Lecture notes International Business management

what international business is and why it is important and how does international business differ from domestic. international business management lecture notes pdf free download
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PONDICHERRY UNIVERSITY (A Central University) DIRECTORATE OF DISTANCE EDUCATION International Business Environment Paper Code : MBIB 3001 MBA - INTERNATIONAL BUSINESS III SemesterNotes Lesson 1.1 - International Business – An Overview Introduction One of the most dramatic and significant world trends in the past two decades has been the rapid, sustained growth of international business. Markets have become truly global for most goods, many services, and especially for financial instruments of all types. World product trade has expanded by more than 6 percent a year since 1950, which is more than 50 percent faster than growth of output the most dramatic increase in globalization, has occurred in financial markets. In the global foreign exchange markets, billions of dollars are transacted each day, of which more than 90 percent represent financial transactions unrelated to trade or investment. Much of this activity takes place in the so-called Euromarkets, markets outside the country whose currency is used. This pervasive growth in market interpenetration makes it increasingly difficult for any country to avoid substantial external impacts on its economy. In particular massive capital flows can push exchange rates away from levels that accurately reflect competitive relationships among nations if national economic policies or performances diverse in short run. The rapid dissemination rate of new technologies speeds the pace at which countries must adjust to external events. Smaller, more open countries, long ago gave up illusion of domestic policy autonomy. But even the largest and most apparently self-contained economies, including the US, are now significantly affected by the global economy. Global integration in trade, investment, and factor flows, technology, and communication has been tying economies together. Why then are these changes coming about, and what exactly are they? It is in practice, easier to identify the former than interpret the latter. The reason is that during the past few decades, the emergence of corporate empires in the world economy, based on the contemporary scientific and technological developments, has led to globalization of production. As a result of international production, co-operation among global productive 4Notes units, the large-scale capital exports, “the export of production” or “production abroad” has come into prominence as against commodity export in world economy in recent years. Global corporations consider the whole of the world their production place, as well as their market and move factors of production to wherever they can optimally be combined. They avail fully of the revolution that has brought about instant worldwide communication, and near instant-transformation. Their ownership is transnational; their management is transnational. Their freely mobile management, technology and capital, the modern agent for stepped-up economic growth, transcend individual national boundaries. They are domestic in every place, foreign in none-a true corporate citizen of the world. The greater interdependence among nations has already reduced economic insularity of the peoples of the world, as well as their social and political insularity. Definition of International Business International business includes any type of business activity that crosses national borders. Though a number of definitions in the business literature can be found but no simple or universally accepted definition exists for the term international business. International business is defined as organization that buys and/or sells goods and services across two or more national boundaries, even if management is located in a single country. International business is equated only with those big enterprises, which have operating units outside their own country. In its traditional form of international trade and finance as well as its newest form of multinational business operations, international business has become massive in scale and has come to exercise a major influence over political, economic and social from many types of comparative business studies and from a knowledge of many aspects of foreign business operations. In fact, sometimes the foreign operations and the comparative business are used as synonymous for international business. Foreign business refers to domestic operations within a foreign 5Notes country. Comparative business focuses on similarities and differences among countries and business systems for focuses on similarities and differences among countries and business operations and comparative business as fields of enquiry do not have as their major point of interest the special problems that arise when business activities cross national boundaries. For example, the vital question of potential conflicts between the nation-state and the multinational firm, which receives major attention is international business, is not like to be centered or even peripheral in foreign operations and comparative business. Scope of International Business Activities The study of international business focus on the particular problems and opportunities that emerge because a firm is operating in more than one country. In a very real sense, international business involves the broadest and most generalized study of the field of business, adapted to a fairly unique across the border environment. Many of the parameters and environmental variables that are very important in international business (such as foreign legal systems, foreign exchange markets, cultural differences, and different rates of inflation) are either largely irrelevant to domestic business or are so reduced in range and complexity as to be of greatly diminished significance. Thus, it might be said that domestic business is a special limited case of international business. The distinguishing feature of international business is that international firms operate in environments that are highly uncertain and where the rules of the game are often ambiguous, contradictory, and subject to rapid change, as compared to the domestic environment. In fact, conducting international business is really not like playing a whole new ball game, however, it is like playing in a different ballpark, where international managers have to learn the factors unique to the playing field. Managers who are astute in identifying new ways of doing business that satisfy the changing priorities of foreign governments have an obvious and major competitive advantage over their competitors who cannot or will not adapt to these changing priorities. The guiding principles of a firm engaged in (or commencing) international business activities should incorporate a global perspective. A firm’s guiding principles can be defined in terms of three board categories 6Notes products offered/market served, capabilities, and results. However, their perspective of the international business is critical to understand the full meaning of international business. That is, the firm’s senior management should explicitly define the firm’s guiding principles in terms of an international mandate rather than allow the firm’s guiding principles in terms as an incidental adjunct to its domestic activities. Incorporating an international outlook into the firm’s basic statement of purpose will help focus the attention of managers (at all levels of the organization) on the opportunities (and hazards) outside the domestic economy. It must be stressed that the impacts of the dynamic factors unique to the playing field for international business are felt in all relevant stages of evolving and implementing business plans. The first broad stage of the process is to formulate corporate guiding principles. As outlined below the first step in formulating and implementing a set of business plans is to define the firm’s guiding principles in the market place. The guiding principles should, among other things, provide a long-term view of what the firm is striving to become and provide direction to divisional and subsidiary managers vehicle, some firms use “the decision circle” which is simply an interrelated set of strategic choices forced upon any firm faced with the internationalization of its markets. These choices have to do with marketing, sourcing, labor, management, ownership, finance, law, control, and public affairs. Here the first two marketing and sourcing-constitute the basic strategies that encompass a firm’s initial considerations. Essentially, management is answering two questions: to whom are we going to sell what, and from where and how will we supply that market? We then have a series of input strategies-labor, management, ownership, and financial. They are in their efforts to develop their own business plans. As an obligation addressed essentially to the query, with what resources are we going to implement the basic strategies? That is, where will we find the right people, willingness to carry the risk, and the necessary funds? A third set of strategies-legal and control-respond to the problem of how the firm is to structure itself of implement the basic strategies, given the resources it can muster. A final strategic area, public affairs, is shown as a basic strategy simply because it places a restraint on all other strategy choices. 7Notes Each strategy area contains a number of subsidiary strategy options. The decision process that normally starts in the marketing strategy area is an iterative one. As the decision maker proceeds around the decision circle, previous selected strategies must be readjusted. Only a portion of the possible feedback adjustment loops is shown here. Although these strategy areas are shown separately but they obviously do not stand-alone. There must be constant reiteration as one moves around the decision circle. The sourcing obviously influences marketing strategy, as well as the reverse. The target market may enjoy certain preferential relationships with other markets. That is, everything influences everything else. Inasmuch as the number of options a firm faces is multiplied as it moves into international market, decision-making becomes increasingly complex the deeper the firm becomes involved internationally. One is dealing with multiple currency, legal, marketing, economic, political, and cultural systems. Geographic and demographic factors differ widely. In fact, as one moves geographically, virtually everything becomes a variable: there are few fixed factors. Strategy is defined as an element in a consciously devised overall plan of corporate development that, once made and implemented, is difficult (i.e. costly) to change in the short run. By way of contrast, an operational or tactical decision is one that sets up little or no institutionalized resistance to making a different decision in the near future. Some theorists have differentiated among strategic, tactical, and operational, with the first being defined as those decisions, that imply multi-year commitments; a tactical decision, one that can be shifted in roughly a year’s time; an operational decision, one subject to change in less that a year. In the international context, we suggest that the tactical decision, as the phrase is used here, is elevated to the strategic level because of the rigidities in the international environment not present in the purely domestic-for example, work force planning and overall distribution decisions. Changes may be implemented domestically in a few months, but if one is operating internationally, law, contract, and custom may intervene to render change difficult unless implemented over several years. 8Notes Modes of Entry into International Business A mode of entry into an international business is the channel which your organization employs to gain entry to a new international market. This lesson considers a number of key alternatives, but recognizes that alternatives are many and diverse. There are two major types of entry modes: equity and non-equity modes. The non-equity modes category includes export and contractual agreements. The equity modes category includes: joint venture and wholly owned subsidiaries. Exporting Exporting is the process of selling of goods and services produced in one country to other countries. There are two types of exporting: direct and indirect. Direct Exports Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. Types of Direct Exporting. Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services or products such as production machinery, benefit the most form sales representation. Importing distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory, such as toys, appliances, prepared food. Advantages of Direct Exporting ➢ Control over selection of foreign markets and choice of foreign representative companies 9Notes ➢ Good information feedback from target market ➢ Better protection of trademarks, patents, goodwill, and other intangible property ➢ Potentially greater sales than with indirect exporting. Disadvantages of Direct Exporting ➢ Higher start-up costs and higher risks as opposed to indirect exporting ➢ Greater information requirements ➢ Longer time-to-market as opposed to indirect exporting. Indirect exports: An indirect export is the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign market. Types of Indirect Exporting ➢ Export Trading Companies (ETCs) provide support services of the entire export process for one or more suppliers. Attractive to suppliers that are not familiar with exporting as ETCs usually perform all the necessary work: locate overseas trading partners, present the product, quote on specific enquiries, etc. ➢ Export Management Companies (EMCs) are similar to ETCs in the way that they usually export for producers. Unlike ETCs, they rarely take on export credit risks and carry one type of product, not representing competing ones. Usually, EMCs trade on behalf of their suppliers as their export departments. ➢ Export Merchants are wholesale companies that buy unpackaged products from suppliers/manufacturers for resale overseas under their own brand names. The advantage of export merchants is promotion. One of the disadvantages for using export merchants result in presence of identical products under different brand names and pricing on the market, meaning that export merchant’s activities may hinder manufacturer’s exporting efforts. ➢ Confirming Houses are intermediate sellers that work for foreign buyers. They receive the product requirements from their clients, 10Notes negotiate purchases, make delivery, and pay the suppliers/ manufacturers. An opportunity here arises in the fact that if the client likes the product it may become a trade representative. A potential disadvantage includes supplier’s unawareness and lack of control over what a confirming house does with their product. ➢ Nonconforming Purchasing Agents are similar to confirming houses with the exception that they do not pay the suppliers directly – payments take place between a supplier/manufacturer and a foreign buyer. Advantages of Indirect Exporting ➢ Fast market access ➢ Concentration of resources for production ➢ Little or no financial commitment. The export partner usually covers most expenses associated with international sales ➢ Low risk exists for those companies who consider their domestic market to be more important and for those companies that are still developing their R&D, marketing, and sales strategies. ➢ The management team is not distracted ➢ No direct handle of export processes. Disadvantages of Indirect Exporting ➢ Higher risk than with direct exporting ➢ Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting ➢ Inability to learn how to operate overseas ➢ Wrong choice of market and distributor may lead to inadequate market feedback affecting the international success of the company ➢ Potentially lower sales as compared to direct exporting, due to wrong choice of market and distributors by export partners. Those companies that seriously consider international markets as a crucial part of their success would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who would want to avoid financial risk as a threat to their other goals. 11Notes Licensing An international licensing agreement allows foreign firms, either exclusively or non-exclusively to manufacture a proprietor’s product for a fixed term in a specific market. Summarizing, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor earnings usually take forms of one time payments, technical fees and royalty payments usually calculated as a percentage of sales. As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government show for intellectual property and on the ability of the licensor to choose the right partners and avoid them to compete in each other market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and interests of both, licensor and licensee. Following are the main advantages and reasons to use an international licensing for expanding internationally: ➢ Obtain extra income for technical know-how and services ➢ Reach new markets not accessible by export from existing facilities ➢ Quickly expand without much risk and large capital investment ➢ Pave the way for future investments in the market ➢ Retain established markets closed by trade restrictions ➢ Political risk is minimized as the licensee is usually 100% locally owned ➢ Is highly attractive for companies that are new in international business. 12Notes On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and reasons why companies should not use it as: ➢ Lower income than in other entry modes ➢ Loss of control of the licensee manufacture and marketing operations and practices dealing to loss of quality ➢ Risk of having the trademark and reputation ruined by a incompetent partner ➢ The foreign partner can also become a competitor by selling its production in places where the parental company is already in. Franchising The Franchising system can be defined as: “A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.” Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of rights and resources which usually includes: equipments, managerial systems, operation manual, initial trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is done by the franchisor. In addition to that, while a licensing agreement involves things such as intellectual property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of the business. Advantages of the International Franchising Mode ➢ Low political risk ➢ Low cost ➢ Allows simultaneous expansion into different regions of the world ➢ Well selected partners bring financial investment as well as managerial capabilities to the operation. 13Notes Disadvantages of the International Franchising Mode ➢ Franchisees may turn into future competitors ➢ Demand of franchisees may be scarce when starting to franchise a company, which can lead to making agreements with the wrong candidates ➢ A wrong franchisee may ruin the company’s name and reputation in the market ➢ Comparing to other modes such as exporting and even licensing, international franchising requires a greater financial investment to attract prospects and support and manage franchisees. Turnkey Projects A turnkey project refers to a project in which clients pay contractors to design and construct new facilities and train personnel. A turnkey project is way for a foreign company to export its process and technology to other countries by building a plant in that country. Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy. One of the major advantages of turnkey projects is the possibility for a company to establish a plant and earn profits in a foreign country especially in which foreign direct investment opportunities are limited and lack of expertise in a specific area exists. Potential disadvantages of a turnkey project for a company include risk of revealing companies secrets to rivals, and takeover of their plant by the host country. By entering a market with a turnkey project proves that a company has no long-term interest in the country which can become a disadvantage if the country proves to be the main market for the output of the exported process. Wholly Owned Subsidiaries (WOS) A wholly owned subsidiary includes two types of strategies: Greenfield investment and Acquisitions. Greenfield investment and Acquisition include both advantages and disadvantages. To decide which entry modes to use is depending on situations. 14Notes Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and potentially costly, but it is able to full control to the firm and has the most potential to provide above average return. “Wholly owned subsidiaries and expatriate staff are preferred in service industries where close contact with end customers and high levels of professional skills, specialized know how, and customizations are required.” Greenfield investment is more likely preferred where physical capital intensive plants are planned. This strategy is attractive if there are no competitors to buy or the transfer competitive advantages that consists of embedded competencies, skills, routines, and culture. Greenfield investment is high risk due to the costs of establishing a new business in a new country. A firm may need to acquire knowledge and expertise of the existing market by third parties, such consultant, competitors, or business partners. This entry strategy takes much time due to the need of establishing new operations, distribution networks, and the necessity to learn and implement appropriate marketing strategies to compete with rivals in a new market. Acquisition has become a popular mode of entering foreign markets mainly due to its quick access. Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the alternative. Acquisition has been increasing because it is a way to achieve greater market power. The market share usually is affected by market power. Therefore, many multinational corporations apply acquisitions to achieve their greater market power require buying a competitor, a supplier, a distributor, or a business in highly related industry to allow exercise of a core competency and capture competitive advantage in the market. Acquisition is lower risk than Greenfield investment because of the outcomes of an acquisition can be estimated more easily and accurately. In overall, acquisition is attractive if there are well established firms already in operations or competitors want to enter the region. On the other hand, there are many disadvantages and problems in achieving acquisition success. 15Notes Integrating two organizations can be quite difficult due to different organization cultures, control system, and relationships. Integration is a complex issue, but it is one of the most important things for organizations. By applying acquisitions, some companies significantly increased their levels of debt which can have negative effects on the firms because high debt may cause bankruptcy. Too much diversification may cause problems. Even when a firm is not too over diversified, a high level of diversification can have a negative effect on the firm in the long term performance due to a lack of management of diversification. Joint Venture There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favorable when: The partners’ strategic goals converge while their competitive goals diverge The partners’ size, market power, and resources are small compared to the Industry leaders Partners are able to learn from one another while limiting access to their own proprietary skills The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include: ➢ Conflict over asymmetric new investments ➢ Mistrust over proprietary knowledge ➢ Performance ambiguity - how to split the pie 16Notes ➢ Lack of parent firm support ➢ Cultural clashes ➢ If, how, and when to terminate the relationship Joint ventures have conflicting pressures to cooperate and compete: ➢ Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position. ➢ The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources. ➢ The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control. Strategic Alliance A strategic alliance is a term used to describe a variety of cooperative agreements between different firms, such as shared research, formal joint ventures, or minority equity participation. The modern form of strategic alliances is becoming increasingly popular and has three distinguishing characteristics: 1. They are frequently between firms in industrialized nations 2. The focus is often on creating new products and/or technologies rather than distributing existing ones 3. They are often only created for short term durations Advantages of a Strategic Alliance Technology Exchange ➢ This is a major objective for many strategic alliances. The reason for this is that many breakthroughs and major technological innovations are based on interdisciplinary and/or inter-industrial advances. Because of this, it is increasingly difficult for a single firm to possess the necessary resources or capabilities to conduct 17Notes their own effective R&D efforts. This is also perpetuated by shorter product life cycles and the need for many companies to stay competitive through innovation. Some industries that have become centers for extensive cooperative agreements are: ➢ Telecommunications ➢ Electronics ➢ Pharmaceuticals ➢ Information technology ➢ Specialty chemicals Global Competition ➢ There is a growing perception that global battles between corporations be fought between teams of players aligned in strategic partnerships. Strategic alliances will become key tools for companies if they want to remain competitive in this globalized environment, particularly in industries that have dominant leaders, such as cell phone manufactures, where smaller companies need to ally in order to remain competitive. Industry Convergence ➢ As industries converge and the traditional lines between different industrial sectors blur, strategic alliances are sometimes the only way to develop the complex skills necessary in the time frame re- quired. Alliances become a way of shaping competition by decreas- ing competitive intensity, excluding potential entrants, and iso- lating players, and building complex value chains that can act as barriers. Economies of Sscale and Reduction of Risk ➢ Pooling resources can contribute greatly to economies of scale, and smaller companies especially can benefit greatly from strategic alliances in terms of cost reduction because of increased economies of scale. In terms on risk reduction, in strategic alliances no one firm bears 18Notes the full risk, and cost of, a joint activity. This is extremely advantageous to businesses involved in high risk / cost activities such as R&D. This is also advantageous to smaller organizations which are more affected by risky activities. Alliance as an Alternative to Merger ➢ Some industry sectors have constraints to cross-border mergers and acquisitions, strategic alliances prove to be an excellent alternative to bypass these constraints. Alliances often lead to full- scale integration if restrictions are lifted by one or both countries. Disadvantages of Strategic Alliances The risks of Competitive Collaboration Some strategic alliances involve firms that are in fierce competition outside the specific scope of the alliance. This creates the risk that one or both partners will try to use the alliance to create an advantage over the other. The benefits of this alliance may cause unbalance between the parties, there are several factors that may cause this asymmetry: The partnership may be forged to exchange resources and capabilities such as technology. This may cause one partner to obtain the desired technology and abandon the other partner, effectively appropriating all the benefits of the alliance. ➢ Using investment initiative to erode the other partners’ competitive position. This is a situation where one partner makes and keeps control of critical resources. This creates the threat that the stronger partner may strip the other of the necessary infrastructure. ➢ Strengths gained by learning from one company can be used against the other. As companies learn from the other, usually by task sharing, their capabilities become strengthened, sometimes this strength exceeds the scope of the venture and a company can use it to gain a competitive advantage against the company they may be working with. ➢ Firms may use alliances to acquire its partner. One firm may target 19a firm and ally with them to use the knowledge gained and trust built in the alliance to take over the other. Comparison of Market Entry Options The following table provides a summary of the possible modes of foreign market entry: Comparison of Foreign Market Entry Modes Conditions Favoring Mode Advantages Disadvantages this Mode Exporting Limited sales potential Minimizes risk and Trade barriers & in target country; little investment. tariffs add to costs. product adaptation Speed of entry Transport costs required Maximizes scale; uses Limits access to local Distribution channels existing facilities. information close to plants Company viewed as High target country an outsider production costs Liberal import policies High political risk Licensing Import and investment Minimizes risk and Lack of control over barriers investment. use of assets. Legal protection possible Speed of entry Licensee may become in target environment. competitor. Able to circumvent Low sales potential in trade barriers Knowledge spillovers target country. High ROI License period is Large cultural distance limited Licensee lacks ability to become a competitor. 20Joint Import barriers Overcomes ownership Difficult to manage Ventures restrictions and Large cultural distance Dilution of control cultural distance Assets cannot be fairly Greater risk than Combines resources priced exporting a & of 2 companies. licensing High sales potential Potential for learning Knowledge spillovers Some political risk Viewed as insider Partner may become a Government restrictions Less investment competitor. on foreign ownership required Local company can provide skills, resources, distribution network, brand name, etc. Direct Import barriers Greater knowledge of Higher risk than other Investment local market modes Small cultural distance Can better apply Requires more Assets cannot be fairly specialized skills resources and priced commitment Minimizes knowledge High sales potential spillover May be difficult to manage the local re- Low political risk Can be viewed as an sources. insider Special Difficulties in International Business What make international business strategy different from the domestic are the differences in the marketing environment. The important special problems in international marketing are given below: Political and Legal Differences The political and legal environment of foreign markets is different from that of the domestic. The complexity generally increases as the number of countries in which a company does business increases. It should also be noted that the political and legal environment is not the 21Notes same in all provinces of many home markets. For example, the political and legal environment is not exactly the same in all the states of India. Cultural Differences The cultural differences, is one of the most difficult problems in international marketing. Many domestic markets, however, are also not free from cultural diversity. Economic Differences The economic environment may vary from country to country. Differences in the Currency Unit The currency unit varies from nation to nation. This may sometimes cause problems of currency convertibility, besides the problems of exchange rate fluctuations. The monetary system and regulations may also vary. Differences in the Language An international marketer often encounters problems arising out of the differences in the language. Even when the same language is used in different countries, the same words of terms may have different meanings. The language problem, however, is not something peculiar to the inter- national marketing. For example: the multiplicity of languages in India. Differences in the Marketing Infrastructure The availability and nature of the marketing facilities available in different countries may vary widely. For example, an advertising medium very effective in one market may not be available or may be underdeveloped in another market. Trade Restrictions A trade restriction, particularly import controls, is a very important problem, which an international marketer faces. 22

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