International BusinessInternational Business

By KMIBy KMI

International business is business International business is business whose activities are carried out across whose activities are carried out across national bordersnational borders

Foreign BusinessForeign BusinessMulti-domestic CompanyMulti-domestic CompanyGlobal CompanyGlobal CompanyInternational CompanyInternational Company

By KMI

Core Capabilities of Global Core Capabilities of Global BusinessBusiness

► In-depth knowledge In-depth knowledge of the organisation’s of the organisation’s products/services, their strengths and special products/services, their strengths and special customer service skills.customer service skills.

► Highly developed Highly developed marketing skills marketing skills by way of insight by way of insight of consumer behavior, market segments, share of of consumer behavior, market segments, share of the market and distributions channels.the market and distributions channels.

► Capacity for continuous innovation and research Capacity for continuous innovation and research which is a prerequisite for maintaining and which is a prerequisite for maintaining and consolidating of their global leadership status in a consolidating of their global leadership status in a highly competitive business environment.highly competitive business environment.

► Creation and retention of a pool of talented and Creation and retention of a pool of talented and motivated management team motivated management team and work force and work force aligned with the strategic objectives of the aligned with the strategic objectives of the organisation.organisation.

► Financial resourcefulness Financial resourcefulness with the capability to with the capability to utilize the funds effectively with sound planning utilize the funds effectively with sound planning and control structures.and control structures. By KMI

Developing the Global Developing the Global BusinessBusiness

ExportingExporting using foreign intermediaries. It is low using foreign intermediaries. It is low risk and ethnocentric.risk and ethnocentric.

Overseas branches Overseas branches is still ethnocentric.is still ethnocentric. Overseas production Overseas production is still ethnocentricis still ethnocentric InsiderisationInsiderisation is a shift to polycentrism The is a shift to polycentrism The

company is a multinational.company is a multinational. The global company The global company takes a world view while takes a world view while

recognizing total differences: it has a geocentric recognizing total differences: it has a geocentric orientation. It integrates learning, skills and orientation. It integrates learning, skills and competences to achieve global efficiencies competences to achieve global efficiencies while retaining local responsiveness.while retaining local responsiveness.

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Management OrientationsManagement Orientations►EthnocentricEthnocentric oriented companies oriented companies

follow policies that are primarily home-follow policies that are primarily home-grown and the management assumes grown and the management assumes that the practices which work in the that the practices which work in the headquarters or in the home country headquarters or in the home country are most suitable and should be are most suitable and should be adopted and pursued in all their adopted and pursued in all their international operations.international operations.

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Management OrientationsManagement Orientations► PolycentricPolycentric oriented companies follow the oriented companies follow the

philosophy that the organization located in philosophy that the organization located in the host country should be staffed by local the host country should be staffed by local individuals to the maximum extent as they individuals to the maximum extent as they are expected to understand more closely are expected to understand more closely their culture, work ethics and markets. their culture, work ethics and markets. Consequently, subsidiaries in various Consequently, subsidiaries in various countries operate under the directions of countries operate under the directions of locals and are controlled by the parent locals and are controlled by the parent company through well-conceived financial company through well-conceived financial reporting systems.reporting systems.

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Management OrientationsManagement Orientations► Geocentric orientationGeocentric orientation is an approach is an approach

in which the management considers that in which the management considers that a worldwide focus, both at the a worldwide focus, both at the headquarters and also in the host headquarters and also in the host countries, offers optimal advantages. The countries, offers optimal advantages. The best people, regardless of their home or best people, regardless of their home or host country origin, should be used to host country origin, should be used to solve company problems. Major issues of solve company problems. Major issues of headquarters and subsidiaries, such as headquarters and subsidiaries, such as raising of funds, building of plants, raising of funds, building of plants, research and development are viewed in research and development are viewed in the entire global perspective.the entire global perspective.

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Reasons for rapid Reasons for rapid globalizationglobalization

► Adoption of free market economic policies Adoption of free market economic policies by by increasing number of countries has created increasing number of countries has created opportunities for capital investment and opportunities for capital investment and significant economic growth.significant economic growth.

► Rapid improvement in communications Rapid improvement in communications have have reduced costs of transportation and facilitated reduced costs of transportation and facilitated quick movement of goods, services and quick movement of goods, services and financial resources.financial resources.

► Technological advances Technological advances have made it possible have made it possible to manage and control business operations in to manage and control business operations in different countries through electronic mail, different countries through electronic mail, internet and frequent travel by key internet and frequent travel by key management and other professional staff.management and other professional staff.

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Reasons for rapid Reasons for rapid globalizationglobalization

►The development of the emerging The development of the emerging markets has expanded the markets has expanded the demand for demand for products and services worldwide.products and services worldwide.

►Global companies seek competitive Global companies seek competitive advantages advantages by locating production by locating production facilities of components and parts in facilities of components and parts in those countries where the costs are those countries where the costs are the lowest.the lowest.

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Expansion of Global MarketsExpansion of Global Markets►Specialization of productsSpecialization of products►Reduction in tariff barriers and Reduction in tariff barriers and

relaxation of direct foreign relaxation of direct foreign investment regulationsinvestment regulations

►Economies of ScaleEconomies of Scale ►High R&D expenditures on ProductsHigh R&D expenditures on Products ►Reduction in Communication and Reduction in Communication and

Transportation CostsTransportation Costs By KMI

ExportingExportingGoods are made at home but sold Goods are made at home but sold abroad. It is the easiest, cheapest and abroad. It is the easiest, cheapest and most commonly used route into a new most commonly used route into a new foreign market.foreign market.

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AdvantagesAdvantages► Exporters can concentrate production in a Exporters can concentrate production in a

single location, giving economies of scale single location, giving economies of scale and consistency of product quality.and consistency of product quality.

► Firms lacking experience can try Firms lacking experience can try international marketing on a small scale.international marketing on a small scale.

► Firms can test their international Firms can test their international marketing plans and strategies before marketing plans and strategies before risking investment in overseas operations.risking investment in overseas operations.

► Exporting minimizes operating costs, Exporting minimizes operating costs, administrative overheads and personnel administrative overheads and personnel requirements.requirements.

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Indirect ExportsIndirect Exports► Indirect exports is where a firm’s goods Indirect exports is where a firm’s goods

are sold abroad by other organizations are sold abroad by other organizations who can offer greater market knowledge.who can offer greater market knowledge.

► Export houses are firms which facilitate Export houses are firms which facilitate exporting on behalf of the producer. exporting on behalf of the producer. Usually the producer has little control over Usually the producer has little control over the market and the marketing effort.the market and the marketing effort.

► Specialist export management firms Specialist export management firms perform the same functions as an in-house perform the same functions as an in-house export department but are normally export department but are normally remunerated by way of commission.remunerated by way of commission.

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Direct ExportsDirect Exports► Direct exporting occurs where the producing Direct exporting occurs where the producing

organization itself performs the export tasks organization itself performs the export tasks rather than using an intermediary. Sales are rather than using an intermediary. Sales are made directly to customers overseas who may made directly to customers overseas who may be the wholesalers, retailers or final users.be the wholesalers, retailers or final users.

► Sales to final user. Typical customers include Sales to final user. Typical customers include industrial users, governments or mail order industrial users, governments or mail order customers.customers.

► Company branch offices abroad. A firm can Company branch offices abroad. A firm can establish its own office in a foreign market for establish its own office in a foreign market for the purpose of marketing and distribution as the purpose of marketing and distribution as this give greater control.this give greater control.

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LicensingLicensingLicensing Licensing is a technique of entering a is a technique of entering a specific market in which the licensor specific market in which the licensor enters into an agreement with a enters into an agreement with a licensee, by offering the licensee the licensee, by offering the licensee the right to use the manufacturing right to use the manufacturing process, trade mark, patent, trade process, trade mark, patent, trade secret or any other item of value for a secret or any other item of value for a fee or royalty.fee or royalty.

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AdvantagesAdvantages► Direct Exporting may be unattractive because Direct Exporting may be unattractive because

of tariffs, quotas or other import restrictions of tariffs, quotas or other import restrictions in overseas markets.in overseas markets.

► Licensing may allow fairly rapid penetration of Licensing may allow fairly rapid penetration of overseas markets.overseas markets.

► Licensing does not require substantial Licensing does not require substantial financial resources.financial resources.

► Political risks are reduced since the licensee is Political risks are reduced since the licensee is likely to be a local company.likely to be a local company.

► Local production may be the only feasible Local production may be the only feasible option in the case of bulky products such as option in the case of bulky products such as cement and flat glass.cement and flat glass.

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Advantages of Overseas Advantages of Overseas ManufacturingManufacturing

► The company would not have to share its The company would not have to share its profits with any other entity.profits with any other entity.

► The company would not have to share its The company would not have to share its technology and know-how with any foreign technology and know-how with any foreign entity.entity.

► The company would not have communication The company would not have communication problems which are frequently experienced problems which are frequently experienced in joint venture operations.in joint venture operations.

► The overseas manufacturing operations of The overseas manufacturing operations of the Korean company would be fully the Korean company would be fully integrated and aligned with its overall integrated and aligned with its overall international operations.international operations.

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DisadvantagesDisadvantages► The substantial amount of investment may prevent The substantial amount of investment may prevent

or discourage the company from undertaking or discourage the company from undertaking wholly-owned overseas manufacturing operations.wholly-owned overseas manufacturing operations.

► The risks of nationalization and losses are much The risks of nationalization and losses are much greater in the event the host government greater in the event the host government introduces major changes in its policies towards introduces major changes in its policies towards foreign investments.foreign investments.

► It may be difficult to recruit suitable high-level It may be difficult to recruit suitable high-level technical and management personnel in the host technical and management personnel in the host country in the absence of benefits of equity country in the absence of benefits of equity ownership.ownership.

► The wholly-owned subsidiary may not be able to The wholly-owned subsidiary may not be able to avail the benefits of the overseas partner’s avail the benefits of the overseas partner’s valuable knowledge and expertise of the domestic valuable knowledge and expertise of the domestic conditions, local markets and distribution channels conditions, local markets and distribution channels etc.etc.

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Branch OperationsBranch Operations► If the foreign business is not expected to be If the foreign business is not expected to be

profitable in the initial years and therefore the profitable in the initial years and therefore the losses of the subsidiary company can have a losses of the subsidiary company can have a negative effect on the image of the MNC.negative effect on the image of the MNC.

► If the legal and accounting formalities of the If the legal and accounting formalities of the branch operations are more simple vis-à-vis those branch operations are more simple vis-à-vis those involved in a subsidiary company.involved in a subsidiary company.

► If the MNC does not intend to have a long term If the MNC does not intend to have a long term presence in the foreign country, it would prefer to presence in the foreign country, it would prefer to establish branch operations.establish branch operations.

► If the amount of investment involved in the If the amount of investment involved in the foreign country is of a nominal amount and it may foreign country is of a nominal amount and it may be advisable to set up branch operations instead be advisable to set up branch operations instead of a subsidiary company.of a subsidiary company.

► If it is advisable to have a low operating profile to If it is advisable to have a low operating profile to achieve the business objectives.achieve the business objectives.By KMI

International Trade International Trade ExpansionExpansion

► Reduction in tariffs, quotas, exchange controls Reduction in tariffs, quotas, exchange controls and liberalization of trade and investments have and liberalization of trade and investments have resulted in making the imported products resulted in making the imported products competitive in local markets.competitive in local markets.

► Phenomenal improvement in communication and Phenomenal improvement in communication and transportation technologies have resulted in rapid transportation technologies have resulted in rapid movement of goods and consequent reduction in movement of goods and consequent reduction in transportation costs.transportation costs.

► Development of free-trade zones such as Development of free-trade zones such as European Union and North American Free Trade European Union and North American Free Trade Agreement have resulted in increase in Agreement have resulted in increase in international trade owing to preferential international trade owing to preferential movement of goods and dismantling of high tariff movement of goods and dismantling of high tariff regimes.regimes.

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International Trade International Trade ExpansionExpansion

► Global standardization and worldwide brand building Global standardization and worldwide brand building with local adaption have created significant market with local adaption have created significant market opportunities in different countries.opportunities in different countries.

► Substantial expenditures have been incurred on R&D Substantial expenditures have been incurred on R&D and standardization of manufacturing and marketing and standardization of manufacturing and marketing techniques by global companies in industries such as techniques by global companies in industries such as manufacturing of pharmaceutical products, energy manufacturing of pharmaceutical products, energy development, telecommunications, fast food, etc and development, telecommunications, fast food, etc and such companies seek opportunities to apportion these such companies seek opportunities to apportion these costs to markets in different countries.costs to markets in different countries.

► Important raw material exporting countries now have a Important raw material exporting countries now have a growing class of affluent citizens and foreign residents growing class of affluent citizens and foreign residents which have resulted in the creation of substantial which have resulted in the creation of substantial markets for import of vehicles, construction materials, markets for import of vehicles, construction materials, equipment, edible products and luxury goods.equipment, edible products and luxury goods.

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Characteristics of MNCsCharacteristics of MNCs►Large sizeLarge size►Multi country operationMulti country operation►Various objectivesVarious objectives►Various environmentsVarious environments►Centralized ownership and controlCentralized ownership and control►High efficiencyHigh efficiency

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Success Factors for MNCsSuccess Factors for MNCs►Strategic managementStrategic management►Global leadership and knowledge of Global leadership and knowledge of

opsops►Adapt products to global marketsAdapt products to global markets►Trademarks and brands recognized Trademarks and brands recognized

globallyglobally►Effective distribution systemsEffective distribution systems►Financial soundFinancial sound

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MNCs ObjectivesMNCs Objectives►(i) Economies of scale (i) Economies of scale ►(ii) To recover R & D costs(ii) To recover R & D costs►(iii) To gain access to wide global markets(iii) To gain access to wide global markets►(iv) To seize the advantages offered by (iv) To seize the advantages offered by

growing economies growing economies ►(v) To enter into widely diversified (v) To enter into widely diversified

markets markets ►(vi) To derive maximum advantages of (vi) To derive maximum advantages of

access to cheap sources of labour, raw access to cheap sources of labour, raw materials and energy.materials and energy.

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Centralized Cash Centralized Cash ManagementManagement

►Security and ConvenienceSecurity and Convenience►Availability of InformationAvailability of Information ►Holding of Minimum Surplus Holding of Minimum Surplus

Funds for Precautionary PurposesFunds for Precautionary Purposes►Reduction in Interest CostsReduction in Interest Costs►Acquisition of Services of Acquisition of Services of

Competent PersonnelCompetent Personnel

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MNC FinancingMNC Financing► to obtain financing at overall lower costs, to obtain financing at overall lower costs,

comprising of interest costs and impact of comprising of interest costs and impact of any adverse fluctuations in exchange rates.any adverse fluctuations in exchange rates.

► because of liberalization of foreign exchange because of liberalization of foreign exchange regulations which allow easy and free regulations which allow easy and free movement of capital in the important movement of capital in the important financial centers.financial centers.

► because financing can be obtained because financing can be obtained conveniently in different countries in which conveniently in different countries in which MNCs conduct significant business MNCs conduct significant business operations.operations.

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MNC FinancingMNC Financing►fund raising in certain countries is fund raising in certain countries is

easier because the debt and equity easier because the debt and equity markets there are broad-based and markets there are broad-based and have greater market depth.have greater market depth.

►to seize strategic advantages of their to seize strategic advantages of their presence and relationships in presence and relationships in important financial centers in many important financial centers in many countries.countries.

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MNC Control Policies for MNC Control Policies for SubsidiariesSubsidiaries

►Large size of the subsidiary companies Large size of the subsidiary companies and Substantial Capital Investmentand Substantial Capital Investment

►Access to technology and Access to technology and manufacturing processmanufacturing process

►Operations of the subsidiary Operations of the subsidiary companies are closely integrated and companies are closely integrated and inter-dependentinter-dependent

►StringentStringentBy KMI

Difficulties of Centralized Difficulties of Centralized Financial PolicyFinancial Policy

►centralized financial policies are:centralized financial policies are:►The staff at the parent company would The staff at the parent company would

not be fully conversant with the local not be fully conversant with the local rules and regulations in the host rules and regulations in the host country.country.

►The operations of the subsidiary may The operations of the subsidiary may suffer due to delays in the decisions by suffer due to delays in the decisions by the parent company resulting in higher the parent company resulting in higher costs and inefficiencies.costs and inefficiencies.

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Difficulties of Centralized Difficulties of Centralized Financial PolicyFinancial Policy

► The executives at the parent company The executives at the parent company would be overburdened as they would have would be overburdened as they would have to take numerous decisions pertaining to to take numerous decisions pertaining to the subsidiary.the subsidiary.

► The morale and initiative of the local staff The morale and initiative of the local staff may be affected as they would have to may be affected as they would have to obtain approvals for decisions which can be obtain approvals for decisions which can be taken here readily by responsible officers.taken here readily by responsible officers.

► The overall costs would increase The overall costs would increase considerably due to duplication of work and considerably due to duplication of work and additional traveling and incidental costs.additional traveling and incidental costs.

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MNC Financial DecisionsMNC Financial Decisions► Should the parent company invest in the Should the parent company invest in the

subsidiary as a wholly owned company or subsidiary as a wholly owned company or should the parent company retain only a should the parent company retain only a majority interest in the subsidiary?majority interest in the subsidiary?

► If the parent company decides to retain only a If the parent company decides to retain only a majority interest, then should the subsidiary majority interest, then should the subsidiary raise equity through a resourceful local raise equity through a resourceful local investor in the host country or should it make investor in the host country or should it make a public offering of its shares?a public offering of its shares?

► Should the subsidiary be financed Should the subsidiary be financed substantially through equity investment or substantially through equity investment or should it raise debt financing to meet a large should it raise debt financing to meet a large proportion of its capital costs?proportion of its capital costs?

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MNC Financial DecisionsMNC Financial Decisions► Should the subsidiary make the borrowings in the Should the subsidiary make the borrowings in the

local currency of the host country or in any other local currency of the host country or in any other currency to avail benefits of exchange currency to avail benefits of exchange fluctuations?fluctuations?

► Should the subsidiary distribute a large portion of Should the subsidiary distribute a large portion of its profits as high dividends or should it retain a its profits as high dividends or should it retain a substantial portion of its earnings to meet the substantial portion of its earnings to meet the cost of its expansion strategy?cost of its expansion strategy?

► Should the subsidiary raise the bulk of its Should the subsidiary raise the bulk of its working capital requirements through borrowings working capital requirements through borrowings from banks or should it place heavy reliance on from banks or should it place heavy reliance on trade credit?trade credit?

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Difficulties faced by Parent Difficulties faced by Parent CoCo

►Physical and Cultural DistancesPhysical and Cultural DistancesThe geographical and cultural distances The geographical and cultural distances separating the parent company increases separating the parent company increases the duration, expenses and barriers in the duration, expenses and barriers in communications between the communications between the headquarters and their foreign subsidiary headquarters and their foreign subsidiary companies and creates difficulties in the companies and creates difficulties in the planning and control process.planning and control process.

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Difficulties faced by Parent Difficulties faced by Parent CoCo

Diverse Economic ConditionsDiverse Economic ConditionsThe parent company has to adjust The parent company has to adjust operations to the situations prevailing in the operations to the situations prevailing in the countries in which the subsidiary companies countries in which the subsidiary companies are located. Differences in size of the are located. Differences in size of the market, nature of competition, type of the market, nature of competition, type of the products, labor costs and currency products, labor costs and currency implications render the tasks of setting implications render the tasks of setting standards and evaluating performance of standards and evaluating performance of foreign subsidiaries extremely complicated.foreign subsidiaries extremely complicated.

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►Uncontrollable FactorsUncontrollable FactorsPlanning and control is effective only in Planning and control is effective only in situations when timely corrective actions situations when timely corrective actions can be taken in the event of deviations can be taken in the event of deviations in performances. Corrective action may in performances. Corrective action may not produce positive results because not produce positive results because many foreign subsidiaries operate in many foreign subsidiaries operate in conditions which are very different from conditions which are very different from those of the parent company.those of the parent company.

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Entry Barriers for New Entry Barriers for New EntrantsEntrants

►(i) It may be difficult to achieve economies of (i) It may be difficult to achieve economies of scale quickly due to technical/operating scale quickly due to technical/operating constraints with the result that the new constraints with the result that the new entrants may sustain substantial losses for a entrants may sustain substantial losses for a considerable period.considerable period.

►(ii) The technology and specialised know-(ii) The technology and specialised know-how for manufacture of the products may be how for manufacture of the products may be held closely by a few suppliers and it may be held closely by a few suppliers and it may be difficult or too expensive for new entrants to difficult or too expensive for new entrants to gain access to such technology.gain access to such technology.

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Entry Barriers for New Entry Barriers for New EntrantsEntrants

►(iii) The existing suppliers may have (iii) The existing suppliers may have deeply-entrenched brands and enjoy deeply-entrenched brands and enjoy strong customer loyalty which may strong customer loyalty which may make it difficult for the new entrants make it difficult for the new entrants to compete with them.to compete with them.

►(iv) The existing suppliers may be (iv) The existing suppliers may be financially resourceful and enter into financially resourceful and enter into price wars to deter new entrants.price wars to deter new entrants.

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Entry Barriers for New Entry Barriers for New EntrantsEntrants

► (v) The initial capital requirements may be too large (v) The initial capital requirements may be too large and beyond the capacity of potential new entrants.and beyond the capacity of potential new entrants.

► (vi) It may be difficult for new entrants to have (vi) It may be difficult for new entrants to have access to sources of raw materials as the existing access to sources of raw materials as the existing manufacturers may have highly favourable manufacturers may have highly favourable ownership/lease rights of these sources.ownership/lease rights of these sources.

► (vii) The existing suppliers may have well-(vii) The existing suppliers may have well-established relations with knowledgeable and established relations with knowledgeable and resourceful distribution channels and the new resourceful distribution channels and the new entrants may find it difficult to develop new entrants may find it difficult to develop new marketing channels for distribution of their marketing channels for distribution of their products.products.

► (viii) The government regulatory policies may (viii) The government regulatory policies may prohibit new entrants from establishing new units to prohibit new entrants from establishing new units to provide protection to state-owned industries.provide protection to state-owned industries.

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Exit BarriersExit Barriers►i. Substantial Investment in Highly i. Substantial Investment in Highly

Specialized Fixed Assets:Specialized Fixed Assets:►ii. High Redundancy Costs:ii. High Redundancy Costs:►iii. Ancillary Costs of Closure of iii. Ancillary Costs of Closure of

Business:Business:►iv. High Fixed Operating Costs :iv. High Fixed Operating Costs :

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FDIFDI► (i) Expansion of global markets and competition to (i) Expansion of global markets and competition to

secure business globally require firms to operate secure business globally require firms to operate simultaneously in several countries by making simultaneously in several countries by making direct foreign investments in the host countries.direct foreign investments in the host countries.

► (ii) Foreign direct investments allow the firms to (ii) Foreign direct investments allow the firms to gain first-hand advantages of the prevailing and gain first-hand advantages of the prevailing and emerging business opportunities in the host emerging business opportunities in the host countries.countries.

► (iii) Foreign direct investments enable firms to (iii) Foreign direct investments enable firms to overcome barriers to trade and operate abroad as overcome barriers to trade and operate abroad as domestic entities without the unfavourable impact domestic entities without the unfavourable impact of customs duties, tariffs and other import of customs duties, tariffs and other import restrictions.restrictions.

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►(iv) Foreign direct investments are (iv) Foreign direct investments are channeled in business opportunities to seize channeled in business opportunities to seize advantages of low costs of labour, raw advantages of low costs of labour, raw materials and energy in the host countries materials and energy in the host countries and ensure their uninterrupted supplies.and ensure their uninterrupted supplies.

►(v) Foreign direct investments in (v) Foreign direct investments in manufacturing facilities in host countries manufacturing facilities in host countries create a perception of locally manufactured create a perception of locally manufactured products among the buyers.products among the buyers.

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►(vi) Various countries offer attractive (vi) Various countries offer attractive incentives such as tax holidays and incentives such as tax holidays and facilities of special export/industrial facilities of special export/industrial zones to companies to attract them to zones to companies to attract them to make foreign direct investments.make foreign direct investments.

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FDI ProblemsFDI Problems► Poor infrastructure facilities of roads and Poor infrastructure facilities of roads and

communications.communications.► Currency depreciation of the underdeveloped country.Currency depreciation of the underdeveloped country.► High costs of energy inputs and their unreliable High costs of energy inputs and their unreliable

availability.availability.► Absence of laws relating to patents, copyrights and Absence of laws relating to patents, copyrights and

intellectual properties.intellectual properties.► High Risk of political instability in the country.High Risk of political instability in the country.► Widespread corruption in the government and other Widespread corruption in the government and other

social sectors.social sectors.► Lack of education and non-availability of a skilled and Lack of education and non-availability of a skilled and

competent work force.competent work force.► Absence of generally accepted accounting principles.Absence of generally accepted accounting principles.► Uncertain long-term economic and financial policies.Uncertain long-term economic and financial policies.

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Transfer PricingTransfer PricingInternational transfer pricing is the International transfer pricing is the price at which products or services are price at which products or services are transacted between units of the same transacted between units of the same company which are located in different company which are located in different countries. countries.

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AdvantagesAdvantages► The individual units would achieve high level The individual units would achieve high level

of efficiency as they can negotiate most of efficiency as they can negotiate most favourable market-based prices as if they favourable market-based prices as if they were independent units.were independent units.

► The selling unit would make efforts to The selling unit would make efforts to improve the quality of the products in improve the quality of the products in accordance with the requirements of the accordance with the requirements of the purchasing unit.purchasing unit.

► The performance of the individual units can The performance of the individual units can be evaluated more objectively. be evaluated more objectively.

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DisadvantagesDisadvantages►Market price may be temporaryMarket price may be temporary►May act as a disincentive to utilize May act as a disincentive to utilize

over capacityover capacity►Many products do not have equivalent Many products do not have equivalent

market pricesmarket prices

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ProtectionismProtectionism►The Governments in developing The Governments in developing

countries may take the following policy countries may take the following policy decisions to protect their interests in the decisions to protect their interests in the face of threats from global companies:face of threats from global companies:

►(i) Impose quotas which would prescribe (i) Impose quotas which would prescribe limits on the quantities and values of limits on the quantities and values of raw materials that the global company raw materials that the global company may import from its affiliated/parent may import from its affiliated/parent companies.companies.

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► (ii) An import tariff structure may be (ii) An import tariff structure may be imposed which may make the imported imposed which may make the imported goods expensive and enable the domestic goods expensive and enable the domestic manufacturers to compete in the local manufacturers to compete in the local market.market.

► (iii) The government may place restrictions (iii) The government may place restrictions on the ability of global companies to acquire on the ability of global companies to acquire domestic companies, especially those which domestic companies, especially those which are engaged in business of a sensitive are engaged in business of a sensitive nature such as defense, utilities, etc.nature such as defense, utilities, etc.

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►(iv) The government may impose (iv) The government may impose restrictions on the maximum per cent of restrictions on the maximum per cent of shares that a global company can hold shares that a global company can hold in a domestic business entity.in a domestic business entity.

►(v) Legal standards of safety and quality (v) Legal standards of safety and quality of imported goods may be imposed to of imported goods may be imposed to prevent global companies from prevent global companies from importing goods which are considered to importing goods which are considered to be of a substandard or inferior quality.be of a substandard or inferior quality.

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►(vi) Impose stringent conditions of (vi) Impose stringent conditions of deletion programs.deletion programs.

►(vii) Stipulate that a certain proportion (vii) Stipulate that a certain proportion of the local personnel should be hired of the local personnel should be hired by the global company.by the global company.

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Political RiskPolitical RiskDomestic InstabilityDomestic Instability Foreign ConflictForeign Conflict Political ClimatePolitical Climate Economic CultureEconomic Culture Level of CorruptionLevel of Corruption

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Political Risk EvaluationPolitical Risk Evaluation►(i) The assets may be nationalized or (i) The assets may be nationalized or

expropriated by the government of the expropriated by the government of the host country.host country.

►(ii) The country may impose stringent (ii) The country may impose stringent exchange control restrictions which exchange control restrictions which would make it difficult to repatriate the would make it difficult to repatriate the profits and investments.profits and investments.

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Political Risk EvaluationPolitical Risk Evaluation►(iii) The country may face domestic (iii) The country may face domestic

instability such as revolution, social and instability such as revolution, social and political unrest and terrorist activities political unrest and terrorist activities which would be detrimental to the which would be detrimental to the interests of the company.interests of the company.

►(iv) The country may be involved in (iv) The country may be involved in conflict, disputes and war with other conflict, disputes and war with other countries which would cause countries which would cause disruptions in business.disruptions in business.

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Political Risk EvaluationPolitical Risk Evaluation► (v) Deterioration of relationships between (v) Deterioration of relationships between

the investor country and the country in the investor country and the country in which the investment is proposed would which the investment is proposed would pose difficulties in the business operations pose difficulties in the business operations of the company.of the company.

► (vi) Frequent changes in the government (vi) Frequent changes in the government with far reaching shifts in its policies.with far reaching shifts in its policies.

► (vii) Risk of sovereign default by the host (vii) Risk of sovereign default by the host country.country.

► (viii) Maintenance of the tolerance (viii) Maintenance of the tolerance standards, relaxation in any way could standards, relaxation in any way could impact the demand.impact the demand.

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