international business chpt 1

7/31/2019 International Business Chpt 1

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International Business-Nirav Parekh


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International business

Activities that buys and

sells goods and servicesacross two or more

national boundaries, evenif the management islocated in one country.


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Importance of International Business

Reasons for increasing importance Globalization

Competition Exchange Rate Global Capital Flows Comparative cost advantage

Industrial Development Economic Development Interdependence New Technology


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Difference Between Domestic andInternational Trade Higher Rate of Profits

Profits from exports is exempted from Taxwhereas profits from domestic business is subjectto tax.

Expansion of Production capacities

Domestic Companies expand their productioncapacities more than the demand ( economies ofscale)

Competition


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Cont.

Wide Market

Political Stability

Technology

High Cost of Transportation

Foreign Exchange


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Difference between Domestic Business and

International Business

Dimension Domestic Business IB1. Environment Pest (known) PEST (not fully

known). Certain factors could

change at any time which

could effect business

2) Plan and strategy Can be worked outfor short term and carried

forward to

long term

Only long term

planning and strategy will

work

3) Competition

Many domestic andsome international players and

one can understand their

movement.Internationalcompetitive forces

play a vital role and it is very

difficult

to understand the

motive and movement


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4) Currency Local

Different currencies.Fluctuations in

currencies can cause problems.

5) Legal aspects Only local regulations are fullyapplicable to conduct business Internationalregulations and host country

regulations

are applicable




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6) marketing mix Local in scope Have to adapt to host countryrequirements.

E.G Certain countries have left

hand driving and

certain countries have right hand

driving.

Certain countries have bannedadvertisements for liquor

and cigarettes.

Certain countries the retail

environment is different.

The ads have to be changed to

suit international tastes.

Packaging also needs

to be changed.




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7) culture and

language Fully understood Takes a lot of time tounderstand and adaptto it. Also colours and Brand

names have to

be proper for the host country.8) Investment One can start with minimum

investment. Also regulatory

bodies are less involvedExcept exports every other kind

of overseas operation calls

for huge investments.

Also special regulatory

bodies are involved

since foreign currency is

involved.9) Business risk One can predict the

risk Difficult to predict.10) Research Reasonable cost and easy to

conduct research Very expensive and difficult toconduct business research.




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Global Business Environment

Several countries have increased the openness oftheir markets, through the

progressive lowering of barriers to trade and

foreign investment, the liberalization of domestic financial markets

and removal of restrictions on capital movements

Implementation of privatization programme

Competition, rising cost in domestic markets,falling transport and communication cost haveencouraged firms to look for opportunitiesabroad


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Global Business Environment Three aspects of the recent period of increased

international capital mobility set it apart from pre-1914period of free capital movement The monetary and exchange rate regime The range of financial assets

Role of institutional investors As countries get richer, they enact tougherenvironmental and labour regulations

Free trade enables developing countries to increase theireconomic growth and become richer

The pollution levels are rising in the worlds poorcountries, while they have been falling in developedcountries.

Eg:- the US manufacturing firms have been moving toMexico.


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Factors affecting International

Business Social and Cultural Environment

Social environment consists of religious aspects,language, customs, traditions, beliefs, tastes andpreferences etc

Study helps in deciding on the type of product

Culture is thought and behavior patterns

Culture change quickly picking up new ideas and

dropping old ones Irrespective of caste and religion, we have more orless the same needs known as cultural universal

The cultural universals enables a businessman to

market the products internationally.


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Social Environment:

1) national taste:

In Thailand , people prefer black shampoo.

Nestle brews different varieties of instant coffee as people indifferent countries have different taste.

Green is a favourite colour in Middle east countries.2) Language

3) demographic profile:

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. e.g Barbiegenerates huge revenues through the childrens segment of affluentcountries. Also brands like Osh Kosh BGosh and Jini and Joni can dowell in India considering the huge children population.


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Social Environment:

4) Literacy rate: Countries with a high literacy rateexperience a better standard of living .

Here the need is for standardised goods, supported bytechnical services.

For a country with an educated population , the amountof training required for the staff will be far less than in

the case of a country which has a low literacy rate. This is an important parameter as it influences the costs

incurred.


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Social Environment:

5) Female workforce:

With economic independency in countries like China, India , women nolonger depend on men to make decisions about what to buy.

As they have the required purchasing ability, they make decisionson their own.

In India , china , Thailand and Russia, there is a huge demand forcategories like Jewellery, Cosmetics, vehicles, ready to eat foods,primarily because of the working women.

6) Double Income families (from to nuclear families): As thehousehold income increase the demand for the number of products,increases proportionately.


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Cont. Technological Environment

International Business has gained significance due toadvancement in technology It flows from the advance countries to developing

countries through multinationals, JV, technologicalalliances, licensing and franchising.

It influences the way we live, cook, communicate orsell. Advanced countries spend considerable amount on

research and development Developing countries like India allow MNCs entry into

their country to develop domestic markets. Hence technology and global business are

interdependent. MNCs have to understand and analyze more of

economic environment of the foreign countries forstrategy formulation.


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Cont. Economic Environment

IB is directly influenced by the Economicenvironment of various countries.

Business helps for identification of needs of thepeople, their wants, demand, supply etc.

Developing countries concentrate on allocation ofscarce resources, increasing production andproductivity, to meet the growing need of thepeople.

IB houses streamlines the distribution of goodsfrom the manufacturing centers to customers.


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Economic environment :

Before entering any country, the economic study is of vitalimportance

A) Size of the market :most companies are looking at India because

of the huge potential. A case in point is HP which is now focusing on India to sell their

range of laptops and printers in India. Indias middle class and upper class population is more then the

population of Europe.

B) Gross Domestic Product (GDP) :If a constant good rate is maintained , MNCs would

definitely look at such countries. India is maintaining around 7-8% growth rate. In the 1990s it was

Malaysia and Indonesia.


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C) Purchasing Power: Higher PP leads to a highlypotential market.

D) Banking :is the only channel through which remittances takeplace and hence is a major infrastructure for IB.

Europe and American and the Far east economies havea highly effective banking system.

On the other hand, Africa and CIS are not able to providegood banking services to the International businesscommunity.


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E) Foreign exchange :countries with sufficient foreign

exchange reserves, a liberal policy onrepatriation and which have demand for theproducts and services are an ideal destinationfor any company to do IB


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Economic environment : F) Income levels:

Economies are classified into low and high incomeeconomies.

Industrialised nations are high income economies andenjoy a high per capita income.

Companies marketing premium quality or hightechnology products have an easy entry into suchadvanced economies with the proper strategy e.g IPOD

and Playstations. Similarly developing countries which are low income

economies are price sensitive. Accordingly foreign companies will think of cheaper or

middle level products for these economies.


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Political Environment Countries with stable government and political

system enjoy successful business operations. Includes Policies and characteristics of political

party, the nature of constitution and governmentsystem. Eg. USA is the best example of better Political

environment Political friendship results in growth of bilateral or

multilateral trade. International business face political risk as and

when there are changes in government policiesand political power.


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Political Environment : Host country political environment :

The political parities in each country have differentideologies.

It is imperative to know these ideologies before enteringany country.

Both Coke and IBM had to leave India , when in 1977 ,Janata party came to power in India.

Global Political environment :formation of strategic alliances like EU helps

companies in that region to enter any country in thatalliance as it benefits them more than companies formnon EU.


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GNP (Gross National Product)

The GNP per capita of a country shows theaverage value of goods and services produced byeach person each year. This is then divided by

the total population to get an average earningsper person.http://www.studentsoftheworld.info/infopays/rank/PNBH2.html

Countries are divided into 4 categoriesdepending on the GNP Low Income Countries Lower-middle Income countries Upper Middle Income countries High Income Countries


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Cont. Low Income Countries - Countries having less than US $ 400 per capita.

Also called as Third countries. Characteristics are high birth rate, limitedindustrialization, low literacy rate, etc

Lower-middle Income countries Countries having GNP per capital of US

$ between 400 and 2000. Called as LDCs. Characteristics are early stage of

industrialization, availability of cheap labour, dependency on agriculture

etc.

Upper Middle income countries GNP per capita of US $ ranging from

2000 to 12000. Also known as industrializing countries. Characteristics are

increase in literacy, low wage costs, high exports, and rapid economic

developments.

High Income countries Countries with more than GNP of US $ 12000.

Characteristics are high income, industrialization, development of

technology etc

international business chpt 1

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