LESSON 1

Contents

International business- definition , importance, nature

Different entry modes in international bussiness

Globalisation , Drivers of globalization

International business consists of transactions that are devised and carried out across national
borders to satisfy the objectives of individuals, companies, and organizations.

International Business is the process of focusing on the resources of the globe and objectives of
the organisations on global business opportunities and threats.

International business defined as global trade of goods/services or investment. More

comprehensive view does not focus on the firm but on the exchange process
Free Trade occurs when a government does not attempt to influence, through quotas or duties,
what its citizens can buy from another country or what they can produce and sell to another
country. The Benefits of Trade allow a country to specialize in the manufacture and export of
products that can be produced most efficiently in that country.

Importance of international business

1. To achieve higher rate of profits

2. Expanding the production capacity beyond the demand of the domestic country

3. Severe competition in the home country

4. Limited home market

5. Political conditions

6. Availability of technology and managerial competence

7. Cost of manpower, transportation

8. Nearness to raw material

9. Liberalisation, Privatisation and Globalisation (LPG)

10. To increase market share

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11. Increase in cross border business is due to falling trade barriers (WTO), decreasing costs in
telecommunications and transportation; and freer capital markets

Different countries and companies are given the chance to expand and to share their products and
services to others beyond their own territory.

In fact, there is an actual give and take scenario between two or more nations that sign a mutual
agreement of trading. Below are the lists on what make international business important.

1. It acquires more sales

Businessmen will have the chance to expand their companies and to be known to other countries.
Undoubtedly, this will increase their profits rather than restricting their business within their own
borders.
Our local country will also benefit from this since new products, technologies, and services are
being offered for us to use.
And, because we allow them to export their goods and services to us, we are also given the
chance to export our own products to them. In this way, both our local businessmen and
government will also earn.

2. It opens new opportunities

If there are increasing numbers of foreign companies in our country, they will need more
manpower to help them in running the business. We will be given the chance to use and to share
our skills and knowledge, once we are hired.
In return, we will gain income to provide the needs of our family. The agreement also implies
that we can go to their country to work, to study, or to live.

3. It gives new technologies

Other countries have invented different technologies which can help us in our daily living like
modern appliances and computers.
For those countries that lack the means to create new high quality technologies can also have an
access to enjoy the benefits once these technologies are exported to them.
Another example is the invention of rear projection screens. These will help us in disseminating
and advertising in our country.

4. It utilizes the resources

Countries that are rich in fuel, minerals, and many more can utilize their resources by sharing
these to others. Instead of keeping these resources, they can share these to other countries so that
others will also have the benefits. In return of their resources, they can have more income for
their government.

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5. It provides quality products
Different countries have their own unique and useful products and services that they can offer to
us. In this way, we can choose the best ones that are helpful to us. There are wide varieties of
choices when it comes to brands, prices, designs, and features.

6. It helps in earning foreign exchange

Investors are welcomed to invest from both local and international. More investors mean that the
economic status of our country will become stable. This helps a lot, especially those fellow
citizens that need assistance from the local government.

7. It acquires investment in infrastructure

Countries that deal with international business need to invest in infrastructure. This will help
them in transporting and communicating with other business partners and customers. This will
also help the people since these infrastructural developments are open to be used by the public.

Nature of International Business

1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

Expansion of International trade

In the past 30 years, the volume of international trade has expanded from $200 billion to over
$7.5 trillion.

The sales of foreign affiliates of multinational corporations are now twice as high as global
exports

RECENT CHANGES IN INTERNATIONAL BUSINESS

Total world trade declined dramatically after 2000, but is again on the rise.

The rate of globalization is accelerating.

Regionalization is taking place, resulting in trading blocs.

The participation of countries in world trade is shifting.

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DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

1. Exports

Export deals with physical movement of goods and services from one place to another through a
customs port followings the rules of both the country of origin and country of destination.
Depending upon the involvement of the exporter, exports can be classified as direct or indirect.
Direct exporters export their goods and services in their own name and the buyer directly remits
proceeds, in a proper manner and through a proper channel. The proper channel means that the
remittance is made through the banking channel in the currency, which is quoted in the invoice,
and the proper channel means that the goods are legally exported through a customs port.
Indirect exporters supply goods to direct exporters. Lack of expertise, international contacts and
manpower cause them to depend upon direct exporters. Farmers rarely export grains on their
own. Artisans cannot develop international contacts to clinch business deals. Therefore, they
become indirect exporters. Their products are to other countries but not in their names. Exporters
can be classified in several ways:

1. Depending upon the size of business, they are classified as small and large exporters.
Current national trade policy provides incentives and facilities to promote both small &
large exporters in different ways that are status holders due to their performance in earning
foreign exchange.
2. Depending upon the product lines exported, they are classified as single product and
multiple product line
3. Depending upon their legal status, they are classified as proprietary, partnership, private
limited and public limited companies.
4. Depending upon the destination of their exports, they are classified as single destinations or
multi destination exporters. Nowadays, the majority of the companies adopt the philosophy
of multi product, multi location, multi strategic, and multi dimensional operations.
5. Depending upon the frequency of their exports, they are classified as occasional exporters
and dynamic exporters.

2. International licensing
International licensing is an agreement between the licensor and the licensee over a period of
time for the use of brand name, marketing, know-how, copyright, work method and trade mark
by paying a license fee. For example, British American Tobacco Company (BATS) has given
licenses in many countries for the manufacture of their brand of cigarettes 555. In India, ITC is
the licensed producer of 555. Pepsi cola licensed to Heineken of the Netherlands giving them
the exclusive right to produce and sell Pepsi cola in Netherlands. The licensor has minimum
involvement in day-to-day functions. Therefore the returns are also comparatively low.
Licensing specifies the territory as well as period. The licensor gives such permission after
establishing such a command-able position globally. It has a brand command.

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3. Franchising
Franchising is a form of licensing wherein the franchiser exercises more control over franchisee.
The franchiser supplies the main part of the product, and provides the following services to the
franchisee: 1. TRADEMARKS 2. OPERATING SYSTEMS 3. PRODUCT, & 4. BRAND
NAME.

Company support systems like advertising, training of employees, quality assurance are also
involved in franchising. McDonald, Dairy Queen, Dominos Pizza and KFC are the known
franchise brands. NIIT & Aptech have appointed franchisees in Africa, south East Asia, Gulf
countries and China. Hotels like The Hilton and Marriott are well known operators in hotel
sector. Jatias in India are the national franchisees of McDonalds. All the investments on
premises, HR, operations and promotions are totally borne by the franchisees. In practice the
franchiser is determined to maintain a standard throughout the world in terms of quality brand
logo and symbol. But the product is adaptable depending on the socio-cultural background of the
country. McDonalds sells BEEF BURGERS in Russia & VEG BURGERS in India.

Sometimes the franchisers initiate the process where the economy is on boom. In many
developing nations, franchisees initiate the process and they are forced to bear all the expenses.

4. Contract manufacturing
Many companies outsource their products and concentrate mainly on marketing operations.
Contract manufacturing is the strategy of identifying a manufacturing unit to produce items at a
competitive price in any part of the world. Nike is procuring its athletic footwear in a number of
factories in South East Asia. Mega Toys is sourcing from China. Hundreds of international
companies with their origin in European countries have selected manufacturing centers in India,
China and South East Asia. Mark and Spencer, J.C. penny, Target and H & M have contract
manufacturing arrangements in many parts of the world. Contract manufacturing with a
dimension in the service sector offer ample opportunities for Indian companies in the form of
BUSINESS PROCESS OUTSOURCING (BPO) and KNOWLEDGE PROCESS
OUTSOURCING (KPO). All the developed nations are becoming end user of outsourced
products and services of developing nations.

5. Contract marketing
All the companies, which are strong in production, may not have equal marketing strengths.
However, they may be comfortable dealing with marketing outlets around the world such as
TESCO, Maeys, K Mart, Wal-Mart and Spinneys. Such manufacturing units enter in to a
marketing agreement and concentrate more on production at lower costs. Thermax, Ion
Exchange and Supreme industries have selected marketing firms in other countries, which have a
good background with technology support. Majority of technology-based companies essentially
have to identify competent organizations with marketing infrastructure to aggressively promote
their products or projects. Many Indian companies are contract marketers for Germany based

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medical equipments, dental care items and hearing aids. Their contractual obligations include
TARGETS & TERRITORIES.

6. Management contracts
Companies with a low level of technology and managerial expertise may seek the assistance of
foreign countries. A management contract is an agreement between two companies whereby one
company provides managerial and technical assistance for which proper monetary compensation
is given, either as a flat lump sum fee or a percentage on the sales or a share in the profits. Delta
airlines, Air France and KLM offer such services in developing countries. Exxon is a major
operator in Gulf region in the field of oil exploration.

7. Joint venture
VENTURE ORIGINATES FROM ADVENTURE which means NEW, either market or
technology or environment. A joint venture is a binding contract between two venture partners to
set up a project either in home country or host country or a third country. In this case both parties
are committed to joint risk taking and joint profit sharing. For example, The Taj group of hotels
has a joint venture in Russia for setting up Five Star Hotels. Mahindra & Mahindra has recently
entered in to a joint venture with Renault to manufacture cars. A large number of joint ventures
have been miserable failures in the past. In the initial stage every venture promises excellent
opportunities to both the venture partners. However, when the operation actually starts, certain
functional level grievances and issues become inevitable. Therefore, it is absolutely necessary for
both the venture partners to understand all the aspects of management, investment and
regulations of the countries where they operate. The business units should have clear guidelines
and operation manuals wherein the role of every one should be clearly defined. Hence, a joint
venture is nothing but a marriage binding between two partners from different backgrounds
with an understanding, commitment and mutually rewarding experience to work together.

8. Collaboration
While a joint venture deals with the project in totality, in financial terms and the proportionate
partnership commitments, Collaboration deals with only a part of the functions. For example
Bajaj Auto has technological collaboration with Kawasaki of Japan, who offers the technology
for two wheelers. Others well known technological collaborations are Ind-Suzuki, Kinetic-Honda
and Hero-Honda. All the developing countries encourage technology collaborations. The
investors in the US, Japan, Germany and UK enjoyed the fruits by offering technical expertise to
the developing nations. The world famous Kellogg Business School has collaborated with the
Indian school of business (ISB) in Hyderabad, by offering teaching methodology. Likewise,
there may be financial collaborations, HR collaborations, systems collaborations and strategic
collaborations. The common term used for collaboration is TIE-UP.

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9. Foreign direct investment

The flow of funds from one destination to another is called investment. Companies, which are
constantly involved in international business, invest their money in manufacturing and marketing
bases through ownership and control. Kellogg, Pepsi, Coca Cola and the Hyatt group of hotels
are willing to invest even if the profits are expected after a long gestation period. Currently every
developing country is formulating strategies by offering ample amount of incentives to attract
investments. Foreign firms adopt certain methods as mentioned below: a. They control the
operations through subsidiaries to achieve strategic synergies. b. They have control through
technology, manufacturing expertise, intellectual property rights and brand name. c. One
permanent person or a team in the country of operation is appointed to monitor day to day
operations. The most attractive part of the operation is the direct investment, which contributes to
optimization of resources in the host country, generating employment opportunities and
enhancing the standard of living in the host country. The other major developments, which have
taken place during the past two decades, are exposure of the host countries to advance
technology and quality products. It is boon to the host country since capital is great resource it is
coming through investment. The main disadvantages are lack of clarity of repatriation of profits,
imposition of restrictions by host countries and elimination of small and medium industries due
to the financial power of the investor. A number of South American countries like Argentina and
few South East Asian nations like Indonesia fell pray to the dominant forces of overseas
investors. They feel that the old colonialism may re-emerge through investments. Generally, a
foreign investment takes place on full swing in developing countries only in the past two
decades. China, Taiwan, India, Brazil, Argentina and other developing countries have started
attracting huge foreign investments. If it takes place in specific sectors like infrastructure,
mining, marine technology and agro processing, it is highly beneficial to both the host country
and investor.

10. Mergers and acquisitions

In this case the company in the host country selects a foreign company merges itself with it. The
foreign company acquires the control of ownership. This mode of entry gives an outstanding
competitive edge over others. Such companies strengthen their international manufacturing
facilities and marketing network. Proctor & Gamble entered Mexico and became leaders in five
years by acquiring Loreto. Tata bearing acquired Metal Box in India. It is an easy and fast
method since the cost of acquisition is comparatively low. At the same time the disadvantages
are: a. It is a complex task involving banks, lawyers, bureaucrats and obviously politicians. b.
The host countries may impose restrictions on acquisitions. c. The labour problem is a big
challenge to acquisitions specially in developing countries where unemployment is a critical
issue. The global STEEL-KING L.N.Mittal was successful right from the first acquisition of
steel mill in Indonesia. Many other acquisitions followed in Trinidad, Kazakhstan, Hungary and
others. The recent Aditya Birla Group Company Hindalco acquisition of Novelis has

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strengthened its production synergy and market access for non-ferrous category in the
international market.

11. Take-overs

This is a strategy whereby a company identifies a healthy unit with strong brand name and
network and brings it under the management of another unit in order to become a leader in the
field and guarantee success. Since there may be many parties wanting to takeover a well-known
company, competition becomes inevitable. It is obvious that only one entity will win and the
winner has to withstand hostilities. Therefore, the process is called a hostile take over and the
winner is called the take over tycoon. Wellknown examples are the Hindujas who took over
Ashok Leyland and Uniliver who took over Brook Bond and Lipton. Take-over is also on
different levels, such as company takeover, business takeover, product takeover and brand
takeover. Some takeovers in the past have made many corporate success stories. For example,
Unilivers take over of Brook Bond and Lipton enhanced its position as a leader in the tea
industry in India. Always takeovers cost more as compared to acquisition but probability of
success is high.

12. Turnkey projects

A turnkey project is a contract under which a company is fully involved from concept to
completion. It covers right from supply of manpower, capital, and erection of plant, installation
and commissioning up to the trial operation of a project. The turnkey project contractors either
get a fixed fee or the cost plus profits are collected over a period of time. Today, infrastructure
projects like power plants, airports, refineries, railway lines, highways and dams are undertaken
on a turnkey basis. Bechtel, Brown Bovery, Hyundai, Mitsubishi, L&T and Daewoo are turnkey
contractors for international projects. They use terms like BOT (Build, Operate and Transfer)
and BOOT (Build, Own, Operate and Transfer) depending upon the level of involvement and
obligations. Whenever turnkey project contractor is capable of cutting costs on material and
manpower or finances or speed of completion: every component increases profitability.

13. Counter trade

In all the above operations, foreign exchange is necessary for transactions. For exports, the
supplier gets the proceeds in foreign exchange. For joint ventures, profits are shared in foreign
exchange. For international licensing, the license fee is paid in foreign exchange. The current
challenge to many international business organizations is to get payments in foreign currency. A
vast majority of the countries in the world do not have the necessary reserves of foreign
exchange to remit. However they can still be actively involved in international business, by using
COUNTER TRADE mechanism. Counter trade came in to existence in the absence of foreign
exchange reserves in a country. Sometimes the country is not willing to pay, though foreign
exchange reserves are with it. Such unwillingness will lead to non-repatriation of payment.
Ultimate solution is to enter in to counter trade practices. Counter trade can be classified in to
three categories: 1. Pure Barter 2. Buy Back 3. Counter Purchase

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 Pure Barter In this system goods and services are mutually exchanged between two countries
depending upon their bargaining strength. A country with surplus products can finalize deals
with another country that has a shortage of the same range of products. At the same time, the
second country may have a surplus of a different range of products, which are in short supply in
the first country. Hence, both countries can exchange their products by fixing a price in advance
for a given period of time. This age old system that was prevalent during the era of ancient
civilizations is being practiced currently. The Indus Valley supplied timber for maritime
activities to Mohenjadaro and Harappa. The same practice has re-emerged with sophisticated pre
fixation of value. Pure barter is defined as the mutual exchange of goods and services between
two countries depending upon their bargaining strength, in order that both the countries enjoy the
benefits.

A buy back is an arrangement by which the home country representative sets up a project in the
host country, which does have sufficient foreign exchange reserves to fully pay for the project to
the supplier. The project amount is partially paid in foreign exchange and the remaining amount
is paid in kind. Usually, the home country representative comparatively at low price purchases
the end product of the same project. This can be marketed in the home country or it could even
be diverted to a third country in order to maximize the profit margin. Buy back arrangements
have become popular since many turnkey project contractors get greater benefits by marketing
the end product in any part of the world at a higher margin. Bharat Heavy Electricals (BHEL)
sets up projects in other countries. Partially it gets the payment in foreign exchange. For the
balance amount it takes back tankers from the host country and markets them in any other
country and also brings them back to India to sell at a higher price. Such deals enable the home
country businesses to get international exposure very fast. The host country is an ultimate
beneficiary since the project is locate in and owned by it.

Counter purchase is a method, wherein company A from country A supplies product X to

country B. Country B, which has a surplus of product Y, compensates by supplying it to
company A, which finds a market for e product Y, say country C. Country C sells a product Z to
a country D, which has sufficient foreign exchange to pay for it. Country D can then pay country
C, and finally country A collects payment routed through company B and C. Thus purchasing
takes place against supply until a country, which has sufficient foreign exchange reserves is
found. He transaction. Many multinationals use this system to make large amounts of money at
every stage of For example, Pepsi International supplies rice to South Africa from India. From
South Africa it procures steel equivalent to the amount of rice collects and supplies it to Ghana.
From Ghana, it procures coffee and cocoa equivalent to the steel imports and sells them to
Canada, which has sufficient foreign exchange reserves to pay for them. By appointing one
representative or employee the company can carry out routine functions deals in the Far East are
Marubeni Corporation, Mitsubishi and Majuko. The age-old economic theory of inter-
dependency of nations has been redefined with the counter purchase mechanism. Today, to trade
with other countries, it is not necessary that the country in question has to have sufficient foreign

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exchange reserves. Without foreign exchange reserve one can continue trade. The model on the
next page shows the benefits that both the home country and the host country enjoy on successful
completion of the transactions undertaken. Today, anyone can do business with any country.
Foreign exchange as a medium of transaction had a dominant role in all the countries in the past.
Due to counter purchase mechanism very few countries with foreign exchange reserve can
comfortably contribute to international business.

GLOBALISATION

Globalization (or globalisation) is the process of international integration arising from the
interchange of world views, products, ideas and mutual sharing, and other aspects
of culture. Advances in transportation, such as the steam locomotive, steamship, jet
engine, container ships, and in telecommunications infrastructure, including the rise of
the telegraph and its modern offspring, the Internet, and mobile phones, have been major factors
in globalization, generating further interdependence of economic and cultural activities. Though
scholars place the origins of globalization in modern times, others trace its history long before
the European Age of Discovery and voyages to the New World. Some even trace the origins to
the third millennium BCE. Large-scale globalization began in the 19th century. In the late 19th
century and early 20th century,

Economic globalization is the increasing economic interdependence of national economies

across the world through a rapid increase in cross-border movement of goods, service,
technology and capital. Whereas the globalization of business is centered around the diminution
of international trade regulations as well as tariffs, taxes, and other impediments that suppresses
global trade, economic globalization is the process of increasing economic integration between
countries, leading to the emergence of a global marketplace or a single world market.] Depending
on the paradigm, economic globalization can be viewed as either a positive or a negative
phenomenon. Economic globalization comprises the globalization
of production markets, competition, technology, and corporations and industries. Current
globalization trends can be largely accounted for by developed economies integrating with less
developed economies by means of foreign direct investment, the reduction of trade barriers as
well as other economic reforms and, in many cases, immigration

Because of globalization, for the first time in history, the availability of international
products and services can be accessed by individuals in many countries, from diverse
economic backgrounds.

Globalization refers to the shift toward a more integrated and interdependent world
economy. Globalization has several facets, including the globalization of markets and the
globalization of production.

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The globalization of markets refers to the merging of historically distinct and separate national
markets into one huge global marketplace. Falling barriers to cross-border trade have made it
easier to sell internationally. It has been argued for some time that the tastes and preferences of
consumers in different nations are beginning to converge on some global norm, thereby helping
to create a global market.5 Consumer products such as Citigroup credit cards, Coca-Cola soft
drinks, Sony PlayStation video games, McDonald's hamburgers, Starbucks coffee, and IKEA
furniture are frequently held up as prototypical examples of this trend. Firms such as those just
cited are more than just benefactors of this trend; they are also facilitators of it. By offering the
same basic product worldwide, they help to create a global market.

The globalization of production refers to the sourcing of goods and services from locations
around the globe to take advantage of national differences in the cost and quality of factors of
production (such as labor, energy, land, and capital). By doing this, companies hope to lower
their overall cost structure or improve the quality or functionality of their product offering,
thereby allowing them to compete more effectively. Consider Boeing's 777, a commercial jet
airliner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in
Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing
flaps; and so on.11 In total, some 30 percent of the 777, by value, is built by foreign companies.
For its most recent jet airliner, the 787, Boeing has pushed this trend even further; some 65
percent of the total value of the aircraft is outsourced to foreign companies, 35 percent of which
goes to three major Japanese companies.

DRIVERS OF GLOBALIZATION

Drivers of Globalization

Two macro factors underlie the trend toward greater globalization.17 The first is the decline in
barriers to the free flow of goods, services, and capital that has occurred since the end of World
War II. The second factor is technological change, particularly the dramatic developments in
recent decades in communication, information processing, and transportation technologies.

Declining trade and investment barriers - During the 1920s and 30s many of the world's
nation-states erected formidable barriers to international trade and foreign direct investment.
International trade occurs when a firm exports goods or services to consumers in another
country. Foreign direct investment (FDI) occurs when a firm invests resources in business
activities outside its home country. Many of the barriers to international trade took the form of
high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect
domestic industries from foreign competition. One consequence, however, was "beggar thy
neighbor" retaliatory trade policies, with countries progressively raising trade barriers against
each other.

Having learned from this experience, the advanced industrial nations of the West committed
themselves after World War II to removing barriers to the free flow of goods, services, and

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capital between nations.18 This goal was enshrined in the General Agreement on Tariffs and
Trade. Under the umbrella of GATT, eight rounds of negotiations among member states worked
to lower barriers to the free flow of goods and services. The most recent negotiations to be
completed, known as the Uruguay Round, were finalized in December 1993. The Uruguay
Round further reduced trade barriers; extended GATT to cover services as well as manufactured
goods; provided enhanced protection for patents, trademarks, and copyrights; and established the
World Trade Organization to police the international trading system.19 Table 1.1 summarizes the
impact of GATT agreements on average tariff rates for manufactured goods. As can be seen,
average tariff rates have fallen significantly since 1950 and now stand at about 4 percent.

The globalization of markets and production and the resulting growth of world trade, foreign
direct investment, and imports all imply that firms are finding their home markets under attack
from foreign competitors.

The role of technological change

The lowering of trade barriers made globalization of markets and production a theoretical
possibility. Technological change has made it a tangible reality. Since the end of World War II,
the world has seen major advances in communication, information processing, and transportation
technology, including the explosive emergence of the Internet and World Wide Web.
Telecommunications is creating a global audience. Transportation is creating a global village.
From Buenos Aires to Boston, and from Birmingham to Beijing, ordinary people are watching
MTV, they're wearing blue jeans, and they're listening to iPods as they commute to work.

In addition to the globalization of production, technological innovations have facilitated the

globalization of markets. Low-cost global communications networks such as the World Wide
Web are helping to create electronic global marketplaces. Low-cost transportation has made it
more economical to ship products around the world, thereby helping to create global markets.
For example, due to the tumbling costs of shipping goods by air, roses grown in Ecuador can be
cut and two days later sold in New York. This has given rise to an industry in Ecuador that did
not exist 20 years ago and now supplies a global market for roses. In addition, low-cost jet travel
has resulted in the mass movement of people between countries. This has reduced the cultural
distance between countries and is bringing about some convergence of consumer tastes and
preferences. At the same time, global communication networks and global media are creating a
worldwide culture.

Despite these trends, we must be careful not to overemphasize their importance. While modem
communication and transportation technologies are ushering in the "global village," significant
national differences remain in culture, consumer preferences, and business practices. A firm that
ignores differences between countries does so at its peril.

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 LESSON - 2

Contents

Scope of international business,

Selecting an entry strategy,
Indias involvement in international business.

One of the most dramatic and significant world trends in the past two decades has been the rapid,
sustained growth of international business. Markets have become truly global for most goods,
many services, and especially for financial instruments of all types. World product trade has
expanded by more than 6 percent a year since 1950, which is more than 50 percent faster than
growth of output the most dramatic increase in globalization, has occurred in financial markets.
In the global forex markets, billions of dollars are transacted each day, of which more than 90
percent represent financial transactions unrelated to trade or investment. Much of this activity
takes place in the so-called Euromarkets, markets outside the country whose currency is used.

This pervasive growth in market interpenetration makes it increasingly difficult for any country
to avoid substantial external impacts on its economy. In particular massive capital flows can
push exchange rates away from levels that accurately reflect competitive relationships among
nations if national economic policies or performances diverse in short run. The rapid
dissemination rate of new technologies speeds the pace at which countries must adjust to external
events. Smaller, more open countries, long ago gave up illusion of domestic policy autonomy.
But even the largest and most apparently self-contained economies, including the US, are now
significantly affected by the global economy. Global integration in trade, investment, and factor
flows, technology, and communication has been tying economies together. Why then are these
changes coming about, and what exactly are they? It is in practice, easier to identify the former
than interpret the latter. The reason is that during the past few decades, the emergence of
corporate empires in the world economy, based on the contemporary scientific and technological
developments, has led to globalization of production. As a result of international production, co-
operation among global productive units, the large-scale capital exports, the export of
production or production abroad has come into prominence as against commodity export in
world economy in recent years. Global corporations consider the whole of the world their
production place, as well as their market and move factors of production to wherever they can
optimally be combined. They avail fully of the revolution that has brought about instant
worldwide communication, and near instant-transformation. Their ownership is transnational;
their management is transnational. Their freely mobile management, technology and capital, the
modern agent for stepped-up economic growth, transcend individual national boundaries. They
are domestic in every place, foreign in none-a true corporate citizen of the world. The greater
interdependence among nations has already reduced economic insularity of the peoples of the
world, as well as their social and political insularity.

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Scope of international business activities

The study of international business focus on the particular problems and opportunities that
emerge because a firm is operating in more than one country. In a very real sense, international
business involves the broadest and most generalized study of the field of business, adapted to a
fairly unique across the border environment. Many of the parameters and environmental
variables that are very important in international business( such as foreign legal systems , foreign
exchange markets, cultural differences, and different rates of inflation) are either largely
irrelevant to domestic business or are so reduced in range and complexity as to be of greatly
diminished significance. Thus, it might be said that domestic business is a special limited case of
international business. The distinguishing feature of international business is that international
firms operate in environments that are highly uncertain and where the rules of the game are often
ambiguous, contradictory, and subject to rapid change, as compared to the domestic
environment. In fact, conducting international business is really not like playing a whole new
ball game, however, it is like playing in a different ballpark, where international managers have
to learn the factors unique to the playing field. Managers who are astute in identifying new ways
of doing business that satisfy the changing priorities of foreign governments have an obvious and
major competitive advantage over their competitors who cannot or will not adapt to these
changing priorities. The guiding principles of a firm engaged in (or commencing) international
business activities should incorporate a global perspective. A firms guiding principles can be
defined in terms of three board categories products offered/market served, capabilities, and
results. However, their perspective of the international business is critical to understand the full
meaning of international business. That is, the firms senior management should explicitly define
the firms guiding principles in terms of an international mandate rather than allow the firms
guiding principles in terms as an incidental adjunct to its domestic activities. Incorporating an
international outlook into the firms basic statement of purpose will help focus the attention of
managers (at all levels of the organization) on the opportunities (and hazards) outside the
domestic economy. It must be stressed that the impacts of the dynamic factors unique to the
playing field for international business are felt in all relevant stages of evolving and
implementing business plans. The first broad stage of the process is to formulate corporate
guiding principles. As outlined below the first step in formulating and implementing a set of
business plans is to define the firms guiding principles in the market place. The guiding
principles should, among other things, provide a long-term view of what the firm is striving to
become and provide direction to divisional and subsidiary managers vehicle, some firms use
the decision circle which is simply an interrelated set of strategic choices forced upon any
firm faced with the internationalization of its markets. These choices have to do with marketing,
sourcing, labor, management, ownership, finance, law, control, and public affairs. Here the first
two marketing and sourcing-constitute the basic strategies that encompass a firms initial
considerations. Essentially, management is answering two questions: to whom are we going to
sell what, and from where and how will we supply that market? We then have a series of input
strategies-labor, management, ownership, and financial. They are in their efforts to develop their

14
own business plans. As an obligation addressed essentially to the query, with what resources are
we going to implement the basic strategies? That is, where will we find the right people,
willingness to carry the risk, and the necessary funds? A third set of strategies legal and control-
respond to the problem of how the firm is to structure itself of implement the basic strategies,
given the resources it can muster. A final strategic area, public affairs, is shown as a basic
strategy simply because it places a restraint on all other strategy choices. Each strategy area
contains a number of subsidiary strategy options. The decision process that normally starts in the
marketing strategy area is an iterative one. As the decision maker proceeds around the decision
circle, previous selected strategies must be readjusted. Only a portion of the possible feedback
adjustment loops is shown here. Although these strategy areas are shown separately but they
obviously do not stand-alone. There must be constant reiteration as one moves around the
decision circle. The sourcing obviously influences marketing strategy, as well as the reverse. The
target market may enjoy certain preferential relationships with other markets. That is, everything
influences everything else. Inasmuch as the number of options a firm faces is multiplied as it
moves into international market, decision-making becomes increasingly complex the deeper the
firm becomes involved internationally. One is dealing with multiple currency, legal, marketing,
economic, political, and cultural systems. Geographic and demographic factors differ widely. In
fact, as one moves geographically, virtually everything becomes a variable: there are few fixed
factors. For our purposes here, a strategy is defined as an element in a consciously devised
overall plan of corporate development that, once made and implemented, is difficult (i.e. costly)
to change in the short run. By way of contrast, an operational or tactical decision is one that sets
up little or no institutionalized resistance to making a different decision in the near future. Some
theorists have differentiated among strategic, tactical, and operational, with the first being
defined as those decisions, that imply multi-year commitments; a tactical decision, one that can
be shifted in roughly a years time; an operational decision, one subject to change in less that a
year. In the international context, we suggest that the tactical decision, as the phrase is used here,
is elevated to the strategic level because of the rigidities in the international environment not
present in the purely domestic-for example, work force planning and overall distribution
decisions. Changes may be implemented domestically in a few months, but if one is operating
internationally, law, contract, and custom may intervene to render change difficult unless
implemented over several years.

A mode of entry into an international market is the channel which your organization employs to
gain entry to a new international market. This lesson considers a number of key alternatives, but
recognizes that alteratives are many and diverse. Here you will be consider modes of entry into
international markets such as the Internet, Exporting, Licensing, International Agents,
International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and
International Sales Subsidiaries. Finally we consider the Stages of Internationalization.

15
 . Licensing includes franchising, Turnkey contracts and contract manufacturing.
Licensing is where your own organization charges a fee and/or royalty for the use of its
technology, brand and/or expertise.
Franchising involves the organization (franchiser) providing branding, concepts, expertise, and
infact most facets that are needed to operate in an overseas market, to the franchisee.
Management tends to be controlled by the franchiser. Examples include Dominos Pizza, Coffee
Republic and McDonalds Restaurants.
Turnkey contracts are major strategies to build large plants. They often include a the training and
development of key employees where skills are sparse for example, Toyotas car plant in
Adapazari, Turkey. You would not own the plant once it is handed over.

International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are individuals or
organizations that are contracted to your business, and market on your behalf in a particular
country. They rarely take ownership of products, and more commonly take a commission on
goods sold. Agents usually represent more than one organization. Agents are a low-cost, but low-
control option. If you intend to globalize, make sure that your contract allows you to regain
direct control of product. Of course you need to set targets since you never know the level of
commitment of your agent. Agents might also represent your competitors so beware conflicts
of interest. They tend to be expensive to recruit, retain and train. Distributors are similar to
agents, with the main difference that distributors take ownership of the goods. Therefore they
have an incentive to market products and to make a profit from them. Otherwise pros and cons
are similar to those of international agents.

Strategic alliances
Strategic alliances is a term that describes a whole series of different relationships between
companies that market internationally. Sometimes the relationships are between competitors.
There are many examples including:
Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.
Research and Development (R&D) arrangements.
Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.
Marketing agreements.
Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain
independent and separate.

16
 Joint Ventures (JV)

Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a
proportion of the new business. There are many reasons why companies set up Joint Ventures to
assist them to enter a new international market:
Access to technology, core competences or management skills. For example, Hondas
relationship with Rover in the 1980s.
To gain entry to a foreign market. For example, any business wishing to enter China needs to
source local Chinese partners.
Access to distribution channels, manufacturing and R&D are most common forms of Joint
Venture.

Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually owning
an overseas manufacturing plant i.e. the organization invests in plant, machinery and labor in the
overseas market. This is also known as Foreign Direct Investment (FDI). This can be a new-
build, or the company might acquire a current business that has suitable plant etc. Of course you
could assemble products in the new plant, and simply export components from the home market
(or another country). The key benefit is that your business becomes localized you manufacture
for customers in the market in which you are trading. You also will gain local market knowledge
and be able to adapt products and services to the needs of local consumers. The downside is that
you take on the risk associated with the local domestic market. An International Sales
Subsidiary would be similar, reducing the element of risk, and have the same key benefit of
course. However, it acts more like a distributor that is owned by your own company.

Internationalization Stages

So having considered the key modes of entry into international markets, we conclude by
considering the Stages of Internationalization. Some companies will never trade overseas and so
do not go through a single stage. Others will start at a later or even final stage. Of course some
will go through each stage as summarized now:

Indirect exporting or licensing

Direct exporting via a local distributor
Your own foreign presences
Home manufacture, and foreign assembly
Foreign manufacture
It is worth noting that not all authorities on international marketing agree as to which mode of
entry sits where. For example, some see franchising as a stand alone mode, whilst others

17
 see franchising as part of licensing. In reality, the most important point is that you consider all
useful modes of entry into international markets over and above which pigeon-hole it fits into.
If in doubt, always clarify your tutors preferred view.

Exporting

There are direct and indirect approaches to exporting to other nations. Direct exporting is
straightforward. Essentially the organization makes a commitment to market overseas on its own
behalf. This gives it greater control over its brand and operations overseas, over an above
indirect exporting. On the other hand, if you were to employ a home country agency (i.e. an
exporting company from your country which handles exporting on your behalf) to get your
product into an overseas market then you would be exporting indirectly. Examples of
indirect exporting include:

Piggybacking whereby your new product uses the existing distribution and logistics of another
business.
Export Management Houses (EMHs) that act as a bolt on export department for your company.
They offer a whole range of bespoke or a la carte services to exporting organizations.
Consortia are groups of small or medium-sized organizations that group together to market
related, or sometimes unrelated products in international markets.
Trading companies were started when some nations decided that they wished to have overseas
colonies. They date back to an imperialist past that some nations might prefer to forget e.g. the
British, French, Spanish and Portuguese colonies. Today they exist as mainstream businesses
that use traditional business relationships as part of their competitive advantage.

Indias involvement in international business

IN order to successfully navigate the international trade arena, Indias new government will be
tasked with lever-aging Indias growing role within the international trading system to achieve
both its domestic and international objectives. As the geo-economic landscape has seen a shift in
recent years, emerging economies have increasingly begun to play a more pronounced role in a
number of global economic issues, and as the worlds fourth largest economy, Indias role in this
system has become more prominent.

At the most recent ministerial conference of the WTO in Bali, Indonesia in early December
2013, Indias growing role as a voice for the poor was amplified as it fought to ensure that the
outcome would favour not only the poor within its own borders, but those of the developing
countries as well. While the members did indeed arrive at a consensus after a protracted week of
negotiations, the sheer effort reflected the much larger problem of not only divergent interests
between different groups of countries but that of aligning domestic development objectives with
international trade commitments. While the first challenge will require the combined political

18
will of all WTO members, the second will have to be addressed by country leaders within their
own borders. It is in tackling this second challenge that Indias new government will need to
think strategically to leverage the benefits of the international trading system in order to achieve
its national objectives.

Indias approach to trade promotion has followed a two-pronged approach, dealing with both
supply-side and demand-side constraints. It aimed to first implement domestic policies to
enhance its supply capacity and second, address the demand-side of trade promotion by engaging
in international trade negotiations to secure better market access. While the latter was achieved
by Indias engagement in multilateral as well as plurilateral trade negotiations, the former was
accomplished through Indias National Foreign Trade Policy (NFTP) which is adopted every five
years, and augmented with annual supplements in order to streamline policy and thereby develop
a more comprehensive and better trade capacity

A complementarity between these two aspects is, therefore, imperative. However, in the past,
planning and administration of policy instruments under the NFTP has often taken its own course
without thorough consideration of the sectoral needs that get preferential market access through
trade agreements. Recent studies undertaken by CUTS International indicate that India has
immense trading potential with its neighbouring countries in many sectors and products.
However, most of these products are not included in the list of focus markets and focus products
selected under Indias current NFTP.1 Indeed, in order to strengthen the functioning of the
NFTP, there is a need for better coordination between the NFTP and other domestic policies,
including with state governments.

More attention needs to be focused on the interface between trade and other policies such as
competition, standards, government procurement, and manufacturing to ensure policy coherence.
Incidents such as when products with a high import demand in countries with which India has
formal trading agreements fail to receive assistance as focus products are reflective of a lack of
policy coherence with other government strategies. Herein lies one of the major challenges and
opportunities that Indias new government must tackle.

Instruments that impact trade performance can be divided into three categories: (a) schemes
which pertain to the development of production capacities within countries; (b) the reduction of
trade costs facilitating the movement of the outputs of these productive operations across
borders;2 and (c) export promotion activities which include identifying the formal export process,
identifying potential markets abroad after concluding free trade agreements, studying their
specific demand profile and finding specific business partners.3 A strategic and comprehensive
foreign trade policy that incorporates these three features will play a crucial role in achieving
Indias national objectives over the next five years.

19
In recent years CUTS International has been engaged in research that has afforded an
opportunity to act as a conduit linking those who frame the NFTP to those affected by it. Indias
current national trade policymaking process tends to be centralized and as yet there are no
established channels of communication between the grassroots beneficiaries and policymakers.
During our research we identified five priority areas that the incoming government will need to
address in order to maximize benefits from Indias NFTP in the coming years: (i) inclusiveness
with respect to SMEs (small and medium enterprises) as major beneficiaries; (ii) coordination
with external trade negotiations; (iii) linkages between NFTP and FDI policy; (iv) role of the
NFTP in exploring and strengthening participation of Indian business units in regional/global
value chains; and (v) the role of NFTP in domestic policy and regulatory reforms for better
economic governance.4

Indias Foreign Trade Policy 2009-14 was formulated with an objective to double Indias
exports of goods and services by 2014, while simultaneously aiming at doubling Indias share in
global trade by 2020.5 NFTP 2009-14 and its annual supplements contain several such
specifically targeted schemes, tailor-made to use trade expansion in the labour-intensive goods
sector as an instrument for employment generation. These objectives were envisaged to be
achieved through the use of fiscal incentives, providing full refund of indirect taxes and levies,
institutional measures, change in procedures, increased market access around the world,
diversifying export markets and improving infrastructure in order to reduce transaction costs.
However, the policy lacked certain supportive features that would have facilitated inclusiveness
and access to a larger set of stakeholders.

The implementation of such schemes often lacked inclusiveness, resulting in small and medium
scale operators and enterprises (SMEs) often unable access the benefits. One of the major
challenges faced by SMEs, particularly those in the informal sector, is a lack of both awareness
and understanding of how to operate in the international business environment. In developing
countries like India, stakeholders at the grassroots are often unaware of the various support
schemes that are offered by their own governments. Hence, in order to create a more inclusive
NFTP, measures need to be put in place to ensure increased awareness of the NFTPs schemes
and policy instruments by local level stakeholders.

Acknowledging and, in certain cases, addressing the conflict of interest faced by certain
stakeholders is imperative to ensuring an inclusive NFTP. The interests of different parties must
be taken into consideration while evaluating the NFTP and suggesting changes. This requires
greater effort to increase interaction with sub-national actors, such as the state governments, in
implementing Indias NFTP. The Inter-State Trade Council, among others, can play a key role in
ensuring a continuous dialogue between state governments and union territories. Revitalizing
such groups could play a necessary and key role in advising the Government of India on
measures for providing an enabling international trade environment within the states themselves.
This would provide a framework for the states to be partners in international trade and export

20
efforts.6 State WTO cells could also be strengthened in order to generate awareness of sub-
national actors on Indias trade policy and other related matters.

Second, an examination of recent trends towards what are commonly known as mega-regional
trade agreements shows that emerging countries, including India, find themselves excluded from
these negotiations. While there has been much speculation regarding why members were left out,
these countries, none the less, need to adopt a proactive approach to managing this current shift
in order to avoid the backlash of exclusion such as trade diversion, as well as the establishment
of international trade rules outside the WTO. Keeping in mind its national interests, it is
imperative for India to continue with the mandate of negotiating trade agreements at the
multilateral as well as bilateral and regional levels.

There is a need to resuscitate and broaden the mandate of bodies such as the (now defunct)
National Advisory Committee on International Trade, to help conduct periodic reviews of the
impact of trading agreements on the Indian economy. There is enough evidence to show that
Indias current trade agreements fail to take advantage of its core competencies. Therefore, going
forward, mechanisms to conduct sustainability impact assessments in order to understand
economic, social and environmental sustainability of future trade agreements are necessary in
order to develop Indias negotiating positions.

Third, it is important to align Indias foreign trade policy with its FDI policy in light of
significant backward and forward linkages that exist between trade related sectors and FDI.
Given Indias position along its development trajectory, she is poised to benefit not only from
efficiency-seeking FDI that seeks to locate production process in low cost regions, but also
market seeking FDI. While the NFTP has indeed opened up certain sectors, this objective has not
been similarly reflected in Indias FDI policy and has thus resulted in sub-optimal utilization of
this policy. Owing to the fact that companies are off-shoring not only their manufacturing
processes but also their business functions, there is an increase in FDI flows which are aimed at
tertiary sectors rather than only secondary sectors. Given Indias strength in this sector, an FDI
policy that incorporates Indias comparative advantage in this area could enhance export
competitiveness. Attracting FDI into cluster development or economic corridors could also work
to further align Indias NFTP and FDI policy.

Fourth, global value chains (GVCs) remain an area that India has not adequately explored.
There has been little deliberation on how policies and instruments as contained in the NFTP can
be used to facilitate the participation of business units into both regional value chains and GVCs.
GVCs first emerged as regional supply chains in East Asia, with Japanese investors taking the
lead. This fragmentation of production improved the cost competitiveness of the final products
which were then able to compete with products from other developed countries. Over time,
multinationals from other developed countries moved to the region for improving their cost
competitiveness. What emerged from this phenomenon were GVCs with production spread

21
across countries, regions and continents, gathering cost advantages to become globally
competitive.7 While India is one of the top 25 exporting countries in the world, it has one of the
lowest foreign value added trade share at only ten per cent and the lowest rate of GVC
participation.8 The NFTP could play a key role in exploring and strengthening participation of
Indian business units in both regional and global value chains to enable it to leverage the large
potential for growth in this area.

Last, the NFTP needs to play a role in domestic policy and regulatory reforms for better
economic governance. While a number of developed countries have successfully used their
foreign trade policy instruments for improving overall domestic economic governance, in India
the NFTP is often approached as a stand alone-policy. Coherence between the NFTP and other
major macroeconomic policies is crucial for domestic policy and regulatory reforms to ensure
complementarity between all major macro-economic policies.

Indias manufacturing policy is an example of a macroeconomic initiative that was undertaken

by the government to increase the percentage of manufacturing from the current level of 15 per
cent to 25 per cent of GDP by 2025. However, better coherence with the NFTP will help enhance
the sectors contribution to GDP growth which has remained stagnant in recent years. Similarly,
although the extant public procurement rules follow the principle of non-discrimination which is
in line with Indias commitment at the WTO, a transparent, competitive and fair public
procurement policy would ensure better market accessibility as well as reciprocity for domestic
suppliers to venture into other government procurement markets. Institutional and
macroeconomic reforms, which seek to improve the business climate and provide a better
foundation for the economy to generate growth and competitiveness, must ensure that companies
are able to take advantage of aligning trade opportunities.9

The second of Indias two-pronged approach to trade promotion is achieved by its engagement in
multilateral as well as preferential and plurilateral trade negotiations. The effectiveness of a
sound domestic policy improves if it is accompanied by a coherent external strategy that enables
it to leverage the benefits of the international trading system. While India initially followed a
closed economic policy, post economic reforms, Indias participation in the global economic
arena has hugely increased. After liberalizing its economy and joining the WTO in 1994, India is
a protagonist of the multilateral trading system. However, as the global landscape has changed
with a proliferation of preferential trading agreements, India too has increasingly begun to
participate in these preferential trading agreements. In part this was mirroring a global trend post
the problems with the Doha Round. But equally, the success of Indias first FTA with Sri Lanka
in 1999 ushered in a new attitude towards interaction with its trading partners and the global
trading system as a whole. Today, India has signed about 15 PTAs and many more are in the
pipeline.

22
Nonetheless, India remains excluded from the major mega-regional trade agreements that are
becoming a prominent feature of todays trading environment. These FTAs could pose a threat to
its economic security. Indias pursuit of its own mega-regional trading agreement, namely the
Regional Comprehensive Economic Partnership (RCEP) Agreement, is a unique move on its part
to counter the negative impacts that could stem from these FTAs as well as establish it as a
regional power. The benefits of this trading agreement are immense. It provides an opportunity
for India to further integrate into regional production networks, consolidate overlapping FTAs
within the region and thus increase trade and development opportunities in the region and enable
congruence with its Look East foreign policy.

Indias foreign trade policy also needs to keep in mind its strategic and security interests. In
order to play a role commensurate to its size and potential, India needs to reinforce all elements
of its state power, not only economic but military as well. India must also ensure that it follows a
strategic trade policy in respect to providing sector-specific market access to some of its critical
trading partners from whom it can secure new and possibly dual technologies for indigenous
defence production. Over a period of time, such a strategic trade policy could help the country
develop a military-industrial complex, generating employment opportunities and ensuring a
better balance of trade.

While India remains one of the highest end users of defence equipment, a country with the
worlds third largest pool of technical manpower and scientific talent, and with a track record of
indigenously excelling in high-end technologies of space, nuclear, information technology, it is
still dependent on foreign sources to meet 70 per cent of its defence
requirements.10 Simultaneously, it has to get its act together on a National Offset Authority under
a whole-of-government approach to be able to capture cross-sectoral deals when negotiating with
foreign defence equipment suppliers.

In order to effectively tackle specific issues of development, Indias NFTP requires a whole-of-
government approach. In pursuit of a countrys overall national interest, government agencies
cannot function as separate entities. A whole-of-government approach requires complex
coordination for optimum outcomes. This method is designed to establish a common approach
and understanding to problem solving in what is commonly referred to as policy coherence.

In order to ensure this coordinated approach in forming and implementing Indias trade policy,
including negotiating trade agreements, the Department of Commerce, the Department of
Revenue, and the Ministry of External Affairs need to work in tandem. The Inter-State Trade
Council and State WTO cells would also need to be effectively integrated into policy formulation
to ensure increased engagement with state governments, and better political buy-in for Indias
trade policy.

23
To successfully navigate the international trade arena, Indias new government will need to
pointedly address the five gaps as outlined above. An inclusive NFTP that is not designed as a
stand-alone policy, but is strategically integrated into all aspects of Indian foreign policy, has the
potential to help India achieve both its domestic and international objectives. As Indias role
within the global economy continues to grow, the possibility of garnering more benefits from the
international arena to help achieve its domestic objectives is increasing and a well-balanced
NFTP could help achieve this goal. It is imperative that the next Foreign Trade Policy (2014-19)
include not only a gamut of policy instruments which are capable of being adjusted to
macroeconomic shocks and ripple effects from the outside economies, but also instruments
which operate seamlessly with other domestic macroeconomic policies to function as a welfare-
inducing policy instrument.11

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 LESSON-3

Contents

IT and international business

Difficulties and benefits of international business

Globalization and international business

International versus domestic business.

IT and International Business

Computerization has changed the way business is conducted the world over. No aspect of
business has remained untouched by the information technology (IT) revolution. This is
especially true of international business where people located in different parts of the world
conduct transactions with each other. The activities of international business include
manufacturing, in-land transportation, customs and excise matters, port operation, shipping,
clearing and forwarding, etc. During the course of these transactions, a large number of
documents are created and exchanged, many of these documents or the information contained
therein is repeated, while creating and mailing these documents before the advent of IT.,
hundreds of man-hours would be lost in repetitive operation, innovations in IT have
revolutionized international business; the use of technology in managing and processing
information. Especially in large organizations helps save time, bring down costs, and reduce
manpower, manual data input and transfer has now become not only obsolete, but also irrational.

Areas
In international business today, IT finds maximum utility in the following areas:
1. Electronic procurement
2. Electronic marketing
3. Electronic logistics
A modern competitive enterprise seeks to hold an edge over the market. IT helps
provide this competitive advantage through its various applications tools. By adapting these tools
in various areas of business, the organization can gain many advantages in terms of accessibility
to a customer or supplier in any part of the world, speed of operations, reduction in man power,
etc. due to the reach of the internet it is possible to conduct buying and selling transactions
irrespective of geographical location. Internet banking helps in the speedy execution of payments
and settlement of accounts. A website can be a virtual showroom, where products can be
displayed, demonstrated, and sold. Such a website can also provide various after- sales service
tips and suggestions, launch discussions forums, ask for customer feedback, and educate the

25
customer. IT application such as electronic data interchange (EDI) has also enabled logistics
operations to be paperless.

1. Electronic Procurement
E-procurement essentially comprises a number of inter-related methods for improving the
procurement process through the use of electronic systems and processes. The need for e-
procurement stems from the fact that in today's globalized world, a manufacturer can source
inputs such as raw materials, components, machinery and consumables from any part of the
world. The manufacturer is constantly looking for suppliers who can offer quality materials at
the most competitive rates. The internet has become a favourite hunting ground for the best
bargains. Small companies can purchase their inputs through various websites, which sell a
variety of items. However, for the larger organizations, electronic procurement is a
systematically outlined process. Here, enterprises use automated applications to streamline
buying both production and non-production goods and services.
The entire electronic procurement process can be divided into three major
components: pre-purchase, purchase, and payment activities. Pre-purchase activity can begin
with a Request For Purchase (RFP) generated by the user department and sent to the purchase
department. The electronic platform helps to plan pre-purchase activities starting with the vendor
pre-qualification process. Vendors are invited to register their interest in a prescribed application
form. They are asked to provide information about their organization, availability of resources,
such as manpower, machinery, and monetary resources. Reference letters from their bankers help
establish their standing in the market. A list of their present customers is also sought to gauge
their market base. The short-listed vendors are registered and whenever there is a requirement of
their services, a Request For Quote (RFQ) is sent to them. In case of very large purchase orders,
venders are invited to bid in a competitive bidding process. Tender evaluations tools help
identify the most suitable bid. A number of companies resort to reverse auctions, whereby, they
announce the auction process on their website and ask the vendors to make their bids before the
deadline. The bids are then opened and evaluated, before the contract is awarded to the selected
vendor with the most suitable offer. This process is called a reverse auction because in this case
the auction is for procurement instead of a sale.

2. Electronic Marketing
Internet has changed the way we exchange goods for money. It has broken geographical
barriers between buyers and sellers. The internet enables a manufacturer in India to sell his/her
goods to a customer in any part of the world through the World Wide Web. It is necessary,
however, that the buyer has access to internet and has the necessary know-how and desire to
make online purchases.

The internet has provided a very effective platform for electronic marketing or e-marketing. E-
marketing means using digital technologies to help sell your goods or services. This is different

26
 from a conventional market place, where sellers display their goods and buyers can touch and
feel the goods and bargain with sellers. In case of e-marketing, sellers can display photographs,
video films and specifications of their products. In most cases, the prices are also displayed so
that buyers have a clear idea about the product and price.
3. Electronic Logistics
Electronic logistics is use of web based technologies to support warehousing and
transportation management processes. E-logistics enables distribution to couple routing
optimization with inventory tracking and tracking information.
In international trade and distribution, computerization is slowly but surely tacking hold
of every aspect of business.
Electronic logistics is use of web based technologies to support warehousing and
transportation management processes. E-logistics enables distribution to couple routing
optimization with inventory tracking and tracking information.
In international trade and distribution, computerization is slowly but surely tacking hold
of every aspect of business. From ability to transmit huge amount of data speedily, or make
global data available to expedite the decision making process.
Due to the advantages offered by IT, many logistics providers are planning to handle
majority of their commercial transactions electronically. Also, exporters are already using IT for
various activities ranging from e-procurement of goods to availing transportation services on the
net.

Important Electronic Tools

Shipping lines are keen to encourage their customers to use the internet and have
developed a number of attractive tools. The biggest benefit of these tools is that both shippers as
well as shipping lines gain by using them. Following are some of the important tools:

Electronic receipt of vessel schedule information

Tracking and tracing of cargo
Remote bill of lading (B/L) printing
Single data entry reporting
Exception reporting
Online tendering, etc.

1. Electronic Receipt of Vessel Schedule Information

Shippers can visit a logistics portal to check the schedule of different shipping lines and
choose what suits their supply chains the best. This saves shippers time and effort. The shipping
lines, too, benefit as they do not have to inform individual shippers about their voyage

27
schedules. At present, the only limitation to this system is that not every portal maintains
information about every shipping line, nor does every shipping line provide updated information
on their sites or related portals.
2. Tracking and Tracing of Cargo
The biggest benefit shippers enjoy as far as e-logistics is concerned, is tracking and
tracing the cargo. With e-connectivity they need to spend less time per enquiry with shipping
lines about the status of their cargo and significantly improve their supply chain visibility.
However, different portals offer different services.
3. Remote Bill of Lading Printing
The main benefits of this facility are reduced production and distribution costs for the carriers.
The shipper's gain is fast and error-free receipt of documents. More and more shippers are using
this facility and are demanding simplified transmission of transport documents. One of the
reasons for this is error-free transmission of Bill of Lading. Shipping lines normally dispatch the
Bill of Lading within 48 hours of vessel sailing.
4. Single Data Entry Reporting
With the aligned system of documentation, the format of various shipping documents is
now standardized. Information once keyed in any document will automatically appear in all
aligned documents. This system saves repetitive data entries and also saves substantial time and
cost.
5. Exception Reporting
Shippers across the world, who work tirelessly towards manufacture of quality products,
also want reliable delivery schedules. Exception reporting by the shipping line helps the shipper
to know if there are any deviations from the instructions, which he/she has given to the shipping
line.
6. Online Tendering
To find out the ocean freight rates from various shipping lines, the shipper has to send an
enquiry separately to each shipper. Online tendering helps the shipper to send out rate enquiries
to as many shipping lines as desired by merely pressing a button. Today, in the era of
rationalization, mergers and acquisitions, the shipper's global requirements are getting
increasingly complex. Online tendering helps them get competitive quotations from shipping
lines operating on various routes. These multinationals maintain databases of such quotations in
order to choose the most competitive rates on various routes.
Conclusion
Technology is changing at a very fast pace. Various aspects of electronic business such as
e-procurement, e-marketing, e-logistics use a number of technology products. The life cycle of
technology products is very short. We are living in a knowledge-driven era, where everyone has

28
access to information thanks to internet and a variety of other sources of information. However,
the market is dominated by those, who translate information into knowledge and use the
knowledge to improve productivity and efficiency of their enterprises. India is enjoying an
enviable position because of its leadership in the area of information technology. A number of
business solutions are developed in India for world wide applications. However, such
applications take a long time to be implemented in India itself.

One of the most dramatic and significant world trends in the past two decades has been the rapid,
sustained growth of international business. Markets have become truly global for most goods,
many services, and especially for financial instruments of all types. World product trade has
expanded by more than 6 percent a year since 1950, which is more than 50 percent faster than
growth of output the most dramatic increase in globalization, has occurred in financial markets.
In the global forex markets, billions of dollars are transacted each day, of which more than 90
percent represent financial transactions unrelated to trade or investment. Much of this activity
takes place in the so-called Euromarkets, markets outside the country whose currency is used.
This pervasive growth in market interpenetration makes it increasingly difficult for any country
to avoid substantial external impacts on its economy. In particular massive capital flows can
push exchange rates away from levels that accurately reflect competitive relationships among
nations if national economic policies or performances diverse in short run. The rapid
dissemination rate of new technologies speeds the pace at which countries must adjust to external
events. Smaller, more open countries, long ago gave up illusion of domestic policy autonomy.
But even the largest and most apparently self-contained economies, including the US, are now
significantly affected by the global economy. Global integration in trade, investment, and factor
flows, technology, and communication has been tying economies together. Why then are these
changes coming about, and what exactly are they? It is in practice, easier to identify the former
than interprret the latter. The reason is that during the past few decades, the emergence of
corporate empires in the world economy, based on the contemporary scientific and technological
developments, has led to globalization of production. As a result of international production, co-
operation among global productive units, the large-scale capital exports, the export of
production or production abroad has come into prominence as against commodity export in
world economy in recent years. Global corporations consider the whole of the world their
production place, as well as their market and move factors of production to wherever they can
optimally be combined. They avail fully of the revolution that has brought about instant
worldwide communication, and near instant-transformation. Their ownership is transnational;
their management is transnational. Their freely mobile management, technology and capital, the
modern agent for stepped-up economic growth, transcend individual national boundaries. They
are domestic in every place, foreign in none-a true corporate citizen of the world. The greater
interdependence among nations has already reduced economic insularity of the peoples of the
world, as well as their social and political insularity. International business includes any type of
business activity that crosses national borders. Though a number of definitions in the business
literature can be found but no simple or universally accepted definition exists for the term
29
international business. At one end of the definitional spectrum, international business is defined
as organization that buys and/or sells goods and services across two or more national boundaries,
even if management is located in a single country. At the other end of the spectrum, international
business is equated only with those big enterprises, which have operating units outside their own
country. In the middle are institutional arrangements that provide for some managerial direction
of economic activity taking place abroad but stop short of controlling ownership of the business
carrying on the activity, for example joint ventures with locally owned business or with foreign
governments. In its traditional form of international trade and finance as well as its newest form
of multinational business operations, international business has become massive in scale and has
come to exercise a major influence over political, economic and social from many types of
comparative business studies and from a knowledge of many aspects of foreign business
operations. In fact, sometimes the foreign operations and the comparative business are used as
synonymous for international business. Foreign business refers to domestic opperations within a
foreign country. Comparative business focuses on similarities and differences among countries
and business systems for focuses on similarities and differences among countries and business
operations and comparative business as fields of enquiry do not have as their major point of
interest the special problems that arise when business activities cross national boundaries. For
example, the vital question of potential conflicts between the nation-state and the multinational
firm, which receives major attention is international business, is not like to be centered or even
peripheral in foreign operations and comparative business.

DIFFICULTIES IN INTERNATIONAL BUSINESS

What make international business strategy different from the domestic are the differences in the
marketing environment. The important special problems in international marketing are given
below:

1. Political and legal differences- The political and legal environment of foreign markets is
different from that of the domestic. The complexity generally increases as the number of
countries in which a company does business increases. It should also be noted that the political
and legal environment is not the same in all provinces of many home markets. For example, the
political and legal environment is not exactly the same in all the states of India.

2. Cultural differences- The cultural differences, is one of the most difficult problems in
international marketing. Many domestic markets, however, are also not free from cultural
diversity.
3. Economic differences- The economic environment may vary from country to country.
4. Differences in the currency unit- The currency unit varies from nation to nation. This may
sometimes cause problems of currency convertibility, besides the problems of exchange rate
fluctuations. The monetary system and regulations may also vary.

30
5. Differences in the language- An international marketer often encounters problems arising out
of the differences in the language. Even when the same language is used in different countries,
the same words of terms may have different meanings. The language problem, however, is not
something peculiar to the international marketing. For example: the multiplicity of languages in
India.
6. Differences in the marketing infrastructure- The availability and nature of the marketing
facilities available in different countries may vary widely. For example, an advertising medium
very effective in one market may not be available or may be underdeveloped in another market.
7. Trade restrictions- A trade restriction, particularly import controls, is a very important
problem, which an international marketer faces.
8. High costs of distance- When the markets are far removed by distance, the transport cost
becomes high and the time required for affecting the delivery tends to become longer. Distance
tends to increase certain other costs also.
9. Differences in trade practices- Trade practices and customs may differ between two
countries.
BENEFITS OF INTERNATIONAL BUSINESS
Survival- Because most of the countries are not as fortunate as the United States in terms of
market size, resources, and opportunities, they must trade with others to survive; Hong Kong, has
historically underscored this point well, for without food and water from china proper, the British
colony would not have survived along. The countries of Europe have had similar experience,
since most European nations are relatively small in size. Without foreign markets, European
firms would not have sufficient economies of scale to allow them to be competitive with US
firms. Nestle mentions in one of its advertisements that its own country, Switzerland, lacks
natural resources, forcing it to depend on trade and adopt the geocentric perspective.
International competition may not be matter of choice when survival is at stake. However, only
firms with previously substantial market share and international experience could expand
successfully.

Growth of overseas markets - Developing countries, in spite of economic and marketing

problems, are excellent markets. According to a report prepared for the U.S. CONGRESS by the
U.S. trade representative, Latin America and Asia/Pacific are experiencing the strongest
economic growth. American markets cannot ignore the vast potential of international markets.
The world is more than four times larger than the U.S. market. In the case of Amway corps., a
privately held U.S. manufacturer of cosmetics, soaps and vitamins, Japan represents a larger
market than the United States.

Sales and profit - Foreign markets constitute a larger share of the total business of many firms
that have wisely cultivated markets aboard. Many large U.S. companies have done well because

31
of their overseas customers. IBM and Compaq, foe ex, sell more computers aboard than at home.
According to the US dept of commerce, foreign profits of American firms rose at a compound
annual rate of 10% between 1982 and 1991, almost twice as fast as domestic profits of the same
companies.

Diversification- Demand for mast products is affected by such cyclical factors as recession and
such seasonal factors as climate. The unfortunate consequence of these variables is sales
fluctuation, which can frequently be substantial enough to cause lay offs of personnel. One way
to diversify a companies risk is to consider foreign markets as a solution for variable demand.
Such markets, even out fluctuations by providing outlets for excess production capacity. Cold
weather, for instance may depress soft drink consumption. Yet not all countries enter the winter
season at the same time, and some countries are relatively warm year round. Bird, USA, inc., a
Nebraska manufacturer of go carts, and mini cars, for promotional purposes has found that global
selling has enabled the company to have year round production. It may be winter in Nebraska but
its summer in the southern hemisphere-somewhere there is a demand and that stabilizes the
business.

Inflation and price moderation- The benefits of export are readily self-evident. Imports can
also be highly beneficial to a country because they constitute reserve capacity for the local
economy. Without imports, there is no incentive for domestic firms to moderate their prices. The
lack of imported product alternatives forces consumers to pay more, resulting in inflation and
excessive profits for local firms. This development usually acts a s prelude to workers demand
for higher wages, further exacerbating the problem of inflation. Import quotas imposed on
Japanese automobiles in the 1980s saved 46200 US production jobs but at a cost of $160,000
per job per year. This cost was a result of the addition of $400 to the prices of US cars, and
$1000 to the prices of Japanese imports. This windfall for Detroit resulted in record high profits
for US automakers. Not only do trade restrictions depress price competition in the short run, but
they also can adversely affect demand for year to come.

Employment -Trade restrictions, such as high tariffs caused by the 1930s smoot-hawley bill,
which forced the average tariff rates across the board to climb above 60%, contributed
significantly to the great depression and have the potential to cause wide spread unemployment
again. Unrestricted trade on the other hand improves the worlds GNP and enhances employment
generally for all nations. Importing products and foreign ownership can provide benefits to a
nation. According to the institute for international Economics-a private, non- profit research
institute the growth of foreign ownership has not resulted in a loss of jobs for Americans; and
foreign firms have paid their American workers the same, as have domestic firms.

Standards of living- Trade affords countries and their citizens higher standards of living than
other wise possible. Without trade, product shortages force people to pay more for less, products
taken for granted, such as coffee and bananas may become unavailable overnight. Life in most

32
countries would be much more difficult were it not for the many strategic metals that must be
imported. Trade also makes it easier for industries to specialize and gain access to raw materials,
while at the same time fostering competition and efficiency. A diffusion of innovations across
national boundaries is useful by-products of international trade. A lack of such trade would
inhibit the flow innovative ideas.

GLOBALISATION AND INTERNATIONAL BUSINESS

It is sometimes suggested that globalization means the advance of a homogeneous civilization
and a uniform business system that would no longer require adjustment to different business
environments. Nothing could be further from the truth. While globalization marches on,
pressures to maintain national identity and solidarity are not subsiding. On the contrary, the
growing interaction between different systems makes people more, rather than less, aware of the
differences among them, often leading them to suspect foreign inputs as potentially threatening
to their group identity. Unfortunately, the erroneous assumption regarding homogeneity might
lead firms to believe that their strategies, practices, and products or services have universal
applicability with no need to distinguish between domestic and international business. Instead,
company executives should strive to learn the intricacies of the foreign environments in which
they operate, because this is the only way to leverage their firms global reach and scale.
Globalization and localization may seem contradictory, but they are two sides of the same coin
and are bound to live side by side in the future. Throughout this book, you will learn about this
simultaneous existence of global and local forces and their interaction in international business.
The material will explore how to leverage the global resources of the multinational enterprise yet
compensate for its unfamiliarity with the foreign environments in which it operates; how to
extract economies of scale by selling a product in multiple locations while making product
adjustments and adaptations to reflect different tastes and selling methods; and how to maintain a
globally unified compensation system for employees while taking into account the vast
differences in practices, values, standards of living, and taxation across the globe. Please note
that we use the terms country and nation in this book to denote boundaries of economic and
political units that are not necessarily sovereign states, such as Hong Kong, which is part of
China but is a separate entity for foreign trade and investment purposes.

International Versus Domestic Business

Traditionally, international business has been the outgrowth of domestic business. In fact, most
major corporations that are active in todays international scene started their operations in the
domestic market. Leading Japanese automakers such as Toyota and Honda started their
operations in their domestic market before beginning to export to other countries. As the
magnitude of their operations grew, they found it profitable or otherwise necessary to build
plants and facilities in other countries, most notably the United States. While many firms still
follow the traditional route of domestic growth first, international expansion second, we
increasingly see firms that target international markets when launching their operations.

33
Nasdaq-traded Israeli firm Checkpoint, a leader in the software security segment, is one such
company. In addition, some companies engage in international activities without having a home
base in the traditional sense. An example is the mainland operations of many Hong Kong
investors whose suitcase companies do not have a presence in their home base. Although
international business is often an extension of domestic business, it is significantly different from
the latter in environmental dynamics and operational nature. Environmentally, the diversity that
exists between countries with regard to cultures, social customs, business practices, laws,
government regulations, and political stability is among the many reasons for the complexity of
international business. Therefore, international business is usually riskier than domestic business,
although, on the whole, presence in multiple international markets provides a measure of
diversification, which mitigates risk. Variations in inflation, currency, taxation, and interest rates
among different nations have a significant impact on the profitability of an international firm.
For a firm that is borrowing and investing in a foreign country, higher interest rates, tax rates,
and inflation rates mean higher cost of operation and lower profitability. At the same time, for a
firm that is depositing money in a foreign bank, higher interest rates mean a higher return.
Similarly, when the euro goes down in value against the U.S. dollar, U.S. exporters to the
European Union (EU) will receive (unless hedging their currency exposure) fewer dollars for
their euro denominated transaction, while U.S. importers of EU goods will be able to either
lower the cost of the imports or increase their profitability. The Coca-Cola Company, described
in the opening case, needs not only to hedge its currency risk but also navigate financial
environments with different accounting and tax systems. It also needs to attend to different
cultures and social system, different regulations, and different consumption patterns, among
other factors. The competitive landscape can also be dramatically different in markets in which
Coca-Cola is facing strong local competition (for example, from Wahaha in China), while in
other markets the company must adjust for different rules (for instance, a ban on comparative
advertising). Competition can spring from nowhere: for example, Mecca Cola emerged in the
Middle East partially to take advantage of anti-American sentiment. The combined complexity
entailed in operating in numerous markets that are different from each other and the uncertainty
involved in the potential for a sudden change in any of those environments defines the essence of
international business. This complex landscape creates opportunities (for instance, the opening of
a new market such as Vietnam) but also poses risks and uncertainties. Broadly, risk refers to
unpredictability of operational and financial outcomes. Uncertainty refers to the unpredictability
of environmental or organizational conditions that affect firm performance. Uncertainty about
environmental or organizational conditions increases the unpredictability of corporate
performance and therefore increases risk. However, as earlier noticed, being in multiple markets
also mitigates risk; for instance, in 2005 General Motors lost billions of dollars in North
America, but its profits in China helped to somewhat narrow its overall loss. Operationally,
international business tends to be more difficult and costly to manage than business activities
confined to a single country. Whatever benefits might be available from international operations,
they will not be realized if the firm cannot run a complex business effectively. Local employees

34
and expatriates may have trouble getting along because of cultural, linguistic, and managerial
style differences. The cultural diversity encountered when operating in several countries may
create problems of communication, coordination, and motivation. Organizational principles and
managerial philosophies may differ widely, increasing the cost and difficulty of operation.

Why Do Firms Expand Internationally?

Generally speaking, the motivations for conducting international business include market
motives, economic motives, and strategic motives. The motives vary from one business activity
to another, producing multiple motivations for the international firm with a broad scope of
activities in different parts of the globe. Market motives can be offensive or defensive. An
offensive motive is to seize market opportunities in foreign countries through trade or
investment. Amway, Avon, and Mary Kay all entered China in the early 1990s in search of
opportunities in the countrys direct marketing business. Besides having the largest population
and one of the fastest-growing economies in the world, Chinas strong culture of personal
connections and the pervasiveness of closeknit families and friends helped make the country the
worlds biggest direct-selling market. That the Chinese government later outlawed direct selling
altogether exemplifies the inherent risk in doing business abroad, although the companies found
ways to adjust (for instance, Mary Kay has opened up customer learning centers as a substitute
for direct door-to-door marketing and sales) until the ban was lifted years later. A defensive
motive is to protect and hold a firms market power or competitive position in the face of threats
from domestic rivalry or changes in government policies. Lenovo, now the worlds third largest
maker of personal computers, entered international markets via acquiring IBMs personal
computers division partially to defend from growing encroachment into its domestic market by
Dell and Hewlett Packard. Similarly, many North American and Asian companies in the
computer and electronics industries invested heavily in European countries to bypass various
barriers against imports from nonEuropean Union members. Foreign automakers such as
French conglomerate Peugeot-Citron have established operations in China partially to offset
inroads by their global competitors into this important market

China has become a magnet for international expansion. SOURCE: Jupiterimages. Economic
motives apply when firms expand internationally to increase their return through higher revenues
or lower costs. International trade and investment are vehicles enabling a firm to benefit from
intercountry differences in costs of labor, natural resources, and capital, as well as differences in
regulatory treatments, such as taxation. For example, more than 2,000 plants have sprung up near
the U.S-Mexico border to take advantage of low-wage Mexican labor to assemble American-
made components for reexport to the United States. Some of the investors later relocated their
plants to still cheaper China, Vietnam, and India. Fossil, a leading producer of wristwatches,
opted to locate its overseas manufacturing headquarters in East Asia rather than in its home
country, the United States. Firms such as Motorola, Boeing, Microsoft, AlcatelLucent, Intel,
Kodak, Otis, and Coca-Cola established production facilities in Chinas special economic zones

35
or open coastal cities to attain a significantly lower taxation rate than that applicable in the
United States. Strategic motives lead firms to participate in international business when they
seek, for instance, to capitalize on distinctive resources or capabilities developed at home (e.g.,
technologies and economies of scale). By deploying these resources or capabilities abroad or
increasing production through international trade, firms may be able to increase their cash
inflows. Firms may also go international to be the first mover in the target foreign market before
a major competitor gets in, gaining strategic benefits such as technological leadership, brand
recognition, customer loyalty, and competitive position. Volkswagen was the second automaker
to enter China and the first to locate in the all-important Shanghai market, gaining a virtual
monopoly in that market for years. Additionally, firms may benefit from vertical integration
involving different countries. For example, a company in the oil exploration and drilling business
may integrate downstream by acquiring or building an oil refinery in a foreign country that has
a market for its refined products. Conversely, a company that has strong distribution channels
(e.g., gas stations) in a country but needs a steady source of supply of gasoline at a predictable
price may integrate upstream and acquire an oil producer and refiner in another country. Yet
another strategic motive is to follow the companys major customers abroad (often termed
piggybacking). Japanese tire maker Bridgestone found itself in the U.S. market when its
customersJapanese carmakersexported their cars, with Bridgestone tires mounted on them,
to the United States, and their customers needed replacement tires. Other suppliers of Honda,
Nissan, and Toyota followed suit, many eventually locating manufacturing operations in the
United States. Bridgestone, for instance, took over U.S. tire manufacturer Firestone to become
the worlds largest tire maker. Since responsiveness and product adaptation are becoming
increasingly critical for business success, proximity to foreign customers is an important driver
of overseas investment.

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 LESSON 4

Contents

Political Systems, Economic Systems, Legal Systems, Cultural Environment

And Associated Risks .

International business is much more complicated than domestic business because countries differ
in many ways. Countries have different political, economic, and legal systems. They vary
significantly in their level of economic development and future economic growth trajectory.
Cultural practices can vary dramatically, as can the education and skill level of the population.

All these differences can and do have major implications for the practice of international
business. They have a profound impact on the benefits, costs, and risks associated with doing
business in different countries; the way in which operations in different countries should be
managed; and the strategy international firms should pursue in different countries.

A firm in international business encounters three different sets of external environment

- Domestic environment
- Foreign environment
- Global environment

POLITICAL SYSTEMS
By political system we mean the system of government in a nation. Political systems can be
assessed according to two dimensions.

The first is the degree to which they emphasize collectivism as opposed to individualism. The
second is the degree to which they are democratic or totalitarian.

Collectivism refers to a political system that stresses the primacy of collective goals over
individual goals.3 When collectivism is emphasized, the needs of society as a whole are
generally viewed as being more important than individual freedoms. In such circumstances, an
individual's right to do something may be restricted on the grounds that it runs counter to "the
good of society" or to "the common good."

It has two variants communism and social democracy

The communists believed that socialism could be achieved only through violent revolution and
totalitarian dictatorship, whereas the social democrats committed themselves to achieving
socialism by democratic means, turning their backs on violent revolution and dictatorship. The
Soviet Union had collapsed and had been replaced by a collection of 15 republics, many of
which were at least nominally structured as democracies. Communism was swept out of Eastern

37
Europe by the largely bloodless revolutions of 1989. Although China is still nominally a
communist state with substantial limits to individual political freedom, in the economic sphere
the country has moved sharply away from strict adherence to communist ideology. Other than
China, communism hangs on only in a handful of small fringe states, such as North Korea and
Cuba.

Social democracy also seems to have passed a high-water mark, although the ideology may
prove to be more enduring than communism. Social democracy has had perhaps its greatest
influence in a number of democratic Western nations, including Australia, France, Germany,
Great Britain, Norway, Spain, and Sweden, where Social Democratic parties have often held
political power. Other countries where social democracy has had an important influence include
India and Brazil.

Individualism The opposite of collectivism, individualism refers to a philosophy that an

individual should have freedom in his or her economic and political pursuits. In contrast to
collectivism, individualism stresses that the interests of the individual should take precedence
over the interests of the state. Like collectivism, individualism can b e traced to an ancient Greek
philosopher, in this case Plato's disciple Aristotle (384-322 BC). In contrast to Plato, Aristotle
argued that individual diversity and private ownership are desirable. In a passage that might have
been taken from a speech by contemporary politicians who adhere to a free market ideology, he
argued that private property is more highly productive than communal property and will thus
stimulate progress. According to Aristotle, communal property receives little care, whereas
property that is owned by an individual will receive the greatest care and be most productive.
The central message of individualism, therefore, is that individual economic and political
freedoms are the ground rules on which a society should be based.

DEMOCRACY AND TOTALITARIANISM

Democracy and totalitarianism are at different ends of a political dimension. Democracy refers to
a political system in which government is by the people, exercised either directly or through
elected representatives. Totalitarianism is a form of government in which one person or political
party exercises absolute control over all spheres of human life and prohibits opposing political
parties.

Democracy-The pure form of democracy, as originally practiced by several city-states in ancient

Greece, is based on a belief that citizens should be directly involved in decision making. In
complex, advanced societies with populations in the tens or hundreds of millions this is
impractical. Most modem democratic states practice representative democracy. In a
representative democracy, citizens periodically elect individuals to represent them. These elected
representatives then form a government, whose function is to make decisions on behalf of the
electorate. In a representative democracy, elected representatives who fail to perform this job
adequately will be voted out of office at the next election. To guarantee that elected

38
representatives can be held accountable for their actions by the electorate, an ideal representative
democracy has a number of safeguards that are typically enshrined in constitutional law. These
include ( 1) an individual's right to freedom of expression, opinion, and organization; (2) a free
media; (3) regular elections in which all eligible citizens are allowed to vote; (4 ) universal adult
suffrage; (5) limited terms for elected representatives; (6) a fair court system that is independent
from the political system; (7) a nonpolitical state bureaucracy; (8) a nonpoliticalpolice force and
armed service; and (9) relatively free access to state information. -based economic reforms.

A second form of totalitarianism might be labeled theocratic totalitarianism. Theocratic

totalitarianism is found in states where political power is monopolized by a party, group, or
individual that governs according to religious principles. The most common form of theocratic
totalitarianism is based on Islam and is exemplified by states such as Iran and Saudi Arabia.
These states limit freedom of political and religious expression with laws based on Islamic
principles.

A third form of totalitarianism might be referred to as tribal totalitarianism. Tribal totalitarianism

has arisen from time to time in African countries such as Zimbabwe, Tanzania, Uganda, and
Kenya. The borders of most African states reflect the administrative boundaries drawn by the old
European colonial powers rather than tribal realities. Consequently, the typical African country
contains a number of tribes (for example, in Kenya there are more than 40 tribes). Tribal
totalitarianism occurs when a political party that represents the interests of a particular tribe (and
not always the majority tribe) monopolizes power. Such one-party states still exist in Africa.

A fourth major form of totalitarianism might be described as right-wing totalitarianism. Right-

wing totalitarianism generally permits some individual economic freedom but restricts individual
political freedom, frequently on the grounds that it would lead to the rise of communism. A
common feature of many right-wing dictatorships is an overt hostility to socialist or communist
ideas.

Political risk associated:

3 types of risk:

Ownership Risk
Exposes property and life
Operating Risk
Interference with the ongoing operations of a firm
Transfer Risk
Limitations on the outflow.

Political risk may involve

Confiscation
The government takeover of a firm without compensation to the owners.

39
 Expropriation
A form of government takeover in which the firms owners are compensated.
Domestication
The government demands transfer of ownership and management responsibility.

Economic systems

In countries where individual goals are given primacy over collective goals, we are more likely
to find market-based economic systems. In contrast, in countries where collective goals are given
preeminence, the state may have taken control over many enterprises; markets in such countries
are likely to be restricted rather than free. We can identify three broad types of economic
systems-a market economy, a command economy, and a mixed economy.

Market economy

In the archetypal pure market economy, all productive activities are privately owned, as opposed
to being owned by the state. The goods and services that a country produces are not planned by
anyone. Production is determined by the interaction of supply and demand and signaled to
producers through the price system. If demand for a product exceeds supply, prices will rise,
signaling producers to produce more. If supply exceeds demand, prices will fall, signaling
producers to produce less. In this system consumers are sovereign. The purchasing patterns of
consumers, as signaled to producers through the mechanism of the price system

Totalitarianism

In a totalitarian country, all the constitutional guarantees on which representative democracies

are built-an individual's right to freedom of expression and organization, a free media, and
regular elections-are denied to the citizens. In most totalitarian states, political repression is
widespread, free and fair elections are lacking, media are heavily censored, basic civil liberties
are denied, and those who question the right of the rulers to rule find themselves imprisoned, or
worse.

Four major forms of totalitarianism exist in the world today. Until recently, the most widespread
was communist totalitarianism. Communism, however, is in decline worldwide, and most of the
Communist Party dictatorships have collapsed since 1989. Exceptions to this trend (so far) are
China, Vietnam, Laos, North Korea, and Cuba, although most of these states exhibit clear signs
that the Communist Party's monopoly on political power is retreating. In many respects, the
governments of China, Vietnam, and Laos are communist in name only since those nations now
adhere to market, determine what is produced and in what quantity.

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Command economy

In a pure command economy, the government plans the goods and services that a country
produces, the quantity in which they are produced, and the prices at which they are sold.
Consistent with the collectivist ideology, the objective of a command economy is for government
to allocate resources for "the good of society." In addition, in a pure command economy, all
businesses are state owned, the rationale being that the government can then direct them to make
investments that are in the best interests of the nation as a whole rather than in the interests of
private individuals. Historically, command economies were found in communist countries where
collectivist goals were given priority over individual goals.

Mixed economy

Between market economies and command economies can be found mixed economies. In a mixed
economy, certain sectors of the economy are left to private ownership and free market
mechanisms while other sectors have significant state ownership and government planning.
Mixed economies were once common throughout much of the world, although they are
becoming much less so. Until the 1980s, Great Britain, France, and Sweden were mixed
economies, but extensive privatization has reduced state ownership of businesses in all three
nations. A similar trend occurred in many other countries where there was once a large state-
owned sector, such as Brazil, Italy, and India (there are still state-owned enterprises in all of
these nations).

Economic risks associated:

Exchange controls may be levied

Tax policies may be used to control corporations and their capital

Price controls may employed to control prices of imported products or services.

Legal systems

The legal system of a country refers to the rules, or laws, that regulate behavior along with the
processes by which the laws are enforced and through which redress for grievances is obtained.
The legal system of a country is of immense importance to international business. A country's
laws regulate business practice, define the manner in which business transactions are to be
executed, and set down the rights and obligations of those involved in business transactions. The
legal environments of countries differ in significant ways.

Like the economic system of a country, the legal system is influenced by the prevailing political
system (although it is also strongly influenced by historical tradition). The government of a
country defines the legal framework within which firms do business, and often the laws that

41
regulate business reflect the rulers' dominant political ideology. For example, collectivist-
inclined totalitarian states tend to enact laws that severely restrict private enterprise, whereas the
laws enacted by governments in democratic states where individualism is the dominant political
philosophy tend to be pro private enterprise and pro-consumer.

INTERNATIONAL RELATIONS AND LAWS

International Politics:The effect of politics on international business is determined by both the

bilateral political relations between home and host countries and by multilateral agreements
governing the relations among groups of countries.

International Law:Plays an important role in the conduct of international business.

Treaties and agreements have a strong influence on international business relations.

(International law) :

The World Trade Organization defines internationally acceptable economic practices for its
member nations.

The Patent Cooperation Treaty (PCT) provides procedures for filing patent applications.

The United Nations has developed codes and guidelines that affect international business

In case of disagreement the parties can choose any of the options:

Arbitration: Procedures are quicker and often spelled out in the original contract

Litigation: Often involves extensive delays and is very costly

DIFFERENT LEGAL SYSTEMS

There are three main types of legal systems-or legal tradition-in use around the world: common
law, civil law, and theocratic law.

Common Law

The common law system evolved in England over hundreds of years. It is now found in most of
Great Britain's former colonies, including the United States. Common law is based on tradition,
precedent, and custom. Tradition refers to a country's legal history, precedent to cases that have
come before the courts in the past, and custom to the ways in which laws are applied in specific
situations. When law courts interpret common law, they do so with regard to these
characteristics. This gives a common law system a degree of flexibility that other systems lack.
A "common law system" is a legal system that gives great precedential weight to common
law, so that consistent principles applied to similar facts yield similar outcomes. The body of
past common law binds judges that make future decisions, just as any other law does, to ensure

42
consistent treatment. In cases where the parties disagree on what the law is, a common law court
looks to past precedential decisions of relevant courts. If a similar dispute has been resolved in
the past, the court is usually bound to follow the reasoning used in the prior decision (this
principle is known as stare decisis). If, however, the court finds that the current dispute is
fundamentally distinct from all previous cases (called a "matter of first impression"), judges have
the authority and duty to make law by creating precedent. Thereafter, the new decision becomes
precedent, and will bind future courts. Stare decisis, the principle that cases should be decided
according to consistent principled rules so that similar facts will yield similar results, lies at the
heart of all common law systems.
One third of the world's population live in common law jurisdictions or in systems mixed
with civil law.
In a common law jurisdiction several stages of research and analysis are required to determine
"what the law is" in a given situation. First, one must ascertain the facts. Then, one must locate
any relevant statutes and cases. Then one must extract the principles, analogies and statements by
various courts of what they consider important to determine how the next court is likely to rule
on the facts of the present case. Later decisions, and decisions of higher courts or legislatures
carry more weight than earlier cases and those of lower courts. Finally, one integrates all the
lines drawn and reasons given, and determines "what the law is". Then, one applies that law to
the facts.
In practice, common law systems are considerably more complicated than the simplified system
described above. The decisions of a court are binding only in a particular jurisdiction, and even
within a given jurisdiction, some courts have more power than others. For example, in most
jurisdictions, decisions by appellate courts are binding on lower courts in the same jurisdiction,
and on future decisions of the same appellate court, but decisions of lower courts are only non-
binding persuasive authority. Interactions between common law, constitutional law, statutory
law and regulatory law also give rise to considerable complexity.
Judges in a common law system have the power to interpret the law so that it applies to the
unique circumstances of an individual case. In turn, each new interpretation sets a precedent that
may be followed in future cases. As new precedents arise, laws may be altered, clarified, or
amended to deal with new situations.

Civil Law

A civil law system is based on a detailed set of laws organized into codes. When law courts
interpret civil law, they do so with regard to these codes. More than 80 countries, including
Germany, France, Japan, and Russia, operate with a civil law system. Conceptually, civil law
proceeds from abstractions, formulates general principles, and distinguishes substantive rules
from procedural rules.It holds case law to be secondary and subordinate to statutory law. When

43
discussing civil law, one should keep in mind the conceptual difference between a statute and a
codal article. The marked feature of civilian systems is that they use codes with brief text that
tend to avoid factually specific scenarios.Code articles deal in generalities and thus stand at odds
with statutory schemes which are often very long and very detailed.

A civil law system tends to be less adversarial than a common law system, since the judges rely
upon detailed legal codes rather than interpreting tradition, precedent, and custom. Judges under
a civil law system have less flexibility than those under a common law system. Judges in a
common law system have the power to interpret the law, whereas judges in a civil law system
have the power only to apply the law.

An important common characteristic of civil law, aside from its origins in Roman law, is the
comprehensive codification of received Roman law, i.e., its inclusion in civil codes. The
earliest codification known is the Code of Hammurabi written in ancient Babylon during the 18th
century BC. However, this, and many of the codes that followed, were mainly lists of civil and
criminal wrongs and their punishments. Codification of the type typical of modern civilian
systems did not first appear until the Justinian Code.
Germanic codes appeared over the 6th and 7th centuries to clearly delineate the law in force for
Germanic privileged classes versus their Roman subjects and regulate those laws according to
folk-right. Under feudal law, a number of private custumals were compiled, first under the
Norman empire (Trs ancien coutumier, 12001245), then elsewhere, to record the manorial
and later regional customs, court decisions, and the legal principles underpinning them.
Custumals were commissioned by lords who presided as lay judges over manorial courts in order
to inform themselves about the court process. The use of custumals from influential towns soon
became commonplace over large areas. In keeping with this, certain monarchs consolidated their
kingdoms by attempting to compile custumals that would serve as the law of the land for their
realms, as when Charles VII of France commissioned in 1454 an official custumal of Crown law.

The concept of codification was further developed during the 17th and 18th centuries AD, as an
expression of both natural law and the ideas of the Enlightenment. The political ideal of that era
was expressed by the concepts of democracy, protection of property and the rule of law. That
ideal required the creation of certainty of law, through the recording of law and through its
uniformity. So, the aforementioned mix of Roman law and customary and local law ceased to
exist, and the road opened for law codification, which could contribute to the aims of the above-
mentioned political ideal.
Another reason that contributed to codification was that the notion of the nation-state required
the recording of the law that would be applicable to that state.

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Certainly, there was also a reaction to law codification. The proponents of codification regarded
it as conducive to certainty, unity and systematic recording of the law; whereas its opponents
claimed that codification would result in the ossification of the law.
Civil law is primarily contrasted with common law, which is the legal system developed first in
England, and later among English speaking peoples of the world. Despite their differences, the
two systems are quite similar from a historical point of view. Both evolved in much the same
way, though at different paces. The Roman law underlying civil law developed mainly from
customary law that was refined with case law and legislation. Canon law further refined court
procedure. Similarly, English law developed from Norman and Anglo-Saxon customary law,
further refined by case law and legislation. The differences of course being that (1) Roman law
had crystallized many of its principles and mechanisms in the form of the Justinian Code, which
drew from case law, scholarly commentary, and senatorial statutes; and (2) civilian case law has
persuasive authority, not binding authority as under common law.
Codification however, is by no means a defining characteristic of a civil law system. For
example, the statutes that govern the civil law systems of Sweden and other Nordic countries or
Roman-Dutch countries are not grouped into larger, expansive codes like those found in France
and Germany.
Theocratic Law

A theocratic law system is one in which the law is based on religious teachings. Islamic law is
the most widely practiced theocratic legal system in the modem world, although usage of both
Hindu and Jewish law persisted into the twentieth century. Islamic law is primarily a moral
rather than a commercial law and is intended to govern all aspects of life.10 The foundation for
Islamic law is the holy book of Islam, the Koran, along with the Sunnah, or decisions and
sayings of the Prophet Muhammad, and the writings of Islamic scholars who have derived rules
by analogy from the principles established in the Koran and the Sunnah. Because the Koran and
Sunnah are holy documents, the basic foundations of Islamic law cannot be changed. However,
in practice Islamic jurists and scholars are constantly debating the application of Islamic law to
the modem world. In reality, many Muslim countries have legal systems that are a blend of
Islamic law and a common or civil law system.

This system is based on religious teachings, as they are enshrined in the religious scriptures.
Islamic law, Shari at, is the most widely practiced religious legal system in todays world. It is
based on morality rather than commercial requirement of human behaviour in all aspects of a
persons self and social life. It also follows the writings of scholars and teachers of Islamic
scholarship, who derived rules by analogy from the principles established in the holy Quran. The
basic foundations of Islamic law remain unaltered even after many centuries because they have
been derived from the holy book and are acceptable to all devout Muslims.

45
Even though Islamic jurists and scholars constantly debate the application of Islamic law to the
modern world, their debates are only scholastic deliberations. However, to keep pace with the
advancement of life, many Muslim countries have a blend of Common law and Civil law system
along with the Shariat law.

Theocracy is a form of government which defers not to civil development of law, but to an
interpretation of the will of a God as set out in religious scripture and authorities. Law in a
theocracy must be consistent with religious text the ruling religion abides by. In a theocracy, the
courts are usually presided over by religious officials, who are taken as more versant in the
applicable legal texts.

Legal risks associated :

Legal risk arise when a countrys legal system fails to provide adequate safeguards in the case of
contract violations or to protect property rights.

In general, it can be more costly to do business in a country where:

- Strict standards (product safety , safety in the workplace ,environmental pollution)

- Damages for non- compliance are very high
- Lack of well- established laws for regulating business practices
- Failure to adequately protect intellectual property.

In general,

More favourable environment politically stable economies that have free markets systems
and well established legal system with adequate safeguards in case of contract violations.

Less favourable environment politically unstable nations or those that operate with a
command economy and where there is lack of well- established laws for regulating business
practices.

CULTURAL ENVIRONMENT

Culture is an integrated system of learned behavior patterns that are characteristic of the
members of any given society. Much has been written on the subject of culture and its
consequences. Whilst on the surface most countries of the world demonstrate cultural
similarities, there are many differences, hidden below the surface. One can talk about "the West",
but Italians and English, both belonging to the so called "West", are very different in outlook
when one looks below the surface. The task of the global marketer is to find the similarities and
differences in culture and account for these in designing and developing marketing plans. Failure
to do so can be disastrous.

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Terpstran9 (1987) has defined culture as follows:

"The integrated sum total of learned behavioral traits that are manifest and shared by members of
society"

Culture, therefore, according to this definition, is not transmitted genealogically. It is not, also
innate, but learned. Facets of culture are interrelated and it is shared by members of a group who
define the boundaries. Often different cultures exist side by side within countries, especially in
Africa. It is not uncommon to have a European culture, alongside an indigenous culture, say, for
example, Shona, in Zimbabwe. Culture also reveals itself in many ways and in preferences for
colours, styles, religion, family ties and so on. The colour red is very popular in the west, but not
popular in Islamic countries, where sober colours like black are preferred.

Much argument in the study of culture has revolved around the "standardisation" versus
"adaption" question. In the search for standardisation certain "universals" can be identified.
Murdock7 (1954) suggested a list, including age grading, religious rituals and athletic sport.
Levitt5 (1982) suggested that traditional differences in task and doing business were breaking
down and this meant that standardisation rather than adaption is becoming increasingly
prevalent.

Culture, alongside economic factors, is probably one of the most important environmental
variables to consider in global marketing. Culture is very often hidden from view and can be
easily overlooked. Similarly, the need to overcome cultural myopia is paramount.

CHARACTERISTICS OF CULTURE

Culture is learned, shared, and transmitted from one generation to the next.

Culture can be passed from parents to children, by social organizations, special interest
groups, the government, schools, and churches.

Culture is multidimensional, consisting of a number of common elements that are

interdependent.

Approaches to the study of culture

Keegan3 (1989) suggested a number of approaches to the study of culture including the
anthropological approach, Maslow's approach, the Self- Reference Criterion (SRC), diffusion
theory, high and low context cultures and perception. There are briefly reviewed here.

Anthropological approach

Culture can be deep seated and, to the untrained can appear bizarre. The Moslem culture of
covering the female form may be alien, to those cultures which openly flaunt the female form.
The anthropologist, though a time consuming process, considers behaviour in the light of
experiencing it at first hand. In order to understand beliefs, motives and values, the

47
anthropologist studies the country in question anthropology and unearths the reasons for what,
apparently, appears bizarre.

Maslow approach

In searching for culture universals, Maslow's6 (1964) hierarchy of needs gives a useful analytical
framework. Maslow hypothesised that people's desires can be arranged into a hierarchy of needs
of relative potency. As soon as the "lower" needs are filled, other and higher needs emerge
immediately to dominate the individual. When these higher needs are fulfilled, other new and
still higher needs emerge. Physiological needs are at the bottom of the hierarchy. These are basic
needs to be satisfied like food, water, air, comfort. The next need is safety - a feeling of well
being. Social needs are those related to developing love and relationships. Once these lower
needs are fulfilled "higher" needs emerge like esteem - self respect - and the need for status
improving goods. The highest order is self actualisation where one can now afford to express
oneself as all other needs have been met.

Whilst the hypothesis is simplistic it does give an insight into universal truisms. In Africa, for
example, in food marketing, emphasis may be laid on the three lower level needs, whereas in the
developed countries, whilst still applicable, food may be bought to meet higher needs. For
example, the purchase of champagne or caviar may relate to esteem needs.

The self reference criterion (SRC)

Perception of market needs can be blocked by one's own cultural experience. Lee
(1965)4 suggested a way, whereby one could systematically reduce this perception. He suggested
a four point approach.

a) Define the problem or goal in terms of home country traits, habits and norms.

b) Define the problem or goal in terms of the foreign culture traits, habits and norms.

c) Isolate the SRC influence in the problem and examine it carefully to see how it complicates
the pattern.

d) Redefine the problem without the SRC influence and solve for the foreign market situation.

The problem with this approach is that, as stated earlier, culture may be hidden or non apparent.
Uneartherning the factors in b) may, therefore, be difficult. Nonetheless, the approach gives
useful guidelines on the extent for the need of standardisation or adaption in marketing planning.

Diffusion theory

Many studies have been made since the 1930's to assess how new innovations are diffused in a
society. One of the most prolific writers was Everett Rogers8. In his book, "Diffusion of
Innovations" (1962) he suggested that adoption was a social phenomenon, characterised by a
normal distribution.

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In this case the innovators are a small percentage who like to be seen to lead, then the others,
increasingly more conservative, take the innovation on. The adoption process itself is done in a
series of stages from awareness of the product, through to interest, evaluation, trial and either
adoption or rejection (in the case of non adopters). The speed of the adoption process depends on
the relative advantage provided by the product, how compatible or not it is with current values or
experiences, its complexity, divisibility (how quickly it can be tried) and how quickly it can be
communicated to the potential market. In international marketing an assessment of the product or
service in terms of these latter factors is very useful to the speed of its adoption. Most
horticultural products, for example, have no problem in transfer from one culture to another,
however specific types may have. It is unlikely that produce like "squash" would sell well in
Europe, but it does in Zimbabwe.

High and low context culture

High-context culture

context is at least as important as what is actually said

what is not being said can carry more meaning than what is said

focuses on group development

Japan and Saudi Arabia are examples

Low-context culture

most of the information is contained explicitly in words

what is said is more important that what is not said

focuses on individual development

The U.S. is an example

Perception

Perception is the ability to see what is in culture. The SRC can be a very powerful negative force.
High perceptual skills need to be developed so that no one misperceive a situation, which could
lead to negative consequences. Many of these theories and approaches have been "borrowed"
from other contexts themselves, but they do give a useful insight into how one might avoid a
number of pitfalls of culture in doing business overseas.

Consumer products are likely to be more culturally sensitive than business to business products,
primarily because technology can be universally learned. However there are dangers in over
generalisations. For example, drink can be very universal and yet culture bound. Whilst
appealing to a very universal physiological need - thirst - different drink can satiate the same
need. Tea is a very English habit, coffee American but neither are universals in African culture.

49
However, Coca Cola may be acceptable in all three cultures, with even the same advertising
appeal.

Cultural universals

Cultural universals are manifestations of the total way of life of any group of people.

These include elements such as bodily adornment, courtship rituals, etiquette, concept of family,
gestures, joking, mealtime customs, music, personal names, status differentiation, and trade
customs.

Elements of Culture

- Language (verbal and non- verbal)

- Religion
- Values and attitudes
- Manners and customs
- Material elements
- Social institutions
- Material elements
- Education

The four roles of language

Language aids in information gathering and evaluation.

Language provides access to local society.

Language capability is increasingly important in company communications.

Language provides more than the ability to communicate because it extends beyond
mechanics to the interpretation of contexts that may influence business

Cultural knowledge

Cultural knowledge can be defined by the way it is acquired:

objective or factual information is obtained through communication, research, and

education.

experiential knowledge can be acquired only by being involved in a culture other

than ones own.

Interpretive knowledge is the ability to understand and fully appreciate the nuances of
different cultural traits and patterns.

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 DIMENSIONS OF CULTURE

Differences in cultural lifestyle can be explained by:

individualism

power distance

uncertainty avoidance

Masculinity

Asian countries tend to have high uncertainty avoidance and low masculinity.

Western countries tend to have low uncertainty avoidance and high masculinity

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 LESSON 5

Contents

Framework for analyzing international business environment

FRAMEWORK FOR ANALYSING INTERNATIONAL BUSINESS ENVIRONMENT

Environmental analysis is defined as the process by which strategists monitor the economic,
governmental/legal, market/competitive, supplier/technological, geographic, and social settings
to determine opportunities and threats to their firms. Environmental diagnosis consists of
managerial decisions made by analyzing the significance of the data (opportunities and threats)
of the environmental analysis. The definition of environmental analysis given above has been
made in the context of the strategic management process for an existing firm. It is, however,
quite obvious that environmental analysis is the cornerstone of new business opportunity analysis
too. Indeed, today a much more greater emphasis is given than in the past to the fact that
environmental analysis is an essential prerequisite for strategic management decision-making.

It is now unquestionably accepted that the prospects of a business depend not only on its
resources but also on the environment. An analysis of the strengths, weaknesses, opportunities
and threats (SWOT) is very much essential for the business policy formulation. Just as the life
and success of an individual depend on his innate capability, including physiological factors,
traits and skills, to cope with the environment, the survival and success of a business firm depend
on its innate strength the resources as its command, including physical resources, financial
resources, skill and organization and its adaptability to the environment. Every business
enterprise, thus, consists of a set of internal factors and is confronted with a set of external
factors. The internal factors are generally regarded as controllable factors because the company
has control over these factors; it can alter or modify such factors as its personnel, physical
facilities, organization and functional means, such as the marketing mix, to suit the environment.

The external factors, on the other hand, are by and large, beyond the control of a company. The
external or environmental factors such as the economic factors, socio-cultural factors,
government and legal factors, demographic factors, geophysical factors etc. are, therefore,
generally regarded as uncontrollable factors. As the environmental factors are beyond the control
of a firm, its success will depend to a very large extent on its adaptability to the environment, i.e.
its ability to properly design and adjust the internal (the controllable) variables to take advantage
of the opportunities and to combat the threats in the environment. The business environment
comprises a microenvironment and a macro environment.

Micro environment The micro environment consists of the actors in the companys
immediate environment that effect the performance of the company. These include the suppliers,
marketing intermediaries, competitors, customers, and publics. The macro environment
consists of the larger societal forces that affect all the actors in the companys micro environment

52
namely, the demographic, economic, natural, technological, political and cultural forces. It is
quite obvious that the micro environmental factors are more intimately linked with the company
than the macro factors. The micro forces need not necessarily affect all the firms in a particular
industry in the same way. Some of the micro factors may be particular to a firm. For example, a
firm, which depends on a supplier, may have a supplier environment, which is entirely different
from that of a firm whose supply source is different. When competing firms in an industry have
the same microelements, the relative success of the firms depends on their relative effectiveness
in dealing with these elements. Suppliers An important force in the microenvironment of a
company is the supplier, i.e., those who supply the inputs like raw materials and components to
the company. The importance of reliable source/sources of supply to the smooth functioning of
the business is obvious. Uncertainty regarding the supply or other supply constraints often
compels companies to maintain high inventories causing cost increases. It has been pointed out
that factories in India maintain indigenous stocks of 3-4 months and imported stocks of 9 months
as against an average of a few hours to two weeks in Japan. Because of the sensitivity of the
supply, many companies give high importance to vendor development. Vertical integration,
where feasible, helps solve the supply problem. It is very risky to depend on a single because a
strike, lock out or any other production problem with that supplier may seriously affect the
company. Similarly, a change in the attitude or behavior of the supplier may also affect the
company. Hence, multiple sources of supply often help reduce such risks. The supply
management assumes more importance in a scarcity environment. Company purchasing agents
are learning how to wine and dine suppliers to obtain favorable treatment during periods of
shortages. In other words, the purchasing department might have to market itself to suppliers.

Customers- As it is often, exhorted, the major task of a business is to create and sustain
customers. A business exists only because of its customers. Monitoring the customer sensitivity
is, therefore, a prerequisite for the business success. A company may have different categories of
consumers like individuals, households, industries and other commercial establishments, and
government and other institutions. For example, the customers of a tyre company may include
individual automobile owners, automobile manufacturers, public sector transport undertakings
and other transport operators. Depending on a single customer is often too risky because it may
place the company in a poor bargaining position, apart from the risks of losing business
consequent to the winding up of business by the customer or due to the customers switching
over the competitors of the company. The choice of the customer segments should be made by
considering a number of factors including the relative profitability, dependability, stability of
demand, growth prospects and the extent of competition.

Competitors- A firms competitors include not only the other firms, which market the same or
similar products, but also all those who compete for the discretionary income of the consumers.
For example, the competition for a companys televisions may come not only from other T.V.
manufacturers but also from two-wheelers, refrigerators, cooking ranges, stereo sets and so on
and from firms offering savings and investment schemes like banks, Unit Trust of India,

53
companies accepting public deposits or issuing shares or debentures etc. This competition among
these products may be described as desire competition as the primary task here is to influence the
basic desire of the consumer. Such desire competition is generally very high in countries
characterized by limited disposable incomes and many unsatisfied desires (and, of course, with
many alternatives for spending/investing the disposable income). If the consumer decides to
spend his discretionary income on recreation (or recreation cum education) he will still
confronted with a number of alternatives choose from like T.V., stereo, two-in-one, three in-one
etc. The competition among such alternatives, which satisfy a particular category of desire, is
called generic competition. If the consumer decides to go in for a T.V. the next question is which
form of the T.V. black and white or colour, with remote-control or without it etc. In other
words, there is a product form competition. Finally the consumer encounters the brand
competition i.e., the competition between the different brands of the same product form. An
implication of these different demands is that a marketer should strive to create primary and
selective demand for his products.

Marketing intermediaries- The immediate environment of a company may consist of a number

of marketing intermediaries which are firms that aid the company in promoting, selling and
distributing its goods to final buyers. The marketing intermediaries include middlemen such as
agents and merchants who help the company find customers or close sales with them,
physical distribution firms which assist the company in stocking and moving goods form their
origin to their destination such as warehouses and transportation firms; marketing service
agencies which assist the company in targeting and promoting its products to the right
markets such as advertising agencies, marketing research firms, media firms and consulting
firms; and financial intermediaries which finance marketing activities and insure business risks.
Marketing intermediaries are vital links between the company and the final consumers. A
dislocation or disturbance of this link, or a wrong choice of the link, may cost the company very
heavily. Retail chemists and druggists in India once decided to boycott the products of a leading
company on some issue such as poor retail margin. This move for collective boycott was,
however, objected to by the MRTP commission; but for this company would, perhaps, have been
in trouble.

Democratic- A company may encounter certain publics in its environment. A public is any
group that has an actual or potential interest in or impact on an organisations ability to achieve
its interests. Media publics, citizens action publics and local publics are some examples. For
example, one of the leading companies in India was frequently under attack by the media public,
particularly by a leading daily, which was allegedly bent on bringing down the share prices of
the company by tarnishing its image. Such exposures or campaigns by the media might even
influence the government decisions affecting the company. The local public also affects many
companies. Environmental pollution is an issue often taken up by a number of local publics.
Actions by local publics on the issue have caused some companies to suspend operations and/or
take pollution abatement measures.

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GROWTH OF CONSUMER PUBLIC IS AN IMPORTANT DEVELOPMENT
AFFECTING BUSINESS- It is wrong to think that all publics are threats to business. Some of
the actions of the publics may cause problems for companies. However, some publics are an
opportunity for the business. Some businessmen, for example, regard consumerism as an
opportunity for the business. The media public may be used to disseminate useful information.
Similarly, fruitful cooperation between a company and the local publics may be established for
the mutual benefit of the company and the local community.

Macro environment- As stated earlier, a company and the forces in its microenvironment
operate in a larger macro environment of forces that shape opportunities and pose threats to the
company. The macro forces are, generally, more uncontrollable than the micro forces. A sketch
picture of the important macro-environmental forces is given below.

Economic environment- Economic conditions, economic policies and the economic system are
the important external factors that constitute the economic environment of a business. The
economic conditions of a country-for example, the nature of the economy, the stage of
development of the economy, economic resources, the level of income, the distribution of
income and assets, etc- are among the very important determinants of business strategies. In a
developing country, the low income may be the reason for the very low demand for a product.
The sale of a product for which the demand is incomeelastic naturally increases with an increase
in income. But a firm is unable to increase the purchasing power of the people to generate a
higher demand for its product. Hence, it may have to reduce the price of the product to increase
the sales. The reduction in the cost of production may have to be effected to facilitate price
reduction. It may even be necessary to invent or develop a new low-cost product to suit the low-
income market. Thus Colgate designed a simple, hand-driven, inexpensive ($10) washing
machine for low-income buyers in less developed countries. Similarly, the National Cash
Register Company took an innovative step backward by developing a crank-operated cash
register that would sell at half the cost of a modern cash register and this was well received in a
number of developing countries. In countries where investment and income are steadily and
rapidly rising, business prospects are generally bright, and further investments are encouraged.
There are a number of economists and businessmen who feel that the developed countries are no
longer worthwhile propositions for investment because these economies have reached more or
less saturation levels in certain respects. In developed economies, replacement demand accounts
for a considerable part of the total demand for many consumer durables whereas the replacement
demand is negligible in the developing economies. The economic policy of the government,
needless to say, has a very great impact on business. Some types or categories of business are
favorably affected by government policy, some adversely affected, while it is neutral in respect
of others. For example, a restrictive import policy, or a policy of protecting the home industries,
may greatly help the import-competing industries. Similarly, an industry that falls within the
priority sector in terms of the government policy may get a number of incentives and other
positive support from the government, whereas those industries which are regarded as inessential

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may have the odds against them. In India, the governments concern about the concentration of
economic power restricted the role of the large industrial houses and foreign concerns to the core
sector, the heavy investment sector, the export sector and backward regions. The monetary and
fiscal policies, by the incentives and disincentives they offer and by their neutrality, also affect
the business in different ways. An industrial undertaking may be able to take advantage of
external economies by locating itself in a large city; but the Government of Indias policy was to
discourage industrial location in such places and constrain or persuade industries undertaking, a
backward area location may have many disadvantages. However, the incentives available for
units located in these backward areas many compensate them for these disadvantages, at least to
some extent. According to the industrial policy of the Government of India until July 1991, the
development of 17 of the most important industries were reserved for the state. In the
development of another 12 major industries, the state was to play a dominant role. In the
remaining industries, co-operative enterprises, joint sector enterprises and small scale units were
to get preferential treatment over large entrepreneurs in the private sector. The government
policy, thus limited the scope of private business. However, the new policy ushered in since July
1991 has wide opened many of the industries for the private sector. The scope of international
business depends, to a large extent, on the economic system. At one end, there are the free
market economies or capitalist economies, and at the other end are the centrally planned
economies or communist countries. In between these two are the mixed economies. Within the
mixed economic system itself, there are wide variations. The freedom of private enterprise is the
greatest in the free market economy, which is characterized by the following assumptions: (i)
The factors of production (labor, land, capital) are privately owned, and production occurs at the
initiative of the private enterprise. (ii) Income is received in monetary form by the sale of
services of the factors of production and from the profits of the private enterprise. (iii) Members
of the free market economy have freedom of choice in so far as consumption, occupation,
savings and investment are concerned. (iv) The free market economy is not planned controlled or
regulated by the government. The government satisfies community or collective wants, but does
not compete with private firms, nor does it tell the people where to work or what to produce. The
completely free market economy, however, is an abstract system rather than a real one. Today,
even the so-called market economies are subject to a number of government regulations.
Countries like the United States, Japan, Australia, Canada and member countries of the EEC are
regarded as market economies. The communist countries have, by and large, a centrally planned
economic system. Under the rule of a communist or authoritarian socialist government, the state
owns all the means of production, determines the goals of production and controls the economy
according to a central master plan. There is hardly any consumer sovereignty in a centrally
planned economy, unlike in the free market economy. The consumption pattern in a centrally
planned economy is dictated by the state. China, East Germany Soviet Union, Czechoslovakia,
Hungary, Poland etc., had centrally planned economies. However, recently several of these
countries have discarded communist system and have moved towards the market economy. In
between the capitalist system and the centrally planned system falls the system of the mixed

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economy, under which both the public and private sectors co-exist, as in India. The extent of
state participation varies widely between the mixed economies. However, in many mixed
economies, the strategic and other nationally very important industries are fully owned or
dominated by the state. The economic system, thus, is a very important determinant of the scope
of private business. The economic system and policy are, therefore, very important external
constraints on business.

Political and legal environment- Political and government environment has close relationship
with the economic system and economic policy. For example, the communist countries had a
centrally planned economic system. In most countries, apart from those laws that control
investment and related matters, there are a number of laws that regulate the conduct of the
business. These laws cover such matters as standards of products, packaging, promotion etc. In
many countries, with a view to protecting consumer interests, regulations have become stronger.
Regulations to protect the purity of the environment and preserve the ecological balance have
assumed great importance in many countries. Some governments specify certain standards for
the products (including packaging) to be marketed in the country; some even prohibit the
marketing of certain products. In most nations, promotional activities are subject to various types
of controls. Media advertising is not permitted in Libya. Several European countries restrain the
use of children in commercial advertisements. In a number of countries, including India, the
advertisement of alcoholic liquor is prohibited. Advertisements, including packaging, of
cigarettes must carry the statutory warning that cigarette smoking is injurious to health.
Similarly, advertisements of baby food must necessarily inform the potential buyer that breast-
feeding in the best. In countries like Germany, product comparison advertisements and the use of
superlatives like best or excellent in advertisements is not allowed In the United States, the
Federal Trade Commission is empowered to require a company to provide the quality,
performance or comparative prices of its products. What is being asked of the drug industry
and of American business in general is a fuller disclosure of the relevant facts about products.
For drugs, food additives, some cosmetic preparations, and so forth, a full disclosure requires
more knowledge of the long-range side effects of materials ingested into the complex human
body. For American industry as a whole, greater candour has been called for under such
legislation as Truth in Lending and Fair Packaging Act, under administrative decrees such as the
warning requirement on cigarette packages and advertising, under the threats of private damage
suits using the common-law concepts of warranty, and under voluntary programmes such as unit
pricing and listing nutritional content of foods. The increasing complexity of products and the
variety of product choices suggest further moves away from caveat emptor or let the buyer
beware doctrines, moves which on the whole should prove a welcome although sometimes
inconvenient challenge for business. There are a host of statutory controls on business in India. If
the MRTP companies wanted to expand their business substantially, they had to convince the
government that such expansion was in the public interest. Indeed, the Government in India
has an all-pervasive and predominantly restrictive influence over various aspects of business, e.g,
industrial licensing which decides location, capacity and process; import licensing for machinery

57
and materials; size and price of capital issue; loan finance; pricing; managerial remuneration;
expansion plans; distribution restrictions and a host of other enactments. Therefore, a
considerable part of attention of a Chief Executive and his senior colleagues has to be devoted to
a continuous dialogue with various government agencies to ensure growth and profitability
within the framework of controls and restraints. Many countries today have laws to regulate
competition in the public interest. Elimination of unfair competition and dilution of monopoly
power are the important objectives of these regulations. In India, the monopolistic undertakings,
dominants undertakings and large industrial houses are subject to a number of regulations which
prevent the concentration of economic power to the common detriment. The MRTP Act also
controls monopolistic, restrictive and unfair trade practices which are prejudicial to public
interest. Such regulations brighten the prospects of small and new firms. They also increase the
scope of some of the existing firms to venture into new areas of business. The special privileges
available to the small scale sector have also contributed to the phenomenal success of the Nirma.
Certain changes in government policies such as the industrial policy, fiscal policy, tariff policy
etc. may have profound impact on business. Some policy developments create opportunities as
well as threats. In other words, a development which brightens the prospects of some enterprises
may pose a threat to some others. For example, the industrial policy liberalizations in India,
particularly around the mid-eighties have opened up new opportunities and threats. They have
provided a lot of opportunities to a large number of enterprises to diversify and to make their
product mix better. But they have also given rise to serious threat to many existing products by
way of increased competitions; many sellers markets have given way to buyers markets. Even
products which were seldom advertised have come to be promoted very heavily. This battle for
the market has provided a splendid opportunity for the advertising industry. Advertising billing
has been increasing substantially. That an estimated cost savings of about Rs. 200 crores per year
have accrued to the Reliance Industries as a result of the changes in duties on some of the
material inputs used by them is just an indication of the tremendous impact the fiscal and tariff
policies can have on the business.

Socio-cultural environment- The socio-cultural fabric is an important environmental factor that

should be analysed while formulating business strategies. The cost of ignoring the customs,
traditions, taboos, tastes and preferences, etc., of people could be very high. The buying and
consumption habits of the people, their language, beliefs and values, customs and traditions,
tastes and preferences, education are all factors that affect business. For a business to be
successful, its strategy should be the one that is appropriate in the socio-cultural environment.
The marketing mix will have to be so designed as best to suit the environmental characteristics of
the market. In Thailand, Helene Curtis switched to black shampoo because Thai women felt that
it made their hair look glossier. Nestle, a Swiss multinational company, today brews more than
forty varieties of instant coffee to satisfy different national tastes.

Even when people of different cultures use the same basic product, the mode of consumption,
conditions of use, purpose of use or the perceptions of the product attributes may vary so much

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so that the product attributes method of presentation, positioning, or method of promoting the
product may have to be varied to suit the characteristics of different markets. For example, the
two most important foreign markets for Indian shrimp are the U.S and Japan. The product
attributes for the success of the product in these two markets differ. In the U.S. market, correct
weight and bacteriological factors are more important rather than eye appeal, colour, uniformity
of size and arrangement of the shrimp which are very important in Japan. Similarly, the mode of
consumption of tuna, another seafood export from India, differs between the U.S. and European
countries. Tuna fish sandwiches, an American favourite which accounts for about 80 per cent of
American tuna consumption, have little appeal in high tuna consumption European countries
where people eat it right from the can. A very interesting example is that of the Vicks Vaporub,
the popular pain balm, which is used as a mosquito repellant in some of the tropical areas. The
differences in languages sometimes pose a serious problem, even necessitating a change in the
brand name. Preett was, perhaps, a good brand name in India, but it did not suit in the overseas
market; and hence it was appropriate to adopt Prestige for the overseas markets. Chevrolets
brand name Nova in Spanish means it doesnt go. In Japanese, General Motors Body by
Fisher translates as corpse by Fisher. In Japanese, again, 3Ms slogan sticks like crazy
translates as sticks foolishly. In some languages, Pepsi-Colas slogan come alive
translates as come out of the grave. The values and beliefs associated with colour vary
significantly between different cultures. Blue, considered feminine and warm in Holland, is
regarded as masculine and cold in Sweden. Green is a favourite colour in the Muslim world; but
in Malaysia, it is associated with illness. White indicates death and mourning in China and
Korea; but in some countries, it expresses happiness and is the colour of the wedding dress of the
bride. Red is a popular colour in the communist countries; but many African countries have a
national distaste for red colour. Social inertia and associated factors come in the way of the
promotion of certain products, services or ideas. We come across such social stigmas in the
marketing of family planning ideas, use of bio-gas for cooking, etc. In such circumstances, the
success of marketing depends, to a very large extent, on the success in changing social attitudes
or value systems. There are also a number of demographic factors, such as the age, and sex
composition of population, family size, habitat, religion, etc., which influence the business.
While dealing with the social environment, we must also consider the social environment of the
business which encompasses its social responsibility and the alertness or vigilance of the
consumers and of society at large. The societal environment has assumed great importance in
recent years. As Barker observes, business traditionally has been held responsible for
quantitiesfor the supply of goods and jobs, for costs, prices, wages, hours of works, and for
standards of living. Today, however, business is being asked to take a responsibility for the
quality of life in our society. The expectation is that business- in addition to its traditional
accountability for economic performance and results will concern itself with the health of the
society, that it will come up with the cures for the ills that currently beset us and, indeed, will
find ways of anticipating and preventing future problems in these areas. As Stern succinctly
points out, the more educated the society becomes, the more interdependent it becomes, and

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the more discretionary the use of its resources, the more marketing will become enmeshed in
social issues. Marketing personnel are at interface between company and society. In this position,
they have the responsibility not merely for designing a competitive marketing strategy, but for
sensitizing business to the social, as well as the product demand of society.

Demographic environment- Demographic factors like the size, growth rate, age composition,
sex composition, etc. of the population, family size, economic stratification of the population,
educational levels, languages, caste, religion etc. Are all factors that are relevant to business?
Demographic factors such as size of the population, population growth rate, age composition, life
expectancy, family size, spatial dispersal, occupational status, employment pattern etc, affect the
demand for goods and services. Markets with growing population and income are growth
markets. But the decline in the birth rates in countries like the United States have affected the
demand for baby products. Johnson and Johnson have overcome this problem by repositioning
their products like baby shampoo and baby soap, promoting them also to the adult segment,
particularly to the females. A rapidly increasing population indicates a growing demand for
many products. High population growth rate also indicates an enormous increase in labour
supply. When the Western countries experienced the industrial revolution, they had the problem
of labour supply, for the population growth rate was comparatively low. Labour shortage and
rising wages encouraged the growth of labour-saving technologies and automation. But most
developing countries of today are experiencing a population explosion and a situation of labour
surplus. The governments of developing countries, therefore, encourage labour intensive
methods of production. Capital intensive methods, automation and even rationalization are
apposed by labour and many sociologists, politicians and economists in these countries. The
population growth rate, thus, is an important environmental factor which affects business. Cheap
labour and a growing market have encouraged many multinational corporations to invest in
developing countries. The occupational and spatial mobilities of population have implications for
business. If labour is easily mobile between different occupations and regions, its supply will be
relatively smooth, and this will affect the wage rate. If labour is highly heterogeneous in respect
of language, caste and religion, ethnicity, etc., personnel management is likely to become a more
complex task. The heterogeneous population with its varied tastes, preferences, beliefs,
temperaments, etc. gives rise to differing demand patterns and calls for different marketing
strategies. References to a number of demographic factors that have business implications have
already been made under socio-cultural environment.

Natural environment Geographical and ecological factors, such as natural resource

endowments, weather and climatic conditions, topographical factors, locational aspects in the
global context, port facilities, etc., are all relevant to business. Differences in geographical
conditions between markets may sometimes call for changes in the marketing mix. Geographical
and ecological factors also influence the location of certain industries. For example, industries
with high material index tend to be located near the raw material sources. Climatic and weather
conditions affect the location of certain industries like the cotton textile industry. Topographical

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factors may, affect the demand pattern. For example, in hilly areas with a difficult terrain, jeeps
may be in greater demand than cars. Ecological factors have recently assumed great importance.
The depletion of natural resources, environmental pollution and the disturbance of the ecological
balance has caused great concern. Government policies aimed at the preservation of
environmental purity and ecological balance, conservation of non-replenishale resources, etc.,
have resulted in additional responsibilities and problems for business, and some of these have the
effect of increasing the cost of production and marketing. Externalities have become an
important problem the business has to confront with.

Physical and technological environment Physical Factors, such as geographical factors,

weather and climatic conditions may call for modifications in the product, etc., to suit the
environment because these environmental factors are uncontrollable. For example, Esso adapted
its gasoline formulations to suit the weather conditions prevailing in different markets. Business
prospects depend also on the availability of certain physical facilities. Some products, like many
consumer durables, have certain use facility characteristics. The sale of television sets, for
example, is limited by the extent of the coverage of the telecasting. Similarly, the demand for
refrigerators and other electrical appliances is affected by the extent of electrification and the
reliability of power supply. The demand for LPG gas stoves is affected by the rate of growth of
gas connections. Technological factors sometimes pose problems. A firm, which is unable to
cope with the technological changes, may not survive. Further, the differing technological
environment of different markets or countires may call for product modifications. For example,
many appliances and instruments in the U.S.A. are designed for 110 volts but this needs to be
converted into 240 volts in countries which have that power system. Technological
developments may increase the demand for some existing products. For example, voltage
stabilisers help increase the sale of electrical appliances in markets characterised by frequent
voltage fluctuations I power supply. However, the introduction of TVs, Fridges etc, with in built
voltage stabilizer adversely affects the demand for voltage stabilizers. Advances in the
technologies of food processing and preservation, packaging etc., have facilitated product
improvements and introduction of new products and have considerably improved the
marketability of products. The television has added a new dimension to product promotion. The
advent of TV and VCP/VCR has, however, adversely affected the cinema theatres.

The fast changes in technologies also create problems for enterprises as they render plants and
products obsolete quickly. Product-market-technology matrix generally has a much shorter life
today than in the past. It is particularly so in the international marketing context. It may be
interesting to note that almost half of Hindustan Levers 1980 export business did not exist in
1987. In fact, as much as a third of the companys 1987 turnover was from products and markets,
which were under three years of age.

International environment The international environment is very important from the point of
view of certain categories of business. It is particularly important for industries directly
depending on imports or exports and import-competing industries. For example, a recession in
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foreign markets, or the adoption of protectionist policies by foreign nations, may create
difficulties for industries depending on exports. On the other hand, a boom in the export market
or a relaxation of the protectionist policies may help the export-oriented industries. A
liberalization of imports may help some industries which use imported items, but may adversely
affect import-competing industries. It has been observed that major international developments
have their spread effects on domestic business. The Great Depression in the United States sent its
shock waves to a number of other countries. Oil price hikes have seriously affected a number of
economies. These hikes have increased the cost of production and the prices of certain products,
such as fertilizers, synthetic fibres, etc. The high oil price has led to an increase in the demand
for automobile models that economise energy consumption. The demand for natural fibres
increased because of the oil crisis. The oil crisis also prompted some companies to resort to
demarketing. Demarketing refers to the process of cutting consumer demand for a product
back to level that can be supplied by the firm. Some oil companies-the Indian Oil Corporation,
for example-have publicized tips o how to cut oil consumption. When the fertilizer price shot up
following the oil crisis, some fertilizer companies appealed to the farmers to use fertilizers only
for important and remunerative crops. The importance of natural manure like compost as a
substitute for chemical fertilizers was also emphasized. The oil crisis led to a reorientation of the
Government of Indias energy policy. Such developments affect the demand, consumption and
investment pattern. A good export market enables a firm to develop a more profitable product
mix and to consolidate its position in the domestic market. Many companies now plan
production capacities and investment taking into account also the foreign markets. Export
marketing facilitates the attainment of optimum capacity utilization; a company may be able to
mitigate the effects of domestic recession by exporting. However, a company which depends on
the export market to a considerable extent has also to face the impact of adverse developments in
foreign markets.

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