Overview of International Business

Group 5: Mercury Abhinav Agarwal Abhinav Mittal Deepali Agarwal Abhinav Mahajan Ragini Pant

Globalization

Globalization
Globalization can mean many things. We will focus exclusively on economic globalization. Definition: Economic globalization constitutes integration of national economies into the international economy through trade, direct foreign investment (by corporations and multinationals), short-term capital flows, international flows of workers and humanity generally, and flows of technology.
- Jagdish Bhagwati, In Defense of Globalization (2003)

Globalization Includes

Interpretation
Three ways of interpretation Hyper Globalists Sceptical View Transformationalists

Evidence
Move towards globalization was afoot 2 centuries ago, when European nations following Industrial Revolution, began exporting manufactured goods and importing raw material. The trend towards globalization picked up pace, with growth of multinational firms in US, Europe and Japan. FDI jumped from $12bn (1950 s) rose to $1.5tn by 2007. World trade from $60bn (1950 s) rose to $13.6tn by 2007.

Institutions

GATT WTO World Bank IMF

The Impact - Positive

Profound positive impact on Economic Growth Labor markets and incomes Macro and micro-economic policies of various governments When markets are highly integrated, the resources are allocated optimally among different markets. Gains in one market are shared by other markets.

The Impact - Positive

Macro Level Countries with closed trade policy the per capita annual income was 13% lower than in countries with an open trade policy (Gwartney & Lawson 2001) In a study of 117 countries GDP growth rate for countries with open trade policies was 2.29% (developed) and 4.49% (developing) vs < 1% for countries with closed policy Micro Level Globalization has been a boon for companies Local National Regional Multi-national

The Impact - Negative

Economic chaos and upheavals arising in a country spill over to other markets. US sub-prime crisis Failure of market forces and inequalities require some kind of governance of the global markets so that evils are controlled and the gains from globalization can be maximized

Meaning and Importance of IB

International Business
IB includes the transaction of economic resources such as goods, capital, services (comprising technology, skilled labour, and transportation etc.), and international production. Thus, IB not only includes trade of goods and services but also foreign investment (esp. FDI) Each country tries to expand its export to earn FOREX, in turn, to meet its import requirements

Foreign Direct Investment (FDI)

FDI is made for a variety of purposes Acquiring natural resources Recovery of expenditure on R&D Capturing larger segment of the international market. FDI very important for developing nations, as it helps to bridge the resources gap FOREX resources Latest technology Develop managerial capability

FDI

Investment Entry Modes

Contractual
Licensing Franchising

Strategic Alliance Contract Manufacturing Assembling Joint Venture Subsidiary Acquisition

Domestic vs. International Business

MNC
MNC is an enterprise that owns or controls production facilities outside the country in which it is based. To qualify as an MNC the number of countries must be atleast six. - United Nations (1973) According to a UN study in the year 2002, for the top 100 MNC s in the world
57.5% of total sales 48.1% of total assets 49.1% of total employment was foreign

Depending on strategy MNC s grouped as

Ethnocentric, Polycentric Geocentric

Domestic vs. International Business

Complexities in IB that are not found in domestic business Transactions in IB are mostly intra-firm (transfer pricing) Varying environment (PESTEL) in host country not known to company Political Risk and Exchange Rate Risk (Financial Risk) Varying business strategies adopted, depending on host nation

Evolution and Development of International Business

Process of Evolution
The process of evolution takes place in three stages.
1. Trade 2. Assembly or Production 3. Integration

Product Life Cycle Theory

Early Developments
16th & 17th century East India company Industrial revolution in Europe: Import: Raw material Export: Manufactured goods First world war Trading activities increased Engaged in services that government of host countries was not able to render efficiently

Post War Developments

America Strongest economy Developed industries required raw materials Lead to rapid industrialization of US firms since 1950s US FDI: Grew from $12B (1950) to $80B (1970) Europe 1960 Japan 1980: Largest producer of automobile 1970 Two sets of Developing countries Oil exporting countries : Huge foreign exchange reserves Newly industrializing countries: Imported technology from developed countries and built own industrial base

Recent Trends

FDI Inflow in Different Groups

Factors Leading to Growth in IB in Recent Decades

1. Technological Advancement
Product and Process Technology Innovative products Improved process technology Information Technology Brought different countries closer Reduced difficulties in going global Economies of Scale To serve larger markets

2. Supportive Institutions
Developing Countries Strengthening infrastructure sector Bilateral and Multilateral aid flow American aid programme : To build infrastructure in developing countries International Bank for Reconstruction and Development (IBRD) Creation of Industrial credit Investment Corporation of India

3. Openness of Economic Policies

Structural Adjustment: Macroeconomic policy reforms with an emphasis on liberalization and globalization Trade deficit and external debt problem Economic reforms to improve export sector Substituting external loans with Foreign Investment

4. Break-up of Former USSR

New independent economies emerged Pursued market oriented economic policy substituting their closed economic and centrally planned economic policy Added to growing volume of International Business

5. Increase in Competition
Source raw material and intermediate goods from least cost countries Set up operating units in different countries Minimize operational cost Reduce financial risk

CASE STUDY India s Overseas Investment

Overview
Key driving factors
Overseas expansion Overseas listing Spreading of Risk Ensuring supply chain Access to wider global markets

Different Modes of Investment

Direct Investment Outside India
By Corporates/Body Corporate/Partnerships By Individuals/Trusts

Portfolio Investments Branch Outside India

Q1.What has prompted Indian firms to operate abroad?

y The first policy in the form of guidelines governing

overseas direct investment was issued in 1969 by the Government of India. y These guidelines defined the extent of participation of Indian companies in projects abroad. y They permitted minority participation by an Indian party with no cash remittances. y So it failed to give a big push to overseas investment.

 1992: y procedural formalities simplified y Ceiling for investment in form of cash raised y Automatic approval system introduced  1995: y Ceiling for investment raised further y Fast track system for approval introduced y Reserve Bank of India (RBI) became the nodal agency

for administering the overseas investment policy . This provided a single window system for overseas investment approvals.

 2000:

Introduction of FEMA (Foreign Exchange

Management Act) It changed the emphasis from exchange regulation to exchange management. It aimed to facilitate external trade and payments as well as to promote an orderly development and maintenance of foreign exchange market in India.

 Liberalization measures:
1. 2. 3. 4. 5. 6.

Indian firms can use ADR/GDR proceeds or external commercial borrowing to fund their overseas operations Ceiling for investment raised to $100 million (from $50 million). Even more in case of Nepal, Bhutan and other south Asian countries SEZ: -Open foreign branches -Foreign currency account with a foreign bank RBI approval not mandatory Remittance limit doubled to US $2 million Indian companies permitted to invest upto 400% of net worth in overseas Joint Ventures Competitive advantage in IT Weaker currency as compared to western markets Developing countries also found the products interesting

 Other reasons:
1. 2. 3.

Q2.What are the broad areas showing liberalization in policy towards overseas investment

 Liberalization measures:

Q3. How have Indian firms helped improve the country s balance of payment?

What Does Balance Of Payments BOP Mean?

y The Balance of Payments is the statistical record of a country s international transactions over a certain period of time presented in the form of double-entry bookkeeping.

Balance of Payments Accounts

y The balance of payments accounts are those that

record all transactions between the residents of a country and residents of all foreign nations. y They are composed of the following:
y The Current Account y The Capital Account y The Official Reserves Account

The Current Account

 Includes y All imports and exports of goods and services. y Unilateral transfers of foreign aid. y If the debits exceed the credits, then a country is

running a trade deficit. y If the credits exceed the debits, then a country is running a trade surplus.

Service export

The Capital Account

 The capital account measures the difference

between Indian sales of assets to foreigners and Indian purchases of foreign assets.  Composed of y Foreign Direct Investment (FDI) y Portfolio investments y Other investments

The Official Reserves Account

y Official reserves assets include gold, foreign

currencies, SDRs, reserve positions in the IMF.

THANK YOU

Indian Companies that benefited

y IT companies like Tata Consultancy Services, Infosys

technologies, Cognizant Technology Solutions etc have grown at a great pace after globalization.
y Companies like Tata Motors, Hero Honda, Maruti

Suzuki etc. now have customers all over the globe

Airtel
y This is India s biggest telecom service provider. y After its growth started slowing down in India, Bharti

Airtel is now increasing its global presence. It acquired Zain Telecom in Africa recently.

y After sensing global opportunities, Bharti Airtel recently

repositioned itself to cater to its global customers alike!

Aditya Birla Group

y It is the world s 4th largest Carbon Black maker with an

annual capacity of 9,00,000 tonnes.

y It recently acquired Georgia based Columbian Chemical

Company (CCC) which is a 100 year old company.

y According to Mr. Kumar Mangalam Birla, the world has

become smaller because of globalization. We need to constantly reinvent ourselves, he says.

Dabur
y Dabur is India s 4th largest FMCG player with a strong

foothold in the Healthcare and Personal care areas.

y Dabur is targeting markets that are similar to India. y It has acquired firms like US based Namaste Group

and Turkey based Hobi Kozmetik .

ADVANTAGES & DISADVANTAGES OF GLOBALIZATION

Advantages Increased free trade between nations

Disadvantages Increased flow of skilled and non-skilled jobs from developed to developing nations as corporations seek out the cheapest labor Increased likelihood of economic disruptions in one nation effecting all nations Corporate influence of nation-states far exceeds that of civil society organizations and average individuals Threat that control of world media by a handful of corporations will limit cultural expression Greater chance of reactions for globalization being violent in an attempt to preserve cultural heritage

Increased liquidity of capital allowing investors in developed nations to invest in developing nations Corporations have greater flexibility to operate across borders Global mass media ties the world together

Increased flow of communications allows vital information to be shared between individuals and corporations around the world

Advantages Greater ease and speed of transportation for goods and people Reduction of cultural barriers increases the global village effect Spread of democratic ideals to developed nations Reduction of likelihood of war between developed nations

Disadvantages Greater risk of diseases being transported unintentionally between nations Spread of a materialistic lifestyle and attitude that sees consumption as the path to prosperity International bodies like the World Trade Organization infringe on national and individual sovereignty Increase in the chances of civil war within developing countries and open war between developing countries as they vie for resources Decreases in environmental integrity as polluting corporations take advantage of weak regulatory rules in developing countries

Increases in environmental protection in developed nations