International Business

Dr. Sangeeta Mehrolia

Assistant Professor
Christ (Deemed to be University)
 International Business
• Introduction to International Business
• Basics of Macroeconomics for international business
• PEST Factors and their impact on international business
• Trade Theories and their relevance
• Foreign Exchange Management in international business
• Multinational Corporations and Globalization
• International Organizations and their role
• Regional Trade Agreements and Free Trade Agreements
(RTA and FTA)
• Global operations: International Financial, Global
marketing, global supply chain and Global HR

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Introduction to International Business
• What is international business?
• Forces driving globalization
• What’s wrong with globalization?
• Why companies engage in international
business
• Modes of operation
• Why international business differs from
domestic business
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Introduction to International Business
• Objectives
– To define globalization and international business
and show how they affect each other
– To understand why companies engage in
international business
– To discuss major criticisms of globalization
– Understand different ways in which a firm can
achieve global objectives
– Understand differences between international
and domestic business

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 Globalization
• Fundamental shift in world economies
▪Reduced barriers to trade – it’s a flat world
▪Reduction in “Perceived Distance”
▪Global “Material Culture”
▪National economies merging into the Global System
• Integration of the world economies through the
reduction of barriers to the movement of trade,
capital, technology, information and people
• Globalization of markets
• Globalization of production

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 What is International Business?
• International business consists of all commercial
transactions that takes place between two or more
countries
• Transactions could be sales, production, investments
or transportation
• International business comprises a large and growing
portion of world’s total business
• Most organizations are or considering to be
international
• As a manager, you will be required to understand
international business if you have to succeed –
especially as distinct from domestic business

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 Factors in International Business Operations

OPERATING OPERATIONS
ENVIRONMENT
OBJECTVES
PHYSICAL AND
SOCIAL FACTORS • Sales expansion
• Resource acquisition
• Political policies and • Risk minimization
legal practices
• Cultural factors STRATEGY
• Economic forces
• Geographical
influences MODES FUNCTIONS OVERLYING ALTERNATIVES

• Importing and exporting • Marketing • Choice of countries

COMPETITIVE • Tourism and • Global manufacturing •Organization and control
FACTORS transportation and supply chain mechanisms
• Licensing and franchising management
• Competitive product • Turnkey operations • Accounting
strategy • Management contracts • Finance
• Company resources • Direct and portfolio • Human Resources
and experience investments (including
• Competitors in each JV)
market
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 Forces driving globalization
1. Liberalization of cross border trade and resource
movements
2. Development of services that support international
business
3. Increase in and expansion of technology
4. Growing consumer pressure
5. Increased global competition
6. Changing political situation
7. Expanded cross-national cooperation
8. Increased disposable income in emerging countries

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1. Liberalization of cross border trade
• Change from protected to open economy
• Citizens demanding greater variety of goods
in line with international standards
• Competition making producers more efficient
• Each country wanting other countries to
lower trade barriers

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 2. Development of services that
support IB
• Easier local currency vs. forex dealings
• Growth of courier services
• Infrastructure cutting across countries
• Easing visa restrictions

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 3. Increase in and expansion of
technology
• High levels of innovation across countries
• Faster go-to-market

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 4. Growing consumer pressure
• Consumers wanting better and highly
differentiated products and services
• High levels of consumer awareness
• Easy access to information on products
around the world

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 5. Increased global competition
• Companies looking to get into markets where
their domestic competition goes
• Companies looking to source from countries
from where their competitors do
• ‘Born global’ companies increasing rapidly
• Going global becoming the only way to
survive

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 6. Changing political situation
• Fall of the Soviet federation – hence change
in economic policies
• Willingness of governments to improve
facilities for trade – travel, airports,
information flow etc

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 7. Expanded cross national
cooperation
• Treaties, agreements, consultation
• Reciprocal advantages
• Solving problems jointly
• Role of WB, IMF, WTO etc.

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 What’s wrong with globalization?
1. Threats to national sovereignty
– Question of local objectives and policies
– Question of local over dependence
– Question of cultural homogeneity
2. Economic growth and environmental stress
3. Growing income inequality

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International Business 17
 Why companies engage in
international business
1. Create more value for their investors
2. Expanding sales
3. Acquiring resources
4. Minimizing risk

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 Reasons for going global
1. To achieve high profits rate of profits
2. Expanding the production capacities beyond
the demand of the domestic country.
3. Severe competition in home country
4. Limited home market
5. Political stability vs political instability
6. High cost of transportation
7. Nearness to raw materials

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 Reasons for going global
7. Availability of quality human resource at less
cost
8. Liberalization and globalization
9. To increase market share
10. To achieve higher rate of economic
development
11. Tariff and Import quotas

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THE STRATEGY OF INTERNATIONAL
BUSINESS

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 The strategy of International
Business
• Companies that operate internationally they face two
asymmetric forces
- Pressure of global integration – should a company
standardize all the activities in its value chain to achieve
economies of scale?
- Pressure of Local responsiveness - should it customize all
its local activities as per requirement in respective country?
• There is straightforward relationship between: higher the
pressure of global integration, the greater the need to
maximize efficiency
• Higher the pressure of local responsiveness to local
conditions, the greater the need to maximize market
sensitivity

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 Conflicting forces
• Firms that compete in the global marketplace face
these two conflicting types of competitive pressures
all the time
– the pressures limit the ability of firms to realize location
economies and experience effects, leverage products, and
transfer skills within the firm
1. Pressures for cost reductions - force the firm to lower
unit costs
2. Pressures to be locally responsive - require the firm to
adapt its product to meet local demands in each
market but, this strategy can raise costs.
So, Dealing with both pressures is challenging.

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 When Are Pressures For
Local Responsiveness Greatest?
1.Differences in consumer tastes and preferences
– strong pressure emerges when consumer tastes and
preferences differ significantly between countries
2.Differences in traditional practices and infrastructure
– strong pressure emerges when there are significant
differences in infrastructure and/or traditional practices
between countries

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 When Are Pressures For
Cost Reductions Greatest?
1. In industries producing commodity type products
that fill universal needs (needs that exist when the
tastes and preferences of consumers in different
nations are similar if not identical) where price is
the main competitive weapon
2. When major competitors are based in low cost
locations
3. Where consumers are powerful and face low
switching costs

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 Strategy to deal with this
conflicting situation
• There are four basic strategies to compete
in international markets
– the appropriateness of each strategy depends
on the pressures for cost reduction and local
responsiveness in the industry
1. International strategy
2. Multinational strategy – localization strategy
3. Global strategy
4. Transnational strategy

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Strategy of International Busniess

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 International strategy
1. International Startegy – take products first
produced for the domestic market and sell them
internationally with only minimal local
customization
•This strategy makes sense when
– there are low cost pressures and low pressures
for local responsiveness
- Ethnocentric approach

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 Localization- Multinational
strategy
2. Localization - increase profitability by customizing
goods or services so that they match tastes and
preferences in different national markets
•Polycentric approach
•This strategy makes sense when
– there are substantial differences across nations with
regard to consumer tastes and preferences and cost
pressures are not too intense
Ex : accounting products and finance related software,
retail banking, Health Care products,

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 Global strategy
3. Global standardization - increase profitability
and profit growth by reaping the cost reductions
from economies of scale, learning effects, and
location economies
– goal is to pursue a low-cost strategy on a global
scale
•This strategy makes sense when
– there are strong pressures for cost reductions
and demands for local responsiveness are
minimal
Ex- aircraft industry, semiconductors chips- intel,
bulk chemicals, American express cards

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 Transnational strategy
4. Transnational - tries to simultaneously achieve low
costs through location economies, economies of scale,
and learning effects
– firms differentiate their product across geographic
markets to account for local differences and foster a
multidirectional flow of skills between different
subsidiaries in the firm’s global network of operations
•This strategy makes sense when
– both cost pressures and pressures for local
responsiveness are intense
Ex- electronic commerce, MTV,

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MODES OF OPERATIONS IN
INTERNATIONAL BUSINESS

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 Modes of operations in international
business
1. Merchandise exports and imports
2. Service exports and imports
3. Collaboration strategy
4. Investments
– Direct investment
– Portfolio investment

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 Exports & Imports
• Exporting refers to the sale of goods or
services produced by a company based in one
country to customers that reside in a different
country
• Importing is the purchase of goods or services
by a company based in one country from
sellers that reside in another

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 Advantages of Exporting
• Lower investment way to enter foreign
markets
• Lower risk way to enter foreign markets
• Expands sales
• Achieves scale economies
• Diversifies sales

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 Principal types of exporting
• Direct: goods and services are sold to an
independent party outside of the exporter’s
home country.
• Indirect exports: goods and services are sold
to an intermediary in the domestic market,
which then sells the goods in the export
market.

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 General Motives for Collaborative
Arrangements
• To Spread and Reduce Costs
• To Specialize in Competencies
• To Avoid or Counter Competition
• To Gain Knowledge

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 International Motives for
Collaborative Arrangements
• Gain location-specific assets
• Overcome legal constraints
• Diversify geographically
• Minimize exposure in risky environments

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 Collaborative strategies
• With Non Equity Alliance
Licensing
Franchising
Contract Manufacturing
turnkey projects
Business Process Out sourcing
• Equity Alliance
Joint venture
Mergers
Acquisitions

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 Licensing

• Domestic manufacturer leases the rights to the use its

intellectual property, i.e. technology, work method, patents,
copy rights, brand name, trade marks etc. to a manufacturer
in the foreign country for a fee.
• Parties involved : Licensor and Licensee
• Licensor: manufacturer in the domestic firm
• Licensee: Manufacturer in the foreign nation.
• Cost effective market entry.
• Domestic firm earns revenue without additional investments.
• Ex: GlaxoSmithKline and Merck & Co. and software companies
like Microsoft and Sony , emoji company GmbH, Walt Disney
Company in 2009 acquired marvel comics.
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 Licensing

1. emoji® – The Official Brand, thousands of copyrighted icons

available for legal licensing & merchandising. Few companies
(licensee) are facebook, whatapp, nestle, coca-cola, chitos ,
zara, nicklodian, Kellogg´s Chocos, O2
2. As part of this agreement, Nestlé is granting the Coca-Cola
Company a license to manufacture and distribute NESTEA in
Canada, Spain, Portugal, Andorra, Romania, Hungary and
Bulgaria. In other countries that are currently part of the JV,
The Coca-Cola Company will no longer produce or distribute
NESTEA.

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 International franchising:
• Under franchising, an independent organization called franchisee
operate the business under the name of another company called
franchisor. Under this agreement the franchisor pays a fee to the
franchisor. Franchisor provide following services to franchisor:
1. trade marks
2. operating system
3. product reputation
4. continues support system like: Advertising, training
employee, quality assurance services and reservation system.
Ex: Domino’s (Jubilant Food Works), Pizza hut, KFC and MC Donald
(Hardcastle private limited)

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 Contract Manufacturing
• Some companies outsource their part of or entire production and
concentrate on marketing operations. This process is called the
contract
• Ex: Nike has concentrated with a number of factories in South-Asia
to produce its athletic footwear and it concentrates on marketing.
• Bata also contracted with a number of cobbler in India to produce
its foot ware and concentrate on marketing .
• Mega Toys- A Los angles based company concentrated with Chinese
plants to produce toys and Mega Toys concentrates on marketing.
• Sony TV: Sony starts manufacturing Bravia Android TVs with
Competition Team Technology (India) Pvt. Ltd. at
Sriperumbudur in Tamil Nadu.

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 Business Process outsourcing
• BPO is the long term contracting out of non-core business processes to an
outside provider to help achieve increased shareholder value
• Why BPO?-
Availability of highly qualified skill pool and faster adoption of well-defined
business processes leads to higher productivity gains without
compromising on quality.
• To enable executive to concentrate on strategy
• To improve process and save money
• Increase organizational capability

Forms of BPO may include both IT, management and business operation
may depend upon IT, they are separate function from core IT operation
like network management..

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 Turnkey project:
• A turnkey project is a contract under which a firm agrees to fully design,
construct and equip a manufacturing/business/service facilities and turn
project to the purchaser when it is ready for operation for a remuneration.
• Forms of remuneration include:
1. A fixed price (a firm plans to implement the project below this
price).
2. Payment on cost plus basis (i.e. total cost incurred +profit)

• International turnkey projects include nuclear power plant, air port,

oil refinery, national highway, railway lines. They all are large and
multilayer projects.
Ex: Delhi metro and Japanese ODA (official development assistance) .

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 Equity Alliance – FDI & FPI
1. FDI through
1. Joint Venture (A +B = C)
Two and more companies they jointly invest in equity (Facility and
Infrastructure) and form a new company.
Ex: Nestle and Coca-Cola (NESTEA) beverage worldwide partner before
2015.
The Renault-Nissan Alliance’s joint-venture is called eGT New Energy
Automotive Co. in China.
2. Merger (A + B = AB)
Two or more companies join their resources and form a new company.
Parent company will not exist.
Ex: Vodafone and Idea (future), bank of Rajasthan and ICICI bank,
ACC and Abuaja cement, Disney and ABC television group.

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 Equity alliance – FDI & FPI
iii) Acquisition (A B = A) - A takeover resources of B and form a
new company A.
Ex:
•Disney To Buy Some of 21 st Century Fox's Assets including
21 st Century Fox's studio, 21 st Century Fox's Television, Fox-owned
cable networks (including FX and National Geographic)
•Amazon would be buying high-end organic grocery chain Whole Foods
for $13.7 billion.
•Google division confirmed that it plans to acquire part of HTC's mobile
division team for $1.1 billion
•$26 billion deal of Microsoft and LinkedIn both closed last year

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 FDI & FPI
1. Green Field Strategy
100% wholly owned subsidiary of a international company
Greenfield Venture is a form of market entry strategy with
establishment of a new wholly owned subsidiary in a foreign
country by constructing its facilities from start. Through
Greenfield Venture, a business enters a new market without the
help of another business which is already present there.
EX: Mercedes Benz Green Field
2. Foreign Portfolio Investment

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 Why international business differs
from domestic business
1. Physical and social factors
– Geographic influences
– Political policies
– Legal policies
– Behavioral factors
– Economic forces
2. Competitive factors
– Competitive strategy
– Company resources and experience
Competitors in each market

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