Unit -1

1. Foreign direct investment vs Foreign institutional Investors

Ans. Both are the forms of investment made in a foreign country. FDI is made to
acquire controlling ownership in an enterprise but FII tends to invest in the foreign
financial market. FDI is termed as a direct investment because the investor company
looks for a substantial amount of management control or influence over the foreign
company. FII are the investors that pool their money to invest in the assets of the
country situated abroad.

BASIS FOR
FDI FII
COMPARISON

Meaning When a company situated in one FII is when foreign

country makes an investment in a companies make
company situated abroad, it is investments in the stock
known as FDI. market of a country.

Entry and Exit Difficult Easy

What it brings? Long term capital Long/Short term capital

Transfer of Funds, resources, technology, Funds only.

strategies, know-how etc.

Economic Growth Yes No

Consequences Increase in country's Gross Increase in capital of the

Domestic Product (GDP). country.

Target Specific Company No such target, investment

flows into the financial
market.

Control over a Yes No

company
 2. Tariff vs Non-tariff barriers

Ans. Non-Tariff Barriers (NTBs) refer to restrictions that result from prohibitions, conditions,
or specific market requirements that make importation or exportation of products difficult
and/or costly. NTBs also include unjustified and/or improper application of Non-Tariff
Measures (NTMs) such as sanitary and phytosanitary (SPS) measures and other technical
barriers to Trade (TBT).
NTBs arise from different measures taken by governments and authorities in the form of
government laws, regulations, policies, conditions, restrictions or specific requirements, and
private sector business practices, or prohibitions that protect the domestic industries from
foreign competition.
Non-tariff barriers Examples:

● Occupational safety and health regulation

● Employment law
● Import licenses
● State subsidies, procurement, trading, state ownership
● Export subsidies
● Fixation of a minimum import price
● Product classification
● Quota shares

Tariff barriers: It is a custom duty or a tax imposed on products that move across borders. It acts
as an instrument to control imports or exports.
Eg: Import duty
Export tariff: export tax
Transit duty: transport duty
Ad valorem duty: fixed value/percentage on invoice of commodity

3. Intellectual Property Rights

Ans. Intellectual property (IP) is a category of property that includes intangible creations of the

human intellect. There are many types of intellectual property, and some countries recognize more
than others. The most well-known types are copyrights, patents, trademarks, and trade secrets.

Patents
A patent is a form of right granted by the government to an inventor or their successor-
in-title, giving the owner the right to exclude others from making, using, selling, offering
to sell, and importing an invention for a limited period of time, in exchange for the public
disclosure of the invention. An invention is a solution to a specific technological
problem, which may be a product or a process and generally has to fulfill three main
requirements: it has to be new, not obvious and there needs to be an industrial
applicability.
Copyright
A copyright gives the creator of an original work exclusive rights to it, usually for a
limited time. Copyright may apply to a wide range of creative, intellectual, or artistic
forms, or "works". Copyright does not cover ideas and information themselves, only the
form or manner in which they are expressed.
Industrial design rights
An industrial design right (sometimes called "design right" or design patent) protects the
visual design of objects that are not purely utilitarian. An industrial design consists of the
creation of a shape, configuration or composition of pattern or color, or combination of
pattern and color in three-dimensional form containing aesthetic value. An industrial
design can be a two- or three-dimensional pattern used to produce a product, industrial
commodity or handicraft. Generally speaking, it is what makes a product look appealing,
and as such, it increases the commercial value of goods. [32]
Trademarks
A trademark is a recognizable sign, design or expression which
distinguishes products or services of a particular trader from similar products or services
of other traders.[36][37][38]
Trade dress
Trade dress is a legal term of art that generally refers to characteristics of the visual and
aesthetic appearance of a product or its packaging (or even the design of a building)
that signify the source of the product to consumers.
Trade secrets
A trade secret is a formula, practice, process, design, instrument, pattern, or compilation
of information which is not generally known or reasonably ascertainable, by which
a business can obtain an economic advantage over competitors and customers. There
is no formal government protection granted; each business must take measures to
guard its own trade secrets (e.g., Formula of its soft drinks is a trade secret for Coca-
Cola.)

4. International Management vs Domestic management

Ans. Trade refers to the exchange of goods and services for money, which can be
undertaken within the geographical limits of the countries or beyond the boundaries.
The trade which takes place within the geographical boundaries of the country is called
domestic business, whereas trade which occurs between two countries internationally,
is called international business.
 BASIS FOR
DOMESTIC BUSINESS INTERNATIONAL BUSINESS
COMPARISON

Meaning A business is said to be International business is one

domestic, when its economic which is engaged in economic
transactions are conducted transaction with several
within the geographical countries in the world.
boundaries of the country.

Area of operation Within the country Whole world

Quality standards Quite low Very high

Deals in Single currency Multiple currencies

Capital Less Huge

investment

Restrictions Few Many

Nature of Homogeneous Heterogeneous

customers

Business It can be conducted easily. It is difficult to conduct research.

research

Mobility of factors Free Restricted

of production

5. Sources and Consequences of Political Risks?

Ans. International trade can be a risky business at the best of times even in the most
developed markets, but Canadian exporters need to be extra vigilant when venturing
into emerging markets where the political risk may be more difficult to discern and deal
with.
While political risk is unavoidable in the global marketplace, risk also comes with
reward.
Common types of political risks

To better understand the impact that certain political risks can have on your business,
let’s look at three of the most common types and real-world examples.

Expropriation/government interference

For no apparent reason or with no justification, foreign governments can seize,

confiscate or otherwise expropriate a company’s investment. They can even adopt a
series of measures that have the effect of expropriation. In either case, the result is that a
firm could lose overseas investments or assets.
Real-world example: Following a coup attempt in 2016, the Turkish government has
targeted those domestic companies associated with the Gulen movement, which it
claims was behind the attempt. The actions have included arbitrary impositions of
regulatory requirements up to outright expropriation. The impact to Canadian
companies has been that they have needed to add a further level of counterparty due
diligence to any business dealings with Turkish companies to determine their
relationship with the government.

Transfer and Conversion

During an economic crisis, foreign governments or central banks may decide to impose
restrictions or prohibitions on the conversion of the local currency to hard currency or
may prevent hard currency from leaving the country.
Real-world example: Faced with lower oil prices and consequently dwindling foreign
exchange reserves, in 2015 the Nigerian government started imposing capital controls
and prevented Nigerian importers from obtaining foreign currency through the banking
system. By 2016, this resulted in Nigerian companies being unable to pay Canadian
suppliers in a timely manner.
Political violence
Political terrorism, war, civil strife or other forms of political violence can damage or
destroy a company’s assets and prevent it from conducting operations essential to doing
business.
Real-world example: Starting in September 2017, violence erupted in parts of
Ethiopia as certain ethnic groups demonstrated against state discrimination. Following
months of confrontations between security forces and protests, the country had to
declare multiple state of emergencies. Some international companies, who are perceived
as receiving favouritism from the state, were specifically targeted by protesters. One
lesson for Canadian companies has been the importance of working with local
communities and not just government.
6. Strategic concerns with regard to legal environment?

Ans. Many legal issues affect the process of value creation, ranging from where a
company makes a product to how it tries to market it. Specifically, the following legal
contingencies often shape an international company’s strategic plans.
i) Product Safety and Liability:
International companies often must customize products to comply with local standards if
they are to do business in a particular country. Sometimes these legal standards are
higher than in their home market, sometime they are just different. Product liability laws
are particularly stringent in the United States, the EU, and many other wealthy
countries.

ii) Marketplace Behaviour:

National laws determine permissible practices in pricing, distribution, advertising, and
promotion of products and services. For instance, TV cigarette advertising is prohibited
in many countries. In France, a manufacturer cannot offer a product it does not
manufacture as an inducement to buy one of its products. Germany prohibits
comparative advertising, while China prohibits comparisons if they reflect negatively on
the other product.

iii) Product Origin:

National laws shape the flow of products across borders. Countries devise laws that use
the origin of the product to determine the charge to the provider for the right to bring it
into the local market. Also, countries measure product origin to determine the proportion
of the product that is made in the local market (the idea of local content) versus made
outside the local market. Local content is important to all nations, and most use this sort
of law to push foreign companies to make a greater share of the product in the local
market.

iv) Legal Jurisdiction:

Each country specifies which law should apply and where litigation should occur when it
involves agents – whether they are legal residents of the same or of different countries.
A nation’s courts have the final decision on jurisdiction. Usually, a company will push
the court in its home country to claim jurisdiction, believing it will then receive more
favorable treatment. As such, companies must make sure that contracts include a
choice of law clause and a choice of forum clause that specifies which law will govern in
the event of a dispute.

v) Arbitration:
Often, companies will resort to arbitration to resolve disputes. A small number of
complaints against governments are heard through the International Centre for
Settlement of Investment Disputes. This body is closely linked to the World Bank; a
noncompliant government risks getting cut off from bank funds if it decides not to
honour its legal debts.
Generally, though, most arbitration is governed by the New York Convention, a protocol
specified in 1958 that allows parties to choose their own mediators and resolve disputes
on neutral ground. The international accord limits appeal options to narrow
circumstances in order to make the decision more enforceable.

7. Different stages of product development in IB?

Ans. Five stages are:

1. Idea generation
You don’t have to solely rely on your own creativity for ideas for new products or
services. Look for ideas in any number of places: requests from customers, brainstorms
with employees, responses to a competitor’s product, or suggestions on social media.

2. Research and development

R&D has two components. First, you’ll need to research the costs of developing a
product or service and the market need. The Competitive Intelligence Tool can help with
market and competitor analysis. Next, you’ll need to create a prototype. This allows you

to test and refine your design, as well as determine how to market it. 3. Testing

Once you’ve developed a prototype of the product or service, it’s time to test it with
customers. This can be done in formal focus groups of customers and prospects, or
informally by testing it with existing customers. Ask about what they see as standout
when it comes to your products or services, where they feel your products or services
can be improved, and if your price point is competitive.

4. Analysis
Testing the product or service will yield valuable data from customers, such as which
features they like or don’t like, how much they’ll pay for it, and any potential problems.
By analyzing the data, you can make modifications to the final offering before rollout.

5. Rollout

The final stage in new product and service development is rolling it out to the market.
It’s unlikely that your business will prosper through word of mouth alone. Promote your
product or service through marketing and advertising to help make your launch a
success. Fortunately, these days you have endless options — both digital and
traditional — for connecting with potential customers.

8. What is globalization and its various components?

Ans.
 Globalization can be considered a process: a lengthy and often times convoluted process in which
movement in one direction or the other is estimated by porous boundaries, shifting alliances, and
seemingly contradictory patterns. The major elements of globalization - the impact of trade
agreements; the fetters on cross- border capital movements; the effects of migration patterns; the
accessibility and transparency of information; and the spread of technology – ebb and flow from the
vicissitudes of political, cultural, and economic conditions.
Below is an explanation of the characteristic elements attached to Globalization:

▪ Trade Agreements - Bilateral, regional or multilateral economic arrangements designed to reduce

or eliminate trade barriers.
▪ Capital Flow - Measurement of an increase or decrease in a nation’s domestic or foreign assets.
▪ Migration Patterns - Impact of labor market fluidity on production costs through the loss
(emigration) or gain (immigration) of potential workers, especially those with particular skills.
>Information Transfer - Communication trends that help mitigate the asymmetric functioning of markets
and economies.

▪ Spread of Technology - Rapid dispersion of the means and methods of producing goods and
services.

9. International Entry Modes: Factors effecting the decisions on mode of entry?

Ans.

Type of Entry Advantages Disadvantages

Low control, low local knowledge,
Exporting Fast entry, low risk potential negative environmental impact
of transportation
Less control, licensee may become a
Licensing and competitor, legal and regulatory
Fast entry, low cost, low risk
Franchising environment (IP and contract law) must
be sound
Shared costs reduce investment Higher cost than exporting, licensing, or
Partnering and Strategic
needed, reduced risk, seen as franchising; integration problems
Alliance
local entity between two corporate cultures
Fast entry; known, established High cost, integration issues with home
Acquisition
operations office
Gain local market knowledge;
Greenfield Venture
can be seen as insider who High cost, high risk due to unknowns,
(Launch of a new, wholly
employs locals; maximum slow entry due to setup time
owned subsidiary)
control
1) External Factors:
i) Market Size:
Market size of the market is one of the key factors an international
marketer has to keep in mind when selecting an entry mode. Countries
with a large market size justify the modes of entry with long-term
commitment requiring higher level of investment, such as wholly
owned subsidiaries or equity participation.

ii) Market Growth:

Most of the large, established markets, such as the US, Europe, and
Japan, has more or less reached a point of saturation for consumer
goods such as automobiles, consumer electronics. Therefore, the
growth of markets in these countries is showing a declining trend.
Therefore, from the perspective of long-term growth, firms invest
more resources in markets with high growth potential.

iii) Government Regulations:

The selection of a market entry mode is to a great extent affected by
the legislative framework of the overseas market. The governments of
most of the Gulf countries have made it mandatory for foreign firms to
have a local partner. For example, the UAE is a lucrative market for
Indian firms but most firms operate there with a local partner.

iv) Level of Competition:

Presence of competitors and their level of involvement in an overseas
market is another crucial factor in deciding on an entry mode so as to
effectively respond to competitive market forces. This is one of the
major reasons behind auto companies setting up their operations in
India and other emerging markets so as to effectively respond to
global competition.

v) Physical Infrastructure:
ADVERTISEMENTS:
The level of development of physical infrastructure such as roads,
railways, telecommunications, financial institutions, and marketing
channels is a pre-condition for a company to commit more resources
to an overseas market. The level of infrastructure development (both
physical and institutional) has been responsible for major investments
in Singapore, Dubai, and Hong Kong. As a result, these places have
developed as international marketing hubs in the Asian region.

vi) Level of Risk:

From the point of view of entry mode selection, a firm
should evaluate the following risks:
a) Political Risk:
Political instability and turmoil dissuades firms from committing
more resources to a market.
ADVERTISEMENTS:

b) Economic Risk:
Economic risk may arise due to volatility of exchange rates of the
target market’s currency, upheavals in balance of payments situations
that may affect the cost of other inputs for production, and marketing
activities in foreign markets. International companies find it difficult
to manage their operations in markets wherein the inflation rate is
extremely high.

c) Operational Risk:
In case the marketing system in an overseas country is similar to that
of the firm’s home country, the firm has a better understanding of
operational problems in the foreign market in question.

vii) Production and Shipping Costs:

ADVERTISEMENTS:

Markets with substantial cost of shipping as in the case of low-value

high-volume goods may increase the logistics cost.
viii) Lower Cost of Production:
It may also be one of the key factors in firms deciding to establish
manufacturing operations in foreign countries.

2) Internal Factors:
i) Company Objectives:
Companies operating in domestic markets with limited aspirations
generally enter foreign markets as a result of a reactive approach to
international marketing opportunities. In such cases, companies
receive unsolicited orders from acquaintances, firms, and relatives
based abroad, and they attempt to fulfill these export orders.

ii) Availability of Company Resources:

Venturing into international markets needs substantial commitment
of financial and human resources and therefore choice of an entry
mode depends upon the financial strength of a firm. It may be
observed that Indian firms with good financial strength have entered
international markets by way of wholly owned subsidiaries or equity
participation.

iii) Level of Commitment:

ADVERTISEMENTS:

In view of the market potential, the willingness of the company to

commit resources in a particular market also determines the entry
mode choice. Companies need to evaluate various investment
alternatives for allocating scarce resources. However, the commitment
of resources in a particular market also depends upon the way the
company is willing to perceive and respond to competitive forces.

iv) International Experience:

A company well exposed to the dynamics of the international
marketing environment would be at ease when making a decision
regarding entering into international markets with a highly intensive
mode of entry such as Joint ventures and wholly owned subsidiaries.
v) Flexibility:
Companies should also keep in mind exit barriers when entering
international markets. A market which presently appears attractive
may not necessarily continue to be so, say over the next 10 years. It
could be due to changes in the political and legal structure, changes in
the customer preferences, emergence of new market segments, or
changes in the competitive intensity of the market.

10. EPRG approach in global business.

Ans. EPRG framework was introduced by Wind, Douglas and Perlmutter. This
framework addresses the way strategic decisions are made and how the relationship
between headquarters and its subsidiaries is shaped.
Perlmutter’s EPRG framework consists of four stages in the international operations
evolution. These stages are discussed below.

Ethnocentric Orientation
The practices and policies of headquarters and of the operating company in the home
country become the default standard to which all subsidiaries need to comply. Such
companies do not adapt their products to the needs and wants of other countries
where they have operations. There are no changes in product specification, price and
promotion measures between native market and overseas markets.
The general attitude of a company's senior management team is that nationals from
the company's native country are more capable to drive international activities forward
as compared to non-native employees working at its subsidiaries. The exercises,
activities and policies of the functioning company in the native country becomes the
default standard to which all subsidiaries need to abide by.
The benefit of this mind set is that it overcomes the shortage of qualified managers in
the anchoring nations by migrating them from home countries. This develops an
affiliated corporate culture and aids transfer core competences more easily. The major
drawback of this mind set is that it results in cultural short-sightedness and does not
promote the best and brightest in a firm.

Regiocentric Orientation
In this approach a company finds economic, cultural or political similarities among
regions in order to satisfy the similar needs of potential consumers. For example,
countries like Pakistan, India and Bangladesh are very similar. They possess a strong
regional identity.
Geocentric Orientation
Geocentric approach encourages global marketing. This does not equate superiority
with nationality. Irrespective of the nationality, the company tries to seek the best men
and the problems are solved globally within the legal and political limits. Thus, ensuring
efficient use of human resources by building strong culture and informal management
channels.
The main disadvantages are that national immigration policies may put limits to its
implementation and it ends up expensive compared to polycentrism. Finally, it tries to
balance both global integration and local responsiveness.

Polycentric Orientation
In this approach, a company gives equal importance to every country’s domestic
market. Every participating country is treated solely and individual strategies are
carried out. This approach is especially suitable for countries with certain financial,
political and cultural constraints.
This perception mitigates the chance of cultural myopia and is often less expensive to
execute when compared to ethnocentricity. This is because it does not need to send
skilled managers out to maintain centralized policies. The major disadvantage of this
nature is it can restrict career mobility for both local as well as foreign nationals,
neglect headquarters of foreign subsidiaries and it can also bring down the chances of
achieving synergy.

11. Porter’s Diamond framework

Ans. Michael Porter’s Diamond Model (also known as the Theory of National Competitive
Advantage of Industries) is a diamond-shaped framework that focuses on explaining why certain
industries within a particular nation are competitive internationally, whereas others might not.
And why is it that certain companies in certain countries are capable of consistent innovation,
whereas others might not? Porter argues that any company’s ability to compete in the international
arena is based mainly on an interrelated set of location advantages that certain industries in
different nations posses, namely: Firm Strategy, Structure and Rivalry; Factor Conditions; Demand
Conditions; and Related and Supporting Industries. If these conditions are favorable, it forces
domestic companies to continiously innovate and upgrade. The competitiveness that will result
from this, is helpful and even necessary when going internationally and battling the world’s largest
competitors. This article will explain the four main components and include two components that
are often included in this model: the role of the Government and Chance. Together they form
the national environment in which companies are born and learn how to compete.
 12. Deming Eclectic OLI model

Ans. An eclectic paradigm, also known as the ownership,

location, internationalization (OLI) model or OLI framework, is a three-tiered
evaluation framework that companies can follow when attempting to determine if
it is beneficial to pursue foreign direct investment (FDI). This paradigm assumes
that institutions will avoid transactions in the open market if the cost of
completing the same actions internally, or in-house, carries a lower price. It is
based on internalization theory and was first expounded upon in 1979 by the
scholar John H. Dunning.

KEY TAKEAWAYS

● An eclectic paradigm is also known as the ownership, location,

internationalization (OLI) model or OLI framework.
● The eclectic paradigm takes a holistic approach to examining entire
relationships and interactions of the various components of a business.
● The goal is to determine if a particular approach provides greater overall
value than other available national or international choices for the
production of goods or services.
Understanding Eclectic Paradigms
The eclectic paradigm takes a holistic approach to examining entire relationships
and interactions of the various components of a business. The
paradigm provides a strategy for operation expansion through FDI. The goal is to
determine if a particular approach provides greater overall value than other
available national or international choices for the production of goods or services.
Since businesses seek the most cost-effective options while still
maintaining quality, they may use the eclectic paradigm to evaluate any scenario
which exhibits potential.