IB M1M2M3 Prof Patil 2013-14

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Prof. Purshottam Patil

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Course Content University Assessment 100 Marks

1. Overview of the International Business Process

2. PEST factors affecting International Business

3. Government influence on trade

4. International Trade Theories

5. FDI

6. Country Evaluation and Selection

7. Collaborative Strategies

8. International Marketing

9. International Trade Agreements

10. International Trade Organizations

11. International HR Strategies .

12. International Diplomacy - .International Business Prof Purshottam Patil 2013 2

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Reference Text 1. International Business - Daniels & Radebouqh

2. International Business Sundaram & Black

3. International Business Roebuck & Simon

4. International Business Charles Hill

5. International BusinessSubba Rao

International Business Prof Purshottam Patil 2013 3

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1. Overview of the International Business Process

Differentiate between exports & IB

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Exports vs. International Business

IB has wider spectrum unlike exports, include

1. Indian Companies acquire/ take over Companiesabroad.

2. They invest huge amounts to find right locationfor cost effective production base.

3. They are on a look out for a precise JV partneroverseas.


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Definition : International BusinessAny commercial transaction taking place

across the boundary lines of a sovereign (self

governing) entity. It may take place betweentwo Companies (for profit/prosperity) orNations (for goodwill/economic growth)

Export or Perish is now Globalize or Perish.

Discuss E-Merck, Emerging Economies

What are motives of Companies for IB?


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Motives of Companiesfor International Business


1. PLC Management.decline phase in onenation > replicatewhole process in

other (Enfield India,

Suzuki 800cc, HPLaptops:)

2. Geographical Expansions: A growth strategy Doingwell at home country, looknew overseas markets. e.g.

Ranbaxy,, Cipla, & Dr Reddy.

Apollo Tyres, Tata Motors/Tea, Sun Pharma

3.Adventurous

youngergeneration:

L N Mittal,Kumar Birla

4. Corporate Ambition:Multi-national operations willmake-up losses in one nation.

Coca Cola, Kelloggs

5. Technological Advantage: Core

Competencies>Global Advantage.Bicon. Infosys/TCS. GhardaChemicals, Jain Irrigation, Thermax,

Ion Exchange, Bharat HeavyElectricals, L & T

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Motives of Companies for International Business contd.


6. Labor Advantage:Indian Manu. units

perform well due to ^lyproductive workforce.,Diamond, handicraft,

wood work, leatherindustry, handlooms,

embroidery, carpetweaving, cashew process,

& sea food industry

7. CorporateImage

Building :First built

image >generaterevenues.

Samsung, LG

8. Govt Incentives : Fiscal,& infrastructural incentive

by host nation. Aditya Birlagroup in Thailand &

Indonesia.

9. New businessopportunities : untapped

Latin America, Sub-SaharanAfrica, CIS nations, & China

10. Emergence of SEZ', EOUs,AEZ's : new dimension to IB.

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What are motives of Nations for IB?


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Motives of Nationsfor International Business


1. Earn foreign exchange:

balance payments for imports.e.g. India imports crude oil,

defense equipment , medical

equipments, etc . If exports>imports= surplus of BOP. Ifexports < Gulfnations_ crude

oil

3. Trade Theories: ofAbsolute Advantage,

Comparative Advantage& Competitive

Advantage indicate

certain nations haveresources advantage asin labor, techno,

infrastru, etc thanothers.

4. Diplomatic Relations:National embassies & highcommissions, world over, are

catalysts promote trade & investts,e.g. remarkable job done by Indian

Diplomats in Latin America to

promote India Inc.

5. Core Competency of nations:Rubber products # Malaysia, IT &

Knitwear # India , Rice #Thailand, Wool # Australia.

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6. Investt for Infrastru :Heavy investt of nationsin infrastru as airports,

seaports, economic zones& inland container

terminals. Have to ^trade activities to recover

these amounts. e.g.Mauritius, Hong Kong,

Singapore, Malta &Cyprus

7. National

Image:Conqueringnations by

trade. Made inIndia, Made inJapan bring

credentials torespectivenations.

8. Foreign TradePolicy & Targets:

Developing nationsdraft road map &implement trade

policies . e.g. India(import control

order in 1947).ppc

9. National Targets:By 2015: India Aims

1% > 2% globalmarket share

10. WTO & Global Agencies : WTO, WorldBank, IMF, IMO, ISO, ITU, ICAO promote

inter-national trade.

Motives of Nationsfor International Business, contd.


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Similarities: Domestic vs. International Business


Discuss differences wrt Environment, Plan & Strategy, Competitive forces,

currency movements, Research, HR, Legal Aspects, Pricing Strategy,Distribution Channels, Promotion, Logistics cost.

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Dimension Domestic Business International Business

1.Evironment PEST, legal, competitive are

known

not fully known

2. Plan & Strategy Short term_ workable, may

be carried to long term

only long term will work,

multiple strategies

required

3. Competitiveforces & their

intensity

movement of domesticcompetitive forces are visible

difficult to understandmovement of global

competitive forces

4.Currencies

movements

Cost, Price, Revenue &

Margins computed in localcurrency. Volatility has min.

impact on business.

Various currency

transactions. Fluctuationsin cross currency

movements & related risks

common.

5. Business risks Comparatively, one canredict future risks & shocks

Difficult to predict & riskma cro u at an time

Differences : Domestic vs. International Business


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6. Research Easier, reliable Expensive, difficult, no

uniformity in output &findings.

7. Human

Resources

Established reputation help

business survive even if HR have

min. skills & knowledge

Multi-lingual/cultural HR,

individual a profit centre &

accountable

8. Corporate

vision &

objective

Narrowed down to a single nation

with a steady growth.

Covers nations. Cultural,

geographical influence may be

on vision & objective

9. Product &

usage

As per need of domestic

customers affordability, beliefs,

values, culture & buying behavior

Nation specific. Subject to

regulations.

10. legal

aspects

Local regulations fully apply. Min.

adherence to global regulations.

Global & host nation

regulations apply.

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11. investt. &

sourcing

Start: Min. invest. Individual ability &

repayment terms determine funding.

Except exports all overseas

operations need huge investts.12. Pricing strategy Majorly Cos use cost-plus margin or

competitive pricing.

Cos use marginal cost pricing,

transfer pricing or competitive

pricing to succeed.

13. Distribution

Channels

Any channel can be used, without

restrictions.

Govt./market practice governs

distribution channel. Cash &carry, shopping malls & mail-

order services popular in IB.

14. Promotion Advertising, personal selling & other

promotional methods are not

restricted through a strict legal

framework, if socially acceptable

Restrictions are nation

specific. E.g. advertisements

for liquor, cigarettes not

permitted in some nations.

Campaigns using female

models banned in others.

15.Logistics Domestic players are involved in all

activities. cost very high locally

Advanced technology &

systems reduce Cost

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UEQ.2012.3 Export or physical movement of goods andservices alone cant justify international business. Explainbriefly. 10 marks

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IB Quiz No. 1 ..Chairman, Federal Reserve, the Central Bank of US Martin Pieters, Chief Executive Full Form UNCTAD: Full form FIPB: ..22ndGovernor of RBI .Union Civil Aviation Minister Jet- Etihad stuck a landmark agreement in April 2013, under which the Middle East

carrier agreed to buy 24 % of Jet for about $ 600 million, a premium of 34% over themarket price though it was not getting control. was first government agency

to question the Jet-Etihad deal, especially the powers in the agreement giving Etihad thepower to approve a number of transactions. The top 15 Indian TNCs (Transnational Companies, MNCs), with assets of $ 500 million

or more, earned % of their total revenues from global operations, held % of theirtotal assets overseas & employed 20% of their total workforce abroad.

US apparel retailer: having partnership with DLF Brands Ltd, India, plans toinvest $ 50 million in Indian Market.

Author of the book: Screw Business as Usual is .. Ans: 1. Ben S Bernanke, 2. Vodafone India, 3. United Nations Conference on Trade and

Development 4. Foreign Investment Promotion Board, 5. Duvvuri Subbarao 6. AjitSingh, 7. SEBI (Securities & Exchange Board of India), 8. 75 & 57, 9. Forever 21, 10.Richard Branson, founder of Virgin Atlantic, Virgin Mobile


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Methods of Entry In International Business


Modes of Entryfor International

Business

1.Export

s2.

International

Licensing

3. Franchising

4. ContractManufactur

ing

5.

ContractMarketing

6.Management

Contracts7. Joint

Venture

8.

Collaboration

9. ForeignDirect

Investment

10. Mergers &

Acquisitions

11. Take-Overs

12. Turn-KeyProjects

13.Counter

Trade

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Classification

of Exporters

ExporterInvolvement

1. Direct:exports byexporter'sown name

2.Indirect: lackexpertize,overseas

contacts &manpower.

supply goods todirect exporters,

farmers,artisans, etc

Business size

1. smallexporters

2. Largeexporters

Productlines

1SingleProductExporter

2. MultipleProductExporter

Legal status

1. Proprietory

2.Partnership

3. Pvt Ltd

4. Public Ltd

Destination

1. SingleDestination

2. MultiDestination

Frequency

1.Occassional

2. Dynamic

1. Exports


2 I t ti l Li i

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2. International Licensing


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. ranc s ng


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4. Contract Manufacturing


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6 M t C t t

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6. Management Contracts


Agreements between 2 cos. where 1 co.

provides managerial & technical assistance, inreturn of proper monetory compensation, asflat, lump-sum fee, % of sales or profit

sharing.

e.g.1 Delta Airlines, Air France offer services

in developing areas.e.g.2 Exxon operates in oil exploration in theGulf region.

7 Joint Venture

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7. Joint Venture


Binding contract between 2 venture partners to set up a

project, either in home / host / 3rd nation.

Both parties committed to joint risk-taking & joint profitsharing.

JVs, promising excellent opportunities initially to bothpartners, may fail due to functional level grievances &issues. Hence understanding all aspects of management,investment & regulations in operating nations, by both

partners is crucial.

E.g.1 In 1980s, Taj group of Hotels had JV in Russia. Forsetting up 5 star hotels. e.g.2 Mahindra & Mahindra JV withRenault to manufacture cars, with brand name Logan.

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8. Collaboration


JV : deals with complete project in financial terms &

proportionate partnership commitments.Collaboration (=Tie-ups) deals with only some functions.

Investors in US, Japan, Germany, & UK offer technicalexpertise to developing nations.

E.g1 Technological collaboration of Bajaj Auto with

Kawasaki Japan. Kinetic & Hero with Honda.

E.g2 Kellogg Business School collaborated with Indian

School of Business(ISB), Hyderabad.

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9. Foreign Direct Investments (FDI)


Direct investment contributes to optimization of resources in host nation,

generating employment & enhancing its standard of living.

Yesteryears: funds flow was amongst developed nations only. Today: China,India, Brazil & Argentina attracting huge foreign investments.

Investments in infrastructure, mining, marine technology & agro-processingbeneficial to both host & investor nation.

Disadvantages: lack of clarity regarding repatriation (send back/ doubts),imposition of restrictions by host nation, elimination of SMEs. E.g.s Indonesia,

Argentina victims to the dominant overseas investors

Kellogg, Pepsi, Coca Cola & Hyatt groups willing to invest even if profitsexpected after long gestation period

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10. Mergers & Acquisitions


Company in the host country selects a foreign company & merges itselfwith it. The foreign Co acquires the control of ownership.

Cos strengthen their international manufacturing facilities &marketing networks.

Cross Border Acquisitions Volume growing at a rapid rate for 2 decades:

2001: M & As accounted for approx. 78% FDI inflows

Disadvantages: 1. Complex task involving banks, lawyers, bureaucrats& politicians. 2. Host nations may impose restrictions on acquisitions.

3. Labor issues is a big challenge for acquisitions, especially indeveloping nations, where unemployment is a critical issue.

e.g1 P & G entered Mexico & became a leader in 5 years by acquiringLoreto. e.g2 Steel Magnet L. N. Mittal first acquired a steel mill inIndonesia, followed by those in Trinidad, Kazakhstan, Hungary, etc.e.g3 The acquisition of Novelis strengthened Hindalco, an Aditya Birla

Cos production synergy & market access globally, in the non-ferrouscategory.

10 M & A Ad

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10. M & As: Advantages


1. Quick to execute: Acquire established enterprise> rapidpresence in target foreign market. E.g1 Diebold: 144 years old,Ohio, US, based Co., into ATM machines. 1990_ 70:30 JV with IBMInterbold. 1997: Acquired remaining 30%. 1999: acquired BrazilsProcompAIE, Frances Groupe Bull, Hollands Getronics, openedmanufacturing JVs in China. Result_ 2002: Presence in 80 nations,international sales accounted for 37% of $ 1.94 Billion. E.g2German automobile Co. Daimler-Benz growth in US > acquired #3

US Co. Chrysler to form Daimler-Chrysler

2. Preempt Competition: The largest acquisition ever in 1999_British Co. Vodafones $ 60 Billion acquisition of Air touchCommunications in US.

3. Acquisitions(buy tangible & intangible assets, generating knownrevenue & profits) seem less risky than Green-Field Ventures (buildsubsidiary from start_ uncertain revenue & profits_ although givesfirm greater ability to build kind of subsidiary co. it wants)

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10. M & As: Limitations


Study1: Mercer ManagementConsulting study of 150 acquisitions

(period 1990-95) worth more than $500 Million each. Findings: 50%eroded share holder value, 33%created marginal returns, 17%

successful.

Study2: KPMG, accounting &management consulting Co., study

of 700 large acquisitions (period1996-98). Findings: 30% created

value, 31% destroyed value & othershad little impact.

f l

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10. M&As: Reasons for Failure


1.Acquiring firm overpay forassets of acquired Co. due to: i)

price bid up by multiple firms.ii)Hubris Hypothesis : Top

managers have exaggerated senseof their own capabilities. e.g.

Daimler acquired Chrysler in 1998@ $ 40 Billion, 40% over Chryslersmarket value before bid. This tookplace at end of multi year boom in

US auto sales & paid a largepremium over Chryslers market

value just before demand

slumped.

2.Acquiring Acquired firmscultural clash:high

management turnover-causing loss of local

knowledge- post acquisitiondue to cultural & working

differences. Many sr. managersleft Chrysler, 1styear post

merger: Chrysler executivesdisliked dominant DaimlersGerman managers decisions-

Germans resented the 2-3times pay to Chryslers

American counterparts.

3. Inadequate Pre-acquisition screening: absence of potentialbenefit-cost analysis pr-acquisition. In cross border acquisition,

acquiring firm fails to understand target firms national culture &business system.

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11. Take-over


Co. identifies & brings under its management, a healthy unitwith a strong brand name & network, to be the leader in givensegment.

Takeover maybe for product, brand, business & co.

Multiple parties aspiring to takeover may generatecompetition. Only one party wins & may hence withstandhostilities. Hence hostile takeover & winner as takeovertycoon e.g. Hindujastakeover of Ashok Leyland. Unilever

takeover of Lipton & Brooke Bond (enhanced its position as aleader in Tea industry in India).

Inevitably, takeovers cost more than acquisitions, but theprobability is high.

12 T K P j t

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12. Turn Key Projects


Contract under which Co. fully involved from Concept to

Completion. A means of exporting process technology toother nations.

Depending on involvement & obligations terms are: BOT (Build, Operate & Transfer) & BOOT (Build, Own, Operate &

Transfer)

Turn key project contractors either get a fixed fee/ the costplus profits are collected over a period of time.

Profitability increases as there is enhancement in cost cuttingon material & manpower, finances or speed of completion.

E.g. infrastructure projects as power plants, airports,petroleum/ metal refineries, railway lines, highways & dams.International Turnkey contractors e.g. Bechtel, Brown Bovery,Hyundai, Mitsubishi, L & T & Deawoo

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12. Turn Key Projects


Advantages: Turnkey strategy less risky than FDI. In political/

economic unstable nation, long term investments not feasible (e.g.risk of nationalization /economic collapse)

Disadvantages: 1. Firm entering into turnkey deal have no longterm interest in foreign nation.

2. Firm entering turnkey deal may create own competitor. E.g.Western firms that sold oil refining technology to Gulf nation firmsnow compete with them in global oil market.

3. If firms process technology is competitive advantage, thenselling this technology through turnkey project may beunfavorable.

13 Counter Trade

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13. Counter Trade


13 C T d T

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13. Counter Trade Types


Counter Trade

i. Pure Barter(product-to-

productexchange)

ii. Buy Back (buyend product

from hostpartner)

iii. Counter Purchase(Exchange of goodsin various nations

until forex is found)

13 i Pure Barter

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13.i. Pure Barter


Goods / services mutually exchangedbetween 2 nations depending on the surplusavailable & their bargaining strength

E.g. Russia supplied newsprint & crude oil toIndia for decades. In return India supplied

tea, garments, medicines & tobacco to Russia,at comparatively low prices.

13 ii B B k

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13.ii. Buy Back :


Home country Co. sets up project in host country- having sufficient forexto fully pay the supplier. Project amount is partially paid in forex &

remaining in kind. Home country representative purchases end productof same project at relatively low price, which could be marketed in homecountry or even to third country to maximize profit.

Advantages to Host nation: 1. The project is located & owned by it. 2. Itneed not pay the full sum of money needed for the project.

Advantages to Home nation: Buy back arrangements popular as manyturnkey project contractors reap better benefits by marketing end

product globally at higher margin.

E.g. BHEL (Bharat Heavy Electricals Ltd) sets up projects in othercountries for equipments, markets them in other nations including Indiafor higher margins

13 iii C t P h

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13.iii.Counter Purchase


Company A (Country A)supplies product X

to country B (having surplus product Y)

Country B compensates by supplyingproduct Y to company A

company A finds a market for product Y incountry C

Country C sells product Z to CountryDcountry D having sufficient forex & payscountry C

Country C pays toAcountry A pays to company B.Thus: purchasing takes place against supply until

nation D with adequate forex is found for thetransaction.

13 iii Counter Purchase

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Pepsi International supplies rice to S Africa

from India.

From S Africa it procures steel equivalent tothe rice amount & supplies it to Ghana.

From Ghana it procures coffee & cocoa equivalentto steel imports & sells them to Canada,possessing adequate forex reserves.

13.iii.Counter Purchase

By appointing one employee, the Co conducts routine functions.

Due to counter purchase mechanism, very few nations withsufficient forex reserves can comfortably contribute to world trade

transactions. International Business Prof Purshottam Patil 2013 41

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Foreign Entry Decision


Exploit competitiveadvantage through

entry abroad

Produce atHome &Export

ProduceAbroad

Licensing/Management

Contracts

MaintainControl

over assetsabroad

Majority / Whollyowned affiliate

Build fromScratch

Acquire /Merge /

Takeover

JointVenture

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UEQ.2008Dec.2

Why do Companies & Countriesenter into International Business

when the opportunities exist intodomestic market (10 marks)


MNCs

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MNCs

MNCs ( Multi National Corporations). Also called MNEs

(Multi National Enterprises) Business unit which operates simultaneously in different

parts of the world, either by manufacturing or/&marketing. E.g1 1600: British East India Company. 1602:

Dutch East India Co.

e.g2. Manhattan (US) based Co. Colgate Palmolive Inc.manufactures & markets dental care, health care, hair

care & skin care products in more than 120 nations. E.g4. Procter & Gamble, based in Cincinnati (US) with

similar product lines, operates in more than 150 nations


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MNCs

Few MNCs total turnover > GDP ofmany small / Less developed nations.

e.g. In 2005:

Sales of General Motors: $ 195 Billion.

GDPs: Poland (US $ 149 Billion),

Algeria (US $ 29.6 Billion), Kenya ( US $11.1 Billion)


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MNC Influence on Economies Globally


Money Power

Muscle

Power

Mangerial Power

Technology Power

Political

Power

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Specific Product based MNCs created by Nations


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Typical MNC HQ : Key Roles


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Reasons for Growth of MNCs

Non TransferableKnowledge: MNC havingprocess / product patent

makes ^er profit by

venturing overseas itself,unlike just selling patents

SecrecyProtection :Licensee will

protect patentrights, however

may be lessconscious thanoriginal owner.

ProtectingReputations:

inferior job of foreignlicensee > hits MNCreputation. Hence

investment overseasto licensing/franchising

Building Reputations:MNCinvestment > builds reputation >

attract business/ deposits. e.g. banksas Citibank, HSBC, Standard

Chartered Bank, etc

PLC: Further growth in home

nation dries up. marketsoverseas may have less

competition & penetration. e.g.Gillette, HP laptops, Sony

Walkmans & Xerox faced various

PLC in home nationInternational Business Prof Purshottam Patil 2013 49

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Reasons for Growth of MNCs, contd..

Capital Availability:Capital Markets' access toMNCs favors their

overseas establishments

Strategic Motive: Potential entry ofindigenous firms/ overseas MNCs> Threatto MNCs. Overseas Investt > Solution for

growth e.g. MNCs from US, Japan, Europeinto India / China.

Avoid Tariffs & Quotas:Produce goods at home, ship

overseas> face T & Qs.Solution: direct investt in

target nation. e.g. overseasentry of Automobile giants asFiat, Volkswagen, Hyundai &Honda with techno & money,

not products

Symbiotic Relationship: Firmsopen offices in nations where clientsopen subsidiaries. e.g. Accounting/

Consultants as Templeton, GoldmanSachs, Ernst & Young offices even insmall nations as Panama, Mauritius,

Malta & Sri Lanka.


ro ems rom row

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ro ems rom rowof MNCs


Case 1 MNCs Controversies: Royalty

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Case 1_ MNCs Controversies:Royaltyissues at SmithKline Beecham 1997: SKB India decided to pay 5% Horlicks sales revenues

to parent Co., towards use of brand name. Horlicks had80% of Cos Rs 430 Crores net sales, then. It paid Rs 5Crores. Estimated annual outgoings: Rs 20 Crores againstnet profit of Rs 45.6 Crores, that year.

Impact: Feb 1997_ SKB Consumer Healthcare stockplunged by Rs 100, to Rs 365, in 10 days. Loss_ about 27%,Rs 275 Crores in Market Capitalization.

Issue with investors: should royalty payments be made toparent Co.? Though Indian Co. is not brand owner, hasspent ^ amount on Horlicks brand promotion since last 4decades & nearly Rs 175 Crores over past 10 years. The Co.

could use this money to promote its own brand,International Business Prof Purshottam Patil 2013 52

Case 2 MNCs Controversies: Parke Davis

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Case 2_ MNCs Controversies: Parke-DavisParke-Davis India is 40% subsidiary of Parke-Davis

Inc, USA. In 1995, the latter set up 100% subsidiary.

It planned to manu. & mkt. confectionary

products, where Parke-Davis was already operating.Bought Halls & Chiclets brand from Parke-Davis

India @ Rs 10 Crores, considerably low price.

Impact : Post transfer, within 17 months fromSept94, Parke-Davis shares plunged almost 70%- aloss of about Rs 285 Crores in marketcapitalization.


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UEQ.2008.3:By using appropriate examples,

explain various modes of entry intoInternational Business. 20 marks

(except M & A, Take-Over, Turnkey

Projects & Counter Trade)


Currency-Capital Test

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Currency Capital Test 1. Argentina Buenos Aires Peso

2. Brazil Brasilia Real

3. Canada Ottawa Canadian Dollar

4. China Beijing Yuan

5. Denmark Copenhagen Krone

6. Egypt Cairo Egyptian Pound

7. Indonesia Jakarta Rupiah

8. Iran Tehran Rial

9. Israel Jerusalem1 Shekel

10. Japan Tokyo Yen

11. Korea S. Seoul Won 12.Pakistan Islamabad Pakistan Rupee

13.S. Arabia Riyadh Riyal

14.Switzerland Bern Swiss Franc

15.UK London Pound SterlingInternational Business Prof Purshottam Patil 2013 56

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2. PEST factors affecting International Business


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Why to study Environmental Factors?

Pilot checks atmosphere prior to take off /landing

Sailor understands water depth sailing

Farmer plants seeds depending on soil/monsoon

Similar for IB understanding environment

of operation is necessary


I f IB E i d

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Importance of IB Environment study..Why did Enron fail in India?

What is the hindrance for Kelloggs success in India?

Why has KFC not made any breakthrough in India, unlike its

success in other nations?

Why did P&Gs American Style of Sales Force Management fail

in Japan?

Why did Amways multilayer marketing technique fail in South

Korea?

Why did KFC & McDonalds fail in Brazil & Tashkent,respectively?


hi h d i i d d i ?

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Which decisions depend upon Environment?


Decisionsdepending

uponEnvironment

Selectionof

Country

Selectionof Plant

Location

Liason with

Govt.

ProductLaunches

ChannelManagement

Promotion/outlet

opening

MNCs hire Expert Risk Analysts to

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MNCs hire Expert Risk Analysts to

Advice Management


PoliticalScience

Economics

SociologyIndustrial

Psychology

PolicyMatters

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Major RiskAnalyses Priorto Cos Entry

Political

Economic

ExchangeRelated

Socio-Cultural

Financial

Legal

Technolo--gical

Competiti-on

Infrastruct-ure

LaborRelated

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Classification of Political Environment

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Classification of Political Environment


PoliticalEnvironment

a. Home

CountryPolitical

Environment

b. Host

CountryPolitical

Environment

c. GlobalPoliticalEnvironment

2.1 Political Environment

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Classification of Economic Environment


EconomicEnvironment

a. Home

CountryEconomy

b. Host

CountryEconomy

c. Global

LevelEconomy

2.a.1 Economic Policies

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2.a.1 Economic Policies


Impact of National Economic Policies

2 a 2 Trade & Commercial Policies: process

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2.a.2 Trade & Commercial Policies: process


Ministry of Commerce &

Industry announces Trade Policy

Foreign Trade Target is fixed

Promotions gear up to reachtarget. Global Cos incentivized to

set operations in home nation

e.g. Indonesia, Thailand & Brazilextend facilities in home nation

for same

2.a.3 Promotional & Regulatory Measures

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g y


Restrictions &

BureaucraticHurdles Imposed

Risk AverseBusiness

Community

Exchange ControlRestrictions &

Draconian Codes ofBusiness Eliminated

Favorable ForeignTrade

Small nations as Malta, Cyprus & Mauritius transformed intoforeign trade economies due to conducive promotional &

regulatory measures

2.b Host Nation Economy

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2.b Host Nation Economy


1. Market Size: MNCs enterpotential EMs as BRICS &

MIKT (Mexico, Indonesia,South Korea & Turkey).Coca Cola, Pepsi, HP &Samsung consider India

future destination.

2. GDP: ^GDP ^attractive

IB market. Thailand,Malaysia & Indonesia

attractive in 1990s due to ^GDP growth rate.

3. Industrialization:Developing nations keen to

enter US, EU. Indian Cos.keen to enter L. America,Brazil, Argentina, & Chiledue to industrialization

4. Banking: Crucial IBremittance channel. SSA

(Sub Saharan Africa)depend on EU, US & fareast nations due to their

efficient banking services.

2.b Host Nation Economy contd..

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y


2.c Global Level Economy

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2.c Global Level Economy


3. Social Environment

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Importance of Social Environment in IB

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p


1. National Taste

Thailand: Peopleprefer BlackShampoo

Nestle brews varietyof coffee as perdifferent nations'taste

Arab Nations: Greenis favourite color

Russia: Red, thoughcommunism is notprevalent, widelyused in banners,posters, hoardings,etc

2. Language

Language skillsimperative. Hyundai &LG operations in India>

S. Koreans learnt Indianlanguages

Customize Brand names& slogans. In Japan,General Motors' 'Bodyby Fisher'= 'Corpse by

Fisher' & Pepsi's 'ComeAlive'= 'Come out ofGrave'

3. Values & Beliefs

Blue: Masculine >Sweden. Feminine >Holland,

Green: Favorite>Muslim nations, asillness> Muslim nationMalaysia,

White: Bridal Dresscolor> Europe. Death >

China & Korea. Red: Favourite> Russia.

Danger> Many nations.

Swastika: Sacred>India, unlike Westernnations

Importance of Social Environment in IB contd..

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p

4.Demography

Age, sexratio, familysize,occupation >influence

buisness Barbie> ^

revenuethroughchildrensegment.

5. LiteracyRate

^ Literacy rates:

Better Std ofLiving

^ Literacy rates:std'ized goods

with technical

services support ^ Literacy Rate:Lesser trainingrequired for staff

6. Female Workforce

China, Russia, Indonesia &Thailand > Women

contribute higher to GDP. Dulux: Campaigns directedto women in Europe, as it

was felt that they haveaesthetic taste for colors.

Apple's iPod ^recordrevenues due to womencustomers

Women ^ contributors:India_ IT, handicrafts.China_ Soft toys, ceramics.

Indonesia_ garments, paperwork

Importance of Social Environment in IB contd..

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p

4. Technological Environment

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g


Multimedia using Pentium 4 chips common in DMs. will take at

least 5 years more to enter Africa.Cos. able to maintain & enhance technological activities remaincompetitive.

Cos invest millions in R&D, despite less projected revenue. e.g.Hoffkins, Pfizer invest ^ in R&D, as sure on ROI over period. In20th century, Asian Tigers, Japan, S. Korea, Hong Kong, Singapore& Taiwan achieved ^ success due to efficient technology policy.

Nations as Japan in electronics equipment, Germany in medicalequipment & US for pharma are leaders since decades.

Technology leaders encash on price skimming strategies wheremargins are huge. e.g. Eriksson, Motorola, Nokia & LG successful

as they manufactured cell phones

UEQ 2001 3

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UEQ.2001.3

A French Co. wants to sell

cosmetics in Asia. However, Asian

skin reacts differently to cosmetics

compared to Europeans. The Co. isnot willing to specially formulate

their offerings for the Asian skin.How should French Co. go about

their entry into Asia? (20 marks)International Business Prof Purshottam Patil 2013 80

5. Cultural Environment

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primaryinfluence on

lifestyle,attitude &

behaviors ofconsumer

material &psychologi

caldevelopment of

nation

Cultural Environment for International Business refers to

5. Cultural Environment:

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5 Cu tu a o e t

Crucial Task in International Business


Identify relevant similarities & differences amongnations, also means to match culture of organization& nation.

e.g.1 when Toshiba gained 100% ownership of Rank-Toshiba in Plymouth, all managers in charge learntBritish style of working.

e.g.2 Branded products move fast in EU & US, butAfricans perceive them as being very expensive.

5. Cultural Environment:

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3 Characteristics of Culture


5. Cultural Environment:Influence of culture on IB

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Influence of culture on IB


1. Differences in beliefs,

values & lifestyles amongnations > difference in

product utility. Fast foodas KFC, McDonalds,

hamburgers, pizzaspopular in modern than

traditional societies

2.Products launched onbasis of perceived or realutility value. Products fromWestern Europe, Japan &

US priced @ premium indeveloping nations due tobetter quality perception

3. Culture influences acceptability of advertisementsamong nations. e.g. advertisements acceptable world-

over are not accepted in S. Arabia. Liquoradvertisements prohibited in many nations.

. u tura nv ronment:Influence of culture on IB contd

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Influence of culture on IB contd..


6. Legal Environment

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g


Cos. toavail local

legalservices

related to:

Pollution

investments

laborlegislatio

ns

distribution &

logisticsTaxes

Contracts

environment


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i. Home Country Laws:

Usually facilitating in nature

Deal with


conduct of firmin domestic

market Trade with other

nations

6. Lega Environment

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Host Country Laws include


g

1. InvestmentRegulations

2. Tariffs &Duties

3. Anti-Dumping

Regulations

4. Protection oflocal industries

from unfaircompetition by

DMs

6. Lega Environment

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Host Country LawsDiscourage of imports of non-essential products due

to Tariffs & Duties helps to:


g

6. Lega Environment

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iii. International Laws:


g

Include treaties, conventions & agreements between nations,having the same standing as laws.

Prevalent in areas of Patents, Trademarks, Protection & PrivacyLaws.

Cos. to understand broad provisions of UN resolutions &multilateral trade agreements as WTO.

FDA, Health regulations & registration formalities are judiciouslyimplemented in IB.

E.g. Nigerian Govt. nationalized assets of British Petroleum, as theCo. sold Nigerian crude oil to S. Africa, despite an embargo.

7. Competitive Environment

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Competition:

Environmental threat that affects, hampers,challenges operations of International firm.

Reasons for Product related competition:


substitutes

low-costproduction

process

technology

cost

reduction byeconomies of

scale


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Competition encountered at various stages in IB:


Entry

Production

HRM

FinancialResources


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Competition encountered at various stages in IB:

E.g1. Motorola faced competition from Nokia. Nokiafocused on fast growing markets as India & China, thefollower became leader, then.

E.g2 Late entrant, Cuba based Havana Club, surpassedleaders as Smirnoff & Bacardi.

Hyundai Motors (India), Honda Motors (Europe) &Tata Motors (S. Africa) withstood competition &succeeded.

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UEQ.2012.3Explain characteristics ofMNCs. How are they different from

domestic companies? How do MNCstake advantage in emerging economieslike India & how do they benefit these

economies? (20 marks)


IB UEQ

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In IB, policies of national govts. are either on equal terms& conditions or on discriminatory term & conditions.

E.g. Russias trade policy allows Indian imports, thoughthe price & quality are unfavorable compared to those ofother nations.

Similarly China imports goods from Pakistan onpreferential terms like lower rate of tariffs, etc.

Government policies aim at 1protecting domesticindustry from competition of advanced nations byimposing quotas, also at 2building competencies ofdomestic companies by providing subsidies.

MNCs formulate strategies regarding entry & conduct of

business in various nations, based on these govt. policies.

G t i fl t d b t l t d t


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Governments influence trade by announcements related tothe instruments of the trade policy, viz.


i) Tariffs

ii)Subsidies

iii)

ImportQuotasiv)

VoluntaryExport

Restraints

v)LocalContent

Requirements

vi)Administrative Policies.


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Tariffs:

Refer to tax imposed on import

Purpose: To protect domesticindustry by increasing cost ofimported goods. Govt. of Indiaimposed tariffs to protect domesticindustries as automobile, sugar,cement & steel.


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Advantages of Tariffs:

1. Govt. of the importing country> gets revenuesin form of import duties.

2. Industry of Importing country: cost ofimported goods will be ^er vis--vis domesticgoods, so importing country products exploremarkets

3. Jobs> in domestic nation saved 4. Ancillary Businesses> servicing, etc protected


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Limitations of Tariffs:

1. Consumers>ofdomestic nation lose,as they pay ^er price.

They pay forinefficiency ofdomestic industry.

2. Exporting country>

loses demand for itsproduct, sales &profit.

Implication

1. Tariffs enhanceefficiency of fewnations & curtail

growth of mostefficient nations.

2. Thus reduceefficiency of world

economies & resultsin inefficientutilization of allkinds of resources.

Types of Tariffs

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ased on Origin & Destination, 3 Types:

Based on Quantification 3 types:

Types of Tariffs

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Based on Quantification, 3 types:

Average Tariffs (Ad valorem Method) (source www.worldbank.org)Types of Tariffs

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Country Name

5.05 4.46 3.02 1.84 1.81 1.51 1.097.74 3.07 1.75 4.96 1.81

32.2 14.1 4.83 4.68 4.23 4.1

5.05 4.46 3.02 1.84 1.81 1.51 1.09

5.05 4.46 3.02 1.84 1.81 1.51 1.0954 27.5 26.5 13.4 8.18

13.3 4.13 4.39 3.85 3.15 2.59

3.37 3.93 4.35 2.5 3.07 1.98 1.29

0.03 0.03 0.01 0.0710.1 4.93 5.46 5.03 3.91 4.46

4.56 3.84 3.73

5.05 4.46 3.02 1.84 1.81 1.51 1.09

. . 8 1.8 1. 8 1.6 1.62 1. 8

Based on Purpose, 4 typesTypes of Tariffs

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Based on Purpose, 4 types

i) Revenue Tariff

Aims to collectsubstantialrevenues forgovt. withoutobstructing flow

of imports Imposed on

items of massconsumption,but rate of dutyis low.

ii) ProtectiveTariff

Aim to protecthome industries

usually high, toreduce imports

may hurtconsumers, dueto shortages asimports maystop.

iii) Anti-Dumping Duty

Dumping:selling goods inforeign marketsat price belownormal cost to

capture foreignmarket

harmful to lessdevelopednations wherecost of

production ishigh.

iv)Countervailing

Duty same as anti-

dumping duties,less severe

imposed thrucash assistance /

subsidies byforeign nationto itsmanufacturersto nullifybenefits offered

to host nationscos.

duties ratesproportional tocash assistance/subsidies

granted.

Based on Trade Relations, 3 types

Types of Tariffs

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Based on Trade Relations, 3 types


i) Singlecolumn tariff

Same, fixedrates

applicable toall nations.

ii) Doublecolumn tariff

2 rates,

lower rates

applicable tofriendlynation,

higher rate

for othernations

iii) Triplecolumn tariff

3 rates:general,

international& preferentialtariffs.

First two have

minimaldifferencethan the leastrate of 3rd .


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ii) Subsidies

To encourage/ protect domesticproducer from foreign producer, govt.

pays to domestic producer by reducingoperations costs. Such paymentsknown as subsidies.

E.g. cash grants, loans & advances atlow rates of interest, tax holidays &supply of inputs at lower rates.

Subsidies in Developing NationsGOI t t d ithd i b idi f tili

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GOI started withdrawing subsidies on fertilizers,pesticides, prices of agricultural output, output of small

scale industries, etc. > led to closure of certain SMEs. Also^ed losses, indebtedness & suicides of Indian farmers.

Subsidies in developing nations 1reduce losses & provide2insurance against crop failure, market fluctuations, shift incustomer tastes & technology changes

Thus, subsidies provide sustainability for agriculturalsector & small scale industrial sector, thereby employment& livelihood for masses.

Subsidies in Advanced Nations

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Subsidies: Advantages1) Domestic producer becomes low cost producer> enjoys

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1) Domestic producer becomes low cost producer> enjoys^profit margins, also fixes minimum price.

2) Help domestic producer compete with foreignproducer in domestic market.

3) Enhance international competitiveness of domestic

industry & can also have the first mover advantage.4) Consequently get tax gains & employment to domesticnation.

E.g1 Dr Reddys Lab got the low cost producer & firstmover advantage in Asian & African markets.

E.g2 US subsidies helped Boeing have first moveradvantage.

Subsidies: Limitations

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1) Subsidies paid by govt. by taxing

individuals> national cost. Thus,subsidies>> national benefit < nationalcost=national waste.

2)At times, reduce internationalcompetitiveness of domestic companies>

Protect inefficiency & lethargy of domesticfirms> WTO proposed phased withdrawalof subsidies.

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Administrative Policies

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Administrative Policies include

bureaucratic rules & processes, formulatedto make it tough for imports to entercountry.

Governments use formal & informalpolicies to restrict imports & boost exports.

Japan: Least formal trade barriers as tariffs

& quotas. Uses administrative policiesinstead.

Govt. intervention: Perspectives

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Political

Govt. intervention: Perspectives

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Political

i) National Security: Strategic industries (defense, aerospace,posts, railways, etc) as in US & Japan, to be run by govt. GOIhas reserved these industries for exclusive public sectoroperation.

ii) Protecting Industries: Govt. to protect domestic industry

else foreign competitors can easily kill pvt industries. E.g.Healthy SMEs turned sick due to cheap Chinese & East Asiannations (Thailand, S. Korea, Malaysia) products.

iii) Protecting Jobs: Liberalization of India> Closure of SMEs,downsizing of MNCs, outsourcing of employees, privatizationof PSUs, etc.> reduce jobs.

iv) Retaliation: Only govt. can deal with tough approach withforeign firms, as it has power & machinery to implementdecisions.

Govt. intervention: PerspectivesEconomic:

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Economic:

i) Infant Industry Argument:Industry in infant stageof life cycle> cannot invest heavily then> it needsprotection from foreign competition.

ii) Strategic Trade Policy:

Govt. intervention, as in subsidies to certain domesticfirms having competitive advantage is essential. Thisenhances first mover advantages, abroad.

Foreign competing firms may create entry barriers to

domestic firms in home nation. Govt. interventionprovides support to firms in domestic market. USgovt s role to support domestic firms when Japanese

Documents

IB M1M2M3 Prof Patil 2013-14