International Business

INTERNATIONAL BUSINESS

Business:James Stephenson says that:“Every human activity which is engaged in for the sake of earning profit may be called business.”

International business:Transactions across the borders to satisfy the individuals, organizations and due to some other reasons.These reasons are foreign exchange, foreign currency, enhancing organization network, alternative process, surplus and economy of scale.Economy of scale: is to minimize cost due to large scale production.

Difference between international and domestic business:Culture, Level of competition, Market intelligence, Politics Government, legal system, Technology, Logistics Media, Religion issue, Currencies, Global standard, Resource advantage, Benefits.

No direct foreign marketing:A company in this stage does not actively cultivate customers outside national boundaries; however this company’s products may reach foreign markets. Sales may be made to trading companies as well as foreign customers who come directly to the firm. Or products may reach foreign markets via domestic wholesalers or distributors who sell abroad without explicit encouragement or even knowledge of the producer. As companies develop web sites on the internet, many receive orders from international Web surfers. Often an unsolicited order from a foreign is what piques the interest of a company to seek additional international sales.

Infrequent Foreign marketing:Temporary surpluses caused by variations in production levels or demand may result in infrequent marketing overseas. The surpluses are characterized by their temporary nature; therefore sales to foreign markets are made as goods are available, with little or no intention of maintaining continuous market representation. As domestic demand increases and absorbs surpluses, foreign sales activity is withdrawn. In this stage, little or no change is seen in company organization or product lines. However, few companies today fit this model because customers around the world increasingly seek long term commercial relationships. Further, evidence exists that financial returns from initial international expansions are limited.Benetton, one of the largest clothing manufacturers in Italy has a global presence across 120 countries and more than 5,000 stores.While it is initial few years of operation witnessed expansion within Italy, the company ventured outside Italy for the first time in 1969 when it opened its store in Paris.Benetton entered India in 1991-92 as a joint venture with DCM Group, now a 100 per cent subsidiary. Brand United Colors of Benetton is present across 106 stores in 45 cities and brand Sisley was launched in India in 2006.

Regular Foreign marketing:

At this level, the firm has permanent productive capacity devoted to the production of goods to be marketed in foreign markets. A firm may employ foreign or domestic overseas intermediaries or it may have its own sales force or sales subsidiaries in important markets. The primary focus of operations and production is to service domestic market needs. However, as overseas demand grows, production is allocated for foreign markets, and products may be adapted to meet the needs of individual foreign markets. Profit expectations from foreign markets move from being seen as a bonus to regular domestic profits to a position in which the company becomes dependent on foreign sales and profits to meet its goals.

Global marketing:Marketers use many words when referring to the term international marketing; they may use foreign marketing, multinational marketing, or transnational marketing. They all basically imply marketing in more than one country.Global marketing is a newer term and most marketers agree that it has a somewhat different meaning than the above words. The global marketer "sells the same thing in the same way everywhere."23 Many feel that segmenting markets on political boundaries and producing special products for each country is cost inefficient. The global corporation views the world as one market and sells a global product.

Major obstacles to internationalizationFollowing are the major obstacles to internationalization

Obstacles within the company: Finances Psychological: unknown environment Self-Reference Criterion

Obstacles outside the company: Government Barriers Barriers imposed by International Competition

Self-Reference Criterion: Conscious and unconscious reference to own national culture while operating in the host

country. (e.g. eye contact US-Japan) To counter the impact of the self-reference criterion, the corporation must select appropriate

personnel for international assignments and engage in sensitivity training.

Government Barriers: Restriction placed on foreign corporations by imposing tariffs, import quotas and other

limitations, such as restrictive import license awards.

Barriers imposed by International Competition: Blocked channels of distribution Exclusive retailer agreements Cutting prices Advertising blitzes

DRIVERS OF IM

Now a day’s many firms look beyond home country market to make sure their growth, to recover investment cost, to get competitive advantages such as low cost, to get maximum profit, to expand their market share, to get cheap labor, to get quality raw material. For getting these advantages firms have to become internationalize. Here are some drivers of IM through which firms can go to international market from domestic market.There are two major types of entry modes: 1) Non-equity mode, which includes export and contractual agreements, 2) Equity mode, which includes joint venture and wholly owned subsidiaries.The non-equity modes category includes export and contractual agreements. The equity modes category includes joint venture and wholly owned subsidiaries.The market-entry technique that offers the lowest level of risk and the least market control is export and import. The highest risk, but also the highest market control and expected return on investment are connected with direct investments that can be made as an acquisition (sometimes called Brownfield) and Greenfield investments.Modes of entry include:

Exporting Direct export Indirect export

Licensing Franchising Turnkey projects Wholly owned subsidiaries (WOS) OR FDI Joint venture

EXPORT:Exporting is the process of selling of goods and services produced in one country to other countries. There are two types of exporting: direct and indirect.Direct Exports : Direct involvement means that the firm works with foreign customers or markets with the opportunity to develop a relationship. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. The main characteristic of direct exports entry mode is that there are no intermediaries.Advantages :

Control over selection of foreign markets and choice of foreign representative companies Good information feedback from target market, developing better relationships with the

buyers Better protection of trademarks, patents, goodwill, and other intangible property Potentially greater sales, and therefore greater profit, than with indirect exporting.

Disadvantages : Higher start-up costs and higher risks as opposed to indirect exporting Requires higher investments of time, resources and personnel and also organizational changes Greater information requirements Longer time-to-market as opposed to indirect exporting.

Indirect exports : Indirect exports are the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign market and does not deal with foreign customer or market.Advantages :

Fast market access Concentration of resources towards production Little or no financial commitment as the clients' exports usually covers most expenses

associated with international sales. Low risk exists for companies who consider their domestic market to be more important and

for companies that are still developing their R&D, marketing, and sales strategies. Export management is outsourced, alleviating pressure from management team No direct handle of export processes.

Disadvantages : Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting Wrong choice of distributor, and by effect, market, may lead to inadequate market feedback

affecting the international success of the company Potentially lower sales as compared to direct exporting (although low volume can be a key

aspect of successfully exporting directly). Export partners that incorrectly select a specific distributor/market may hinder a firm's functional ability.

LICENSING:Licensing is when a firm, called the licensor, leases the right to use its intellectual property—technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee. The property licensed may include Patents, Trademarks, Copyrights, Technology, Technical know-how, Specific business skills etc.Advantages:

Obtain extra income for technical know-how and services Reach new markets not accessible by export from existing facilities Quickly expand without much risk and large capital investment Pave the way for future investments in the market Retain established markets closed by trade restrictions Political risk is minimized as the licensee is usually 100% locally owned Is highly attractive for companies that are new in international business.

Disadvantages: Lower income than in other entry modes Loss of control of the licensee manufacture and marketing operations and practices leading to

loss of quality Risk of having the trademark and reputation ruined by an incompetent partner The foreign partner can also become a competitor by selling its production in places where the

parental company is already in.FRANCHISING:

Under franchising, an independent organization called the franchisee operates the business under the name of another company called the franchisor. In such an arrangement the franchisee pays a fee to the franchisor. Franchising is a form of Licensing but the Franchisor can exercise more control over the Franchisee as compared to that in Licensing.Advantages:s

Low political risk Low cost Allows simultaneous expansion into different regions of the world Well selected partners bring financial investment as well as managerial capabilities to the

operation.Disadvantages:

Franchisees may turn into future competitors Demand of franchisees may be scarce when starting to franchise a company, which can lead to

making agreements with the wrong candidates A wrong franchisee may ruin the company’s name and reputation in the market Comparing to other modes such as exporting and even licensing, international franchising

requires a greater financial investment to attract prospects and support and manage franchisees.

TURNKEY PROJECT:A turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. A turnkey project is a way for a foreign company to export its process and technology to other countries by building a plant in that country. Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy.Advantages

Focus firm’s resources on its area of expertise Avoid all long-term operational risks

Disadvantages Financial risks

o Cost overruns Construction risks

o Delays o Problems with suppliers

WHOLLY OWNED SUBSIDIARIES (WOS) OR FDI:A wholly owned subsidiary includes two types of strategies

Greenfield investment Acquisitions

Greenfield investment:Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and potentially costly, but it is able to provide full control to the firm and has the most potential to provide above average return. Greenfield investment is more likely preferred where physical capital intensive plants are planned. This strategy is attractive if there are no competitors to buy or the

transfer competitive advantages that consists of embedded competencies, skills, routines, and culture. Greenfield investment is high risk due to the costs of establishing a new business in a new country. Acquisitions:When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion. Acquisition has been increasing because it is a way to achieve greater power. The market share usually is affected by market power. Therefore, many multinational corporations apply acquisitions to achieve their greater market power require buying a competitor, a supplier, a distributor, or a business in highly related industry to allow exercise of a core competency and capture competitive advantage in the market.JOINT VENTURE:A joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and then they share in the revenues, expenses, and control of the enterprise. Advantages:

Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk.

Disadvantages: Risk giving control of technology to partner. May not realize experience curve or location economies.

Shared ownership can lead to conflict.

INTERNATIONAL MARKETING TASK MODELThe task of the international marketer is more complicated since he has to deal with two levels of uncertainties instead of one. Such uncertainty is created due to uncontrollable factors and each foreign country in which the company operates adds its own unique set of uncontrollable factors.This model includes:

Marketing controllable factors Domestic uncontrollable factors Foreign uncontrollable factors

Marketing controllable factors:It includes 4 p’s

Product Price Placement Promotion

Product: include goods and services.Price: Pricing includes discounts, allowances and incentives, and strategies like penetration pricing or skimming.Placement: Includes warehousing, fulfillment, electronic download, shipping, middlemen.

Promotion: Includes advertising, copywriting, media selection, sales force, personal and mass selling, sales promotion, positioning.

Domestic uncontrollable factors:These include home country elements which can directly affect thesuccess of a foreign venture and these factors are out of immediate control of the marketer. These factors are as under:Political decisions: involving domestic foreign policy Examples are that of US restrictions of trade with countries like Libya, Iraq and South Africa, due to so called support to terrorists in Libya and Iraq and due to apartheid policies in South Africa.Domestic economic climate: This has far reaching effects oncompetitive position in foreign markets. The capacity to invest in plants and facilities are directly affected with this variable, which could in turn create a positive or negative effect on foreign trade.Competition within home country: This can also have a profound effect upon the international marketer’s task. Competition within their home country affects the company’s domestic as well as international plans.

Foreign uncontrollable factors:Political/Legal forces: One example is that of China which hasmoved from a communist legal system in which all business was done with the State, to a commercial legal system. Another example is that of the Indian Government, which in 1977 gave Coca Cola the choice of either revealing its secret formula or leaving the country.Economic forces: The local economic forces in the foreign country may have strong influence on the currency value and repatriation.Competitive forces: The nature of competition may vary fromcountry to country and will have different responses, depending ondeep rooted cultural factors to competition in terms of price, distribution, advertising and sales promotion.Level of Technology: There are vast differences that may existbetween developed and underdeveloped countries. Technical expertise may not be available at a level necessary for product support and for maintenance.Structure of Distribution: The channels of distribution vary fromcountry to country and there could even be state controls on distribution in some countries.Geography and infrastructure: The transportation and physicaldistribution depends on these factors and this will also be different indifferent countries.Cultural forces: Each country’s culture is different and this couldaffect all the marketing variables like product design, brand name,logo, advertising campaigns, sales promotions, pricing policies, price negotiations, distribution networks and strategies, etc.

GLOBAL INSTITUTIONSWTO:The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.Location: Geneva, SwitzerlandEstablished: 1 January 1995

C reated by : Uruguay Round negotiations (1986-94) Membership: 160 countries on 26 June 2014 in which 117 are developing countries. Budget: 197 million Swiss francs for 2013Secretariat staff: 640Head: Roberto Azevêdo (Director-General)

Functions of WTO: Negotiating the reduction or elimination of obstacles to trade (import tariffs, other barriers to

trade) and agreeing on rules governing the conduct of international trade (e.g. antidumping, subsidies, product standards, etc.)

Administering and monitoring the application of the WTO's agreed rules for trade in goods, trade in services, and trade-related intellectual property rights

Monitoring and reviewing the trade policies of our members, as well as ensuring transparency of regional and bilateral trade agreements

Settling disputes among our members regarding the interpretation and application of the agreements

Building capacity of developing country government officials in international trade matters Assisting the process of accession of some 30 countries who are not yet members of the

organization Conducting economic research and collecting and disseminating trade data in support of the

WTO's other main activities Explaining to and educating the public about the WTO, its mission and its activities.

Technical barriers to trade: Technical regulations and product standards may vary from country to country. Having many

different regulations and standards makes life difficult for producers and exporters. If regulations are set arbitrarily, they could be used as an excuse for protectionism.

The Agreement on Technical Barriers to Trade tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles, while also providing members with the right to implement measures to achieve legitimate policy objectives, such as the protection of human health and safety, or the environment.

GATT: The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. According to its preamble, its purpose was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis." It was negotiated during the United Nations Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1947, took effect in 1948, and lasted until 1994; it was replaced by the World Trade Organization in 1995. The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994. General Agreement on Tariffs and Trade (GATT): set up to avoid the trade protection that was so disastrous during the period 1918 to 1939First agreement 1947, 23 countries signed: now 140 signed

Since 1947, GATT has sponsored eight major rounds of tariff and other barriers reductions – now administered by WTOGATT embodies three principles: Non-discrimination: each country gives all others the same import duties Consultation over disputes Sanctions for non-compliance

International Trade Organization:Prior to world war 2 many countries employed "beggar thy neighbor" tradepolicies, raising tariffs and instituting non-tariff barriers that impeded imports in anattempt to reduce unemployment and increase domestic output. However, othercountries retaliated by raising their own barriers against imports. This resulted inreducing export markets, which then only worsened the already poor economicconditions. The problems created by such policies led United States to proposethat a new international trade organization be established to regulate trade policiesand settle disputes between trading partners. Under the U.S. proposal, theInternational Trade Organization (ITO) was to be a specialized agency of theUnited Nations and was to have several broad functions: promoting the growth oftrade by eliminating or reducing tariffs or other barriers to trade; regulatingrestrictive business practices hampering trade; regulating international commodityagreements; assisting economic development and reconstruction; and settlingdisputes among member nations regarding harmful trade policies. Negotiations toestablish the ITO began in Geneva, Switzerland, in 1947, with a more completecharter being drafted later in Havana, Cuba. Opposition to the charter of the ITOsoon emerged, especially in the U.S. Congress. Subsequently, President harry truman's administration withdrew its support for the ITO, and interest in the ITOfaded. The void left by the collapse of the ITO has been filled by other institutions,like the General Agreement on Tariffs and Trade (GATT), the World Bank, and theUnited Nations Conference on Trade and Development (UNCTAD).

PORTER’S FIVE FORCES MODELOR

WHICH MARKET TO ENTER

Porter’s model includes 5 forces and are as follows Threats of New Entrants Threat of Substitutes Intensity of rivalry among established firms Bargaining power of Customers Bargaining power of Suppliers

Importance of five forces model:What strategy to use?Basic knowledge of business strategy & forces that influence the decision makingIndustry analysis :

1) Industry relevance2) Industry players3) Industry structure

Future changes Strategize:Competitive advantage, Cost advantage, Market dominance, New product development,

Contraction / Diversification, Price leadership, Global Re-engineering, Downsizing, De-layering and Restructuring.Measure and monitor strategy effectiveness.

Threats of New Entrants:The easier it is for new companies to enter the industry, the more difficult competition there

will be. Factors that can limit the threat of new entrants are:1. How loyal are the end users in this industry? 2. How troublesome or hard is it for the end users to switch and use another product? 3. Does it require a large seed capital to enter this industry? 4. Do entries to this industry regulated by government? 5. How hard is it to gain access to the distribution channels? 6. How long does it take for new staff to acquire the necessary skills to do the work?

Example:

Large established companies with strong brand names such as McDonald’s make it more difficult to enter the market because new entrants are faced with price competition from existing chain restaurants. Thus, it takes a pretty much time for a new business to establish in the fast food industry.

Threat of Substitutes: Threats of Substitute in the Porter’s theory actually means goods and services that does similar functions

How many close substitutes are available? How pricy are the substitutes? What is the perceived quality of the substitutes? When there is one product successful, it also leads to the creation of other products

that can perform the same functions as the product of the same industry. Porter recommends that by doing advertising, product quality improvement,

marketing, R&D and product distribution, an industry can improve its collective position against the substitute.

Examples:Google and YahooFacebook and TwitterBing and g+

Intensity of rivalry among established firms : 1. How many close competitors exist in the industry? 2. What are the sizes of your close competitors? 3. What is the industry structure? Is it a fragmented, consolidated, oligopoly or monopoly

industry? 4. What is the current industry growth rate?5. How high are the exit barriers? Do your competitors have a high committed fixed cost thus

they have to operate even at a loss? 6. How diversified are your competitors? 7. How extensively do your direct competitors advertise?8. Each competitors aim to serve different needs and market segment with different mixes of

price products service features

Examples:Subway and Burger kingKFC and Pizza Hut

Bargaining power of Customers: How large are your buyers’ company? How many companies are there for the buyer to choose from? Are the buyers buying a huge volume?

Do you depend only on a few buyers to sustain your sales? How hard is it for the buyers to switch and use a competing product? Are the buyers purchasing from you as well as your competitors? Do the buyers have the capacity to enter your business and produce the goods themselves?

Example:Coca cola:Depends on the marketing channel used for Coca-Cola,

1. Super Markets2. Convenience Stores3. Mass Merchandisers4. Soda Shop5. vending machine6. Restaurants and Food stores

Bargaining power of Suppliers:• Are there substitutes for your suppliers’ products? • Do your suppliers serve multiple industries? Does the total industry revenue accounting for

only a small portion of the supplier’s total revenue? • Are there substitutes for your suppliers’ products? • Do your suppliers serve multiple industries? Does the total industry revenue accounting for

only a small portion of the supplier’s total revenue?

Trade barriers: A trade barrier is an obstacle to (or something that stops) trade A physical trade barrier is a natural barrier like mountains, rainforests, deserts

Tariffs:A tariff is a tax on imported products or services. In the case of tariffs imposed by the United States, the business that imports or produces the foreign product must pay the tax to the U.S. government. The tariff revenue goes directly to the U.S. Treasury.Example:Two companies sell athletic shoes in the US. Company 1 is located in Brazil. Company 2 is in Hershey, Pennsylvania. A tariff must be paid on all shoes made outside the US and sold in the US. The tariff is 10% of all sales. Both companies sell shoes at a price of $100 per pair 1. Which company must pay the tariff? Which company benefits from the tariff?2. How much will the tariff cost the company?3. Who receives the revenues generated by the tariffs?

Non-Tariff Barriers: Measures, other than traditional tariffs, that are used to distort international trade flows Raise prices of both imports and import-competing goods. Favor domestic over foreign supply sources by causing importers to charge higher prices and

to restrict import volumes.

Quota:A quota is a limit on the amount of goods that can be imported. Putting a quota on a good creates a shortage (or a scarcity), which causes the price of the good to rise and allows domestic (inside the country) producers to raise their prices and to expand their production.Example:Germany has imported 2 million tons of steel from France every year for the past decade. Germany then started an import quota on steel. Germany now only imports around 1 million tons of steel from France, but the country of Germany still uses around 3 tons of steel a year.

1. How will this impact German steel company?2. How will this impact french steel company?3. Why would a country do this?

Embargos:Embargos are government orders which completely prohibit trade with another country.If necessary, the military actually sets up a blockade to prevent movement of merchant ships into and out of shipping ports.The embargo is the harshest type of trade barrier and is usually enacted for political purposes to hurt a country economically and thus undermine the political leaders in charge. EXAMPLE: The United States placed an embargo on Cuba after the Cuban Missile Crisis. We do not refuse with Cuba—this is still in effect today.

Benefits of Trade Barriers: Most barriers to trade are designed to prevent imports from entering a country. Trade barriers provide many benefits: Protect homeland industries from competition Protect jobs Help provide extra income for the government. Increases the number of goods people can choose from. Decreases the costs of these goods through increased competition

FDI:Purchase of physical assets or significant amount of ownership of a company in another country to gain some measure of management control.Simply defines as an investment made by a company in one country, into a company of the another country.

Reasons for FDI growth: Increasing globalization International mergers and acquisitions Entrepreneurship and small firms

Types of FDI:

Inward FDI: Inward (inflow) is when the foreign capital are invested in local resources. Inward FDI is encouraged by Tax breaks, subsidies, low interest loans, grants. Inward FDI is restricted by Ownership restraints or limits, differential performance

requirements For example: General Motors decide to open a factory in Brunei. They are going to need some human capital. That human capital is inward FDI for Brunei.

Outward Direction: Outward (outflow) is when the local resources are invested to another country The outflow of Brunei capital to other country For example: Brunei invest in Dorchester Hotel Outward FDI is encouraged by Government-backed insurance to cover risk Outward FDI is restricted by Tax incentives or disincentives on firms that invest outside of the

domestic country.

Greenfield Target: An investment involve the flow of FDI by building up

New production capacities Expansion of the existing production

Greenfield Investing is offered as an alternative to another types of investment, for example as mergers and acquisitions, joint ventures, or licensing agreements.

Foreign Horizontal Direct Investment: An investment made by a multinational company in different nations. It is the investment made for conducting similar business operations. For example: Apple Inc. factory in Brunei Horizontal FDI results in expansion of the parent company and brings FDI in the other

economy

Vertical Foreign Direct Investment:Backward Vertical = It is when an industry abroad provides inputs for a firm's domestic production process For example: Brunei Shell Petroleum with Royal Dutch ShellForward Vertical = industry abroad sells the outputs of a firm's domestic production process.

For example: when Volkswagen entered the United States market it acquired a large number of dealers rather than distribute its cars through independent United States dealers

METHODS OF FDI: by incorporating a completely owned subsidiary or company anywhere by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an fairness joint venture with another investor or enterprise

Importance of FDI: Resource for economic growth Money inflow from overseas Business grows in several countries FDI & Economic development Opportunities Competitive requirement Corporative Activities Branch plant or subsidiary company operations Rise in National Income