IBT-Prelim-Reviewer.pdf

INTERNATIONAL BUSINESS AND TRADE PRELIM EXAM REVIEWER The first phase was taken with the end of the First World War in 1919. However, after the Second World War in 1945, most of the colonial governments refused to export raw materials and import finished goods for the purpose of p...

INTERNATIONAL BUSINESS AND TRADE PRELIM EXAM REVIEWER The first phase was taken with the end of the First World War in 1919. However, after the Second World War in 1945, most of the colonial governments refused to export raw materials and import finished goods for the purpose of protecting domestic companies. The consequences of World War II made the world countries feel the need for international cooperation in global trade which led to the formation of various organizations like the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now called AS World Bank. A true global company views the entire world as a single market. There is a great revision given by Arvindh Mills: Source raw material wherever they are cheapest. Manufacturing wherever in the world is most cost effective. Sell in those markets where the prices are highest. Raise finance globally. forge international strategy alliance. To manage all these, take the best talent from all over the world. And you will have achieved the stature of a true multinational. FEATURES Large Scale Operations In International business, all the operations are conducted on a very huge scale. Production and marketing activities are conducted on a very large scale. It first sells its goods in the local market and then the surplus goods are exported. Integration of Economies International Business integrates (combines) the economies of many countries. This is because it uses finance from one country, labor from other country and infrastructure from another country. It designs the product in one country, produces its parts in many different countries and assembles in another country and sells in many countries. Dominated by developed countries and MNC’s International Business is dominated by developed countries and their multinational companies. Europe and Japan dominate the foreign trade, this is because they have high financial and other resources. Benefits to Participating countries International Business gives benefits to all participating countries. However, the developed countries get the maximum benefits; the developing countries also get benefits. They get foreign capital and technology. They get rapid industrial development. They get more employment opportunities. Keen Competition International Business must face competition in the world market. The competition is between unequal partners. Special role of science and technology International Business gives a lot of importance to science and technology. Science and Technology helps business to have a large-scale production. 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. 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 markets. Severe competition in home country ✓ The countries oriented towards market economies since the 1960’s, experience severe. ✓ competition from other business firms 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. Availability of Technology and Managerial Competency ✓ Availability of advanced technology and competent human resources in some countries acts as pulling factors for business firms from the home country. 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 where as the foreign firms suffer from lower profit margins. Nearness to Raw materials ✓ The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting companies from the various foreign countries. 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. Liberalization and Globalization ✓ Most of the countries in the globe liberalized their economies and opened their countries to the rest of the globe. These changed policies attracted the multinational companies to extend their operations to these countries. 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. CULTURAL CONSIDERATIONS IN INTERNATIONAL BUSINESS Culture - the thought and behaviour patterns that member of a society learns through language and other forms of symbolic interaction. Characteristics: Culture is derived form the climatic conditions of the geographical region and economic conditions of the country. It is a set of traditional beliefs and values which are transmitted and shared in a given society. It is a total way of life and thinking patterns that are passed form generation to generation. It is norms, customs, art, values, etc. It prescribes the kind of behaviour considered acceptable in the society. It is based on social interaction and creation. Culture acquires through learning but not inherited genetically. Culture goes on changing. Cultural Universal - common needs Language - the basic medium of communication. Religion - one of the important social institutions on influencing the business. Culture and Negotiation Americans are straightforward. Chinese negotiations are generally tough-minded and well prepared and use various tactics to secure the best deal. The Importance of Cultural Awareness in International Business Businesses are going global but why are they failing? Technology and globalisation have made global expansion far more accessible for businesses around the world over the past decade. Globalisation is essential to business expansion and for companies that enter foreign markets and hire local employees, their human resource policies and practices must be adapted so that they are beneficial to their foreign employees and subsidiaries. Adapting global business models to the local market A term that has been gaining momentum as international business expansion grows is glocalisation. A combination of the words ‘globalisation’ and ‘localisation’, glocalisation is a concept which involves adapting globally marketed processes, products and services to fit in with local needs. Workplace diversity - a powerful tool for enhancing creativity and inclusion. - fosters an environment that promotes fresh perspectives and approaches to problem-solving. Diverse teams - made up of individuals with various backgrounds, values, opinions, and business customs. Cultural values within a society affect how individuals feel about their jobs and often define their workplace expectations. Subcultural differences such as socioeconomic status, language, belief systems and social institutions can vary greatly within a single region. Cultural awareness in the workplace is about establishing common ground so that everyone is able to understand and respect one another's differences Communication in negotiation is the means by which negotiators can achieve objectives, build relationships, and resolve disputes. Most negotiators know that it is the most important tool you can have for successful negotiations. Communication becomes even more important when negotiations include counterparts that are from different cultures. STAGES OF INTERNATIONALISATION: Stage – 1: Domestic Company ✓ Domestic Company limits its operations, mission and vision to the national boundaries. This company focus its view on the domestic market opportunities, supplies and customers. Stage – 2: International Company ✓ Domestic companies which grows beyond their production capacities, think of internationalizing their operation. Those companies which decide to exploit the opportunities outside the domestic country are stage – 2 companies. Stage – 3: Multi-National Company ✓ International companies turn into the multi-National companies when they start responding to the specific needs of different country market regarding product, price and promotion. ✓ This stage is also referred to as multiDomestic companies. These companies formulate different strategies for different markets. They operate like a domestic market of the country concerned in each of their markets. Stage – 4: Global Company ✓ A global company is one which has a global strategy. Global Company either produces in its home country or in a single country and focuses on marketing these products globally or produces globally and focuses on marketing these products domestically. Stage – 5: Transnational Company ✓ It produces, markets, invests and operates across the world. It is an integrated global enterprise that links global resources with global markets at profits. There is no pure Transnational. MODES OF ENTRY TO INTERNATIONAL BUSINESS Market entry strategy - is how companies seek to expand their local market and find new audiences. - acts as a road map for businesses looking to grow their local market and reach new consumers through franchising, international trading, and exporting. - this business strategy typically arises when entrepreneurs or brands have secured a target demographic and domestic market and seek global expansion. 1. EXPORTING: ✓ Exporting is the simplest and most widely used mode of entering foreign markets. It involves selling goods or services produced in one country to customers in another country. Need for limited finance: If the company selects a company in the host country to distribute, the company can enter the international market with no or less financial resources. Forms of Exporting: 1. Indirect exporting: Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company (intermediary). Various publishers in India including Himalaya Publishing House sell their products, i.e., books various exporters in India, which in turn export these books to various foreign countries. 2. Director exporting: Direct exporting is selling the products in a foreign country directly through its distribution arrangements or through a host country’s company. Baskin Robbins initially exported its icecream to Russia in 1990 and later opened 74 outlets with Russian partners. Finally, in 1995 it established its ice- cream plant in Mascow. 3. Intra-corporate Transfers: Intra-corporate transfers are selling of products by a company to its affiliated company in host country (another country). Selling of products by Hindustan Lever in India to Unilever in the USA. This transaction is treated as exports in India and imports in the USA. 2. INTERNATIONAL LICENSING: Licensing is a popular method of entering foreign markets. The cost of entering foreign markets through this mode is less costly. The domestic company need not invest any capital as it has already developed intellectual property. As such, the domestic company earns revenue without additional investment. Hence, most of the companies prefer this mode of foreign entry. Lcensor to licensee relationship. Advantages:  Licensing mode carries relatively low investment on the part of licensor.  Licensing mode carries low financial risk o the licensor.  Licensor can investigate the foreign market without much efforts on his part.  Licensee gets benefits with less investment on research and development.  Licensee escapes himself from the risk of product failure. Disadvantages:  Licensing agreements reduce the market opportunities for both the licensor and licensee. Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola.  Both the parties have responsibilities to maintain the product quality and promoting the product. Therefore, one part can affect the other through their improper acts.  Costly and tedious litigation may crop up and hurt both the parties and the market.  There is scope for misunderstanding between the parties despite the effectiveness of the agreement. The best example is Oleg Cassini and Jovan.  There is a problem of leakage of the trade secrets of the licensor.  The licensee may develop0 his reputation.  The licensee may sell the product outside the agreed territory and after the expiry of the contract. 3. INTERNATIONAL FRANCHISING: Franchising is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing. International franchising is growing at a fast rate. ✓ Under franchising, an independent organization called the franchisee operates the business under the name of another company called the franchisor. Under this agreement the franchisee pays a fee to the franchisor. 4. CONTRACT MANUFACTURING: Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing or outsourcing. The company focuses on marketing, branding, and sales, while the production is outsourced. 5. TURNKEY PROJECT A turnkey project is a contract under which a firm aggress to fully design, construct and equip a manufacturing/ business/ service facility and turn the project over to the purchaser when it is ready for operation for remuneration. The forms of remuneration includes: A fixed price (firm plans to implement the project below the price) Payment on cost plus basis ( total cost incurred plus profit) 6. MERGERS AND ACQUISITIONS: Domestic companies enter international business through mergers and acquisitions. A domestic company selects a foreign company and merges with the foreign company in order to enter international business. Alternatively,the domestic company may purchase the foreign company and acquire its ownership and control. 7. JOINT VENTURES: Two or more firms join to create a new business entity that is legally separate and distinct from its parents. Joint ventures are established as corporations and owned by the funding partners in predetermined proportions. It is a partnership between two or more companies to create a new, independent business entity. What Is International Finance, and Why Is It So Important? International finance, sometimes known as international macroeconomics, is the study of monetary interactions between two or more countries, focusing on areas such as foreign direct investment and currency exchange rates. International finance is the study of monetary interactions that transpire between two or more countries. International finance focuses on areas such as foreign direct investment and currency exchange rates. Increased globalization has magnified the importance of international finance. An initiative known as the Bretton Woods system emerged from a 1944 conference attended by 40 nations and aims to standardize international monetary exchanges and policies in a broader effort to nurture post World War II economic stability. International finance involves measuring the political and foreign exchange risk associated with managing multinational corporations. International trade is arguably the most important influencer of global prosperity and growth. But there are worries related to the fact the United States has shifted from being the largest international creditor, to becoming the world's largest international debtor, absorbing excess amounts of funding from organizations and countries on a global basis. This may affect international finance in unforeseen ways. How would international finance principles help the company manage risks like currency fluctuations and funding operations? When expanding into a foreign market, international finance principles help a company manage risks like currency fluctuations and funding operations by utilizing tools such as forward contracts and currency options to hedge against foreign exchange risk. These principles also guide the company in accessing global capital markets, determining whether to borrow in local or foreign currency, and evaluating interest rates and exchange rate risks. Additionally, the company can apply financial techniques like discounted cash flow (DCF) analysis to assess foreign investments while considering currency volatility. International finance also aids in optimizing transfer pricing, repatriating profits, and managing taxes and regulations, ultimately minimizing financial risks and enhancing profitability.