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CHAPTER 1: GLOBALIZATION AND INTERNATIONAL BUSINESS

1.1

International Business
International business can be defined as any business that crosses the national borders
of a country. It includes importing and exporting; international movement of goods,
services, employees, technology, licensing, and franchising of intellectual property
(trademarks, patents, copyright and so on). International business includes investment
in financial and immovable assets in foreign countries. Contract manufacturing or
assembly of products for local sale or for export to other countries, establishment of
foreign warehousing and distribution systems, and import of goods from one foreign
country to a second foreign country for subsequent local sale is part of international
business.

1.2

Elements of International Business


1. Legal and Regulatory Framework: This framework refers to companies
having to comply with the law of the land they operate in. Companies
involved in international business may have to comply with laws of more than
one country. This certainly poses a challenge as each country has its own set of
laws. These companies have to ascertain that their scope of business is within
the regulatory framework set by the authorities of that country.
2. Financial Management: In a domestic scenario, all the payments of a
business involve the local currency. In an international scenario, for example,
a company may pay in Chinese Yuan for sourcing its materials from China,
pay wages in Malaysian Ringgits at its production base in Malaysia, and
receive payments in Euros from its customer in Germany. Hence, a company
has to deal with multiple currencies, exchange rate mechanisms, hedging of
currencies, banking systems, fluctuating interest rates and so on.
3. Trade Barriers and Tariffs: In a domestic scenario, a company can move its
goods and services almost freely within the country. But in international trade,
companies face issues like licensing, anti-dumping laws, quota restrictions,
and tariffs for their business operations in a foreign country or region
4. Accounting and Taxation: Domestic businesses need to comply with the
accounting and taxation standards prevailing in that country. A company with
international operations has to comply with the accounting standards and tax
laws of the foreign country as well.
5. Culture: In a domestic market, a business deals with a homogenous culture
whereas a company with international business has to deal with heterogeneous
cultures in multiple countries. The company's management has to study
different cultures and get accustomed to different languages, culture,
sentiments, and traditions of the foreign country in order to conduct business
productively.
6. Market Forces: Demographics of each country have its own perceptions
about different products and services. The local, political, economic, and
technological environments differ from country to country. While these
differences are at a macro level, at the micro level we have to consider several

other factors. They may be in terms of customer preferences, product


placement, pricing, advertising, distribution channels and so on. An
international company has to face the challenges of multiple regional
customers, each with unique requirements.
1.3

Globalization
Globalization is a process where businesses are dealt in markets around the world,
apart from the local and national markets. According to business terminologies,
globalization is defined as 'the worldwide trend of businesses expanding beyond their
domestic boundaries'. It is advantageous for the economy of countries because it
promotes prosperity in the countries that embrace globalization.

1.4

Drivers of Globalization
1. Global Market Place: International business has become easier since the
advent of internet and the emergence of e-business. A company must have a
good product, the right strategy and an appetite to take risk at the global
marketplace in order to do business internationally.
2. Emerging Markets: Compared to developed countries, developing countries
are growing at a healthy pace, thus reducing the barriers of trade. Emerging
markets provide an unexplored marketplace with unlimited potential and
scope for business. Any company with good or innovative products and
services cannot afford to ignore the opportunities provided by these emerging
markets. Foreign Direct Investment (FDI) policy of a nation lays down the
foundation for competitive and prosperous market conditions. Embracing
globalization has become a vital component of development strategy for
developing countries, and is being used as an effective instrument of economic
growth. Some countries like China, India, and Philippines also provide tax
holidays to foreign companies for setting up their business (in certain sectors)
in these countries. Such incentives make these countries an attractive
destination for companies looking for low cost production.
3. Small Domestic Market: A company, which is mature in its domestic market,
is driven to sell in more than one country because the sales volume achieved in
its own domestic market is not large enough to fully capture the manufacturing
economies of scale. For example, Nokia is an international company based in
Finland.
4. Diminishing Trade and Investment Barriers: The lowering of barrier to
trade and investments (by most countries around the world) also provides an
opportunity to companies looking for expanding their business. Expanding
into a foreign country provides access to low wage labourers, highly skilled
work force, larger market base and so on. Companies have a chance to set up
subsidiaries in low-cost countries for manufacturing their products. Easy flow
of goods and services results in the company literally designing the product in
one country, manufacturing the various components in different countries,
assembling the final product in a third country and marketing the product
across the world.

5. Technological Innovation: The advent of internet and e-commerce,


advancement of telecommunication, information technology, and
improvement in logistics have changed the dynamics of business operations.
The use of mobile telephony, wireless communications, and satellite
connectivity has reduced the time needed for decision making at an
international level. Constant innovation in technology has enhanced
information flow between geographically remote areas, thus bringing the
markets of different countries closer and paving the way for international
business.
6. Changing Demographics: Most developed countries face challenges in
sourcing workforce as the average age of the population is getting older. In the
next 10 years, most of the industrialized nations will have to depend on
sourcing its workforce from countries like India, China and other countries,
where the population is young, with abundance of skilled labour. India alone
produces close to five lakh engineers and one million English speaking
graduates and other diploma holders per year
7. Liberalization of Cross-Border Trade and Resource Movement: Over time
most governments have lowered restrictions on trade and foreign investment
in response to the expressed desires of their citizens and producers. The
primary motives for this change include giving citizens greater consumer
choice and lower prices, international competition making domestic producers
more efficient, and the hope that liberalization will cause other countries to
also lower trade barriers.
8. Development of Services That Support International Business: Services
provided by government, banks, transportation companies, and other
businesses greatly facilitate the conduct and reduce the risks of doing business
internationally.
9. Growing Consumer Pressures: Because of innovations in transportation and
communications technology, consumers are well-informed about and often
able to access foreign products. Thus competitors the world over have been
forced to respond to consumers demand for increasingly higher quality, more
cost-competitive offerings.
10. Increased Global Competition: The pressures of increased foreign
competition often persuade firms to expand internationally in order to gain
access to foreign opportunities and to improve their overall operational
flexibility and competitiveness.
11. Changing Political Situations: The transformation of the political and
economic policies of Eastern Europe, Vietnam, and China has led to vast
increases in trade between those countries and the rest of the world. In
addition, the improvements in national infrastructure and the provision of
trade-related services by governments the world over have further led to
substantial increases in foreign trade and investment levels

12. Expanded Cross-National Cooperation: Governments have increasingly


entered into cross-national treaties and agreements in order to gain reciprocal
advantages for their own firms, to jointly attack problems that one country
cannot solve alone, and to deal with areas of concern that lie outside the
territory of all countries. Often, such cooperation occurs within the framework
of international organizations such as the International Bank for
Reconstruction and Development (World Bank).
1.5

Modes to Enter in International Business


For a company that wants to expand internationally, the most common entry options
are listed as follows:
Export strategy.
Licensing.
Franchising.
Foreign direct investment.
1. Export Strategy: This method remains the most common means of entry into
international markets. Export strategy is a very attractive option that is merely an
extension of domestic operations. It also minimizes the risk component as well as the
capital requirement. The host company's involvement in the international market is
limited to identifying customers for marketing its products.
2. Licensing: A domestic company can license foreign firms to use the company's
technology or products and distribute the company's product. By licensing, the
domestic company need not bear any costs and risks of entering foreign markets on its
own, yet it is able to generate income from royalties. The reverse of this arrangement
is the risk of providing valuable technological knowledge to foreign companies, and
thereby losing some degree of control over its use. Monitoring licenses and
safeguarding company's Intellectual Property Rights can prove to be challenging in an
international scenario. Puma adopted licensing strategy post 1999.
3. Franchising: Licensing works well for manufacturing companies but franchising is a
better option for international expansion efforts of service or retailing companies.
Franchising has the same advantages as licensing. The franchisee bears almost all the
costs and risks in establishing the foreign operations. The franchiser's contribution is
limited to providing the concept, technology and training the franchisee in the already
established model. Maintaining quality poses the biggest challenge to the franchiser.
McDonalds uses franchising model.
4. Foreign Direct Investment (FDI): FDI is the investment made by a company in a
foreign country to start its operations. Various options available for an FDI are as
follows:
I.
Whole owned subsidiary - This option is viable if a company is willing to
take all the risks of all the operations pertaining to its business in a foreign
country. A subsidiary can be formed from scratch (green field investment) to
manufacture and market its products and services in a foreign country. A firm
can also export its products or services to other countries from its subsidiaries.
American Airlines is a wholly owned subsidiary of AMR Corp.
II.
Joint Ventures (JV) - This is a very popular mode of entry into foreign
markets, as it minimizes business risk and investment. It is owned by one or

more firms in proportion to their investment. If a JV is done with an existing


competitor, it could be termed as a strategic alliance. Sony Ericsson is an
example of joint venture between Sony, a Japanese company and Ericsson, a
Swedish company.
III.

Merger or acquisition - A company can merge into or acquire an existing


company with established operations in a foreign country. It saves a lot of time
in construction, initial setup, and regulatory approvals and so on. In the
bargain, the acquiring company can use all the established brand names,
distribution networks and so on of the acquired company. Eg. Proctor and
Gamble

IV.

Strategic investment - Any firm to a share in the profits, if any. The


shareholding can be a minority stake can purchase a stake in a foreign
company, whereby they are entitled and may be without voting rights.
Generally, the investing company does not participate in the management of
the target company.

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