By Tanmay Jain

Unit – 1
Introduction to Global Business
By Tanmay Jain
 By Tanmay Jain

Meaning of Global Business:

Global business, also known as international business, refers to the activities and transactions
conducted by individuals, companies, and governments across national borders. It involves the
exchange of goods, services, information, and resources between different countries and
regions. Global business encompasses a wide range of activities, including trade, investment,
marketing, finance, and more.

Global businesses may be multinational corporations with many subsidiaries or independent

companies with operations in multiple countries. Examples of global companies include Hilton
and Hyatt Hotels, Adobe, Cisco, 3M, Monsanto, and American Express.

Nature of International Business:

• International Restrictions: In international business, there is a fear of the restrictions

which are imposed by the government of the different countries. Many country’s
governments don’t allow international businesses in their country. They have trade
blocks, tariff barriers, foreign exchange restrictions, etc. These things are harmful to
international business.
• Benefits to Participating Countries: It gives benefits to the countries which are
participating in the international business. The richer or developed countries grow their
business to the global level and they get maximum benefits. The developing countries
get the latest technology, foreign capital, employment opportunities, rapid industrial
development, etc. This helps developing countries in developing their economy.
Therefore, developing countries open up their economy for foreign investments.
• Integration of Economies: International Business combines the economies of many
countries. The companies use the finance, labour, resources, and infrastructure of the
other countries in which they are working. They produce the parts in different countries,
assembles the product in other countries and sell their product in other countries.

• International Trade: International trade forms the foundation of international

business. It involves the exchange of goods and services between countries,
encompassing exports and imports. Businesses engage in international trade to tap into
new markets, access resources and raw materials, and take advantage of comparative
advantages offered by different countries.
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• Market Expansion: One of the primary scopes of international business is to expand

market reach beyond domestic boundaries. Businesses seek growth opportunities by
entering new markets and targeting international customers. This expansion may
involve adapting products or services to fulfil the needs and preferences of different
cultures and developing marketing strategies tailored to specific international markets.

• Global Supply Chains: International business relies on global supply chains, where
components, raw materials, and finished products move across multiple countries.
Managing and optimizing global supply chains involve coordinating suppliers,
manufacturers, distributors, and logistics providers across borders to ensure efficient
operations and timely delivery of goods and services.

• Legal and Regulatory Considerations: The international business operates within the
legal and regulatory frameworks of different countries. This includes compliance with
trade regulations, customs procedures, intellectual property laws, tax regulations,
labour standards, and environmental regulations in each market. Businesses must
understand these legal complexities to ensure compliance and mitigate risks.

• Cultural and Ethical Considerations: International business requires an

understanding and appreciating of different cultures, customs, and business practices.
Cultural sensitivity and adaptability are essential to establish successful relationships
with international partners, customers, and employees. Businesses also face ethical
considerations related to social responsibility, sustainability, and corporate governance
in different markets.

• Global Economic and Political Environment: The international business operates

within a global economic and political landscape that shapes market conditions, trade
policies, and business opportunities. Economic growth, political stability, trade
agreements, tariffs, sanctions, and geopolitical dynamics influence the scope and
dynamics of international business operations.
 By Tanmay Jain

Need & Importance of International Business:

• Increase Revenue and Brand Awareness: Your company will be able to explore new
markets and draw in new clients due to your international expansion, which will
increase your sales and revenue but also the visibility of your brand internationally.
Your business can grow sales by entering a new market and extending the shelf life of
your goods and services.

Going to a new market where certain goods and services are not offered and customers
cannot purchase them gives you access to fresh and enthusiastic customers who are
prepared to acquire your goods and services.

• Minimizing Reliance on the Current Market: The chance to lessen reliance on the
present market where you are already established exists when a store expands
worldwide. Right now, many other businesses in the market are very competitive. You
are unable to profit from this market and raise sales.

Moving your company abroad would now be one of the best solutions. You can split
the resources to create money without being overly dependent on one particular market
instead of concentrating on just one plan or putting all your eggs in one basket.

• Collaborate with Skilled Individuals and Utilize the External Resource: The ability
to utilise the other country’s resources, such as technology, skill, and understanding in
a certain industry, is another significant benefit of expanding your firm internationally.
It enables you to employ better technologies and discover better work practices,
ultimately enhancing your company’s operations and revenue.

Additionally, you will collaborate with skilled individuals who are experts in your field.
You can benefit from their knowledge and experience by working together to
comprehend how a new country you have recently expanded to operates.

• Get a First-Mover Advantage: The desire to outperform rivals is one of the main
drivers behind many businesses seeking to go global. They will benefit greatly from
being the pioneer. Customers will be familiar with your brand before those of your
rivals. Additionally, changing their habits and thinking maybe challenging when buyers
have certain brands in mind. They will visit yours rather than your competitors.
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• Resource Access: International business enables companies to acquire essential

resources that may not be readily available or cost-effective in their home country. This
can include access to raw materials, specialized labour, advanced technologies, or even
intellectual property. By sourcing these resources internationally, companies can
enhance their production efficiency, reduce costs, and maintain a competitive edge in
the global market.
• Diversification: Operating in multiple countries allows companies to diversify their
operations and reduce their reliance on a single domestic market. Diversification is
essential for risk management. When one market faces economic downturns, regulatory
changes, or market-specific challenges, a company can rely on revenue streams from
other markets to offset potential losses. This diversification strategy enhances a
company's overall resilience.
• Transfer of Knowledge and Skills: International business facilitates the transfer of
knowledge, skills, and technology across borders. This transfer is particularly valuable
for developing countries, which may lack access to advanced expertise and
technologies. By participating in international business, these countries can accelerate
their development and economic growth.
• Investment Opportunities: International business offers investment opportunities for
individuals and organizations looking to diversify their portfolios. Investing in foreign
markets can provide access to potentially higher returns and reduce risk through
diversification. International investments can include stocks, bonds, real estate, and
direct investments in foreign companies.

What is Internationalization:

Internationalization, often abbreviated as "I18n" (the number 18 represents the 18 letters

between "I" and "n" in the word), is the process of designing and developing products, services,
software, websites, or content in a way that makes them accessible, adaptable, and culturally
relevant to users or customers in various countries and regions around the world. The primary
goal of internationalization is to enable easy and efficient localization, which is the process of
adapting products or content for specific target markets or languages.
 By Tanmay Jain

Stages of Internationalization:

1. Domestic Company:

Most international companies have their origin as domestic companies. The orientation of a
domestic company essentially is ethnocentric. A purely domestic company 'operates
domestically because it never considers the alternative of going international. The growing
stage-one company, when it reaches growth limits in its primary market, diversifies into new
markets, products technologies instead of focusing on penetrating international markets.
However, if factors like domestic market constraints, foreign market prospects, increasing
competition etc. make the company reorient its strategies to tap foreign market potential, it
would be moving to the next stage in the evolution.

A domestic company may extend its products to foreign markets by exporting, licensing and
franchising. The company, however, is primarily domestic and the orientation essentially is
ethnocentric. In many instances, at the beginning exporting is indirect.

The Company may develop a more serious attitude towards foreign business and move to the
next stage of development, i.e., international company.

Features:

i. Their focus remains with domestic market.

ii. Their productions facilities remain based in-home country. Their analysis is focused on the
national market.

iii. They do not think globally and avoid taking risk in going global.

iv. Their top management may have traditional kind of business management competency and
less global expertise.

v. They perceive that there is risk in expanding into global market and thus they try to play safe
and satisfied with whatever gains they are getting in domestic market.
 By Tanmay Jain

2. International Company:

International company is normally the second stage in the development of a company towards
the transitional corporation. The orientation of the company is basically ethnocentric and the
marketing strategy is extension, i.e., the marketing mix "developed" for the home market is
extended into the foreign markets. International companies normally rely on the international
business.

Features:

i. Focus on going beyond, domestic

ii. Their management remains ethnocentric with a vision to expand internationally. They extend
their domestic products, domestic prices and other business practices to foreign countries.

iii. They keep their marketing mix constant and extend their operations to new countries.

iv. Their management style remains centralized for their home nation and extended top down
to the overseas market country.

3. Multinational Company:

When the orientation shifts from ethnocentric to polycentric, the international company
becomes multinational. In other words, when a company decides to respond to market
differences, it evolves into a stage three multinational that pursues a multi-domestic strategy.

The focus of the stage three company is multinational that pursues a multinational or, in
strategic terms, multi-domestic. The marketing strategy of the multidimensional company is
adaptation. In multinational companies each foreign subsidiary is managed as if it were an
independent city state.

The subsidiaries are part of an area structure in which each country is part of a regional
organization that reports to world headquarters.

Features:

i. Companies when they spread their wings to more nations become multinational companies.

ii. Sooner or later they realize that they have to change their marketing mix according to the
foreign market.
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iii. This can also be termed as multi domestic, in which different strategies are adopted for
different market.

iv. The management of such companies remains decentralized and even production may be in
the host country.

v. Performance evaluation is done at different host countries.

4. Global Company:

The global company will have either a global marketing strategy or a global sourcing strategy
but not both. It will either focus on global markets and source from the home or a single country
to supply these markets, or it will focus on the domestic market and source from the world to
supply its domestic channel.

Features:

i. Such companies have a global marketing strategy.

ii. They either produce in home country or in a single country and focus marketing globally.

iii. They adapt to the market conditions according to the foreign market.

iv. Their performance evaluation is done worldwide.

5. Transactional Company:

Transactional Company operates at the global level by way of utilizing global resources to
serve the global markets. It has geocentric orientation and has integrated network. Its key assets
are dispersed and every sub-unit of the company contributes towards achievement of the
company objectives. It produces best quality raw materials from the cheapest source in the
world, process them in the country wherever it is economical and sells the finished products in
those markets where prices are favourable.

Feature:

i. Transnational companies have a geocentric approach, which means they think globally and
act locally.
 By Tanmay Jain

ii. Transnational companies collect information worldwide and scan it for use beyond
geographical boundaries.

iii. The vision of such to grow more in a global way.

iv. The R&D, management, product development is shared worldwide.

v. Their human resources procurement and development remains globally.

(EPRG) approaches to international business:

EPRG full form stands as Ethnocentric, Polycentric, Regiocentric, and Geocentric. It is a

framework created by Howard V Perlmutter, Jerry Wind and Douglas in 1969. The EPRG
Framework helps organization choose which approach is most suitable for it to achieve
successful results in countries abroad. When organizations decide to go overseas in search of
market expansion they need to adopt one of the styles as in ethnocentric, polycentric,
regiocentric, geocentric. EPRG model often is also called EPG Model in International
Business.

Organizations choose strategies based on what suits them most, therefore making them
differently oriented. As a result, costs and profits are generated in different ways, depending
on the mentioned kind of orientation. Therefore, the identification of the right orientation is
essential. For example, it is important that different activities of the organization are consistent
between headquarter and SBUs situated in other part of world at various stages. It is also
important that the culture of organization, its marketing strategy, financial strategy, operational
strategy is consistent. Only then, the organization can operate efficiently in the market. Let us
look at the four approaches as follows:

• Ethnocentric:

It means to apply one’s own culture in social science and anthropology. Japan has a reputation
for being ethnocentric. Ethnocentric comes from ethnicity which means belonging to a social
group that has a common national or cultural tradition. Ethnicity as a frame of reference is used
to judge other cultures, practices, behaviour, beliefs and people, instead of using the standards
of the particular culture involved. Since this judgment is often negative, some people also use
the term to refer to the belief that one’s culture is superior to, or more correct or normal than,
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all others especially regarding the distinctions that define each ethnicity’s cultural identity,
such as language, behaviour and customs.

There is no change in terms of product specifications, price, promotion, and other aspects and
is same as compared to the native market.

Typical examples of ethnocentric companies are Japanese companies such as Panasonic, Sony
and Hitachi. In Ethnocentric Approach, the key positions in the organization are filled with the
employees of the parent country. All the managerial decisions viz. Mission, vision, objectives
are formulated by the MNC’s at their headquarters, and the same is to be followed by the host
company. It is based on the rationale that, the staffs of the parent country is best over the others.
In the host countries in top position the organization appreciates having parent country
employees at top.

The head office is given more importance as compared to the overseas subsidiaries or offices
situated in the international markets. These companies ignore the potent opportunities outside
the home country and they are referred to as domestic companies.

The advantages of ethnocentric approach can be as follows:

i. Better coordination between the host and the parent company.

ii. The culture of the parent company can be easily transferred to the subsidiary company,
thereby infusing beliefs and practices into the foreign country this also help in
controlling the subsidiary effectively.
iii. The parent company can have a close watch on the operations of the subsidiary.

• Polycentric Orientation:

Polycentric approach of business can be defined as host country orientation. Here the host
country’s customs, behaviour, culture, language is considered while doing business. Under a
polycentric perspective, a company’s management team believes that it is better to adopt host
country’s culture to befriend the customers, suppliers and government. In Polycentric
orientation organizations see host country’s unique and exclusive conduct because businesses
are best run locally as per local culture. This approach lays a strong groundwork because every
subsidiary develops its unique marketing and business strategies for success and the country’s
domestic market is given equal importance. This approach is best suited for the developing
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countries in which certain constraints on the front of finance, political, and cultural front are
experienced.

The best example of polycentric organization is McDonald. The familiar offerings in their
restaurants in the United States may be somewhat less familiar if you venture abroad. In India,
where many people do not eat beef, McDonald’s offers the McAloo Tikki, a vegetable patty
with characteristic Indian spices. European McDonald’s often serve wine in addition to soft
drinks. Customers in the Netherlands can order a Stroopwafel McFlurry, a dessert that mixes
in a popular Dutch cookie treat. The product offerings are fine-tuned to individual country or
regional tastes, polycentric advertising strategies are equally diverse, relying on music,
spokespeople, language and cultural references that are familiar to the local population.

The Google search engine is well-known for its clever “Doodles” the images and text that
appear almost daily to celebrate a particular person or event in a country. Google Doodles are
made as per polycentric approach. The doodles announce events around the world; special
doodles are designed for Olympics, Soccer World Cup, and Cricket World Cup etc.

The advantages of polycentric approach are as follows:

i. The difficulty in the adjustment of expatriates from the parent country gets removed.
ii. The hiring of locals or the nationals of the host country is comparatively less expensive.
The morale of the local staff increases.
iii. Better productivity due to better knowledge about the host market; the career
opportunities for the nationals of the host country increases.
iv. Better government support.

• Regiocentric:

It is an approach adopted by a firm wherein it adopts a marketing strategy across a group of

countries, which have been grouped on the basis of their market characteristics; i.e., the market
characteristics of these countries would be more or less similar. The company which follows
this approach of framework studies the similarities in markets to design strategies. The
management of the company records the economic, social, cultural, and political similarities
between the native areas of the overseas region to sell its products and services to potential
customers. It is worth noting that the cultural and regional identity of India, Pakistan, and
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Bangladesh is quite similar whereas Norway and Spain that both falls in Europe are very
different in terms of culture, climate, and transport amongst other aspects.

Coca-Cola and Pepsi are regiocentric companies. Regiocentric strategy assumes that all
countries of the region can be regarded as a single market.

HSBC is one of the largest banking and financial services organizations in the world, with well-
established Businesses in Europe, the Asia-Pacific region, the Americas, the Middle East and
Africa. They use a regiocentric approach. Organization group countries on the basis of their
market characteristics; i.e., the market characteristics of these countries would be more or less
similar.

Some of the advantages of regiocentric approach are as follows:

i. Helps cultural fit. When organizations hire the managers from the same region as that
of the host country may not encounter any problem with respect to the culture and the
language followed there. It costs less in hiring the natives of the host country.
ii. The managers work well in all the neighbouring countries within the geographic region
of the business.
iii. The nationals of host country can influence the decision of managers at headquarters
with respect to the entire region.

• Geocentric:

It is practiced when an organisation does not organise its strategies based on country or regions.
Geocentric firms adopt an approach whereby they have a global mind-set. They view the whole
world as their market and seek to identify global needs and wants and create products and
services. The companies following the geocentric approach of the EPRG Framework are truly
the global players. They think global and act global. Their HR policies for staffing and job
position approach to staffing assigns job positions to any person best suited for the position,
regardless of the employee’s background, culture or country of origin. These organizations
understand costing in hiring in terms of immigration policies; costs of worker relocation and
diversity management create pressure on HR management.

McDonalds is a global company which follows Geocentric approach because it perceives

world as a single market and tries to offer low cost products and services everyone. Even MTV
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(24 hours music channel) is a geocentric organization. The Geocentric approach does not
connect nationality with the factor of dominance.

Advantages of geocentric orientation are as follows:

i. MNC’s can develop a pool of senior executives with international experiences and
contacts across the borders in the world. The expertise of each manager can be used for
the accomplishment organization’s objective as a whole.
ii. Reduction in resentment, i.e. the sense of unfair treatment reduces.
iii. Shared learning, the employees, will learn from each other’s experiences.

Theories of international business:

1. Mercantilism Theory:

Mercantilism can be considered the oldest theory of international trade. Mercantilism promoted
international business or trades. It was systematically developed in the 15th century by an
Italian Economist, Antonio Serra, and lasted nearly 300 years. Mercantilism talks about a
nation should increase its exports and reduce imports as far as possible.

During the mercantilism period, gold, silver, and other precious metal were the only means of
exchange of trade between nations. A nation was considered strong which has enough of these
precious metals. It assumed increasing exports would earn more silver and gold and a nation’s
economy will be stronger and importing means an outflow of precious metals means weakening
the nation.

Thus, the main theme of the mercantilist theorists is to promote exports and reduce imports by
means of different restrictions such as barriers, quotas, etc. and it is a state-controlled theory.

It aims to protect a nation’s wealth from the outflow to other nations by different restricting
means which is also called protectionism. It also assumes a zero-sum game which means if two
nations participate in international trade one should face a loss equal to benefit of the next
nation and vice versa.
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2. Absolute Cost Advantage Theory:

Adam Smith, the father of economics propounded the absolute cost advantage theory by
addressing the weakness of mercantilism theory. He introduced the concept of free trade policy
which was totally ignored by mercantilism. Absolute cost advantage refers to the advantage a
nation gets from producing products more efficiently with the same input than other nations.

It suggests a nation should specialize its production in the product in which it gets absolute cost
advantage and ignore in which it gets absolute disadvantage. The specialized products should
be exported to another nation and products having the absolute disadvantage of the home
country should be imported from another nation, as such the international trade occurred.

Smith also ignores the zero-sum game of mercantilism – rather he assumes a positive-sum
game which means if two countries participate in international both can be benefited. And, here
government plays the role of facilitator.

3. Comparative Cost Advantage Theory:

By criticizing Adam Smith’s absolute cost advantage theory David Ricardo introduced
the comparative cost advantage theory. He argued that absolute advantage is not necessary
rather a nation should focus on where it gets comparatively more advantage.

Ricardo suggests there can be no trade if two nations’ absolute cost advantage is equal. It
suggests a nation should specialize its production on the product in which it gets comparatively
more advantage or in case of disadvantage, should choose the product having less disadvantage.

Ricardo suggests while producing the costs should be checked carefully and compared and then
the product asking comparatively less cost should be produced.

Other principles of comparative advantage are the same as the absolute advantage such as free
trade, a positive-sum game, no government intervention, etc.
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4. Heckscher-Ohlin’s Factor Endowment Theory (H-O Model):

Eli Heckscher and Bertil Ohlin propounded the theory of factor endowment and further
explained Ricardo’s comparative cost advantage theory. Here, factor endowment refers to the
richness or easy availability of basic production factors like land, labour, and capital to a nation.
H-O model suggests that a nation should specialize its production in products which it has an
abundance of production factors. This theory assumes factors relative to abundance are cheaper
and factors relative to scarcity are expensive to a nation.

According to this theory, if India, China, Nepal, etc. are rich in labour factors then they should
produce labour-intensive products. And, USA, Japan, etc. are rich in the capital they should
produce capital-intensive products. In this way, capital-rich countries should import labour-
intensive products, and labour-rich countries import capital-intensive products as such
international trade takes place.

While understanding the H-O model, it is necessary to understand the Leontief Paradox – which
means just the opposite of the principle of the H-O model i.e. capital-rich countries exporting
labour-intensive products and vice versa.

5. International Product Life Cycle (IPLC) Theory:

The IPLC theory is created by Reymond Vernon in 1966. He explained how a new product of
a nation gets domestic and international attention and starts exporting and at the end of IPLCs
the last stage how the domestic nation starts importing the same product.

Raymond explains when a country produces new products it begins to export to foreign
markets, as such, foreign nations find it cheaper to produce the same product in their home.
And, where originally the new product is originated, their people find it cheaper and beneficial
to use foreign same products over their domestic country.

And, originated country’s product sales decline, and the country is liable to import products
from foreign countries to satisfy its people’s needs.

Raymond mentioned four stages in which an international product walk,

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• Introduction Stage – The new or innovative product is introduced. Mainly labour-

intensive. Sales or export grows at the turtle’s speed.
• Growth Stage – Exports increase. The competition takes place. Capital intensive
means are assumed.
• Maturity Stage – Exports reach the top and remain constant. Intense competition.
Availability of substitute products. Exports start to decline.
• Decline Stage – Exports of new products from the home country rapidly decline. The
nation has three options whether to exit the product, import, or enter into a totally new
market.

6. National Competitive Advantage Theory: Porter’s Diamond:

Michael Porter 1990, introduced the national competitive advantage theory which explains
why a nation succeeds in international competition.

He wanted to address what makes a firm achieve a competitive advantage in a nation or a nation
in a particular industry.

With research in 100 industries in 10 countries, he identified four factors that help a firm to
gain a national competitive advantage which he introduced as Porter’s Diamond. And, after
achieving it such factors also strengthen the exporting capacity of the firm.

The Porter’s Diamond is shortly mentioned below:

• Demand Conditions – Stronger the demand of a domestic market the more high-
quality products would be produced and exporting may be attained.
• Factor Endowments – A nation having better production factors would do better in
the international market.
• Related and Supporting Industries – E.g. schools are the supporting institutions for
universities.
• Firm Structure, Strategy, and Rivalry – The better the firm’s strategy and structure
the better the firm will win against rivalries.
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Barriers to trade:

Barriers to trade are obstacles or restrictions that hinder the free flow of goods and services
across international borders. These barriers can take various forms and are typically imposed
by governments or regulatory authorities. Barriers to trade can have a significant impact on the
volume and nature of international trade.

Tariff Barriers:

Tariff barriers, often simply referred to as "tariffs," are taxes or duties imposed by a government
on imported or, in some cases, exported goods. These taxes are levied at the border and increase
the price of the affected products. Tariffs serve multiple purposes, including raising revenue
for the government, protecting domestic industries from foreign competition, and correcting
trade imbalances. There are several types of tariff barriers:

• Ad Valorem Tariffs: Ad valorem tariffs are assessed as a percentage of the value of

imported goods. These tariffs are proportional to the product's price. For example, if a
country imposes a 10% ad valorem tariff on imported laptops, and a laptop's market
value is $1,000, the tariff paid would be $100.
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• Compound Tariffs: Compound tariffs incorporate elements of both ad valorem and

specific tariffs. They consist of a combination of a fixed amount and a percentage of
the product's value. For example, a country may impose a compound tariff of 5% ad
valorem plus $20 per unit for imported smartphones. If a smartphone is valued at $400,
the tariff would be $40 (5% of $400) plus $20, resulting in a total tariff of $60.
• Revenue Tariffs: Revenue tariffs are designed primarily to generate income for the
government rather than protect domestic industries. They are typically set at moderate
rates to encourage trade while ensuring a consistent source of government revenue.
Revenue tariffs are often applied broadly across various imported goods.
• Protective Tariffs: Protective tariffs aim to safeguard domestic industries from foreign
competition. These tariffs are generally set at higher rates to make imported products
more expensive, thus giving domestic producers a competitive advantage. Protective
tariffs are used to shield key industries from international competition.
• Export Tariff: An export tariff is a tax or duty imposed by a country on goods being
exported to foreign markets. It serves purposes such as generating revenue for the
government, conserving domestic resources, and controlling prices of essential goods.
Export tariffs can make a country's products more expensive abroad, impacting their
competitiveness and trade dynamics.
• Import Tariff: Import tariffs, also known as customs duties, are taxes applied by a
country to goods imported from foreign nations. They serve objectives like protecting
domestic industries, generating government revenue, and implementing trade policy
goals. Import tariffs can affect the cost and availability of imported products,
influencing trade patterns and negotiations.
• Transit Tariff: Transit tariffs are levies imposed on goods passing through a country's
territory en route to other destinations. They can serve as revenue sources, regulatory
measures, or control mechanisms for the movement of goods. Transit tariffs can add
costs and administrative complexity to the transportation of goods, particularly in
regions with multiple countries involved in trade routes.
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Non-tariff barriers:

Non-tariff barriers (NTBs) are trade barriers that do not involve the imposition of tariffs (taxes
or duties) on imports or exports but, instead, use various other means to restrict or obstruct
international trade. NTBs can take different forms and are often more complex than tariffs.
They are typically regulatory, procedural, or administrative in nature. Here are some common
types of non-tariff barriers:

• Quotas: Quotas, in the context of international trade, are government-imposed

restrictions on the quantity or value of specific goods that can be imported or exported
within a specified time period. These restrictions set a maximum limit on the amount
of a particular product that can cross a country's border, either in terms of the number
of units, weight, volume, or value. Quotas can be applied to imports or exports and
serve various economic, political, and regulatory purposes.
• Subsidies: Subsidies are financial or other forms of support provided by governments
to domestic industries, producers, or exporters. They are intended to achieve policy
objectives such as bolstering domestic industries, promoting exports, or encouraging
innovation. While subsidies can offer essential support to certain sectors, they can
distort international trade when they give domestic producers an unfair advantage over
foreign competitors. Subsidized products, when exported, can flood international
markets and harm foreign industries. To address this, countervailing measures like
countervailing duties may be imposed to counteract the subsidy's effects, ensuring fair
competition in global trade.

• Licensing: Licenses are one of the most common instruments that countries use to
regulate the importation of goods. A license system allows authorized companies to
import specific commodities that are included in the list of licensed goods.
Product licenses can either be a general license or a one-time license. The general
license allows the importation and exportation of permitted goods for a specified period.
The one-time license allows a specific product importer to import a specified quantity
of the product, and it specifies the cost, country of origin, and the customs point through
which the importation will be carried out.
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• Embargo: An embargo is a government-imposed trade restriction or economic

sanction that prohibits or severely restricts the import, export, or exchange of goods,
services, or financial transactions with one or more countries, entities, or individuals.
Embargoes are typically used for political, diplomatic, economic, or security reasons
and are a powerful tool in international relations.

Types of international business environment:

1. Political Environment:

The political environment refers to the type of government, the government’s relationship with
a business, & the political risk in the country. Doing business internationally, therefore, implies
dealing with a different type of government, relationships, & levels of risk. There are many
types of political systems, for example, multi-party democracies, one-party states,
constitutional monarchies, and dictatorships (military & non-military). Therefore, in analysing
the political-legal environment, an organisation may broadly consider the following aspects:

• The Political system of the business;

• Approaches to the Government towards business, i.e. Restrictive or facilitating;

• Facilities & incentives offered by the Government;

• Legal restrictions, for instance, licensing requirements, reservation to a specific sector

like the public sector, private or small-scale sector;

• The Restrictions on importing technical know-how, capital goods & raw materials;

• The Restrictions on exporting products & services;

• Restrictions on pricing & distribution of goods;

• Procedural formalities required in setting the business

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2. Economic Environment:

The economic environment relates to all factors contributing to a country’s attractiveness to

foreign businesses. The economic climate can be very different from one nation to another.
Governments are often divided into three main categories: the more developed or
industrialised, the less developed or third world, & the newly industrialising or emerging
economies.

Within each category, there are significant variations. Still, the more developed countries are
the rich countries, the less developed the poor ones, & the newly industrialising (those moving
from poorer to richer). These distinctions are generally based on the gross domestic product
per capita (GDP/capita). Better education, infrastructure, & technology, healthcare, & so on
are also often associated with higher levels of economic development.

The level of economic activity combined with education, infrastructure, & so on both impacts
nearly every aspect of conducting business & a firm needs to recognise this environment for
successful international operations. While analysing the economic climate, the organisation
intending to enter a particular business sector may consider the following aspects:

• An Economic system to enter the business sector.

• Stage of economic growth & the pace of growth.

• Level of national & per capita income.

• Incidents of taxes, both direct & indirect tax

• Infrastructure facilities are available & the difficulties thereof.

• Availability of raw materials & components & the cost thereof.

• Sources of financial resources & their costs.

• Availability of manpower-managerial, technical & workers available & their salary &
wage structures.
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3. Technological Environment:

The technological environment comprises factors related to the materials & machines used in
manufacturing goods & services. The receptivity of organisations to new technology &
adoption of new technology by consumers influence decisions made in an organization.

As firms do not have any control over the external environment, their success depends on how
well they adapt to the external environment. An essential aspect of the international business
environment is the level & adoption of technological innovations in various countries.

The last decades of the twentieth century saw significant advances in technology, & this is
continuing in the 21st century, where technology is often regarded as a source of competitive
advantage. As a result, companies strive to gain access to the latest technologies to stay
competitive.

It is easier than ever for even small business plans to have a global presence thanks to the
internet, which significantly grows their exposure, their market, & their potential customer
base. For economic, political, & cultural reasons, some countries are more accepting of
technological innovations; others are less accepting. In analysing the technical environment,
the organisation may consider the following aspects:

• Level of technological development in the country as a whole & specific business

sector.

• The pace of technological changes & technological obsolescence.

• Sources of technology.

• Restrictions & facilities for technology transfer & time taken for technology absorption.

4. Cultural Environment:

The cultural environment is one of the critical components of the international business
environment & one of the most difficult to understand. This is because the cultural climate is
essentially unseen; it has been described as a shared, commonly held body of general beliefs
& values that determine what is right for one group, according to Kluckhohn & Strodtbeck.
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National culture is described as the body of general beliefs & values that are shared by the
nation. Beliefs & values are generally seen as formed by factors such as history, language,
religion, geographic location, government, & education; thus, firms begin a cultural analysis
by seeking to understand these factors. The most well-known is that developed by Hofstede in
1980. His model proposes four dimensions of cultural values: individualism, uncertainty
avoidance, power distance & masculinity. Let’s look at each of these.

• Individualism is the degree to which a nation values & encourages individual action &
decision-making.

• Uncertainty avoidance is the degree to which a nation is willing to accept & deal with
uncertainty.

• Power distance is the degree to which a nation accepts & sanctions differences in power.

This extensive utilization of the cultural values framework is due to its ability to gather data
from diverse countries. Numerous scholars and managers have discovered the value of this
model in examining the management strategies suitable for various cultural contexts. In a
nation high on individualism, one expects individual goals, individual tasks, & individual
reward systems to be practical. In contrast, the reverse would be true in a nation with low
individualism.

• While analysing social & cultural factors, the organisation may consider the following
aspects:

• Approaches to society towards business in general & in specific areas;

• Influence of social, cultural & religious factors on the acceptability of the product;

• The lifestyle of people & the products used for them;

• Level of acceptance of, or resistance to change;

• Values attached to a particular product, i.e. the possessive value or the functional
significance of the product;

• Demand for specific products for specific occasions;

• The propensity to consume & to save.

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Unit – 2
Modes of Entering Global Business
By Tanmay Jain
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International business analysis - modes of entry:

1. Export Entry Modes:

Export mode is the most common strategy to use when entering international markets.
Exporting is the shipment of products, manufactured in the domestic market or a third country,
across national borders to fulfil foreign orders. Shipments may go directly to the end user, to a
distributor or to a wholesaler. Exporting is mainly used in initial entry and gradually evolves
towards foreign-based operations. Export entry modes are different from contractual entry
modes and investment entry modes in a way that they are directly related to manufacturing.
Export can be divided into direct and indirect export depending on the number and type of
intermediaries.

1.1 Direct Exporting (Sell to Buyers):

Direct exporting means that the firm has its own department of export which sells the products
via an intermediary in the foreign economy namely direct agent and direct distributor. This
way of exporting provides more control over the international operations than indirect
exporting. Hence, this alternative often increases the sales potential and also the profit. There
is as well a higher risk involved and more financial and human investments are needed.

There are differences between distributors and agents. The basis of an agent’s selling is
commissions, while the distributors’ income is a margin between the prices the distributor buys
the product for and the final price to the wholesalers or retailers. In contrast to agents the
distributors usually maintain the product range. The agents also do not position the products,
and do not hold payments while the distributors do both and as well as provide customers with
after sales services. Using agents or distributors to introduce the products to a foreign market
will have the advantages that they have knowledge about the market, customs, and have
established business contacts.

Advantages of Direct Export:

• Access to the local market experience and contacts to potential customers.

• Shorter distribution chain (compared to indirect exporting).

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• More control over marketing mix (especially with agents).

• Local selling support and services available.

Disadvantages of Direct Export:

• Little control over market price because of tariffs and lack of distribution control
(especially with distributors).
• Some investment in sales organisation required (contact from home base with
distributor or agents).
• Cultural difference, providing communications problems and information filtering
(transaction cost occurs).
• Possible trade restrictions.

1.2 Indirect Exporting (Sell to Intermediaries):

Indirect exporting is when the exporting manufactures are using independent organisations that
are located in the foreign country. The sale in indirect exporting is like a domestic sale, and the
company is not really involved in the global marketing, since the foreign company itself takes
the products abroad.

Indirect export is often the fastest way for a company to get its products into a foreign market
since customer relationships and marketing systems are already established. Through indirect
export, it is the third party who will handle the whole transactions. This approach for exporting
is useful for companies with limited international expansion objectives and if the sales are
primarily viewed as a way of disposing remaining production, or as marginal. The types of
indirect export are as follows:

• Export management companies

• Export trading companies
• Export broker agents
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Advantages of Indirect Export:

• Limited resources and investment required.

• High degree of market diversification is possible as the company utilize

the internationalization of an experienced exporter.

• Minimal risk (market and political).

• NO export experience required.

Disadvantages of Indirect Export:

• No control over marketing mix elements other than product.

• An additional domestic member in the distribution chain may add costs, leaving smaller
profit to producer.
• Lack of contact with market (no market knowledge acquired).
• Limited product experience (based on commercial selling).

2. Contractual Entry Modes:

Contractual entry modes are long term non-equity alliance between the company that wants to
internalize and the company in target country for entry mode. There are many types of
contractual entry mode namely technical agreements, Service contracts, managements, contract
manufacture, Co-production agreements and others. The most use contractual entry modes are
Licensing, Franchising and Turnkey projects which is going to be explained below.

2.1 Licensing:

Licensing concerns a product rights or the method of production marketing the product rights.
These rights are usually protected by a patent or some other intellectual right. Licensing is
when the exporter, the licensor, sells the right to manufacture or sell its products or services,
on a certain market area, to the foreign party (the licensee). Based on the agreement, the
exporter receives a onetime fee, a royalty or both. The royalty can vary, often between 0.125
and 15 per cent of the sales revenue. In other words, in a licensing agreement, the licensor
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offers propriety assets to the licensee. The latter is in the foreign market and has to pay royalty
fees or made a lump sum payment to the licensor for assets like e.g. trademark, technology,
patents and know-how. Licensing agreement’s content is usually quite complex, wide and
periodic.

Other than the intellectual property rights, the licensing contract might also include turning-in
unprotected know-how. In this licensing contract, the licensor is committed to give all the
information to the licensee about the operation. There are many types of licensing
arrangements. In a licensing arrangement, the core is patents and know-how, which can be
completed by trademarks, models, copyrights and marketing and management’s know-how.

Licensing contract is divided into three main types of licensing:

• Product licensing, the idea of licensing is to agree on usage, manufacturing or marketing

right of the whole product, a partial product, a component or a product improvement.
• Method licensing, the method licensing agreement turns in the right to use a certain
manufacturing method or a part of it and also possibly the right to use model protection.
• Representation licensing agreement is usually done within two companies that are
concentrated on project deliveries, in this case the contract will relate to for example
projecting systems, sharing manufacturing and marketing procedures.

Advantages of licensing:

• The ability to enter several foreign markets simultaneously by using several licensees or
one licensee with access to a regional market, for example the European Union.
• Enter market with high trade barriers.
• It is a non-equity mode; therefore, licensor make profit quickly without big investments.
The firm does not have to bear the development costs and risks associated with opening a
foreign market.
• Licensing also saves marketing and distribution costs, which are left for the licensee.
• Licensing also enables the licensor to get insight of licensee’s market knowledge, business
relations and cost advantages.
• The licensor decreases the exposure to economic and political instabilities in the foreign
country.
• Can be used by inexperienced companies in international business.
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• Avoid the cost to customer of shipping large bulky products to foreign markets.

Disadvantages of licensing:

• There is a risk that the licensee may become a competitor once the term of the agreement
concludes, by using the licensor’s technology and taking their customers.
• Not every company can use this entry model unless in possess certain type of intellectual
property right or the name of the company is of enough interest to the other party.
• The licensor’s income from royalties is not as much as would be gained when
manufacturing and marketing the product themselves.
• There is another risk that the licensee will under-report sales in order to lower the royalty
payment

2.2 Franchising:
Franchising is a form of licensing, which is most often used as market entry modes for services
such as fast foods, business to-consumer services and business-to-business services.
Franchising is somewhat like licensing where the franchiser gives the franchisee right to use
trademarks, know-how and trade name for royalty. Franchising does not only cover products
(like licensing) but it usually contains the entire business operation including products,
suppliers, technological know-how, and even the look of the business. The normal time for a
franchisee agreement is 10 years and the arrangement may or may not include operation
manuals, marketing plan and training and quality monitoring.

The idea of the franchising chain is that all parties use a uniform model in order to make the
customer of a franchising chain may feel that he is dealing with franchisor’s company itself. In
fact, regarding to the law, the customer is dealing with independents companies that have even
have different owners. Franchising agreement usually includes training and offers management
services, as the operations are done in accordance with the franchisor’s directions. Franchising
has especially spread to areas, where certain selling style, name and the quality of service are
crucial.

Franchisee has different customs on the payments to the franchisor. Normally when a company
joins the franchising chain it pays a one-time joining fee. As the operation goes on, the
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franchisee pays continues service fess that usually are based on the sales volumes of the
franchisee company.

Advantages of franchising:

• Same as licensing above.

• Like with licensing, the franchisor gains local knowledge of the market place and in this
case the domestic franchisee is highly motivated.
• The fast expansion to a foreign market with low capital expenditures, standardized
marketing, motivated franchisees and taking of low political risk.

Disadvantages of franchising:

• Same as in licensing above.

• Since franchising requires more capital initially, it is more suitable to large and well-
established companies with good brand images. So small firm get often problem to use this
entry modes.
• Home country franchisor does not have daily operational control of foreign store. There is
a risk that franchisees may not perform at desired quality level.
• more responsibilities, more complicated and greater commitment to foreign firm than
licensing or exports.

2.3 Turnkey Project:

In turnkey projects, the contractor agrees to handle every detail of the project for a foreign
client, including the training of operating personnel. At completion of the contract, the foreign
client is handed the “key” to a plant that is ready for full operation. Hence, we get the term
turnkey. The company, who make the turnkey project, works overseas to build a facility for a
local private company or agency of a state, province or municipality. This is actually a means
of exporting process technology to another country. Typically, these projects are large public
sector project such as urban transit stations, commercial airport and telecommunications
infrastructure.

Sometimes a turnkey project such as an urban transit system takes the form of a build-operate-
transfer or a built-own-operate-transfer project. A sophisticated type of counter trade, in which
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the builder operates and may also own a public sector project for a specified period of years
before turning it over to the government.

Advantages of Turnkey Projects:

• They are a way of earning great economic returns from the know-how required to assemble
and run a technologically complex process, for example contractor must train and prepare
owner to operate facility.
• Turnkey projects may also make sense in a country where the political and economic
environment is such that a longer-term investment might expose the firm to unacceptable
political and/or economic risk.
• Less risky than conventional FDI.

Disadvantages of Turnkey Projects:

• The firm that enters into a turnkey deal will have no long-term interest in the foreign
country.
• The firm that enters into a turnkey project may create a competitor. If the firm’s process
technology is a source of competitive advantage, then selling this technology through a
turnkey project is also selling competitive advantage to potential and/or actual competitors.

3. Investment Entry Modes:

Investment entry modes are about acquiring ownership in a company that is located in the
foreign market. In other word, the activities within this category involve ownership of
production units or other facilities in the overseas market, based on some sort of equity
investment. Several companies want to have ownership in some or all of their international
ventures. This can be achieved by joint ventures (equity based), acquisitions, green-field
investment.

3.1 Joint Ventures:

A joint venture is a contractual arrangement whereby a separate entity is created to carry on
trade or business on its own, separate from the core business of the participants. A joint venture
occurs when new organizations are created, jointly owned by both partners. At least one of
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these partners must be from another country than the rest and the location of the company must
be outside of at least one party’s home country.

Typically, a company forming a joint venture will often partner with one of its customers,
vendors, distributors, or even one of its competitors. These businesses agree to exchange
resources, share risks, and divide rewards from a joint enterprise, which is usually physically
located in one of the partners’ jurisdictions. The contributions of joint venture partners often
differ. The local joint venture partner will frequently supply physical space, channels of
distribution, sources of supply, and on-the ground knowledge and information. The other
partner usually provides cash, key marketing personnel, certain operating personnel, and
intellectual property rights.

Joint venture is an equity entry mode. Ownership of the venture may be 50% for each party, or
may be other proportions with one party holding the majority share. In order to make a joint
venture remain successful on a long-term-basis, there must be willingness and careful advance
planning from both parties to renegotiate the venture terms as soon as possible. When multiple
partners participate in the joint venture, the venture maybe called a consortium.

Advantages of a Joint venture:

• Joint venture makes faster access to foreign markets. The local partner to the joint venture
may have already established itself in the marketplace and often will have already obtained,
or have access to, government contacts, lines of credit, regulatory approvals, scarce
supplies and utilities, qualified employees, and cultural knowledge. Upon formation of the
Joint venture, the non-resident partner has access to the local partner’s pre-established ties
to the local market.
• When the development costs and/or risks of opening a foreign market are high, a firm might
gain by sharing these costs and/or risks with a local partner. In many countries, political
considerations make joint ventures the only feasible entry mode.
• The reputation of the resident partner gives the joint venture credibility in the local
marketplace, especially with existing key suppliers and customers.
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Disadvantages of Joint venture:

• Shared ownership can lead to conflicts and battles for control if goals and objectives differ
or change over time.
• Joint venture can foreclose other opportunities for entry into a foreign marketplace.
• It can be difficult for a joint venture to independently obtain financing, particularly debt
financing. That is, in part, because Joint venture are usually finite in their duration and lack
permanence. Thus, the parents of a joint venture should expect either to adequately
capitalise the entity up front or to guarantee loans made to the joint venture.
• Another potential disadvantage of joint venture a firm that enters into a joint venture risks
giving control of its technology to its partner and there is the possibility you might wind up
turning your own joint venture partner into a competitor. However, this danger can be
ameliorated by non-competition, non-solicitation, and confidentiality provisions in the joint
venture agreement.

3.3 Wholly Owned Subsidiaries:

A company will use a wholly owned subsidiary when the company wants to have 100 percent
ownership. This is a very expensive mode where the firm has to do everything itself with the
company’s financial and human resources. Thus, more it is the large multinational corporations
that could select this entry mode rather than small and medium sized enterprises. A wholly
owned subsidiary could be divided in two separate ways Greenfield investment and
Acquisitions.

3.4 Greenfield Investment:

Greenfield investment is a mode of entry where the firm starts from scratch in the new market
and opens up own stores while using their expertise. It involves the transfer of
assets, management of talent, and proprietary technology and manufacturing know-how. It
requires the skill to operate and manage in another culture with different business practices,
labour forces and government regulations. The degree of risk varies according to the political
and economic conditions in the host country. Despite these risks many companies prefer to use
this mode of entry because of its total control over strategy, operation and profits.
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Advantages of Greenfield investment:

• A wholly owned subsidiary gives a firm the tight control over operations in different
countries that are necessary for engaging in global strategic coordination (i.e., using profits
from one country to support competitive attacks in another).
• A wholly owned subsidiary maybe required if a firm is trying to realize location and
experience curve economies.
• Local production lessens transport/import-related costs, taxes & fees.
• Availability of goods can be guaranteed, delays may be eliminated.
• More uniform quality of product or service.
• Local production says that the firm is willing to adapt products & services to the local
customer requirements.

Disadvantages of Greenfield investment:

• Higher risk exposure namely political risk and economic risk.

• Heavier pre-decision information gathering & research evaluation.
• “Country-of-origin” effects can be lost by manufacturing elsewhere.
• Establishing a wholly owned subsidiary is generally the costliest method of serving a
foreign market.

3.5 Acquisitions:
Acquisition is a very expensive mode of entry where the company acquirers or buys an already
existing company in the foreign market. Acquisition is one way of entering a market by buying
an already existing brand instead of trying to compete and launch the company’s products on
the market and thereby lowering the chance of a profitable product. Acquisition is a risky
alternative though, because the culture of the corporation is hard to transfer to the acquired
firm. Most important, it is a very expensive alternative and both great profit and great losses
could be the end product of this entry mode.

Advantages of Acquisitions:

• They are quick to execute.

• Acquisitions enable firms to pre-empt their competitors.
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• Managers may believe acquisitions are less risky than green-field ventures.

Disadvantages of Acquisitions:

• The acquiring firms often overpay for the assets of the acquired firm.
• There may be a clash between the cultures of the acquiring and acquired firm.
• Attempts to realize synergies by integrating the operations of the acquired and acquiring
entities often run into roadblocks and take much longer than forecast.
• There is inadequate pre-acquisition screening.

4. Foreign Direct Investment:

Foreign Direct Investment involves a company entering an overseas market by making a

substantial investment in the country. Some of the modes of entry into international business
using the foreign direct investment strategy includes mergers and acquisitions, joint ventures
and greenfield investments.
This strategy is viable when the demand or the size of the market, or the growth potential of
the market in the substantially large to justify the investment.

Some of the reasons because of which companies opt for foreign direct investment strategy
as the mode of entry into international business can include:
• Restriction or import limits on certain goods and products.

• Manufacturing locally can avoid import duties.

• Companies can take advantage of low-cost labour, cheaper material.

Advantages of Foreign Direct Investment:

• You can retain your control over the operations and other aspects of your business
• Leverage low-cost labour, cheaper material etc. to reduce manufacturing cost towards
obtaining a competitive advantage over competitors
• Many foreign companies can avail for subsidies, tax breaks and other concessions from the
local governments for making an investment in their country
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Disadvantages of Foreign Direct Investment:

• The business is exposed to high levels of political risk, especially in case the government
decides to adopt protectionist policies to protect and support local business against foreign
companies
• This strategy involves substantial investment to be made for entering an international market

5. Management contracts:

A management contract is a business arrangement in which one party, known as the

management contractor, agrees to provide specific managerial services, expertise, or know-
how to another party, often a foreign entity, referred to as the client or host company, under a
legally binding agreement. In exchange for these services, the management contractor typically
receives compensation in the form of fees or a percentage of profits. This mode of entry allows
companies to leverage their managerial capabilities without making substantial investments in
assets or equity ownership in a foreign market, making it a cost-effective way to expand their
presence internationally while offering expertise and guidance to the client company.

Advantages of Management Contracts:

• Companies entering international markets through management contracts don't need to
make substantial financial investments, as they're primarily providing expertise and
services rather than capital.
• The client company benefits from the specialized knowledge and experience of the
management contractor, potentially improving their operational efficiency, quality, and
overall performance.
• Management contracts can be implemented relatively quickly compared to modes of
entry that require physical infrastructure or partnership agreements, facilitating swift
market entry.
• Financial risks are typically borne by the client company, not the management
contractor. This means that if the venture faces financial difficulties or losses, it's the
client's responsibility to address them.
• Management contractors generate revenue through the fees they charge for their
services, which can contribute to their overall profitability.
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Disadvantages of Management Contracts:

• Management contractors often have limited control over the client company's
operations. The client retains ownership and strategic decision-making authority, which
can lead to conflicts if the client doesn't fully embrace the recommended management
practices.
• The success of the management contractor is closely tied to the success of the client
company. If the client's business encounters difficulties or fails, it can negatively impact
the contractor's profitability.
• The effectiveness of a management contract depends on the clarity of its terms, mutual
understanding, and effective communication. Misinterpretation or disputes related to
contract terms can pose significant risks.
• Management contractors may become overly dependent on a single client or a limited
number of clients. This can be risky if the client decides to terminate the contract or
seek services elsewhere, affecting the contractor's revenue.
• Adhering to local laws and regulations, such as work permits, licensing, and tax
requirements, can be complex and challenging, depending on the host country's
regulatory environment, posing potential difficulties for the management contractor.

6. Contract Manufacturing:

Contract manufacturing is a business arrangement in which a company (the client or brand

owner) outsources the production of its goods or products to another manufacturing company
(the contractor or third-party manufacturer). Under this agreement, the client provides the
specifications, design, and often the raw materials or components, while the contractor handles
the actual production process, including labour, equipment, and facilities. Contract
manufacturing is a strategic approach that allows companies to focus on their core
competencies, reduce production costs, and scale their operations efficiently without the need
for substantial investments in manufacturing infrastructure.

Advantages of Contract Manufacturing:

• Contract manufacturing often leads to cost savings for the client company. The
contractor typically benefits from economies of scale, lower labor costs, and specialized
production techniques, resulting in lower production costs for the client.
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• By outsourcing manufacturing, companies can concentrate their resources and efforts

on their core competencies, such as product development, marketing, and innovation,
rather than getting bogged down in the complexities of manufacturing.
• Contract manufacturing allows for flexible production volumes. Companies can easily
scale up or down production to meet fluctuations in market demand without the burden
of maintaining excess capacity during slow periods.
• Contract manufacturing involves lower capital investment for the client compared to
setting up and managing their own manufacturing facilities. This reduces financial risk
and exposure to potential manufacturing-related issues.
• Contract manufacturers often possess specialized skills and capabilities, which can be
valuable to the client. These manufacturers may have a deep understanding of particular
production techniques or industries.

Disadvantages of Contract Manufacturing:

• Maintaining consistent product quality can be challenging when the client has less
direct control over the manufacturing process. Ensuring that the contractor meets
quality standards is critical.
• Coordinating with a third-party manufacturer can introduce complexities in the supply
chain. Effective communication is essential to avoid misunderstandings and delays.
• Contract manufacturing may limit the ability to customize products or make rapid
design changes since the manufacturer often focuses on standardized production
processes.
• Contract manufacturers often serve multiple clients, potentially leading to competition
or conflicts of interest. The client company must ensure that their interests are protected.
• Relying on a contract manufacturer's capabilities and capacity can create a level of
dependency. If the contractor faces production issues or capacity constraints, it can
impact the client's operations.
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Unit – 3
Globalization
By Tanmay Jain
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Meaning of Globalization:

Globalization is the growing interdependence of the world's economies, cultures, and

populations. It's the result of the opening up of the global economy and the increase in trade
between nations. Globalization is the free movement of goods, services, and people across the
world. It's brought about by cross-border trade in goods and services, technology, and flows of
investment, people, and information.

Globalization also refers to the integration of global economics, industries, markets, culture,
and policies. It reduces distances between regions/countries through a global network of trade,
communication, immigration, and transportation.

Globalization has led to market expansion, which enables businesses to make proper use of
their resources. It also helps in increasing the foreign exchange reserves of a nation and creating
employment for a large number of people.

Features of Globalization:

• Integration of Markets: Globalization involves breaking down trade barriers and

creating a more interconnected global marketplace. This means that products and
services from one country can easily enter and compete in other markets. It has led to
increased international trade and the growth of multinational corporations.

• Technological Advancements: Advances in information and communication

technologies (ICT) have revolutionized how people and businesses connect globally.
The internet, mobile phones, and digital communication tools have made it easier for
individuals, companies, and governments to interact, collaborate, and share information
across borders.

• Economic Interdependence: Globalization has resulted in greater economic

interdependence among nations. When one country's economy is affected, it can have
ripple effects on other economies due to the interconnectedness of global trade,
investment, and financial markets.

• Multinational Corporations (MNCs): Multinational corporations operate in multiple

countries and often have a global presence. They leverage globalization to access new
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markets, reduce costs, and tap into diverse talent pools. MNCs play a significant role in
shaping the global economy.

• Cultural Exchange: Cultural globalization refers to the diffusion of cultural elements

such as languages, ideas, values, traditions, and popular culture across borders.
Globalization has enabled people to access and consume cultural products from around
the world, leading to a more interconnected global culture.

• Migration and Movement of People: Globalization has facilitated the movement of

people across borders for various reasons, including work, education, and seeking a
better quality of life. This has resulted in increased cultural diversity and the blending
of cultures in various regions.

• Global Communication: Globalization has made communication across borders

seamless. With the advent of the internet and social media, people and organizations
can communicate, collaborate, and share information with others worldwide in real-
time, fostering global connections and networking.

• Environmental Challenges: Globalization has led to environmental challenges that

transcend national borders, including pollution, deforestation, and climate change.
Addressing these issues requires international cooperation and agreements.

• Economic Growth and Innovation: Globalization has spurred economic growth by

providing businesses with access to larger markets, fostering competition, and driving
innovation. It has resulted in increased economic opportunities and higher living
standards for many people worldwide.

• Global Challenges: Globalization has made it possible to address global challenges

more effectively, such as pandemics, terrorism, and climate change. However, it has
also highlighted the need for international cooperation and coordination to tackle these
complex issues comprehensively.
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Advantages of Globalization:

• Economic Growth: Globalization has led to increased economic growth by expanding

markets. It encourages competition, which can improve efficiency and innovation.
Foreign investments and access to global markets can stimulate economic activity.
• Access to a Wider Variety of Goods and Services: Globalization has made a vast
array of products and services available to consumers worldwide. This often leads to
more choices, competitive pricing, and access to goods that may not be locally
available.
• Innovation and Technology Transfer: Globalization fosters innovation by facilitating
the exchange of ideas and technologies across borders. Multinational corporations
(MNCs) invest in research and development globally, and this technology transfer
benefits various industries.
• Job Creation: Globalization can create job opportunities. Increased exports, foreign
direct investment (FDI), and the growth of MNCs contribute to employment in sectors
related to international trade.
• Reduced Poverty: Many developing countries that have embraced globalization have
experienced reduced poverty rates. Increased access to global markets and foreign
investments can lead to economic development and improved living standards.
• Cultural Exchange: Globalization promotes cultural exchange by facilitating the
exchange of ideas, art, music, and traditions among people from different parts of the
world. This leads to a richer and more diverse cultural landscape.
• Access to Information and Education: The internet and global communication
networks have democratized access to information and education. This benefits both
developed and developing countries by reducing knowledge gaps.

Disadvantages of Globalization:

• Rising Inequality: Globalization can raise the problem of inequality everywhere in the
world by increasing specialization and trade. By trade boost of the per-capita income,
it a cause relative poverty, worldwide.
• Growing Unemployment rate: Globalization can increase the unemployment rate
since it demands higher-skilled work at a lower price. In countries where Companies
 By Tanmay Jain

are relatively incapable of producing highly skilled workers, the unemployment rate
can increase in those countries.
• Imbalanced Trades: The balance of trade refers to the ratio between export and import
of commodities and services. Any country can trade with any other country, and
globalization causes an imbalance in this ratio. It is also termed ‘trade deficits.’ Over
the years, trade imbalance has increased in developed countries by competition in the
market.
• Environmental Harm: The speed of industrialization is rising as an outcome of
globalization. Industrialization advances economic growth, but it also harms the
environment. Various chemical industries use harmful fertilizers and solutions or
release industrial wastes into nature that causes harm to human life and the
environment.
• Exploits poorer labour markets: Globalization enables businesses to develop jobs
and economic possibilities in developing countries by often offering cheaper labor
costs. Yet, overall economic growth in such developing countries may be slowed due
to globalization or, worse, become stagnant.

Socio–Cultural, Political and Legal and Economic Implications of

globalization:

1. Socio-Cultural Implications:

• Cultural Exchange: Globalization encourages the exchange of cultural ideas, values,

traditions, and practices among different societies. This can lead to a broader
understanding of diverse cultures and promote tolerance and mutual respect.
• Cultural Hybridization: As cultures interact, they often blend, adapt, and create new
cultural forms. For instance, the fusion of Western and traditional clothing styles or the
blending of musical genres from different regions exemplify cultural hybridization.
• Cultural Homogenization: While globalization celebrates diversity, it can also lead to
cultural homogenization. The dominance of globalized mass media, Hollywood
movies, and Western consumer culture can overshadow local traditions and languages,
potentially eroding cultural distinctiveness.
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• Language and Communication: The spread of global communication technologies

and English as a global lingua franca has facilitated cross-border communication.
However, it can also pose challenges to preserving and promoting other languages and
dialects.
• Cultural Conflict and Tensions: When different cultural values and belief systems
collide, cultural conflicts and tensions can arise. These conflicts can occur at the local,
national, and international levels and may require diplomacy and cultural sensitivity to
resolve.

2. Political & Legal Implications:

Global Governance: Globalization necessitates greater global governance. International

organizations like the United Nations (UN) and the World Trade Organization (WTO) address
various global issues, from peacekeeping to trade disputes. Countries cooperate to address
common challenges, but sometimes tensions arise over sovereignty and decision-making
authority.

Sovereignty: Critics argue that globalization can erode national sovereignty as countries
participate in international agreements that limit their policy autonomy. For example, trade
agreements often involve concessions that restrict a nation's ability to protect domestic
industries.

Trade Agreements: Globalization has led to the proliferation of trade agreements, both
regional and global. These agreements have political implications, as they impact a country's
trade relationships and economic policies. Negotiations often involve complex geopolitical
considerations.

Human Rights: Globalization has put a spotlight on human rights issues worldwide.
International organizations and treaties monitor and address human rights violations,
increasing accountability for governments. This can influence national policies and
international relations.

Legal Harmonization: To facilitate global trade and investment, there is a push for legal
harmonization across countries. For instance, international intellectual property rights
 By Tanmay Jain

agreements aim to standardize patent and copyright protection, but they also raise concerns
about access to essential medicines and cultural expression.

3. Economic Implications:

Economic Growth: Globalization is associated with increased economic growth as it opens

up new markets and encourages competition. Countries that actively participate in
globalization often experience higher levels of economic activity and development.

Trade Liberalization: Globalization promotes trade liberalization by reducing trade barriers.

This leads to the freer flow of goods and services across borders, fostering economic integration
among countries and creating opportunities for specialization.

Multinational Corporations (MNCs): MNCs are pivotal in globalization. They operate in

multiple countries, contributing to economic development through investments, technology
transfer, and job creation. However, their influence can also lead to concerns about their impact
on local economies and cultures.

Income Inequality: Globalization's impact on income inequality is a complex issue. While it

has lifted many people out of poverty, it has also contributed to income disparities within and
among countries. The distribution of benefits often favours the wealthy and skilled workers.

Financial Integration: Financial globalization allows capital to flow freely across borders.
This can attract investments and reduce borrowing costs. However, it also exposes economies
to financial crises, as seen in the 2008 global financial crisis.

Labour Mobility: Labour mobility is a consequence of globalization as people seek job

opportunities in other countries. This can have economic benefits, as remittances flow back to
sending countries, and receiving countries gain access to a diverse labour force. However, it
can also lead to social and political challenges, including debates over immigration policies
and cultural integration.
 By Tanmay Jain

Globalisation and India:

Globalisation of Indian Economy:

The introduction of globalisation changed Indian society drastically. Globalisation and the
Indian economy became interrelated, and next economic policies displayed a direct influence
of this change.

Government shaped administrative policies according to it as well. The aim was to promote
business opportunities in this country, generate employment, and attract global investments.
Globalisation of the Indian economy also witnessed an impact on its culture. Introduction to
other societies and their norms brought various changes to the culture of this country as well.

Furthermore, India is one of those countries that attain economic success after the
implementation of this concept. The introduction and growth of foreign investment in major
sectors of this country fuelled the rise of the Indian economy even further.

Impact of Globalisation on Indian Economy:

During this discussion of globalisation and the Indian economy, a name that deserves special
mention is former Finance Minister of India Dr Manmohan Singh. He was at the forefront of
this movement and ensured a successful implementation of it. He also drafted the economic
liberalization proposal. Here are some quick statistics that will reflect the immediate effect of
globalisation on Indian economy –
1. After 1992, the average annual growth rate of GDP was 6.1%.

2. In 1993-94, the export of India recorded an exponential growth of 20%. Also, in the
following financial year, it was at a healthy 18.4%.

3. In 1995, the total export value of computer services was about ＄11 billion, and in 2015
it recorded around ＄110 billion.
These statistics prove globalisation and the Indian economy brought positive changes and fast-
tracked India's economic growth.
 By Tanmay Jain

Benefits of Globalisation of Indian Economy:

The concept of globalisation in India resulted in the following benefits that helped to transform
the Indian economy and the country as a whole –

1. More Employment Opportunities:

The introduction of globalisation brought an influx of foreign investments and the favourable
policies of the Indian government also helped companies to set up units in this country. This
has resulted in new employment opportunities. Also, access to low-cost labour prompted
foreign businesses to outsource work to companies operating here.

In a nutshell, the employment opportunities in this country rapidly progressed after

globalisation and Indian business merged.

2. Increase in per-capita Income:

As a direct effect of more employment opportunities, the per-capita income of Indian

households also increased after globalisation.

Resultantly, it altered their standard of living and improved the purchasing power of an average
Indian. This gave birth to a new middle-class and recorded an increase in demand for consumer
products in this country.

3. More Choices for Consumers:

Globalisation and the Indian economy provided Indian consumers with a plethora of choices.
Indian, as well as foreign manufacturers, brought various products of the same kind, and
consumers got a chance to select their preferred one.

This increase in competition prompted manufacturers to create better products at a much lower
price point.

4. Access to Untapped Markets:

A noticeable benefit of globalisation is that it provides access to many untapped markets with
huge potential. The globalisation of the Indian economy means it allowed foreign companies
 By Tanmay Jain

to operate in the Indian market. Also, Indian businesses got an opportunity to operate on a
global scale. As a result, the import-export sector in India saw an astonishing rise after 1991.

Globalisation and the Indian economy are a vital chapter of economics. It offers an insight into
how this concept transformed India as a country and paints a clear picture of globalisation and
the future of the Indian economy.

GATT:

The General Agreement on Tariffs and Trade (GATT) was an international trade agreement
that aimed to promote global trade by reducing trade barriers, such as tariffs and quotas, among
member countries. It operated from 1947 until it was succeeded by the World Trade
Organization (WTO) in 1995. GATT established principles of non-discrimination, tariff
reduction, and dispute resolution to facilitate international trade and create a more open and
predictable trading environment among its member nations.

General Agreement on Tariffs and Trade (GATT), set of multilateral trade agreements aimed
at the abolition of quotas and the reduction of tariff duties among the contracting nations. When
GATT was concluded by 23 countries at Geneva, in 1947 (to take effect on Jan. 1, 1948), it
was considered an interim arrangement pending the formation of a United Nations agency to
supersede it. By the time GATT was replaced by the World Trade Organization (WTO) in
1995, 125 nations were signatories to its agreements, which had become a code of conduct
governing 90 percent of world trade.

Principles of GATT:

1. Trade Without Discrimination (Most-Favoured-Nation Principle):

• The MFN principle is the cornerstone of GATT, emphasizing the principle of non-
discrimination in international trade.
• It ensures that a country treats all other GATT member countries equally. If a country
grants preferential trade terms, such as lower tariffs or fewer trade restrictions, to one
nation, it must extend the same treatment to all GATT members.
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• The MFN principle aims to prevent countries from taking advantage of others'
economic conditions, promote fair and equitable trade relations, and avoid trade
discrimination.

2. Protection of Domestic Industries through Tariffs:

• GATT encourages the use of customs tariffs (import taxes) as the primary means to
protect domestic industries from foreign competition.
• Tariffs provide a transparent and predictable mechanism for regulating trade while
allowing countries to protect sensitive industries. By imposing tariffs, countries can
control the flow of imports without resorting to more restrictive measures like import
quotas or bans.

3. Promotion of Fair Competition:

• GATT addresses unfair trade practices, with a focus on preventing "dumping," where
a country exports goods at prices below their production costs.
• This principle aims to level the playing field and ensure that trade is conducted on fair
and competitive terms. It discourages practices that distort international trade by
creating artificial advantages for certain countries or industries.

4. Prohibition of Quantitative Trade Restrictions:

• GATT strongly discourages the use of quantitative trade restrictions, such as import
quotas, licenses, or prohibitions.
• The goal is to facilitate the free flow of goods by preventing arbitrary limits on the
quantity of imports. Exceptions can be made for countries facing balance-of-payments
difficulties, but these restrictions must adhere to specific conditions and be temporary.

5. Possible Emergency Actions:

• GATT includes provisions for countries to seek temporary relief from specific GATT
obligations in exceptional circumstances.
• To invoke this principle, a country must follow the waiver procedures outlined in the
agreement. This allows for flexibility in adhering to GATT rules when a nation's
economic or trade circumstances are severely affected.
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6. Regional Trading Agreements:

• GATT recognizes that exceptions to the MFN principle can be made through regional
trading agreements.
• When countries form customs unions or free trade areas, they can grant preferential
treatment to each other without extending it to all GATT members. This exception
acknowledges the importance of regional economic integration.

7. Settling Trade Disputes:

• GATT establishes a structured framework for the peaceful resolution of trade disputes
among member countries.
• This framework includes mechanisms for consultation, negotiation, and dispute
settlement. It aims to ensure that trade disputes are resolved transparently, avoiding
unilateral actions that could disrupt international trade.

Advantages of GATT:

1. Improves International Trade Relations: GATT eliminated several trade barriers

and reduced tariffs. Hence, the countries became more open to trading with each
other. Also, they realised the advantages of participating in free trade, and the number
of signatories to GATT increased from 23 to 128.
2. Promotion of Harmony and Peace: Post-World War 2, several countries came
together for the first time to take a collective decision. Hence, the agreement promoted
world peace and collaboration. Also, the European countries were struggling, and a
war-like situation was built. However, GATT kept the situation in check and helped
reduce the possibility of war.
3. Better Communication among Nations: GATT incentivised nations to interact with
each other and improve their trade relations. Hence, the nations tried to understand the
problems in other nations and used effective communication to solve these problems.

Disadvantages of GATT:

1. Impact on Domestic Industries: With the implementation of GATT, more countries

started importing goods instead of promoting their domestic industries. Therefore, the
unemployment rates of different countries shot up. GATT enabled rich countries to
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increase production and push the products to other nations. Hence, the middle and low-
income nations suffered a lot.
2. Exposure to Risk: The trade of services was not under the purview of GATT. Hence,
services like finance, technology, etc. expanded worldwide, and only a few nations
dominated these industries. Hence, an impact on any of these nations impacted the
entire economy.
3. The Reduced role of the Government: Once a country signs an agreement like GATT,
it must abide by all its principles. Hence, the government loses control over its own
country and its people.

Three Provisions of GATT:

GATT works on three main provisions.

1. As per the first provision, all the member nations must give each other the status of the
most favoured nation. As per the status, the tariffs and other quantitative restrictions
would be the same for all nations. However, the special tariffs imposed on the British
Commonwealth countries and customs unions were not under the purview of GATT.

2. The second provision included the number of imports on which there will be no trade
restrictions. However, there were some exclusions to this provision:

• In case of a surplus of agricultural produce

• If the country was facing issues with its balance of payments due to a reduction in the
foreign exchange reserves
• Counties that were emerging and needed to protect their industries
• Issues involving national security

3. The third provision was added to the GATT agreement in 1965. According to the
provision, the developed countries must agree to remove import tariffs from developing
countries. The primary motive of this provision was to support developing countries.
Based on these three provisions, the GATT works.
 By Tanmay Jain

Objectives of GATT:

1. To encourage full employment and large and steadily growing volume of real income and
effective demand.

2. To improve the world production and exchange of goods.

3. To ensure the full use of world resources.

4. To ensure a steady improvement in the living standards of people in member countries.

5. To settle the disputes through consultation within the framework of GATT.

World Trade Organisation (WTO):

The World Trade Organization (WTO) is the only global international organization dealing
with the rules of trade between nations. At its heart are the WTO agreements, negotiated and
signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is
to help producers of goods and services, exporters, and importers conduct their business.

In Which Year Was WTO Established?

The World Trade Organisation was established on January 1, 1995, following the Marrakesh
Agreement which was ratified on April 15, 1994. The General Agreement on Tariff and Trade
was substituted by the Marrakesh Agreement.

Objectives of WTO:

• WTO aims to improve the standard of living of every individual belonging to its
member nations.
• WTO aims to ensure a hundred percent employment and a rise in demand for goods
and services.
• It aims to enlarge the production and trading of products and services.
• WTO also aims to ensure the full utilization of national and international resources.
• WTO even aims to safeguard the environment from depletion due to human
interference.
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• It aims to ensure that all companies accept and abide by the concept of sustainable
development.
• WTO also aims to implement a new foreign trade mechanism as provided in the
Agreement.
• WTO aims to promote international trade that can certainly benefit all countries.
• To remove the existing obstacles, present in an open global trading system.
• It even aims to take certain steps towards developing the poorest and underdeveloped
countries.
• WTO even aims to enhance competitiveness between all the member countries to
benefit the maximum number of customers.

Functions of WTO:

The WTO’s major function is to supervise and implement trade regulations in the worldwide
economy. The organization administers the multifaceted trade agreements scheduled in the
WTO agreement. The primary functions of the WTO are as follows:

(i) It helps in the implementation, administration and realization of the objectives for which it
was established.

(ii) It provides the framework for the implementation, administration and operation of the trade
agreements related to trade in civil aircraft, government procurement, trade in dairy
products and bovine meat.

(iii) It figures out the meeting place for negotiations amongst its members relating to their
multinational trade relations in matters related to the agreements and framework for the
implementation of the results of such negotiations, as determined by the Ministerial
Conference.

(iv) It puts into practice the understanding of rules and procedures concerning the Settlement
of Disputes of the Agreement.

(v) It seeks to cooperate with the IMF and the World Bank and its affiliates with a view to
realizing greater coherence in global economic policy-making.
 By Tanmay Jain

Advantages of WTO:

• First, WTO helps in the promotion of peace and wellness among countries.
• With WTO, one can constructively handle disputes between member nations.
• Second, WTO helps in the stimulation of economic growth.
• WTO assists developing nations.
• WTO ensures an adequate level of corporate governance and free trade, reducing the cost
of living.
• Trade between nations under the governance of WTO raises employment and income
opportunities for the participants.
• WTO protects the government from attacks like lobbying.
• The free trade ensured by the WTO offers better and more choices concerning goods and
services.
• WTO even boosts agricultural exports and international trade.
• WTO even enhances the inflow of FDI (foreign direct investment) and helps restrict
dumping.
• WTO provides huge benefits for industries like cloth and textiles.

Disadvantages of WTO:

• The world trade organization is threatening the agricultural sector. It is because it

reduces subsidies and leverages the import of food crops.
• The World Trade Organization imposes a huge threat on industries that operate
nationally.
• The World Trade Organization even has significant impacts on human and employee
rights.
• World trade organization undermines national sovereignty and decision-making made
at the local level.
• WTO even increases economic instability at the national level.
• New industries may find it difficult to establish themselves in an extensive competitive
environment.
 By Tanmay Jain

Principles of WTO:

1. Non-Discrimination: Non-discrimination is a fundamental principle of the WTO that

ensures that member countries treat each other equally in trade relations. It means that
WTO members should not discriminate against other member countries in favour of
their domestic industries or specific trading partners. All countries are expected to
provide equal access and opportunities to all other WTO members in terms of trade.

2. Most-Favoured Nation (MFN): The MFN principle is a core tenet of the WTO and
emphasizes that if one-member country grants preferential trade terms (e.g., lower
tariffs) to another member, it must extend those same terms to all WTO member
countries. This principle prevents discriminatory trade practices and promotes fairness
by ensuring that any trade concession offered to one member is offered to all others.

3. National Treatment: National treatment ensures that imported products are treated the
same as domestically produced goods within a country's market. This means that once
a product, whether domestic or foreign, enters a country, it should not face
discriminatory treatment. National treatment prevents discrimination against imported
goods and promotes a level playing field for all products in the domestic market.

4. Reciprocity: Reciprocity is a key concept in trade negotiations conducted within the

WTO. It involves countries making mutual concessions to reduce trade barriers. For
instance, if Country A agrees to lower its import tariffs on specific goods from Country
B, it expects a reciprocal concession from Country B in return. Reciprocity is essential
for trade negotiations and helps ensure that trade agreements are mutually beneficial.

5. Predictability: Predictability in trade is achieved through binding and enforceable

commitments. When countries agree to specific trade terms, such as tariff levels or
import quotas, within the WTO framework, these commitments are legally binding.
This provides businesses with confidence in a stable and predictable trade environment,
knowing that trade rules will be upheld.
 By Tanmay Jain

6. Transparency: Transparency is a vital aspect of the WTO's operation. It requires

member countries to publish their trade regulations and notify the WTO of any changes
in their trade policies. Transparency ensures that trade practices are open and accessible
to all member countries, helping to prevent unfair trade practices and promoting a level
of predictability in trade relations.

7. Reform and Development: The WTO recognizes the importance of economic reform
and development, particularly for developing countries. It encourages its member
countries, especially those with emerging economies, to undertake economic reforms
that can lead to economic growth and development. The WTO provides technical
assistance and support to help countries achieve these goals, fostering economic
progress and inclusivity.