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Unit - 1

International Business –Definition – Internationalizing business-Advantages – factors causing

globalization of business- international business environment – country attractiveness –
Political, economic and cultural environment – Protection Vs liberalization of global business
environment

1. International Business:
International Business: Exchange of Goods & Services, Resources, Knowledge, & Skills,
among individuals & businesses in two or more countries.

“International business is defined as all business transactions that involve two or more
countries” – Daniels and Radebaugh

Approaches of International Business

Nature of International Business
1) Ethnocentric:Under this approach, target
 Involvement of commercial activity market is own country, Excessive production will
 Involvement of two countries export due to change in customer taste,
 Many bases preferences. Home country orientation.
 Language difference
 Comparative more physical risk 2) Polycentric:Under this approach, the
companies customize the marketing mix to meet
 Surrounded with political risk
the taste, performance and needs of the
 Proactive / Reactive
customers of each international market.Host
 Government Intervention
country orientation.
 Payment in foreign currency
 Differs from Domestic Business 3) Regiocentric: Under this approach, the
company operating successfully in a foreign
Scope of International Business
country thinks of exporting other neighbouring
 International Marketing countries of the host country.Sees similarities
 International Finance and Investments and differences in world region.
 Foreign Exchange
• At this stage, the concerned subsidiary
 Global HR
considers the regional environment (such as laws,
Features of International Business culture, policies etc.) for formulating the policies
& strategies.
• Large scale operations
• Integration of economies 4) Geocentric: Under this approach, the company
• Dominated by developed countries and analyses the tastes, preference and needs of the
MNCs customers in all foreign markets and then adopts
• Benefits to participating countries a standardized marketing mix for all the foreign
• Keen competition markets.
• Special role of science and technology
• International restrictions
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Problems of International Business
Importance
of International Business • Political factors
• Earn foreign exchange • High foreign investments and high
• Optimum utilization of resources cost
• Achieve its objectives • Exchange instability
• To spread business risks • Entry requirements
• Improve organization's efficiency • Tariffs, quota etc.
• Get benefits from Government • Corruption and bureaucracy
• Expand and diversify • Technological policy
• Increase competitive capacity • Quality Management

International Business Entry Strategies/ Modes of International Business/ internationalizing business

Other Modes: a) Piggybacking b) Turnkey Projects c) Green Field investments

Approaches of International Business

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2. Internationalizing business
Internationalization: ‘’As the process of increasing involvement in international operations’’ –
Prof Welch

Internationalization is the designing of the product in such a way that it will meet the needs of
users in many countries or can be easily adapted to do so.

Internationalisation is the process through which firms expand the business outside the
national (domestic) country.
Stages of Internationalization
Reasons of internationalization 1) STAGE 1 IS DOMESTIC OPERATION: The firm’s market is
 Domestic Market Saturated exclusively domestic. Most international companies have
 Domestic Market Small their origin as domestic companies. These companies focus
 Slow Growth of domestic on domestic operations only.
market Example: Patanjali have currently its major operations in
 Suppliers follow their India only.
customers internationally
 Competitive Pressures 2) STAGE 2 IS EXPORT OPERATION: The firm expands its
 Attractive cost structures market by engaging into export operations and offering the
globally domestic products to other countries also, but retains
 Growth rate and potential production facilities within domestic borders.
 Compete successfully in
Example: Indian firms exporting textiles, jute, spices, nuts,
domestic market
rice all around the world.

3) STAGE 3:-SUBSIDIARIES OR JOINT VENTURES:

The firm physically moves some of its operations out of the

Internationalizing business home country. There is a mutual cost, profit sharing and
management in such method.
1) Direct Export
2) Indirect Export Example: A joint venture between Maruti (Indian Company)
3) Foreign Direct Investment and Suzuki (Japanese Company).
4) Contractual agreement 4) STAGE 4:- MULTINATIONAL OPERATIONS:
5) Mergers and Acquisition
6) Production facility in foreign The firm becomes the fully fledged multinational co.[MNC]
market with the assembly of production facilities in several countries
& regions of the world. Some decentralization of decision
making is common but many personnel decisions are still
made at corporate level in headquarters.
Example: Mc Donalds is a MNC operating worldwide.

5) STAGE 5:- TRANSNATIONAL OPERATIONS: In this the firms

that reach this particular stage are often called transnational
companies because they achieve both global efficiency and
local responsiveness. They use global market and resources
for their functioning.
Example: Coca-Cola, Nestle
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Advantages of Internationalization Disadvantages of Internationalization

• High living standards • Political Factors

• Wider Market • Huge Foreign Indebtedness
• Large Scale Economies • Exchange Instability
• Cultural Transformation • Entry Requirements
• Optimum utilisation of world • Tariffs , Quotas , Trade Barriers
resources • Corruption
• Economic growth of the world • Technological Pirating
• Reduced Risks • Bureaucratic Practices of
• Division of labour and specialisation Government
• Increases Socio Economic Welfare • Quality Maintenance


3. Globalization of business
Globalization refers to the free cross-border movement of goods, services, capital,
information, and people.

Globalization refers to the intensification of cross-national economic, political,

cultural, social, and technological interactions that leads to the establishment of
transnational structures and the integration of economic, political, and social
processes on a global scale.
“Globalization is the process of integration and convergence of economic, financial, cultural
and political systems across the world”. In simple globalization means integrating the Indian
economy with world economy.

“Globalization refers to the process of integration of the world into one huge market”

The important components of globalization are

 globalization of markets
 globalization of production
 Globalization of investment
 Globalization of Technology

Globalization is the tendency of investment funds and businesses to move beyond domestic
and national markets to other markets around the globe, thereby increasing the
interconnection of the world.

Factors causing globalization of business

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Factors causing globalization of business

1) Improved transport, making global travel easier. For example, there has been a rapid
growth in air travel, enabling greater movement of people and goods across the
globe.
2) Containerisation. From 1970, there was a rapid adoption of the steel transport
container. This reduced the costs of inter-modal transport, making trade cheaper and
more efficient
3) Improved technology which makes it easier to communicate and share information
around the world. E.g. internet. For example, to work on improvements on this
website, I will go to a global online community, like elance.com. There, people from
any country can bid for the right to provide a service. It means that I can often find
people to do a job relatively cheaply because labour costs are relatively lower in the
Indian sub-continent.
4) Growth of multinational companies with a global presence in many different
economies.
5) Growth of global trading blocks which have reduced national barriers. (e.g. European
Union, NAFTA, ASEAN)
6) Reduced tariff barriers which encourage global trade. Often this has occurred through
the support of the WTO.
Firms exploiting gains from economies of scale to gain increased specialisation. This is an essential feat
Growth of global media.
Global trade cycle. Economic growth is global in nature. This means countries are increasingly interconne
Financial system increasingly global in nature. When US banks suffered losses due to the sub-prime mort
Improved mobility of capital. In the past few decades, there has been a general reduction in capital barrie
Increased People are more willing to move between different countries in search for work. Global trade n
Internet. This enables firms to communicate on a global level; this may overcome managerial diseconomi

Types of globalization

a) Financial globalization
b) Economic globalization
c) Technological globalization
d) Political globalization
e) Cultural globalization
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Globalization:“the growing economic interdependence of countries worldwide through

increasing volume and variety of cross border transactions in goods and services and of
international capital flows and also through the more rapid and widespread diffusion of
technology” – International Monetary Fund

Globalization of Markets

Globalization of markets refers to the process of

integrating and merging of the distinct world
markets into a single market.

EXAMPLE: Coca-Cola, Pepsi, McDonald’s burgers,

Levis Jeans etc.,
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Reasons for globalization of markets Globalization of production

 Large scale industrialization enabled mass Globalization of production is locating the

production  Risk reduction by diversification manufacturing facilities in a number of
 Increase profits and achieve goals locations around the globe.
 Adverse business environment in home country
EXAMPLE: Jet airlines Boeing 777 and Swan
 Demand for their products in foreign markets
opticals
 Failure of domestic companies to cater the
needs of customers Globalization of production reasons
Features of globalization of markets  Impositions of imports by the
foreign country
 Size of the company need not be too large
 Availability of high quality raw
 Distinction of national markets still prevail
materials and components
 Most of the foreign markets are markets for
 Availability of inputs at low
non-consumer goods
cost
 Skilled human resource at low
cost
 Liberal labour laws
 To reduce cost of transport
Globalization of Investment
 To cater to varying tastes of
Globalization of investment refers to customers
investment of capital by a global company in
any part of the world.

Globalization of investment Globalization of technology

 Increase in volume of □ Latest technology and distinctive

competencies
global trade
 Limitations of exporting □ Technological collaboration
and importing
 Liberalization □ Usage of technology by paying royalty
 Avoid restrictions

Modes of globalization of investment

 Acquisition
 Joint ventures
 Long term loans
 Issuing equity, shares, debentures,
bonds’
 Global deposit receipts
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Advantages of globalization Disadvantages of globalization

 Free flow of capital, technology  Kills domestic business

 Industrialization  Exploits human resource
 Production facilities throughout the world  Unemployment and
 Increase in production and consumption underemployment
 Lower prices and high quality  Widening gap between rich and
 Jobs and Incomes poor
 Higher standard of living  Transfer of natural resources
 Balanced Human development  National sovereignty at stake
 Welfare and prosperity  Commercial and political
colonialism Versatile Business

4. Country attractiveness
Political, economic, and legal systems of a country raise important ethical issues that have
implications for the practice of international business.

The political, economic, and legal environment of a country clearly influences the
attractiveness of that country as a market and/or investment site.

A country attractiveness assessment is based on three dimensions

1) Market opportunities
2) Industry opportunities
3) Country risks (many organizations publish country assessment results based on
various economic/political/social factors)

Dimensions of country attractiveness

1) Market opportunities

Market opportunities assessment measures the potential demand in the country for a
firm’s products or services based on: • Market size • Growth • Quality of demand and
potential demand in a country.

2)Industry opportunities

Industry opportunities assessment determines profitability potential of a company’s

presence in a country given the following factors

: • Quality of industry competitive structure (Porter’s five-force Industry Analysis Framework)

• Resource availability (Porter’s diamond framework)

3) Country risk

• Political risks: Political risks are probable disruptions owing to internal or external events or
regulations resulting from political action of governments or societal crisis and unrest.
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• Economic risks: Economic risks expose business performance to the extent that the
economic business drivers can vary and therefore put profitability at stake.

• Competitive risks:Competitive risks are related to non-economic distortion of the

competitive context owing to cartels and networks as well as corrupt practices. The
competitive battlefield is not even and investors who base their competitive advantage on
product quality and economics are at disadvantage.

• Operational risks: Operational risks are those that directly affect the bottom line, either
because government regulations and bureaucracies add costly taxation or constraints to
foreign investors or because the infrastructure is not reliable

Framework of country’s industry and market assessment

Framework of country’s risk analysis

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General investment framework of country’s attractiveness

5. International Business Environment

Motivating or provoking factors to go international

(a) Pull factors or Proactive reason: Attractiveness of the foreign market, including
relative profitability and growth prospects.
(b) Push factors or Reactive reasons: Compulsion of the domestic market, like saturation
of the market, prompting to internationalize.

An overview of business environment

SWOT analysis is one of the first steps in the strategic management process.
Business dynamics is a dependent factor. Hence the importance of environmental analysis
paid more attention in business.

Business Environment

(1) Internal Environment

(2) External environment it includes
(a) Micro/Task/ Operating environment
(b) Macro/ General/ Remote
environment

Environment of International Business

(a) Domestic environment

(b) Foreign environment
(c) Global environment
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6. Protection Versus Liberalization of business

Basis Protection Liberalization
Meaning Protectionism is the economic The removal of restrictions on the free
policy of restraining trade between trade of goods between countries
states through methods such as
tariff, quotas and other measure
Techniques Tariffs, quotas, subsidies, local Removal of trade barriers
content requirement, etc
Reasons / encourages domestic industry motive
motive Is to encourage domestic industry
Encourages the International business
Compliance to Domestic Rules and Regulations Consider the rules and regulations of
international have to be compiled with foreign country with which it is trading
rules and
regulations
Pre – requirement Carefully observe and understand a
requirement Considering the culture of country’s culture before trading with i
domestic industry and economy
Advantages Protects Domestic industry, It can help to lower prices and wide
encourages employment and range of quality goods and services
growth opportunities in home
country
Disadvantages It reduces overall volume of world Unsustainable utilization of resources,
trade, low global income, affects the domestic industries
employment opportunity, and less
variety of goods

Protectionism: is a policy of protecting the domestic businesses from foreign competition by

applying tariffs, import quotas, or many types of other restrictions attached to the imports of
foreign competitors’ goods and services.

There are many protectionist policies in place in many nations despite the fact that there is a
popular consensus that the world economy, as a whole, benefits from free trade.
 Government-levied tariffs − The best form of protectionist measure is the
government-levied tariffs. The common practice is raising the price of the imported
products so that they cost more and hence become less attractive than the domestic
products. There are many believers that protectionism is a helpful policy for the
emergent industries in the developing nations.
 Import quotas − Import quotas are the other forms of protectionism. These quotas
limit the amount of products imported into a country. This is considered to be a
more effective strategy than protective tariffs. Protective tariffs do not always repel
the consumers who are ready to pay higher prices for imported goods.
 Mercantilism − Wars and recessions are the major reasons behind protectionism. On
the other hand, peace and economic prosperity encourage free trade. In 17th and
18th centuries, the European monarchies used to rely heavily on protectionist
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policies. This was due to their aim to increase trade and improve the domestic
economies. These (currently discredited) policies are called mercantilism.
 Reciprocal trade agreements − Reciprocal trade agreements limit the protectionist
measures in lieu of eliminating them fully. However, protectionism still exists and is
heard when economic hardships or joblessness is aggravated by foreign competition.
Currently, protectionism is in a unique form. Economists term the form as administered
protection. Most rich nations have fair trade laws. The announced purpose of Free Trade
Laws is twofold −
 First is to make sure that foreign countries do not subsidize exports so that market
incentives are not distorted and hence efficient allocation of activity among the
countries is not destroyed.
 The second purpose is to assure that international companies do not dump their
exports in an aggressive manner. These mechanisms are meant to augment free
trade.
Liberalization: is the process of relaxation from government control. It is a very important
economic term. Technically, it means the reductions in applied restrictions of the government
on international trade and capital. Liberalization is also used in tandem with another term −
Deregulation.
Deregulation is the disappearance of state restrictions on both domestic and international
business. However, in principle, the two terms are distinct because liberalized markets are
often subject to government regulations for various reasons, such as consumer protection.
But in practice, both terms generally refer to the removal of state intervention in markets.

Arguments, Counterarguments, and Discussions

The advantages of liberalization and deregulation are questioned in many ways. Both
of these phenomena are related with the “Washington consensus.” The consensus is a set of
market-related policy prescriptions supported by neoliberals for economic growth of
developing countries. Critics, however, argue that the policies are used to exploit poorer
workers by corporations from rich countries.
Activists and scholars alike somewhat agree that markets are, in reality, neither truly
free nor fair. For example, there are subsidies paid by the government to cotton producers in
the United States and the European Union. This, in reality, artificially drives the prices down,
putting African cotton farmers in an uncomfortable state.
Critics note that the issue is not about the freeing of markets per se but, rather, that
the companies of wealthier countries are manipulating the term to their own benefits at
large.

Liberalization, Privatization, and Globalization

Due to close resemblance and similar attributes, the term LPG (Liberalization,
Privatization, and Globalization) is generally used nowadays to describe the phenomena of
freeing up of markets.
Although the three terms are distinct and have their own attributes, it is particularly
helpful to describe the contemporary and new market conditions of 21 st century through the
term LPG. In fact, liberalization is the gateway to globalizations and hence, when we talk
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about the benefits of globalization, it is always a manifestation of the process of

liberalization.
It is impossible to consider the business aspects without having a global view in many
of the scenarios and hence, LPG is a way to deal with the latest marketing and operational
trends in international marketing.

Revolutionary Economic Trends

Liberalization and deregulation stimulated the epic run of three major areas of business −
 International trade grew at an average rate of 6% annually between 1948 and 1997.
 FDI was impacted too, which saw the stocks and inflows exceed the rise in world
trade.
 Foreign exchange markets achieved an average daily turnover reaching trillions of
dollars.
Liberalization and deregulation contributed heavily to the globalization of the world
economy.

Advantages of International Business

Disadvantages of International Business
Maximum utilization of resources
Stability in prices  Increased Costs
Economic growth  Foreign regulation and standards
Economies of scale  Delay in Payments
Encouragement to industrialization
 Complex Org. Structure
Earning of foreign exchange
 Exhaustion of Natural Resources
Establishment of international cooperation
 Cultural Differences
Less cost due to the use of modern techniques
Development of Transport and communication  Market Competition in Host Country
Higher standard of living  National Controls
Employment  Lack of home country support
International brotherhood  Dependence
Greater competition  Loss to agricultural countries
Up gradation of technology
Security from famineEscape from domestic competition

****************************All the best****************************