INTERNATIONAL BUSINESS MANAGEMENT

UNIT –1

2 MARKS

1. What is globalization?
Globalization refers to the shift toward a more integrated and interdependent economy .
Globalization has several facts including the globalization of market and the globalization of
productions.

2. What is totalitarianism?
Totalitarianism is a form of government in which one person or political party exercises
absolute control over all spheres of human life and prohibits opposing political parties.
a. Communist totalitarianism – Eg – china, Vietnam.
b. Theocratic totalitarianism – The Islamic republic of Iran.
c. Tribal totalitarianism - Zimbabwe.
d. Right –wing totalitarianism –Singapore, South Korea.

3. What is meant by globalization of market?

The globalization of market refers to the merging of historically distinct and separate
national markets into one huge global market place.

4. What is meant is globalization of production?

It refers to the sourcing of goods and services from locations around the globe to take
advantage of national differences in the cost and quality factors of production(such as labor, energy
land and capital).

5. How does international business differ from domestic business?

i. countries are different
ii. The range of problems confronted in an international business is wider and the
problems are complex than the domestic business.
iii. International business must find ways to work within the limits imposed by
government’s intervention.
iv. International transaction involve converting money into different currencies.

6. What is meant by collectivism?

Collectivism refers to a political system that stresses the primacy of collective
goals over individual goals. When collectivism is emphasized, the needs of society as a whole are
generally viewed as being more important than individual freedoms.

7. What is meant by market economy?

 All productive activities are privately owned, as opposed to being owned by the states. The
goods and services that a country and demand and signalled to producers through the price system.

8. What is meant by mixed economy?

In a mixed economy, certain sectors of economy are left to private ownership and free market
mechanisms while other sectors have significant state ownership and government planning.

9. What do you meant by intellectual property right?

Intellectual property right refers to property right that is the product of intellectual activity,
such as computer software, a screenplay, a music score or the chemical formula for a new drug.
Patents, copy rights, and trademarks establish ownership rights over intellectual property.

10. What is meant by patent?

A patent grants the inventor of a new product or process exclusive rights for a defined period
to the manufacture, use, or ale of that invention.

11. What is meant by copyright?

Copyright is the exclusive legal right of author, composer, playwright, artist, an publisher to
publish and disperse their work.

12. What is meant by trade mark?

Trademarks are designs and names, often officially registered by which merchants of
manufactures designate and differentiate their products.

13. What is international business environment?

International business environment is regarded as the sum total of all the external forces
working upon the firm as it goes about its affairs in foreign and domestic markets

14. What is culture?

Culture is a system of values and norms that when taken together constitute a design for
living.

15. What is meant by ethnocentrism?

Ethnocentrism is a belief in the superiority of one’s own ethnic group or culture.

16. What are the determinants of culture?

i. Religion
ii. Social structure
iii. Language
iv. Education
v. Economic philosophy
vi. Political philosophy
17. What is meant by economic risk?
Economic risk can be defined as the likelihood that economic mismanagement will cause
drastic changes inn a country’s business environment that hurt the profit and other goals of a business
enterprise.

18. Define International business.

International business may be defined as all those business activities that involve cross border
transactions of goods, services and resources between two or more nations.

19. What is Polycentrism?

Polycentrism can be defined as a host country orientation; which reflects host countries goals
and objectives with respect “to different management strategies and planning procedures with
regard to international operations.” Under a polycentric perspective, a company’s management team
believes that in international business practices local preferences and techniques are usually found
most appropriate to deal with the local market conditions

20. What are the factors to be considered to calculate country attractiveness?

Market size, geographic proximity, language and similarities in buying situations in the market,
the country’s view on outside companies and more especially its expatriates, Costs, resources,
infrastructure and transportation, Political stability. On the financial side, country promising higher
liquidity should be preferred even at the cost of lower returns.

DISCUSS THE FACTORS CAUSING GLOBALISATION OF BUSINESS

 Increase in Global competition

 Rapid increase and expansion of technology

 Liberalization of cross border movements.

 Development of Supporting industries

 Decline of Barriers to Trade and Investments.

 Decline in Investment barriers.

 High rate of Profit

 Untapped Markets

 Expansion of production beyond the demand of the Home market.

 Limited Domestic Market

  Proximity to Raw materials

 Availability of labor

 Increasing market share

 Product development cost and efforts.

 World Economic Trends.

Increase in global competition

The pressure of increased foreign competition can force a company to expand its
business into international market. Nowadays companies can respond rapidly to many foreign sales
opportunities. So increase in global competition lead to globalization.

Rapid increase and expansion of technology

The pace of the technology advance has accelerated to greater heights and the
knowledge of product and services is available more quickly due to communication and transportation
technology.

Liberalization of Cross Border Movement

World Trade Organizations (WTO) in 1995 made some rules due to which the
restrictions imposed on international trade are diminishing. Though liberalization have been occurring
even in countries outside WTO. Liberalization of cross border movement also causes globalization.

Development of Supporting Services

Banks have developed efficient means for companies to receive payments for their
foreign sales, e.g Western Union money transfer. These developments in supporting services also
facilitates globalization.

Decline of Barriers to Trade and Investment

Average tariff rates have significantly since 1950’s, and under the Uruguay
agreement, this removal of barriers to trade has taken place in conjunction with increased trade,
world output and foreign direct investment.

High rate of Profit

When the firms do not earn higher profits or expected profits in the domestic
markets, business firms search for foreign markets, which may promise higher rate of profit.

Untapped Markets
 International business may produce ample chances of exploring foreign markets, so
that the production could be considerably increased. For e. g. Bata shoe company sells the shoes in
UK at price which is ten times more than their prices in India.

Expansion of Production beyond the Demand of home markets

Some of the companies may be compelled to produce to the fullest capacities of the
plant, which will be far more than domestic demand. These companies, in such cases, will forced to
sell their excess production in foreign countries.

Limited Domestic Market

If the size of the home market happens to be very small due to smaller size of the
country and also lower purchasing power of the people or both the companies have to
internationalize their operations.

Proximity to Raw Materials

In some cases, establishing the manufacturing centers in the foreign countries in the
foreign countries will be more advantageous due to nearness of the raw material. For e. g. US
companies located their manufacturing centres in Saudi Arabia due the availability of crude
petroleum.

Availability of Labour

Many developed countries establish their business concerns in less developed countries
due to availability of cheap labour in the less developed nation. E.g. Outsourcing jobs.

Increasing Market Share

Many large scale business companies would like to enhance their market share
in the global market. For this purpose, they would explore all possibilities of setting up manufacturing
centers or marketing centers. Hence there will be need for them to turn global.

Product Development Cost and Efforts

In several industries, the cost of new product development is very high and the
domestic market or restricted overseas market are not adequate to meet the huge cost of product
development. To restrain such high costs, globalization of business is required.

World Economic Trends

Another important factor for globalization of business is the difference in the

growth rates of the difference in the growth rates of the different economies and markets of the
world.
 Analyse in detail International business environment
The issues that international businesses face are entirely different from those that of
domestic firms. Whether the subject is political differences, trade and tariff issues or even corporate
makeup, the major issues of international business are issues that simply do not occur in domestic
businesses.

Three types of environment that affect the international business are as Follows:

1. Political environment.
2. Economic environment.
3. Cultural environment.

1. Political environment
Political environment refers to the factors or influence of the system of government
and judiciary in a country on international business. A political system refers to the rules of
the game on how a country is governed politically. There are 2 primary political systems that
exist all over the globe namely
i. Democracy
ii. Totalitarianism

Democracy

Democracy refers to a political arrangement, in which the supreme power is

vested with the people. The republican form of government is followed whereby the
public in a democratic manner, elect their representatives, who do the ruling.

E. g. India, U.S.A

Totalitarianism

Totalitarianism is a form of government in which one person or political party

exercises absolute control over all spheres of human life and prohibits opposing political
parties.
e. g. Cuba

There are four major forms of totalitarianism:

 Communist totalitarianism – Found in states where the communist party monopolizes power

 Theocratic totalitarianism - Found in states where political power is monopolized by a party,

group, or individual that governs according to religious principles

 Tribal totalitarianism - Found in states where a political party that represents the interests of a
particular tribe monopolizes power
  Right-wing totalitarianism - permits some individual economic freedom, but restricts individual
political freedom.

Political risks of international Business

Risks are faced due to host government’s actions like:

 Confiscation - Process of taking over the company’s assets without any compensation
 Expropriation - Refers to a foreign government’s taking over of a company’s assets for
a mere compensation, less than that of it market value.
 Nationalization - Refers to governments taking over the assets and property and operating the
business take over under its ownership.
 Domestication - Occurs when host country takes steps to transfer foreign investments to national
control and ownership through series of government decrease.
2. Economic Systems/Economic environment:
The economic environment of a country plays a significant role in international business
decisions and in establishing its attractiveness to trade or to locate manufacturing operations or to
invest by other countries.

Elements of Economic Environment that affects international business are:

 Gross national income(GNI) & gross domestic product(GDP)

 Purchasing power parity
 Degree of human development
 Inflation
 Unemployment
 Debt
 Labour and total cost

1. Gross national income(GNI) & gross domestic product(GDP)

GNI is the value of all production in the domestic plus the net flows of factor income
such as rents, profits, and labour income from abroad during a year. A country with low GNI
per capita may have a vibrant economy.

2. Purchasing power parity

PPP is the number of units of a country’s currency required to buy the same amounts of
goods and services in the domestic market that one unit of income would buy in the other
country. The most common PPP exchange rate comes from comparing a basket of goods
and services in a country with an equivalent basket in the United States.

3. Degree of human development

Managers should jointly consider both PPP and degree of human development in order
to fully measure development of an international market in terms of capabilities and
opportunities
.
4. Inflation
 Sustained rise in prices measured against a standard level of purchasing power is
called inflation. So inflation is a major determinant in interest rates, exchange rates, the cost
of living and also the stability of the current political system.

5. Unemployment
Countries that are unable to create jobs for their citizens create a risky business
environment the proportion of unemployed workers in a country shows how will a country
productively uses it human resources.

6. Debt
The larger the total debt becomes, the more uncertain a country’s economy becomes,
both in the present, as interest expenses divert money from more productive uses, and the
future, as people worry about the ability of future generations to pay back the debt.

7. Labour and total cost

The cost of labour is a key element of total costs for E. G the labour cost savings a
company realizes by outsourcing a service job to India can be as much as 60%.

Legal Systems

 The legal system of a country refers to the rules that regulate behavior along with the processes
by which the laws are enforced and through which redress for grievances is obtained

There are three types of legal systems:

 Common law - based on tradition, precedent, and custom

 Civic law - based on detailed set of laws organized into codes

 Theocratic law - law is based on religious teachings

The Determinants of Economic Development

 Countries have different levels of economic development

 Gross national income (GNI) per person is a common measure of economic development

 Purchasing power parity (PPP) involves adjusting GNI by purchasing power

Costs:

The costs of doing business in a country are influenced by political, economic, and legal factors:

 Political costs include the cost of paying bribes or lobbying for favorable or fair treatment

 Economic costs relate primarily to the sophistication of the economic system, including the
infrastructure and supporting businesses
  It can be more costly to do business in countries with dramatically different product, workplace,
and pollution standards, or where there is poor legal protection for property rights

Cultural environment:

 Culture is a system of values and norms that are shared among a group of people and that when
taken together constitute a design for living

 Determinants of culture are

 Political and economic philosophy,

 Social structure of a society,
 Religious and Ethical systems,
 Language,
 Education.

 values are abstract ideas about what a group believes to be good, right, and desirable

 norms are the social rules and guidelines that prescribe appropriate behavior in particular
situations

 Society refers to a group of people who share a common set of values and norms.

Values and Norms

 Values provide the context within which a society’s norms are established and justified and form
the bedrock of a culture

 Norms include folkways (the routine conventions of everyday life) and mores (norms that are
seen as central to the functioning of a society and to its social life)

Culture, Society, and The Nation-state:

 There is not a strict one-to-one relationship between a society and a nation state

 Nation-states are political creations that can contain one or more cultures

 Similarly, a culture can embrace several nations

The Determinants of Culture:

 The values and norms of a culture are the evolutionary product of a number of factors at work
in a society including religion, political and economic philosophies, education, language, and
social structure

Social Structure:

 Social structure refers to a society’s basic social organization

Two dimensions to consider:

 The degree to which the basic unit of social organization is the individual, as opposed to the
group

 the degree to which a society is stratified into classes or castes

Individuals and Groups:

 A group is an association of two or more people who have a shared sense of identity and who
interact with each other in structured ways on the basis of a common set of expectations about
each other’s behavior

 Societies differ in terms of the degree to which the group is viewed as the primary means of
social organization

 In many Western societies, there is a focus on the individual, and individual achievement is
common

 This contributes to the dynamism of the US economy, and high level of entrepreneurship

 But, leads to a lack of company loyalty and failure to gain company specific knowledge,
competition between individuals in a company instead of than team building, and less ability to
develop a strong network of contacts within a firm

 In many Asian societies, the group is the primary unit of social organization

 This may discourage job switching between firms, encourage lifetime employment systems,
and lead to cooperation in solving business problems

 But, might also suppress individual creativity and initiative

Social Stratification:

 All societies are stratified on a hierarchical basis into social categories, or social strata

While all societies are stratified to some extent, they differ by:

 the degree of mobility between social strata

 the significance attached to social strata in business contacts

 Social mobility is the extent to which individuals can move out of the strata into which they are
born

 A caste system is a closed system of stratification in which social position is determined by the
family into which a person is born, and change in that position is usually not possible during an
individual's lifetime
  A class system is a form of open social stratification in which the position a person has by birth
can be changed through his or her achievement or luck

 The social stratification of a society is significant if it affects the operation of business

organizations

 Class consciousness is a condition where people tend to perceive themselves in terms of their
class background, and this shapes their relationships with others

 In cultures where class consciousness is high, the way individuals from different classes work
together may be very prescribed and strained

Religious and Ethical Systems:

 Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred

 Ethical systems are a set of moral principles, or values, that are used to guide and shape
behavior

 Religion and ethics are often closely intertwined

 Four religions dominate society -Christianity, Islam, Hinduism, and Buddhism

 Confucianism is also important in influencing behavior and culture in many parts of Asia

Culture and Competitive Advantage:

The connection between culture and competitive advantage is important because:

 it suggests which countries are likely to produce the most viable competitors

 it has implications for the choice of countries in which to locate production facilities and do
business

FACTORS TO BE CONSIDERED TO DECIDE COUNTRY ATTRACTIVENESS

 Companies planning international business must plan strategies for going in a

sequential manner from one country to another for allotting resources and
entering a new country.

 Companies should become aware of the tools for comparing and rating different
countries. Thus, they get into the promising and profit-making opportunities.

 They should also avoid getting into expensive detailed scrutiny to survey a wide
spectrum of countries. Market size, case and matching areas of operations and
 geographic proximity, language and similarities in buying situations in the
market are some of the parameters.

 Besides government interference, the country’s view on outside companies and

more especially its expatriates should be the deciding factors to enter country or
not.

 Other variables include the following areas that heed a significant understanding
by the companies planning to enter another country:

(a) Do the business requirements of the country matching with the company’s
capabilities and policies.
(b) Company size is adequate for the business.
(c) Company has the requisite technology for the country.
(d) The country allows high percentage of ownership to outside country
companies.
(e) The country allows easy remittance of profits.
(f) Costs, resources, infrastructure and transportation are manageable.

 Besides, the company must look at the country where the business certainty can be
expected rather than going to a country where there is uncertainty. Political stability is
one good criterion to work for. In some countries product copying is norm rather than
an exception. Companies should avoid such country: otherwise, is first move
advantage would get eroded in no time.

 On the financial side, country promising higher liquidity should be preferred even at
the cost of lower returns.

 Political risks can be apprehended by understanding past historical patterns, where

experts could requested to analyze current scene by looking at the level of frustration
among the citizens that would provide for the instability factor of the government.