International Business Environment Textbook PDF

 (i) International Business Environment (Strictly written according to Syllabus of Third Semester B.Com. Bangalore University) Dr. P. SUBBA RAO...

 (i) International Business Environment (Strictly written according to Syllabus of Third Semester B.Com. Bangalore University) Dr. P. SUBBA RAO Professor of Business Administration School of Business The University of Papua New Guinea Papua New Guinea Australia and Dean Professor and Head Faculty of Commerce and Management Sri Krishnadevaraya University Anantapur - 515 003 (A.P.) India SECOND REVISED EDITION : 2008 MUMBAI DELHI NAGPUR BANGALORE HYDERABAD CHENNAI LUCKNOW PUNE AHAMABAD  (ii) © HPH, 2005 No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publisher. Ninth Revised Edition : 1999 (January) Tenth Revised Edition : 1999 (July) Eleventh Revised Edition : 2000 First Edition : June 2005Reprint : 2001 Second Revised Edition : June 2008 Published by. : Mrs. Meena Pandey for HIMALAYA PUBLISHING HOUSE, “Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai – 400 004. Phone : 2386 01 70/2386 38 63 Fax : 022-2387 71 78 Email : [email protected] Website : www.himpub.com Branch Offices : Delhi : “Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi – 110 002. Phone : 2327 03 92 Fax : 011-2325 62 86 Email : [email protected] Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur – 440 018. Phone : 272 12 16, Telefax : 0712-272 12 15 Bangalore : No. 16/1 (Old 12/1), First Floor, Next to Hotel Highlands, Madhava Nagar, Race Course Road, Bangalore – 560 001. Phone : 2228 15 41, 2238 54 61 Telefax : 080-2228 66 11 Email : [email protected] Hyderabad : No. 2-2-1 167/2H, 1st Floor, Near Railway Bridge, Tilak Nagar, Main Road, Hyderabad - 500 044. Phone : 5550 17 45 Fax : 040-2756 00 41 Channai : No.2, Ramakrishna Street, North Usman Road, T.Nagar, Chennai - 600 017. Phone : 044-2814 40 04 / 05 Pune : No.11, Third Floor, Wing-A, Sahadeo Avenue - II, S.No. 5/9 + 5/10, Someshwarawada, Baner Road, Pune - 411 008. Mob : 94210 53743 Lucknow : C-43, Secotr - C, Ali Gunj, Lucknow - 226 024. Phone : 0522-404 75 94 Printed by : Geetanjali Press, Nagpur. Typeset by : Page Designers, Bangalore  (iii) PREFACE Globalisation brought significant paradigm shifts in the business arena both at the home as well as in various foreign countries. Consequently the concept of business and the principles of business management both at the home as well as in various foreign countries have changed dramatically. In fact business at the global level has been narrowing down the gaps in business practices in various countries. The concept of global village resulted in exchange of cultures across the globe, location of manufacturing centres in various countries by treating the entire globe as a single country, producing the components in one country, assembling the product in the second country and the market the product in the third country, the banks in the fourth country finance the operations and the insurance companies in the fifth country provide the insurance facilities and so on so forth. Added to this the customer by staying in one country, buy the products from any country in the world. This complex process has become reality due to information technology and electronic business. These significant and crucial landmarks widened the arena of domestic business to international business. Further the scope of international trade and international marketing is enlarged into international business. Consequently, the significance of international business is manifested. A number of Indian business schools have started introducing a subject/course on “International Business” in their MBA program. Of late a number of Universities started introducing this subject/ course even at under-graduate level like Bangalore University. In fact, many foreign Universities like the University of Papua New Guinea, introduced this subject at under-graduate level during 1990s. This book is written based on the “ International Business Environment”, syllabus of B.Com., course of Bangalore University. I thank the authorities of the University of Papua New Guinea for encouraging me to write this book. I thank Shri D.P.Pandey of Himalaya Publishing House for his continuous support. I specially thank Sri Neraj Pandey and his team of Himalaya Publishing House for encouraging me to write this book. My thanks are also due to Ms. Krishnaveni of Himalaya Publishing House for her untiring effort in contacting me and providing input electronically. Finally, I am grateful to Madhu for bringing this book nicely in a short span of time. 24th April, 2005 Prof.P. Subbarao Port Moresby, Papua New Guinea (iv)  (v) SYLLABUS UNIT 1 : Evolution of International business – characteristic features of International business – factors affecting the international business – Changing scenario of International Business. UNIT 2: International Business Environment – economic – political – legal, social – culture, Technological UNIT 3 : Multinational corporations – Global companies – international business houses – concepts, structures and functions. UNIT 4 : International finance; Foreign Exchange – convertibility of rupee ( Basics) forex market – structure and functions. World Bank, IMF, UNCTAD UNIT 5 : International Marketing: product – packing – promotion UNIT 6 : International Human Development: recruitment – selection and development policies. UNIT 7 : Regional Trading Blocks: EU, NAFTA, SAARC, WTO SKILL DEVELOPMENT: I. List atleast 3 MNCs of G-7 Countries operating in India along with products they manufacture. II. Preparation of a chart on different currencies of different countries. III. Table of atleast one month data of Foreign exchange rate of atleast 2 currencies. IV. Latest news affecting India through WTO, World Bank, IMF etc. V. Chart of product life cycle of International product. VI. Description of procedures followed in recruitment / selection of atleast one MNC in India. (vi)  (vii) CONTENTS 1. INTERNATIONAL BUSINESS 1-33 (A) EVOLUTION OF INTERNATIONAL BUSINESS (B) CHARACTERISTIC FEATURES OF INTERNATIONAL BUSINESS (C) FACTORS AFFECTING INTERNATIONAL BUSINESS (D) CHANGING SCENARIO OF INTERNATIONAL BUSINESS (E) ADVANTAGES OF INTERNATIONAL BUSINESS (F) PROBLEMS OF INTERNATIONAL BUSINESS 2. INTERNATIONAL BUSINESS ENVIRONMENT 34-85 (A) INTRODUCTION (B) SOCIAL AND CULTURAL ENVIRONMENT (C) TECHNOLOGICAL ENVIRONMENT (D) ECONOMIC ENVIRONMENT (E) POLITICAL ENVIRONMENT 3. MULTINATIONAL CORPORATIONS 86-113 (A) DEFINITION (B) DEFINITIONS AND CONCEPTS (C) FACTORS THAT CONTRIBUTED FOR THE GROWTH OF MNCs (D) ADVANTAGES AND DISADVANTAGES (E) CONTROL OVER MNCs (F) ORGANISATIONAL STRUCTURE OF MNCs (G) RELATIONSHIP BETWEEN HEADQUARTERS AND SUBSIDIARIES (H) MNCs IN INDIA (I) THE INDIANISATION OF TRANSNATIONALS 4. INTERNATIONAL FINANCE AND FOREIGN EXCHANGE 114-146 (A) INTERNATIONAL FINANCE (B) INTERNATIONAL FINANCIAL ENVIRONMENT (C) GLOBAL CAPITAL STRUCTURE (D) FOREIGN EXCHANGE (E) THE FOREIGN EXCHANGE MARKET (F) CONVERTIBILITY OF THE RUPEE AND ITS IMPLICATIONS (G) FOREIGN INSTITUTIONAL INVESTORS (H) GLOBAL DEPOSITORY RECEIPTS (I) CAPITAL EXPENDITURE ANALYSIS (J) INTERNATIONAL RISK MANAGEMENT 5. INTERNATIONAL MARKETING 147-191 (A) INTRODUCTION (B) PRODUCT  (viii) (C) GLOBALISATION OF MARKETS AND BRANDS (D) PRICING (E) PLACE/DISTRIBUTION (F) PROMOTION (G) INTERNATIONAL MARKETING STRATEGIES IN DIFFERENT STAGES OF PRODUCT LIFE CYCLE (H) INTERNATIONAL OR MARKET INTELLIGENCE (I) INTERNATIONAL MARKETING INFORMATION SYSTEM. 6. INTERNATIONAL HUMAN RESOURCE MANAGEMENT AND DEVELOPMENT 192-231 (A) GLOBAL RECRUITMENT (B) GLOBAL SELECTION PROCESS (C) EXPATRIATES (D) PERFORMANCE APPRAISAL (E) TRAINING AND DEVELOPMENT (F) COMPENSATION AND BENEFITS (G) WOMEN IN INTERNATIONAL BUSINESS (H) DUAL CAREER GROUPS (I) INTERNATIONAL INDUSTRIAL RELATIONS (J) QUALITY CIRCLES (K) PARTICIPATIVE MANAGEMENT 7. REGIONAL TRADE BLOCKS 232-260 (A) ECONOMIC INTEGRATION; (B) EUROPEAN UNION (EU); (C) NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA); (D) THE ASSOCIATION OF SOUTH-EAST ASIAN NATIONS (ASEAN); (E) EUROPEAN FREE TRADE ASSOCIATION; (F) LATIN AMERICAN INTEGRATION ASSOCIATION; (G) SOUTH ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION (SAARC) SKILL DEVELOPMENT 261-284  Unit One INTERNATIONAL BUSINESS CHAPTER OUTLINE (A) EVOLUTION OF INTERNATIONAL BUSINESS (B) CHARACTERISTIC FEATURES OF INTERNATIONAL BUSINESS (C) FACTORS AFFECTING INTERNATIONAL BUSINESS (D) CHANGING SCENARIO OF INTERNATIONAL BUSINESS (E) ADVANTAGES OF INTERNATIONAL BUSINESS (F) PROBLEMS OF INTERNATIONAL BUSINESS Introduction The beverages you drink might be produced in India, but with the collaboration of a USA company. The tea you drink is prepared from the tea powder produced in Sri Lanka. The spares and hard-disk of the computer you operate might have been produced in the United States of America. The perfume you apply might have been produced in France. The television you watch might have been produced with the Japanese technology. The shoes you wear might have been produced in Taiwan, but remarketed by an Italian company. Your air-travel services might have been provided to you by Air-France and so on so forth. Most of you have the experience of browsing internet and visiting different web sites, knowing the products and services offered by various companies across the globe. Some of you might have the experience of even ordering and buying the products through internet. This process gives you the opportunity of transacting in the international business arena without visiting or knowing the various countries and companies across the globe. You get all these even without visiting or knowing the country of the company where they are produced. All these activities have become a reality due to the operations and activities of international business. Thus, international business is the process of focusing on the resources of the globe and objectives of the organisations on global business opportunities and threats, in order to produce, buy, sell or exchange of goods/services world-wide. (A) EVOLUTION OF INTERNATIONAL BUSINESS The origin of international business goes back to human civilization. Historically periods of greater openness to trade have been characterized by stronger but lopsided 1 2 ____________________________________________ International Business Environment global growth. The concept of international business-a broader concept relating to the integration of economies and societies, dates back to the 19th century. The first phase of globalization began around 1870 and ended with the World War I (1914) driven by the industrial revolution in UK, Germany and USA. The import of raw material by colonial empires from their colonies and exporting finished goods to their overseas possessions was the main reason for the sharp increase in the trade during this phase. The ratio of trade to GDP was as high as 22.1 in 1913. Later various Governments initiated and imposed a number of barriers to trade to protect their domestic production that led to decline in the ratio of trade to GDP to 9.1 during 1930s.The international trade between two world wars has been described as “ a vast game of beggar-my-neighbour.” Advanced countries experienced sever set back consequent up on the imposition of trade barriers as they produce in excess of domestic demand and a decline in the volume of international trade. Added to this, the break down of the gold standard resulted in vacuum in the field of international trade. Then the world nations felt for the need for international cooperation in global trade and balance of payments affairs. These efforts resulted in the establishment of International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD-popularly known as the World Bank). The prolonged recession before the World War II in the west, led to and international consensus after the World War II that a different approach towards international trade was required. Consequently 23 countries conducted negotiations in 1947 in order to prevent he protectionism policies and to revive the economies from recession aiming at the establishment of the International Trade Organization. This attempt of the advanced countries ended with the General Agreement on Trade and Tariffs (GATT) that provided a framework for a series of ‘rounds’ of negotiations by which tariffs were reduced. Efforts to convert the General Agreement on Trade and Tariffs (GATT) into World Trade Organization (WTO) were intensified during 1980s and ultimately GATT was replaced by the WTO on 1st January 1995.envisaging the trade liberalizations. The efforts of IMF, World Bank and WTO along with the efforts of individual countries due to economic limitations of the closed economies led to the globalization of business. Globalization gave fillip to international business particularly during 1990s. In fact, the term international business was not popular before two decades. The term international business has emerged from the term ‘international marketing’, which, in turn, emerged from the term ‘international trade.’ International Trade to International Marketing: Originally, the producers used to export their products to the nearby countries and gradually extended the exports to far-off countries. Gradually, the companies extended the operations beyond trade. For example, India used to export raw cotton, raw jute and iron ore during International Business. ______________________________________________________ 3 the early 1900s. The massive industrialisation in the country enabled us to export jute products, cotton garments and steel during 1960s. India, during 1980s could create markets for its products, in addition to mere exporting. The export marketing efforts include creation of demand for Indian products like textiles, electronics, leather products, tea, coffee etc., arranging for appropriate distribution channels, attractive package, product development, pricing etc. This process is true not only with India, but also with almost all developed and developing economies. International Marketing to International Business: The multinational companies which were producing the products in their home countries and marketing them in various foreign countries before 1980s, started locating their plants and other manufacturing facilities in foreign/host countries. Later, they started producing in one foreign country and marketing in other foreign countries. For example, Uni Lever established its subsidiary company in India, i.e., Hindustan Lever Limited (HLL). HLL produces its products in India and markets them in Bangladesh, Sri Lanka, Nepal etc. Thus, the scope of the international trade is expanded into international marketing and international marketing is expanded into international business. Stages Influence Goals Domestic Social and Cultural Market Share International Technological High Profit Multinational Economic Risk Avoidance Global Political Resources Transnational Acquisition Expand Business Capacities Domestic International Advantages Business Business Low Price Variety of Goods High Living Standards Approaches Influence Economic Growth Ethnocentric Export Competitive Polycentric Direct Investment Advantages Regiocentric Licensing Geocentric Franchising Problems Turnkey Projects Political Risks Joint Ventures Foreign Debt. Mergers and Exchange Instability Acquisitions High Cost Fig. 1.1 : International Business Model 4 ____________________________________________ International Business Environment The 1990s and the new millennium clearly indicate rapid internationalisation and globalisation. The entire globe is passing at a dramatic pace through the transition period. Today, the international trader is in a position to analyse and interpret the global, social, technical, economic, political and natural environmental factors more clearly. Figure 1.1 presents influencing environmental factors, stages, approaches, and modes of entry, goals of and advantages of international business. (B) CHARACTERISTIC FEATURES OF INTERNATIONAL BUSINESS Conducting and managing international business operations is a crucial venture due to variations in political, social, cultural and economic factors, from one country to another country. For example, most of the African consumers prefer less costly products due to their poor economic conditions, whereas the German consumers prefer high quality and high priced products due to their higher ability to buy. Therefore, the international businessman should produce and export less costly products to most of the African countries and vice versa to most of the European and North American countries. High priced and high quality Palmolive soaps are marketed in European countries and the economy priced Palmolive soaps are exported and marketed in developing countries like Ethiopia, Pakistan, Kenya, India, Cambodia etc. Characteristic features of international business include: u Accurate Information: International business houses need accurate information to make an appropriate decision. Europe was the most opportunistic market for leather goods and particularly for shoes. Bata based on the accurate data could make appropriate decision to enter various European countries. u Timely Information: International business houses need not only accurate but timely information. Coca-Cola could enter the European market based on the timely information, whereas Pepsi entered later. Another example is the timely entrance of Indian software companies into the US market compared to those of other countries. Indian software companies also made timely decision in the case of Europe. u Size of the Business: The size of the international business should be large in order to have impact on the foreign economies. Most of the multinational companies are significantly large in size. In fact, the capital of some of the MNCs is greater than our annual budget and GDPs of the some of the African countries. u Market Segmentation: Most of the international business houses segment their markets based on the geographic market segmentation. Daewoo segmented its market as North America, Europe, Africa, Indian sub- continent and Pacific markets. International Business. ______________________________________________________ 5 Potentiality of Markets u International markets present more potentials than the domestic markets. This is due to the fact that international markets are wide in scope, varied in consumer tastes, preferences and purchasing abilities, size of the population etc. For example, the IBM’s sales are more in foreign countries than in USA. Similarly, Coca-Cola’s sales, Procter and Gamble’s sales and Satyam Computer’s sales are more in foreign countries than in their respective home countries. The population for the year 2000 indicates that: USA’s population would be 300 million, Mexico’s 126 million, Brazil’s 205 million, Indonesia’s 223 million, Pakistan’s 138 million, Nigeria’s 154 million and Bangladesh’s 146 million. The size of the population, sometimes, may not determine the size of the market. This is due to the backwardness of the economy and low purchasing power of the people. In fact, the size of Eritrea – an African country is roughly equal to that of the United Kingdom in terms of land area and size of the population. But, in terms of per capita income it is one of the poorest countries in the world with an estimated per capita income of US $ 150 per annum. Therefore, the international business houses should consider the consumers’ willingness to buy and also ability to buy the products. In fact, most of the multinational companies, which entered Indian market after 1991, failed in this respect. They viewed that almost the entire Indian population would be the customers. Therefore, they estimated that the demand for consumer durable goods would be increasing in India after globalisation. And they entered the Indian market. The heavy inflow of these goods and decline in the size of Indian middle class resulted in a slump in the demand for consumer durable goods. Therefore, the international business houses should accurately estimate the size of the customers who are willing and able to buy the products/services rather than just the size of the population of the foreign countries. u Wider Scope : Foreign trade refers to the flow of goods across national political borders. Therefore, it refers to exporting and importing by international marketing companies plus creation of demand, promotion, pricing etc. As stated earlier, international business is much broader in its scope. It involves international marketing, international investments, management of foreign exchange, procuring international finance from IMF, IBRD, IFC, IDA etc., management of international human resources, management of cultural diversity, international marketing, management of international production and logistics, international strategic management and the like. Thus, international business is broader in scope and covers all aspects of the system.] 6 ____________________________________________ International Business Environment u Inter-country Comparative Study : International business studies the business opportunities, threats, consumers’ preferences, behaviour, cultures of the societies, employees, business environmental factors, manufacturing locations, management styles, inputs and human resource management practices in various countries. International business seeks to identify, classify and interpret the similarities and dissimilarities among the systems used to anticipate demand and market products. The system presents inter- country comparison and inter-continental comparison. Comparative analysis helps the management to evaluate the markets, finances, human resources, consumers etc. of various countries. The comparative study also helps the management to evaluate the market potentials of various countries. The study also indicates the degree of consumer acceptance of the product, product changes and developments in different countries. Managements of international business houses can group the countries with similar features and design the same products, fix similar price and formulate the same marketing strategies. For example, Prentice-Hall grouped India, Nepal, Pakistan, Bangladesh, Sri Lanka etc. into one category based on the customers’ ability to pay and designed the same quality product and sold them at the same price in all these countries. Similarly,, Dr. Reddy’s Lab does the same for its products to sell in the African countries. Differences In Government Policies, Laws And Regulations Sovereign governments enact and implement the laws, and formulate and implement policies and regulations. The international business houses should follow these laws, policies and regulations. MNCs operating in India follow our labour laws, business laws and policies and regulations formulated by the Indian Government. For example, international business is required to enter into joint venture with the domestic company to enter Malaysia. Important among them include: u Host Country’s Monetary System : Countries regulate the price level, flow of money, production levels etc. through their monetary systems. In addition, they regulate foreign exchange rates also through the monetary system. The tools of monetary system include bank rate, cash reserve ratio, statutory liquidity ratio etc. Governments also regulate remittance of the profit of international business houses to other countries. International companies should obey these regulations. The Indian Government introduced full convertibility on current account; in fact, many Governments introduced full convertibility on current account as a part of economic liberalisation. u National Security Policies of the Host Countries: Every country formulates the policies for its national security. Multinational companies should abide by these national security policies. For example, USA is a free economy as far as carrying out the business compared to many other countries in the world. However, USA also imposes restrictions regarding the business operations, which affect the national security. International Business. ______________________________________________________ 7 u Cultural Factors: Cultural and custom factors vary widely from one country to another. These factors include dressing habits, eating habits; religious factors and the like (See Box 1.1). Multinational companies should consider these factors of the host country while operating in that country. For example, the culture of the Fiji people is that they attend to the family activities at least three times a day. Therefore, the companies operating in that country allow their workers to go home three times a day. (See Box 1.2) BOX 1.1 CHOICE OF EATING HABITS RESTS WITH CONSUMER Multi-national PepsiCo would like its food products classified under the “Good for you’’ category to contribute fifty per cent of its total sales. According to Indra Nooyi, President and Chief Financial Officer of PepsiCo, the company grouped its products into three categories: `Fun for you,’ which comprised products like Pepsi or Lays’; “Better for you,’’ where PepsiCo removed the perceived negative elements out of a product and in its place introduced a new one like Diet Pepsi; and “Good for you,’’ which included the Tropicana brand of juices. In an interaction with journalists of The Hindu group of publications here today, Ms. Nooyi said that at present the ‘Good for you’ and ‘Better for you’ products accounted for 35 per cent and ‘Fun for you’ products the remaining 65 per cent. Ms. Nooyi said the number of servings of the company’s products in the U.S. had been going up — “Yet, the calories we sell have been going down.’’ Companies like PepsiCo had a range of products in their portfolio, catering to different tastes of varied consumers. Observing that “the ownership of lifestyle is being transferred from individuals to corporations,’’ she said that the choice of a product should be made by consumers. “Eat what you want. Drink what you want,’’ she said. In this context, she referred to a current backlash in the U.S., where consumers asserted their right over the choice of eating habits. Source: Adapted from http://www.hindu.com/2005/04/01/stories/2005040108541600.htm BOX 1.2 IMPACT OF CULTURE OF SWITZERLAND HOUSEWIVES ON MARKETING OF DISHWASHERS In Switzerland, foreign dishwasher manufacturers expected the same rapid sales as they had first obtained in other West European markets; but sales in Switzerland were so slow that research had to be done to find out why (this research should, of course, have been done before not after market entry). The research showed that the Swiss housewife had a different set of values compared to, her French and English counterparts; she was very conscious of her role as strict and hardworking and her responsibility for the health of her family. To the Swiss housewife dishwashers simply made life easy, and this conflicted with her Calvinistic work ethic. As a result of this research, dishwasher manufacturers had to change their advertising — promoting, instead of ease and convenience, hygiene and health. They did this by emphasising that because dishwashers used temperature higher than hand-hot, the process was more hygienic than washing up by hand. Thereafter, they had no problem selling automatic dishwashers in Switzerland. Source: Edgar P. Hibbert, “International Business”, Macmillan, 1997, p. 70. 8 ____________________________________________ International Business Environment u Language : Language is an important factor in international business. Even though ‘English language’ is a major language in business operations in the world, there are still a large number of ‘non-English’ speaking countries. Therefore, international business houses should train their employees in the local language of the host country. Added to this, there would be many languages in use in many countries like ours. Therefore, the business houses should train their employees in the local languages also. u Nationalism and Business Policy : Nationalism is a dominating factor of the social life of the people of the host countries. In fact, nationalism also affects the business operations of the multinational corporations dramatically and drastically. The US people used the slogan, ‘Be American and Buy American Made’, when the US automobile industry failed to meet the competition of Japanese automobile companies operating in USA. Similar incidents are also observed in developing countries. Therefore, international business houses should be cautious of nationalism and its after effects. Changing Scenario of International Business The scenario of international business has been changing at a fast rate after 1990s. Many factors contributed to the changing scenario of international business. These factors include: u Globalization of various economies including the former communist countries and socialist pattern of societies, u Establishment of World Trade Organization on 1st January 1995 in the place of General Agreements on Trade and Tariffs, u Information technology revolution and its wider applications to business across the globe, u Higher growth rate of transport technology and consequent reduction in cost , increase in speed and efficiency, u Enlargement of European Union from 15 members to 25 members u Higher growth rate of GDP of China, India, South Korea, Singapore, Malaysia, Thailand, Brazil and Mexico. u Spread of production activities of multinational companies in the newly globalised economies in addition to the developed economies, u Increase in business alliances in degree and variety like alliances, joint ventures, mergers, amalgamations and takeovers, u Increased globalisaion of culture u Increase in educational opportunities and career-orientation among the people of developing countries particularly China and India. These factors resulted in enhancement of opportunities for higher value addition in developing countries. Consequently developing countries started attracting multinational companies to establish their manufacturing facilities in their countries. International Business. ______________________________________________________ 9 (C) FACTORS AFFECTING INTERNATIONAL BUSINESS Various economies including the former communist and socialist countries opened their economies to the rest of the globe. The shifts in globalization and international business have been at a fast rate after 1990s. The external environmental factors have been contributing significantly for the significant strides in global business. The drivers of globalization/ factors contributing to the globalisation include establishment of WTO, emergence and growth of regional integration, decline in trade barriers, decline in investment barriers, increase in FDI, technological changes and gowth of MNCs. Establishment of World Trade Organisation: Governments of the member countries of General Agreement on Trade and Tariff (GATT) concluded the Uruguay round negotiations on the 15th December, 1994. The Ministers expressed their political support to the outcome of the meeting by signing the Final Act in Marrakesh, Morocco on the 15th April 1994. According to the Marrakesh declaration, the results of the Uruguay round would, “strengthen the world economy and lead to more trade, investment, employment and income growth throughout the world.” The World Trade Organsiation was established with effect from 1st January 1995 in order to facilitate the implementation, administration and operation and further the objectives of this agreement and on the Multinational Trade Agreements and shall also provide the framework for implementation, administration and operation of the plurilateral Trade Agreements. The value of exports increased by 57% and import increased by 61% after the establishment of WTO i.e., during 1995 and 2004. Regional Integration The regional and economic integration of the countries of the same region or areas increases the size of market, aggregate demand for products and services, quantity of production, employment and ultimately the economic activity of the region. Further, the people of the region get a variety of products at comparatively lower prices. This factor, in turn, enhances the purchasing power and living standards of the people. The significant regional integrations include European Union, NAFTA and ASEAN. European Union The European Economic Community is also known as European Common Market. Originally six countries, viz., France, Federal Republic of Germany, Italy, Belgium, Netherlands and Luxembourg formed into the European Economic Community (EEC) by the Treaty of Rome, 1957.The number of member countries of the EEC increased from six to 15 by 30th April2004. The EEC by enlarging its scope and operations turned into European Union.On May 1, 2004 10 more joined 10 ____________________________________________ International Business Environment EU. Thus the membership of EU as on 30th April 2005 was 25. The EU has a common agricultural policy, common monetary policy and fisheries policy. The EU has emerged as one market from January 1, 2002 with the introduction of a common currency i.e., Euro. The political national boundaries are erased for the business and economic activities — goods, services, people and capital can move freely from one country to another of the EU. Now, the member countries do not impose any import tariffs. Import tariffs of the member countries are replaced by the community tariffs system. This factor provides easy access of total EU to the exporters. Thus, the EU could create the largest, single market by removing the obstacles for the free movement of goods, services, persons and capital among the member countries of the EEC. The single market enlarged the production, trade, income, investment and employment in all the member countries. The balance of payments position of all the member counties has become strong. European union alone accounts for 42% of the world exports (or US$ 3708 billion out of total global exports of US$ 8880 billion) and 41% of the world imports ( or US$ 3784 billion out of US$ 9215 billion) in 2004. Thus European Union contributes significantly for the globalisation of international business. NAFTA: The North American Free Trade Agreement (NAFTA) came into being on January 1, 1994. The most affluent nations of the world, i.e., the USA and Canada along with Mexico – a developing country joined together to form a trade block. A free trade agreement was signed by the USA and Canada in 1989. This was extended to Mexico in 1994. NAFTA is expected to eliminate all tariffs and trade barriers among these countries by 2009. However, internal tariffs on a large number of product categories were removed already. NAFTA has a population of 363 million and hence it is one of the significant trading areas in the globe. NAFTA countries account for 15% of the world exports (or US$ 1330 billion out of total global exports of US$ 8880 billion) and 22% of the world imports ( or US$ 2010 billion out of US$ 9215 billion) in 2004. Thus NAFTA also contributes significantly for the globalisation of international business. Similarly other regional integrations like ASEAN and SAARC also contributed for the growth of the global economy. Declining Trade Barriers Another significant driver of globalisation is the declining trade barriers. International trade occurs when the goods flow across the countries. Governments used to impose trade barriers like quotas and tariffs in order to protect domestic business from the competition of international business. Advanced countries after World War II agreed to reduce tariffs in order to encourage free flow of goods. The member countries of the General Agreement on Trade and tariff (GATT) in various rounds of negotiations agreed to reduce the tariff rates. The Uruguay round of negotiations contributed to further reduction of trade barriers and extension of GATT International Business. ______________________________________________________ 11 to cover manufactured goods and services. Consequently USA reduced the rate of tariffs from 44% in 1913 to 14% in 1950, to 4.8% in 1990 and further to3.9% in 2000. Similarly, Japan reduced the rate of tariff from 30% in 1913 to 5.3% in 1990 and to 3.9%in 2000.Thus; most of the advanced countries reduced the tariff rates to 3.9% in 2000. The growth of international trade between 1950 and 2004 was about 25-fold. These reductions in tariff and other trade barriers contributed for the growth of global trade. Declining Investment Barriers Global business firms invest capital in order to establish manufacturing and other facilities in foreign countries. Foreign governments impose barriers on foreign investment in order to protect domestic industry. But, various countries have been removing these barriers on foreign direct investment in order to encourage the growth of global business. Various governments made 1,121 changes in the laws governing foreign direct investment between 1991 and 2000. Out of these amendments, 95% were in favour of foreign direct investment. In addition, bilateral treaties increased from 181 as of 1980 to 1,856 as of 2000 among 160 countries. These treaties, which were designed to promote and protect investment among countries, enabled the fast growth of globalisation of not only trade, but also production. Consequently, the global production increased by 7-fold between 19 50 and 2004. Growth in Foreign Direct Investment The investment made by a company in new manufacturing and/or marketing facilities in a foreign country is referred to as ‘Foreign Direct Investment (FDI). There are a number of reasons for the growth of FDI in recent years. These reasons include: increase in sales and profits, enter rapidly growing markets, reduce costs, consolidate trade blocs, protect domestic markets, protect foreign markets, acquire technological and managerial know-how. FDI flows have increased dramatically during the last 25 years, with a rapid growth during 1990s.The outflow of FDI was more than 12 times after 1990s compared to that during 1970s. It increased from US$ 564 billion in 1980 to US$ 6,767 billion in 2002.The flow of FDI is expected to increase further once the world economy picks-up from its recent recession in advanced countries. Advanced countries were the major players in the flow of FDI. They were the predominant providers and recipients of FDI as 87% of FDI was provided by advanced countries and they received 65% of the FDI in 2002.It indicated that developing countries provided only 13% of total FDI and received 35% of total global FDI in 2002. USA was the largest provider as well as recipient of FDI followed by UK in 2002. Emerging economies are now receiving high FDI than what they received in 1980s. However, a few countries like China, Hong Kong, Brazil, Mexico, India and 12 ____________________________________________ International Business Environment Singapore are receiving over 50% of FDI among developing countries. Growth and spread of FDI enlarged the globalization of production and marketing. Strides in Technology Technological change is amazing and phenomenal after 1980s. In fact, it is like a revolution in case of telecommunication, information technology and transportation technology. Companies spread latest technology throughout the globe and technology itself makes the global company possible and fastens the process of globalisation. In addition, the latest developments in information technology have enabled the global company to develop into a virtual global company. Microprocessors and Telecommunications: The development of microprocessors paved the way for the growth of high-power, superior-speed low cost computing and handling vast amount of information. These have been revolutionary changes in global telecommunications consequent upon the developments in microprocessors. The development in microprocessors and telecommunications improved the speed and efficiency of co-ordinating the operations of global business firms. The Internet and World Wide Web: The internet and world wide web will be the backbone of future global business. The activities of the global companies across the globe are co-ordinated, monitored and controlled with the help of Internet. The various facilities of the Internet and World Wide Web like e-mail; voice mail, data, and real-time video communications such as video conferencing enable the global business companies to operate efficiently. For example, the executives of a new automobile company in India can visit the home page of the Japanese and US automobile companies by using www search engine and download information on product designs, specifications, models, price, service to the customers, market information etc. This new Indian automobile company can make use of the information in designing its cars and pricing them. On-line Globalisation: The companies with manufacturing facilities throughout the globe can send information regarding changes in raw material, customer preferences, changes in product designs etc., through the internet all over the globe. Even the customer enquiries and complaints can be received and redressed through Internet. Thus, the information technology enabled the globalisation process at a faster rate with more efficiency at low cost. Transportation Technology: The significant development in transportation technology reduced the distance among the countries drastically. The important developments in the transport technology include: commercial jet aircraft, super fighters, containers etc. These developments made the transshipment from one mode to another easy and reduced the travel time from one country to another drastically. International Business. ______________________________________________________ 13 Growth of Multinational Companies A multinational corporation/company is an organisation doing business in more than one country. Transnational company produces, markets, invests and operates across the world. MNCs and TNCs have been growing and spreading their operations due to market, financial and other superiorities and the expansion of international markets. USA had 185 out of 500 top MNCs in the world in 2000 followed by European Union (141) and Japan (104). Developing countries had around 35 MNCs among the top 500 MNCs in the world in 2000. MNCs also have been driving towards globalisation. (D) CHANGING SCENARIO OF INTERNATIONAL BUSINESS The above stated factors contributed for the significant change in the scenario of international business and resulted in the variations in the operations of international companies. These variations in the scenarios generally categorized into five stages viz., domestic company, international company, multinational company, global company and transnational company. Now, we study each scenario in detail. Scenario - 1 : Domestic Company Domestic company limits its operations, mission and vision to the national political boundaries. This company focuses its view on the domestic market opportunities, domestic suppliers, domestic financial companies, domestic customers etc. These companies analyse the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment. The domestic companies’ unconscious motto is that, “if it is not happening in the home country, it is not happening.” The domestic company never thinks of growing globally. If it grows, beyond its present capacity, the company selects the diversification strategy of entering into new domestic markets, new products, technology etc. The domestic company does not select the strategy of expansion/penetrating into the international markets. Scenario - 2 : International Company Some of the domestic companies, which grow beyond their production and/or domestic marketing capacities, think of internationalizing their operations. Those companies who decide to exploit the opportunities outside the domestic country are the stage two companies. These companies remain ethnocentric or domestic country oriented. These companies believe that the practices adopted in domestic business, 14 ____________________________________________ International Business Environment the people and products of domestic business are superior to those of other countries. The focus of these companies is domestic but extends the wings to the foreign countries. These companies select the strategy of locating a branch in the foreign markets and extend the same domestic operations into foreign markets. In other words, these companies extend the domestic product, domestic price, promotion and other business practices to the foreign markets. Normally internationalisation process of most of the global companies starts with this stage two process. Most of the companies follow this strategy due to limited resources and also to learn from the foreign markets gradually before becoming a global company without much risk. The international company holds the marketing mix constantly and extends the operations to new countries. Thus, the international company extends the domestic country marketing mix and business model and practices to foreign countries. Scenario - 3 : Multinational Company Sooner or later, the international companies learn that the extension strategy (i.e., extending the domestic product, price and promotion to foreign markets) will not work. The best example is that Toyota exported Toyopet cars produced for Japan in Japan to the USA in 1957. Toyopet was not successful in the USA. Toyota could not sell these cars in the USA as they were over priced, underpowered and built like tanks. Thus, these cars were not suitable for the US markets. The unsold cars were shipped back to Japan. Toyota took this failure as a rich learning experience and as a source of invaluable intelligence but not as failure. Toyota based on this experience designed new models of cars suitable for the US market. The international companies turn into multinational companies when they start responding to the specific needs of the different country markets regarding product, price and promotion. This stage of multinational company is also referred to as multidomestic. Multidomestic company formulates different strategies for different markets; thus, the orientation shifts from ethnocentric to polycentric. Under polycentic orientation the offices/branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to the country concerned. Thus, they operate like a domestic company of the country concerned in each of their markets. Philips of Netherlands was a multidomestic company of this stage during 1960s. It used to have autonomous national organisations and formulate the strategies separately for each country. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based on global strategy. Global strategy was based on focusing the company resources to serve the world market. International Business. ______________________________________________________ 15 Philips strategy was to work like a domestic company, and produce a number of models of the product. Consequently, it increased the cost of production and price of the product. But the Matsushita’s strategy was to give the value, quality, design and low price to the customer. Philips lost its market share as Matsushita offered more value to the customer. Consequently, Philips changed its strategy and created “industry main groups” in Netherlands which are responsible for formulating a global strategy for producing, marketing and R & D. Scenario - 4: Global Company A global company is the one, which has either global marketing strategy or a global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces the products globally and focuses on marketing these products domestically. Harley designs and produces super heavy weight motorcycles in the USA and markets in the global market. Similarly, Dr. Reddy’s Lab designs and produces drugs in India and markets globally. Thus, Harley and Dr. Reddy’s Lab are examples of global marketing focus. Gap procures products in the global countries and markets the products through its retail organisation in the USA. Thus, Gap is an example for global sourcing company. Harley Davidson designs and produces in the USA and gains competitive advantage as Mercedes in Germany. The Gap understands the US consumer and gets competitive advantage. Scenario - 5: Transnational Company Transnational company produces, markets, invests and operates across the world. It is an integrated global enterprise that links global resources with global markets at profit. There is no pure transnational corporation. However, most of the transnational companies satisfy many of the characteristics of a global corporation. For example, Coca-Cola, Pepsi-Cola etc. CHARACTERISTICS OF A TRANSNATIONAL COMPANY The characteristics of a transnational company include: geocentric orientation, scanning or information acquisition, long-run visions etc. We discuss these characteristics in detail. (i) Geocentric Orientation: A transnational company is geocentric in its orientation. This company thinks globally and acts locally. This company adopts global strategy but allows value addition to the customer of a domestic country. This company allows adaptation to add value to its global offer. Table 1.1 presents scenarios of international business. 16 ____________________________________________ International Business Environment The assets of a transnational company are distributed throughout the world, independent and specialised. The R & D facilities of a transnational company are spread in many countries, but specialised in each country based on the local needs and integrated in world R & D project. Similarly, the production facilities are spread but specialised and integrated. In case of Caterpillar, manufacturing and assembly facilities are located in many countries. Components are shipped for assembly and the assembled product is shipped to the place of the customer. TABLE 1.1 SCENARIOS OF INTERNATIONAL BUSINESS Stage and 1 2 3 4 5 Company Domestic International Multidomestic Global Transnational Strategy Domestic International Multidomestic Global Global Model N.A. Co-ordinated Decentralized Centralized Integrated Federation Federation Hub Network View of Home Extension National Global Global World Country or Resources and Resources Markets Markets Markets Markets Orientation Ethnocentric Ethnocentric Polycentric Mixed Geocentric Key Assets Located in Core Decentralized All in home Dispersed Home centralized, and self- country except Interdependent Country others sufficient marketing and specialized dispersed or sourcing Role of Single Adapting and Exploiting Marketing Contributions to Country Country leveraging local or sourcing company Units competencies opportunities worldwide Knowledge Home Created at Retained Marketing All functions Country centre and within developed developed jointly transferred operating jointly and and shared. units shared Source : Warren Keegen, op.cit., p. 52. Units of the transnational corporation in different countries create and develop the knowledge in all functions and share among them. Thus, knowledge and experience are shared jointly. Transnational gains power and competitive advantage by developing and sharing knowledge and experience. Development of dishwashing by using video camera by the French subsidiary of Colgate and sharing of the knowledge among all Colgate operating companies across globle is an example here. (ii) Scanning or Information Acquisition: Transnational companies collect the data and information worldwide. These companies scan the environmental information regarding economic environment, political environment, social and cultural environment and technological environment. These companies collect and scan the information regardless of geographical and national boundaries. International Business. ______________________________________________________ 17 (iii) Vision and Aspirations: The vision and aspirations of transnational companies are global, global markets, global customers and grow ahead of other global/transnational companies. (iv) Geographic Scope: The transnational companies scan the global data and information. By doing so, they analyse the global opportunities regarding the availability of resources, customers, markets, technology, research and development etc. Similarly, they also analyse the global challenges and threats like competition from other global companies, local companies of host countries, political uncertainties and the like. They formulate global strategy. Thus, the geographic scope of a transnational company is not limited to certain countries in analysing opportunities, threats and formulating strategies. (v) Operating Style: Key operations of a transnational are globalised. The transnational companies globalise the functions like R & D, product development, placing key human resources, procurement of high valued material etc. For example, the R &D activity of Proctor & Gamble, and key human resource activity of Colgate are the joint and shared activity of the units of these companies in various countries. (See Table 1.1). (vi) Adaptation: Global and transnational companies adapt their products, marketing strategies and other functional strategies to the environmental factors of the market concerned. For example, Mercedes Benz is a superluxury car in North America, luxury automobile in Germany, standard taxi in Europe. (vii) Extensions: Some products do not require any change when they are marketed in other countries. Their market is just extension. For example, Casio calculators of Japan, Hero pens of China, and BlC’s line of pens, butane lighters and razors. (viii) Creation through Extension: Transnational companies create the global brand through extending the product to the new market. Rothmans Cigarettes extended its product to many European countries and African countries and created it as global and national basis. (ix) Human Resource Management Policy: The transnational company’s human resource policy is not restricted by national, political or legal constraints. It selects the best human resources and develops them regardless of nationality, ethnic group etc. But the international company reserves the top and key positions for nationals. (x) Purchasing: Transnational company procures world-class material from the best source across the globe. The changing scenarios of international business also resulted in adopting various approaches in doing the business by the multinational companies.Now, we study the approaches to international business. 18 ____________________________________________ International Business Environment International business approaches are similar to the stages of internationalisation or globalisation. Douglas Wind and Pelmutter advocated four approaches of international business. They are: 1. Ethnocentric Approach 2. Polycentric Approach 3. Regiocentric Approach 4. Geocentric Approach. 1. Ethnocentric Approach : The domestic companies normally formulate their strategies, their product design and their operations towards the national markets, customers and competitors. But, the excessive production more than the demand for the product, either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. The domestic company continues the exports to the foreign countries and views the foreign markets as an extension to the domestic markets just like a new region. The executives at the head office of the company make the decisions relating to exports and, the marketing personnel of the domestic company monitor the export operations with the help of an export department. The company exports the same product designed for domestic markets to foreign countries under this approach. Thus, maintenance of domestic approach towards international business is called ethnocentric approach. Fig. 1.2 makes the ethnocentric concept clearer. Managing Director Manager Manager Manager Manager Manager Human R&D Finance Production Marketing Resources Assistant Assistant Assistant Manager Manager Manager North India South India Exports Fig. 1.2 : Organisation Structure of Ethnocentric Company This approach is suitable to the companies during the early days of internationalisation and also to the smaller companies. 2. Polycentric Approach : The domestic companies which are exporting to foreign countries using the ethnocentric approach find at the latter stage that the foreign markets need an altogether different approach. (See Fig. 1.3). Then, the company establishes a foreign subsidiary company and decentralises all the operations and delegates decision-making and policy making authority to its International Business. ______________________________________________________ 19 executives. In fact, the company appoints executives and personnel including a chief executive who reports directly to the Managing Director of the company. Company appoints the key personnel from the home country and all other vacancies are filled by the people of the host country. Managing Director CEO2 Foreign Subsidiary (Uganda) Manager Manager Manager Manager Manager R&D Finance Production Human Resources Marketing Fig. 1.3 : Organisation Structure of Polycentric Company The executives of the subsidiary formulate the policies and strategies, design the product based on the host country’s environment (culture, customs, laws, government policies etc.) and the preferences of the local customers. Thus, the polycentric approach mostly focusses on the conditions of the host country in policy formulation, strategy implementation and operations. 3. Regiocentric Approach The company after operating successfully in a foreign country, thinks of exporting to the neighbouring countries of the host country. At this stage, the foreign subsidiary considers the regional environment (for example, Asian environment like laws, culture, policies etc.) for formulating policies and strategies. However, it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies. (See Fig. 1.4). Managing Director CEO, Subsidiary South Africa Marketing Marketing Marketing (Lesotho) (Botswana) (Namibia) Manager Manager Manager Manager Manager R&D Finance Production Human Resources Marketing Fig. 1.4 : Organisation Structure of Regiocentric Company 20 ____________________________________________ International Business Environment 4. Geocentric Approach : Under this approach, the entire world is just like a single country for the company. They select the employees from the entire globe and operate with a number of subsidiaries. The headquarters coordinate the activities of the subsidiaries. Each subsidiary functions like an independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc. Figure 1.5 helps to understand the concept of geocentric approach clearly. Managing Director Headquarters India Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary India Namibia Kenya Lesotho South Africa Fig. 1.5 : Organisation Structure of Geocentric Company Goals of International Business We have discussed the characteristic features of international business and the precautions that the multinational companies should take while operating in foreign countries. Now, we study the factors affecting international business. u To achieve Higher Rate of Profits : As we have discussed in various courses/subjects like Principles and Practice of Management, Managerial Economics and Financial Management that the basic objective of the business firms is to earn profits. When the domestic markets do not promise a higher rate of profits, business firms search for foreign markets that hold promise for higher rate of profits. Thus the objective of profit affects and motivates the business to expand its operations to foreign countries. For example, Hewlett Packard earned 85.4% of its profits from the foreign markets compared to that of domestic markets in 1994. Apple earned US $ 390 million as net profit from the foreign markets and only US $ 310 millions as net profit from its domestic market in 1994. u Expanding the Production Capacities beyond the Demand of the Domestic Country : Some of the domestic companies expanded their production capacities more than the demand for the product in the domestic countries. These companies, in such cases, are forced to sell their excess production in foreign developed countries. Toyota of Japan is an example. (See Box 1.3 for Economies of Developed Countries). u Severe Competition in the Home Country : The countries oriented towards market economies since 1960s experienced severe competition from other business firms in the home countries. The weak companies which International Business. ______________________________________________________ 21 could not meet the competition of the strong companies in the domestic country started entering the markets of the developing countries. BO BOX 1.3 THE ECONOMIES OF DEVELOPED COUNTRIES United States : In the US, the rate of growth of Gross Domestic Product (GDP) rose by 2.6 per cent in the second quarter of 1996 over the corresponding period of 1995 — much higher than the first quarter growth rate of 1.7 per cent. Recent data present a contradictory picture. While some surveys point to a stronger rate of growth of industrial production in the third quarter of 1996, the growth rate of durable goods orders fell by 0.8 per cent between May and June 1996. Canada : The Canadian economy’s growth rate is likely to pick up in 1996. An index of business confidence shows higher real spending on machinery and equipment in the first half of 1996, reflecting a high level of producer confidence. On the consumption side, however, the picture is less promising. Japan : In recent months, the prospects of a sustained recovery in Japan have improved although the Economic Planning Agency has warned that the recovery is still fragile, and that expansionary trends have yet to be confirmed. Recently, there have been increasing signs of an upturn in private consumption, led by improving job opportunities and rising wages. Australia : Despite stronger-than-expected economic growth in the first quarter of 1996, the Reserve Bank of Australia (RBOA) lowered the cash rate by 0.5 per cent to 7 per cent in end-July 1996. The governor of the RBOA said that the lower, and declining, rate of growth of wages suggested that economic growth had fallen below its potential levels. Moreover, recent indicators of consumer spending point to a softer private consumption growth rate in the second quarter of 1996 while excess capacity and high inventories suggest that industrial production growth is likely to remain depressed over the next few months. Source: Adapted from Business Today, August 7-21, 1996, pp. 48-49. u Limited Home Market : When the size of the home market is limited either due to the smaller size of the population or due to lower purchasing power of the people or both, the companies internationalise their operations. For example, most of the Japanese automobile and electronic firms entered US, Europe and even African markets due to the smaller size of the home market. ITC entered the European market due to the lower purchasing power of the Indians with regard to high quality cigarettes. Similarly, the mere six million population of Switzerland is the reason for Ciba-Geigy to internationalise its operations. In fact, this company was forced to concentrate on global market and establish manufacturing facilities in foreign countries. 22 ____________________________________________ International Business Environment u Political Stability vs Political Instability : Political stability does not simply mean that continuation of the same party in power, but it does mean that continuation of the same policies of the Government for a quite longer period. It is viewed that USA is a politically stable country. Similarly, UK, France, Germany, Italy and Japan are also politically stable countries. Most of the African countries and some of the Asian countries are politically instable countries. Business firms prefer to enter the politically stable countries and are restrained from locating their business operations in politically instable countries. In fact, business firms shift their operations from politically instable countries into politically stable countries. u Availability of Technology and Competent Human Resources : Availability of advanced technology and competent human resource in some countries act as pulling factors for business firms from the home country. The developed countries due to these reasons attract companies from the developing world. In fact, American and European companies, in recent years, depended on Indian companies for software products and services through their business process outsourcing (BPO). (See Box 1.4) BO BOX 1.4 INDIAN SOFTWARE INDUSTRY: SOURCES FOR US AND EUROPEAN BUSINESS Indian government followed protectionist policies since independence. However, the 1990’s foreign exchange crisis led to globalization of Indian economy coupled with the information technology revolution. India’s education system has been highly successful in producing well qualified engineering, medical and management graduates and scientists. India is currently producing more than 2.5 million graduates a year including around 120,000 IT related programs. India’s middle-income group is highly educated in IT related programs, biotechnology, medicine, pharmaceutical and management. India’s top educational institutions are world-class educational institutions. In addition, 50 percent of the India’s current population is in the age group of 25-30, which is highly energetic. Added to this, this group of young people is highly endowed with challenging and competitive attitudes. India is the largest English speaking country in the world. The cost of professionals in India is 10 to 15 times less compared to US and European labour markets. These factors helped Indian software industry to grow at a faster rate with world-class standards. Added to this, satellite communications help Indian business to serve the global business without going globally. As such software firms and other companies around the world depend on India by outsourcing some of their business operations. India’s software exports were US$ 6 billion in 2000. They have grown to a new high an dcould exceed targets set fro the next few years. International Business. ______________________________________________________ 23 u High Cost of Transportation : Initially companies enter foreign countries through their marketing operations. At this stage, the companies realise the challenge from the domestic companies. Added to this, the home companies enjoy higher profit margins whereas the foreign firms suffer from lower profit margins. The major factor for this situation is the cost of transportation of the products. Under such conditions, the foreign companies are inclined to increase their profit margin by locating their manufacturing facilities in foreign countries where there is enough demand either in one country or in a group of neighbouring countries. For example, Mobil which was supplying the petroleum products to Ethiopia, Kenya, Eritrea, Sudan etc., from its refineries in Saudi Arabia, established its refinery facilities in Eritrea in order to reduce the cost of transportation. Similarly, Caterpillar located its manufacturing facilities at different centres in order to reduce the cost of transportation. This company produces high-value-added parts in limited locations and less valued and non-critical components and assembles the final products in a number of foreign countries. u Nearness to Raw Materials : The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting the companies from various foreign countries. Most of the US based and European based companies located their manufacturing facilities in Saudi-Arabia, Bahrain, Qatar, Oman, Iran and other middle east countries due to the availability of petroleum. Theses companies, thus, reduced the cost of transportation. u Availability of Quality Human Resources at Less Cost : This is a major factor, in recent times, for software, high technology and telecommunication companies to locate their operations in India. India is a major source for high quality and low cost human resources unlike USA, developed European countries and Japan. Importing human resources from India by these firms is costly rather than locating their operations in India. Hence, these companies started their operations in India, China and Thailand. u Liberalisation and Globalisation : Most of the countries in the globe liberalised their economies and opened their countries to the rest of the globe. These changed policies attracted the multinational companies to extend their operations to these countries. u To Increase Market Share : Some of the large-scale business firms would like to enhance their market share in the global market by expanding and intensifying their operations in various foreign countries. Companies that expand internally tend to be ‘oligopolistic’. Smaller companies expand internationally for survival while the larger companies expand to increase 24 ____________________________________________ International Business Environment the market share. For example, Ball Corporation, the third largest beverage cans manufacturer in USA, bought the European packaging operations of Continental Can Company. Then it expanded its operations to Europe and met the Europe demand which is 200 per cent more than that of USA. Thus, it increased its global market share of soft drink cans. u To Achieve Higher Rate of Economic Development : International business helps the governments to achieve higher growth rate of the economy, increase the total and per capita GDP, industrial growth, employment and income levels. (See Box 1.5) BOX 1.5 INTERNATIONAL BUSINESS : CONTRAST IN ECONOMIC DEVELOPMENT OF SOUTH KOREA AND GHANA Ghana attained independence from U.K. in 1957 and adopted Socialism Government established state owned enterprises including Cocoa Marketing Board. Ghana followed a policy of self dependency policy. Ghana had the natural advantage in producing Coca and it is the world’s largest exports of Cocoa before 1957. The Cocoa Marketing Board used to purchase Cocoa from formers at price almost equal to 50% of world’s price and at sell in the global market. Farmers switched over to food crops due to less price offered by the Cocoa Marketing Board. Consequently, the country’s exports and foreign exchange reserves declined by 1980s. Country faced with recession since 1990s. As such the annual per capita income increased from US $ 250 1970 to only US $ 390 in 1998. In contrast, South Korea whose annual per capita income was more or less equal to that of Ghana in 1970 i.e., US $ 260. Significantly increased to US $ 8,600 in 1998. The reasons for this miracle development of South Korea include: following free trade policies, reduction in tariffs and quotas, reduction in export subsidies, developing the educational facilities, shift of the economy from agriculture sector to industrial sector, shift from labour intensive industry to capital intensive industry, creation of competition among business and encouraging the business to export. Thus the closed economic policy of Ghana led it to a poor country and opened economic policy of South Korea led it to a fast advanced country. Source : Adapted from “Poor Man’s Burden” A Survey of the Third World, September 23, 1989, World Bank, World Development Report, 2000, Oxford University Press 2000 and Charles W.L. Hill, “International Business”, Tata Mc Graw-Hill, New Delhi, 2003, pp. 137-138. u Tariffs and Import Quotas : It was quite common before globalisation that governments imposed tariffs or duty on imports to protect the domestic company. Sometimes Government also fixes import quotas in order to reduce the competition to the domestic companies from the competent foreign companies. These practices are prevalent not only in developing countries but also in advanced countries. International Business. ______________________________________________________ 25 For example, Japanese companies are tough competitors to the US companies. USA imposed tariffs and quotas for import of automobiles and electronics from Japan. Harley-Davidson of USA sought and got five years of tariffs protection from Japanese imports. Similarly, Japan places high tariffs on imports of rice and other agricultural goods from the USA. To avoid high tariffs and quotas, companies prefer direct investment to go globally. For example, companies like SONY, Honda and Toyota preferred direct investment in various countries by establishing subsidiaries or through joint ventures in various foreign countries including the USA and India. Similarly, General Electricals and Whirlpool also have foreign subsidiaries. Xerox, Canon, Philips, Unilever, Lucky Gold Star, South Korean Electronics Company, Pepsi, Coca-Cola, Shell, Mobil etc. established manufacturing facilities in various foreign countries in order to avoid tariffs, import duties and quotas. Having discussed the need for international business, we shall discuss the stages of international business. (E) ADVANTAGES OF INTERNATIONAL BUSINESS So far, we have discussed the basis for international business by studying the theories. You might have observed the competitive advantages which are derived from this analysis. For example, the comparative cost theory concludes that the countries can specialise in producing certain products in which they have the competitive advantage of producing at low cost. It does mean that the customers in all the countries can have the goods at low price. Now, shall we discuss the competitive advantages of international business: u High Living Standards : Comparative cost theory indicates that the countries which have the advantage of raw materials, human resources, natural resources and climatic conditions in producing particular goods can produce the products at low cost and also of high quality. Customers in various countries can buy more products with the same amount of money. In turn, it can also enhance the living standards of the people through enhanced purchasing power and by consuming high quality products. u Increased Socio-Economic Welfare : International business enhances consumption level, and economic welfare of the people of the trading countries. For example, the people of China are now enjoying a variety of products of various countries than before as China has been actively involved in international business like Coca-Cola, McDonald’s range of products, electronic products of Japan and coffee from Brazil. Thus, the Chinese consumption levels and socio-economic welfare are enhanced. 26 ____________________________________________ International Business Environment u Wider Market : International business widens the market and increases the market size. Therefore, the companies need not depend on the demand for the product in a single country or customer’s tastes and preferences of a single country. Due to the enhanced market the Air France, now, mostly depends on the demand for air travel of the customers from countries other than France. This is true in case of most of the MNCs like Toyota, Honda, Xerox and Coca-Cola. u Reduced Effects of Business Cycles : The stages of business cycles vary from country to country. Therefore, MNCs shift from the country, experiencing a recession to the country experiencing ‘boom’ conditions. Thus, international business firms can escape from the recessionary conditions. u Reduced Risks : Both commercial and political risks are reduced for the companies engaged in international business due to spread in different countries. Multinationals which were operating in erstwhile USSR were affected only partly due to their safer operations in other countries. But the domestic companies of then USSR collapsed completely. u Large-Scale Economies : Multinational companies due to the wider and larger markets produce larger quantities, which provide the benefit of large- scale economies like reduced cost of production, availability of expertise, quality etc. u Potential Untapped Markets : International business provides the chance of exploring and exploiting the potential markets which are untapped so far. These markets provide the opportunity of selling the product at a higher price than in domestic markets. For example, Bata sells shoes in the UK at £ 100 (Rs. 7,000) whose price is around Rs. 700 in India. u Provides the Opportunity for and Challenge to Domestic Business : International business firms provide the opportunities to the domestic companies. These opportunities include technology, management expertise, market intelligence, product developments etc. For example, Japanese firms operating in the US provide these opportunities to the US companies. This is more evident in the case of developing countries like India, African countries and Asian countries. Similarly, the MNCs pose challenges to the domestic business initially. Domestic firms develop themselves to meet these challenges. Thus, the opportunities and challenges help the domestic companies to develop. Maruti helped Telco to come up with Tata Indica. Foreign Universities helped IIMs, IITs and Indian Universities to enhance their curricula. u Division of Labour and Specialisation : As mentioned earlier, international business leads to division of labour and specialisation. Brazil specialises in coffee, Kenya in tea, Japan in automobiles and electronics, India in textile garments etc. International Business. ______________________________________________________ 27 u Economic Growth of the World : Specialisation, division of labour, enhancement of productivity, posing challenges, development to meet them, innovations and creations to meet the competition lead to overall economic growth of the world nations. International business particularly helped the Asian countries like Japan, Taiwan, Korea, Philippines, Singapore, Malaysia, and the United Arab Emirates. u Optimum and Proper Utilisation of World Resources : International business provides for the flow of raw materials, natural resources and human resources from the counties where they are in excess supply to those countries which are in short supply or need most. For example, flow of human resources from India, consumer goods from the UK, France, Italy and Germany to developing countries. This, in turn, helps in the optimum and proper utilisation of world resources. u Cultural Transformation : International business benefits are not purely economical or commercial, they are even social and cultural. These days, we observe that the West is slowly tending towards the East and vice versa. It does mean that the good cultural factors and values of the East are acquired by the West and vice versa. Thus, there is a close cultural transformation and integration. u Knitting the World into a Closely Interactive Traditional Village : International business, ultimately knits the global economies, societies and countries into a closely interactive and traditional village where one is for all and all are for one. Competitive advantage in a Global Setting According to Pitts and Snow, competitive advantage is, “any feature of a business firm that enables it to earn a higher return on investment, despite counter pressure from competitors.” They view that competitive advantage is gained at the corporate level through synergy and strategic business unit level through market share. Large size of the business firms can grow further by entering into new markets of various countries. Large firms have the following advantages: u Large-scale economies like low cost of production, effective utilisation of resources, appointment of specialists and experts etc. u Ability to expand and diversify its activities. u Ability to bear political and commercial risks. u Paying less rate of interest to its creditors and underwriters. u Ability to bargain with the suppliers of inputs and achieve the agreement at favourable terms for the company. u Providing customer services efficiently and economically. u Paying less taxes to the Government by shifting the funds from one business to another. 28 ____________________________________________ International Business Environment u Use portfolio planning to have synergistic advantage by allocating more resources to those portfolios/products which have high market demand and by reducing the resources to those products/portfolios with low market demand. In other words, the company reduces or stops further investment in dogs, diverts the income from cash cows to problem children and/or star portfolios. Further, business firms can get the competitive advantage from the following sources: u Economies of Scale: Companies can get the economies of scale through division of labour, specialisation, automation, rationalisation, computerisation, forward integration and backward integration. u Latest Technology: Companies can adopt the latest technology either on their own and/or through joint-ventures. u Human Resources: Highly committed, skilled, and innovative human resources, employees with positive attitude and high emotional quotient would also enhance the competitive advantage to the company. u Continuous upgradation of employees through learning and training. u Computer-Aided design, production process, e-commerce, business process re-engineering and enterprise resource planning would also be sources for competitive advantage. u Product and process innovation and development. u Employees with diversified culture and cultural collaboration. u Continuous organisational learning, capacity building and upgradation. u Acquiring market power to understand, monitor and control suppliers of inputs, customers, dealers or market intermediaries and competitors. u Cheap sources of raw materials, finance etc., in various foreign countries. u Changing and varying tastes and preferences of customers at varying degrees across the globe. u Different levels of economic development, social and cultural development, technological development of world countries. u Mobility of labour force across the globe. (F) PROBLEMS OF INTERNATIONAL BUSINESS As is said that, “life is not a bed of roses”, international business is not all that lovely. It has its problems. The important problems include: u Political Factors: Political instability is the major factor that discourages the spread of international business. For example, in the Iran-Iraq war, International Business. ______________________________________________________ 29 Iraq-Kuwait war, dismantling of erstwhile USSR, Civil War in Fiji, Malaysia, and Sri Lanka, military coups in Pakistan, Afghanistan, frequent changes in political parties in power and thereby changes in government policies in India etc., created political risks for the growth of international business. Also, latest Indo-Pak Summit at Agra in July, 2001 ended in a no compromise situation, which affected international business. However, the business people from India and Pakistan are planning to develop trade links between the countries (See Box 1.6). BOX 1.6 INDO-PAK CEO’S FORUM FOR ENHANCING TIES A day after its launch, the India-Pakistan CEO’s Forum on 15th September 2003, said it has identified trade and investment, manufacturing, services and communications as the four key initiative areas for enhancing trade between the two countries. “The CEO forum is an institution-building exercise by the thought leaders of the two countries. The forum is involved in building a more positive trade scenario in the region and will act as a base camp to improve relations between the two neighbours,” Confederation of Indian Industry (CII) president Anand Mahindra said. He said the Forum aimed at building a congenial atmosphere to exploit the trade potential between the two countries. Amin Hashwani, leader of visiting Pakistan delegation and the co-chairperson of the forum emphasized the need to restore rail and air links between India and Pakistan. Source: News Times, 17th September 2003 u Huge Foreign Indebtedness: The developing countries with less purchasing power are lured into a debt trap due to the operations of MNCs in these countries. For example, Mexico, Brazil, Poland, Romania, Kenya, Congo, and Indonesia. u Exchange Instability: Currencies of countries are depreciated due to imbalances in the balance of payments, political instability and foreign indebtedness. This, in turn, leads to instability in the exchange rates of domestic currencies in terms of foreign currencies. For example, Zambia, India, Pakistan, Philippines depreciated their currencies many times. This factor discourages the growth of international business (See Box 1.7). u Entry Requirements: Domestic governments impose entry requirements to multinationals. For example, an MNC can enter Eritrea only through a joint-venture with a domestic company. However, with the establishment of World Trade Organisation (WTO), many entry requirements by the host governments are dispensed with. u Tariffs, Quotas and Trade Barriers : Governments of various countries impose tariffs, import and export quotas and trade barriers in order to protect domestic business. Further, these barriers are imposed based on the political 30 ____________________________________________ International Business Environment and diplomatic relations between or among Governments. For example, China, Pakistan and USA (before 1998) imposed tariffs, quotas and barriers on imports from India. But the erstwhile USSR and present Russia liberalised imports from India. BOX 1.7 IMPACT OF ASIAN CRISIS ON GLOBAL BUSINESS Almost everyone, particularly those living in Asia, knows that the year 1998 was bad, economically speaking. And now you can put a statistical handle