Introduction to International Business

The beverages you drink might be produced in India, but with the collaboration of a USA company. The tea you drink is prepared from the tea powder produced in Sri Lanka. The spares and hard disk of the computer you operate might have been produced in the United States of America. The perfume you apply might have been produced in France. The television you watch might have been produced with the Japanese technology. The shoe you wear might have been produced in Taiwan, but remarketed by an Italian company. Air France and so on so forth might have provided your air travel services to you. Most of you have the experience of browsing Internet and visiting different web sites, knowing the products and services offered by various companies across the globe. Some of you might have the experience of ‘even ordering and buying the products through Internet. This process gives you the opportunity of transacting in the international business arena without visiting or knowing the various countries and companies across the globe. You get all these even without visiting or knowing the country of the company where they are produced. All these activities have become a reality due to the operations and activities of international business. Thus, international business is the process of focusing on theresources of the globe and objectives of the organizations on global business opportunities and threats, in order to produce, sell or exchange of goods/ services worldwide.

Mergers & Acquisitions

M & A involve the combination of two organisations. The term merger refers to the integration of two previously independent organisations into a completely new organisation; Acquisition involves the purchase of one organisation by another for integration into the acquiring organisation. Organisations have a number of reasons for wanting to acquire or merge with other firms, including horizontal or vertical integration, diversification ; gaining access to global markets, technology, or other resources; and achieving operational efficiencies, improved innovation, or resource sharing. As a result, M&A have become a preferred method for rapid growth and strategic change.

Advantages of M&As

1. Market entry

2. Possession of marketing infrastructure

3. Achieving economies of scale

4. Increasing the market power

5. Diversification

6. Acquisition of technology

7. Use of surplus funds

8. Optimum utilization of resources and facilities

9. Product mix optimisation

10.Pre-emptive strategy (to block competitor from acquisition)

11.Horizontal or Vertical integration

12.Tax benefits

13.Logistical factors

14.Acquisition of brands

15.Minimisation of Risk

16.Regulatory factors

Ex. Asian Paints takeover of Singapore based Berger paints –

entry to 11 countries incl China. Tata Steel – Corus – entry to

Europe and Latin America.

Disadvantages of M&As

1. Indiscriminate acquisitions land several companies in financial and other problems

2. When company is taken over, its problems are also often inherited

3. If adequate homework was not done and the evaluation was not right, the acquisition decision could be wrong.

4. Some of the units acquired would have problems such as old plant, obsolete technology, surplus or demoralised labour

5. The company may not have the experience and expertise to manage the unit taken over if it is in an entirely new field.

Globalization : Definitions

Economic Definition

Globalization may be defined as the process of integration of economies across the world through cross-border flow of factors, products and information.

Corporate Definition

Globalization in its true sense is a way of corporate life necessitated, facilitated and nourished by the transnationalization of the world economy and developed by corporate strategies. Globalisation is an attitude of mind which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment.

Driving and Restraining Forces of Globalisation

There are number of forces which induce and propel globalization and thereby expand the scope and importance of international business. On the other hand there are also forces which restrain globalisation.

Driving Forces

1. Liberalisation

Universal economic policy of liberalisation fostering a seamless business world.

GATT/WTO policies

Revolutionary policy changes as in China (turn of the century), RPA countries(late 80’s)

LPG – surge in M&A, FDI resulting in greater global economic integration

2. MNC’s

Linking resources and objectives with world market opportunities

taking advantage of liberalisation

3. Technology

Powerful driving force

Technological breakthroughs are substantially increasing the scale economies and the market scale required to break-even

4. Transportation and Communication Revolution

Reducing disadvantage of distance and cost

Development in the field of air and sea cargo- containerisation, Refrigeration (cryogenic tanks), LNG, LSWR, Perishable goods, Floral, Food stuff, quick changes in fashion and design.

IT & Telecommunication Revolution

5 Product Development cost and efforts

Huge R&D and development cost/ investment - huge global market

Fast technological changes- Risk of obsolescence-quick payback

6. Quality and Cost

The two most important determinants of demand. Can be better achieved when a firm is global in its operations, Scale economies, PLC, Learning curve etc

7. Rising Aspirations and Wants

Innovative ideas, breakthrough improvements-3 dimentions- bottom line, customer satisfaction, reduction in cycle time.

8. Competition

Exploring new markets, risk taking, diversification, new ownerships

9. World Economic Trends

Difference in growth rates – developed and developing countries

Domestic rapid economic growth-large number of players- exploiting opportunities outside the country- China

10. Regional Integration

The proliferation of regional integration schemes

European Union(EU), South Asian Association for Regional Cooperation(SAARC), North American Free Trade Agreement (NAFTA)

Creates a borderless region between the members Financial flows

11. Leverages

A global company can leverage its experience to expand its global operations. According to Keegan “ Leverage is simply some type of advantage that a company enjoys by virtue of the fact that it conducts business in more than one country “

Restraining Forces.

There are two types of factors, which hamper globalisation.

1. External factors

a. Government policies and controls – Interventionist approach

b. Social and political opposition against foreign business

c. Unethical practices to protect domestic firms

d. Selfish motives of governance

2. Internal factors

Factors within the organisation – myopic approach-nearsightedness

Organisational culture – may hamper or pamper – no vision

Multinational Corporations

Multinational Corporations are huge industrial organisations having a wide network of branches and subsidiaries spread over a number of countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies.

Such a company may enter into joint venture with a company in another country. There may be agreement among companies of different countries in respect of division of production, market, etc. These companies are to be found in almost all the advanced countries with the USA perhaps the biggest amongst them. Their operations extend beyond their own countries and cover not only the advanced countries but also the less developed countries.

Advantages of MNCs to the Host Country

1. They bring about increase in the national income and per capita income of the host country.

2. They bring about increase in the level of investment, employment and income in the host country.

3. They fill up savings gap in the economy by transferring surplus saving of one country to the deficient savings in some other countries of the world.

4. They help the host country to solve the problem of trade deficit through export promotion and import substitution.

5. They fill up technological gap by transfering technology from technically advanced country to technologically backward country.

6. They create employment opportunities in manufacturing as well as allied service sectors.

7. They break protectionalism, create competition among domestic companies and thus enhance their competitiveness.

8. The marketing skills of the MNCs are impressive particularly in providing marketing infrastructure.

9. They help rapid industrialisation and improve general standard of living in the host country.

Advantages of MNCs to the Home Country

1. They create opportunities for domestic firms to market their products throughout the world.

2. They create employment opportunities for the people of home country, both at home and abroad.

3. They earn valuable foreign exchange for the country and therefore, strengthen the balance of payments condition of the home country.

Disadvantages of MNCs to the Home / Host Country

1. Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts. The current account may deteriorate as a result of substantial importation of intermediate and capital goods while the capital account may worsen because of the overseas repatriation of profits, interest, royalties, etc.

2. While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host country government.

3. The management, entrepreneurial skills, technology, and overseas contacts provided by the MNCs may have

little impact on developing local skills and resources. In fact, the development of these local skills may be inhibited by the MNCs by

stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets.

4. MNCs impact on development is very uneven. In many situations MNC activities reinforce dualistic economic structures and widen income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.

5. MNCs typically produce non-essential products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.

6. MNCs often use their economic power to influence government policies in directions unfavourable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidised inputs, and cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.

7. MNCs may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They tend to drive out local competitors and inhibit the emergence of small-scale enterprises.

Peter Drucker Transnational Economy

Peter Drucker observes in his work “The New Realities” that the world economy has changed from being International to Transnational. While the international economy is regulated by national government, the transnational economy is a borderless world economy regulated by global institutions. The transnational economy according to Drucker is characterised by the following features :

1. The transnational economy is shaped by monetary flows which have their own dynamics. The monetary and fiscal policies of sovereign nation states increasingly react to events in the international money and capital markets rather than actively shape them.

2. The emergence of management as the decisive factor of production. The transnationalisation of the money and capital markets and accessibility to it.

3. The primacy of market maximisation as a goal over profit maximisation.

4. Trade becoming a function of investment.

5. The decision making power-shift from the national governments to the regional trade blocks.

6. A genuine and autonomous world economy made up of money, credit and investment flows organised by information technology.

7. A growing persuasiveness of the transnational corporations which see the world as a single market for production and marketing of goods and services.

Balance of Payment

Balance of Payment is a standard double entry accounting record to capture all the transactions of an economy with Rest of the World. Balance of Payment always balances as it is double entry account. There may be deficit or surplus in current and/or capital account or any sub account. But final adjustment

happens by increasing or reducing Forex reserves. In practical sense it means that, the government has to balance the BoP account either by borrowing or reducing reserves.

IMF (International Monetory Fund)

IMF provides loans to countries experiencing balance of payment problems. Also it promotes capital account convertibility. Hence on both these factors, IMF’s role is crucial in world economic transactions. The IMF is an organization of 185 countries, working to foster global monetary co-operation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.

A core responsibility of the IMF is to provide loans to countries experiencing balance of payments problems. This financial assistance enables countries to rebuild their international reserves; stabilize their currencies; continue paying for imports; and restore conditions for strong economic growth. Unlike development banks, the IMF does not lend for specific projects.

IMF account in BoP denotes quota contributions to IMF (reserve trench) and SDR are Special Drawing Rights.

Objectives of IMF (International Monetory Fund)

1. Promote international monetary cooperation

2. Balanced growth of trade

3. Help nations improve Balance of payment

4. Promote exchange stability

5. Multilateral system of payment

Functions of IMF

1. IMF surveillance

2. IMF lending

3.Technical assistance

World Bank

World Bank works on ‘World free of poverty’. Thus it is a developmental institution. It extends help in the form of soft loans and contributions to underprivileged societies and regions. It has four arms : IBRD (Int’l Bank for Reconstruction & Development), IDA (Int’l Dev Association), IFC (Int’l Finance Corpn.) and MIGA (Multilateral Investment Guarantee Agency). IBRD and IDA provide loans to Governments for infrastructure, education and health. IDA is soft loan window i.e. it provides loans to Less Developed Countries (LDC) on concessional

terms. IFC provides loan and equity support to corporate desirous of setting up plants in LDCs. MIGA guarantees such cross border investments against political risks.

The four main legal instruments of the WTO are:

1. The General Agreement on Tariff & Trade (GATT) alongwith associated agreements and jurisprudence.

2. The General Agreement on Trade in Services (GATS)

3. The Agreement on Trade-Related Intellectual Property Rights (TRIPS)

4. Trade Related Investment Measures (TRIMS)

The birth of WTO paved the way for the reduction of duties, tariffs, non tariff barriers like quotas and controls. WTO enlarged the market access opportunities and provided efficient rules for undistorted competition among the world countries. WTO contributes to the strengthening the institutional framework for business relations among member countries.

W T O & its Objectives

1. Trade Liberalisation

2. Non-discrimination

3. Raising Standards of Living

4. Ensuring optimum utilisation of World Resources

5. Environmental concern

6. Development of less developed Countries

7. Full Employment

8. Multilateral Trading System

W T O & its Functions

1. Administering WTO Trade Agreements

2. Reduction of Trade Barriers

3. Settlement of International Trade Disputes

4. Co-operation with other International organisations like IMF & IBRD

5. Forum for Trade Negotiations

6. Trade Policy Review Mechanism

7. Consultancy Services

India and WTO

India was one of the 76 governments that became members of the WTO on the first day of formation of WTO in 1995. Thus, India was one of the founder members of the WTO.

India is expected to play a leader’s role for the developing countries in the WTO. Recently, India is experiencing the problems from the WTO due to dumping. Indian agriculture

sector is affected badly compared to industrial sector by dumping.

Impact of WTO on India

The WTO is an organisation that intends to supervise and liberalise international trade. The global business environment is very significantly influenced by the WTO principles and agreements. It has both positive as well as negative impact on India’s development and trade.

Positive Impact

1. Boost to exports

2. Security and Predictability

3. Policy assistance

4. Trade links

5. Settlement of disputes

6. Special concessions

7. Technical assistance

8. Sustainable development

9. Policy review mechanisms

Negative impact

1. Prominence to developed nations

2. Price rise

3. Challenges to service sector

4. Erosion of autonomy

5. Fundamentally undemocratic

6. Overlooks labour and human rights

7. Increasing inequality

Foreign Direct Investment

Definition:

FDI occurs when an entity/investor from one country (home country, e.g. USA) obtains or acquires the controlling interest in an entity in another country (host country,e.g. India) and then operates and manages that entity and its assets as part of the multinational business of the investing entity.

Foreign Portfolio Investment (FPI)

Definition:

FPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a

controlling stake in an enterprise. These include investment via equity instruments (Stocks) or debt (Bonds) of a foreign enterprise which does not necessarily represent a long-term interest.

Advantages of FDI

A. It can provide a firm with new markets and marketing channels, cheaper

production facilities, access to new technologies, capital process, products,

organizational technologies and management skills.

B. FDI can provide a strong impetus to economic development of the host country.

This is all the more true when large MNCs enter developing nations through FDI.

C. FDI allows companies to avoid foreign government pressure for local

production.

D. It allows making the move from domestic export sales to a locally based

national sales office.

E. Capability to increase total production capacity.

Disadvantages of FDI s coming through MNCs

1. Although the initial impact of MNC investment is to improve the foreign

exchange position of the recipient nation, its long-run impact may reduce

foreign exchange earnings on both current and capital accounts. The current

account may deteriorate as a result of substantial importation of intermediate

and capital goods while the capital account may worsen because of the

overseas repatriation of profits, interest, royalties, etc.

2. While MNCs do contribute to public revenue in the form of corporate taxes,

their contribution is considerably less than it should be as a result of liberal

tax concessions, excessive investment allowances, subsidies and tariff

protection provided by the host country government.

3. The management, entrepreneurial skills, technology, and overseas contacts

provided by the MNCs may have little impact on developing local skills and

resources. In fact, the development of these local skills may be inhibited by

the MNCs by stifling the growth of indigenous entrepreneurship as a result

of the MNCs dominance of local markets.

4. MNCs impact on development is very uneven. In many situations MNC

activities reinforce dualistic economic structures and widen income

inequalities. They tend to promote the interests of some few modern-sector

workers only. They also divert resources away from the production of

consumer goods by producing luxurious goods demanded by the local elites.

5. MNCs typically produce non-essential products and stimulate inappropriate

consumption patterns through advertising and their monopolistic market

power. Production is done with capital-intensive technique which is not

useful for labour surplus economies. This would aggravate the

unemployment problem in the host country.

Anti – Dumping Policy

Dumping is defined as the act of a manufacturer in one country exporting a product to another country (1) at a price which is either below the price it charges in its home market or (2) it is less than normal manufacturing cost in another country or (3) if it can be proven that there has been a substantial increase of a specific good; dumping large surpluses into a market will substantially lower the market price as will introducing lower than market priced goods. The term has a negative connotation as advocates of free markets see “Dumping” as a form of protectionism. Anti-dumping action means charging extra import duty on a particular product from the particular exporting country in order to bring its price closer to the “normal value” or to remove the injury to domestic industry in the importing country.

Theories for Determining Foreign Exchange Rates

1. Purchasing Power Parity

Purchasing power parity is a theory about exchange rate determination based on a plain idea that the two currencies involved in the calculation of the exchange rate have the same purchasing power for the same good sold in the two countries.

2. Interest Rate Parity

The determination of exchange rate in a forward market finds an important place in the theory of Interest Rate Parity (IRP). The IRP theory states that equilibrium is achieved when the forward rate differential is approximately equal to the interest rate differential. In other words, the forward rate differs from the spot rate by an amount

that represents the interest rate differential. In this process, the currency of a country with a lower interest rate should be at a forward premium in relation to the currency of a country with a higher interest rate.

Interest Rate Arbitrage

This is borrowing a currency in one country, transferring in to another (at spot rate), investing it in the converted currency, and converting it back to original currency at forward rate, repaying loan and making profit. Profit depends upon spot-forward rate and interest rate difference in two countries.

In perfect market there should not be any arbitrage opportunity. But in practice such opportunities exist and as arbitrageurs spot it and use it, these opportunities vanish and equilibrium is established.

3. The Fisher effect

According to Fisher, the interest rate has two components viz., a real return and adjustment for price level changes.

The formula given by Fisher is :

Nominal Interest Rate = Real Interest Rate + Expected Inflation Rate

Meaning of Business Ethics

Business ethics are those principles, practices or philosophies that are concerned with moral judgement and good conduct as they are applicable to business situation. Business ethics refers to right or wrong behavior in business decisions. Business ethics involves morally accepted behavior in business practices.

Importance of Business Ethics

Customer will be satisfied only if the business follows all the business ethics.

Business ethics is needed in order to make members of the business conscious as regards their duties and responsibilities towards consumer and other social groups.

Business ethics is needed to make business activities fair to consumers. It checks business malpractices and offers protection to consumers.

Business ethics is needed in order to improve the confidence of consumers as regards quality, price, reliability, etc of goods and services supplied.

Business ethics is needed in order to protect the interest of all those concerned with business – the shareholders, employees, dealers, and suppliers. It avoids their exploitation through unfair trade practices.

Business ethics is needed in order to create good image in the society and also for avoiding public criticism. Ethical business gets public support.

Business ethics leave a long-lasting impression on the customers and the impression on their minds builds trust, fetching a business more customers while retaining the older ones.

Without following certain ideals in business, one cannot become successful. Success that is attained without a foundation of strong ethics is bound to be short-lived. A business cannot continue to prosper without an ethical base. A few successes can be coincidences or flukes but persistent success can only be a result of a strong foundation of ethics.

Public will be ready to invest or lend money only if they are convinced that the organization is following fair business practices.

Business in the long run, do require social recognition and support.

Ethics and Law

Ethics concentrates on the Do’s whereas Law concentrates on Don’ts.

Ethics is not backed by power but Law is backed by power.

Ethics does not use force whereas Law uses force when necessary.

Ethics is broad concept whereas Law is narrow concept.

Following things will fall within the ambit of ethics but not of law

Look after the aged.

Be considerate to your workers.

Obey your elders.

Do not tell a lie.

Do not misguide for personal benefits.

Keeping promises

Business Ethics is now a management discipline

Ethical issues are there everywhere, at all levels of business activity. Business ethics concern the ground rules of individual company and social behavior.

At Stakeholder’s level

Shareholders

Ensure capital appreciation

Ensure steady and regular dividends

Disclose all relevant information

Protect minority shareholders interests

Not to window dress balance sheets

Protect interest in times of mergers, amalgamations and takeovers

Banks and Lending institutions

Guarantee safety of borrowed funds

Prompt repayment of loans

Customers

Better quality of goods

Goods and services at reasonable price

Not to corner stocks and create temporary shortage

Not to practice discriminatory pricing

Not to make false claims about products in advertisements

Employees

Security of job

Better and safe working conditions

Better recommendation

Participative management

Welfare facilities

Suppliers and partners

Prompt Payments

Fair practices of business

Creating a level playing field

Government

Complying with rules and regulations

Honesty in paying taxes and other dues

Acting as partner in progress of the country

Society / Community

Concern for poor and down trodden

No discrimination against any particular section or group

Concern for clean environment

Preservation of scarce resources for posterity

Contributing to better quality of life

Internal Policy Level

Fair practices relating to recruitment, compensation, lay-offs, perks, promotion, etc.

Transformational leadership to motivate employees to aim at better and higher things in life

Better communication at all levels

Personal Policy Level

Not to misuse others for personal ends

Not to indulge in politics to gain power

Not to spoil promotional chances of others

Not to use office car, stationary and other property for personal use

Not to fall prey to shortcuts and easy money

Promise keeping

No violence, i.e. preventing or not causing physical harm to others

Mutual help

Corporate Governance

According to SEBI committee, “Corporate Governance is the system by which the companies are directed and controlled by the management in the best interest of the stakeholders and others, ensuring greater transparency and better and timely financial reporting.”

Objectives of Corp Governance

To enhance the long term value and economic efficiency of the company. It encompasses all shareholders and integrates all the participants involved in the process.

To elevate the reputation of the company and the esteem of its management

To attract, employ and retain talent and motivate employees to give their best. A more open and participative style of management ensures free exchange of ideas and frank appreciation at all levels.

To create and adopt, code of conduct with wholehearted commitment and improve the moral and ethical standards of performance to the utmost level.

To have a right balance, knowledge and competence to set strategies and lead the organization.

To use the resources entrusted to the management, in most economic and efficient productive and effective ways, for the benefit of shareholders as well as for the society at large.

To set the high standards of business ethics based upon humanity, honesty and hardwork.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a business strategy that works. In a world where brand value and reputation are increasingly seen as a company’s most valuable assets, CSR can build the loyalty and trust that ensure a bright sustainable future. In our complex, global society, corporations are becoming increasingly visible. They are not judged on their results but on their behavior too, and this can be an opportunity. By integrating CSR into your business as core value, you are not only making a significant contribution to a better society, but just as importantly you are recognized for doing so. And this has obvious benefits for the company. If one is to be successful in 21st century, one must simultaneously excel in all three

elements of sustainable development: Economic Prosperity, CSR and Environmental Stewardship. The right way to approach social responsibility is not in rules and regulations but in a high level ethical code that could be built into an organization’s value system. CSR is an approach that helps us to get away from the old idea that economic, social and environmental goals are always and invariably in conflict. What we need to work out is how progress on any one of those fronts can support progress on the others. We want to see business, the voluntary sector, and public bodies all working together, not doing so grudgingly, but because each sees it as advancing its own key interests to do so, as well as advancing the interests of others.

Benefits of CSR are :

Enhanced Brand Image and Reputation

Increased Trust and Customer Loyalty

Sustainable Development

Example of Cocacola

Triple Bottomline Concept : 3 Ps

1.Profits

2.Planet

3.People

1. PROFITS

Why Organisations which make losses are nuisance to the society.

1.Not giving value for Shareholders’ money invested.

2.Misutilises scarce natural resources incl raw materials.

3.Wastes employees talent and potential and promotes inefficiency.

4.Not paying taxes which are utilised for economic development of the country.

5. Not paying creditors and upsets economy.

6. Jeopardises employees future. In a way - Pushing them in to unemployment market.

2.PLANET

Preventing Environmental Pollution

1. Growing cost of compliance

2.The cost of breaking the law

3. The polluting enterprise is more vulnerable to changes in environmental legislation

4. Polluters will increasingly find it difficult to obtain finance and insurance cover

5. The polluting enterprise will find it harder to attract and retain talent

6. The polluting enterprise can be attacked as being anti social and uncaring

7. The polluting enterprise can find itself left behind by competitors which adopt greener products and processes.

3. PEOPLE

Preserve, promote and nurture Social and Cultural values

1.Respect for core human values and human rights.

2. Respect for local tradition

3.Respect all Religions.

4.Respect & Obey Elders.

5.Be considerate to your workers.

6.Do not tell a lie for personal/ Corporate benefits.

7.Do not misguide for personal/ Corporate benefits.

8.Keeping promises

9.“Atithi Devo Bhava” – an Indian culture.

10. “Create a level playing field”

11. Zero politics and Sense of purpose.

12. Set an example : Be a Role Model

Influence of PEST Factors on International Business

Any business is affected by its external environment. The major

macroeconomic factors in the external environment that affect the

business are political, environmental, social and technological.

A. Political Environment

The political environment of a country greatly influences the business

operating in those countries or business trading with those countries.

The success and growth of international business depends on the stable,

collaborative, conducive and secure political system in the country.

The following factors affect the political environment in a country.

1. Tax Policy : The tax policy of a country affects the profitability of

the business there. The Corporate Taxation laws affect the

profitability directly. The direct taxation laws also affect the

business because it influences consumer spending. The structure of

indirect taxation in a country like its excise duty structure, customs

and sales tax greatly affects the input costs of a business.

For e.g. Countries like UAE have very low direct taxation levels

inducing great spending and hence trading and marketing based business

are successful. But due to very high indirect taxation levels the

manufacturing business is not very successful.

2. Government support : One of the most important political factor

is the Government support to international businesses. Business

can be successful only if the local government provides support in

terms o infrastructure, license clearing if required, transparent

policy and quick dispute resolution mechanism. Also the nature of

the political system i.e. democracy, communism etc. in the country

influences the Government support.

For e.g. the RBI has provided single window clearance for FDI and

hence has greatly increased the FDI levels in our country.

3. Labor Laws : the labor laws in a country affect the viability of a

business in that country. The pension laws also play a critical role

especially in cross border acquisitions. Many businesses had to be

withdrawn or closed because of the labor unrest in the country.

For e.g.: Withdrawal of Premier Automobiles due to union strikes in our

country.

The problems faced by doctors and nurses in UK due to the restrictive

laws in that country.

4. Environmental policy : The countries environmental policy (under

the Kyoto Protocol or otherwise) affects many business like

chemicals, refineries and heavy engineering.

5. Tariffs and duty structure : The level of duties and tariffs that

are imposed by the country influence its imports and exports

greatly. Some countries follow a protectionist policy to the

domestic industry by raising import barriers For e.g. India in the

pre liberalization era, Russia.

6. Political stability and political milieu : Political stability greatly

affects the longevity of the businesses in a country. Political risk

assessment should be done to determine the country risk on the

basis of following parameters :

a. Confiscation: the nationalization of businesses without

compensation. For e.g. India during the nationalist wave during

Indira Gandhi’s tenure.

b. Nationalization : Resource nationalization is a major risk for

businesses involving local resources like oil, minerals etc. For

e.g. the resource nationalization in Columbia.

c. Instability risk : The possibility of military takeovers or huge

government changes. For e.g. the coups in Thailand or in Fiji

has affected the profits of businesses there by as much as 60%

due to work stoppage and property destruction.

d. Domestication : The global company relinquishing control in

favor of domestic investors. For e.g. Barclays bank in South

Africa

B. Economic factors

The economic factors in a country greatly influence the business in that

country. The following factors are important in the macroeconomic

environment.

1. Economic system : the economic system in a country i.e.

capitalism/ communism/ mixed economy (India) is important for

deciding the nature of the businesses. The nature of the system

decides the allocation of resources. Due to globalization there is a

gradual shift toward market forces to allocate resources even in the

communist countries like China.

2. Interest rates : The interest rates in the country affect the cost of

capital (if raised locally) and the operational costs. Interest rates

also determine the confidence of the Government in the economy

and consumer spending.

3. Exchange rates : The exchange rates affect international trade and

capital inflows in the country.

4. Income levels and spending pattern : Though it is more of a

demographic parameter has is very important bearing on the sell

side of all international businesses. For e.g. In a country like India,

with rising aspirer population there is a market opportunity for

products like IPod (considered luxury items till now)

C. Social factors

Businesses are driven by people both as human capital and as

consumers. It is necessary for an international businessman to

understand the social and cultural aspects of the country they operate in.

The following are the important social factors.

1. Age distribution : the age distribution of the population is

important to consider the consumption patterns in the markets.

Age distribution also determines the mindset of the market and

helps segmentation of the market accordingly. It also has a bearing

on the employee quality. A young population also determines a

workforce.

2. Family system : the family system has a bearing on the decision

makers in consumption. For e.g. in Islamic countries women have

a less say in making consumption decisions. In emerging

economies like India children are gaining important role in

consumption. This helps in positioning of products.

3. Cultural aspects : The cultural aspects influence the way the

business is conducted in countries. In Japan there is a different way

in which contracts are signed and executed. In Russia being a

communist oriented mindset the business is conducted in a closed

manner. Italians have a seemingly lazy way of doing business and

hence it is very difficult to conduct business in the pacy US way.

4. Career attitudes : the career attitude of the workforce is important

social aspect.

D. Technological Factors

Technology has a very important role to play in determining the success

of international businesses because technology has made international

business possible. The following are the technological factors that

influence the business.

1. R&D : the support that the Government gives to R&D encourages

setting up R&D business levels. Also the ease of a qualified local

workforce influence business. For e.g. the semiconductor industry

in Taiwan

2. Technology transfer : The ease of technology transfer influences

the business climate. The environment where the technology

transfer is not viable gradually loses out on business from emerging

countries that seek technology transfers. For e.g. in the early 40s

countries like Czechoslovakia (the Czech Republic) was a very

technologically advanced country but had very low business

interest due to the less chances of technology transfers. For e.g. GE

withdrew operations from a JV as there as they could not access

local expertise)

Discuss NAFTA/ EU/ ASEAN/ SAARC

SAARC

The South Asian Association for Regional Cooperation (SAARC) is an

economic and political organization of eight countries in Southern Asia.

It was established on December 8, 1985 by India, Pakistan, Bangladesh,

Sri Lanka, Nepal, Maldives and Bhutan. In April 2007, at the

Association's 14th summit, Afghanistan became its eighth

member.Sheelkant Sharma is the current secretary & Mahinda

Rajapaksa is the current chairman of SAARC which is headquartered at

Kathmandu.

Objectives of SAARC:

to promote the welfare of the peoples of South Asia and to improve

their quality of life;

to accelerate economic growth, social progress and cultural

development in the region and to provide all individuals the

opportunity to live in dignity and to realize their full potential;

to promote and strengthen collective self-reliance among the

countries of South Asia;

to contribute to mutual trust, understanding and appreciation of one

another's problems;

to promote active collaboration and mutual assistance in the

economic, social, cultural, technical and scientific fields;

to strengthen cooperation with other developing countries;

to strengthen cooperation among themselves in international

forums on matters of common interest; and

to cooperate with international and regional organizations with

similar aims and purposes.

NAFTA

The North American Free Trade Agreement (NAFTA) is a trilateral

trade bloc in North America created by the governments of the United

States, Canada, and Mexico. In terms of combined purchasing power

parity GDP of its members, as of 2007 the trade bloc is the largest in the

world and second largest by nominal GDP comparison. It also is one of

the most powerful, wide-reaching treaties in the world.

The North American Free Trade Agreement (NAFTA) has two

supplements, the North American Agreement on Environmental

Cooperation (NAAEC) and the North American Agreement on Labor

Cooperation (NAALC).

Implementation of the North American Free Trade Agreement (NAFTA)

began on January 1, 1994. This agreement will remove most barriers to

trade and investment among the United States, Canada, and Mexico.

Under the NAFTA, all non-tariff barriers to agricultural trade between

the United States and Mexico were eliminated. In addition, many tariffs

were eliminated immediately, with others being phased out over periods

of 5 to 15 years.  This allowed for an orderly adjustment to free trade

with Mexico, with full implementation beginning January 1, 2008. 

The agricultural provisions of the U.S.-Canada Free Trade Agreement,

in effect since 1989, were incorporated into the NAFTA. Under these

provisions, all tariffs affecting agricultural trade between the United

States and Canada, with a few exceptions for items covered by tariff-rate

quotas, were removed by January 1, 1998.

EU (European Union)

The European Union (EU) is a political and economic union of 27

member states, located primarily in Europe. The EU generates an

estimated 30% share of the world's nominal gross domestic product

(US$16.8 trillion in 2007). Thus EU presents an enormous export and

investor market that is both mature and sophisticated.

The EU has developed a single market through a standardised system of

laws which apply in all member states, guaranteeing the freedom of

movement of people, goods, services and capital. It maintains a common

trade policy. Fifteen member states have adopted a common currency,

the euro.

ASEAN

The Association of Southeast Asian Nations or ASEAN was established

on 8 August 1967 in Bangkok by the five original Member Countries,

namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand.

Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995,

Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.

OBJECTIVES

The ASEAN Declaration states that the aims and purposes of the

Association are:

(i) To accelerate the economic growth, social progress and cultural

development in the region through joint endeavors.

(ii) To promote regional peace and stability through abiding respect

for justice and the rule of law in the relationship among countries

in the region and adherence to the principles of the United Nations

Charter.

(iii) To maintain close cooperation with the existing international and

regional organizations with similar aims.

Organizational Structures in International Business

Douglas Wind and Pelmutter advocated four approaches of international

business. They are:

1. Ethnocentric Approach

The domestic companies normally formulate their strategies, their

product design and their operations towards the national markets,

customers and competitors. But, the excessive production more than

the demand for the product, either due to competition or due to

changes in customer preferences push the company to export the

excessive production to foreign countries. The domestic company

continues the exports to the foreign countries and views the foreign

markets as an extension to the domestic markets just like a new

region. The executives at the head office of the company make the

decisions relating to exports and, the marketing personnel of the

domestic company monitor the export operations with the help of an

export department. The company exports the same product designed

for domestic markets to foreign countries under this approach. Thus,

maintenance of domestic approach towards international business is

called ethnocentric approach.

2. Polycentric Approach

The domestic companies, which are exporting to foreign countries

using the ethnocentric approach, find at the latter stage that the

foreign markets need an altogether different approach. Then, the

company establishes a foreign subsidiary company and decentralists

all the operations and delegate decision making and policy-making

authority to its executives. In fact, the company appoints executives

and personnel including a chief executive who reports directly to the

Managing Director of the company. Company appoints the key

personnel from the home country and the people of the host country

fill all other vacancies.

3. Regiocentric Approach

The company after operating successfully in a foreign country thinks of

exporting to the neighboring countries of the host country. At this stage,

the foreign subsidiary considers the regions environment (for example,

Asian environment like laws, culture, policies etc.) for formulating

policies and strategies. However, it markets more or less the same

product designed under polycentric approach in other countries of the

region, but with different market strategies.

4. Geocentric approach

Under this approach, the entire world is just like a single country for

the company. They select the employees from the entire globe and

operate with a number of subsidiaries. The headquarters coordinate

the activities of the subsidiaries. Each subsidiary functions like an

independent and autonomous company in formulating policies,

strategies, product design, human resource policies, operations etc.

General Agreement on Tariffs and Trade (GATT)The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. According to its preamble, its purpose was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis." It was negotiated during the United Nations Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1947, took effect in 1948, and lasted until 1994; it was replaced by the World Trade Organization in 1995.

General Agreement on Trade in Services (GATS)The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Round negotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade.

All members of the WTO are signatories to the GATS. The basic WTO principle of most favoured nation (MFN) applies to GATS as well. However, upon accession, Members may introduce temporary exemptions to this rule.

Trade-Related Aspects of Intellectual Property Rights (TRIPs)The Agreement on Trade-Related Aspects of Intellectual Property Rights(TRIPS) is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994.

The TRIPS agreement introduced intellectual property law into the international trading system for the first time and remains the most comprehensive international agreement on intellectual property to date. In 2001, developing countries, concerned that developed countries were insisting on an overly narrow reading of TRIPS, initiated a round of talks that resulted in the Doha Declaration. The Doha declaration is a WTO statement that clarifies the scope of TRIPS, stating for example that TRIPS can and should be interpreted in light of the goal "to promote access to medicines for all."

Trade-Related Investment Measures (TRIMs)The Agreement on Trade-Related Investment Measures (TRIMs) are rules that apply to the domestic regulations a country applies to foreign investors, often as part of an industrial policy. The agreement was agreed upon by all membersof the World Trade Organization. The agreement was concluded in 1994 and came into force in 1995. The WTO was not established at that time, it was its predecessor, the GATT (General Agreement on Trade and Tariffs. The WTO came about in 1994-1995.)

Policies such as local content requirements and trade balancing rules that have traditionally been used to both promote the interests of domestic industries and combat restrictive business practices are now banned.

Trade-Related Investment Measures is the name of one of the four principal legal agreements of the WTO trade treaty.

TRIMs are rules that restrict preference of domestic firms and thereby enable international firms to operate more easily within foreign markets.