International Business

International Business

International Business

Dr Hiranmoy Roy1

Need For International BusinessInternational Business is exciting because it combines the science and the art of business with many other disciplines as economics, anthropology, geography, history, language, jurisprudence, statistics and demography.

Int. Business is important because economic isolation has become impossible

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Failure to be a part of global market assures a nation of declining economic influence and a deteriorating standard of living for its citizens.Successful participation holds the promise of improved quality of life, better society and even a peaceful world.

On an individual level students of IB are likely to work for an MNC such as manufacturing, banks, insurance and consulting firm.

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There is an unprecedented opportunity for an individual to enter international business.Speed, creativity and innovation are important for success of IB than size.Tech. and trade are growing larger than economiesTech. continues to ease conducting IB pointing for larger potential for future.4

Therefore IB offers more potential for expansion, growth and income than domestic business aloneIB causes flow of ideas, services and capital across the worldInnovation can be better disseminated, human capital can be used better and financing can take place more quickly

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IB offers consumers wider variety of goods both in terms of quality and quantity.IB offers opportunity for movement of factors of production and challenging employment Relocation of ResourcesOpen market for competitionIB do not benefit all to same degreeIB offers both opportunity and challenge to companies, individuals and countries6

Defining International BusinessIB consists of transactions that are devised to carry out across borders to satisfy objectives of individuals, companies and countriesPrimary type of IB are export-import trade and FDIFDI is carried out by joint ventures and subsidiariesOther type of IB are franchising, licensing and management contracts

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Difference between IB and domestic businessNew set of Macro environmental factors, constraints and conflicts resulting from different cultures, societies and lawsIB also reefer's to international transactions. Subject to constant change IB is more an art as a scienceSuccess in the art of business depends on firm grounding on scientific aspects8

Some Issues of IB How our idea, goods or service fits into int. market?Enter market through trade or investments?Should I obtain supply domestically or abroad?What product adjustment necessary to local conditions?What threats from global environment and how to counteract?9

Chapter 2: Culture and International BusinessThe challenge for managers is to handle different values, attitudes and behaviours that govern human interactionTo understand cultural differences and to determine similarities across cultures and exploit them in strategy formulation.Success in new markets is a function of adaptability, appreciation of others belief.Recognition of different approach may lead to establishing best practice.

10Cultural competence (flexibility) must be recognized as key management skills.Cultural risk is just as real as commercial or political risk in International Business area.Culture Defined:Culture includes everything that a group thinks, says, does, and makes- its customs, language, material artifacts, and shared systems of attitudes and feelings. The definition therefore encompasses wide variety of elements from matreialstic to spiritual.

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Every person is encultured into particular culture, learning the right way of doing things.Problems arise when a person encultured in certain culture has to adapt to another one.The process of acculturation adjusting and adapting to specific culture other than ones own- is one of the keys to success in international operations.Cultural differences are based on nationality, religion, race, or geographic areas have resulted in the emergence of distinct subcultures.12

The international managers task is to distinguish relevant cross-cultural and intra cultural differences and then to isolate potential opportunities and problems.Borrowing and interaction among national cultures leads to narrowing gaps between culturesIB entity acts as a change agent by introducing new ideas or products and practices.Social change in manner of consumption (McDonalds)

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Some countries are dominant in cultural sector such as US in television programming and movies. Commonly suggested Protectionism may not work.

Elements of Culture:Language : It is the mirror of cultureVerbal Language- tune of voice, Non-Verbal (Gestures, body positions, eye contacts)Language mastery is required before acultured.14

Language serves distinct roles in IB (through gathering information)Intelligence of a market is gathered by being part of a market, rather observing from outside.Local manager of MNC is primary source of political information.Language important for managers in company communications

Difficulty encountered by managers to communicate with employees through interpreters15

Tabling a Proposal delaying decision in US but it implies prompt action in UK.When British promise at the end of the day it do not implies within 24 hours, rather when they complete the job.British- Negotiations Bombed- meaning they were a success, But in US could convey exactly the opposite meaningBridge the language gapMulti lingual- Multi Cultural Format16

If you want to kill a message translate it. (85% accuracy through software)Non- Verbal Language- Time, Space, Material Possessions, Friendship Patterns and Business Agreements- a starting pt. from which managers beginTime: In many parts of the world time is flexible, not a limited commodity. Hong it is futile to set exact meeting time as movement from place to place depend on traffic situation.

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Showing impatience for such behaviour would astonish an Arab, Latin American and AsianUnderstanding national or cultural differences in the concept of time is critical for IB manager.Extending Social Acquaintance, Personal Rapport, are essential for conducting Business.Contracts may bound on Hand Shakes not lengthy and complex agreements- which makes Western Businessmen Unhappy

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Space: Arabs, Latin Americans likes to stand close to people when they talk.In US not comfortable at close rangeIf backs from Arabs- this may take as ve reationWestern- Squarely Kissed on the lips by a business partner- regardless of sex often taken aback.Int. Body language must be included in non-verbal language of IB.Finger- and Thumb- OK- In US successful completion of negotiations.In Southern France manager indicate sales was worthless19

In Japan a little bribe had been requestedIt is insulting in BrazilianNorth Europeans are quite reserve in using their hand and maintain a good spaceSouth Europeans involve their bodies to a far greater degree in making a point.Religion: Religion has an impact on IB. that is seen in cultures values and attitudes.Dominant Religions- Christianity, Islam, Hinduism, Buddhism, Confucianism

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Some countries have officially secularism such as Marxism- Leninism e.g., China, Cuba, VietnamHolidays Sunday, FridayMcDonalds and Coke met with success- but do not imply world becoming westernized.Universal respect needed in cross cultural negotiations.21

Politics and LawEconomic Risk: Exchange controlsTax policy to control MNCsPrice controls- to control prices of imports such as foods and health careManaging Risks: Ways exist to lessen riskManagers action can reduce risk provided they understand root causes of host countries policiesClose montiring of political situationsInsurance cover to cover political and economic risks

IB Follows two types of laws as follows- Common Law- based on traditionCode law based on statutes23

Chapter 5: Theory of International Trade and InvestmentMercantilism: Feudal states were self sufficientFood, Shelter available human labourBasic needs met.Merchants startrted visiting market place.Traveler's began exchanging goodsTrade become usefulIndustrial RevolutionGovt. regulation of International CommerceMixed exchange of trade with accumulation of wealth.

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Govt. identified strength with accumulation of gold and silverPolicy of Exports dominating importsRestriction on importation of many goods.Laws passed to making it illegal export of gold and silver, even if such were required to importationPower and influence in the conduct of trade.25

Evolution of trade- Classical- The0ry of Absolute advantage (Adam Smith)Theory of Comparative advantage- David RicardoTheory of Factor Proportions- Eli Heckscher and Bertil Ohlin The Leontief Paradon- Wassily LeontiefOverlapping Product Ranges Theory- Staffan Brunestam LindereProduct Cycle Theory- Raymond VeronImperfect Market and Trade theory- Paul KrugmanThe competitive advantage of nations- Michael Porter.26

Chapter 5: Theory of International Trade and InvestmentFew Questions of International Trade:Why countries trade?Do countries trade or do firms trade?Do the elements of Competitiveness of a firm, industry or countrty arise from some inherent endowment of the country or they change with time and circumstances?Once identified can these sources be manipulated or managed by firms or Govt. to the benefit of traders

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MercantilismThe evolution of trade today reflects three eventsThe collapse of feudal society (Autarky- did not trade because its own needs met internally)The feudal society was self sufficient although hardly sufficient in modern termsOnly basic needs were fulfilled Mercantilism mixed exchange through trade with accumulation of wealth.Accumulation of Silver and Gold

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The question that why countries trade has proven difficult to answerEvolution of trade theories: Theory of Absolute advantage (Adam smith)The theory of Comparative advantage (Ricardo)The theory of factor proportions ( Eli Heckscher & Bertil Ohlin)Leontief Paradox (Wassily Leontief)Overlapping Product Ranges Theory (Staffan Burenstam Linder)Product Cycle Theory (Raymond Vernon)Imperfect Markets and Trade Theory (Paul Krugman)

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Classical TheoryTheory of Absolute and Comparative advantageAbsolute advantage and Division of labour fundamental to trade theoryEach country would specialize in a product for which it was uniquely suitedEach country would specialize in products for which it possessed absolute advantageCountries would produce more and exchange products for goods that were cheaper in price than those produced at home

30Classical Theory

Country wheatcloth _______________________________________ England24 forgo 2/4 of CFrance 42 forgo 4/2 of C

*Labour hoursEngland has absolute advantage in the production of wheat and France has absolute advantage in the production of cloth31

England has comp. adv. in production of wheat. If England produces one unit of wheat, it is forgoing the production of 2/4 (= 0.50) of a unit of cloth. If France produces one unit of wheat it is forgoing the production of 4/2 (=2) units of a cloth. Eng. Thus has lower opportunity cost in the production of wheat.France has comparative advantage in the production of cloth. If Eng. Produces 1 unit of cloth, it is forgoing the production of 4/2 (= 2) units of a wheat. If France produces 1 unit of cloth, it is forgoing the production of 2/4 (=0.50) units of wheat. France therefore has lower opportunity cost of producing cloth.32

Factor Proportions Trade TheoryThe HO theory considered two factors of production, labour and capital.Different goods required different proportions of two factors (technology determines) Production of 1 unit of good X requires 4 units of labour and 1 unit of cap. To produce 1 unit of good Y requires 4 units of lab. and 2 units of cap.X is thus relatively labour intensive product and Y is relatively capital intensive product.33

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1 2 3 4CapitalLabour1 unit of Good YRelatively Capital-Intensive 1 unit of Good XRelatively Lbour- Intensive

According to HO (FP) theory factor intensity Depend on the state of technology (current method of production) This theory assumes same technology of production for would be used for the same goods in all countries It is not, therefore, differences in the efficiency of production that will determine trade between countries as it did in classical theory.Classical theory assumed differences in technology and productivity of labor.If there is no difference in technology or productivity of labor across countries then what determines the comp. advantage in prod. And export?The answer is factor prices determine cost difference.

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And prices are determined by the endowments of labor and capital the country posses.The theory assumes factors are immobile across borders, therefore differences in endowments determines the relative costs of labor and capitalUsing these assumptions ,the FP theory stated that a country should specialize in the production and export of those products that use intensively its relatively abundant factor.Relatively Lab. Abundant Country should specialize in lab. Intensive goods. It should export lab. Intensive goods in exchange for cap. intensive goods and vice-versa.

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Assumptions: The theory assumes two country, two factor and two goods model 2 x 2 x 2 assumptionMarkets for inputs and outputs are perfectly competitiveIncreasing production of a products experiences diminishing returnsBoth countries are using identical technologies

Leontief Paradox:Wassily Leontief - 1947 (USA) , 1950 (applicability of FP theory in case of USA) Input Output Analysis.37