International Business

INTERNATIONAL BUSINESS Teachers’ Manual Author Prof. Pulapa Subba Rao Prof Pr ofes esso sorr of Bu Busi sine ness ss Ad Admi mini nist stra rati tion on University of Papua New Guinea Publisher: Himalaya Publishing House Pvt. Ltd., Mumbai, India

Chapter 1 International Business: An Overview

CHAPTER-1 INTERNATIONAL BUSINESS: AN OVERVIEW

International Business


CHAPTER-1 INTERNATIONAL BUSINESS: AN OVERVIEW



Evolution of International Business     

Why Int Intern ernati ationa onall Bus Busine iness? ss? Inte In tern rnat atio iona nall Bu Busin sines esss Be Befo fore re Wo Worl rld d Wa Warr-II Inte In tern rnat atio iona nall Bu Busin sines esss Be Betw twee een n Wo Worl rld d Wa Wars rs Inte In tern rnat atio iona nall Bu Busi sine ness ss Af Afte terr Wo Worl rld d Wa Wars rs Emer Em erg gen ence ce of In Inte terrna natitio ona nall In Inst stititut utio ions ns:: lilike ke IM IMF, F, IB IBR RD, GA GATT TT and WT WTO O



Different Concepts      

International Trade International Marketing International Manufacturing International Business International Trade vs. Marketing International Marketing vs. Business



Drivers of International Business      

Establishment of International Institutions like IMF, IBRD, IDA, IFC, and WTO Emergence of Trade blocks like European Union, NAFTA, ASEAN and SAARC Foreign Direct Investment International manufacturing Centers Strides in Information Technology Liberalization of Economies



Stages of International Business     

Domestic Company International Company Multinational Company Global Company Transnational Company



Special Issues of International Business 

Modes of International Business



Goals of International Business



Advantages of International Business



Problems of International Business



Strategies of International Business


Chapter 2 Theories of International Trade

CHAPTER-2 THEORIES OF INTERNATIONAL TRADE



Why and How International Trade?   

Mutual Benefits to Two countries Differences in Opportunity Costs Comparative Advantage



Mercantilism    

Countries should Export more than they Import and Receive the Difference in Gold. Governments Imposed Restrictions on Imports and Encouraged Exports Benefited Colonial Powers and Caused Discontent in the Colonies Decay of Gold Standard Reduced the Validity



Theories of International Trade      

Adam Smith’s Theory of Comparative Cost Advantage

Comparative Cost Advantage Theory Comparative Advantage With Money Concept Implications Criticisms



Other Theories



Relative Factor Endowments Theory Country Similarity Theory Product Life Cycle Theory Global Strategic Rivalry



Porter’s National Competitive Advantage Theory

  



CHAPTER-3

INTERNATIONAL BUSINESS ENVIRONMENT



International Business Environment Factors        

Meaning of Business Environment Environmental Factors: (STEPIN) Social and Cultural Technological Economic Political International Natural



Cultural Environment • • • • •

Meaning Characteristics Cultural Attitude and International Business Cross-Cultural Communication Cultural Universals



Social Environment • • • • • •

Social Environment Behavioural Factors Affecting Business Power Distance Individualism Vs. Collectivism Risk-Taking Behaviour Masculinity



Social and Cultural Environment • • • •

Strategies for dealing with Differences: Adjustments, Communication Competitive Advantage Culture and Business Ethics Culture and Consumer Behaviour

Making



Religions and Economic Implications • • • • •

Christianity Islam Hinduism Buddhism Confucianism



Technological Environment Meaning of • Influence of and Investment in • Economic Development and • International Cooperation and • Technology Transfer • Plant Location and • Appropriate Technology • Globalization and Technology •



Economic Environment •

• • • • • •

Economic Systems Income Levels of Countries: Characteristics Basket cases, Location of Income Business and Economic Development Macro-Economic Issues and Business Economic Transition Opportunity to MNCs



Political Environment • • • • • • •

Political Ideologies Political Rights and Civil Liberties Totalitarianism Political Relations and Business TYPES OF Political Systems Political Stability and Economic Development Political Risks



Legal Environment •

• • • • •

Kinds of Legal Systems Theoretical Law Property Rights Protection of Intellectual Property Product Safety and Product Liability Labour Laws


Chapter 2 Theories of International Trade Trade

CHAPTER-4 MODES OF ENTERING



Modes of Entering Introduction I ntroduction     

Analysis of Alternative Foreign Markets Level of Competition Environmental Scanning Assessing Costs, benefits and Risks Decision Factors: Ownership Advantages, Location Advantages, Internationalisation Advantages



Modes of Entry I.

EXPORTING

1. Indirect Exports 2. Direct Exports 3. Intra-corporate Transfers II.

LICENSING

4. International Licensing III. II I. FR FRA ANC NCHI HISI SING NG

5. International Franchising IV.. SP IV SPEC ECA AL MO MODE DES S

6. Contract Manufacturing 7. Business Process Outsourcing 8. Management Contracts 9. Turnkey Projects V.

FOREIG FOR EIGN N DIRECT DIRECT INVEST INVESTMEN MENT T WITHOUT WITHOUT ALLI ALLIAN ANCES CES

10. Green Field Strategy VI. FORE FOREIGN IGN DIRECT DIRECT INVE INVESTMEN STMENT T WITH AL ALLIA LIANCES NCES

11. Mergers and Acquisitions 12. Joint Ventures



CHAPTER-5 FOREIGN DIRECT INVESTMENT



Foreign Direct Investment- Introduction  

Meaning Forms of FDI: Purchase the Existing, new Investment in Property, participation in a Joint Venture, Transfer of Assets, Export of Goods for Equity, Trading in Equity



International Investment Theories     

Ownership Advantage Theory Internationalization Theory Dunning's Eclectic Theory Factor Mobility Theory Product Life Cycle Theory



Factors Influencing FDI 





Supply Factors: Production costs, Logistics, Resource

availability, Access to technology, Availability of Human resources Demand Factors: Customer access, Marketing advantages, Exploitation of competitive advantages, Customer mobility Political Factors: Avoidance of trade barriers, Economic development incentives.



Why FDI?      

To Increase Sales and Profits To Enter fast growing Markets To Reduce Costs To Consolidate Trade Blocs To protect Domestic and Foreign Markets To Acquire Technological and Managerial Know-How



FDI In India  

 

Government Policy since 1991 Liberalisation in the FDI sector and Ceilings on Foreign investment Direct Investment Inflows FDI in select Asian Countries



CHAPTER-6

GLOBALIZATION



Globalization-What is It? 





Globalization is the shift towards a More Integrated and Interdependent World Economy Globally Mobile Capital, Property knowledge and technology sweep away regulations Interdependency and Integration of various countries of the World



Features of Globalization       

Operation throughout the World Erasing Differences among markets Establishing manufacturing centers throughout the world Operation in international Financial Markets Allow the free flow of Human Resources Spread the markets in all countries Establish various services of the business in all countries



Globalization Process   

 

Stage-I: Export to Foreign Countries Through Intermediaries Stage-II: Export to Foreign Countries Directly Stage-III: Establishes Production and Marketing facilities in Foreign Countries Stage-IV: Makes foreign subsidiary full-fledged Stage-V: Serves the foreign customers like a domestic company



Drivers of Globalization       

Establishment of WTO Regional Integration/Trade Blocks Declining Trade Barriers Declining Investment Barriers Growth of FDI Strides in Technology Growth in MNCs



CHAPTER-7

WORLD TRADE ORGANIZATION (WTO)



World Trade Organization-Introduction 

  



The Emergence of General Agreement on Tariffs and Trade (GATT) Objectives of GATT Uruguay Round and Dunkel Proposals World Trade Organisation (WTO) was established in 1995 to implement the final act of Uruguay Round agreement of GATT GATT Vs. WTO



WTO and WORLD TRADE WITHOUT DISCRIMINATION  



Promotes trade without any discrimination MFN Clause: Member countries should give equal treatment to the products imported from any other member countries National Treatment Clause: Member country should treat the foreign products once they enter their country exactly equal to those of similar domestic products



URUGUAY ROUND PACKAGE 



    

To reduce the subsidy on Inputs and eliminate administered pricing in agricultural sector. WTO members abolished quotas on trade in textiles and clothing on 1 January 2005. Challenges and Strategies to Compete Trade Related Intellectual Property Rights Patents Regime Kicks In NO Foreign Capital Discrimination Trade in Services



Ministerial Meetings of WTO      

First meeting: Held on 9 th December1996 at Singapore Second meeting :Held during 18-20, May 1998 at Geneva Third meeting: Held on December 3, 1999 at Seattle Fourth meeting: Held at Doha, Qatar during 9-13, November 2001. Fifth meeting: Held during 10-14, September 2003 at Cancun, Mexico. Sixth Meeting: Held in Hong Kong, China from 13-18 December 2005.



WTO and India      

Founder Member Benefits in India Impact of Abolition of Textile Quota System Adoption of Product Patent Disadvantages India and Dumping


Chapter 8 Multinational Companies (MNCs)

CHAPTER-8

MULTINATIONAL COMPANIES (MNCs) International Business


Multinational Companies (MNCs)Introduction   



MNC does business in more than one country. Why Domestic Companies become MNCs? Operating Characteristics of MNCs (Protection, Tap global markets, Increase market share, Reduce cost, Overcome tariffs) Factors Contributed for the Growth of MNCs (Expansions of market territory, Market superiority, Financial superiority, Technological superiority Product innovations)



Advantages& Disadvantages of MNCs    

Advantages to Host Country Advantages to Home Country Disadvantages to Host Country Disadvantages to Home Country



Organization Structure of MNCs           

Design Organization Structure Vertical/ Tall Organization Horizontal/ Flat Structure Product Structure Functions-Based Structure Matrix Structure Team Structure Geographical Structure Decentralised Business structure Strategic Business Unit Structure Virtual Structure International Business


Role of MNCs in India •

•

•

•

•

•

•

•

•

•

Profit Maximisation International networking of Markets Diversification Policy Concentration in Consumer goods Location of Central control Offices Public Accountability Technology Social Justice Cultural Erosion Indianise a Global company


Chapter 9 Conflicts and Negotiations in International Business

CHAPTER-9 CONFLICTS AND NEGOTIATIONS IN INTERNATIONAL BUSINESS



Conflicts and Negotiations in International Business   

Conflicts between/ Among Companies Varying Goals Result in Conflicts Areas of Conflicts: Macro economic Areas, Production Areas, Marketing Areas, Finance Areas, Human Resource Areas, Social and Ethical Areas, Environmental Issues, and Competing Areas.



Conflict Resolutions     

Negotiation strengths Bargaining process Behavioural Aspects in Negotiations Bilateral and Multilateral Agreements Corporate Citizenship



CHAPTER-10 INTERNATIONAL TRADE POLICIES AND RELATIONS International Business


International Trade Policies and RelationsIntroduction       

Protect Domestic Industry from Competition Tariffs Subsidies Import Quotas Voluntary Export Restraints Local Content Requirements and Administrative Policies



International Law and Business Firms      

Material Sources of International Law International Disputes Private international Law International Court of Justice International Chamber of Commerce Country Groups



CHAPTER-11

TRADE BLOCKS AND BUSINESS CENTRES



Trade Blocks-Introduction  

 

Trade Blocks Vs. Economic Integrations Types of Trade Blocks:Free Trade Area, Customs Union, Common Market, Economic Union Regional Approach Advantages of Integration



European Union (EU) 



European Common Market formed in 1957, wit 6 members turned into European Union with 25 members Objective:“The community shall have its task, by setting up a common market, to promote throughout the community a harmonious development by economic activities, a continuous and balanced expansion, an increase in stability and accelerated raising of the standard of living and closer relations between the Member States belonging to it.”



Functioning of the EU        

Common Agricultural Policy (CAP) Common Fisheries Policy European Monetary Union THE EUROPEAN SYSTEM OF CENTRAL BANK Common Transport Policy EURO CURRENCY THE EURO SYSTEM Enlarged EU mulls future challenge



North American Free Trade Agreement (NAFTA)  

 

Formation: 1st January,1994 Objectives: To create new business opportunities particularly in Mexico, To enhance the competitive advantage of the companies operating in the USA, Canada and Mexico in wider international markets, To reduce the prices of the products and services by enhancing the competition. Measures Critical Appraisal



The Association of South-East Asian Nations (ASEAN) Established: 1992  To develop free trade area ASEAN Free Trade Area (AFTA): Objectives:  To Encourage inflow of Foreign Investment  To establish Free Trade Area  To reduce Tariffs  AFTA and India 



South Asian Association for Regional Cooperation (SAARC)          

Established in December 1985 Objectives: to improve the quality of life to develop the region in all Aspects. to provide the opportunity to the people to enhance the self-reliance. to provide climate for creating mutual trust. to enhance the mutual assistance to enhance the co-operation to have unity among the member countries to extend co-operation to other trade blocks.



Asia Pacific Economic Cooperation 

    

Facilitates Economic Growth, Cooperation, Trade and Investment To reduce Tariffs and trade Barriers Bogor Goals Safe and Efficient movement of Goods Economic Growth Achievement and Benefits



Other Trade Blocks  

MERCOSUR ANDEAN: Trade in Goods Customs Union Free Trade Area Common Market Free Movement of Capital


Chapter 12 International Business: Size and Groeth

CHAPTER-12 INTERNATIONAL BUSINESS: SIZE AND GROETH



World Merchandise Export Trade 

 



The world merchandise exports (US$8880 billion in 2004) recorded a positive growth North America experienced negative growth rates in 2001 and 2002 Europe alone accounted for nearly 50% of the global merchandise exports in 2004 Next to Europe, Asia’s exports were largest in 2004



World Merchandise Import Trade   





Recorded a positive growth (US$ 9215 billion in 2004) North America experienced negative growth rates in 2001 Europe in 2004 accounts for (44.85 percent of the total global merchandise imports). European Union’s(25 Countries) share in 2004 was as high as 41.06 percent. Next to Europe, Asia’s imports were largest in 2004 (US$2214 billion in money value and 24.02 percent



World Trade in Commercial Services (Exports)



The (US$2100 billion in 2004) recorded a positive growth North America experienced negative growth rate in 2001 Thus Europe accounted for more than half.



European Union’s share was as high as 47.86 percent



Next to Europe, Asia’s exports were largest

 



World Trade in Commercial Services (Imports)   

Recorded a positive growth (US$ 9215 billion in 2004) North America experienced negative growth rate in 2001 South and Central America also experienced negative growth in 2002 and zero growth in 2001



European Union’s share in 2004 was as high as 45.56 percent



Next to Europe, Asia’s imports were largest in 2004



CHAPTER-13 GLOBAL STRATEGIC MANAGEMENT



Global Strategic Management 

Vision: What We want to Create



Mission: An enduring statement of purpose that distinguishes one organisation from other similar organisations.



Strategy: Unified, comprehensive and integrated plan that relates to the strategic advantages of the firm to the challenges of the environment



strategic Management: Continuous, iterative cross functional process aimed at keeping an organisation as a whole appropriately matched to its environment



Peculiarities of Global Strategic Management     

Integrated strategic management of a global company Mostly action-oriented Scans the environment of all the countries Operate in home country and in foreign countries Depends upon the cultural differences among the countries



Ethics in Global Business  





Meaning Ethical Values in Global Business: Utilisation of the natural

resources of the host country appropriately and in an optimum way. Utilisation of the natural resources for the production of goods for the consumption in the domestic country. If these goods are exported, the benefit of foreign exchange should be provided to the host country. Do not use the ingredients in the production which harm the basic health of the customers of the host country Corruption



CHAPTER-14 INTERNATIONAL ACCOUNTING



International Accounting-Introduction         

Accounting system provides financial information to various stakeholders of the company The accounting function in international firms is more complicated due to: varying exchange rates 8 varying inflation rates 8 differing currency controls 8 varying expropriation risks 8 differing custom duties 8 differing levels of sophistication 8 changing national requirements 8



Country Differences in Accounting A research on differences in accounting standards in 22 advanced countries found that there were · 76 differences in the approach of cost of goods sold  65 differences in the assessment on return on assets  54 differences in the measurement of R & D expenses 20 differences in the calculation of net profit margin.



CHAPTER-15

INTERNATIONAL FINANCE AND FOREIGN EXCHANG



International Finance-Introduction    

Additional Issues to be Considered in International Business: 8 Currency to be used in the international business transactions. 8 Creditworthiness of the importer. 8 Acceptable methods of payment. 8 Arranging Finance.



Methods of Payment      

Payment in advance Open account Documentary collection Letters of credit Credit cards Counter trade 

  



International Risk Management-Types of Risks        

Political Politi cal Ris Risks ks Commer Com mercia ciall Ris Risks ks Exch Ex chan ange ge Co Cont ntro roll Re Restr stric ictio tions ns on Re Remi mitta ttanc nces es Diffe Di fferi ring ng Tax Sy Syste stems ms Sour So urce cess of Fu Fun nds Exch Ex chan ange ge Ra Rate te Fl Fluc uctu tuat atio ions ns,, Diff Di ffer ere ent St Stag ages es and Rate tess of In Inflflat atio ion n Risks Ri sks of No Nonn-pa paym ymen entt



CHAPTER-16 BALANCE OF PAYMENTS



Balance of Payments Statements Bala Ba lanc nce e of Pa Payyme men nts St Sta ate teme ment nt pr pre ese sen nts a cl cla ass ssififie ied d rec ecor ord d of : alll rec al ece eip ipts ts on ac acco coun untt of go goo ods exp xpor orte ted d  8 servic ser vices es ren rende dered red  8 capi ca pita tall re rece ceiv ived ed by re resi side dent ntss  8 payments made by the residents due to goods imported  8 and an d se serv rvic ices es re rece ceiv ived ed fr from om capi ca pital tal tr tran ansfe sferr rred ed to no nonn-re resi side dent ntss / fo fore reig igne ners rs..  8



Balance of Payments-Items     

Items can be classified as hereunder: Current Account Capital Account Unilateral Payments Accounts Official Settlement Account.



CHAPTER-17

INTERNATIONAL FINANCIAL INSTITUTIONS AND LIQUIDITY



International Financial Institutions      

International Monetary Fund International Bank for Reconstruction and Development( IBRD)/ World Bank International Development Agency International Finance Corporation United nations Conference on Trade and Development Multinational Investment Guarantee Agency



International Monetary Fund (IMF) 

IMF came into being to promote economic and financial cooperation among the member countries with a view to facilitate the expansion and balanced growth of world trade with effect from March 1, 1947



Quotas in IMF Country        

Quota (% of SDRs)

U.S.A. U.K. Germany France Japan Canada Italy India

37.10 10.74 13.01 10.74 13.31 6.37 7.05 4.16



International Bank for Reconstruction and Development (IBRD)/ World Bank   

Established on 5th December 1944 An inter-governmental institution, corporate in form. Established to provide long term assistance for the reconstruction and development of the economies of the member countries



Functions of IBRD    

To assist in the reconstruction and development. To promote private foreign investment by means of guarantees. To promote the long-range balanced growth of international trade. To arrange the loans or guarantees by it in relation to international loans



International Development Association 

Established in 1960 as an affiliate of the World Bank.



Provide finance to less developed member countries on a ‘soft’



loan basis. Called the soft loan window of the IBRD



Objectives



8

 

Development finance on easy terms to the less developed member countries. 8assistance for poverty alleviation 8 To provide finance at concessional interest rates



International Finance Corporation (IFC)  

Established in July 1956 in order to provide finance to private sector in developing countries. An affiliate of the World Bank Objectives (i) assist in financing the establishment, improvement and expansion of productive private enterprise (ii) Seeking to bring together investment (iii) Seek to stimulate, and to help create conditions conductive to the flow of private capital, domestic and foreign, into productive investment in member countries.



CHAPTER-18 INTERNATIONAL MARKETING



International Marketing   

International Marketing: Extension of marketing activities across the globe Standardization Vs. Customization Options in Trade Off in International Marketing: Ethnocentric Approach, Polycentric Approach, Geocentric Approach



International Marketing Mix    

Product Price Place Promotion



International Marketing Information System Automated System  System Design  IMIS Subsystems  Marketing Information System  Marketing Research: Research Design, Data Collection, Tabulation, Statistical tools, Data Analysis, Report writing, Report presentation-Use of Research findings 



CHAPTER-19

FOREIGN TRADE PROCEDURES



Export Trade Procedures Preliminaries Offer and receipt of confirmed orders Production and clearance of the products for exports Shipment Negotiation of Documents and realisation of export proceeds, and (vi) Obtaining various export incentives. (i) (ii) (iii) (iv) (v)



Export – Production& Procurement of goods and Shipment    

Packing and Marking Quality Control and Pre-Shipment Inspection Excise Duty Rebates Shipment: Customs Clearance, GR-I Form, Shipping Bill, Export License, Carting Order, Customs Examination of Cargo at Docks, Let Ship , Mate’s Receipt , Port Trust Dues , Bill of Lading, Shipping by Other Modes of Transport



CHAPTER-20 INTERNATIONAL PRODUCTION AND LOGISTICS MANAGEMENT International Business


Key Decisional Areas in Production Management     

Process Capacity Inventory Human Resource Quality



Acquisition of Resources      

Vertical Integration Make Option Buy Option Make and Buy Option National Origin Time Issues



CHAPTER-21 INTERNATIONAL HUMAN RESOURCE MANAGEMENT



International Human Resource Management-Activities           

Recruitment Selection Process Expatriates Performance Management Training and Development Compensation Women in International Business Dual Career Groups International Industrial Relations Quality Circles Participative Management



Expatriates 

 

Expatriates: Living or working in a foreign country. The parent country nationals working in foreign subsidiary and third country nationals are expatriates. International Adjustment Stages: Honey-Moon, Cultural Shock, Adjustment, Mastery Dimensions of Adjustment:Individual, Self-Efficacy,Relational Skills,Perception Skills, Non-Work, Job, Organizational Culture



Cross Cultural Training         

Information and Fact Finding Training Attribution Training Culture-Awareness Training Cognitive-Behaviour Modification Training Experimental Training Rigorous Training Job Novelty Training Interaction with Host Nationals BLUNDERS IN CROSS-CULTURAL TRAINING



Specific Issues in Global HRM     

Women in International Business Dual Career groups Industrial Relations Quality Circles Participative Management



CHAPTER-22 CONTROLLING AND EVALUATION OF INTERNATIONAL BUSINESS



Controlling and Evaluation of International Business • • • • •

Need for Controlling Problems in Controlling Role of Information Systems Organization Structure Areas to be controlled



Control Mechanisms         

Corporate Culture Reports Visits to Subsidiaries Management Performance Evaluation Cost and Accounting Comparability Evaluative Measure Control in Special Situations Changes in Strategies Legal Structures and Control



CHAPTER-23 E-BUSINESS VIS-ÀVIS INTERNATIONAL BUSINESS International Business


New Information Technologies    

Neural Networks Business Process Re-engineering, Enterprise Resource Planning and Supply Chain Management



Re-engineer the International Business Process    

Management of Ongoing Business Processes Improvements of Business Processes Re-engineering of Business Processes Management of International Business Process



CHAPTER-24 FUTURE OF INTERNATIONAL BUSINESS



Future of International Business      

Virtual International Business Front-End Stage Back-End Stage Recession in Global Markets Crisis in East Asia China: Threat or Opportunity



Future of Global Business--Stages 1. Heavy flow of goods into the developing Countries 2. Dumping of goods mostly in developing Countries. 3. Recession in both developing and developed countries. 4. Recovery : Initially advanced countries and later the developing countries recover. 5. Stabilisation : All the economies stabilise their production, employment and income levels. 6. Growth with stability : World economies grow with the stability in production, employment and income. This stage results in multidirectional international business.


International Business

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