MMPC 16 Ebooks Final

SELF GYAN
MMPC 16
INTERNATIONAL BUSINESS MANAGEMENT
TABLE OF
CONTENTS
01 LONG IMP QUESTIONS
02 EXTRA LONG QUESTIONS
03 VERY IMP SHORT NOTES
04 EXTRA SHORT NOTES

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MMPC 16- International Business Management

FIRST PRIORITY MOST IMPORTANT QUESTIONS
Q1- Explain Foreign Direct Investment (FDI) Theories? (v v v v v imp)
ANS-Despite Multinational Enterprises’ dominance of world production and trade in the post-World
War II period, the search for FDI theories is a contemporary phenomenon. Stephen, H. Hymer
demonstrated in his doctoral thesis ‘The International Operations of National Firms: A Study of
Direct Investment’ (published in 1976) that traditional theories of international trade and capital
movements were incapable of illuminating the contribution of MNEs in foreign countries in 1960.
The existence of MNEs was due to local firms manipulating market power and acting as agents. The
approaches used to clarify the activities of multinational enterprises have been classified into four
groups. The first is the market imperfection approach, whose theoretical framework considers
specific, also known as ownership advantages, enjoyed by an enterprise. Through these benefits, FDI
is restricted, and international companies also collude with other firms to increase their profits.
Second, the Product Life Cycle model examines various stages of the company. There are
chronological stages in the life cycle of a company’s innovated products. Third, the failure of
traditional theories of international trade and capital movements based on the assumption of
perfect competition, as well as its prevalence in various segments of the international market,
provide ample scope. It gave rise to the transaction cost theory of FDI, which states that firms make
foreign investments to increase their competence and reduce transaction costs. Finally, the eclectic
paradigm that surrounds other FDI theories provides a logical framework for conducting empirical
investigations that are most relevant to the problem at hand. The eclectic paradigm is not a theory in
itself, but rather a synthesis of contradictory theories.
Market Imperfections Approach
The expansion of MNEs has always perplexed neoclassical economists because of how these
enterprises can make profits in foreign countries where production costs are higher than in the
domestic market. Because many people were unaware of the host country’s history, it was difficult
to take advantage of the situation. It may be preferable for the foreign company to pass on its
reward to local entrepreneurs, who, along with other local (inherent) advantages, could supply at a
lower cost than the foreign investors. The response to this paradoxical situation was present in the
existence of the imperfect market in the foreign countries. Hymer presented a case for market
imperfection approach. According to him, the traditional theories of international trade and capital
movements were not enough to explain the association of MNEs in international market. Their
presence was observed to be due to market imperfections. The supporters of this approach thought
that the prevailing market imperfections were ‘structural’ (imperfections of monopolistic nature)
and arose from the innovation of better technology, access to capital, control of distribution system,
economies of scale, differentiated products (by the introduction of different advertising methods)
and improved management. All these factors facilitated the foreign enterprises more than offset the
shortcomings from their operations in the foreign market and the additional cost incurred there.
Hymer was primarily concerned about the market power of MNEs, which limited the entry of other
firms. Market power is the result of collusion with others in the industry to avoid competition,
resulting in higher profits. There is a one-way casual link between the firm’s behaviour and the
imperfect market structure. Market power was first developed in the home country, and as profit
margins in the home country shrank, the firm invested abroad and gained control of the foreign
market through patent rights. Because the profit margin in the home country has decreased, the
firm invests abroad and controls the foreign market through patent rights.
The Eclectic Paradigm
This theory on FDI was proposed by John H. Dunning in 1979. Eclectic Paradigm has three
components:
 OLI Model (ownerships, locations, and internationalization).
The theory assumes that institutions will avoid transactions in the open market if the cost of
performing the same actions internally is lower.
Ownership Advantage - This term refers to the competitive advantages of enterprises seeking FDI.
The greater the investing firms’ competitive advantages, the more likely they are to engage in this
foreign production.
Locational/Geographical Attractions - Locational/Geographical Attractions refer to alternative
countries or regions for MNEs to undertake value-added activities. The more immobile, natural, or
created resources that firms must use in conjunction with their own competitive advantages favour
a presence in a foreign location, the more firms will choose to augment or exploit their specific
advantages through FDI.
Advantages of Internationalization- Firms can organize the creation and exploitation of their core
competencies. The greater the net benefits of internationalizing crossborder intermediate product
markets, the more likely it is that a firm will prefer to engage in foreign production itself rather than
licensing the right to do so to others. In a nutshell, the theory states that if a company does not have
an ownership advantage, it will conduct its operations in the domestic market and will not seek FDI.
If, on the other hand, ownership advantage is available, the firm will examine whether it has a
locational or geographical advantage; if it does not, the firm will produce in its home country and
export its goods to other countries. Finally, it will examine the benefits of internationalization and
determine which process is the most cost effective, whether to carry out production activities in the
host country or to give the license to another country, and whether or not to pursue FDI.
Product Life-Cycle Approach

The product life-cycle approach is associated with the work of Raymond Vernon. Published in 1966,
it deals with the evolution of the U.S. multinationals and foreign direct investment patterns. In
Vernon's model, three stages are followed in the introduction and establishment of new products in
the domestic and foreign markets, with emphasis on innovation and oligopoly power as being the
first basis for export and later for the FDI.
The first stage in the sequential development of the product is the new product stage which
emerges in the home country following innovations as a result of intense R&D activities by the
company. The product is introduced in the overseas market through export, and the innovating firm
earns excessive profits both from domestic sales and exports abroad because of its monopoly
position.
The second stage is, characterised by the mature product stage, when the demand in the foreign
countries expands and the host country firms begin to produce competing products. The home
country enterprise is induced to invest abroad for taking advantage of its technology and increasing
demand for the product. As the company specific advantages of the firms controlling the technology
are much higher than the local firms, the production in the host country would be cheaper. It
stimulates foreign investment in subsidiaries.
In the third stage, the product becomes standardized, arid competition grows in, the world market.
The MNEs invest even in the LDCs, where the cost of production is lower. The host country,
otherwise, has to import these products from abroad because its own production cost is more. The
foreign investment may take the form of licensing arrangements also.
The initial analysis of the product life cycle approach gives a good account of the nature of the
expansion of the U.S. companies after World War H. The theory was modified by Vernon in 1971 and
1977 in the light of the oligopoly threat arising from global innovative activities. He identified the
first stage as the emerging oligopoly, the second stage as the mature oligopoly and the third stage as
the senescent oligopoly, referring to the state of production when the standardized product is
entirely produced abroad. The home country, where the product was initially innovated, imports all
of the goods that it needs.
The, product life cycle model is useful in explaining the foreign investment patterns of the U.S.
companies, but it has limited application to the firms going international, which were motivated by
locational advantages. The location advantages led to the establishment of assembly plants of
automobiles in the foreign countries. The FDI is also stimulated by the import restrictions and
currency realignments. When a domestic devaluation of dollar occurred in the 1970s in relation to
such major currencies as Japanese Yen and German Deutsche Mark, the exports of these countries
no longer remained profitable in the U.S. market. The Japanese and German firms increased their
investment in the U.S. economy to establish production facilities there.
Transaction Cost Approach
The transaction cost or internalisation approach was brought into prominence in the 1970s by
McManus et. al. by emphasising the effects of the MNE on the internalisation of the external
markets. The imperfections in the foreign markets are assumed of natural types rather than of
structural type, i.e., imperfections of monopolistic nature. The analysis of the proponents of the
Transaction Cost Approach is based on the criticism of neoclassical economics which arises from the
non-realization of the assumptions of perfect competition.
In the absence of the perfect market and the price system giving flawed signals, the transaction
costs, such as the cost of information, enforcement of agreements, and the cost of bargaining are
often quite high. The price existing in the foreign countries may not be based on market forces. The
agents of the corporation in the foreign markets may exploit the multinational by generating non-
pecuniary externalities. Such disadvantages to the company may be neutralised by adopting a mode
of organisation which attempts to coordinate the different production units in a hierarchical
manner.
The multinationals adopt a hierarchy for reducing the transaction costs. The MNEs through the FDI
create opportunities for interactions in the host country for the appropriate mode of production and
distribution patterns. Such interactions increase the gains from trade. benefiting the interacting
parties. Hymer and Kindleberger have treated the FDI as a way to maximise the monopoly position
for internalizing the pecuniary externalities. The transaction cost theorists have considered, the FDI
for reducing the transaction costs and internalizing non-pecuniary externalities.
The distinction between pecuniary and non-pecuniary externalities is made on the basis of the type
of market. If the market is of the structural imperfections type, where the monopolists differentiate
their products, the pecuniary externalities arise out of the monopolistic behaviour of the
participating companies. The non-pecuniary externalities occur in a natural type market
imperfections. For transaction cost approach, it is not necessary for a firm investing abroad to
possess monopolistic power. It needs the market to be of such a type as to make hierarchical
coordination possible, thereby reducing the cost of -production as compared to coordination
through the price system.
Q2- Define global financial system. Discuss the various terms of payments of international trade?
(v v v v v imp)
ANS GLOBAL FINANCIAL SYSTEM- financial system which consists of regulators and various financial
institutions that conduct their business on an international level. Therefore, in global finance the
businesses are not conducted at the national level. The primary components of global finance are
the international institutions, like International Monetary Fund, World Bank and Asian Development
Bank along with various national institutions and government departments, such as various Central
Banks, finance ministries, and those private companies who act on a global scale.
The most prominent international institutions which are linked with global finance are as follows:
1-- International Monetary Fund (IMF): The International Monetary Fund is tasked with for
encouraging international trade, ensuring financial stability and economic growth and reducing
global poverty. IMF oversees economic development, lending, and capacity development at global
level. The International Monetary Fund also helps member states to address disequilibrium in
balance of payments, grants long term loans for financial stability and act as a lender of last resort to
avoid sovereign default.
2-- World Bank: It is an institution which aims to offer funding for development projects which, for
most of the part, is offered to developing nations. The World Bank assumes the credit risk of these
developing nations; and tends to provide financing to projects that otherwise would not be able to
access such funding.
3-- World Trade Organization (WTO): WTO frames polices for orderly conduct of trade, commerce
and global financing. Further, it advocates rulebased and transparent policy architecture and dispute
resolution procedure. WTO agreement on Trade-Related Investment Measures (TRIMS) recognizes
that certain investment measures can restrict and distort trade as some nationstates can
discriminate against other on the grounds of being a foreign products, quantitative restrictions, and
local content requiring which has its implications for business firms on matters of global finance.
Terms of Payment in International Trade

Most of the MNCs along with even the small sized exporting firms, are extensively involved in
foreign trade apart from the other international activities. This section highlights different modes of
payment in international trade. In highly competitive international markets today, the nature of
payment terms offered is often play a decisive role in obtaining export orders. One has to be very
careful and selective in negotiating the payment terms for a particular business. This decision is
affected by various factors, which can be categorized as under:
2--DOCUMENTARY COLLECTIONS: Documentary collection is one of the most preferred methods of

payment settlement in international trade. It balances the risks exposure between both the trading
parties. Under this method, an exporter manufactures or procures goods and dispatches them to an
importer through agreed mode of transport, delivery terms and cargo insurance policy. Exporter
prepares the documents and submits them to his bank (remitting bank) as per procedure as laid
down under Foreign Exchange Management Act 2000 and regulations therein. Remitting bank
process the documents to collecting bank which ask for collection of payment from importer against
trade documents. Documentary collections are of two types namely ‘documents against payment’
(D/P) also known as ‘sight draft’ or ‘sight bill’. Under D/P transaction; an importer pays to the
collecting bank before collecting the trade documents. Second type of documentary collections are
known as ‘documents against acceptance’ (D/A) also known as ‘time draft/ bill’ or ‘usance draft/bill’.
There is credit period extended by exporter to importer under D/A transactions. D/A transactions
are risky and should be used with due diligence. Process of payment settlement under documentary
collection is as under
4-- LETTER OF CREDIT: Letter of credit is widely used in high-value business transactions. It is
considered a safe payment term. Exporter(s) prefer L/C terms in case of long duration business
deals, doubt on importer credit worthiness or lower credit rating, new & unestablished business
relationships, countries with high political or economic risks, etc. Under a letter of credit, an
importer asks his bank to make a contractual agreement with beneficiary (exporter) for supply of
agreed goods and services. As a result; the risk of payment passes from an importer to a bank
(issuing bank). Bank undertakes a negotiable commitment for payment to an exporter subject to
documentary compliance. Issuing bank issues a contractual agreement in favour of beneficiary
(exporter) through SWIFT message at exporter bank, which is called an advising bank. Advising bank
advises to exporter on various terms & conditions of credit and other associated risks. After dispatch
of cargo, an exporter is required to submit trade documents to the bank as per negotiated terms and
conditions of L/C. The negotiating bank routes the documents to issuing bank under established
banking customs and procedures. Issuing Bank pays subject to fulfilment of documentary
compliance. To successfully leverage L/C as payment mode, trading parties should be aware of
process, parties involved and papers, which is exhibited, step by step, as under:
Q3- Briefly discuss the welfare impact of Preferential Trade Arrangements (PTAs).? (v v v v v imp)
ANS - The resurgence of PTAs has led to renewed interest as to how PTAs have an impact on the
welfare. Conceptually, they have four general economic effects. These are discussed as follows:
1-- Income gains from greater specialization of resources and greater opportunities for exchange
within the region. These are called the static gains from regional integration. The static gains from
trade are the result of the elimination of the dead weight losses due to tariffs and non-tariff barriers
being removed. There are the two kinds of gains; first the enhanced exchange of goods and services,
and second the enhanced specialization in the industry or work-function which originates from the
removal of trade barriers.
2-- Additional, there are growth opportunities in the long-run especially from the economies of scale
and scope, improved competitiveness of firms, improvements in technology and inward foreign
direct investment inflows. These are called the dynamic gains from regional integration. The
dynamic gains are expected to be much larger than the static gains from trade.
3-- Transitional costs that fall in the short-run on inefficient sectors and immobile factors, as firms
rationalize and reallocate their activities throughout the region. When prices of a regional partner
are lower than those at home, opening-up to free trade means that demand for products of the
domestic industry will fall. There can be industrial sickness resulting in exit of certain business firms
as the consumers switch-over and buy cheaper imported goods from the PTA partner country. As
firms exit or downsize leading to lay-off workers, the workers willing to relocate find jobs quickly
with the increasing business opportunities in a RTA. Those not willing to relocate, however, may
never regain full time employment.
Thus; the free trade has transitional costs. The cost of goods and services fall first before the
accruing of prospective potential static and dynamic trade gains. Economists express it as “short-
term pain for long-term gain”
4-- Greater economic interdependence within the region, due to the inter-linkages created by trade
and investment flows. Such economic interdependence creates sensitivity and vulnerability to
instabilities in a trading partner but also offers potential additional gains from the multiplier effects
of linkages with a faster growing partner. For example, if the Mexican economy is more closely tied
and linked to the US economy, the more Mexico will benefit from the much stronger US economy.
Conversely, a currency crisis in Mexico will have substantial impact on US exports to Mexico.
The welfare impacts are expected to be particularly large for small countries (note that “small”
means small in terms of the world market for a particular product so a country could be small in one
market and large in others at the same time) because they are price-takers in world markets. These
impacts are both positive and negative, but the gains are expected to be much larger than the
losses.
TRADE CREATION AND TRADE DIVERSION

Let us examine the static gains from regional integration more carefully. First, the economic welfare
impacts of a PTA can be mixed; that is, it is NOT ALWAYS TRUE that global welfare or even welfare
for a member country improves as a result of a PTA.
The impacts depend upon the following:
1-- Trade creation occurs when production is shifted from higher cost producers to lower cost
producers within the trading bloc. When the trade barriers are eliminated among PTA members,
differences in comparative costs will lead to shifts in trade, production and investment patterns.
According to the law of comparative advantage, production should shift to the lower cost producers
and this would improve economic efficiency within the PTA.
2-- Trade diversion occurs when production is shifted to higher cost internal producers from lower
cost external producers. This is because the products of the external producers have become
uncompetitive in the internal market due to the creation of the preferential trading area. Before the
PTA both inside and outside countries faced the same tariff barriers. Once the PTA is formed only
the outside countries face the tariff barriers. Removal of the tariff barriers against the inside
countries may give them a competitive advantage that diverts trade and production away from the
most efficient producers (the outsiders) towards the less efficient. Thus the PTA creates
inefficiencies since trade is not with the overall lowest cost producer.
If trade creation outweighs trade diversion, economists normally argue that world welfare will
improve as a result of an FTA (that is, the static gains are, on net, positive). If trade diversion
dominates, welfare falls. It might be helpful to illustrate the concepts of trade diversion and trade
creation with an example. Assume we have three countries: Chile, France and Germany producing
and consuming apples. Assume that Chilean apples cost 50 cents each, French apples are 60 cents,
and German apples are 70 cents. If there are no national tariffs, Chilean producers are the most
efficient apple producers and the law of comparative advantage predicts that Chile will produce and
export apples to France and Germany. The world price of apples would be 50 cents. Suppose
Germany levies a 15-cent specific tariff on all apple imports in order to protect its domestic industry.
Then Chilean apples in Germany cost 50+15 = 65 cents, and French apples in Germany cost 60 + 15 =
75 cents. Since German apples cost 70 cents, German consumers continue to import Chilean apples
at a price of 65 cents (i.e. the tariff has reduced, but not eliminated, trade) between Germany and
Chile. French apples are not imported.
Q4- Differentiate between domestic and international business and discuss the importance of
international business.? (v v v v v imp)
ANS - Domestic vs International Business--The basic principles of business concerning tasks,
functions, and processes that apply to international business are the same as that of domestic
business. However, the environment in which domestic and international firms operate varies
considerably and therefore requires an international firm to modify and adapt its business practices
country by country. Unlike a domestic business manager, an international manager faces greater
difficulties, greater uncertainties, and more importantly, much greater risks. The tasks of an
international business executive are clearly much more challenging.
These difficulties, uncertainties, and risks originate from differences in the political, economic, legal
and cultural environment, and from differences in foreign exchange markets and exchange rate
systems. In most cases, these problems manifest themselves as constraints which render the process
of decision-making and its implementation in international business more difficult (and in some
cases, more hazardous) than in domestic business. More importantly, culturally insensitive decisions
often result in conflicts which are more difficult (and costly) to resolve without seriously affecting
the performance of the firm, its future operations, and the effectiveness of its management. The
dynamic nature of constant changes in business, economic, political, and legal environments in the
host country adds still more difficulties with which the international business executive must deal on
an almost daily basis.
The differentiation between domestic and international business can broadly be done on the
following parameters:
Culture-Each country in which the firm operates is culturally different. To be successful, the firm
must operate in a culturally sensitive manner and within the constraints of the culturally determined
manners, customs, values, and norms of the host country. An international business manager must
respect and empathize with cultural differences in all aspects of business and social life, seek to
conform and cooperate rather than confront or behave-as if operating in his/her own culture. Nike,
the global sports shoe manufacturer, realized this fact in a hard way when it produced and marketed
Nike Air brand of shoes for the first time. It wrote “Air” in cursive fonts and in an artistic way but it
created a great problem in Saudi Arabia because it looked like the word ‘Allah’ in Persian. Similarly,
marketing campaigns, especially the advertising may have to be adapted according to the local
culture. Many years ago, campaign for ‘Tuff’ shoes which had shown male and female models
wearing only shoes and no clothes had come under scanner. It was considered as obscene and was
subsequently banned in India. However a similar campaign in some other country like France may
not have evoked public outcry and might have been considered normal like any other campaign.
Fiscal and Government Policies
Conducting business across national borders involves the use of different currencies and observing
different government rules and regulations limiting the firm’s freedom of action; for example,
restrictions on the amount of profit to be transferred. Different governments practice different
exchange rate policies and systems, ranging from daily decrees about the value of the local currency
in terms of the world’s major currencies to fixed and floating exchange rate systems. These practices
add greater risk and uncertainty to the already highly risky and uncertain nature of international
financial transactions. To be successful, the firm must develop an appropriate strategy to deal with
these differences and the associated problems.
Legal Environment
The legal environment differs from country to country, requiring firms to show particular sensitivity
to laws, rules, and regulations which may affect operations and performance. Disregarding or
disobeying the laws of the host country can be very damaging to the finances and the image of the
firm. Laws pertaining to joint ownership of assets, for example, are often very complicated,
bureaucratic, frustrating, and time-consuming. Legal difficulties are often the source of serious
disputes between the host government and the firm, requiring protracted negotiations which may
end in failure to invest or to continue the existing business.
Consumer Tastes and Preferences

Differences in consumer tastes and preferences and demand patterns arising from cultural
differences require the firm to adopt appropriate production, procurement, and marketing
strategies to minimize costs and maintain the firm’s value. McDonald’s, for example, does not offer
beef and pork items in India and sells only vegetarian food dishes in predominantly vegetarian state
of Gujarat. Even in the case of standard global products, certain modifications may be necessary to
render the product more acceptable to the consumer in the host culture. For example, the name of
the product in the host country’s language may be offensive or the packaging may be inappropriate.
Availability of Factors of Production
Different countries possess different factor endowments with different qualities, requiring the firm
to formulate and implement suitable product development and logistics strategies consistent with
the availability and quality of resources in the host country. Certain skills or supplies may be either
unavailable or available in limited quantities and qualities. If unavailable, the firm must either import
them or develop local sources of supply
Following its entry into the Soviet market in1990, McDonald’s, one of the first Western fast food
firms, experienced serious difficulties in obtaining high-quality local food supplies consistent with its
food technology. To meet its high standards in quality, delivery, and production methods,
McDonald’s had to transfer agricultural technology, equipment, and consultants from other
countries with superior technology to work with Soviet farmers. One astonishing outcome was an
increase of 100 per cent in potato output alone. It even setup its own dairy farms, cattle farms, food-
processing plants, and distribution system.
Thus, international business should not be seen just as an extension of domestic business. It is quite
different from the domestic business. The factors which lead to these differences are summarized in
Table 1.1.
IMPORTANCE OF INTERNATIONAL BUSINESS

In recent years, international business has acquired additional importance for host countries in
particular and world economies in general as a result of developments in the following areas:
Technology Diffusion
Technological developments are transmitted to every corner of the earth through the practice of
international business. This transmission is not only in the form of products and services used every
day, but also in the form of modern management, production, marketing, and logistics systems
employed by domestic as well as international firms. And thanks to the dramatic developments in
communication and information technology, the benefits of such transmissions are shared
worldwide.
Stimulation to Competition
Except in the case of entry through acquisition, the arrival of an international firm in the host
country, either in partnership with a local firm or on its own, may stimulate domestic competition
and lead to increased entrepreneurial challenges, especially in the developing countries.
International firms with superior worldwide experience, knowledge, technology, and other relevant
resources have the ability to offer goods and services often at lower prices and higher quality.
Higher Standard of Living
Availability of a wide range of goods of international quality at competitive prices has brought many
so called “luxury” products within the reach of common man, especially in developing countries.
Thanks to international business, the standard of living in many developing countries has increased
significantly.
Impetus for Standardization
Standardization refers to the adoption of norms and practices generally acceptable in world
markets. In some cases, one standard product may be sold throughout the world using similar selling
techniques. Common standards enable easier and more effective comparisons to be made by
consumers and other interested parties, e.g., health and safety authorities. The product
standardization has become an easier option due to diminishing differences in consumer tastes,
preferences, and interests. This is due to advances in technology, telecommunication, transport, and
advertising.
Adapting to International Environment
A business firm operates within its internal and external environment. The internal environment is
one over which the firm has considerable control: the firm determines its own internal
environmental factors by specifying its corporate mission, organizational structure, recruitment
policy, and its relationship with suppliers, etc. The external environment is one over which the firm
has little or no control. Whatever little control the firm may have is usually the consequence of its
market power or collective action by a representative body, such as the Confederation of British
Industries (CBI) in Britain or the Confederation of Indian Industries (CII) in India. The firm must,
therefore, conform to its external environmental factors, whether they may be national,
international, or global, or suffer the consequences of its failure to do so. For example, changes in
health and safety regulations, trade policies, and the legal environment are unavoidable. Nike, one
of the world’s biggest manufacturers of sports and leisure wear, was forced into cancelling its
licensing agreement with one of its Asian licensees suspected of employing child labour.
With the increasing internationalization of business activities, the methods of dealing with internal
and external environmental factors tend to become more standardized. The main reason for this
development is that domestic firms aspiring to expand internationally often emulate existing
international firms in adapting to environmental changes. In other words, international business acts
as an instrument for domestic firms to adopt more effective business policies and techniques as a
preparation for going international. For example, many US and European firms have adopted
Japanese management techniques, such as quality circles, the just-in-time system (JIT), and total
quality management (TQM) in order to remain competitive in their own domestic markets in general
and in international market in particular.
Encouragement to Global Business and Economic Reforms
Governments play an important role in the development and promotion of international business
activities. They provide a great variety of financial and non-financial incentives to attract FDI into
their countries, often in competition with their neighbours. The increasing scale of liberalization of
trade and investment, deregulation of domestic industries, and privatization of state-owned
enterprises has the attraction of foreign business as one of its primary objectives. These measures
have created immense international business opportunities. The major impact of international
business in this context has been the encouragement to governments to open up their borders to
international trade and investment, standardize their systems and procedures, adopt internationally
acceptable values and attitudes, particularly with respect to human rights and child labour, and
encourage the development of democratic institutions.
Economic Cooperation and Integration
One of the most fundamental impacts of the process of internationalization since the end of World
War II has been the progressive ending of the isolation of national economies. Gradually more and
more barriers to international trade and investment are being replaced with measures designed to
enhance cooperation and coordination among nation states. The need to cooperate and coordinate
over wider geographical areas has led to the formation of regional groupings in the form of free
trade areas resulting in rapid increase in the growth of international business activities.
Q5- Distinguish between international and domestic marketing, giving examples? (v v v v v imp)
ANS - INTERNATIONAL AND DOMESTIC MARKETING--A marketer of a firm planning to start an
international business should understand the market forces such as patterns of demand and sources
of supplies of an international market. Marketing concepts help us to understand market nuances
such as needs, wants, desires and demand of prospective customers of a culturally and economically
diverse market and help identify potential markets for business including suitable market entry
strategy. One can accordingly segment the market(s), decide the products features and prospective
price offers and devise the distribution and promotional strategy.
A marketer of a firm planning to start an international business should understand the market forces
such as patterns of demand and sources of supplies of an international market. Marketing concepts
help us to understand market nuances such as needs, wants, desires and demand of prospective
customers of a culturally and economically diverse market and help identify potential markets for
business including suitable market entry strategy. One can accordingly segment the market(s),
decide the products features and prospective price offers and devise the distribution and
promotional strategy.
Wave of economic globalization has shifted the production centres from countries with high labour
costs to low-costs centres in Asia, primarily in China, South East Asian Wave of economic
globalization has shifted the production centres from countries with high labour costs to low-costs
centres in Asia, primarily in China, South East Asian.
International Marketing refers to exchange of goods, services and ideas among different countries.
In other words, the International Marketing is the application of marketing principles to satisfy the
diverse needs and wants, fulfil desires and demand of different customers residing across the varied
and differentiated international markets. The concept of marketing has undergone a radical change
in the past few years and some of the key drivers of this change are:
Today, the marketing concepts followed and practiced have undergone a marked change. The focus
is now on consumers and competition. The emphasis is therefore on what is being demanded by the
consumers and what is being supplied to them by the competitors. The end as perceived by a good
marketer is ‘profit’ via consumer satisfaction.
Marketing can now be defined as “the process of focusing the resources and objectives of an
organization upon the opportunities and needs that exist in the environment”. Marketing as a
concept is universal, but the markets and behaviour of consumers vary across countries and can be
quite different. This necessitates any student of International marketing to gain knowledge in three
critical areas:
 Cross-Cultural Knowledge
 Country/ Regional Knowledge
 Cross-Border Transactions Knowledge
To simply put it, International Marketing refers to the marketing of goods and services across the
international borders in an era of declining trade barriers and decreasing transportation costs among
the countries. Philip R. Cateora and John L. Graham in their book”International Marketing” define
International Marketing as the performance of business activities designed to plan, price, promote
and organize direct flow of a company’s goods and services to consumers or users in more than one
nation for a profit.
International Marketing as already expressed is nothing but directing the efforts to fulfil the needs,
wants, desires and demand of consumers in other countries. The marketer looks upon world as
market. International marketing may thus be defined as “the process of focusing the resources and
objectives of an organization upon the opportunities and needs that exist globally”.
If the distinction between the two definitions is the word global then is the task of global marketing
is very similar to that of domestic marketing? The answer to the above statement is a ‘Yes’ but new
dimensions have emerged. They include the increase in the number of markets and difference in the
orientation that arises because of entering a new country or a new business environment.
Thus the differences between domestic and global marketing arise entirely from the differences that
exist in the national environment within which the marketing efforts are directed and the
differences that arise in the organization because of operations being conducted simultaneously in
different markets. In order to understand the magnitude of differences between domestic and
international marketing, it becomes necessary to analyze the impact on marketing variables using a
checklist.
Q6- How can a country’s political policies and legal framework influence the international business
activity ? Discuss citing examples? (v v v v v imp)
ANS - Political policies and legal framework influence the international business activity --A firm
has no control on external environment even in domestic business where it have to deal with issues
like, tax rates and policy, changes to the economic structure, threats from competition, political
factors, government regulations, industrial licensing and approvals, ecological concerns, legal
compliances to different acts and rules and dealing with changing technological landscape. This
becomes extremely complex when a firm enters international business as it has to deal with
different business environment in the countries, it enters with. International business environment
is regarded as the “sum of all the external forces working upon the firm as it goes about its affairs in
foreign markets”. A firm can plan a course of action to manage uncontrollable external factors in the
domestic business as managers are familiar with business landscape of the country and forces
shaping it including political economy of home country.
Waves of liberalization, globalization and privatization has influenced the global trade environment
so dramatically that producers, exporters and policy makers in developing countries like India are
struggling to respond to emerging changes and challenges especially with reference to ever evolving
trade regime which is manifested by both anti-globalization and globalization debate: For example,
1-- Waves of liberalization, globalization and privatization has influenced the global trade
environment so dramatically that producers, exporters and policy makers in developing countries
like India are struggling to respond to emerging changes and challenges especially with reference to
ever evolving trade regime which is manifested by both anti-globalization and globalization debate:
For example,
2-- he proliferation of various trade agreements and ever-evolving non-tariff regime especially, the
Sanitary & Phyto-Sanitary and Technical Measures have brought newer challenges on quality
compliance for internationally engaged firms.
POLITICAL ENVIRONMENT
The political environment within a country impacts business and operation of firms. Many
organizations working in countries like U.S. are used to peaceful working environment, however, this
may not exist in other countries. A country’s political environment influences the operation of
business both domestically and internationally as politics and economics are interlinked.
Political Ideologies
Political ideologies are the ideas, theories and orientations. It is more important to know how these
ideas, theories can be executed or leveraged to achieve the business goals. Many political ideologies
can co-exist in a single country (for example India). Each political ideology will have its own pressure
group each balancing its ideologies with another, as a result, a political system remain stable among
varying and sometimes conflicting ideologies.
There are three kinds of alternate ideologies. These are:
1) Pluralism (Political philosophy)
2) Totalitarianism (totalitarian rule)
3) Democracy (Mix of pluralism and totalitarian rule)
Democracy: Multi-National Corporations prefer to locate their business operations in democratic

countries. The prime reason for this is that democratic norms usually provide freedom especially
economic-freedom and legal rights which safe guards the interest of individuals as well as business
institutions. Political system of democracy has following six features:
LEGAL ENVIRONMENT
There are different dimensions of legal environment prevailing within a country and its resultant
impact on the firms engaged in the business.
Q7- Explain the need for strategic alliances. Discuss in detail how implementation and
management of the alliances take place? (v v v v v imp)
ANS - Need for strategic alliances -- An alliance is the sharing of capabilities between two or more
firms with the intention of enhancing their competitive advantages or creating new business entity
to achieve a mutually beneficial business objective. Global alliance(s) are aimed either to develop a
global market presence or to enhance the global competitive capabilities of the firm. Alliances exist
both locally and globally depending on the expansion and diversification plans of an organization.
There exist mixed stories of success of such alliances both in domestic and global businesses.
Traditionally, such alliances have existed in the industrial sectors like auto-components, textiles and
food processing. Through the 60’s and 70’s India has been trying to forge joint ventures (JVs)
between the local and foreign counter parts. The Maruti (Government of India) and Suzuki Motor
Company or the Kwality (Delhi based ice-cream company) and Walls (Hindustan Unilever) tie-ups are
some of them. In most cases; where the business objectives are clear and coherent; such alliances
witnessed a success. The development of BrahMos Missile system, one among the best in the world,
is a result of pooling of technical expertise, capabilities and financial resources of India and Russia.
The export order for sale of BrahMos Missile to Philippines valuing around 374 Million USD in 2021,
is one among the largest export order for any defence sector company in India. The missile also
offers a strategic deterrence to India for its own defence. Indian government has been vying to
supply it to other countries in Indo-Pacific region to achieve both strategic and business gains from
this collaboration of India and Russia (Shad Morris, Oldroyd & Ram Singh, 2021). A global strategic
alliance is normally established when a company wants to have a competitive advantage in the
related business or enters into a new geographic market especially in the countries where the
restrictions on imports are higher. Usually the alliances are formed between two or more
corporations for the target market which can be catering to one of the markets where import
restrictions are high. Nowadays, alliances are formed to collaborate on specific strengths of each
other and reap the business dividends with lower cost of products and services.
Need for Strategic Alliances
Now the question arises as to why we need strategic alliances!!!! Here are some of the reasons for
using strategic alliances:
Implementation and management of the alliances-

Q8- Highlight the different modes of payment in international trade. Explain their operations.? (v v
v v v imp)
ANS - Most of the MNCs along with even the small sized exporting firms, are extensively involved in
foreign trade apart from the other international activities. This section highlights different modes of
payment in international trade.
Different modes of payment in international trade And their operations
In highly competitive international markets today, the nature of payment terms offered is often play
a decisive role in obtaining export orders. One has to be very careful and selective in negotiating the
payment terms for a particular business. This decision is affected by various factors, which can be
categorized as under:
SECOND PRIORITY MOST IMPORTANT QUESTIONS

Q9- Explain various types of trade blocks and discuss the welfare impact of Preferential Trade
Arrangements (PTAs)? (v v v v v imp)
ANS- Regional Trading Bloc; popularly known as trading blocs, is a group of countries within a
specified geographical region, which specify the common trade policy vis-à-vis tariff, non-tariff
issues, and other trade issues such as movement of labour and capital among themselves with an
objective of creating Free Trade Area or Customs Union or Common Market Area or Economic
Union. In short, they are a force of economic integration which increasingly shapes the world trade
(www.economicsonline.co.uk). Trade blocs can be stand-alone agreements among several states.
Trade blocs fall into different categories based on the level of economic integration. These
categories are discussed in subsequent section
After second world, countries realized the importance of trade not only for economic development
but for promoting peace and prosperity in the region. Free trade initiatives were taken, particularly
in Europe where countries pool their coal resources in order to help each other and avoid conflicts.
This small initiatives result in formation of European Union after passing through various stages of
economic integration. Today, there is no region in the world that does not have free trade
agreements or other initiatives for free trade and commerce. Various stages of economic integration
have been evolved namely preferential trade, free trade, custom union, common market and
Regional Trade Blocs economic union. Free Trade encourages labour force specialization and also
help countries specialize in the areas of their factor endowments. In other words, free trade allows a
country to produce and export what it does best and most efficiently, while allowing it to import
specialized goods from other countries. Thus, Free trade helps both sides to save costs while gaining
superior products through the exchange of goods and services.
TYPES OF TRADE BLOCS
There are various types of trade blocs. These are:
Preferential Trading Arrangements (PTAs): It is a kind of trading bloc that gives preferential access
on certain products to the member countries. It can be established through a trade pact and is the
first stage of economic integration. The tariffs and nontariff barriers are reduced only on a part of all
traded goods. The PTAs are advanced to next stage of economic integration that is Free Trade Area.
Free Trade Area/Agreement (FTA): In a FTA, all tariffs and non-tariff barriers are removed exception
being some items in the negative list which is mutually agreed among member states. Examples of
FTAs are the NAFTA (North American Free Trade Agreement) and India-Sri Lanka Free Trade
Agreement. Rules of Origin (RoO) are framed which specifies the conduct and criteria of value-
addition under a FTA. Rules of Origin provide protection against malpractices used by firms beyond
the member states to export goods at lower rates of duties. For example, when India and the Sri
Lanka are FTA partners and offer 0% duties to each other subject to fulfilment of Rules of Origin
criteria. Sri Lanka in turn may have a FTA with another country, let us hypothetically assume, it is
China. Chinese firms will export their goods at zero duty first to Sri Lanka and such goods do have a
probability to enter India under India-Sri Lanka FTA. But, Rules of Origin will ensure that such goods
cannot enter Indian Territory without fulfilling the criteria as mandated under Rules of Origin
Customs Union (CU): In a customs union, external tariffs are harmonized among member states for
the goods originating from the non-member countries. Thus, a CU has a common external tariff
(CET) against non-members states. Because the tariff is the same for all member countries, rules of
origin are not required to prevent “backdoor” imports from non-member countries. South African
Customs Union i.e. SACU (a regional economic grouping among countries such as South Africa,
Namibia, Mozambique, Botswana and Eswatini, erstwhile Swaziland), is an example of customs
union.
Common Market: A common market have all features of a Customs Union, i.e. elimination of tariff
and non-tariff barriers plus common external tariff and also have provisions for free movement of
labour and capital within the regional economic grouping. Central American Common market
consisting of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, is an example of Common
Market.
Economic Union: An economic union is a common market coupled with harmonized and unified
economic policies which are coordinated among the member countries. Economic Union have
common trade policies, common external tariffs, free movement Regional Trade Blocs of labour and
capital and common banking and monetary policies. For example, in an economic union, countries,
normally, have a common monetary and fiscal policy and a common currency. The purpose of the
Maastricht Treaty was to move the European Community (EC) from a customs union to an economic
union, with a common currency (the Euro) and central bank (the European Central Bank).There can
be a monetary union with an economic union, for example Euro Zone countries having a common
currency, EURO with European Union which is an Economic Union. Monetary Union is a case when
two or more member states have common currency thus leading to formation of a Monetary Union.
Political Union: Political Union is the highest stage of levels of economic integration in a regional
economic grouping. In addition to economic union, Political Union envisages the harmonization of
system of political governance, i.e. single government, one president, one foreign policy, one
defence policy among the member states. In nutshell, the member countries of an economic union
decide to become a one country.
PTAs, FTAs, Customs Unions and Economic Union are termed as Regional Trade Agreements in the
terminology of WTO. Henceforth; we will use the term RTA as a broader term to discuss various
aspects of trade blocs.
WELFARE IMPACT OF PTAs

The resurgence of PTAs has led to renewed interest as to how PTAs have an impact on the welfare.
Conceptually, they have four general economic effects. These are discussed as follows:
1-- Income gains from greater specialization of resources and greater opportunities for exchange
within the region. These are called the static gains from regional integration. The static gains from
trade are the result of the elimination of the dead weight losses due to tariffs and non-tariff barriers
being removed. There are the two kinds of gains; first the enhanced exchange of goods and services,
and second the enhanced specialization in the industry or work-function which originates from the
removal of trade barriers.
2-- Additional, there are growth opportunities in the long-run especially from the economies of scale
and scope, improved competitiveness of firms, improvements in technology and inward foreign
direct investment inflows. These are called the dynamic gains from regional integration. The
dynamic gains are expected to be much larger than the static gains from trade.
3-- Transitional costs that fall in the short-run on inefficient sectors and immobile factors, as firms
rationalize and reallocate their activities throughout the region. When prices of a regional partner
are lower than those at home, opening-up to free trade means that demand for products of the
domestic industry will fall. There can be industrial sickness resulting in exit of certain business firms
as the consumers switch-over and buy cheaper imported goods from the PTA partner country. As
firms exit or downsize leading to lay-off workers, the workers willing to relocate find jobs quickly
with the increasing business opportunities in a RTA. Those not willing to relocate, however, may
never regain full time employment. Thus; the free trade has transitional costs. The cost of goods and
services fall first before the accruing of prospective potential static and dynamic trade gains.
Economists express it as “short-term pain for long-term gain”.
4-- The welfare impacts are expected to be particularly large for small countries (note that “small”
means small in terms of the world market for a particular product so a country could be small in one
market and large in others at the same time) because they are price-takers in world markets. These
impacts are both positive and negative, but the gains are expected to be much larger than the
losses.
Small countries gain from regional economic integration:
Q10- explain the concept of globalization And Effects of Globalization? (v v v v v imp)

ANS- Globalization has long been considered similar to internationalization. However, globalization
is a broader concept which extends beyond integration of market and influences all aspects of
international economy. Its evolution can be traced to the beginning of 19th century and it has
developed in different phases to the present times. It has led to the integration of the world
economy which has added an element of inter dependence among nation-states and society on
various aspects of life. The process of globalization deals with the integration of global economies,
global strategies, global industry and global markets. There are certain globalization identifiers which
have been termed as industry’s globalization drivers. These include an industry’s external drivers
which affect the degree of globalization. Globalization also has strategic implications which are in
the form of international alliances, organizational challenges, Government relations and
competition.
CONCEPT AND MEANING OF GLOBALIZATION
‘Globalization may be hard to define, because the term “globalization” could be defined from
different points of view. Globalization is perhaps the most important force at work in contemporary
society, business, management and economics (Stonehouse et. al., 2004). While some people think
of globalization as primarily synonym to global business, in fact, it is much more than that. Economic
globalization has been joined by political globalization leading to providing opportunities to respond
to globalization challenges.Technological globalization accelerated the rapid diffusion of free
enterprise through new means of communication. Many new opportunities are coming from the
advances in computer technology. E-commerce and Internet are changing many a selling and
purchasing process. The Internet has emerged as a vital tool linking enterprises/firms internally and
externally with customers, strategic partners and critical suppliers. The computer network expanded
technological possibilities of data exchange with 200 countries (Krajewski et.al. 2005). Together,
economic, political and technological globalization has spawned a new phenomenon called
psychological globalization which is defined as deepening relationships and broadening
interdependence among people from different countries (Kluyver et al., 2003; Daniels et al., 2002;
Grazina J and Marija K., Ekonomika 2006).
As per UNESCO globalization can be defined as a “set of economic, social, technological, political and
cultural structures and processes arising from the changing character of production, consumption
and trade of goods and assets that comprise the base of the international political economy”.
Globalisation can also be defined as the global spread of production and trade which is
comprehensively supported by technology, unrestricted mobility of capital and largely facilitated
access of labour. Globalization involves the interconnection of countries, economically and culturally
and these interconnections are shaped by newer and smarter evolution of technologies, political
support and facilitated legal and regulatory regime. The result of globalisation has been the coming
together of disparate cultures, political systems and patterns of economic development.
Definition of Globalization
Economists differ globally on definition of ‘globalization’ and there is no universally agreed definition
of globalization. The term globalization is typically used to refer to international integration among
economies on areas such as production, investments, and trade and labor markets. Hence;
globalization refers to a movement toward economic, financial, trade, and communications
integration among countries. In other words, globalization means the opening of local and
nationalistic perspectives to a broader outlook of an interconnected, reciprocal and interdependent
world order which facilitates the free flow of goods and services, capital, and ideas (Case-Let:
Globalizing Yoga) across national boundaries. Globalization does not include unhindered movement
of labor however such free flow may exist among agreed trade blocks and economic union. If, bench
marked with degree of economic, social, political and environmental integration; globalization is not
a new phenomenon. It has existed for centuries and is a continuous process; it is the increased
degree of such integration that makes globalization a buzz word in 21st century
In recent years, globalization has become a key concept/theme in every research or conference
relating to international business/international marketing strategy. Ever since Levitt’s (1983) article
on globalization of markets was published, academics and practitioners have debated whether
international markets are becoming homogenous, and if the international marketing paradigm ought
to change from highlighting national differences to exploring international similarities. In the field of
management, the term globalization has often been used inter changeably with internationalization.
For managers, globalization is not only a curiosity, but also an actuality that has to be dealt with on a
daily basis. The scholars, however, have diverse thinking and attitudes toward globalization.
Christopher Rodriguez, the then CEO of Thomas Cook Group views globalization in a very narrow
way as “running a global business from a global centre.” Similarly, Richard Grasso, the then
Chairman and CEO of the New York Stock Exchange, treats globalization as an economic trend:
“Global markets when they are realized in their entirety, are the ultimate result of a trend now
under way, called globalization.”
EFFECTS OF GLOBALIZATION
Now you have a fair idea of how present day globalization evolved. We shall now briefly discuss the
effects of globalization.
definitions of globalization given by various thinkers. You might have noted a common feature of the
definitions by these thinkers who regard globalization as a process of increasing the economic,
political, cultural and technological interdependence among nations and countries. Globalization is a
process by which there is an increase in inter-connection and dependence between nations, people
and businesses through greater cross-country mobility, communication and cross-cultural
exchanges. Thus globalization process has given impetus to greater global production and
distribution of products and services of a homogeneous kind on a world-wide basis. Now we can
demarcate the separate areas of the effects of the process of globalization. These areas of effects of
globalization are as follows:
1-- Integration of Economies: Globalization essentially leads to greater interdependence among
countries. For instance, China is a largest producer of raw material for pharmaceuticals, known as
Active Pharma Ingredients and Excipients. India imports huge quantities of these APIs and Excipients
from China to manufacture a variety of generic drugs to world market. India is referred as the
pharmacy of the world for its innate capacities to supply generic drugs to world markets at a fraction
of cost of what some of these drugs are sold in developed countries. In this process, the entire
mankind benefits from the raw material expertise of China and manufacturing excellence of India for
supply of low cost generic drugs to world markets.
2-- Integration of Strategy: A global strategy would require establishing the brand name and
products in prominent markets globally, in order to reap the benefits of competitive advantage
through scale, scope, systems and synergy economies. This further facilitates integration of global
vision, business strategy and business activities throughout the world.
3-- Integration of Industries: Globalization facilitates the increase in integration of production
activity and distribution of value added goods to world markets on the basis of competitive
advantages. Global industries become inter dependent enjoying location advantages by virtue of
their presence in host, parent or third world countries and leveraging the cost-effective factors of
production in the entire supply chain operations of a firm.
4-- Integration of Markets: Globalization leads to lowering of tariff and nontariff barriers thus
providing bigger market access. The consumers further benefit from cultural globalization as they
start using the standard products as being consumed or used in developed countries. The name and
brand of products are popularly known in various markets under the waves of socioeconomic
globalization. This has created homogeneity in tastes and liking of end users for a product in specific
markets.
The process of globalization integrates global economies, global strategy, global industries, global
markets, global drivers and global players in order to create organizations for global environment. It
has created integration of services, resources and products thus creating a boundary-less
environment.
Q11- Whit are the socio-economic factors that influence business ? What are the problems that
companies face when they ignore cultural sensitivities of a country ? Discuss with relevant
examples? (v v v v v imp)
Or
Analyze the political, economic, social, technological and legal environment in e international
business environment
ANS- A firm has no control on external environment even in domestic business where it have to deal
with issues like, tax rates and policy, changes to the economic structure, threats from competition,
political factors, government regulations, industrial licensing and approvals, ecological concerns,
legal compliances to different acts and rules and dealing with changing technological landscape. This
becomes extremely complex when a firm enters international business as it has to deal with
different business environment in the countries, it enters with. International business environment
is regarded as the “sum of all the external forces working upon the firm as it goes about its affairs in
foreign markets”. A firm can plan a course of action to manage uncontrollable external factors in the
domestic business as managers are familiar with business landscape of the country and forces
shaping it including political economy of home country.
This is not the case for international business operations where many uncontrollable external forces
can challenge it. Some examples of such challenges are uncertainty of foreign trade regime, different
political environment, changed economic legislation, confusing tax policies and procedure,
misleading cultural interpretations and complex legal compliances. Hence, the managers of an
internationally engaged firm need to scan the following elements of international business
environment to enter a market for business
Fig- Elements of International Business Environment

Figure as illustrated sometimes is also referred as PESTEL analysis of business environment. Any firm
intending to go-global require economic data of prospective national economies to interpret,
analyse and make cross border comparisons using standard criteria to understand the external
environment affecting their business. Fortunately, such data is available online and an exporter can
easily analyse the nature of the environment on a country-by-country basis. Each economy has
national accounts data, indicating estimates of gross national product including growth trends, gross
domestic product, consumption, investments, government expenditures, and price levels. An
exporter can also access the demographic data describing size of population, their distribution by
age-category, and rates of population growth
internationally trained staff, without culturally tinted-glasses, to independently study the

international socio-cultural environment. International marketer explicitly recognizes the non-
economic bases of marketing behaviour and its growing role in today’s globalized markets. Barbie
doll come not only in white colour any more, but one can find Barbie Doll having African (Black),
Chinese and Indian facial features so that children from respective region can easily correlate
themselves when they find someone similar. Consumption, in today’s globalized but turbulent
business environment is a function of many other cultural influences. Not only the disposable
income of consumers but many non-economic factors can explain the different patterns of
consumption of two individuals with identical incomes or by analogy, of two different countries with
similar per capita incomes.
Ecologically, there is increased awareness for saving the environment and firms are reducing their
carbon-foot prints to win and retain such awakened global customers. Lastly, no business firm afford
to ignore the technological environment of the country and should accordingly adapt its product and
services for varied international markets.
POLITICAL ENVIRONMENT
The political environment within a country impacts business and operation of firms. Many
organizations working in countries like U.S. are used to peaceful working environment, however, this
may not exist in other countries. A country’s political environment influences the operation of
business both domestically and internationally as politics and economics are interlinked.
Political Ideologies
Political ideologies are the ideas, theories and orientations. It is more important to know how these
ideas, theories can be executed or leveraged to achieve the business goals. Many political ideologies
can co-exist in a single country (for example India). Each political ideology will have its own pressure
group each balancing its ideologies with another, as a result, a political system remain stable among
varying and sometimes conflicting ideologies.
Impact of Difference in Political Ideologies on Country’s Boundaries
Differences in political ideologies are due to differing history, culture, language, religion, geography
and polity which defend the boundaries of two nations. Bigger nations or regions split into smaller
states when political system collapses (e.g. USSR). To understand the political environment better;
let us now discuss the various forms of government. These are as follows:
Pluralism: Pluralism is a political philosophy which is based on the assumption that people of
different beliefs, backgrounds, and lifestyles can coexist in the same society. Furthermore, all people
can participate equally in the political process and can practically be part of decision-making
mechanism to contribute to the “common good” of the entire society. Scandavian countries are
examples of pluralism which have political system in place to accept and integrate the minority
groups whether religiously, culturally, by gender and even by orientation.
Totalitarianism: Totalitarianism is an extreme form of political system wherein there is one
authoritarian political party. Moreover, the political system prohibits all opposition parties, outlaws
individual’s rights, and places state authority to all, undermine civil liberalities, free press, and right
to organize. The system exercises very high degree of control of public and regulate their public as
well as private life. For example, North Korea and China are examples of extreme and complete form
of totalitarianism and authoritarianism.
Democracy: Multi-National Corporations prefer to locate their business operations in democratic
countries. The prime reason for this is that democratic norms usually provide freedom especially
economic-freedom and legal rights which safe guards the interest of individuals as well as business
institutions.
ECONOMIC ENVIRONMENT
There are 193 countries in the world and vary significantly in the level of economic development. A
prominent question that a Multi-National Corporation (MNC) faces is that in which of these
countries it should expand? Two important considerations that would guide an MNC are: first, the
ease of access to factors of production (e.g., raw material, labour, etc.) and second, the demand
conditions (size of market, market growth rate, and so on). To understand the economic
environment, it is important to understand how the countries of the world are classified.
The countries of the world can be classified based on different aspects namely income, region,
economic system, etc. Exhibit shows the classification.
1-- Classification based on Income

Based on income; the countries are usually classified by their GNP or GDP per capita.GNP stands for
Gross National Product and GDP for Gross Domestic Product. GNP is the total value of all final goods
and services produced within a nation in a particular year, plus income earned by its citizens
(including income of those located abroad). It excludes income of non-residents located in a
particular country. GDP includes the total value of the economic activity within a country’s borders
regardless of whether that activity is a result of foreign or domestic investment. Gross National
Income (GNI) per capita is the amount of economic activity per citizen of a country in a year. The
World Bank Report 2011 classifies economies into the categories shown in Table3.1 on the basis of
GNI per capita.
2-- Classification based on Region

The various regions and their classifications are important to Multinational Corporations. The MNCs
scan these markets along the geographic lines to design and structure their organizations and also to
analyze the contiguous zone for marketing of their goods. Additionally, the logistics operations are
also planned based on geographic regions. Respective regions also reflect the developmental status
of such economies.
3-- Classification based on Economic System
SOCIAL AND CULTURAL ENVIRONMENT

n the new global environment; cultural awareness about other countries is essential for the
managers. This is a critical issue and any ignorance of cultural sensitivities will lead to dire
consequences which would even jeopardize business transaction. Before proceeding on overseas
assignment, the managers should do their homework, i.e. acquainting themselves a bit about the
foreign cultures. This could be done by undergoing a short course in foreign language, cross cultural
training, familiarizing themselves about specific business etiquettes and practices. One can do so
through cultural guides thus avoid mistakes
TECHNOLOGICAL ENVIRONMENT
Technology has been one of the biggest factors that has affected modern business. Two facets of
technology are particularly noticeable. One is the speed of communication
and the second is the reduction in the cost of technology. Let us first discuss about the speed of
communication; you will notice that the cost of communicating has now become a fraction of what
it used to be two-three decades back. More so, the communication landscape has witnessed a
complete transformation with newer and smarter tools, email, WhatsApp, Zoom Call, Google Meet,
along with introduction of various product software like MS-TEAM and WEBEX. The technological
leapfrogging in internet technologies has facilitated the growth of seam-less and cost-effective
communication around the world. Figure as under illustrates the number of internet users
worldwide in the period 2006-2020. Thus, it will be seen that the internet user population world
over is almost doubling every 3-5 years. The spread of internet users is varying with highest
penetration in North America and lowest being in the African countries. India has 3rd largest number
of internet users in absolute terms, only next to China and the USA but in terms of internet
penetration, it is mere 64% in India as compared to 95% in the United States of America and 83% in
People’s Republic of China
Q12- Discuss in detail international trade theories and their implications. (v v v v v imp)
ANS- INTERNATIONAL TRADE THEORIES- International business began with international trade
operations, which were facilitated by the global economy’s laissez faire attitude. It improved the
well-being of many nations, and the position of trade barriers reduced trade gains, giving rise to the
search for alternative avenues to boost net exports. Alternative trade routes resulted in the
establishment of companies in foreign countries via FDI. In this context, it is critical to comprehend
the determinants and consequences of international trade and FDI on trading partners,
multinational corporations’ international operations, and the economies of home and host
countries. Several theories have been developed across countries over time, which have served as
the foundation for international trade and FDI.
Theory of Mercantilism
From the sixteenth to the eighteenth centuries, world trade was based on the economic theory and
practice of mercantilism, particularly in Western Europe, namely France, England, and Germany. It
included elements such as belief in protectionism, nationalism, and the welfare of the nation.
Furthermore, it included the planning and regulation of economic activities in order to achieve
national goals, as well as the reduction of imports and promotion of exports. The trade revolution
gave rise to a new economic concept known as ‘Mercantilism.’ According to this theory, agriculture
practices have a very limited impact on a country’s economic development because agriculture
becomes unproductive after a certain period of time. However, economic development through the
use of industries has no bounds.The mercantilists, primarily European countries, believed that a
nation’s power lies in its wealth, which grew by increasing gold and silver reserves. This was thought
to be possible by establishing a favourable trade balance. This belief gained traction on the grounds
that gold could be used to fund military expeditions and wars, and that exports would create jobs in
the economy.
Adam Smith and Ricardo criticized mercantilism theory by emphasizing the importance of individuals
and pointing out that their welfare was the welfare of the nation. They believed in liberalism and
defined national wealth as “the sum of enjoyments” of individuals in society. Their trade doctrines
were founded on the laissez faire principle and specialization in the production of goods for which
resources were most suitable and easily available. The critics of mercantilism accepted any activity
that would increase people’s consumption. Mercantilists failed to recognize that export promotion
and import substitution are not possible in all countries, and that mere possession of gold cannot
improve people’s well-being. Keeping resources in the form of gold reduces production of goods and
services, lowering the welfare of citizens. The concentration of production of goods for domestic
consumption through less efficient use of resources will result in less production and lower gains
from international trade.
Theory of Absolute Cost Advantage-
Adam Smith advocated the theory of absolute cost advantage. Many factors influence bilateral trade
between the two countries, including transportation costs, tariffs, internal and external factors,
national and international aspects, and so on. Every country should invest in the production of the
commodity that it can produce more cheaply than the other country and exchange it for the
commodity that is less expensive in the other country. Keeping all the variables constant, the
following are the assumptions of the absolute cost advantage theory:
There is free trade between countries, which means that trading countries do not have to pay any
tariffs; additionally, there are constant returns to scale, and technical progress is also found to be
constant. Finally, both countries manufacture the same commodity. The example in Table 4.1 will
help you better understand the theory:
According to this theory, trade between the two countries will take place only when there is an
absolute cost difference between the goods produced by the two countries. Prior to trade, India
produced 10 tractors and 5 trucks. At the same time, France produced 5 tractors and 10 trucks. If
these two countries trade, they will specialize in terms of absolute advantage and gain from trading
with each other. India has an absolute cost advantage in tractor production, while France has an
absolute cost advantage in truck production. India can produce 10 tractors and only 5 trucks in one
hour of labour. However, in the case of France, the situation is the inverse. If both countries produce
both goods, they will be able to trade in that condition. Only 15 tractor and truck units are
manufactured. At the same time, if India and France engage in international trade with their
specialized goods, they can produce 20 units of each. It means that India, which has an absolute cost
advantage in tractor production, will produce tractors, while France, which is specialized in trucks,
will produce only trucks.
Theory of Comparative Cost Advantag-
Adam Smith’s theory of absolute advantage failed to explain the basis of trade when a country has
an absolute advantage in producing both goods. To address this issue, David Ricardo in 1817
explained that if both trading countries do not have an absolute advantage in either of the two
goods, how can international trade take place? He emphasized that a cost advantage for both
trading countries is not required for trade to occur. Even if one country can produce all goods at a
lower labour cost than the other, it would still benefit both trading countries.
The Table shows that France has an absolute cost advantage in the production of Trade Theories
both goods, namely jute and leather, when compared to India. India has a comparative cost
advantage in the production of leather, while France has a comparative cost advantage in the
production of jute. However, this means that India needs 100 men per year to produce leather and
120 men to produce jute. On the other hand, the same amount of Jute and Leather France requires
80 and 90 labours, respectively. As a result, India employs more labour than France in the
production of jute and leather. In other words, France is more capable than India in producing both
goods, and it has an absolute advantage in the market. Nonetheless, France would benefit more
from jute production and will export it to India because it has a greater comparative advantage in it.
It is due to the fact that the cost of producing Jute (80/120 labour) is less than the cost of producing
Leather (90/100 labour). At the same time, India will shift its production to leather production
because the country has the least disadvantage. International trade will benefit both countries in
this manner.
Haberler’s Theory of Opportunity Cost
Ricardo’s theory of comparative cost advantage was criticized because it was based on the labour
theory of value. According to the labour theory of value, the value of a good is equal to the amount
of labour time involved in its production. Ricardo discovered that labour was the only factor of
production, that it was homogeneous, and that it was used in fixed proportions in the production of
all commodities. Although all of these assumptions were found to be unrealistic because there are
other factors of production besides labour, labour cannot be used in uniform proportions, and
labour can be substituted with capital in countries where capital is cheaply available. Because of
these flaws, Haberler developed his theory of Opportunity Cost. According to the theory, if a country
produces either A or B commodity, the opportunity cost of commodity A is the amount of
commodity B sacrificed in order to obtain an additional unit of commodity A. Nonetheless, the
exchange ratio of the two goods is expressed in terms of opportunity cost. Along with the
production possibility curve, the concept has been used in international trade theory. Haberler’s
theory is based on the following assumptions:
According to the theory, a production possibility curve (PPC) depicts various alternative
combinations of the two commodities that a country can produce more efficiently by utilizing both
factors of production and the technology at hand. The slope of PPC calculates the amount of one
good that a country must give up in order to obtain an additional unit of another good. The slope of
PPC, on the other hand, explains the marginal rate of transformation (MRT). Haberler’s theory was
thought to be superior to the comparative costs theory of international trade. Its superiority stems
from an examination of pre-trade and post-trade conditions under constant, increasing, and
decreasing opportunity costs, whereas comparative cost theory was founded on constant
production costs within a country and comparative advantage and disadvantage between the two
countries. Despite its contributions to international trade, Jacob Viner has criticized the theory of
opportunity cost on the following grounds:
Mill’s Theory of Reciprocal Demand

J. S. Mill applied Ricardo’s concept of comparative cost. This means that labour productivity varies by
country. According to Mill, reciprocal demand is the ratio in which two commodities are traded
based on the strength of demand elasticity in both countries for both A and B commodities. J.S. Mill
used the concept of an offer curve in his theory. Although, Marshall and Edgeworth introduced the
concept of offer curves, the theory is predicated on the following assumptions:
The theory can be explained using the example given in Table 4.3 based on the above assumptions:
Assume France produces of linen or jute in one year, whereas Italy produces 6 units of linen or 8
units of jute with the same labour and time factors. According to J.S. Mill, “It will benefit Italy to
import linen from France and France to import jute from Italy.” It is because France has an absolute
advantage in both the production of linen and jute, while Italy has the least comparative
disadvantage in the production of jute. Prior to entering into trade with each other, France’s
domestic cost ratio was 1:1, and France’s domestic cost ratio was found to be 3:4. However, if they
trade with each other, France has a 5:3 (or 10:6) advantage over Italy in the production of linen,
while Italy has a 5:4 advantage in the production of jute (or 10:8). Nonetheless, 5/3 is greater than
5/4. In the production of linen, France has a greater comparative advantage. As a result, France will
benefit from exporting linen to Italy in exchange for jute. Similarly, Italy’s position in the production
of linen was determined to be 3/5 (or 6/10), while its position in the production of jute was
estimated to be 4/5 (or 8/10). However, 4/5 is greater than 3/5, so it is advantageous for Italy to
export Jute to France in exchange for Linen. Nonetheless, Mill’s theory of reciprocal demand is
concerned with the possible trade terms under which the two goods were exchanged between the
two countries. However, the terms of trade refer to the barter terms of trade between the two
countries, i.e. the proportion of a country’s imports to its exports. Furthermore, the domestic
exchange ratios recognized by the relative efficiency of labour in both countries set the limits of
possible international trade barter terms. However, it is clear from the example. above that France,
with two labor-time inputs, produces 10 units of linen and the same number of units of jute,
whereas Italy, with the same labour time, can produce 6 units of linen and 8 units of jute. However,
in France, the domestic exchange proportion between linen and jute is 1:1, while in Italy, it is 1:1.33.
As a result, the maximum possible terms of trade in France were 1 Linen: 1 Jute, while in Italy it was
calculated to be 1 Linen: 1.33 Jute. As a result, the trade terms between the two goods were
determined to be 1 Linen or 1 Jute or 1.33 Jute.
Q13- Discuss the importance of international business.. (v v v v v imp)

ANS- DOMESTIC VS INTERNATIONAL BUSINESS
The basic principles of business concerning tasks, functions, and processes that apply to
international business are the same as that of domestic business. However, the environment in
which domestic and international firms operate varies considerably and therefore requires an
international firm to modify and adapt its business practices country by country. Unlike a domestic
business manager, an international manager faces greater difficulties, greater uncertainties, and
more importantly, much greater risks. The tasks of an international business executive are clearly
much more challenging. These difficulties, uncertainties, and risks originate from differences in the
political, economic, legal and cultural environment, and from differences in foreign exchange
markets and exchange rate systems. In most cases, these problems manifest themselves as
constraints which render the process of decision-making and its implementation in international
business more difficult (and in some cases, more hazardous) than in domestic business. More
importantly, culturally insensitive decisions often result in conflicts which are more difficult (and
costly) to resolve without seriously affecting the performance of the firm, its future operations, and
the effectiveness of its management. The dynamic nature of constant changes in business,
economic, political, and legal environments in the host country adds still more difficulties with which
the international business executive must deal on an almost daily basis.
importance of international business -
In recent years, international business has acquired additional importance for host countries in
particular and world economies in general as a result of developments in the following areas
Technology Diffusion-
Technological developments are transmitted to every corner of the earth through the practice of
international business. This transmission is not only in the form of products and services used every
day, but also in the form of modern management, production, marketing, and logistics systems
employed by domestic as well as international firms. And thanks to the dramatic developments in
communication and information technology, the benefits of such transmissions are shared
worldwide.
Stimulation to Competition
Except in the case of entry through acquisition, the arrival of an international firm in the host
country, either in partnership with a local firm or on its own, may stimulate domestic competition
and lead to increased entrepreneurial challenges, especially in the developing countries.
International firms with superior worldwide experience, knowledge, technology, and other relevant
resources have the ability to offer goods and services often at lower prices and higher quality.
Higher Standard of Living
Availability of a wide range of goods of international quality at competitive prices has brought many
so called “luxury” products within the reach of common man, especially in developing countries.
Thanks to international business, the standard of living in many developing countries has increased
significantly.
Impetus for Standardization
Standardization refers to the adoption of norms and practices generally acceptable in world
markets. In some cases, one standard product may be sold throughout the world using similar selling
techniques. Common standards enable easier and more effective comparisons to be made by
consumers and other interested parties, e.g., health and safety authorities. The product
standardization has become an easier option due to diminishing differences in consumer tastes,
preferences, and interests. This is due to advances in technology, telecommunication, transport, and
advertising.
Adapting to International Environment
A business firm operates within its internal and external environment. The internal environment is
one over which the firm has considerable control: the firm determines its own internal
environmental factors by specifying its corporate mission, organizational structure, recruitment
policy, and its relationship with suppliers, etc. The external environment is one over which the firm
has little or no control. Whatever little control the firm may have is usually the consequence of its
market power or collective action by a representative body, such as the Confederation of British
Industries (CBI) in Britain or the Confederation of Indian Industries (CII) in India. The firm must,
therefore, conform to its external environmental factors, whether they may be national,
international, or global, or suffer the consequences of its failure to do so. For example, changes in
health and safety regulations, trade policies, and the legal environment are unavoidable. Nike, one
of the world’s biggest manufacturers of sports and leisure wear, was forced into cancelling its
licensing agreement with one of its Asian licensees suspected of employing child labour With the
increasing internationalization of business activities, the methods of dealing with internal and
external environmental factors tend to become more standardized. The main reason for this
development is that domestic firms aspiring to expand internationally often emulate existing
international firms in adapting to environmental changes. In other words, international business acts
as an instrument for domestic firms to adopt more effective business policies and techniques as a
preparation for going international. For example, many US and European firms have adopted
Japanese management techniques, such as quality circles, the just-in-time system (JIT), and total
quality management (TQM) in order to remain competitive in their own domestic markets in general
and in international market in particular.
Encouragement to Global Business and Economic Reforms
Governments play an important role in the development and promotion of international business
activities. They provide a great variety of financial and non-financial incentives to attract FDI into
their countries, often in competition with their neighbours. The increasing scale of liberalization of
trade and investment, deregulation of domestic industries, and privatization of state-owned
enterprises has the attraction of foreign business as one of its primary objectives. These measures
have created immense international business opportunities. The major impact of international
business in this context has been the encouragement to governments to open up their borders to
international trade and investment, standardize their systems and procedures, adopt internationally
acceptable values and attitudes, particularly with respect to human rights and child labour, and
encourage the development of democratic institutions.
Economic Cooperation and Integration
One of the most fundamental impacts of the process of internationalization since the end of World
War II has been the progressive ending of the isolation of national economies. Gradually more and
more barriers to international trade and investment are being replaced with measures designed to
enhance cooperation and coordination among nation states. The need to cooperate and coordinate
over wider geographical areas has led to the formation of regional groupings in the form of free
trade areas resulting in rapid increase in the growth of international business activities.
Q14- Discuss the concept of strategic alliances and Types of Strategic Alliances (v v v v v imp)
ANS- CONCEPT OF STRATEGIC ALLIANCE - Strategic alliances are “voluntary agreements between
firms for exchanging, sharing, or co-developing of products, technologies or services. Strategic
alliances are businessoriented collaborations aimed for gaining competitive advantages and avail
extended ownership solutions for business.
Alliances are of two kinds, contractual and equity based. The former includes comarketing, research
and development contracts, turnkey projects, strategic suppliers, strategic distributors and
licensing/franchising. They require lower commitments and their scope is limited. Alternatively,
equity based alliances require higher commitments, and includes, strategic investment, cross
shareholding and joint venture. Another important aspect of strategic alliances are strategic
networks, which are a kind of joint ventures for gaining competitive grounds and gain business
advantage from each other’s strengths. The recent case of business alliance of Louis Vuitton and
BMW is much in news as both the industries are quite different but have something in common, the
customers for luxury product. They enter into a strategic alliance as both offer exclusive luxury
brands focused on craftsmanship. The logic is simple, one who can afford a BMW vehicle, can
probably also afford a Louis Vuitton bag. Hence; it is their shared audience and values that has
facilitated both the partners to join hands. Their recent ad-promotional reminds of win-win when a
model shows a Louis Vuitton bags with the BMW i8 sports car
Comprehensive Model of Strategic Alliances and Networks
The aspect of strategic alliance is based on the industry based, resource based and institution based
considerations. This is also illustrated in Figure.
FIG- A Comprehensive Model of Strategic Alliances and Networks

According to the Industry Based View; the most firms are independent players and are interested in
maximizing their own profits. Many firms within the business collaborate within themselves
(horizontal alliances) to gain competitive grounds. Sometimes; due to high entry barriers, the firms
align within themselves to enter any market. In many cases the suppliers also collaborate within
themselves to enter new markets. The cartelization helps them to gain foothold in those markets.
Fourth, instead of treating the buyers and distributors as possible threats, establishing distribution
alliances (also called as downstream alliance) may bind the local firms, buyers and distributors
together. Finally, the market potential of substitute products may encourage firms to form strategic
alliance and networks to materialize the commercial potential of these new products.
The Resource Based View covers several aspects of Value, Rarity, Imitability and Organizational
(VRIO) framework aspects of strategic alliance and networks. Strategic alliances and networks must
create ‘value’. The strategic alliance and networks reduce costs, risks and uncertainties, and allows
the firms to tap into their partner’s complementary assets. As a result, it leads to innovation and
learning opportunity for partners. The second aspect of the framework is ‘rarity’ which has two
dimensions, the first being the ‘capability rarity’ and the second is the ‘partner rarity’. The capability
to handle inter-firm relationships is sometimes referred to as relational capabilities. This is about the
kind of relationship skills which are required to foster trust and confidence with partners for
sustaining in the long run. The partner rarity is about defining key parameters which will be
important for organizations in future to decide the potential partners.
The imitability aspect pertains to two levels, first being the ‘firm’ and second is the ‘alliance or
network’ level. At the firm level; it is about how well the resources and capabilities are imitated by
the partners. The second aspect about the alliance or network
is about the trust and understanding, which, in turn, forms the basis of any successful alliance. The
last factor of the framework is the ‘organization’. The kinds of resources an organization is endowed
with, has its bearing on the strategic alliance. This is about, how firms over the years develop
mechanisms and systems to handle alliances where operations are varied and large in nature.
Especially, for MNE’s there are separate departments which handle all alliances. These dedicated
sections ensure successful running of the alliances and network as a part of the organization.
The Institution Based Considerations include the formal and informal aspect to it. Strategic alliances
and networks function within a set of formal regulatory frameworks. These formal institutions
impact the antitrust concerns and entry mode requirements. They also impose sanctions and
minimum requirements for the market entry modes. Informal institutions are based on collective
norms, supported by a normative pillar. The last set of informal institutions stress the cognitive
pillar, which is based on internalization of values and beliefs that guide firm behaviour.
TYPES OF STRATEGIC ALLIANCES
Global alliances are more complex process for any internationally engaged firm. The success or
failure involves in global alliances entails far-larger stakes for any firm economically and strategically.
According to Doz and Hamel (1998) there are three broad types of strategic alliances:
A-- Coalition: This is an alliance of the competitors, distributors, and suppliers in the same industry;
pooling their resources and capabilities together in such a manner that they are able to gain better
hold of the global markets. For example, STAR alliance network in the airlines industry is an example
of coalition
B-- Co-specialisation: In this alliance, the unique capabilities are pooled together for developing new
products or technologies. In this case each partner contributes to a unique asset, resource or
competence. For instance, India and Japan has decided in 2019 to co-develop 5th and 6th
generation communication technologies, pooling strengths of each other wherein Japan has
specialization in IT Hardware and India’s core strengths lie in the development of software. Similarly;
Rolls-Royce and Hindustan Aeronautics Limited (HAL) has signed an agreement in 2021 to
manufacture parts for Rolls-Royce’s Adour engines under ‘Make-in-India’ program of government of
India. Airbus and GE SNECMA are examples of such alliances.
C-- Learning alliance: These alliances are formed for know-how transfers, particularly, knowledge
transfers. For example, Honda is spending $2.75 billion to join General Motors’ autonomous vehicle
unit Cruise Automation in 2017. The endeavour is aimed at learning the futuristic ideas. Similarly,
Mazda and Toyota has entered into a business and capital alliance in 2017 to learn from each other
experience in manufacturing and create a new type of value for future mobility. This includes
projects for electrification, alternative eco-friendly technologies and enhanced connectivity and
commuting option for customers.
Alliances begin with the classic equity alliance or joint venture. It is formed when two or more
distinct firms pool a portion of their resources in a separate but jointly owned organization. In such a
joint venture or alliance, the equity stakes may be equal or one of the partners may hold more than
majority. These could be Greenfield Projects (completely new investments) or a divisional merger
whereby two separate divisions of two partnering firms merge themselves to form an alliance.
Alliances may take several forms, namely, technology licensing, joint research and development,
joint product development and joint distribution and marketing. Unlike equity alliance, divisional
mergers are easy to form and dissolve, since partnering firms have minimum or no stakes. The third
kind of alliance, minority equity alliance, involves one parent company making a minority investment
in another. Minority equity alliances are used frequently in industries which rely on high-end
technology and one of the companies is technologically outdated or has obsolete technology and is
intending to offer a minority stake to a company for sharing their technology, technical or
managerial know-how. Industries like telecommunication, software and biotechnology are some of
the places where minority-stake investment strategies are commonly deployed or leveraged. The
minority equity alliance can be a hedge, in which the larger firms may have an option to later
purchase a majority equity stake in its smaller partner. Minority equity alliances are also used when
there are governmental restrictions on full acquisitions.
The type of alliance to be forged is also dependent on the scope (global or local) and the objective
(market access or capabilities enhancing) of the organization. Local alliance is the one in which the
object is for a foreign company to penetrate a local market or to have access to a set of resource
available in a particular country. A Global alliance is the one in which the object would be either to
develop a global market presence or to enhance the worldwide competitive capabilities of the firms.
There are three broad types of global alliance. In nutshell, it can be concluded that coalition is an
alliance of competitors, distributors and suppliers in the same industry pooling their capabilities to
reduce cost or establish standards with the ultimate goal of developing market reach. Co-
specialisation is alliance of firms that join their respective unique capabilities to complement each
other in order to create a business or to develop new products/ technology. Lastly; for partners to
transfer technical and managerial know-how or to develop new competencies, a learning alliance is
formed.
Q15- Examine the various strategic issues involved in International Operations Management ?(v v
v v v imp)
ANS- International Operations Management - Operations Management is becoming more and more
international in its scope. Even a firm, which markets the products/services only within domestic
market, may be conducting its business operations internationally like sourcing of the inputs or
finished products internationally and even manufacturing the products internationally. A dynamic
company will take advantage of the favourable conditions that exist anywhere in the world. We may
say that International Operations Management refers to the transformation of raw material into
finished goods and other related activities of an international firm. There are several advantages in
planning for large-scale production for international markets rather than producing for domestic
markets.
These may include:
1-- Cost of Production: The firms producing globally can take advantage of location advantages i.e.
producing close to sources of supply (raw material) or close to customers keeping in mind the cost-
cutting of products or creating value proposition for its customers. For instance, Apple outsourced
its manufacturing operations to low cost (low wages) destination like China and India. Global auto-
components manufactures are locating to India for cost advantages for global operations. Global
retail chains get their textiles and apparel stitched or produced in Bangladesh or Vietnam for cost
advantages.
2-- Scale of Economies: A firm can take advantage of scale of economies e.g. Coco-Cola sells
standardized soft drink in more than 160 countries across the globe. It also adds to the advantage of
the ‘global experience curve’ by learning from global markets. However, two criteria must be taken
into consideration while taking advantage of scale of economies and experience curve:
a) It must create value for a customer, and
b) The demand must be sufficiently large to reap the scale advantages.
Moreover, internationally engaged business firms seeks to create ‘values proposition’ through
manufacturing operations, for instance, they may consolidate manufacturing for several nearby
countries to take advantage of economies of scale and reduce the shipping cost and tariffs. A firm
can substitute higher cost foreign suppliers and can also reduce transportation costs. They can sell
the same products in several contagious or nearby countries; they can also shift production
processes among plants in different countries to achieve process specialization, cost cutting and
reap benefits of factor endowments.
Thus, it can be concluded that Operations Management is significant for a firm, as manufacturing
function provides a strategic intent to any firm to compete successfully in the international market.
Other related areas of significant importance in Operations Management are; Total Quality
Management (TQM), Business Process Re-engineering, New Product Development, Lead Time,
Greater Flexibility, Business Process Outsourcing, Six Sigma and Reduced Cost of Production. Exhibit
presents a model of International Operations Management in relation to conversion process.
FIG- : Model for International Operations Management

STRATEGIC ISSUES IN INTERNATIONAL OPERATIONS MANAGEMENT
Operations Management of an international business must be well integrated with the corporate
strategy of the firm. In fact corporate strategy of the firm should set the boundaries for planning and
implementation of activities relating to operations management. For example, if a firm is adopting a
differentiation strategy, international operations management must focus on creating goods and
services that are able to build a unique value proposition to its customers, which is different from its
competitors. As such, the organization’s corporate strategy dictates the strategic issues relating to
operations management, the important ones are:
• International Production Strategies
• International Logistics Management
• International Service Operations
• International Retailing
• International Supply Chain Management
International Production Strategies
International production strategies include various decision areas like sourcing and vertical
integration, standardization of production facilities, outsourcing, technology transfer, etc., (Exhibit
12.1). However, the success of International Production Strategies depends on ‘4Cs’, viz. (a)
Manufacturing Compatibility (b) Production Configuration (c) Production Coordination and (d)
Control of Production. All these 4 Cs are now discussed
A-- Manufacturing Compatibility: Compatibility is the range of consistency between foreign
investment and company’s competitive strategies. Managers must consider following strategies:
1-- Cost minimization/efficiency Strategies: The driving force here is to establish economies of scale
and producing in the countries where labour costs are low. This is the prime reason for ever-growing
foreign investments in the markets of Asia, part of Africa, Latin America and Eastern Europe. These
locations are attractive because of low labour cost, the availability of cheap raw materials as well as
components and the proximity to the market. We have witnessed that as the wages rose in South
Korea, the manufacturing began to shift to other low cost destination like China, Indonesia,
Malaysia, Thailand, Vietnam, etc. China is now the world’s largest industrial base with around 28.7%
share in global production and 15% share in world trade (UNIDO, 2021 & WTO, 2021).
2-- Dependability: It is the degree of trust in company’s products; its delivery assurance and price
promises.
3-- Quality: Quality refers to the ability of a product or service to consistently meet or exceed
customer’s expectations. Quality offers competitive advantage to a firm. Honda, Nissan and Toyota
captured US market because of the quality only. TQM and quality certification are essential for
success in global arena. Performance reliability, service quality, speed of delivery and consistency are
all important components of quality aspect.
4-- Flexibility: It refers to the ability of the production process to make different kinds of products
and to adjust the volume of output. This relates to the concept of agile manufacturing.
5-- Research & Development (R&D): It refers to the organized efforts that are directed towards
increasing scientific knowledge and product or process innovations. Most of the advances in semi-
conductors, communication, medicine and aerospace technology can be attributed to R&D efforts.
B-- Production Configuration: Management of the firm needs to determine the configuration of
production facilities. There are three basic configurations:
Q16- Explain the concept of globalization and describe the drivers of globalization?(v v v v v imp)
ANS- CONCEPT AND MEANING OF GLOBALIZATION - ‘Globalization may be hard to define, because
the term “globalization” could be defined from different points of view. Globalization is perhaps the
most important force at work in contemporary society, business, management and economics
(Stonehouse et. al., 2004). While some people think of globalization as primarily synonym to global
business, in fact, it is much more than that. Economic globalization has been joined by political
globalization leading to providing opportunities to respond to globalization challenges.Technological
globalization accelerated the rapid diffusion of free enterprise through new means of
communication. Many new opportunities are coming from the advances in computer technology. E-
commerce and Internet are changing many a selling and purchasing process. The Internet has
emerged as a vital tool linking enterprises/firms internally and externally with customers, strategic
partners and critical suppliers. The computer network expanded technological possibilities of data
exchange with 200 countries (Krajewski et.al. 2005). Together, economic, political and technological
globalization has spawned a new phenomenon called psychological globalization which is defined as
deepening relationships and broadening interdependence among people from different countries.
DRIVERS OF GLOBALIZATION FOR AN INDUSTRY
An industry becomes global because of the occurrence of certain factors. From that stand point,
every industry cannot be a global one. There are certain drivers which determine the potential for
globalization of an industry.
There are four broad groups of drivers of globalization of an industry. These are: Market, Cost,
Government and Competition. Together, these four sets of drivers cover all the major critical
industry conditions that affect the potential for globalization. The drivers are primarily
uncontrollable and each industry has a level of globalization potential that is determined by these
external drivers.
Proponents of global marketing argue that because market needs are homogenous, country
differences are less relevant to international marketing planning. Yet, others assert that the
existence of global markets is a “myth”. They point to the many contradictory trends around the
world, suggesting stark differences in national markets and hence the need for adaptation and
customization of international marketing, based on individual country differences.
The removal of trade barriers and the growing similarity of national markets created the potential
for globalization of markets and competition. The development of MNCs or of global networks
allying independent firms, cheap technology, and effective transportation & communication services
has provided the practical means necessary for the integration of supply-chains. These conditions
are necessary, but not sufficient. Intense competition in most industries is the driving force
necessary for integration and globalization.
A discussion on globalization (for example, Cavusgil and Zou, 1994) has shifted the attention to a
more fundamental issue: the underlying motives of the firm. Jain (1989) asserts that strategy
adaptation (versus globalization) is the means to an end – the establishment of a firm’s economic
assets and competitive position in the market place. The fundamental question is ‘when a firm
operates in an overseas market, what are its ultimate objectives?’ The need to broaden the
discussion to include the firm’s strategic perspective in this debate has been articulated by several
authors (e.g., Walters; Douglasand Craig; and Szymanski, Bhardwaj and Vardarajan).
Until recently, studies have treated a firm’s choice of its global or local strategy, as the outcome
variable, that is the result of a firm’s marketing plan. Recent studies have expanded this limited
scope, to study how global or local strategies affect the overall position of the firm. Douglas and
Wind and Jain point out that one key pay off of the decision on globalization and adaptation is the
competitive advantage of the firm. While discussing alternative product policy options for firms,
Walters and Toyne emphasize the need to evaluate such options in the context of the competitive
strategy of the firm.
The following four factors affect a company’s ability to formulate and implement global strategy:
Figure elaborates the above factors further. The figure gives an overview about the external drives
of industry potential for global strategy
Figure : External Drivers of Industry Potential for Globalization

The potential for global strategy include following four factors:
FIRST PRIORITY MOST IMPORTANT SHORT QUESTIONS

Q1- World Trade Organisation (WTO)? (v v v v v imp)
ANS- The World Trade Organization (WTO) is the only global international organization dealing with
the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by
the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers
of goods and services, exporters, and importers conduct their business.
WTO – World Trade Organisation, was established in 1995 as the heir organisation to the GATT
(General Agreement on Trade and Tariff). GATT was founded in 1948 with 23 nations as the global
(international) trade organisation to serve all multilateral trade agreements by giving fair chances to
all nations in the international exchange for trading prospects. WTO is required to build a rule-based
trading government in which countries cannot place unreasonable constraints on trade.
In addition, its mission is to increase stock and trade of services, to assure maximum utilisation of
world resources and to preserve the environment. The WTO deals include trade in commodities as
well as services to promote international trade (bilateral and multilateral) through the elimination of
the tax as well as non-tariff obstacles and implementing greater marketplace access to all member
nations.As an influential member of WTO, India is at the lead of building fair global laws, statutes
and shields and supporting the concerns of the developing system. India has fulfilled its promises
towards the liberalisation of trade, made in the WTO, by eliminating quantitative limitations on
imports and decreasing tariff charges.
The World Trade Organization (WTO) is a global organization made up of 164 member countries that
deals with the rules of trade between nations. Its goal is to ensure that trade flows as smoothly and
predictably as possible.
As part of his broader attempts to renegotiate the United States' global trade deals, former
President Donald Trump threatened to withdraw from the WTO in August 2018, calling it a
"disaster. If the U.S. had moved to withdraw from the organization, trillions of dollars in global trade
would have been disrupted. The Biden Administration has committed to WTO but is stressing that
reforms are still needed.However, this was not the first time the WTO has come under scrutiny. You
may remember seeing news footage of the protests at the doors of the World Trade
Organization's (WTO) Third Ministerial Conference held in Seattle, Washington in 1999 (later dubbed
the "battle of Seattle". Similar demonstrations against the WTO have also occurred in Canada and
Switzerland throughout the 2000s and 2010sWhat exactly is the WTO, and why do so many people
oppose it? The following article addresses these questions and concerns regarding the world's only
international organization that deals with the global rules of trade.
The WTO was born out of the General Agreement on Tariffs and Trade (GATT), which was
established in 1947. GATT was part of the Bretton Woods-inspired family, including the International
Monetary Fund (IMF) and World Bank. A series of trade negotiations, GATT rounds began at the end
of World War II and were aimed at reducing tariffs for the facilitation of global trade.The rationale
for GATT was based on the most-favoured-nation (MFN) clause, which, when assigned to one
country by another, gives the selected country privileged trading rights. As such, GATT aimed to
help all countries obtain MFN-like status so no single country would hold a trading advantage over
others.
Q2- International Recruitment and Selection? (v v v v v imp)

ANS- The IHRM literature uses four terms to describe MNE approaches to managing and staffing
their subsidiaries: ethnocentric, polycentric, region-centric, and geocentric. These terms are taken
from the seminal work of Perl mutter, who claimed that it was possible to identify three primary
attitudes among international executives. These are ethnocentric, polycentric, and geocentric
approaches to build and develop a multinational enterprise. Perl mutter highlights these approaches
to develop international organizations based on certain assumptions of top management which will
help them expand product geographies and functional decision-making. To demonstrate these three
approaches, Perl mutter used aspects of organizational design, such as decision-making, evaluation
and control, information flows, and complexity of organization. He also included “perpetuation,”
which he defined as “recruiting, staffing, development.” A fourth attitude – region-centric - was
added later. You will recall that these four approaches were earlier discussed in the context of
managing international marketing decisions (i.e., how a firm strategize and adapt its products and
services to international markets but the context here is different).
Approaches to International HRM
A multinational enterprise uses any one of the following four approaches or a mix of some of these
to meet its manpower requirements:
Ethnocentric approach is characterized by MNEs preference for using home country nationals for all
senior positions and rewarding them more generously over the host country nationals. The
discrimination if carried too far alienates and demoralizes the host country’s employees.
In polycentric approach the host country nationals are preferred for local positions. The local units
get greater degree of autonomy in recruiting personnel for managerial and other positions. The
knowledge of local language, culture and environment on the part of local managers helps create a
more favourable attitude among employees of the local organization and also with the suppliers and
customers. The risk associated with too much localizing is that it may alienate the local unit(s) from
the mainstream organization.
In region-centric approach, managers are recruited on regional basis and these may include some
employees from parent country but a larger section from the host country or region. For instance, an
American multinational operation, in Europe may prefer to have European managers at regional
headquarters in Europe in large numbers instead of sending all the business heads from the
headquarters.
The geocentric approach is based on the philosophy of global outlook of the management. It shows
MNEs commitment to employ best brains available from anywhere. The top positions even at the
headquarters may go to host country or even third country nationals. Very few multinationals follow
this approach as the culture and tradition of the corporation is built-over the years on the basis of
certain objectives, philosophies and practices.
Q3- Factors Influencing Entry Modes? (v v v v v imp)

ANS- By now you have learnt different theories of internationalization which can help a firm in
making an appropriate entry decision for international markets. Let us now try to understand the
effects of certain factors on the market entry decision of the firm. The market entry factors for any
organization depend on several external factors, such as:
Country attractiveness remains one of the most important aspects for making market entry
decisions.While evaluating country attractiveness, the market and industry opportunity needs to be
assessed for a specific market. The general attractiveness is dependent on the opportunity and risk
analysis. The context of opportunity will change from industry to industry and accordingly the risk
will also change. The market opportunities are based on market size, market growth, and quantum
of demand of products and services. Similarly; the industry opportunities are based on quality of
competitive climate, industry competitive structure and investment incentives granted by the
governments.
Country risk is the second factor that needs to be assessed before entering into any market. The
country risk is dependent on the political and operational risks.The stability factor of the economy
remains critical while assessing country risk. Compared to Europe, doing business in Africa may be a
different proposition and this is dependent on the internal stability of the region. The other factors
can be regulatory risks, trade barriers, currency risks, cultural distances and institutional norms.
The third factor influencing the market entry decision in international markets is that of government
policies. Government policies vis-a-vis the foreign investments and companies including the kind of
regulatory support offered have its important bearing on the market entry decision. Government
policies reflect the long-term orientation for the industrial polices and role of MNEs. The growing
interest of foreign companies in the production-linked incentives scheme for promoting domestic
manufacturing is a result of government policies. Similarly, the government of India is offering
almost US$12 billion as subsidies to the chip-manufactures to set-up their plants in India. This will
improve the eco-system of domestic manufacturing and promote local employment, economic
opportunities and exports. Government policies have another dimension of political risks, for
instance, a foreign company is always concerned about the nationalization of assets, expropriation,
import restrictions, economic blockage, etc. Due to Russia-Ukraine stand-off in 2021, many
companies have moved to safer places for business.
Timing also influences the decision of international market entry. When an economy opened-up, it
makes sense to enter rather than when many other firms have established themselves to give tough
competition for market entry (Shad Morris, James Oldroyd & Ram Singh, 2021). This is also known as
the first-mover advantage.
The internal capabilities of the firm refer to entering and developing local resources, assets and
competencies in order to gain and sustain competitive advantage. The last aspect on the cost benefit
analysis refers to the expected return on investment.
Q4- Effects of Globalisation? (v v v v v imp)

ANS- The definitions of globalization given by various thinkers. You might have noted a common
feature of the definitions by these thinkers who regard globalization as a process of increasing the
economic, political, cultural and technological interdependence among nations and countries.
Globalization is a process by which there is an increase in inter-connection and dependence between
nations, people and businesses through greater cross-country mobility, communication and cross-
cultural exchanges. Thus globalization process has given impetus to greater global production and
distribution of products and services of a homogeneous kind on a world-wide basis. Now we can
demarcate the separate areas of the effects of the process of globalization. These areas of effects of
globalization are as follows:
1-- Integration of Economies: Globalization essentially leads to greater interdependence among
countries. For instance, China is a largest producer of raw material for pharmaceuticals, known as
Active Pharma Ingredients and Excipients. India imports huge quantities of these APIs and Excipients
from China to manufacture a variety of generic drugs to world market. India is referred as the
pharmacy of the world for its innate capacities to supply generic drugs to world markets at a fraction
of cost of what some of these drugs are sold in developed countries. In this process, the entire
mankind benefits from the raw material expertise of China and manufacturing excellence of India for
supply of low cost generic drugs to world markets.
2-- Integration of Strategy: A global strategy would require establishing the brand name and
products in prominent markets globally, in order to reap the benefits of competitive advantage
through scale, scope, systems and synergy economies. This further facilitates integration of global
vision, business strategy and business activities throughout the world.
3-- Integration of Industries: Globalization facilitates the increase in integration of production
activity and distribution of value added goods to world markets on the basis of competitive
advantages. Global industries become inter dependent enjoying location advantages by virtue of
their presence in host, parent or third world countries and leveraging the cost-effective factors of
production in the entire supply chain operations of a firm.
4-- Integration of Markets: Globalization leads to lowering of tariff and nontariff barriers thus
providing bigger market access. The consumers further benefit from cultural globalization as they
start using the standard products as being consumed or used in developed countries. The name and
brand products are popularly known in various markets under the waves of socioeconomic
globalization. This has created homogeneity in tastes and liking of end users for a product in specific
markets.
The process of globalization integrates global economies, global strategy, global industries, global
markets, global drivers and global players in order to create organizations for global environment. It
has created integration of services, resources and products thus creating a boundary-less
environment
Q5- Legal Environment? (v v v v v imp)

ANS- There are different dimensions of legal environment prevailing within a country and its
resultant impact on the firms engaged in the business.
Q6- Matrix organization structure? (v v v v v imp)

ANS- Matrix structures are often found in organizations pursuing growth in dynamic and complex
environments. The matrix provides a way of coordinating different functional contributions to serve
specific program needs. The advantages associated with this type of structures are as follows:
Q7- INTERNATIONAL CONSUMER BEHAVIOUR? (v v v v v imp)

ANS- Marketing, in the international context, is complicated by varying consumer behaviour, which
itself is governed by a number of factors, that are sometimes uncontrollable. The first step,
therefore, is to classify the factors as controllable and uncontrollable factors. The controllable
factors must be taken care in any international marketing operations, and there should be
continuous tracking of the uncontrollable factors in order to understand their impact, especially
when they turn unfavourable.
The uncontrollable factors affecting international marketing decisions are:
SECOND PRIORITY MOST IMPORTANT SHORT QUESTIONS
Q1- Ethics, corporate social responsibility and corporate philanthropy? (v v v v v imp)

ANS- Corporate Philanthropy- Philanthropy is most often seen in the form of financial contributions,
but it can also include time and resources. The concept behind philanthropy involves making an
effort to drive social change. It’s not only the charitable donations that can go toward any number of
direct-giving scenarios, such as disaster relief or feeding the homeless. Philanthropy involves finding
a long-term solution to homelessness, rather than delivering temporary relief. On the corporate
level, philanthropy is practiced in many different ways. Many corporations simply donate money to
causes that are intended to bring about social change. They may or may not place their brand on the
cause and take credit for the resources offered. This kind of giving often happens without any direct
involvement outside of the funds offered. Corporations may also be directly involved in philanthropy
by partnering closely with a cause, or, in some cases, by bringing the efforts in-house. Some
corporations have entire departments dedicated to managing their charitable gifts and philanthropic
programs. Although philanthropy and charity are separated by definition, the two are commonly
lumped into a single category within the corporate atmosphere. Philanthropy and charity are both
programs of giving that are not necessarily limited to the communities where they operate. Most
often, they simply select causes and then contribute on a financial level.
Corporate Social Responsibility
Corporate social responsibility directly involves the corporation’s business model and its business
practices. It goes a step further than philanthropy by directly involving the corporation in the causes
and in the community. For example, a mining company should implement cleanup programs to
mitigate pollution from the operation. Leaving a polluting mine after the work is done is
irresponsible, and it has negative consequences for the community and for the health of the
community. Corporate social responsibility is not mandatory and is not always practiced, but it
should be a major aspect of any large-scale corporation, as some negative side effects may stem
from the business practices. Corporate Social Responsibility or CSR means that the corporation is
working to mitigate potentially negative effects on the community and also to solve for the effects it
has socially, environmentally and on general public health. So what is the difference between CSR
and philanthropy? Philanthropy is simply a way to reinvest wealth in a cause. It can happen at the
corporation’s leisure; it is purely optional. If the corporation does not participate in philanthropy, it
will likely not affect the way the corporation is viewed. Failing to implement CSR, however, will cast
the corporation in a negative light. The mining example is a common example, and numerous
examples exist in natural resource extraction in general because the business has heavy
environmental impacts. If the mining company removes all of the precious metals possible then
abandons the mining site that is leaching chemicals into local waterways, they are failing the
community and foregoing their Corporate Social Responsibility obligations. The same principles
would apply to a coal company that fails to deal with worker health issues, such as as black lung.
Failing to address community health and environmental effects directly means that the company is
failing the community, rather than serving the community. A Corporate Social Responsibility
program would hire mitigation teams to seal and cap mining sites to stop harmful chemical leaching,
or they would set up health services in the community to treat black lung, as well as other
respiratory issues developed while working underground. The CSR programs are hands-on and
ultimately demonstrate that the corporation cares about the issues created as a result of its business
model. Corporate Social Responsibility in practice often looks much different than it should however.
Many corporations implement feel good type programs to place their brand in a favorable light but
the programs offer little in the way of resources.
ETHICS-
Business ethics studies appropriate business policies and practices regarding potentially
controversial subjects, including corporate governance, insider trading, bribery, discrimination,
corporate social responsibility, fiduciary responsibilities, and much more. The law often guides
business ethics, but at other times business ethics provide a basic guideline that businesses can
follow to gain public approval.
Business ethics ensure that a certain basic level of trust exists between consumers and various forms
of market participants with businesses. For example, a portfolio manager must give the same
consideration to the portfolios of family members and small individual investors as they do to
wealthier clients. These kinds of practices ensure the public receives fair treatment.The concept of
business ethics began in the 1960s as corporations became more aware of a rising consumer-based
society that showed concerns regarding the environment, social causes, and corporate
responsibility. The increased focus on "social issues" was a hallmark of the decade.
Since that time, the concept of business ethics has evolved. Business ethics goes beyond just a moral
code of right and wrong; it attempts to reconcile what companies must do legally vs. maintaining
a competitive advantage over other businesses. Firms display business ethics in several ways.
There are several reasons business ethics are essential for success in modern business. Most
importantly, defined ethics programs establish a code of conduct that drives employee behavior—
from executives to middle management to the newest and youngest employees. When all
employees make ethical decisions, the company establishes a reputation for ethical behavior. Its
reputation grows, and it begins to experience the benefits a moral establishment reaps:
 Brand recognition and growth

 Increased ability to negotiate
 Increased trust in products and services
 Customer retention and growth
 Attracts talent
 Attracts investors
Q2- The concept of BRICS? (v v v v v imp)

ANS- BRICS is an acronym for Brazil, Russia, India, China, and South Africa. Goldman Sachs
economist Jim O'Neill coined the term BRIC (without South Africa) in 2001, claiming that by 2050
the four BRIC economies would come to dominate the global economy. South Africa was added to
the list in 2010. This thesis became conventional market wisdom in the aughts. But there were
always skeptics, including some who claimed the phrase was Goldman marketing hype. Indeed, few
talk about BRICS much anymore—at least not in terms of their global domination. Goldman closed
its BRICS-focused investment fund in 2015, merging it with a broader emerging markets fund.
Brazil, Russia, India, China, and South Africa ranked among the world's fastest-growing emerging
market economies for years, thanks to low labor costs, favorable demographics and abundant
natural resources at a time of a global commodities boom It's important to note that the Goldman
Sachs thesis wasn't that these countries would become a political alliance (like the EU) or even a
formal trading association. Instead, Goldman said they have the potential to form a powerful
economic bloc, even acknowledging that its forecasts were optimistic and dependent on significant
policy assumptions. Still, the implication was that economic power would bring political power, and
indeed leaders from BRICS countries regularly attended summits together and often acted in
concert with each others’ interests.
The BRICS countries, from 2009 to 2014, agreed on economic and financial issues, including World
Bank and IMF reforms. They agreed to undertake measures of mobilizing sufficient resources so that
the IMF can strengthen its potential to combat all kinds of crisis. They also created the BRICS
Interbank Cooperation Mechanism that provides Extending Credit Facility in Local Currency and the
BRICS Exchanges Alliance.The BRICS nation offered a source of foreign expansion for firms and solid
returns for institutional investors. They also focused on some regional issues, including the problems
related to Libya, Syria, Afghanistan and Iran (their indigenous nuclear program). BRICS also
coordinated together in resolving:
 Conflicts
 IMF reform
 The struggle against illicit drug trafficking
 The need, use, and development of technologies in information and
communication
The BRICS countries also sought to create favourable conditions for barrier-free
trade.
Q3- International Trade Policy? (v v v v v imp)

ANS- International trade plays an important role in enriching the economic growth of any
nation. Through specialization and division of labor, trade promotes efficient utilization of
scarce resources. Since trade is part of a country’s Gross National Product (GNP), it plays a
pivotal role in providing employment, raising standard of living, and enabling consumers to
choose from a wider set of goods and services. Trade policies, in turn, decide the path and
course of international trade by setting barriers, providing incentives to domestic producers,
and promoting trade relations with various nations. For this reason, vigorous foreign trade
policies and government reforms are of great importance for enabling efficient trade and
economic practices. As the Indian economy continues with its recovery from COVID-19
which left almost every sector grappling and struggling for sustenance, the significance of
appropriate trade policy becomes even more crucial.
The Ministry of Commerce and Industry announced “New Foreign Trade Policy (FTP), 2021-
26 which came into effect on 1st April 2021. A number of changes were introduced in the
policy framework compared to the last trade policy which was launched on 1 st April 2015.
The previous policy regulations focused on increasing goods and services export, generating
sufficient employment opportunities and promoted some initiatives in line with these
objectives like “Make in India”, “Skill India”, “Digital India”, “Start-up India” and “Ease of doing
business”. On the contrary, the new policies were designed keeping in mind the objective of
making India a leader in the area of international trade and channelizing the synergies
gained through merchandise and services exports for growth and employment with a goal to
make India a USD 5 Trillion economy. The Services Export from India Scheme (SEIS) was
continued in the latest trade policy which aimed at incentivizing domestic service exporters
through providing 5-7% Incentive on Net foreign income in the form of duty credit scrips for
eligible exports. However, considering the unprecedented situation brought about by the
pandemic, the government decided to continue the relief packages under various export
promotion schemes by another year. The new foreign trade policy aims –
 To address the constraints related to regulatory and policy framework in order to

minimize the transaction cost and promote ease of doing business. These measures
are envisaged to boost exports in the long run by creating a low-cost operating
environment.
 To help the districts emerge as export hubs. The initiative would be implemented in a
phased manner with the aim of mobilizing the potential of each district to achieve its
potential as an export hub.
 To correct the persistent trade imbalance of India through improvising the
infrastructure of domestic services and manufacturing sector.
Q4- International Trade Policy? (v v v v v imp)

ANS- Discussed in long questions
Q5- Legal Environment? (v v v v v imp)

ANS- Discussed in questions 4 long
Q6- Advantages of FDI? (v v v v v imp)

ANS- Foreign Direct Investment, often abbreviated as FDI is defined as an investment made by an
individual or an organisation in one country into a business located in another. Apart from money,
FDI brings with it knowledge, technology, skills and employment. The creation of jobs is the most
obvious advantage of FDI, one of the most important reasons why a nation (especially a developing
one) will look to attract foreign direct investment. FDI boosts the manufacturing and services sector
which results in the creation of jobs and helps to reduce unemployment rates in the country.
Increased employment translates to higher incomes and equips the population with more buying
powers, boosting the overall economy of a country. Human capital involved the knowledge and
competence of a workforce. Skills that employees gain through training and experience can boost
the education and human capital of a specific country. Through a ripple effect, it can train human
resources in other sectors and companies. Targeted countries and businesses receive access to the
latest financing tools, technologies, and operational practices from all across the world. The
introduction of newer and enhanced technologies results in company’s distribution into the local
economy, resulting in enhanced efficiency and effectiveness of the industry. Many goods produced
by FDI have global markets, not solely domestic consumption. The creation of 100% export oriented
units help to assist FDI investors in boosting exports from other countries. The flow of FDI into a
country translates into a continuous flow of foreign exchange, helping a country’s Central Bank
maintain a prosperous reserve of foreign exchange which results in stable exchange rates. Inflow of
capital is particularly beneficial for countries with limited domestic resources, as well as for nations
with restricted opportunities to raise funds in global capital markets. When direct investment tends
to flow from one country to another, it presents benefits both to the home country as well as the
host country but at the same time involves some costs also. Let us see some of the advantages of
the FDI to the home as well as the host countries. The advantages to the host country are as follows:
Q7- Transfer Pricing? (v v v v v imp)

ANS- The MNEs also use manipulation, of transfer prices to covertly transfer surpluses of the
affiliates to the headquarters. The transfer price is the price at which intra-firm (i.e., between two
affiliates of a MNE) trade takes place. Hence, imports of raw materials, spare parts and capital goods
of the affiliates from the parent or other associates (and exports of affiliates to them) take place at
transfer prices. Since the transfer prices are determined by the foreign parent, there is ample scope
of their manipulation to their advantage. There is considerable evidence from India and other
developing countries of indulgence of the MNEs in manipulating transfer prices to the disadvantage
of the host nations. The extent of manipulation in certain cases exceeded 100 per cent. Thus, FDIs
affect balance of payments of the host countries, not only through initial capital inflows, foreign
exchange spent on capital goods imports and servicing remittances, but also through foreign
exchange generated through exports or saved through import substitution, imports of raw materials
and components, which could be unreasonably high, and through possible manipulation of transfer
prices.
Transfer pricing is an accounting and taxation practice that allows for pricing transactions internally
within businesses and between subsidiaries that operate under common control or ownership. The
transfer pricing practice extends to cross-border transactions as well as domestic ones.
A transfer price is used to determine the cost to charge another division, subsidiary, or holding
company for services rendered. Typically, transfer prices are reflective of the going market price for
that good or service. Transfer pricing can also be applied to intellectual property such as
research, patents, and royalties.
Multinational corporations (MNC) are legally allowed to use the transfer pricing method for
allocating earnings among their various subsidiary and affiliate companies that are part of the parent
organization. However, companies at times can also use (or misuse) this practice by altering their
taxable income, thus reducing their overall taxes. The transfer pricing mechanism is a way that
companies can shift tax liabilities to low-cost tax jurisdictions.

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SELF GYAN

01 LONG IMP QUESTIONS

02 EXTRA LONG QUESTIONS

03 VERY IMP SHORT NOTES

04 EXTRA SHORT NOTES

ये book के वल ignou एग्जाम की तैयारी कराने के

IInluces very important

fully focused for exam

Minimum preparation maximum

100 percent result

High quality materials in books

only important questions

MMPC 16- International Business Management

Product Life-Cycle Approach

Terms of Payment in International Trade

2--DOCUMENTARY COLLECTIONS: Documentary collection is one of the most preferred methods of

TRADE CREATION AND TRADE DIVERSION

Consumer Tastes and Preferences

IMPORTANCE OF INTERNATIONAL BUSINESS

Democracy: Multi-National Corporations prefer to locate their business operations in democratic

Implementation and management of the alliances-

SECOND PRIORITY MOST IMPORTANT QUESTIONS

WELFARE IMPACT OF PTAs

Q10- explain the concept of globalization And Effects of Globalization? (v v v v v imp)

Fig- Elements of International Business Environment

internationally trained staff, without culturally tinted-glasses, to independently study the

1-- Classification based on Income

2-- Classification based on Region

SOCIAL AND CULTURAL ENVIRONMENT

Mill’s Theory of Reciprocal Demand

Q13- Discuss the importance of international business.. (v v v v v imp)

FIG- A Comprehensive Model of Strategic Alliances and Networks

FIG- : Model for International Operations Management

Figure : External Drivers of Industry Potential for Globalization

FIRST PRIORITY MOST IMPORTANT SHORT QUESTIONS

Q2- International Recruitment and Selection? (v v v v v imp)

Q3- Factors Influencing Entry Modes? (v v v v v imp)

Q4- Effects of Globalisation? (v v v v v imp)

Q5- Legal Environment? (v v v v v imp)

Q6- Matrix organization structure? (v v v v v imp)

Q7- INTERNATIONAL CONSUMER BEHAVIOUR? (v v v v v imp)

SECOND PRIORITY MOST IMPORTANT SHORT QUESTIONS

Q1- Ethics, corporate social responsibility and corporate philanthropy? (v v v v v imp)

 Brand recognition and growth

Q2- The concept of BRICS? (v v v v v imp)

Q3- International Trade Policy? (v v v v v imp)

 To address the constraints related to regulatory and policy framework in order to

Q4- International Trade Policy? (v v v v v imp)

Q5- Legal Environment? (v v v v v imp)

Q6- Advantages of FDI? (v v v v v imp)

Q7- Transfer Pricing? (v v v v v imp)

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