International Business

Mrs.Jayashree Patil-Dake
BA (Eco-Hons), MA (Eco-Hons), MBA (Marketing), NET, SET, PhD (perusing) Senior Faculty, MBA Dept and Coordinator PGDMIB, BCPGC, Hyd-27

Introduction
Globalization of Health Care

3.2 International Business

Unit-I Global Imperative: An Overview-IB A Global perspective-emergence of globalization-drivers of globalization-Internationalization Process-stages in IBApproaches to IB The World of IB: Regional and Global Strategy-The Multinational Enterprise-Triad and International BusinessInternational Trade Theories; Environment of IB, Cultural Environment and Political Environment References: 1. IB- Charles W L Hills & Arun K Jain, Tata McGraw Hills 2. IB- P. Subba Rao, Himalaya Publishing House 3. IB- Michael R. Chinkota, Cengage Learning etc pl refer syllabus copy for details.

IB: Global Perspective

IB is a process of focusing on the resources of the globe and objectives of the organization on global businesses opportunities and threats, in order to produce, buy, sell or exchange of goods/services world-wide.

Evolution of IB
Evolution of IB is as old as human civilization, however to simplify 1) First phases of globalization began around 1870 and ended with WW-I (1919): Industrial revolution in UK, Germany n USA- import of raw material by colonial empires from colonies and exporting finished goods to overseasresulted in sharp increase in volume of trade.( vast game of beggar-thyneighbour. GDP/Trade ratio= 22.1 in 1913 and GDP/Trade ratio= 9.1 in 1930 Sharp decline in trade due to trade barriers, excess production to domestic demand, decline in Int trade, breakdown of gold std leading to vacuum in field of Int trade. Hence there was a need felt for International co-operation in global trade and balance of payments affairs. Efforts resulted in IMF and IBRD

Evolution of IB, contd

2) Recession before WW-II in west, led to an international consensus after the WW-II that different approach to Int Trade is required. So 23 countries conducted negotiations in 1947 in order to prevent the protectionist policies and to revive the economies from recession aiming at the establishment of ITO This attempt let to GATT- that provided framework for a series of rounds of negotiations by which tariffs were reduced. Efforts of IMF, WB and WTO to liberalize economies led to Globalization. Globalization gave fill up to IB during 1990 International Marketing + International Trade = International Business

Evolution of IB, contd

3) International Trade to International Marketing: Originally export was to neighboring countries and then to far off. Then companies started operations beyond trade. (e.g. India: raw jute-jute products etc) During 1980; India could create markets for its products along with mere exporting. Export Marketing created demand for Indian products like textiles, by arranging attractive distribution channels, attractive packaging, product development, pricing etc. .

Evolution of IB, contd

4) International Marketing to IB: MNCs producing at home and marketing in foreign countries before 1980s started locating their plants and other manufacturing facilities in foreign/host countries. They later on started producing in one foreign country and marketing in India. e.g. HLL; Uni Lever established its subsidiary co in India i.e. Hindustan Lever Limited. HLL produces its products in India and markets them in Bangladesh, Sri Lanka, Nepal etc. Thus scope of IB is expanded into international marketing and international marketing is expanded into international business

Goals of IB
To achieve higher rate of return Expanding the production capacities beyond the Demand of the Domestic Company Sever competition in the Home country Limited Home Market Political Stability Vs. Political Instability Availability of Technology and competent Human Resource High cost of Transportation Nearness to Raw Materials Availability of Quality Human Resource at Less Cost Liberalization and Globalization To increase Market Share To achieve Higher Rate of Economic Development Tariff and Import Quotas

Economy of Different Countries

US:
-largest GDP($13.21bn,2006) -Ext Debt was $10 Tn or 79% of GDP -Public Debt 65% of GDP=national debt -Mixed Economy: pvt firms decisions are regulated by govt -High growth rate of GDP -low unemployment -high R&D investment

Japan:
-industrialized, free economy -worlds 3rd largest PPP after US n China -2nd largest market exchange rates -International Trade is Highly efficient and competitive -But low productivity in agri, distribution and services -Mastery of high technology -comparatively small defense allocation -extraordinary speed to be a large economy -10% population moved from working age to elderly age

Canada: -dominated by service industry -also has sizeable manufacturing sector -Logging and Oil are imp industries -International Trade major contributor to Economy :especially natural resources -Free Economy -Lower Per Capita GDP than US but Higher than many European Economies

Australia: -western style market economy -dominated by service sector(68%of GDP -yet agricultural and mining sector (8%) That account 65% of its exports -Rich natural resources -Major exporter of agri products, various metals, coal and natural gas

Advantages of IB
Higher Living Standards Increased Socio-Economic Welfare Wider Market Reduced Effects of Business Cycles Reduced Risks Large-scale Economies Potential Untapped Markets Provides the Opportunity For & Challenge to Domestic Business Division of Labour and Specialization Economic Growth of the world Optimum and Proper Utilizations of World Resources Cultural Transformation Knitting the world into a closely interactive Traditional Village

Competitive Advantages of Global Setting

Acc to Pitts and Snow, Competitive Advantage is, any feature of a business firm that enables it to earn a higher return on investment, despite counter pressure from competitors Competitive advantage is gained at the corporate level through synergy and strategic business unit level though market share. Large firms can grow further by entering into new markets of various countries. They can enjoy advantages like: - large scale economies: low cost, effective utilization , experts and specialists etc - ability to expand and diversify activities - ability to bear political and commercial risks - paying lower rate of interest to its creditors, underwriters - ability to bargain with suppliers, achieving favorable terms of trade - providing customer service efficiently and economically - paying less taxes to govt. by shifting funds from one business to another - changing and varying tastes and preferences of customers at varying degrees across the globe -different levels of economic development, social and cultural development, technological development of world courtiers

Advantages contd...

- mobility of labour forces across the globe. - use of portfolio planning for synergistic advantage by allocating more resources to those portfolios/products which have higher mkt demand and by reducing resources to those products with low market demand. (reducing/stopping further investments in Dogs, diverting income from Cash Cows to problem children and Star portfolios.) - Economics of Scale - Latest Technology - Human Resources -continuous up gradation of employees through training - Computer-aided design, product process, e-commerce, business process re-engineering and enterprise resource planning would also sources for competitive advantages - product and process innovation and development - acquiring market power to understand, monitor and control suppliers of inputs, customers, dealers or market intermediaries and competitors - cheap sources of raw materials, finances etc. in various foreign countries

Indian Software Industry: Sources for US and European Business

India:
- protectionist policies since independence - 1990s foreign exchange crisis led to globalization - Led to IT revolution in India - Successful Educational System to produce good engineers, medicos, MBAs, Scientists etc - India is producing more than 2.5 million graduates including 120000 IT professionals - Indian middle class highly educated in IT, biotech, medicine, pharma and management - Top educational institutions are world class - 50% of Indian population is in age group of 25-30,which is highly energetic. - this group is endowed with challenging, competitive attitude - India is largest English speaking country in world - cost of professional is 10-15 times less than US and European labour markets - All these favorable factors led to Software industry growth with world class std. - Satellite communication helped serving global business without software companies going global - Software and other firms around world depend on Indian by Outsourcing - Indian Software and service export crossed $23.4 Bn in 2006 and it targets to cross $60 bn by 2010

Problems of IB
Political Factors Huge Foreign Indebtedness Exchange Instability Entry Requirements Tariffs, Quotas and Trade Barriers Corruption Bureaucratic Practices of Governments Technological Pirating Quality Maintenance High Cost

Drivers of Globalization
Former communist and socialist economies opened themselves to rest of the world After 1990 shifts from globalization to IB have been faster. The external environmental factors have been contributing significantly for remarkable strides in global business. Drivers to globalization/factors contributing to globalization include:
establishment of WTO, emergence and growth of regional integration, decline in trade barriers, decline in investment barriers, increase in FDI, technological changes and growth of MNCs.

International Business Model

Stages: Domestic International Multinational Global Transnational Influences:
Social Technological Economic Political
Domestic Business Approaches: Ethnocentric Polycentric Regiocentric Geocentric International Business Influences:
Goals: Market Share High Profits Risk Avoidance Resources Acquisition Expand Business Expand Business Capacities Advantages: Low price

Variety of Goods
High Living Std Economic Growth Competitive Advantage Problems: Political risks Foreign Debt Exchange instability High Cost

Exports
Direct Investment Licensing Franchising Turnkey Projects Joint Ventures Mergers & Acquisitions

Drivers to globalization/factors contributing to globalization

establishment of WTO, emergence and growth of regional integration, decline in trade barriers, decline in investment barriers, increase in FDI, technological changes and growth of MNCs.

Establishment of WTO
1994: govts of member countries of GATT concluded Uruguay round negotiations on 15th Dec 1994. Final draft was singed in Marrakesh, Morocco on 15th April 1994; declaring results of Uruguay round would, strengthen the world economy and lead to more trade, investment, employment and income growth thought-out the world. The value of exports increased by 245% and import increased by 1014% after the establishment of WTO (during1995-2006)

Emergence and Growth of Regional Integration The regional integration of countries of same region or areas increase the size of market, aggregate demand for products and services, quantity of production, employment and ultimately the economic activity of the region. People of the region get variety of products at comparatively lower prices. This enhances purchasing power and living std of people The significant regional integrations (trade blocks) include EU, NAFTA, ASEAN, EFTA,APEC,MERCOSUR and ANDEAN.

Decline in Trade Barriers

Int trade occurs when free flow of goods and services across countries. Govt. impose trade barriers like quotas and tariffs to protect domestic business from competition of IB After WW-II advanced countries agreed to reduce tariff in order to encourage free flow of goods. Member countries of GATT in various rounds of negotiations agreed to reduce tariff rates Uruguay round negotiations contributed to further reduction of TBs and extension covered manufactured goods and services USA reduced rate of tariff from 44% in 1913-14% in 1950 to 4.8% in 1990 and to 3.9% in 2000. also Japan reduced t.b. Most advanced countries reduced tariff rates to 3.9% in 2000. Int trade b/w 1950 and 2077 was about 28 fold. These reduction in tariff and other trade barriers contributed for growth of global trade.

Decline in Investment Barriers

Global business firm invest capital to establish manufacturing and other facilities in foreign countries. Foreign govt. impose barriers on foreign investment in order to protect domestic industry. Various countries have been removing these barriers on FDI in order to encourage growth of global business Various govts made 1238 changes in FDI governing laws b/w 1991-2007 Out of which 95% amendments were in favour of FDI. Additionally, bilateral treaties increased from 181 as of 1980 to 1856 as of 2000 in 160 countries. These treaties were designed to promote and protect investment among countries, enable fast growth of globalization of trade and production also. Consequently, global production increased by 9 fold b/w 1950-2007

FDI is an investment made by a company in new manufacturing and/or marketing facilities in a foreign country. FDI increased due to: Increase in sales and profits Enter into rapidly growing markets Reduces costs Consolidate trade blocks Protect domestic markets Protect foreign markets Acquire technological and Managerial know-how FDI flows have increased in last 25 yrs with rapid growth during 1990a. The outflow of FDI was more than 15 times after 1990s compared to during 1970s. FDI increased from US $ 564 bn in 1980 to US$8981 bn in 2007 FDI flow is expected to increase further once world economy picks up from recent recession in advanced countries DCs i.e. Advanced countries major players in FDI flows. They were predominate providers and recipients of FDI; as 84% of FDI was provided by DCs they received 69% of FDI in 2007. Indicates that DCs provide only 16% of total FDI and received 31% total global FDI in 2002. USA was largest provider as well as recipient of FDI followed by UK in 2007. Emerging economies are now receiving high FDI than 1980s. However, Vienna, HK, Brazil, Mexico, India and Singapore are receiving over 50% FDI among DCs. Growth and spread of FDI enlarged globalization of production and marketing.

Increase in FDI

Strides in Technology
Technological change is amazing and phenomenal after 1980s.Revolution in telecommunication, IT, Transporting Technology, etc Microprocessor and Telecom: high power, superior speed, low cost of computing, handling vast amount of info Internet and WWW: backbone for future global business. The usage of search engine to down load info on product designs, specifications, models, prices, services to customers, market info On-line Globalization: info regarding changes in raw material, customer preferences, changes in product designs can be sent easily. Transportation Technology: commercial jet aircraft, super fighters, containers etc development in transportation technology reduced distance among countries drastically. Transshipment from one mode to another became easier and reduced travel time.

Growth of MNCs
A multinational corporation/company is an organization doing business in more than one country. Transnational company produces, markets, invests and operates across world. MNCs & TNCs have been growing and spreading their operations due to market, financial and other superiorities and expansion of international markets. EU had 163 out of 500 top MNCs in world(2007) followed by USA(162) and Japan(67). MNCs of developing countries have been increasing in contrast to developed countries. India had six MNCs among top 500 MNCs.

Influences of IB
Political Social Cultural Economic factors These factors differ from country to country which makes conducting and managing IB crucial venture. Africa and Europe preferences to price and quality etc

Eating Habits in Italy and Poland

Italy: Poland:
-Mediterranean country -3 means a day -Eat lot of meat, fats, potatoes (like Germans) -Eating habits are unlike other Mediterranean regions -Now a days, eating is just a routine -Typical Mediterranean country -climate, nature etc -morning: light meals-biscuits, milk, juice etc -Afternoon: pasta, beef with veg, drink white wine -Italians eat during night -eating is way to spend time with family and friends -Kitchen is element of culture -Pizza, Pasta symbol of Italian culture

Impact of Culture on Switzerland Housewives on Marketing of Dishwashers

- Foreign Dishwashers expected rapid sales of Washing Machines as in western Europe - No market research was conducted before entering into market - Market research conducted after entry; it was found that: . Swiss housewife had different set of values than French and English . She was very conscious of her role as strict and hardworking . more responsible towards health of her family . Calvinistic work ethics conflicted with Dishwashers as it makes life easier. . So advertising and promoting was changed keeping this in mind . Dishwasher was advertised and promoted as hygiene and health rather than ease and convenience . It was projected that temperature and process used is hygienic than hand wash. . So they could sell automatic dishwashers in Switzerland

Characteristic Features of IB
Accurate Information: Europe Shoes-Bata

Timely Information: US co entering Indian software markets

Size of Business: size if IB house should be able to impact foreign companies

Market Segmentation: generally, Geographical Mkt Segmentation Daewoo segmented as North America, Europe, Africa, Indian Sub-continent and Pacific markets

Potentiality of Markets
Int markets are more potential Wider in scope, varied in consumer tastes, preferences and purchasing abilities, size of population (IBM sales more in foreign countries than in US, similarly Coca-cola sales, P&G, Satyam, sale more other than home countries World population is on rise. Size of population may not determine size of market due to backwardness, low purchasing power etc( Eritrea-an African country roughly equals to UK in terms of Land, Size of Population. But per capita income of Eritrea is only US $ 150 pa. Willingness to buy and ability to buy is important Many MNCs entered in India with expectations but they failed due to heavy inflow of goods and decline in size of middle class led to slump -Wider Scope: -Inter-country comparative study:

Difference in Govt Policies, Laws and Regulations -Host countrys monetary system -National security policies of Host country -Cultural factors -Language -Nationalism and Business policy

Changing Scenario of IB
Globalization of various economies including communist and socialistic states WTO IT revolution Transport Technology revolution EU: 15 members to 27 members High growth rates of BRIC, Mexico, S. Korea, Singapore, Malaysia, Thailand Increase in business alliances: M&A JVs etc Globalization of Cultures Increase in Education Opportunities, careerorientation in china India etc- growth of MNCs

Stages of Internationalization
1. 2. 3. 4. 5. Domestic Company International Company Multinational Company Global Company Transnational Company

1. Domestic Company
Domestic company limits operations, mission, vision to national political boundaries. Focus on domestic market opportunities Domestic suppliers Domestic financial companies Domestic customers Analyses national environment of country, formulates strategy to exploit opportunities offered by environment. Unstated motto: if it is not happening in the home country, it is not happening Never thinks growing globally. If it grows beyond present capacity, it selects diversification strategy of entering into new domestic markets, new products, technology etc. It does not select strategy of expansion/penetrating into international markets etc

2. International Company
Some domestic companies grow beyond their production or domestic marketing capacities, thin of internationalizing their operations. Who decide to exploit the opportunities outside the domestic country are stage two: international companies These companies remain ethnocentric or domestic country oriented. Believe practices adopted in domestic business, people, product of domestic business are superior to those of other companies. The focus of these companies is domestic but extends the wings to the foreign countries Select strategy of locating branch in foreign markets and extend same domestic operation. Extend domestic product, domestic price, promotion and other business practices to foreign markets Internationalization process of many companies start with this stage two process. They follow this strategy due to limited resources to learn from foreign markets gradually before becoming global company without much risk. International Companies hold marketing mix constantly and extends operations to new countries. Thus, the intentional company extends domestic country marketing mix and business model and practices to foreign countries.

3. Multinational Company
International company learns extension strategy (extending domestic product, price, promotion to foreign mkt) will NOT work.

Toyota, Japan Toyota in 1957 couldn't sell cars in USA, produced for Japan in Japan-overpriced, underpowered, tank built and unsold cars were shipped back to Japan) Toyota learnt from this failure. Designed new model cars suitable for US mkts. Int co turned into MNC when they started responding to specific needs of different markets regarding product, price and promotion This stage of internationalization is called multi-domestic. company formulating diff strategies for diff mkts. Orientation shifts from ethnocentric to polycentric. Orientation shifts from ethnocentric to polycentric Under polycentric orientation offices/branches/subsidiaries of MNC work like domestic company in each country where they operate with distinct policies and strategies suitable to the country concerned. They operate like a domestic company of country concerned in each of their markets. Phillips, Netherlands was multi-domestic company formulating diff strategies for diff mkts during 1960s.. With autonomous national organizations and formulation of strategies separately for each country. It worked until Japanese companies and Matsushita started competing based on global strategy which was based on focusing the company resources to serve the world market. Phillips strategy was to work like domestic company and produce number of models of product. It increased cost of production, price But Matsushitas strategy was to give value, quality, design, low price to customer. Philips lost its market share as Matsushita offered more value to customer Consequently, Philips changed its strategy and created industry main groups in Netherlands which are responsible for formulating a global strategy for producing, marketing and R&D

4. Global Company
Global company has either global marketing strategy or global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces products globally and focuses on marketing these products domestically. Harley designs and produces Super heavy Motorcycles in US and markets in global market. Dr. Reddys lab designs and produces drugs in India and markets globally. Both have global market focus. Gap procures products in global countries and market products through its retail organization in US. Thus Gap is example of global sourcing company Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in Germany. The Gap understands the US consumer and gets competitive advantage

5. Transnational Company
Transnational company produces, markets, invests and operates across the world. It is integrated global enterprise that links global resources with global markets at profit. There is no pure transnational corporation However, most of them satisfy many of the characteristics of global corporations, Coca-cola, Pepsi-cola etc. Its geocentric in orientation thinks globally and acts locally, adopts global strategy but allows value addition to customer of domestic country. This company allows adaptation to add value to its global offer. The assets are distributed throughout world, independent and specialized. R&D facilities are spread in many countries, but specialized in each country based on local needs and integrated in world R&D projects. Production facilities are spread but specialized and integrated. Caterpillar, manufacturing and assembly facilities are located in may courtiers. Components are shipped for assembly and assembled product is shipped to place of the customer.

Features of Transnational Company

Geocentric orientation: think globally act locally Scanning or Information Acquisition: PEST analysis Vision and Aspirations: global to grow ahead of others Geographic scope: SWOT for global strategy Operating Style: operations are globalized Adaptation: adapt products, Mkting, functional strategies to concerted mkts environmental factors Extension: for products which need no change (pen) Creation through Extension: Rothmans Cigarettes extended to European & African countries, created global and national basis. Human Resource Management Policy: not restricted by nationality, political, legal constraints but reserving Key positions to nationals. Purchasing: procures world-class material from best sources

Stages of International Business

Stage and Company
Strategy

1.Domestic
Domestic

2. International
International

3.Multidomestic
Multidomestic

4. Global
Global

5.Transnational
Global

Model

N.A. Federation

Coordinated Federation

Decentralized Hub

Centralized Network

Integrated

View of World Markets

Orientation

Home country

Extension or Resources
Ethnocentric

National and Resources

Polycentric

Global Markets
Mixed

Global Markets

Ethnocentric

Geocentric

Key Assets Home country Role of Country Units Knowledge

Located in centralized, other dispersed Single country

Core and self sufficient

Decentralized country except marketing or sourcing Exploiting local Opportunities Retained within developed jointly and shared

All in home Interdepend ent and specialized Marketing or sourcing worldwide Marketing developed jointly and shared

Dispersed

Adopting and Leveraging Created at operating units

Contribution s to company All functions

Home country centre and transferred

Domestic and International Business

Domestic Business
Ethnocentric Approach Geographic scope within boundaries Operations ltd to domestic

International Business
Polycentric or Regiocentric Min two countries max to entire globe Operations could be spread to entire globe

Analyzes and scans domestic business

Tariff rates do not affect Foreign exchange don't affect domestic business directly Domestic culture affects operations and product designs No impact of EXIM procedures directly HR in not complicated task Domestic companies meet needs of domestic customers and markets

Analyzes and scans international environment

Tariff and Quotas do affect international business Foreign exchange and its fluctuations directly and significantly affect IB Many cultural of many countries affect EXIM procedure directly affect IB of various nations. HR task is more complicated IB should understand customers and markets of various countries.

IB Approaches
IB approaches are similar to stages of Internationalization or globalization Ethnocentric Polycentric Regiocentric Geocentric

1. 2. 3. 4.

Ethnocentric
Maintenance of domestic approach towards international business is called ethnocentric approach. Under Ethnocentric Approach the domestic companies view foreign markets as an extension to domestic markets. The company exports the same product designed for domestic markets to foreign countries under this approach. This approach is suitable to the companies during the early days of internationalization and also to the smaller companies.
Managing Director

Manager R&D

Manager Finance

Manager Production

Manager HR

Manager Marketing

Asst. Manager North India

Asst. Manager South India

Asst. Manager Exports

Polycentric
Under polycentric approach, companies establish foreign subsidiary and empowers its executives. Domestic companies which are exporting to foreign countries using ethnocentric approach find at the later stage that foreign markets need am altogether different approach. The company establishes foreign subsidiary company and decentralizes all the operations and delegates decision-making and policy making authority to its executives. In fact, company appoints executives and personnel including a chief executive who reports directly to Managing Director of the company. Company appoints key personnel from the home country and all other vacancies are filled by the people of the host country. The executive of the subsidiary formulate policies and strategies, design the product based on the host countrys environment (culture, customs, laws, government policies etc.) and the preferences of the local customers. Thus polycentric approach mostly focuses on the conditions of the host country in policy formulations, strategy implementation and operations. Managing Director CEO Foreign Subsidiary (Uganda)

Manager R&D

Manager Finance

Manager Production

Manager HR

Manager Marketing

Regiocentric
The company operating successfully in foreign country, thinks of exporting to neighboring countries of the host country. At this stage, foreign subsidiary considers the regional environment (e.g. Asian environment like laws, culture, policies etc) for formulating policies and strategies. However, it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies. Under Regiocentric approach, subsidiaries consider regional environment for policy/strategy formulation.
Managing Director CEO, Subsidiary South Africa Marketing (Botswana) Marketing (Namibia) Manager Marketing

Marketing (Lesotho) Manager R&D

Manager Finance

Manager Production

Manager HR

 Under geocentric approach, the entire world is just like single country for the company. They select employees from the entire globe and operate with a number of subsidiaries The headquarters coordinate activities of the subsidiary. Each subsidiary functions like independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc. Under geocentric approach, companies view, the entire world as a single country.
Managing Director

Geocentric

Subsidiary India

Subsidiary Namibia

Subsidiary Kenya

Subsidiary Lesotho

Subsidiary Papua New Guinea

 Thank You