Master of Business Administration - Semester 4MB0053: International Business Management”

(Book ID: B1315)ASSIGNMENT

Q1. Write a short note on GATT and WTO, highlighting the difference between the two.

General Agreement on Tariffs and Trade (GATT) - GATT is a multilateral agreement among countries providing a framework for conducting international trade. GATT is regarded as an international institution governing international trade relations. It consists of disciplines on governments and matters related to import and export of goods. It was established to promote international trade by reducing tariff and non-tariff restrictions on imports imposed by member nations. Tariff barrier refers to imposing import duty and non-tariff barriers means restricting imports through import licensing and by banning the imports. GATT provides a framework for negotiations on the level of tariff. It promotes multilateral trade among member nations. It provides protection against unfair trade and obstructions to trade.

WTO

In this section we will discuss about the World Trade Organisation (WTO). WTO was established on 1st January 1995. In April 1994, the Final Act was signed at a meeting in Marrakesh, Morocco. The Marrakesh Declaration of 15th April 1994 was formed to strengthen the world economy that would lead to better investment, trade, income growth and employment throughout the world. The WTO is the successor to the General Agreement of Tariffs and Trade (GATT). India is one of the founder members of WTO. WTO represents the latest attempts to create an organisational focal point for liberal trade management and to consolidate a global organisational structure to govern world affairs. WTO has attempted to create various organisational attentions for regulation of international trade. WTO created a qualitative change in international trade. It is the only international body that deals with the rules of trades between nations.

Q2. Describe various entry strategies available to a firm when it wants to enter a foreign market.

Strategy for International Business in India

The strategy for international business is through incorporation of the concept of configuration and competence. The concept of configuration is based on the value chain concept. The competence strategy is to identify the core competency of the firm that puts it in a superior position. Core competence is achieved when the financial, technological and manpower resources are available conveniently at low cost.

1 Regional understanding

Regional understanding is a strategy that has macroscopic and microscopic forms. In a macroscopic view, a regional understanding refers to the co-operation between nations that have are geographically placed together. Developing countries must strengthen regional cooperation with other developing countries to enhance development. The international regional organisations such as ASEAN (Association of South East Asian Nations), EU (European Union), MERCOSUR (South American Countries), and NAFTA (North American Free Trade Agreement) are examples of international regional alliances that have evolved immensely benefiting the member countries in terms of market access and economies. The regional co-operation also has its own advantages and disadvantages. The advantages of regional understanding are the following:

· Better market access among the regional alliances.

· Improved inflow of foreign exchange.

· Enhanced economies of scale.

· Easier mode of representation in the international market.

The conflicts arise in terms of bilateral agreements outside the regional co-operation, threat of acquisition by foreign companies, destruction of domestic market and so on.

In a microscopic view, the regional understanding as a corporate business strategy achieves the following:

· Enhance business productivity and increase employment opportunities.

· Prioritise resources such that public funding offers effective business support which satisfies business needs.

· Maximum benefit to the region by focusing on key priorities.

· Regional understanding as a business strategy is a process by which decisions are coordinated and integrated across the entire region.

Regional understanding focuses on the review of an overall regional acquisition. It also focuses to regionalize contracting, facilitate sharing of contracts, develop contracting capabilities, develop and implement standard operating procedure for regional contracting, and enhance small business opportunities.

2 Strategic alliances

Strategic alliances refer to the alliance between actual or potential competitors. In strategic alliance, two organisations who are potential competitors agree to cooperate with each other and form an alliance by entering into a cooperative agreement. For example, Motorola initially found it difficult to enter the Japanese market. It then formed an alliance with Toshiba in 1987 to build microprocessors. Toshiba provided marketing and managerial help to Motorola for expansion in Japan. Strategic alliances among international businesses are common. Strategic alliance is preferred in industries such as electronics, computer hardware and software, telecommunication and so on. The companies cooperate in technology development, sharing R&D information of mutual interest to develop new products that complement each other. Strategic alliance also helps them to build networks of dealers and distributors to handle their products.

Another reason for forming strategic alliance is risk sharing. When industries enter a new market or develop new products there is no guarantee of success. These agreements can help in reducing and controlling the risk of an individual firm.

Strategic alliances are formed to exploit economies of scale. Alliance partners can reap economies of scale in partnership. The complementary assets and resources that alliance partners possess are their development, manufacturing and distribution activities. Strategic alliances help in learning important skills and abilities from their competitors.

Strategic alliance can be classified into the following categories:

· Non-equity alliances – In the non-equity alliance, the cooperating firms agree to work together to carry out activities. They do not take equity positions in each other or form an independent organization to manage their cooperative efforts. These alliances are managed by contracts.· Equity alliances – In equity alliance, the cooperating firms supplement contracts with equity holding in alliance partners.· Joint ventures – In joint venture, the cooperating firms create a legal independent firm in which they invest and share profits.

Strategic alliance is preferred in international business because it helps in:

· Providing access to new markets.

· Gaining access to local distribution network.

· Gaining access to other financial resources.

· Attaining risk reduction.

· Enhancing the manufacturing process.

· Improving access to latest technologies.

Q3. Write a note on ‘Globalization’.

Globalization is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalization is defined as ‘the worldwide trend of businesses expanding beyond their domestic boundaries’. It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalization.

Benefits of globalizationThe merits and demerits of globalization are highly debatable. Whileglobalization creates employment opportunities in the host countries, it alsoexploits labor at a very low cost compared to the home country. Let usconsider the benefits and ill-effects of globalization. Some of the benefits of

globalization are as follows: Promotes foreign trade and liberalization of economies. Increases the living standards of people in several developing countries

through capital investments in developing countries by developedcountries.

Benefits customers as companies outsource to low wage countries.Outsourcing helps the companies to be competitive by keeping the costlow, with increased productivity.

Promotes better education and jobs. Leads to free flow of information and wide acceptance of foreign

products, ideas, ethics, best practices, and culture. Provides better quality of products, customer services, and standardized

delivery models across countries. Gives better access to finance for corporate and sovereign borrowers. Increases business travel, which in turn leads to a flourishing travel and

hospitality industry across the world. Increases sales as the availability of cutting edge technologies and

production techniques decrease the cost of production. Provides several platforms for international dispute resolutions in

business, which facilitates international trade.

Some of the ill-effects of globalization are as follows: Leads to exploitation of labor in several cases. Causes unemployment in the developed countries due to outsourcing. Leads to the misuse of IPR, copyrights and so on due to the easy availability of technology,

digital communication, travel and so on. Influences political decisions in foreign countries. The MNC increasingly use their economical

powers to influence political decisions. Causes ecological damage as the companies set up polluting production plants in countries

with limited or no regulations on pollution. Harms the local businesses of a country due to dumping of cheaper foreign goods. Leads to adverse health issues due to rapid expansion of fast food chains and increased

consumption of junk food. Causes destruction of ethnicity and culture of several regions worldwide in favour of more

accepted western culture.

Q4. What does FDI stand for? Why do MNCs opt for FDI to enter international market?

Foreign Direct Investment (FDI) Policy

Foreign direct investment (FDI) is an investment made with an intention of establishing a long term interest by a business enterprise in another country. It is also required that such an enterprise holds directly or indirectly, an ownership of 10% or more of voting rights in the target enterprise.

FDI policy, which is dictated by the Government of the host country, plays a vital role in the economic growth of that country. Attracting FDI inflows with constructive policy is a challenge for any nation. Developing countries offer a lot of incentives for FDI, particularly in capital intensive sectors like power, infrastructure, transport, construction. Effective FDI policies help the host country to portray itself as an attractive investment destination.

Main objectives of FDI policy are to provide and facilitate investor friendly business environment, so that the foreign investors feel safe with the financial and legal framework of the country. The Government of the host countries often formulate new or special regulatory framework to attract FDI. The host country often needs to invest in development of domestic infrastructure to make it investor friendly.

Q5.What is the need to understand cultural differences? Explain Hofstede’s cultural dimensions.

Need to understand cultural differences

Cultural differences affect the success or failure of multinational firms in many ways. The company must modify the product to meet the demand of the customers in a specific location and use different marketing strategy to advertise their product to the customers. Adaptations must be made to the product where there is demand or the message must be advertised by the company. The following are the factors which a company must consider while dealing with international business:

· The consumers across the world do not use same products. This is due to varied preferences and tastes. Before manufacturing any product, the organization has to be aware of the customer choice or preferences.

· The organization must manage and motivate people with broad different cultural values and attitudes. Hence the management style, practices, and systems must be modified.

· The organization must identify candidates and train them to work in other countries as the cultural and corporate environment differs. The training may include language training, corporate training, training them on the technology and so on, which help the candidate to work in a foreign environment.

· The organization must consider the concept of international business and construct guidelines that help them to take business decisions, and perform activities as they are different in different nations. The following are the two main tasks that a company must perform:

° Product differentiation and marketing - As there are differences in consumer tastes and preferences across nations; product differentiation has become business strategy all over the world. The kinds of products and services that consumers can afford are determined by the level of per capita income. For example, in underdeveloped countries, the demand for luxury products is limited.

° Manage employees - It is said that employees in Japan were normally not satisfied with their work as compared with employees of North America and European countries; however the production levels stayed high. To motivate employees in North America, they have come up with models. These models show that there is a relation between job satisfaction and production. This study showed the fact that it is tough for Japanese workers to change jobs. While this trend is changing, the fact that job turnover among Japanese workers is still lower than the American workers is true. Also, even if a worker can go to another Japanese entity, they know that the management style and practices will be quite alike to those found in their present firm. Thus, even if Japanese workers were not satisfied with the specific aspects of their work, they know that the conditions may not change considerably at another place. As such, discontent might not impact their level of production.

Hofstede’s cultural dimensions

According to Dr. Geert Hofstede, ‘Culture is more often a source of conflict than of synergy. Cultural differences are a trouble and always a disaster.’

Professor Hofstede carried out a detailed study of how values in the workplace are influenced by culture. He worked as a psychologist in IBM from 1967 to 1973. At that time he gathered and analysed data from many people from several countries. Professor Hofstede established a model using the results of the study which identifies four dimensions to differentiate cultures. Later, a fifth dimension called ‘long-term outlook’ was added.

The following are the five cultural dimensions:

· Power Distance Index (PDI) – This focuses on the level of equality or inequality, between individuals in the nation’s society. A country with high power distance ranking depicts that inequality of power and wealth has been allowed to grow within the society. These societies follow caste system that does not allow large upward mobility of its people. A country with low power distance ranking depicts the society and de-emphasises the differences between its people’s power and wealth. In these societies equality and opportunity is stressed for everyone.· Individualism – This dimension focuses on the extent to which the society reinforces individual or collective achievement and interpersonal relationships. A high individualism ranking depicts that individuality and individual rights are dominant within the society. Individuals in these societies form a larger number of looser relationships. A low individualism ranking characterises societies of a more collective nature with close links between individuals. These cultures support extended families and collectives where everyone takes responsibility for fellow members of their group.· Masculinity – This focuses on the extent to which the society supports or discourages the traditional masculine work role model of male achievement, power, and control. A country with high masculinity ranking shows the country experiences high level of gender differentiation. In these cultures, men dominate a major part of the society and power structure, with women being controlled and dominated by men. A country with low masculinity ranking shows the country, having a low level of differentiation and discrimination between genders. In low masculinity cultures, women are treated equal to men in all aspects of the society.· Uncertainty Avoidance Index (UAI) – This focuses on the degree of tolerance for uncertainty and ambiguity within the society that is unstructured situations. A country with high uncertainty avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. A rule-oriented society that incorporates rules, regulations, laws, and controls is created to minimise the amount of uncertainty. A country with low uncertainty avoidance ranking shows that the country has less concern about ambiguity and uncertainty and has high tolerance for a variety of opinions. A society which is less rule-oriented, readily agrees to changes, and takes greater risks reflects a low uncertainty avoidance ranking.· Long-Term Orientation (LTO) – Describes the range at which a society illustrates a pragmatic future oriented perspective instead of a conventional historic or short term point of view. The Asian countries are scoring high on this dimension. These countries have a long term orientation, believe in many truths, accept change easily, and have thrift for investment. Cultures recording little on this dimension, trust in absolute truth is conventional and traditional. They have a small term orientation and a concern for stability. Many western cultures score considerably low on this dimension.

Q6.Write short notes on: a) Ethnocentric approach b) Polycentric approach

Ethnocentric approach

The key managers are from the parent country. The strategy is important during the early stages of the business because a part of the business that was successful in the home country needs to be transferred to the host country. Some of the reasons for this approach are as follows:

· The lack of qualified employees from the host country.

· The need for a united corporate culture.

· The maintenance of good communication, coordination, and control with headquarters.

The following are the disadvantages of the ethnocentric approach:

· Host country employees being deprived of promotion.

· The time taken by the home country managers to adapt to the host countries.

· The sensitivity of the expatriates to the needs and expectations of their host country subordinates.

Polycentric approach

This approach requires host country nationals to manage subsidiaries. The benefits of such a policy are that there are fewer possibilities of language issues, expensive training periods, and cultural adjustment issues. The disadvantage of this approach is that the local managers may find it hard to bridge the gap between the subsidiary and the parent company. There may also be language issues, loyalties to the host country that conflict with the needs of the multinational organisation, and cultural differences between the home country managers.