IBM Unit 1

IBM UNIT 1 - INTRODUCTION
Topics Covered - International Business Definition Internationalizing businessAdvantages factors causing globalization of business- international business environment
country attractiveness Political, economic and cultural environment Protection Vs
liberalization of global business environment.
Table of Contents
1.1
International Business ............................................................................................... 1
1.2 Definition:....................................................................................................................... 2
1.2.1 Nature of International Business.............................................................................. 2
1.2.2 Scope of International Business............................................................................... 2
1.2.3 Need for International Business............................................................................... 2
1.2.4 Reasons for Recent International Business Growth................................................. 3
1.2.5 Problems in International Business.......................................................................... 3
1.2.6 Methods of International Business........................................................................... 3
1.3
Globalization ............................................................................................................. 6
1.3.1
Benefits of Globalization ................................................................................... 7
1.3.2
Factors Causing Globalization of Business........................................................ 8
1.4
International Business Environment........................................................................ 10
1.4.1 Country Attractiveness........................................................................................... 11

1.4.2 Country Attractiveness Company Strength Matrix............................................. 12
1.1 International Business
Comprises all commercial transactions (private and governmental, sales, investments,

logistics, and transportation) that take place between two or more regions, countries
and nations beyond their political boundaries.
Students majoring in International Business at Saunders College of Business, learn
how to serve customers in international markets.
They also learn how to take a local business global.
Immersion in another nation's culture, values, and business practices is the key to
international business success.
Students gain an understanding of how people in other countries live and develop
business strategies that meet the needs and wants of customers. Specific courses may
include topics in strategic planning, marketing, government relations, and policy
analysis.
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This material is proprietary to KV Institute of Management, a Nationally Ranked B School in Coimbatore and cannot be
copied or duplicated for use outside of KV. Violators will face infringement proceedings of copyright laws.
A successful product in one country does not guarantee success in another.

At Saunders College, we teach our students what it really means to have a global
business.
We stress the values of diversity and understanding students graduate with the
ability to take a problem and solve it while also factoring in variables such as
language, customs and government policy.
1.2 Definition:
International Business is the process of focusing on the resources of the globe and
objectives of the organisations on global business opportunities and threats.
International business defined as global trade of goods/services or investment.
More comprehensive view does not focus on the firm but on the exchange process
Free Trade occurs when a government does not attempt to influence, through quotas
or duties, what its citizens can buy from another country or what they can produce
and sell to another country.
The Benefits of Trade allow a country to specialize in the manufacture and export of
products that can be produced most efficiently in that country.
The Pattern of International Trade displays patterns that are are easy to understand
(Saudi Arabia/oil or Mexico/labor intensive goods).
Others are not so easy to understand (Japan and cars).
1.2.1 Nature of International Business

1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets
1.2.2 Scope of International Business
1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange
1.2.3 Need for International Business

1. To achieve higher rate of profits
2. Expanding the production capacity beyond the demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions
6. Availability of technology and managerial competence
7. Cost of manpower, transportation
8. Nearness to raw material
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9. Liberalization, Privatization and Globalization (LPG)
10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO), decreasing
costs in telecommunications and transportation; and freer capital markets
1.2.4 Reasons for Recent International Business Growth
1. Expansion of technology
2. Business is becoming more global because
Transportation is quicker
Communications enable control from afar
Transportation and communications costs are more conducive for
international operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources
enable Companies to take better advantage of international opportunities
1.2.5 Problems in International Business

1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy
1.2.6 Methods of International Business
1. Joint Ventures
2. Contract Manufacturing
3. Licensing
4. Franchising
5. Exporting
1. Joint Venture
The term Joint Venture applies to those strategic alliances where there is equity
participation from both the foreign entrant and the local collaborator.
The equity participation can be of different ratios, ranging from a minority stake,
equal stake to a controlling stake or a more predominant majority stake.
From the perspective of the foreign entrant, a joint venture has the following
advantages:
o Decrease the capital risk involved.
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o Leverage the local companys facilities, in manufacturing, distribution and

retailing.
o Leverage the local companys managerial capability in the local environment.
o Leverage the local companys contacts with the government to get green
signals.
Many companies avoid having joint venture due to the complexity involved in
coordinating policies, decisions and execution with a different company.
There are instances when companies which have the ability to take the risk involved
in entering a new market still enter into joint venture.
This is often a result of the policies laid out by governments in many emerging
markets.
For example, China has a policy wherein foreign companies have to enter joint
collaboration with state owned companies to even set up shop there.
As in India, the government has policies which prevent foreign companies from
having full ownership in certain industries. In such cases, foreign companies end up
having to enter into joint venture to take advantage of the low cost of manufacturing
and the large size of the markets.
Still, the disadvantages or hurdles stay which a foreign company has to deal with to
make its venture successful. Some of disadvantages of joint venture are:
o Difference in culture.
o Difference in managerial styles.
o Differences in the motivation behind the participation. Communication
problems.
o Selection of the right partner.
2. Contract Manufacturing
Contract manufacturing has a limited role as an entry strategy and is more often used
as a compliment to other entry strategies.
It is used in conjunction with strategies like wholly owned subsidiaries or
franchising.
Contract Manufacturing is also often used when a company enters a new market and
has an activity that is required but is not a core nor is proprietary in nature, like the
manufacturing of clothes, or simple goods like clothing irons and other consumer
goods.
In most of the industries where contract manufacturing is resorted to, the core
activities of the company lie more in marketing and research and development rather
than in manufacturing.
Below are the lists of advantages and disadvantages in resorting to contract
manufacturing as an entry method.
Advantages:
o Less capital required.
o Low managerial risk.
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o Focus on core activities.
o Less complicated exit problems.
o Less complicated division of responsibility.
Disadvantages:
o
o
o
o
Chance for a lack of control on certain product parameters.

Differences in quality standards.
Scalability of problems.
Selection of vendors.
3. Licensing
Licensing is a common method of international market entry for companies with a
distinctive and legally protected asset, which is a key differentiating element in their
marketing offer.
It involves a contractual arrangement whereby a company licenses the rights to
certain technological know-how, design, patents, trademarks and intellectual property
to a foreign company in return for royalties or other kinds of payment.
For example, Disney's mode of entry in Japan had been licensing.
Because little investment on the part of the licensor is required, licensing has the
potential to provide a very large ROI.
However, because the licensee produces and markets the product, potential returns
from manufacturing and marketing activities may be lost.
Here are several conditions where licensing is favorable over other entry methods:
o Import and investment barriers.
o Legal protection possible in target environment.
o Low sales potential in target country.
o Large cultural distance.
o Licensee lacks ability to become a competitor.
Licensing offers businesses many advantages, such as rapid entry into foreign
markets and virtually no capital requirements to establish manufacturing operations
abroad.
Returns are usually realized more quickly than for manufacturing ventures.
The other major advantage of licensing is that, despite the low level of local
involvement required of the international licensor, the business is essentially local
and is in the shape of the local business that holds the license.
As a result, import barriers such as regulation or tariffs do not apply.
4. Exporting
Exporting is one of the methods that organizations can use to enter foreign markets.
In this entry method, products produced in one country are marketed in another
country through marketing and distribution channels.
Thus, it requires a significant investment in marketing strategies.
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In reality, exporting is the most traditional and well-established form of operating in

foreign markets.
It can be further categorized into direct or indirect export.
Direct Export:
The organization uses an agent, distributor, or overseas subsidiary, or acts via a

Government agency.
Usually, companies export through local agents or distributors mainly because they
have local knowledge that is important in conducting the business; they speak the
language, understand the local business, and know who the customers are and how to
reach them.
Indirect Export:
Products are exported through trading companies (common for commodities like
cotton and cocoa), export management companies, piggybacking and counter-trade.
The main advantage of indirect exporting is that the manufacturer/exporter does not
need too much expertise and can count on trading companies and/or export
management companies knowledge.
In the counter-trade method there are two separate contracts involved, one for the
delivery and payment for the goods supplied and the other for the purchase and
payment for the goods imported.
The seller, in fact, accepts products and services from the importing country in partial
or total payment for his exports. This method is suited for situations where
competition is low and currency exchange is difficult.
5. Wholly Owned Subsidiaries

Many organizations prefer to establish their presence in foreign markets with 100%
ownership through wholly owned subsidiaries.
Under this method, organizations obtain greater control over operations and higher
profits since there is no ownership split agreement.
However, such entry method requires large investments and faces higher risks,
especially in the political, legal and economical arenas.
There are two approaches for the wholly owned subsidiaries entry method; one is
through acquisition and the other through green field investments.
Greenfield investment means using funds to build an entirely new facility.
Even though such approach entails full control and no risk of cultural conflicts, its
costs are extremely high, and returns on investment are obtained in the long-run due
to the extent of time required to build the facility, start operations, and attain
economies of scale and the experience-curve.
1.3 Globalization
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Globalization implies the opening of local and nationalistic perspectives to a broader

outlook of an interconnected and interdependent world with free transfer of capital,
goods, and services across national frontiers.
1.3.1
1.
Benefits of Globalization
Free Trade
Free trade is a way for countries to exchange goods and resources.
This means countries can specialize in producing goods where they have a
comparative advantage (this means they can produce goods at a lower opportunity
cost).
When countries specialize there will be several gains from trade
o Lower prices for consumers
o Greater choice of goods
o Bigger export markets for domestic manufacturers
o Economies of scale through being able to specialise in certain goods
2. Free Movement of Labor

Increased labor migration gives advantages to both workers and recipient countries.
If a country experiences high unemployment, there are increased opportunities to
look for work elsewhere.
This process of labor migration also helps reduce geographical inequality.
This has been quite effective in the EU, with many Eastern European workers
migrating west.
Also, it helps countries with labor shortages fill important posts.
For example, the UK needed to recruit nurses from the far east to fill shortages.
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3.
Increased Economies of Scale.

Production is increasingly specialized.
Globalization enables goods to be produced in different parts of the world.
This greater specialization enables lower average costs and lower prices for
consumers.
4. Greater Competition
Domestic monopolies used to be protected by lack of competition.
However, globalization means that firms face greater competition from foreign firms.
5.
Increased Investment
Globalization has also enabled increased levels of investment.
It has made it easier for countries to attract short term and long term investment.
Investment by multinational companies can play a big role in improving the
economies of developing countries.
1.3.2 Factors Causing Globalization of Business

1. Technological Advancement
Technological advancement at almost every level, from widespread Internet access to
standardization of transport containers and rapid global transportation, serves as a
key driver of globalization.
Standardization of manufacturing processes allows businesses to harness the
economies of scale that make it feasible to serve a global-sized market, and reliable,
worldwide transportation provides the necessary element to build a supply chain to
serve that market.
The 24/7 nature of the Internet gives consumers easy access to products from across
the world and, in turn, drives a need for globalization in marketing.
2. Global Communication
Global communication, aided in large part by online communication channels, such
as social media, aid in the transmission not only of ideas, but of social norms and
wants.
In essence, global communication leads to more homogenized tastes in everything
from tablet computers to music.
This trend toward global-level interest in products, regardless of origin point, calls
for marketing that deals with brands from a global perspective, rather than a local or
even national level.
Marketers must craft imagery and messages that transcend cultural particulars and
reflect universally appealing core ideas.
3. Capital Mobility
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Capital now moves across national borders with comparative ease, which makes it
easier for companies to secure financing from a variety of sources.
This ability to secure funding from abroad, should domestic sources prove unwilling,
can facilitate domestic growth and foreign expansion.
In order to secure foreign funding, a businesss marketing team must prove capable
of demonstrating that, for example, a foreign market exists for the businesss
products, and that it knows how to address both domestic and foreign markets to
capture share in both.
4. Considerations
Globalization presents a conundrum for small business owners.
On the one hand, small businesses often find themselves competing with and
marketing in competition with better funded global brands.
On the other hand, these same businesses have access to a worldwide consumer base
that can prove a substantial source of income.
Choosing between offering service to a worldwide consumer base or focusing on
capturing local and regional business means weighing a number of factors, including
logistics, expense, and the difficulty inherent in developing global-friendly marketing
materials.
Although some businesses lend themselves to serving the global market, selling
information products for example, many small businesses opt out of globalization.
5. The Reduction and Removal of Trade Barriers
Since the end of World War II, the General Agreement on Tariffs and Trade (GATT)
and its successor, the WTO, have reduced tariffs and various non-tariff barriers to
trade, enabling more countries to exploit their comparative advantage.
Developing countries continue to drive the global recovery, but their output growth is
also expected to moderate to 6.0 per cent during 2011-2012, down from 7.0 per cent
in 2010, because of the slowdown in the advanced countries and phasing out of
stimulus measures.
Developing Asia, led by China and India, continues to show the strongest growth
performance, but some moderation (to around 7 per cent) is expected in 2011 and
2012.
6. High unemployment is the Achilles heel for the recovery
The Uruguay Round of trade negotiations (1986-94) was the real watershed for
global trade.
Here, a large package of measures was agreed, which freed up trade in both goods
and in services.
As a result, the volume of world trade rose by 50% just in the 6 years following the
conclusion of the Uruguay Round.
Equally important is the number of countries taking part in free trade negotiations.
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In 1948, when the GATT treaty became effective, there were only 23 Contracting
Parties to the agreement.
Just over 60 years later, there are now 153 member states of the WTO who all enjoy
the benefits of free trade based on the principle of comparative advantage.
Accordingly, between 1948 and 2008, trade rose from only 5% to a massive >25% of
world GDP.
This means countries are becoming more and more reliant upon each other for their
export earnings, income and employment.
This exposes them to the international trade multiplier, where domestic business
cycles become vulnerable to changes in the level of economic activity in the rest of
the world.
7. Transport Costs
Improvements in containerization have drastically lowered freight charges.
For example, over the last 25 years, sea transport unit costs have fallen by over 70%,
while air-freight costs have fallen by 3-4% year-on-year.
The result has been a boost in trade flows, as transport costs are now less likely to
cancel out the gains from comparative advantage.
However the rise in sea and air transport has also caused great concern over the
negative externalities of global trade.
Indeed recent estimates that CO2 emissions will rise by >70% by 2020 have led to
calls for green taxes on shipping transport.
If these go ahead, they will partially offset the falls in transport costs, hence the
process of globalization will be dampened to some extent.
8. Growth of the Internet
The growth of the internet has increased e-commerce, enabling firms of all sizes to
compete more easily in global markets.
Essentially, the internet acts as a 24-hour shop front allowing consumers all over the
world to buy products online and around the clock, from whoever happens to be
offering the best deal.
For the firm, it therefore provides cheap marketing with global reach, such that even
small local businesses can afford to serve customers abroad.
Accordingly, the internet gives all firms - both domestic and MNCs alike - easier
access to foreign markets.
We now find that international trade is no longer the sole preserve of the larger firm.
It can now even be undertaken by, say, a local antiques shop, which can either set up
its own website or sell through an online auction like eBay.
The end result is of course that more countries become interdependent and reliant
upon each other for the sale and provision of goods and services.
1.4 International Business Environment
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The international business environment can be defined as the environment in

different sovereign countries, with factors exogenous to the home environment of the
organization that influences decision-making on resource use and capabilities.
This includes the social, political, economic, regulatory, tax, cultural, legal, and
technological environments.
1.4.1 Country Attractiveness
Country attractiveness is a multidisciplinary concept at the crossroads

of development economics, financial economics, comparative law and political
science: it aims at tracking and contrasting the relative appeal of different territories
and jurisdictions competing for scarce investment inflows, by scoring
them quantitatively and qualitatively across ad hocseries of variables such as GDP
growth, tax rates, capital repatriation etc.
There are multiple factors determining host country attractiveness in the eyes of large
foreign direct institutional investors, notably pension funds and sovereign wealth
funds. Research conducted by the World Pensions Council (WPC) suggests that
perceived legal/political stability over time and medium-term economic growth
dynamics constitute the two main determinants.
Some development economists believe that a sizeable part of Western Europe has
now fallen behind the most dynamic amongst Asias emerging nations, notably
because the latter adopted policies more propitious to long-term investments:
Successful countries such as Singapore, Indonesia and South Korea still remember
the harsh adjustment mechanisms imposed abruptly upon them by the IMF and
World Bank during the 1997-1998 Asian Crisis What they have achieved in the
past 10 years is all the more remarkable: they have quietly abandoned the
Washington consensus [the dominant Neoclassical perspective] by investing
massively in infrastructure projects this pragmatic approach proved to be very
successful.
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1.4.2 Country Attractiveness Company Strength Matrix
(1) Geographically,
The country is located in the centre of key trading partner countries.
Timber Wolf would be able to expect demand from Paraguayans for its hiking boots
because of the country's rough terrain.
Despite severe climate in particular seasons for parts of the region, Paraguay's large
subtropical climate provides a favourable condition to operate a manufacturing plant.
The country also offers electricity and hide, major resources for Timber Wolf's shoe
manufacturing operation, at lower costs due to the abundance of hydropower and
beef products.
Taking these factors into consideration, the Physical Geography section receives a
score of 5.
(2) Politically,
Paraguay offers many incentives to attract foreign direct investment and has laws
to protect the rights of foreign investors.
In addition, the country's MERCOSUR membership would provide Timber Wolf
with many advantages over trade with other member countries.
However, the political risks of the country outweigh these opportunities.
In fact, Paraguay's transition to democracy has not been completed.
The leading political party is split into two oppositional factions, creating an
unstable government.
Also, the corrupted judicial system impedes the enforcement of property rights,
and that makes expropriation a possibility.
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As a result, the Political Environment section receives a score of 3.
(3) The economic

Ideology of Paraguay suggests that the government still plays a major role in the
economy, and the situation does not seem to change in the near future.
The country's privatization efforts are still in their infancy.
There has been declining annual growth, increased foreign debt, continuous
currency devaluation, and a negative balance of trade.
In addition, Paraguay's infrastructure is weak.
Taking these factors into consideration, the Economic Environment section
receives a score of 2.
(4) For the social-cultural environment,
Most people in Paraguay have a basic education, making the marketing effort
easier.
A large population in Asuncion would provide a sufficient labour pool of
potential employees, and they would also be a target market for Timber Wolf's
shoes.
Labour unions exist, but it would not be difficult to prevent the unionization.
Taking these factors into consideration, Paraguay's Social-Cultural environment
receives a score of 6.
Thus, Paraguay's overall score on country attractiveness is 4.
1.4.3 Political Environment
A political system is basically the system of politics and government in a country.
It governs a complete set of rules, regulations, institutions, and attitudes.
A main differentiator of political systems is each systems philosophy on the rights of

the individual and the group as well as the role of government.
Each political systems philosophy impacts the policies that govern the local
economy and business environment.
There are more than thirteen major types of government, each of which consists of
multiple variations.
Lets focus on the overarching modern political philosophies.
At one end of the extremes of political philosophies, or ideologies, is anarchism,

which contends that individuals should control political activities and public
government is both unnecessary and unwanted.
At the other extreme is totalitarianism, which contends that every aspect of an

individuals life should be controlled and dictated by a strong central government.
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In reality, neither extreme exists in its purest form. Instead, most countries have a
combination of both, the balance of which is often a reflection of the countrys
history, culture, and religion.
This combination is called pluralism, which asserts that both public and private
groups are important in a well-functioning political system.
Although most countries are pluralistic politically, they may lean more to one
extreme than the other.
In some countries, the government controls more aspects of daily life than in others.
While the common usage treats totalitarian and authoritarian as synonyms, there is a
distinct difference.
For the purpose of this discussion, the main relevant difference is in ideology.
Authoritarian governments centralize all control in the hands of one strong leader or
a small group of leaders, who have full authority.
These leaders are not democratically elected and are not politically, economically, or
socially accountable to the people in the country.
Totalitarianism, a more extreme form of authoritarianism, occurs when an

authoritarian leadership is motivated by a distinct ideology, such as communism.
In totalitarianism, the ideology influences or controls the people, not just a person or
party.
Authoritarian leaders tend not to have a guiding philosophy and use more fear and
corruption to maintain control.
Democracy is the most common form of government around the world today.
Democratic governments derive their power from the people of the country, either by
direct referendum (called a direct democracy) or by means of elected representatives
of the people (a representative democracy).
Democracy has a number of variations, both in theory and practice, some of which
provide better representation and more freedoms for their citizens than others.
What businesses must focus on is how a countrys political system impacts the
economy as well as the particular firm and industry.
Firms need to assess the balance to determine how local policies, rules, and
regulations will affect their business. Depending on how long a company expects to
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operate in a country and how easy it is for it to enter and exit, a firm may also assess
the countrys political risk and stability.
A company may ask several questions regarding a prospective countrys government

to assess possible risks:
o How stable is the government?
o Is it a democracy or a dictatorship?
o If a new party comes into power, will the rules of business change
dramatically?
o Is power concentrated in the hands of a few, or is it clearly outlined in a
constitution or similar national legal document?
o How involved is the government in the private sector?
o Is there a well-established legal environment both to enforce policies and
rules as well as to challenge them?
o How transparent is the governments political, legal, and economic decisionmaking process?
While any country can, in theory, pose a risk in all of these factors, some countries
offer a more stable business environment than others.
In fact, political stability is a key part of government efforts to attract foreign

investment to their country.
Businesses need to assess if a country believes in free markets, government control,

or heavy intervention (often to the benefit of a few) in industry.
The countrys view on capitalism is also a factor for business consideration.
In the broadest sense, capitalism is an economic system in which the means of

production are owned and controlled privately.
In contrast, a planned economy is one in which the government or state directs and
controls the economy, including the means and decision making for production.
Historically, democratic governments have supported capitalism and authoritarian

regimes have tended to utilize a state-controlled approach to managing the economy.
As you might expect, established democracies, such as those found in the United
States, Canada, Western Europe, Japan, and Australia, offer a high level of political
stability.
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While many countries in Asia and Latin America also are functioning democracies,
their stage of development impacts the stability of their economic and trade policy,
which can fluctuate with government changes.
Within reason, in democracies, businesses understand that most rules survive changes
in government.
Any changes are usually a reflection of a changing economic environment, like the
world economic crisis of 2008, and not a change in the government players.
This contrasts with more authoritarian governments, where democracy is either not in
effect or simply a token process.
China is one of the more visible examples, with its strong government and limited
individual rights.
However, in the past two decades, China has pursued a new balance of how much the
state plans and manages the national economy.
While the government still remains the dominant force by controlling more than a
third of the economy, more private businesses have emerged.
China has successfully combined state intervention with private investment to

develop a robust, market-driven economyall within a communist form of
government. This system is commonly referred to as a socialist market economy
with Chinese characteristics.
The Chinese are eager to portray their version of combining an authoritarian form of
government with a market-oriented economy as a better alternative model for
fledging economies, such as those in Africa.
This new combination has also posed more questions for businesses that are
encountering new issuessuch as privacy, individual rights, and intellectual rights
protectionsas they try to do business with China, now the second-largest economy
in the world behind the United States.
The Chinese model of an authoritarian government and a market-oriented economy

has, at times, tilted favour toward companies, usually Chinese, who understand how
to navigate the nuances of this new system.
Chinese government control on the Internet, for example, has helped propel home
grown, Baidu, a Chinese search engine, which earns more than 73 percent of the
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Chinese search-engine revenues. Baidu self-censors and, as a result, has seen its
revenues soar after Google limited its operations in the country.
Factors that influence international business
a) Economic System
The type of economic system a country builds is a political choice. Foreign countries
often will have different economic systems from your domestic market and
adjustments often need to be made to take these differences into account.
A country may operate in a market economy where private individuals own most of
the property and operate most of the businesses. A market economy is usually the
best economic environment for a foreign business because of the protection of private
property and contract rights.
Some countries lean more towards a socialist economy where many industries and
businesses are owned by the state. Operating businesses in this environment will be
more difficult, but products can still be produced and sold as people still pick their
jobs and earn money.
A few countries operate under a communistic economic system where the state
pretty much controls all aspects of the economy. Conducting business in this
environment ranges for difficult to impossible.
The reality is that all economies are mixed economies that take parts from two or
more of the 'pure' economic systems. For example, you can conduct business in
communist China in Hong Kong and other special areas where a market economy is
allowed to operate.
b) Government System
Businesses must often contend with different governmental systems.
Examples include democracies, authoritarian governments, and monarchies.
Some governments are easier to work with than others.
Democracies, for example, are answerable to their citizens and the rule of law.
Authoritarian regimes are usually answerable to no one, including the law. It is less
risky to conduct business in democracies and constitutional monarchies (a monarch
with a constitution that protects the public and subjects the monarch to the rule of
law) than in countries with authoritarian regimes.
c) Trade Agreements
Countries often enter into trade agreements to help facilitate trade between them.
If your country has entered into a trade agreement with another country, conducting
business in that country will usually be easier and less risky because the trade
agreement will provide some predictability and protection.
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One great advantage, for example, is that your products will be subjected to fewer
trade barriers that serve as obstacles to exporting your products into the country.
d) Formal Trade Barriers
A trade barrier is simply anything that makes it harder for a company to export
products to a foreign country.
Formal trade barriers are enacted by governments for the purpose of restricting
imports to protect a country's domestic industries.
Formal trade barriers include tariffs, which are taxes on imports that helps make
domestic products more competitive, and product quotas that limits the number of
products imported into the country.
e) Informal Trade Barriers
Governments may impose regulations that aren't primarily promulgated as barriers to

trade but have the same effect.
Examples can include specific product standards and health and safety standards that
businesses will be required to meet before the products can be sold.
1.4.4 Economic Environment

International management is the management of business operations conducted in
more than one country.
The fundamental tasks of business management including the financing production
and distribution of products and services, do not change in any substantive way when
a firm is transacting business across international borders.
The basic management functions of planning, organizing, leading and controlling are
the same whether a company operates domestically or internationally.
However, managers will experience greater difficulties and risks when performing
these management functions on an international scale. For example,
1. When US chicken entrepreneur Frank Purdue translated successful advertising
slogan into Spanish it takes a tough man to make a tender chicken came out as It
takes a virile man to make a chicken affectionate.
2. It took McDonalds more than a year to figure out that Hindus in India do not
eat beef. The companys sales took off only after McDonalds started making
burgers sold in India out of lamb.
3. In Africa the labels on bottles show pictures of what is inside so illiterate
shoppers can know what theyre buying. When a baby food company showed a
picture of an infant on its label, the product didnt sell very well.
4. United Airlines discovered that even colors can doom a product. The airline
handed out white carnations when its started flying from Hong Kong only to
discover that to many Asians such flowers represent death and bad luck.
The economic environment represents the economic conditions in the country where
the international organization operates.
18
This part of the environment includes such factors as economic development,

infrastructure, resource and product markets; and exchange rates, each of which is
discussed in the following sections.
In addition factors such as inflation, interest rates, and economic growth are also part
of the international economic environment
Economic Development:
Economic development differs widely among the countries and regions of the world.
Countries can be categorized as either developing or developed.
Developing countries are referred to as less developed countries (LDCs).
The criterion traditionally used to classify countries as developing is per capita
income, which is the income generated by the nations production of goods and
services divided by total population.
The developing countries have low per capita incomes.
LDCs generally are located in Asia, Africa, and South America. Developed countries
are generally located in North America , Europe and Japan.
Most international business firms are headquartered in the wealthier, economically
advanced countries,
However, smart companies are investing heavily in Asia, Eastern Europe and Latin
America.
For example the number of Internet users and the rate of e-commerce in Latin
America is rapidly growing. Computer companies have launched on line stores for
Latin American customers to buy computers over the Internet.
American Online sees Latin America as crucial to expanding its global presence,
even though Universe Online International (UOL) based in Brazil got a tremendous
head start over AOL.
These companies face risks and challenges today, but they stand to reap huge benefits
in the future.
Infrastructure:
A countrys physical facilities that support economic activities make up its

infrastructure which includes transportation facilities such as airports highways, and
railroads, energy producing facilities such as utilities and power plants and
communication facilities such as telephone lines and radio stations.
Companies operating in LDCs must contend with lower levels of technology and
perplexing logistical distribution and communication problems.
Undeveloped infrastructures represent opportunities for some firms, such as United
Technologies Corporation based in Hartford, Connecticut whose business include jet
engines air conditioning and heating systems and elevators.
Trade
19
Trade barriers are government-induced restrictions on international trade. Man-made

trade barriers come in several forms, including:
o Tariffs
o Non-tariff barriers to trade
o Import licenses
o Export licenses
o Import quotas
o Subsidies
o Voluntary Export Restraints
o Local content requirements
o Embargo
o Currency devaluation
Trade restriction
Most trade barriers work on the same principlethe imposition of some sort of cost
on trade that raises the price of the traded products.
If two or more nations repeatedly use trade barriers against each other, then a trade
war results.
Economists generally agree that trade barriers are detrimental and decrease overall
economic efficiency.
This can be explained by the theory of comparative advantage.
In theory, free trade involves the removal of all such barriers, except perhaps those
considered necessary for health or national security.
In practice, however, even those countries promoting free trade heavily subsidize
certain industries, such as agriculture and steel.
Trade barriers are often criticized for the effect they have on the developing world.
Because rich-country players set trade policies, goods, such as agricultural products
that developing countries are best at producing, face high barriers.
Trade barriers, such as taxes on food imports or subsidies for farmers in
developed economies, lead to overproduction and dumping on world markets, thus
lowering prices and hurting poor-country farmers.
Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates
for labor-intensive processed goods.
The Commitment to Development Index measures the effect that rich country trade
policies actually have on the developing world.
Another negative aspect of trade barriers is that it would cause a limited choice of
products and, therefore, would force customers to pay higher prices and accept
inferior quality.
In general, for a given level of protection, quota-like restrictions carry a
greater potential for reducing welfare than do tariffs.
Tariffs, quotas, and non-tariff barriers lead too few of the economy's resources being
used to produce tradeable goods.
20
An export subsidy can also be used to give an advantage to a domestic producer over
a foreign producer.
Export subsidies tend to have a particularly strong negative effect because in addition
to distorting resource allocation, they reduce the economy's terms of trade.
In contrast to tariffs, export subsidies lead to an over allocation of the economy's
resources to the production of tradeable goods.
1.4.5 Cultural Environment

Businesses do not exist in a vacuum, and even the most successful business must be
aware of changes in the cultures and societies in which it does business.
As society and culture change, businesses must adapt to stay ahead of their
competitors and stay relevant in the minds of their consumers.
Changing Preferences
A major socio-cultural factor influencing businesses and business decisions is

changing consumer preferences.
What was popular and fashionable 20 years ago may not be popular today or 10 years
down the road.
Different styles and priorities can undermine long successful products and services.
For example, a clothing company must constantly be aware of changing preferences
when creating new products or it will quickly become outdated.
Demographics
Changes in demographics are also a significant factor in the business world.

As populations age, for example, markets for popular music and fashions may shrink
while markets for luxury goods and health products may increase.
Additionally, changes in the proportion of genders and different racial, religious and
ethnic groups within a society may also have a significant impact on the way a
company does business.
Advertising Techniques
Advertising is perhaps the area of business most closely in touch with socio-cultural
changes.
Advertising often seeks to be hip and trendsetting, and to do this, advertising
agencies and departments cannot lose track of the pulse of the societies in which they
engage in business.
Changes in morals, values and fashions must all be considered when creating
outward facing advertising.
Internal Environment
In addition to a company's interactions with the market and its customers, sociocultural factors also impact a company's internal decision-making process.
21
For example, changing gender roles and increasing emphasis on family life have led
to increased respect for maternity and even paternity leave with organizations.
Additionally, attitudes towards racial discrimination and sexual harassment have
changed drastically over the years as a result of socio-cultural change.
Religion and Custom
Religion and custom are two of the most important factors impacting a business.
Every organization has to adapt itself to the prevalent customs and traditions in a
region.
A uniform business policy cannot be implemented throughout the world, as
allowances need to be made for the religious sensibilities of the local population.
Let us understand the concept in detail with the help of an example.
o McDonald's, one of the largest restaurant chains in the world, started its India
operations in 1996.
o Although McDonald's had been in business for roughly 40 years, during
which it had expanded to different parts of the world, its foray into the Indian
sector was met with skepticism.
o The prime reason why many people didn't give McDonald's a chance in India
was because most of the McDonald's restaurants around the world served beef
in their burgers.
o India, with its Hindu majority population, considers cow as sacred, and
vegetarianism is taken so seriously that many vegetarians avoid sitting with
someone having a non-vegetarian meal.
o The marketing heads at McDonald's were also aware of the vast diversity in
Indian food habits, and they had to come up with a menu that would appeal to
such a large number of people.
o To succeed in a country where frugality was an inherent characteristic,
McDonald's also had to work towards keeping the price of its products under
check, without compromising on the hygiene and quality factors.
o To succeed in such a behemoth and diverse market, McDonald's had to pay
attention to all these socio-cultural factors.
Change in Preferences
One of the most important socio-cultural trends which has an impact on a business is
the constantly changing preferences of customers.
A business may build a brand name for itself and model its core strategies in a certain
manner, but if it fails to recognize and adapt to the changing preferences of the
customers, it is doomed to fail.
The example given below will analyze this in detail.
o Nokia was one of the biggest mobile handset manufacturers until recently.
22

o In 2007, Apple launched the iPhone, which completely changed the rules in
the smartphone market.
o iPhone was a bold statement by Apple on what a phone could achieve.
o The launch of iPhone, and its subsequent critical and commercial acclaim,
was a clear indicator to all handset manufacturers that customers expected
quality experience while browsing the internet, listening to songs, watching
videos, etc. iPhone's unprecedented sales, despite the fact that it came with a
higher contract cost, was a testimony to the fact that the customers were
appreciative of innovation and technology, and didn't mind paying extra to
get the best thing in the market.
Change in Demographics
Demographics is another socio-cultural factor that has an impact on the fortunes of a

business.
The number of people living in a region, their ethnicity, age, gender, race, sex, etc.
are important factors to consider for any business organization.
An understanding of the demographics of the customer base can provide a business
with invaluable pointers towards launching new products, pricing, marketing
strategies, etc.
The following example will illustrate how demographics lead to a change in strategy.
o Harley Davidson, the iconic US-based motorcycle manufacturer, has
established itself as one of the premier bike makers in the world.
o Most of the customer base of Harley Davidson comprises Baby Boomers,
over the age of 35. After the World War II ended, America emerged as one of
the most powerful nations of the world.
o The period after the war was filled with optimism and exhilaration.
o The Baby Boomer generation grew up in a period marked with added
emphasis on individuality and adventure.
o Motorcycling had emerged as an alternate lifestyle, with most motorcyclists
preferring the heavy, cruiser bikes of Harley Davidson.
Marketing
Socio-cultural factors play a major role in the marketing strategy of a business.

In fact, the whole idea of marketing is to connect with the existing customers, and to
reach out to potential customers.
The way a society is composed, and the manner in which it views itself culturally,
plays an important role in the development of a robust marketing strategy.
The marketing strategies vary from one country to another, and the factors that
influence the strategy are literacy levels of the population, its core beliefs, its
sensitivities, willingness to change, etc.
In the following example, we will take a look at how Nestl had to change its
marketing policy to prevent itself from being in the center of a controversy.
23

o Nestl, one of the largest food-processing brands in the world, was involved in
a controversy in the 1970s, when it was accused of causing deaths and
malnutrition in infants in sub-Saharan Africa.
o The center of the controversy was Nestl's breastfeeding substitute - a baby
milk powder.
o The substitute was marketed aggressively all around the world, but in several
African countries, where literacy levels were low, people failed to realize that
the product was aimed to act as a substitute for those children, whose mothers
were unable to breastfeed them.
24

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IBM UNIT 1 - INTRODUCTION

International Business ............................................................................................... 1

Benefits of Globalization ................................................................................... 7

Factors Causing Globalization of Business........................................................ 8

International Business Environment........................................................................ 10

1.4.1 Country Attractiveness........................................................................................... 11

1.1 International Business

Comprises all commercial transactions (private and governmental, sales, investments,

IBM UNIT 1 - INTRODUCTION

A successful product in one country does not guarantee success in another.

1.2.1 Nature of International Business

1.2.3 Need for International Business

IBM UNIT 1 - INTRODUCTION

1.2.5 Problems in International Business

IBM UNIT 1 - INTRODUCTION

o Leverage the local companys facilities, in manufacturing, distribution and

IBM UNIT 1 - INTRODUCTION

Chance for a lack of control on certain product parameters.

IBM UNIT 1 - INTRODUCTION

In reality, exporting is the most traditional and well-established form of operating in

The organization uses an agent, distributor, or overseas subsidiary, or acts via a

5. Wholly Owned Subsidiaries

IBM UNIT 1 - INTRODUCTION

Globalization implies the opening of local and nationalistic perspectives to a broader

2. Free Movement of Labor

IBM UNIT 1 - INTRODUCTION

Increased Economies of Scale.

1.3.2 Factors Causing Globalization of Business

IBM UNIT 1 - INTRODUCTION

IBM UNIT 1 - INTRODUCTION

IBM UNIT 1 - INTRODUCTION

The international business environment can be defined as the environment in

1.4.1 Country Attractiveness

Country attractiveness is a multidisciplinary concept at the crossroads

IBM UNIT 1 - INTRODUCTION

1.4.2 Country Attractiveness Company Strength Matrix

IBM UNIT 1 - INTRODUCTION

As a result, the Political Environment section receives a score of 3.

(3) The economic

A political system is basically the system of politics and government in a country.

It governs a complete set of rules, regulations, institutions, and attitudes.

A main differentiator of political systems is each systems philosophy on the rights of

Lets focus on the overarching modern political philosophies.

At one end of the extremes of political philosophies, or ideologies, is anarchism,

At the other extreme is totalitarianism, which contends that every aspect of an

IBM UNIT 1 - INTRODUCTION

Totalitarianism, a more extreme form of authoritarianism, occurs when an

IBM UNIT 1 - INTRODUCTION

A company may ask several questions regarding a prospective countrys government

In fact, political stability is a key part of government efforts to attract foreign

Businesses need to assess if a country believes in free markets, government control,

The countrys view on capitalism is also a factor for business consideration.

In the broadest sense, capitalism is an economic system in which the means of

Historically, democratic governments have supported capitalism and authoritarian

IBM UNIT 1 - INTRODUCTION

China has successfully combined state intervention with private investment to

The Chinese model of an authoritarian government and a market-oriented economy

IBM UNIT 1 - INTRODUCTION

Businesses must often contend with different governmental systems.