Module-1: Introduction to Int’l Business

By: T.S.Narayanan
Nature of international business
 Globalization -a mindset which views the entire world as a single

market filled up the concept of International business.

 It started as International trade when producers used to export

their products to the nearby countries and to far-off countries.

 It turned to International marketing when production in one

country was begun to be marketed in foreign countries.

 It became International business when plants were set up in

foreign countries; then production in one country and marketing

abroad.
Meaning of international business
 International Business refers to the exchange of goods and

services between two parties of different countries.

 International Business may be understood as those business

transactions involve crossing of national boundaries

 International Business is the process of focusing on global

business opportunities and threats in order to produce/buy/sell

or exchange of goods and services worldwide.
Features of international business
 Large scale operations

 Integration of economies

 Dominated by developed countries and MNCs

 Benefits to participating countries

 Keen competition

 Role of science and technology

 International restrictions

 Sensitive nature
Importance of international business
 Earn foreign exchange- International business exports its goods and

services all over the world and earns valuable foreign exchange.
 Optimum utilization of resources-because it produces goods on a

very large scale for the international market.

 To spread business risks- because it does business all over the

world, a loss in one country can be set off by profit in another

country.
 Improve organizational efficiency- to face competition in the

international market.
 Continued..
 Achieve objectives - at international scale, it earns high profits

easily and quickly as it uses most updated technology.

 Expand and diversify- because it earns high profits.

 Increase competitive capacity- it produces high quality goods

at low cost using superior technology and management

techniques.
 Get benefits from government-as it brings in foreign exchange,

it can get financial and tax benefits from the government.

Differences -domestic & international
Basis Domestic International

Approach Ethnocentric Polycentric or

Regiocentric
Operating Product design & Product design &
style strategies for national strategies for
market international market

Geographic Within national Across national borders

limit boundaries to global scale

Environmen Scan national level Scan relevant

t international area
Tariffs & Does not affect Has an effect
Quotas
Continued..
Basis Domestic International
Forex rates Do not affect Has a significant effect

Culture Only that of domestic Of the various

country countries where
business is present
Import- Export Not affected Affected by policies of
various operating
countries
Human Normally people from Employs people from
Resources local country different countries
Markets & Meets demand locally; Meets needs of various
Customers business within the countries; business
country with many countries
Scope of International Business
 Foreign investments- contain investments of funds
from abroad in exchange for financial return
 Exports and imports of merchandise- tangible

goods.
 Licensing and Franchising-former for production

and marketing of goods, latter for service business.

Both grant access to patents, trade secrets or
technology to another firm in a foreign country.
Continued..
 Service exports and imports- participating countries

involve in exchange of various services.

 Growth opportunities- for both developing and under-

developing countries by mutual trading at a global level.

 Currency exchange benefits- take advantage of the

currency fluctuations.
 Overcome domestic market limitations
End of Lecture-1
Globalisation- what is it?
 Integration of the economy of the nation with the world

economy.
 Result of multiple strategies that are directed at transforming

the world towards greater interdependence and integration.

 Includes the creation of networks and pursuits transforming

social, economic and geographical barriers.

 Globalization is the method of interaction and union among

people, corporations and governments universally.

 Why expand internationally?
i. Explore markets with better profitability- international market
could have better purchase power and offer higher profits.

ii. Achieve economies of scale with a larger customer base-for

tech based companies who can offer products with no
additional cost

iii. Reduce over dependence on any one market- uncertainties of

a domestic market can be mitigated.

iv. Service customers who are abroad- again, for tech companies,
from their home country they can extend global service.
Strategies for going global

i. Exporting & Importing

ii. Contract manufacturing

iii. Licensing and Franchising

iv. Joint ventures

v. Wholly owned subsidiaries

Exporting and Importing
 Exporting refers to selling of goods and services by a firm of

home country to a firm of foreign country. For example, sale

of sweets by Haldiram to WalMart Store in USA.
 Importing refers to buying of goods and services by a firm of

home country from a firm of foreign country. For example,

purchase of toys by an Indian toy dealer from a Chinese firm.
 Modus operandi: Either the firm directly engages in import/

export or engages a middleman for indirect import /export.

Advantages of Exporting and Importing
Easy Mode – As compared to other modes of international
business, it is the easiest way to get entry into international
market.

Less Investment – It does not require heavy investment as

needed in case of other modes of entry. Moreover, firm is not
required to invest much of its time in business operations.

Less Risk – It is less risky due to negligible or low foreign

investment as compared to other modes of entry
 Contract Manufacturing
 A firm enters into a contract with another firm in foreign country

to manufacture certain components or goods as per its

specifications. Eg: Nike, Reebok, Levi’s .
 Also known as outsourcing.

 Modus operandi:

i. Production of certain components to be used for final product

ii. Assembly of components into final product

iii. Manufacture of the complete product

Advantages of Contract Manufacturing
 No need to set Production Facilities
 Low Investment Risk

 Lower Cost of Production

 Better utilization of idle capacity

 Benefits of Export Incentives

 Licensing and Franchising
 Licensing is a contractual arrangement in which one firm grants

access to its patents, trade secrets or technology to another firm

in a foreign country for a fee called royalty. Eg: Pepsi, Coca-cola
 Franchising is a contractual agreement which involves grant of

rights by one party to another for use of technology, trademark

and patents in return for a certain period of time on agreed cost.
 Franchising is relatively more rigid than Licensing

 Franchising is used in connection with service business and

Licensing in production and marketing of goods.

 Advantages of Franchising & Licensing
 It is a more affordable method as the licensors or franchisers don’t

need to pour too many funds abroad.

 The level of risk of the licensor is low with no investment costs.

 Licensee/Franchisee is the individual belonging to the country with

govt. intervention- this helps clear the hurdles in business.

 The licensee has more market understanding and contacts as he is a

local individual which guarantees achievement of marketing goals.

 Excluding Licensee/Franchise, no other foreign organization can

utilize such trademarks and licenses

End of Lecture-2
 Joint Ventures
 When two or more firms join together for a common purpose

and mutual benefit, it is known as joint venture. Eg: Hero with

Honda, Maruti with Suzuki.
 Modus operandi: ( in any of the 3 ways below)

 A foreign company acquires interest (i.e. portion of equity

shares) in an existing Indian company.

 An Indian company acquires interest in an existing foreign

firm.
 Both foreign company and Indian company join together to

form a new enterprise.

Advantages of Joint Venture
 Less financial burden in global expansion as local partner

also contributes to the equity capital of such venture.

 Facilitates large-scale operation and execution of heavy

projects, which require huge capital and manpower.

 Benefits of local partner’s knowledge regarding the

competitive

conditions, culture, business and political systems.

 Sharing of cost and risks with a local partner.
Wholly Owned Subsidiaries
 Is a company in which 100 per cent investment in its equity capital

is made by a parent company.

 Company making the investment is known as ‘Parent Company’ or

‘Holding Company’.
 Modus operandi:

i. Set up a new company in a foreign country with 100%

investment – also known as Greenfield venture.

ii. Investing 100% in an established company in a foreign country

iii. By investing more than 50% equity shares in a foreign company

Advantages
 Full Control: the parent company is able to exercise full

control over the management of wholly owned

subsidiary company in the foreign country.
 No Disclosure of Trade Secrets : As the parent company

has full control over operations of foreign subsidiary, it

prevents leakage of technology or trade secrets to others
 Internationalisation & Globalization
Parameter Internationalization Globalization
s
Definition Process of increasing the Process of integration of
enterprise of a certain local local markets into one global
company in international market
market

Focus Expansion of the client base Exchange of products and

of a local business in the services from the interaction
global or international market of local markets in one global
market.

Result Increasing the influence of the Decrease of global market

enterprise of a local market trade barriers, the emergence
and influencing globalization. of free and open markets, the
mobility of free trade capital,
increased migration
Stages of Internalization
Stage 1: Domestic Company:
Limits its operations, mission and vision to the national boundaries.
 Focus on the domestic market opportunities, supplies &

customers.
 Analyze national environment and formulate strategies.

Stage 2: International Company (Eg: Spencer’s)

 Grow beyond their production capacity and think of exploiting

opportunities outside national boundaries.

 Focus is domestic but extend their domestic operations abroad.
 Continued
Stage 3: Multi-National Company (Eg: Adidas)
 When international companies shift focus to different countries

for product, price and promotion, they become multi-national.

 They operate like a domestic market of country concerned in

each

of their market and devise different strategies accordingly.

Stage 4: Global Company (Eg: McDonald’s)

 They have a global strategy for marketing products on global

scale.
 Production could happen in home country or any single
Stages of Internationalization
Continued..
Stage 5: Transnational Company (Eg: Nokia)
 These companies are operating in multiple countries,

having foreign direct investment in all of them.

 Such companies follow a flexible approach,
understanding and adapting to the local culture and
demand of each country.
 Hence, offices in each country work in a decentralized

manner with decision-making powers

End of Lecture-3
Approaches to International Business

i. Ethnocentric Approach (Home country orientation)

ii. Polycentric Approach (Host country orientation)

iii. Regiocentric Approach ( Regional approach)

iv. Geocentric Approach (Global approach)

Ethnocentric approach
 A firm employs home market strategies to the
international market.
 Plans for overseas market are developed in the home

office of the company.

 Personnel is hired from home country.

 Also, promotion and distribution strategies are similar to

that employed in the home country

Polycentric approach
 Establishes a foreign subsidiary company and decentralizes all the

operations and delegates decision-making and policy making

authority to its executives
 Marketing strategies are framed out as per the situation of the host

country (the country where subsidiary is situated).

 Decisions can be altered as per the economic, political and cultural

disparities in the country.

 This provides a firm to manage its operations independently,

without much interference from its headquarters

Regiocentric approach
 The firm treats a group of countries with similar

characteristics as a single market and accordingly designs

a marketing strategy.
 At this stage, the foreign subsidiary considers the regional

environment for formulating policies.

 It markets more or less the same product design, under

polycentric approach in other country of region with the

different market strategy.
Geocentric Approach
 The entire world is just like a single country for the company.

 They select the employees from entire globe and operate with

a number of subsidiaries.
 Each subsidiary functions as an autonomous company in

formulating policies, strategies, product design, etc,

 Marketing strategies are not influenced by the home or host

country preferences and formulates an integrated marketing

strategy for across the globe.
Conceptual framework of MNCs
Continued…
 MNC involves international relocation of production.

 International relocation of production may be understood with respect

to production in the context of a domestic economy.

 It is a process in which firm which belongs to one country (called

home country) goes abroad and invests in that country (called host
country) and employs the factor of production of that country,
essentially with the help of investment that is emanating from the
domestic firm.
 The basis of international production lies in investment and

technology
Foreign Direct Investment (FDI) &
Foreign Institutional Investment (FII)
 FIIs are routed through stock market with the purpose of

making quick speculative gain.

 FIIs relate to the financial sector

 In contrast, FDI enters the host economy through

strategic agreements, undertakes production activity and

have a stake in the management and control.
 FDI relates to the real sector
Multinational Corporations and
Transnational Corporations
Multinational corporations Transnational corporations

Own a home company and Do not have subsidiaries, but

its subsidiaries just many companies
Eg: Unilever, Proctor & Eg: Shell, Accenture,
Gamble, Mc Donald’s Deloitte,Glaxo-Smith Klein

Have a centralized Do not have centralized

management system management system

Face a barrier in decision They gain more interest in

making due to the the local markets
centralized management as they maintain their own
system systems.
End of Lecture-4
Host and Home Country Relations
 Home country is the country from where the FDI emanates and

the Host country is the country where the FDI goes to.
 FDI always comes at some cost to host country.

 With FDI there is transfer of technology and managerial skills

to host county.
 There is relocation of production facility.

 These transfers and relocations have spill–over effect in host

country
Positive Impact of FDI on Host Country

1. Inflow of Capital: There is inflow of capital in host

country. As a result, level of investment in the host
country rises.

2. Transfer of Technology: FDI brings with itself

technology and managerial skills; host country gains
access to such technology and can use it for its own
benefit.

3. Creation of Employment: FDI bring with itself lot of

jobs in host country. MNCs create direct and indirect
 Continued..
4. Better Consumer Choices: MNCs’ products provide the
consumer with a variety of choices.

5. Positive effect on Balance of Payment: MNCs would effect

import substitution; they would also indulge in exporting of
goods and services from the host country. All these things shall
strengthen the current account position of the host country.
Balance of Payments of a country is the difference between all
money flowing into the country in a particular period of time and
the outflow of money to the rest of the world.
Negative Impact of FDI on Host Country
1. Suppresses domestic enterprises and product:MNCs due to their
better efficiencies began to dominate the consumer market
resulting in decreased demand for domestic products and share.

2. No ‘Workers Safety Net’: MNCs use capital intensive technology

and this leads to unemployment and underemployment.

3. Increase in income inequality: MNCs pay wages and salaries to

their employees at a higher rate than domestic firms.

4. Creation of monopoly power: Mega mergers and acquisition in

host country by MNCs result in creation of monopoly power.
Continued..
5. Pollution Haven Hypothesis: The pollution haven hypothesis is
the concept of relocation of MNCs in the countries that have lesser
stringent environmental laws and regulations. These countries shall
attract polluting industries from other countries.

6. Undermining National Sovereignty: Some MNCs are so large that

they are in position to dominate national sovereignty.

7. Adverse Effect on Balance of Payments: pass on royalties to their

parent company in home country; there is transfer pricing issue; also

repatriation of profits in the form of interest and dividend.

Technology Transfer and Foreign collaboration

 MNCs effect international relocation of production with the help of

capital, technology and management.

 However, the factor endowment in the host countries favors labour.

 Therefore, it makes sense for developing countries to use labour

intensive techniques of production.

 The host country needs to make a choice of continuing with the old

technology and reconciling to a lower growth rate or inviting FDI

and adopting new technology which is likely to step up the growth
rate.
Types of foreign collaborations
End of Lecture-5