International Business StudyNotesNepal

International Business (IB)
BBM 6th Semester

Lecture Notes
Prepared By:
Supuspa Bhattarai
Unit 1
Globalization and International Business
Concept of Globalization
• Modern globalization was driven by establishment
of the WTO and widely popularized and supported
by international institutions like UN, WB, IMF, etc
with different agenda and policy packages like
MDG, 2030 Agenda, etc. that address the global
challenges for better and more sustainable future for
all.
Meaning of Globalization
• Globalization is the process of spreading the scope
of international business activities through
interaction among and integration of people,
companies and government and optimum use of
resources.
Forms of Globalization
• Economic Globalization
• Technological Globalization
• Socio-Cultural Globalization
• Political Globalization
• Ecological or Environmental (Natural) Globalization
Drivers of Market Globalization
• The supportive drivers and features of market
globalization are:
– Regulatory(liberalization, Deregulation, Privatization
and Harmonization)
– Institutionalization (After world war II): Regional,
Bilateral, Transnational, NGOs etc.
– Technological (innovation, R&D, growth in IT,
Transportation)
– Business Techniques and Transnational Corporation
(TNCs) or MNEs (MNCs or MNEs; small and medium
enterprises)
Issues of Globalization
• National Sovereignty Erodes
• Uneven Distribution of Income and Benefits
• TNCs wipe-out SMEs and Promote Job-less growth
• Threat to social and cultural values
• Energy crisis and environmental degradation due to
prosperity and poverty
• Uncertainty to small countries
Globalization Components and Their
Impacts
• Global production and productivity with
specialization
• Global business (trade, investment, finance and
human resources etc.)
• Global market competition
• Global environmental, socio-economic, social,
political, cooperation and knowledge management
aspects.
Factors Affecting Globalization
• Expansion of Technology
• Liberalization of Economies and Cross-Border Trade
• Cost Concerns
• Development of Services that support International
Trade (easier bank credits, foreign currencies, clearing
arrangements, insurance and auxiliary (supportive)
industries)
• Growing Consumer Pressures
• Increased Global Competition
• Expanded Cross-National Cooperation
• Changing Political Situations
• International Media Outreach
Concept of IB
• IB is the performance of business activities abroad
by a citizen or a domestic enterprise in the form of
trade or investment.
• In the modern world IB goes beyond international
trade in merchandises to include services performed
and investment made in capital, technology, know-
how, management, and intellectual properties across
the frontiers.
Nature
• Need for highly communicative with IT and accurate
information for strategic decisions.
• Normally sizes of the business are larger to cover many
countries.
• Market segment is based on the geographic market
segmentation.
• There are more potential with wide in scope; and
varied in consumer tastes, preferences and purchasing
abilities, incomes and population size.
• IB is performed under different environments; with
management of FDI; Foreign exchange; international
finance; international human resources; and strategic
management.
Scope and Dimensions
• International marketing of merchandise, services
and intellectual property.
• International Investments
• IHRM
• International strategic management
• International finance and foreign exchange
management
Reasons for International Business
Expansion
• Taking Comparative/Competitive Advantage of Business
• Matching with Consumer Pressures
• Benefitting from International Product Life Cycle (IPLC)
• Managing and Escaping Competition
• Benefitting from World Economic Boom and Increasing
Market Size
• Gaining Higher Profit Margins and Growth opportunities
• Adjusting Excess Capacity
• Political Trend towards Cross-national Economic Cooperation
• Geographic Diversification
• Benefitting from Technological Advances
Domestic Vs International Business
• IB transactions take place across the borders and are
– Exposed to external environmental factors and it is also,
– Exposed to implications of payments in terms of foreign
currencies.
• These are the two factors differentiating between IB
and domestic business.
• External environmental factors in IB include
exposures to new countries with its different legal,
political, economic, market, socio-cultural,
geographical and climatic situations.
Domestic Vs International Business
• In domestic business impacts of external
environmental forces are not as complicated as in
case of IB.
International Business versus
Domestic Business
• Managing an international business is significantly different
than that of managing domestic business for at least the
following reasons:
– Multiplicity of Countries
– Range of Problem
– Nature of Government Intervention
– Currency
– Socio-cultural Element
– Ecological or Environmental Concerns
– Legal Differences
Unit 2
Theories of International Trade and Investment
Theories of International Trade
• Mercantilism
• Absolute Advantage Theory
• Comparative Advantage Theory
• Factor Endowment Theory: Hecksher-Ohlin
Model
• The International Product Life Cycle Theory
(IPLC)
• The Theory of National Competitive
Advantage: Porter’s Diamond
Mercantilism
• Mercantilism is the means to strengthen the political
power by making a strong nation and a strong
government.
• The political power can be achieved by wealth.
• A nation’s wealth depends on accumulation of
treasure, usually gold and silver.
• A strong government with wealth can improve the
welfare of the citizens.
• Mercantilists believed in the dynamic view of only
through mobilization of resources with the help of
trade a nation’s citizen desires are satisfied.
• A nation must enter into trade to create trade surplus
for wealth and power.
Absolute Advantage Theory
• The father of economics, Adam Smith, is the first
person to propagate the theory of international
trade.
• A. Smith explains that trade takes place when
one nation can produce a good at a lower cost,
than another nation.
• Absolute cost advantage is the capacity of a
nation to produce more of a good, with same
amount of input.
• A. Smith believed that, specialization on the
efficiently goods will help to increase world trade,
and output as well.
• Specialization and free trade has the
following advantages:
– Labour will be efficient that results productivity
increase,
– Create incentive to develop more effective
production process or technique,
– Production or output itself will increase, and
– Excess of production over domestic consumption
could be used to export and buy more import
requirements.
• Assumptions and Limitations of the theory are:
– Two Countries and two products,
– Exists perfect and free competition,
– Cost calculation based on labour and labour uniform in
quality and mobile within a country,
– Market forces determine the volume, pattern,
composition and directions of trade not the
government,
– No transportation cost in trade between two countries,
– Specialization occur on such goods which can be
produced by a country more efficiently, and
– A country should export some of such goods, on which it
has specialized and make payments for import of goods,
produced by other country more efficiently.
Comparative Advantage Theory
• It was only in 1817 that Prof. David Ricardo attempted to
answer the question, “What happens when one country
can produce both the goods at an absolute cost
advantage?”
• According to Prof. David Ricardo trade takes place under
the condition of comparative cost advantage, “as long as
the less efficient nation is not equally less efficient in
production of both the products”.
• Trade will takes place when absolute advantages are
different between two goods.
• In other words, one of the two countries has
disadvantages in both the products, but one product has
comparatively less disadvantage than in another product.
Comparative Advantage Theory
• This means in this product it has comparative
advantage.
• Prof. David Ricardo believed and emphasized
on concentration of the resources on
producing goods that a country can produce
more efficiently.
Assumptions and Limitations of
Comparative Advantages Theory
• Money does not exist and prices are determined
by labour costs. Only labour cost was considered
important in calculating production costs.
• There are only two countries and only two
commodities.
• There is no transport cost and transfer cost.
• There exists full employment of all factors in both
the countries, which is not always true.
• Production technologies in both the countries
exhibit constant returns to scale.
Assumptions and Limitations of
Comparative Advantages Theory
• There will be no technological innovations and no
technological spill over.
• Factors of production can be easily moved at low
cost, from one sector to others, as the countries
specialize through trade.
• The underlying market structure-driving
production is based on perfect and free
competition.
• The theory also ignored the possibility of world
trades in services, ideas and technology.
Subsequent Developments
• Use of currencies as means of exchange and
currencies values subject to fluctuation.
• Transport, insurance and other transfer costs
added pricing.
• Involvement of more than two commodities
and more than two countries.
• Scope of trade increased under the law of
decreasing unit costs.
Factor Endowment Theory-Hecksher-
Ohlin Model (1933)
• In 1933, Prof. Bertil Ohlin, a swedish economist, built
on work begin by the economist, Prof Eli Heckscher,
in 1919, and developed the theory of factor
endowment (Hecksher-Ohlin, or HO model, or
Proportion Theory)
• The HO model explains that the differences in of
production costs occur because of differences in
supply of production factors.
• The theory argued that, comparative advantage
arises from differences in national factor
endowments, and the pattern of trade is determined
by the differences in factor endowments.
Factor Endowment Theory-Hecksher-
Ohlin Model (1933)
• According to the HO Model, countries export
products requiring large amounts of their
abundant production factors and import
products requiring large amounts of their
scarce production factors.
Assumptions
• Different goods have different factor
intensities.
• Countries differ with respect to their factor
endowments.
Limitations
• Endowments can be created through new and
superior technologies and innovations.
• Homogenous products and same tastes were
the assumptions. However, the difference in
tastes is also a basis of trade, where price
factor is neglected.
• Assumption of non-existence of money and no
transportation cost cannot be valid.
The International Product Life Cycle
(IPLC) Theory
• Prof. Raymond Vernon explained this theory.
• According to this theory, as the product reaches
the stages of maturity and decline, production
will shift to foreign locations, especially to
emerging economies where unskilled,
inexperience labour can be made efficient for
standardized (or capital intensive, for example)
production process.
• Thus, companies will manufacture in the
countries those products first in which they were
researched and developed (R&D). Obviously, they
are almost industrialized countries.
(IPLC) Theory
• A good example is Nokia mobile products that were
researched and developed in the Scandinavian
countries including Sweden, but now Nokia is built in
China, an emerging economy.
• The innovating nation (e.g. Sweden for Nokia) no
longer will have a production advantage at those
stages, because markets and technologies are already
wide-spread.
• Plants have to move to emerging nations markets
where unskilled, inexpensive labour can be made
efficient for standardized production process.
• Exports decrease from the innovating country as
foreign production displaces them.
(IPLC) Theory
• In any given market, products pass through four
distinct phases of life cycle in the internatinal
market: Introduction, the growth, the maturity
and the declining and death.
• The product, as it passes through any of these
phases will have to explore for markets, if they
were to survive and sustain.
• For example, a product declining or dying 9
declining and death stages) in one market can be
introduced afresh in other markets where it
would go into Introduction or growth stages.
(IPLC) Theory
• Hence, a product reaching at maturity and
decline stages in one country market may be
Introduced afresh (at introduction or growth
stages) in other country markets: i.e.
international trade.
The Theory of National Competitive
• Prof. Michael Porter of the Harvard Business School
conducted extensive research on 100 industries in 10
countries in 1990.
• His team attempted to explain why a nation achieves
international success in a particular industry.
• For e.g. Japan in automobile Industry, Switzerland in
luxury watch and pharmaceuticals, Germany and
USA in chemical industries.
• Porter tried to solve this puzzle by identifying
determinants of national competitive advantage.
• As per this theory, there are four attributes that always
shape environment in which local firms compete.
• Four attributes promote or impede the creation of
competitive advantage of the nation.
• These attributes known as Porter’s Diamond are as
under:
– Factor Endowment
– Demand Conditions
– Related and Supporting Industries
– Firm Strategy, Structure and Rivalry
• Porter’s theory states that these four attributes create
a diamond.
• Firms are most likely to be successful in the industries
where the diamond is most favorable.
• He adds that one attribute could reinforce or
strengthen state of the other.
• A country can achieve competitive advantage in the
industry where the combined effect of all the four
attributes is favorable.
• Porter stressed that a government can play A ROLE IN
FACILITATING OR OBSTRUCTING THE CREATION OF
SUCH A FAVOURABLE ENVIRONMENT.
Foreign Direct Investment Based
Theories: FDI-based Theories
• The classical theory of international investment
(or FDI) claims that international capital moves
from one nation to another because of
differences in interest rates for investments of
equal risks. (For this to happen there has to be
perfect competition)
• According to “Kindleberger” under perfect
competition, FDI would not occur, nor would it be
likely to occur in a world wherein the conditions
were even approximately competitive .
• Therefore, contemporary international
investment theories were developed in
subsequent years.
1. Monopolistic Advantage Theory
• Stephen Hymer proposed this theory in the late
1960s.
• This theory holds that FDI is made by firms in
Oligopolistic industries processing technical and
other advantages over indigenous (local) firms.
• Firms in such industries must possess advantages not
available to local firms.
• Such a firm would then have advantages like
economies of scale, superior technology or superior
management (marketing, HR, finance, operations).
• Hence, there is a monopolistic benefit over local
firms i.e. there exists product market imperfections.
2. Product and Factor Market Imperfection Theory
• Richard Caves, a Harvard economist, expanded
Stephen Hymer’s Theory of Monopolistic Advantage
in the 1970s.
• He showed that superior knowledge permitted the
investing firm to produce differentiated products
that the buyers would prefer rather than locally
made similar products.
• Such actions would give the firm some control over
the selling price and an advantage over local firms.
• The Market Imperfection Theory belongs to
contemporary theory which explains that FDI does
not occur under perfect competition and
approximately competitive conditions .
2. Product and Factor Market
Imperfection Theory
• It is known fact that in perfect competition
buyers and sellers are assumed to have
perfect information of the market.
• This theory holds that investments flow into
other nations under the imperfect conditions.
3. International Product Life Cycle
(IPLC) Theory
• Raymond Vernon’s IPLC theory maintains direct
link between international trade and
international investment.
• IPLC theory explains that FDI is a natural stage in
a product’s life.
• If a company tries to retain any market where it is
exporting, it will have to invest in overseas
production activities when other companies
begin to offer similar products.
• Investing in this way will increase during the 3rd
and 4th stages i.e. maturity and decline.
3. International Product Life Cycle
(IPLC) Theory
• Thus, FDIs will occur when product life cycle moves to
the 3rd and 4th stages.
• For this, the company will have to locate its production
activities (factory) in those countries where the factors
of production are less expensive.
• Vernon’s view is that firms invest in advanced countries
when local demand in those countries grows large
enough to support local production as Xerox did.
• Thereafter, they shift production to developing
courtiers where they can lower costs, particularly due
to cheap labour.
• For e.g. Xerox , apple
4. Internalisation Theory
• It is the extension of the market imperfection
theory, as Buckley and Casson (1976) proposed it
is as an internalisation approach to FDIs.
• It states that to receive a higher return on its
investment, a firm will transfer its superior
knowledge to a foreign subsidiary rather than sell
it in the open market.
• By investing in a foreign subsidiary rather than
licensing, the firm will be able to send the
knowledge across borders while maintaining it
within the firm, realizing a better return on the
investment it has made to produce it.
5. Eclectic Theory
• It is an assorted or miscellaneous theory, as it
combines the diverse elements of some of the
FDI theories.
• This theory is also known as Dunning’s Eclectic
Theory of International Production, as John
Dunning explained it in his book “Explaining
International Production” in 1988.
• This theory explains that a firm goes abroad
for investment due to the following three
(OLI) advantages and are:
5. Eclectic Theory
– Ownership Specific Advantages: Firm can get
benefits of technology, knowledge, economies of
scale and monopolistic advantages when it invests
in foreign countries.
– Location Specific Advantages
– Internalisation Advantages
• This theory is also known as the OLI model as
it is based on three advantages of foreign
investment, viz., ownership, location and
internalisation.
6. Modified Theories for Third World
Firms
• Go through the text book of Arhan
Sthapit…..
Implications of International Trade
Theories
• Free Trade Implication
• Trade Pattern Implication
• Trade Competitiveness Implication
Implications of International
Investment (FDI) Theories
• Market Imperfections
• Location Advantages
• PLC Advantages
• Competition
• The Market in Developing Countries
Contemporary Issues in International
Trade
• Free Trade, Fair Trade and Protectionist Trade
• Trade Facilitation and Trade Policy Harmonization
• Subsidies and Countervailing
• Transit Facility for Land-locked Nations (LLNs)
• Containerized Trade and Dry Ports
• Sanitary and Phyto-sanitary Measures
• Technical Barriers to Trade (TBT)
• Trade Capacity Building
• GSP (generalized system of preferences) and
Preferential Systems to Trade
• Dumping and anti-dumping measures
• Voluntary Export Restraints (VER)
Unit 3
Global Business Environment
Concept of Global Business
Environment
• Global business environment is defined as totality of
factors or forces surrounding an internationally operating
firm that influence the firm’s performance and outcome
in the global market.
• The global business environment has gone through
sweeping and rapid changes in the recent years.
• The global financial crisis of 2008/09 and economic
recession affected firms’ business as well as economies
across the world; the economies are getting closely
interconnected.
• The global political environment has become more
volatile and uncertain, with ongoing conflicts in the
Africa and Middle East as a result great threats been
posed to global peace and business.
Environment
• A business firm typically has the three levels of
business environment and are:
– Operating Environment: Factors that come in the
firm’s operations like competitors, creditors,
customers, labour, suppliers and trade unions.
– Industry Environment: Consists of industry specific
factors identified by the Porter’s 5 Forces Model:
Supplier power, buyer power, entry barriers,
substitute-availability and competitive rivalry for firms
providing same products.
– Remote Environment: A firm’s general or remote
environment is composed of external and
uncontrollable factors put in an acronym of PEST-NG
that stands for:
Environment
• Political & Legal Environment
• Economic & Financial Environmental Factors
• Socio-Cultural Environmental Factors
• Technological Environmental Factors
• Natural Environment Factors
• Global Environment Factors
Political and Legal Systems
• A political system integrates the parts of a society
into a viable, functioning unit.
• A major challenge of the political system is to
bring together people of different ethnic or other
backgrounds to allow them to work together to
govern themselves.
• For the study of the political system, a business
firm should first of all analyze the constitution,
major political parties, form or structure of
government, the mechanisms designed to guide a
transition of power from one leader to the next,
key power blocks, and the extent of popular
support.
• A country’s political system influences how
business is conducted domestically and
internationally.
• Political system consists of constituents that
includes:
a. Executive: Council of ministers and government
bureaucracy
b. Legislature: Parliament with upper and lower
house
c. Judiciary: Courts and other judicial and quasi-
judicial authorities/institutions.
• Based on the political ideologies, there are
different political systems which may be
discussed in two categories:
A. Collectivism vs. Individualism
B. Democracy vs. Totalitarianism
Actors in Political Systems
• Constitutional Bodies
• Constitution and State Structure
• Political Parties
• Extra-constitutional Power Blocks
• Power Transition Mechanisms
• Supranational Organizations
• Regional Trading Blocs
• Domestic Competitors
• Special Interest Groups
Actors in Legal Systems
• Government
• Constitution and National Laws
• Judiciary and Court Systems
• Religious Power Groups
• Supranational Organizations
• Regional Trading Organizations
• Competing Firms
• Special Interest Groups
Political Risks
• Political risks can be termed as the risks that occurs
because of political instability.
• As a result of risks, the existence of company may
sometimes come under threats.
• Instability in the political system brings political risk
which may cause the closure of the company or compel
the company to sell itself to others.
• But, it is not so difficult in the country with a democratic
political ideology.
• In a liberalized, democratic political system, complaints
and grievances against irregularities and unjust practices
can be lodged with the concerned authorities, cases be
filled in the court of law, and even international
community can put up pressure.
Types of Political Risks
• Government Takeover of Corporate Assets
– Expropriation
– Domestication
• Operational Restrictions
• Agitation, War, Armed Conflict, and Violence
• Blockage of Funds
• Embargoes and Sanctions
– Sanctions
– Embargo
• Terrorism
E-Commerce and Intellectual Property
Rights
• E-commerce is a new form of business transactions
where internet is used in joining together suppliers
with business firms and business firms with customers.
• E-commerce refers to the internet-based industry of
buying and selling products or services via electronic
means.
• It uses a combination of internet technology, mobile
commerce, electronic funds transfers, electronic data
interchange, supply chain management, inventory
management systems, internet marketing, data
collection systems, and many other technologies and
innovative business systems.
Rights
• E-commerce makes it easier for both buyers and
sellers to find each other whenever they may be
located, and whatever may be their size.
• There are four dimensions or types to e-commerce
and are namely B2B, B2C, C2B and C2C.
• Popular e-commerce companies includes
amazon.com, eBay.com, bestbuy.com, flipkart.com
etc.
• In Nepalese context, muncha.com, thamel.com,
foodmandu.com, rojeko.com, eSewa.com,
naaptolnepal.com and sastodeal.com are some firms
involved in e-commerce.
Rights
• Countries increasingly face challenges to manage
e-commerce transactions for which they have to
develop appropriate legal systems.
• In Nepal, Electronic Transactions Act-2008 has
been executed since December 8, 2008 (22nd
Mangsir 2063 BS0 to deal with e-commerce.
• Internationally there is International Consumer
Protection and Enforcement Network (ICPEN).
• In US, some electronic commerce activities is
regulated by Federal Trade Commission (FTC).
Rights
• In UK, Prudential Regulation Authority and the
Financial Conduct Authority regulates e-
commerce activities.
• In India, the Information Technology Act 2000
governs e-commerce activities.
• In China, Telecommunications Regulations of
the People’s Republic of China regulates e-
commerce activities.
Intellectual Property Rights
• Intellectual property (IP) is simply the property of mind,
and knowledge.
• IP is the property related to the product of intellectual
activity, such as computer software, a textbook, a drama,
a music score, or the chemical formula for a new drug.
• The creator of intellectual property has all infinite legal
rights on it.
• Patents, copyrights, and trademarks establish ownership
rights over intellectual property.
• Intellectual Property Rights take a number of forms.
• For example, a books, painting and films relate to
copyright; inventions can be patented; brand names and
product logos can be registered as trademarks; and so
on.
• The WTO’s Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS)
negotiated in the Uruguay Round (1986-94),
introduced intellectual property rules into the
multilateral trading system for the first time.
• When there are trade disputes over
intellectual property rights during the
international business activities, the WTO’s
dispute settlement system is available to settle
them.
• Components of IPRs:
A. Industrial Property: It lies mainly in patents and
inventions, designs, trademarks, service marks,
geographic indications, layout-design of integrated
circuits and trade secrets.
B. Copyright and Related Rights: They are concerned
with art related works. They include creators rights
on their music, operas, films, dramas, computer
programmes and databases, literary pieces, text
books, paintings, sculptures and other similar works
of art, as well as pantomimes and choreographic
works. The related rights include those of
performers, phonogram producers, publishers and
broadcasting organizations.
Government Interventions and
Investment Barriers
• Government of different countries have different
attitudes about their economic influence on
business.
• Government may practice interventions on
business and also create barriers to investments
of foreign firms and even foreign governments.
• Managers should analyze how such government
policies affect performance of IB firms/MNCs.
• Governments intervene in foreign trade and
investment to achieve political, social or
economic objectives.
Investment Barriers
• Government often create trade barriers that benefits
specific interest groups like domestic firms,
industries, and labour unions.
• Government’s objective is to create jobs by
protecting industries from foreign competition.
• Government intervention is often motivated by
protectionism, which refers to national economic
policies designed to control free trade and protect
domestic industries from foreign competition.
• Protectionism is typically manifested by tariffs,
nontariff barriers such as quotas, and arbitrary
administrative rules designed to discourage imports.
Investment Barriers
• In addition to business laws of the country, the
foreign country government formulates different
business policies which are mainly fiscal, trade
and monetary policies.
• Fiscal policy can affect personal tax rates and
therefore influence consumer spending behavior.
It can also affect corporate tax rates, which
influence the earnings of firms.
• Trade policy can affect the firm’s import and
export transactions that make or break its
competitiveness in the market.
Investment Barriers
• Similarly, monetary policy can affect interest rates,
which may influence the demand for a firm’s product
(if the purchases are sometimes paid for with
borrowed funds).
• By influencing interest rates, monetary policy also
affects the interest expenses that firms incur.
• IB managers need to be aware that foreign country
governments can practice different types of
interventions in trade and investment by creating
various policy barriers.
• There are basically two paths to argue or reason for
government intervention in business: political and
economic.
Investment Barriers
• Political Reasons for Government Intervention:
Political reasons for government intervention are
concerned with protecting the interests of certain
groups within a nation (usually, producers) often at the
expense of other groups (normally buyers), or with
achieving some political objective that lies outside the
economic areas, such as protecting the
ecology/environment or human rights. The main
political reasons behind favoring government
intervention in business are:
– For Protecting Jobs and Industries
– For ensuring National Security
– For protecting Consumers/Buyers
Investment Barriers
– For Retailing Against Unfair Foreign Competition
– For Furthering Foreign Policy Objectives
– For Protecting Human Rights
• Economic Reasons for Government Intervention:
Economic reasons for government intervention
are concerned with promoting overall wealth of a
nation to the benefit of all, both producers and
buyers.
– For protecting Infant and Indigenous Industries
– For Implementing Strategic Trade Policy
Government Intervention on International Trade
(Instruments of Government Intervention on Trade)
• Main instrument of government intervention on

trade include the traditional forms of
protectionism: they are tariffs and nontariff trade
barriers (NTBs).
• Individual countries (such as Nepal or China) or
groups of countries (e.g. the European Union) can
impose these barriers.
• The United Nations estimated that trade barriers
alone cost developing countries more than $100
billion in lost trading opportunities with
developed countries every year.
A. Tariffs
– They are largely import duties that serve barriers to
– Tariffs are defined as the taxes or duties levied on
imported goods primarily for the purpose of raising
their selling price in the importing nation’s market to
reduce competition for domestic products.
– Tariffs increase selling price of the imported
commodity in the receiving country so that country’s
domestic products remain cheaper than the imported
ones, and hence, also remain competitive.
• Tariffs are generally of two broad types:

1. Import Duties (Primary and Secondary Types of
Import Tariffs)
2. Official Prices
1. Import Duties/Tariffs: The duties imposed
by a country (or customs authority) on its
imported goods are known as import duties.
Import duties are not exercised in exports but
are limited to imports.
• Primary Import Tariffs: Such primary types of import
tariffs apply to all transactions, except when there is a
zero tariff. The primary types of import tariffs are of
following types:
– An ad Valorem duty: It is an import duty levied as a
percentage of the invoice value of imported goods,
usually on rupees or dollars. Ad Valorem means
according to value.
– Specific duty: It is a fixed sum of money levied on a
physical unit of an imported product like weight,
gauge, or other measure of quantity.
– Compound duty: It is the combination of specific and
ad valorem duties. Customs authority that adopts this
duty combines both import L/C value based and
quantity based tariffs, and applies whichever tariff
amount is higher.
• Secondary Import Tariffs: These are also secondary
types of import duties that apply to specific import
conditions only:
– Countervailing duty (CVD): It is a permanent surcharge
imposed on certain imports when products are subsidized
by foreign governments. It is charged on those imported
goods to which the exporter’s country have had given
subsidy.
– Anti-Dumping duty (ADD): It is a special duty imposed
on imported goods to protect an affected domestic industry
from injury caused by sale of dumped goods in the
importing country. An importing nation can charge such
duty on those imported goods which prove to be dumped
by the exporter. WTO’s Agreement on Anti-Dumping also
allows members nations to charge such duties to discourage
unfair trade practices in the world.
2. Official Prices: They are included in the customs
tariff of some nations, so that they are the basis for
calculating ad valorem duty whenever the actual
invoice price of the imported goods is lower. So, the
practice is that the importer sends the difference
between the false invoice price and the true price of
the commodity. In countries like Nepal, where under-
invoicing is widespread among the businessmen,
official prices should be applied to check such trade
malpractices, say many experts. Yet, in the recent
years, implementation of VAT has discouraged and
controlled the malpractice of under-invoicing by
importers to a large extent.
B. Non-tariff Barriers (NTBs): They are all forms of
discrimination against imports other than the import
duties. As nations progressively reduced import duties,
non-tariff barriers have assumed greater importance. The
trend continued until 114 member nations of GATT
concluded negotiations in 1994 that created the WTO
and provided for the elimination of NTBs, both
quantitative and non-quantitative, over a 10 year period.
• On the basis their influence, NTBs are of two broad
types:
– NTBs with Direct Price Influence
– NTBs with Quality Control Effect
1. NTBs with Direct Price Influence: Government
impose the following non-tariff barriers that directly
make change in the commodity price:
I. Subsidies
II. Aids and Loans
III. Customs Valuation
2. NTBs with Quality Control Effect: The following
non-tariff barriers control the quantity or volume of
the commodity to be imported:
I. Import Quotas
II. Buy-local Legislation
III. Border Regulations and Standards
IV. Specific Permission Requirements and Exchange

Controls
V. Administration Delays/Procedures
VI. Reciprocal Requirements
VII.Restrictions on Services
a. Essentiality
b. Standards
c. Immigration
Government Policy on Investment (FDI) Barriers
• FDIs or foreign investments have both good and

bad impact on the country’s economy and society.
The government may use its policy instruments for
both promoting and discouraging inward FDIs.
Specifically speaking of the barriers to investments
or FDIs, the government policy intervention may
take two forms:
1. Barriers to Inward FDIs
2. Barriers to Outward FDIs.
1. Barriers to Inward FDIs: These are the

inward barriers that restrict inward FDIs in
the host country. The host country
government can use a wide range of barriers
to restrict inward investments from foreign
countries. The most common categories of
investment barriers are:
– Ownership restraints
– Performance requirements
2. Barriers to Outward FDIs: Barriers that restrict outward
investments from the home country to host countries apply
to countries like Nepal that generally have no permission
for investing funds abroad. For example, from the 1960s
until 1979, Britain had exchange control regulations that
limited the amount of capital a firm could take out of the
country. This policy not only had the goal of improving the
British BOP, but also of making more difficult for British
firms to undertake FDIs in other countries. Another barrier
is to occasionally use tax rules to discourage investors
towards investing abroad. Finally, other investment barriers
include those that prohibit national firms from investing in
certain countries for political reasons. For e.g., US rules
formally prohibits their firms from investing in Cuba and
Iran.
Cultural Environment
• Culture is the sum total of beliefs, rules, customs,
techniques, institutions, and artifacts that
characterize human populations.
• Culture is also defined as a complex set of values,
ideas, beliefs, attitudes and other meaningful
symbols created by human beings to shape human
behavior, and the artifacts of that behavior, as they
are transmitted from one generation to another.
• Multiculturalism is an undeniable reality.
• Today’s workplace is multi-cultural: a mix of
people from different cultures, ethnic and caste
groups, and with varied lifestyles.
Cultural Environment
• Cultural factors are significant in international
organizations where people from different cultural
backgrounds co-exist and flourish.
• Countries in South Asia, East Asian and Japan have
one of the most sophisticated cultural influences in
their people, which international businesspeople
must understand.
Elements/Components of Cultural
Environment
• Material Culture
– Technology
– Economics
• Social Institutions
– Social Organization (Guthis, Cooperatives)
– Education
– Political Structures
• Man and the Universe (Attitudes, norms and
beliefs)
– Belief System
– Value System
Elements/Components of Cultural
Environment
• Aesthetics
– Graphic and Plastic Arts
– Folklore
– Music, Drama, and the dance
• Religion
• Language
• History and Geography
Why Culture Matters in International
Business?
• Varying Communication Implications
• Varying Impact of Social Behaviors on IB
• Varying CSR and Ethical Standards
• Impact of Socio-cultural Nuances on Business
Negotiations
• Varying Customer Reactions to Marketing
1. Varying Communication
Implications
• Communication meanings vary across cultures: As an
international business firm deals with two or more
cultures and sub-cultures, managers need to have an
understanding of the implications of various aspects of
the culture. The meanings of communication vary from
one culture to the other. The same communication may
give different messages in Kathmandu and Karachi
(Pakistan), or in Butwal and Budapest (Hungary), and so
in Damak and Damascus (Syria).
• Non-verbal Communications: Varying Cultural
Implications: There are higher chances of difference in
non-verbal communications. The issue may be studied in
the following aspects as shown below:
1. Varying Communication
Implications
– Kinesics
– Proxemics
– Time Language
• Chronemics: It refers to the timing of verbal
exchanges.
– Paralanguage: It involves those hints and signals in
person’s voice that give us meaning.
– Physical Context: How color and layout/design
communicate?
– Haptics: Haptics is all about touch language.
2. Varying Impact of Social
Behaviors on IB
• Socio-cultural attitudes and behaviors affecting business
vary across cultures towards work, business
(entrepreneurship), religion, risk-taking, social class or
strata, politics, the role of women, respect for the law and
social institutions.
• It is important for managers to be aware of socio-cultural
behaviors of people in different countries, they should
understand actual differences in interpersonal style and
cultural expectations, and separate this from incorrect
assumptions as they operate in multiple countries across
cultures.
• Manages should be aware that Asian culture and
American culture have quite different norms and values.
3. Varying CSR and Ethical
Standards
• Standards of business ethics and corporate social
responsibility (CSR) vary across cultures.
• To be effective in business, IB managers should
understand that cultures in the concerned countries
matter as they should understand the ethical standards
and concepts of corporate social responsibility in
those countries.
• The society’s culture certainly can have an impact on
the propensity of people and firms to behave in an
ethical or unethical manner.
3. Varying CSR and Ethical
Standards
• Liu and Chen (2012) conducted a cross-cultural study
on US and Chinese students regarding their ethical
behaviours. And they found that the female students,
regardless of their cultural background (Chinese or
American), had a higher social desirability bias and
were more ethical than the male students.
4. Impact of Socio-cultural Nuances
on Business Negotiations
• Socio-cultural nuances influences nature of
business negotiations.
• Socio-cultural nuances (emotional or
behavioral tone) of people affect their
bargaining behaviors or postures which IB
managers should well understand for doing
negotiations in business.
6. Varying Customer Reactions to
Marketing
• Customer reactions to the firm’s marketing and
advertisements vary across cultures.
• IB managers need to develop a good understanding of
cultures in the countries they operate so that they can
predict customer reactions to its marketing efforts
including product development and advertising.
• Companies cultural blunders in marketing, more
particularly in product development and advertising i.e.
by using Lord Buddha’s image in boots, and pictures of
Hindu deities, viz., Goddess Laxmi and God Ganesh in
swim suits and slippers respectively, they not only hurt
sentiments and religious beliefs of Buddhists and Hindus
but also damages the company’s marketability and
business.
Regional Economic Integration
(REI)
• Regional economic integration can be defined as the
integration of different regional economies into a
single economic unit.
• Individual sovereign countries are organized into a
group and then their respective restrictive measures
on movements of goods and services and other
resources within the member countries, are abolished.
• REI may also involve engagement in other economic
activities that promote their citizens welfare.
• Other activities may be agriculture, tourism,
investment, financial and banking services, exchange
of technologies, research, culture, etc.
Reasons for Regional Economic
Integration (REI)
• Geographic proximity
• Consumers’ tastes and preferences
• Distribution channels
• Common history ad interests
• Common economic and trade opportunities,
and problems
Types/Stages of Regional Economic
Integration
1. FREE TRADE AREA (FTA):

– Under the FTA trade barriers are gradually
abolished between members. Customs tariffs and
non-tariff barriers, such as quota (QR), licensing
requirement, are substantially reduced and
ultimately made negligible.
Integration
2. CUSTOMS UNION (CU):

– This is the second stage of economic integration
where gradual abolition of trade barriers is
combined with imposition of a common external
trade policy or levying of common external
tariffs.
Integration
3. Common Market (CM):

– It is called common market when features of
customs union are combined with the abolition of
restrictions on the movement of factors between
the member countries.
Integration
4. ECONOMIC UNION (EU):

– The economic union is the fourth and final stage in
the process of REI where all the fiscal and
monitory policies of the member countries are
unified to create even greater economic
harmonization.
Integration
5. POLITICAL-ECONOMIC UNION (EU):
– The ultimate development of an economic union takes
form of a Political Union where member countries
decide to shed their national political status, but share
the single political identity.
– It is a perfect unification of all policies by a common
organization; submersion of all separate national
institutions into a regional political-economic entity.
Nations work together to harmonize their security and
foreign economic policies.
– A common parliament is created with representatives
from member nations who work in synchronization
with every member nation’s legislature.
Leading Economic/Trading Blocs
• ASEAN-Association of South East Asian Nations
• BIMSTEC-Bay of Bengal Initiative for Multi-sectoral
Technical and Economic Cooperation
• ANZCERTA-Australia New Zealand Closer
Economic Relations Trade Agreement
• NAFTA-North American Free Trade Area
• ACP-African, Caribbean and Pacific Group of States
• EU-European Union
• FTAA-Free Trade Areas of Americans
• MERCOSUR-Southern Common Market
Leading Economic/Trading Blocs
• SAFTA: South Asian Free Trade Area
• APEC: Asian Pacific Economic Cooperation
• SAPTA: South Asian Preferential Trade Agreement
• SADC: South African Development Committee
• SICA: System of Central American Integration
• CEFTA: Central European Free Trade Area
• CARICOM: Duty Free Access To Canada
Emerging Foreign Markets
• New industrialized countries of the world are
considered emerging economies that have not
yet reached developed status, even after
having good macro-economic status outpacing
to other developing counterparts.
• Their participation in international trade,
investment, stock exchange market and
finance are very high, but these countries also
have population below poverty level, huge
gaps in income distribution etc.
• Main Features of emerging markets:
– Per capita income of these countries is high
compared to their counterparts.
– Economic growth rate is high.
– Expediting liberalized economic systems with
policy and institutional transformation.
– Expanding middle class
– Improved standard of living, social stability and
tolerance.
– Increased cooperation with regional and
multilateral institutions.
• Ten big emerging economies in alphabetical order are:
– Argentina
– Brazil
– China
– India
– Indonesia
– Poland
– South Africa
– South Korea
– Turkey
• Recently recognized as emerging are Egypt, Iran, Nigeria,
Pakistan, Russian Federation, Saudi Arabia, Taiwan and
Thailand.
The Changing Demographics of the
Global Economy
In the 1960s:
• the U.S. dominated the world economy and
world trade and world FDI
• U.S. multinationals dominated the
international business scene
• about half the world-- the centrally planned
economies of the communist world-- was
off limits to Western international business
Today, much of this has changed.
The Changing Demographics of the Global
Economy
 Changing World Output and World Trade Picture
• In the early 1960s:
– U.S. - dominant industrial power accounting for
about 40.3% of world manufacturing output
• By 2008:
– U.S. accounted for only 20.7% (by 2017, 15.03%)
– Other developed nations experienced a similar
decline
– Rapid economic growth now in countries like
China, India, and Brazil
– Further relative decline by the U.S. is likely
• So companies may find both new markets and new
competitors in the developing regions of the world .
Global Economy
• The Changing Demographics of World GDP and Trade
Global Economy
 Changing Foreign Direct Investment Picture
• The share of world output generated by developing countries
has been steadily increasing since the 1960s
• The stock of foreign direct investment (total cumulative value

of foreign investments) generated by rich industrial countries is
declining
• Cross-border flows of foreign direct investment are rising
• The largest recipient of FDI is China.

Global Economy
Percentage Share of Total FDI Stock, 1980 - 2008
Global Economy
 The Changing Multinational Enterprise
• A multinational enterprise is any business that has
productive activities in two or more countries
• Since the 1960s:
– there has been a rise in non-U.S. multinationals
– there has been a rise in mini-multinationals
Global Economy
• Globalization has resulted in a decline in the dominance
of U.S. firms in the global marketplace
– In 1973, 48.5 % of the world’s 260 largest MNEs
were U.S. firms
– By 2008, just 19 of the world’s 100 largest non-
financial MNEs were from the U.S., 13 were from
France, 13 from Germany, 14 were from Britain, and
10 were from Japan.
Global Economy
The Changing World Economic Order
– Particularly after 1990s, many countries started the democratization process, and moved
from closed economic setup to a free-market system.
• The collapse of communism in Eastern Europe
– export and investment opportunities
• Economic development in China
– huge opportunities despite continued Communist
control
• Free market reforms and democracy in Latin America
– new markets and new sources of materials and
production
The International Monetary and
Financial Environment (Concept)
• Financing is important to the operations of MNC’s,
and importers and exporters involved in the
• Importers seek financing for the purchase of
merchandise.
• Exporters likewise, need financing for the
manufacturing of their products and maintenance of
their inventories.
• MNCs need financing for their operations.
• IB managers face a lot of issue relating to the
financial system concerned with their operations.
• The financial system involves key components like
foreign-exchange market and its operation, currency
exchange control subsystem, central and commercial
banking subsystem, etc.
• MNCs as well as import and export companies must
understand dynamics of foreign exchange and exchange
rates if they were to survive in the market.
• Making payment in the domestic market is basically
different from doing so abroad.
• Use of only one currency exists in domestic business
where as in IB there will be use of two or more currencies
during foreign transactions.
• IB transactions take place within the global monetary
and financial systems (GMFS).
• Firms regularly trade U.S. dollar, European euro,
Japanese yen, Chinese yuan, and other leading
currencies to meet their international business
obligations.
Currencies(Foreign Exchange)
• Foreign exchange is money denominated (marked) in the
currency of another country or group of countries.
• The market in which these transactions take place is the
Foreign Exchange Market.
• Foreign exchange (Forex) can be in the form of cash,
funds available on credit and debit cards, traveller cheque,
bank deposits, or other short-term claims.
• A exchange rate is the price of a currency, usually in
relation to another currency.
• The exchange rate is the number of units of one currency
that buys one unit of another currency.
• Exchange rate may change every day.
Currencies(Foreign Exchange)
• Exchange rates make international price and cost comparisons
possible.
• Currencies are mostly national, e.g., Nepal’s rupees, China’s
Yuan or US’s dollars. Similarly, Euro in European Union.
• Foreign exchange transactions involve the purchase or sale of
one national currency against another; say Nepalese rupees
with US dollars or euro.
• Some currencies are more strong than that of others due the
nation’s economic condition.
• The Nepal Rastra Bank’s exchange rate notice appears in the
NRB website, the government official’s broadsheet national
dailies The Rising Nepal and Gorkhapatra as well as other
electronic media including national radio Radio Nepal every
day.
Foreign Exchange Market (Forex)
• Foreign exchange market is one where foreign
exchange instruments are traded (bought and sold).
• There is no central trading floor of foreign exchange
market where buyers and sellers would meet. Most
forex trade activities are completed by banks and
foreign exchange dealers, using telephones,
cellphones, cables and mails.
• Foreign exchange market operates 24 hours a day.
The forex market never sleeps.
• Three parties are involved in Forex Market.
• Parties in Forex Market:
– Exporters and Importers: Buy and sell foreign
exchange due to export and import of goods and
services.
– Parties involved in FDIs: Investing capital into
and pulling dividends out of a country.
– Portfolio Investors: Buy foreign stocks, bonds and
mutual funds hoping to sell them at a more
profitable exchange rate later.
• The Forex market has two major segments:
– The Over-the-counter (OTC) market: It includes
banks, namely, commercial and investment banks,
and it is where most of the forex market activity of
the country takes place.
– Securities Exchanges (The Exchange-Traded
Market): This market is comprised of securities
exchanges, such as the Chicago Mercantile
Exchange where certain types of forex instruments
are traded.
Characteristics of the Foreign
Exchange Market
• Market for Trading Forex Instruments
• Remarkable Market for Size, Composition and
Location-the forex market never sleeps
• Wide-use and Dominance of the US Dollars
SWIFT
• SWIFT (Society for World-wide Interbank Financial
Telecommunications) is a cooperative arrangement
among banks for conducting financial transactions
through telecommunications throughout the world.
• It makes the financial transactions between the banks as
swiftly as a mouse click throughout the world.
• Its headquarter is located in Belgium.
• It has been using the systems developed by USA and the
Netherlands.
• Its coverage is worldwide within the major points/stations
spread across the US, Belgium, Netherlands, and Hong
Kong.
• A number of Nepali commercial banks including NABIL
Bank are members of this cooperative network.
Foreign Exchange Rate System
• After the collapse of gold standard system in 1971,
most developed countries have adopted the floating
forex rate system, while other nations have followed
other forex systems as suitable to their needs.
• Today most major currencies are traded freely, with
their value floating according to the forces of supply
and demand.
• The exchange rate system today consists of two main
types of foreign exchange management:
– Floating System
– Fixed System
Foreign Exchange Rate System
• Within the fixed system, a pegged system is also
exercised. In the past there was also a controlled
exchange system. Hence we discuss the following
exchange rate system:
– Controlled Exchange Rate System
• Controlled Fixed Rate System
• Controlled Floating System
– Fixed Exchange Rate System
• Pegged Exchange Rate System
– Floating Exchange Rate System
• Free Floating System
• Managed Floating
Controlled Exchange Rate System
• There is a strong control on the exchange rate system
by the government.
• It is the system in which not the demand and supply
forces of the currencies, but the government-usually
its central bank-determines the rate.
• The government controls the rates as per the changes
in its economic and monetary policies.
• This system may be operated either with fixed rate
i.e. controlled fixed or with floating rate i.e.
controlled floating system.
Controlled Exchange Rate System
• The government doesn’t permit forex trading
in the market, and controls the rate by means
of monopoly purchase and sale of forex
through its central bank and government
agencies.
Fixed Exchange Rate System
• This is where a Government maintains a given
exchange rate over a period of time.
• This could be for a few months or even years.
• In order to maintain the exchange rate at the stated
level government uses fiscal and monetary policies to
control aggregate demand.
• In a fixed exchange rate system the XR is set by the
government or central bank at a particular rate.
• E.g. INR to NPR 1.6:1
Fixed Exchange Rate System
• The forces of supply and demand do not determine the
rate. The central bank holds reserves of US dollars and
intervenes in order to keep the exchange rate pegged at
that level known as the Official Rate.
• Under a fixed exchange rate system governments
maintain
– par value for their currencies
– an official exchange rate determined by comparing par
values
– an exchange rate stabilization fund to buy and sell
foreign currencies in order to preserve the official
exchange rate
Floating Exchange Rate System
• A floating exchange rate regime is where the
rate of exchange is determined purely by the
demand and supply of that currency on the
foreign exchange market.
• The value of a currency is allowed to be
determined by the forces of demand and
supply on the foreign exchange market.
• There is no government intervention.
Floating Exchange Rate System
• Any change in supply or demand for a
currency will cause a depreciation or
appreciation in the exchange rate.
• An increase in demand for the local currency
causes it to appreciate or rise.
• However, if there is a greater demand for the
foreign currency the value of the local
currency falls or depreciates to the foreign
currency.
Managed Floating Exchange Rate
System
• This is where the currency is broadly managed by
the forces of demand and supply but the
government takes action to influence the rate of
change in the exchange rate.
• The Central Bank seeks to stabilize the exchange
rate within a predetermined range for a given
period of time, but DOES NOT FIX IT at any
particular level.
• This allows for policy makers the benefit of
planning with some degree of certainty, for the
macroeconomic affairs of a country.
Managed Floating Exchange Rate
System
• Central bank intervenes to smoothen out ups
and downs in the exchange rate of home
currency to its own advantage.
Modes of Payment in International
Business
Cash in Advance
Cash in Advance
Open Account
Open Account
Letters of Credit
Letters of Credit
Letters of Credit
Sight Bill
Sight Bill
Usance Bill
Usance Bill
Global
Financial System
Contents
• Concept of the global financial system
• Evolution of the global financial system
• International reserve currency
• Post-BrettonWoods global financial system
• Institutions of global financial system
• Financialization
What is a global financial system?
• The Global Financial System refers to those
financial institutions and regulations that act on
the international level, as opposed to those that
act on a national or regional level
• This is the interplay of financial companies,
regulators and institutions operating on a
supranational level
• The global financial system can be divided into
regulated entities (international banks and
insurance companies), regulators, supervisors and
institutions
When the global financial system has
emerged?
• Birth of the global financial system is directly
connected to the growth of international
economic relations
• International trade in a global scale started in
the late 19th century
• International trade is complicated by the fact
that most nations have their own currency, and
that the rules and regulations governing
financial transactions vary widely between
countries
Evolution of the global financial
system (1)
• Late 19th – early 20th centuries – little coordination of international
finances
– Gold standard – financial obligations were settled in currencies
redeemable in gold
• World War I involved vastly larger international capital flows than
ever before
– European nations such as Britain and Germany went deeply in
debt, borrowing heavily from other nations, especially the
United States
• The Great Depression of the 1930s resulted partially from sharply
declining international trade caused, in part, by high tariffs
• World War II disrupted world trade and led to international
cooperative arrangements to facilitate economic stability and growth
Evolution of the global financial
system (2)
• 1944 – Bretton Woods Conference
– John Maynard Keynes and Harry Dexter White successfully proposed a
new international financial order
– The International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (World Bank) were created
– Dollar was established as a main reserve currency (Keynes had argued
against the dollar having such a central role in the monetary system, and
suggested an international currency called Bancor used instead)
• 1947 – General Agreement on Tariffs and Trade (GATT - WTO)
– Dramatic reductions in barriers to international trade
– Led to the creation of a system of international financial arrangements
and deeper economic / financial integration (especially EU, NAFTA)
• 1971 – Dollar’s convertibility into gold was suspended
• 1973 – Abandonment of fixed exchange rates
International monetary systems
Date System Reserve assets Leaders
1803 - 1873 Bimetallism Gold, silver France, UK
1873 - 1914 Gold standard Gold, pound UK
1914 - 1924 Anchored dollar standard Gold, dollar USA, UK, France
1924 - 1933 Gold standard Gold, dollar, pound USA, UK, France
1933 - 1971 Anchored dollar standard Gold, dollar US, G-10
1971 - 1973 Dollar standard Dollar US
US, Germany,
1973 - 1985 Flexible exchange rates Dollar, mark, yen
Japan
1985 - 1999 Managed exchange rates Dollar, mark, yen US, G7, IMF
1999 - ? Dollar, euro Dollar, euro US, Eurozone, IMF
Source: IMF
International Reserve Currency
is a currency used as a reserve or store of wealth, as if it
were an asset itself
• Source of wealth for whoever has the privilege to issue
that currency
– Un-cashed cheque at everyone else’s expense
– Permits deficit financing (Vietnam and Iraq wars, current
US bank bailout)
Historic Role of Reserve Currencies
• No reserve currency has ever been permanent
• Reserve currencies reflects political power and
authority
• UK pound sterling is a reserve currency for more
than 100 years
• The exorbitant privilege refers to the benefit the
country has in its currency being the international
reserve currency: this country would not face a
balance of payments crisis, because it purchased
imports in its own currency (concept created by
Valerie Giscard d’Estaing)
The exorbitant privilege for euro?
Operating reserve currency brings costs
• Euro area lacks political will for unity and
avoids promoting Euro as reserve
• Euro area not de-coupled, but connected, to
US crisis
• Flight to quality is thus benefiting dollar
Global financial system based on US
dollar
• China’s dollar dependence (Not just China, but Brazil, India,
Russia and oil-exporting Gulf states all similarly attached to US
situation)
– Reserve accumulation over $1tn
– Power to destabilise US financial system but only at huge cost
to itself
• US domestic economy transformed (like in 19th century in UK) to
financial services while neglecting exports, manufacture and jobs
• Weaker dollar needed to stimulate US economy but counter-
balanced against damage it does to its partners
• US lacks surpluses given its economic weakness to sustain strong
dollar as reserve
Features of the post-BW system
(Bretton Woods)
• Volatility drastically increased
– Contradicting expectations and orthodox economic predictions
• Volatility created need to hedge against fluctuating prices
– New markets in volatility-management tools: derivatives
– Created marketplace for speculative profits and amplified the use of
these tools
• Assault on transparency
– Vast majority of derivatives ‘OTC’ – over the counter and not traded on
exchanges
– Created mechanism to avoid supervision or regulatory oversight
• New markets in derivatives allowed huge profit opportunities via
speculation on price movements that were disconnected from real
economic activity
Post-BW global financial system
• Financial crises have been more intense and have
increased in frequency by about 300%
– All financial crises since 1971 have been preceded by large
capital inflows into affected regions
• Investors have frequently achieved very high rates of
return, with salaries and bonuses in the financial
sector reaching record levels
Institutions of global financial system
• International Institutions
– IMF - keep account of international balance of payment of members
states, also acts as lender of last resort
– World Bank - provide funding, take up credit risk and offer financial
favorable terms to development projects in developing countries
– WTO - negotiate international trade agreements, settles trade disputes
– Bank for International Settlements (BIS)
– Institute of International Finance (IIF)
• Government institutions
– Financial ministries, tax authorities, central banks, securities and
exchange commissions, etc.
• Private participants
– Commercial banks, pension funds, hedge funds, etc.
• Regional institutions
– Eurozone, NAFTA, CIS, Mercosur
Bank for International Settlements
is an intergovernmental financial organization of central
banks which fosters international monetary and
financial cooperation and serves as bank for central
banks
• Regulates capital adequacy
• Encourages reserve transparency
• Leads the changes of banking regulation and
supervision through the Basel Committee on Banking
Supervision passing global regulatory standards
(Basel II, Basel III)
Institute of International Finance
is the world’s only global association of financial
institutions
• Providing analysis and research to its members on
emerging markets and other central issues in global
finance
• Developing and advancing representative views and
constructive proposals that influence the public debate on
particular policy proposals, including those of multilateral
agencies, and broad themes of common interest to
participants in global financial markets
• Coordinating a network for members to exchange views
and offer opportunities for effective dialogue among
policymakers, regulators, and private sector financial
institutions
The era of financialization
• Developed countries’ financial systems exploded
relative to other parts of economy, particularly the
role of banks
• Climate of greater general indebtedness and increased
gearing (debt to equity ratios)
– Financial assets and debts become larger proportion of
GDP
– Banks strategically became focused upon commissions
business and speculative operation
GDP share of US financial industry
Bank assets, $ billions
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Dec.77 Sep.81 Jun.85 Mar.89 Dec.92 Sep.96 Jun.00 Mar.04 Dec.07
Financialization
• Speculative price bubbles
– Debt being used to inflate value of assets against
which more debt is raised to re-start the cycle
• Financial innovation
– Also used to evade legislative oversight, e.g. 1999
Amendment to US Community Reinvestment Act
which excluded banks’ mortgage investment in
securities from scrutiny – then sub-prime lending
doubled from 2001 to 2006
• Policy mistakes
– Ignored bubbles and stoked consumer spending via
indebtedness
CDS contracts outstanding in $ billions
70000
60000
50000
40000
30000
20000
10000
0
1H01 2H01 1H02 2H02 1H03 2H03 1H04 2H04 1H05 2H05 1H06 2H06 1H07 2H07 1H08
Growth in derivatives
Key features of international
financialization
• Liberalisation of capital account
• Capital flows increasingly taking form of FDI and
portfolio investment
• Inflation targeting priority over growth, jobs, health
or other social outcomes to protect value of
investment capital
WTO and Free Trade Policies
Advantages of WTO
(General Impact on Nepal’s IB)
• Trade Opportunities
– Security of market access opportunities
– Uniform set of rules at customs
– Fair trade opportunities through elimination for
quotas and subsidies
– Trade capacity building
• Predictable Trading Environment
• Counter to unfair trade practices
• Access to dispute settlement
Disadvantages of WTO
(General Impact on Nepal’s IB)
• Constraints and challenges
– Erosion of tariff preferences
– Constant deterioration of export commodity price
– Tariff to poor countries export in rich nations
• Threat to Domestic Industry from free Imports
• Revenue Loss to Government
• Employment and BOP Implications
• Erosion of Special Privilege of SMEs
• IPR and Bio-diversity protection
• Food security due to low productivity
Unit 4
International Strategic Management
Overview of International Strategic
Management
• Strategy: A set of commitments and actions, which is fully
integrated and coordinated. It’s goal is to utilize core
competencies and develop competitive advantages.
• Strategic Management: Management process to asses a
company and its competitors. Furthermore, it meets all these
competitors by setting appropriate goals and strategies. Finally,
it evaluates these goals and strategies to see whether or not
they have been successful or need to be replaced by new
strategy or goals.
• International Strategic Management: a management
planning process, which determines the strategies and
goals, but in an international setting: how to expand
abroad or compete internationally.
Overview of International Strategic
Management
• International Strategic Management is a planning process
of developing international strategy in the direction of
achieving strategic-fit between the organization's
competence & resources and the global environment
under which it tends to operate.
• It is an ongoing process that adhere an organization to
compete in an international scenario.
• International Strategic Management (ISM) is an ongoing
management planning process aimed at developing
strategies to allow an organization to expand abroad and
compete internationally.
• Strategic planning is used in the process of developing a
particular international strategy.
Components of IB Strategy
• Scope of Operations: Refers to the array of markets
in which the firms plans to operate.
• Resource Allocation/Deployment: It involves how
the firm will distribute its resources across different
areas or markets.
• Distinctive Competence: It refers to what the firm
does exceptionally well. Such competencies can’t be
copied or duplicated by rivals. For e.g. Coke’s
Formula
• Synergy: Synergy results when the total effort is
greater than the sum of individual efforts, i.e. 2+2
becomes 5
Strategy and Opportunity Assessment
• Assessing opportunities in foreign markets and
formulating and choosing appropriate strategies in view
of external business environment factors is the key part
of IB strategic management. It also lies in evaluating
the firm’s competencies that keep it distinctive and
different from its competitors.
• A global market opportunity is a favorable combination
of circumstances, locations, or timing that offer
prospects for exporting, investing, sourcing, or
partnering in foreign markets.
• The firm may perceive opportunities to sell, establish
factories, obtain inputs of lower cost or superior quality,
or entre collaborative arrangements with foreign
partners that support the focal firm’s goal.
• IB managers try to coordinate sourcing,
manufacturing, marketing, and other value adding
activities on a worldwide basis. They adopt
organization wide standards and common process.
• They seek to develop products that appeal to the
broadest base of customers worldwide. Organizing
the firm in the global scale is challenging.
• It requires skillfully organizing activities across
diverse settings, integrating and coordinating these
activities, and implementing common processes to
ensure the activities are performed optimally.
• In addition, firm must simultaneously respond to the
specific needs and conditions of specific foreign
markets where it does business.
• For e.g. Buyers in foreign markets want products or
services which is not readily available within the
nation and at the same time should help to bring ease
into their day to day life, occupation or profession
etc. after consumption.
Role of Strategy in International Business
• When developing strategies, managers start by

examining the firm’s specific strengths and
weaknesses (S&W). They then analyze the particular
opportunities and challenges or threats (O&T) facing
the firm.
• Once SWOT is done, IB managers should decide
which customers to target, what product lines to offer,
how best to deal with competitors, and how generally
to organize and coordinate the firm’s activities around
the world.
• IB strategy is carried out in two or more countries.
• MNEs develop international strategies to help the

firm allocate scarce resources and configure value-
adding activities on a worldwide scale, participate in
major markets, implement valuable partnerships
abroad, and engage in competitive moves in response
to foreign rivals.
• Firm looking to become a global competitive force
must simultaneously seek three key strategic
objective:
– Efficiency
– Flexibility
– Learning
Efficiency
• Build efficient value chains.
• Efficiency refers to reducing the firm’s operations and
activities on a global scale.
• MNC’s with multiple value chain should give special
focus on generating efficiency through efficient R&D,
manufacturing, product sourcing, marketing, customer
service activities.
• For Toyota, this means manufacturing in low cost
countries like China and in major markets like the United
States, e.g., Kentucky State. Toyota works with its
suppliers to ensure they provide low-cost parts and
components while maintaining quality.
Flexibility
• To accommodate country specific risks and opportunities
IB firms should develop worldwide flexibility.
• The diversity and volatility of the international
environment are especially challenging for managers; it
affects the firm’s ability to tap local resources and exploit
local opportunities.
• Exchange rate fluctuations may prompt managers to
switch to local sourcing or to adjust prices.
• The firm structures its operations to ensure it can respond
to specific customer needs in individual foreign markets,
especially those critical to company performance. It all
requires flexibility.
Learning
• IB firms should develop the ability to learn from
operating in international environments and apply this
learning on a worldwide basis.
• Global business environment is extremely diverse
therefore unique learning opportunities has to be tapped
by the IB firms during the internationalization process if
the firm.
• Operating in different countries helps firms to acquire
new technical know-how, new product ideas, improved
R&D capabilities, cultural knowledge, partnering skills,
and survival capabilities in unfamiliar environments.
Assessing Global Market Opportunity
(Steps/Process)
Analyzing Organizational Readiness to Internationalize
• Management should assess the strength and weaknesses
in the firm’s ability to do international business.
• At the same time, management should conduct a
research to identify the opportunities and threats for the
company.
• Diagnostic tools such as CORE (company readiness to
export) would facilitate a self audit of readiness to
internationalise.
(Steps/Process)
Assessing the suitability of Products and
services for foreign markets
• Management should know the following facts for
assessing the suitability of a product or service for
foreign market and are:
– Initiation of Purchasing
– Location of sales and distribution
– Limitations to sales like economic, cultural, geographic and
other factors.
– Reason behind the purchase by customers
(Steps/Process)
Screening countries to identify target markets
• Whether a firm is engaged in importing, investing or
exporting the choice of country is critical, particularly in
the early stages of internationalization.
• The best markets are large and fast growing.
• There are two basic screening methods:
– Elimination
– Ranking an indexing
(Steps/Process)
Assessing industry market potential
• Once a firm reduces the number of potential country
targets to five or six then management should
estimate industry-specific market potential.
(Steps/Process)
Choosing foreign business partner
• International business partners include distribution
channel intermediaries, facilitators, suppliers, joint
venture partners, licensees, and franchisees.
• It is up to the management for the right selection of
channel member.
• Selection should be based on
– Relationship
– Efficiency
– Effectiveness and
– Performance.
(Steps/Process)
Estimating company sales potential
• It is to estimate how much sales the company
can achieve in the target foreign market
country.
Estimating/Assessing Market
Potential
• Whether it is emerging/developing or developed
economies it is a challenging task for managers
estimating the market potential or demand for
products in foreign markets.
• Different economies have unique business
environments; they may have limitations of reliable
data, market research firms, and trained researchers.
• The US, Japan and most of euro zone countries are
developed economies. On the other hand, the largest
emerging markets are China, India and Brazil; they
have a combined GDP of more than $15 trillion,
surpassing that of the US.
Potential
• Africa is among the biggest markets for mobile phone
sales, growing to more than 100 million users in just
a few years.
• Automakers are doing substantial business selling
economy cars throughout Latin America, South Asia,
and Eastern Europe.
• Emerging and developing economies are huge
markets for products and services.
• Estimating market potential or demand in foreign
countries requires managers to use innovative
research methods for gaining insights or data.
Potential
• To determine potential demand, managers first
estimate the possible sales of the category of products
for all companies (i.e. Industry Demand or Market
Potential), then estimate its own market share
potential (i.e. Company Demand or Company Sales
Potential).
• There are two stages as mentioned above involves in
estimating the global market potential and are:
1. Estimating Industry Market Potential
2. Estimating Company Sales Potential
• Industry market potential is an estimate of the likely
sales for all firms in the particular industry for a
specific period.
• Each industry sector also has its own industry-
specific market potential indicators, which the
company needs to analyze and assess.
• On the basis of the market potential assessment in
each country, the firm can design its marketing mix to
meet the perceived potential.
• To estimate industry market potential, managers
obtain data and insights on the following variables for
each country:
– Size and growth rate of the market and trends in
the specific industry
– Tariff and nontariff trade barriers to market entry
– Standards and regulations that affect the industry
– Availability and sophistication of distribution for
the firm’s offerings in the market
– Unique customer requirements and preferences
– Industry specific market potential indicators
• Indicators for Assessing Market Potential and
Opportunities:
– Gross National Product (GNP): It is a measure of the
value of all goods and services produced by nation. GNPs
range from a mere $140 million for the Maldives to $6.4
trillion for the United States. Dividing GNP by its total
population, the result achieved is the per capita GNP, which
measures market intensity.
– Population: It is another general indicators of the market
size and potential of a country. On this score, China is the
foremost market because its population exceeds 1 billion.
– Personal Income: Another indicator or a country’s
wealth is potential income of its citizens. Income can
reflect the degree of attractiveness of a market because
consumption generally rises as income increases.
– Obsolescence and Leapfrogging of Products:
Consumers in emerging economies not necessarily
follow the same patterns as those in higher-income
countries. In many emerging economies including
Nepal, consumers have leapfrogged the use of
traditional telephones by jumping from having no
telephones to using cell phones exclusively. In many
markets, products become obsolescent to give space
for new products.
– Cultural Factors: Cultural values or tastes also
determine the nature of market. Denmark and
Switzerland, for example, have very similar per capita
incomes, but per capita consumption of frozen food is
much higher in Denmark, because of the convenience
loving culture of this Scandinavian country.
– Costs: Nepalese and other Asians working in USA as
skilled laborers find their salary is extremely higher
than they would spend in Nepal, but the cost of basic
needs in the US are also extremely higher. When such
costs are high, consumers may spend more than what
they would expect.
– Income Elasticity: Income elasticity varies by product,
and by the income level. Demand for necessities such
as food is usually less elastic than is demand for luxury
goods such as automobiles. A change in income level
affects food consumption in poor economies much
more than it would in a higher income country or
market.
– Substitution: The rate of substitution differs from
country to country. Despite high income level, people
in Hong Kong do not prefer automobiles, because
autos are not a good substitute for public transport
there. The crowded conditions in the Hong Kong make
private cars no a good substitute to mass transit
systems .
– Income Inequality: In countries where there is high
level of inequality means people are both poor as well
as wealthy. Companies should identify such facts. For
e.g. India and Brazil
– Buyers Behavior: Buyers behavioral and
psychological aspects create or break demand for
certain products. For e.g. Psychographic Segmentation
(lifestyle and personality), Behavioral Segmentation
(Occasions, usage rate, loyalty, status, attitude towards
products etc.) and Demographic segmentation (age,
lifecycle stage, gender, social class etc.) largely
influences buyers behavior in a particular country.
• Methods for Estimating Industry Market
Potential:
– Simple Trend Analysis: Trend analysis provides a
rough estimate of the size of a current industry sales in
the country i.e. quantifying production as a whole,
adding imports from abroad and deducting exports.
– Monitoring Key industry-specific indicators:
Collecting information related to potentiality for
production and product demand. For a earth-moving
company information for estimating demand creation
would be like number of announced construction
projects in the country intended for investment.
– Monitoring Key Competitors: Manager investigates the
degree of major competitors activity in the countries of
interest.
– Following Key Customers around the World: Automotive
suppliers can anticipate where their services will be needed
next by monitoring the international expansion of their
customers such as Honda or Hyundai.
– Tapping into Suppliers networks: Many suppliers serve
multiple clients and can be a major source of information
about competitors.
– Attending International Trade Fairs: By attending a trade
fair in the target country, a manager can learn a great deal
about market characteristics that help indicate industry
sales potential.
• Company sales potential is the share of annual
industry sales the firm can realistically achieve in the
target country. Estimating company sales potential
requires the researcher to obtain highly refined
market information.
• Determinants of Company Sales Potential are
mentioned as under:
– Height of Competition: The company’s sales potential
depends on how much competitive it is with local or third
country competitors whose marketing efforts are often
unpredictable.
– Pricing and Financing of Sales: If the pricing and
financing are attractive to both customers and channel
members, the company can have more sales potential
and vice versa.
– Quality of human resources: If the company has HRs
having sufficient skills in language, culture and other
areas to do business in target markets, its sales
potential will be bigger.
– Quality of financial resources: Sufficient capital is a
prerequisite for any project. International ventures
often require substantial financial outlays.
– Risk bearing of top managers: If top management
is willing to commit higher level of resources and
thus bear more risks, the company can have bigger
sales potential.
– Partner Capabilities: The firm’s ability to generate
sales in the target market depends on competencies
and resources of foreign partners, including
channel members.
– Access to distribution channel: Ability to
establish effective channel members and channel
infrastructure in the target market determines sales
potential.
– Timetable for market entry: A key decision is whether
managers opt for gradual or rapid market entry.
– Firm’s contacts and capabilities: If the firm has better
network sales potential will be high and vice versa.
– Firm’s Reputation: Reputed companies naturally have
more sales potential.
Approaches to Global Management
• The EPRG model is the basic approach to
global management which stands for:
– Ethnocentrism,
– Polycentrism,
– Regio-centrism and
– Geo-centrism.
• The EPRG model attempts to identify four
broad types of management orientation of a
firm towards internationalization of its
operations.
Ethnocentrism
• It considers that the management practices, product,
marketing and other business strategies applicable in the
home country are equally applicable in the foreign land as
well.
• It looks upon the foreign market only as an extension of
the home market and tries to impose the home country
strategies in the foreign operations.
• Firms following this orientation does all business
operations and planning from the home country base,
with no or little difference in product plans, pricing
strategy, distribution and promotional measures in the
home and foreign countries.
Polycentrism
• When a firm adopts a polycentric orientation to
international management, it attempts to organize
its international business activities on country-by-
country basis.
• Activities are largely decentralized to cater the
local needs of the country.
• Each country is treated as a separate market entity
and individual strategies are worked out
accordingly.
Regio-centrism
• In regio-centric approach, the fiirm adopts a
business management policy covering a group of
countries which have comparable business and
market characteristics.
• The operational strategies are formulated on the
basis of the entire region rather than individual
countries, and production and distribution
facilities are created to serve the whole region
with effective economy of operations and closer
control and coordination.
Geo-centrism
• In a geocentric orientation, the firm adopts a world-
wide approach to global management, and its
business becomes truly global in nature.
• The firm’s management establishes manufacturing
and processing activities at specific points around the
world in order to serve the various national or
regional markets through a complicated but well
coordinated system of production, promotion and
distribution.
• It follows the middle path lying of the extremes of
polycentrism, ethno and regio-centrism.
• Regio-centrism also tries to cover a wide range of
management orientation acceptable in the countries of
the region.
• But, in practice, geocentric approach is more
preferable, as it calls for a much greater scale of
production, coordination and organizational set-up in
order to cater the markets of heterogeneous
characteristics.
Choosing a Strategy (Types of Strategy
and Strategic Choice)
• To succeed in international business
operations, firms have to choose the best
management strategy.
• In international business, the firms have at
least four strategic choices:
– International Strategy
– Multi-domestic Strategy
– Global Strategy
– Trans-national Strategy
International Strategy
• International strategy is a business plan or strategy
created by a company to do its business in
international markets.
• An international strategy requires analyzing the
international market, studying resources, defining
goals, understanding market dynamics & develop
offerings.
• International strategy for a company looking to grow
is a continuous process.
• Usually the head office at the home country retains
the tight control over product and marketing strategy.
International Strategy
• International strategy is practically to go with an
ethnocentric management orientation that emphasizes
on home country products and skills.
• Examples includes: McDonalds, IBM, Kellogg’s, P&G, Wal-
mart, Microsoft etc.
Steps for Preparing an International Strategy

Multi-domestic Strategy (Localization Strategy)
• A multi-domestic strategy is an international marketing
approach that chooses to focus advertising and
commercial efforts on the needs of a local market rather
than taking a more universal or global approach.
• This means that companies employing this marketing
strategy will seek to understand the culture of various
local markets and tailor their entry into those markets
based on the demographics of that area.
• With this approach, a great deal of effort is made to adapt
advertising and presentation to appeal to local
sensibilities, rather than using a mass market approach.
Multi-domestic Strategy (Localization Strategy)
• A firm using a multi-domestic strategy sacrifices
efficiency in favor of emphasizing responsiveness to local
requirements within each of its markets.
• For e.g., rather than trying to force all of its American-made shows
on viewers around the globe, MTV customizes the programming that
is shown on its channels within dozens of countries, including New
Zealand, Portugal, Pakistan, and India.
• Similarly, food company H. J. Heinz adapts its products to match
local preferences. Because some Indians will not eat garlic and
onion, for example, Heinz offers them a version of its signature
ketchup that does not include these two ingredients.
• Such strategy is generally based on a polycentric management
orientation .
Global Strategy (Global Standardization Strategy)
• A global strategy is one that a company takes when
it wants to compete and expand in the global market.
• In other words, a strategy businesses pursue when
they wish to expand internationally.
• A global strategy refers to the plans an organization
has developed to target growth beyond its borders.
• Specifically, it aims to increase the sales of goods or
services abroad.
• The global strategy is concerned with an ethnocentric
and regio-centric management orientation that
emphasizes on using home country experience and
skills for cost reduction.
Global Strategy (Global Standardization Strategy)
• A firm using a global strategy sacrifices responsiveness to
local requirements within each of its markets in favor of
emphasizing efficiency.
• This strategy is the complete opposite of a multi-domestic
strategy.
• Some minor modifications to products and services may
be made in various markets, but a global strategy stresses
the need to gain economies of scale by offering
essentially the same products or services in each market.
• For e.g., Microsoft, for example, offers the same software programs
around the world but adjusts the programs to match local
languages.
Choosing a Strategy (Types of Strategy and Strategic
Choice)
Transnational Strategy
• An international business structure where a
company's global business activities are coordinated
via cooperation and interdependence between its head
office, operational divisions and internationally
located subsidiaries or retail outlets.
• A transnational strategy offers the centralization
benefits provided by a global strategy along with the
local responsiveness characteristic of domestic
strategies.
• A transnational strategy is practically based on a
geocentric management orientation that emphasizes
on combination of both customization (Polycentrism)
and Standardization (Ethnocentrism).
Transnational Strategy
• A firm using a transnational strategy seeks a middle
ground between a multi-domestic strategy and a
global strategy.
• Such a firm tries to balance the desire for efficiency with
the need to adjust to local preferences within various
countries.
• For example, large fast-food chains such as McDonald’s and
KFC rely on the same brand names and the same core menu
items around the world. These firms make some concessions to
local tastes too. In France, for example, wine can be
purchased at McDonald’s. This approach makes sense for
McDonald’s because wine is a central element of French diets.
Entering and Operating in International
Markets: Entry Strategies/Modes of Entry
• There are many ways or patterns in which firms can go
international so that it can successfully enter and
operate in given international markets.
• IB firms can take decisions to go global for the
expansion of its trade or manufacturing in the targeted
host nation, for which firm can take choose one or more
from the vault of market entry strategies.
• Entry strategies ranges from trade mode to wholly
owned subsidiaries(Foreign Investment Mode).
• The selection of the most suitable strategic alternative
is based on the relevant factors related to the company
and foreign market.
Markets: Entry Strategies
• The major strategies are listed as under:
– Exporting (and Importing)
– Collaborative Ventures and Strategic Alliances
• Strategic Alliances
• Joint Ventures
• Consortia
• Management Contracts
• Turnkey Operations
• Equity Alliances
• Foreign Manufacturing Alliances
– Licensing and Franchising
– Wholly Owned Subsidiaries
Exporting (and Importing)
• The most commonly used method for entering
foreign markets.
• Exporting may be defined as making a product in the
firm’s domestic market place and selling it in another
country.
• Exporting involves use of marketing channels to
reach to the buyers in the foreign country markets.
• It is a basic strategy for the business organization to
go international.
• Exporting is generally performed either:
– Through export agents or
– Through overseas marketing subsidiaries
• The beauty is, it reduces the financial risks.
• Apart from direct exporting, IB firms can go with
indirect type of exporting in which goods are
exported through:
– Trading company
– Export Management Company
– Piggybacking or Mother-Henning Distribution Channel
• Piggybacking or Mother-Henning Distribution:
– It is also known as cooperative export arrangement. These
arrangements are the cooperative arrangements that involve the
use of a distribution system of exporters with established systems
of selling abroad. They agree to handle the export function of
anon-competing (but not necessarily unrelated) company on
contractual basis.
– If five Nepali carpet companies create a cooperative export
arrangement to export their products to Germany and
Switzerland, it will be known as piggybacking or mother-henning
distribution, where the cooperative takes care of export
documentation and other export formalities on behalf of the five
companies.
• Counter Trade: Counter-trade refers to the range of
barter like arrangements by which goods and services
can be traded for other goods and services, when a
country’s currency is non-convertible.
Collaborative Ventures and Strategic Alliances
• Two or more firms from different countries can
collaborate with one another to create their collaborative
business ventures to enter international markets.
• With a purpose of entering a new international market, a
firm may collaborate with another firm of that market or
even other countries.
• The entry strategies regarding the collaborative ventures
and strategic alliances are discussed as under:
– Strategic Alliances, Joint Ventures, Consortia, Management
contracts, Turnkey Operations, Equity Alliances and Foreign
Manufacturing Alliances.
Strategic Alliance (SA)
• A strategic alliance is the collaboration of two or more firms to
follow any specific strategy.
• A strategic alliance is an agreement between two or more
parties to pursue a set of agreed upon objectives needed while
remaining independent organizations.
• Typically, two companies form a strategic alliance when each
possesses one or more business assets or have expertise that
will help the other by enhancing their businesses.
• Strategic alliances can develop in outsourcing relationships
where the parties desire to achieve long-term win-win benefits
and innovation based on mutually desired outcomes.
Strategic Alliance
• IBM, Toshiba and Siemens have had such a strategic
alliance to fight against counterfeit and inferior quality
products in the world markets.
• Strategic Alliances have two extreme types:
– Formal Joint Ventures: It is an alliance where two or more firms
have equity stakes. (e.g. Fuji-Xerox)
– Short-term Contractual Agreements: It is an alliance in which
two companies agree to cooperate on a particular task such as
developing a new product through R&D. (e.g. IBM, Toshiba and
Siemens)
• When the allies create a separate company or entity, it
becomes a Joint Venture.
Strategic Alliance
• Reasons Behind Strategic Alliance
– Protect the concerned companies from political and
economic risks.
– Managing situations at the time of shortage of competent
employees for handling foreign market or if the company is
short of capital.
– Access to the specific resources of the collaborating
company. For example: good distribution network, culture,
knowledge, brand image etc.
– Follow the law of the country that does not permit wholly
owned foreign subsidiaries.
Joint Ventures (JV)
• A joint venture (JV) is a business arrangement in which two or
more parties agree to pool their resources for the purpose of
accomplishing a specific task.
• This task can be a new project or any other business activity.
• In a joint venture (JV), each of the participants is responsible
for profits, losses, and costs associated with it.
• However, the venture is its own entity, separate from the
participants' other business interests.
• They are a partnership in the colloquial sense of the word but
can take on any legal structure.
• A common use of JVs is to partner up with a local business to
enter a foreign market.
Joint Ventures (JV)
• Examples:
• Sony Ericsson is another famous example of a JV
between two large companies. In this case, they
partnered in the early 2000s with the aim of being a
world leader in mobile phones. After several years of
operating as a JV, the venture eventually became
solely owned by Sony.
• In Nepal there are 7 Joint Venture Banks and are:
– HBL, NSBIL, EBL, SCBNL, NBBL, NMBL
Joint Ventures (JV)
• There are two types of JVs and are:
– Equity: It involves each partner taking an equity
stake in the venture i.e. each partner invests in the
equity of JV firm.
– Contractual Agreement: It relies on contractual
agreement between partners, and sometimes,
partners’ investment could be unequal and other
may not have even invested in it. It all depends on
contractual agreement.
Consortia or Consortium
• A consortium is a group made up of two or more
individuals, companies, or governments that work
together to achieving a common objective.
• Entities that participate in a consortium pool
resources but are otherwise only responsible for the
obligations that are set out in the consortium's
agreement.
• Every entity that is under the consortium, therefore,
remains independent with regard to their
normal business operations and has no say over
another member's operations that are not related to
the consortium.
• A consortium is a group of entities that collaborate
to achieve a common objective.
• Consortiums are common among educational
institutions that pool resources so that students can
benefit from a broader range of assets.
• Examples of for-profit consortiums are Airbus Industrie GIE,
composed of the companies British Aerospace, Aérospatiale,
Construcciones Aeronáuticas SA, and Hulu, composed of
Comcast, Time Warner, the Walt Disney Company, and 21st
Century Fox.
• More Examples:
– For example, the Five College Consortium in
Massachusetts includes the University of Massachusetts
Amherst, Mount Holyoke College, Hampshire College,
Smith College, and Amherst College as members.
– Students attending any of those institutions can attend
classes at any other partnered school for credit at no extra
cost. Such educational consortiums involve partnerships
between institutions that are close to one another. Other
college consortia include The Quaker Consortium, The
Claremont Colleges, and the Big Ten Academic Alliance.
Management Contracts
• A company signs a contract with another country or its company to
manage its assets till such a time that it develops human resources or
technology necessary for managing the assets.
• A management contract can involve a wide range of functions such as
technical operation of a production facility, management of personnel,
accounting, marketing services and training.
• Management contracts are used primarily when the foreign company
can manage better than owners.
• Under the aegis of Nepal government, Nepal Bank Ltd and Rastriya
Banijya Bank had management contracts with European firms led by
Mr. McAllister and Henderson, respectively, to manage the largest
commercial banks of Nepal. The key areas where these foreign firms
could brig about improvements in the Nepali banks included
reduction in non-performing assets (NPAs) and execution of MIS
(management information system) plan.
Turnkey Operations
• It is a project in which a firm agrees to set up an operating plant
for a foreign client (company) and hand over the key when the
plant is fully operational.
• If a Chinese company builds everything in a factory in Nepal,
and makes it ‘ready to operate’, it hands over the key to local
party (business firm) in Nepal; it will be known as the turnkey
project.
• A turnkey project operation is a product or service process
which can be implemented or utilized with no additional work
required by the buyer, but just by turning the key. The
contractor agrees to handle every detail of the project for a
foreign client, including the training of personnel.
Turnkey Operations
• Turnkey project operations allow a form to export their
process know-how to the countries where FDIs might be
prohibited.
• It enables the firm to earn greater returns from this assets
• But, a disadvantage is that the firm thus may inadvertently
create efficient global competitors for itself.
• For example, many of the western companies that sold oil-
refining technologies to firms in Saudi Arabia, Kuwait and
other Gulf nations now find themselves competing with
their companies in the world oil markets.
Advantages of Turnkey Operations
• A way of earning greater economic returns from
exporting process technology
• Useful where FDI is limited by host government
regulations.
• Less risky than FDI in countries with unstable
political and economic environment.
• Means of exporting process technology.
Equity Alliances
• An equity alliance is a collaborative arrangement between
companies from different countries, in which at least one of
the collaborating companies takes an ownership position
(almost always minority) in the other(s).
• In some cases, each party takes an ownership, such as by
buying part of each other’s shares or by swapping
(exchanging) some shares with each other.
• For instance, Panama-based Copa and Colombia-based
AeroRepublic took equity in each other.
Equity Alliances
• The purpose of the equity alliance is to solidify a collaborating
contract, such as supplier-buyer contract, so it is more difficult
to break-particularly if the ownership is large enough to secure a
board membership for the investing company.
• An equity alliance occurs when where the involved firms create
an alliance in equity investment by participating in the equity
capital of a business or firm in another country; and as a result,
they create a joint venture. This is also a strategy to enter a
foreign market.
• Equity alliance help make the collaborations solider and
stronger.
Foreign Manufacturing Alliances
• Under this arrangement, one firm lets the other firm
produce goods to its specifications, but the first firm still
assumes the responsibility for marketing.
• In this case, the international firm has used the contract
only for manufacturing, but performs other functional
activities of management including marketing.
• Some experts also call it foreign direct investment without
investment.
• Examples, include Norge manufactures washing machines
which are marketed and sold by MontgomeryWard in USA.
Licensing and Franchising
• Licensing is an arrangement whereby one company
allows another company to use its brand name,
trademark, technology, patent, copyright or other assets
in exchange for royalty-usually based on sales.
For example: Coca-cola supplies the formula
syrup to Bottlers Nepal Ltd, a licensee. As a licensor,
the coca-cola company (headquarter at US city of
Atlanta, Georgia) has the license agreement with the
Nepali company.
The parent company in the Philippines has a
license agreement with Nepali company to produce San
Miguel beer in Nepal.
• The Licensing Process
Advantages of Licensing
• Helps company to spread out its R&D and investment costs
with incremental income.
• Little additional capital or time investment.
• Legitimate means of capitalizing on intellectual property in a
foreign market.
• Receive royalties for granting the rights to intangible property
to licensee for specific period.
• Allows firms to participate where there are barriers to
investment.
• Primarily used by manufacturing firm.
Disadvantages of Licensing
• Inconsistent product quality may affect product image
negatively
• The agreement generally prohibits the originating
firm from exploiting the assets in particular foreign
market.
• Does not give firm tight control over manufacturing,
marketing and strategy to realize experience curve
and location economies.
• Potential conflicts with licensee
• Possibility of creating future competitor
• Franchising is a specialized form of licensing in which
the franchisor not only sells intangible property rights
(IPRs) to the franchisee, but also insists that the
franchisee agree to stand by strict rules as to how it
does business; hence there is the involvement of longer
term commitments in this strategy.
• In this strategy the franchisor operationally assist the
business on a consulting basis, such as through sales
promotion, human resource training and management
development.
• For example: KFC has intellectual property rights
on its special chicken spices that its provides to its
franchisees all over the world including Nepal.
• Domino’s pizza grants to franchisees the goodwill of
the Domino’s name and support services to get
started, such as store and equipment layout
information and a manager training programme.
There is a continual relationship.
Advantages of Franchising
• Important way of gaining foreign returns on certain
customer-services and trade name assets
• Limited financial commitment.
• Involves longer term commitment than licensing.
Primarily used by service firms.
• Royalty payments that are some percentage of
franchisees revenues.
• Firm relieved of many costs and risk of opening new
market.
Disadvantages of Franchising
• Since there is no manufacturing operation by the
foreign company, so there is no benefit of location
economies and experience curve.
• May put the firms worldwide reputation at risk if
there is no quality control.
• Potential conflicts with franchisee
• Possibility of creating future competitor
Wholly Owned Subsidiaries (Foreign Investment Mode)
• A wholly owned subsidiary is the one in which a firm owns 100
% of the stock in a foreign company.
• This can take on two main forms: (a) a green-field investment in
a new operation or (b) an acquisition (or merger) with an
existing local firm in the foreign country.
• Greenfield Investment: A Greenfield investment venture
involves the establishment of a wholly new operations in a
foreign country. It is the direct investment that occurs when a
firm headquartered in one country builds operating facilities or
subsidiaries in a foreign country. For e.g. Eastman Kodak’s
research laboratory in Japan, Ford’s plants in Germany and
Uniliver’s distribution centers in US.
Why many firms make Greenfield investments?
• To capitalize on low labour cost.
• The goal is often to transfer production to location
where the labour is cheap.
• Japanese businesses have moved much of their
production to Thailand, and many US companies to
India, because of the lower labour costs in their
mew lands.
Wholly Owned Subsidiaries (Foreign Investment Mode)
• Acquisition:
Global Outsourcing
• Outsourcing is the process in which companies entrust
businesses processes of their business functions to external
vendors in offshore locations.
• Global outsourcing uses a blend of onsite, offshore and near
shore outsourcing solutions to achieve strategic business
objectives for the outsourcing company.
• Global outsourcing has become an increasingly valuable
strategy to support business growth.
• Outsourcing will enable businesses to reduce operational
costs like manpower and infrastructure that they would have
needed to carry out these operations.
Global Outsourcing
• Outsourcing ensures a steady increase in your productivity,
quality of services, profits and in the overall growth of the
business. Outsourcing has various procedures like
transaction processing, data conversion services, data entry
services, product data entry, e-book data entry services,
web research, inventory management and many more.
• Global outsourcing takes a long-term holistic view of the
client enterprise and aligns its business goals to the
outsourced service offerings, in contrast to tactical short-
term contracts that take a piecemeal project-by-project or
simple "out-tasking" approach to outsourcing.
Global Outsourcing
Advantages of Global Outsourcing:
• Helps to focus on the core activities of the
organization
• Helps to reduce labor efforts
• Helps to reduce cost
• Helps to increase efficiency
• Helps to save on technology and infrastructure
• Helps to get professional and skilled resources
• Makes you get faster and better services
Global Outsourcing
• Global Sourcing: A procurement strategy in which
a business seeks to find the most cost efficient
location for manufacturing a product, even if the
location is in a foreign country. For example, if a toy
manufacturer finds that manufacturing and delivery
costs are lower in a foreign country due to lower
wages of foreign employees, the company might
close the domestic factory and use a foreign
manufacturer.
Global Outsourcing
• Onsite/Onshore/Domestic Outsourcing:
Onshore outsourcing (also called domestic
outsourcing) is the obtaining of services from
someone outside a company but within the same
country.
Global Outsourcing
• Offshore Outsourcing: It is a relocation of a business
process or entire manufacturing facility to a foreign
country.
• It is to relocate your home country’s business or factory
plant to a foreign country.
• It is common in the service sector, including banking,
software code writing, legal services, and customer-service
activities.
• Offshore outsourcing is a strategic practice in which a
business hires a third party supplier to perform work in a
nation other than the one in which the hiring business
primarily conducts its operations.
Global Outsourcing
• Near-shore Outsourcing: Near-shore outsourcing is
the practice of getting work done or services
performed by people in neighboring countries rather
than in your own country. Many companies in the
United States, for example, outsource work to
Canada and Mexico. Geographic proximity means
that travel and communications are easier and less
expensive, there are likely to be at least some
commonalities between the cultures, and people are
more likely to speak the same language.
MNCs and Foreign Direct Investment (FDI) in the
world economy – concept, types and trends.
• FDI occurs when a firm invests directly in business
to produce and or market products in a foreign
country.
• When a firm undertakes an FDI, it becomes a
multinational company (MNC) or multinational
enterprise (MNE).
• FDI also occurs when a firm buys an existing
enterprise in a foreign country.
• Today, MNCs are the major players in the world
economy.
• Concept of MNC: MNC is an organization with
extensive international operations in two or more
countries simultaneously.
• MNCs typically is involved in producing and selling
goods or services in two or more countries.
• It consists of a parent company in the home country and
two or more subsidiaries in other host countries.
• The parent company and subsidiaries function with a
high degree of strategic integration.
• There exists difference between MNC and trans-
national corporation (TNC).
• Trans-national corporation (TNC) is a company that
maintain significant operations in more than one
country but decentralizes management to the local
country.
• A TNC does not attempt to manage foreign operations
from its home country.
• Local nationals are hired to run operations in each
country, and marketing strategies for each country are
tailored to that country’s unique characteristics.
• Switzerland-based Nestle is often described as an
example of TNC.
Characteristics of MNCs
• Simultaneous Operation in Multiple Countries
• Factors of Production from Multiple Countries
• System from the Home Country Applied to the
Host Countries
• Virtual Independence for Subsidiaries
Types of MNCs
• On the basis of Management Orientation
– Ethnocentric MNC
– Regio-centric MNC
– Polycentric MNC
– Geo-centric MNC
• On the basis of purpose of organization
– Raw-material seeker MNC
– Market Seeker MNC
– Cost-minimizing MNC
Advantages and Disadvantages of MNCs
Foreign Direct Investments (FDIs)
• FDI refers to the investment placed directly in business
operations in a foreign country; thus it is international
investment.
• In other words, FDI is the act of moving the capital across
the border for the purpose of actively controlling property
and ownership of a company in a foreign country.
• When a firm undertakes an FDI, it becomes a multinational
company (MNC) or multinational enterprise (MNE).
• FDI also occurs when a firm buys an existing enterprise in a
foreign country.
Types of FDIs
• FDI takes on two main forms: Green-field investment or direct
investment and acquisition , and foreign portfolio investment.
• Green-field Investment (Direct Investment) and
Acquisition: It is to establish a wholly new industry or operation
in a foreign country. It can also involve acquisitions where a
company can acquire other foreign company with minority share
(10-49 percent share), majority share (50-99 percent) or even
with full outright stake (100 percent). A company may also
purchase a sufficient share in another foreign country company
to obtain its significant management control and make direct
investment in that venture. Acquiring a sufficient share in
another foreign country company is known as acquisition.
Types of FDIs
• Foreign Portfolio Investments: Foreign portfolio
investments (FPI) is investment by individuals, firms or
public organizations in foreign financial instruments
(e.g., government bonds, foreign stocks, etc.). Such
purchase of shares and bonds aims at obtaining returns
on the funds invested. Importantly, FPI do not involve
taking a significant equity stake in a foreign business
entity (i.e., the equity stake is less than 10 %). FPI is
also known as a ‘non-controlling interest, as such
investments have generally no intention to control the
organization but only a goal of earning returns on
investment.
Types of FDIs
• Horizontal FDI: It is the investment in the same industry abroad as a
firm operates at home. Dabur India has invested in Nepal in the same
industry (Ayurvedic herbal products, tooth products, etc.) as in India.
• Vertical FDI: It is the investment in an industry abroad that provides
inputs into or sells outputs from a firm’s domestic operations. There is
a backward vertical FDI in extractive industries (mining industries
like oil extraction, copper or bauxite mining). It is so because they
obtain inputs of oil, copper, or bauxite from mines abroad and use
these raw materials in their real downstream operations of oil refining
and copper/bauxite production respectively at home. There is
forward vertical FDI in which an industry abroad sells the outputs of a
firm’s domestic production. Forward vertical FDI is less common
than backward one.
Trends of FDIs
Trends of FDIs
Trends in FDIs
Trends in FDIs
Trends in FDIs
Trends in FDIs
FDI Trend In Nepal
• Foreign Direct Investment in Nepal increased by 17512.80
NPR Million in 2018. Foreign Direct Investment in Nepal
averaged 4159.94 NPR Million from 2001 until 2018,
reaching an all time high of 17512.80 NPR Million in 2018
and a record low of -469.70 NPR Million in 2006. (Source:
Trading EconomicsWebsite)
• The FDI inflows into Nepal increased after the restoration
of Democracy1990, as the country adopted a liberal and
open market policy.
• The FDI flow increased significantly after a full fledged law
Foreign Investment and Technology Transfer Act (FITTA)
was enforced in 1992 to replace old Foreign Investment and
Technology Act of 1981.
FDI Trend In Nepal
• The amount albeit (though) small compared to that of
neighboring countries, FDI inflow in Nepal has been
increasing in recent years. FDI stock reached 6.1 percent of
GDP in 2015/16, which was mainly driven by increase in
reserves of FDI-based industries. Reserve constitutes two-
third of FDI stock.
• Foreign investors from more than 39 countries have made
investment in 252 firms showing great interest in the
service sector which has received 70.2 percent of
outstanding FDI in Nepal. Industrial sector is the second
preferred sector for FDI. However, the agriculture sector is
the least preferred sector having only 0.3 percent of
outstanding FDI as in mid-July 2016.
FDI Trend In Nepal
• Loans have a very small share (i.e. 3.7 percent) in total
outstanding FDI. In terms of paid up capital, India brought the
highest FDI in Nepal. However, if we consider total stock of FDI
by including reserves and loans, West Indies surpasses India with
FDI Stock of 62.8 billion as in mid-July 2016. All FDI from West
Indies has been made in the services sector.
• Regarding the manufacturing firms established with FDI, two-
third of them are producing industrial goods, the rest are
producing fast moving consumer goods. These manufacturing
firms employ 87 percent domestic workers.
• After the promulgation of the Constitution historically making
Nepal a Federal Democratic Republic in September 2015, more
FDI inflows are expected. For this to happen, Nepal should be
able to restore political stability.
Why is Nepal not Getting Enough of
FDIs? (Nepal’s Problems with FDIs)
• Political instability and threats to business security
• Nepal’s business environment and economic policies are
still not adequately investor friendly.
• Nepal’s underdeveloped capital market.
• Nepal’s stock market is largely inefficient.
• Failure to operate the central depository system on
time in the stock market is an obstacle.
• Poor Infrastructure
• Poor labour relations
• Poor access to finance and declining exports
• Bureaucratic hassles
Unit V
Functional Areas of International Business
Concept of International Business
Management
• International business management is a critical element and
highly specialized task.
• It is a risk inherent and challenging task regulated by many
country rules and complex maze of regulations, political
influences, different cultures, currencies, languages and time
zones.
• International business management encompasses many tasks
that move goods and services through multi-modal logistics
and services at optimum speed across borders, to the right
people, to the right place and accompanied by accurate and
compliant documentations.
Important Factors of International
Business management
• Management’s goals, plans strategies, priorities-based on
resources and management efforts-investment, product,
sales, expansion, market entry, market network etc.
• Management and Organization-Management’s time and
interest, suitable organizational structure; and control
mechanism; human resource management etc.
• Manufacturing Capacity-product or services readiness to
export with plants, equipments and other infrastructure
for additional capacity.
Business management
• Financial Resources - accounting, financial strategies,
working capita, capital to investigate and penetrate foreign
market, product adaptation, promotion, distribution etc.
• Technological Knowledge and R&D-to develop and adapt
products and services for foreign markets.
• Marketing Know-how: assessment of market attractiveness,
marketing internationally, and additional knowledge on
environmental forces.
• Foreign Exchange Management-foreign exchange markets,
exchange rate determination and foreign exchange
exposures.
Business management
• Experience of IB-past performance, lessons learned
from successes or failures have a bearing on future
success.
All of the above subjects are concerned with
the functional areas of IB management.
Global Production
• Global production is the extension of the transformation
process of tangible (resources like land, labor, capital or raw
materials) and intangibles (deeds, ideas, information and
knowledge) inputs into goods and services(creation of output
from resources/ideas)across national frontier.
• Production involves all activities related to creation of a
product (manufacturing of physical or visible things) or service
(invisible deeds to a person or thing).
• The global production combines the insight from the global
value chains (GVCs).
Global Production
• There are three principles of production; (a) PURPOSE-
creation of value (through innovation and knowledge on
customer’s needs) that is greater than the value created by the
competitors, (b) STRATEGY-creation of competitive
advantage, and (c) FOCUS-concentration on specific areas in
value creation to achieve competitiveness.
• The modern global production system is embracing most
sophisticated technologies including ICT, digitalized
machineries, electronic equipment, trade-in-services,
intellectual properties, outsourcing, global value chains (GVCs)
and logistics supports with multi-domestic (polycentric) and
transnational (geocentric) management approaches.
Global Production
• The global market or global village has emerged with
shifting marketing focus from a micro-economy to
managing strategic partnerships and positioning the firm
between vendors and customers with the aim of creating
more value for customers.
• Therefore, contemporary global production system is
getting sophisticated requiring dynamic leadership and
knowledge for prudential decisions.
Outsourcing
• Outsourcing is basically a make or buy decision.
• International business frequently face make or buy
decisions.
• It is the decision about whether they should perform a
certain value creation activity themselves or simply
outsource it to another entity, particularly independent
suppliers in foreign countries.
• In sports shoe industry, the make or buy decisions have
been taken to an extreme with such companies as NIKE
and REEBOK; these companies are not involved in
manufacturing; all their production has been
outsourced, mainly to manufactures of low wage
countries.
Benefits of Outsourcing/Global Sourcing
• Cost Efficiency: The firm takes advantage of the large

wage gap between advanced economies and emerging
markets. One study found that firms expect to save an
average of more than 40 % off baseline costs as a result
of off-shoring, particularly in R&D, product design
activities, and back-office operations such as accounting
and data processing.
• Higher-tech products: Outsourcing is a good way to get
product components based on better technologies. It
improves the IB firm’s production quality.
Benefits of Outsourcing/Global Sourcing
• Better Product Quality: A firm can get better quality

components by sourcing it from foreign independent
suppliers as they are specialized in the given product
quality.
• Better Delivery Service: A firm can get delivery of
components on the time and place it wants. It is so as
the foreign independent suppliers maintain good
timetable for delivery of ordered components so that
they can make delivery efficiently.
Risks (Challenges) of
Outsourcing/Global Sourcing
• Cost Lower-than-expected cost savings: Sourcing from other
countries may often be more complex and costly than
expected. Establishing an outsourcing facility can be
surprisingly can be surprisingly expensive, due to the need to
upgrade poor infrastructure or locate it in a large city to
attract sufficient skilled labour.
• Environmental Factors: Currency fluctuations, tariffs and
other trade barriers, high energy and transportation costs,
adverse macroeconomic events and labour strikes.
• Weak Legal Environment: Many popular locations for global
sourcing (for e.g., China, India and Russia) have weak
intellectual property laws and poor enforcement, which can
erode key strategic assets.
• Inadequate or low skilled workers: Some foreign suppliers
may be staffed by employees who lack appropriate
knowledge about the tasks with which they are charged.
• Overreliance on Suppliers: Unreliable suppliers may put
earlier work aside when they gain a more important client.
Suppliers occasionally encounter financial difficulties or are
acquired by other firms having different priorities and
procedures.
• Risk of Creating Competitors: As the IB firm shares its
intellectual property and business process knowledge with
foreign suppliers, it also runs the risk of creating future
rivals.
• Erosion of Morale and Commitment: Employees morale
and commitment might get low since employees of home
country gets caught in between of their employers and their
employer’s client.
Logistics
• Logistics the part of the supply chain process that plans,
implements, and controls the efficient, effective flow and
storage of goods, services and related information from the
point of origin to the point of consumption, to meet
customers’ needs.
• Logistics physically moves goods through the supply chain.
• It incorporates information, transportation, inventory,
warehousing, materials handling and similar activities
associated with the delivery of raw materials, parts,
components, and finished products.
• IB managers try to reduce moving and storage costs by
using JIT system.
Logistics
• The logistics function is complicated in an
international business because of the following:
– Wide Geographic Distance
– Time
– Exchange rates
– Customs andTrade Barriers
– Multiple legal environments
– Costly nature of distribution infrastructure.
• More diverse the firm’s global supply chain, the
greater the cost of logistics.
Managing Global Supply Chain
• A company’s supply chain involves the coordination of materials,
information and funds from the initial raw material supplier to
the ultimate customer.
• It is the management of the value added process from the
supplier to the customers’ customer.
• In the global context, the suppliers can be located in the
countries where the manufacturing or assembly takes place, or
they can be located in one country and shipped to the country of
manufacture or assembly.
• Global supply chain refers to the firm’s integrated network of
sourcing, production, and distribution, organized on a world
scale and located in countries where competitive advantage can
be maximized.
• The concepts of supply chain and value chain are related but
distinct.
• The value chain is the collection of activities intended to design,
produce, market, deliver, and support a product or service.
• By contrast, the supply chain is the collection of logistics
specialists and activities that provide inputs to manufacturers or
retailers.
• Supply chain management involves series of value adding
activities that connect a company’s supply side with its demand
side. Skillful supply chain management serves to optimize value
chain activities.
• The marketing intermediaries are an active participant in the
supply chain management; they sell the output to the final
consumer.
• For example Dell Laptops: When customer in Canada
orders a Dell laptop, the order is typically routed to the
Dell factory in Malaysia, where workers must access 30
distinct component parts that originate with Dell
suppliers scattered around the world. Indeed, the total
supply chain for a typical Dell computer, including
multiple levels of suppliers, typically includes some 400
companies in Asia, Europe, and the America. Dell is so
skilled at managing all this complexity that customers
typically receive their computers within two weeks of
submitting an order.
• A global supply chain management strategy should
include the following elements:
– Customer service requirements
– Plant and distribution centre network design
– Transportation Management
– Inventory management
– Outsourcing and third party logistics relationships
– Key customer and supplier relationships
– Business processes
– Information systems
– Organizational design and training requirements
– Performance metrics
– Performance goals
Global Marketing Strategies
• When companies go into international business,
they need to have an understanding of global
marketing.
• When a firm internationalizes, its marketing is
concerned with identifying, measuring, and
pursuing customer needs and market opportunities
abroad.
• Global marketing is the multinational process of
planning and executing the conception, pricing,
promotion, and distribution of ideas, goods and
services to create exchanges that satisfy individual
and organizational objectives.
• Global marketing may be defined as a marketing
process of focusing the resources and objectives of
company on a global marketing opportunities.
• Global marketing strategy is a plan of action the firm
develops for foreign markets that guides its decision-
making on (1) how to position itself and its offerings,
(2) which customer segments to target, and (3) to
what degree it should standardize or adapt its
marketing programme elements.
• IB firms must develop and design an appropriate
marketing mix that consists in four major areas:
product, price, promotion and distribution.
– Product Strategy
– Pricing Strategy
– Promotion/Marketing Communication Strategy
– Distribution Strategy
• The IB managers need to formulate and implement
strategies in the above four areas.
• IB managers usually have two major choices for their
global marketing strategy. They may either standardize
their products and other marketing mix in different
foreign markets or adapt them to realities of those
markets.
• They can choose either standardization or
adaptation strategy (customization) strategies in
targeting and positioning, product development,
pricing, promotion and distribution, global
marketing strategy.
• IB Managers usually have two major choices for
their global marketing strategies and they are:
– Standardization Strategy
– Adaptation Strategy
Standardization Strategy
• Standardization strategy makes the marketing
programme elements uniform, with the same
product or services in different target markets,
sometimes even the global marketplace.
• Standardization strategy is remarkable for three
outcomes or benefits: (a) cost reduction, (b)
improved planning and control, and (c) ability to
develop a consistent image and build global brands.
• Most IB firms face pressures in foreign markets to
customize or adapt their marketing to local realities
there.
Standardization Strategy
• MasterCard, Airbus, and Pfizer use standardized
marketing strategy with great success.
• Philips also used a standardized advertisement (TV
commercial featuring the then Indian model Aishwarya
Rai in an acrobatic dance sequence) in its all world
markets for many years in the 1990’s and later too.
Adaptation Strategy
• Adaptation is the strategy in which the firm modifies
one or more elements of its global marketing
programme to accommodate specific customer
requirements in a particular foreign market.
• Adaptation/customization strategy has at least four
outcomes/benefits: (a) meeting the local customer
needs more precisely, (b) creating unique appeal for
the product, (c) complying (matching) with local or
national laws, and (d) achieving greater success in
competing with local and global rival companies.
Adaptation Strategy
• This strategy is usually preferred by many MNCs because
there are differences in national preferences, living
standards and economic conditions, laws and regulations,
and in national infrastructure.
Global Positioning
• A brand’s position refers to the way that customers
and prospects perceive it relative to the other brands
in the same category.
• A company’s positioning strategy is a plan that
details what the company will do in order to
cultivate the desired perception in the market so
their brand is compared favorably.
• Global positioning is a strategy in which the firm’s
offering is positioned similarly in the minds of the
buyers worldwide. E.g., Starbucks,Volvo, Sony.
Global Positioning
• Marketers have utilized a number of general
positioning strategies, these include positioning by:
– Attribute or Benefit
– Quality and Price
– Use or User and Competitor
• In Global positioning there are two options:
– High-tech: It is useful for high tech consumer
products like computer, automobiles, etc.
– High-touch: This positioning requires more focus
on product look or image. Product should give
symbols of wealth, materialism and romance.
Global Branding
• When firm enters and positions itself in global
markets, it results into development of a global brand.
• Global brands are brands that reach the world’s mega-
markets and are perceived as the same brand by
consumers and internal constituents.
• Some brands are standardized where as some brands
are adapted as per the local conditions.
• Consumers prefer globally branded products because
branding provides a sense of trust and confidence in
the purchase decision.
• The strength of a global brand is best measured by its
brand equity- the market value of a brand.
Global Branding
• A strong brand enhances the efficiency and
effectiveness of marketing programmes, stimulates
brand loyalty, allows the firm to charge premium
prices, increases its leverage with intermediaries and
retailers, and generally enhances its competitive
advantage in global markets.
• There are many well-known global brands in various product
categories; for example Barbie (toys), Visa and MasterCard (credit
cards), Gillette Sensor (personal care products), Cadbury
(chocolate/food), Samsung and LG (consumer electronics),
Heineken (beverages), and IKEA (furniture).
Global Branding
• Few considerations should be give at the time of
developing global branding strategies:
– Choosing between a global brand and a localized brand
in a given foreign market
– Cultural meanings of brand
– Protection of brand against piracy and counterfeit
product brands
– Government regulations and practices on brands and
trademarks.
Product Development
• It is to develop a new product for the new
foreign market.
• Product policy may also be described as a
variation on the product adaptation strategy.
• Adaptation policy makes some modification on
the existing product line , the new product
development policy involves developing a
noticeably different product.
Product Development
• For e.g., Switzerland based company Nestle has
offered Maggi Ataa noodles in India to suit to the
typical Indian market needs, whereas it does not sell
this particularly variety of noodles in its home
country market. Switzerland and else where in
Europe.
• It also applies to Maggi pickle and Maggi ketchup
products.
Product Development
New Product Development Process
1. Idea Generation
2. Idea Screening
3. Concept Development and Testing
4. Marketing Strategy Development
5. Business analysis
6. Product development and testing
7. Test Marketing
8. Commercializing
Idea Generation
• Idea generation is the first step of New Product Development
process. It is a systematic search to find out new ideas. It comes from
everywhere and in any form. In the first stage, new ideas are
collected from many sources, which are:
– Internal Sources: Mostly, large companies have their own formal
Research and Development department. But normally
any employee can come up with a good idea.
– Customers: A company should always listen to customers’ questions,
complaints and feedbacks that help to generate new product ideas to
satisfy customer problems.
– Competitors: To generate ideas companies can conduct competitors
SWOT analysis.
– Distributors and suppliers: Also known as collaborators are close to the
market. They know the consumer problems and new ideas and
techniques to address these problems.
Idea Screening
• Idea generation can provide us with a pool of
ideas. But the second step of new product
development is to find good ideas and drop the
poor one.
• Following are some of the factors influencing
evaluating criteria to make it succeeded:
– Is the product useful to customer’s needs?
– Company objectives and resources (people and skills)?
– Company strengths and weaknesses?
– Affordability, advertising and distribution?
– Current trends?
– What is the expected return on investment?
Concept Development and Testing
• Concept development and testing is the third step of
new product development.
• A product concept provides a detailed description of the
idea, keep in mind your consumer perspective.
• Those ideas qualify the screening stage to become a
concept and it must be tested.
• Companies cannot launch a new product without
properly testing the concept.
• Concept testing help companies to investigate
customers reactions before introducing to the market.
Marketing Strategy and Business Analysis
• In this step, the company develop marketing and
business strategy to introduce a new product in the
market successfully.
• The company engages different business units – to
perform marketing and financial analysis – to meet the
marketing objectives.
• The company initially explain target market and product
positioning. It should also explain forecasted sale,
market share and profit both in short and long-run. The
company also describes the marketing mix strategy.
• Business analysis involves a detailed review of company
cost, sales, profit projections whether the company is
satisfied with objectives.
Product Development
• When all the marketing and business strategies
are finalized.
• In this step, the product concept is transformed
into a physical product.
• In the development stage, a prototype is
designed that is functional and able to satisfy
the consumer wants.
• The product undergoes serious tests to make
sure its effectiveness and performance.
Test Marketing
• After designing a successful prototype, it is introduced
for further research and feedback.
• With the help of test marketing, the company tries to
understand the consumers and dealers feedback and
reaction.
• Important changes are made in the actual product if
needed.
• This step completes the process empowers the
company to successfully introduce the new product in
the market.
Commercialization
• Test marketing helps the company to make decisions
and launch the new product in the market.
Commercialization is introducing the new product in
the target market. The marketing mix strategies are
applied. Four decisions are important when launching a
new product.
– When to introduce the product.
– Where to launch a new product in single or multiple
location, national or international market.
– To whom the company must decide distribution and
promotion (already decided in test marketing phase).
– How (action plan) a company should introduce the new
product in the target market.
Pricing Strategy
• The pricing of any product is extremely complex
and intense as it is a result of a number of
calculations, research work, risk taking ability and
understanding of the market and the consumers.
• The management of the company considers
everything before they price a product, this
everything includes the segment of the product,
the ability of a consumer to pay for the
products, the conditions of the market, action
of the competitor, the production and the raw
material cost or say the cost of manufacturing,
and of course the margin or the profit margins.
Pricing Strategy
• Pricing strategy is a way of finding a competitive
price of a product or a service.
• This strategy is combined with the
other marketing pricing strategies that are the 4P
strategy (products, price, place and promotion)
economic patterns, competition, market demand
and finally product characteristic.
• This strategy comprises of one of the most
significant ingredients of the mix of marketing as it
is focused on generating and increasing the
revenue for an organization, which ultimately
becomes profit making for the company.
Pricing Strategy
• The key pricing strategies in international marketing are
as follows:
Standardized Pricing and Local Pricing
– An international firm has to decide whether it uses
standardized price in all foreign markets or use local
(adapted) pricing.
– Standardized pricing means the same pricing is
charged for a product in all foreign markets,
regardless of local market conditions whereas,
– Local pricing is the one in which different prices are
charged in different markets, reflecting differences in
consumer purchase power or other market
characteristics.
Pricing Strategy
Cost-based Pricing
• Price typically includes fixed cost, variable cost and profit.
• In this strategy, pricing a product depends on the cost
structure measured in terms of fixed cost, variable cost and
profit involved in production, management and distribution
of the product.
Pricing Strategy
Aggressive Export Pricing
• The pricing policy is to decide whether the firm choose
aggressive export pricing or dynamic incremental pricing.
• Aggressive export pricing is the one adopted to gain
market share and/or to remain competitive in
international markets.
• Predatory pricing, also known as aggressive pricing (also
known as "undercutting"), intended to drive out
competitors from a market. It is illegal in some countries.
• Companies or firms that tend to get involved with the
strategy of predatory pricing often have the goal to place
restrictions or a barrier for other new businesses from
entering the applicable market.
Pricing Strategy
Aggressive Export Pricing
• Dynamic Incremental Pricing: It is the method of
pricing a product based on incremental cost. In this
type of pricing, the selling price of a product is
determined by the variable cost, and not kept
according to the overall cost of creating the product.
• Incremental cost is the cost of creating additional products
from the same setup (i.e. R&D, factory, machinery being
same as used for other products), i.e. the fixed cost remains
same, and the selling price of the product thus generated is
based mainly on the variable cost.
Pricing Strategy
Penetration Pricing and Skimming Pricing
• Penetration pricing is the policy in which a
product is first priced below the price of competitors’
products so that it could quickly penetrate the market
and then raise it to the target level. Compaq used this
policy strategy to enter the European market.
• Skimming strategy is the policy in which a product
is priced above that of competitors’ product when
competition is minimal, so that the firm can quickly
recover investments. A skimming pricing policy can
influence those buyers who are more concerned with
quality, uniqueness and status of the product rather
than its price.
Pricing Strategy
Transfer Pricing
• Transfer pricing is the setting of the price for goods
and services sold between related legal entities within
an enterprise.
• For example, if a subsidiary company sells goods to a
parent company, the cost of those goods paid by the
parent to the subsidiary is the transfer price.
• Transfer pricing is probably the most important
consideration for all multinational companies (MNCs)
related to international corporate taxation because it
impacts the purchasing behavior of subsidiaries and
has tax implications for the company as a whole.
Pricing Strategy
Transfer Pricing
• If Dabur Nepal produced 1000 units of gel-toothpaste
tubes (not finished goods) and sell them to Dabur
India, the pricing applied therein would be transfer
pricing.
• Governments around the world are cracking down on
transfer pricing regulations because of the rise of
budget deficits and companies’ use of transfer pricing
to avoid taxes.
Factors Affecting International Pricing
• Demand and Supply of the Product
• Cost of Production
• Exchange Rate
• Market Share and Nature of Product
• Tariffs and Distributing Cost
• Promotion Costs
• Cultural Factors
• Location of Production Locations
• Type of Distribution Systems Used
• Economic Climate of the Foreign Market
Communication strategy
• Marketing communication establishes linkages
between a company and customers.
• Marketing communication strategy should necessarily
generate sales oriented messages on product, service
or organization are conveyed to target audience or
buyers.
• Communication strategy’s main objectives includes:
– Inform the benefits and values that a product or service offers
– Build up image
– Motivate buyers
– Generate business
– Maintain continued business relationships
Communication strategy
• The purpose is to persuade and influence the attitudes and
buying behaviors of customers and other persons who can
influence the customers.
• There are many techniques/methods of marketing
communication means and are:
– Advertisement
– Face to Face Selling
– Trade Fairs and Exhibitions
– Trade Mission
– Buyer-Seller Meet
– Sales Promotion Campaign
– Personal Trade Mission
– Visiting Buyers
Advertisement
• Advertisement is a non-personal presentation of
commercial message to the potential clients.
• Mostly advertisements are on fee paying basis.
• The most popular fee paying media include product
specialized magazine, newspapers, trade journals,
direct mails, hording boards, posters, radio and TV,
internet and direct mail of literatures and catalogues.
• It is necessary to consider the following while
designing the message and selection of media and are:
– Reaching the target audience-and their size
Advertisements
– Socio-economic characteristics and segments
– Geographical coverage
– Competitors strategies and programmes
– Effectiveness of media
– Legal provisions
– Cost, time, frequency, coverage, circulation, volume
access to audience or readers etc.
Face to Face Selling
• Personal selling is a principal component of promotional
mix.
• It helps to establish and build trust and good relationships
with eye to eye and face to face communications and
feedbacks transmitting information about emotions,
cooperation and trustworthiness.
• Selection of personal selling means depends to a great
extent on (a) the relative cost, (b) the funds available (c)
media available and (d) the type of product.
• In many cases the internet would seem to eliminate the
need for personal selling.
Trade Fairs and Exhibitions
• The participation in trade fair and exhibition has
many advantages.
• It is possible to meet many buyers, prospective
client and competing suppliers of the concerned
products.
• It is up to the IB firm to decide if the trade fair is
an appropriate tool of market promotion for the
selected product in the target market.
• The purpose of trade fair and exhibitions would
be one or more of the following:
Trade Fairs and Exhibitions
– To select an importer/agent/distributor/or buyer.
– To test the market.
– To undertake market research
– To introduce product in the market and initiate new
contracts; and/or
– To conduct spot sale and generate orders.
Trade Mission
• The government or other institutions may organize
trade mission to promote export to a particular
country.
• Trade mission might focus on specific or general
product.
• Organizers arrange venue, date, duration, meeting
with potential trade partners matching product
interest, and also facilitate trade negotiations.
• Such a mission has advantage of getting introduced
with important business community at one point.
Buyer-Seller Meet
• The government or other institutions may occasionally
organize platform for meeting importers and exporters to
establish business relations.
• Such meeting might be product-specific for carpet, garment,
handicrafts, jewellery etc.
• Products are displayed and business negotiations and
transactions take place on the spot.
• A marketer of the company must get ready to meet prospective
buyers with samples at specified venue and time.
• The success of the event depends on the product offered for
sale and ability of a marketer to meet the needs of potential
importers in terms of quality, quantity, delivery time, payment
requirements etc.
Sales Promotion Campaign
• Sales promotion campaign consists of activities that
stimulate and motivate buyers and consumers.
• It may include store promotion, samples distribution,
coupons, quantity discounts, prizes, gifts, premium
pack, bonus, commission, sales contexts, display
contexts or combination of two or more.
• An exporter may plan the duration, size, budget,
evaluation mechanism. Etc. and undertake
appropriate campaign on the basis of market
conditions.
Personal Trade Mission
• Personal trade visits to buyers/consumers are very
effective.
• They create interest and induce even the most indifferent
person.
• They enable to communicate about the product,
performance, price and other business related matters and
to get immediate feed backs from the potential buyers.
• Personal visits also enable an exporter to undertake a brief
market research and collect information about market
trends, competitors behaviors, buyer’s behaviors, import
regulations etc.
Visiting Buyers
• Some potential buyers looking for alternative sources or
searching new suppliers may contact embassies,
chambers, associations, consulates, trade promotion
organizations, and look for trade directories and other
sources of information.
• The specialized buyers department stores or large chain
retailers might contact exporters or manufacturers and
wish to visit show-room/factory and office and
negotiate directly.
• During such time, exporters should have well
information about products, export capabilities,
country’s regulations etc.
Visiting Buyers
• Chances of generating business through meetings with
visiting buyers are higher than through other means of
communication.
• A marketer should also find out reliable and dependable
means of communication, which is very important to foster
enduring relations between buyer and a seller.
Distribution Strategy
International distribution strategy
• A distribution channel is a chain of businesses or intermediaries
through which a good or service passes until it reaches the final
buyer or the end consumer. Distribution channels can include
wholesalers, retailers, distributors, and even the Internet.
• There are three ways to set-up global distribution of your
products:
– International departments. Setting up
international departments means that your brand will
directly enter another country’s market. This gives you
complete control on distribution, but elements like
personnel, training, compensation and cultural
background should be considered.
Distribution Strategy
– Working with distributors. Export management companies
and export consultants can arrange your product distribution in
foreign areas. Distributors with experience in shipping and
importing have the fastest and easiest procedures when it comes
to selling in the foreign markets. These companies help in
establishing your company overseas by exclusively handling the
distribution of your products.
– Online. Export has entered the internet and is now utilizing
online tools to send out products into the world. This has
threatened certain foreign distributors, in fear of their services
becoming obsolete within the global market. Although internet
may take over the sales function, promotion and shipping
continue to stay offline to a large extent. Local distribution
partners may play a role in this.
Global e-marketing Strategy
• e-marketing is the process of marketing a product or service using
the Internet.
• e-marketing not only includes marketing on the Internet, but also
includes marketing done via e-mail and wireless media.
• It uses a range of technologies to help connect businesses to their
customers.
• Global e-marketing strategies/models are as under:
– B2B
– B2C
– C2B
– C2C
– B2G (G-Government)
Financial Management
• Financial management refers to the strategic planning,
organizing, directing, and controlling of financial undertakings
in an organization or an institute.
• It also includes applying management principles to
the financial assets of an organization, while also playing an
important part in fiscal management.
• Objectives of Financial Management:
– Maintaining enough supply of funds for the organization;
– Ensuring shareholders of the organization to get good returns on their
investment;
– Optimum and efficient utilization of funds;
– Creating real and safe investment opportunities to invest in.
Sources of Fund for International
Operations
• Globalization has opened doors and opportunities that were
never explored before. Activities of companies are not limited
to one region or a single country.
• International finance helps organizations engage in cross-border
transactions with foreign business partners, such as customers,
investors, suppliers and lenders.
• Various international sources from where funds may be
generated include the following:
– Commercial Banks, International Agencies and
Development Banks and International Capital Markets.
Operations
(I) Commercial Banks
• Global commercial banks all over provide loans in foreign
currency to companies.
• They are crucial in financing non-trade international operations.
• The different types of loans and services provided by banks vary
from country to country.
• One example of this is Standard Chartered emerged as a major
source of foreign currency loans to the Indian industry.
• It is the most used source of international financing.
Operations
(II) International Agencies and Development Banks
• Many development banks and international agencies have come
forth over the years for the purpose of international financing.
• These bodies are set up by the Governments of developed
countries of the world at national, regional and international
levels for funding various projects.
• The more industrious among them include International
Finance Corporation (IFC), EXIM Bank and Asian
Development Bank.
Operations
(iii) International Capital Markets
• Emerging organizations including multinational
companies depend upon fairly large loans in rupees as
well as in foreign currency.
• The financial instruments used for this purpose are:
– American Depository Receipts (ADR’s): This a tool
often used for international financing. As the name suggests,
depository receipts issued by a company in the USA are
known as American Depository Receipts. ADRs can be
bought and sold in American markets like regular stocks.
Operations
– Global Depository Receipts (GDR’s): In the Indian context, a GDR
is an instrument issued abroad by an Indian company to raise funds in
some foreign currency and is listed and traded on a foreign stock
exchange. A holder of GDR can at any time convert it into the number of
shares it represents. Many renowned Indian companies such as Infosys,
Reliance,Wipro, and ICICI have raised money through issue of GDRs.
– Foreign Currency Convertible Bonds (FCCB’s): Foreign currency
convertible bonds are equity-linked debt securities that are to be
converted into equity or depository receipts after a specific period. A
holder of FCCB has the option of either converting them into equity
shares at a predetermined price or exchange rate or retaining the bonds.
The FCCB’s are issued in a foreign currency and carry a fixed interest rate
which is lower than the rate of any other similar nonconvertible debt
instrument.
Investment Decisions
Tax Practices
Currency Risk Management
• The international business companies normally run
into three kinds of risks from the currency
fluctuations:
1) transaction exposure,
2) translation exposure, and
3) economic exposure.
• These risks may cause a great loss due to
unexpected or unplanned changes in the values of
assets and liabilities.
Transaction Exposure
• Transaction exposure occurs due to the exchange rate
fluctuations between the time the contract is done and the time
payment is made.
• For example: an order for shirts is placed by American Company
to Nepalese company in US $100,000 (Rs. 11,500,000 at the
prevailing rate of Rs.115/US Dollar but the payment is to made
after 90 days. By chance if dollar value depreciate against
Nepalese rupees to reach Rs.110/US Dollar, Surya Nepal will
get loss of Rs. 500,000 affecting its cash flow.
• If the negotiation was done in terms of Nepali Rupees, the
company would not have incur any loss but international
business always involves payments in foreign exchange.
Translation Exposure
• Translation exposures are the potential changes in the
value of a company’s financial records that arise during
the account consolidation process.
• When financial records of company’s subsidiaries which
are operating in different countries are translated into
home currency to prepare company’s consolidated
financial status, the exchange rate fluctuations will have
substantial impacts on the values of such financial
statements.
• The currency rate fluctuations highly affect the earnings,
expenditures and values of assets and liabilities.
Economic Exposure
• Economic exposure, also known as operating exposure
refers to an effect caused on a company’s cash flows due
to unexpected currency rate fluctuations. Economic
exposures are long-term in nature and have a substantial
impact on a company’s market value.
• Economic exposure can prove to be difficult to hedge as
it deals with unexpected fluctuations in foreign
exchange rates. As the foreign exchange volatility rises,
the economic exposure increases and vice versa.
• In such case, there are techniques to hedge the possible risk of loss
through currency fluctuation: 1) Forward market hedge, 2) Currency
option hedge 3) Money market hedge and 4) Swap contract.
1. Forward market hedge: The Forward Contract/Forward
market hedge is an agreement between two parties wherein
they agree to buy or sell the underlying asset at a
predetermined future date and at a price specified today.
The Forward contracts are the most common way
of hedging the foreign currency risk. For example: if the
exporter of country A and importer of country B has agreement to
deliver the product today and the payment to be made after 30 days,
then the importer B may enter into a contract with currency dealer
(bank or financial agent) to deliver country’s A currency at a
forward rate- the rate quoted today for future delivery.
2. Currency Option Hedge:
An option is the right, but not the obligation, to trade a foreign
currency at a specific exchange rate. Under an option,
although the holder of option (buyer) is under no obligation to
buy or sell the currency, the writer (seller) is obliged to fulfill
the obligation. Therefore, there is the flexibility to the holder
of an option not to trade the foreign currency at the pre-
determined price, unlike in a forward contract, if it is not
profitable.
There are two types of foreign currency option: Call option is the
right of holder to buy foreign currency at a pre-determined
price used to hedge future payables; Put option is the right of
holder to sell foreign currency at pre-determined price to
hedge future receivables.
3. Money Market Hedge:
A company hedge foreign currency fluctuation or exposure by
borrowing and lending in the domestic or foreign money markets. If
the Nepalese company has a payment of $ 100,000 to be received
from American company after 90 days, it can borrow $100,000 in an
US bank for a period of 90 days and it can invest the same for 90
days till the payment receivable is due.
4. Swap Contract:
Currency swaps are hedging technique for long-term transactions to
currency rate fluctuations. Under this technique, exchanging one
currency for another at specified exchange rate and date is agreed
between two parties intermediated by banks and large investment
firms.
International HRM (IHRM)/Global
HRM
• International Human Resource Management (IHRM) can be
defined as a set of activities targeting human resource
management at the international level.
• It strives to meet organizational objectives and achieve
competitive advantage over competitors at national and
international level.
• IHRM comprises of typical HRM functions such as recruitment,
selection, training and development, performance appraisal and
dismissal done at the international level and additional exercises
such as global skills management, expatriate management and so
on.
HRM
• In short, IHRM is concerned with handling the human
resources at Multinational Companies (MNCs) and it
includes managing three types of employees and are:
– Home country employees: Employees residing in the home
country of the company where the corporate head quarter is
situated, for example, an Indian working in India for some
company whose headquarters are in India itself.
– Host country employees: Employees residing in the nation in
which the subsidiary is located, for example, an Indian working
as an NRI in some foreign country.
– Third country employees: These are the employees who are
not from home country or host country but are employed at the
additional or corporate headquarters.
Objectives of IHRM or Global HRM
• Create a local appeal without compromising upon the
global identity.
• Generating awareness of cross cultural sensitivities
among managers globally and hiring of staff across
geographic boundaries.
• Training upon cultures and sensitivities of the host
country.
Importance of IHRM
• Recruitment andTeam Building
• On-the-JobTraining and Professional Development
• Motivation
• Regulatory Compliance (Staffing as per the rules and
regulations of host country.)
• Performance Management and Evaluation
• Change Management
• Retention
HRM
• Staffing Policy
• Diversity Management
• Labour Relations/Industrial Relations
• Preparing employees for repatriation
Staffing Policies
• Human resource management in international business
presents issues that are different from those in domestic
or local business.
• The nature and characteristics of international business
are more complicated than domestic or local business.
As such, it is necessary to account for different types of
human resource management issues in international
business.
• HR managers must also choose the right staffing policy
approach based on the needs of the organization.
• Effectively addressing the various types of human
resource management issues and deciding on the most
suitable staffing policy approach leads to success in
HRM in international business.
Staffing Policies
• Three types of human resource management issues
in international business are as follows:
– Expatriation
– Compensation
– Repatriation
Staffing Policies
• In staffing in international business, HR managers must
determine when or where to expatriation. Expatriate workers
are frequently assigned to key positions in overseas operations.
• Human resource managers must also decide on the issue of
compensation. The compensation of expatriate workers must
be examined along with compensation of local workers and
the compensation of workers in the home country.
• HR managers must also address the issue of repatriation.
Repatriation happens when the worker needs to come back to
the home country, usually to continue working for the
company. Repatriation also happens when the expatriate
worker retires.
Staffing Policies
• In international human resource management, the
types of staffing policy approaches are as follows:
– Ethnocentric staffing
– Polycentric staffing
– Geocentric staffing
• Ethnocentric: The Key management positions are
filled by the parent country individuals.
Staffing Policies
• Polycentric: In polycentric staffing policy the host country
nationals manage subsidiaries whereas the headquarter
positions are held by the parent company nationals.
• Geocentric: In this staffing policy the best and the most
competent individuals hold key positions irrespective of the
nationalities.
• Geocentric staffing policy, it seems is the best when it comes to
Global HRM. The human resources are deployed productively and it
also helps build a strong cultural and informal management
network. The flip side is that human resources become a bit expensive
when hired on a geocentric basis. Besides the national immigration
policies may limit implementation.
Diversity Management
• Diversity management refers to organizational actions that
aim to promote greater inclusion of employees from
different backgrounds into an organization’s structure
through specific policies and programs.
• Organizations are adopting diversity management
strategies as a response to the growing diversity of the
workforce around the world.
• One of the major issues in managing diversity is to deal
with the majority and minority perspective. Naturally,
there always is a predominant majority of a particular
race or ethnicity in an organization and various others
are in minority groups.
– Considering that the most pressing issue in managing
diversity arises out of the treatment of women, the issues
of race and gender come across as the unique drivers in
managing diversity.
– In recent times, these issues have come to the forefront
due to higher awareness among the minority groups about
their rights as well as disciplined enforcement of laws and
regulations that govern workplace behavior.
• Thus, it is in the interest of the management of any
organization to sensitize their workforce towards race
and gender issues and assure that the workplace is free
of discrimination against minority groups as well as
women
Labour Relations/Industrial Relations
• Three actors of labour relations / industrial relations
and are:
– Society (Government)
– Employers (Employers Association)
– Employees (Trade Unions)
Preparing Employees for Repatriation
• Repatriation is the act of returning home from a foreign
assignment after completing foreign assignment.
• Repatriation is a critical decision for managers.
• Repatriation gives mixed feelings to the
employees/expatriate managers i.e. both professional and
personal concerns.
• At worst reverse cultural shock may emerge.
• Repatriation tends to cause difficulties in many areas, most
notably:
– Financial
– Work, and
– Social
• In preparing employees for repatriation and reducing
repatriation problems, a number of plans and
techniques may be advised and are:
– Counseling: International HR managers can provide
counseling on the types of problems employees face upon
returning home. Counseling to address psychological and
career needs.
– Monitoring compensation and career path: While the
expatriate is abroad, the firm can monitor his or her
compensation and career path. After repatriation, the firm
can adjust his compensation and ensure the expatriate has a
career position equal to, or better than, the one held before
going abroad.
– Interim financial support: After repatriation, the firm can provide
bridge loans and other interim financial assistance, as well as counseling
on financial aspects to address his/her financial needs.
• Repatriation Process
– Preparation: Making expatriates mentally and physically
ready to return back to the home country.
– Physical Relocation: Actual movement of expatriates and
their family along with the household belonging to the next
posting, usually home country.
– Transition: It is a phase after the expatriate’s return to home
country. It involves making provisional arrangements for
accommodation, and other household tasks including
reviving bank accounts, and getting insurance.
– Re-adjustment: It is a coping phase where expatriates
face reverse cultural shock on their returning home. At
this stage, expatriates have a number of problems like
fear of career growth, fear of income loss, status fear.
The firm should try to organize reunion with the
expatriate’s past friends, relatives and colleagues to
address some of the problems.

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International Business (IB)

BBM 6th Semester

• Main instrument of government intervention on

• Tariffs are generally of two broad types:

IV. Specific Permission Requirements and Exchange

• FDIs or foreign investments have both good and

1. Barriers to Inward FDIs: These are the

1. FREE TRADE AREA (FTA):

2. CUSTOMS UNION (CU):

3. Common Market (CM):

4. ECONOMIC UNION (EU):

• The stock of foreign direct investment (total cumulative value

• Cross-border flows of foreign direct investment are rising

• The largest recipient of FDI is China.

• When developing strategies, managers start by

• MNEs develop international strategies to help the

Steps for Preparing an International Strategy

• Cost Efficiency: The firm takes advantage of the large

• Better Product Quality: A firm can get better quality

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