1

CHAPTER2

THEORIESOFINTERNATIONALTRADE

Trade theories facilitate in understanding the basic reasons behind the evolution of a
country as a supply base ormarketforspecificproducts.Theyalso offeraninsight,both
descriptiveandprescriptive,intothepotentialproductportfolioandtradepatterns.

1. TheoryofMercantilism
.
Attributesandmeasuresthewealth ofa nationbythesizeofitsaccumulated
treasures.
Aimsatcreatingtradesurpluswhichinturncontributestotheaccumulationof
anationswealth.
Restriction on imports through tariff and quotas and promotionofexportby
subsidisingproduction.
Greatlyassistedandbenefitedthecolonialpowersinaccumulatingwealth.
This is the
raison detre behind the import substitution strategy adopted by
manybeforetheeconomicliberalisation
Nowinneomercantilism,aimiscreatingfavorabletradebalance.EgJapan.
Is thetheoryvalid still ?Aqualifiedyes.Equatepoliticalpowerwitheconomic
powerwithatradesurplusasincaseofJapan.
Limitations:
Tradeiswinlosegameandhencenocontributiontotheglobalwealth.Thus
Internationaltraderemainsazerosumgame.
Accto
DavidHumesPriceSpecieFlowdoctrine
,afavorablebalanceof
trade ispossibleonlyinshortrunandwouldautomaticallybeeliminatedinthe
longrun.
If all follow this, would result in highly restrictiveenvironmentof international
trade.
Focuses on gold and overlooks other factors in nations wealth such as
naturalresources,manpoweranditsskilllevels,capitaletc.
Usedbycolonialpowersforexploitation.Coloniesremainedpoor.

2. TheoryofAbsoluteAdvantage
:
An absolute advantage refers to the ability of a country to produce a good
moreefficientlyandcosteffectivelythananyothercountry.
ChetanPrakashJain.S017,ComprehensivenotesonManagingMultinationalEnterprises,FMS(Exe)4th

Adam Smith emphasised productivity and advocated freetradeasameans

of increasing global efficiency in his treatise :
An Inquiry intothe Nature and
Causes of the Wealth of Nations,1776.
Basedon theoryof
laissezfaire
and
advocatedthattheGovernmentsshouldnotinterfere.
Insteadofproducing allproducts,eachcountryshouldspecialiseinproducing
thosegoodsthatitcanproducemoreefficiently.
It couldbeNatural:CheaplabourinIndiaandChinaorAcquired:Software
inIndia.
Tradingisnot aZero sumgame.Bothcountriesmutuallybenefitasaresult
ofefficientallocationoftheirresources

3. TheoryofComparativeAdvantage:
Promulgated by
David Ricardo in
Principles of Political Economy and
Taxation.
Thismodelexamines
differencesintheproductivity
oflabor(due
todifferencesintechnology)betweencountries.
In this, a country benefits from international trade even if it is less efficient
thanothernationsintheproductionoftwocommodities,
ComparativeAdvantageisdefined asthe
inability
ofanationtoproduceone
goodmoreefficientlythanothercountrybut
abilitytoproducethatgoodmore
efficientlythananyothergood.
Thusa countryshouldspecialiseinproductionand exportofacommodityin
which the absolute disadvantage is less than thatof anothercommodity.eg.
US has a comparative advantage in computer production, Colombia has in
roseproduction.
When countries specialise in production in which they have a comparative
advantage, more goods and services can be produced and consumed as a
resultofwhichtotalworldoutputincreases.
Balassaindexisusedtomeasurerevealedcomparativeadvantage.
Themainimplicationsofthemodelarewellsupportedbyempiricalevidence:
productivitydifferencesplayanimportantroleininternationaltrade.
comparativeadvantage(notabsoluteadvantage)mattersfortrade.

Limitationoftheoriesofspecialisation:
These lay emphasis on specialisation with an assumption that countries are
driven only by the impulse of maximisation of production and consumption.
Middle east countries pursue developing agricultural sector to attain self
reliance.
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Specialisationin onecommoditymayresultinefficiencygain.Attimesit'sdue
tosynergies.
Itassumesfullemploymentconditionwhichisnotvalid.
Theotherpartnermayforgoabsolutegainstopreventrelativelosses.
Overlooks:logisticscosts,sizeofeconomyandproductionruns.
Littleinsightintotypeofproductsinwhichonecanhaveanadvantage.
Themodelpredictsthat countriesshouldcompletelyspecialisein production
whichrarelyhappensas:
More than one factor of production reduces the tendency of
specialisation
Protectionism
Transportationcostsreduceorpreventtrade.

4. TheoryofFactorEndowment(HECKSCHEROHLIN):
It explains the reasons for differences in the commodity prices and
competitive advantage between two nations. In other words, this model
examines
differencesinlabor,laborskills,physicalcapital,land,orother
factorsofproduction
betweencountries
Anationwillexportthecommoditywhoseproductionrequiresintensiveuseof
the nations relatively abundant and cheapfactorsand importthecommodity
whoseproductionrequiresuseofthenationsscarceandexpensivefactors.
Thus, the pattern oftradeare
determinedbyfactorendowmentratherthan
productivity.
The
Leontiefparadox
: USexportedmore labourintensivecommoditiesand
imported more capital intensive products contrary to what H O model
predicted.
The model predicts that relative output prices andfactorprices will equalise,
neither of which occurs in the real world. The model has less empirical
support.

5. CountrySimilaritytheory:

Staffan B Linder
found that whileFactorendowmenttheoryexplainedtrade
in natural resource based industries, in case of manufactured goods, costs
weredeterminedbythesimilarityinproductdemandsacrosscountriesrather
thanbytherelativeproductioncostsorfactorendowments.
Majorityoftradeoccursbetweennationsthathavesimilarcharacteristics.
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Principles:
preferencesimilarity
Similardemandpattern
proximityofgeographicallocations

6. InternationalProductLifeCycleTheory(IPLC)
Itexplainsshiftingofmarketsaswellasthelocationofproduction.
The level of innovation and technology, resources, size of market and
competitivestructureinfluencetradepatterns.
Gap in technology, preference and the ability of customers in international
marketalsodeterminethestageofIPLC.
Developedby
RobertVernon
.

Fourdistinctidentifiablephases:
Introduction:

Growth
Maturity
Decline.
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Eg:UKandbicycle

7. TheNEWTradeTheory
Trade not only to benefit from their differences but also to increase returns
whichinturnenablethemtobenefitfromspecialisation
It brings in the concept of economies ofscaleandthefirstmoveradvantage
toexplicatetheLeontiefparadox.
Higher economies of scale lead to increase in returns, enabling countries to
specialise in the production of such goods and trade with countries with
similarconsumptionpatterns.
Itexplainsbothintraindustryandintrafirmtrade.

8. TheoryofCompetitiveAdvantage
:
PropoundedbyMichaelPorterin
TheCompetitiveAdvantageofNations
It concentratesonafirmshome countryenvironmentasthemainsourceof
competenciesandinnovations.
As 4 determinants interact with each other, it is also known as Diamond
model.theFourdeterminantsare:
Factor(input)conditions:
Howwellendowedanationisasfarasresourcesareconcerned.
HR,Capital,Natural
Infrastructure:Administrative,information,technological
DemandConditions:
Sophisticatedanddemandingcustomers.
Localcustomerneedsthatanticipatethoseelsewhere.
Unusual local demand in specialised segment that can be served nationally
andglobally.
Relatedandsupportingindustries
:
Accesstocapable,locallybasedsuppliersandfirmsinrelatedfields
Presenceofclustersinsteadofisolatedindustries.
Firmstrategy,structureandrivalry:
Alocalcontextandrulesthatencourageproductivity,
Incentivesystemsbasedonmerit,
Openandvigorouslocalcompetitionespamonglocallybasedrivals
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DeterminantsofCompetitiveAdvantage

Implicationsoftradetheories:
Conceptualbaseforinternationaltradeandshiftsintradepatternsanddeterminants
ofcompetitiveness.
Location implications : makes sense to disperse production activities to countries
wheretheycanbeperformedmostefficiently.
Firstmoverimplications:Itpaystoinvestsubstantialfinancialresourcesinbuildinga
firstmover.orearlymoveradvantage.
Policy implications : promoting free trade is generally in the best interests of the
home country, although not always in the best interests of the firm. Eventhough,
manyfirmspromoteopenmarkets.

ChetanPrakashJain.S017,ComprehensivenotesonManagingMultinationalEnterprises,FMS(Exe)4th

CHAPTER5:WTO

WTO is the only international organisation that deals with global rules of trade between
nations.Itprovidesa frameworkforconductofinternationaltradeingoodsandservices.It
laysdownrightsandobligations ofgovernmentsin thesetofmultilateralagreements and
alsocoversIPR,dispute settlement etc.Itcameintoexistence on1.1.95as successorto
GATT.Itisamemberdriven,consensusbasedorganisation.
WTOv/sGATT:

S. GATT
No

WTO

Remainedaprovisional
agreement

TheCommitmentsarepermanent

Mainlytotradeingoods

Coversotherareassuchasservices,
IPRetcalso

Hadcontractingparties

Hasmembers

Noinstitutionalfoundation

HasaPermanentinstitutionwithits
ownsecretariat

Couldcontinuewithdomestic
legislationevenifthatviolateda
provisionofGATT

NotallowedunderWTO

Anumberofprovisionswere
Alltheagreementsaremultilateralin
plurilateralandthereforeselective natureinvolvingcommitmentofentire
membership.

Didnotcovercertaingreyareas
suchasagriculture,textilesand
clothing.

SuchareascoveredunderWTO

Highlysusceptibletoblockages

HasaDisputeSettlement
Mechanism

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ReasonsforacountrytojoinWTO

1. Need to individual bilateral trade agreements obviated if a country joins this

multilateralframework.
2. Morelikelytogetbetterdealinmultilateralagreementsthaninbilateralagreements.
3. Can learn from others experiences and also influence decision makingprocessin
WTO.
4. Disputesettlementsystemworksasan inbuiltmechanismfor enforcementofrights
andobligationsofmembercountries.
5. WTOcoversmorethan98%countries.Wouldbeoddtoremainoutofthat.

OrganisationalStructureofWTO:

1. Firstlevel:
TheMinisterialConference
2. Secondlevel:
GeneralCouncil,DisputeSettlementbody,TradePolicy
Reviewbody
3. Thirdlevel:
Councilsforeachbroadareaoftrade.(Trade,Services,
TRIPS
4. Fourthlevel:
Subsidiarybodies

PrinciplesoftheMultilateralTradingSystemundertheWTO:
1. Trade without discrimination : A country cannot discriminate between its trading
partnersandproductsandservicesofit'sownandforeignorigin.
a. MFNtreatmen
t: Incase acountrygrantssomeoneaspecialfavour(suchas
lower rate of custom/import dutyetc),thenit hastodothesame forallother
WTOmember.
b. National treatment:Itmeansgivingothersthesametreatmentasonesown
nationals, i.e.importedandlocallyproducedgoodsshouldbetreatedequally
atleaseaftertheforeigngoodshaveenteredthemarket.
2. Gradualmovetowardsfreermarketthroughnegotiations
3. Increasedpredictabilityofinternationalbusinessenvironment
4. Promotingfairtradecompetition.

DohaMinisterialConference:November2001
ThemaincommitmentsofDohaDeclarationare:
ChetanPrakashJain.S017,ComprehensivenotesonManagingMultinationalEnterprises,FMS(Exe)4th

1. To continue the commitment for establishing a fair and market oriented trading
system through fundamental reform of support and protection of agricultural
markets,specificallythrough
a. Substantialimprovementinmarketaccess.
b. Reductionofallformsofexportsubsidieswithaviewofphasingthemout.
c. Substantialreductionsintradedistortingdomesticsupport.
2. To give developing nations Special and Differential Treatment in negotiations to
enablethemeffectivelytotakeintoaccounttheirdevelopmentneeds
3. To ensure negotiations on trade in services aimed at promoting the economic
growth of all trading partners and the development of developing and least
developedcountries.
4. To reduce or eliminate tariffs and nontariffsbarriersinnonagriculturalmarkets, in
particularonproductsofexportinteresttodevelopingcountries.
5. Doha Development Agenda (DDA) is a single undertaking that means nothing is
agreeduntileverythingisagreed.

TheWTOtalks,namedtheDohaRoundbecausetheywerelaunchedinDoha,Qatar,are
stalemated over agricultural trade. Most other countries lay the main blame for the
impasseontheUnitedStates.U.S.negotiators havetabledaproposalthatiswidelyseen
asrequiringlittleornoactual policychangebytheUnitedStates,particularlywithrespect
to trade distorting subsidies paid to certain U.S. farm sectors, while asking for wide and
deep market opening by its trading partners. The majority ofcountries,includingmostof
the developingworldandtheEuropean Union,havebeenunwillingtoagreeto whatthey
see as maximum concessions by themselves in return for minimal concessions by the
UnitedStates.Moresignificantly,othercountrieshaverefusedtomakeofferstoopentheir
markets for services and manufactured goods until they know the outlines of an
agriculturaldeal.

TheclaimthatdevelopingcountryagriculturalmarketsareclosedtoU.S.exportsandmust
bepriedopenduringtheDohaRoundissimplynotsupportedbythefacts.

TheEuropeanUnionhassignaledthatit ispreparedtoimproveitsoffertoopenits
agricultural markets from a current proposal oftieredtariffreductionsthat wouldproduce
an overall average cut of 39 percent to a more ambitious formula that would yield an
average cut ofabout50percent. Thislevelofcutsby the EUwouldbeunprecedentedin
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world tradenegotiations andwouldputpressureonotherwealthycountriestoagreetodo

thesame.Developingcountrieshaveofferedtocut theirowntariffs,onaverage,byabout
55percentofthereductionsofferedbythedevelopedworld.Iftheirlegitimateconcernson
specialproducts are met,itisquitepossible that theywouldagreetoanoverallformulaof
tariff cuts that is somewhat more ambitious. An agricultural trade package along these
lines

The trend in the current world economy is that of improvement in bilateral and
regional/interregional agreements between countries and regional organizations. These
agreements have shaped global trade as a whole. More precisely, these agreements
provide a rational way for countries and regional organizations to break out of the
stagnancyintheDoharoundnegotiations.
There are two implications which need to be overcome by the WTO and regional
organizations, they are as follows: first, regional organizations need todevelopaflexible
framework in order to manage and monitor economic agreements within their regions.
Second, these regional/interregional agreements need to be harmonized by regional
organizations and related countries in order to complement the WTO multilateral trading
system. There is a possibility that these regional/interregional agreements will create a
synergywiththeWTOmultilateraltradingsystem.

Nairobi:
10thWTOMinisterialConferenceadoptedNairobiPackage

Thefivedaylong10thWorldTradeOrganisation(WTO)MinisterialConferenceconcluded
on 19 December 2015 in Nairobi,Kenya.Theconferenceconcludedwiththeadoptionof
theNairobiPackagethatisaimedatbenefittingorganizationspoorestmembers.

The conference was attended by trade ministers of 162 member countries of the WTO.
IndiawasrepresentedbyMinisterofState(IndependentCharge)forCommerce&Industry
NirmalaSitharaman.ItisforthefirstsuchmeetinghostedbyanAfricannation.

The Nairobi Package contains a series of six Ministerial Decisions on agriculture, cotton
andissuesrelatedtoleastdevelopedcountries.Theseinclude

1.
Agriculture

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Developing country members will have the right to have recourse toaspecialsafeguard
mechanism
(SSM)
foragriculturalproducts.

Membersshallengageconstructivelytonegotiate andmakeallconcertedeffortstoagree
and adopt a permanent solution on the issue of
public stockholding for food security
purposes.

In relation to agricultural products, developed members shall immediately eliminate their

remaining scheduled
export subsidy entitlements, while developing country members
shalleliminatetheirexportsubsidyentitlementsbytheendof2018.

2.
Cotton

The decision related to cotton includes three agriculture elements viz., market access,
domesticsupportandexportcompetition.

On market access, the decision calls for cotton from LDCs to be given
dutyfree and
quotafree access to the markets of developed countries and to thoseofdeveloping
countriesdeclaringthattheyareabletodosofrom1January2016.

Thedomesticsupportpartofthe cottondecisionacknowledgesmembers'reformsintheir
domesticcottonpoliciesandstressesthatmoreeffortsremaintobemade.

Onexportcompetitionforcotton,thedecisionmandatesthatdevelopedcountriesprohibit
cotton
exportsubsidies
immediatelyanddevelopingcountriesdosoatalaterdate.

3.
LDCIssues

The Ministerial Conference adopted a decision that will facilitate opportunities for
leastdeveloped countries'
export of goods to both developed and developingcountries
underunilateralpreferentialtradearrangementsinfavourofLDCs.

Onthe
servicesfront,theconferencedecidedonimplementationofpreferentialtreatment
in favour of services and service suppliers of Least Developed Countries andincreasing
LDCParticipationinservicestrade.

4.
ExpandedInformationTechnologyAgreement(ITA)
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Along with theabove decisions, theconferenceagreedonthetimetableforimplementing

alandmarkdealtoeliminate tariffson201informationtechnologyproductsvaluedatover
1.3trillionUSdollarsperyear.

Negotiations on the expanded ITA were conducted by 53WTOmembers,includingboth

developedanddevelopingcountries,whichaccountforapproximately90percentofworld
tradeintheseproducts.

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CHAPTER11

MODESOFINTERNATIONALBUSINESSEXPANSION

FivestagesofInternationalisation:followagradualpattern.
UPPSALAMODEL:
1. Domesticoperationandmarketingactivities,
2. Infrequentexports
3. Exportsthroughindependentrepresentativesoragents
4. EstablishmentofSalessubsidiaries
5. Foreignproductionandmanufacturing..
ThreetypesofExpansionmodes:
1. Traderelated
2. Conractual
3. Investment

Factors:
1. Abilityandwillingnessto
Commit
resourcesinthetargetcountry
2. Magnitudeof
Risk
thefirmiswillingtotake,
3. Typesof
Return
anticipated,
4. Extentof
Contro
ltobeexerted,
5. Levelof
Externalisaiton
ofthefirmsresources,
6. Desired
Flexibility
ofexpansionmode.

Strategictradeoffs
inselectinginternationalbusinessexpansionmodes:

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TRADERELATEDMODES:

A. Exports
:

1. Exports
:
a. Manufacturing goods in the home country or a third country and shipping
themforsalestoacountryotherthanthecountryofproduction.
b. Mostcommoninitial modeofentry,involvinglowerrisksandisalowcostand
simplemodeofentry.
c. Strategicoptiontodisposeoffsurplusproductions.
d. Suitablefor
i. assessingpotentialfornewmarkets.
ii. marketswithsmallpotentialorinfrequentdemandpattern
iii. marketswithuncertainities.
2. IndirectExports:
a. Throughanexportintermediarybasedinitshomecountry
b. notrequiredtodealwithhasslesofexportoperations,needslittleinternational
experienceandmuchlessresourcecommitment.
c. lowcostopportunitytotestproductsintheinternationalmarkets.
d. Limitations:
i. Feedbackfromcustomerslimited
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ii. Partwithrelativelyhighershareofitsprofitmargins
iii. Littleinsightintothemarkets
iv. Doesnotdevelopitsowncontactswithbuyers.
e. through Agents in the home country
Importers buying agents, buying
offices, Merchant intermediaries (Merchant exporter, International trading
companies,Trading/exporthouses)

3. DirectExports
:
a. Withoutanymarketintermediaryinthehomecountry
b. Advantages:
i. Highershareofprofit
ii. collectsmarketingintelligence
iii. developsskillsforexportoperations
iv. establishedrapportandbrandimagebecauseofdirectcontact.
c. Agents(inhostcountry):Merchantimporters,Distributorsetc.

B.Piggybacking
:
Expanding business in foreign country by using the distributionnetworkofanother
company,termedaspiggybackingorcomplementaryexporting.
Exportingfirmridesatthebackofthecarrier.
getsimmediateaccesswithlittleinvestment.
usedforrelatedbutnoncompetitiveproductsofunrelatedcompanies.
Eg:FiatandTataMotors,WrigleywithParrysconfectionary.

C.Countertrade:

Various forms of trade arrangements wherein the payment is in the form of

reciprocal commitments for other goods or services rather thananexclusive
cashtransaction.
tradefinancingandpricesettingaretiedtogetherinasingletransaction
Advantages
:
1. Opportunity to access the market that do not have the capability to pay in hard
currency.
2. Tradeopportunitywithrestrictivemarket
3. Facilitateshighercapacityutilisation
4. establishedlongtermrelationshipwithinternationalbuyers.
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5. Effective instrument for industrial growth in countries with foreign exchange

constraints
6. Increaseprofitandmarketshare
7. Forimporter:effectivesourceoffinance
8. conservation of foreign exchange, coping with statutory requirements related to
foreigncurrency
9. Reducesdebtliability.

MajorformsofCountertrade
:

Nouseofmoney:
1. Simple
Barter
:
2. Clearing Arrangements
: transaction of goods and services extends over a long
time.
3. Switch Trading
: A third party known as the switch trader is involved in the
transaction which facilitates buying of unwanted goods from the importer and
makingpaymenteitherbycashorbartertotheexporter.

Involvesuseofmoney:
1. Counter purchase : involves two separate transactions payable in hard currency
eachwithitsowncashvalue.(Brazilexportsvehicles,steeltoOilcountriesforOil)
2. Buyback(compensation):
Outputofequipmentandplantsoldistakenback.
3. Offset : Importer makes partial payment in hard currency, besides promising to
source inputs from the importing country and also makes investment to facilitate
productionofsuchgoods.

Eg.IndiaandIraq:Oilforwheatandricebarterdeal.
AirIndiaandBoeing.

CriticismofCountertrade:
1. Distortingeffectonfreemarketoperations.
2. Importershaverestrictedchoice,
3. SeldomimprovedBOP/foreignexchangeproblemsofimportingcountries,
4. Oftenobsoletetechnologyisdumped.
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D.Emodesofbusinessexpansion

CONTRACTUALMODEOFEXPANSION

Make use of strategic strengths ( Superior Technology, strong brand equity,

manufacturing facilities, established distribution networks )and resources of a
foreignbasedpartnercompanyforinternationalbusinessexpansion
Often complementary in nature and have mutually beneficial effect on a firms
overseasoperations.
Preferredunderfollowingcircumstances:
Reluctancetoinvestconsiderableresource
Highlevelofperceived/actualrisk.
localpartnercanaddconsiderablevaluetofirmsoperations.
Hightariffsonimportedgoods
Socioculturaldifferences
Policyrestrictionsprohibitinguseof otherbusinessexpansionmodessuchas
investment.

MAJORFORMSOFCONTRACTUALMODEOFEXPANSION

1. International strategic alliance

: When a firm agrees withe one ormorethanone
firm overseas, to carry out a business activity wherein each one contributes its
different capabilities and strengths to the alliance, this is termed as International
strategic alliance. Relationship is reciprocal, along horizontal lines and firms retain
their national and ideological identities while competing in markets excluded from
thepartnership.EgPHILIPS.
Advantages:
Investmentcostisshared
Accesstotangibleandintangibleresourcesofeachother
Reductioninindividualrisk
Firmscooperateandevenforcescooperationoncompetingfirms.
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Limitations:
Shareinternalresourcesandinformation
Goalcompatibilitymayleadtoconfilict
Sharingresourcesmaynurturefuturecompetitors
EgStarAllianceinAirlineindustry,RanbaxywithNipponChemipharLtdinJapan

2. InternationalContractManufacturing:

Strategictoolforeconomicdevelopmentinanoofcountries.
Eg China produces for many companies and their products. Nike gets entire
manufacturing through this. Ranbaxy and Lupin got such contracts from foreign
companies.

3. InternationalManagementContract:
Byprovidingitsmanagerialandtechnicalexpertiseoncontractualbasis
Eg.GlobalHyatt,TajHotels,EngineerIndiaLtd.

4. TurnkeyProjects
:
By making use of its core competencies in designing and executing
infrastructure,plantsormanufacturingfacilitiesoverseas.
Eg Bechtel has completed more than 22000 such projects inmorethan140
countries.

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5. Internationalleasing
:
By leasing out new and used equipment to a manufacturing firm in such
countries which do not possess enough financial resources or necessary
foreigncurrencytopayforequipmentandmachinery
International Lease Finance Corporation (ILFC) at Los Angles is the largest
Aircraftlessor.

6. Internationallicensing:
A firm makes its intangible assets, such as patents, trademarks and
copyrights,technicalknowhow andskillsavailabletoa foreign companyfora
feetermedasroyalty.
Powerfultoolforinternationalexpansionwithlittlefinancialcommittment
EgArrow,theshirtmakerusesthisstrategy.DrReddy.
ItcouldbeProcesslicensingorTrademarklicensing.
Cross licensing: In this companies swap their intellectualpropertyformutual
benefit.
LIMITATION:
Maintainingproductquality:couldadverselyaffectbrandimage
Couldrestrictlicensorsfutureactivitiesinthecountry.
maynurtureafuturecompetitor

7. Internationalfranchising:
Lowrisk,lowcostbusinessexpansionmodeenablingafirmtosimultaneously
expandinmanycountrieswithlittlefinancialcommitments.
FourCharacteristics:
Contractual relationship in whichthefranchisorlicensesthefranchisee
to carry out business under a name owned by or associated with the
franchisorandinaccordance withabusinessformatestablishedbythe
franchisor.
Controlbythefranchisoroverthewaythebusinessiscarried.
Provisionofassistancethroughouttheperiodofcontract.
Franchiseeowns,providescapitalandassumesrisk

Advantages
Facilitatesrapid,lowcostentry.
Lowinvestmentsandoverheads
Avoidsdaytodayhasslesofoperation
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Makesuseoflocalentrepreneursasbusinesspartners
speedytransferoftechandbusinessskills
accesstowellestd.productsandbrandnames
benefitsfromsharedresponisibility
Internationalmarketpromotionhelpsthefranchisee
legalindependance
Widelyusedinfastfoodchainsandhotelindustry.

Limitations:
Hostcountryregulations,
Identificationofrightpartner,
onlyfeesandnotprofits
lackofdirectcontroloveropertions.
adverseeffectonbrandifqualityiscompromised
Uncertaintiesandconflictsinreceivingfranchisingfees.

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INVESTMENTMODES:

If a country is found to be attractive enough to justify a firms longterm commitment,

investment modes of expansion are often adopted. Its like shifting manufacturing
operationstoforeigncountriesmainlyforthereasons:
Effectiveresponsetomarketconditions.
takeadvantageofhostcountrysincentives,
gainacesstohostcountrysresourcestobeusedasinputs,
costeffectivelocation
manufacturingincloseproximitytomarket,
tocircumventtraderestrictionsandprohibitiveimportduties,
tominimiselogisticscosts.

Majorforms
:
1. OverseasassemblyorMixing
:
Manufacturerexportscomponents,partsormachineryinCompletelyKnockedDown
(CKD)condition and asssemblesthesepartsatasitein aforeigncountry.Alsotermedas
ScrewdriverOperations.

2. Jointventures
:
A firm shares equity and other resources with other partner firms to form a new
companyinthetargetcountry
Eg.MarutiSuzukiandGOI.
Benefits:
Provideaccesswherecompleteownershipisrestricted,
Accesstocomplementarystrengths,
lessinvestmentascomparedtocompleteownership
Higherreturnsthantradeorcontractualmode,
Reducedrisks,
effectivelyovercometariffandnontariffbarriers
Limitations:
Sharedcontrol,
Futurecompetitor,
Managementproblemsifculturedifferencesarenottakencareof,
Tradesecrets,knowhowshared,
Lackofflexibilityasinvestmentarelongterm.
Eg:SonyandEricsson,verycommoninoilandgasindustry.
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3. Whollyownedsubsidiaries
:
Besidesownershipandcontrol,whollyownedsubsidiarieshelptheinternationalising
firmprotectitstechnologyandskillfromexternalsharing.
Limitations
:
Commitmentoflargefinancialandotheroperationalresources,
Highinvestmentandthereforehighrisk,
Requires considerable international experience and exposure to establish
one.
Generallynotallowedinvitalandsensitiveindustrialsectors,
Stricterscrutinyandoperationalnorms,
Highvulnerabilitytocriticismbyvariousinterestgroups

MAJORFORMS
:
1. Greenfieldoperations:
Creating production and marketing facilities on a firms own from
scratch. (
Exapansion or reinvestment in existing foreign affiliates or
sites is referred as BROWNFIELD INVESTMENT). Greenfield
investmentispreferredinfollowingsituations:
RighttargetsforM&Anotavaiable,
FinancialconstraintstoAcquisition,
Incentivesofthehostcountry,
Whereinternationalacquisitionsareprohibited,
2. MergersandAcquisitiins:
Transfer of existing assets of a domestic firm to a foreign firm lead to MnA.
PreferredoverGreenfieldforthefollowingreasons:
impwherespeedofexpansionisimportant,
readyaccesstotangibleandintangibleassets,
addstooperationalefficiencyoverseas.
Couldbe3types:
1. Minority
2. Majority
3. Fulloutrightstake
Eg,LucentandAlcatel,P&GandGillette.
ReasonsforinternationalacquisitionsbyIndianfirms:
Increaseproductivitylevelstointernationalstandards,
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profitabilitybyeconomiesofscaleandscope,
improvecompetitivenessinglobalmarket
betteraccesstoforeignmarkets.
Eg.TataCorusdeal

STRATEGY

BASICDECISIONRULESFORSELECTINGMODE

1. NaiveRule
The firm uses same expansion mode for all markets ignoring heterogeneity of
differentmarketsandconditions.

2. PragmaticRule
The firm enters a new market initially with a low risk entry mode. It looks for a
workableentrymodeonlyiftheinitialentrymodeisnotfeasibleorprofitable.

3. StrategyRule
All alternative expansionmodesaresystematicallycomparedandevaluatedbefore
a decision is made.This rule helps maximize the profit contribution over the strategic
planningperiodsubjecttoavailabilityofresources,risks,andnonprofitobjectives.

MARKETINGSTRATEGYANDEXPANSIONMODES

Ifinselectfewcountries:
MarketPenetration
Ifsimultaneouslyorinquicksuccessioninmanycountries:
Marketskimming
Dependingon:
1.
ComplexityofBusinessenvironment
2.
MarketingStrategy,
thestrategicoptionsareindicatedasunder:

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SEQUENTIALADOPTIONOFBUSINESSEXPANSIONMODES

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Whyshouldthefirmsgoforeign?

Therearebothorganisationalandenvironmentalfactors.
Organizationalreasonsare
:
1. Exploitingworldwidemarketimperfections:The essenceofcompetitiveadvantage
isafirmsabilitytocreate and sustaineconomic profitsinanimperfectmarketplace
for products (by producing differentiated products) andfactors(lookingforcheaper
inputsinforeignlocations.)
2. Exploitingtheopportunitiesthatarisealongthelifecycleofafirmsproduct.

Environmentalorexternalreasonsare:
1. Respondingtothemacroeconomicimperativesforglobalization:
a. Globalizationofcapitalmarkets
b. Declineincostsoftransportandcommunications
c. Growthofregionalandinternationaltradingarrangement.
2. Exploiting the competitive advantage of nations as explained in Michael Porters
theory.

What are the two sets of idea that provide guidelines for firms in making their
foreignentrydecisions?

1. The theory of internalization based on the economics of transaction costs of

activitiesundertakenbythefirm.
a. This theory of
transaction cost economy (TCE)arguesthattransactionsin
markets settings may be prone to frictionandfailureresultingintransaction
costs for firms undertaking them. Such transactions are more likely to entail
suchcostsarecharacterisedbythreeattributes:
i. Theyhaveassetspecificity: Theassets involvedinthetransactioncan
notberedeployedtoalternativeusesoruserswithoutlossinvalue
ii. There is likelihood of a greater frequency of interactions between the
partiestothetransactionand
iii. There is uncertainty surrounding the outcome of an arms length
transaction.
Thelogic behindTCEisthattheMNEwillinternalise(throughFDI) whenthe
basis of its competitive advantage is derived from nontransferable sources
(tech, brand equity, R&D, innovation, IPR etc). In such instances it is likely
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that the exporting or licensing may not be effective in transferring the

competitiveadvantage.
2. The impact of the two environmental variables that are unique to the MNE, i.e.
Multiple Sources of External Authority (MA) and Multiple Denominations of Value
(MV).
a. The sovereignty of a nationstate is embodied in its authority to influence
events within its legal territory and its choice to be relatively immune to
outside influences. This authority generally manifests itself in terms of laws
and regulatory institutions, political institutions, official language(s), norms of
behavior, culture. The MNE has exposure to multiple (often conflicting)
sources of external authority.There are three aspects of MA that merits
consideration:
i. Thenumberofgeographiclocationsthatthefirmoperatesin
ii. The variance in country environments resulting from operating in
differentgeographiclocationsand
iii. The lack of a superstructure to mediate threats or opportunities that
ariseattheintersectionsofthevariancesincountryenvironments.
Therefore, when MA is high, the MNE should choose export of
contractual modes of entry and when MAis low,theMNEshould choosethe
DFImodeofentry.

b. Similarly, under
MV (Multiple Denominations of Value) :
which means the
firms cash flows are denominated in different exchange rates. This in turn,
results in three effects on the MNE: (1).
translation exposure
, which is the
problem of expost settling up and valuations already undertaken across
multiple currencies (2)
transaction exposure
, which is the problem of
hedging known or anticipated cashflowsagainstfutureexchange rateshifts
and (3)
economic exposure,
which is the problem of the impact of
unanticipated changes in real exchange rates on the firms competitive
position.
MV, thus , has the opposite set of implications.
When the degree of MVis
high, MNEwouldfavortheDFImode ofentry,in orderto takeadvantageofthe
benefitsfrom assetdiversification.However,ifMVislow,thereislittlevaluetoasset
diversification and therefore, MNE would prefer export and contractual mode of
entryinordertoavoidthecostsofcarryingexcesscapacityworldwide.
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CHAPTER12

FOREIGNDIRECTINVESTMENT

FDI
means acquiring ownership in an overseas business entity. Its management
dimensions distinguishes itself from portfolio investment. It is defined as an investment
involving a long term relationship and reflecting a lasting interest and control by a
residententerpriseinoneeconomyinanenterpriseresidentinaneconomyotherthanthat
oftheforeigndirectinvestor.
It is less sensitive to fluctuations in forex. Returns fromFDIaregenerallyinformofprofit
i.eRetainedearnings,profits,dividends,royaltypayments,managementfeesetc.

Importance:
Largestsourceofexternalfinancefordevelopingcountries.
Roleindevelopmentprocessofhosteconomies,
Roleinenhancingexportsofthehostcountry,
Helps enhance the competitiveness of domestic economy through tech transfer,
strengthening infrastructure, raising productivity and generating employment
opportunities.
Caninfluenceecoandpoliticalaffairs
modernformofeconomiccolonialismandexploitation.
Preferred because : non debt creating, non volatile, and the returns depend on
theperformanceoftheprojectfinancedbytheinvestors.
Superioras:
Longertermperspective,nonvolatile,
more likely to be used for improving productivity and not to finance
consumption,
more than just capital (tech, know how and other skills) and thushavea
greaterimpactoneconomicgrowth.

RaisondetreforFDI

Costoftransportation,
Liabilityofforeignness,egKelloggsinIndiaandDisneylandinFrance,

BenefitsofFDI:
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Accesstosuperiortechnology,
Increasedcompetition,
Increaseindomesticinvestment,
Bridginghostcountriesforeignexchangegaps.
Negativeimpact
Marketmonopoly
Crowdingoutandunemploymenteffects,
Technologydependence,
Profitoutflow,
corruption,
Nationalsecurity
SelectionofFDIdestination
Costofcapitalinput,
Wagerate,
Taxationregime,
Costsofinputs,
Costoflogistics,
MarketDemand.

TypesofFDI
1. Onthebasisof
Direction
ofinvestment
a. InwardFDI
b. OutwardFDI(DirectInvestmentAbroadDIA)
2. Onthebasisoftypeof
Activity
a. HorizontalFDI:similarproductionactivity
b. VerticalFDI:toprovideinputsortoselloutputs
i. BackwardVerticalFDI:extractiveindustries,BPandSHELL
ii. ForwardVerticalFDI
c. Conglomerate FDI : manufacturing products not manufactured by the firmin
thehomecountry
3. Onthebasisof
Investmentobjective
a. ResourceseekingFDI
b. MarketseekingFDI
c. EfficiencyseekingFDI
4. Onthebasisof
EntryModes
a. Greenfieldinvestments,
b. MergersandAcquisitions
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5. Onthebasisof
Sector
a. IndustrialFDI:inmanufacturing
b. NonindustrialFDI:inservices.

6. Onthebasisof
StrategicModes
a. Exportreplacement
b. Exportplatforms
c. DomesticSubstitution

THEORIESOFINTERNATIONALINVESTMENT

1. CapitalArbitrageTheory
One of the earlier theories based on the belief that FDI takes place due to
differencesintheratesofreturnoncapitalacrosscountries.Basedontheassumptionthat
the markets were perfectly competitive and the firms invest overseas as a formoffactor
movementtobenefitfromdifferentialprofits.
ItsmoresuitableforFPIwherethereturnsoncapitalarecrucialintheshortterm.
2. MarketImperfectionTheory:
Variousfactorsleadtoimperfectionsinmarket.FDIisoftenemployedasastrategic
tool to access restrictive markets withmarketimperfectionsandthushelpininternational
business expansion, by effectively bypassing the trade restrictions such as prohibitive
import tariffs and quotas. Eg, Japanese automobiles major establishing manufacturing
facilitiesinUSandEurope.

3. InternalizationTheory:
A firm expands internationally in order to exploit its specific advantage or core
competencies in foreign markets. The firms try to protect such corecompetencieswithin
the organisation by way of investing in a foreign country inordertohave control overits
overseasoperations.

4. MonopolisticAdvantageTheory:
It is the monopolistic advantages (also known as Firm Specific Advantage (FSA)
suchassuperior knowledgeandeconomiesofscale not possessedbycompetingfirms
thatjustifyinvestmentinphysicalcapitaloverseas.
Tworequirements
:
The advantage should outweigh the cost of operating in foreign countryand
exposingitselftoanalienbusinessenvironment
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31

The firm should be able to enjoy such advantage only through control of
foreignoperationsbyownershiprather thanotherlowriskmodesofbusiness
expansion.
5. InternationalProductLifeCycleTheory:
Validforbothtradeandinvestmentpattern.
However doesnt explain why investment is preferred than exporting or
licensing.
MainlyappliestoindustrialFDIinmanufacturingsector.
Ignoresrevenueasitiscostcentered.
DoesnotdiscussopportunitieswhenFDIismoreprofitable.

6. EclecticTheory:
ByProfDunning.
This(O,L,I)isablendofmacroeconomictheoryofinternationaltrade(L)and
micro economic theories of the firm (O & I).It providesmost comprehensive
explanation of FDI, integrating firm specific (O Ownership factor), location
specific(L)andinternationalization(I)advantages.
Theownershipfactor(O).
Some core competencies or FSA such as intangibleassets,tangibleassets,
size,monopolisticadvantagesarespecifictothefirm.
Though it incurs costs such as , Cost of foreignness (psychic distance,
unfamiliarity with market conditions, Differences in environment, increased
expenses.
TheFSAloweritsoperationalcostsorearnhigherrevenues.
Thelocationfactor(L)
Keydeterminanttoitsrelativeattractivenessasaninvestmentdestination.
Advantages could be Economic, Socio cultural, low psychic distance,
Political.
Theinternalisationfactor(I)
Thefirmattemptstointernaliseitsoperationsto
protectitsproprietyknowledgefromcompetitors
createandmaintainmonopolisticoroligopolisticpowerinthemarket,
protectitselfagainstmarketuncertainties
MNEsalsoindulgeinarbitraginggovernmentimposedmarketregulations.

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Chapter13
MultinationalEnterprise.

Abusinessentity thatoperatesinmultiple(morethanone)countrieswitheffectivecontrol
overitsoperationsbywayofFDI.
Critreri:
Shouldownorcontroloperationsinmultiplecountries,typicallyacrossworld.
Should generate a substantialportionofitsrevenuesbyitsoperations fromforeign
countries.
Shouldemployworkforcefrommultiplecountriesi.e.globalemployement.
It should have a strategic management perspective and a vision of multinational
operations.
A global company is characterised byastrongglobalpositioningintermsofglobal
assets, capabilities, brands and its relative resilience to shocks and even to the
businesscycle

TYPESOFMNE:
1. Onthebasisofinvestment:
a. Associates:Anenterpriseinwhichanonresidentinvestorownsbetween10
and50%.
b. Subsidiaries
:morethan50%
c. Branches
:Unincorporatedwhollyorjointlyownedbyanonresidentinvestor.

2. OnthebasisofOperations:
a. Horizontally integrated MNE
: manufacturing operations in differenent
countriesproducingsameorsimilarproducts
b. Vertically integrated MNE
: products of one operations serve as input for
otherproduction,
c. DiversifiedMNEs:
EitherHorizontallyorVerticallyintegrated.

3. OnthebasisofManagementOrientation:
a. Ethnocentricfirms
:
i. HQsdominatethedecisionmakingwhichiscentralised.
ii. ComplexorganisationalstructureatHQandsimpleatsubsidiaries.
iii. Homecountryexpatriatesdominateseniormanagement.
iv. predominantlyconcernedwithviability worldwide and legitimacy onlyin
itshomecountry.
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b. PolycentricFirms
:
i. High level of market orientation where subsidiaries haveautonomyin
decisionmaking
ii. Foreign affiliates are highly adapted to the market requirements and
culturesofcountriesoftheiroperations,
iii. Coredecisionmakingmaybecentrallyintegrated
iv. Concerned with legitimacy in all countries whereitoperatesin, evenif
thatmeanssomelossofprofits..
c. RegiocentricFirms
:
i. Foreign affiliates consolidate their decision making and organisatin on
regionalbasis.
ii. Regional offices have considerable autonomies with accountability to
theparentfirm.
iii. the level of integration is high within the regions but NOT across the
regionoffersoperationaladvantage.
iv. Triestobalanceviabilityandlegitimacyattheregionallevel
d. GeocentricFirms:
i. Organisationmorecomplexthananyother.
ii. follows a collaborative approach in decisionmakingbetweenHQsand
subsidiaries.
iii. Universalstandardsforevaluationandcontrol.
iv. Bestworkforceisemployedforkeypositionsfromacrosstheworld.
v. Tries to balance viability and legitimacy throughaglobalnetworkingof
itsbusiness
vi. Enclave: deals with high priority problems of host countries in a
marginalfashion.
Integrative: recognises that the MNEs key decisions must b e
separatelyassessedfortheirimpactoneachcountry.

IMPACTOFMNEsONHOSTECONOMIES:

Positiveeffects:
1. BringinFDI:
leadingtoindustrialandeconomicdevelopment
2. Transfer of technolog
y, managerial skillsandmarketingstrategiseswhichhavea
favorableimpactonoverallindustrialgrowth.
3. PromoteCompetition
:
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34

4. PromoteR&D
5. BenefitCustomers
6. PromoteexportsintheHosteconomies:
alongwithimportsubstitution.

Negativeeffects:

1. InfluencinghostcountrysGovt.decisions.
2. Transferofinappropriatetechnology.
3. Dumpingofobsoletetechnology
4. CulturalImperialism
Eg
:
McDonaldisationofeatinghabitsinmanycountries.
WaltDisneysfailureinFrenchEuroDisneyisa classiccaseofFrenchresistanceto
AmericanculturalImperialism .
5. Exploitationofhostcountrysresources
6. Perceivedasagentsofneocolonialism
7. Promotesunhealthymarketcompetition
8. PromoteshostileM&A.
9. Crowdingoutdomesticenterpreneurship
10. Limited benefits to Host country
mainly on BOP position, supporting
industriesandsupplieresmaynotbenefitiftheMNEisverticallyintegrated
11. Circumventing host countrys regulatory framework :useof transferpricing
toavoidtaxpayments.

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CHAPTER14

INTERNATIONALMARKETING

It has assumed importance not only for operating in international market, but also as a
precondition for success in operating domestically because the home market has now
become export market as a result of liberalization. Focus has shifted from selling to
customerneeds.Procuring anewcustomercosts5Xthanretainingone.Costs16Xmore
tobringanewcustomertothesamelevelofprofitabilityasthelostcustomer.
ThusIMcanbedefinedastheperformance ofbusinessactivities,designedtoplan,price
promote and direct the flow of a companys goodsandservices tocustomeror usersin
morethanonenationforaprofit.
IMwouldinvolve:
IdentifyingneedsandwantsofcustomersinInternationalMarkets,
Taking marketing mix decisions related to product, pricing, distribution and
communication, keepinginviewthediverseconsumerandmarketbehaviouracross
differentcountriesononehandandfirmsgoalstowardsglobalisationontheother,
PenetratingintoInternationalMarketsusingvariousmodesofentryand
TakingdecisionsinviewofdynamicIMenvironment.

FRAMEWORKOFIM:
SettingMarketingobjectives:
MarketIdentificationSegmentationandTargeting:
Useareactiveoraproactiveapproach
Use of direction and composition of trade statistics to see cross country
comparisonofmarketsizeanditsgrowthrate
MarketSize=GDP(production)+Valueofimports ofG&SValueofexports
ofG&S
Segmentation should be measurable, sustainable, accessible, differentiable
and actionable. On the basis of geography, demographic factors such as
income, age, gender etc, psychographic profiles, marketing opportunity,
marketingattractiveness
EntryModeDecisions
Trade:Exports:lowinvestment,lessrisky,forsmallandmidsizedcompanies
withresourceconstraints
Contractual
Investmentmode.
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36

IMMarketingMixDecisions:

4PsControllablefactors
Uncontrollable factors : Environmental Social, cultural, political, legal and
cultural
1.
ProductDecisions:
Components of product : Core Component, Packaging component, and
Augmentedcomponent.
ProductStandardisation
referstomarketinga productintheoverseasmarketwithlittlechangeexcept
for some cosmetic changes such as modifying packaging and labelling. eg
heavyPlantsandMachinery,productswithglobalappeal(BigMacetc).
Benefits:
GlobalProductimage,
Cateringtoglobalcustomers,
Costsavingsonacofeconomiesofscale,
Economyindesignandmonitoring.
Facilitatesindesigningtheproductasaglobalbrand.
Factorsfavouring
High level of technology intensity : maintains international standards
andreduceconfusion,
Formidableadaptationcosts,
Convergenceofcustomerneedsworldwide(MTV,MacD,Levisjeans,
Country of origin impact, (electronics from Japan, fragrance from
France,SoftwarefromIndiaetc)
ProductAdaptation
Refers to making changes in the product in response to the needs of the
targetmarketistermedasProductAdaptationorCustomisation.
Mayvary frommajor modificationtominoralterationsinitspackaging,logoor
brandname.
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37

Benefits:
tapmarketswhichwerenotaccessibleduetomandatoryrequirements,
competitivelyfulfills customerneedsandexpectationsinvariedcultural
environment,
facilitatesgainingmarketshare,
increasedsaleleadstoscaleeconomies.
MandatoryfactorsfavouringProductAdaptation:
Government regulations, (ban on use of azo dyes in Europe requires
use of natural dyes in all products, Made in China idols of Ganesha,
Durga)
Standardsofelectriccurrent,
Operatingsystems,
Measurementsystems,
Packagingandlabellingregulations
VoluntaryfactorsfavouringProductAdaptation:
Customer Demographies : (Size in garments OwnattributesinBarbie
Doll)
Culture (Food items and clothing Mac Burger Camers sales boomed
withpolaroidinstantphotography)
Conditions of use: (Nokia 1100 anti slip grip, torchlight, dust
resistancecover,recentlyMotorolawithshatterproofscreen)
Price
TradeoffstrategybetweenProductStandardisationandProductAdaptation.
ProductLaunch
:Dependinguponmarketandtheproductattributes:
Waterfallapproach
:
The product trickle down in the international markets in a cascade manner
and
arelaunchedsequentially.
Longer duration is available for a product to customise in a foreign market
beforeitsislaunchedinanothermarket.
More suitable for firms that have limited resources and whofinditdifficultto
managemultiplemarketsimultaneously,
Canbecarriedoutinaphasedmanner.
22yearsforMcD,20yearstoCocaColabeforetheymarketedoverseas
Sprinklerapproach:
Product is launched simultaneously in various countries. Preferred over
Waterfallapproachinthefollowingconditions:
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38

2.

3.

Highlycompetitivemarket,
Shortlifecycleoftheproduct.
Highpotential(size,growth,lessentrycost)ofthemarket
Resource and capability of the firm to manage multiple market
simultaneously.
egluxuryfashiongoods,ITsoftware.
BrandingDecisions
:Quelchidentifies6traitsforaglobalbrand:
Dominates the domestic market, which generates cash flow to enter new
markets.
Meetsauniversalconsumerneed,
Demonstratesuniversalconsumerneed,
Reflectsconsistentpositioningworldwide,
Benefitsfrompositivecountryoforigineffect,
Focusisontheproductcategory
PricingDecisions:
Only component of the Mix which is often adopted in international marketwiththe
leastcommitmentofthefirmsresources.
Extremelysignificantfordevelopingandleastdevelopedcountries
Approaches:
Costbasedpricing
Fullcostpricing
Marginalcostpricing:
providesanalternatemarketingoutlet
asatooltopenetrateintoInternationalMarkets
getssomecontributionwhichthefirmcouldhaveotherwiseforgone
ves: recovery of fixed cost required, anti dumping, trigger price wars,
andunrealisticlowpricequotations
Marketbasedpricing
FactorsinfluencingPricingDecisions:
Cost, Competition, Purchasing Power, Buyers Behaviour, Foreign exchange
fluctuations.

InternationalDistributionChannels:
May be defined as a set of interdependent organisations networked together to
make the product or services available to the end consumer in international
markets.
Morecomplexthandomesticbecauseof:

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39

Significantdifferencesinthemarketsdistributionsystems
Selectioninoverseasmarketinmorecomplexduetononfamiliarity.
Collecting information regarding same requires more resources both
managerialandfinancial.
Difficulttoassesslongtermcommitmentofchannelmembers
Types: Direct and Indirect (does not come in contact with overseas based market
intermediary).

4.

CommunicationDecisions
:
Attempting to convey a set of messages to the target customers through some
channel in order to create a favourable response for their market offerings and
regularlyreceivemarketfeedback.
Involves advertising, direct marketing, personal selling, sales promotion, public
relationsantradefairs&exhibitions.
Factoraffectingselectionofthecommunicationmixare:
MarketSizeandCharacteristics,
CostandResourceavailability,
Mediaavailability,
Typeofproductanditspricesensitivity,
ModeofentryintheInternationalMarket.
Advertising:
Standardisationv/sadaptation
Adwithnochange:UCB
Ad with changes in illustration : in market segmented on the basis of
psychographic profile of the customers., cultural proximity of customers,
techinsensitiveorindustrialproduct,similarityinmarketingenvironment.
AdvertisingAdaptation:(AXE,Pepsi)
DirectMarketing:Directmailing,Doortodoormarketing,Multilevelmarketing.
PersonalSelling:
Salespromotion:useofshorttermincentivestoinduceapurchasedecisions.
Publicrelations,
InternationalTradefairsandexhibitions.
FactorsinfluencingInternationalCommunicationDecisions
Culture : (Revital : daily health supplement in India, multivitamin supplement in
Nigeria).
Language:(HondaFittacarrenamedasJazz,TataZicachangednow)
Education
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Mediainfrastructure
Governmentregulations.

FrameworkforInternationalProductPromotionStrategies:

Keegans framework help us determine the appropriate Product Promotion Strategies

depending upon the Product function or needsatisfiedthe conditionofproductuseand
customersabilitytobuy.

Strategy Produc
t
functio
nor
need
satisfie
d

Conditio
nsof
product
use

Ability
tobuy
produc
t

Recomme
nded
product
strategy

Recom
mended
commu
nication
s
strategy

Rank
order
from
least
to
most
expen
sive

Product
example
s

Straight
adaptatio
n

Same

Yes

Extension

Extensio
n

Soft
Drinks

Product Differen Same

extension t

promotio
n
adaptatio
n

Yes

Extension

Adaptati
on

Bicycles,
Chewing
gum,
Reid&
Taylor

Product Same
adaptatio
n
promotio
n
extension

Different

Yes

Adaptation

Extensio
n

Detergent
s,Electric
al
appliance
s

Differen Different
t

Yes

Adaptation

Adaptati
on

Clothing

Dual
adaptatio
n

Same

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Developi
ngnew
product

Same

Different

No

Invention

Develop 5
new
communi
cations

Washing
Machines

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CHAPTER15
INTERNATIONALFINANCE

1. INTERNATIONALMONETARYSYSTEMS
a. Gold Standards :
Specie, Bullion and Exchange : Abandoned after Great
Depressinof1930.
b. FixedExchangeRates:
Bretton Woods Conference in July 1944. Gold exchange standard. This era
went
on till 1971, 15th August when US abandoned its commitmenttoconverthe
US
dollaratfixedpriceof$35perounce.FollowedbySmithsonianagreementin
Dec1971.Finallyabandonedin1973
c. FloatingExchangeRateSystem
:
Countries are reasonably insulated from the problems faced by other
countries.

2. CONTEMPORARYEXCHANGERATEARRANGEMENTS:
a. Floating Exchange Rate System : independently (clean) floating or
managed(dirty)floating.
b. Pegged Exchange Rate System:
Pegging value of home currency to a
foreigncurrencyorabasketofcurrencies.
Soft pegs : Conventional fixedpeg(fluctuatesforat least3monthswith ina
bandoflessthan2%or1%againstanothercurrency)Intermediatepegs(crawling
pegsandbandswherepegisperiodicallyadjusted)
Hardpegs: Currencyboardarrangements refertoamonetaryregimebased
onanexplicitlegislativecommitmentto exchangedomesticcurrency foraspecified
foreign currency at a fixedexchangerate.In some,theremaynotbeanyseparate
legaltenderandtheyusecurrencyofaforeigncountry.

3. PREVAILINGCURRENCIESANDMARKETS
a. US$
mostimportant.
b. Eurocurrency:A currencydepositedinabankoutsidethecountryofitsorigin
is known as eurocurrency. The market for this has grown considerably over
theyears.
4. DETERMINATIONOFEXCHANGERATES:
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a. Purchasing Power Parity Theory: Assuming nonexistence of tariffs and

other trade barriers and zero cost of transport, the law of one price, the
simplestconceptofPPP,states thatidentical goodsshouldcostthesamein
all nations. The equilibrium price rate b/w two currencies would be equal to
the ratio of price levels in two countries. Cross country comparison of the
exchangeratesofcurrenciesmaybecarriedoutusingtheBigMacIndexand
CommSeciPodindex.
b. Interest Rate Theories:
Unlike the Price levels used in PPP theory, here
inflationratesareusedindeterminingtheexchangerates.
i. Fisher Effect Theory : (Nominal interest rate = Real interest rate +
Expectedinflationrate).
ii. International Fisher Effect Theory : Its a combination of PPP and FE
stating that the exchange rate movements are caused by interestrate
differentialswhichis anunbiasedpredictor ofthefuturechangesinthe
spotrateofexchange.

5. FOREIGN EXCHANGE MARKET:

Refers to the organised setting within which
individuals, businesses, governments and banks buy and sell foreign currencies
andotherdebtinstruments
a. Types:InterbankorwholesalemarketandRetailmarket
b. Participants in the foreign exchange model: Traders, Hedgers and
Arbitragers.
c. Exchange rate quotations : Thevalueof one currencyinthe unitsof another
isknownasExchangeRate.
Spot vs forward quote: The amount agreed for foreignexchangetransaction
maybedeliveredeitherimmediately(spot)oratalaterdate(forward)
Direct vs indirect: Under direct, units of home currency per unit of a foreign
currency are quoted (Rs 68 per US $ 1.). Under indirect, units of foreign
currencyperunitofhomecurrencyi.e.inverseofdirectquote.
Crossexchange rate:quotingexchangeratesoftwocurrencieswithoutusing
theUSdollarasthereferencepoint.
Bidvs Ask.:Thepriceatwhichabankiswillingto pay iscalledBid,whereas
thepriceatwhichthebankiswillingtosellthecurrencyisknownasAsk.

6. FOREIGNEXCHANGERISKSANDEXPOSURE:
a. Foreign exchange risks refer to the varianceofdomestic currencyvalueof
assets,liabilities,oroperatingincomeattributabletounanticipatedchangesin
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exchange rates (and not to unpredictability of foreign exchange rates).This

riskbecomesdependentonforeignexchangeexposure.
b. Foreign exchange exposure
: Refers to the sensitivity of the real value of
assets,liabilities andoperatingincome tounanticipatedchangesinexchange
ratesexpressedinitsfunctionalcurrency
Thus forex risk is a function of variance both in unanticipated changes in
exchangeratesandforexexposures.Threetypesofexposure:
Transactionalexposure:Effectofexchangeratefluctuationsonthevalueof
anticipated cashflows denominated in home or functional currency terms,
relatingtotransactionsalreadyenteredintoinforeigncurrencyterms.
Economic exposure: Effect on a firms future operating cash flows.
(operating exposure). Strategies to manage such exposure are leads, lags,
nettingandmatching.
Translation exposure
:orAccounting exposurearisingduetoconversionor
translation of the financial statements of foreign subsidiaries and affiliates
denominatedinforeigncurrenciesintoconsolidatedfinancialstatementsofan
MNEinitsfunctionalorhomecurrency.
c. Managing foreign exchange risk : Hedging is a common methodology in
foreign exchange management and refers to the avoidance of foreign
exchangeriskandcoveringanopenposition.
Forward contract : It is a commitment to buy or sell a specific amount of
foreign currency at a later date or within a specific time period and at an
exchangeratestipulatedwhenthetransactionisstruck.
Futurecontract:Itisastandardizedcontractthattradesonorganizedfuture
marketsfora specificdeliverydateonly.Differenceswithforwardcontractare
asfollows:
Hasstandardizedroundlots.
Dateofdeliverynotnegotiable,
International money markets or foreign exchanges issue future
contractswhileforwardcontractsareissuedbycommercialbanks.
Options : It is an agreement between a holder (buyer) and a writer (seller)
thatgives the holdertheright,butnot the obligation, tobuyorselltheforeign
currency at the predetermined price,unlikeinaforwardcontract, ifisisnot
profitable. The price at which the option is exercised is known astheStrike
price.
Call option (right to buy) used to hedge future payable
Put
option
(righttosell)usedtohedgefuturereceivables.
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Swap : Agreement to exchange one currency for another at a specified

exchangerateanddateistermedascurrencyswap.
Currency arbitrage : Buying a currency at a lower rate in one market for
immediate resale at a higher rate in another with anobjectiveto makeprofit
from divergence exchange rates in different money markets is known as
currencyarbitrage.
d. BusinessStrategytoManageforeignexchangefluctuations:
On appreciation of currency, goods become more expensive in foreign
markets whereas imported goods become cheaper. An increase in the domestic
price of foreign currency is referred to as depreciation, whereas the decline in the
domesticpriceoftheforeigncurrencyistermedasappreciation.
Differentstrategiestobeadoptedbythefirm:

S.N Ifdomesticcurrencyis
weak
o

Ifdomesticcurrencyis
strong

Stresspricebenefits

Engageinnonpricecompetitionby
improvingquality,delivery,andafter
salesservice

Expand product lines and add Improveproductivityandengagein

vigorouscostreduction
morecostlyfeatures

Shift sourcing and manufacturing Shiftsuchtooverseas

tothedomesticmarket

Exploit export opportunity in all Giveprioritytoexportstorelatively

strongcurrencycountries.
markets

Conduct conventional cashfor Dealwithcountertradewithweak

currencycountry
goodstrade

Use full costing approach, but Cutprofitmarginandusemarginal

use marginalcost pricing to costpricing.
penetrate new or competitive
markets

Speed repatriation of foreign Keeptheforeignearnedincomein

hostcountry,slowcollection.
earnedincomeandcollections

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Minimise expenditures in local, Maximizeexpendituresinlocal,host

countrycurrency.
hostcountrycurrency

Buy needed servicesindomestic Buyneededservicesabroadandpay

fortheminlocalcurrencies.
market

10

Minimiselocalborrowings

11

Billforeigncustomersindomestic Bill foreign customers in their own

currency.
currency.

12

Borrowmoneyneededforexpansion
inlocalmarket.

7. GLOBALCASHMANAGEMENT:
Useacentralizedsystem,acashmanagementcentre(CMC)
8. MODEOFPAYMENTININTERNATIONALTRADE:
The mode of payment differs widely, depending upon the nature of market
competition, type of products dealt in, creditworthiness of buyers and exporters
relationship and experience with the importer. Various factors affecting the terms
include the risks associated, speed, security, cost, and the market competition.
Differentmodesare:

a. Advancepayment:
b. Documentary credit:
The payment collection mechanism that allows
exporters to retain ownership of the goods or reasonable ensures their
receiving payments is known as documentary collection. The bank acts as
theexportersagents.Ithastwoprincipaldocuments:
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Billsoflading:issuedbytheshippingcompanytotheshipperforaccepting
the merchandise for the carriage and only its legitimate holder is entitled to claim
ownership of the goodscovered therein onitssurrenderinoriginal totheshipping
companyatthedestination.
Bill of exchange :Itisan unconditionalorderinwriting, signed bytheseller
(Drawn by the exporter) also known as the drawer, addressed to the buyer
(importer) or importer's agent (also known asdrawee)orderingtheimportertopay
on demand or at a fixed or determinable future date, the amount specified on its
face.It is used as an instrument to effect payment in international comeerce. It is
negotiable.Usingadraft enablestheexporter(beneficiary)to employhisbankasa
collectingagent.
This advising bank gets in touch with the importer through an issuing bank
which gives a letter of creditonbehalfoftheimporter.Billsof ladingandthebillof
exchange are given to the advising bank which sends them to the issuing bank
whichafterscrutinyreleasespaymentstotheadvisingbank/exporter.(Itcouldbea
sight L/C or a usance L/C time draft). Letter of Credit (L/C) may be irrevocable,
revocable or confirmed (confirmed by a bank in the exporters country which
commits itselftoirrevocablemakepaymentsonpresentation ofdocumentsundera
irrevocableL/C),unconfirmed,sight.

c. Term credit : A financial instrument used by the importer and during the
deferredtimeperiod,hecanoftensellthegoodsandpaythedueamountwith
thesalesproceeds.
d. Revolving : The amount involved is reinstated when utilized without issuing
anotherL/C.
e. Documentarycreditwithoutletterofcredit:
f. Consignment Sales:
The shipment of goods is made to the overseas
consignee and the title of goods is retained with the exporter until is finally
sold.
g. Open Account :
Both the parties agree upon the sales terms without
documentscallingforpayments.
9. INTERNATIONALTRADEFINANCE:
a. Bankers Acceptance :
It is the time draft or bill of exchange (a shortterm
debt instrument) drawn on and accepted by a bank. The bank buys
(discounts) the BA and pays the drawer (exporter) a sim less than the face
valueofthedraftfollowedbysellingtoaninvestorinthemoneymarket.
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b. Discounting: Exporters can convert their credit sales into cash by way of
discountingthedraftevenitisnotacceptedbythebank.
c. Accounts Receivables Financing : In an open account shipment or time
draft, goods are often shipped to the importerwithoutassuranceof payment
from a bank. Banks often provide loans to the exporter based on its
creditworthinesssecuredbyanassignmentoftheaccountsreceivable.
d. Factoring : It involves purchase of export receivables by the factor at a
discounted price. The factoringservice couldbeundertakenwithrecourseor
withoutrecoursertotheseller.Thefactorsassumethecreditrisks.
e. Forfeiting
: It refers to the exporter relinquishing his / her rights to a
receivabledueatafuturedateinexchangeforimmediatecashpaymentatan
agreeddiscount,passingall risksandtheresponsibilityforcollectingthedebt
to the forfeiter. Generally, forfeiting is applicable in cases where export of
goods is on credit terms and the export receivables are guaranteed by the
importers bank. Its like converting a credit sale into a cash sale. For the
exporters, it improves liquidity, frees the balance sheet of debt, frees from
risks, and does not impact his borrowing limit, hedges against interest &
exchangeraterisks,savesoninsurancecost,etc
f. LettersofCredit
g. Counter Trade : Combines trade financing and price setting in one
transaction.

10.

EXPORTFINANCE:
a. ExportCredit:
preandpostshipment
b. Financing to overseas importers : Buyers credit, Line of Credit (exporter
countrys bankto anoverseasbank/govt/institutiontofacilitatetheimportof
avarietyoflistedgoodsfromtheexportingcountry.
c. Creditriskinsurance
:
Additional

ForwardandFutureContract

Fundamentally, forward and futures contracts have the same function: both types of
contracts allow people to buy or sell a specific typeofassetataspecifictimeata given
price.

However,itis inthespecificdetailsthatthesecontractsdiffer.Firstofall,futurescontracts
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49

areexchangetradedand,therefore,arestandardizedcontracts.Forwardcontracts,onthe
other hand,areprivateagreementsbetweentwopartiesandarenotasrigidintheirstated
terms and conditions. Becauseforwardcontractsareprivateagreements,there isalways
a chance that a party may default on its side of the agreement. Futures contracts have
clearinghousesthat guaranteethetransactions,whichdrasticallylowerstheprobabilityof
defaulttoalmostnever.

Secondly, the specific details concerning settlement and delivery are quite distinct. For
forward contracts, settlement of the contract occurs at the end of the contract. Futures
contracts are markedtomarket daily, whichmeansthatdaily changesaresettleddayby
day until the end of the contract. Furthermore, settlementforfuturescontractscanoccur
overa rangeofdates.Forwardcontracts,onthe otherhand,onlypossessonesettlement
date.

Lastly, because futures contracts are quite frequently employed by speculators, who bet
on the direction in which an asset's price will move, they are usually closed out prior to
maturity and delivery usually never happens. On the other hand, forward contracts are
mostlyusedbyhedgersthatwanttoeliminatethevolatilityofanasset'sprice,anddelivery
oftheassetorcashsettlementwillusuallytakeplace.

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CHAPTER16

GLOBALOPERATIONSANDSUPPLYCHAINMANAGEMENT

Globalisationofoperations:
Theforce ofglobalisation,such asreductionintradebarriers,cheaperandeasiermeans
of internationaltransportationandcommunication,wagedifferential,andmarketsaturation
in the home market on one hand and rapidly growing marketing opportunities overseas,
especially in emerging economies on the other, have led to expansion ofoperationon a
globalscale.Globalisationofoperationsinclude:
Globalsourcingofinputs,
Globalproductionofgoodsandservices,
Globaltransportationofproducts,
Globalmanagementofentiresupplychain.

Offshoring
:
Relocation of business processes to a lowcost location by shifting the task overseas is
termedasOffshoring.Particularlysuitableforthefollowingactivities:
Products at the maturity stage where technology becomes standardised and
widespread, requiring long production runs making labour cost crucial to achieve
competitiveness
Partsofaproductionprocesswhicharelabourintensiveandneedtobeoffshoredto
lowcostcountries.
Types:
Captive:deliveryfromasharedservicecenterownedbythecompany
ThirdParty:deliveryfromanoutsidevendor
Nearshoring:relocationtoacountryinthesamegeographicregion.

StrategicoptionsforTranslationalOperations:
Depends on cost factor, risk associated with specialization, need for product
adaptation, import regulations and investment policies, changes in external business
environment. It also depends upon IR Balance i.e. Global Integration and Local
Responsiveness.

Globallyconcentratedoperations
:productioncenteredatonelocationandexport
toallotherplacesfromthatlocation
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51

Host Market operations: Each

production unit produces to serve it's own host
countrymarket
Production specialization for a global or regional market : Specialization of
productionin afewplantssupplying amulti countrymarketsasaparofproductor
processrationalizationstrategy.Duetoscaleeconomiesoffered byalargeregional
markets,individualplantsizeundersuchastrategyisgenerallyverylarge.
Transnational vertical integration : Specialization by semi finished products or
processes rather than by final products as in above. Either performs a separate
part of operations in a chainlike sequence or performs separate operation in the
production process and ships it's outputs to the final assembly plant in another
country.

Globalsupplychainmanagement:
Asetofinterrelatedactivitiessuchasconceptualizing, design,manufacture,market
andserviceisknown asthe
Valuechain
.Theprimaryactivitiesincludeinboundlogistics,
operation(manufacturing),outboundlogistics,marketingandsales,aftersalesserviceand
the support activities include Firms infrastructure, HR, Finance, Technology and
Procurement.
Two of the primary activities i.e .Inbound logistics (comprising procuring inputs,
components, parts, raw materials and related services) and Outbound logistics
(comprising operations and transfer of finished products to the end customer). Firms
create value for their customers through performing these activities in a competitive
manner.
Supply chain management aims at minimization and elimination of all wastes
throughverticalintegrationofall functionalactivitiesin managingthesuppliersuppliersall
thewaythroughtomanagingthecustomers customer's and focussingonthescheduling
and time efficiency. Material Management is the upstream and the Physical distribution
managementisthedownstreampartofthesupplychain.
Importantconstituents:
Warehousing
:Storage,consolidation,breakingbulk,mixingorassembly.
Inventory management : maintain uninterrupted supply, optimize buying costs,
economize production costs, advantage of quantity discounts, cope up with
seasonalfluctuations.
Packingandunitization
:helpsincargohandling.
Transportation:
Informationandcommunicationtechnology:
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52

ThirdPartyLogistics:Itrefers toacompanythatprovidesmultiplelogisticsservicesfor
it's clients and customers.Thus outsourcing of more sophisticated logistics and supply
chainservices,especiallyonaglobalscalemaybedefinedas3PL.

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Chapter17:InternationalHumanResourceManagement

HRM referstotheprocessesandpracticesinvolvedinmanagingpeoplesoastoachieve
organisational goals. Theapplicationofthosepracticesandprocessesto managepeople
in more than one country is termed as IHRM. Features specific to IHRM include
multiculturalism, geographical dispersion, relocation of expatriates, diverse regulatory
environmentfortaxation,andlabourlaws.
Globalisationofbusinesshasresultedinnewchallengesforcrosscountrymanagementof
HR,brieflysummarisedasunder:
Increasing significance as a crucial determinant to a firms success or failure in
internationalbusiness.
Significance of transnational experience for top management jobs in global
corporationsisgrowing.
Offshoring has augmented thecomplexityofstaffing,performance,monitoring, and
differentialcompensationwhenemployeesarelocatedfarfromcorporateHQ.
Needs different HRM practices than those generally dealt with in standard text
booksmainlybasesonwesternpractices.

Strategic HRMreferstoHRMissues,functions,policiesandpracticesthatresult fromthe

strategic activities of MNEs that impact on international concerns and goals of these
enterprises.
International HRMcomprisesidentifying diverserequirementsofvarioussubsidiariesand
developing and sustaining HR capabilities to achieve organisational goals. This is also
knownasadaptationofallHRMfunctionstointernationalsettings.

MORGANsMODEL
:providesusefulinsightintotheHRMintheinternationalcontext:

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54

IHRMmaybedefinedastheinterplayofthesethreedimensions.

Domesticv/sInternationalHRM:
Increasedfunctionalactivities:
Managingexpatriation,crosscountryrelocation,internationaltaxation,transnational
labourlegislationetc.
Functionalheterogeneity:
Diver
se businessenvironmentswithwidevariationsingovernmentpolicies,culture
andregulatoryenvironmentscallsforanHRMwithconsiderableheterogeneity.
Increasedinvolvementinemployeespersonallives:
Enhancedrisks:
Increasedinfluenceofexternalenvironment

Internationalorganisationalstructures:

Principle types of organisational structures as discussed below reflect an evolutionary

patternoforganisationalstructuresalongtheprocessofinternationalisation:
Independent
exportsdepartment
International division
structure : This division handles all of a companys
internationaloperations.[
Someparallelandlessformalreporting tovariousfunctionalheadsatthecorporate
HQs.
This structure ensures attention of top management towards developing a holistic
andunifiedapproachtoINoperations.
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55

Facilitates cross product and cross geographic coordination and reduces

resourceduplication.
Greater autonomy but often used in the early stages of internationalisation with
relatively low ratio of foreign to domestic sales, and limited foreign product and
geographicdiversity.
Global Organisational Structures : Rise in a companys overseas operations
necessitatesintegrationofitsactivitiesacrosstheworldandbuildingupaworldwide
organisational culture. Decision is based on the extent and type of control and
extentofautonomydesired.
Global functional division structure
: Each functional department of division is
responsible for it's activities across the world. MNEs with narrow and integrated
productlines(eg.Caterpillar)usuallyadoptsthefunctionalorganisationalstructure.
Greateremphasisonfunctionalexpertise
Relativelyleanmanagerialstaff
Highlevelofcentralisedcontrol
Higherinternationalorientationofallfunctionalmanagers
Disadvantages:
Difficultyincrossfunctionalcoordination
Challengeinmanagingmultipleproductlinesduetoseparationof
operationandmarketingindifferentdepartments..
Favored only when centralised coordination and control of
various activities is required as only CEO is responsible for the
profits
Global product structure : A corporate product division is given responsibility for
the product growth. It receivesinternalfunctionalsupportfromallotherdivisions. It
hasdifferentproductdivisionswhichhasfurthergeographicaldivisions.
Enjoysconsiderableautonomy
Effectiveinmanagingdiversifiedproductlines
Effective in carrying out product modification sa as to meet rapidly
changingcustomerneedsindiversemarkets.
Enables close coordination between technological and marketing
aspectsofvariousmarkets.
Disadvantages:
Tends to replicate various functional activities and multiplicity of
staff.
Littleattentionispaidtoworldwidemarketdemandandstrategy.
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Lack of cooperation between various product lines may also

resultintosalesloss.
May pursue currently attractive markets neglecting those with
betterlongtermpotential.
Global geographic structure : A firms global operations are organised on the
basis of geographic regions. Generally used by the companies with mature
businesses and narrow product lines. It allows the independent heads to focuson
the local market requirements, monitor environmental changes, and respond
quicklyandeffectively.Suchstructureiseffectivewhentheproductlinesarenottoo
diverse and resources can be shared. Subsidiaries in each company are deeply
embeddedwithnationalisticbiases thatprohibitthemfromcooperatingamongeach
other.
Global Matrix Structure : It isanintegratedorganisationalstructure, whichsuper
imposes on each other more than one dimensions. It might consist of product
divisions intersecting withvariousgeographicalareasorfunctionaldivisions.Unlike
functional, geographical, or product division structures, the matrix structure shares
jointcontroloverfirmsvariousfunctionalactivities
Facilitates greater interaction and flow of information throughout the
organisation.
Tends to balance the MNEs perspectives, taking cross functional
aspectsintoconsiderations
Itfacilitatesease oftechnologytransfer toforeignlocationsandofnew
products to differentmarketsleadingto highereconomies ofscale and
betterforeignsalesperformance.
Disadvantages:
May lead to conflicting situations and if an effective conflict
resolutionmechanismisnotinplace,itwouldinhibitfirmsability
torespondquicklytoenvironmentalchanges.
ViolatesFayolsbasicprincipleofunityofcommand
Employees may resort to compromise with suboptimal
alternatives so as to avoid conflict. This may not be the most
appropriatestrategy.
Translational network structure
: it represents the ultimate form of an earth
spanning organisation, which eliminates the meaning of two or three matrix
dimensions. It encompasees the elements of function, product, and geographic
designs while relying upona networkarrangement tolinkworldwidesubsidiaries.It
is characterised by an overall integrated system of various interrelated
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57

subsystems. It is designed around nodes, which are the units responsible for
coordinating with product, functional, and geographic aspects of an MNE. The
conceptualframeworkprimarilyconsistsofthreecomponents:
Disperssubunits
Specialisedoperations
Interdependentrelationships

EvolutionofGlobalOrganisationalStructures:

StrategicorientationsandpracticesforHRM:

IHRM
PRACTICES

ETHNOCENTR
IC

POLYCENTRI
C

REGIOCENTRI
C

GEOCENRIC

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58

Planning,
recruitment
andselection

Parentcountry
nationals
(PCNs)
are
developedand
appointedat
keypositions
acrossthe
world.
Hostcountry
nationals
HCNs)
employe
donlyforlower
positions

PCNs
are
employedat
keypositionsin
theirown
countryand
HCNs
manage
the
subsidiaries.

Managersare
developedand
deployedfor
keypositions
anywhereinthe
regionbutnot
acrossthe
region.

Basedon
qualifications,
skills,and
experience,the
bestpersons
aredeveloped
anddeployed
forkey
positions
anywhereinthe
worldwithinan
MNE

Trainingfor
crosscultural
adaptations

Verylimitedor
none
Nolanguage
requirement

Limitedfor
PCNs,some
language
training

Limitedto
moderate
traininglevels
forPCNs
Englishisoften
usedasthe
languageof
international
business.

Continuousfor
cultural
adaptationand
multilingualism

Effectof
Mayhurtcareer Mayhurtcareer Neutralto
International
ofPCNsHCNs slightlypositive
assignmenton
advancement
career
employees
oftenlimitedto implications
careergrowth
theirown
international
country
assignmentsof
longerduration.

International
assignment
requiredfor
careergrowth.

Evaluationand
Home
control
standards
applied
worldwideto
evaluate
employees
performance

Independent
performance
evaluation
standards
determined
locallyforhost
country

Globally
integrated
performance
standards

Compensation HighinHQs,
lowin

Widevariation Rewardsfor
Rewardsto
fromsubsidiary contributionsto international

Determined
regionally

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59

Communicatio
nInformation
flow

subsidiaries

tosubsidiary

regional
objectives

andlocal
executivesfor
reachinglocal
andworldwide
objectives
basedgoalsof
global
corporations.

Highvolumeof
orders,
commands,
adviceto
subsidiaries

Littletoand
fromHQslittle
among
subsidiaries.

Littletoand
fromHQsbut
maybehighto
andfrom
regionalHQ
andamong
countriesofa
region

Horizontal
network
relations

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