Module 1

Dr. Amlin David

Assistant Professor
Saintgits Institute of Management
 Module 1 contents
• Introduction to International Business:
• An overview of environment of international business- Significance, nature,
importance and scope of international business- reasons for companies going
international, major strategic decisions in international business- factors
influencing international business decisions - labour issues, legal issues and
environmental issues in international business - indicators of growth of
international business - trade/GDP ratio, FDI/GDP ratio, FDI/capital formation
ratio, growth of international production, growth of global supply chains and
global sourcing. Impact of globalization on international Business
 An overview of environment of
International Business
• The international business environment is a complex network of
economic, political, legal, and cultural forces that shape how
organisations conduct international business. It consists of external
and internal factors that impact a company’s success or failure in
different markets.
 Definitions of International Business
• The expansion of business functions from domestic to any foreign
country with an objective of fulfilling the needs and wants of
international customers.
• The exchange of goods and services, resources, knowledge and skills
among individuals and businesses in two or more countries.
• It is a commercial enterprise that perform economical activity beyond
the bounds of its location, has branches in two or more foreign
countries and makes use of economic, cultural, political, legal and
other differences between countries (International Business Journal)
 Evolution of International Business
• Barter system
• Merchants
• National Borders
• Roman civilization
• Colonialization
• Industrial revolution
• World war
• Globalization
• East India Company
• Effect of world war
• Rise of Emerging markets
• Prolonged recession before WWII
• GATT by 23 countries in 1947 aiming at establishment of international
trade organization.
• GATT provided framework for a series of negotiations bywhich tariffs
were reduced
• Efforts to convert GATT into WTO were intensified during 1930
• GATT was replaced by WTO on 1st January , 1995
• Efforts of IMF, IBRD and WTO led to the globalization of business
particularly during 1990’s.
 Levels of environment
• Internal environment
• Micro environment/ task environment/ operating environment
• Macro environment/ general environment/ remote environment
 Internal environment
• Internal factors which have a bearing on the strategy and business
decisions are outlined below
1. Value system
2. Mission and Objectives
3. Management structure and nature
4. Internal power relationship
5. Human resources
6. Company image and brand equity
7. Company image and brand equity
 External environment
• External environment consists of a micro environment and macro environment.
• Micro environment is also known as task environment and operating environment
because the micro environmental forces have a direct bearing on the operations of
the firm.
• Micro environment consists of the factors in the company’s immediate
environment that affect the performance of the company. These include suppliers,
customers, marketing intermediaries, competitors and public.
• Macro environment consists of larger societal forces that affect all factors in the
company’s micro environment – namely demographic, economic, technical,
political and cultural forces.
Factors contributing to rapid growth of IB
• Profitability
• Increase in and expansion of technology
• Liberalisation and Globalization
• Development of services
• Growing consumer pressures
• Changing political situation
• Expanded cross-national cooperation
• Stagnation in some of the developed markets
Continued
• Local Constrains
• Growth potentials
• Image creation
• Nearness to raw materials
• Monopoly power
• Business policy
• Legal Constrains
 Significance of International Business
• Cultural exchange
• Competitive advantage
• Corporate social responsibility
• Market expansion
• Improving the standard of living
 Why CSR Matters
• Attracting and retaining customers
• Employee motivation
• Community support and customer loyalty
 Nature of International Business
• Complexity
• Risk and uncertainty
• Geographic spread
• More potential than the domestic market
• Good Relationships
 Why Singapore is a global business hub?
• Highly connected
• Technologically sophisticated
infrastructure
• Workforce
• Legal protection
• Business supportive environment
 Scope of International Business
• Foreign Investments
• Exports and Imports of merchandise
• Licensing and Franchising
• Service Exports and Imports
• Growth opportunities
• Benefitting from currency exchange
• Limitations of the Domestic market
 Foreign Investments
• Foreign investment contain investments of funds from the abroad in
exchange for financial return. Foreign investment is done through
investment in foreign countries through international business.
• Foreign investments are two types which are direct investment and
portfolio investment.
 Export and Imports of Merchandise
• Merchandise export means sending the home country’s goods to other
countries, which are tangible and merchandise imports means bringing
tangible goods to the home country.
 Licensing and Franchising
• Franchising means giving permission to the new party of the foreign
country in order to produce and sell goods under your trademarks,
patents or copyrights in exchange of some fee is also the way to enter
into the international business.
• Licensing system refers to the companies like Pepsi and Coca-Cola
which are produced and sold by local bottlers in foreign countries.
Rise of Baskin Robbins
 Service Exports and Imports
• The trade between the countries of the services is also known as
invisible trade.
• There is a variety of services like tourism, travel, boarding, lodging,
constructing, training, educational, financial services etc. Tourism and
travel are major components of world trade in services.
 Growth Opportunities
• There are lots of growth opportunities for both of the countries,
developing and under-developing countries by trading with each other
at a global level.
• The imports and exports of the countries grow their profits and help
them to grow at a global level.
 Benefitting from currency exchange
• International business also plays an important role while the currency
exchange rate as one can take advantage of the currency fluctuations.
 Limitations of Domestic Markets
• If the domestic market of a country is small then the international
business is a good option for the growth of the business in the host
country.
• Depression of domestic market firms will force to explore foreign
markets.
 Push and Pull factors in International
Business
• The pull factors are those forces of attraction which pull the business
to the foreign markets.
• Push factors refer to the compulsions of the domestic market , like
saturation of the market , which prompt companies to Internationalize.
 Importance of International Business

For the firms For the Nation

• Profit advantage • Earning foreign exchange
• Growth opportunities • Optimum use of national
• Domestic market constraints resources
• Competition • Employment opportunities
• Government policies and regulations • Enhanced growth perspectives
• Monopoly power • Cultural exchange
• Spin off benefits • Political cooperation
• Strategic Vision • Improving the standard of living
 Importance of IB
• Earn Foreign Exchange
• Get benefit from the government
• Optimum utilization of resources
• To increase market shares
• Expand and diversify
• To spread business risk
 Reasons why companies are going
International
• Profit advantage
• Growth opportunities
• Domestic market constraints
• Competition
• Government policies and regulations
• Monopoly power
• Spin off benefits
• Strategic Vision
 Benefits of International Expansion
• Acquire global talent
• Reduce costs
• Become more resilient
• Expand globally for growth opportunities
• Expand globally for tax and compliance benefits
Unsuccessful examples of global expansion
• Starbucks expansion in Israel is an example of failed global expansion.
• Opening five stores in Tel Aviv in 2001, they had pulled out by 2003.
There is some controversy and disagreement over why Starbucks failed,
but reasons cited include:
• A failure to understand the Israeli preference for stronger coffee styles
(such as Turkish coffee)
• An inability to compete on price with cheaper local coffee
• A poor relationship with the local expansion partner
• An underestimation of the loyalty of locals to small ‘Mom and Pop’
operations.
 Successful examples of global expansion
• Apple has staked its future on global markets, rather than the domestic
front. Asia and Europe are major markets, with Chinese consumers
being, by far, the largest consumers of iPhones.
• Of course, for Apple, global expansion is not just about finding new
markets for its products, but its global supply chain: Supply chains
from 43 countries are required to produce the final product. For
example, while final product assembly occurs in China, the
accelerators in iPhones come from Germany.
 Major strategic decisions in International
Business
1. International business decision
2. Market selection decision
3. Entry and operating decision
4. Marketing mix decision
5. International organization decision
 International Business Decisions
• Present and future domestic market opportunities
• Present and future overseas opportunities
• Resources of the company
 Market selection decision
• Thorough evaluation of organizations capabilities and analysis of the
potentials and other relevant environmental factors of the foreign
markets.
• Study on the potential of the various overseas markets and knowledge
of their respective marketing environment.
 Entry and operating decisions
• There are number of market entry strategies such as licensing,
franchising, exporting, countertrade, establishing abroad assembly
facilities, manufacturing facilities, wholly owned or joint ventures,
contract manufacturing etc.
 Marketing mix decision
• The foreign market is characterized by a number of uncontrollable
variables. The marketing mix consists of internal factors that are
controllable.
• The elements of marketing mix product, promotion, price and physical
distribution should be suitably designed so that it fits the foreign
market environment.
 International organization decision
• Structure on effectively conducting the business
• Various factors to consider are expected volume of business, the nature
of overseas market, the nature of the product, the size and resources of
the company, and the length of its experience.
 Why foreign investors choose India as an
investment destination
• One of the world’s fastest growing economies.
• Largest youth population in the world.
• Indian infrastructure
• Rising global competitiveness
• India rises in global innovation index 2022
• Rising economic influence
Factors influencing International Business
decisions
• External – Government policies and controls
• Internal – Factors within the organization which discourage
globalisation, Organization culture
 Labour issues in International Business
• The term international labor issues refers to violations of workers’
rights that recur consistently throughout the world. Workers’ legal
rights, which protect them from abuses by employers, vary from
country to country.
• However, Articles 23 and 24 of the United Nations (UN) Universal
Declaration of Human Rights (UDHR) describe rights that create a
universal standard for proper labor relations.
 Articles 23 and 24

Article 23 Article 24
• Everyone has the right to work, to free choice of • Everyone has the right to rest and leisure,
employment, to just and favorable conditions of including reasonable limitation of working hours
work and to protection against unemployment. and periodic holidays with pay.
• Everyone, without any discrimination, has the
right to equal pay for equal work.
• Everyone who works has the right to just and
favorable remuneration ensuring for himself and
his family an existence worthy of human dignity,
and supplemented, if necessary, by other means
of social protection.
• Everyone has the right to form and to join trade
unions for the protection of his interests.
 Key labor issues that effect international business (Cont)
1. Labor standards and rights
2. Wage disparities and exploitation
3. Child labor and forced labor
4. Unionization and collective bargaining
5. Cultural and social norms
6. Diversity and inclusion
7. Expatriate and local employment
8. Training and skill development
9. Human rights and social responsibility
10. Global supply chains
 Environmental issues in International Business
• Forest and agricultural land degradation
• Depletion of water bodies
• Public health
• Loss of biodiversity
• Poor water supply and sanitation issues
• Natural hazards like floods, annual rainfall due to deforestation
• Poor agricultural practices
• Civil conflicts involving natural resources
• Increasing pollution have led to increase in air pollution, shifting
precipitation patterns and declining intervals of drought recurrence.
• Unequal distribution of resources
Indicators of Growth of International Business trade/ GDP
Ratio
• Exports and Imports growth
• Trade agreements and openness
• FDI
• Globalization
• Economic diversification
• Currency exchange rates
• Commodity prices
• Technological advancements
• Trade balance
• Political stability
• Infrastructure development
• Global supply chains
 FDI
• FDI refers to the purchase of an significant number of shares of a
foreign company in order to gain certain degree of management
control.
 Nature of FDI
• Reserve bank of India’s automatic approval route for equity holding
upto 51 per cent.
• Foreign investment boards discretionary approval route for larger
projects with equity holding greater than 51 per cent.
• Acquisition of shares ( since 1996)
• RBI’s non resident Indian ( NRI) schemes and
• External commercial borrowings
 Why FDI
• A way of filling up the gap between the domestically available supplies
of savings, foreign exchange , government revenue and human capital
skills and the desired level of these resources necessary to achieve
growth and development targets.
• Factories set up by MNC’s act as nuclii of growth.
• FDI can create healthy competition in the recipient countries.
• Locational advantages attract FDI
• FDI often depends on country’s political attempts to reduce security
risks.
• Reduce poverty.
 Factors influencing FDI
Supply Factors Demand Factors Government Factors
Production costs Customer access Economic priorities
Logistics Follow clients Avoidance of trade barriers
Resource availability Follow rivals Economic development incentives
Access to technology Exploitation of competitive
advantage
 Trade to GDP ratio
• The trade-to-GDP ratio is an indicator of the relative importance of
international trade in the economy of a country.
• It is calculated by dividing the aggregate value of imports and exports
over a period by the gross domestic product for the same period.
Although called a ratio, it is usually expressed as a percentage.
 FDI/GDP Ratio
• The Foreign Direct Investment (FDI) to GDP ratio is a measure that
indicates the level of foreign investment relative to the size of a
country's economy.
• It provides insights into the degree of international capital inflow and
the extent to which a country is attracting foreign investment
compared to its overall economic output.
• A higher FDI/GDP ratio suggests that a larger portion of a country's
economic activity is influenced by foreign investment.
 Factors influencing FDI/ GDP Ratio
• Investment policies
• Market size and potential
• Natural resources
• Infrastructure and connectivity
• Political stability and security
• Economic performance
• Technology and innovation
• Trade agreements
• Tax incentives
• Legal and regulatory environment
• Sectoral opportunities
 Interpretation of FDI/ GDP Ratio
• High FDI/GDP Ratio: A high ratio indicates that a significant portion
of a country's economic activity is driven by foreign investments. This
could signify that the country is attractive to international investors,
which might be due to factors like market potential, business-friendly
policies, or access to resources.
• Low FDI/GDP Ratio: A low ratio suggests that foreign investment
has a relatively smaller impact on the economy compared to domestic
economic activities. This might indicate that the country is less
attractive to international investors or has policies that restrict foreign
capital inflow.
 FDI/ Capital Formation Ratio
• The FDI to Capital Formation ratio is calculated by dividing the total value of
foreign direct investment by the total value of capital formation within a specific
time period (usually a year). Mathematically, the ratio can be expressed as:
• FDI/Capital Formation Ratio=Total FDI/Total Capital Formation
• This ratio helps to provide insights into the extent to which foreign direct
investment contributes to a country's overall investment in physical assets. A high
ratio suggests that a significant portion of the country's capital formation is driven
by foreign investment, indicating a strong presence of foreign investors in the
domestic economy. On the other hand, a low ratio implies that domestic
investment plays a larger role in capital formation compared to foreign
investment.
 Growth of Global Supply Chains
• According to Houilihan concept of supply chain embraces the following points
1. Supply chain identifies the complete process of providing goods and services to
the final user.
2. It includes all parties and logistics operations from supplier to customer within
a single system
3. The scope of supply chain includes procurement, production and distribution
operations.
4. The supply chain extends across organizational boundaries
5. The primary objective of supply chain is service to customers. This must be
balanced against costs and assets.
6. Objectives of individual supply chain members are achieved through the
performance of the chain as a whole.
 Global sourcing
• Buy strategy is greatly benefited by the opportunities for global
sourcing. Some of the reasons for offshore purchases are the following
1. Lower price
2. Better quality
3. Only source available
4. More advanced technology
5. More consistent attitude
6. More cooperative delivery
7. Countertrade requirements
 Impact of Globalization on International Business / Benefits
• Economic development with help of Foreign capital utilisation.
• Higher living standards.
• More competition and innovation.
• Inflation is less likely to derail economic growth.
• Enhance consumer choice and consumer surplus.
• Spurs innovation with fresh ideas from abroad.
• Export jobs often pay more than other jobs
• More access to foreign investment and keep interest rates low.
• Opens up domestic and global opportunities for firms in developing
countries.
• Helps to reduce poverty.
 Essential conditions for globalization
• Business freedom
• Facilities
• Government support
• Resources
• Competitiveness
• Orientation
Negative impact of Globalization