additional
item, with the aim to boost up the product’s attractiveness. It may be a phone with extra
internet, a washing machine with a 10-year guarantee etc.
● Premium pricing. This means setting up a price at a higher level to establish the
exclusiveness of a high-quality product. Premium brand stores or luxury cars are a great
example.
● Bundle pricing. It is a pricing strategy in which multiple products are sold at one price,
instead of charging each one of them separately.

While looking into factors influencing the price strategies, we can establish two main categories,
namely internal and external factors:

● Among the factors that are internal to the firm, three stand out: the knowledge of costs,
the knowledge of the market and sales channel, and the firm's business strategies. While
the company can, to some extent, exert control over these elements, sometimes it may not
be so easy to do so. Indeed, some changes require significant cost and time efforts and
thus are not always profitable for the organization.
 ● External factors have a great influence on pricing decisions, but cannot be completely
controlled by the firm. They include the macroeconomic conditions in the countries to
which you want to export, the behavior of target customers, the competitive structure and
legislative constraints of the different markets.

CHANNEL DISTRIBUTION

Distribution plays an important role in the implementation of the international marketing

programme as it enable the products and services to reach the ultimate customer. An
international marketing firm has the option of managing its distribution function either directly
or indirectly through middleman or a suitable combination of the two.

Following are the distributions channels in International market

Indirect Distribution: Indirect channels are further classified based on whether the international
marketer makes use of domestic intermediaries. An international marketer therefore can make
use of the following types of intermediaries for distribution in foreign markets.

● Domestic Overseas Intermediaries

1. Commission buying agents

2. Country controlled buying agents
 3. Export management companies (EMCs)
4. Export Merchants
5. Export agents
6. Piggy backing

● Foreign Intermediaries

1. Foreign Sales Representatives

2. Foreign Sales Agent
3. Foreign Stocking and Non-Stocking Agents
4. State Controlled Trading Companies

Direct Distributions: The options available to international marketer in organizing direct

distributions include sending representatives abroad from the headquarters, setting up of local
sales/branch office in the foreign country of for a region establishing a subsidiary abroad,
entering into a joint venture or franchising agreement.

Companies having long-term interest in international marketing find it expedient to deploy their
own sales forces in foreign markets. This helps them in increasing their sale volume through
committed market development activities, better control and motivation of foreign intermediaries
being used and paving the way for smoother transition to direct distribution and marketing.

FOREIGN EXCHANGE DETERMINATION SYSTEMS

An exchange rate is the price of one nation's currency in terms of another nation's currency. Like
other prices, exchange rates are determined by the forces of supply and demand. Foreign
exchange markets allocate international currencies.

Exchange Rates are Determined

To determine its currency's exchange rate, every country has its own methodology. Several
methods can be used to decide the exchange rate, including fixed exchange rate, managed
floating exchange rate, and flexible exchange rate.
Flexible Exchange Rate

It is sometimes referred to as a pegged exchange rate system since governments tend to keep an
eye on exchange rates. The currency value is pegged either to certain currencies- either
individually or collectively- or to its reserves of gold and foreign currencies.
As far as fixed exchange regimes are concerned, China is probably the most famous example.
There was also a fixed rate regime under the former Soviet Union. The exchange rate is not
solely determined by market forces under this regime. When the foreign exchange market
fluctuates widely, the central banks will sell or buy reserves.

Floating Exchange Rate

An exchange rate that fluctuates or is flexible is called a floating exchange rate. The market
determines whether it moves or not. The term "floating currency" refers to any currency subject
to a floating regime. The US dollar is an example of a floating exchange currency.

Floating exchange rates are popular among economists. Those who believe in a free market
believe that currency value should be determined by the market. USD prices tend to decline
when crude oil prices rise, for example. The two are inversely related.
The USD value fluctuates freely since oil prices vary daily.

Economists claim that markets correct themselves frequently. Most major economies are largely
dependent on floating exchanges thanks to little government intervention. In popular parlance,
these are countries commonly called 'First World Countries'.

Speculation

Every nation has money as an asset. Indians will care more about the British pound's value than
they would about the rupees if they believe the rupee will go up in value. As a result, when
people hold foreign exchange hoping to reap the benefits of rising currency values, the exchange
rates are also affected.
Exchange Rate and Interest Rates

Furthermore, the difference between interest rates between nations plays a role in determining
the exchange rate. In search of the highest percentage interest rate, banks, MNCs, and affluent
individuals move billions of dollars around the globe.

Exchange Rates in the Long Run

Purchasing power parity or PPP can be used to make long-term predictions on the exchange rate
in an exchange rate structure which is flexible. As per the theory, if a business has no frontiers to
cross such as taxation (tariffs on business) and quotas (quantitative controls on imports), then
exchange rates must gradually adjust so that the same products cost the same price regardless of
whether you're translating into rupees in India, yen in Japan, or dollars in the US, apart from the
different modes of transportation.

Pegged Float Exchange Rate

There are three hybrid regimes in this system. Governments and Central Banks can control
foreign exchange rates by intervening in the markets. However, exchange rates are mostly
determined by existing market forces.

FACTORS AFFECTING CURRENCY EXCHANGE RATE

There are several factors that contribute to a currency's exchange rate. Here are some of the top
factors that can affect an exchange rate:

1. Inflation Rates

Changes in market inflation cause changes in currency exchange rates. A country with a lower
inflation rate than another's will see an appreciation in the value of its currency. The prices of
goods and services increase at a slower rate where the inflation is low. A country with a
consistently lower inflation rate exhibits a rising currency value while a country with higher
inflation typically sees depreciation in its currency and is usually accompanied by higher interest
rates.
2. Interest Rates

How do interest rates affect money exchange rates? Changes in interest rate affect currency value
and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in
interest rates cause a country's currency to appreciate because higher interest rates provide higher
rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates.

3. Country's Current Account/Balance of Payments

A country's current account reflects balance of trade and earnings on foreign investment. It
consists of total number of transactions including its exports, imports, debt, etc. A deficit in
current account due to spending more of its currency on importing products than it is earning
through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its
domestic currency.

4. Government Debt

Government debt is public debt or national debt owned by the central government. A country
with government debt is less likely to acquire foreign capital, leading to inflation. Foreign
investors will sell their bonds in the open market if the market predicts government debt within a
certain country. As a result, a decrease in the value of its exchange rate will follow.

5. Terms of Trade

A trade deficit also can cause exchange rates to change. Related to current accounts and balance
of payments, the terms of trade is the ratio of export prices to import prices. A country's terms of
trade improves if its exports prices rise at a greater rate than its imports prices. This results in
higher revenue, which causes a higher demand for the country's currency and an increase in its
currency's value. This results in an appreciation of exchange rate.

6. Political Stability & Performance

A country's political state and economic performance can affect its currency strength. A country
with less risk for political turmoil is more attractive to foreign investors, as a result, drawing
investment away from other countries with more political and economic stability. Increase in
foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country
with sound financial and trade policy does not give any room for uncertainty in value of its
currency. But, a country prone to political confusions may see a depreciation in exchange rates.

7. Recession

When a country experiences a recession, its interest rates are likely to fall, decreasing its chances
to acquire foreign capital. As a result, its currency weakens in comparison to that of other
countries, therefore lowering the exchange rate.

8. Speculation

If a country's currency value is expected to rise, investors will demand more of that currency in
order to make a profit in the near future. As a result, the value of the currency will rise due to the
increase in demand. With this increase in currency value comes a rise in the exchange rate as
well.
UNIT V HUM AN RESOURCE M ANAGEM ENT IN INTERNATIONAL BUSINESS

Selection of expatriate managers - Managing across cultures -Training and development-

Compensation-Disadvantages of international business – Conflict in international
business- Sources and types of conflict – Conflict resolutions – Negotiation –Ethical
issues in international business – Ethical decision-mak

SELECTION OF EXPATRIATE MANAGERS

Expatriate selection is “the process of gathering information for the purposes of evaluating
and deciding who should be employed in particular jobs” (Shen & Edwards, 2004, p. 816).
Expatriate selection includes educating candidates, evaluating candidates, and selecting who
should be sent on international assignments.

Technical competency

Technical competency have always been considered to play the most critical role .As expatriates
work in countries or regions far from their home countries, and companies in these countries or
regions cannot provide technical support in time, their technical competency can guide them to
deal with problems smoothly.

Personal Traits

As expatriate employees are required to work in other countries, this implies a deep experience
of cultural differences. Therefore, some personal characteristics or competencies that help
employees interact with people from different cultural systems will affect the possibility of a
successful international assignment. For example, a personality that is willing to try new things
and has a keen interest in foreign cultures can help expatriates adapt to the new cultures and
explore the attractions of the host country. In addition, due to the new environment, there may be
a variety of unexpected situations which requires expatriates to effectively handle pressure and
maintain emotional balance to deal with them. Therefore, expatriates need emotional stability
and resilience to cope with adversity.

Relational Abilities
Expatriates need to get along with overseas clients and colleagues from different cultural
backgrounds, revealing the importance of relational abilities or communication skills. First of all,
being proficient in the language of the host country is a great advantage, which helps them better
communicate with the local people, reduce cultural misunderstandings and create a friendly
communication environment. The degree of social ‘fit’ is also mentioned in previous studies,
which refers to the ability to adapt and integrate into local society and develop relations with
local people, which enables expatriate employees to understand important work or non-work
information and feedback.

Environmental variables

Macro environment of the host country, such as the structure of political, economic and legal
system, may be vastly different from that of the home country, and expatriate employees are not
familiar with it. Expatriates should fully understand these environmental variables, as
understanding these variables is conducive to international assignment.

Family situation

The family situation refers to the ability of family members of expatriates, especially spouses, to
adapt to the new environment. For international assignments, the expatriate’s family also also
needed to be considered in the selection process. Because the ability of expatriates and
accompanying family members to adapt to the new environment will affect the success of the
international assignment

SELECTION PROCEDURE

● The first step is to conduct a job analysis of the position to determine the key
competencies required to work in different cultural backgrounds.
● The successful experience of previous international assignments can be used to establish
an internal candidate pool with key capabilities.
● Among them, the interest of candidates is considered to be an influential factor, which is
related to the success of selection.
● Employee interest in international assignments can be measured by asking career
development question
 ● More importantly, it is necessary to track interested candidates. A simple way to track
candidates is to create and maintain a form to record the candidate’s skills, language
skills, cultural experience, and how the candidate meets the requirements of expatriate.
● Finally, if there is an opportunity for international assignments and the right expatriate
employee needs to be selected, interviews can be conducted for qualified and interested
employees in the talent pool.

TRAINING AND DEVELOPMENT OF EXPATRIATES:

International human resources can be a complex and difficult area. Unprecedented political
events and changes to the way we work, like hybrid working, may be impacting your
multinational organization. Still, you must continue to focus on increasingly mobile talent and
the integration of people management processes to make doing business at a global scale a
success.

Pre-departure training for expatriates is a broad term for a programme that briefs soon to be
expatriates on what to expect when living and working abroad. Well delivered training allows
employees to personalize learning have to anticipate and plan for challenges they and their
family may face when they move abroad.

Benefits

There are a range of benefits of a holistic training plan for expats as they settle in to their role
abroad:

1. Clear understanding of their role: employees who are sent abroad for the right reasons
are likely to be most successful. Pre-assignment training that clearly lays out the primary
goals of their assignment is likely to help employees meet expectations with greater ease.
2. Better integration: the inability to settle into their new country is cited by most
expatriate failures as a key reason for their return home. Therefore, detailed inter-cultural
studies and sensitivity training is required to:
3. -Provide a detailed overview of the cultural differences between home and host countries.
4. -Develop emotional flexibility to accept unfamiliar behaviour and values are effective
ways of doing things.
 5. -Help the expatriate to evoke a sense of respect towards the culture and norms of their
host country and to enact change in a culturally sensitive way.
6. Improved language skills: ideally pre-assignment training will offer the basics of the
host country’s language to those moving abroad. Good host language skills improve an
expatriate’s access to information once they move abroad and helps them to build
connections, an essential element of expat success.
7. Happy families: BGRS mobility trend survey shows the most common reason listed for
expat failure is ‘family concerns’ including challenges relating to their partner settling in,
children’s education, quality of life or support in the host country. Some of these can be
alleviated by not forgetting the expatriate’s family when it comes to pre-assignment
training.
8. In-country coaching: pre-assignment training should also outline the in-country
coaching an expat can expect. Receiving structured support from other expats,
management and colleagues once they move, can significantly improve the overall
success of their time working abroad.

THE THREE PHASES OF EXPATRIATE TRAINING

Expatriate supports should be available at every stage of the assignment process:

1. Pre-expatriation training: supporting the candidate and their family prior to the beginning
of the international assignment. This period is crucial to setting an expatriate up for
success. Preparation usually includes training in hard and soft skills as well as cultural
awareness to prepare candidates for life in another country.
2. During expatriation: the best organizations continue to support those on assignment. This
can be through a mentorship programme with previous expats or to fill knowledge or
skills gaps.
3. During repatriation: often overlooked, moving back home can be a very challenging time
for former expats. Offering support to reintegrate into the business and navigating the
change that may have occurred since they left can reduce the chances of repatriate churn.

Pre-Departure Training
 ● Project alignment training Language (formal, conversational, and regional differences)
● Cultural mores such as food, dress, and observance of holidays
● Professional expectations such as interactions with high-level staff
● Currency and exchange rates

COMPENSATION

Whether an overseas assignment will succeed or fail mostly depends on the quality of the
expatriation compensation employees receive while working abroad. A lucrative
compensation package will guarantee that your foreign employees feel entirely supported
financially during their assignment.

Approaches to Expatriate Compensation

A competitive expatriation compensation plan is one that an expatriate considers to be fair

while still being cost-effective for the firm. It’s essential to plan these expat salary packages in
such a way that they can achieve both the organization’s mobility and personnel objectives.
Developing one, however, is difficult given that a three-year abroad assignment can cost more
than $3 million. There are several typical approaches to international compensation.

The Home-Based Approach

The home-based approach aims to match the employee’s usual living standards in their
native country, considering taxes, housing, commodities, and services. This approach divides
the employee’s basic pay into four broad categories. They are: taxes, commodities and services,
housing, and discretionary income. The home-based approach is the most popular approach to
international compensation worldwide. Almost 76% of long-term postings worldwide and
85% of US multinational organizations follow this pay structure to compensate their expatriate
workers.

The Host-Based Approach

The host-based approach means that the organization assigns an employee to the payroll of
their host country. The organization also follows that country’s procedures, rules, and
regulations to determine the compensation and other incentives. When employing a host-based
approach, your employees will likely not earn additional allowances for their assignments.
So, this approach is the most cost-effective option for businesses that wish to save expenses.
However, even after returning to their home countries, the employees may remain too absorbed
in the compensation systems of their host countries. This strategy often faces challenges.

DISADVANTAGES OF INTERNATIONAL BUSINESS

Adverse effects on economy: One country affects the economy of another country through
international business. Moreover, large-scale exports discourage the industrial development of
importing country. Consequently, the economy of the importing country suffers.

Competition with developed countries: Developing countries are unable to compete with
developed countries. It hampers the growth and development of developing countries, unless
international business is controlled.

Rivalry among nations: Intense competition and eagerness to export more commodities may
lead rivalry among nations. As a consequence, international peace may be hampered.

Colonization: Sometimes, the importing country is reduced to a colony due to economic and
political dependence and industrial backwardness.

Exploitation: International business leads to exploitation of developing countries the developed

countries. The prosperous and dominant countries regulate the economy poor nations.

Legal problems: Varied laws regulations and customs formalities followed different countries,
have a direct b earring on their export and import trade.

Publicity of undesirable fashions: Cultural values and heritages are not identical in all the
countries. There are many aspects, which may not be suitable for our atmosphere, culture,
tradition, etc. This, indecency is often found to be created in the name of cultural exchange.

Language problems: Different languages in different countries create barriers to establish trade
relations between various countries.
Dumping policy: Developed countries often sell their products to developing countries below
the cost of production. As a result, industries in developing countries of the close down.

Complicated technical procedure: International business in highly technical and it has

complicated procedure. It involves various uses of important documents. It required expert
services to cope with complicate procedures at different stages.

Shortage of goods in the exporting country: Sometimes, traders prefer to sell their goods to
other countries instate of in their own country in order to earn more profits. This results in the
shortage of goods within the home country.

Adverse effects on home industry: International business poses a threat to the survival of
infant and nascent industries. Due to foreign competition and unrestricted imports upcoming
industries in the home country may collapse.

CONFLICT IN INTERNATIONAL BUSINESS:

o Communication failure
o Personality conflict
o Value differences
o Goal differences
o Methodological differences
o Substandard performance
o Lack of cooperation
o Differences regarding authority
o Differences regarding responsibility
o Competition over resources
o Non-compliance with rules

CONFLICT RESOLUTION

Conflict resolution is a range of methods for alleviating or eliminating sources of conflict. The
term "conflict resolution" is sometimes used interchangeably with the term dispute resolution or
alternative dispute resolution. Processes of conflict resolution generally include negotiation,
mediation, and diplomacy. The processes of arbitration, litigation, and formal complaint
processes such as ombudsman processes, are usually described with the term dispute resolution,
although some refer to them as "conflict resolution." Processes of mediation and arbitration are
often referred to as alternative dispute resolution.

Methods of Dispute Resolution include:

⮚ Lawsuits (litigation)
⮚ Arbitration
⮚ Collaborative law
⮚ Mediation
⮚ Conciliation
⮚ Facilitation

Adjudicative processes, such as litigation or arbitration, in which a judge, jury or arbitrator

determines the outcome.

Consensual processes, such as collaborative law, mediation, conciliation, or negotiation, in

which the parties attempt to reach agreement.

A Lawsuit is a civil action brought before a court of law in which a plaintiff, a party who claims
to have received damages from a defendant's actions, seeks a legal or equitable remedy. The
defendant is required to respond to the plaintiff's complaint. If the plaintiff is successful,
judgment will be given in the plaintiff's favor, and a range of court orders may be issued to
enforce a right, award damages, or impose an injunction to prevent an act or compel an act.

Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the
resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more
persons (the "arbitrators", "arbiters" or "arbitral tribunal"), by whose decision (the "award") they
agree to be bound. It is a settlement technique in which a third party reviews the case and
imposes a decision that is legally binding for both sides. Other forms of ADR include mediation
(a form of settlement negotiation facilitated by a neutral third party) and non-binding resolution
by experts.
Collaborative Law (also called Collaborative Practice, Collaborative Divorce, and
Collaborative Family Law) was originally a family law procedure in which the two parties
agreed that they would not go to court, or threaten to do so.

Mediation, a form of alternative dispute resolution (ADR) or "appropriate dispute resolution",

aims to assist two (or more) disputants in reaching an agreement. The parties themselves
determine the conditions of any settlements reached— rather than accepting something imposed
by a third party. The disputes may involve (as parties) states, organizations, communities,
individuals or other representatives with a vested interest in the outcome.

Conciliation is an alternative dispute resolution (ADR) process whereby the parties to a dispute
(including future interest disputes) agree to utilize the services of a conciliator, who then meets
with the parties separately in an attempt to resolve their differences. He does this by lowering
tensions, improving communications, interpreting issues, providing technical assistance,
exploring potential solutions and bringing about a negotiated settlement.

SOURCES OF CONFLICT:

⮚ Communication failure
⮚ Personality conflict
⮚ Value differences
⮚ Goal differences
⮚ Methodological differences
⮚ Substandard performance
⮚ Lack of cooperation
⮚ Differences regarding authority
⮚ Differences regarding responsibility
⮚ Competition over resources
⮚ Non-compliance with rules
Ways of addressing conflict

Accommodating: Individuals who enjoy solving the other party‘s problems and preserving
personal relationships. Accommodators are sensitive to the emotional states, body language, and
verbal signals of the other parties. They can, however, feel taken advantage of in situations when
the other party places little emphasis on the relationship.

Individuals who enjoy solving the other party‘s problems and preserving personal relationships.
Accommodators are sensitive to the emotional states, body language, and verbal signals of the
other parties. They can, however, feel taken advantage of in situations when the other party
places little emphasis on the relationship

Avoiding: Individuals who do not like to negotiate and don‘t do it unless warranted. When
negotiating, avoiders tend to defer and dodge the confrontational aspects of negotiating;
however, they may be perceived as tactful and diplomatic.

Individuals who do not like to negotiate and don‘t do it unless warranted. When negotiating,
avoiders tend to defer and dodge the confrontational aspects of negotiating; however, they may
be perceived as tactful and diplomatic.

Collaborating: Individuals who enjoy negotiations that involve solving tough problems in
creative ways. Collaborators are good at using negotiations to understand the concerns and
interests of the other parties. They can, however, create problems by transforming simple
situations into more complex ones.

Individuals who enjoy negotiations that involve solving tough problems in creative ways.
Collaborators are good at using negotiations to understand the concerns and interests of the
other parties. They can, however, create problems by transforming simple situations into more
complex ones

Competing: Individuals who enjoy negotiations because they present an opportunity to win
something. Competitive negotiators have strong instincts for all aspects of negotiating and are
often strategic. Because their style can dominate the bargaining process, competitive negotiators
often neglect the importance of relationships.
Individuals who enjoy negotiations because they present an opportunity to win something.
Competitive negotiators have strong instincts for all aspects of negotiating and are often
strategic. Because their style can dominate the bargaining process, competitive negotiators often
neglect the importance of relationships

Compromising: Individuals who are eager to close the deal by doing what is fair and equal for
all parties involved in the negotiation. Compromisers can be useful when there is limited time to
complete the deal; however, compromisers often unnecessarily rush the negotiation process and
make concessions too quickly.

Individuals who are eager to close the deal by doing what is fair and equal for all parties
involved in the negotiation. Compromisers can be useful when there is limited time to complete
the deal; however, compromisers often unnecessarily rush the negotiation process and make
concessions too quickly.

Other Negotiation Styles

Shell identified five styles/responses to negotiation. Individuals can often have strong
dispositions towards numerous styles; the style used during a negotiation depends on the context
and the interests of the other party, among other factors. In addition, styles can change over time.

Counseling

When personal conflict leads to frustration and loss of efficiency, counseling may prove to be a
helpful antidote. Although few organizations can afford the luxury of having professional
counselors on the staff, given some training, managers may be able to perform this function.
Nondirective counseling, or "listening with understanding", is little more than being a good
listener—something every manager should be.
NEGOTIATION

The importance of careful preparation for cross-cultural negotiations cannot be

overstated. The managers in any negotiation need to familiarise themselves with the
cultural background and underlying motivations of the negotiators and the tactics and procedures
they use to control the process. By doing this they can make progress, and therefore maximise
company goals.

The successful negotiations depend on thorough understanding of each other's

position.

The first step in that direction is that each party should assess not only its
own strengths but also weaknesses i.e. self analysis.

The second step in the preparations for negotiations is to analyse the positions of
anticipated counterpart i.e. analysis of the other party.

The third logical step by which both the prospective investors and the prospective
host country government or company can prepare themselves is the setting of
realistic or reasonable goals. The company must certainly identify what it wants to
get out of an investment. It should also decide what can be the least acceptable
condition".

The fourth logical step is to understand cultural differences in negotiating styles. The
managers first need to know their own styles and then determine how their styles
differ from the norms in other countries. Keeping in mind the nature of the
negotiations and all other relevant factors the top management must decide about the size and
composition of the negotiation team. The age, experience, expertise and mastery on human
relationship are important qualities that the members are expected to possess

Managing Cross-Cultural Negotiations

The process of bargaining with one more parties at arrive at solution acceptable to all. Used in
creating joint ventures, then for expansion, local managers, imports/exports of materials and
finished goods, recapture of profits two types of negotiation Distributive negotiation: two parties
with opposing goals compete over a set value. Integrative negotiation: two groups integrate
interests, create value, and invest in the agreement (win-win scenario).

Types of negotiation are available to them. Some of the most common are distributive
negotiation, integrative negotiation, team negotiation, and multiparty negotiation.

In distributive negotiation, parties compete over the distribution of a fixed pool of value. Here,
any gain by one party represents a loss to the other. You may also hear this referred to as a
zero-sum negotiation or win-lose negotiation.

Integrative negotiation gives us one of the biggest chances of a win-win. In these types of
negotiation situations, there is more than one issue to be negotiated, and negotiators have the
potential to make tradeoffs across issues and create value. In many cases, distributive
negotiations can become integrative if we take the time to search for additional issues to include.

Team negotiations are those types of negotiation situations where the negotiating parties are
made up of more than one person. These might include union contract negotiations or major
business negotiations.

Lastly, mulitparty negotiations include, as you might imagine, multiple parties. These types of
negotiation situations might include municipal projects or international negotiations. Multiparty
negotiations do require more complex negotiating skills, but there is also more opportunity to
find tradeoffs and create value.

One of the final types of negotiation that you may encounter is the “one-shot” negotiation where
parties have no intention of continuing to work together. One-shot negotiations often carry a risk
of unethical behavior and hard bargaining if parties believe they have no need to build a trusting
relationship.

Negotiation Tactics Five general principles

Separate the people from the problem: see other’s side, avoid blame, stay positive; recognize emotions.
Focus on interests over positions: gives insight into the motivation behind why a particular position was
chosen. Generate a variety of options before settling on an agreement: better for everyone to have many
options. Insist that the agreement be based on objective criteria: emphasize the communal nature of the
process. Stand your ground: neither side should agree to terms that will leave it worse off than its best
alternative to a negotiated agreement, or BATNA.

Bargaining Behaviors Bargaining behaviors are both verbal and nonverbal. Use of extreme
behaviors: Some begin with an extreme offer or request. Promises, threats, and other behaviors:
often greatly influenced by the culture Nonverbal behaviors: silent language (silent period, facial
gazing, touching, conversational overlaps)

ETHICAL ISSUES IN INTERNATIONAL BUSINESS

International business is when an organization carries out its operations, such as

manufacturing, selling, marketing, or sourcing from across national borders. International
business can also include global governmental and international agencies exchanging physical
and intellectual assets. On the other hand, ethical issues refer to an occurrence in which a
business faces a moral conflict that needs to be taken care of. For example, a situation where a
decision has been made, or an activity attracts questionable moral standards. Ethical issues
characteristically involve conflicting with the given society's norms and, at times, with the legal
provisions.
Ethical issues in international business include:

● Child labor
● Workplace diversity
● Working standards
● Human rights
● Equal employment opportunity
● Trust and integrity
● Environmental preservation

Multinational corporations are constantly confronted with moral dilemmas concerning these
ethical issues. At times there is an apparent right course of action that such organizations might
choose. Still, the situation in the area of operations might make it difficult to determine what is
ethically acceptable.

For example, it is ethical to avoid gender discrimination and give women equal employment
opportunities worldwide. But an organization operating in the Middle East may face a dilemma
between upholding ethical standards and risking rejection from the local societies. Adhering to
the local societies' customs that do not allow equal employment opportunities could risk the
organization getting into global scandals. To explain why ethical issues frequently arise in
international business, consider a company that operates within the United States, say in
California. Most of the company's employees are likely to be from within. The same can be said
for the customers and the stakeholders. It can also be said that people working in this
hypothetical company exhibit similar or nearly similar societal norms. Most importantly,
well-known state and federal laws regulate the company's activities. In such a case, all the
players know the labor, wages, and environmental protection laws and have the same integrity
perspective. The company is improbable to face ethical issues since all the ethics and regulations
are well known.

However, suppose the company was to expand its operation to a country in Asia, like Japan. In
that case, it will be expected to hire Japanese locals who have different cultural norms from
Americans. Besides, Japan has different laws concerning environmental conservation, minimum
wages, or an outlook on trust and integrity. The environmental laws and minimum wages in the
US are superior to those in Japan. In such a case, the company will be torn between adhering to
local laws, which might be less costly to comply with, or adhering to the parent country's law.
However, the former might render the company competitively disadvantaged to other players in
the host country.

At the same time, if the company chooses to work under norms established in the parent country,
the locals might not feel so good about it as such norms do not align with theirs. This issue
becomes even more complicated if the company has more subsidiaries in other regions such as
Africa and South America. The bottom line is that every country has different cultural norms and
regulations. What might be seen as normal in one country might be unacceptable in another.
Besides, unethical practices in international business can be inviting to organizations as they
present an advantage over expensive compliance needs.

Ethics in international business, act as a way for multinational corporations to strike a balance
between doing what is correct from a global perspective and respecting the customs of local
society. Organizations need to identify and counter ethical issues in the world since customers
are growing more concerned about how businesses manage their operations rather than only
focusing on product quality.

ETHICAL DECISION MAKING

Five things that an international business and its managers can do to make sure ethical issues are
considered

– Favor hiring and promoting people with a well-grounded sense of personal ethics
– Build an organizational culture that places a high value on ethical behavior
– Make sure that leaders within the business not only articulate the rhetoric of ethical behavior,
but also act in a manner that is consistent with that rhetoric
– Implement decision-making processes that require people to consider the ethical dimension of
business decisions
– Develop moral courage
Improving Global Business Ethics
Seven Moral Guidelines for MNCs

⮚ Inflict no intentional or direct harm

⮚ Produce more good than bad for the host country
⮚ Contribute to host country’s development
⮚ Respect the human rights of their employees
⮚ Pay their fair share of taxes
⮚ Respect local cultural beliefs that do not violate moral norms
⮚ Cooperate with the government to develop and enforce background institutions

The Role of Ethics in International Business

International business ethics has a number of open questions and dilemmas. Today it is
characterized by the following elements: Every culture and nation has its own values, history,
customs and traditions, thus it has developed own ethical values and understanding of ethical
principles; There is no international ethical code of conduct, accepted and followed by all the
countries; There is a lack of governments’ initiative to create ethical cooperation framework and
thus to enhance ethical behavior in international business; It is hard to outline those ethical
values which would be understandable, acceptable and important for representatives of all the
continents simultaneously within different types of international cooperation projects.

Following approach to international business ethics:

Every individual and every corporate body must outline its ethical values; Every
individual and company should ensure understanding of ethical values and belief in their
effectiveness and importance;
Employees of every organization must participate in creating a corporate code of conduct,
which in this case definitely represents corporate culture, rather than only personal views of a
company’s leader; Every individual and company must monitor compliance with the outlined
values at all times.
All the ethical values must be divided in two categories – rigid and flexible. Rigid are those
values which cannot be renounced under any circumstances (honesty, integrity,
professionalism), and flexible ones, which are those moral principles which may be interpreted
in different ways in different situations (will to understand other cultures’ values, remuneration
policies).

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