INTERNATIONAL BUSINESS

IB is the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organizations. Primary type of transactions are export-import trade and FDI.

It is the marketing operations of an enterprise that produces and or sells in a foreign country when:That organization is a part of or associated with an enterprise with an enterprise which also operates in other country.

There is some degree of influence on or control of the organization activities from outside the home country in which it produces and or sells.

G LOBALISATION

• Globalization refers to rapid increase in the share of economic activity taking place across national borders.

• It goes beyond the international trade includes the way in which goods/ services are produced /created, delivered &sold & movement of capital

STAGES OF GLOBALISATION

• Domestic company• International company (ETHNOCENTRIC)• MNC (POLYCENTRIC)• Global company (REGIOCENTRIC)• Transnational company ( GEOCENTRIC)

DOMESTIC COMPANY

• Limits its operations, mission & vision to the national political boundaries. These companies focus its view on the domestic opportunities, domestic suppliers, domestic customers etc. these companies analyze the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment. The domestic company’s unconscious motto is that “if its happening in the home country its not happening any where”.

• Domestic companies never thinks of growing globally. If it grows, beyond its present capacity the company selects diversification strategy of entering into new domestic market, new products, technology. It does not select the strategy of expansion or penetrating international markets.

•

INTERNATIONAL COMPANY• Companies who divide to develop the opportunities outside the

domestic country are stage two companies. They remain ethnocentric or domestic country oriented. They believe that practice adopted in domestic business, people and product of domestic business are superior to other companies. Focus of their companies in domestic but extends its wings to foreign countries. They select the strategy of locating the branch in foreign country, extend domestic operation to foreign markets, and extend domestic price and product and promotion practice to foreign markets.

• Company follows these strategies due to limited resources and to learn from foreign market gradually before becoming a global company without much risk.

MULTINATIONAL COMPANY

• Formulates different strategies for different market so orientation shift from ethnocentric to polycentric orientation. Under polycentric orientation the office and the subsidiaries of multinational companies work like domestic company in each country where they operate with individual policies and strategies suitable to that country concerned.

GLOBAL COMPANY

• A company, which has either global marketing or global strategy

1. Either produce in home country or a single country and focus on marketing products globally

2. Produce the products globally and focus on marketing the products domestically. Eg. Dr.Reddy’s lab designs and produces drugs in India and markets globally.

TRANSNATIONAL COMPANY

• Produces, markets, invest and operate across the world. Its an integrated global enterprise which links global resource with global markets at profits. There is no pure transnational corporation. Most of the transnational companies satisfy many of the characteristics of the global corporation. It’s geocentric in approach.

ETHNOCENTRIC:

• They treat all foreign operations as if they were extension of domestic operations. Each unit is integrated into the planning and control system of the parent country. Standard products and services are produced that can be used anywhere in the world. They follow the same procedure of the parent country to the other countries also. This is suitable only if the tastes and preferences of different markets are same. Eg whirlpool when entered Japan.

POLYCENTRIC

• They go to every market and study the market and then produce goods that suits the market. It is right opposite to ethnocentric. They have a danger of global presence in the market. They treat the MNE as a holding company and to decentralize decision making to the subsidiary level.

REGIOCENTRIC

• The managements operate in the foreign market and change the policies and procedures depending on the regions and situations. They are better than ethnocentric as they suit the purpose of profit maximization by thoroughly understanding the market and changing conditions

GEOCENTRIC

• ‘GLOCALISATION’- THINK GLOBAL ACT LOCAL• they maintain brand image, standards of

quality but they style make the strategies depending on the market. Operations, manpower, resources are global. Company needs a lot of experience to adapt this operation.

Reasons For Globalization

Firm operate internationally for a number of reasons:

• They may be seeking to secure better sources of raw materials & energy.

• They may want to obtain access to low cost factors of production such as labour.

• They may be attracted to certain countries because of subsidies those countries provide.

• They may be seeking new markets for their products.• Domestic markets may no longer be able to attract production

at minimum efficient scale.

Contd…

• They may be motivated by life style factors.Domestic markets become saturated As they older , firms look abroad for new opportunities.

• They may be seeking opportunities for economies of scope & for learning.

ADVANTAGES OF GLOBALISATION• opportunistic development• following customers abroad• pursuing geographic diversification• market extension for incremental profit• develop PLC differences ( if a product is in decline stage it can

be introduced in the other country)• maximum capacity utilization• leverage key success factors abroad• quality products• improve standard of living• technological advantage• reduction in the price of the goods• employment generation• competition in the domestic market

DISADVANTAGES OF GLOBALISATION

• expensive ( spent on research)• differences in political and legal environment• cultural differences• unemployment in the local market• economic differences• difficulty in trade practices• dumping of products• HR policies of company ( issues in the work culture)• exploitation of resources

ROUTES OF GLOBALISATION

EXPORTING LICENSING FRANCHISING JOINT VENTURES MERGERS AND ACQUISITION COUNTERTRADE AGREEMENTS MANUFACTURING ABROAD

EXPORTING

• Most of the firms start their operations in the foreign country as exporters and then later switch to other modes. In this the companies manufacture in the home country and then send it to the other national markets. Eg. most of the leather industries .

LICENSING

• It is an agreement where a licensor grants the rights to intangible property to another entity (licensee) for a specified period of time and in return, the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights and trademarks

LICENSING

ADVANTAGES OF LICENSING

• The firm does not have to bear the development costs and risks associated with opening foreign market.

• It is used when a firm wishes to participate in a foreign market but is prohibited from doing so due to barriers to investment.

• It can help a company to establish a market and to set operating standards for new technologies and products.

• It is a method of earning short term fees with the promise of longer term profits.

• Eg. Sun micro systems has licensed its micro processor technology to Toshibs and other leading computer manufacturers in Japan.

• Eg Coca-Cola has licensed its trademark to clothing manufacturers.

DISADVANTAGES OF LICENSING • Does not give the firm a tight control over manufacturing, marketing and

the strategy required for realizing experience curve• Competing in the global market may require a firm to coordinate in other

countries by using the profits earned in one country to support competitive attack in the other. Licensing does not allow the firm to do this .

• A firm can lose control over its technology by licensing it.• Competitors are given new technology, process or information without

having to spend any money on R&D.• The licensor typically has no local presence but rather relies exclusively on

the licensee.• There is no chance for complimentary opportunities of any kind such as

identifying local demand for goods that could be produced by spinning of this technology.

• Competitive obsolescence is guaranteed as the licensee seeks methods of improving the technology and striking out on its own.

FRANCHISING

• It is basically a specialized form of licensing in which the franchisor not only sells the intellectual property rights to the franchisee but also insists him to follow strict rules as to how it does business.

• The franchisor will also often assist the franchisee to run the business on an ongoing basis. As with licensing, the franchisor typically receives a royalty payment that amounts to some percentage of the franchisee’s revenues. Whereas licensing is pursued primarily by manufacturing firms, franchising is employed by service firms. Eg KFC, Mc.Donalds.

Why Franchise?

• More rapid expansion at lower capital cost

• Motivated owner/operators• Economies of scale and operating

efficiencies• Revenue• Location• Flexibility

Barriers to Global Franchising

• Culture, Culture, Culture!• Location, Location, Location!• Intellectual Property Protection• Political/Legal Framework• Availability of Raw Materials• Availability of Skilled Managers• Education and Training• Quality Control• Marketing Strategy

JOINT VENTURES

• It is the establishment of a firm that is jointly owned by two or more independent firms. It does not involve buying and selling of shares. A and B come together to form a new company C. And hence both the companies still exist. The expertise of A and B may be different and hence decides to leverage. They exist for a particular period of time.

ADVANTAGES OF JOINT VENTURES

• To upgrade technology( eg. TVS tie up with Suzuki )• More funds. ( may have attractive business but not the capital and

hence results in a joint venture.)• Managerial expertise• To block competition ( eg. Mahindra Ford )• Exports ( eg Tata and Dalmier ) • Operational improvements• Reduction of risk of failure by sharing the burden with the partner• Rapid market access and opportunity for quick profits• An increase in the company and product acceptance brought

about by having a local firm serve as the direct interface with the customer.

DISADVANTAGES OF JOINT VENTURES

• Overcharging ( if u want to learn the technology the company charges u more)

• Interference of management• Inability to work well with the foreign partner

results in either sellout or a cessation of the arrangement.

• Domination of the local market by the partner and hence not allowing the foreign company to have direct contacts with the customer.

MERGERS AND ACQUISITION

• This involves buying and selling of shares• In a merger two or more companies combine to form a new

company. They might exist in the market place with their own brand name or dissolve and come out with another brand name or combine both the brand names. Eg. Smithline Beecham and Glaxo formed Glaxo Smithline. HP and Compaq merged and now exists as HP.

• In a take over one company buys the other company. Normally it has a negative impact. In this one gets the market share over night. eg.HLL took over TOMCO (Tata Oil Mill Ccmpany). If the brand image of the company is good then they leverage with the brand image.

ADVANTAGES• Economies of scale• Increase market power• Diversification • Technology acquisition• Market entry ( eg. Coke entered India by acquiring Thums up)• Possession of market infrastructure (eg. OBC merged with GTB to

have an advantage of the network strength of GTB.)• Product mix optimization• Optimum utilization of resources and facilities• Pre emptive strategy ( before a company could take advantage of

the market place u create entry barriers and attack them)• Acquisition of brands

DISADVANTAGES

• Might have a problem with integration• May but technology that is outdated• Dissolution of the brand name if changed

COUNTERTRADE AGREEMENTS

It is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for export of goods, instead of money payements.

forms of counter trade• Barter • Buy back• countrpurchase

MANUFACTURING ABROAD

• The ultimate decision to sell abroad is the decision to establish a manufacturing plant in the host country. The government of the host country may give the organization some form of tax advantage because they wish to attract inward investment to help create employment for their economy

DRIVERS OF GLOBALIZATION

Declining trade and investment barriers: a) After the world war II the lowering of trade barriers led

to the free flow of goods, services, and capital between nations.

b) In addition to lowering of trade barriers, many countries have also removed restrictions on barriers to FDI.

c) These two changes made the laws less restrictive thereby encouraging both inward and outward investment by foreign firms.

DRIVERS OF GLOBALIZATION

The role of technological changea) Advances in microprocessors and

telecommunicationb) Emergence of the internet and world wide

webc) Innovations and developments in the

transportation technology

DRIVERS OF GLOBALIZATION

• Other Environment specific driver a) Competitionb) Regional, economic and political integrationc) Economic growthd) Converging consumer needse) Cost reductionf) Increase sales and profits

1-7 history of international business

• International trade is not a new aspect of business• Globalization forces

– computers and communications– reduction of barriers to trade– merger of the global community

• International business as a business practice is not new

• 1600 British East India Company• Shipping routes to the east opened by Dutch companies in 1590• American colonial traders of the 1700’s• Singer Sewing Machine 1868 (Scotland)

DIMENSION DOMESTIC BUSINESS OPERATION INTERNATIONAL BUSINESS OPERATION

1.Environment The economic, political, legal, socio-cultural, competitive and technology environments are known, hence one can take the necessary precautions.

The environment is not fully known, innumerable hidden factors which may emerge at any time to pose problems

2. plan and strategy Plans and strategies can be worked out for short terms and carried forward to long term

Only long term planning and strategy will work. Strategies inputs are required in multiples

3. competition The maximum domestic competitive forces operate and one can understand their movement

International competitive forces place a vital role and is very difficult to understand their motive and movement

4.currency Local currency is used for transactions. Costing, pricing, revenue and margins are computed in a single currency.volatility may have a minimum impact in business in short term.

Transactions are carried out in various currencies. Fluctuations in cross currency movement and associated risks are common. Currency fluctuation influences pricing and costing and investment decisions

DIFFERENCES BETWEEN IB AND DOMESTIC BUSINESS:

5. business risks Comparatively one can predict future risks and shocks and they will not have a major impact on the business houses

Very difficult to predict and risks may crop up at any time, due to the political situation, the society itself or other unknown factors

6. research It is reasonable and easy to conduct business research, demand analysis and customer survey. It is also reliable for business ventures

Very expensive and difficult to conduct. Reliability criteria depends on individual countries and there is no uniformity in the output

7. human resources Due to past laurels and established systems, comorates can succeed even if the HR have minimum skills and knowledge

Multilingual, multi-strategic and multi-cultural HR are necessary and they should be able to withstand large risks

8. organizational vision and objective

Narrowed down to work in a single country with a steady growth objective. Each one will understand the vision and objective very quickly

Broaden to cover many countries and geograohic and cultural diversity may influence the vision and objective

9. product development Adapted to the local environment, as per the requirements of the domestic customers affordability, beliefs, values and cultural elements

Varies from country to country subject to the regulations of the host country. This is especially true for consumers and medicinal items

10. legal aspects Only local regulations are fully applicable to conduct business. There is minimum adherence to international regulations related to IPR

International regulations and host country regulations are applicable. Advanced countries impose strict regulations compared to LDC’s

11. investment Depending on the size of the business one can start with a minimum investment. Involvement of regulatory bodies is minimal.

All overseas operation except exports call for huge investments to set up and expand business in many countries. Special regulatory bodies are involved in the process since foreign currency is transacted

12.pricing A majority of companies use cost plus margin pricing or competitive pricing

Companies use marginal cost pricing or transfer pricing or competitive pricing to succeed

13. distribution The business house can use its discrition to select any channel to reach the customer

The distribution channel is governed by the government or market practice.cash and carry shopping malls and mail order service are becoming popular in international business.

14.promotion Advertising, personal selling and other promotional methods are not restricted through strict legal framework if they are not socially objectionable

Different countries have different restrictions. Eg, advertisements for liquor and cigarettes are banned in few countries.

15. logistics Domestic players are involved in all the activities

International players with advanced technology and systems are involved.

ENVIRONMENT OF IB

• Political – Legal Environment• Economic Environment• Cultural Environment• Technological Groups

POLITICAL ENVIRONMENT

• This refers to the influence of the system of government and judiciary in a nation on international business

• A political system is stable, honest, efficient and dynamic which ensures political participation to the people.

• The type and structure of government main in a country decides, promotes, fosters, encourages, shelters, directs and controls the business of that country.

• It is primary factor for economic developed.

Political factorsConsider:• The political stability of the nation. Is it a

democracy, communist, or autocratic government?

• Monetary regulations. Will the seller be paid in a currency that they value or will payments only be accepted in the host nation currency?

DEMOCRACY• Democracy may patent itself in any of two fundamental manners. If each individual

is given the right to rule and vote on every matter, the result is pure democracy which is not, however workable in a complex society with a large constituency.

• Public in a democratic manner, elect their representatives who do the ruling.• A representative democracy rest on the assumption that should the elected

representatives fail to perform adequately they will be voted down at the next election.

• democracy maintain stable business environment primarily through laws protecting individual property rights,

• In theory, business prospers when the private sector enjoys freedom to decide, freedom to earn and freedom to spend. But in practice, free markets, property rights and democracies do not guarantee economic growth. Ex: Country like India

•

TOTALITARIANISM

• It is also called as authoritarianism; individual freedom is completely subordinated to the power of the authority of state and concentrated in the hands of one person or in a small group which is not constitutionally accountable to the people.

• Societies ruled by a pressure group – political, economic or military or by a ruler, plus most kingdom belong to this category.

• During the first and second world wars, the controlling governments began to appear in most mature economies. Even after the second war, the totalitarianism system became most common in newly independent nations.

• Nazi Germany (Under Adolf Hitler) and the former Soviet Union (Under Joseph Stalin) are historic examples. Today:- Cambodia, Myanmar, China, Cuba

THEOCRACY

• When a country is religious, leaders are also its political leaders; the political system is called Theocracy.

• Religious leaders frame and enforce laws and regulations that are based on religious beliefs.

• A political system that is under the control of religious leaders is theocratic totalitarianism. Ex: Afghanistan

SECULAR

• A political system in which political leaders are guided by military and bureaucratic power is called secular totalitarianism. In such a system, the military controls the government and makes decisions which it deems to be in the best interest of the country. Ex: Pakistan

TRIBAL

• A third form of totalitarianism is the tribal totalitarianism. This exists principally in African countries such as Zimbabwe, Tanzania, Uganda and Kenya. Tribal totalitarianism occurs when a political party that represents the interest of a particular tribe monopolizes power.

POLITICAL RISK

• Political risk is any governmental action or politically motivated event that could adversely affect the long – term profitability or value of the firm.

• It can pressure the market of an exporter, the production facilities of a manufacturer or the ability of a firm to repatriate its profits from a host country to its home country.

• Political risk varies from nation to nation. It is very high in countries Yugoslavia, Myanmar, Turkey and Indonesia. It is non-existent in US, Canada, Australia and western European countries.

Managing Political Risks

• Avoiding Investment: The simplest way to manage political risks is to avoid investing in

a country ranked high in such risks. Investments are transferred to some other country which is considered to be relatively safe. This may be poor choice as the opportunity to do business in a country will be lost.

• Adaptation: Adaptation means incorporating risk into business strategies.

MNC’s incorporate risk by means of the following three strategies:• Local equity and debt• Development assistance• Insurance

• Low Equity and Debt This involves financing subsidiaries with

the help of local firms, trade unions, financial institutions and government localization entails modifying operations, product mix or any such activity to suit local tastes and culture. Ex: Mc Donald started franchisee operations in India ensured pack in did not contain any beef.

• Development Assistance Offering development assistance allows an

international business to assist the most country in improving its quality of life. Since the firm and the nation become partners, both stand to gain. In Myanmar, the US oil company and France’s total have invested billions of dollars to develop natural gas fields and also spent $ 6 million on local education, medical care and other improvements

• Insurance This is the last means of adaptation.

Companies buy insurance against the potential effects of political risk. Some policies protect companies, when host governments restrict the convertibility of their currency into parent country currency. Others insure against losses created by violent events, including war and terrorism.

LEGAL ENVIRONMENT• Legal environment refers to the legal system obtaining in a country. It refers

to rule and laws that regulate behavior of individuals and organizations.• Failure to fulfill with the laws means that penalties will be inflicted by the

courts depending on offense.• The legal system of a country is very much important to international

business.• A country’s law regulates business practice, define the manner in which

business transactions are to be carried and set down the rights and obligations of those involved in business deals.

• Legal system in a country is influenced by its political system. The government of a country firms conduct business and often the laws that regulate business reflect the ruler’s political ideology. Totalitarian states for example, tend to exact laws that restrict private enterprise while democratically elected governments are pro-private enterprise .

SYSTEM OF LAW

• Islamic law, derived from the interpretation of the Quran and practiced in countries where Muslims are in majority

• Common law, derived from English law, is prevalent in countries which were under British influence.

• Civil or code law, derived from Roman law practiced in Germany, Japan, France, and non-Marxist and non-Islamic countries.

• Marxist legal system which has takers in communist countries.

ISLAMIC LAW

• Derived from interpretation of Quran and teachings of Mohammed.• Islam means submission or surrender.• Muslim submits to will of god, who judges or decides what is proper and what is

improper.• God’s commandments as revealed to Mohammed provide path for true believers

to follow. It provides ethical and moral percepts as well as rules of public order.• The idea of law in Islamic societies in quite different from western countries. Most

western nations perceive law as an expression of will of people acting through their legislatures. Islamic law is product of godly revelation. It cannot be changed as people believe in will of god.

• Islam law prohibits receipt and payment of interest. It also rule out alcohol, gambling .

• It advocates risk sharing, property rights, individual rights and duties and sacredness of controls.

• To conclude Islam law emphasizes on ethical, moral, social and religious dimensions to enhance equality and fairness.

SOCIALIST LAW

• Evolves from Marxist socialist system and practiced in communist countries like Russia, China, Vietnam, North Korea, and Cuba.

• Extensive codes are primary sources of socialist law. The legislature is primary branch of government and judiciary comes next.

• Ideology plays a vital role in socialist law. Unlike civil law, which can be used by government of widely differing political view points, socialist legal codes a redesigned to achieve personal and societal transformation.

• Communist ideology pass through socialist law. The legal environment provides for state ownership of means of production and distribution and also calls for state ownership of land and in most cases collective use of land. It supports centralized planning.

• There is little tolerance of private property rights, freedom, taxation and price control.

COMMON LAW

• develop from English law and skillful in US, Canada, England, Australia, India etc.• It is based on cumulative wisdom of judge’s decisions in individual cases. Contracts,

agency are controlled by collection of principles reason from specific disputed resolved in an advisory process.

• In common law similar disputes should achieve similar legal results. Therefore parties to a dispute will look for similar earlier cases with favorable decisions.

• This provides stability required for biz people to plan their future actions. But flip side is it creates potential problems for not so well informed international biz manager.

• For example, manufacturers of defective products are more vulues to lawsuits in US than in New Zealand as a result of evolutionary difference in law of negligence in the two countries.

• Legislation and its regulations are another source of law in common law countries as it provides blanket rules.

• Tradition is also a major source in common law countries.

CIVIL LAW

• Originated with Romans and is practiced in Germany, France and Japan.

• Based on detailed set of laws that make up a code.• In Common law system, judges serves as neutral reference,

defining points of law and ruling on various motions put forth by opposition party’s lawyers. The lawyers are responsible for developing their client’s case and choosing which evidence to submit to court. Whereas in Civil law judge takes on many of tasks of lawyer’s i.e. he collects evidence to be presented to the court.

• Under Code law ownership is determined by registration. Whereas in Common law ownership is established by use.

ECONOMIC ENVIRONMENT

• Classification of countries on the basis of income

• Countries classified by economic system• Region-wise classification of countries• Economic trade policies• Economic institutions

Economical Factors

Consider:• Consumer wealth and expenditure within the

country. • National interests and inflation rate. • Are quotas imposed on your product. • Are there import tariffs imposed. • Does the government offer subsidies to

national players that make it difficult for you to compete

INCOME-WISE CLASSIFICATION OF COUNTRIES

LIC (Low Income)• Having PCcapital of $735 or less.• Ex: Cambodia, Indonesia, Mongolia, Vietnam in East Asia and Pacific.• Georgia, Tajikistan, Uzbekistan… in Europe and Central Asia• Congo, Ethiopia, Nigeria, Zimbabwe…..in Sub-Saharan Africa.• These are called developing countries.•

LMC (Low-Middle Income)• Having incomes between $736 and $2995.• Ex: China, Fiji, Philippines……..in East Asia and pacific.• Bulgaria, Romania, Turkey……in Europe and Central Asia.• Brazil, Cuba Paraguay, Peru…..in Latin America and Caribbean• Algeria, Egypt, Iran, Iraq…..in Middle East and North Africa.• Sri Lanka, Maldives in South Asia.• Namibia, Swaziland, South Africa in Sub-Saharan Africa.• These are called developing countries.

UMC (Upper-Middle Income)• Having incomes between $2996 and $9265.• Ex: Malaysia, American Samoa……..in East Asia and pacific.• Hungary, Poland, Croatia……in Europe and Central Asia.• Chile, Grenada, Panama…..in Latin America and Caribbean• Libya, Saudi Arabia…..in Middle East and North Africa.• Botswana, Gabon, Mauritius in Sub-Saharan Africa.• These are called developing countries. High-Income OECD• Having incomes more than $9266.• Australia, United States, United Kingdom, Japan, New Zealand, Germany, France….• These are called developed countries.• The other high income countries are Antigua, Bahamas, Greenland, Kuwait, Israel, UAE……

DEVELOPING COUNTRIES

• Most developing countries share a set of common goals.

• Ex: Reduction in poverty, unemployment, provision for minimum levels of education, health, food…..

• Substantial increasing dependence on foreign technologies, institutions and value systems.

DEVELOPED COUNTRIES:

• These countries are highly industrialized, highly efficient and people enjoy a high quality of life.

• People receive excellent healthcare and benefit from the best educational systems in the world.

• These countries generate nearly 80% of the world’s wealth.

• They are natural place to do business because of high demand.

• They have relative political and economic stability.

ECONOMIC ENVIRONMENT FACTORS

• Economic system• Economic planning• Industry• Agriculture• Infrastructure• Financial and fiscal sector• Removal of regional imbalances• Price and distribution control• Economic Reforms

COUNTRIES ECONOMIC SYSTEMS:

• Market Economy– It is also called capitalism.– All productive functions are privately owned.– Production is determined by the interaction of

supply and demand forces.– Consumers are supreme, they decide what the

producers should produce and supply.

• Command Economy• It is also called Socialism.• Planning is a must in this.• Decisions relating to all economic activities are taken• Consistent with collective ideology• The main objective is to own and run business for the good

of society.

• These are usually found in communist countries. Since the failure of communism in the late 1980’s, the number of commands economy nations has fallen considerably.

• Mixed Economy• This falls midway between market economy and command

economy.• They admit existence of private sector along with government

ownership. The economic set up under this is split into three parts:

– Sectors in which both production and distribution are entirely managed and controlled by the state to the complete exclusion of private enterprise.

– Sectors in which the state and private enterprise jointly participate as well as in distribution

– Sectors in which the private enterprise has complete access subject only to the general control and regulation of the state.

ECONOMIES IN TRANSITION

India• From 1950 to 1991, India had a mixed economy.• Now it is to say that the economy is on its way towards open market operations.• China• It is attracting attention of all the nations• No other country on earth has done more for its people economically in the last 20 years• It has ¼th of world’s population and one of the world’s population and one of the world’s

largest economies despite its communist rule• After 1970 China has made many changes in its economic and legal systems• It has opened opportunities for collectively and privately owned enterprises.• It increased its imports of technology, modernized its banking systems and other service

industries.• During 1990’s it became one of the most attractive markets for FDI by MNC’s around the

world.• Over 1/3rd of all investments has gone to China• In 2000 alone 12000 foreign companies set up wholly owned subsidiaries in china.

Vietnam• Located in Southern Asia• Country with a population of 80 million• It almost became a free economy when the communist party’s top decision makers

decided in 2002 to pursue policies necessary to boost the role of private sector.• Like China, Vietnam is one of the new investment dealings in Asia.• Crime, corruption, poor infrastructure are impeding the flow of investment into

Vietnam. Russia• Russia’s marriage with communism dates back to 1917.• For the next 75 years everything were controlled by the government.• Russia is permanent very big political and economic reforms at the same time.• Russia as an entity came into being following the dissolution of the USSR in 1991 and as

of today it is CIS (Common wealth of Independent States)• In winter of 1998-99, the Russian government requested food from Western Europe

and the US to help its people avoid hunger.

CULTURAL ENVIRONMENT

• Culture consists of the consideration and

behavioral patterns that members of society learn through language and other forms of symbolic interaction – their customs, habits, beliefs and values, the common view points that attach them together as a social entity.

Elements or Determinants of Culture

• Language• Aesthetics• Religion• Education• Customs and Manners• Attitudes• Culture

LANGUAGE

• Foundation of any culture – it is an abstract system of word meaning and symbols for all aspects of culture.

• Language includes speech, written characters, numerical, symbols and signal of non-verbal communication.

• Languages can be classified based on whether message conveyed in implicit or explicit.

• Languages in which people state things directly and explicitly are low context (Ex: German) and indirectly and implicitly are high context (Ex: Asian language).

• It helps determine success in following ways:– It provides a clearer understanding of given situation. International manager can directly

conduct biz without need of an interpreter if he has ability to communicate in host language.

– It establishes effective and suitable bridges to local people.– Speaking with host in their language gives speaker feel of emotions and significance with

which host communicates.– It provides practical means of understanding another culture.– Learning language, understanding all tone and line and socializing with a host are rewarding

experiences for an international manager. They help manager to be more effective.

RELIGION

Hinduism• 500 million adherents, mainly found in India.• Critics argue that by emphasizing moksha, dharma rejection. Hinduism

cancel out entrepreneurialism and acquisition of wealth. But, India has produced hundreds of entrepreneurs who have made it big as home and abroad.

• Theoretical classification of 4 stages:– Brahmacharya – Student life– Grihstha – Married and house holder– Vanaprastha – Hermit in forest– Sanyasi – Old man and have less traveler.

• Wealth is worshipped in form of Goddess Lakshmi unlike in West were richness is merely respected.

Christianity• Widely practiced religion in world – About 1

billion people• Live in Europe and America• Capitalism - most dominant economic

philosophy which advocates hard work and wealth acquisition

Islam• Second largest religion practiced in more than 35 countries

from Africa to Middle East to China and Malaysia in Far East.

• exclude receipt or payment of interest which affects country’s banking and financial system.

• Approving of free enterprise and of earning lawful profit through trade and commerce.

• advocate market based systems.• There has been increase of fundamentalism in some

Islamic countries.

Buddhism• 250 million followers in Central and South East

Asia, China, Korea and Japan.• Stress spiritual achievement and wealth

creation is not encouraged.• Cultural stress on entrepreneur behavior is not

seen.

Confucians• 150 million people found in China, Korea and Japan.• Teaches importance of attaining personal recovery through

right action.• High moral and ethical conduct and loyalty to others are

central to Confucianism.• Teaches to lower the costs of doing biz which has led to

economic success of Japan, South Korea, etc.• Loyalty, mutual obligations and honesty are central to

Confucianism.

Education and Culture• Education is lifelong process of learning through which

members of a society acquire knowledge and develop skills, ideas, values, norms and attitudes which they share with other members of society

• Education has considerable economic implications– Countries rich in educational facilities attract high wage industries– Market potential of country defends on education. MNC’s doing biz

in these countries will find it easier to hire and train local managers.– Level of education determines nature of advertising, packaging,

quality of market research

Aesthetics and Culture• Relates to creative tastes of culture• Aesthetic values of Indians are different from Canadians as

reflected by art literature, music etc.• Behavior of people is one more quality of aesthetics• International managers should understand aesthetic local

values if one has to appreciate another culture• Color is also related to aesthetics. In Western countries black

is associated with mourning. In Asian countries white is color of mourning. Green is favored in Islam but associated with sickness across Asia.

CULTURAL

McArabia Kofta

Technological environment:

• Technology as a systematic application of scientific or other organized knowledge to practical tasks.

• Features of technology:– The first feature of technology is its change and then

more change.– Technologies effects are wide spread.– Technology is self-reinforcing.

Technological

Consider:• The technological infrastructure of the market. • Do all homes have access to energy

(electricity) • Is there an Internet infrastructure. Does this

infrastructure support broadband or dial up? • Will your systems easily integrate with your

host country’s?

TECHNOLOGICAL

• “World Wide Web” has exploded in last 10 years

• Computers can move money around world = “finance capital”

• Silicon Valley is 9th largest economy in world!

INTERNATIONAL TRADE THEORIES Trade theory is useful because it helps to explain what

might be produced in a given environment ,where the company might go to produce a given product efficiently /and whether governmental practices might interface with the free flow of trade among countries. Basically all theories look in to the following factors :

• How much to be traded ?• What products to be traded ?• With whom to be traded ?• Should the govt. intervene in trade ?

INTERNATIONAL TRADE THEORIES

• Mercantilism• Absolute advantage• Comparative advantage• National Competitive Advantage• The new product life cycle theory

Mercantilism• The first theory of international trade emerged in England in the mid 16th

century. its principle statement was that gold and silver were the mainstays of national wealth and essential to dynamic commerce.

• At that time silver and gold were the currency of trade between countries .the country can earn gold and silver by exporting goods.

• In ordinary means therefore to increases our wealth and treasure is by foreign trade where in we must ever observe this rule ; to sell more to stranger yearly than we consume of their values

• The main belief of mercantilism was that it was in a country’s best interests to maintain a trade surplus, to expand.

• National wealth was measured by its treasure (gold)• Countries should strive to export more than they

import to earn gold• Use subsidies to enhance exports• Use tariffs to limit imports• Use overseas colonies to export to at high prices

and buy from at low prices• The effects of mercantilism practiced until the mid-

20th century continue to be felt to this day

• A nation’s wealth depends on accumulated treasure

• Gold and silver are the currency trade.

• Theory says you should have trade surplus. – Maximize exports through – Minimize imports through tariffs

quotas.

4-6

Absolute Advantage• Adam Smith, The Wealth of Nations (1776)• Real wealth consisted of goods and services available

to citizens, not gold• Different countries inherently can produce some goods

more efficiently than others and should specialize in such goods.

• Specialization should be based on natural or acquired advantages of a nation

• Global efficiency can thus be increased through free trade

• Capability of one country to produce more of a product with the same amount of input than another country.

• Produce only goods where you are most efficient, trade for those where you are not efficient.– Trade between countries is, therefore, beneficial.

• Assumes there is an absolute advantage balance among nations.

ASSUMPTIONS OF THEORY

• Trade is between two countries• Only two commodities are traded • Free trade exists between countries• The only element of cost of production is

labour

An arithmetic example

The U.S. has an absolute advantage in iPad production; its iPad workers' productivity (output per worker hour) is higher than that of the U.K, which leads to lower costs (less labor required to produce a set of iPad).

In like manner, the U.K has an absolute advantage in cloth production.

Trade Based on Absolute Advantage

A Case of Absolute Advantage

Country

Output per Labor Hour

iPad Cloth

U.K.U.S.

5 sets15 sets

20 yards10 yards

• A country has an absolute advantage over another in producing a good, if it can produce that good using smaller amount resources than another country.

• For example if one unit of labor in Australia can produce 80 units of wool or 20 units of wine; while in France one unit of labor makes 50 units of wool or 75 units of wine, then Australia has an absolute advantage in producing wool and France has an absolute advantage in producing wine.

• Australia can get more wine with its labor by specializing in wool and trading the wool for French wine, while France can benefit by trading wine for wool.

Comparative Advantage Theory

• In 1817 principles of political economy .• David Ricardo took Adam Smith’s theory one

step further by exploring what might happen when one country has an absolute advantage in production of all goods.

• Mutually beneficial trade can occur even when one country is absolutely more efficient in the production of all goods. – The more efficient country should specialize in and

export that good in which it is relatively more efficient (where its absolute advantage is bigger).

– The less efficient country should specialize in and export the good in which it is relatively less inefficient (where its absolute disadvantage is smaller).

• A country enjoys an absolute advantage over another country in the production of a product if it uses less resources to produce that product than the other country does.

• A country enjoys a comparative advantage in the production of a good if that good can be produced at a lower cost in terms of other goods.

Qualifications and Assumptions

• Only two countries and two goods.• Transportation cost is nil.• No difference in price of resources.• Resources can move freely with in the country.• Constant return on sales.• Fixed stock of resources.• Assume away the effect of trade and income

distribution within the country.

• Ricardo's comparative advantage theory extends Smith's view to the case where one of the two countries has an absolute advantage in both commodities, and shows that even here trade is good for both countries.

• As noted above , Ricardo's Comparative Advantage Theory rests on the same very strong assumptions that underlie Smith's Absolute advantage theory .

• An Example of Comparative Advantage

The U.S. labor has a 5-to-1 absolute advantage in the production of iPads. The U.S. labor also has a 3-to-1 absolute advantage in the production of cloth. The U.S. has a greater absolute advantage in producing iPads than in producing cloth.

China has an absolute disadvantage in the production of iPads and cloth. However, China’s absolute disadvantage is smaller in producing cloth than in producing iPads.

A Case of Comparative Advantage

CountryOutput per labor hour

iPads Cloth Relative cost

U.S. 5 sets 15 yards 1 iPad=3 yards of cloth

China 1 set 5 yards 1 iPad=5 yards of cloth

• Gains from Specialization and Trade with Comparative Advantage

As the U.S. transfers 1 worker from cloth production to iPad production, its

output of iPads increases by 5 and cloth production falls by 15 yards. As China transfers 3 workers from iPad production to cloth production, its cloth

production increases by 15 yards and iPad production falls by 3.

The gain from production and trade is the increase in the world output that results from each country specializing in its production according to its

comparative advantage.

The Change in the World Output Resulting from Specialization

CountryChange in the production of

iPads Cloth

U.S. 5 sets 15 yards

China 3 sets 15 yards

Change in the World Output +2 sets 0