International Business Management BBA Sem-V PDF

Gratulent Publications UNIT - I INTRODUCTION TO INTERNATIONAL BUSINESS DEFINITION OF INTERNATIONAL BUSINESS International business includes any type of business activity that crosses national borders. Though a number of definitions in the business literature can be found but no simple or universally accepted definition exists for the term international business. International business is defined as organization that buys and/or sells goods and services across two or more national boundaries, even if management is located in a single country. International business is equated only with those big enterprises, which have operating units outside their own country. In its traditional form of international trade and finance as well as its newest form of multinational business operations, international business has become massive in scale and has come to exercise a major influence over political, economic and social from many types of comparative business studies and from a knowledge of many aspects of foreign business operations. In fact, sometimes the foreign operations and the comparative business are used as synonymous for international business. Foreign business refers to domestic operations within a foreign country. Comparative business focuses on similarities and differences among countries and business systems for focuses on similarities and differences among countries and business operations and comparative business as fields of enquiry do not have as their major point of interest the special problems that arise when business activities cross national boundaries. For example, the vital question of potential conflicts between the nation-state and the multinational firm, which receives major attention is international business, is not like to be centered or even peripheral in foreign operations and comparative business. All countries need goods and services to satisfy wants of their people. Production of goods and services requires resources. Every country has only limited resources. No country can produce all the goods and services that it requires. It has to buy from other countries what it cannot produce or can produce less than its requirements. Similarly, it sells to other countries the goods which it has in surplus quantities. India too, buys from and sells to other countries various types of goods and services. Generally no country is self-sufficient. It has to depend upon other countries for importing the goods which are either non-available with it or are available in insufficient quantities. Similarly, it can export goods, which are in excess quantity with it and are in high demand outside. International trade means trade between the two or more countries. International trade involves different currencies of different countries and is regulated by laws, rules and regulations of the concerned countries. Thus, International trade is more complex. International or Foreign trade is recognized as the most significant determinants of economic development of a country, all over the world. The foreign trade of a country consists of inward (import) and outward (export) movement of goods and services, which results into. outflow and inflow of foreign exchange. Thus it is also called EXIM Trade. Reasons takes place on account of International trade  Human wants and countries’ resources do not totally coincide. Hence, there tends to be interdependence on a large scale.  Factor endowments in different countries differ.  Technological advancement of different countries differs. Thus, some countries are better placed in one kind of production and some others superior in some other kind of production.  Labour and entrepreneurial skills differ in different countries. Importance of international business 1. Earn foreign exchange: International business exports its goods and services all over the world. This helps to earn valuable foreign exchange. This foreign exchange is used to pay for imports. Foreign exchange helps to make the business more profitable and to strengthen the economy of its country. 1 Gratulent Publications 2. Optimum utilization of resources: International business makes optimum utilization of resources. This is because it produces goods on a very large scale for the international market. International business utilizes resources from all over the world. It uses the finance and technology of rich countries and the raw materials and labour of the poor countries. 3. Achieve its objectives: International business achieves its objectives easily and quickly. The main objective of an international business is to earn high profits. This objective is achieved easily. This it because it uses the best technology. It has the best employees and managers. It produces high-quality goods. It sells these goods all over the world. All this results in high profits for the international business. 4. To spread business risks: International business spreads its business risk. This is because it does business all over the world. So, a loss in one country can be balanced by a profit in another country. The surplus goods in one country can be exported to another country. Thesurplus resources can also be transferred to other countries. All this helps to minimise the business risks. 5. Improve organization’s efficiency: International business has very high organization efficiency. This is because without efficiency, they will not be able to face the competition in the international market. So, they use all the modern management techniques to improve their efficiency. They hire the most qualified and experienced employees and managers. These people are trained regularly. They are highly motivated with very high salaries and other benefits such as international transfers, promotions, etc. All this results in high organizational efficiency, i.e. low costs and high returns. 6. Get benefits from Government: International business brings a lot of foreign exchange for the country. Therefore, it gets many benefits, facilities and concessions from the government. It gets many financial and tax benefits from the government. 7. Expand and diversify: International business can expand and diversify its activities. This is because it earns very high profits. It also gets financial help from the government. 8. Increase competitive capacity: International business produces high-quality goods at low cost. It spends a lot of money on advertising all over the world. It uses superior technology, management techniques, marketing techniques, etc. All this makes it more competitive. So, it can fight competition from foreign companies. Nature and characteristics or features of international business are:- 1. Large scale operations: In international business, all the operations are conducted on a very huge scale. Production and marketing activities are conducted on a large scale. It first sells its goods in the local market. Then the surplus goods are exported. 2. Integration of economies: International business integrates (combines) the economies of many countries. This is because it uses finance from one country, labor from another country, and infrastructure from another country. It designs the product in one country, produces its parts in many different countries and assembles the product in another country. It sells the product in many countries, i.e. in the international market. 3. Dominated by developed countries and MNCs: International business is dominated by developed countries and their multinational corporations (MNCs). At present, MNCs from USA, Europe and Japan dominate (fully control) foreign trade. This is because they have large financial and other resources. They also have the best technology and research and development (R & D). They have highly skilled employees and managers because they give very high salaries and other benefits. Therefore, they produce good quality goods and services at low prices. This helps them to capture and dominate the world market. 4. Benefits to participating countries: International business gives benefits to all participating countries. However, the developed (rich) countries get the maximum benefits. The developing (poor) countries also get benefits. They get foreign capital and technology. They get rapid industrial development. They get more employment opportunities. All this results in economic development of the developing countries. Therefore, developing countries open up their economies through liberal economic policies. 2 Gratulent Publications 5. Keen competition: International business has to face keen (too much) competition in the world market. The competition is between unequal partners i.e. developed and developing countries. In this keen competition, developed countries and their MNCs are in a favourable position becausethey produce superior quality goods and services at very low prices. Developed countries also have many contacts in the world market. So, developing countries find it very difficult to face competition from developed countries. 6. Special role of science and technology: International business gives a lot of importance to science and technology. Science and Technology (S & T) help the business to have large-scale production. Developed countries use high technologies. Therefore, they dominate globalbusiness. International business helps them to transfer such top high-end technologies to the developing countries. 7. International restrictions: International business faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments do not allow international businesses to enter their countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is harmful to international business. 8. Sensitive nature: The international business is very sensitive in nature. Any changes in the economic policies, technology, political environment, etc. have a huge impact on it. Therefore, international business must conduct marketing research to find out and study these changes. They must adjust their business activities and adapt accordingly to survive changes. REASONS FOR THE EMERGENCE OF INTERNATIONAL BUSINESS:  To achieve higher rate of profits:The basic objective of the business firm is to earn profit. The domestic markets do not promise a higher rate of profits. Business firms search for foreign market which hold promise for higher rate of profits. Thus, the objective of profits affects and motivates the business to expand its operations to foreign countries.  Expanding the production capacity:Domestic companies expanded their production capacities more than the demand for product in domestic countries. In such cases, these companies are forced to sell their excessive production in foreign developed market.  Severe competition in home country:The countries oriented towards market economies since 1960’s, experience severe competition from other business firm in the home country. The weak companies which could not meet the domestic countries started entering the markets of developing countries.  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 internationalize their operations.  Political Stability v/s Political Instability: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 the operations from politically instable countries to the politically stable countries.  Availability of Technology and Managerial Competency:Availability of advanced technology and competent human resource in some countries acts as pulling factors for business firms from the home country. The developed countries due to these reasons attract companies from developing world. In fact, American and European countries depend on Indian Companies for software products and services through their BPO’s.  High cost of transportation:Initially companies enter foreign countries through their marketing operations. At this stage, the companies realize the challenge from the domestic companies. Added to this, the home companies enjoy higher rate of profit margins whereas the foreign firms suffer from lower profit margins. The major factor for this situation is the cost of transportation,Under such conditions, the foreign companies are inclined to increase their profit margin by locating their manufacturing unit in foreign countries where there is enough demand either in one country or in a group of neighbouring countries. 3 Gratulent Publications  Nearness to Raw materials:The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting the companies from the various foreign countries. Most of the US based companies open their manufacturing unit in Middle East countries due to the availability of petroleum. These companies, thus, reduces the cost of transportation.  Availability of Quality HR at less cost:This is the 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 and other developed countries.  Liberalization and Globalization:Most of the countries in the globe liberalized their economies and opened their countries tothe rest of the globe. These changed policies attracted the multinational companies to extend their operations to these countries.  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.  To achieve higher rate of economic development:International Business helps the governments to achieve higher growth rate of the economy, increases the total and per-capita income, GDP, industrial growth, employment and income levels. Limitations: 1. Political Factors: Political instability is the major factor that discourages the spread of international business. 2. 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. 3. 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. 4. Entry Requirements: Domestic governments impose entry requirements to multinational. 5. Tariff Quotas and Trade Barriers: Governments of various countries impose tariffs, import and export barriers in order to protect the domestic business. Further these barriers are imposed based on the political and diplomatic relations between or among various governments. 6. Corruption: Corruption has become an international phenomenon. The higher rate bribes and kickbacks discourage the foreign investors to expand their operations. 7. Bureaucratic Practices of Government: Bureaucratic attitudes and practices of government delay sanctions, grants permission and licenses to foreign companies. 8. Technological Pirating: Copying the original technology, producing imitative products, imitating other areas of businessoperations were common in Japan. This practices invariably alarms the foreign companies against expansion. 9. Quality maintenance: International business firms have to meticulously maintain quality of the products based on quality norms of each country. The firms have to face severe consequences, if they fail to conform to the country standards. 10. High Cost: Internationalizing the domestic business involves market survey, product improvement, qualityup gradation, managerial efficiency and the like. These activities need larger investments and involve higher cost and risk. Hence, most of the business houses refrain themselves from internationalizing their business. FACTORS AFFECTING INTERNATIONAL BUSINESS Impact of Inflation: Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. 4 Gratulent Publications If a country’s inflation rate increases relative to the countries with which it trades, its current account will be expected to decrease. Consumers and corporations in that country will most likely purchase more goods overseas (due to high local inflations), while the country’s exports to other countries will decline. Impact of National Income: The total amount of income accruing to a country from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits. If a country’s income level (national income) increases by a higher percentage than those of other countries, its current account is expected to decrease. Impact of Government Restrictions: Government will impose some trade restrictions on certain products for health and safety reasons. Government restricts international trade to protect domestic producers from competition by using main tools:  Tariffs;  Subsidies;  Quotas  Tariffs: A tariff is a tax that is imposed by the importing country when an imported good crosses its international boundary.  Subsidy: A subsidy is a payment made by a government to a domestic producer based on the quantity produced.  Quota: A quota is a limit on the quantity of a good that may be imported. Impact of Exchange Rates: The price of a nation’s currency in terms of another currency. An exchange rate thus has 2 components:  Domestic Currency and  Foreign Currency, and can be quoted either directly or indirectly.  In direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency.  In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency. Geographical Location: The geographical location of the trading country’s also affect the international trade. The ease of transportation, climate, presence of coastal areas etc. Competitiveness: Competitiveness is a measure of the relative ability of different countries to provide different products or services. Competitiveness takes into account the efficiency, costs of employment, level of government regulation and the ease of doing business. Globalization: It is a general tendency for national economies to become more integrated with each other. This happens because of a combination of advanced communication technologies, logistic technologies, increased capital flows and reduction of trade barriers by national governments. Tariff and Non-tariff barriers INTRODUCTION Trade barriers are restrictions imposed on the movement of goods between countries (import and export). The major purpose of trade barriers is to promote domestic goods than exported goods, and there by safeguard the domestic industries. Trade barriers can be broadly divided into tariffbarriers and non-tariff barriers. 5 Gratulent Publications Tariff Barriers Term tariff means ‘Tax’ or ‘duty’. Tariff barriers are the ‘tax barriers’ or the ‘monetary barriers’ imposed on internationally traded goods when they cross the national borders. Major tariff barriers: Specific duty: It is based on the physical characteristics of the good. A fixed amount of money can be levied on each unit of imported goods regardless of its price. Ad Valorem tariffs: The Latin phrase ‘ad valorem’ means “according to the value”. This tax is flexible and depends upon the value or the price of the commodity. Combined or compound duty: It is a combination of specific and ad valorem duty on a single product, for instance, there can be a combined duty when 10% of value (ad valorem)and 1$ per kilogram(specific tax) are charged on metal M. Sliding scale duty: The duty which varies along with the price of the commodity is known asliding scale duty or seasonal duties. These duties are confined to agricultural products, as their prices frequently vary because of natural and other factors. Revenue tariff: A tariff which is designed to provide revenue or income to the home government is known as revenue tariff. Generally this tariff is imposed with a view of earning revenue by imposing duty on consumer goods, particularly on luxury goods whose demand from the rich is inelastic. Anti –dumping duty: At times exporters attempt to capture foreign markets by selling goods at rock-bottom prices, such practice is called dumping. As a result of dumping, domestic industries find it difficult to compete with imported goods. To offset anti-dumping effects, duties are levied in addition to normal duties. Protective tariff: In order to protect domestic industries from stiff competition of imported goods, protective tariff is levied on imports. Normally a very high duty is imposed, so as to either discourage imports or to make the imports more expensive as that of domestic products. Classification of tariff on the basis of trade relationship: Single column tariff: here the tariff rates are fixed for various commodities and the same rates are charged for imports from all countries. Tariff rates are uniform for all countries and discrimination between importing countries is not made. Double column tariff: here two rates of tariff on all or some commodities are fixed. The lower rate is made applicable to a friendly country or the country with which bilateral trade agreement is entered into. The higher rate is made with all other countries. Triple column: here 3 rates are fixed. They are: general rate, international rate, preferential rate. The first two are similar to lower and higher rates while the preferential rate is substantially lower than the general rate and is applicable to friendly countries with trade agreement or with close trade relationship. Non-Tariff Barriers Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports, but are unlike the usual form of a tariff; And Tariff Barriers restricts Exports. Some common examples of NTB’s are anti-dumping measures and countervailing duties, which, although called non-tariff barriers. Example of Tariff Barrier is Export Duty. Non Tariff Barriers Any barriers other than tariff. 6 Gratulent Publications It is meant for constructing barriers for the free flow of the goods. It does not affect the price of the imported goods. It affects the quality and quantity of the goods. 1. LICENSES: License is granted by the government, and allows the importing of certain goods to the country. 2. VOLUNTARY EXPORT RESTRAINS (VER): these types of barriers are created by the exporting country rather than the importing one. These restrains are usually levied on the request of the importing company. eg. Brazil can request Canada to impose VER on export of sugar to Brazil and this helps to increase the price of sugar in Brazil and protects its domestic sugar producers. 3. Quotas: under this system, a country may fix in advance, the limit of import quantity of commodity that would be permitted for import from various countries during a given period. This is divided into the following categories: a) Tariff quota: certain specified quantity of imports allowed at duty free or at a reduced rate of import duty. A tariff quota, therefore, combines the features of a tariff and import quota. b) Unilateral quota: the total import quantity is fixed without prior consultations with the exporting countries. c) Bilateral quota: here quotas are fixed after negotiations between the quota fixing importing country and the exporting country. d) Multilateral quota: a group of countries can come together and fix quotas for each country. 4. Product standards: here the importing country imposes standards for goods. If the standards are not met, the goods are rejected. 5. Domestic content requirements: governments impose DCR to boost domestic production. 6. Product Labeling: certain countries insist on specific labeling of the products. Eg. EU insists on products labeling in major languages in EU. 7. Packaging requirements: certain nations insist on particular type of packaging of goods. Eg. EU insists on packaging with recyclable materials. 8. Foreign exchange regulations: the importer has to ensure that adequate foreign exchange is available for import of goods by obtaining a clearance from exchange control authorities prior to the concluding of contract with the supplier. 9. State trading: in some countries like India, certain items are imported or exported only through canalizing agencies like MMTT(minerals and metals trading cooperation of India) 10. Embargo: partial or complete prohibition of trade with any particular country, mainly because of the political tensions. Other NTBs are:  Health and safety regulations.  Technical formalities  Environment regulations 7 Gratulent Publications UNIT - II TRADING BLOCS A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization,where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participatingstates. A regional trading bloc is a group of countries within a geographical region that protect themselves fromimports from non-members. A trade bloc is basically a free-trade zone, or near-free-trade zone, formed by oneor more tax, tariff, and trade agreements between two or more countries. Trading blocs are a form of economicintegration, and increasingly shape the pattern of world trade.Regional trade blocks promote trade within the block and defend its members against global competition. Defenceagainst global competition is obtained through established tariffs on goods produced by member states, importquotas, government subsidies, onerous bureaucratic import processes, and technical and other non-tariff barriers. Since trade is not an isolated activity, member states within regional blocks also cooperate in economic, political,security, climatic, and other issues affecting the region. Members of successful trade blocs usually share fourcommon traits: similar levels of per capita GNP, geographic proximity, similar or compatible trading regimes, andpolitical commitment to regional organization. Advocates of worldwide free trade are generally opposed to trading blocs, which, they argue, encourage regionaltrade as opposed to global free trade. TYPES OF REGIONAL TRADING BLOCS Trade blocs can be stand-alone agreements between several states (such as the North American Free TradeAgreement (NAFTA) or part of a regional organization (such as the European Union). Depending on the level ofeconomic integration, trade blocs can fall into six different categories, such as preferential trading areas, freetrade areas, customs unions, common markets, economic union and monetary unions, and political union. 1. Preferential Trade Area : Preferential Trade Areas (PTAs) exist when countries within a geographical regionagree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This isoften the first small step towards the creation of a trading bloc. 2. Free trade area : Free Trade Areas (FTAs) are created when two or more countries in a region agree toreduce or eliminate barriers to trade on all goods coming from other members. This is the most basic form ofeconomic cooperation. Member countries remove all barriers to trade between themselves but are free toindependently determine trade policies with non-member nations. An example is the North American Free TradeAgreement (NAFTA). 3. Customs union: This type provides for economic cooperation as in a free-trade zone. Barriers to trade areremoved between member countries. The primary difference from the free trade area is that members agreeto treat trade with non-member countries in a similar manner. A customs union involves the removal of tariffbarriers between members, plus the acceptance of a common (unified) external tariff against non-members.This means that members may negotiate as a single bloc with third parties, such as with other trading blocs,or with the WTO. The Gulf Cooperation Council (GCC) Cooperation Council for the Arab States of the Gulf isan example. 4. Common market: A ‘common market’ is the first significant step towards full economic integration, andoccurs when member countries trade freely in all economic resources not just tangible goods. This means thatall barriers to trade in goods, services, capital, and labor are removed. In addition, as well as removing tariffs,non-tariff barriers are also reduced and eliminated. For a common market to be successful there must also be asignificant level of harmonization of micro-economic policies, and common rules regarding monopoly powerand other anti- competitive practices. There may also be common policies affecting key industries, such as theCommon Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European Single Market (ESM). 8 Gratulent Publications This type allows for the creation of economically integrated markets between member countries. Trade barriersare removed, as are any restrictions on the movement of labor and capital between member countries. Likecustoms unions, there is a common trade policy for trade with non-member nations. The primary advantage toworkers is that they no longer need a visa or work permit to work in another member country of a commonmarket. An example is the Common Market for Eastern and Southern Africa (COMESA). 5. Economic and Monetary union: This type is created when countries enter into an economic agreement toremove barriers to trade and adopt common economic policies. An example is the European Union (EU). Monetaryunion is a type of trade bloc which is composed of an economic union (common market and customs union) witha monetary union. Monetary union is established through a currency-related trade pact. An intermediate stepbetween pure monetary union and a complete economic integration is the fiscal union. Economic and MonetaryUnion of the European Union with the Euro for the Euro-zone members is the example of monetary union. 6. Political union: In order to be successful the more advanced integration steps are typically accompanied byunification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of the trade barriers,introduction of supranational bodies, and gradual moves towards the final stage, a “political union”. Politicalunion is the final stage in economic integration with more formal political links between the countries. A limitedform of political union may exist when two or more countries share common decision making bodies and havecommon policies. It is the unification of previously separate nations. The unification of West and East Germanyin 1990 is an example of total political union. Effects of Trading Blocs: The Effects of Trade Blocs Discriminatory trade policy is the defining characteristic of a trade bloc. The different types of trade blocs (orPTAs) can be broadly distinguished in three categories: (1) a free trade agreement (FTA) where trade barriers among member countries are removed, but where each member remains responsible for the determination of its trade policy vis-à-vis non-member countries; (2) a customs union (CU), with liberalized intra-block trade, as well as the adoption of a external tariff structureand trade barriers towards outsiders common to all members of the CU; and (3) a common market, which entails a CU with deeper integration between its members (such as free movementsof goods, services and factors of production, common economic policies, etc). Most of the analyses on the effects of trade blocs focus on FTAs and/or CUs. The effects of a PTA are of twotypes: the trade effects and the welfare effects. The trade effects comprise the impact of a PTA on the volumeand quantity of trade, on the terms of trade (i.e. prices) and on the level of protection (generally tariffs) for PTAmembers and excluded countries. In analyzing the welfare effects of a PTA, it is important to distinguishbetween the impact of trade bloc (formation and expansion) on the welfare of (1) each of its member, (2) thetrade bloc as a whole and (3) the countries excluded from the trade bloc. A standard result of international trade theory is that, in a competitive environment and in the absence of marketdistortions and externalities, free trade will maximise global welfare. Removing trade barriers between a subsetof countries could therefore appear to be, a priori, a move in the right direction. Yet, the ‘theory of second best’points out that removing a distortion while others remain in place may not increase welfare. Trade blocs areexamples of second best since a distortion is removed, i.e. trade barriers between member countries, whileanother distortion is created in the form of a discrimination between members and non-members (the latterfacing trade barriers from the PTA), as well as other market imperfections. Hence, the welfare implications of atrade bloc are ambiguous as they depend on many factors. The demonstration of the theory of second bestsituation entailed by a PTA was derived from the seminal work of Jacob Viner (1950), which shows that whileliberalizing trade between a group of countries can lead to ‘trade creation’ between members (which shouldincrease welfare), it can also reduce trade between the CU and its trading partners. 9 Gratulent Publications Major Trading Blocs: EU The EU is the world’s largest trading bloc, and second largest economy, after the USA. The European Union(EU) is an economic and political union of 27 member states that are located primarily in Europe. The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisionsby the member states. Institutions of the EU include the European Commission, the Council of the EuropeanUnion, the Court of Justice of the European Union, the European Central Bank, the Court of Auditors, and theEuropean Parliament. The European Parliament is elected every five years by EU citizens. The EU’s de factocapital is Brussels. The EU was originally called the Economic Community (Common Market, or The Six) after its formation followingthe Treaty of Rome in 1957. The original six members were Germany, France, Italy, Belgium, Netherlands, andLuxembourg. The term ‘European Communities’ is a collective term for the European Coal and Steel Community(ECSC), founded in 1951, the European Economic Community (EEC) and the European Atomic EnergyCommunity (EURATOM or EAEC), founded in 1957. The European Union, created by the Maastricht Treaty, didnot make the European Communities disappear. They form its institutional framework. The Union remain basedon the Communities, supplemented by the policies and the forms of cooperation - Economic and MonetaryFund, Common Foreign and Security Policy, cooperation in justice and home affairs brought in by that treaty. The latest major amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009.The EU has developed a single market through a standardised system of laws that apply in all member states.Within the Schengen Area (which includes 22 EU and 4 non-EU states) passport controls have been abolished.EU policies aim to ensure the free movement of people, goods, services, and capital, enact legislation in justiceand home affairs, and maintain common policies on trade, agriculture, fisheries and regional development. A monetary union, the eurozone, was established in 1999 and is composed of 17 member states. Through theCommon Foreign and Security Policy the EU has developed a role in external relations and defence. Permanentdiplomatic missions have been established around the world. The EU is represented at the United Nations, theWTO, the G8 and the G-20. The EU has 27 members countries. The initial aim was to create a single market for goods, services, capital, and labour by eliminating barriers totrade and promoting free trade between members. Some examples of the role the European Union playsaround the world are given below: The EU promotes peace and reconciliation through its political, practical and economic support. It provides development aid which is making a huge difference to millions of people’s livelihoodsaround the world. The Union is committed to human rights and works to ensure they are respected universally. The Union works closely with the United Nations on a host of issues. It supports in building security around the world through its Common Security and Defence Policy(CSDP). The European Union is the world’s largest trading bloc. Trade is a common policy so the EU speaks witha single voice in trade negotiations with international partners in promoting a free and fairer internationaltrading system. The European Union (EU) has four main institutions namely through which it functions, the Council of Ministers,the European Commission, the European Parliament and the European Court of Justice. Other bodies such asthe Economic and Social Committee and the Committee of the Regions have particular roles to play in thedecision making process. The Council of Minister The Council is the EU’s main decision-making body. It is the embodiment of the Member States, whoserepresentatives it brings together regularly at ministerial level. The Council is comprised of ministers from nationalgovernments of each of the member states. It meets mostly in Brussels or Luxembourg to deliberate uponlegislation and policy. Diplomats and officials in a committee called Coreper, involving the permanentrepresentations to the EU of each member state, prepare the Council’s work. The United Kingdom PermanentRepresentation is known as UKRep. 10 Gratulent Publications The Presidency of the Council is held by each member state, in rotation, for a period of six months. The countryholding the presidency hosts a meeting of the heads of states and governments every six months, known as theEuropean Council. The Council has following major responsibilities: 1. It is the Union’s legislative body; for a wide range of EU issues, it exercises that legislative power in codecision with the European Parliament; 2. It coordinates the broad economic policies of the Member States; 3. It concludes, on behalf of the EU, international agreements with one or more States or internationalorganisations; 4. It shares budgetary authority with Parliament; 5. It takes the decisions necessary for framing and implementing the common foreign and security policy,on the basis of general guidelines established by the European Council; 6. It coordinates the activities of Member States and adopts measures in the field of police and judicialcooperation in criminal matters. The European Commission The EU’s Administrative & Executive body is headed by the Twenty Commissioners who are charged withfurthering the goals of the Union and implementing EU policy and legislation. The Commission for considerationand decision by the Council of Ministers and the European Parliament drafts initial proposals for legislation andpolicy. The Commissioners, who serve for five years, are nominated by national governments and approved bythe European Parliament. MEPs have the power to sack the Commission. The headquarters of the Commissionis in Brussels. The Commission is the driving force in the Union’s institutional system: 1. It has the right to initiate draft legislation and therefore presents legislative proposals to Parliament and the Council; 2. As the Union’s executive body, it is responsible for implementing the European legislation (directives,regulations, decisions), budget and programmes adopted by Parliament and the Council; 3. It acts as guardian of the Treaties and, together with the Court of Justice, ensures that Community lawis properly applied; 4. It represents the Union on the international stage and negotiates international agreements, chiefly in thefield of trade and cooperation. The European Parliament The European Parliament is the democratically elected body whose 626 members (MEPs) are elected everyfive years. Working in Brussels and Strasbourg, Parliament scrutinises the activities of other EU institutions,passes the annual EU budget, and shapes and decides new legislation jointly with the Council of Ministers. TheParliament has a staff of 3,850.Elected every five years by direct universal suffrage, the European Parliament is the expression of the democraticwill of the Union’s 498 million citizens. Brought together within pan- European political groups, the major politicalparties operating in the Member States are represented. The Parliament has three essential functions: 1. It shares with the Council the power to legislate, i.e. to adopt European laws (directives, regulations,decisions).Its involvement in the legislative process helps to guarantee the democratic legitimacy of the texts adopted; 11 Gratulent Publications 2. It shares budgetary authority with the Council, and can therefore influence EU spending. At the end ofthe procedure, it adopts the budget in its entirety; 3. It exercises democratic supervision over the Commission. It approves the nomination of Commissionersand has the right to censure the Commission. It also exercises political supervision over all the institutions. The European Court of Justice Based in Luxembourg, the Court, which has a judge from each member state, adjudicates on all legal issuesand disputes involving Community law. The judges, who sit for a period of six years, are assisted by nineadvocates-general who give a preliminary ruling on each case before a final judgement. The Court deals withtwo main types of actions: those referred to it by national courts for rulings of interpretation of Community law;and those started by one of the other institutions (usually the Commission against a member state). NAFTA: The North American Free Trade Agreement (NAFTA) is a comprehensive trade agreement that sets the rules oftrade and investment between Canada, the United States, and Mexico. Since the agreement entered into forceon January 1, 1994, NAFTA has systematically eliminated most tariff and non-tariff barriers to free trade andinvestment between the three NAFTA countries. – NAFTA is a formal agreement that establishes clear rules for commercial activity between Canada, theUnited States, and Mexico. NAFTA is overseen by a number of institutions that ensure the properinterpretation and smooth implementation of the Agreement’s provisions. Since NAFTA came into effect, trade and investment levels in North America have increased, bringingstrong economic growth, job creation, and better prices and selection in consumer goods. North Americanbusinesses, consumers, families, workers, and farmers have all benefited. For more information about NAFTA’s many benefits, please see: Results: North Americans Are Better Off After 15 years of NAFTA. NAFTA provides North American businesses with better access to materials, technologies, investmentcapital, and talent available across North America. Each NAFTA country forgoes tariffs on imported goods “originating” in the other NAFTA countries. Rulesof origin enable customs officials to decide which goods qualify for this preferential tariff treatment underNAFTA. The negotiators of the Agreement sought to make the rules of origin very clear so as to provide certainty and predictability to producers, exporters, and importers. They also sought to ensure that NAFTA’s benefits are not extended to goods imported from non-NAFTA countries that have undergoneonly minimal processing in North America. The procedures for presenting a claim to each NAFTA partner are different. To certify that goods qualifyfor the preferential tariff treatment under NAFTA, the exporter must complete a certificate of origin. Aproducer or manufacturer may also complete a certificate of origin to be used as a basis for an exporter’scertificate of origin. To make a claim for NAFTA preference, the importer must possess a certificate oforigin at the time the claim is made. Four categories of travelers are eligible for temporary entry from one NAFTA country into another:business visitors, traders and investors, intra-company transferees, and professionals. On January 1, 2008, the last remaining tariffs were removed within North America. When implemented,NAFTA immediately lifted tariffs on the majority of goods produced by the NAFTA partners and called forthe phased elimination, over 15 years, of most remaining barriers to cross-border investment and to themovement of goods and services between the three countries. Objectives of NAFTA :  eliminate barriers to trade in, and facilitate the cross-border movement of goods and services betweenthe territories of the Parties;  promote conditions of fair competition in the free trade area;  increase substantially investment opportunities in the territories of the Parties;  provide adequate and effective protection and enforcement of intellectual property rights in each Party’sterritory;  create effective procedures for the implementation and application of this Agreement, for its jointadministration and for the resolution of disputes; and  establish a framework for further trilateral, regional and multilateral cooperation to expand and enhancethe benefits of this Agreement. 12 Gratulent Publications NAFTA has been a remarkable success story for all three partners. It has contributed to significant increases intrade and investment flows between Canada, the United States, and Mexico. It has benefited companies in allthree countries, paving the way for increased sales, new partnerships, and new opportunities. Structure of NAFTA A number of NAFTA institutions work to ensure smooth implementation and day-to-day oversight of theAgreement’s provisions. (a) Free Trade Commission: Made up of ministerial representatives from the NAFTA partners. Supervises the implementation and further elaboration of the Agreement and helps resolve disputesarising from its interpretation. Oversees the work of the NAFTA committees, working groups, and other subsidiary bodies. (b) NAFTA Coordinators Senior trade department officials designated by each country. Responsible for the day- to-daymanagement of NAFTA implementation. (c) NAFTA Working Groups and Committees Over 30 working groups and committees have been established to facilitate trade and investmentand to ensure the effective implementation and administration of NAFTA. Key areas of work include trade in goods, rules of origin, customs, agricultural trade and subsidies, standards, government procurement, investment and services, cross-border movement of business people, and alternative dispute resolution. (d) NAFTA Secretariat: The NAFTA Secretariat is an independent agency that is responsible for the impartialadministration of the dispute settlement provisions of the North American Free Trade Agreement. It hasa Canadian, a Mexican, and a United States Section, each headed by a national Secretary, and withoffices in each national capital. The Secretariat is accountable to the NAFTA Free Trade Commission, which comprises the ministers responsible for international trade in the three NAFTA partner countries. It is also responsible for administering the dispute settlement provisions of the Agreement and foradministering dispute resolution processes. It maintains a court-like registry relating to panel, committee,and tribunal proceedings. It also maintains a tri-national website containing up-to-date information onpast and current disputes. Commission for Labor Cooperation Created to promote cooperation on labour matters among NAFTA members and the effectiveenforcement of domestic labour law. Consists of a Council of Ministers (comprising the labour ministers from each country) and a Secretariat,which provides administrative, technical, and operational support to the Council and implements anannual work program. Departments responsible for labour in each of the three countries serve asdomestic implementation points. (f) Commission for Environmental Cooperation Established to further cooperation among NAFTA partners in implementing the environmental sideaccord to NAFTA and to address environmental issues of continental concern, with particular attentionto the environmental challenges and opportunities presented by continent-wide free trade. Consists of a Council (comprising the environment ministers from each country), a Joint PublicAdvisory Committee (a 15-member, independent volunteer body that provides advice and publicinput to Council on any matter within the scope of the environmental accord), and a Secretariat(which provides administrative, technical, and operational support). SAARC: The South Asian Association for Regional Cooperation (SAARC) is an organisation of South Asian nations,which was established on 8 December 1985 when the government of Bangladesh, Bhutan, India, Maldives,Nepal, Pakistan, and Sri Lanka formally adopted its charter providing for the promotion of economic and socialprogress, cultural development within the South Asia region and also for friendship and cooperation with otherdeveloping countries. It is dedicated to economic, technological, social, and cultural development emphasisingcollective self-reliance. 13 Gratulent Publications Its seven founding members are Sri Lanka, Bhutan, India, Maldives, Nepal, Pakistan, and Bangladesh.Afghanistanjoined the organisation in 2007.Meetings of heads of state are usually scheduled annually; meetings of foreign secretaries, twice annually. It isheadquartered in Kathmandu, Nepal. The main goal of the Association is to accelerate the process of economic and social development in memberstates, through joint action in the agreed areas of cooperation.The idea of regional cooperation in South Asia was first mooted in November 1980. After consultations, theForeign Secretaries of the seven countries met for the first time in Colombo, in April 1981. This was followed, afew months later, by the meeting of the Committee of the Whole, which identified five broad areas for regionalcooperation. The Foreign Ministers, at their first meeting in New Delhi, in August 1983, formally launched theIntegrated Programme of Action (IPA) through the adoption of the Declaration on South Asian RegionalCooperation (SARC). At the First Summit held in Dhaka on 7-8 December 1985, the Charter establishing theSouth Asian Association for Regional Cooperation (SAARC) was adopted. Objectives The objectives, principles and general provisions, as mentioned in the SAARC Charter, are as follows: –  To promote the welfare of the peoples of South Asia and to improve their quality of life;  To accelerate economic growth, social progress and cultural development in the region and to provideall individuals the opportunity to live in dignity and to realise their full potentials;  To promote and strengthen collective self-reliance among the countries of South Asia;  To contribute to mutual trust, understanding and appreciation of one another’s problems;  To promote active collaboration and mutual assistance in the economic, social, cultural, technical andscientific fields;  To strengthen cooperation with other developing countries;  To strengthen cooperation among themselves in international forums on matters of common interests;and  To cooperate with international and regional organizations with similar aims and purposes. Principles The principles are as follows –  Respect for sovereignty, territorial integrity, political equality and independence of all members states;  Non-interference in the internal matters is one of its objectives;  Cooperation for mutual benefit All decisions to be taken unanimously and need a quorum of all eight members All bilateral issues to be kept aside and only multilateral(involving many countries) issues to be discussedwithout being prejudiced by bilateral issues. SAARC Secretariat Secretariat of the South Asian Association for Regional Cooperation is in Kathmandu, Nepal. It is headed by theSecretary General appointed by the Council of Ministers from Member Countries in an alphabetical order for athree-year term. He is assisted by the Professional and the General Service Staff, and also an appropriatenumber of functional units called Divisions assigned to Directors on deputation from Member States. TheSecretariat coordinates and monitors implementation of activities, prepares for and services meetings, and serves as a channel of communication between the Association and its Member States as well as other regionalorganisations. The Memorandum of Understanding on the establishment of the Secretariat which was signed by ForeignMinisters of member countries on 17 November 1986 at Bangalore, India contains various clauses concerningthe role, structure and administration of the SAARC Secretariat as well as the powers of the Secretary-General. In several recent meetings the heads of state or government of member states of SAARC have taken someimportant decisions and bold initiatives to strengthen the organisation and to widen and deepen regional cooperation. The SAARC Secretariat and Member States observe 8 December as the SAARC Charter Day1.The highest authority of the Association rests with the Heads of State or Government. 14 Gratulent Publications Council of Ministers Comprising of the Foreign Ministers of member states it is responsible for the formulation of policies; reviewingprogress; deciding on new areas of cooperation; establishing additional mechanisms as deemed necessary;and deciding on other matters of general interest to the Association. The Council meets twice a year and mayalso meet in extraordinary session by agreement of member states. Standing Committee Comprising of the Foreign Secretaries of member states it is entrusted with the overall monitoring and coordinationof programmes and the modalities of financing; determining inter-sectoral priorities; mobilising regional andexternal resources; and identifying new areas of cooperation based on appropriate studies. It may meet as oftenas deemed necessary but in practice it meets twice a year and submits its reports to the Council of Ministers. Programming Committee Comprising of the senior officials it meets prior to the Standing Committee sessions to scrutinize SecretariatBudget, finalise the Calendar of Activities and take up any other matter assigned to it by the Standing Committee. Technical Committees Comprising of representatives of member states, they formulate programmes and prepare projects in theirrespective fields. They are responsible for monitoring the implementation of such activities and report to theStanding Committee. The Chairmanship of each Technical Committee normally rotates among member countriesin alphabetical order, every two years. Action Committees According to the SAARC Charter, there is a provision for Action Committees comprising member states concernedwith implementation of projects involving more than two, but not all member states. ASEAN ASEAN is the most prominent regional grouping in Asia. The Association of Southeast Asian Nations is a geopolitical and economic organization of ten countries located in Southeast Asia, which was formed on 8 August, 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expandedto include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include accelerating economicgrowth, social progress, and cultural development among its members, protection of regional peace and stability,and opportunities for member countries to discuss differences peacefully. ASEAN has emphasized regional cooperation on the three pillars of security and socio-cultural and economicintegration. It has made most progress in economic integration and aims to create an ASEAN EconomicCommunity (AEC) by 2015. The foundation of the AEC is the ASEAN Free Trade Area (AFTA), a common external preferential tariff schemeto promote the free flow of goods within ASEAN. Other elements of economic integration, such as the free flowof investment and services and the elimination of non-tariff barriers, have been added by the ASEAN leaders. MERCOSUR  Mercosur, the “Common Market of the South,” is the largest trading bloc in South America.  Its purpose is to promote free trade and the fluid movement of goods, people and currency. Objectives of Mercosur:  The free transit of produced goods, services and factors among the member states. Among other things, this includes the elimination of customs rights and lifting of non-tariff restrictions on the transit of goods or any other measures with similar effects.  Fixing of a common external tariff (CET).  Move member countries economies away from import substitution models.  Develop institutional groups. Levels of regional economic integration:  Free trade Areas  Custom Union  Common Markets  Economic Union 15 Gratulent Publications MERCOSUR’s current position – Custom Union Administrative / Institutional Structure of MERCOSUR:  Common Market Council (CMC) : The Council is the highest level agency of MERCOSUR with authority to conduct its policy, and responsibility for compliance with the objects and time frames set forth.  Common Market Group (CMG) : Basic duties are to cause compliance with the Asunicon Treaty and to take resolutions required for implementation of the decisions made by the Council. Furthermore, it can initiate practical measures for trade opening, coordination of macroeconomic policies, and negotiation of agreements with non-member states and international agencies, participating when need be in resolution of controversies under MERCOSUR.  Commercial Commission of MERCOSUR (CCM): Assists the Common Market Group in the enforcement of trade policies.  Joint Parliamentary Commission (CPS): The Committee will have both an advisory and decision making nature, with powers to submit proposals as well. Social Economic Consultative Forum (FCES): It brings together various associations and interest groups from member countries. 16 Gratulent Publications UNIT - III INTERNATIONAL BUSINESS ENVIRONMENT Environment refers to the surrounding things, objects, factors, influences and circumstances under which someone or something exists. Business environment refers to those aspects and factors of the surroundings of business enterprises that affect its operations and determine its effectiveness. It’s a mixture of complex and dynamic external and internal factors within which a business is to be operated. Every business enterprise is influenced by both internal and external factors. Therefore, business environment factors can be divided into two categories:  Internal environment  External environment  Internal environment: It reflects the internal organization of a business firm which it operates. Yet, changes in the internal environment affect the working system of a business though these are generally regarded as controllable factors. The company can alter or modify these factors according to its objectives. The main factors of internal environment are as follows: Mission and objectives of the firm; Business and managerial policies of the firm; Production capacity, technology and efficiency of the productive apparatus; Organisation and management structure; Availability of resources; Prospects of business development.  External environment It includes those external factors that create opportunities and threats for a company. These factors are dynamic within which the business is to be operated. The external environment consists of:  External Micro Environment  External Macro Environment  External Micro Environment  It consists of all those factors that have a direct bearing on the operations of the firm.  These factors are linked more intimately with the company than the macro factors.  The micro factors need not necessarily affect all companies in a particular industry in the same manner.  This environment includes the following factors: 17 Gratulent Publications  Suppliers;  Customers;  Competitors;  Marketing intermediaries;  Bankers and financial institutions;  Shareholders;  Creditors  External Macro Environment  It consists of all those factors that affect the operations of a business firm indirectly.  These are beyond the control of the firm.  This environment includes the following factors known as PLECTIN:  Political; Legal; Economic; Cultural; Technological; International and Natural factors.  The internal environmental factors indicate the various strengths and weaknesses of the firm.  The external environmental factors provide various opportunities and threats posed by the surrounding factors to the firm.  By a combination of internal and external factors, a company’s strategy can be formulated. Political Environment The political environment refers to the type of government, the government relationship with business, and the political risk in a country. Doing business internationally thus implies dealing with different types of governments, relationships, and levels of risk. The political environment in a country influences the legislations and government rules and regulations under which a foreign firm operates. Every country in the world follows its own system of law. A foreign company operating in that particular country has to abide with its system of law as long as it is operating in that country. Countries can be classified as free-market, centrally planned, or mixed. Free-market economies are those where government intervenes minimally in business activities, and market forces of supply and demand are allowed to determine production and prices. Centrally planned economies are those where the government determines production and prices based on forecasts of demand and desired levels of supply. Mixed economies are those where some activities are left to market forces and some, for national and individual welfare reasons, are government controlled. In the late twentieth century there has been a substantial move to free-market economies, but the People’s Republic of China, the world’s most populous country, along with a few others, remained largely centrally planned economies, and most countries maintain some government control of business activities. There are many different types of political systems, for example, multi-party democracies, one-party states, constitutional monarchies, dictatorships (military and non-military). Also, governments change in different ways, for example, by regular elections, occasional elections, death, coups, war. Government-business relationships also differ from country to country. Business may be viewed positively as the engine of growth, it may be viewed negatively as the exploiter of the workers, or somewhere in between as providing both benefits and drawbacks. Specific government-business relationships can also vary from positive to negative depending on the type of business operations involved and the relationship between the people of the host country and the people of the home country. To be effective in a foreign location an international firm relies on the goodwill of the foreign government and needs to have a good understanding of all of these aspects of the political environment. A particular concern of international firms is the degree of political risk in a foreign location. Political risk refers to the likelihood of government activity that has unwanted consequences for the firm. These consequences can be dramatic as in forced divestment, where a government requires the firm to give up its 18 Gratulent Publications assets, or more moderate, as in unwelcome regulations or interference in operations. In any case the risk occurs because of uncertainty about the likelihood of government activity occurring. Generally, risk is associated with instability and a country is thus seen as more risky if the government is likely to change unexpectedly, if there is social unrest, if there are riots, revolutions, war, terrorism, and so on. Firms naturally prefer countries that are stable and that present little political risk, but the returns need to be weighed against the risks, and firms often do business in countries where the risk is relatively high. In these situations, firms seek to manage the perceived risk through insurance, ownership and management choices, supply and market control, financing arrangements, and so on. In addition, the degree of political risk is not solely a function of the country, but depends on the company and its activities as well a risky country for one company may be relatively safe for another. Thus, in analyzing political-legal environment, an organisation may broadly consider the following aspects:  Political system of the business; Approaches of the Government towards business i.e., restrictive or facilitating; Facilities and incentives offered by the Government; Legal restrictions such as licensing requirement, reservation to a specific sector like public sector, private or small-scale sector; Restrictions in importing technical know- how, capital goods and raw materials; Restrictions in exporting products and services; Restrictions on pricing and distribution of goods; Procedural formalities required in setting the business. Economic Environment: The economic environment relates to all the factors that contribute to a country’s attractiveness for foreign businesses. The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the more developed or industrialized, the less developed or third world, and the newly industrializing or emerging economies. Within each category there are major variations, but overall the more developed countries are the rich countries, the less developed the poor ones, and the newly industrializing (those moving from poorer to richer). These distinctions are usually made on the basis of gross domestic product per capita (GDP/capita). Better education, infrastructure, technology, health care, and so on are also often associated with higher levels of economic development. Clearly the level of economic activity combined with education, infrastructure, and so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, and a firm needs to understand this environment if it is to operate successfully internationally. While analyzing the economic environment, the organisation intending to enter a particular business sector may consider the following aspects:  Economic system to enter the business sector.  Stage of economic growth and the pace of growth.  Level of national and per capita income.  Incidents of taxes, both direct and indirect.  Infrastructure facilities available and the difficulties thereof.  Availability of raw materials and components and the cost thereof.  Sources of financial resources and their costs.  Availability of manpower-managerial, technical and workers available and their salary and wage structures. Socio-Cultural Environment: Introduction The social and cultural influences on international nurketing are imense. Differences in religion and material culture all affect consumers' perceptions and patterns of buying behavinar it ither that determines the extent to which consumers across the globe are either similar or different and on the potential for global branding and standardisation This category encompasses a wide range of considerations, many of which can i misunderstood or unanticipated significantly undermine a business marketing efforts. These include: 1) Literacy rates, 2) General education levels, 3) Language 4) Religion, 5) Ethics, 6) Social values, and 7) Social organisation. A failure to understand the social/cultural dimensions of a market are complex to manage, as McDonald's found in India. It has to deal with a market that is 40 per cent vegetarian, had an aversion to either bent of pork 19 Gratulent Publications among meat-caters and hostility to frozen meat and fish, but with the general Indian fondness for spice with everything. To satisfy such tastes, McDonald's discovered it needed to do more than provide the right burgers. Customers buying vegetarian burgers wanted to be sure that these were cooked in a separate area in the kitchen using separate utensils and sauces like McMasala and Mcimli were developed to satisfy the Indian taste for spice, Interestingly, however, these are now innovations they have introduced into other markets. When a firm operates in an international business environment, as an individual is bound by the society in which people live, it needs to understand the importance of society. Social class is an important part of the society. In most Western societies, these classes are classified as upper, middle, and lower. The level of perception of each class and their frequency of buying goods differ from one country to another In countries like India perception and trends of the consumers have been changing owing to the liberalisation and the changes in lifestyles. Another important aspect of society is the group. The performance of groups differs in individualistic and collectivist societies. The family is an important part of the social environment. The social and cultural environment is one of the critical components of the international business environment and one of the most difficult to understand. This is because the social and cultural environment is essentially unseen, it has been described as a shared, commonly held body of general beliefs and values that determine what is right for one group National culture is described as the body of general beliefs and values that are shared by a nation. Beliefs and values are generally seen as formed by factors such as history, language, religion, geographic location, government, and education; thus firms begin a cultural analysis by seeking to understand these factors. Before entering a foreign market, marketers should study all aspects of that nation's culture, including language, education, religious attitudes, and social values. The French love to debate and are comfortable with frequent eye-contact. In China, humility is a prized virtue, colours have special significance, and it is insulting to be late. Swedes value consensus and do not use humour in negotiations. The "etiquette tips for marketing professionals" feature offers some examples that will help you deal with cultural differences that arise in business dealings with foreign guests. Factors Constituting Cultural Differences The basic premise of cross-cultural differences lies in values and priorities. Factors that constitute cross- cultural differences are as follows: 1) Time: Different countries assign different values to time dimension. For example, the Americans, the Germans, and the Japanese, assign very high priority to time. They value time in terms of money, hence, they are very efficient in time management. But in many other countries, such time value is absent. Because of their strong sense on time value, the Americans, most Europeans like U.K., France, the Russian as well as the Japanese, and the South Koreans are fast decision-makers, which at times put them in difficulties. Thus, pervapeive difference in time value show cross-cultural differences in relationship event in business. Understanding each other's time value is therefore very important to reduce the cultural gap. Factors Constituting Cultural Differences Time Patterns of Thought Personal Space Familyt Roles & Relationships Language Religion Personal Achievement Competiotiveness & Individuality Social Behaviour Ethnocentric Attitudes Flexibility and Sincerity Intercultural Socialisation 20 Gratulent Publications 2) Patters of Thought: Paterne of theught could be another strong for cross-cula Typically, fadians believe that their pure ser the reflection of their past Americano other hand, believe that is deal of them, which they can forever it is for do Americans always take advantage of impending opportunities with an attacking strategy. 3) Personal Space: Coss-cultural influences vermine the nature, and type of ictio imeracting with others, wome may believece, while others prefer face-to-face interaction. Personal spacing styles are overexion meetings. Those who believe in maintaining distance may feel unhappy when their personal space is invaded Leto take the campie of business interactions between de American and he Arabs. Americans may feel uncaty with the chover interaction style of Arabe, while the Arabs may feel disturbed when Americans may keep distance from them during interaction. 4) Family Roles and Relationships: Family roles and relationships influence the pattern of culture in my societies, family roles and relationships are very traditional, personal, and predictable. The husband is the provider, the wife supervises the household, and males in the household are more valued than lamales. Each member of the family has a designated rode and the respemaibility for muntaining status quo for such a coûr. Peer persuure peevserves the mirs, and work stations and business interactions are less influential than familial responsibilities. 5) Language: Verbal and non-vestul tystems of communication systems or languages of every culture primarily reflect values and composation of languages. In Hindu mythology, Lord Krishna is an icon, for his multiple roles such as a warmor, as a good family person, as strategist, etu. He is invoked with many names and each name indicates a different meating Similarly, for a Hindu, cow is a sacred animal, hence Hindus use several words for cows. Eskimos describe snow uning maty words and experssons. Similarly, Arabs use numerous wonds to describe a camel. Some of these words may not carry any meaning, but people attach meaning to them. It is for the managers to understand and observe the composition of languag infer certain cultural cues. 6) Religion: Religion is the most dominant force that influences one's culture except perhaps in communist countries like China and Cuba. Not only the cultural pattern, religion also influences the business, socio-economic, and political situation, the lifestyle of peopir, certain beliefs endorsed by specific religion, etc. Understanding religion- hiased cross-cultural issues, therefore, becomes most important for international business. 7) Personal Achievement: Achievement is another valne espoused by the traditional American business person. The success and reputation of Indian business leaders are measured by the size of their organisation, the amount of their compensation, and their position in the hierarchy. The larger the organisation and the compensation, and higher the stature, the greater the respect they earn. In other cultures, especially where family time is meaningful, the quality of relationships and the time sp with family are the symbols of success and prestige. When American (perhaps subconsciously) communicates this acquisitive attitude to a culture that does not share their achievement motivation, communication channels can be damaged or severed. 8) Competitiveness and Individuality: Competitiveness and individuality are the most crucial cross-cultural issues, since, from these emanate the individual ambition, aggressive behaviour, etc. In countries like USA, competitiveness is encouraged, while in Japan it is discouraged as the Japanese believe in team spurn and consensual decision-making. In India and China also, collectivity, team spirit and patience are valued more than individuality and competitiveness. Individuality and competitiveness also influence the status symbols, body language, aggressiveness, and self-advertisement. These are in conflict with other cultures that value modesty, team spirit, collectivity, and patience. 9) Social Behaviour: Social behavioural pattern varies among different cultures. The Chinese people helieve in taking a bite of every food item served, as this demonstrates their sense of politeness. Now, imagine a money- conscious American business hospitality meet for a Chinese delegation. The food budget would far exceed than envisaged. Similarly, the sense of punctuality is another cross-cultural cue. Punctuality is revered in American culture. It is said that such value is attached to punctuality by the Americans because of their obvious nature of impatience. There are many other aspects of social behaviours that exert influence in cross-cultural relations. For Indians, touching the feet of the boss (especially by the lower staff) is showing respect to elders as well as 21 Gratulent Publications gratitude. For Americans it is something unimaginable even a low-level employee will not touch the feet of the US. President or a company President/Chairman. 10) Ethnocentric Attitudes: Ethnocentric attitudes indicate nurturing of feelings by a culture group that their cultural values, habits, and religion are superior to others. This superiority complex is harmful for cross- cultural relations, as it often culminates in disrespect and inflexibility, and ensuing conflict. Ethnocentricity also develops the syndrome of stereotyping, i.e., a typical assumption that behaviour of people from another culture group will match with their perceived superior culture. Stereotyping at times negatively affects cross-cultural relations, and can even impair a business deal. 11) Flexibility and Sincerity: The degree of flexibility in cross-cultural relationships has to be cautiously dealt with. With a flexible approach, the superior need to analyse the responses and reactions of culturally different subordinates to interpret their reactions to the communications. It requires sincerity, and patience, empathetic listening, etc. 12) Intercultural Socialisation: Intercultural socialisation helps in awareness of each other's cultural constructs, and thereby develops informed understanding of cross-cultural behaviour, habits, actions, and the reasons. Such intercultural socialisation is important, particularly for the reasons that actions and behaviour of one culture group or the other are so different; at times it may create confusion. For example, while bowing is a form of welcome greeting for most of South-East Asian countries like Japan, for Westemers shaking of hands is the normal custom of welcoming. Similarly, leaving some portion of food after dining is considered as customary in some culture groups, but a sign of impoliteness for others. Importance of Socio-Cultural Environment in International Business Major social factors considered under international marketing are as follows: 1) National Taste: In Thailand, people prefer black shampoo; Nestle brews different varieties of instant coffee because people in those countries have different tastes, uncommon in other countries. Green is the favourite colour of all the Arab countries; red is still widely used in Russia, in banners, posters, and hoardings although communism is in no way relevant to modern Russia. 2) Language: Cross culture and cross border operations call for necessary language skills, e.g., South Koreans have learnt Indian languages to operate in India. One can see this in Hyundai or LG factories in India. Companies also have to change their brand names and slogans in different countries. In Japan, General Motor's slogan "body by fisher" means "corpse by fisher", and Pepsi Cola slogan "come alive" means "come out of the grave". Prior to promoting the brand, one has to take into account the socio-cultural background of a specific nation and different interpretations of a name in the local language. 3) Values and Beliefs: It is also important for companies to understand the significance of different designs and colours in different countries. For example, blue is perceived as feminine in Holland and masculine in Sweden. Green is favourite colour in the Muslim world, but is associated with illness in Malaysia although it is a Muslim country. White indicated death in china and Korea but it is the colour of bridal dresses in Europe. Red is associated with danger in many countries but it is a favourite in Russia. Another example is 'swastika", which is considered sacred in India, but has completely different connotations in the west. 4) Demography: A number of demographic factors such as age, sex ratio, family size and occupation influence the business of many companies. Different companies concentrate on different segments. For example, Barbie generates huge revenues through the children's segment of affluent countries. 5) Literacy Rate: Countries with a high literacy rate experience a better standard of living. Here the need is for standardises goods, supported by technical services. For a country with an educated population, the amount of training required for the staff will be far less than in the case of the country which has a low literacy rate. This is an important factor, as it influences the cost incurred, products manufactured. 22 Gratulent Publications 6) Female Workforce: The most spectacular change that has taken place in the current era is the empowerment of women throughout the world. In China, Indonesia, Russia and Thailand, women are major contributors to the GDP. With economic independency, women no longer have to depend on men to make decisions about what to buy, they can make their own decisions about whether to purchase any consumer product or durable. For example, Indian women in IT-enabled services and handicrafts, Chinese women in the soft toys and ceramics and Indonesian women in garments and paperwork, who have brought great success to their countries. 7) Double Income Families: As the household income increases, the demand for the number of products increases proportionately. This is especially true for packaged food items, electronic gadgets, household appliances, health equipment, Japanese entertainment electronics and French perfumes dominate in the whole of Europe and North America. Pizza Express, McDonald and Kentucky Fried Chicken invariably rule the households of double income families throughout the world. 8) Impulse Buying: Benefit-oriented buying is taking place everywhere. Pre- planned shopping and scheduled purchases are gradually going away. Throughout the world, people need instant items. They see, ask and buy. It is a major challenge to international businessmen to provide benefits to lure impulse buying. Influence of Social Environment on International Business The influence of social environment on individuals and business organisation is as follows: 1) The behaviour, personality, attitude and thinking of individuals are influenced by the social environment. 2) It affects the consumption behaviour and demands of products in the market. 3) The culture of an individual influences their attitude towards work and business affairs. 4) Culture also influences the degree of individualism and collectivism in the people. It also determines their degree of independence while taking a purchase decision. 5) The culture has a strong impact on the outlook and attitude of individuals towards pollution, consumerism and the role of mass media and business. 6) Work ethics in business, corporate governance and social responsibility is also determined by the culture of the society. 7) Knowledge about rights and duties and work ethics is also influenced by the culture of the society. 8) Various structures of social division, such as the caste system also influence the consumer behaviour. non-veg products. For example, people of Brahmin caste refrain from buying 9) In spite of the fact that every country has a unique culture, some cultural elements are getting common due to frequent cross-cultural mobility of the people and extensive usage of modern communications. The purpose behind buying is also determined by the social environment. For this reason, organisations need to tailor their marketing strategies according to the needs of different customers. The aspirations and beliefs also differ from country to country; therefore, the marketing mix should be planned keeping in mind such diverse social customs and standards Influence of Cultural Environment on International Business The various global marketing decisions or actions are influenced by different cultural factors. Following are the influences of the cultural environment on global marketing: 1) Culture Determines Goods and Services: The decision regarding what kind of goods and services should be produced by a business is determined by the culture of the host country. It also influences the food habits, way of dressing, colour options, etc., of the people. For example, there may be a great demand of seafood in some 23 Gratulent Publications markets whose culture supports it. However, in some countries, there may not be any demand of seafood as they find it against their cultural norms. Henceforth, it is vital for a global business to contemplate upon the culture of the host country before taking any manufacturing decision. 2) Culture Determines Attitude to Work: In some societies, culture determines people's attitude towards their work. People belonging to a particular culture are hard working as they are more committed towards their work. For example, it is believed that Arabians are comparatively less dedicated towards their work in comparison to the Japanese. 3) Culture and Global Business: Global companies operate in more than one country and hence deal with various cultures. They need to recognise the cultural and social factors of various countries and regulate their manufacturing, advertising and sales techniques as per the needs. For this purpose, they sometimes need to alter the characteristics of their products, such as design, colour, packaging and so on. 4) Culture and Competitive Advantage: The cultural ethics and customs of the society have a great impact on the costs involved in doing a business. These costs further affect the capability of a company to build a competitive advantage under international market. In case of conducting global business, the relationship between competitive advantage and culture is vital due to the following reasons: i) It helps in identifying possible competitors and ii) It suggests countries the best alternatives for conducting manufacturing and marketing operations. 5) Culture and Strategy: The success of global business depends upon maintaining harmony between the culture and business strategy. However, it is not simple to practically attain this harmony as MNCs operate in different nations having varying cultural environment. However by successfully identifying some similarities, MNCs can control the needs to customise their business practices. It will also fulfil the demands of regional cultures. Technological Environment: The technological environment comprises factors related to the materials and machines used in manufacturinggoods and services. Receptivity of organisations to new technology and adoption of new technology by consumers influence decisions made in an organisation. As firms have no control over the external environment, their success depends upon how well they adapt to the external environment. An important aspect of the international business environment is the level, and acceptance, of technological innovation in different countries. The last decades of the twentieth century saw major advances in technology, and this is continuing in the twenty-first century. Technology often is seen as giving firms a competitive advantage; hence, firms compete for access to the newest in technology, and international firms transfer technology to be globally competitive. It is easier than ever for even small businesses to have a global presence thanks to the internet, which greatly expands their exposure, their market, and their potential customer base. For economic, political, and cultural reasons, some countries are more accepting of technological innovations, others less accepting. In analyzing the technological environment, the organisation may consider the following aspects:  Level of technological development in the country as a whole and specific business sectors.  Pace of technological changes and technological obsolescence.  Sources of technology.  Restrictions and facilities for technology transfer and time taken for absorption of technology Environmental Factors: Introduction The constituents of physical covinment forests, lakes, climate conditions, natural resources, geographical location and termorials of a corry. The political and economic decisions, religion, language, creampart business actores, determination of land usage, etc. are influenced by the physical ment. It is important for them to herve the growth and development in raw materials and natural resources in target nations in order to formulate and sustain a feasible global marketing plan. Country's natural caviomement is important for the prosperity of its people. These natural resources are used for the benefits of people or enterprise irrespective of their state of depletion. In the past few years. people 24 Gratulent Publications have become concerned nationwide and even internationally, regarding the way humans interact with one another, the setup of their economic systems and the natural environment of the planet. One of the main components of the economic serap is "business" as it affects nature by utilising its resources and altering the earth's ecological systems. Factors of Natural Environment in International Business Following are the factors associated with natural environment of international business : 1) Climate: Climate is an important factor since it restricts the physical and economical capability of people. Climate encompasses temperature, wind and precipitation. Climate determines the degree of human settlements. Human settlements are found less in regions with harsh climatic conditions. However, they are found more in number where climatic conditions are permissive. Climate does not cause developments but allows them to take place. On the other hand, the non-climatic factors are considered more significant for the development of manufacturing and trade. These factors include technological growth, capital availability, cultural tradition, political and economic organisations, convenience to reach an area, deposits of minerals, etc. As per the Diamond model given by Porter, the impact of climate, even if it is a factor condition, can be modified by the use of technology. Similar continental positions and latitudes experience similar type of climates. Also, a region will have moderate climate if a major portion of its area is covered with water. This is why the northwest Europe and the northwest United States have similar and moderate climates (moist and mild climate) because they are at the similar latitude. Similar is the case with New Zealand, Southeast Australia and some portion of South Africa. Conversely, Central Asia and Kansas are dry and are hot during summers and cold during winters. This is because they are far from sea and at the same latitude. 2) Natural Resources: The resources that nature offers are called natural resources. People depend on these natural resources. However, the non-fuel minerals and the energy are the two natural resources which are beneficial for a business. If an economy has sufficient resources, then a manager would like to optimally tilise those resources for expanding the firm internationally. This can also attract the attention of the foreign governments. In fact, tempting investment incentives can be offered by them to the industries that operate in a particular sector. Also, a nation's overall economic situation will be affected by that sector's performance. This will be further helpful in predicting the trends in the economy. The two natural resources are as follows i) Energy: There are two categories of energy resources: a) Non-Renewable Energy Sources: Coal, petroleum, fossil fuels, natural gas and nuclear power are the main non-renewable sources of energy. b) Renewable Energy Sources: It is believed that the fossil fuels (non-renewable energy sources) will get replaced by the renewable sources of energy in the future. This might be due to the fact that either the non-renewable sources of energy will get exhausted or their prices will become higher. The various renewable sources of energy are solar energy, hydroelectric energy, geothermal energy. wind energy, waves, ocean thermal energy, tidal energy and energy from biomass fuels like ethanol, etc. Not all these resources are available at all places, but all can be utilised if proper conditions are available. Moreover, hydroelectric energy is used extensively out of all the sources mentioned above. It makes up 7% of the world's total consumption of energy. There are also certain programmes which are run by more than 48 nations for the development and effective utilisation of renewable sources of energy. ii) Non-Fuel Minerals: Finding out the new sources of energy is the prime focus of the world regarding the natural resources. However, there are several mineral resources available which require strategic thinking of both industries and governments. Nowadays, every aspect of modern living utilises non-fuel resources, be it automobile manufacturing or the construction of houses. In fact, the former Soviet Union (FSU) and South Africa produce almost all of the vanadium, platinum, manganese and chrome that are present in the world. The use of vanadium is in making sulphuric acid and aerospace titanium alloys; platinum is utilised in oil refining as a catalytic agent; and hardening of steel requires manganese and chrome. Moreover, tungsten, barite and tin are produced mostly by China. 25 Gratulent Publications 3) Topography: The business is influenced by topographical features. Also differences occur in the social structures, politics, cultures and economies of nations due to various topographical features like water bodies, deserts, plains and mountains. Some of these features facilitate and some obstruct the process of physical distribution. Modifications in products may be required because of topographical differences. For example, the production of cakes is influenced by altitude, therefore cake manufacturers have to modify their baking manuals accordingly. Similarly, altitude affects the power of internal combustion engines. Therefore, larger engines have to be used at heights 5,000 feet or above. The different components of the topography are as follows: 1) Mountains and Plains: Interactions and exchanges are hinde

International Business Management BBA Sem-V PDF

Document Details

Tags

Related

Summary

Full Transcript

Upgrade to continue