The beverages you drink might be produced in India, but with th e collabor ation of a US A compa ny . Th e te a yo u dr in k is prepared from the tea powder produced in Sri Lanka. The spares and hard-disk of the comp ut er you oper ate mi ght 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 te chnology. The shoe you wear mi ght have been pr oduced 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 Inter net. This process give s you the opportuni ty oftransacting in the international business arena without visiting orknowing the various countries and companies across the globe. You get all these even without visiting or knowing the country ofthe company where they are produced. All these activities have become a reality due to the operations and activities ofinternational business. Thus, international business is the process of focusing on the re sources of the globe and objectives of the orga ni za ti ons on global business opportunities and threats. EVOLUTION OF INTERNATIONAL BUSINESS The business across the borders of the countries had been carried on since times immemorial. But, the business had been limited to the international trade until the recent past. The post- Worl d War If period wi tnessed an unexpect ed expa nsion of national companies into international or multinational companies. The post 1990s period has given greater fillip to international
The beverages you drink might be produced in India, but withthe collaboration of a USA company. The tea you drink isprepared from the tea powder produced in Sri Lanka. The spares
and hard-disk of the computer you operate might have beenproduced in the United States of America.The perfume you apply might have been produced in France. Thetelevision you watch might have been produced with the Japanesetechnology. The shoe you wear might have been produced inTaiwan, but remarketed by an Italian company. Air France and soon 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 servicesoffered by various companies across the globe. Some of you mighthave the experience of 'even ordering and buying the productsthrough Internet. This process gives you the opportunity 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 havebecome 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 onglobal business opportunities and threats.
EVOLUTION OF INTERNATIONAL BUSINESS The business across the borders of the countries had been
carried on since times immemorial. But, the business had beenlimited to the international trade until the recent past. The post-World War If period witnessed an unexpected expansion of national companies into international or multinational companies.The post 1990s period has given greater fillip to international
business. In fact, the term international business was not in existence
before two decades. The term international business has emergedfrom the term international marketing, which in turn, emerged
from the term ‘export marketing’. International Trade to International Marketing: Originally, the
producers used to export their products to the nearby countries andgradually extended the exports to far-off countries. Gradually, thecompanies extended the operations beyond trade. For example,
India used to export raw cotton, raw jute and iron ore during theearly 1900s. The massive industrialization in the country enabled
us to export jute products, cotton garments and steel during 1960s. India, during 1980s could create markets for its products, in
addition to mere exporting. The export marketing efforts includecreation of demand for Indian products like textiles, electronics,leather products, tea, coffee etc., arranging for appropriatedistribution channels, attractive package, product development,pricing etc. This process is true not only with India, but also with
almost all developed and developing economies.International Marketing to International Business: Themultinational companies which were producing the products intheir home countries and marketing them in various foreigncountries before 1980s, started locating their plants and other manufacturing facilities in foreign/host countries. Later, thestarted producing in one foreign country and marketing in other foreign countries. For example, Uni Lever established itssubsidiary company in India, i.e., Hindustan Lever Limited (HLL).
HLL produces its products in India and markets themBangladesh, Sri Lanka, Nepal etc. Thus, the scope ofinternational trade is expanded into international marketing andinternational marketing is expanded into international business.
NATURE OF INTERNATIONAL BUSINESS
The 1990s and the new millennium clearly indicate rapid
internationalization and globalization. The entire globe is passingat a dramatic pace through the transition period. Today, theinternational trader is in a position to analyze and interpret theglobal social, technical, economic, political and naturenvironmental factors more clearly.
Conducting and managing international business operations isa crucial venture due to variations in political, social, cultural andeconomic factors, from one country to another country. For example, most of the African consumers prefer less coproducts due to their poor economic conditions. Whereas theGerman consumers prefer high quality and high priced productsdue to their higher ability to buy. Therefore, the internationalbusinessman should produce and export less costly products to
most of the African countries and vice versa to most of theEuropean and North American countries. High priced and highquality Palmolive soaps are marketed in European countries andthe economy priced Palmolive soaps are exported and marketed indeveloping Countries like Ethiopia, Pakistan, Kenya, IndiCambodia etc.
International business houses need accurate information to make
an appropriate decision. Europe was the most opportunistic marketfor leather goods and particularly for shoes. Bata based on theaccurate data could make appropriate decision to enter variousEuropean countries.
International business houses need not only accurate but timelyinformation. Coca-Cola could enter the European market based onthe timely information, whereas Pepsi entered later. Another example is the timely entrance of Indian software companies into
the US market compared to those of other countries. Indiansoftware companies also made timely decision in the case of'Europe.
The size of the international business should be large in order tohave impact on the foreign Economies. Most of the multinationalcompanies are significantly large in size. In fact, the Capital of some of the MNCs is more than our annual budget and GDPs of
Most of the international business houses segment their marketsbased on the geographic market segmentation. Daewoo segmented
its market as North America, Europe, Africa, Indian subcontinentand Pacific markets.
International markets present more potentials than the domesticmarkets. This is due to the fact that international markets wide inscope, varied in consumer tastes, preferences and
Purchasing abilities, size of the population etc. For example, theIBM’s sales are more in foreign countries than in USA. Similarly,Coca-Cola’s sales, Procter and Gamble’s sales andSatyam Computer's sales are more in foreign countries than intheir respective home countries.
The population for the year 2000 indicates that: USA's populationwould be 300 million, Mexico’s 126 million, Brazil’s 205 million,
Indonesia’s 223 million, Pakistan’s 138 million, Nigeria’s 154million and Bangladesh’s 146 million. The size of the population, sometimes, may not determine the sizeof the market. This is dueto the backwardness of the economy and low purchasing power of the people, In fact, the size of Eritrea - an African country isroughly equal to that of the United Kingdom in terms of land area and size of the population. But, in terms of per capita
income it is one of the poorest countries in the world withestimated per capita income of US $ 150 per annum. Therefore, the international business houses should consider theconsumers' willingness to buy and also ability to buy the products In fact, most of the multinational companies, which entered Indianmarket after 1991, failed in this respect. They viewed that almost
the entire Indian population would be the customers. Therefore,they estimated that the demand for consumer durable goods wouldbe increasing in India after globalisation. And they entered theIndian market. The heavy inflow of these goods and decline in thesize of Indian middle class resulted in a slump in the demand for
consumer durable goods. Wider Scope: Foreign trade refers to the flow of goods acrossnational political borders. Therefore, it refers to exporting andimporting by international marketing companies plus creation of demand, promotion, pricing etc. As stated earlier, international
business is much broader in scope. It involves internationalmarketing, international investments, management of foreignexchange, procuring international finance from IMF, IBRD, IFC,IDA etc., management of international human resourcemanagement of cultural diversity, international marketing,management of international production and logistics,international strategic management and the like. Thuinternational business is broader in scope and covers all aspects of
the system. Inter-country Comparative Study: International business studiesthe business opportunities, threats, consumers' preferences,behavior, cultures of the societies, employees, busineenvironmental factors, manufacturing locations, managementstyles, inputs and human resource management practices various countries. International business seeks to identify, classifyand interpret the similarities and dissimilarities among the systems
used to anticipate demand and market products'. The systempresents inter-country comparison and inter-continentalcomparison/comparative analysis helps the management toevaluate the markets, finances, human resources, consumers etc. of various countries. The comparative study also helps management to evaluate the market potentials of various countries.
The study also indicates the degree of consumer acceptance of theproduct, product changes and developments in different countries.Managements of international business houses can group thecountries with similar features and design the same products, fixsimilar price and formulate the same marketing strategies. For
example, Prentice Hall grouped India, Nepal, Pakistan Bangladesh,Sri Lanka etc. into one category based on the customers' ability topay and designed the same quality product and sell them at thesame price in all these countries. Similarly, Dr. Reddy's Lab doesthe same for its products to sell in the African countries. DIFFERENCES IN GOVERNMENT POLICIES,
LAWS AND REGULATIONS
Sovereign governments enact and implement the laws, and
formulate and implement policies and regulations. Thinternational business houses should follow these laws, policiesand regulations. MNCs operating in India follow our labor laws,business laws and policies and regulations formulated by theIndian Government. For example, international business shouldenter into joint venture with the domestic company to enter
Malaysia. Important among them include: Host Country's Monetary System: Countries regulate the pricelevel, flow of money, production levels etc. through monetary systems. In addition, they regulate foreign exchangerates also through the monetary system. The tools of monetarysystem include bank rate, cash reserve ratio, statutory liquidityratio etc. Governments also regulate remittance of the profit of international business houses to other countries. International
companies should obey these regulations. The Indian Governmentintroduced full convertibility on current account; in fact, manyGovernments introduced full convertibility on current account as apart of economic liberalisation. National Security Policies of the Host Countries: Every countryformulates the policies for its national security. Multinationalcompanies should abide by these national security policies. For
example, USA is a free economy as far as carrying out the businesscompared to many Other countries in the world. However, USA also imprestrictions regarding the business operations, which affect the
national security.Cultural Factors: Cultural and custom factors vary widely from
one country to the. These factors include dressing habits, eatinghabits, religious factors and the like. Multinational companiesshould consider these factors of the host country while operatingin that country. For example, the culture of the Fiji people is thatthey attend to the family activities at least three times a day.Therefore, the companies operating in that country allow their
workers to go home three times a day. (See Box 1.2).
Language: language is an important factor in international business.Even though ‘English language' is a major language in businessoperations in the world, there are still a large number of 'non-English' speaking countries. Therefore, international businesshouses should train their employees in the local language of thchost country. Added to this, there would be many languages in use
in many, countries like ours. Therefore, the business houses shouldtrain their employees in the local languages also.
Nationalism and Business Policy : Nationalism is a dominatingfactor of the social life of the people of the host countries. In fact,nationalism also affects the business operations of multinational corporations dramatically and drastically. The USpeople used the slogan 'Be American and Buy American Made',
when the US automobile industry failed to meet the competition of
Japanese automobile companies operating in USA. Similincidents are -dso observed in developing countries. Therefore,international business houses should be cautious of nationalismand its after effects.The Growth of international business.
Companies pursue international business to expand sales ,acquire resource, diversify sources of sales and suppliers andminimize competitive risk. So the main reasons for the growth of international business are:
• Rapid increase in and expansion of technology
• Liberalization of government policies on cross-border movement of trade and resources
• Development of institutions to support and facilitateinternational trade
• Increased global competition.
Expansion of technology: The expansion of technology has lead
to a faster means of communications between people businesses. Also with the emergence of faxing, e-mailteleconferencing, direct-dial telephone and also e-commercetransactions can be executed at a faster rate.
Business has become more global because:
o Transportation is quicker
o Communication enables control from far o Transportation and communication costs are
cheaper
For example: a 3 minute phone call from New York to Londoncost $10.80 in 1970 and $0.30 in 2000.
Liberalization of cross-border movements: Every country haslaws regarding movement of goods and services and the resources,such as workers and capital, or both. The restrictions on movementof these items have a great impact on international business.
But these days due to the lower government barriers for movement of goods, services, and resources enables companies totake better advantage of international opportunities.
For example: due to the removal of quotas on the important of cloths by western countries, has give opportunity to low costproducers in developing countries to access the lucrative market.
Developing of support services: In recent years companies andgovernments have developed services that ease internationbusiness and reduce risk.
For example: banks have developed efficient means for companiesto receive payment from their foreign sales. Also global insuranceservices which cover the damage en route and non-payment of buyer.
Increase in global competition: The pressure of increase inforeign competition can persuade a company to expand its businessinto international markets. Also due to the advances in technologycompanies can rapidly respond to many foreign sopportunities. They can even shift production quickly amongcountries.
More companies are operating internationally because:o New products quickly become known globally
o Companies can produce in different countries,
taking advantage of economies of scale.o Also many domestic competitors, suppliers and
customers are going international.
Motivations to go International
High Cost of Transportation: Initially companies enter foreigncountries through their marketing operations. At this stage, thecompanies realise the challenge from the domestic companies.Added to this, the home companies enjoy higher profit marginswhereas the foreign firms suffer from lower profit margins. Themajor factor for this situation is the cost of transportation of theproducts.
V.Under such conditions, the foreign companies are inclined toincrease their profit margin by locating their manufacturfacilities in foreign countries where there is enough demand either in one country or in a group of neighboring countries.
For example, Mobil, which was supplying the petroleum productsto Ethiopia, Kenya, Eritrea, Sudan etc. from its refineries in SaudiArabia, established its refinery facilities in Eritrea in order toreduce the cost of transportation. Similarly, Caterpillar located itsmanufacturing facilities at different centers in order to reduce thecost of transportation. This company produces high-value- addedparts in limited locations and less valued and non-cr
components and assembles the final products in a number of foreign countries. Nearness to Raw Materials: The source of highly qualitative rawmaterials and bulk raw materials is a major factor for attracting thecompanies from various foreign countries. Most of the US basedand European based companies located their manufacturinfacilities in Saudi Arabia, Bahrain, Qatar, Oman, Iran and other
Middle East countries due to the availability of petroleum. Thesescompanies, thus, reduced the cost of transportation. Availability of Quality Human Resources at Less Cost : This isa major factor, in recent times, for software, high technology andtelecommunication companies to locate their operations in India.India is a major source for high quality and low cost humanresources unlike USA, developed European countries and Japan.Importing human resources from India by these firms is costly
rather than locating their operations in India. Hence companies started their operations in India and other similar countries. Liberalization and Globalization: Most of the countries in theglobe liberalised their economies and opened their countries w therest of the globe. These changed policies attracted multinational companies to extend their operations to th
countries. To Increase Market Share:Some of the large-scalebusiness firms would like to enhance their market share inthe local market by expanding and intensifying th
operations 9In various foreign countries. Companies thatexpand internally tend to be 'oligepolistic". Smaller com
panies expand internationally for:, survival while the larcompanies expand to increase the market share. For example, BallCorporation, the third largest beverage cans manufacturer in USA,bought the European pa~1aging operations of Continental Can
Company. Then it expanded its operations to Europe and met theEurope demand, which is 200 per cent more than that of USA.Thus, it increased its global market share of soft drink cans. To Avoid Tariffs and Import Quotas: It was quite commonbefore globalization that governments imposed tariffs or duty onimports to protect the domestic company. Sometimes Governmentalso fixes import quotas in order to reduce the competition to the
domestic companies from the competent foreign companies. Thesepractices are prevalent not only in developing countries but also inadvanced countries.For example, Japanese companies are competent competitors tothe US companies. USA imposed tariffs and quotas regardingimport of automobiles and electronics from Japan. HarleyDavidson of USA sought and got five years of tariffs protectionfrom Japanese imports. Similarly, Japan places high tariffs onimports of rice and other agricultural goods from USA.
To avoid high tariffs and quotas, companies prefer dinvestment to go globally. For example, companies like Sony,Honda and Toyota preferred direct investment if] various countriesby establishing subsidiaries or through joint ventures in variousforeign countries including USA and India, Similarly, GeneralElectrical, and Whirlpool also have foreign subsidiaries. Xerox,Canon, Phillips, Unilever, Lucky Gold Star, South Kor
Electronics Company, Pepsi, Coca-Cola. Shell, Mobil etestablished manufacturing facilities in various foreign countries inorder to avoid tariffs, import duties and quotas.
Having discussed the need for international business, we shall
discus the basis for international business. IMPACT OF ENVIORNMENTAL FACTORS ONINTERNATIONAL TRADE.
Introduction:
International business differs from domestic business in that a firmoperating across borders must deal with the forces of three kinds of environment- domestic, foreign, and international. In contrast, afirm whose business activities are carried out within the borders of one country needs to be concerned essentially with only thedomestic environment. However, no domestic firm is entirely free
from foreign or international environment forces because thepossibility of having to face competition from foreign imports or from foreign competitors that set up operations in its own market isalways present. Let us first examine these forces and then see howthey operate in the three environment.
Forces in the Environment:
Environment as used here is the sum of all forces surrounding and
influencing the life and development of the firm. The forcesthemselves can be classified as external and internal. Furthermore,management has no direct control over them, though it can exertinfluences such as lobbying for a change in a law and heavilypromoting a new product that requires a change in a culturalattitude. The external forces are commonly called uncontrollableforces and consist of the following:
The elements over which management does have some control arethe internal forces, such as the factors of production(capital, raw
materials and people)and the activities of th
organization(personnel, finance, production, and
marketing).These arecontrollable forcesmanagement must
administer in order to adopt to changes on uncontroenvironmental variables. Look at how one change in the politicalforce-the passage of the northern American free trade agreement-isaffecting all the nations: United States, Mexico and Canada.Suddenly these companies must examine their business practicesand change those affected by this new law. For example, someAmerican concept and foreign subsidiaries in the United Stateshave relocated part of there operations to Mexico to exploit the
lower wages there. There European and Asian companies that haveset up production in one of the member-countries to supply thisgiant free trade region. By doing this, they avoid paying importduties on products coming from their home countries.
THE DOMESTIC ENVIORNMENT
The domestic environment is composed of all the uncontrollableforces originating in the home country that surround and influence
the life and development of the firm. Obviously theses are theforces with which managers are most familiar. Being domesticforces does not preclude their affecting foreign operatihowever. For example, if the home country is suffering from ashortage of foreign currency, the government may prestrictions on overseas investment to reduce its outflow. As aresult, management of multinationals find that they cannot expandoverseas facilities as they would like to do. In another instance
from real life. A labor union striking the home-based plantslearned that management was supplying parts from its foreignsubsidiaries. These strikers contacted the foreign unions, whichpledged not to work over time to supply what the struck plantscould not. The impact of this domestic environmental force wasfelt overseas as well as home.
The forces in the foreign environment are the same as those in thedomestic environment except that they occur in foreign nations.However; they operate differently for several reasons, includingthe following:
Different Force Values
Even though the kinds of forces in the two environments areidentical, their values often differ widely, and at times they arecompletely opposed to each other. A classic examplediametrically opposed political force values and the bewildermentthey create for multinational managers was the case of dresser industries and the gas pipeline in the Soviet Union. President Reagan extended the American embargo againshipments of equipment for the pipeline to include focompanies manufacturing equipment under the license from U.S.firms, the dresser home office instructed its French subsidiary tostop work on an order for compressors. Meanwhile the Frenchgovernment ordered Dresser-France to defy the embargo and beginschedule deliveries under penalty of both civil and criminalsanctions. As a dresser’s vice president put it, “The order putDresser between a rock and a hard place.”
A similar case occurred when, because of the American exportembargo on shipments to Cuba, that country could not buy busesfrom the U.S. manufacturer with which it had done business for years ordered the buses from the firm’s argentine subsidiary. Whenword came from the firms American head quarters that the order should not be filled because of the American embargo, theargentine government ordered the argentine subsidiary to fill theorder, saying that argentine companies, of which the argentinesubsidiary was one, did not answer to the demands of a foreigngovernment. The argentine management of the subsidiary was in aquandary. Finally, headquarters relented and permitted iargentine subsidiary to fill the order.
Another problem with foreign forces is that they are frequentlydifficult to assess, especially their legal and political elements. Ahighly nationalistic law may be passed to appease a section of thepopulation. To all outward appearances, a government mayAppear to be against foreign investment, yet pragmatic leaders
may actually encourage it. A good example is Mexico, which until1988 had a law prohibiting foreigners from owning a majorityinterest in a Mexican company. However, a clausePermitted exceptions “if the investment contributes to the welfareof the nation.” IBM, Eaton, and others were successful in obtainingpermission to establish a wholly owned subsidiary under thisclause.
Forces interrelated
In the chapters that follow, it will be evident that the forces areoften interrelated. This in itself is not a novelty, because the samesituation confronts a domestic manager. Often different, however,are the types and degrees of interaction that occur. For instance,the combination of high-cost capital and an abundance of unskilledlabor in many developing countries may lead to the use of
technology than would be employed in the more industrializednations. In the other words, given a choice between installingcostly, specialized machinery needing few workers and installingless expensive, general-purpose machinery requiring a larger labor force, management will frequently choose the latter when facedwith high interest rates and a large pool of available workers.Another example is the interaction between physical and socio-cultural forces. Barriers to the free mov ement of a nation’speople, such as mountain ranges and deserts, help maintain pockets
of distinct cultures within a country.
THE INTERNATIONAL ENVIORNMENT:
The International environment is the interaction (1) between thedomestic environment forces ad the foreign environment forcesand (2) between the foreign environment forces of two countries
when an affiliate in one country does business with customers inanother. This agrees will the definition of international business:business that involves the crossing of national borders.
For example, personnel at the headquarters of a multi domestic or
global company work in the international environment if they areinvolved in any way with another nation, whereas those in aforeign subsidiary do not unless they too are engageinternational business through exporting or the management of other affiliates. In other words, the sales manager of Goodyear-Chile does not work in the international environment if he or shesells tries only Chile. If Goodyear – Chile exports tries to Bolivia,then the sales manager is affected by force of both the domestic
environment of Chile and the foreign environment of Bolivia andtherefore is working in the international environment. InternationalOrganization whose action affects the international environment isalso properly part of it. These organization include (1) worldwidebodies (e.g., World Bank), (2) regional economic grouping of nations (e.g., North America Free Trade Agreement), and (3)Organizations bound by industry agreements (e.g., Organization of Petroleum Exporting Countries).
The socio cultural environment & international busines
operations.
Understanding cultural differences is critical to the success of firms engaging in international business. A society cultureaffects the political, economic, social, and ethical rules afirm must follow in its business dealings within that society.
With over 300 countries in the world, many have their ownlanguage, customs and culture. Being educated on the culture andvalues of your target markets will increase your success in theinternational marketplace.
Customs and culture affect consumption of goods. Factors likecolors, numbers, and communication fit this category.
example, when considering product or promotional gift colors,keep in mind that white is the color of death in China and Korea,whereas purple is seen in the same light in Spain. In the U.S.,yellow implies cowardice, whereas it takes on religious andmystical undertones in India. Study the cultural differences of the
target markets and of your own. Firms may be surprised how aproduct that is fully accepted by a U.S. market is negativelyrejected by its foreign counterparts.
Language is an important element because it is the means by whichpeople in a society communicate with each other. Linguistic tiesoften create important competitive advantage because the ability tocommunicate is so important in conducting business transactions.
Although the international business language is English, it may notbe that way for long. It is to a firm advantage to speak the nativelanguage of your customer and understand his or her culture inorder to communicate more effectively.
A society’s culture also reflects its value, beliefs, behaviors,customs, and attitude. Culture is learned behavior thattransmitted from one member of a society to another. Cultural
attitudes about such factors as time, age, education, and statusreflect these values and in turn shape behavior of opportunitiesavailable to international businesses operating in a giculture.e.g.
Time
Attitudes about time differ dramatically across cultures.
e.g. In America time represents opportunity to produce more andraise income and it should not be wasted.
These affect business operations in numerous ways such as inhiring practices, job turnover and the design of compensationpackages.
These elements of national culture affect the behavior expectations of managers and employees in the workpl
International businesspeople who face the challenge of managingand motivating employees with different cultural backgroundsneed to understand these cultural elements if they are to beeffective managers.
For this purpose, researchers have grouped countries according tocultural characteristics. By grouping countries sharing similar attitudes towards work roles, job satisfaction, and other work related aspects.
Cultural differences often create ethical dilemmas for internationalbusiness people. Behavior that is acceptable in the home countryculture may be deemed inappropriate by the host country culture.Such culture conflicts commonly arise among persons fdifferent cultural backgrounds, and international businesspeoplemust be prepared to deal with any ethical conflicts that result.
The impact of politico legal environment on international
business operations.
Political risk As a manager evuvalate a country as a potential place
to do business and as they struggle to succeed once they need tobe aware of political risk.It occurs because of political instability.
Types and cause of political risk 1.Changing opinions of political leadership.2. civil disorder 3.External relations
1.Changing opinions of political leadership.
Political leader opinions may change over time ,and theleaders could be replaced by the force or election with politicianswhose views toward business and foregin investement are muchless positive.
2. civil disorder Unrest may occur because of economic conditions,
human rights violations . or group animosity within the socity.3. External relations
Animosity between the host country and foreiginvestors home country may result in work –stoppage protests, theforced divestment of operations, and the loss of supplies andmarkets. Micro and macro political risks
Micro political riskare the political action are aimed at
specific foreign investements.
Macro political risk is the political actions affect abroad spectrum of foreign investors.
Government intervention in the economyAs a company move abroad, management must deal
with governments that influnces the economy in different ways
1. individualistic paradigmIt means the minimal government intervention in the
economy. Individualistic states belive in regulation , and theyare likely to be democratic and economyically free.
2. communitarian paradigm
It means the government defines needs and priorities and partners
with business in a major way.
International Legal Environment:
Explores the legal regimes of some of the major economic powers,focusing on the pragmatic implications of major legal issues for international business transactions.
As briefly stated in the Analysis on Impacts on the non-ITBusiness, IT businesses face an uncertain future after the attackson September 11 in the United States. Notwithstanding this eventand the recent natural disasters in El Salvador, IT businesses willlikely face an uphill battle as the economy attempts to regain its
lost momentum. Other facets are in place to support the growth of the ICT sector. The legal environment is favorable for the ICTindustry with legislation protecting intellectual propertytrademarks and copyrights. The government has also establishedagencies for the support of the ICT industry. As the telephonyinfrastructure is rebuilt, the environment will be prime considerable growth in the ICT industry in El Salvador.
Ultimately, the economic situation of El Salvador's major tradingpartners (such as the U.S.) will dictate the economic climate for ElSalvador. A healthy economy in the United States will foster agreater chance for economic stability and growth in El Salvador,which in turn will favor growth in the informationcommunications industry.
STAGES OF INTERNATIONALISATION
The internationalization process generally includes fives
stages. Viz domestic company, international company,
multinational company, global company and transnational
company. Now, we will study stage of internationalization in
detail.
STAGE 1: DOMESTIC COMPANY
Domestic company limits its operations, mission and vision tothe national political boundaries. These companies focus its viewon the domestic market opportunities, domestic supplierdomestic financial companies, domestic customers etc.
These companies analyze the national environment of the
country, formulate the strategies to exploit the opportunitiesoffered by the environment. The domestic companieunconscious motto is that, "if its not happening in the homecountry, it is not happening”
The domestic company never thinks of growing globally. If itgrows, beyond its present capacity, the company selects thediversification strategy of entering into new domestic markets,new products, technology etc. The domestic company does notselect the strategy of expansion/penetrating into the internationalmarkets. STAGE 2: INTERNATIONAL COMPANY
Some of the domestic companies, which grow beyond their
production and/or domestic marketing capacities, think internationalizing their operations. Those companies who decideto exploit the opportunities outside the domestic country are thestage two companies. These companies remain ethnocentric or domestic country oriented. These companies believe that thepractices adopted in domestic business, the people and products of
domestic business are superior to those of other countries. Thefocus of these companies is domestic but extends the wings to theforeign countries.markets and extend the same domestic operations into foreignmarkets. In other words, these companies extend the domesticproduct, domestic price, promotion and other business practices tothe foreign markets.Normally internationalization process of mostof the global companies starts with this stage two process. Most of the companies following this strategy due to limited resources and
also to learn from the foreign markets gradually before becom aglobal company without much risk.
ingC
The international company holds the marketing mix constantand extends the operations to new countries. Thus the internationalcompany extends the domestic country marketing mix and
business model and practices to foreign countries.
STAGE: 3 MULTINATIONAL COMPANIES
Sooner or later, the international companies learn that theextension strategy (i.e., extending the domestic product, price andpromotion to foreign markets) will not work. The best example isthat Toyota exported Toyopet cars produced for Japan in Japan toUSA in 1957. Toyopet was not successful in USA. Toyota couldnot sell these cars in USA as they were over underpowered and built like tanks. Thus these cars were notsuitable for the US markets. The unsold cars were shipped back
to Japan.Toyota took this failure as a rich learning experience and as asource of invaluable intelligence but not as failure. Toyota,based on this experience designed new models of cars suitablefor the US market. The international companies turn intomultinational companies when they start responding to thespecific needs of the different country markets regardingproduct, price and promotion.
This statue of multinational company is also referred to asmultidomestic. Multidomestic company formulates differentstrategies for different markets; thus, the orientation shifts fromethnocentric to polycentric. Under polycentric orientation theoffices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate withdistinct policies and strategies suitable to that country concerned.Thus they operate like a domestic company of the countryconcerned in each of their markets.
Philips of Netherlands was a multidomestic company of this stage
during 1960s. It used to have autonomous national organizations
and formulate the strategies separately for each country. Its
strategy did work effectively until the Japanese companies and
Matsushita started competing with this company based oil global
strategy. Global strategy was based on focusing the company
Philips strategy was to work like a domestic company, and
produce a number of models of the product consequently it
increased the cost of production and price of the product. But the
Matsushita's strategy was to give the value, quality, design and
low price to the customer. Philips lost its market share as
Matsushita offered more value to the customer Consequently Philips changed its strategy and created
"industry main groups" in Netherlands which are responsible for
formulating a global strategy for producing, marketing and R &
D.
STAGE 4: GLOBAL COMPANY
A global company is the one, which has either global marketingstrategy or a global strategy.Global company either produces in home country or in a singlecountry and focuses on marketing these products globally, or produces the products globally and focuses on marketing theseproducts domestically.
Harley designs and produces super heavy weight motorcycles
in USA and markets in the global market. Similarly, Dr. Reddy'sLab designs and produces drugs in India and markets globally.
Thus Harley and Dr. Reddy’s Lab are examples of global
marketing focus. Gap procures products in the global countries
and markets the products in its retail organization in USA. Thus
gap is an example for global sourcing company.
Harley Davidson designs and produces in USA and gains
competitive advantage as Mercedes in Germany. The Gunderstands the US consumer and got competitive advantage.
STAGE 5: TRANSNATIONAL
COMPANY
Transnational company produces, markets, invests andoperates across the world. It is an integrated global enterprisewhich links global resources with global markets at profit. There is
no pure transnational corporation. However, most of transnational companies satisfy many of the characteristics of aglobal corporation. Characteristics of a
Transnational Company
The characteristics of a transnational company includgeocentric orientation, scanning or information acquisition, long-run visions etc. We discuss these characteristics in detail.
1(i) Geocentric Orientation: A transnational company isgeocentric in its orientation. This company thinkglobally and acts locally. This company adopts global
strategy but allows value addition to the customer of adomestic country. This company allows adaptation toadd value to its global offer. Table 1.1 presents stages of internationalization.
The assets of a transnational company are distribut
throughout the world, independent and specialized. The R &D facilities of a transnational company are spread in manycountries, but specialized in each Country based on the localneeds and integrated in world R & D project. Similarly, theproduction facilities are spread but specialized and integrated.
In case of Caterpillar, manufacturing and assembly facilities
are located in many countries. Components are shipped for
assembly and the assembled product is shipped to the place o f the
customer.Units of the transnational corporation in different countries
create and develop the knowledge in all functions and shareamong them. Thus knowledge and experience is shared jointly.Transnational gains power and competitive advantage bdeveloping and sharing knowledge and experience.of theknowledge among all, Colgate operating companies across globeis an example here.
(ii) Scanning or information Acquisition: Transnationalcompanies collect the data and information world-wide. Thesecompanies scan the environmental information regardingeconomic environment, political environment, social and cultural
environment and technological environment. These companiescollect and scan the information regardless geographical andnational boundaries. (iii) Vision and Aspirations: The vision and aspiration of transnational companies are global, global markets, globalcustomers and grow ahead of other global/transnational companies
(iv) Geographic Scope: The transnational companies scan theglobal data and information. by doing so, they analyze the globalopportunities regarding the availability of resources, customers,markets, technology, research and development etc. Similarly,they also analyze the global challenge and threats like competitionfrom the other global companies, local companies of hostcountries, political uncertainties and the like. They formulateglobal strategy. Thus the geographic scope of a transnational
company is not limited to certain countries in analyzingopportunities, threats and formulating strategies. (v) Operating Style:Key operations of a transnational areglobalize. The transnational companies globalize the functionslike R & D, product development, placing key human resources,Procurement of high valued material etc. For example, the R &Dactivity of Proctor & Gamble, and key human resource activity of Colgate are the joint and shared activity of the units of these
companies in various countries. .
vi) Adaptation: Global and transnational companies adapt their products, marketing strategic and other functional strategies to theenvironmental factors of the market concerned, For example,
Mercedes Benz is a super luxury car in North America, luxuryautomobile in Germany, standard taxi in Europe.
(vii) Extensions: Some products do not require any change whenthey are marketed in other countries. Their market is extension. For- example, Casio calculators of Japan, Hero pens of China, and BIC's line of pens, butane lighters and razors.
(viii) Creation through Extension:Transnational companiescreate the global brand through extending the product to the newmarket. Rothmans Cigarette extended its product to mEuropean countries and African countries and created it as globaland national basis (ix) Human Resource Management Policy: The transnationalcompany's human resource policy is not restricted by national
political or legal constraints. It selects the best human resourcesand develops them regardless of nationality, ethnic group etc. Butthe international company reserves the top and key positions for nationals (x) Purchasing:Transnational company procures world-classmaterial from the best source across the globe.
INTERNATIONAL BUSINESS APPROACHES
International business approaches are similar to the stages
of internationalization or globalization. Douglas Wind and
Pelmutter advocated four approaches of international
business. They are:
1. Ethnocentric ApproachThe domestic companies normally formulate their strategies.
Their product design and their operations towards the nationalmarkets, customers and competitors. But, the excessive productionmore than the demand for the product, either due to competition or due to changes in customer preferences push the company toexport the excessive production to foreign countries. The domesticcompany continues the exports to the foreign countries and views
the foreign markets as an extension to the domestic markets justlike a new region. The executives at the head office of thecompany make the decisions relating to exports and, the marketingpersonnel of the domestic company monitor the export operationswith the help of an export department.
The company exports the same product designed for domesticmarkets to foreign countries under this approach. Thmaintenance of domestic approach towards international businessis called ethnocentric approach.
Organization structure of Ethnocentric company
This approach is suitable to the companies during the earlydays of internationalization and also to the smaller companies.
2. Polycentric Approach
The domestic companies, which are exporting to foreigncountries using the ethnocentric approach, find at the latter stagethat the foreign markets need an altogether different approach. .
Then, the company establishes a foreign subsidiary companyand decentralists all the operations and delegates decision-makingand policy-making authority to its executives. In fact, the company
appoints executives and personnel including a chief executive whoreports directly to the Managing
Director of the company. Company appoints the key personnelfrom the home country and the people of the host country fill allother vacancies.
Organization Structure Of Polycentric Company
13. Regiocentric Approach
The company after operating successfully in a foreign country,thinks of exporting to the neighboring countries of the hostcountry. At this stage, the foreign subsidiary considers the regionsenvironment (for example, Asian environment like laws, culture,
policies etc.) for formulating policies and strategies. However, itmarkets more or less the same product designed under polycentricapproach in other countries of the region, but with different market
Under this approach, the entire world is just like a single countryfor the company. They select the employees from the entire globeand operate with a number of subsidiaries. The headquarter coordinates the activities of the subsidiaries. Each subsidiaryfunctions like an independent and autonomous company informulating policies, strategies, product design, human resource
policies, operations etc.Fig 1.4 helps to understand the concept of geocentric approachclearly.
Fig 1.4 Organization Structure of Geocentric Company
Political and Legal factors are the part of the external environment
that influences managerial decisions. A political system integratesthe parts of a society into a viable, functioning unit. PoliticalSpectrum presents a general schematic of the various forms of government. The two extremes on the political spectrum aredemocracy and totalitarianism.
Democracy
It refers to equal politically and legally, should enjoy widespreadfreedoms and should actively participate in the politically process.Democratic systems involve wide participation by citizens in thedecision-making process. Contemporary democratic politicasystems share the following traits:
1. Freedom of opinion, expressions, press and freedom toorganize.
2. Elections In which voters decide who is to represent them.3. Limited terms for elected officials.4. An independent and fair court system, with high regard for
individual rights and property.5. A nonpolitical bureaucracy and defense infrastructure.6. An accessibility to the decision-making process.
Totalitarianism
Totalitarian governments are usually theocratic or secular. Intheocratic totalitarianism, religious leaders are also politicleaders. Secular totalitarianism has enforced control throughmilitary power. In totalitarian system, decision makingrestricted to a few individuals. Communism is also a form of secular totalitarianism that combines political and economsystems into a sociopolitical agenda.
Formulating political strategies is more complicated for managersthan formulating competitive marketplace strategies. Whdealing in the political arena, manager’s needs to know howdecisions are made that could influence their ability to operate.
Then they need to know what rules are for trying to influencepolitical decisions. There are certain steps that a company mustfollow if it wants to establish an appropriate political strategy in itscountry of operations:
1. Identify the issue2. Define the political aspect of the issue3. Assess the potential political action of other companies and
special interest groups4. Identify important institutions and key individuals5. Formulate strategies6. Determine the impact of implementation7. Select the most appropriate strategy and implement it
LEGAL FACTORS
Legal system is also an external environment that influencesbusiness. Managers must be aware of the legal systems in thecountries in which they operate; the nature of the legal profession,both domestic and international; and the legal relationships thatexist between countries. Legal systems differ in terms of thenature of the system- common law, civil law and theocratic law-and the degree of independence of the judiciary from the political
process. Countries in transition struggle to develop a legal systemconsistent with the global market economy. However, there arecertain political and legal factors which are listed below:
1. Anti-Trust litigation2. Government Laws3. Tax Laws4. Special Incentives
5. Foreign Trade Regulations6. Attitude-towards Firms7. Stability of Government8. Recruitment Laws9. Corporate Governance and
10. Business Ethics
SOCIO-CULTURAL FACTORS
Socio-cultural influences should also be considered when assessing
foreign market opportunities. In many cases, firms will attempt tominimise the potential impact of socio-cultural differences byinitially focusing on countries that are culturally similar to their home markets.
Depending on the proposed type of internationalisation effort,certain socio-cultural variables may be more important than others.If the proposed strategy is to export goods to a new market, the
socio-cultural factors of most importance are those that relate toconsumers.In contrast, if a firm is considering establishing a factory or distribution centre in a foreign country, the firm should evaluatesocio-cultural factors associated with its potential employees.
It should be apparent that to be successful in their relationshipswith people in other countries, international businesspeople mustbe students of culture.
Attitudes and Beliefs
Culture consists of specific learned norms based on attitudes,values and beliefs, all of which exist in every nation. Culturecannot be easily isolated from factors as economic and politicalconditions
“Germans put leisure first and work second” says a German-bornwoman now living is the U.S. In “America, it’s the other wayround.” Like the Germans, the Mexicans say that “Americans liveto work, but we work to live”. This is an example of the extremecontrasts among cultural attitudes towards work
Education
The trends in education must be studied. Education in it’s widestsense can be thought of as any part of the learning process thatequips an individual to take his or her place in the adult society.Data related to Literacy Rate, kinds of schools, quantity of schoolsand their enrollment, and possibly the amount of per capita spend
on education helps provide a lot of assistance. Marketers areinterested in the literacy rate because it helps them decide whattype of media to employ and at what level they should prepareadvertisements, labels, point-of –purchase displays and owner’smanuals.
Language
Probably the most apparent cultural distinction that the new comer to international business perceives is the means of communication.Language is a factor that greatly affects cultural stability. Whenpeople from different areas speak the same language, culturespreads easily. Commerce can occur more easily with other nationsthat share the same languages because expensive and consuming translation is necessary.
Religion
Religion, an important component of culture, is a strong shaper of values. A knowledge of the basic tenets of some of the morepopular religions will contribute to a better understanding of whypeople’s attitudes vary so greatly from country to country.
For eg. Mc Donalds serves neither beef nor pork in India so as notto offend it’s Hindu and Muslim population
A listing of the topics will give us a better understanding of whatculture is and may also serve as a guide to international managers
when they are analyzing a particular problem from the socio-cultural viewpoint :
1. Lifestyle Changes2. Career Expectations3. Consumer Activism4. Population Growth Rate5. Levels of Education6. Social Mobility
7. Attitudes to Work and Leisure
TECHNOLOGICAL FACTORS
The technology of a society is the mix of usable knowledge that asociety applies and directs toward the attainment of cultural andeconomic objective; it exists in some form in every cultural
organization. It is significant in the efforts of developing nations toimprove their level of living and a vital factor in the competitivestrategies of multi national firms.Technological superiority is the goal of most companies, of coursebut it is especially important to international companies because :
- it enables a firm to become competitive or even leadership in world markets.
At one time, P&G and Unilever were competing worldwide for
the laundry detergent market, but then P&G introduced Tide, adetergent with superior cleaning power. It’s sales took off and left
Unilever far behind. Finally, Unilever introduced its o
detergent but P&G had stolen the lead.
- it can be sold ( via licensing or management contract ) or it can
- it can give a firm confidence to enter a foreign market evenwhen other companies are already established there
ECONOMIC FACTORS
The following determinants helps to understand the specificfactors associated with economic growth across countries and thekey differences between fast and slow growing economies. Thekey dimension used to distinguish one country from the other isthe size of demand or GDP
1.
Gross Domestic Product (GDP)
It is the total monetary value of all goods and services produceddomestically by a country. Itincludes income earneddomestically by foreigners, butdoes not include income earned
by domestic residents on foreign ground (domestic or foreignfactors of production). The gross domestic product (GDP) is themost important economic indicator. It represents a broad measureof economic activity and signals the direction of overall aggregateeconomic activity. The GDP also includes inflation information inthe form of data on a number of Price Deflators of GDP and itscomponents.
2. Investment
In neoclassical growth models, a higher value of the saving rate,both domestic and foreign, raises the steady-state level of outputper capita and thereby increases the growth rate for a givenstarting value of GDP.
The fertility rate has an important influence on population growth,which has a negative effect on the steady-state ratio of capital toworkers in the neoclassical growth model. Hence, the modelpredicts a negative effect of fertility on economic growth. Higher fertility also reflects a greater devotion of resources to childrearing,
and for this reason it is better to use fertility rates than populationgrowth.
4. Human Resources
The various models of new growth theories emphasize humancapital as a key factor driving the long-term growth of income. Inthe framework of the extended neoclassical growth model, for given values of other explanatory variables, a higher human capitalstock leads to a higher steady-state per capita income. In theendogenous growth model, human capital generates perpetualgrowth by either preventing returns to broad capital from falling or by increasing capabilities for the innovation and adaptation of newtechnologies. The human resource variables include a measure of human capital stock. The greater initial educational stock indicatesthat a more skilled workforce can produce more output from givennatural and physical resources. Hence, a country with a greater
education stock is in a better condition for future growth. Inaddition, life expectancy at birth, as a log value at the initial year of the period, is used to measure health attainment, which is seenas another important component of human capital stock. A higher life expectancy tends to indicate healthier, more producworkers.
5. Terms of Trade Shock
The terms of trade shock is considered to be an exogenous factor that affects the growth rate of an economy. Improvement in theterms of trade, measured as the ratio of export to import prices, canmake a country produce more and expand its export sector.
It is defined as crisis dummy variable for each country during any
five-year period as equaling one if a crisis occurred during theperiod and otherwise to take on the value zero. Crisis Externalimbalances normally affect cyclical fluctuations rather than long-run growth. However, when a significant balance-of-paymentdifficulty causes a crisis, it can disrupt the entire economy becausethe uncertainty it generates discourages investment and other productive activities, while increasing speculative activitiesFinancial distress may lead to bankruptcies of profitable firms thatwould otherwise have been viable.
Interest rate
The price of credit, or ratio of the fee charged to secure credit froma lender to the amount borrowed, usually expressed on anannual percentage basis.
Interest is the price the borrower has to pay to compensate thelender for three main things:
a. Deferred consumption. By agreeing to lend Rs onelakh, you are not using this money today. postponing your consumption, you need somecompensation.
b. Loss of purchasing power. The Rs one lakh you lendtoday will be worth less in one year due to inflation.When you lend, you lose purchasing power, for this you
need to be compensated.c. Risk of default. The borrower may simply run away
with your Rs one lakh. You need some compensationagainst this risk. That is the reason that the governmentpaper should pay the least interest - the risk of default iszero.
Federal Reserve policy is the most important determinant of themoney supply. The Federal Reserve affects the money supply byaffecting its most important component, bank deposits.
8. Inflation rates
It is the rate of change in the price of goods and services from oneyear to the next. Two commonly used indicators of inflation ratesin the U.S. are the Consumer Price Index (CPI) and the Producer Price Index (PPI).
9. Unemployment rate
The unemployment rate is defined as the number of unemployedpersons divided by the labor force, where the labor force is thenumber of unemployed persons plus the number of employedpersons. The unemployment rate represents the numb
unemployed as a percent of the labor force.
The official definition of the unemployment rate, given below in aseries of four definitions, contains a couple of unavoicomplications.
(1) A person who loses a 40 hour per week job, but works for onehour mowing a lawn for pay is classified as employed.
(2) A person who simply expresses interest in having a job isclassified as unemployed. "Discouraged workers" who have lost ajob, but do not make an effort to find a new job in a given week arenot classified as unemployed or even as in the labor force. Bothpossibilities mean that the announced unemployment rate is not asdefinitive as it might sound.
I t refers to lowering of currency’s value. It is a lowering by thegovernment of the value of a nation’s currency relative to that of foreign currencies.
Application of Michael Porter’s Value chain analysis
International Business Operations.To understand the strategic planning options available tcorporation, its mangers need to recognize that different types of industry-based competition exist. Specifically, they must identifythe position of their industry along the global versus multidomesticcontinuum and then consider the implication of that position for their firm.Porter has developed a framework for analyzing the basic strategy
alternatives of a firm that competes globally. The starting point of the analysis is an understanding of the industry or industries inwhich the firm competes.Managers need to identify strategic internal factors and valueactivities. Furthermore, the differences between global multidomestic industries about the configuration and co-ordinationof functional corporate activities necessitate differences in strategicemphasis. As an industry becomes global, mangers of firms withinthat industry must increase the co-ordination and concentration of
functional activities.
Porter’s model of International Strategy
In developing a systematic model of international businstrategy, Porter refined concepts from two of his earlier models:the value chain and the international generic strategies model.
Concept of Value Chain
Diagnosing a firm’s key strengths and weaknesses is often easier when adopting a disaggregated view of the firm. The use of the“value chain” approach is one way to disaggregate the firm for purposes of internal analysis. This approach is a way of systematically viewing the series of activities a firm performs toprovide its customers with a product. Figure 1 diagrams a typicalvalue chain.
Upstream value activities Downstream valueactivities
Primary activities
Source: Adapted from Porter (1986)
The value chain disaggregates a firm into its strategimportant activities to understand the behavior of the firm’s cost
and the firm’s existing or potential sources of differentiation. Afirm gains competitive advantage by performing these strategicallyimportant activities – internal factors – at a lower cost or better than its competitors.Every firm can be viewed (disaggregated) as a collection of valueactivities that are performed to design, produce, market, deliver,and support its product. As portrayed in Figure 1, these activitiescan be grouped into nine basic categories for virtually any firm at
the business unit level. Within each category, a firm typicallyperforms a number of discrete activities that may represent keystrengths or weakness. Service activities, for example, mayinclude such discrete activities as installation, repair, pdistribution, and upgrading – any of which could be a major source
of competitive advantage or disadvantage. Through the systematicidentification of these activities, mangers using the value chainapproach can target potential strengths and weakness for further evaluation.i
The basic categories of activities can be grouped into two broadtypes. Primary activities are those involved in the physicalcreation, marketing, delivery, and after-sale support of the firm’sproduct or service. Overarching all of these activities aresupport
activities, which provide infrastructure or inputs that allow them totake place on an ongoing basis.The primary activities can be further disaggregated into upstreamand down stream (see Figure 1) and these have influential locationconsequence for the firm’s foreign subsidiaries and activities. Thedown stream activities include distribution, marketing and sales,and servicing, the upstream activities are associated woperations and the acquisition of inputs.
Identifying Primary Activities
Identifying primary value activities requires the isolation activities that are technologically and strategically distinct. Eachof the five basic categories of primary activities is divisible into anumber of distinct activities, such as the following:Inbound Logistics: activities associated with receiving, storing anddisseminating inputs to the product, such as material handling,warehousing, inventory control, vehicle scheduling, and returns to
suppliers.Operations: activities associated with transforming inputs into thefinal product form, such as machining, packaging, assembly,equipment maintenance, testing, printing, and facility operations.
Use of Porters five forces model to evaluate the attractiveness
of an international market
An industry is a group of firms that market products which areclose substitutes for each other (e.g. the car industry, the travelindustry). Some industries are more profitable than others due tothe dynamics of competitive structure in an industry.
The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model.Porter explains that there are five forces that determine industryattractiveness and long-run industry profitability. These fiv"competitive forces" are :
¤ The threat of entry of new competitors (new entrants)¤ The threat of substitutes¤ The bargaining power of suppliers¤ The bargaining power of buyers¤ The degree of rivalry between existing competitors.
1. Threat of New Entrants:
New entrants to an industry can raise the level of competition,thereby reducing its attractiveness. The threat of new entrantslargely depends on the barriers to entry. High entry barriers exist insome industries (e.g. shipbuilding) whereas other industries arevery easy to enter (e.g. estate agency, restaurants). Key barriers toentry include :- Economies of scale- Capital / investment requirements- Customer switching costs- Access to industry distribution channels- The likelihood of retaliation from existing industry players.
2. Threat of Substitutes:
The presence of substitute products can lower induattractiveness and profitability because they limit price levels. Thethreat of substitute products depends on:
- Buyers' willingness to substitute- The relative price and performance of substit- The costs of switching to substitutes.
3. Bargaining Power of Suppliers :
Suppliers are the businesses that supply materials & other productsinto the industry. The cost of items bought from suppliers (e.g. rawmaterials, components) can have a significant impact oncompany's profitability.If suppliers have high bargaining power over a company, then intheory the company's industry is less attractive. The bargainingpower of suppliers will be high when:
- There are many buyers and few dominant sup- There are undifferentiated, highly valued produc- Suppliers threaten to integrate forward into the industry(e.g. brand manufacturers threatening to set up their own retailoutlets)- Buyers do not threaten to integrate backwards into supply- The industry is not a key customer group to the suppliers.
4. Bargaining Power of Buyers :
Buyers are the people or organisations who create demand in anindustry. The bargaining power of buyers is greater when :- There are few dominant buyers and many sellers in the industry- Products are standardised- Buyers threaten to integrate backward into the ind- Suppliers do not threaten to integrate forward into the buyer'sindustry
- The industry is not a key supplying group for buyers.
5. Intensity of Rivalry :
The intensity of rivalry between competitors in an industry willdepend on:- The structure of competition -
For example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has aclear market leader.
- The structure of industry costs -
For example, industries with high fixed costs encouracompetitors to fill unused capacity by price cutting.
- Degree of differentiation -Industries where products are commodities (e.g. steel, coal) havegreater rivalry; industries where competitors can differentiate their products have less rivalry.
- Switching costs -Rivalry is reduced where buyers have high switching costs - i.e.there is a significant cost associated with the decision to buy aproduct from an alternative supplier.
- Strategic objectives - When competitors are pursuing aggressive growth strategierivalry is more intense. Where competitors are "milking" profits in
a mature industry, the degree of rivalry is less.
- Exit barriers -
When barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.
Porter’s Five Forces of Competitive Position
New Market Entrants, eg:
entry ease/barriersgeographical factorsincumbents resistancenew entrant strategyroutes to market
Supplier Power, eg:
brand reputationgeographical coverageproduct/service level qualityrelationships with customersbidding processes/capabilities
Competitive Rivalry, eg:
number and size of firmsindustry size and trendsfixed v variable cost basesproduct/service rangesdifferentiation, strategy
a) Unemployment Import restrictions may lead to retaliation by other countries,may decrease export jobs
Loss of jobs in industries that rely on imported Products
Cost of protectionism: higher prices, low quality, lack of Innovation
There is no question that some long-term unemployment iscaused by government intervention and unions that interferewith the supply of labor. It is, however, a great mistake(made by some conservative economists) to attribute mostunemployment to government interventions in the economyor to any lack of desire to work on the parunemployed. Unemployment was a serious economicproblem in the late nineteenth and early twentieth centuries
prior to the welfare state or widespread unionizatUnemployment then, as now, was closely linked to generalmacroeconomic conditions. The Great Depression, whenunemployment in the United States reached 25 percent is theclassic example of the damage that collapses in credit can do.Since then, most economists have agreed that cyclfluctuations in unemployment are caused by changes in the
Preserve national identityImprove position compared to other countries
Maintain spheres of influencePromote industrialization
Deal with unfriendly countriesProtect infant industries
demand for labor, not by changes in workers' desires to work,and that unemployment in recessions is involuntary.
Even leaving aside cyclical fluctuations, a large part of unemployment is due to demand factors rather than supply.
High unemployment in Texas in the early eighties, for example, was due to collapsing oil prices. Hunemployment in New England in the early nineties is due todeclines in computer and other industries in which NewEngland specialized. The process of adjustment followingshocks is long and painful, and recent research suggests thateven temporary declines in demand can have permanenteffects on unemployment as workers who lose jobs are
unable to sell their labor due to a loss of skills or for other reasons. Therefore, most economists who studyunemployment support an active government role in trainingand retraining workers and in maintaining stable demand for labor.
b) Infant Industry Argument
Production becomes more competitive over time because of increased economies of scale and greater workers efficiency
The infant industry argument relies upon the empirical claimthat historically many countries industrialised behind tariff barriers. (A recent book advancing the argument you mentionis Kicking Away the Ladder (2002) by Ha-Joon Chang, aneconomist at Cambridge University (UK).) This is true but itonly establishes correlation not causation. Had resources not
been wastefully diverted by tariffs, real incomes would haverisen even faster during the 19th century than they did.There is no evidence that subsidies played an important rolein boasting American or German manufacturing in the 19thcentury, though it is certainly the case that the world-widemovement away from free trade during that period hurtBritain.
According to Broadberry, one of the leading economhistorians in this field, American productivity manufacturing was already twice Britain’s in 1870 – adifferential that remain remarkably stable through the 20thcentury, and was probably twice Britain’s in 1850. A number
of reasons explain this.
(1) American manufacturing had a much higher capital tolabour ratio - one possible explanation for this is that highwages in America led employers to substitute capital for labour.(2) Technology choice (potent because of lock-effects – thecost of switching technology) America adopted ma
production techniques far earlier than Britain – perhapsbecause of the high cost of skilled labour(3) And In terms of labour productivity as a whole the mostsignificant reason why Britain was overtaken by America andGermany in the late 19th century was because both thosecountries experienced huge movements of workers fromagriculture to industry (i.e. from a comparatively productivity sector to high productivity sectors) something
that had already happened to Britain fifty years previous.British growth slowed down because of her ‘prematurematurity’.
A similar argument applies to post-war economic growth inJapan. The Japanese government attempted to help its so-called leading industries (most heavy industry) and yes, theJapanese economy experienced rapid growth but a closer look at the evidence demonstrates that those industries which
received subsidies actually experienced the slowesproductivity growth while the development of neunprotected industries in which Japan developed comparative advantage such as electronics drove Japaneseeconomic growth. All this shows is that economic growth cantake place despite needless interference from the state notbecause of it.
Tariff is tax levied on imported and, more rarely, exported goods.It is also called a customs duty. Tariffs may be distinguished fromother taxes in that their predominant purpose is not financial buteconomicnot to increase a nation's revenue but to pdomestic industries from foreign competition.Tariffs are traditionally designed to raise revenue for government; however they can also be for;
• Reducing the level of imports by making them
expensive relative to domestic substitutes (this lowers abalance of trade deficit).
• To counter the practice of dumping by raising the importprice of the dumped good to market level.
• To retaliate against trade barriers imposed by anocountry, a trade war.
• To protect key industries such as agriculture, such as theEuropean Union has done with its Common Agricultural
Policy.• To protect a new industry until it is sufficiently
established to compete on the international market.
Tariffs can be of three types:
Import tariffs:Import tariffs are taxes levied on imported goods primarily for the
purpose of raising their selling price in the importing nation’smarket to reduce competition for domestic producers. A fewsmaller nations also use them to raise revenue on both the importsand exports. Exports of commodities such as coffee and copper arecommonly taxed in developing nations.Export tariffs:
Export tariffs are very rare. If a country is deficient in something, itrestricts export of that particular product by levying export tariff on
it. If a country is in short supply of a product, it doesn’t want thatproduct to be exported.Transit tariff:
Tariff levied on goods transferred from one country to another.This was a common practice in the 1950’s and1960’s.
If the three tariffs are imposed it raises the final price of theproduct.
Tariff can be advocated in 3 forms:
1. Ad valorem:
It is a fixed percentage of the value of the good that is beingimported. Sometimes these are problematic as when
international price of a good falls, so does the tariff, anddomestic industries become more vulnerable to competition.Conversely when the price of a good rises on the internationalmarket so does the tariff, but a country is often less interested inprotection when the price is higher. They also face the problemof transfer pricing where a company declares a value for goodsbeing traded which differs from the market price, aimed atreducing overall taxes due.
2. Specific Duty (Specific Tariff):
A specific tariff is a tariff of a specific amount of money thatdoes not vary with the price of the good. These tariffs may beharder to decide the amount at which to set them, and they mayneed to be updated due to changes in the market or inflation.3. Compound Duty:
A combination of specific and ad volarem duties is calledcompound duties.
Non tariff controls: Quantity Controls.Governments use other non-tariff regulations and practices toaffect directly the quantity of imports and exports. Principal formsof quantity controls include the following:
Quotas:
The Quota is the most common type of quantitative import andexport restriction. An import quota directly affects the amount of
imports by putting an absolute ceiling on supply – say, for example, three million DVD players from a particular country in agiven year. Therefore, quota usually increases the consumer pricebecause there is little incentive to use price competition to increasesales.
A variation of an import quota is the so-called VoluntaryExport Restraint (VER) essentially; the government of Country Aasks the government of Country –B to reduce it’s companies’exports to Country A voluntarily. The term voluntarilysomewhat misleading: typically, either Country B volunteers toreduce its exports or else Country A may impose tougher traderegulations. For Example, in the 1980’s, the United States pressedthe Japanese to limit their exports of automobiles to the United
States to no more than 1.85 million vehicles per year. Therefore,like a quota a VER limits the quantity of trade between countriesand therefore, raises the prices of imported goods to consumers.
A country may establish export quotas to assure domeconsumers of a sufficient supply of goods at a low price, to preventdepletion of natural markets. To restrict supply, some countriesband together in various commodity agreements, such as those for coffee and petroleum, which then restrict and regulate exports from
the member countries. The typical goal of an expert quota is toraise prices to importing countries.A specific type of quota that prohibits all forms of trade is anembargo, which works like a quota. Countries-or groupscountries- may place embargoes on either imports or exports, onwhole categories of products regardless of destination, on specificproducts to specific countries, or on all products to given countries.Governments impose embargoes in an attempt to use economicmeans to achieve political goals.
“Buy” Local Legislation:
Another Form of quantitative trade control is “Buy “legislation. Government purchases are a large part of expenditures in many countries: typically, governments favordomestic producers. In the Unites States, For example” buyAmerican” legislation requires government procurement agencies
to favor domestic. Sometimes governments specify a domesticcontent restriction – that is, a certain percentage of the productmust be of the local origin. Sometimes they favor domesticproducers by establishing price mechanisms.
Standards: Countries can devise classification, labeling, and testing standardsto allow the sale of domestic products but obstruct that of foreign-made ones. Take product labels, for instance, - the requirement thatcompanies indicate on a product where it is made providesinformation to consumers who may prefer to buy products fromcertain countries.
This technicality adds to a firm’s production costs, particularly
if the label must be translated for each export market. Further, rawmaterials, components, design, and labor, increasingly come frommany countries, so most products today are of mixed origin.
The professed purpose of testing standards is to protect thesafety or health of the domestic population. However, someforeign companies argue that testing standards are just another means to protect domestic producers.
Specific Permission Requirements:
Some countries require that potential importers or exporters securepermission from government authorities before conducting tradetransactions. This requirement is known as an “Import License”A company may have to submit samples to government authoritiesto obtain an import license.
Administrative Delays:
Creates uncertainty and raises the cost of carrying inventory. For example, United Parcel Service (UPS) provisionally suspended it’sground service between the United States & Mexico because of burdensome Mexican customs delays. However, competitivepressure moves countries to improve their administrative systems.
Governments sometimes require exporters to take actumerchandise in lieu of money or to promise to buy merchandise or services in place of cash payments in the country to which theyexport. This requirement is common in the aerospace and defenseindustries- sometimes because the importer does not have enough
Russian crude oil for airbus aircraft. These sort of transactions are called as “Countertrade or Offsets”. They oftenrequire exporters to find markets for goods outside their lines of expertise or to engage in complicated organizational arrangementsthat require them to relinquish some operating control.
Non tariff controls: Direct Price Influences.
Subsidies:
Countries sometimes direct payments to domestic companies tocompensate them for losses incurred from selling abroad, such asU.S. subsidies to cotton exporters. However, they provide other types of assistance to make it cheaper or more profitable to selloverseas. For example, most countries offer potential exportersmany business development services, such as market information,
trade expositions and foreign contacts.
Aid and Loans:
Governments also give aid and loans to other countries. If therecipient is required to spend the funds in the donor country, whichis known as tied aid or tied loans some products can competeabroad that might otherwise be noncompetitive. Tied aids helpswin large contracts for infrastructure, such as telecommunications,railways and electric power projects.
Customs Valuation:
Generally most countries have agreed on preventive proceduresfor assessing values when their customs agents levy tariffs. First,customs officials must use the declared invoice price. If there isnone or if they doubt its authenticity, agents levy tariffs. Firstcustom officials must use the declared invoice price. If there is
none or if they doubt its authenticity, agents must then assess onthe basis of the value of identical goods. If not possible, agentsmust assess on the basis of similar goods arriving in or about thesame time. For example, there is no sales invoice when importedgoods enter for lease rather than purchase. Customs officials must
then base the tariff on the value of identical or similar goods. If thisbasis cannot be used, officials may compute a value based on finalsales value or on reasonable cost
Other direct price influence: Countries use other means to affect prices, including special feessuch as for consular and customs clearance and documentation,requirements that customs deposits be placed in advance
shipment, and minimum price levels at which goods can be soldafter they have customs clearance.INTERNATIONAL PRODUCT AND BRANDING
STRATEGIES.
INTERNATIONAL BRANDING STRATEGIES:
With the globalization of markets and the growth of competitionon a global scale, companies are increasingly expanding thegeographic scope of their operations, setting up or acquiringcompanies in other countries, or entering into alliances acrossnational boundaries. At the same time, with the spread of globaland regional media, the development of international retailing, andthe movement of people, goods, and organizations across nationalborders, markets are becoming more integrated. As a result, firmsneed to pay greater attention to coordinating and integrating their
marketing strategy across markets.
An important element of a firm's international marketing strategyis its branding policy. Strong brands help to establish the firm'sidentity in the market place, and develop a solid cufranchise as well as providing a weapon to counter growing retailer power. They can also provide the basis for brand extensions, whichfurther strengthen the firm's position and enhance value.
international markets, an important issue for the firm is whether touse the same brand name in different countries, leveraging brandstrength across boundaries, or whether to maintain local brandsresponding to local customer preferences. A related issue is whatlevel of branding to emphasize, i.e. corporate/house or product-
level brands or some combination of both.
The central role of branding in defining the firm's identity and itsposition in international markets means that it is critical to developexplicit international brand architecture. This implies identifyingthe different levels of branding within the firm, the number of brands at each level as well as their geographic and product marketscope. The most critical element in this structure is the number of
levels, i.e. corporate, house/product business and product and howthese are used in conjunction with each other. Related to thedevelopment of this architecture, is the question of how to managebrands that span different geographic markets and product lines.Who should have custody of international brands, and responsible for coordinating their positioning in different nationalor regional markets, as well as making decisions about use of agiven brand name on other products or servic
The significance of the various issues depends to a substantialdegree on how a firm has expanded internationally, and how itsinternational operations are organized. Some firms, such as P&Gand Coca-Cola, have expanded through leveraging their domestic"power" brands in international markets. Consequently, as theyseek to expand further, they have to consider whether to developbrands geared to specific regional or national preferences. Otherssuch as Nestlé and Unilever have traditionally adopted country-
centered strategies, building or acquiring a mix of national andinternational brands. Such companies have to decide how far tomove towards greater harmonization of brands and integration of their brand architecture across countries, and if so, how to do so.These issues are particularly critical in European markets whereproduct market structures-traditionally centered on countries, arenow becoming more interlinked (Caller 1996). This crepressures for firms to integrate their brand strategies a
markets within the EU. While this focus is appropriate for arelatively few high profile brands such as Nike or Coca-Cola, itignores the issues faced by the vast majority of multinational firmswho own a variety of local and international brands that differ intheir strength, target market and their association. Such firms have
to determine how to develop a cohesive and effective brandstructure, which brands to emphasize and build, whether to use thesame brands across product groups and across countries, and howdifferent brands at different levels of the organization should beinterrelated so as to maximize their market impact and efficiency.
Field study of consumer goods companies based in Europe wasconducted to gain some insights into international brand structures,
how these were evolving and the underlying drivers of brandstructure. Of particular interest was whether the firm had explicitinternational brand architecture and if so, how this was managed.The study was based on semi-structured interviews conducted withsenior executives at the product division level in companies, aswell as executives in advertising agencies, market reseacompanies, and consulting companies who were responsible for international brands and branding strategies.
Consistent with the findings of Laforet and Saunders, the studyrevealed three major patterns of brand architecture: corporate-dominant, product-dominant and hybrid or mixed structures. Therewas, however, considerable variation even within a given type of structure depending to a large extent on the firm's administrativeheritage and international expansion strategy as well as the degreeof commonality among product lines or product businesses. Inaddition, these structures were continually evolving in response to
the changing configuration of markets or because of the firm'sexpansion strategy in international markets.
Corporate-dominant architecture tended to be most commoamong firms with a relatively limited range of products or productdivisions, or with a clearly defined target market, e.g. Shell,Kelloggs, Nike, Benneton, etc. Product dominant architecture, onthe other hand, was typically found among firms such as Akzo
Nobel with multiple national or local brands, or firms such as P&Gor Mars that had expanded internationally by leveraging "power"brands. The most common were hybrid or mixed structures,consisting of a mix of global corporate, regional and nationalproduct-level brands, or corporate endorsement of product brands
or different structures for different product division
Both corporate and product dominant structures were evolvingtowards hybrid structures. Firms with corporate dominastructures were adding brands at other levels, for example, thehouse or product level, to differentiate between different productdivisions. Product-dominant structures, on the other hanespecially where these emphasized multiple local (national) brands
were moving toward greater integration or co-ordination acrossmarkets through corporate endorsement of local products. Thesecompanies also varied in the extent to which they had clearlyarticulated international brand architecture to guide this evolution.Some, for example, laid out the different levels at which brandswere to be used, the interrelation between brands at differentlevels, the geographic scope of each brand and the product lines onwhich a brand was to be used, while others had few or no
guidelines concerning international branding.
The study also provided some insights into the drivers underlyingbrand architecture. This suggested that brand architecture essentially fashioned by three major factors: firm-bascharacteristics, product market characteristics and underlyingmarket dynamics (see Figure 1). While the firm's history shapes itsbrand architecture, market dynamics and the growth of economicand political integration as well as rising media costs create
pressures to harmonize branding across country markets to achieveeconomies of scale and scope. As a result, brand architecture, likeany living organism, is continually changing, both shaped by andevolving in response to these drivers
The brand architecture of an organization at any given point intime is in large measure a legacy of past management decisions aswell as the competitive realities it faces in the marketplace. The
firm's history creates 'brand baggage'. This includes strong brandswith rich traditions (like Louis Vuitton) as well as the burden of weak brands with strong traditions (Samsonite). Managementinertia and stakes within the firm often create barriers to thepruning of weak brands or their absorption into strong brand
categories. Brand architecture also reflects product markcharacteristics. Where products are strongly culturally embedded,local or national brands are likely to proliferate, catering to specificlocal preferences. On the other hand, where customer preferencesand desired product attributes are relatively homogeneoworldwide, and products share common functions, there are greater opportunities for global or international brands at the corporate or product divisional level.
AMERICAN DEPOSITORY RECEIPTS.
DEPOSITORY RECEIPTS:
A negotiable financial instrument issued by a bank to represent aforeign company has publicly traded securities. This depositoryreceipts trade on a local stock exchange.
Depository receipts make it easier to buy shares in focompanies because the shares of the company do not have to leavethe home state.
When the depository bank is in the USA, the instruments areknown as American Depository Receipts (ADR). European banksissue European depository receipts, and other banks issue globaldepository receipts (GDR).
AMERICAN DEPOSITORY RECEIPTS:
A negotiable certificate issued by a U.S. bank representing aspecified number of shares (or one share) in a foreign stock that istraded on a U.S. exchange. ADRs are denominated in U.S. dollars,with the underlying security held by a U.S. financial institution
overseas, and help to reduce administration and duty costs on eachtransaction that would otherwise be levied.
This is an excellent way to invest in foreign company whilerealizing any dividends and capital gains in U.S dollars. However,
ADR’s do not eliminate the currency and economic risks for theunderlying shares in another country. For example, dividendpayments in euro would be converted in to U.S dollars, netconversion expenses and foreign taxes and in accordance with thedepository agreement.ADR are listed on the NYSE, AMEX or NASDAQ.
ADRs were introduced because of the complexities involved in
buying shares in foreign countries. Primarily the difficuassociated with trading at different prices and currency values. For this reason, U.S. banks simply purchase a bulk lot of shares fromthe company, bundle the shares into groups, and reissues them onthe NYSE, AMEX, or NASDAQ. The depository bank sets theratio of U.S. ADRs per home country share. This ratio can beanything less than or greater than 1. The reason they do this is thatthey wish to price the ADR high enough as to show substantial
value, yet low enough, so that theindividual investorscanpurchase these shares. Most investors try to avoid investing inpenny stocks, and many would shy away from a company tradingfor 50 Russian Roubles per share, which equates to $1.50 US per share. As a result, the majority of ADRs range between $10 and$100 per share. If, in the home country, the shares were worthconsiderably less, then each ADR would represent several realshares.
There are three different types of ADR issues:
• Level 1 - This is the most basic type of ADR whereforeign companies either do not qualify or do not wish tohave their ADR listed on an exchange. Level 1 ADRs arefound on theOTC market and are an easy andinexpensive way to gauge interest for its securities inNorth America. Level 1 ADRs also have the loosest
• Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs have slightly morerequirements from the SEC but they also get higher
visibility trading volume.
• Level 3 - The most prestigious of the three, this is whenan issuer floats a public offering of ADRs on a U.S.exchange. Level 3 ADRs are able to raise capital and gainsubstantial visibility in the U.S. financial markets.
The advantages of ADRs are twofold. For individuals, ADRs arean easy and cost effective way to buy shares in a foreign company.They save considerable money by reducing administration costsand avoiding foreign taxes on each transaction. Foreign entitieslike ADRs because they get more U.S. exposure and allow them totap into the wealthy North American equity markets. In return, theforeign company must provide detailed financial information to thesponsor bank.
The International Legal Environment of Business
Managers must be aware of the global legal environment of business. The political, economic, cultural, and legdimensions are all important business considerations.
Dimensions of the International Environment of Business
Political Dimensions
The international business manager must deal with differenttypes of governments, ranging from democracies t
totalitarian states. In the Marxist form of governmeeconomic decisions were centralized. A centralizedeconomy limits the supply of goods coming from outside thecountry, the price that can be charged for goods inside thecountry, and the amount of currency that can be taken out of the country by multinational businesses.
Every business manager should do a country analysis.There are four economic factors that especially affbusiness investment.
1. Difference in size and economic growth rate of variousnation-states.
Why place a business, especially a retail business, ieconomy that isn’t growing?
2. The impact of central planning versus a mareconomy on the availability of supplies.
If you are relying on the government to ensure that you’ll havethe supplies you need, you are gambling that they want you tosucceed as much as you want to succeed.
3. The availability of disposable income. If the people of the country you are investing in can’t afford your product, they won’t buy it and you’ll have wasted a largeinvestment.
4. The existence of an appropriate transportationinfrastructure.
If you can’t ship your product or receive materials to make the
product, you’re in deep stuff!
Cultural Dimensions
Culture may be defined as learned norms of a society thatare based on values, beliefs, and attitudes. If people of thesame area speak the same language, the area is often saidto be culturally homogeneous. Religion is a strong builder of common values. Example nations of that type of culture areIran and Saudi Arabia.
A failure to understand that some cultures are based onascribed group membership (gender, family, age, or ethnicaffiliation) rather than onacquired group membership(religious, political, professional, etc) as in the West, canlead to business mistakes.Another important cultural factor is attitude towards work .Mediterranean and Latin American cultures base their work
affiliation on family and place more emphasis on leisure thanon work.Business managers must carefully consider language,religion attitudes toward work and leisure, family versusindividual reliance, and numerous other cultural values when
planning to do business in another nation-state.
Legal Dimensions
Business managers are guided by the legal system of their own nation as well as the legal system of the host countryand by international law when they venture into foreignterritory.
National Legal Systems
Business managers are advised to learn about the legalsystem of a country and its potential impact in such area ascontracts, investments, and foreign law before conductingbusiness in that country. The five major families of law are:common law, civil law, Islamic law, socialist law, and Hindulaw.
Family
CharacteristicsCommon law Primary reliance is on case law and
precedent instead of statutory law.Courts can declare statutory lawunconstitutional.
Romano-Germaniccivil law
Primary reliance is on codes andstatutory law rather than on case law. Ingeneral, the high court cannot declare
laws of parliament unconstitutional (anexception is the German ConstitutionalCourt).
Islamic law Is derived from the Shari’a, a code of rules designed to govern the daily livesof all Muslims
Socialist law Is based upon the teaching of KMarx. No private property is
recognized. Law encourages thecollectivization of property and themeans of production and seeks toguarantee national security. Accordingto classical Marxist theory, both the law
and the state will fade away as peopleare better educated to socialism andadvance toward the ultimate stage of pure communism.
Hindu law Is derived from the Sastras. Hindu lawgoverning the behavior of people in eachcaste. Primarily concerned with familymatters and succession. Has been
codified into India’s national legalsystem.
International Law
Public international law governs the relationships betweennation-states. Private international lawgoverns therelationships between private parties involved in transactionsacross national borders.The sources of international can be found in custom, treatiesbetween nations, judicial decisions of international courts,decisions of national and regional courts such as the U.S.Supreme Court, scholarly writings, and internationaorganizations.International law includes laws governing (1) exit visas andwork permits; (2) tax and antitrust matters; (3) contracts,patents, trademarks and copyrights; (4) bilateral treaties of
commerce and friendship between nations and multilateraltreaties of commerce such as NAFTA, EU, and the WTO.
International trade is exporting goods and services from acountry and importing goods and services into a country.There are two traditional theories of trade relationships. Thetheory of absolute advantage states that an individual nationshould concentrate on exporting the goods that it canproduce most efficiently. The theory of competitiveadvantage arose out of the realization that a country did nothave to have an absolute advantage in producing a good inorder to export it efficiently; rather, it would contribute toglobal efficiency if it produced specialized products simplymore efficiently than others did.Trade is generally considered to be the lease risky means of
doing international business because it demands littinvolvement with a foreign buyer or seller.An export management company is a company licensed tooperate as the representative of many manufacturers withexportable products. These management companies areprivately owned by citizens of nations-states and have long-standing links to importers in many countries. They provideexporting firms with market research, identify potenti
buyers, and assist the firms in negotiating contracts. Export trading companies, which are guided by the Export TradingAct in the U.S., comprise those manufacturers and banksthat either buy the products of a small business and resellthem in another country or sell products of sevcompanies on a commission basis. Foreign distributors,which are retained by small and medium-sized companies,purchase goods at a discount and resell them in the foreignor host country. Foreign sales representatives differ fromforeign distributors in that they do not take title to the goodsbeing exported. Rather, they usually maintain a principal-agency relationship with the exporter.
International Licensing and Franchising
International licensing is a contractual agreement by whicha company (licensor) makes its trade secrets, trademarks,patents, or copyrights (intellectual property) available to a
foreign individual or company (licensee) in return either for royalties or for other compensation. All licensinagreements are subject to restrictions of the host company.International franchising permits a licensee of a trademarkto market the licensor’s goods or services in a particular
nation. Often, companies franchise their trademark to avoida nation-state’s restrictions on foreign direct investment.Also, political instability is less likely to be a threat toinvestment when a local franchisee is running the business.
Foreign Direct Investment
Direct investment in foreign nations is usually undertakenonly by established companies. Foreign direct investmentmay take one of two forms: the multinational either creates awholly or partially owned and controlled foreign subsidiary inthe host country, or enters into a joint venture with anindividual, corporation, or government agency of the hostcountry.Large multinationals choose to create foreign subsidiariesfor several reasons: (1) to expand their foreign markets, (2)to acquire foreign resources, including raw materials, (3) to
improve their production efficiency, (4) to acquire knowledge,and (5) to be closer to their customers and competitors.Joint ventures, which involve a relationship between two or more corporations or between a foreign multinational and anagency of a host country government or a host countrynational, are usually set up for a specific undertaking over alimited period of time.
Risks of Engaging in International Business
Expropriation of Private Property
Expropriation – the taking of private property by a hostcountry government either for political or for economicreasons – is one of the greatest risks companies take whenthey engage in international business.
Bi-lateral investment treaties (BITs), which are negotiatedbetween two governments, obligate the host government toshow fair and nondiscriminatory treatment to investors fromthe other country.
Sovereign Immunity DoctrineAnother risk for companies engaged in internationbusiness is the sovereign immunity doctrine, which allowsa government expropriating foreign-owned private propertyto claim that it is immune from the jurisdiction of courts in theowner’s country because it is a government not a private-sector entity.
Act-of-State Doctrine
This doctrine holds that each sovereign nation is bound torespect the independence of every other sovereign state andthat the courts of one cannot rectify the injustices done in thecourts of another.
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